Le Roy v. Commissioner
This text of 4 T.C. 70 (Le Roy v. Commissioner) is published on Counsel Stack Legal Research, covering United States Tax Court primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.
Opinion
OPINION.
The first issue involves the deduction of the amount of $1,500 as a bad debt. Briefly, the facts show that varying sums were loaned by and repaid to petitioner from November 15,1938, to July 1,1940, at which time the amount outstanding was $1,500. At that time petitioner made demand for payment. The debtor, who was hopelessly insolvent, was unable to pay. Petitioner then proceeded to sell the collateral, which he bid in himself at public auction for $100, paying $140 as expenses. These circumstances, we think, clearly show that the debt became worthless in 1940. On this point the determination of the Commissioner was erroneous.
The second issue concerns the deductibility of real estate taxes paid the city of New York for the first half of the fiscal year ended June 30, 1941. The taxes were assessed and levied under chapter 7 of the Charter of the City of New York,1 the material provisions of which are set out below.2
Respondent contends in effect that the amounts paid by petitioner in satisfaction of the tax liability for the first half of New York City’s fiscal year are not “taxes paid” within the meaning of section 23 (c) of the Internal Revenue Code, but rather must be treated as part of the cost of the property transferred to petitioner on September 30, 1940.
It is now settled that whether a purchaser of real estate who pays taxes thereon for the year of purchase may deduct the amount paid as “taxes paid or incurred within the taxable year” depends upon whether the vendor was personally liable for such taxes or a lien had attached to the property prior to the transfer. Magruder v. Supplee, 316 U. S. 394; United States v. Consolidated Elevator Co., 141 Fed. (2d) 791. If on the date the purchaser took title to the property there was neither lien nor personal liability on the part of the seller to pay the tax, then petitioner is entitled to deduct the amount paid by him. Ernst Kern Co., 1 T. C. 249; Noble v. Jones, 45 Fed. Supp. 504; appeal dismissed 130 Fed. (2d) 754.
It is apparent from the provisions of section 172 of the Charter of the City of New York that no tax lien attached before the due date of the first installment of taxes, which was October 1. Petitioner purchased the property prior to that time. There is no provision in the charter in respect of personal liability for real estate taxes. Section 71 of the Tax Law of the State of New York does provide, however, that personal liability for real estate taxes attaches when two circumstances are present, (1) the owner is a resident of the tax district in which the property is located, and (2) his name is correctly entered on the assessment roll. It becomes unnecessary, however, for us to examine the evidence on this phase of the question, as in no event would personal liability for the amount of the taxes arise prior to the date of the attachment of the lien. Berri v. City of New York, 16 N. Y. S. (2d) 86; affd., 19 N. Y. S. 347; United States v. Certain Lands in the Borough of Brooklyn, 41 Fed. Supp. 51; cf. United States v. 44,549 Square Feet of Land in the Borough of Brooklyn, 41 Fed. Supp. 523.
Since, then, there was neither personal liability nor any lien prior to the date of the sale, petitioner was entitled to deduct the full amount of taxes paid by him in the year 1940.
The case of S. E. & M. E. Bernheimer Co., 41 B. T. A. 249; aff'd. per curiam,, 121 Fed. (2d) 454, is not in point. That case dealt with the proper time for a taxpayer on the accrual basis to deduct New York City real estate taxes. The statute there involved was different from the one we are concerned with here; no question was present in that case as to the personal liability of the taxpayer to pay the tax; and, as that decision was handed down prior to Magruder v. Supplee, supra, it does not discuss the considerations upon which the latter case rested.
Alternatively, respondent contends that petitioner should be entitled to deduct no more than actually paid by him and not the portion for which he was prepaid by the vendor in the adjustment preceding the closing of the sale. However, if assumption of the liability of the vendor be treated as an addition to the cost of the property, as in Magruder v. Supplee, supra, adjustment for that part of the tax applicable to the period prior to the transfer is properly a reduction of the cost of the property, where the obligation falls upon the vendee, and is to be capitalized.
We hold, therefore, that the determination of the Commissioner in respect of this item was erroneous and that the petitioner is entitled to deduct the full amount of the taxes paid on October 29,1940.
Decision will be entered u/nder Rule 50.
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4 T.C. 70, 1944 U.S. Tax Ct. LEXIS 50, Counsel Stack Legal Research, https://law.counselstack.com/opinion/le-roy-v-commissioner-tax-1944.