Magruder v. Supplee

Background

During 1936–1937, several people bought parcels of real estate in Baltimore while state and city taxes for the current year remained unpaid. Their contracts split the year’s taxes so buyers would pay the share for the period after purchase and sellers would bear the earlier fraction; prices were adjusted accordingly. Buyers paid the taxing authorities and, filing cash-basis income tax returns, deducted the post-purchase portions. The Commissioner disallowed those deductions as part of the property cost, a deficiency was paid under protest, and lower courts had sided with the buyers.

Reasoning

The Court focused on who the law actually made responsible for the taxes. Under Maryland and Baltimore law, the tax assessment became final before the sales and liens attached at the due date; sellers were personally liable before the transfers. A tax lien is an encumbrance on the land, and paying to remove a prior lien is like paying part of the purchase price, not paying a tax imposed on the buyer. The Court relied on the Treasury rule that taxes are deductible only by the person upon whom they are imposed, concluding the taxes were imposed on the sellers, not the buyers, so the buyers’ payments were not deductible.

Real world impact

Buyers who clear a seller’s preexisting property tax lien cannot treat those payments as deductible taxes; they are treated as part of the purchase price. Parties cannot change the legal incidence of local taxes simply by agreement. This decision reverses the lower courts and requires taxpayers to look to local law and lien status when attempting such deductions.