Simon J. Murphy Co. v. Commissioner of Internal Rev.
| Decision Date | 02 April 1956 |
| Docket Number | No. 12491.,12491. |
| Citation | 231 F.2d 639 |
| Parties | SIMON J. MURPHY COMPANY and Social Research Foundation, Inc., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Berrien C. Eaton, Jr., Detroit, Mich. (Edward S. Reid, Jr., Miller, Canfield, Paddock & Stone, Detroit, Mich., on the brief), for petitioners.
Stanley P. Wagman, Washington, D. C. (H. Brian Holland, Ellis N. Slack and Robert N. Anderson, Washington, D. C., on the brief), for respondent.
Before SIMONS, Chief Judge, and ALLEN and MILLER, Circuit Judges.
The petitioners seek a redetermination of income tax deficiencies assessed by the Commissioner for the years 1949 and 1950. The assessments were approved by the Tax Court in the amount of $8,338.06 for the year 1949 and in the amount of $6,094.84 for the year 1950, which ruling is now before us for review.
The facts are stipulated and are summarized as follows: The Simon J. Murphy Company, hereinafter called Murphy Company, was a Michigan corporation which prior to its dissolution in 1950 owned and successfully operated several parcels of improved commercial real estate in downtown Detroit. It consistently prepared its corporate income tax returns on the accrual basis of accounting. Social Research Foundation, hereinafter called Social Research, is an exempt, non-profit foundation incorporated as such under the laws of Michigan.
In 1949, Social Research acquired all of the outstanding capital stock of Murphy Company (126,000 shares), as follows: 3,900 shares were received as a gift from Charles B. G. Murphy; 30,800 shares were purchased from the estate of Fred T. Murphy at a price of $31.80 per share; and on December 29, 1949, 91,300 shares were purchased from the other stockholders at a price of $72.63 per share. Accordingly, Social Research became the sole shareholder of Murphy Company on December 29, 1949.
On January 11, 1950, Murphy Company filed with the State of Michigan a certificate of dissolution, thereby completing its liquidation under and pursuant to a Plan of Liquidation adopted on January 9, 1950, in the course of which Murphy Company transferred to Social Research all its real and personal property, subject to any and all debts and liabilities, which Social Research assumed and agreed to discharge, and Social Research surrendered to Murphy Company for complete cancellation and redemption all of the capital stock of that Company.
Subsequent to the liquidation and pursuant to the Plan of Liquidation, City of Detroit real estate taxes in the amount of $227,077.32, and Wayne County real estate taxes in the amount of $41,666.07, on the transferred real estate were paid by Social Research in the total amount of $268,743.39. Copies of the tax bills, pursuant to which said payments were made, show the following assessed valuations of the transferred real estate: Marquette Building $402,990.00, Murphy Building $201,050.00, Telegraph Building $203,490.00 and Penobscot Building $6,011,680.00. The Penobscot Building was encumbered in 1928 with a mortgage to the Northwestern Mutual Life Insurance Company in the amount of $7,000,000.00, the unpaid balance being $2,540,000.00 on December 29, 1949.
With certain minor or irrelevant exceptions all items of income and expense in connection with the ownership and operation of the transferred real estate were for tax and accounting purposes apportioned as to time between Social Research and Murphy Company as of January 11, 1950, except that the items of City of Detroit and Wayne County real estate taxes were accrued in their entirety as deductions by Murphy Company as of January 1, 1950. This treatment accorded with the past practice of Murphy Company in deducting real estate taxes in the taxable year when they accrued and became a debt. It is not disputed that under the Michigan statute and Detroit Ordinance the real estate taxes accrued on January 1, 1950.
In its final corporation income tax return filed on June 15, 1950, with respect to the taxable period January 1-11, 1950, Murphy Company included all rentals accruable during said taxable period, namely, $73,823.81. It deducted City of Detroit real estate taxes in the amount of $227,077.31, but did not deduct the Wayne County taxes. In its claim for refund and before the Tax Court it increased the deduction for real estate taxes to $268,743.39, so as to include the Wayne County taxes.
In order to protect itself against penalties for nonfiling in the contingency that it was not ruled exempt, Social Research, on or about June 15, 1950 filed a corporate income tax return for the period April 19, 1949 through March 31, 1950, made upon the accrual basis. In this return it deducted real estate taxes in the amount of $58,876.91. It arrived at this figure by estimating the aggregate City of Detroit and Wayne County real estate taxes for the periods covered (the exact amounts being then unknown) and then prorating them on a time basis for the period January 12, 1950 through March 31, 1950.
Based upon a deduction of $268,743.39 for real estate taxes Murphy Company sustained a net operating loss of $234,459.11 for the taxable period January 1 through 11, 1950. It thereafter filed a timely claim for refund with respect to over payment of its 1949 income taxes, which claim was based upon a net operating loss carry-back from the period January 1, through 11, 1950 in the amount of $234,459.11. Without formally ruling on the claim for refund the Commissioner subsequently determined the deficiencies in the 1949 and 1950 income taxes, which are the subject of this litigation. A deficiency assessment was also made against Social Research, as transferee. The assessments were based on the Commissioner's ruling that the City of Detroit taxes were allowable as a deduction in the 11-day period ended January 11, 1950 in an amount not in excess of $6,843.42, and that the Wayne County taxes were allowable as a deduction for the same period in an amount not in excess of $1,255.69. This was an allocation of the taxes on the basis of 11/365ths to Murphy Company and 354/365ths to Social Research.
In the Tax Court, petitioners challenged the right of the Commissioner to make such an allocation. They contended that the taxes became accrued liabilities on the part of Murphy Company on January 1, 1950 and under its accrual method of accounting were proper deductions in their entirety even though the corporation was dissolved on January 11, 1950. The Commissioner contended that the income of Murphy Company for the 11-day tax period in 1950 would be distorted and not clearly reflected if the Company was allowed to deduct the real estate taxes for 365 days while its income and other deductions reflected operations of only eleven days, and that he was authorized under Sections 41, 43 and 45 of the Internal Revenue Code, 26 U.S. C.A. §§ 41, 43, 45, to apportion or allocate the taxes between Murphy Company and Social Research in order to reflect clearly the income of each. The Tax Court held that the sections relied upon applied to deductions generally, including taxes; that section 45 applied even in the absence of fraud or deliberate tax avoidance; that the action of the Commissioner in allocating 11/365ths of the total tax to Murphy Company for the 11-day period was proper; and that the allocation was also necessary to dissolve the fiction that the operation of the Company was unprofitable during the first eleven days of January 1950.
The following well recognized principles are applicable to this case, concerning which the parties apparently have no dispute.
Section 23(c) (1), Internal Revenue Code of 1939, 26 U.S.C.A. § 23(c) (1), provides that in computing net income there shall be allowed as deductions — "Taxes paid or accrued within the taxable year * * *." Where the taxpayer's books are kept on the accrual basis the taxes are deductible in the year of accrual rather than in the year in which they are paid. United States v. Anderson, 269 U.S. 422, 46 S.Ct. 131, 70 L.Ed. 347; Hygienic Products Co. v. Commissioner, 6 Cir., 111 F.2d 330, certiorari denied, 311 U.S. 665, 61 S.Ct. 22, 85 L.Ed. 426; Commissioner of Internal Revenue v. Central United National Bank, 6 Cir., 99 F.2d 568.
It logically follows from this general rule that the owner of real estate at the time when the real estate tax accrues, if he is on the accrual basis, is entitled to take the accrued tax as a deduction in the year in which it accrues, although it is not paid by him in that year. H. H. Brown Co., 8 B.T.A. 112, 117; Arcade Department Store, Inc., 18 B.T.A. 1172, 1177; Edward C. Kohlsaat, 40 B.T.A. 528; Cooledge, 40 B.T.A. 1325; Ohmer Register Co. v. Commissioner, 6 Cir., 131 F.2d 682, 686, 143 A. L.R. 1164.
Petitioners contend that under United States v. Anderson, supra, 269 U.S. 422, 46 S.Ct. 131, 70 L.Ed. 347, and Magruder v. Supplee, 316 U.S. 394, 62 S. Ct. 1162, 86 L.Ed. 1555, the accrued taxes against the transferred real estate were properly charged as a tax liability and tax deduction against Murphy Company for its taxable year 1950 and that it could not be taken as a tax deduction in 1950 by Social Research even though the tax was later paid by Social Research. It was held in Magruder v. Supplee, supra, that when the owner of real estate against which a tax has accrued transfers title to a purchaser who thereafter pays the tax, such payment by the purchaser can not be used by him as a deduction for income tax purposes, but must be considered as increasing the cost basis of the property purchased. The rule has been applied in this Circuit. Walsh-McGuire Co. v. Commissioner, 6 Cir., 97 F.2d 983; Gilken Corp. v. Commissioner, 6 Cir., 176 F.2d 141. In Magruder v. Supplee, supra, the Supreme Court refused to allocate any portion of the tax to the purchaser. This Court likewise refused to allocate any portion of the tax to the purchaser in ...
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