316 U.S. 394 (1942), 947, Magruder v. Supplee

Docket Nº:No. 947
Citation:316 U.S. 394, 62 S.Ct. 1162, 86 L.Ed. 1555
Party Name:Magruder v. Supplee
Case Date:May 25, 1942
Court:United States Supreme Court

Page 394

316 U.S. 394 (1942)

62 S.Ct. 1162, 86 L.Ed. 1555




No. 947

United States Supreme Court

May 25, 1942

        Argued April 30, 1942




        Where, in a sale of real estate, current taxes, which are a lien on the property and for which the vendor is personally liable under the State law, are apportioned, so that the vendee pays the part proportionate to the fraction of the tax year ensuing after the purchase, the payment is not deductible by the vendee in his income tax return as "taxes paid" within the meaning of § 23(c) of the Revenue Act of 1936, but is part of the purchase price. P. 397.

        123 F.2d 399 reversed.

        Certiorari, 315 U.S. 794, to review the affirmance of a judgment for a refund of income taxes, 36 F.Supp. 722.

        MURPHY, J., lead opinion

        MR. JUSTICE MURPHY delivered the opinion of the Court.

        During the years 1936 and 1937, respondents purchased various parcels of real estate in Baltimore, Maryland. In each instance, the state and city taxes on the real estate for the current year had not been paid at the time of

Page 395

purchase. The various contracts provided for the apportionment of these current real estate taxes, respondents agreeing to pay the amount of the taxes, and the vendors undertaking to bear the burden of that portion of the taxes arithmetically allocable to the fraction of the year that had expired prior to the date of purchase. Adjustments were accordingly made in the purchase prices to reflect this arrangement.

       Respondents paid the local authorities the full amounts necessary to discharge the tax liability. In their 1936 and 1937 income tax returns, which were on the cash basis, they deducted that portion of those taxes "allocable" to the periods after purchase. The Commissioner of Internal Revenue ruled that the amounts in question [62 S.Ct. 1164] were not deductible under Section 23(c) of the Revenue Act of 1936, 49 Stat. 1648, 1659,1 but, instead, were merely part of the cost of the properties. Accordingly, he made a deficiency assessment which was paid under protest. This suit for refund followed. The District Court held the amounts were deductible,2 the Circuit Court of Appeals affirmed3 on the authority of its previous decision in Commissioner v. Rust's Estate, 116 F.2d 636. We granted certiorari because of an asserted conflict with Lifson v. Commissioner, 98 F.2d 508.

        The question for decision is whether the amounts apportioned by respondents on the basis of the fractions of the taxable years remaining after the several purchases constitute "taxes paid . . . within the taxable year" within the

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meaning of Section 23(c) of the Revenue Act of 1936, 49 Stat. 1648, 1659, and hence are deductible.

        The guiding principle for determining whether a payment satisfying a tax liability is a "tax paid" within the meaning of Section 23(c) is furnished by the applicable Treasury regulation, which states that, "[i]n general, taxes are deductible only by the person upon whom they are imposed."4 See Colston v. Burnet, 61 App.D.C.192, 59 F.2d 867; Small v. Commissioner, 27 B.T.A. 1219; Paul, Selected Studies in Federal Taxation, Second Series, p. 24. Resort must be had here to the laws of Maryland and of the City of Baltimore to determine upon whom the state and city real estate taxes were imposed. Walsh-McGuire Co. v. Commissioner, 97 F.2d 983, 984; cf. Helvering v. Fuller, 310 U.S. 69, 74-75, and see Paul, op. cit. supra, pp. 23, 24.

        To illustrate concretely, the workings of the Maryland tax system with respect to respondents' purchases the property bought on May 10, 1936, may be taken as typical of all the other transactions. The assessment date, or "date of finality," for both state and city taxes was October 1, 1935.5 These taxes were for the calendar year 1936,6 and

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became due and payable on January 1, 1936,7 although the default date for city taxes was not until July 1, 1936, and for state taxes January 1, 1937.8 Both the state and the city had liens against the property from the due date, January 1, 1936.9 And respondents' vendor became personally liable for these taxes before the sale. An action of assumpsit could have been brought [62 S.Ct. 1165] against him for the taxes at any time after the due date.10 Had he sold the property between October 1, 1935, and January 1, 1936, he...

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