Rev. Rul. 63-138

Advice has been requested as to the deductibility, for Federal income tax purposes, of the taxes imposed upon the sale and the use of cigarettes by the State of Illinois under section 453.2 and 453.32, respectively, of chapter 120, Illinois Revised Statutes 1961, as amended by Senate Bill 856, approved August 9, 1961.

The State of Illinois imposes taxes on cigarettes under two laws, namely the `Cigarette Tax Act' (Ill. Rev. Stat. 1961, chapter 120, sections 453.1-453.30) and the `Cigarette Use Tax Act' (Ill.Rev.Stat. 1961, chapter 120, sections 453.31-453.67).

Section 453.2 of chapter 120, relating to the Cigarette Tax Act, imposes a tax, at a specified rate per cigarette, upon distributors selling or otherwise disposing of cigarettes in the course of business in the State. Under section 453.1 the term `distributor' includes out-of-State manufacturers of cigarettes who elect to qualify as, and are accepted as, distributors.

Section 453.32 of chapter 120, relating to the Cigarette Use Tax Act, imposes a tax upon the privilege of using cigarettes in the State. The statutory provisions with respect to the cigarette use tax closely parallel those relating to the cigarette tax but relieve the distributor from remitting to the States the cigarette use tax on the same cigarettes upon which the cigarette tax has been paid by that distributor. Under section 453.42, a person who acquires cigarettes outside the State for use therein and does not pay the use tax to a distributor is required to file a return with the Illinois Department of Revenue within three days declaring the possession of such cigarettes and transmitting therewith the required use tax.

Senate Bill 856, approved August 9, 1961, amended section 3 of the Cigarette Use Tax Act (Ill. Rev. Stat. 1961, chapter 120, section 453.33) to provide as follows:

All taxes upon cigarettes under this Act are declared to be a direct tax upon the retail consumer and shall conclusively be presumed to be precollected for the purpose of convenience and facility only.

Section 164(a) of the Internal Revenue Code of 1954 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 Illinois Legislature to impose the cigarette use tax on the retail consumer, it is held that on and after August 9, 1961, the cigarette use tax imposed by section 453.32, chapter 120, Illinois Revised Statutes 1961, as amended, is deductible under section 164(a) of the Code by the consumer in computing taxable income; except that the tax is not deductible by an individual who elects to use the standard deduction or the optional tax table unless the tax is attributable to a trade or business carried on by him. 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 under section 62 of the Code.

Effective August 9, 1961, no deduction is allowable to a distributor paying the cigarette use tax to the Illinois Department of Revenue and no portion of the price paid by the retail consumer to the distributor for cigarettes, which represents the Illinois cigarette use tax, is includible in the gross income of such distributor.