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State, Local, and Federal Taxes (Portfolio 525)

Tax Management Portfolio, State, Local, and Federal Taxes, No. 525-3rd, analyzes in depth the deduction of state, local, and federal taxes, and the timing of the deduction, with primary focus on §§164, 275, and 461, in the Internal Revenue Code of 1986, and the regulations thereunder.

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DESCRIPTION

Tax Management Portfolio, State, Local, and Federal Taxes, No. 525-3rd, analyzes in depth the deduction of state, local, and federal taxes, and the timing of the deduction, with primary focus on §§164, 275, and 461, in the Internal Revenue Code of 1986, and the regulations thereunder.

Under §164, taxpayers may deduct, in computing taxable income, certain taxes paid or accrued during the taxable year. Certain specifically enumerated taxes are deductible without regard to the existence of a trade or business or for-profit activity. Some taxes are deductible only if paid or accrued in carrying on a trade or business or for-profit activity. Some taxes are not deductible under any circumstances, even if paid or accrued in carrying on a trade or business or for-profit activity.

Taxpayers are not permitted to deduct taxes they pay unless the tax is imposed on them (rather than some other person) or falls within one of several exceptions allowing taxpayers to deduct taxes that are the obligation of other persons.

This Portfolio discusses these issues, as well as the proper timing for taking a deduction for paid or accrued taxes. Because of the technicalities involved in defining deductible taxes and the complexity of the accrual principles, it is essential that taxpayers and their tax advisers be completely familiar not only with applicable federal income tax principles concerning the tax deductions, but also with the state and local statutes that determine the precise date of imposition for federal income tax accrual purposes.


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AUTHORS

JAMES EDWARD MAULE
James Edward Maule, B.S., University of Pennsylvania (1973); J.D., Villanova University (1976); LL.M. (Taxation), George Washington University (1979); lecturer, Villanova University Graduate Tax Program and Tax Forum CLE Programs; lecturer, Philadelphia Bar Association Tax Section; member, U.S. Income Advisory Board, Tax Management Inc.; former attorney-advisor, United States Tax Court, Judge Herbert L. Chabot; former attorney-advisor, Chief Counsel to the Internal Revenue Service; former Editorial Advisory Board member and Columnist, Journal of Limited Liability Companies; former lecturer, ALI-ABA; former lecturer, Tax Management, Inc. & Continuing Legal Education Satellite Network; former lecturer, Pennsylvania Bar Institute; former lecturer, Georgetown University Law Center Institute on State and Local Taxation; former lecturer, The Dickinson School of Law CLE Programs; member, American Bar Association, Section of Taxation, Committee on S Corporations (Consultant and former Chair, Subcommittee on Subchapter S and State Law; former Chair, Subcommittee on Comparison of Partnerships and S Corporations); member, American Bar Association, Section of Taxation, Committee on Teaching Taxation (Chair, Subcommittee on Manuscripts and Unpublished Teaching Materials; member, Subcommittee on Important Developments); member, American Bar Association, Section of Taxation, Tax Practice Management Committee; member, American Bar Association, Section of Taxation, Formation of Tax Policy Committee; member, American Bar Association, Section of Taxation, Committee on Tax Structure and Simplification; former Chair, American Bar Association, Section of Taxation, Phaseout Tax Elimination Project; former member, American Bar Association, Section of Taxation, Task Force on Pass-Through Entities; former member, American Bar Association, Section of Taxation, Task Force on Legislative Recommendation No. 86-1; former member, Philadelphia Bar Association Tax Section; author and owner, TaxJEM Inc., publisher of computer assisted legal instruction programs; owner, JEMBook Publishing Company, publisher of law and genealogy books; author of numerous books, monographs, and book chapters; contributor to various tax periodicals.

TABLE OF CONTENTS

Detailed Analysis

I. Introduction

A. Overview

B. Historical Background

II. Specifically Enumerated Deductible Taxes

A. Introduction

B. State, Local, and Foreign Real Property Taxes

1. On Real Property Ownership

2. Imposed at Rate Based on Valuation

3. Payments in Lieu of Real Estate Taxes

C. State and Local Personal Property Taxes

1. In General

2. “Ad Valorem”

3. “In Respect of Personal Property”

D. State, Local, and Foreign Income, War Profits, and Excess Profits Taxes

1. Introduction

2. Domestic Taxes

3. Foreign Taxes

4. Possessions Taxes

E. State and Local General Sales Taxes

1. Introduction

2. Sales Tax

3. General Sales Tax

a. In General

b. At Retail

c. “At a Single Rate”

d. Exception for Food, Clothing, Medical Supplies, and Motor Vehicles

e. Motor Vehicles Taxed at Rates Exceeding General Rate

f. Rates in Border Areas

4. Compensating Use Taxes

5. IRS Sales Tax Tables

F. State, Local, and Foreign Taxes

G. Self-Employment Taxes

H. Generation Skipping Transfer Tax

I. Environmental Tax

J. Qualified Motor Vehicle Taxes

III. Taxes Specifically Not Deductible

A. Introduction

B. Taxes Nondeductible for Policy Purposes

C. Taxes Nondeductible Because Capital in Nature

1. In General

2. Taxes Assessed Against Local Benefits

a. In General

b. Deductible Maintenance and Interest Charges

c. Special Taxing District Under “Savings” Clause of the Revenue Act of 1964

3. Transfer Taxes

D. Taxes Nondeductible Because of Source of Funds Associated with Payment

1. Introduction

2. State, Local, and Foreign Income Taxes

3. Real Property Taxes

IV. Taxes and Similar Items Deductible as Trade or Business Expenses or as For-Profit Activity Expenses

A. Introduction

B. Items Deductible Only If Ordinary and Necessary Test Met

1. In General

2. Definition of a Tax

3. Other Items

C. Taxes Paid or Accrued in Carrying on a Trade or Business or in a For-Profit Activity But Not Specifically Enumerated as a Deductible Tax

1. Introduction

2. Employment-Related Taxes

3. Taxes on Transactions or Status

4. Taxes for Service-Related Functions of the Taxing Authority

5. Capitalization Exception

a. In General

b. Optional Capitalization under 266

c. Other Capitalization Requirements

V. Identity of Taxpayer Entitled to Deduction

A. General Rule

1. Introduction

2. Payment Through Agent

3. Payments on Behalf of Corporations

4. Real Property

5. Married Taxpayers

6. Substantiation

B. Taxes of Shareholder Paid by Corporation

C. Cooperative Housing Corporation Shareholders

D. Condominium Unit Owners

E. Apportionment of Real Property Taxes

1. Introduction

2. The Apportionment Formula: Real Property Tax Year

3. Scope of the Rule

4. Excess Deductions

F. General Sales Taxes

1. General Rule

2. Separately Stated

3. Consumer

a. In General

b. Sales Taxes Paid by Taxpayer's Contractor

VI. Timing of the Deduction for Taxes

A. Introduction

B. Cash Method Taxpayers

C. Accrual Method Taxpayers

1. In General

2. All-Events Test

3. Economic Performance Test

a. General Rules

b. Exceptions

c. Recurring Item Exception

4. Limitation on Accrual Accelerations

a. Background

b. Disregard of Certain Post-December 31, 1960 Changes

c. Exception

D. Election to Accrue Taxes Ratably

1. Introduction

2. Effect of the Election

3. Election Requirements

a. In General

b. Simplified Procedure

4. Considerations in Making Election

E. Timing of Apportioned Real Property Taxes

1. Introduction

2. Date of Lien or Personal Liability

3. Sales Before Real Property Tax Year and After Date Tax Becomes Lien or Personal Liability

4. Sales After Real Property Tax Year and Before Date Tax Becomes Lien or Personal Liability

5. Sales During Real Property Tax Year

a. Cash Method Seller

b. Cash Method Purchaser

c. Accrual Method Taxpayers

F. Accrual of Contested Taxes

1. In General

2. Contest

3. Payment or Transfer

4. Survival of the Contest

5. Otherwise Allowable in Same or Prior Year

6. Refunds of Contested Taxes

7. Interrelated Federal and State Taxes

8. Effective Date

VII. Alternative Minimum Tax


WORKING PAPERS

Working Papers

Table of Worksheets

Worksheet 1 Accrual Rulings for State and Local Property and Franchise Taxes

Worksheet 2 Internal Revenue Code of 1954 H.R. Rep. No. 1337, 83d Cong., 2d Sess. (1954) (House Report) S. Rep. No. 1622, 83d Cong., 2d Sess. (1954) (Senate Report) H.R. Rep. No. 2543, 83d Cong., 2d Sess. (1954) (Conference Report) (Excerpts)

Worksheet 3 Revenue Act of 1978 H.R. Rep. No. 1445, 95th Cong., 2d Sess. (1978) (House Report) S. Rep. No. 1263, 95th Cong., 2d Sess. (1978) (Senate Report) H.R. Rep. No. 1800, 95th Cong., 2d Sess. (1978) (Conference Report) (Excerpts)

Worksheet 4 Crude Oil Windfall Profit Tax Act of 1980 H. R. Rep. No. 304, 96th Cong., 2d Sess. (1980) (House Report) S. Rep. No. 394, 96th Cong., 2d Sess. (1980) (Senate Report) H.R. Rep. No. 817, 96th Cong., 2d Sess. (1980) (Conference Report) (Excerpts)

Worksheet 5 P.L. 97-473 (Jan. 14, 1983) S. Rep. No. 646, 97th Cong., 2d Sess. (1982) (Senate Report) H.R. Rep. No. 984, 97th Cong., 2d Sess. (1982) (Conference Report) (Excerpts)

Worksheet 6 Social Security Amendments of 1983 H.R. Rep. No. 25, 98th Cong., 1st Sess (1983) (House Report) S. Rep. No. 23, 98th Cong., 1st Sess. (1983) (Senate Report) H.R. Rep. No. 47, 98th Cong., 1st Sess. (1983) (Conference Report) (Excerpts)

Worksheet 7 The Tax Reform Act of 1986 H.R. Rep. No. 426, 99th Cong., 2d Sess. (1986) (House Report) S. Rep. No. 313, 99th Cong., 2d Sess. (1986) (Senate Report) H.R. Report No. 841, 99th Cong., 2d Sess. (1986) (Conference Report) (Excerpts)

Worksheet 8 State and Local General Sales Taxes - Excerpt from Form 1040 Schedule A Instructions

Bibliography

OFFICIAL

Statutes:

United States Code:

Regulations:

Committee Reports:

Treasury Rulings:

Cases:

UNOFFICIAL

Books:

Treatises:

Periodicals:

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