Internal Revenue Service
Revenue Ruling
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smRev. Rul. 62-45
1962-1 C.B. 27
Sec. 164
Sec. 482
Caution: Distinguished by Rev. Rul. 72-237
IRS Headnote
Section 164(d) of the Internal Revenue Code of 1954, which provides for the allocation of real estate taxes between the seller and the buyer of real estate, does not apply to a transfer resulting from the dissolution of a corporation. However, where inclusion of more than a pro rata amount of real estate taxes in the final return of a dissolving corporation will not clearly reflect income, section 164(d) will not prevent the Commissioner's allocation of such taxes under section 482 of the Code between the corporation and the distributee of the real estate.
Full Text
Rev. Rul. 62-45
Advice has been requested concerning the application of section 164(d) of the Internal Revenue Code of 1954, which requires the apportionment of real property taxes between the buyer and the seller, to the transfer of real property under a corporate dissolution.
The taxpayer corporation used the accrual method of accounting, had not elected to accrue its real property taxes ratably under section 461(c) of the Code, and in the past accrued its real property taxes on its books and for tax purposes on April 1. It was dissolved at the end of its short period January 1-June 30, 1960. Its assets at the date of dissolution, consisting principally of real estate, were distributed to a trust, the beneficiaries of which were the stockholders of the corporation as of the date of dissolution. On the corporation's Federal income tax return for the short period ended June 30, 1960, it deducted the amount of 26 x dollars representing an estimate of real property taxes accrued as of April 1, 1960, for the real property tax year ending December 31, 1960.
Section 164(d) of the Code provides, in part, as follows:
(1) GENERAL RULE.-* * * if real property is sold during any real property tax year, then-
(A) so much of the real property tax as is properly allocable to that part of such year which ends on the day before the date of the sale shall be treated as a tax imposed on the seller, and
(B) so much of such tax as is property allocable to that part of such year which begins on the date of the sale shall be treated as a tax imposed on the purchaser.
Section 1.164-6(a) of the Income Tax Regulations provides, with certain exceptions not here material, that when real property is sold, section 164(d)(1) of the Code governs the deduction by the seller, and the purchaser of current real property taxes.
Since section 164(d) of the Code and section 1.164-6 of the regulations mention only purchase and sale transactions, that section of the Code has no application to a transfer of real property in liquidation or dissolution of a corporation. However, even though section 164(d) of the Code does not apply to corporate dissolution situations, it will not prevent the allocation of real property taxes in such situations where some other section of the Code permits the allocation.
Section 482 of the Code provides, in part, that, in the case of two or more organizations, trades, or business owned or controlled directly or indirectly by the same interests, the Secretary of the Treasury or his delegate may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to clearly reflect the income of such organizations, trades, or businesses.
The power conferred upon the Secretary or his delegate by section 482 of the Code is a discretionary power and once exercised it can be set aside only when clearly shown to be arbitrary. National Securities Corp. v. Commission , 137 Fed.(2d) 600 (1943), certiorari denied, 320 U.S. 794 (1943).
In Tennessee Life Insurance Co. v. R. L. Phinney , 280 Fed.(2d) 38, certiorari denied, 364 U.S. 914, the distributor corporation, which used the accrual method of accounting, deducted, on its tax return for the short year ending with its dissolution on January 23, 1953, a full year's real property taxes accrued on property owned by the distributor on January 1 , 1953. The Commissioner of Internal Revenue prorated the taxes between the distributor and the distributee of the real property for the period of ownership of each of them in the year 1953. The United States Court of Appeals for the Fifth Circuit sustained the Commissioner's proration of the tax on the ground that to do otherwise would not clearly reflect income. The United States Court of Appeals for the Sixth Circuit, however, in an earlier decision reversing the Tax Court's decision (reviewed without dissent), held under similar circumstances that proration was not proper and that the taxpayer correctly deducted an entire year's real property taxes in its short return covering an 11-day period. See Simon J. Murphy Company v. Commissioner , 231 Fed.(2d) 639 (1956), reversing 22 T.C. 1341 (1956). The Service adheres to the decision rendered in Tennessee Life Insurance Company , and does not follow the decision in the Simon J. Murphy Company case.
Accordingly, based upon the foregoing, it is held that section 164(d) of the Code, which provides for the allocation of real property taxes between the seller and the buyer of real estate, does not apply to a transfer resulting from the dissolution of a corporation. However, where the inclusion of more than a pro rata amount of real estate taxes in the final return of a dissolving corporation will not clearly reflect income, section 164(d) will not prevent the Commissioner's allocation of such taxes under section 482 of the Code between the corporation and the distributee of the real estate.
Therefore, in the instant case, since the taxpayer's accrual method of accounting does not clearly reflect his income, the Commissioner will require, under the provisions of section 482 of the Code, an allocation of the property taxes between the taxpayer-corporation and the trust based upon the number of days that each of them owned the property in the real property tax year.