Internal Revenue Service
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 Rev. Rul. 76-160

1976-1 C.B. 129

Section 164
Section 461

IRS Headnote

Real property taxes; accrual; Massachusetts. An accrual method taxpayer that did not elect to accrue Massachusetts real property taxes ratably over the period to which they apply may deduct the taxes only in the year in which they would have accrued but for a change in the billing period recently enacted by the Massachusetts legislature, which accelerated the accrual event of the real property taxes; Rev. Rul. 75-157 clarified.

Full Text

Rev. Rul. 76-160

Advice has been requested whether an accrual method taxpayer is entitled to accrue 18 months of real estate taxes on January 1, 1974, the date of assessment, under the circumstances described below.

The taxpayer, a Massachusetts corporation, computes taxable income under the accrual method of accounting. The taxpayer did not elect under section 461(c)(1) of the Internal Revenue Code of 1954 to accrue real estate taxes ratably over the period to which they apply, but rather deducted the taxes in the year in which they were assessed and became a lien.

In Massachusetts, real property is assessed as of January 1, and a lien for the tax assessed attaches as of that same date. The Massachusetts legislature recently changed the billing period for real property tax from a calendar year to a fiscal year ending June 30, because of a change in the State's fiscal year. The assessment and lien date is January 1 of the calendar year in which such fiscal year commences.

The recently enacted legislation, Mass. Ann. Laws, Ch. 60, sec. 3, note (1973), provides for changes in billing of taxes for the 18-month fiscal period beginning January 1973. In general, the changes require two assessments and two bills for the 18-month period. The first bill is based upon property assessed as of January 1, 1973, at a rate of two-thirds of the amount required to be assessed by law for the 18-month fiscal period. The second bill is based upon property assessed as of January 1, 1974, at a rate of one-third of the amount required to be assessed by law for the 18-month fiscal period.

On January 1, 1974, there were two assessments. The first 1974 assessment was for the final 6 months of the transition period ending June 30, 1974. The second 1974 assessment was for the State's new fiscal year, July 1, 1974, to June 30, 1975. The July-June fiscal year assessment was payable in two installments, one in 1974 and one in 1975. Also, each July-June fiscal year assessment thereafter will be payable in two installments, one in the year of assessment and one in the subsequent year.

Section 164 of the Code provides, in part, that state and local real property taxes shall be allowed as a deduction for the taxable year within which paid or accrued. Section 1.164-1(a) of the Income Tax Regulations provides, in part, that the deduction shall be according to the method of accounting used in computing taxable income.

Section 461(a) of the Code provides, in part, that the amount of any deduction allowed by subtitle A shall be taken for the taxable year that is the proper taxable year under the method of accounting used in computing taxable income. Section 1.461-1(a)(2) of the regulations provides, in part, that under an accrual method of accounting, an expense is deductible for the taxable year in which all the events have occurred that determine the fact of the liability and the amount thereof can be determined with reasonable accuracy.

Section 461(d)(1) of the Code provides, in general, that in the case of a taxpayer whose taxable income is computed under an accrual method of accounting, to the extent that the time for accruing taxes is earlier than it would be but for any action of any taxing jurisdiction taken after December 31, 1960, then, under regulations prescribed by the Secretary or the Secretary's delegate, such taxes shall be treated as accruing at the time they would have accrued but for such action by such taxing jurisdiction.

Section 1.461-1(d)(2)(iii) of the regulations provides as follows:

(iii) The term "any action" includes the enactment or reenactment of legislation, the adoption of an ordinance, the exercise of any taxing or administrative authority, or the taking of any other step, the result of which is an acceleration of the accrual event of any tax. The term also applies to the substitution of a substantially similar tax by either the original taxing jurisdiction or a substitute jurisdiction. However, the term does not include either a judicial interpretation, or an administrative determination by the Internal Revenue Service, as to the event which fixes the accrual date for the tax.

It was the intent of section 461(d) of the Code to deny accrual basis taxpayers the right to deduct more than 1 year's state taxes in one Federal taxable year. See S. Rep. No. 1910, 86th Cong., 2nd Sess. 6 (1960).

Massachusetts real estate taxes accrue on the date on which they are assessed and become a lien. Prior to the enactment of the legislation by the Massachusetts legislature, property taxes for each calendar year were assessed and became a lien on January 1 of such year. As a result of the enactment, property taxes for the first half of each calendar year now are assessed and become a lien on January 1 of the preceding year. In other words, the accrual event for real estate taxes relating to the January through June period of each year has been accelerated by a full year.

Since the Massachusetts legislature has enacted legislation the result of which is the acceleration of the accrual event of the real estate tax, such enactment is "any action" within the meaning of section 1.461-1(d)(2)(iii) of the regulations and section 461(d)(1) of the Code. Such taxes, therefore, shall be treated pursuant to section 461(a) as accruing at the time they would have accrued but for such action. Accordingly, the taxpayer is not entitled to accrue on January 1, 1974, 18 months of real estate taxes assessed on January 1, 1974, but may accrue only the first 1974 assessment (which related to the period January 1 through June 30, 1974) and half of the second 1974 assessment (which related to the period July 1, 1974 through June 30, 1975). Furthermore, on January 1 of each subsequent year the taxpayer will accrue half of the taxes assessed on that date and half of the taxes assessed on January 1 of the previous year.

In Rev. Rul. 75-157, 1975-1 C.B. 66, the Internal Revenue Service considered the Federal income tax treatment of deductions for real estate taxes by the same taxpayer assessed with respect to the 18-month transition period commencing January 1, 1973, and ending June 30, 1974, and described the dates on which the deduction for such taxes accrued. Rev. Rul. 75-157 is clarified to limit the applicability to real estate taxes assessed with respect to the 18-month transition period commencing January 1, 1973, and ending June 30, 1974.