Eckstein v. Commissioner

ELSIE S. ECKSTEIN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Eckstein v. Commissioner Docket No. 88763. United States Board of Tax Appeals 41 B.T.A. 746; 1940 BTA LEXIS 1144; April 5, 1940, Promulgated *1144 1. The petitioner accrued in 1932 as real property taxes for such year and deducted and was allowed in her Federal income tax return for that year amounts in excess of such real property taxes for that year as were finally determined and paid in 1934. At the time of the respondent's determination of the petitioner's income tax liability for 1934 the period of limitations for the assessment against the petitioner of any additional income taxes for 1932 had run. Held, that the respondent did not err in including the amount of the excess deduction for 1932 in the petitioner's income for 1934. 2. The sales tax imposed under the Retailers Occupation Tax Act of Illinois, being imposed upon and payable by the vendor, is not deductible by the vendee even though the latter makes payment to the vendor of the amount of the tax. Becher W. Hungerford, Esq., for the petitioner. A. B. Peterson, Esq., for the respondent. TURNER *746 This proceeding involves a deficiency in income tax of $3,627.09 for 1934. The issues presented are (1) whether that portion of an amount, accrued and deducted by the petitioner in 1932 and allowed by the respondent*1145 for that year as real property taxes, which was in excess of the amount subsequently assessed and paid in 1934 after being contested, constituted income for 1934, (2) whether the amount accrued and deducted by the petitioner in 1934 as real property taxes for that year is to be allowed only to the extent of the amount of such taxes as were actually assessed for that year and subsequently paid in 1935 and 1936, and (3) whether the petitioner is entitled to a deduction from taxable income of $430.70 representing sales taxes imposed by the State of Illinois in connection with purchases made by her during 1934. *747 FINDINGS OF FACT. The petitioner is an individual whose address is Chicago, Illinois. She filed her income tax return for 1934 on or bout March 15, 1935, and her 1932 return on or about March 14, 1933. The petitioner and two estates are the owners of a building known as the North American Building, situated in Chicago. Each owns an undivided one-third interest therein. From January 1 to June 3, 1932, the petitioner owned only a one-sixth interest in the building. On the latter date she received as a gift from her husband an additional one-sixth interest. *1146 Thereafter during 1932 and throughout 1934 she was the owner of a one-third interest. The petitioner and three other persons, or estates, are to owners of a building situated in Chicago and known as the Mercantile Building. Each owns an undivided one-fourth interest in said building. From January 1 to June 3, 1932, the petitioner owned a one-eighth interest in the building. On the latter date she received as a gift from her husband an additional one-eighth interest. During the remainder of 1932 and throughout 1934 she was the owner of a one-fourth interest. The North American Building and the Mercantile Building are operated under the management and supervision of a building manager. The manager maintains a bank account for each building, in which all rents collected are deposited and out of which all expenses incurred in the operation of the building are paid. The books for each building are kept on the accrual basis. After making provision for the payment of all operating expenses, including taxes, the net rents from the respective buildings are credited to the petitioner and the other owners on the basis of their respective interests. In proper schedules on her 1932*1147 return, petitioner entered as deductions pro rata parts of the allowance claimed for depreciation on the above buildings, cost of repairs, and other expenses, including property taxes, and disclosed as net rents $28,560.31 from the North American Building and $11,288.52 from the Mercantile Building. Similarly the net rents shown for 1934 for the North American Building were $19,090.88 and for the Mercantile Building, $16,224.11. Property taxes deducted on the returns for 1932 and 1934 with respect to the buildings mentioned represented the amounts of such taxes accrued on the books kept for the said buildings. In each instance the computation of the tax accrued had been based on the assessed value of the particular building for the next preceding year. The amount accrued and deducted for 1932 with respect to the North American Building was $61,515 and for the Mercantile Building was $26,864. Subsequently, in 1934, the assessor of Cook County, Illinois, determined lower assessed values for the year 1932 and tax bills based *748 upon such lower values were issued for 1932 in the amount of $48,521.14 with respect to the North American Building and $21,175.80 with respect*1148 to the Mercantile Building. These bills were never paid and on or about March 13, 1934, complaints were filed with the Board of Appeals of Cook County alleging that the assessed values of the properties for 1932 as determined by the assessor of Cook County were erroneous. While the foregoing complaints were pending and on or about April 12, 1934, a revenue agent made an investigation of the petitioner's tax liability for 1932. He reduced the amounts accrued and deducted as real property taxes on the buildings for 1932 to the amounts assessed thereon for that year as shown in the bills issued therefor. This action of the agent was approved by the respondent. On or about July 13, 1934, subsequent to a hearing on the abovementioned complaints, the Board of Appeals of Cook County determined that the true and correct values of the properties for assessment purposes were less than the amounts determined by the assessor and upon which his assessment of the 1932 real property taxes had been based. Pursuant to such determination the assessor entered said correction in valuations on the assessment books and issued certificates of revision which constituted warrants to the county treasurer*1149 to issue revised tax bills for 1932 based on the valuations determined by the Board of Appeals of Cook County. Thereupon the county treasurer issued revised tax bills for 1932, the bill with respect to the North American Building being for $37,679.03 and that for the Mercantile Building being in the amount of $16,768.30. The amounts shown in these bills were paid in 1934 and no other amounts for 1932 real property taxes on these properties were ever paid. The differences between the amounts of the estimated taxes accrued in 1932 and deducted for that year with respect to the properties as reduced by the revenue agent and the amounts of the taxes finally determined and actually paid in 1934, namely, $10,842.11 with respect to the North American Building and $4,407.50 relative to the Mercantile Building, were determined by the respondent to constitute income for 1934, the year in which the taxes were paid. As the petitioner owned a one-third interest in the North American Building in 1934, the respondent included one-third of the $10,842.11, or $3,614.04, in her taxable income for that yeat. As she owned a one-fourth interest in the Mercantile Building in 1934, he likewise included*1150 in her taxable income for such year one-fourth of the $4,407.50, or $1,101.88. Since the petitioner owned a one-sixth and one-eighth interest, respectively, in the buildings for approximately the first five months of 1932 and a one-third and one-fourth interest, respectively, for the remainder of that year, the parties accordingly have stipulated that the respondent's *749 inclusions in petitioner's 1934 income on account of accrued taxes for 1932 were excessive to the extent of $752.93 with respect to the North American Building and in the amount of $229.56 with respect to the Mercantile Building, and that only the amounts of $2,861.11 and $872.32, respectively, of such inclusions, making a total of $3,722.43, are now in controversy. The amounts accrued for real property taxes for 1934, pro rata parts of which were claimed by petitioner as deductions in her return for that year, were $38,400 for the North American Building and $16,800 relative to the Mercantile Building. Subsequently, in 1935, tax bills were issued for 1934 real property taxes on the properties in the amounts of $34,705.74 and $15,444.78, respectively. One-half of the amount of each of said bills was*1151 paid in 1935 and one-half was paid in 1936. In determining the petitioner's net income from the respective properties for 1934, the respondent disallowed as a deduction the amount of $1,231.42, representing one-third of the difference between the amount accrued in 1934 as real property taxes for that year on the North American Building and the amount of such taxes actually paid in 1935 and 1936, and also disallowed as a deduction $338.80 representing one-fourth of a similar difference relative to the 1934 real property taxes on the Mercantile Building, or a total amount of $1,570.22 with respect to the two buildings. The books of the North American Building and the Mercantile Building being kept on the accrual basis, the petitioner reported her income from those buildings by the accrual method. Her personal books of account were kept on the cash basis and all items of income and deduction, except those pertaining to the buildings mentioned, were reported by the cash method. At the time the respondent audited the petitioner's income tax return for 1934 and at the time he issued the notice of dificiency dated February 3, 1937, the statute of limitations barred assessment against*1152 the petitioner of any additional income taxes for 1932. During and throughout 1934 the petitioner made various and sundry purchases of items upon which a sales tax of 3 percent was payable under the Retailers Occupation Tax Act of the State of Illinois and paid to her vendors the amount of said sales taxes thereon during said year in the aggregate amount of $430.70. That amount was deducted by the petitioner in her 1934 return as taxes paid. In determining the deficiency the respondent disallowed the deduction. OPINION. TURNER: It is true that the books of account of the two buildings were kept on the accrual basis and the petitioner reported her income therefrom by the accrual method, while her individual books of account *750 were kept and her other income reported by the cash method, but there has been no determination and there is no issue here to the effect that the petitioner's method of reporting income, if properly followed, will not correctly reflect her income. In this connection, see Joseph Stern,14 B.T.A. 838, and *1153 Cornelia V. Cecil,37 B.T.A. 904; affirmed on this point, 100 Fed.(2d) 896. Our first question accordingly is whether on the facts in this case the difference between the amount of property taxes accrued and deducted with respect to the said buildings for the year 1932 and the correct amount of such taxes has been properly included in petitioner's income for the year 1934, when the said taxes for 1932 were finally determined and paid. The petitioner concedes that the deduction by her for 1932 as real property taxes for that year exceeded the correct amount of such taxes by $3,733.43, the amount here in controversy, but contends that the error should be corrected by adjusting her 1932 income instead of her 1934 income, as the respondent has done. Where over a period of years a taxpayer, keeping its books on the accrual basis, deducts and is allowed in its income tax returns for such years taxes or customs duties currently accrued and paid and in a later year it is determined that by reason of overvaluations, or the application of excessive rates under valid laws, the amounts theretofore paid were excessive and a portion thereof is refunded and where*1154 it further appears that the income tax returns for the years in respect of which the deductions were taken and allowed are not then open to adjustment, the amount refunded is to be treated as taxable income in the year in which the refund is made. Houbigant, Inc.,31 B.T.A. 954; affd., 80 Fed.(2d) 1012; certiorari denied, 298 U.S. 669; Victoria Paper Mills Co.,32 B.T.A. 666; affd., 83 Fed.(2d) 1022; Central United National Bank,33 B.T.A. 588; affd., 99 Fed.(2d) 568; Helvering v. Jane Holding Corporation, 109 Fed.(2d) 933. In Charles W. Nash,34 B.T.A. 675; affd., 88 Fed.(2d) 477; certiorari denied, 301 U.S. 700; Chevy Chase Land Co.,34 B.T.A. 150; and Dixie Margarine Co.,38 B.T.A. 471, like treatment was accorded refunds resulting from the payment of taxes under unconstitutional statutes or regulations. Cf Estate of William H. Block,39 B.T.A. 338; affd., *1155 111 Fed.(2d) 60, where a refund resulting from the payment of additional tax pursuant to a retroactive taxing statute was held to be income for the year in which received. While in the instant case the petitioner did not actually pay the real property taxes for 1932 and secure a refund in the taxable year as in Houbigant, Inc., and Victoria Paper Mills Co. cited above, the actual payment of the taxes is of no moment. In those cases, as in the instant case, the books of account were kept and income reported by the accrual method and the right to the deduction claimed rested in each *751 instance upon the actual accrual on the books of account of the amount of such taxes then considered to be the amount properly accruable, and in each case the correct amount of such taxes was determined and the previous accrual was adjusted in the year before us. On authority of the cases cited, the respondent's treatment of the real property taxes for 1932 is sustained. In the petition there is also assigned as error the respondent's disallowance of $1,570.22 representing the excess of the deductions taken as real property taxes for 1934 over the amount actually paid*1156 for such year in 1935 and 1936. The petitioner not only has made no argument nor cited any authorities to support the allegation of error, but, to the contrary, on brief concedes the correctness of the respondent's action. The only apparent purpose for presenting this issue was to use it as a basis for an argument that the respondent's treatment of the excess deduction taken for 1932 is inconsistent with his treatment of the excess deduction claimed for 1934. In any event, however, we have consistently held that where in a given year a taxpayer takes a deduction which, prior to the final determination of his income tax liability for such year, is ascertained to be excessive only the correct amount will be allowed in the final determination of his income tax liability. Inland Products Co.,10 B.T.A. 235; affd., 31 Fed.(2d) 867; Mary W. Leach,16 B.T.A. 781; affd., 50 Fed.(2d) 371; Joseph V. Horn,23 B.T.A. 1131; J. B. Jemison,18 B.T.A. 399; *1157 Beacon Coal Co.,9 B.T.A. 280; Producers Fuel Co.,1 B.T.A. 202. Respecting the argument as to inconsistency in the respondent's method of treatment of the excess deductions for the two years, it is to be observed that the situation in which the petitioner now finds herself appears to have been one entirely of her own creation. After the receipt in 1934 by the petitioner of the first bills for the 1932 taxes assessed on the buildings, and about the middle of April 1934, the respondent made an investigation of the petitioner's income tax liability for 1932, and, as a result, allowed the petitioner deductions for 1932 taxes on the buildings computed on the basis of the bills for such taxes and not on the basis of the accruals made in 1932. The record shows that at the time the respondent made the investigation and the foregoing allowances for taxes there was pending before the Board of Appeals of Cook County a proceeding wherein the petitioner sought a reduction of the amount of the liability shown in the bills. The record fails to show, however, that the petitioner informed the respondent of that action. Furthermore it also fails to show that after*1158 securing in July 1934 a reduction of such liability the petitioner communicated that fact to the respondent. Apparently she preferred to remain silent and retain the benefit obtained from a determination of her 1932 income tax liability on the basis of the larger deductions and leave the *752 correction of the matter to the respondent if and when he discovered what had transpired. Timely action by the petitioner would have avoided the controversy as to 1932 real property taxes. The petitioner contends that the respondent erred in disallowing as a deduction from income for 1934 the amount of $430.70 as sales taxes imposed under the Retailers Occupation Tax Act of the State of Illinois in connection with purchases made by her during that year. The respondent, relying on the holding in I.T. 2783, C.B. XIII-1, p. 54, that the tax imposed under the Retailers Occupation Tax Act of Illinois is imposed on the person who sells tangible personal property and not on the one who purchases it, contends that the tax is deductible by the seller for Federal income tax purposes and that the petitioner is not entitled to the deduction taken by her for such tax. The petitioner concedes*1159 that by the terms of the act the tax levied thereunder is "imposed upon persons engaged in the business of selling tangible personal property at retail", but urges that she is entitled to the deduction for the reason that under a common practice in Illinois in which the consumer seems to have acquiesced, the tax is, in fact, imposed on the consumer because the retailer passes it on to him, not as an element of cost, but as a tax. Federal taxes imposed on vendors in connection with the sales of merchandise are not deductible from income by the purchasers despite the fact that the purchasers paid to the vendor at the time of sales the amounts of the taxes resulting from the sales. A. Eisenberg,11 B.T.A. 574; George M. Cohan,11 B.T.A. 743; reversed on another point, 39 Fed.(2d) 540; George L. Shearer,18 B.T.A. 465; affirmed on this point, 48 Fed.(2d) 552; M. Rea Gano,19 B.T.A. 518. Since the taxes here in controversy were imposed on the vendors from whom the petitioner made purchases and not on the petitioner, we think the foregoing rule is applicable and accordingly sustain the respondent's*1160 contention. Reviewed by the Board. Decision will be entered under Rule 50.