Taxes Paid by a Tenant. Where a tenant pays the taxes on property leased by him, he may consider the amount so paid as an additional payment of rent and may deduct it as an expense of carrying on his business.13 To the landlord the amount is equivalent to an additional payment of rent and must be reported as such, but he may also deduct the amount, as, to him, it is a tax paid during the year by the tenant as his agent. The transaction is tantamount to a payment of the sum by the tenant to the landlord and a repayment by the landlord to the tenant, as his agent, for the purpose of satisfying the tax.14

Taxes Not Deductible. The Revenue Act of 1918 expressly provides that no taxpayer shall deduct (a) income, war-profits and excess-profits taxes imposed by the authority of the United States, (b) taxes assessed against local benefits of a kind tending to increase the value of the property assessed, and (c) taxes paid by a corporation pursuant to a so-called "tax-free" covenant contained in its bonds, mortgages, deeds of trust, or other similar obligations; and that non-resident aliens and foreign corporations may not deduct (a) income, war-profits and excess-profits taxes imposed by the authority of any foreign country, and (b) taxes assessed against local benefits of a kind tending to increase the value of the property assessed imposed by the authority of any foreign government.15 Although income, war-profits and excessprofits taxes imposed by the authority of any possession of the United States, or any foreign country (in the case of citizens or residents or domestic corporations) are not allowed as a deduction, they are allowed as a credit against tax.16 The 10% tax imposed by the Revenue Act of 1916 as amended, on the undistributed net income of corporations is considered an income tax and is therefore not deductible.17 War-profits and excess-profits taxes imposed by the 1918 Law may be deducted from the net income of domestic or foreign corporations in computing the income tax for the same taxable year.18 In addition to the above it

13 T. D. 2090.

14 Reg. 45, Art. 109.

15 Revenue Act of 1918, §§ 214 (a) 3, 234 (a) 3.

16 Revenue Act of 1918, §§ 222, 238.

17 Letter from Treasury Department dated April 1, 1919; I. T. S. 1919,

18 Prior to its amendment by the Revenue Act of 1917 it was held under

has recently been held that inheritance taxes are not deductible.19 Taxes paid by a corporation for its stockholders have been held by the courts not to be deductible. Postage is not a tax and is therefore not deductible.20

TAXES ASSESSED AGAINST LOCAL BENEFITS. The taxes contemplated by the law as deductible are those which are paid to defray the expense of running the government. Where the taxpayer pays an assessment for something which will directly benefit him or his property it is not considered to be a tax in the true sense but rather in the nature of an investment in property. The Revenue Act of 1918 expressly provides that taxes assessed against local benefits "of a kind tending to increase the value of the property assessed" shall not be deductible.21 It has been ruled that so-called taxes, more properly assessments, paid for local benefits, such as street, sidewalk and other like improvements, imposed because of and measured by some benefit inuring directly to the property against which the assessment is levied, do not constitute an allowable deduction from gross income. 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. The taxes deductible are those levied for the general public welfare by the proper taxing authorities at a like rate against all property in the territory over which such authorities have jurisdiction. Assessments under the statutes of California relating to irrigation and of Iowa relating to drainage, and under certain statutes of Tennessee relating to the 1916 Law that the income tax paid on income of one year, whether paid by the taxpayer or withheld at the source, was property deductible from the net income of the following year. (T. D. 2135.) The 1917 amendment provided that income and excess-profits taxes paid by the taxpayer should not be allowed as a deduction (Revenue Act of 1916, §§ 5, 6, 12 (a) and 12 (b) as amended by the Revenue Act of 1917), but in assessing the income tax the net income embraced in a return made under the 1917 Law was credited by the Commissioner with the amount of any excess-profits taxes imposed by Act of Congress and assessed for the same calendar or fiscal year upon the taxpayer, and in the case of a member of a partnership, with his proportionate share of such excess-profits taxes imposed upon the partnership. (Revenue Act of 1916, § 29, added by Revenue Act of 1917.)

19 Reg. 45, Art. 134. See p. 367.

20 Reg. 45, Art. 131.

21 Revenue Act of 1918, §§ 214 (a) 3, 234 (a) 3.

levees, are limited to property benefited, and when it is clear that the assessments are so limited, the amounts paid thereunder are not deductible as taxes. When assessments are made for the purpose of maintenance or repair of local benefits, the taxpayer may deduct the assessments paid as an expense incurred in business, if the payment of such assessments is necessary to the conduct of his business. Where the assessments are made for the purpose of constructing local benefits, the payments by the taxpayer are in the nature of capital expenditures and are not deductible. Where assessments are made for the purpose of both construction and maintenance or repairs, the burden is on the taxpayer to show the allocation of the amounts assessed to the different purposes. If the allocation can not be made, none of the amounts so paid is deductible.2

22

TAXES PAID UNDER "TAX-FREE" COVENANTS. Where a corporation pays taxes for its bondholders under stipulations in bonds agreeing to pay the interest in full regardless of any tax which it may be required to withhold or deduct, the amount of taxes so paid on behalf of such bondholders is not a proper deduction by the corporation.23 The bondholder may, however, treat the amount so paid for him as his tax and deduct the same, if it is a tax levied by a State; if levied by the Federal government he cannot deduct the amount as the law expressly prohibits deduction of the Federal income tax. The amount of income tax paid for a bondholder by an obligor pursuant to a tax-free covenant in its bonds is in the nature of additional interest paid the bondholder and must be included in his gross income.24

STATE INHERITANCE TAXES. State inheritance taxes paid by the executor or administrator of an estate of a deceased person, which are provided by law to be deducted from the respective legacies or distributive shares, are not allowable deductions in computing the net income of such estate subject to tax, even though the will contain a direction to pay inheritance taxes out of the residue. An inheritance tax is upon the transfer of the property and not upon the estate of the decedent or upon the

22 Reg. 45, Art. 133, as amended by T. D. 2937. See also T. D. 2090; Reg. 33, Art. 153.

23 Revenue Act of 1918, § 234 (a) 3. point are contained in Chapter 20.

24 Reg. 45, Art. 31.

See T. D. 1948. The rulings on this

executor or administrator, although the latter is required to pay it. In general, taxes paid or accrued within the year imposed by the authority of any State, or otherwise, are limited to those imposed upon the taxpayer and do not include taxes paid by him on behalf of another, even though he is required by law to make such payment. Since, moreover, state inheritance taxes are imposed upon the transfer before the property reaches the legatee or the distributee, and merely diminish the capital share of the estate received by him, such taxes are not imposed upon the legatee or distributee and are not an allowable deduction from his gross income. Similarly, Federal estate taxes are not deductible.25

TAXES PAID BY CORPORATION FOR STOCKHOLDERS. Under the statutes of many of the States taxes are assessed against the stockholders of banks, the bank being required to pay the tax on behalf of its stockholders. Banks paying taxes assessed against their stockholders on account of their ownership of the shares of stock issued by such banks can not deduct the amount of taxes so paid. The shares of stock being the property of the stockholders, to the extent that the taxes assessed on the value of the shares of stock are property taxes the holders are primarily liable for their paymert. As Federal statutes prohibit States from imposing any tax upon national banks except upon the value of their real estate, in cases where States levy a tax on the stock of such banks and make it the duty of the banks to pay such tax for the stockholders it is clear that such payments are not deductible from the gross income of such banks. This rule applies also in the case of corporations other than banks, upon the value of whose stock taxes are assessed to the stockholders.26 As a general rule the

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25 Reg. 45, Art. 134; letter from Treasury Department dated February 10, 1916; I. T. S. 1918, ¶¶ 486, 796 and 1669; T. D. 2933; Prentiss v. Eisner, U. S. Dist. Court, So. Dist. of N. Y.; I. T. S. 1919, ¶ 3595, decided under the 1913 Law. In this case, speaking of the New York Inheritance Tax, the Court said: "The condition of the devolution of the property is the receipt of the transfer tax by the state. * I * am convinced that the tax cannot properly be regarded as an imposition upon either the property or the right to receive a gross amount of the property of a decedent represented by a legacy, devise or distributive share, but that the property and the right to receive it passed, reduced by the amount of the tax measured by a percentage of the value of the gross share.” (T. D. 2933.)

26 Reg. 45, Art. 566. In such cases it was held, under the 1909 Law, that the bank was not entitled to deduct the amount of taxes 'so paid as the tax

amounts of taxes so paid by a corporation for its stockholders are not collected from the stockholders, the corporation charging the taxes as an item of expense. Such taxes, however, should be reported by the stockholders respectively as taxes paid by them, according to their proportionate interests in the corporation.27 The amount of the taxes so paid should also be treated as additional dividends from the net earnings of the corporation.28 Where shares of stock are sold after the tax has been assessed, but prior to the time it is paid by the corporation on behalf of the stockholders, the one holding the stock on the date when a tax became due and payable is the one entitled to report the amount as a dividend and deduct the amount as a tax paid by him.29 Taxes paid to a State by various corporations upon shares of their stock owned by another corporation, are not deductible from

was not a tax upon the bank or upon its property. (T. D. 1763; but see U. S. v. Guaranty Trust & Savings Bank, 253 Fed. 291.) This rule was continued under the 1913 Law and the 1916 Law, such taxes being held to be against the property of the private stockholders and not against either the corporation or its property. (The Northern Trust Company v. McCoach, 215 Fed. 991: T. D. 2135.) The requirements of a State law that a bank shall pay for the stockholder cannot be construed as authority under which the bank may deduct the tax. (T. D. 2161.) Where a statute requires the bank to pay the tax and gives it a lien upon the shares, the bank is not entitled to deduct the tax. (Eliot National Bank v. Gill, 210 Fed. 833, affirmed 218 Fed. 600; National Bank of Commerce v. Allen, 211 Fed. 743, affirmed 223 Fed. 472, petition to the United States Supreme Court for writ of certiorari denied October 25, 1915.) Where the statute gives the bank the option either to pay the tax out of its general funds or to collect the same from its stockholders, that fact does not change the character of the tax as a tax against the property of the individual stockholders, and the bank cannot deduct. (Northern Trust Co. v. McCoach, 215 Fed. 991.) Even though the state statute makes no provision for recovery from the several shareholders of their proportional part of the amount so paid, the bank cannot deduct. (First Nat. Bank v. McNeel, 238 Fed. 559.) The absence of an express provision in the statute does not show that there is no such right of recovery, or that the intention was for the tax to fall ultimately upon the bank and not upon the stockholders. Savings Bank v. Des Moines, 205 U. S. 503.)

27 Reg. 45, Art. 566; T. D. 2135.

28 Reg. 45, Art. 566. See Chapter 19.

(Home

29 Letter from Treasury Department dated February 25, 1916; I. T. S. 1918, 490. An earlier ruling in a letter dated March 2, 1915, held that the stockholder owning the stock at the time the taxes were assessed was the one entitled to the deduction, but the later ruling referred to above seems to indicate the present attitude of the Treasury Department.

F. T.-24