Section 461: a code section whose time has gone - d

Tax Executive, The, Jan-Feb, 1994 by Larry J. Lisses, Russell C. Nissen

Genesis of Section 461(d)

Section 461(d) was enacted to prevent taxpayers from obtaining a double deduction for property taxes in the year that their state taxing authorities changed the lien date of such State taxes to the last day of the income year (year in which the income was earned and for which the tax return is filed) from the first day of the privilege year (year following the income year, also known as the "taxable year"). This is clearly evidenced by the legislative history of Public Law No. 86-781, which was enacted in 1960. The Conference Report on that law provides:

Several States in recent years have changed this accrual date from January 1 to December 31 in order to provide an extra accrual date for State taxes. This amendment, which would be effective for years after 1960 and thus put the State and taxpayers on proper notice, would change the law to provide for only one accrual for State taxes in any one taxable year where the State legislature has changed the accrual date, and would thus eliminate the additional deduction available under existing law.

H.R. Rep. No. 2213, 86th Cong. Ist Sess. 905 (1960) (emphasis added). Unfortunately, the drafters of section 461(d) wrote the statutory provision so broadly that it encompasses any type of tax and did not limit its application to situations where there was an attempted double deduction of taxes.

Section 461(d) and the Hitachi Case

In Hitachi Sales Corp. of America v. Commissioner, T.C. Memo 1992-504, the California-based taxpayer deducted its March 31st CFT accrual on each of its 1982, 1983, and 1984 tax returns. The Internal Revenue Service disallowed the deductions for such franchise taxes on the grounds that an accrual was not permitted by section 461(d) and the pertinent regulations.

At trial, the IRS and taxpayer stipulated that Hitachi had consistently accrued and deducted its CFT on the last day of the income year. They also stipulated that the IRS had been inconsistent in its position on when the CFT is deductible.(2) In essence, Hitachi and the IRS agreed that for the fiscal years March 31, 1982 through 1984, Hitachi had deducted its CFT in accordance with section 461(a)'s all-events test(3)--namely, on the last day of the income year. The parties disagreed, however, on whether section 461(d) prevented accrual of such taxes until the following year. The dispute thus centered on the applicability of section 461(d). Judge Halpern held for the Commissioner, thereby denying Hitachi the deduction, even though Hitachi was not attempting to deduct two years' taxes in a single year.

Judge Halpern explained that "we must assume that Congress knew how to draft a statute limited solely to double dip years and that the fact that the statute was not so drafted was intentional on the part of Congress."

Hence, the wording of section 461(d) was the controlling factor in the decision in the Hitachi case, not the purpose of the provision or the inequity visited upon the taxpayer by the Tax Court's decision. No consideration was seemingly given to the proper matching of income and expense or to the fact that denying the deduction for CFT resulted in a year where income was not clearly reflected. Taxpayers paying the CFT are thus being penalized as a result of a poorly drafted statutory provision that was enacted in response to what was perceived to be an organized raid on the federal risc by the States.