State, Local, and Federal Taxes, written by James Edward Maule, Esq., Professor of Law at Villanova University School of Law, 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. 

This Portfolio discusses how 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. Other 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. 

State, Local, and Federal Taxes allows you to benefit from:

• Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area
• Invaluable practice documents including tables, charts and lists
• Plain-English guidance from world-class experts
• Real-world and in-depth analysis that lets you explore various options
• Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more
• Alternative approaches to both common and unique tax scenarios

This Portfolio is part of the U.S. Income Portfolios Library, a comprehensive series that includes more than 200 Portfolios, which covers every federal tax topic with expert, in-depth analysis, and offer commentary on a wide range of federal taxation topics, including Compensation Planning, Deductions and Credits, Partnerships and Corporations, Special Pass-Through Entities, Corporate Reorganizations, Real Estate, Procedure and Administration, and more. 

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

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

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Treatises:

Periodicals:

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