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Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934); Higbee
v. Commissioner, 116 T.C. 438 (2001).
A. Real Estate Excise Tax
The first issue is whether petitioners are entitled to
deduct under section 164(a)(1) the Washington State real estate
excise tax that they paid on the sale of their residence.
As relevant herein, section 164(a) allows a deduction for
five specific categories of taxes, specifically including State,
local, and foreign real property taxes. Sec. 164(a)(1).
Notwithstanding the general deductibility of taxes, any tax that
does not fall within one of the specific categories of deductible
taxes enumerated in section 164(a) and that is paid or accrued in
connection with the disposition of property shall be treated as a
reduction in the amount realized on the disposition of that
property.
Section 1.164-3(b), Income Tax Regs., defines real property
taxes as: “taxes imposed on interests in real property and levied
for the general public welfare, but it does not include taxes
assessed against local benefits.” [Emphasis added.]
Petitioners contend that Washington State’s real estate
excise tax constitutes a State real property tax for purposes of
section 164(a)(1). Petitioners’ theory is that the State of
Washington:
does not have a general state income tax and therefore
must collect taxes from other sources to run the state,
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