Grand Hotel Co. v. Commissioner

GRAND HOTEL CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Grand Hotel Co. v. Commissioner Docket No. 18501. United States Board of Tax Appeals 21 B.T.A. 890; 1930 BTA LEXIS 1774; December 23, 1930, Promulgated *1774 1. The ownership of property in the State of Washington on March 1 is the event which determines the liability for real estate taxes and fixes the amount, although not ascertainable on that date. 2. Taxes which accrued and became a lien upon real estate in 1921, while petitioner was not the owner of the property, are not deductible in 1922, when petitioner did become the owner of the property, although not due and payable until the latter year. George W. Roberts, Esq., for the petitioner. T. M. Mather, Esq., for the respondent. BLACK *890 The respondent determined a deficiency in income tax of $436.72 against the petitioner for the year 1922. The deficiency arises from the disallowance by the respondent of certain deductions for taxes claimed by the petitioner. The taxes were real estate taxes for the *891 year 1921 due the State of Washington and its governmental subdivisions, and amounted to $3,956.76. They were paid during the taxable year 1922. FINDINGS OF FACT. The petitioner is a corporation organized and existing under the laws of the State of Washington, with its office and place of business in Walla Walla, Wash.*1775 , where it is engaged in the hotel business and had been so engaged for several years prior to the taxable year. On January 26, 1922, it entered into a contract with J. E. Ransome to purchase from him certain real estate in Walla Walla, upon which was situated the hotel building then occupied by petitioner. A payment of $1,000 on the purchase price was made to the vendor and $28,413.78 was paid to the New York Life Insurance Co. for an assignment to petitioner of a mortgage held by the insurance company against the property. The balance of the purchase price was paid February 10, 1922, and the deed to the property was delivered. Taxes on the real estate for the year 1921 were duly assessed and levied during the year 1921 against the owner Ransome and became a lien against the property March 1, 1921. The taxes were paid by petitioner in two installments, viz., $1,978.38 on June 16, 1922, and $1,978.38 on November 22, 1922. Petitioner kept its accounts on the accrual system, but did not accrue taxes. It paid them in the year when due and payable and deducted the amounts in the year when paid. Only the taxes on the real estate are in controversy. OPINION. BLACK: Petitioner's*1776 specification of errors was as follows: 1. The Commissioner of Internal Revenue erred in holding the $3,956.76 taxes paid by petitioner in 1922 to be an assessment against Mr. J. E. Ransome, the property holder in 1921. 2. The Commissioner of Internal Revenue erred in holding that the $3,956.76 taxes paid by the petitioner in 1922 became a part of the purchase price of the Grand Hotel Building. 3. The Commissioner of Internal Revenue erred in disallowing as a proper deduction for income-tax purposes taxes paid by the petitioner in 1922, and in assessing $436.72 additional income tax as a result of such disallowance. We have decided in the case of , and , that taxes in the State of Washington accrue in the year in which they are levied and are specifically made a lien on real property from and including March 1, in that year, although not due and *892 payable until the following year. We further held that such taxes were deductible by a taxpayer who kept his books on the accrual basis in the year when the taxes were levied and not in the following year*1777 when paid. In the instant case the taxes were assessed, levied, and accrued during the year 1921, while J. E. Ransome was the owner of the hotel real estate. These taxes were a lien on the property from and after March 1, 1921, although they were not due and payable until February, 1922, and under the cases cited were deductible by the owner, J. E. Ransome, in 1921 if he kept his books on the accrual basis and in 1922 if he determined his income on the cash receipts and disbursements basis. The fact that the petitioner became the owner of the property in 1922 does not alter our conclusion as in that event the case of , applies and is controlling. There the tax laws of Massachusetts provided that taxes assessed upon land became a lien thereon from April 1 in the year of assessment. In that case the insurance company purchased property on September 29, 1921, upon which the taxes for 1921 were unpaid and had been a lien thereon since April 1, 1921. It paid the taxes on November 1, 1921, when they were due and payable. In that case we said: It is then apparent that taxes which have become a lien against real*1778 estate in Massachusetts prior to the date of sale are primarily an obligation of the seller and not of the purchaser. If then the purchaser of real estate agreed to pay a lien which he knew existed as a charge on the property at the time of its purchase, and if, in fact, he does discharge that lien by payment, he has not in fact paid taxes or interest of which the lien may have consisted, but he is simply completing his payments in the purchase of the property. The taxes and interest installments which he paid were the seller's taxes and interest installments and it was by an agreement and reduction in the purchase price that the purchaser paid them on behalf of the seller. Section 234(a)(3) reads: In computing the net income of a corporation subject to the tax imposed by section 230, there shall be allowed as deductions: * * * (3) Taxes paid or accrued within the taxable year. Of course it is needless to say that the taxes within the intendment of the statute are the taxpayer's own taxes. For the entire period of 1921 the hotel real estate was owned by J. E. Ransome and the taxes for that year were assessed against the property while it stood in his name and became*1779 a lien on the property on March 1, 1921. It is true that when petitioner bought the property in 1922 the 1921 taxes were not yet delinquent, but nevertheless the lien had attached and when petitioner paid the taxes which were for a prior year accrued at a time when it was not the owner of the property, its action *893 in paying the taxes can only be regarded as the payment of a part of the purchase price. Surely petitioner would not pay taxes which had accrued against property in a prior year when it was not the owner, without having due allowance made for this payment in the agreed purchase price. At the time the petitioner purchased the property there was a lien against it held by the New York Life Insurance Co. and as a part of the purchase price petitioner paid off the mortgage and all accrued interest and full allowance was made for this payment in the adjustment of the purchase price. This lien by the New York Life Insurance Co. was no more valid and outstanding against the property than was the lien which the State of Washington had for 1921 taxes. Both stand on the same footing. The total amount of the purchase price was not proved at the hearing and the deed*1780 of conveyance to petitioner was not introduced in evidence, but on the facts proved we hold that the payment by petitioner of these 1921 taxes was a payment of a part of the purchase price of the property and was not deductible in determining petitioner's net income for the year 1922. Decision will be entered for the respondent.