Rev. Rul. 57-539

Advice has been requested with respect to the application of section 461(c) of the Internal Revenue Code of 154 relating to the accrual of real property taxes under the circumstances described below.

The taxpayer makes its Federal income tax returns in accordance with the accrual method of accounting for the calendar year. Both the assessment date and lien date for real property taxes is the first Monday in March, and the taxes assessed at such time relate to the fiscal year beginning on July first of the year in which they are assessed.

For prior years the taxpayer had followed the practice of allocating deductions for real estate taxes to the periods to which they relate. For example, for 1952, it deducted one-half of the tax assessed in 1951 and one-half of the tax assessed in 1952. For 1953, it deducted the remaining one-half of the tax assessed in 1952 and one-half of the tax assessed in 1953. The deductibility of the taxes for such years was governed by the Internal Revenue Code of 1939. For the taxable year 1954, the taxpayer elected to deduct real property taxes ratably over the period to which they relate, under the provisions of section 461(c) of the 1954 Code. The specific question presented is whether, under such an election, the taxpayer may continue the practice of prior years by deducting for the calendar year 1954 the `last half' of the tax assessed in the year 1953 (applicable to the period January 1, 1954, through June 30, 1954) and the `first half' of the tax assessed in 1954 (applicable to the period July 1, 1954, through December 31, 1954).

Section 461(c) of the 1954 Code, relating to the accrual of real property taxes, provides in part that:

(1) IN GENERAL.-If the taxable income is computed under an accrual method of accounting, then, at the election of the taxpayer, any real property tax which is related to a definite period of time shall be accrued ratably over that period.

(2) SPECIAL RULES.-Paragraph (1) shall not apply to any real property tax, to the extent that such tax was allowable as a deduction under the Internal Revenue Code of 1939 for a taxable year which began before January 1, 1954. * * *

Under the 1939 Code and prior law, real property taxes accrue on some specific date determined by reference to local law. The entire real property tax in the instant case accrued in the calendar year 1953. However, where the practice of allocating deductions for taxes to periods to which the taxes were applicable has been consistently followed for a period of years, such practice has been accepted for Federal income tax purposes even though the taxes ordinarily accrued as of a specific date. See, for example, Whitney Manufacturing Company v. Commissioner , 14 T.C. 1217, acquiescence C.B. 1951-2, 4; Atlantic Coast line Railway v. Commissioner , 4 T.C. 140, acquiescence C.B. 1944, 2; and G.C.M. 24461, C.B. 1945, 111.

As indicated on page 305 of Senate Report No. 1622, 83d Congress, Second Session, to accompany H.R. 8300, the special rules under section 461(c) of the 1954 Code are to prevent the same tax from being deducted more than once and to see that a deduction, otherwise proper, shall not be denied. If the prior practice of the taxpayer in the instant case is continued and ratable accrual provided by section 461(c) of the Code is elected beginning with the taxable year ended December 31, 1954, the same tax will not be deduction more than once, and the income, in so far as it reflects the deduction of real property taxes, will be reported.

Accordingly, it is held that in electing to accrue real property taxes under section 461(c) of the Code, beginning with the taxable year ended December 31, 1954, the taxpayer may deduct in that year both the portion of the real property tax (assessed in 1953) applicable to the first 6 months of 1954, and the portion of the tax (assessed in 1954) applicable to the last 6 months of 1954.