Commissioner of Internal Revenue v. Rust's Estate

• Decision Date: 18 December 1940
• Docket Number: No. 4700.,4700.
• Citation: 116 F.2d 636
• Parties: COMMISSIONER OF INTERNAL REVENUE v. RUST'S ESTATE et al.
• Court: U.S. Court of Appeals — Fourth Circuit

116 F.2d 636 (1940)

COMMISSIONER OF INTERNAL REVENUE v. RUST'S ESTATE et al.

No. 4700.

Circuit Court of Appeals, Fourth Circuit.

December 18, 1940.

Carolyn E. Agger, Sp. Asst. to Atty. Gen., Samuel O. Clark, Jr., Asst. Atty. Gen., and

J. Louis Monarch, Sp. Asst. to Atty. Gen., for petitioner.

Lawrence A. Baker, of Washington, D. C. (Baker, Selby & Ravenel, of Washington, D. C., on the brief), for respondents.

Before PARKER, SOPER, and DOBIE, Circuit Judges.

SOPER, Circuit Judge.

The Commissioner of Internal Revenue petitions for a review of a decision of the United States Board of Tax Appeals wherein it was held that the taxpayer, now deceased, was entitled to a deduction from gross income on account of the payment on March 31, 1936, of a semi-annual instalment of taxes for the fiscal year ending June 30, 1936, on real estate in Washington, D. C. The taxes had been assessed in 1935, prior to the taxpayer's acquisition of the property, but were not payable until March, 1936, after the purchase had been consummated. Income taxes for the calendar year 1936 are involved; and the question is whether the real estate taxes paid as aforesaid may be regarded as a burden imposed upon the taxpayer by reason of his ownership of the property when the taxes fell due and were therefore his taxes rather than the taxes of the previous owner.

Taxes were assessed against the property on or before July 1, 1935, under the statutes of the District of Columbia, for the fiscal year then beginning. On July 19, 1935, the tax rate was fixed by the Commissioners of the District and the amount of the tax was determined to be $14,883.34, which was payable in two equal instalments of $7,441.67 in September, 1935, and March, 1936, respectively.

On July 1, 1935, and for a number of years prior thereto, the property, which is located at 2101 Connecticut Avenue, N. W., stood on the tax rolls in the name of the prior owner. On September 17, 1935, it was purchased by the taxpayer at a mortgage foreclosure sale for $275,000, subject to a mortgage of $725,000. Under the terms of the contract of sale the taxes for the current fiscal year, none of which had been paid, were adjusted to the date of sale; and the taxpayer was credited with $3,142.10, representing the portion of the taxes allocable to the period between July 1 and September 17, 1935. The taxpayer paid the first instalment of taxes on September 28, 1935, and the second instalment on March 31, 1936; but only the second instalment is involved in this controversy. The taxes thus paid were not capitalized on the accounts of the taxpayer as part of the cost of the property. He kept his books on a cash receipts and disbursements basis, and claimed a deduction for the second instalment in his tax return for the year 1936; but it was disallowed by the Commissioner. On review the Board held that the amount in dispute was properly deductible as "taxes paid" by the taxpayer in the taxable year for the period during which he was the owner.

The relevant federal statute is § 23(c) of the Revenue Act of 1936, 49 Stat. 1659, 26 U.S.C.A. Int.Rev.Code, § 23(c), which allows a deduction from gross income of "taxes paid or accrued within the taxable year", with certain exceptions not here material. Treasury Regulations 94, promulgated under the Revenue Act of 1936, Article 34(c)-1 provide that in general taxes are deductible only by the person upon whom they are imposed.

The tax laws of the District of Columbia are also relevant, since they determine such questions as the incidents of the assessment and of the tax lien upon the property and the personal liability, if any, of the owner for the taxes. Walsh-McGuire Co. v. Commissioner, 6 Cir., 97 F.2d 983; Commissioner v. Plestcheeff, 9 Cir., 100 F.2d 62; Shotwell v. Moore, 129 U.S. 590, 598, 9 S.Ct. 362, 32 L.Ed. 827; Paul Selected Studies in Federal Taxation, Second Series, pp. 23-24. These statutes are found in Title 20 of the Code of the District of Columbia, 1929. The fiscal year for the District commences on the first day of July of each year, § 621. A levy is made for each and every fiscal year of a tax upon real and personal property subject to taxation in the District at a rate fixed annually by the Commissioners, § 681. The assessment is made in the name of the owner with exceptions not here material, § 696. The assessment and valuation of real property are made annually, § 697, the valuation as nearly as practicable on the first Monday of June, and the assessment on or prior to July 1, §§ 700-705. Real estate and personal property taxes are payable in semi-annual instalments in the months of September and March, with penalties for delinquency; except as to taxes on family dwellings which may be paid quarterly, § 758. Provisions are made for the sale of real estate for delinquent taxes, §§ 791-801. The assessor is directed to prepare a list of all taxes on real property which are levied and in arrears on the first day of July of each year, and the Commissioners of the District are directed to sell the same if the taxes, together with penalties and costs, shall not be paid prior to the day fixed for sale. If no bid is received sufficient to pay the amount due with penalties and costs, the Collector is directed to bid such amount and purchase the property from the District. Provision is also made for the issuance to the purchaser of a certificate of sale and finally a deed if within two years from the date of sale the property is not redeemed by the owner. It is then provided in § 793 "that failure on the part of the District, from any cause whatsoever, to enforce the liens acquired aforesaid shall not release the property from any tax whatsoever that may be due the District". § 800 also refers to real estate sold for nonpayment of taxes and bought in by the District, and authorizes the Commissioners, after the lapse of two years, to apply to the Supreme Court of the District "for the purpose of enforcing such tax lien by the said District of Columbia on the aforesaid property".

It was under these statutes that the taxes on the property purchased by the taxpayer were assessed in the name of the former owner on July 1, 1935, for the ensuing fiscal year. No personal liability on the part of the former owner, however, arose from this action, since under the decisions in the District of Columbia the assessment of real estate taxes does not create a personal liability, but only a charge upon the land. Tumulty v. District of Columbia, 69 App.D.C. 390, 102 F.2d 254. Nor did any tax lien attach to the land by reason of the assessment. A lien for taxes on real estate is a creature of statute, and attaches only when the legislature prescribes. Ervin v. State, 5 Cir., 80 F.2d 432; Commissioner v. Plestcheeff, 9 Cir., 100 F.2d 62. Since no reference is made in the statute to a lien for taxes except in connection with taxes in arrears, it is a reasonable interpretation that the lien does not arise prior to the occurrence of a delinquency. This is none the less true even though the taxes in question may have been in some sense a charge upon the land under the statutes of the District of Columbia. Quite frequently, as the decisions cited in this opinion show, the state tax law provides that the tax lien shall attach after the assessment is levied.

It is of course necessary for the taxpayer in the pending case to show that he comes within the terms of the income tax statute allowing the deduction, for "the statutes pertaining to the determination of taxable income * * * have disclosed a general purpose to confine allowable losses to the taxpayer sustaining them, i. e., to treat them as personal to him and not transferable to or usable by another". New Colonial Co. v. Helvering, 292 U.S. 435, 440, 54 S.Ct. 788, 790, 78 L.Ed. 1348; Colston v. Burnet, 61 App.D.C. 192, 59 F.2d 867. The question is whether the taxpayer has met this requirement.

The taxes under consideration were not the personal obligation of either the buyer or the seller of the property; but they, nevertheless, fell within the terms of the statute as a deductible item in the computation of taxable income. Whether or not the deduction could lawfully be taken by the seller, or by the buyer, or partly by one and partly by the other, are questions which should be answered by ascertaining upon whom rests the obligation under the state law to pay the taxes, having in mind the practicalities of the situation. Taxes upon real estate constitute an ever recurring burden; and when, as in this case, the property is held as an investment, they are perforce treated as a current expense to be offset against current income. The provision of the agreement of sale that the taxes should be adjusted to the date of sale was therefore natural and proper, since it allotted to each party a part of the burden proportionate to the period during which he possessed the property and enjoyed the income. Such an arrangement between buyer and seller is typical, and it would be in accord with the facts even if prior to the sale the tax has not only been assessed but has given rise to a lien. The apportionment of the tax was clearly correct in the transaction under discussion, since no part of the second instalment of the tax could be fairly allotted to the seller and no part of it was collectible by the District during his period of ownership. The burden of paying this instalment was an obligation which passed to the taxpayer with the ownership, in much the same fashion that the benefit of certain covenants is held to run with the land in the law of property; and the burden of the tax rested upon the taxpayer in a very real sense, for a delinquency would have been followed by a forced sale by the tax authorities.

The opposing theory advanced by the Commissioner is that in the case of a sale of property, a tax already assessed for the current year cannot be treated by the buyer as an item of current disbursement to...