Rev. Rul. 72-409

The Internal Revenue Service has reconsidered the position set forth in Revenue Ruling 71-46, C.B. 1971-1, 63, concerning the accrual date, for Federal income tax purposes, of the real property taxes imposed under the laws of the State of New Jersey.

Revenue Ruling 71-46 involved a domestic corporation which is the owner of both real and personal property located in the State of New Jersey. The taxpayer computed its income under an accrual method of accounting and on a calendar year basis. Revenue Ruling 71-46 held that, for Federal income tax purposes, personal property taxes imposed by the State of New Jersey accrue as of the assessment date which is January 1 and real property taxes imposed by such State accrue as of the assessment date which is on October 1.

Section 1.461-1(a) of the Income Tax Regulations provides that under an accrual method of accounting an expense is deductible for the taxable year in which all events have occurred which determine the fact of the liability and the amount can be determined with reasonable accuracy.

Section 54:5-6 of the New Jersey Statutes Annotated, as amended, provides as follows:

Unpaid taxes as a lien, penalties and costs.--Taxes on land shall be a lien on the land on which they are assessed on and after the first day of January of the year for which the taxes are assessed, and all interest, penalties, and costs of collection which thereafter fall due or accrue shall be added to and become a part of such item.

In New Jersey the assessment date of October 1, for real property taxes is an assessment for the succeeding taxable year. See The City of East Orange v. Dwight R. G. Palmer 220 A. 2d 679 (1966). In the case of Bea v. Turner & Co., 169 A. 832 (1934), the Court held that a tax on real estate (New Jersey) is only a lien on the land and not a personal obligation of a landowner or a charge on its chattels.

The Tax Court of the United States in Keil Properties, Inc. v. Commissioner 24 T.C. 1113 (1955), held that the proper accrual date for taxes is the date on which a personal liability arises or a lien attaches to the property. The decision of the Supreme Court of the United States in Magruder v. Supplee, 313 U.S. 394, C.B. 1942-1, 173, was cited in Keil as a basis for the Tax Court's position. The Keil decision has been followed in other court cases. See, for example, Messer Oil Corporation v. Commissioner 28 T.C. 1082 (1957).

In the instant case while there is no personal liability in New Jersey for the payment of real property taxes, a lien does attach to the property on the first day of January of the year for which the taxes are assessed.

Accordingly, the accrual date for a taxpayer to accrue the New Jersey real property taxes for Federal income tax purposes is January 1 (the lien date) of the year for which the taxes are assessed.

Section 446 of the Internal Revenue Code of 1954 in substance requires the permission of the Commissioner of Internal Revenue before a taxpayer may change his method of accounting for Federal income tax purposes. See section 1.446-1(e) of the regulations, relating to requirements respecting the adoption or change of accounting methods. A consistent method for the deduction of State property taxes is considered to be a method of accounting.

Any taxpayer who wishes to change his method of accounting for State real property taxes to the method prescribed herein must request the permission of the Commissioner.

Furthermore, where a taxpayer, for Federal income tax purposes, has deducted State real property taxes under a consistent method of accounting for such items, pursuant to section 446(b) of the Code, the Internal Revenue Service will not change the taxpayer's method of accounting for such State taxes unless the method used does not clearly reflect income.

Revenue Ruling 71-46, C.B. 1971-1, 63, which holds that personal property taxes imposed by the State of New Jersey accrue for Federal income tax purposes on January 1 and real property taxes imposed by such State accrue on October 1 for Federal income tax purposes, is hereby modified in part with respect to the accrual date of the New Jersey real property tax as set forth above.