Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 76-45

1976-1 C.B. 51

Section 164

IRS Headnote

Taxes; municipal utility districts. Sewer, water, and solid waste disposal system taxes imposed by municipal utility districts, which under state law excluded land not benefited, formed by a taxpayer to enhance the value and marketability of a certain tract of land are not deductible under section 164 of the Code except to the extent they can be shown allocable to maintenance or interest charges.

Full Text

Rev. Rul. 76-45

Advice has been requested whether, under the circumstances described below, taxes imposed by municipal utility districts are deductible under section 164 of the Internal Revenue Code of 1954.

A taxpayer, in order to enhance the value and marketability of a certain tract of land, formed, pursuant to state law, certain municipal utility districts. The utility districts were formed to construct the facilities, plants, equipment, and appliances needed to provide a water system, sanitary sewer system, storm sewer system, solid waste disposal system, and other systems authorized by statute as may be deemed necessary by the respective districts. Under state law, any land that is proposed to be included in the proposed districts and that will not benefit therefrom must be excluded from those districts.

The utility districts are political subdivisions of the state and are subject to the supervision of the state water rights commission.

In order to finance the construction of such facilities the utility districts issued bonds that were sold on the open market to unrelated parties. Under state law, the principal and interest on such bonds can be repaid from the levy and collection of ad valorem taxes on all taxable real property within the district, or by pledging all or any part of the designated revenue resulting from ownership or operation of the district's works, or a combination of both.

The municipal utility districts are also authorized by statute to levy and collect a tax for maintenance purposes, including funds for planning, maintaining, repairing, and operating all necessary plants, works, facilities, improvements, appliances, and equipment of the district and for paying costs of proper services, engineering and legal fees, and organization and administration expenses.

Section 164 of the Code provides that certain taxes, including State, local, and foreign real property taxes shall be allowed as a deduction for the taxable year within which they are paid or accrued. Section 164(c)(1) provides that no deduction shall be allowed for taxes assessed against local benefits of a kind tending to increase the value of the property assessed. However, this rule does not prevent the deduction of so much of such taxes as is properly allocable to maintenance or interest charges.

Section 1.164-3(b) of the Income Tax Regulations defines the term "real property taxes" as taxes imposed on interests in real property and levied for the general public welfare, but such term does not include taxes assessed against local benefits.

Sections 1.164-2(g) and 1.164-4(a) of the regulations provide that assessments for local benefits are not deductible as taxes. That is, no deduction for taxes is allowed for assessments to pay for local benefits such as streets, sidewalks, and other like improvements, if such assessments are imposed because of and measured by some benefit inuring directly to the property against which the assessment is levied. A tax is considered assessed against local benefits when the property subject to the tax is limited to the property benefited. Special assessments are not deductible, even though an incidental benefit may inure to the public welfare. Deductible real property taxes are those levied for the general public welfare by the proper taxing authority at the same rate against all property in the territory over which such authority has jurisdiction.

Section 1.164-4(b)(1) of the regulations provides that insofar as assessments against local benefits are made for the purpose of meeting maintenance, repair or interest charges with respect to such benefits, they are deductible. In such cases, the burden is on the taxpayer to show the allocation of the amounts assessed to the different purposes. If the allocation cannot be made, none of the amount so paid is deductible.

In the instant case, payments made to the utility districts are taxes paid for local benefits because the property subject to the taxes is limited to property benefited.

Accordingly, the taxes imposed by the municipal utility districts are not deductible under section 164 of the Code, except to the extent that they can be shown to be allocable to maintenance or interest charges.