Marlano 2 Retitioner, et al. vs. G.T.AE Case No. 234 Collector of Internal Werke 4 108 Revenue

DECISION

This is an appeal from the decision ef the resp~- ondent requixing the petitioner to pay the sume of P43,756,.00 ond 7,625.) as deficiency income tax for the yesrs 1951 end 1952, respectively. The said sums have been arrived st as follows: | *) cusssnees 1;230%:20 to politi- (b) Cal parties ceccceseccsesoelO ft, ©

(c) Christmas gifts (not cen- ) @CVoasseevosesseenase 648,10

(d) Funeral exenses (not con- Steneoecevaevrwnegeers | 450,00

(e) Feed & coffee (net con- ) SR eee vesewensetvesd 22, 70

(f) Arrow shirts (not contest- SGCoeoeseueseatvnaoseuveacave §0,00 ed (qg) Hotel & representation ex- dered capital expendi- tures ) 6605004206000000000 13 018:

(h) Tevedn ompanece of Mx.

do who was taken Mar tenet to UsSe in 1 2 eee capital i“ - enditure Beoeoseecevweeseos 32262240 F ptt

of Bay View

10 478. % 94014 Bay View Hotel?

607

DBCISION «

Gelso GATE NG. 334 =a De Demreciation claimed f

Lesst Depreci

for 7 month aes at ¢ 25 pe YORE seasscesvecosscascenae meaN 6,061.42 Be. Income not decleredi de ra peed uccamts pa e written off-- 2,933.44 credited to tal account 2, Fit pexcent ( of long texm ie Sal neue sealized fzeom the sale of Lot agape Less: Deduction alloweds .

were disal the yoen 1951 (10% of - aves multiplied a Tax due thereon qs... ~~. wc cee cwnwnn neces Less amount pala "(Oslls Now, S1126 & | 382873 oo ORD eee nO Oe a ee DEFICIENCY TAX VER AND COLLECT ISLE seem!

4282 Net income es rer return Adds Ae Deductions disalloweds

i. teeenses re intestate a ings of F. oeen Oe

Legal & Aiditing Fees :

conterted } Suxcharge on sales tax & qqupreniee sana’ as texes (not contested )}~-—- 24. 08 © 24 269.2% - ~- 1,181.07 con Spent for eedieal trestoent pesncegmessae Aedije > 3,645. © & Christmas gifts net supported Laiveet) EE rag? 1,027.80 oe ee = tnensé.t he 4 Tedgin ot ye yy Wie a 615.% Sey the ry a contested)<-~ 2,546.37 %e a claimed on Bey View Hotel Building for 4 months onty(Jand=April) .......6.. P16, 142. 85 608 of

DECISION «

G.T.A» CASE NO. 224 -~3~- Lesst eva wae lowed { of © 73.24 ewltiplied by ) weveees 11,877.94 94,614.91 Be Income not declareds lL Fifey peseent (S08) of long term one gain derived from the sale of

Teteal

income as per adjus sreeeenenemaneannarsete Less ee Lewes Amount paid 8714783 Geis iio.

This case was heard jointly with C.T.A. Ho. 194 (Eeperanza A. Zamora, in her capacity as Special Adminis- tratzrix of the estate of the deceased Felicidad Zamors

v. Collector of Intemal Kevenue), the sole iseve in thet ease being one of the issues raised in this case.

Petitioner Merianc Zamera is the amex of Bay View Hotel and Fazmacia Tamore. Ne filed his income tex re- tumns fer the years 1951 and 1952. After investigation and examination of said returns, respondent found that petitioner failed to declare his incowe derived from the sale of certain real properties and clained deductions | which ere not allowable. Hence, the deficiency essess- ment mentioned above.

Petitioner admits the correctness of the decision of cospendent with respect te the disallowance ef the deductions claimed in his income tex zetuzns for 1951 and 1952 and the alleged underdecieration of certain in- Covet. execert ac reasris the following itemst «4

- Rene Sa

Promotion expenses of Faxmecia Zamora end Bay View Hotel, . Lf2 of ou P10,478, 5% depretiation t} i 8,061.42 2) i982 -—- 4,614.91 Undeclared inc ae 1051- SOX of eapital gain de- rived from the sele of aaie and tuesen City” 49 ,840%650 be 1952 20h of of “capital gain gain dew =p another meek | n- erty in Quezon City-—-— 10,267.63 The sole issue, therefore, reltes to the correct~- ness of the deficiency income tax assessment as affected by the disputed items mentioned above.

The sum ef ©20,957,.00 was deducted by petitioner from his incone tex return for the yesr 1951. It is al- leged that the said emount wes spent by irs, Esperonza Ae Zamora, wife of petitioner, during her travel to Japan and the “nited States to purchese machinezy for a new "Tiki-tiki" plant and te observe hotel manegement and modexn hotel trends, It sppears, however, that fer said tzip Mrs. Zamera obtained only the sum @f $5,°%*.00 fzom the Central Benk, and that in her applicetion far dollar allocation she stated that she was going abroad on a com bined medics) snd business tripe These facts are not denied by petiticnere And no evidence hes been submitted where Mrt. Zamora sbtained the amount in excess of the %,0o4. given to her which she spent abrosd. Neither has any explanation been wade to show that the statement contained in ‘rs. tamoxe's application fer dollar alloca- tion that she was going abroad on « combined medical and business trip was not correct. In these circumstances, G10 b

DECISION «

C.TeAs CASE 234 - 5 « and in view of the fact that the alleged expenses are not supported by receipts, we believe respondent acted properly in disellowing one-half of the alleged ex- penses. (See Visayan Cebu Terminal Ce., Inc. v. Collec- tox of Intemal Revenue, C.T.A. No. 128, June 29, 1957, citing Cohan v. Commissioner, 39 F (2d) 540, © AFTRA 10552. )

For the years 1951 and 1952, petitioner claimed a deduction fer depreciation of the Bay View Motel build- ing at the rate of 3-£/2% of the waiue of said building, pursuant te Secticn 30(f) of the Revenue Code. On the ether hand, respondent believes that petitioner is en- titled to e deprecistion allowance of only 2-1/2%, and has accordingly disallowed the sums of 98,061.42 for 1951 and 94,614.91 for 1952. ‘In allowing petitioner e depreciation deduction ef 2-1/2% for the Bay View Hotel, respondent relied upon Bulletin "F" published by the Internal Nevenue Service ef the lLaited States. Bulletin *p* contains ea list of depreciable assets, the esti- mated average useful lives thereof end the rates of dee preciation allowable for each kind of property. (See 1955 PH Federal Taxes, 'arse 14,160 to Par. 14,163~0. ) It is true that Bulletin "F" has no binding ferce, but it has strong persuasive ioxrce considering that the same has been the result of scientifie studies and eb- servation for a long period in the united States after whose income Tex Law ours is patterned.

Counsel for petitioner contends that the *functien- al life* cof the Bey View Hotel building, or its noxmal useful life as 2 hotel building, must be considered in determining the rate ef depreciation,applicable there-

Git

4} |

RECISION «

C.TeAs CASE 234 -5« and in view of the fact that the alleged expenses are not supported by receipts, we believe respondent acted properly in disallowing one-half of the alleged ex- penses. (See Visayen Cebu Terminal Co., Ine. v. Collec- ter ef Intemeal Sevenue, C.TeA. Noe 128, June 29, 1957, citing Cohan vw. Commissioner, 39 F (2d) 540, © AFTA 10552. )

For the years 1951 and 1992, petitioner ciained ea deduction for depreciation of the Bay View “otel buiid- ing at the rate ef 3-I/2% of the value ef said building, pursuant te Section 30(¢) of the Kevenue Code. On the ether hand, respondent believes that petitioner is en- titled te a depreciation allowance of only 2-1/2%, and hae accordingly disallowed the suns of 9S,(61.42 fer 1931 and ©4,614.91 for 1992. in allewing petitioner a depreciation deduction of 201/2% for the Say View Hotel, respondent relied upen Bulletin *F* published by the Internal “evenue Service ef the United States. bulletin *p*® contains a list of deprecisbie assets, the esti- mated average useful lives thereof end the rates of de- preciation allowable fer each kind of property. (‘ee 1995 PH Federal Taxes, Pars. 14,160 to Par. 14,163-0, ) “ it is txve that Bulletin "F" has no binding force, but it has strong persussive force considering thet the same has been the result of scientific studies and ob. eexvation for « long pericd in the United States after whose Income Tax Lew curs is patterned, ' Counsel for petitioner contends that the “function-~ al life" of the Bay View Hotel building, or its normal useful life as 2» hotel building, must be considered in determining the rate of deprecietion. applicable there- 612 Wy, = The following special circumstances allegedly juetify « deprecietion rate of 3-3/2%% to..

DECISION -

GoTeA- CASE NO. 234 i bsthic.d its, dp Sep sfitustodteth hg? dds, stl ee He a ne ee § Poa ba ie wie i . gt é rar i a fa al Ht ae Hi ie 25 pits sete ze Seats rg be pl a he Hr sai autuea pasts CeteA. CATE NO. 234 o 7 « soutuses styles of fe ttney and decors ap ~ all these must meet the Tae Sells Massnandln Sea Fottiaeness) ait Among the speciel circumstances mentioned as justify- ing a depreciation deduction of 3-1/2% are (1) the trend of Ermita district, where the Say View Motel is lecated, to become a commercial districts (2) the fect that the hetel has no room for improvements and (3) the changing modes in architecture, styles of furniture, snd decorse- tive designs, all of which oust meet the tastes of a fickle public. We find, however, thet in estimating the reasonable rate ef depreciation allowance fer hotele meade ef conerete and steel at 2-1/2%, the factors sen- tioned by counsel hove been taken into account. Norweal- iy, en average hetel building is estimated to have a use- ful life of “) years, but inasmuch ac the useful life of the building for business purposes “depends to a lerge extent on the suitsebility of the structure te Se use and location, ite architectural quality, the rete of change in population, the shifting of iend values, es well as the extent of maintenance ond rehebilitetion,” it is al- lewed » depreciation rete ef 2.1/2% corxesponding to a meommal useful life of only 40 years. (1955 PH Federal Taxes, Par. 14,160-K.) Consequently, the stand of peti- tiener cannot be sustained.

The possibility that foreign companies, such as the Pan-American Alzways and the /iiiton international Hetels, may put up medern hotels in Menilse, in which event the Bay View bicte| would be merely “a collector's item", is a matter that apparently involves deduction for extra- 614

C05

DECISION «

C.T.Ae CASE NO. 234 ~ 8.

erdinary obsolescence, not en ordinary depreciation de- duction. (See Sec. 11O, Rev. Regs. Ne. 23 1955 PH Fed. Taxes, Pars. 14,175, 14,177. )

We are, therefore, of the opinion that the rate of 2-1/2% determined by respondent as a reasonable al- lewance for depreciation of the Bay View Hetel is in order.

The next item in dispute is the eum of $49,540.00, Fepresenting SOX ef the undeclared capitel gain derived from the sale in 1951 ef certain real properties in Mala- te, Manila, and in Quezon City, all ef which were acquired duxing the Japanese eceupation. It appears that the Me- nila property wae acquired on May 16, 1944 for #132,000L0 and sold on March 3, 1951 for ®75,000.00. This proper- ty was owned jointly by petitioner ond hie sister, the late Felicidad Zamora. The Quezon City property was acquired on January 19, 1944 for 968,000.00 and seld on February 9, 1951 for §94,000,00, We have already held in the case of Espexanze Za- mora v. Collector Internal Revenue, C.T.A. Neo 194, December 29, 1958, that the cost besis of preperty aco quired in Japanese war notes is the equivalent of the war notes in genuine Philippine currency in accordance with the Ballantyne Scale of values, end that the deter- mination ef the gain derived er loss sustained in the sale ef such preperty is net affected by the decline at the time of scale in the purchasing power of the Phil- ippine currency. We quote from the decision in said cases "On the ee thet the purchase price of $132,000.00 was entirely peid in 615 607

DECISION «

C.TeAe CASE HO. 234 «= 9 @ Japanese war notes, the cost of the p erty cennot be P132,000.00 in genuine Phile currency. It is an adaitted f fact t during certain periods ef the enemy eceupation, the value of the anese war notes was My Bs ne lees then the value of the genuine ine currency. It is for this reason thet the Ballantyne Seale of values, wnich was the result of an ‘impar- tial ecientific study’, hes been adented and given judicial recognition. (Garride ve North Camarines Lumber Co., 44 0.G, 440] ‘Berlongan ve Pascual, 45 OG. 222.) If the value of the Japanese war notes in Mey, 1944, when the property was bought, was one-twelfth ef the cenuine PAilippine peso, and since gain stained in the disposition of seid property is te be recken- ed in texas of "hilippine ye the value of the Japanese war notes used in the purchase = Ce Sopery Sue) Be seaneet i> Se ar Philippine pese to determine the cost ef acquisition.

"it is, however, contended that ig the purchase price in Japanese war netes to be converte?’ inte the pre-war vane the Philippine peso, the selling the property in — — alee duced to its pre-war velue a ter ted that the value of the peso much lower than its pre-wer D vaten SEEaie 40 Gn Ok Made ab & taat clematis and for thic reason the case was reopened to enahie the pexties to subadt evidence of the value of the peso in = as con- awed to its pre-war value. parties, r, failed te establish definitel the § :

2 g :

:

g more thorough study ef the question, we have ervived at the conclusion that there is no fall basis for considering the rise and of the value of the currency in deter- + mining the gain derived or loss sustained Poy sale cr gy roo of property.

enue, C.T.. No. 65, Auge Zl, 1955, affd.

in G. Re Nos. La9738 a L971, May 31, 1957. )"

It is alleged, however, thet, in the case of the Manila property which wes acquired for ®132,000,00, one- half ef the purchase pri¢e, or 966,000.00, was paid in Philippine currency, while the other half wes poid in Japanese war notes. After a careful consideration of 616 6%

DECISION <

G,T.As CASE NO. 234 > 30 - the evidence, we found that tne claim fhat 966,000.00 was paid in Philippine currency has been sufficiently established. For this reason, the capital gein derived from the sele of seid property is °3,5. 6, instead @€f 964,000.CO as previously determined by respondent. The property being jointly ommed by petitioner and his sister, the iste Felicided Zamora, the share of petition- er in the profit realized from the saie of the property is #1,780.00. Again, te quete from the decision in Espe- zenze Zamora v. Collector of intemal Revenue, suprat "Finelly, it is alleged that the pur- chase price of P1932,(00,.00 wes not entirely paid in Japunece war notes. Mariano Tamora, Co-owner of the property in cuertion, testi- fied that 966,06.0° wes paid in Phi eurroncy and the other 966,000.00 wee paid in Japanese war notes. No evidence was pre- in May, 1944 is equival te only #11 000. 0. property in Th, Setksprane smmepney)> Gensiacsin te @ cursen € well known f ts the ag ghey ~ of real propert v much ts faix market valve, it is incredib thet edd prop} erty should have been sold by the owner there- ef for leas then one-half of ite asse vel- u@. These facts have convinced us of the ve« waeity of the allegetion thet of the p price of ®392,000,.40 the sum of %66,0°0,00 currency, so that onl ora ay OO was paid in Japanese ’ ;

igs

BE

617 bor CcT-A- CASE NO. 294 « jl « “Since the sum of 966,000.00 in v~ SStatict"in mtiaslinn ecsmec?taey divided 12), the sequisition fo of the SerbSStlor" of s¥iustattar Nine peopey was sold for P75 ,000.00 in 1931, se that the owners thereof, Meriano and Felicidad Zamora, dezived a capital gain of $3,500.00, or $1,780.00 each. x x x 2" in the case ef the Giezon City prepesty, it is al~ leged that the entire purchase price ef 368,959.00 wae | paid in Philippine currency. As in the case of the Ma- nila property, we are inclined to believe the allegatica of petitioner. If, as contended by respendent, the pur- chase price of 968,959.0° was paid in Japanese war notes, the purchese price in Philippine currency would be only ¥17,239.75 (868,959.00 divided by 4, 24.00 in war notes being equivalent to #1. in Philippine currency). Tne sesessed value of said property in Philippine currency at the time of acquisition was 946,910.02. It is quite inezedible thet real property with an assessed value Of 246,910.05 should have been seld by the owner there- of in Japanese war notes with an equivalent value in Philippine currency of only ?17,239.73. We are more ine clined te believe the allegetion that it was purchased for 968,999.00 in genuine Philippine currency. Since the property was sold far 994,000.00 on February 9, 1931, the gain derived from the sale is $15,361.75, after de- ducting from the selling price the cost of acquisiticn in the sum of 968,959.00 and the expenses of sale in the sum of 99,679.25. (See page 13, Memorandum for hesp- ondent. )

Accordingly, the tote] undeclared income of peti- thoner derived from the sales of the Manila snd Quezon t 618 ~i2- City properties in 1951 is 917,111.75 (81,750.00 plus 925,361.75), 50% of which in the sum of 78,555.58 is taxable, the said properties being capital assets held fer more than one year. (See Section 34(b), Rev- enue Code. )

The last item in dispute is the sum of #10,267.63, representing 50% of the cavital qain derived from the sale in 1952 of another real property in Quezon City. Petitioner claims thet 5O% of the capital gain derived from the sale is only °9,320.92. Aesmondent has aeqreed to the correctness of the seid amount. (Page 18, Memo~ rendum fer Respondent. )

In view cof the foregoing, the deficiency income tax due from petitioner for 1951 is °22,98.00, and for 1952, °7,27&.00, computed ss followss Net income per respondent <aeuewm. | §127,512.39 Lesss Difference between $49,540, 50 (50% of capitel gain from saie ef zeal prope in 1951 as found resp +) and 50.558. ke (50% of capital gain from sale of same property as found by this Court) a....... te Adjusted net income oy Dale Lesss Personal exemptions ~<......-.. Net Taxable income mannan © Less! Amount previously paid «.~...

Deficiency tax ee Net incom per respondent 0.

Lesst Difference between 10,267.63 Adjusted net income Lesss Personal exemtien Net taxable income «enw... ne wecne Less Amount previously paid a....0.

619 603

DECISION «

C.TeAs CASH NO, 234 a alideany 2 cetstess oes to "Shee @emicy ancone — <ienty income Total defi heey i

WHEREFORE, the decision appezled from is hereby modified, end petitioner ie hexeby ordered te pay the sum of 930,254.00 as deficiency income tax for the years 1951 sad 1952, within thirty (30) days fem the date this decisien becomes final, plus the corresponding sur- Gharge and interest in case of delinguency, pursuant te Section Si(e) of the Revenue Code. With costs against petitioner. | SO OCADEKED, Manila, December 29, 1958.

620