S. E. & M. E. Bernheimer Co. v. Commissioner

S. E. & M. E. BERNHEIMER CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. S. E. & M. E. Bernheimer Co. v. Commissioner Docket No. 88978. United States Board of Tax Appeals 41 B.T.A. 249; 1940 BTA LEXIS 1211; February 1, 1940, Promulgated *1211 1. Taxes due and payable October 1, had been officially fixed and bill therefor sent to taxpayer in March. The statute provided that the October payment might be anticipated and that no lien therefor attached prior to October 1. Taxpayer, keeping its books on the accrual basis, accrued the taxes prior to October, and claimed deduction as taxes accrued for the period ended September 30. Held, taxpayer was entitled to deduct such taxes in the period stated. United States v. Anderson,269 U.S. 422. 2. Where, under the above statutes, taxpayer paid taxes in advance of due date (October 1) and accrued same on its books, held it is entitled to a deduction of such taxes as taxes paid or accrued within the period ending September 30. Wilbur H. Friedman, Esq., for the petitioner. F. S. Gettle, Esq., for the respondent. VAN FOSSAN *249 This proceeding was brought to redetermine a deficiency in the income tax of the petitioner for the fiscal period from January 1 to September 30, 1935, in the sum of $1,901.65. In his amended answer the respondent claimed an additional deficiency by reason of his original allowance*1212 of a deduction of $10,011 representing advance payments made on account of taxes for the second half of the year *250 1935 and paid during the said fiscal period, such allowance being now claimed to be error. The first issue is the deductibility of real estate taxes, amounting to $29,064.60, on certain properties located in New York City, accrued on the petitioner's books for the period from July 1 to September 30, 1935, and being a part of the second half of the petitioner's taxes for the year 1935 which became due and payable on October 1, 1935. The second issue involves taxes on real estate known as 255 West 88th Street, New York City, accrued and paid as hereinafter stated. In the alternative, the petitioner claims the deduction of the amount paid as a business expense. The following facts were stipulated. FINDINGS OF FACT. The petitioner is a corporation, organized under the laws of the State of New York. Its address is 231 West 96th Street, New York, New York. It is in the real estate business. During the period January 1 to September 30, 1935, it owned numerous parcels of real estate located in the city of New York, and received large sums in rent therefrom. *1213 For the year 1934 and prior years, the petitioner kept its books and filed its income tax returns on a calendar year basis. On May 8, 1935, it received permission from the Commissioner of Internal Revenue to change its accounting period to a fiscal year ending September 30. On or about December 12, 1935, the petitioner filed with the collector of internal revenue for the third district of New York its income tax return for the period January 1 to September 30, 1935. For the year 1934 and prior years, and for the period January 1 to September 30, 1935, the petitioner kept its books and prepared its income tax returns on the accrual basis. On its return for the period from January 1 to September 30, 1935, the petitioner deducted from income the sum of $116,493.60 as "Realth Taxes." This sum consisted of the following items: (a) $77,418 representing the New York City real estate taxes accrued by the petitioner on its books for the period January 1, 1935 to June 30, 1935. This amount is not in question here. (b) $29,064.60 representing New York City real estate taxes accrued by the petitioner on its books for the period July 1, 1935 to September 30, 1935 on its properties*1214 other than 255 West 88th Street, New York. This sum was disallowed by the Commissioner of Internal Revenue as a deduction in his deficiency letter of March 8, 1937. (c) $10,011 representing amounts accrued by the petitioner on its books as New York City real estate taxes on the premises 255 West 88th Street, New York City, for the period July 1, 1935 to September 30, 1935. This item *251 was not disallowed in the deficiency notice. In the respondent's amended answer he contended that the deduction of the item was erroneous and asked for an increased deficiency. The real estate tax bills are sent out during the month of March. During the period in question, the petitioner owned the premises at 255 West 88th Street, New York, New York, received the income therefrom, and paid the expenses thereon. The New York Title & Mortgage Co. was the record holder of the first mortgage on the premises. The title company was under the control of the Mortgage Commission of the State of New York, which commission had control of the said first mortgage. Beginning prior to January 1, 1935, and continuing throughout the period in question, the mortgage was in default as to principal*1215 and interest. To avoid foreclosure of the mortgage by reason of the default the petitioner had entered into negotiations with the Mortgage Commission of the State of New York, for its extension or reorganization, and had agreed with the commission that, pending the negotiations, it would pay to the commission, on the fifteenth day of each month beginning January 15, 1935, one-twelfth of the annual interest, taxes, water rates, and assessments due on the said premises. Such payments were to be applied by the commission on those items and were to be outright payments, not to be returned to the petitioner in any event. The New York City real estate tax on premises 255 West 88th Street for the calendar year 1935 was $40,044. Pursuant to the said agreement and in order to avoid foreclosure of the mortgage, the petitioner paid $20,022 to the mortgage commission on account of the first half of such real estate taxes for the year 1935, and likewise paid the sum of $3,337 in each of the months of July, August, and September 1935, or a total of $10,011, on account of the second half of such taxes. These payments were accrued on the petitioner's books as taxes for the said months and deducted*1216 on its return as taxes. The Mortgage Commission of the State of New York paid to the city collector of New York City, on account of the second half of 1935 taxes on petitioner's premises 255 West 88th Street, New York, New York, the sum of $6,693 on August 31, 1935, and the further sum of $3,337.35 on September 30, 1935, or a total amount of $10,030.35 prior to the close of the fiscal period January 1 to September 30, 1935. OPINION. VAN FOSSAN: The statutory provisions covering the liability for the payment of real estate taxes in New York City here involved, as set forth in chapter 17 of the Charter of the City of New York, as *252 amended by the Laws of New York, 1935, chapter 713, appear below. 1 *1217 The first issue in the case is whether certain taxes on real estate owned by the petitioner and situated in New York City are properly accruable on October 1, 1935, as asserted by the respondent, or within the petitioner's fiscal year which ended on September 30, 1935, as contended by the petitioner. The Board has held in certain cases that taxes accrue on the date when they become a lien on the property. See , and cases there cited. This is not, however, a test of universal applicability. . In the last cited case it was held, under a statute which made no specific provision for a lien but which provided that "all taxes on the tax roll shall be due and payable on the date of the warrant annexed thereto", that the annexing of the warrant was the event which fixed the amount of the tax and determined the liability of the taxpayer to pay it in accord with the principles announced *253 in . In the Anderson case the Supreme Court observed: Only a word need be said with reference to the contention*1218 that the tax upon munitions manufactured and sold in 1916 did not accrue until 1917. In a technical legal sense it may be argued that a tax does not accrue until it has been assessed and becomes due; but it is also true that in advance of the assessment of a tax all the events may occur which fix the amount of the tax and determine the liability of the taxpayer to pay it. In this respect, for purposes of accounting and of ascertaining true income for a given accounting period, the munitions tax here in question did not stand on any different footing than other accrued expenses appearing on appellee's books. In the economic and bookkeeping sense with which the statute and Treasury decision were concerned, the taxes had accrued. The statutes here involved provide for the delivery to the board of aldermen on March 1 of the certified assessment rolls, the fixing by the board of the tax rate, the extension of the amounts to be paid, and the delivery to the city collector on or before March 20 of the assessment rolls, with collection warrants annexed. They further provide that all taxes upon real estate for 1935 and 1936 shall be due and payable in two installments, respectively, *1219 April 1 and October 1, and that such taxes shall be and become liens on the respective days when they become due and payable and not earlier, provided, however, that if there be no delinquent taxes a taxpayer may anticipate later payments and pay any subsequently due payment at the time of making the first payment, or at any time prior to October 1, and receive a discount thereon. It is stipulated as a fact that the tax bills are sent to the taxpayers during the month of March. In the light of these statutory provisions, certain conclusions emerge. It is obvious that before the end of March when the tax bills are sent out all the events "which fix the amount of the tax and determine the liability of the taxpayer to pay it" have occurred, thereby satisfying the test laid down in United Statesv. Anderson. It is equally clear that although the second half of the taxes is not technically "due and payable" until October 1, this provision loses all force if the taxpayer elects to anticipate the due date and pay the second half before October 1. From this it also follows that the fact that a lien for the second half does not attach until October 1, can not in this case be controlling. *1220 If a taxpayer paid the second half of his taxes before October 1, no lien would ever attach. Turning to the facts, we find that the taxes due from petitioner on October 1, for the period July 1 to September 30, 1935, as to property involved in the first issue had been finally fixed and determined in March. Taxpayer had received official notice of the same in the form of a bill from the collector, dated March 26, 1935. The tax bill, on its face, carried notices of the right to anticipate payment. Though *254 they were not technically due until October 1, petitioner, in the light of the facts, accrued them on its books prior to that date. This action we believe to have been proper and to have been in accord with the principles of accrual accountancy. See On this point we reverse the Commissioner. Passing to the second issue involving taxes on the 255 West 88th Street property, we find the facts to argue even more strongly for the taxpayer. The deduction of the taxes here in question was approved by the respondent in his notice of deficiency, claim of error therein being asserted in the amended answer in this proceeding. *1221 The facts are that the taxes had been officially determined and notice thereof sent to taxpayer according to the statute. Petitioner, pursuant to an arrangement with the state mortgage commission, had paid the taxes in controversy to the commission during July, August, and September and the mortgage commission had paid the same to the city collector prior to October 1. This payment was authorized by statute and forestalled the attaching of a lien. Clearly, petitioner was justified in accruing such taxes on its books prior to October 1. It was equally justified in claiming a deduction of such taxes as taxes paid or accrued during the period ending September 30, 1935. Only by such a treatment would the taxpayer's return accurately reflect income for the period in question. In the light of the facts and the conclusion reached above, it is unnecessary to discuss petitioner's alternative contention that the taxes so paid were deductible as business expenses. Reviewed by the Board. Decision will be entered under Rule 50. LEECH (Concurring in part) LEECH (Dissenting in part) LEECH, dissenting and concurring: On the first point I respectfully dissent. *1222 Taxes, like any other obligation, are accruable by a taxpayer on the accrual basis when they become "due and payable." Any other conclusion would permit the double deduction of taxes by a grantor of real estate on the accrual basis and a grantee on the cash basis - an anomalous and impossible result. The contested taxes did not become "due and payable" until after September 30, 1935. See I.T. 2834 (C.B. XIII-2, p. 189, 1934). It follows that these taxes were not accruable and, therefore, not deductible for the period ending October 1, 1935. I concur with the result the majority reaches on the second point, on the ground that the amounts in controversy, if not deductible as taxes accrued, were so, at least, as ordinary and necessary expenses of the taxpayer. BLACK and OPPER agree with this dissent. Footnotes 1. Sec. 895: The taxable status of all real property assessable for taxation in the City of New York shall be fixed for the succeeding fiscal year on the first of October in each year; * * *. Sec. 896: * * * Such deputies [tax commissioners] shall commence to assess real estate on the first day of April in each year, not a Sunday or legal holiday. * * * Sec. 908: As soon as such rolls are completed the board shall annex to each of such rolls its certificate that the same is correct in accordance with the entries and corrected entries in the several books of annual record. The rolls so certified must, on the first day in March in each year, not a Saturday, Sunday or a legal holiday, be delivered by the board of taxes and assessment to the board of aldermen, * * *. * * * Sec. 921: The board of aldermen shall meet not later than the third day in March which is not a Saturday, Sunday or a legal holiday, to fix the annual tax rate. * * * Sec. 922: At such annual meeting the board of aldermen must set down in the assessment-rolls, opposite to the several sums set down as the valuation of real property, the respective sums, in dollars and cents, to be paid as a tax thereon, rejecting the fractions of a cent. * * * Sec. 923: Immediately upon the completion of the assessment-rolls, the city clerk shall procure the proper warrants authorizing and requiring the city collector to collect the several sums therein mentioned according to law and to pay the same from time to time, when so collected, to the chamberlain of the city. * * * immediately thereafter and on or before the twentieth day of March, the assessment-rolls * * * shall be delivered by the president of the board to the city collector with the proper warrant or warrants * * * annexed thereto. Sec. 924: All taxes upon real estate for each of the years nineteen hundred thirty-five and nineteen hundred thirty-six shall be due and payable in two equal installments, the first of which shall be due and payable on the first day of April in such year and the second of which shall be due and payable on the first day of October in such year. * * * All taxes shall be and become liens on the real estate affected thereby and shall be construed as and deemed to be charges thereon on the respective days when they become due and payable and not earlier and shall remain such liens until paid. Any installment of taxes on real estate which is due and payable on any date subsequent to the date upon which the first installment shall become due and payable, may be paid on the date when the first installment becomes due and payable or at any time thereafter provided all prior installments shall have been paid or shall be paid at the same time, and on such payment of such subsequent installment prior to the date upon which it becomes due and payable, a discount shall be allowed from the date of payment to the date when such installment would otherwise be due and payable at the rate of four per centum per annum. ↩