Rev. Rul. 62-107

In view of the decision of the United States Court of Appeals for the Tenth Curcuit in United States v. Oklahoma Natural Gas Company , 285 Fed.(2d) 333 (1960), reconsideration has been given to Revenue Ruling 54-564, C.B. 1954-2, 87, which modified G.C.M. 18828, C.B. 1937-2, 87, relating to the date on which ad valorem taxes imposed by the State of Oklahoma on real estate and personal property accrue for Federal income tax purposes.

G.C.M. 18828 held, in part, that Oklahoma real and personal property taxes accrue, for Federal income tax purposes, as of January 1, except that taxes on unmanufactured farm products accrue as of May 31. G.C.M. 18828 was modified by Revenue Ruling 54-564 to conform to the decisions in Noble v. Jones , 45 Fed.Supp. 504 (1942), and F. A. Gillespie Trust v. Commissioner , 21 T.C. 739 (1954), acquiescence, C.B. 1954-2, 4.

In the Noble case, where a taxpayer employing the cash receipts and disbursements method of accounting had acquired Oklahoma real property during the calendar taxable year in issue, the United States District Court for the Western District of Oklahoma held that liability for Oklahoma ad valorem taxes on the real estate arose, under an Oklahoma grantor-grantee statute which applied in the absence of a specific agreement between the parties, on October 15, the date the taxes became due and a lien on the property. Since the taxpayer had acquired the property before that date and since he had paid the taxes in the taxable year in issue, they were deductible by him as taxes paid.

In the Gillespie Trust case, where a taxpayer employing the cash receipts and disbursements method of accounting had acquired both real and personal property in Oklahoma during the calendar taxable year in issue, the Tax Court of the United States applied the rule of the Noble case to the real and personal property taxes paid thereon by the taxpayer in the taxable year, notwithstanding the fact that the Oklahoma grantor-grantee statute relates solely to real estate taxes. Under a 1941 revision in the grantor-grantee statute, the lien date had become October 1. In both cases, the fact that a lien attached to the property on a certain date determined whether the respective grantors or grantees were liable for the ad valorem property taxes as such and, therefore, were entitled to deductions for `taxes paid' for Federal income tax purposes.

In the Oklahoma Natural Gas Company case, the court held that the proper date of accrual, for Federal income tax purposes, of Oklahoma ad valorem taxes on personal property is the date the owner of such property becomes personally liable for the payment of taxes thereon. Similarly, the court held that the proper date of accrual of Oklahoma ad valorem taxes on real property is the date a charge upon the property in the nature of an in rem liability arises. In both instances, the proper date of accrual coincides with the date of assessment, which is January 1 of each year. The personal liability arising on January 1 for the personal property taxes is extinguishable only by payment. The charge upon the real property arising on January 1 continues until the taxes are paid. Although the exact amount of neither the personal property taxes nor the real property taxes is known on January 1, it was held that both are determinable with reasonable accuracy as of that date.

It has been concluded that the Oklahoma Natural Gas Company decision will be followed and that the decisions in Noble and Gillespie Trust will no longer be followed. Accordingly, the prior acquiescence in the latter decision is withdrawn and nonacquiescence is substituted therefor. See page 6, this Bulletin.

In view of the decision in the Oklahoma Natural Gas Company case, it is held that the ad valorem taxes imposed by Oklahoma on real estate and personal property accrue, for Federal income tax purposes, as of January 1 of each year, the assessment date of such property provided by section 15.6 of Title 68, Oklahoma Statutes, except that taxes on unmanufactured farm products accrue as of May 31, the assessment date provided for such products by section 15.8 of Title 68.

It should be noted, however, that under section 461(c) of the Internal Revenue Code of 1954, a taxpayer who computes taxable income under an accrual method of accounting may, under prescribed circumstances, elect to accrue real property taxes ratably over the period of time to which such taxes relate. See section 1.461-1(c) of the Income Tax Regulations. Also, under section 164(d) of the Code, applicable to taxable years beginning after December 31, 1953, generally, if real property is sold during any real property tax year, the real property tax shall be treated, for Federal income tax purposes, as tax imposed on the seller and purchaser, respectively, in proportion to the part of such year during which each of them owned the property. See section 1.164-6 of the regulations.

Revenue Ruling 54-564, C.B. 1954-2, 87, is revoked. G.C.M. 18828, C.B. 1937-2, 87, is reinstated with respect to the accrual date of Oklahoma real estate and personal property taxes.