Walter v. Comm'r of Internal Revenue, Docket No. 24625-82.
| Decision Date | 14 April 1987 |
| Docket Number | Docket No. 24625-82. |
| Citation | 88 T.C. 900,88 T.C. No. 49 |
| Parties | WALTER AND MARY BAILEY AND FIDEL AND WILMA GARCIA, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Ps purchased two boats (one in 1979 and the other in 1980) for business purposes. They paid California State sales taxes in connection with such purchases, and claimed deductions for such taxes. Respondent denied the deductions, contending that the incidence of the California sales tax falls on the retailer, not the consumer, and therefore such taxes must be capitalized as part of the cost of the boats. HELD: The California State sales tax is a tax imposed upon the consumer, United States v. California State Board of Equalization, 650 F.2d 1127 (9th Cir. 1981), affd. 456 U.S. 901 (1982), rev. denied456 U.S. 985 (1982); accordingly, pursuant to sec. 164(a)(4), I.R.C. 1954, Edward B. Simpson and Gerald A. Holmes, for the petitioners.
Barbara M. Leonard, for the respondent.
Respondent determined the following deficiencies in income tax and additions to tax:
+-------------------------------------------------------+
¦ ¦ ¦ ¦Additions to tax¦
+----------------------+----+----------+----------------¦
¦Petitioners ¦Year¦Deficiency¦sec. 6653(a)1 ¦
+----------------------+----+----------+----------------¦
¦Walter and Mary Bailey¦1976¦$954 ¦$48 ¦
+----------------------+----+----------+----------------¦
¦ ¦1977¦1,472 ¦74 ¦
+----------------------+----+----------+----------------¦
¦ ¦1979¦2,436 ¦122 ¦
+----------------------+----+----------+----------------¦
¦ ¦1980¦693 ¦35 ¦
+----------------------+----+----------+----------------¦
¦Fidel and Wilma Garcia¦1979¦4,503 ¦--- ¦
+----------------------+----+----------+----------------¦
¦ ¦1980¦4,133 ¦--- ¦
+-------------------------------------------------------+
After concessions, the sole issue for decision is whether California sales taxes paid by petitioners Walter and Mary Bailey 2 in connection with their acquisition of two boats (one in 1979 and the other in 1980) for business purposes can be deducted (as claimed by petitioners) or must be capitalized as part of the cost of the boats (as claimed by respondent).
This case was submitted fully stipulated under Rule 122. The stipulation of facts and attached exhibits are incorporated herein by reference.
Petitioners resided in California at the time they filed their petition in this case.
On October 30, 1979, petitioners purchased a 25 foot boat (hereinafter ‘Boat #1‘) and a trailer. The purchase price for Boat #1, together with the trailer, exclusive of the California sales tax, was $26,990; the California sales tax (which was separately stated on the purchase invoice) was $1,754.
On December 1, 1980, petitioners purchased a one-half interest in a second 25 foot boat (hereinafter ‘Boat #2‘) and a trailer. The purchase price for Boat #2, together with the trailer, exclusive of the California sales tax, was $49,500; the California sales tax (which was separately stated on the purchase invoice) was $3,217.50.
Both boats were used by petitioners in their business of renting boats.
Petitioners deducted in 1979 the $1,754 California sales tax paid on Boat #1 and deducted in 1980 $1,608.75 of the tax paid on Boat #2 (one-half of the sales tax paid on the purchase of Boat #2).
Respondent contends that the California sales tax is imposed on the retailer, rather than the consumer, and because petitioners used both boats for business purposes, the sales tax must be capitalized as part of the cost of the boats.
Petitioners contend that the incidence of the California sales tax falls upon the consumer, and thus is deductible under section 164 whether or not the tax was incurred in connection with the acquisition of a business asset. Alternatively, they argue that pursuant to section 62(5) [now section 62(4)], the sales tax is deductible as an expense attributable to property held for the production of rents.
OPINIONSection 164(a)(4) permits a deduction for State and local general sales taxes for the taxable year in which paid or accrued. Section 1.164-1(a), Income Tax Regs., provides that, in general, taxes are deductible only by the person upon whom they are imposed.
Generally, a sales tax, if imposed on the retailer, is not deductible by the consumer. However, section 164(b)(5) broadens the allowability of a deduction for general sales taxes if separately stated. 3 In such instance, the deduction is allowed to the consumer provided it was not paid in connection with the consumer's trade or business. In this regard, section 1.164-5, Income Tax Regs., provides:
only the amount of any separately stated State and local general sales tax (as defined in paragraph (g) of section 1.164-3) * * * paid by the consumer (OTHER THAN IN CONNECTION WITH HIS TRADE OR BUSINESS) is deductible by the consumer as tax. The fact that, under the law imposing it, the incidence of such State or local tax does not fall on the consumer is immaterial. * * * [[[Emphasis added.]
The determination of the deductibility of State sales taxes depends, then, upon: (a) whether the incidence of the sales tax falls upon the retailer or upon the consumer, either directly or through the application of section 164(b)(5); and (b) if the tax is deemed to fall on the consumer through the application of section 164(b)(5), then whether the property was purchased in connection with the taxpayer/consumer's trade or business. If under State law the tax is considered as imposed upon the retailer, then the tax is deductible by the consumer only if it is ‘separately stated‘ and the property is not acquired in connection with the taxpayer/ consumer's trade or business. If the tax is considered as imposed on the consumer directly, the tax is deductible without regard as to whether the property was acquired for business purposes. 4
To determine the incidence of the sales tax involved herein, we first look to the statutory and case law of California. Petty v. Commissioner, 77 T.C. 482, 485 (1981). The operative California statute during the years in question is Cal. Rev. & Tax Code section 6051 (West Supp. 1987), which provides:
For the privilege of selling tangible personal property at retail a tax is hereby imposed on all retailers at the rate of * * * 3- 3/4 percent on or after October 1, 1973, and to and including March 31, 1974, and at a rate of 4- 3/4 percent thereafter. Collection of the tax by the retailer is ‘from the consumer in so far as it can be done.‘ Cal. Rev. & Tax Code section 6052 (West Supp. 1957).
The California State courts have held that for state purposes the incidence of the State sales tax is on the retailer, not on the consumer (Western Lithograph Co. v. State Board of Equalization, 11 Cal. 2d 156, 78 P.2d 731 (1938); Hibernia Bank v. State Board of Equalization, 166 Cal. App. 3d 393, 212 Cal. Rptr. 556 (1985); Occidental Life Insurance Co. v. State Board of Equalization, 135 Cal. App. 3d 845, 185 Cal. Rptr. 779 (1982)); , and that the retailer can recoup payment of the tax from the consumer to the extent such recoupment does not infringe upon the consumer's existing contractual or constitutional rights (De Aryan v. Akers, 12 Cal. 2d 781, 87 P.2d 695 (1939), cert. denied 308 U.S 581 (1939)). However, in Diamond National Corp. v. State Board of Equalization, 425 U.S. 268 (1975), the United States Supreme Court in a per curiam opinion held that the incidence of the California sales tax fell upon the consumer and accordingly reversed the California Court of Appeal's determination that a national bank was not exempt from the California sales tax under former 12 U.S.C. section 548 (1964).
Subsequent to the Supreme Court's decision in Diamond National Corp. v. State Board of Equalization, section 1656.1 was added to the California Civil Code. That section purported to allow the parties (i.e., retailer and purchaser) to decide who would pay the California sales tax. The pertinent part of Cal. Civ. Code section 1656.1 (West Supp. 1987) provides as follow:
Section 1656.1 Sales tax reimbursement to retailer; addition to sales price; rebuttable presumptions; schedule
(a) Whether a retailer may add sales tax reimbursement to the sales price of the tangible personal property sold at retail to a purchaser depends solely upon the terms of the agreement of sale. It shall be presumed that the parties agreed to the addition of sales tax reimbursement to the sales price of tangible personal property sold at retail to a purchaser if:
(1) The agreement of sale expressly provides for such addition of sales tax reimbursement;
(2) Sales tax reimbursement is shown on the sales check or other proof of sale; or (3) The retailer posts in his premises in a location visible to purchasers, or included on a price tag or in an advertisement or other printed material directed to purchasers, a notice to the effect that reimbursement for sales tax will be added to the sales price of all items or certain items, whichever is application.
The United States Court of Appeals for the Ninth Circuit, 5 in United States v. California State Board of Equalization, 650 F.2d 1127 (9th Cir. 1981), affd. 456 U.S. 901 (1982), rev. denied 456 U.S. 985 (1982), reviewed the changes made in the California sales tax statute since Diamond National Corp. and concluded that the California statutory scheme of the tax manifested a legislative intent that the consumer pays the sales tax. 6 The Ninth Circuit held that the seeming neutrality of Cal. Rev. & Tax Code section 1656.1 (West Supp. 1987) was illusory, and that in reality, the legal incidence of the California sales tax was upon the consumer, not the...
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