as Administretor ef the Estate vs. CASE NO, et al.

DECISION

This is an appeal from a decision ef the Collector ef Internal Revenue (now Commissioner of Internal Ke- vere) assessing 4g¢inet Matias H, Agnar the sum of * 381,096.07 as deficiency {ncome tax for the calendar years 1946 te 1951 plus the 50% surcharge imposed in Sec- tion 72 of the Revenue Code for “willful intent to evade the peyment of the legit inate tax."

The original petitioner in this case is Metias H, Agnare Having died on May 18, 1958, the administrator P of his estate, Jose B, Amar, has substituted him as party- petit toner.

Matias H. Amar filed his income tax returns for the Calendar years 1947, 1948, 1949, 1950 and 1951 on March 1, 1948 (Exh. 39, p. 78, Vol. III, OIK rec.), Feb- ruary 28, 1949 (Exh. 40, p. 73, Vol. III, SIR rece), March 1, 1950 (Exh. 41, po. 67, Vol. ITI, SIA rec.), March 1, 1951 and March 1, 1952 (Par. 2, Petition for Review, admitted in Par, 2, Answer), respectively. There

DECISION -

GeTeA. CASE NO. 109 “a is ne decumentary evidence on the exact date hia in- come tax return for 1746 was filed. On the basis of said returns, he paid income tax far the tax years 1947 to 19%.

Upon investigation of his tax liability, respon- dent, in @ letter dated November 26, 1952, determined a deficiency income tax for the years 1746 to 1951 and 80% surcharge in the total amount ef 2 723,032.66, plus compromise penalty (fixh. 1, SIA rec. pe. 126-129). In a reply letter dated December 11, 1957 (SIM rec. pe 131), petitioner's predecessor requested that he be given sixty (@) days within which to go over the records of the case, Respondent granted him until February 10, 1953 within which to take up the matter with his office, with e warning the+ ££ no satisfactory proof is presented to warrent «© reinvestigation, the collection of the texes involved, including the corresponding penalties, would be enforced by summery remedies (STK rec. op. 133).

Mesnwhile, the late “ettias MN. Azner requested res- pondent by telegram (BTR rec.p. 168) to order the city treasurer of Cebu to desist from enforcing 4 werrant of dastraint and levy on the former's properties, which re- qmaest wag denied. (SIR ree. pe. 140.) Agein, he requested for more time to examine the records of the case (SIA rec. pe 142).

In a letter dated Septenber 27, 1954, petitioner's predecessor mede known to respondent his exceptions to the assessment (BIR rec. pp. 226-237). And additional excep-

DECISION <

GC. TeA. CASE NO. 109 tions were submitted by his accountant in a letter dated December 29, 1954 (Exh. C, BIR rec. pp. MO- 21).

After a reinvestigation of +he case, the defi- ciency «ssessaent of 723,039.66 was superseded by ancther essessment dated February 16, 1955 (which was received by Matias ". Aznar on March 2, 1955) in the tetal amount of § 301,096.07, computed as follows:

4246 Net income per TetUEA cocceccece * 9,910.94 Adds Underdeclared {ncome ceccos 5 Met income per investigation se. ' . . Deduct: Personal and addi- #ional @XOMPtLONEG cocseos ____ 6,917.00 Amourt of income subject FO FOAM cocccosccccsccccsccccss I 553.4 Total tax liability eovecccsecces © 9 . Deducti Income tax liability per return as assessed.. ~~ Bash Balence of 4x due cecccscccccce © 3s olf Add: SO” surcharge eoseaseceesee 43,55 DEFICIENCY INCOME TAX csccecsece F 4.3.4.7 Net income per Feturn seccccccee & 10, HO.0G Add: Underdeclered income .eccoe Net income per retavestigetion.. © -OL3. Deduct: Personal snd addi- ional exemptions seserse __7, 000,00 Amount of {income subject +o tax @eeeeeeoeosegeeaseeoeooeoeoeoane 3 56 Total eax liability weoreseneseed 9 Deduct: Income tax liability per return as assessed... bpd balance OF tax due ceccccccscecce F r ° Add: SOx surcharge eCocesceeesece 2 58 DEFICIENCY INCOME TAX ccoscscose 1248 Net Inceme per TeEtUTN creessesce * 9,148.44 Add: Underdeclared income .secee 4192

JECT SION «

=e 4 «= Net income per reinvest {- vibe i MTerrererererrerrrerren ts Deduct: Personal and addi- tional exempt tions eeecee Amount of income subject FO FOX ccoccesceccsveceecsecocese Total tax [1@BLLIty cecccccocees Deduct: Income tax liability per return a9 assessed,.

Salance of tax due eteeczaeccese Adds SOR suronarge cecscsceccvese DEFICTENCY INCOME TAX eeeeoeanece

A242

Net inGome per TetUIN cecscscces Add: Underdec lared INCOME cecnee Net income per reinveeti- FLOM cocvecesrecsesecosesvece +: Personal and addi- tional 2xemptions ecevees Amount of intome sudject tO FAM covvvcvccssescccscesoss Total tax Liability cesccecccsce Deduct: Income téx liability per return 46 4ssessed..

Belance of tex due Seotosecesocoece Adds SOR Surcharge ccccccscescce DEFICIENCY INCOME TAA ceccoscsus

L250

Net income per TetUTN cesccovece Adds Underdeclared income sesece Net ineome per reinvesti- GEELON sescccccsccsececccocceos Deducts Personal and edd{- tional exe +tons e000re Amoun* ef ineone sudject tO FER cocnvccccesecccscsesece Total tax Labi lity crssvesseese Deduct: Income tax liability per return @¢ sesessed..

Balance of tax GUe ceecccccsecces Add: SOR surcharge Cooeerveoccseone. DEFICIENCY INCOME TAX ccooscccevce pe ee | Net income per TOtUEN ceossecesee Adds Underdeclared income csceee - 193 ote Pe 24,772.97 ——__1eC0.00 Fr 9,990.66 P114,409.19 r 8,364.00 365578, 76 # 373,943. 26 ® 6,800.00 —— 350335050

DECISION -

Ge TeAe CASE NO. 109 Net income per reinvesti- GOTLON seccccccsccaccccsceccer & 4,155.80 = Deducts Personal and addi- tional exemptions cecese 7,220.00 Ameunt ef income subject . CO TAX ccoccccvcccesecesccccces F 32,995,80 Total +3 Ifability @eeesee eoeanave S e Deduct: Income tax liability per return as assessed.. “go> Balance of tax due ccccceccccese 5 7,684.00 Add: SOR SUCHArGe cacccoecccccs 3,84 DEFICIENCY INCOME TAX cecccccece 1946 eavccessee 5,550.65 1947 esrteceses 36,931.73 1948 eveecesoe 3-198. 75 1949 eeseesces 45,125.94 1950 eeeveeeece 278, 783.00 1951 eeoecesete = 26 of Tot al ees # 381,096, Inasmuch as respondent has cenceded a tax credit of *96.87 for 1945, the amount demanded wag + 381,096.07 minus $96.87, or §300,977.H. (cane 3, Sl vec. pp. 309-311.)

Respondent resorted to the setworth methed in de- termining the unreported income of the taxpayer whose income for the years in question wes computed as follows, with his networth as of December 31, 1945 as basis:

4.2.4.9 Real estate inventory eccccccess © 64,738.00 O+her ASEOLES coccceccecccecsecces 7 7 Tetal SSSOts coccccccesesccceces # e ® Leese: Depreciation allowed ..... 2,077,9%0 Networth ss ef December 31, 1948 Peoeceeecotsteeeseavesseseseoon © 100.3 16,97 £246 Real estate inventory cesecsene- © B65944.18 Other a680tS coccvececvecvcseces Tetal ASSetsS seccccccesecccccace * e * Leess Deprecfation allowed ...c.- NOt S68CCS cecsccccsservesecsceses .

19 Agi

DECISION -

GC. Toe CASE NOs 109 Less: Liabilities neve ? 17,000.00

Networth as of

Jane le 1946 260 100,516.97 pi afedl Increase in networth sescccsccscccce # Ps Adds Estimated living expenses cece Net INCOMe secscesccccccessccccsves * ee estate inventory re ee hes ee CERT ASSOLE cecnncccsvccescoersvose ~~» oad Total assets CORSE SHOOOERO SS EHE SECS ra 2g DlFe Less: Deprec {ation Bllowed ssecsese Maiecel? Net aesets Coe esececcccecessorecocs Ye eo? Lees: Liabilities secs ? @,000,00

Networth as of

Jane Ue 1947 woe 125e8M4? £195 Incresse in MOtWOTtN cseccenescsces ~ Se .

Add: Estimated living expenses csecc 7 Net LMEOME ccssccccccccccccsovsescs | ;

L248

heal estate INVENFOLTY esccecnsecece 244,824.18 Other assets Coeeeerocesevscceccoone 7 8,7 i SSeEss soseosecesossaecoseone © r . Sa: recitation aliew Peecvete Ner aesets CEHOCHEOSOHOHTO COREE OROSES Hees

Networth a8 of

Increase in networth eocesccescssse * P) r Adds Estimated living expenses ese 7 Net INCOME ssceccccccccsccccscecces © Real estate LIMVENtOTY seecececarcese r400,515,5? Iavestment in schools and - ether colleges Coenen esesosocnses 273,105.79 Other 2960b8 scvcccccnccescosessces %,3 TOtSl S9G0TS ccccscccecccccscsscses © ° - Leas: Depreciation allowed ..cscese ee NOt GBGCTE cecccccccsccnscesessecces r °

Networth as of

Increase {nr networth pcccccccessces © e Add: Hetimated living expenses ...e 7. NOt 1NCOME sescccccccsscesecescoscce 42.229 Real estate Inventory cececcccceces P412,465.52 Investment in schools and other Colleges cesccscccccccccesee 193,400.99 Other @8SOth cocsvecceccccsecececces _310, 788.27 195

Mite Lt

CG. T.A. CASE NO. 109

-7T-

Total ASSES cocscccccccsccsessecrsse £916, 715.38 Less: Depreciation allowed secsseoe _ 47, NOt @SGCCE cocccevecsccacsessesevcee POC, Less: Efabilities .... ? 188,343.99

Networth as of

Jan. 1, 1980 +. 344,666.14 8503,010413 Increase in networth wsccccsceccece ¥ 366, ® Add: Estimated lfving expenses ..c- 7 NOt LNCOME cocccccossveccsesecocere 4231 Real estate inventory cccssceccsccs $419,465.52 Investment {fn schools and other Colleges .c.cssccosescosceese 214,016.21 Other @SSOts cecccesccesccscccssese o Tetal assets Coed eBeceesescsecsosee ~ a6, Leess Deprectation allowed ..secccce eg Net assets @eeeanoeoeeecnaeeooeeneeeseaeee 4 r eo . Leese: Lisbilittes wee. 140,459.03

Networth as of

Jame 1, 195] see 710,909.40 Satara Increase im networth cescccocccccece Sin Add: Estimated living expenses .eceo M@t ANCOME cocccccccscncesesescesos # Meanwhile, on February 2, 1953, respondent, thru the City Treasurer of Cebu, pleced the properties of Matias H, Amnar under distreint and levy to secure pay- ment of the deficiency incone tax in question, | Not satisfied with the decision of +he Collector of Internal Revenuc, the late Meties H.Agnear filed the fastent petition for review on April 1, 1955. Imme- diately thereafter, he filed « petition to restrein res- pondent from collecting the deficiency tax in qestion by summery metheds, which petition wes granted in our Resolution of Febryary ®, 1956, without requiring hia te pest &@ bond, on the ground that the right of respon- dent te cellect the tax by summary reaedies had aiready prescribed, Upen review, the Supreme Gourt set aside

496 Sapte

DECISION -

Ge TeAe CASE NO. 109 ~ 8 « the resolution and required petitioner te deposit with this Court the amount demanded ef him for the years 1949 te 195i or furnish s surety bond for net nore *han double the amount, The issues involved in this case are:

de whether or not the right of the Comaissioner of Internal Revenue +e assess defictency income taxes of the late Matias fi. Aznar for 1946, 1947, and 1948 has already preseribed,

2. Whether er not +he def te tency assessments in question are correct and velidy and 3- Whether or not the {imposition of SOA surcharge on the income tax deficiencies {s justified.

It i9 +he contention of petitioner +hat the right of the Commissioner of Internal Sevenue to assess defi- eiency income taxes for the years 1946, 1947, and 1948 had already prescribed when he received the letter of demand therefor on March ?, 1955, ineemuch @s more than five (5) yeers had elapsed since the filing of the tax returns, On the other hand, respondent aaintains that the returns are false or fraudulent, in which case he is authorized +o make the éssessments within ten (10) years after the discovery ef the fraud on October 29, 1952, in accerdance with Section 332 (a) of the Tax Gode.

The resolution ef the first issue turns upon whether er net the returns are falee or fraudulent with intent to evade tax. And the question of faleity with intent to evade tax can only be resolved upon sunstantietion of ree- 197 gone

DECISION <-

Ceo T.A. CASE NO. 109 »9~ peondent's allegation of unreported large income of petfe- tioner‘'s predecessor, This involves delving into the merits of the case. Such being the case, +he issue of prescriptien shall be disposed ef after we heave consi- dered and passed upen respondent's determination on +he correc+ and +rue income ef the deceased Matias H. Aznar. Respondent determined ¢+he ne+ worth ef Aznar a of January 1, 1946 +o be *100,316.97. Petitioner assatis this amount as erroneous on +he ground +hat+ it dees not include the value of jewelries and +he amoun* collectible from +he U. 5. Government.

JEWELAIES s Peti*+ioner alleges +hat a+ the beginning of 1945 Azgner hed #4 000.00 worth of jewelries. Shen inter- viewed by SIA Exeainer Guerrero, +he latter stated +hat the Jewelries come from his ancestors and were disposed ef as follows:

1948 F 10,000.00 1946 ® ,000.00 1947 10 ,000,00 1948 10 «000.00 1949 T G00. OO (See hepor+ ef BIA Exeminer Guerrero, BIA rec. PPe 90~94, ) However, during the hearing of this case, his accountant testified +heat+ on January i, 1945 Agnar had jewelries worth F 60,000.00, which he acquired by purchase during the Japenese oceupation (“orld war II) and sold en various eccasions, as folleowar 198 gag

DECISION «

Ge To Ae CASE NO. 109 - 10 - Spi arcpsnetescssccanctess DURE Presumably to corroborate the testimony ef the accountant, Mrs. lamona Agustines testified that she bought from the wife ef petitioner Matias H. Aznar in 1946 a diamond ring and @ peir of earrings for *X),000.00, and in 1947 a wrist watch with diamonds, together with antique jewelries, for #15,000.00. In the direc+ examination, Matias HM. Aznar declared thet in 1945 Ais wife seld to Sarde Purific jewel- ries for #5,000.00 and +e Mrs. Hamona Agustines for 4bou+ #35,000.00. In answer to another question, Mr, Aznar stated that his transaction with Sards Purifo, with respec+ to the sale of jewelries, amounted to #15,000.00, We tind the testinonies of Matias 4. Aznar and his witnesses Gatertally inconsistent. Thus his statement be- fore investigeting SIA Examiner Guerrero regarding the amount for which jewelries were sold in 1945 is irreconcilably variant from tha+ testified by hts accountant. Aznar stated to the examiner thet the Jewelries were sold for ¥ 10,000.00, whereas, his accountant declared that they were sold fer #5,000,00. There is a discrepancy of *5,000,.00 between the two amounts. Furthernore, he declared that Mrs. Agustines purchased from his wife jewelrtes for # 35,000.00. And yet Mire. Agustines herself testified that she bought jewelries for FXH,000,.00 and £15,000,00, respectively, or for a total of #45,000,00, thereby resulting in a difference of §10,000.00.

We do not say that witnesses testifying on the same transaction should give identical testimonies. Because of

DECISION «

Ge TeAe CASE NO. 109

~ Ji «-

the frailties and the limitations ef the human sind, witnesses’ statements are apt to be inconsistent in Certain points, but usually the {ncensistencites refer to the minor phases of a transaction, I* is the {ne significance ad the detail ef an occurrence that fails to impress +he human mind. When that same mind {¢ meade to recall what actually happened, the insignifi- cant point which it failed to teke note {is naturally lef+ out. Sut, it is otherwise as regards significant matters, for they leave indelible taprints upon the human mind, Hence, testimonial inconsistencies on the miner details ef an occurrence are dismissed lightly by the courts, while discrepancies on significant pointe are taken sértougly and weigh adversely +o +he party affected thereby. Taxwise, in view of the aforecttred inconsistencies, which we deen mater{al and signif{icant, we dismiss o¢ without factual basis petit+toner's allege- tion thet jewelries form part of his inventory of assets for the purpose of establishing his net worth at the beginning of 1946,

ACGOUNTS RABCEIVASLE FROM UNITED

SYATES GOVEANMENT ~ P39, 754.00:

Petitioner argues that 4n account collectible from the U. 5S. Government in the total amount of §38,754.90, representing a clain for goods commendeered by the Ve S. Army during World War 11, should be ineluded in the net worth as of January 1, 1946, tHe presented as 20 aaa

DECISION -

GCeTeAs CASE NO. 109 « 19 «- his witness Prudencio ©. Youd, whe testified thet he was in charge ef processing ¢clains filed with the Claims Service of the AFWESPAC (later PHILATOOM); thet he pro- cessed a claim of Mr. Matias M. Aznar in the apprexi- mete amount of #38,000.00; and that this claim was paid in two (2) checks, which were issued on different dates: the bigger ameunt in 1947 and the smaller amount in 1948. It is claimed thet these checks were deposited in the Philf{ppine Netfienel Sank e+ Cebu City. The recerds of said bank shew ths+ Mr, Aznar deposited *31,362,37 and #6,992.53 on April 3, 1947 and February 5, 1948, res- pectively. The existence of these deposits {9 admitted by respondent. But the records do aot indicate whether the deposits were etde in check or in cash.

It is of public knowledge that a+ the outbreak of the war, the U. S. Army commandeered various supplies for its use, and efter the wer, cleins for the payment of the commandeered supplies were filed with the U, 5. Government. Many, ifnot all, of these cleims for com pensation were paid. ith +he uncontradicted tes? imony of Prudencic ©. Ybuc, who pretessed the alleged clain in question for payment of supplies commandeered by the Ue 3. Army, the existence of the collectible account is eatisfactorily established. The testimony of Mr, Aagnar ag te the amount collectivle which tallies with the ree cords of the Philippine Nationa] Sank in Cebu City ts convince ing. .

201 ee

DECISION -

C. TA. CASE NO. 109 «- 13 «- We, therefore, hold that +he collectible accounts of the lete Arner from the U. 5. Government in the sum of 238, 254.90 should be added te his assets (under ac~- counts receivable). es of January 1, 1946. As of Decem ber 31, 1947 and December 31, 1948, the years within which the accoun*s were paid +e him, the “accounts re- ceivable® shall decrease by *31,362.37 and *6,892.,53, respectively. In effec+, 23 of December 31, 1948, +here were no more “accounts rece{vable* from the U. 3. Gevern- mente —

TALISAY HOME:

Respendent listed as an asset during the years 1945 and 1947 to 1951, 2 house fn Talisay, Cebu (covered by Tax Declaration No. 8165), This property was not taken up @s 4n asset in 1946 because there is 4 notation in its tax declaration that it was reconstructed in 1947. Petitioner urges upon us the inciusion oi the house in question in the list of assets for the year 1946, Peti- tioner {s right. The reconstruction of the property did net render at valueless during the yeer that it was being reconstructed. Consequently, i+ should be listed as asset ag of January 1, 1946, with the same valuation as in 1945, that ia, 1,500.00.

AGCOUNTS RECETVASLE FROM

CUS TOMERS +

For the year 1948, respondent included in the in- ventory of assets the sums ef ? 38,000.00 and for 1950 202 eats —_—

DECISION <-

GeTeAe CASE NO. 109 = 4 @ and 1951, the amount ef #123,816.58, beth as accounts receivable from customers. These figures were admit- tedly taken from the statements (Exhs. 31 and 32) filed by petitioner's predecesser with the Philippine National Bank. Petitioner centends thet these sccounts should net be inventoried as an asse+ for the reason that they were included in the statements only fer the purpese ef obtaining @ bigger credit from the bank. Besides, these accountsvere allegedly back accounts ef students ef the Southwestern Colleges end were not only worthless, but if collected at all, the money would go to the coffers of the school.

Petitiener’s contention has no merit. in the statements filed with the Philippine National Bank, the late Aznar declered, under oath, that the information contsined therein reflected his true and accurete finan-~ ¢ial condition. We cannot now favorably entertsin the Claim thet this information is not whet it purperts te bee Consequently, we find ne reagen for disturbing the decision of respondent? in including these items as peti- tiener’s assets during the above stated yeers, ps FOR DOUSTFUL Included in the inventorfed assets of petitioner for the tax year 1950 is the smount ef 41,810.56. The basis of this inclusion te Exhibit 321, 9 sworn state- ment ef financial cendition filed by Aznar with the Philippine Watienal Bank, where {+ is indicated that said “03 Geng

DECISION -

CeTeA. CASE NO. 109

- 1B «

amount is a provision for bad or dowetful accounts. Provisions for doubtful accounts, oeing non-deductible expenses, should be reverted as part ef the accounts feceivable, and, +herefore, should remain ae an asset in 1950.

OVER VALUATION OF BUILDINGS:

Petitioner maintains +hat the hospital building (Tax Declaration No. 276193), which respondent lfeted @s an asset from 1949 +o 1951] at the basic valus+ton ef ®©125),000,00, {s overvalued by *32,000.00. Peti- tioner’s appraisal is besed on +he estimates of an architect and a civil engineer who agreed +hs+ a value of 004,240.00 is fair enough. On the other hand, res- pondent's valuation {ts teken from *+he represantattion of the late Aznar who, in his letter (Exh. 35) +0 the Phile- ippine National Bank dated September 5, 1949, st2ted categorically +hat +he hospital building cost hin # 132,000.00, However, in view of the effect of a ty- phoon in 1949 upon the building, respondent sllowed a diminished value of ? 130,000.00. We secen+ 49 correct the valuet+ion determined by responden*+ which, as sfere~ eaid, {se based upon petitioner's own representa+ton, The estimates made by the arehitect and +he eftvil en- gineer were made years after the building in question was constructed, Sesides, who would know more about the cost of a building than the owner himself who fi- nanced its constructiond

DECISION -

Ge TA. CASB NO, 169 - 16 ~ It {a alee alleged thet the dentistry building is over valued by °6,191.34. Respondent's valuation | of 236,191.34 finds basis in the letter of Mir. and Mre. Matias HM. Aznar to the Southwestern Colleges dated December 15, 1950, which is embodied in the minutes of the meet ing ef the Board of Trustees of the Southwestern Colleges held on May 7, 1951 (Exh. G-1). Architect Paca fixed the value of the building at §X,000.00.

As between the two conflicting valuations, we have more faith tn that which appears in the letter referred +o above. Said letter was written long before this tax proceeding was initiated; while Mr. Paca made his esti- mate upon request by petitioner selely for the purpese of this tax case. Respondent's determination ts sus- tained.

ADMINISTRATIVE BUILDING

HIGH SCHOOL BUILDING: |

In the inventory ef assets, respondent included the administrative building voluei at $19,200.00 for the years 1947 and 1948, and 16,700.00 for the years 1949 +e 1951; and a high school building sppreised at #48,000,00 for 1947 and 1948, and #45,000.00 for 1949, 1950 and 1951. The reduced valuations for the letter years are due to allowance for partial less resulting from the 1949 typhoon. The data relative to the ex- istence end basic appraisals of these two buildings are gathered from the corresponding +ax declarations.

DECISION -

GeTeAe CASE NO. 109 -~ iT « Petitioner, does net question their inclusion in the inventery for the years prior te 1950. Ma ebjects to their inclusion as assets 23 of January 1, 1950 on the ground that said building: were destroyed by a ty- phoon sometine in November, 1949, In a clause (marked Exh. S&) found in Exh. Gl, the beard of trustees of the Southwestern Colleges re- fuses to accept the proposal ef Mr. Aznar with respect te the high schoe!l building because said property was “destroyed by the storm in 1949". We have the affidavit of Juan S&S. Intan, an employee in the office of +he City Assessor of Cebu City, to the effect *hat the adminis- trative and the high school buildings were destroyed by the typhoon in 1949, Likewise, we have om the records a Qnd Indorsement (marked Exh. 16) of the same Juan S. Iatan, recommending cancellation of Yex Declarations lies. LRAeA and 17) 28-i, as *he buildings covered therein were destroyed by typhoon in 1949. Intan testified, during the hearing ef this c#se, +o the above facts. Although not presented as exhipit, a copy of a letter of the City Assessor of Cebu City informs Mr. “etiag HK. Aznar that “Tax Declarations Neos. 1R27-i and 1728-8 hed already been cancelled, it 4ppearing +het the build- ings covered by then were completely destroyed Dy the typhoon of 1949", With all this evidence, we are Cen- Vinced that +he two suildings in question were in fact destroyed by 2 typhoon in 1949, and therefore, should i 206.

BOP

DECISION -

TeA. CASE NO. 109 = 18 « be eliminated from the inventery of asse+s beginning December 31, 1949.

INVESTMENT HOLLOW BLOCKS

BUSINESS»

Appearing in the inventory as other asse+ is the amoun+ of °8,663.22 which respondent wholly +reated as an inves+ment in the hollow block business. Peti+ioner objects te such treatnen? as respects the § 1,663.42, which was spent on +he building used in the business, and +he §674.35, which was spen* for labor, fuel, raw materials, office supplies, etc. Contending *+haet the former amount, being @ duplication of inventery end +he latter 8 business expense, both should be eliminsted from the list of assets.

Whatever wag spent in +he hollow block business is an investment, and being 4n investment, +he same should be treated ag an asset. With respect to rhe amount representing +he velue of +he bullding, there is no duplication in the listing as the inventory of real property does not include the building in questlons

SURPLUS GOODS:

Another con*+reverted item relates to the surplus goods purchased by petitioner's oredecessor from the Us. Se Army for which responden* assigned a value of #43,000.00. Petitioner asserts +hat their value should be only ? 2,000.00 in accordance with theiz alleged in- voice.

* 907 nee

DECISION -

C.T.4. CASE NO. 109 @ 19 - The records do net show an invoice which evi- dences #+he value of the surplus goods. If +he in-~ voice was reéliy submitted ¢o +he Jureau of Internal Revenue, why did not petitioner request 8 subpoena for its productions We have, however, in the records a copy of & letter (Exh. 35) dated September 5, 1949 +o the Philippine Net+ional Bank, wherein Mr. Matias /i. Aznar stated that, “as part of my assets I have dif- ferent merchandise from Warehouse 35, Tacloban, Leyte at a totel cost of # 43,000.00 and valued e+ no less than # 206,000.00 a¢ present merke+ value." This evi- dence is uncontroverted, and coming as i+ does, from the late Aunar at 4 +ime when his tax liability was not yet being investigated, we +rust its credence. We, therefore, uphold responden+ in his valua+ion of +he surplus geeds purchased from +he U. 5S. Army.

VARTOUS SUJILDINGG, Petitioner likewise assails the inclusion by res- pondent of *he following buildings as asse+s as of Dec- embex 31, 1950 for the reason that they were allegedly Conveyed anc ceded +o *he Southwestern Colleges on Dece- ember 15, 1950 in consideration of P1CO,723.99, to ve paid in cash .

- Hospital ouitlding 1X ,000,00 Gymnas iua 43,000.00 Dentistry building 36,191.34 sodeys 1] 781,15 Bodega 2 7, 20.00 208

DECISION -

CeTeA. CASE NO. 109 — w Cellege of Law P ©,950.00 Laboratery building F 8,164.00 Nome Economics 5,621.00 Morgue . 2,400.00 Science Building 23, 0.00 Faculty house 5,760.00 It is suggested that the value of these buildings be eli- minated from the real estate inventory, and the sum of ? 100, 723.99 be reflected in Schedule 2 as an asset as of December 31, 1950.

The facts show that the above listed ouildings have been used by the Southwestern Colleges, but the evidence on record fails te yield any indication of the transfer of ownership over the same from the taxpayer te the Southwestern Celleges on December 15, 1950, Exhibit G-1 shows that Mr. and Mrs. Matias H. Aznar offered these same properties in exchange ef shares of stocks of the Southwestern University. Exhibit G, which is the sinutes of the meeting ef the beard of trustees of the Southwestern Colleges held on August 6, 1951, shows that Aznar was amendble te the value fixed by the board of trustees and that he requested to be paid in cash instead ef shares of stock.

If the actual transfer took place at all, we cannot determine the exact date for there is ne evidence on the point. Consequently, we are constrained +e sustain the inclusion ef these buildings as assets of Aznar as of December 31, 1950.

" 209 (90

DECISION - |

GC. TeAe CASE NO. 109 - 2 With respect +o other properties, +o wit?

land # 22, 684.00 house 13, 700.00 greup of houses ; 8,000.00 building (no name) 12,000.00 nurses heme — 4,100.00 nurses home 2,080.00 which were also allegedly ceded +o Southwestern Colleges in 1951 for # 150,000.00 worth ef shares of stocks, peti- tioner presses upon us their exclusion from the inven- tery of assets as of December 31, 1951. The evidence (Exh. H) shows that said properties were formally con- veyed to the Southwestern Celleges only on September 2%, 1982, Petitioner was the owner of +he preper+ies in ques- tien prior +e September 7, 1952 and +his being so, seid properties should form par+ of his assets as of December ai, 1951, The mere fac+ +nat+ these properties were actually in the pessession of and were being used by +he South- western Golleges is not conclusive thot ownership +hereof resided in said school.

LIBRARY BOOKS:

Added +e petitioner's asee+s as an investment in schools and celleges as of December 31, 1950 are library books valued a+ £ 7,041.03. The pasis of +his inclusion is an entry (Exhibi+ =A) in a Journal (Exhibit 25), Petitioner contes+s +he propriety of this inelusion on the ground that Candido Rubi, Agnar’s accountant, could 210 lle |

DECISION «

GeTeAe CASH NO. 109

=- 9Be

not find i+s entry in any journal ef *+he Soathwestern Gelleges. On +he contrary we have, as part ef the evi- dence, the entry, which wae specifically narked By res- ponden+ 23 Exhibit 25-A, in @ journal of +he Southwestern Colleges. Jeing an investment, said item should be treated as an asset beginning Deceaber 31, 1950.

IMPROVEMENTS ON BUILDINGS:

Respenden> listed as an asset for 1950 and 1951 various amounts +otalling ¥113,353.% which were spent for +he improvement of buildings. These amounts appear in the Southwestern Celleges Hospital Construc+ ion Journal (Exhibit 94. Petitioner contends for the ex- clusion of the total sum on the ground *+het +he same is included in +he value of buildings already inven- toried as assets. These various Smounts, being cons- +ruct+ion expenses, were adsorbed in +he increased value of the buildings which were appraised wy respondent a+ coset oi+er improvements were made. In other words, the valuation fixed by respondent already included the cos+ of +he improvements. And {f we were +o treat as asset the amoun+s epent fer +he improvements, we would be con- sidering +he same asee+ twice. Hence, the amoun+ ef #113,353.% eppearing in Bxhibi+ 45-£ and mrked as Exhibit K-3, should be weeded out.

LEGAL CLAIM AGAINGT BENIVO Chilis

The las+ disputed items refer +o +he legal claim agains+ Benito Chan, amounting +o °5,776,.00 and a house lj 2411

DECISION ~

GeTeA. CASE NO. 109

- B«-

and lot valued at #5,776.00, which items respondent included as assets in 1950 and 195] (Exhibi+ 45-E). Petitioner claims that Senite Chen berrowed from the late Matias H, Aznar the ameunt of °8,776,00 and to secure +he lean Chan executed a deed of sale with a right te repurchase on the house and let situated at Talisayan, Misamis Orientel, Chan could sot repay the lean, 60 an action was filed in court fer its collection, It is to be noted that the two {tems invelve +he same amount. The explanation offered by petitioner appears plausible and convincing. Yo *reat these +we items as distinct would be a glaring duplication, Jeing enly @ collateral, the i+en "house and let" should be eliminated, We find without merit pe+it+ioner's pretense +hat his claim for #5,775.0O agains+ Jeni+o Chan is worthless, and therefore should not be +reated ag an asset. Mis claim of werthlessness is predicated upon Exhibi+ PP which {s a carbon copy of +he original alias writ of execution. The return of said writs however, sates that +he came was not satisfied due to lack of +ime. The mere return of the writ in question is not conclu- sive that ¢he dest is worthless or was net eventually paid.

There is no controversy a8 te the res+ of +he items listed in the inventery ef asee+s.

212

SE

DECISION «

GoTeAe CASE NO. 109

FRAUD PENALTY:

Respondent imposed the surcharge ef SOS authorized in Section 72 of the Tex Code.

It appears thet Matias HW. Aznar declared net in- comes of 79,910.94, 710,D0.00, 29,148.34, #8,990,66, #8,364.50 and #6,800.00 for the years 1946, 1947, 1948, 1949, 1980 and 1951, respectively. Using +he net worth methed ef determining the net income of @ taxpayer, we find that he had net incomes ef ?32,47%.45, 267,751.19, 217,800.44, #92, K9.11, # 254,813.56 and #40, 185.8 during the respective years 1946, 1947, 1948, 1949, 1950 and 1951. In consequence, he underdeclared his income by 227 fer 1946, 5645 for 1947, 95% fer 1948, 48@ fer 1949, 2,9464 fer 1950 and 490% for 1951. /aee substantial underdec laret ions ef income fer six consecutive years eloquently demonstrate the falsity or fraudulence ef the income tax returns with an intent te evade the payment ef tax. Hence, the imposition ef the fraud penalty {s proper (Perez vs. Court ef Tax Appeals, GA. Me. L-10%7, May DW, 1958). Even on the assumption that ¢he late Aznar solely relied upen his employees in the preparé+ion ef his income tax returns, still he cannot escape responsibility by shifting the blame to those whe prepared the returns (Mark J. Devis, 49,238 P-N TC Memo.).

Finding that the income tax returns for the years 1946 te 1951 are falee or freudulent with intent to

Mp 213

DECISION -

Ge Todo CASE MO. 109 e Be evade the payment of taxes, we held that the right of respondent te assess the deficiencies for 1946, 1947 and 1948 has not prescribed. Aespondent has the right to assess the same within ten years from the discovery of the fraud under Sectien 332 (a), Tax Code (Cellecter Vs. Bautista, et al., GR. Nos. L-122%0 & L-12259, May 27, 1959, Ne. 9, June 3, 1959) that is, from October 29, 1952 when the SIR Examiner, who investigated the tax liability of Maties K. Aznar, submitted his eriginal repert. Since the assessments were issued on February 16, 1985 and made known te petitioner on March 2, 1955, less than ten years from October 29, 1952, the righ+ to assess has not prescribed.

The +ex ifability ef the late Matias MN. Aznar for the years 1946 through 1951, inclusive, should there- fere be computed +hus:

4.2.4.6 ro+8 income per Teturn ceseecccece © 9,910.94 Adds Underdeclared INCOME ceocccce MOt LNCOME coccccccccccceseccccce # e Less: Persenal and addi- tional @xempttlons cccccecssce Income subject tO t€x cecccsccces ton aue My a net . .

oss Tax @ esses ecovee Balance ef tam due ceccccccccccce srt Adds 508 eurcharge @cceccececcece . Deficiency income tax ccoccceccce

Vagaz

Net income per FetUEN cccccccsccce F10,20.00 Adds Underdeclared income ceccere Net {INCOME cecccccccccccccecescss Oly . Less: Personal and addi- tional exemptions ccececcccece / Income subject +0 t8X% cecccccccce Tax due ther@on ccccccccccsesecece r e Less: Tax @lready assessed ...0ce _ 132.00

Mp 214

DECISION

C.TeAs CASE NO. 109 ~ %G ad Balance of tex due seceosseoveces 115,798,38 Adds SOR surcharge cecccocccccese Defichency income +2x sesccccever 2948 Net inGome per return cecvecseccce | Fe l4hed4 Adds Underdeclered incone ceccece N@P ENC OME ccoccccccccccencsoovens pity . Leses Personal and addi-~- tional exemptlLonsececcesseses _.:

Inceme subject +6 Om ceccccecces Tan due thereon seseccseccvecsece | dglFIe& Leese: Tax already asseased cesses Balance ef +4K GUe cscessoccesoes * IW.

Adds SO surcharge ceescoscccscce Def ielency ENCome FEX consecseoss © 4242 Net {nome por TEtUEN secescceses F 9,990.66 Adds Underdaclared income sesesee 4 N@t ENCOME sevecorscccesessecsses F os ‘De Less: Personal and addi-e +1ONAl SXEMOFTONS saceceseoe aeons BUbjEect FO FOX coscscescos | K due F*hereon cossccceccescssce © By9TBe Less: Tax already sesessed sescoe Balance of *Ox due seccvccescccee © 8,9 ° Adds SOR SUTCNETG® covvseccecceces Det ictency EMCOMO FBX aveveersecs

L220

Net income per TeturN cececcacece! §, 364,50 Adds Underdeclered income cescee Net INCOME cocscccracecesvencees | a, Less: Persone] and addi- *Zenel exempt Lons secescesce Income suljec*® tO FOK seccacesece TOX GUe FHHETSON cescooseseccesos ° Leees Tax already easessed cesses SS OLAEL ERC a Belence of tax due cescscectsserss e Add: GOR surcharge csccccesceces Deficiency (ncome Fx eeosececes

L251

Ne* inceme POE TeMETN esceccessze — 6,300.00 Adds Underdeciared income csccone NOt INCOME cecccsccvecscccecccces Hy Less: Fersenal and addi- +Lonal exempt LOns cescecerce res Income gubject tO t4X ceccccscere Vi acum 215

DECISION ~-

Ce TeA. CASE NO. 109 - 27 - Tax Gie thereon coccocccscccssces # 7,664.00 Less: Yax already assessed weoese SF Toate Balance cf tax due cescccccsccces # e 200 Adds 5G): surcher ge Sceceesesevsese 842 Deficiency income ¢8x csccscescces symagy 1946 ¥ $,850.65

1947 19,932.57

1948 1,441.15

1949 13,376, 27

1950 175,980.00

1951 P 227, 788.64 The total sum of * 227,788.64 shall be decreased by °96.87 representing the tax credit fer 1945, +here- by leaving « balance ef ¥ 227,691.77.

IN VIEW OF THE FOREGOING CONSIDERATIONS, the decision ef respondent Commissioner of Iaternal Ae- venue is hereby modified. Petitiener Jose B. Amar is hereby ordered +e pay +he Comaisetoner ef Internal Revenue or his duly 2u+herized representative +he sum of #2277,691.77 representing deficiency income taxes for the years 1946 +hrough 1961, inclusive, within thirty (30) days frem the date this decision becomes final. If the said amoun+ {is not paid within seid period, there shall be added +o +he unpaid emoun+ +he surcharge of 3%, plus interest a+ the rate ef 12% per annum from the date ef delinquency to +he date ef pay- ment, in accordance with Section $1 of the Nationel

DECISION «

CeTeAe CASE NO. 109 Internal Revenue Code. With costs agains? ce+ft+fener,

Presiding Judge

C0 _ 2 Fiero C__, ROMAN M, UMALI

Associate Judge