Merchants Bank Bldg. Co. v. Commissioner , 32 B.T.A. 1072 ( 1935 )

MERCHANTS BANK BUILDING COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Merchants Bank Bldg. Co. v. Commissioner

Docket No. 69474.

United States Board of Tax Appeals

32 B.T.A. 1072; 1935 BTA LEXIS 847;

August 1, 1935, Promulgated

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In 1929 the petitioner, as the result of a reorganization, acquired certain real estate against which taxes had accrued in 1928. These taxes were paid by the petitioner in 1929. Held, that the payment so made is a part of the cost of the property to the petitioner and is not deductible under section 23 of the Revenue Act of 1928 in determining petitioner's net income for 1929.

W. H. Oppenheimer, Esq., for the petitioner.

E. L. Corbin, Esq., for the respondent.

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TURNER

This proceeding involves a deficiency in income tax determined by the respondent against the petitioner for the period from March 24, 1929, to October 6 of the same year, in the amount of $7,937.12. The deficiency so determined results from the disallowance of the deduction of 1928 real estate taxes paid to the State of Minnesota on real estate acquired by the petitioner in 1929.

FINDINGS OF FACT.

The facts have been stipulated as follows:

1. The petitioner is a corporation organized and existing under and by virtue of the laws of the State of Delaware with its principal offices in St. Paul, Minnesota.

2. Prior to March 1929, there had existed for a number of years past in the City of Saint Paul, Minnesota, two national banks, one known as the Merchants National Bank, one known as the First National Bank. In March, 1929, these two national banks consolidated under the provisions of the Federal statutes and under the charter and name of the First National Bank.

3. The consolidation agreement eliminated from the assets of the consolidated bank the real estate held by each of the consolidating banks. To accomplish this purpose so far as the Merchants National Bank was concerned it transferred its real estate in March, 1929, to the petitioner corporation, the Merchants Bank Building Company, receiving in exchange therefor all of the capital stock of the petitioner corporation. This transaction was handled in strict accordance with the reorganization provisions of the Income Tax Law and was a non-taxable transaction. The property so transferred to the Merchants Bank Building Company was placed on its books as of the same value and on the same basis as it had stood on the books of the Merchants National Bank. The capital stock of the Merchants Bank Building Company was then sold for cash to the stockholders of the Merchants National Bank desiring to purchase the same.

4. At the time of the transfer of the aforesaid real estate from the Merchants National Bank to the petitioner corporation, Merchants Bank Building Company, there was assessed and unpaid taxes thereon for the year 1928 in the amount of $45,192.63. That on May 31st, 1929, the petitioner corporation paid on account of said taxes the sum of $22,596.32 and on October 30, 1929, paid on account of said taxes the sum of $22,596.31, making a total amount paid by the petitioner on account of said taxes during the taxable year the sum of $45,192.63. That said real estate was located in the State of Minnesota.

5. The petitioner corporation maintained its books and records on the cash receipts and disbursements basis.

6. The Commissioner of Internal Revenue has disallowed this sum as a deduction from the income of the Merchants Bank Building Company for the year 1929, claiming that it should have been accrued and taken as a deduction by the Merchants National Bank on its 1928 return under the following situation:

7. The Merchants National Bank maintained its books and records on an accrual basis. It had been the practice of the Merchants National Bank, however, to accrue its taxes and interest on mortgage indebtedness as and when paid, thereby treating these items as if on a cash receipts or disbursements basis, that is to say, the Merchants National Bank claimed deductions for these items (i.e., taxes on real estate and interest on mortgage indebtedness) in the years when paid as a result of which the Merchants National Bank received a deduction in 1928 in computing its income taxes for that year of taxes paid on the real estate involved herein during that year.

8. The system thus followed by the Merchants National Bank and which formed the basis for its income tax returns had been approved and audited and passed by the Department for a great many years.

OPINION.

TURNER: Petitioner contends that since the Merchants National Bank, the predecessor corporation, in keeping with its books of account, did not deduct the taxes in question on its 1928 return and under an office ruling of the Bureau of Internal Revenue, which was not changed until December 30, 1929, Minnesota real estate taxes were not considered deductible until the year following that for which they were paid, and since by that time the property had been acquired by the petitioner through a nontaxable reorganization and the said taxes were, in fact, paid during the taxable period by the petitioner, which kept its books of account on the cash receipts and disbursements basis, the respondent has erred in disallowing the deduction in respect thereto.

The petitioner does not contend that the previous office ruling, revoked on December 30, 1929, was correct, but argues that since under that ruling the Merchants National Bank could not, at the time its 1928 return was made, have taken the deduction for 1928 taxes on its real estate, the respondent should not now be permitted to refuse the deduction to the petitioner on its return for 1929. We see no merit in this argument. The petitioner is entitled to the deduction only if the statute so provides, and no such right can arise from an erroneous ruling by the respondent with reference to the rights of a former owner of the property. We have previously held, in , that Minnesota property taxes become a liability on May 1 of the year for which they are imposed and are not deductible by a taxpayer which acquires the property in the month of June following.

The petitioner contends, however, that this case is different from that in which the property is acquired for a cash consideration, and relies particularly on the stipulated fact that the property in question was acquired through a nontaxable reorganization. Great stress is placed on the provisions of section 113(a)(7) of the Revenue Act of 1928, which provides that in the case of property acquired in a reorganization "the basis shall be the same as it would be in the hands of the transferor * * *." The same argument was made in , and we there held that the liability for property taxes accruing on a specific date is to be determined by the ownership of the property on that date and the payment of taxes on property acquired by the taxpayer subsequent to the date the taxes accrued constitutes a part of the cost of the property and is not deductible under section 23(c) of the Revenue Act of 1928, which is also the statutory provision controlling in the instant case. The petitioner here, as in , is undertaking to base its right to a deduction, for taxes paid, on the reorganization provisions of the statute, which have to do with the question of recognition of gain or loss in connection with certain exchanges of property, and on the provisions prescribing the basis for determining gain or loss from a subsequent disposition of property received in reorganization. The obvious answer to such an argument is that we do not have before us a question of recognition of gain or loss in a reorganization. Neither do we have a case involving the disposition of property received in reorganization, but a question of deduction from gross income for taxes paid, which, as we have pointed out, is governed by an altogether different and unrelated provision of the statute.

The petitioner also places great reliance on the fact that it kept its books on the cash receipts and disbursements basis. We have previously pointed out that payments such as we have here constitute a part of the cost of the property, and it is this fact that results in their nondeductibility and not the manner in which the books of account are kept. Cf. , and ; affd., .

Decision will be entered for the respondent.