Rev. Rul. 64-114

Advice has been requested with respect to the deductibility, for Federal income tax purposes, of the ten percent tax imposed by the State of Virginia on the sale of certain alcoholic beverages under Title 4, Code of Virginia, 1950, as amended in 1962.

Revenue Ruling 61-107, C.B. 1961-1, 42, holds, in pertinent part, that the taxes levied upon all alcoholic beverages, sold either by or through the Virginia Alcoholic Beverages Control Board, under section 15.1 of Title 4, Code of Virginia, 1950, as amended by Chapter 393, Acts of the General Assembly, 1960, effective August 1, 1960, to June 30, 1962, are not deductible by the consumer under section 164(c) of the Internal Revenue Code of 1954.

Sections 15.1(b) and (c) of Title 4, Code of Virginia, 1950, as amended, provide that the State tax shall be ten percent of the price charged by the Alcoholic Beverage Control Board.

Chapter 151, Acts of the General Assembly, 1962, effective June 30, 1962, extended the effective date of section 15.1 of Title 4, Code of Virginia, 1950, to June 30, 1964.

In addition Chapter 210 of the Acts of the General Assembly, 1962, effective June 30, 1962, added section 15.2 to Title 4, Code of Virginia, 1950. Section 15.2 provides as follows:

4-15.2. The State tax imposed upon alcoholic beverages sold at government stores under section 4-15.1 shall be deemed a tax upon the purchaser thereof. The amount of the tax as to each item so offered for sale shall be printed beside the price of each such item in a separate column adjacent to the gross retail price upon the price lists exhibited in government stores.

Section 164(a) of the Code as in effect prior to the enactment of section 207 of the Revenue Act of 1964, 78 Stat. 40, provides that in computing taxable income there shall be allowed as a deduction taxes paid or accrued within the taxable year, with certain exceptions not here material.

Section 1.164-1 of the Income Tax Regulations provides that, in general, taxes are deductible only by the person upon whom they are imposed.

In view of the intent of the General Assembly of Virginia to impose on the purchaser or consumer the ten percent State tax on alcoholic beverages sold at government stores, levied under section 15.1 of Title 4, it is held that such tax is, on and after June 30, 1962, deductible under section 164(a) of the Code as in effect prior to the enactment of section 207 of the Revenue Act of 1964, in computing taxable income, by the purchaser or consumer who pays the tax to the government store, but only for taxable years beginning before January 1, 1964. In the case of an individual who elects to use the standard deduction or optional tax table, no deduction is allowable unless attributable to a trade or business carried on by him which does not consist of the performance of services as an employee. If the tax is attributable to a trade or business carried on by the individual, the amount of the tax is deductible from gross income in computing adjusted gross income. See section 62 of the Code.

Insofar as purchasers or consumers who buy alcoholic beverages from State-designated licensees are concerned, the tax which is reflected in the retail selling price paid to such licensees represents an additional cost of the alcoholic beverage and is not deductible by such purchasers or consumers. The State-designated licensees who pay the tax to the Virginia Alcoholic Beverage Control Board are entitled to a deduction for that tax.

Revenue Ruling 61-107 is hereby modified to indicate that the taxes imposed under section 15.1 of Title 4, Code of Virginia, upon alcoholic beverages sold at government stores, are deductible on and after June 30, 1962, for taxable years beginning prior to January 1, 1964, by the purchaser or consumer under section 164(a) of the Code as in effect prior to the enactment of section 207 of the Revenue Act of 1964.

It should be noted that section 207 of the Revenue Act of 1964 eliminates any deduction for alcoholic beverage taxes for taxable years beginning after December 31, 1963, other than alcoholic beverage taxes paid or accrued in carrying on a trade or business or an activity described in section 212 of the Code.