Court Opinion

ID: 4499117
Source: CourtListenerOpinion
Date Created: 2020-01-23 18:16:18.317357+00
Date Added: 2024-06-11T15:04:06.450044
License: Public Domain

Smith,
dissenting: The question presented by this proceeding is-whether the petitioner, a New Jersey corporation with its principal place of business in Hoboken and making its income tax returns in accordance with its books of account kept upon the accrual basis, is entitled to deduct from gross income in its return for the'fiscal period January 1 to August 31, 1937, any amount for general property and tangible personal property taxes levied by the city of Hoboken for 1937. For years prior to 1937 petitioner had been making returns upon the basis of the calendar year. It obtained permission from the respondent to change its basis of reporting from the calendar year to a fiscal year ended August 31. In order to make the change it was necessary for it to file an income tax return for the eight-month period January 1 to August 31,1937.
In its prior calendar year returns the petitioner deducted from gross income the general property and tangible personal property taxes which became due and were paid by it during the calendar year. The respondent granted permission to the petitioner to change from a calendar year to a fiscal year basis of reporting, provided proper adjust*423ments were made in its books of account and returns of income. In. its return for tbe eight-month period ended August 31, 1937, it deducted from gross income the entire amount of real estate ($6,893.91). and personal property ($2,042.64) taxes which became due and payable for the entire calendar year 1937. The respondent disallowed the deduction of the entire amount. In this case the Board holds that the petitioner is entitled to deduct the entire amount of the general property taxes, but no part of the tangible personal property taxes, for the reason that the latter taxes became a personal liability of the corporation on October 1, 1936.
Section 41 of the Bevenue Act of 1936 provides:
SBC. 41. GENERAL RULE.
The net income shall be computed upon the basis of the taxpayer’s annual' accounting period (fiscal year or calendar year, as the ease may he) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; * * *
In United States v. Anderson, 269 U. S. 422, the Court said that the provision of the income tax law which permitted taxpayers to make returns of income upon the accrual basis was:
* * * to enable taxpayers to keep their books and make their returns according to scientific accounting principles, by charging against income earned during the taxable period, the expenses incurred in and properly attributable to the process of earning income during that period; * * *
The taxes with which we are here concerned are annual taxes. They were levied by the city of Hoboken for the purpose of obtaining; revenues to meet expenses for the calendar year 1937. Under the provisions of the income tax law taxes paid or accrued are a legal deduction from gross income. If it be true, as the Supreme Court has said, that the accrual system was to permit the deduction from gross income of expenses “incurred in and properly attributable to the process of earning income”, I can not see why the petitioner is not entitled to deduct from gross income for the fiscal period here in question an aliquot part of the annual taxes imposed for 1937 and I see no reason for differentiating between real estate and tangible personal property taxes. The question is whether the taxes accrued in an accounting sense — whether any part of them may properly be said to be attributable to the process of earning income for the fiscal period in question. It was held by the Board in New Orleans Cold Storage & Warehouse Co., Ltd., 40 B. T. A. 121, that a corporation which kept its books of account and made its returns upon the accrual basis and obtained permission of the Commissioner to change from a fiscal year to a calendar year basis, and had to file a return for a fractional part of a year, as this petitioner was required to do, was entitled to deduct from the gross income shown on the short *424return an aliquot part of the real and personal property taxes paid upon an annual basis. This was also the conclusion reached by the Circuit Court of Appeals for the Fifth Circuit in Carondelet Bldg. Co. v. Fontenot, 111 Fed. (2d) 287. Cf. Citizens Hotel Co. v. Commissioner, 127 Fed. (2d) 229.
It is not entirely plain from the findings of fact what the petitioner’s books of account showed as to the amount of general property and personal property taxes charged as an expense for the period January 1 to August 31, 1937. It is definitely stated, however, that in the return filed for that period the petitioner deducted the full amount of those taxes which it would have deducted on a return for the full calendar year. Upon the principle of United States v. Anderson, supra, I think that the deduction should be limited to eight-twelfths of those taxes. The evidence clearly shows that the petitioner attempted month by month to charge to “General Factory Expense” a portion of its annual taxes. From its standpoint it was immaterial whether they were general property taxes or tangible personal property taxes. They were all an expense of doing business.
The taxes involved herein were levied as 1937 taxes. From the standpoint of reaching a fair and just amount to be allocated to the eight-month period before us it is immaterial whether it be considered that the taxes were levied for the 12-montli period October 1, 1936, to September 30, 1937, or for the calendar year 1937. In either event the eight-month period falls within such year.
In my opinion petitioner is entitled to deduct from gross income for the fiscal period here in question eight-twelfths of the $8,936.55 general property and personal property taxes levied, for 1937, and no more.
The question before us in this proceeding is entirely different from that which was before the Supreme Court in Magruder v. Supplee, - U. S. - (May 25, 1942). The question there was whether a person who, for instance, purchased an apartment house for $50,000 with an agreement between the contracting parties that rents, interest, and taxes should be adjusted to the date of sale, could deduct from gross income during his period of ownership the portion of the taxes which-he contracted to pay but which had become a lien upon the property or a personal liability of the former owner prior to the date of sale. The Court held that where the lien for the taxes had attached before the date of sale, or the former owner had a personal liability for the payment of the taxes, the amount paid as taxes by the purchaser was not a legal deduction from gross income. The theory of the Court Avas that such payment was a part of the purchase price. That principle is not involved in this proceeding.