Rev. Rul. 72-402

Advice has been requested with respect to the proper accrual date, for Federal income taxes, of real and personal property taxes imposed by the State of Oklahoma under the circumstances described below.

The taxpayer, a domestic corporation, reports its income under an accrual method of accounting and files its Federal income tax return on a calendar year basis. During the current taxable year it was required to pay both real and personal property taxes to the State of Oklahoma.

Section 1.461-1(a)(2) of the Income Tax Regulations provides that, under an accrual method of accounting, an expense is deductible for the taxable year in which all the events have occurred which determine the fact of the liability and the amount thereof can be determined with reasonable accuracy.

Under Oklahoma law the assessment date with respect to real property and personal property is January 1 of each year, except for unmanufactured farm products which are assessed and valued as of the preceding May 31st. See Section 2427, Art. 24, Title 68, Oklahoma Statutes Annotated, as amended. The real property tax is due and payable on the first day of November and if not paid, according to law, such tax becomes a lien for 15 years from that date. See sections 24303 and 24304 of Art. 24, Title 68, Oklahoma Statutes Annotated, as amended in 1965. The personal property tax is also due and payable on the first day of November under the above cited provisions; however, the lien date for personal property tax is set forth in section 24305, Art. 24, Title 68, Oklahoma Statutes Annotated, as amended, as follows:

Within sixty (60) days after taxes on personal property shall become delinquent as of April 1, the County Treasurer shall mail notice to the last known address of such delinquent taxpayer and cause a general notice to be published one time in some newspaper of general circulation, published in the county, giving the name of each person owing delinquent personal taxes, stating the amount thereof due, and stating that such delinquent personal taxes, if not paid within thirty (30) days from date of this publication shall be placed on a personal tax lien docket in the office of the county treasurer. Said liens are inferior to all other liens, conveyances or encumbrances filed prior thereto, on real or personal property, and shall be a lien on all real and personal property of the taxpayer in the county for a period of seven (7) years.

In the United States v. Oklahoma Natural Gas Company, 285 F. (2d) 333 (1960), 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. Under Oklahoma law (1) the owner of taxable personal property on the assessment date is personally liable for taxes assessed as of that date and (2) the owner of real property is not personally liable for ad valorem taxes on that property. The court concluded that in both instances, the proper date of accrual coincides with the date of assessment which is January 1 of each year.

At the time the decision in the Oklahoma Natural Gas Company case was rendered the statutes of the State of Oklahoma did not provide for a specific date on which a lien attaches to real property. In 1965, section 24304, Art. 24, Title 68, of Oklahoma Statutes was amended to provide that taxes upon real property were made a lien for 15 years from the date upon which such taxes become due and payable.

Revenue Ruling 62-107, C.B. 1962-2, 63, published prior to the 1965 amendment, holds that in view of the Oklahoma Natural Gas Company case, 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 date a charge upon real property in the nature of an in rem liability arises and the date personal liability arises for owners of personal property).

Accordingly, under the Oklahoma law as amended in 1965, it is held that, for Federal income tax purposes, the proper date for the taxpayer to accrue the Oklahoma real property taxes is November 1, the date the in rem liability arises (lien date), while the proper date for the accrual of Oklahoma personal property taxes is January 1, the date the personal liability arises (assessment date), except that taxes on unmanufactured farm products accrue as of May 31, the assessment date provided for such products. 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 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.

Section 446 of the Code 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.

In view of the foregoing, Revenue Ruling 62-107 is hereby modified to the extent that it holds, contrary to the instant Revenue Ruling, that ad valorem taxes imposed by the State of Oklahoma on real property accrue, for Federal income tax purposes, on January 1.