135 F. Supp. 694 | D.N.H. | 1955
Action to recover $5,756.99, plus interest, of income tax paid by plaintiff for 1945. The facts, which have been stipulated, are as follows: The plaintiff owned a one-third undivided interest in three pieces of New Hampshire real estate during the years 1941 and 1942, and during 1943 until December 1. The remaining two-thirds was owned by his uncle, Norman B. Smith. Two of the properties were located in Concord, and the third in Manchester.
On April 1 of ,each of the years 1941 through 1943, the City of Concord assessed real estate taxes to “Smith, Norman B. Agt.” and “Smith, Norman B. & al. Trs.” against the Concord properties. On April 1, 1943, the City of Manchester assessed real estate taxes to “Smith, Norman B. et als.” against the Manchester property. None of the assessments in question was made to the plaintiff by name, and in each case the tax bill was mailed to Norman B. Smith.
The Concord properties were sold to the city for the 1941 tax on September 25, 1942, and again on September 24, 1943, for the 1942 tax. On December 1, 1943, Norman B. Smith, for valuable consideration, conveyed his two-thirds interest in these three properties to the plaintiff by warranty deeds subject to all unpaid taxes assessed against said premises.
The Commissioner of Internal Revenue allowed the deduction of one-third of such payments, which represented plaintiff’s share of the taxes, but disallowed the remaining two-thirds. The effect of such disallowance was to reduce plaintiff’s net operating loss carry-over to 1945, and to increase his income tax liability for that year. The resulting deficiency was assessed and paid.
A timely refund claim was filed, alleging that the entire amount of back taxes was deductible on the ground that plaintiff was personally liable therefor. The present action followed, the refund claim not having been formally disallowed and more than six months having elapsed.
The plaintiff contends that the commissioner erred in refusing to allow these tax payments as a deduction from gross income under Title 26 U.S.C. § 23 (c) (1).
The essential question presented is whether the payment of the real estate taxes by the plaintiff was the result of his obligation as co-owner or was a capital expenditure in the process of acquiring clear title to the entire property. It has been held in Magruder v. Supplee, 316 U.S. 394, 62 S.Ct. 1162, 86 L.Ed. 1555, that the vendee of real estate may not deduct real estate taxes if the vendor was personally liable therefor, or if there was a tax lien upon the property prior to the conveyance. In either event, their subsequent payment by the vendee is not the payment of taxes within the purview of Section 23(c) (1), supra. When Norman B. Smith conveyed his undivided two-thirds interest to the plaintiff, there were tax liens on the properties. While the assessments were ambiguous in their designation of the owners, I am of the view that Norman B. Smith was personally liable for the assessments against him and his interest. In this connection, it is to be noted that no assessments were made against the plaintiff, nor were any tax bills mailed to him.
Until such time as these taxes were paid, the plaintiff was not the owner of the property deeded to him. “A tax lien is an encumbrance upon the land, and payment, subsequent to purchase, to discharge a pre-existing lien is no more the payment of a tax in any proper sense of the word than is a payment to discharge any other encumbrance, for instance a mortgage. It is true that respondents here could not have retained the properties unless the taxes were paid, but it is also true that they could not retain them without paying the purchase price. It is no answer therefore to say that the property was burdened with the taxes and that respondents became obligated to pay them. There was a burden, but it was contractually assumed. In discharging this assumed obligation respondents were not paying taxes imposed upon them within the meaning of Section 23(c).” Magruder v. Supplee, supra, 316 U.S. 398, 62 S.Ct. 1165. The situation compels the finding that these payments were capital expenditures and were not deductible from annual gross income.
The contention of the plaintiff that, as ower of an undivided one-third interest, he was liable to meet the entire tax is refuted by Revised Laws of New Hampshire, Chapter 80, Section 32, permitting a part owner to pay his proportionate tax and to have his interest exempted from sale, or, if sold, to redeem by similar payment.
It is urged by the plaintiff that if this payment does not fall within the purview of 26 U.S.C. § 23(c) (1), deduetion was authorized by Section 23(a) (1) (A) as an ordinary and necessary expense in carrying on a business. The defendant contends that this issue is not before the court because this basis’ was not included in the refund claim.
It is fundamental that a taxpayer is precluded in a refund suit from urging any ground not included in his claim before the commissioner. Real Estate-Land Title & Trust Co. v. United States, 309 U.S. 13, 60 S.Ct. 371, 84 L.Ed. 542.
The claim was general in its allegations, and no specific section of the Internal Revenue - Code was cited as a basis for the allowance of the deduction. But it is unnecessary to point out the particular part of the statute so long as the facts are stated with sufficient clarity.
However, no need appears to resolve this question in the light of the above ruling that the outlay was clearly a capital expenditure. Such is not deductible from gross income as business expense. Hadley Falls Trust Co. v. United States, 1 Cir., 110 F.2d 887. This is particularly so where, as here, the expense was reimbursable. Glendinning, McLeish & Co. v. Commissioner, supra.
Accordingly, judgment will be entered' for the defendant.