Rev. Rul. 57-442

Advice has been requested as to the deductibility for Federal income tax purposes of the tax imposed by the State of Rhode Island on cigarettes after the effective date of H 626 passed at the January, 1956, Session of the General Assembly and approved by the Governor on March 15, 1956, amending Chapter 663 of the Public Laws of the State of Rhode Island and Providence Plantations.

In accordance with Chapter 663 of the Public Laws of the State of Rhode Island and Providence Plantations, 1939, as amended, cigarettes sold or held for sale in the State are subject to a tax evidenced by stamps affixed to the package, which are issued by the State tax administrator to distributors and dealers upon application and payment of a required fee.

In I.T. 3383, C.B. 1940-1, 38, it is held that for Federal income tax purposes the cost of the stamps which are required by the laws of the State of Rhode Island under Chapter 663, supra , to be purchased and affixed to packages of tobacco products is an allowable deduction as a tax in the return of the distributor or dealer purchasing and affixing the stamps. When added to the sale price of the tobacco products, the tax is merely an additional cost to the purchaser or consumer and is not deductible by him.

H 626, entitled `An Act in Amendment of Chapter 663 of the Public Laws, 1939, amended, entitled `An Act Imposing a Tax Upon the Sale of Cigarettes'' passed at the January 1956 Session of the General Assembly and approved by the Governor on March 15, 1956, added the following provision:

SECTION 39. All cigarette taxes paid in pursuance of this act or any other statute enacted by the General Assembly shall consluviely be presumed to be a direct tax on the retail consumer, pre-collected for the purpose of convenience and facility only.

Section 164(a) of the Internal Revenue Code of 1954 provides that in computing taxable income, except as otherwise provided, there shall be allowed as a deduction taxes paid or accrued within the taxable year. Section 39.23(c)-1(a) of Regulations 118, made applicable to section 164(a) pursuant to Treasury Decision 6091, C.B. 1954-2, 47, provides that in general taxes are deductible only by the person upon whom they are imposed.

In view of the apparent intent of the Rhode Island General Assembly to impose the cigarette tax upon the consumer in the State of Rhode Island, it is held that the cigarette tax imposed by the State of Rhode Island, under the provisions of Chapter 663, Public Laws of the State of Rhode Island and Providence Plantations, 1939, as amended, is, on and after the effective date of its amendment by H 626, March 15, 1956, deductible under section 164(a) of the Internal Revenue Code of 1954 by the consumer in computing taxable income, except that in the case of an individual who elects to use the optional standard deduction, the tax is not deductible unless attributable to a trade or business carried on by him which does not consist of the performance of services by the taxpayer as an employee. In the latter event, the tax is deductible from gross income.

On and after the effective date of the 1956 amendment, no deduction is allowable to the licensees paying the tax to the State of Rhode Island, and the portion of the price paid by the consumer to the licensees for cigarettes which represents the Rhode Island State tax upon the sale of cigarettes is not includible in the gross income of such licensees.