Republic of the Philippines Court of Tax Appeals Gurzon City y Marietta Kalaw, Inc. vs. The Commissicner of Internal Revenue

V IW-~.;.~I E'l'TA K Ll\..\>.J,. HL.,, PetJ.ti:::H c.:::·.,

THE COI-1MlSSICNER

RY\lENUE, INTEHNAI ..

Respondent <•

X -

- - - - - - - - - - - -

X

D .E C 1 S I 0 N Thio suit is b ~ought by petitioner Marietta Kalaw. Inca for recovery of the a~ount of P30,462.,00 as alleged overpaid income tax for 1968~

Reapondent 0

however, denied the claim for refund and interposed a~ countercleim deficiency assessment for income and personal holding company taxes in the amounts of ?14,185s96 and P74,304~17• respectively 1 both for 19681$ Ae born~ out by the pleadings submitted by the pa· ties and records of the Bureau of Internal Revenue pertaining to this case. it appears that petitioner is a duly registered d1mestic corpo- located at 1200 1> ... Elccobo St,, Errrdta 6 l\1ani.la~ On April 14, 1969.

patition~r filed its in~ome •

DECISION =

CTA CASE NO. 2275 paid income tax as reflected thereon in the sum of P41,072,.00. (Exh. A, Petitioner's Envelope; Exh. 9, p. 140, BIR rec,, Folder 1) as follows:

O.R. Date Amount A~0519577 4/14/69 P20,536,.00

A-0519629) 7/15/69

20,536.00 TOTAL = P41,072.00 (Exhs. E & E-1, Petitioner's Envelope.)

Sometime on February 2, 1970, respondent directed an examiner to conduct an investigation of petitioner's tax liabilities. (Exh. 1, p. 141, BIR rec.) As a consequence thereof, respondent in a letter dated September 30, 1970, informed peti- tioner about a proposed assessment to wit:

Deficiency Income Tax Under Sec. 24 of the Tax Code - += --+ = = = P12,022.00 Additional Tax con Fersonal Holding Company Under Sec. 63 of the Tax Code - - 74,206.44 To th L ~SSs & = = =) 606,228.48 with an advise that an informal conference within the next ten (10) days may be requested should there be any objection to the proposed assessment. (Exh, 8, pe 150, BIR rec., Folder 1.) This was followed by a notice dated January 29, 1971 in- fo-ming petitioner that nothing definite was ved at in the discussion of the proposed nt with respondent's examine:., | llionex 231 DEC:U.,J..ON c:CA CAS:;: I\!0 2 2'1 ~i corfe·ence within the next ten (lC) days if thcr~ is any serious objection to the px0poz0d asaeas- (Exh. lOu p. 151, B!R recee Folder •t \.

-'"I

On February 8p 1971, counsel for petition~~ of having an informal conference on the data it requested, pecitioner, on February 16, 19?1 filed n amended ir-come tax re·· .i) . .:::-n fer 1968 n:d':1ect.ing thereon the amount of ~45,150a50 ss its net income 5 and sho 1.rJing an ovt:~rpayment. of P30 1 t162,.00. (Exho ..

On l·.pr:U 15ll 1971., pe·:.:i.t:.l.oner tiled wit.h re~p~ndent a claim tor r0furd of the amount of P30D462~00 which represents the difference between t.he tax !)reviou~3ly pa·id of i:'~<(.l,072 .. 00 a~1d the t.m;: li~bi.lity of F-10,610.00 on the 9aound thc1\. it reported as capital gains tho amount of P221,134o6S instead of PB9,624~6B actually received in 1968. lt alleged that tte original income tax return "' ... .

.

~ . ...

.~

DECISION =

CTA CASE NG. 2275 - 4 « same date pects loner instituted the instant appeal with this Court. (p. 1=+4, CTA rec,) On January 18, 1972, Revenue Examiner Pastor Oscaya had already investigated and verified the claim of petitioner and recommended to the Chief, Financing, Real Estate & Transfer Taxes (Audit) Division, that the amount of P29,785.00 representing overpayment of income tax in 1968 be refunded. (Exhs, B-3, B-3-A, pp. 47+48, BIR rec., Folder II.) Before complete resolution of the claim, however, the instant case was schedule for hearing by this Court, and during the trial thereof, the parties presented their evidence oral and documentary. -It appears, that on December 27, 1973, respondent assessed and demanded from petitioner the payment of deficiency income tax for 1968 in the apse: of P14,185.96, details of which are as follows:

ACR=36-4-800594—73/68

Net income per return . o e« © «© «© « e « « P154,066.20 Add: Unallowable deductions:

1. Interest expense ... »« P22,594.30

2. Loss on sale of fixed assets 14,408.35 37,002.65 Net income per investigation, . ... . F191,068.85 Tax due thereon stip li 6 & = 6 Less: Amount already assessed .... Balance oe © © © © © 8 Add: 45% mo. int. fr. 4-16-69 to 4-16-72 53,094.00 41, 072,00 P 12,022.00 24163.96 ® @ ¢ @ @ TOTAL AMOUNT DUE & COLLECTIBLE ...s: e P 14,185.96 and personal hol®ing company tax for the same year in the amount of P74,304.17, to wit:

D~:.CISION •· C'J..\!~ CA~lE .NO 2 2 7 5 ..• 5 -

Total

•:linomi·~~ t::•:.bj 2ct ·co ta ~~ 45% personal holding compa.y thf:r"!on.

G

a;• :)

.a t::.~Y~- dtie e ~ c •

Addz

~% ~o. int~ fr.

-1--16·~·.:9 t..o <:1~16-72

TOTAL A10UNT DUE & CO~LECTIBLE

(ExhQ 1 , pl~ 309 310~ BIR reCoa Folder 1~.

p 62,969.,6·~ ~-J:L1'Il.:t;t .. ?.l The quest .. on therefor of vhother P'~t.i t.im"l,D.i: j_s lc ally entith •. to tile refu~ d of overpa:!.d income tax for 1968 4 s int!rl ced with the follo~ing issu~s 9 to w:i.·t t lo

Wh

3 he- or not petitioner haa cha~ged its method of reporting income and expens0s in 1968;

( 2 o Whethe r br not the sale of the cars to ~essr-s. Edgafdo 'J:. Kalm-.• c.nd l•!c-1riano T ~ Kalaw is a bonBfide transgction, the los. of whjc on the part of pe~itioner is a deduc~­ ible expenses; and 3.

~hether or not petitioner is a personal holding company pursuant to Section 63 in re 1 at1on to Sections 64 and

65 of the Revenue Codeo

Before going into the meri ~s of the case, we wil l first thre3h out tie preliminary q uestion of prescription taised by respo dentD In opposing petitioner's appeal , respo .. d ~nt cont.~ndo thc.t t.ht~ instant ' petitio~ wa~ filed with this Court beyond the two year peri.od pi"cvid _d in ~ ; ecti.on 306 (no'l.v ~ ec 292) of the Rev~nue Code G Apparently~ res- "cndent assurned ·that the countin9 of tha tv o ye' r 2 3 ·1 . .

DEClSlOiJ ....

CTA CASE lHJ 2::.:75 instant pet!t1Gn having been filed only ,n April 15 0 1971,.

Respondent misses the p0into While pctj.tioner did file its income tax return for the taxable year 1968 on .April 1.'1:., . 969 11 it pal·~\ the ta.x dt.le thereon Jn l:.'.-70 equal inetr-Jllmant.~>o- the fi.nal nay ~ ment thereof Lppears to have been made on July 15 .

1969 ..

(See Exhso . & 9# supra0) A similar situation had already been considered by the Supreme Court which held that when the tax is paid in i .stall- ments, the prescri tive period provided in Section 306 of the RevenLe Code should be count ~ from t~he date of the: fi.nal paym~~nt. ,. (Call~ v. Priet. , Inasmuch as the i nstant petition was f iled on April 15 , 1971, it is obvious that the same ~as filed ~ithin the time prescribed by lawo Hence, this Court has juriscUc:tiono We will now discuss the issue of whether or not petitioner has changed ite method of repnrting income and expenses in 1968 o Petitioner contends that it has been regul~rly reporting on cash basi~.

owever, in the preparation rapresenting gni~s on ~apital as et was reported

23S

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D:::.CISION C..~..'A. C> ... ;E NO.

2~n5 .., 7 •• year.

It

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amonament c~ ~ts return o n Februery 16 8 1971 to reflect its true net incom'3• In Sllf.Jpor-t t.hereof pet:ition:..r Bubrnittc~d as Fxh o

"A~- 6"

he air:e .c:;ment to ite 1969 nc;tuL·n which reflected the capital gains actually realized for that year.

petitioner who had been adopting the cash basis of reporting income and ex~cnses, had witlout _prev iou.:- f;ermission chc:,ng ed its rne thod of a.ccoun t> ing in 1968 in violation of Section 168 of Revenue ~egulations No. 2o This is b&sed en the fact that for the said year~ petitioner returned the entire (accrued ) amount of capi tal gains i nstead o f the amount .:c.ctuaJ.ly received i n the same y <::ar, bad it been reporting on cash basiso Respondent also argues that due to petitioner's cha1ge of its method of accounting, the disallowance of the amount of ~22,594.30 9 as interest expense which corn .'31-ond t.o the year 1969 g ~ s proper v The conte!ltion of resrx~nd ent:. that petitiorH3r c hanged i ts method of accounting in viol2tion o{ , ,. c.

_\ \., rJ j; C:•. 2.

~ .: , . . " h - (>\.1 t-.. rne r. .t ·i:.., ii"lC.l U~a t 236 ,~ l \,_, -1 i~come of P154,066c20 on the ba~iG of wh!c~ it to ~41,072 ~ 00~ This return ~~s however 1 amended the original r~turn that petitioners !lftcd f~o~ ~e likewise find the argument of respondent th· t due to pet tioner 3 s change i n its method of accour.t ing !J the arr.:.) Lm t of I-' 2 2. ~ 59 4. :~ 0 a:~ :tn t~e.r-e :.:; t:

sxpense which correspond tl the year 1969 iD propar. wi ~hout me:c1 to P104,267.87, thereby deleting the amount of ~22,594-.30,.

This zeeadj wtment. render· furLhfH: discuss!o~ of the interest exponsa 6 unnecessaryo The issue o. the disallcwanca of the los~ of

DECISION =

CTA CASE NO. 2275 aw YD om was at “arms engi transaction", hence, the loss thereof on its part is an allowable deduction under Section 30(a) of the Revenue Code. Respondent contends otherwise.

We disagrees with petitioner, The pertinent provision is Section 31(b) (2) of the Revenue Code which provides:

SEC. 31. Items not Aawiict sale, ~ In computing net income no deduction shall in any case *~ ~) owed in respect of = x xX X X X x xX X KX X

(b) Losses from sales or exchanges of property.=- In computing net income no deduction shall in any case be allowed in respect of losses from sales or exchanges of property, directly or indirectly;

x xx xX X x x xX xX X

(2) Except in the case of distributions in liquidation, between an individual and a carporation more than fifty per centum in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual;

xxx xX xX -_ xxXxM XX It will be noted that the losses here involved is not a consequence of a ditribution in liquidation and Messra, Edgardo T. Kalaw and Maximo T. Kalaw, Jr. are brothers who among other relatives owned directly or indirectly the outstanding stock of petitioner. Hence, losses on tha sale of the cars by petitioner to them is not an allowable deduction, 4 LE:CI[.;IC•N C1'.A c;:~:·~.c4 NC' u ;?. 2 '7 5 We now como to the issue of not:

petitioner is a perso1al ~olding compa.y subiect to the adCit1ona l tax en undistributec net income unde.c t' 1e law o for purposes of the ircome tax law pertin2nt to taxation under ~action 27 of the R8 venuJ Code¥ a banl duly lie nse to do ·usines- as such in the Philippines, a life insurance company, or a foreign personal holdin9 company as defined in Section 67 of the same code, if (1 ) a t leas t 80% of itD gross incomd fer the taxable year is a personal holding company jncom~ as defi~ed in Section 65 thLr.ofr and (2) at any time during the las~ half of tho t:axabl" yc,~ar· m· ... re t:han 50% :tn Vi.'!.lue o 2 1 ts out.stancUng st.ock L:~ owne:da di.rect.ly or :Lndir:~ ctlyl~ by any or for not more han 5 individuals .

Sec~ 64{a) and (b) of the Rev~nue Coda.) holding com · any~ · any corporation which fo_ the mPnt, and {b) the stock o wnership requirement I ,....., • \ . • J f~. ·-~~ 0 239

DECISION =

CTA CASE NO, 2275 The conflict hcwever, arose when on the basis of the original return, respondent deter- mined that petitioner has a gross income of 469,966.73 and a personal holding company income of P421,544.00 as shown in the worksheet of the Revenue Examiner, In other words, respondent contends that at least 80% of petitioner's gross income is perscnal holding company income, Respone dent also contends that petitiorer is 100% owned by related family, so that both the gross income and etcck ownership rejiicenents of the law have been wake therefore, patitioner is a personal holding cotapany.

We Gisegree with respondent. ‘ie have found earlier that petiticner has amended its return fer 1968 on February 16, 1971. Tne figures indicated therein should therefore be the basis of deter- mining whether the statutory conditions with respect to the gross incorte recuirement had been satisfied, Ags shown in the amended return, the cross income of petitioner is P311,518.38, breken down as follows:

Gains or Losses from Sales or Exchange of Froperty other than Capital &ZSET5 6 8 © © &© & »@ @ 3, 783,08) Gains or Losses from

Exchange of Capital

Rentals & Royalties

Dj.v:tdendrJ Othe:r SOUXC:tH;

"

TOTAL GH0~33 INCG1E

. ' Even a cursor;t exami nat.ior. of t:he abov€~ fi.guresu wid1 the disallowqnce of the amount nf P13,783 08 the rentals amounting to Pl64, ·191 .. 55 const.l tu· e more than 50% of the gross i ncom ( • ..,.r:;

• .1.!.. pot:J. 'c ione r,.

nnd, becaus~~ of t~he provision of Sect.i.on 65 (h) of. t e Revenue Code in relation to Secti n 6 of the same Code 0 said amount of ~164.491.55 inspite of b ing rentals can not be ~" consi~ered as personal tolding company incomeo f-'lorf~OVf:r!J as sumi.r g .2.t-:~L~§!JS:.4.9.iJ that: all the items other than rents are considered personal holding company j_ncome., the sum tot .. al then~of would on~y amount to Pl74,592~99 ~1ich 1s less than 80% of the total gross income of P339¥184a54a

Clearly

ther~fcre~ the gross tncome requirement of Section 64(a) ~1) of the Reve~uc ~cd~ h~~ not be~n satisfied~ With this C)ncluslon, ve need ·

DECISION +

CTA CASE NO, 2275

- Li &

to the stock cwnership requirement, For all the foregoing, the computation of the amount refundable to petitioner for the year 1966 is as follows:

Net income per amended return ... P45,159.50 Add; Unallowable deduction:

Gains from sale of property other than capital assets . _13,783.08 Net taxable income .....« « « « £58,942,58 Tax due thereon Oe mes be See TESS Amount alreauy paid o 8 es e © © » 41,072.00 BALANCE Ri. FUNDABLE » & & P26,237,00 a Accordingly, respondent Commissioner of Internal Revenue is hereby ordered to refund to or grant a tax credit in favor of petitioner Marietta Kalaw, Inc, the amount of P26,237,.00 as overpaid income tax for 1968,

WHEREFORE, the decision assessing petitioner for deficiency income tax is hereby modified as indicated in the above opinion of the Court and the assessment for personal holding company income declared null and wold. Nithout pronouncement as to costs.

00 ORDERED, wuezon City, May 26, 1981. J ~

SNSFANTE Of ROA UIN

Sesociate Judcge

We. _CONCURS:

nce vith) 9

MANTE VILLER

ww Associate ‘ ge