Rev. Rul. 73-600

Advice has been requested concerning the Federal tax consequences of the transaction described below.

During 1972 the taxpayer, an individual and a United States citizen, resided in the United Kingdom where he occupied leased living quarters. In that year he paid $1,250 representing the "rates" tax assessed by the local United Kingdom taxing authorities (political subdivisions) on him in respect of his leased living quarters.

The specific question involved is whether the local United Kingdom "rates" tax is a foreign real property tax and, therefore, deductible under section 164(a)(1) of the Internal Revenue Code of 1954.

Section 164(a)(1) of the Code provides a deduction for all state and local, and foreign, real property taxes which are paid or accrued during the taxable year. Section 1.164-1(a) of the Income Tax Regulations provides that, in general, taxes are deductible only by the person upon whom they are imposed. Section 1.164-3(b) of the regulations defines the term "real property taxes" as "taxes imposed on interests in real property" and levied for the general public welfare, not including taxes assessed against local benefits. Section 1.164-3(d) of the regulations provides that the term "foreign taxes" includes only a tax imposed by the authority of a foreign country. This section of the regulations also provides that a tax imposed by a political subdivision of a foreign country is considered to be imposed by the authority of that foreign country. Section 1.164-4(a) of the regulations provides, in part, that deductible real property taxes 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.

The United Kingdom "rates" tax is a foreign tax levied by political subdivisions of the United Kingdom for the general public welfare and is not assessed against local benefits. Also, the "rates" tax is imposed on the subject taxpayer in that he is paying it on his own behalf and not on behalf of another. Thus, for the taxpayer to be allowed to deduct his payment of the "rates" tax under section 164(a)(1) of the Code, the only issue to be resolved is whether the "rates" tax is a foreign real property tax within the meaning of section 164(a)(1), that is, whether the "rates" tax is "imposed on interests in real property." The standard to be applied in making this determination is whether the foreign tax is a "real property tax" as that term is used in the Code. Cf., Biddle v. Commissioner, 302 U.S. 573 (1938), 1938-1 C.B. 309.

The most recent United Kingdom statutory authority is the General Rate Act 1967, c. 9. That Act repealed and consolidated with little substantive change most of the former statutory authority relating to the United Kingdom "rates" tax dating back to its origin in the Poor Relief Act 1601.

Section 16 of the General Rate Act 1967 provides:

Liability to be rated in respect of occupation of property. Subject to the provisions of this Act, every occupier of property of any of the following descriptions, namely--

(a) lands;

(b) houses;

(c) coal mines;

(d) mines of any other description, other than a mine of which the royalty or dues are for the time being wholly reserved in kind;

(e) any right of sporting (that is to say, any right of fowling, of shooting, of taking or killing game or rabbits, or of fishing) when severed from the occupation of the land on which the right is exercisable,

shall be liable to be assessed to rates in respect of the hereditament or hereditaments comprising that property according to the rateable value or respective rateable values of that hereditament or those hereditaments determined in accordance with the provisions of this Act.

Section 17 of the Act provides for rating in respect of certain unoccupied property if the local taxing authority so elects. Under such circumstances the owners of such property would be rated.

Section 19 of the Act provides, in general, that rateable value is computed on the basis of a presumed reasonable annual rental value that a tenant would pay and a landlord would accept.

Section 96 of the Act provides, in effect, that the person liable for the "rates" tax is only personally liable. Where the occupier is rated and thus is the person liable for the "rates" tax, if the tax is not paid by him, such tax cannot be reduced to a lien against the property occupied.

Under the General Rate Act 1967, its predecessor statutes, and other United Kingdom law, the occupier and not the property occupied is rateable. That is, the "rates" tax is not a tax on the land, but a personal charge in respect of the land. The person to be rated is generally the occupier of the property and not the owner. This is illustrated by the fact that if the owner of land is exempt from the "rates" tax, but the occupier is not, the "rates" tax liability attaches to the occupier. On the other hand, if the owner is not exempt from the "rates" tax but the occupier is, then no "rates" tax liability attaches to anyone.

Under United Kingdom law, whether a person is in "rateable" occupation depends upon the facts relating to his occupation or use of property and not his title thereto. For occupation to be rateable, the occupier must exclude all others from using the property in the same way as he uses it. Occupation does not cease to be exclusive because other persons use the property in some other way, for their different uses may make them separately rateable. Rateable occupation also must (1) include actual possession (as distinguished from mere legal possession), (2) have some degree of permanence (generally more than three months), and (3) be of some value or benefit to the occupier.

Generally, unused property is not rateable. The owner of a vacant house is not rateable, but if the house is furnished and ready for occupation he is considered in rateable occupation even though he may not occupy the house one day out of the year.

The foregoing indicates that the "rates" tax is not a tax on or against real property or on interests in real property within the scope of section 164(a)(1) of the Code or the regulations thereunder, but is rather a tax on the occupation or use of real property, computed on the basis of the presumed rental value thereof, and for which there is only personal liability.

Accordingly, the taxpayer in the instant case may not deduct the United Kingdom "rates" tax as a foreign real property tax under section 164(a)(1) of the Code.

Rev. Rul. 64-327, 1964-2 C.B. 56, and Rev. Rul. 68-84, 1968-1 C.B. 71, pertaining to a deduction for real property taxes in Hawaii and California respectively, are distinguishable from the instant case in that they involve the question of on whom the real property taxes therein are imposed for purposes of determining who may deduct such taxes under section 164(a)(1) of the Code, while the instant case involves whether the United Kingdom "rates" tax is a real property tax under section 164(a)(1).