Rev. Rul. 71-212

Advice has been requested with respect to the proper taxable year of deduction under section 461(a) of the Internal Revenue Code of 1954 of a franchise or license tax imposed by the State of Virginia on the taxpayer, a public service corporation.

The taxpayer is a Virginia corporation that is engaged in the business of furnishing telephone service to the public. It uses the accrual method of accounting and files its Federal income tax return on the basis of a calendar year.

Chapter 12 of Title 58 of the Virginia Code imposes a so-called "franchise or license tax" on public service corporations. Article 1 of such chapter has general application. Section 58-504 of Article 1 provides for a tax for the first year of operation based on gross receipts for that year, initially on an estimate and finally on actual receipts. Section 58-505 of Article 1 provides for a tax for all years following the first year of operation based on gross receipts for the year; initially on an estimate and finally on actual receipts. Section 58-580 of Article 8 (which applies specifically to telephone companies) provides the rate of tax (as imposed by sections 58-504 and 58-505) on telephone companies and bases the tax on actual receipts for the year preceding the year of assessment. In addition, section 58-580 of Article 8 provides a rate of tax based on the number of miles of telephone line owned or used by the company in Virginia at the beginning of the first day of the "tax year." Section 58-514.9 of Article 1.1, which also has general application, imposes a tax on the receipts received in the final year of operation.

Section 58-514.3 of Article 1.1, having general application, defines "taxable year" as the year which produced the gross receipts and defines "tax year" as the year following the "taxable year." The "tax year" is the year of assessment.

Section 58-581 of Article 8 requires telephone companies to report annually on April 15th and the tax determined under section 58-580 is assessed from this report (i.e., gross receipts in Virginia for the twelve months ending December 31 of the "taxable year," and the miles of line owned by and used by it in Virginia on the first day of January of the "tax year.") The tax is due and payable on June 15th of the "tax year."

Effective for the "taxable years" be- beginning after 1968, Article 1.1 (having general application) requires (1) that a declaration of estimated tax be filed in the "taxable year" estimating the gross receipts for the "taxable year," and estimating the tax for the "tax year" and (2) that the tax so estimated be paid quarterly during the "taxable year." No similar prepayment of the tax on miles of telephone line is required by the statute.

Section 58.514.9 of Article 1.1 provides that if a public service corporation goes out of business or ceases to be a public service corporation in any taxable year, such event shall not defeat the payment of the tax on gross receipts for the period in which the corporation operated as a public service corporation and received gross receipts.

Section 461(a) of the Code provides, in part, that the amount of any deduction allowed shall be taken for the taxable year that is the proper taxable year under the method of accounting used in computing taxable year.

Section 1.461-1(a) of the Income Tax Regulations provides, in part, that under an accrual method of accounting, an expense is deductible for the taxable year in which all the events have occurred that determine the fact of the liability and the amount thereof can be determined with reasonable accuracy.

Revenue Ruling 68-305, C.B. 1968-1, 213, holds that the estimated payments of the California Bank and Corporation Franchise Tax by an accrual basis corporation in the income year may not be deducted until the succeeding taxable year since its liability to pay such franchise tax cannot be determined before the first day of the succeeding taxable year during which the corporate franchise is exercised for the reason that it is the exercise of such franchise that fixes the tax liability of the corporation. Thus, the franchise tax is for doing business during the succeeding taxable year.

Insofar as the Virginia tax based on gross receipts is concerned, the instant case is distinguishable from Revenue Ruling 68-305 since the estimated franchise or license tax based on gross receipts that is paid during the "taxable year" (income year) is for doing business in such taxable year and all events that determine liability will have occurred by the last day of that year. The fact that the Virginia statutes impose a franchise or license tax on the receipts received in the final year of operation indicates that liability for tax is based upon gross receipts in each year and does not depend upon operation by the taxpayer in the "tax year" following the year of receipts.

Accordingly, in the instant case, for purposes of section 461(a) of the Code, only the actual Virginia franchise or license tax liability based on the gross receipts of the "taxable year" may be accrued by the taxpayer as of December 31. However, since the portion of the Virginia franchise or license tax that is based on miles of telephone line owned and used by the taxpayer as of January 1 of the "tax year" is not determined until that date, such portion of the franchise or license tax is accruable on January 1 of the "tax year."