Rev. Rul. 79-180

ISSUE

Is the New York State renters tax deductible by renters as a real property tax under section 164(a)(1) of the Internal Revenue Code of 1954?

FACTS

On July 6, 1978, the State of New York amended the New York Real Property Tax Law (McKinney 1972) to provide that certain renters of residential property have an interest in real property, are personally liable for the real property taxes due on their interest, and are entitled to a federal itemized deduction for those taxes. Laws 1978, chapter 471. The effective date of the amendment is April 1, 1980. Laws 1979, chapter 41.

Section 304 of the New York Real Property Tax Law provides that all assessments shall be against the real property itself which shall be liable to sale pursuant to law for any unpaid taxes or special ad valorem levies.

However, where real property in whole or in part is rented for residential purposes pursuant to a lease or to the same occupant or occupants for twelve consecutive months or longer, or if the dwelling unit is subject to rent controls and regulation, a renter who pays $150 or more a month in rent (or less than $150, if the renter makes an election) is deemed to have an interest in the real property and is subject to state and local laws covering the levy and collection of taxes and the enforcement of collection of delinquent taxes. This provision does not, however, relieve the owner of real property from the obligation of paying all taxes due on the owner's property or vitiate the sale of the real property for unpaid taxes or special ad valorem levies. The owner of real property is obligated to apply the first money received each month from the renter to taxes due on the owner's real property.

The owner of the real property is required to file annually, on or before the tax status date, with the appropriate assessment department, the rent roll covering all units of the property, including names of those renters to whom section 304 applies. The schedule of rents must include all units whether rented or not and whether residential or not. An assessed valuation is assigned to each rental unit of the property by establishing the relationship of the yearly rent for the unit to the total yearly rent roll and applying this ratio to the assessment established for the rental property as a whole, less the assessment on that portion of the property that is determined not held for rental purposes. Taxes on the property not held for rental purposes are assessed solely against the owner and are not considered in determining the assessed valuation of each rental unit. In the event that the assessor reassesses the real property, the relationships established for the prior assessments shall be applied to the new assessments.

Section 926-a of the New York Real Property Tax Law provides that the owner of the real property is deemed an agent of the collecting officer for purposes of collecting taxes due from each renter to whom section 304 applies. The payments by the renter to the owner must be made in two separate amounts, consisting of basic rent (the rental amount less the amount of the real property tax designated for the rental unit) and the real property tax due from the rental unit. The annual real property tax must be paid to the owner in equal monthly installments. Tax payments to the owner discharge the renter's liability for taxes so paid, regardless of any subsequent disposition of the moneys made by the owner. If a renter fails to pay that portion of the rental charges attributable to taxes or is delinquent in payments to the owner so that less than all of the money due for real property taxes is paid to the owner, the owner is deemed to have assumed the renter's interest in the unit. Where a rental unit is vacant all or part of the taxing period, the owner is deemed to hold the renter's interest in that unit for the period of the vacancy and to assume the liability for taxes levied on that unit.

An owner of real property, where a renter who has an interest in real property pursuant to section 304 is an occupant, may not charge such a renter an amount in any rent period in excess of the rent reserved in the lease or the maximum rent permitted under rent controls and regulations, reduced by the renters tax allocated to the renter.

LAW AND ANALYSIS

Section 164(a)(1) of the Code allows as a deduction, for the taxable year within which paid or accrued, state and local, and foreign, real property taxes.

Section 1.164-3(b) of the Income Tax Regulations provides that the term "real property taxes" means taxes imposed on interests in real property and levied for the general public welfare.

Under federal law, a tax is an enforced contribution, exacted pursuant to legislative authority in the exercise of the taxing power, and imposed and collected for the purpose of raising revenue to be used for public or governmental purposes, and not as a payment for some special privilege granted or service rendered. Rev. Rul. 77-29, 1977-1 C.B. 44.

Rev. Rul. 58-141, 1958-1 C.B. 101, states that the question of whether a particular contribution, charge, or burden is to be regarded as a tax depends on its real nature and, if it is not in its nature a tax, it is not material that it may have been so called.

Thus, the fact that the State of New York treats a portion of the total rental amounts paid by renters to owners of real property as real property tax payments does not establish that those payments are in fact real property tax payments, because the focus is on the nature of the transaction under federal law. See Lyeth v. Hoey, 305 U.S. 188 (1938), Ct. D. 1370, 1938-2 C.B. 208.

The New York renters tax does not impose on the renter any economic burden that did not exist prior to the enactment of section 304 of the New York Real Property Tax Law. Rather, the renters tax merely divides the separately determined rental amount into a so-called rental payment and a so-called real property tax payment. The lack of an economic burden on the renter is further evidenced by the fact that the owner is not relieved from the obligation of paying all taxes due on the owner's property. Under section 926-a, the owner is deemed to assume the renter's interest in the unit if the renter is delinquent in making payment to the owner. In the event of the renter's nonpayment, section 304 looks to the owner for payment and the taxing authority may enforce payment against the owner's interest in the entire property.

HOLDING

The New York State renters tax paid by renters pursuant to sections 304 and 926-a of the New York Real Property Tax Law is not a tax on the renter for federal income tax purposes, but rather is part of the renters' rental payments.

Because the New York renters tax is not a tax on the renter for federal income tax purposes, it is not necessary to decide whether such a tax could qualify as a real property tax deductible under section 164(a)(1) of the Code by the renter. Even if the renters tax could qualify as a tax for federal income tax purposes, see Waxenberg v. Commissioner, 62 T.C. 594 (1974), in which the United States Tax Court concluded that a United Kingdom rates tax was nondeductible because it was not a real property tax for purposes of section 164, but rather was an excise tax imposed on the use or occupancy of property, which is only one of the incidents of ownership of real property; and Rev. Rul. 73-600, 1973-2 C.B. 47, in which the Service has taken the same position on the United Kingdom rates tax; and Rev. Rul. 75-558, 1975-2 C.B. 67, which follows the rationale in Waxenberg in holding that the Prince George's County, Maryland, renters tax is not a real property tax for purposes of section 164 because it is imposed with respect to the occupancy of real property, which is the renter's only incident of ownership of real property.