Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 78-81

1978-1 C.B. 57

Sec. 164

IRS Headnote

Taxes; Irish wealth tax. The Irish wealth tax levied on a U.S. citizen residing in the Republic of Ireland is deductible under section 164 of the Code to the extent the tax is attributable to property, including U.S. state and local government obligations, held for the production of income, either directly by the taxpayer or in trust for the taxpayer's benefit.

Full Text

Rev. Rul. 78-81

Advice has been requested whether, under the circumstances described below, the Irish wealth tax is deductible under section 164 of the Internal Revenue Code of 1954. A taxpayer, who is a citizen of the United States residing permanently in the Republic of Ireland, owns directly property located both in Ireland and in the United States. The property consists of bank deposits, corporate stocks and bonds, and United States state and local government obligations. The taxpayer is also the life income beneficiary of property held in trust for the taxpayer's benefit by United States trustees. The property held in trust consists of corporate stocks and bonds and United States state and local government obligations. The income from the government obligations is exempt from Federal income tax under section 103 of the Code.

Section 2 of the Republic of Ireland Wealth Tax Act, 1975, No. 25, imposes a wealth tax that is charged, levied, and paid annually on the net market value of the taxable wealth on the valuation date (April 5) in every year of every assessable person. The rate of the tax is 1 percent of that net market value.

Section 3(1) of the Act provides that the taxable wealth of an individual who is domiciled and ordinarily resident in Ireland on the valuation date comprises all the property, wherever situated, to which the individual is beneficially entitled in possession on that date. The term "entitled in possession" means having a present right to the enjoyment of property.

Section 7 of the Act exempts from the tax certain categories of property, none of which is relevant in this case.

Section 8 of the Act requires that the market value of any property be estimated to be the price that, in the opinion of the Revenue Commissioners, the property would bring if sold in the open market on the valuation date in the manner and subject to any conditions that might reasonably be calculated to obtain for the vendor the best price for the property.

Section 11 of the Act provides that net market value is market value less certain deductions and exclusions. The deductions include certain stated sums or percentages, plus certain debts and incumbrances, depending on the type of property and its use. The exclusions are stated sums that vary according to the individual's marital status and whether the individual is a minor child.

Section 212 of the Code allows a deduction to an individual for all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income; for the management, conservation, or maintenance of property held for the production of income; or in connection with the determination, collection, or refund of any tax.

Section 265(1) of the Code provides, in part, that no deduction is allowed for any amount otherwise allowable under section 212 that is allocable to interest (whether or not any amount of the interest is received or accrued) wholly exempt from the taxes imposed by Subtitle A. Section 164(a) of the Code describes various types of taxes that are allowed as a deduction for the taxable year within which paid or accrued. In addition, section 164(a) allows as a deduction state and local, and foreign, taxes not specifically described that are paid or accrued within the taxable year in carrying on a trade or business or an activity described in section 212.

Rev. Rul. 70-464, 1970-2 C.B. 152, concludes that the Zurich, Switzerland, Vermoegenssteuer (personal fortune tax) allocable to stocks and bonds owned by a taxpayer and held for the production of income within the meaning of section 212 of the Code is a deductible tax under section 164.

To the extent taxes related to the production of income are deductible under section 164(a) of the Code, they are not precluded from being deducted by section 265(1), even though the activity (production of income) is one described in section 212. See Rev. Rul. 61-86, 1961-1 C.B. 41, which holds, in part, that the portion of state income tax paid by an estate or trust that is allocable to tax-exempt interest income is not disallowed by section 265(1) and is deductible under section 164; see also Manufacturers Hanover Trust Co. v. Commissioner, 431 F.2d 664 (2d Cir. 1970) in which a trust was entitled to deduct the portion of the amortized cost of a purchased life estate that was allocable to income received from tax-exempt interest, because amortization costs are deductible under section 167 rather than under section 212.

Accordingly, to the extent that the Irish wealth tax is attributable to property held for the production of income, including United States state and local government obligations, the tax is deductible by the taxpayer under section 164(a) of the Code in the year in which it is paid or accrued.