Pyramid Metals Co. v. Commissioner

44 B.T.A. 1087, 1941 BTA LEXIS 1236

• Court: United States Board of Tax Appeals
• Decided: July 22, 1941
• Docket: Docket No. 102354.
• Status: Published

Opinions

OPINION.

Murdock:

The Commissioner determined a deficiency in income tax of $146.95 and a deficiency in excess profits tax of- $49.37, each for the calendar year 1938. The only issue for decision is whether or not the petitioner is entitled to a deduction of $822.78 representing the portion of the real estate taxes for the year 1938 which was applicable to the period from August 1, 1938, to the end of the year. The facts have been stipulated and the stipulation is adopted as the Board’s findings of fact.

The Cleveland Realty Corporation owned a piece of property in Chicago, Illinois, which was rented by Lakeside Upholstery Co. The latter had an option to purchase the property by meeting any outside offer. The petitioner made an offer on February 26,1938, to purchase the property on August 1, 1938. This offer recognized the option of the Lakeside Upholstery Co. The Chicago Realty Corporation accepted the offer subject to its terms and conditions and gave notice of the offer to the Lakeside Upholstery Co. on February 26,1938. Lakeside never exercised its option and sale was made of the premises to the petitioner on August 1, 1938. The petitioner, in the settlement, received credit for seven-twelfths of the real estate taxes on the property for 1938. The petitioner paid the real estate taxes on the property for 1938 in two installments of $987.34 each. The first was paid on June 2, 1939, the second on September 5, 1939. Five-twelfths of the real estate taxes for 1938 amounted to $822.78. The petitioner kept its books and filed its return for the calendar year 1938 upon an accrual basis. The petitioner accrued on its books for 1938 and claimed on its return for that year an item of $900.16 representing five-twelfths of the estimated amount of the real estate taxes on the property for the year 1938. The Commissioner, in determining the deficiency, disallowed the deduction.

The petitioner claims the right to deduct $822.78 as taxes under section 23 (c) of the Revenue Act of 1938. The parties agree that these real estate taxes in the State of Illinois accrued on April 1, 1938. The petitioner first endeavors to show that it became the equitable owner of the property prior to that date, on February 26, 1938, when its offer to purchase was accepted and a deposit of $5,000 was made. The facts show, however, that it did not acquire any title, equitable or otherwise, to the property at that time. The offer and acceptance involved only a sale of the property on August 1,1938, and not on any prior date. Furthermore, the tenant of the property had the refusal of it after the owner had received the offer. The petitioner became the owner of the property on August 1, 1938, and not prior thereto. Thus, it was not the owner of the property when these taxes accrued and became a lien.

The case of Edward C. Kohlsaat, 40 B. T. A. 528, involved real estate taxes on property in Illinois and the Board held that they were deductible as taxes only by the owner of- the property on April 1 in the year to which the taxes applied. The Board was simply following a long and consistent line of cases, the theory of which was that the purchaser, who is charged in his settlement with the seller, or who later pays the taxing authorities, amounts which had accrued as taxes or become a lien on the property prior to the time that he acquired title, has made no payment qua taxes but has merely paid a part of the purchase price to acquire a clean title. See discussion, in Commissioner v. Coward, 110 Fed. (2d) 725. Although most of the cases have involved a claim by the purchaser to deduct all of the taxes for the year of purchase or for a prior year (see Grand Hotel Co., 21 B. T. A. 890; Leamington Hotel Co., 26 B. T. A. 1004; Alden Anderson, 27 B. T. A. 980; Missouri State Life Insurance Co., 29 B. T. A. 401; affirmed on this point, 78 Fed. (2d) 778; Texas Coca-Cola Bottling Co., 30 B. T. A. 736; California Sanitary Co., Ltd., 32 B. T. A. 122; Merchants Bank Building Co., 32 B. T. A. 1072; affd., 84 Fed. (2d) 478; Gatens Investment Co., 36 B. T. A. 309; T. H. Banfield, 42 B. T. A. 769; American Liberty Oil Co., 43 B. T. A. 76; Falk Corporation v. Commissioner, 60 Fed. (2d) 204; Lifson v. Commissioner, 98 Fed. (2d) 508), proration of taxes was involved in at least two cases. First Bond & Mortgage Co., 27 B. T. A. 430, and Walsh-McGuire Co. v. Commissioner, 97 Fed. (2d) 983. The claim to the deduction was denied in all of those cases where the taxes had accrued or become a lien before the purchaser had acquired title. The cases of Commissioner v. Rust, 116 Fed. (2d) 636, and Carondelet Building Co. v. Fontenot, 111 Fed: (2d) 267, are not exceptions to the rule, since the taxes allowed as deductions in those cases did not accrue or become liens until after title had passed to the new purchaser.

The one case out of line which has come to our attention is Supplee v. Magruder, 36 Fed. Supp. 722, from the District Court for the District of Maryland. The taxpayer in that case claimed the right to deduct taxes allocable to that portion of the year during which he was the owner of the property and the court allowed the deduction. Judge Chesnut, who wrote the opinion, attempted to distinguish prior cases on the ground that they involved claims to deduct taxes for prior years, but, as a matter of fact, many of the cases cited above involved taxes for the year of purchase, and in the two cases mentioned above prorating was considered and rejected. Furthermore, the question decided by the court in the Supplee case is present in practically every case, potentially at least, since most sales must take place within some taxing year. The long established rule based on sound reason should not be plowed under at this late date, and with all due respect to the District Court, we do not agree with the Supplee decision.

The petitioner also contends that this deduction should be allowed for 1938 in order to clearly reflect income. See section 43. That section was not designed to cover minor items such as this and, obviously, it has no application where the taxpayer can not show that it is entitled to a deduction of some kind under some other provision of the statute.

Eeviewed by the Board.

Decision will he entered for the respondent.