Nepublic of Tee Philippines Court of Tax Appeals Quezon Cify vs. CTA Cash Ho, et al.

Decision

This is en appeal of petitioner “Melvin Ray Arick from a decision of respondent Commissioner of Internal Revenue dated July 14, 41965 requiring the former to pay the amounts of #9,621.72, F25,- $29.30, #30,96%.38, and #19,0%8.51 as deficieney ineome tex liebilities for the years 1957, 1958, 1959 and 1960, respectively, plus #250.0 as oca- promise penelty.

The petitioner, an Amertean citizen, a mining engineer ané Seeond Vice resident of the ‘epento Consolidated Mines, filed his income tax returns for the years 1957, 1958, 1959 and 1960 declaring therein income mostly from salaries, fees and ‘dividends. In due course, said returns were re- ferred to examiners of the Bureau of Internal Revenue for investigation as a result of which the expenses eleined by the petitioner in his CTA CASE Ho, 1679 (2 returns as deductible were Gisnllowed by re-~ spondent.

it appears that sometime on February 18, 1956 petitioner entered dato a contract with the Botolan Copper Company, Inc. represented by its Presigent Nay ©. Tuggie, to operate the company's mining properties located tn Eotolen, tenbales. According te the terns of the cortraect, eett= tioner will stoulder the expenses for explora. tion, development, mining ané milling of the pay ere of the property. ail expenses for work done and inproveuents thereon are to be Feisturced by the Bétolan Copper Company, inc.

Petitioner started operation tn the mine bet in 1957, because of & price drop for copper, he ‘henpet development work 4n Tunsels Nos, 2? and be He linited his activities on this developnent work to seintenance ane preservetion #0 that at a future “time he could underteke further development when proper economic conditions juetity operations, Petitioner, however, continued work on other out erops of the concession. During the taxable years 1957, 1958, 1959 ani 1960 the afne produced no inconé whatsoever and the expenses incurred by petitioner 137,

DECISION «

CTA CASE WO. 1679 3 in the mine for the seid periods were deducted by him from his incone derived from salaries, focs and dividends. These deduetions which ere itentzsed further above were disallowed by respondent. ener, this appeal was nade.

Two iasues are common to all these deficiency aesesements for the years 1957, 1952, 1959 and 7 1960 in question. First, whether the expenses for the maintenanes and preeervation in petitioner's mining property are ordivary and necessary expenses, ineurred in the carrying on of the petitioner's business and ere deductible under Seetion 3°(a) of the Tax Code. Second, vhether petitioner is subject to the compromise penalty of #250 imposed by respondert. ;

With rerpect to the deficiency oceersnents for 1957 and 19599 petitioner further raises the ques- “thon of preseription, As regards the deficiency assessment for 1957 petitioner etili further — raises another issue, that of overpayment, With regerd to the 1957 and 1958 petitioner questions the propriety of the imposition of the b# interest.

We wil) first teke up the deficiency ansere~ ment for 1959. (me records show that. petitioner filed his ineowe tax return for 1959 on April 18,

DECISION ~

CTA CASE NG, 1679 ” dete of April 17, 1965 was not served by oail but by personal delivery; and that respondent's coun- sel sénitted in open court that personal delivery to petitioner was mate on April 20, 1965. It gees without saying that this deficiency assess- ment was out of tine, more speeifiesty, two éaye after. the lapse of the preseriptive peridot) Aaving reached this conclusion, it heeoues unnecessary to bs pace upon the other issues involved in this defi- | eiency assessment of 1959.

Next cones the deficiency svsesnnent for 1957. It appears that petitioner filed his ine come tax return for eaid year on May 15, 1958. A deficieney ssserauent dated February 11, 1963 was served on petitioner on Vebruary 25, 1963. After receipt thereof petitioner filed a erotest on Merch 16, 1963. In the said protest petitioner askes reference to the investigetions conducted by respondent in connection with his tax Miebility for the year 1960 wherein petitioner raises issues similar to those involved tn the deficienay assess- sent for the year 1957. in view of this protest, respondent's ugert held conferences with repre- sentatives of the petitioner to hear the latter's side and referred hisself te investigations and verifications of petitioner's records, books of

DECISION =

CTA CAGE HO, 1679 5 account. and pertinent papers, After these confer- enees and verifications respondent reduced the defieiency assessment from 41,861.76 to #13,698.72 in s letter dated April 17, 1965, Still unsatie~ fied, petitioner contested this new assecamect 1a @ letter dated April 28, 1965. Respondent there- after reduced further the defieieney assessment from 213,698.72 to 09,621.72 in a letter of July th, 1965. It is clear free the foregcing thet the original deficiency stsessment was made on tine but the question now 1s whether the revised and finel essesenent of July 1%, 1965 was within the preseribed period.

( im tha ease of Collector of Internel Revenue ve Suyoe Consolidated “ining Coe, et al. (1% Phil, 890), the Supreme Court held that a taxpayer who hes induced the delay on the pert of resvendent should not be allowed to take atvantage of sueh -@eley. In the present case, the record shows that conferences and verifiestions were made by re- spondent's agent beesnse of petitioner's protest of April 25, 1965, As a matter of fact, because of these conferences ond verifications respondent redueed the original deficiency assessment. Agsin, it apoears that in petitioner's letter of protest reference was wade te the investigation in con

DECISION -

CTA CASE BO. 1679 6 neetion with the retitioner's tax liability for the year 1960 wherein the legal fesne raised in the protest is also raised. Because of this the con- sideration of the tax liability of petitioner for said years were joirtly made and both were resolved in the sawe (efficiency sesessnent of July 1%, 1965 as may be seen to petitioner's Annex A. Under the | cireumstances ve are constrained to say that the protest of March 1%, 1963 avepended the running of the period of oresertption and the said deficien- Cy asseseuent vas still on tine. )

‘ext comes petitioner's clein of overpayuent for the yeer 1°57. Tt appears in petitioner's in- come tax return for this year that there vee sums withhel¢ from the taxnayer's income of said year as. withhol¢@ine texes. In the same return peti- tioner asks for the refund of #41,220.95 (Rxh. 8) as overpayrent ceentioned by the said withholding taxes. ‘“esponéent does not deny this cverpayment ner deny the refonéability of the said amount of £11,220.95, whieh more than offsets the deficiency assessment of °9,621.72. Consequently, there is a refundable encunt of 1,599.23. Considering the result of this dectsion, this amourt may just os well be corridered e@ tex credit which say be used to offset the tex liability of the petitioner in this case.

14] es a -- _ —— —— <= DECISION « rs CTA CASE WO. 1679 ?

the defieteney sesessments for 1955 and 196 involve the deductibility of the sume of ©59,%70./1 and #34, 54¢.25 spent by petitioner for tne mine in said years. (ine parties are agreed that said ex- penses were made solely for maintenance and pre- servation while petitioner waited for economic eonditions warranting the resumption of the sus- pended operations. Such expenses were ovviously | made only fer maintaining and preserving an asset from whieh future income may be derived, pet ltioner was not interested in eurreat gain from tne mining property but wes merely aaintaining it as a foun- Gation for the future. Sxpenses of thie nature are not expenses for the earrying on of a business or trade, held in the ease of enry G. Owen v. Commissioner of interaal nevenue, 23 rc 377. in the caid case the taxpayer was a temporary enpleyee | } of the government living in dasnington, b.t. sSefore his appointment as such employee he ned a law of f iee in Grand forks, Yorth Dakota. Contenplating returo to practice leter, the taxpayer maintained said office because he wanted to preserve his contacts. Passing on the deductibility of the expenses for the maintenanee of taxpayer's law office, the United States Tex Court held the follovings Although there is no direct evidenee in the record in this re~ : spect, petitioner probably derived a 142

DECISION

CTs CASE BO, 9679 e some benefit from his expenditures ineurred te keep his office open during the yeers of his = oy His name on the office windows and @oors served to keep his name be~ fore the public te some extent.

Noreover, the existence of hie lev office was notice to the community thet he intended te resume his prac- tiee at some future date. ‘/erhaps we could best age e+ pa the bene efit received by petitioner from the office during 19%7 as the per- tion of hie goodwill. We bee eve that this is what petitioner nae i in ainéd when he testified, " vanted to keep contacts," the Petitioner however urges that he was in effect carrying on a business or trade because he never intended to abandon the mine, Ne was decided “to make @ paying mine ont of his concession ence circumstenecs are fovorable so much sc that he pureved work on other outerops and wining clains in other eresse of the concession Curing those yeers. Aseusing that petitioner pursned work in other outcrops of the concession, then operational work wes going thereon an¢ the exyenses for pre- servation fore part ané parcel of the cperaticn 143

OSCISION «

CTA CASE HO, 1679 9 since expenses for this purpose go hand in hand with operational work. With respect to expenses of wining ventures the authorities have the follow ing to says | . Im Nealkto “ins Corpses TO Meme, t r made the major de ne shoving that the was workings other rors than these opened for the of development or that the noipal - gpotivity was eaieithan of tawlaeed ope rather then develoment of adidi- | tional ores for mining . ‘.

Folsoed. tusent tenet 1969 Nevi- sion of Volume 44) se sup- plied. .

7 On the whole, we note that for the broad ctatezents of ped gy > gant Rr bage pe regarés expenses ‘neur there has been no showing that the appor- Bode amp e tt wagpnee Re Maem were aetually spent by it “ordinary and necessary fox enepyise en the wale or tas ness" of the petitioner, especial- ly considering that it wes net yet engaged in the ordinery or sormal wining operations, It should be expecially renen- bered thet during the years under review, the only “activities on in petitioner's mines :

tes ;

of cleaning the tunnels, vs hee. pad taatine ef — : Lagoarer | ; 5 203 D' ala : ; x : ha Ee) a Lu he exnmendit Pad 2 :

tc be deemed canital cutiays.

“Gf an expend! ture is to an intended Cirs, 42 F 2&4 93, 85 and tnterprise al he, We 4 DC. Pes wr suns 494, 535 51 abttveee tere of sery pam pele em pian Me tal leys, are cons to tose ‘rafas, Collector of Internal “evenue, CTA Case lin. 35%). under- scoring cupolied.)

a

DECISION ~

CTA CASE NO. 1679 11 (sn the light of the foregoing authorities the expenses in question are not expenses in the carrying on of business under the purview of

Seetion 30(a) of the Natienal a Revenue

Code but are capital expenditures"because peti- tioner's sine never reached the producing stage and the expenses for preservation and maintenance in question ‘are part and parcel ef exploration and development work in the mine. )

It would seem that the case of Xenneth C. Davis, et a1 (par. 166, TC Memo., 15 TC 879) is not applicable te the case at bar. In the Davis Cese the taxpayer aequired a wine that was not operating, the grantor having suspended eperation because of governmental war-time restrietion on g014 sining. All work exeept that for preserva-~- tion and maintenance were at a stendstill. The property however had income from other sources: whieh were pursued by taxpayer. ‘Some of the land ef the concession were leased to farmers, some of the houses thereon rented, and the taxpayer sold timber of the concession. In the instant case, the property was purely a wine with no ine come from other sources; operations were not ata standstill since work was being pursued in other outerops sod claims of the concession. Thus, the expenses for maintenance and preservation formed nert and nerce! of exploration op Aeveloment work in the mine. | 146

DECISION «

CTA CASE BO. 1679 . 12 ( Petitioner urges that if his expenses were capitel expenses they chould be enortined. There is no evidence presented by petitioner, however, that ean provide the court a basis for amortiza- tion. Petitioner having failed to comply with the burden of proof in this respect, the Court cannot crant bim relief in this matter. ) | | Tn eonneetion with the assessment for 1958, petitioner esseils the imposition of the }S im terest imposed by Republic Aet Mo. 2343 enending Section 51(2)(4) of the Tax Code because allegedly the seme has no retroactive effect. This question is not @ novel one having been resolved by the Suprene Court in the case of Centra Asucarere Don Pedro vy. Court of Tax Appeals _ Comuise sioner of Internal Sevenne (6.8. Nos. L=23236 and 1-232?5%, “ey 31, 1967) wherein the Court said: acs HaT aoeae napa at 25 as the June 2°, 1999, woieh was the dete of effectivity of said “epueblic Act read force; the Tax Court cor- pers held that ssid Seetion 51(4), as emended, is not bet lied retroactively 5 cintenen tw peti- tioner herein, 147 DECISION .

CTA — #0, 1679 15 (tne last issve reised by petitioner is the imposition of » compromise penalty of #25000. This ccupromise penalty is untenable in the ab- sence of on agreement freely entered into by petitioner, as appeoring in this case Collector of Internal Reverme v. University of Sto. Tomas, et al., Go. Ton 1+1427% and 111280, Nov. 28, 1958). | hs MIEREPORR , the appoaled decision of the re- _gpondent: is hereby modified, reversing the sane with respect to the assessment for the years e 1997 and 1959, ard ordering the respondent te giiwe the petitioner o tax credit of 91,599 23s : effiruing the safd decision with reapeet to the assessment of 1958 and 196¢ without liabi Lity for the compromise agreement, Without pi-cneunee= went as to coste. . .

80 OMDerTD.

Quezon City, Mey 3°, 1969. ty tee sae * ROMAN M, UMALI

Presiding Judge