CTA Case No. 2625

DECISION -

CTA CASE 40. 2625 .It appears that Mr. Jobm Rocmer, the president of the corperetion, being an . Americea, was in continuous hiding during the Japanese occupation, To protect the faterest of the corporation, particularly its cettle, Mr. FPilemon Lycasen, who owned . @ cattle ranch edjacent to that of peti- tioner’s, wes appointed overseer. After the war, petitioner discovered that prace ticelly ell its cattie were found in’ the ranch of Mr, Filemon Lucasan anc forthwith Gemanded the return thereof, Mr. Lucasan, centending that the cattle belonged to his anda not to petiticner, filed en action for recovery with damages in the Court of First Instance, ‘atboengs del Norte,* After due heering, the court cendereé its decision thereon on June 30, 1952, the dispositive portion of which seads as follows:

"AGjucicating to the Sieri Valley #13 the cettle thet asy be found in the , cattle ranch of Filemon Lycasan, specielly — the 32] heads that had been entrusted to his cere as receiver or trustee of this Court, end ordering the defendant to Geliver to the plaintiff all ssid cate tle or their velue smounting to 740, -_ 9000.00 to pay demeges te the Siari Vale - Jey Estete for the 490 heeds of catele that he sold sinee 1946 up to the date . @& the triel et the rate of 7100.00 per heac of *40,000,00, plus interest at the rete of 6% from the dete of the trial of this case in January, 1951 and to pay the costs of the proceedings, and the aforesaid Gecision wee effirmed on appeal by the Supreme Court on August 31, 1963 m She MO. L= 7046 (pp. Sub, SIR re- ea: ee anette te era « Please see Memorandu dated June 15, 1970 of the Revenue District Officer for the ena) Director, one. 9. 20, Zawboenge City, (pp. $2, SIR ree co ( 228

_ * DECISION

CTA CASE HO. 2625 As Mr, LyCasan was then in finenciel diatress and unable to pay the 740,000.00 representing the 400 heeds of cattle he seid ay the interest thereon amounting to @ settlement wes formulated whereby Mr. Lycasen would liquidate the eforestated amount of P72,000.00 in six (6) anaual ins- tallments at the rete of ©12,000.00 per fasteliment. In seccordance with the fore- qeoing agreement; petitioner seceived the eovallanuns for 1965, 1966 and 1967 which 4t duly reported es income fer those yesrs and mn the corresponding taxes thereon, Zt is the position of respondent, how- ever, thet the 740,000.00 a te peti- tiener »y the triqi court repr ted the velue of the 400 heads of cattle absconded by Mr. Lycasan end was, therefore, merely « return of cepitel., what constitutes income subject to tax ia the 6% interest ewarded ~ petitioner in the form of damages which, amounted to P32,000.00, And ple 3 se 3m thet petitioner uses the ecerusal method of accounting, the entire 732,000.00 should be declared as incowe in 1965 on the — basis of the Supreme Ceurt decision dated : August 31, 1965, entitled “Siari Valley =s- | (po. 1, Memorandum for Petitioner). Conse- yo the taxpeyer hed an underdeclaraticn for 1965 in the amount of #20,000,.00, beceuse it had elready previously reported the amount of P12,000,00 (p. 35, SIR records), For tax- able yeers 1966 and 1967, it included in its returns the installments of ¥12,000.00 ree ceivea per yesr, thus overpaid ite income tax in the smounts of 2,563.90 and 2,576.00, | respectively.

Based on the sbove findings, the defi ciency éssesement in question was issued, On September 6, 1971, a warrent of levy on real property was issued, which wes duly served OR petitioner on September 14, 1971 (p.36, BIR records), In a letter dated Apréal i, 1971, and reiterated another letter, dated September 17, 1971 (pp. 30-33, SIP 299 DECISION .

CTA CASE NO. 262% =te records), petitioner protested the assess-~ ment. The protest was denied by respondent in a letter of the Regional Director in Zamboanga City dated Setober 26, 1971 (p. 26, SIA cecords),. Petitioner further ine sisted for « reconsiderstion of the assess~- mene (pp. 26-27, WIR records), Finally, . Fespondent, in his letter of August 29, 1973 (pp. 18-19, BIR recor¢s), denied the aforesaic pretest.”

rte should be added, however, thet peti- tieser filed another petition for reconsigere-— eien dated Jamuary 12, 1974 of the denial of res- pondent ef its proteat which he nimsel£ issued and signed under date of August 29, 1973, (Bath, “B". DD. 45-48, CTA records.) “ithout rendering @ Gecision on such petition, respondent instead issued « warrant of levy to enforde collection: of the tax assessed. by Pim which wes served on petitioner on August 21, 1974, (mxh, “A", “Anl", pe 44, CTA records.) Hence, this appeal ‘which was filed on September 6, 1974. | _- 2 petdtdioner made its returns on @ “cash” bewia, it is obvious thet it was correct for it imciuded in jts returna the instaliments of P12, 000.00 actualay received per year. on the other hand, if petitioner reported on the “aceruel" ba- sis, then we must decidy vhether or not the income ) » 230 DSCIsSToW .

CTA CASE NO. 2625 represented by the 6% interest awarded to peti- tioner in the form of damages amounting to 732,000, © accrued and «as includible in gross income in 1965 when the decision of the Supreme -ourt dated August 31, 1965, in “Siari Valley Estates, Inc, ve iucasan,” G4, No. .=-7046, was rendered and probably entered. | wittingly or uawittingly, petitioner does not seem to know whether tt kept its booke and mede its returns on an accrual or cash basis, although its arguments proceed on the sesumption thet it is on the cash basis, (See pp. 95-96, CTA records.) Respondent cays in his memorenéum “thet petitioner uses the eccrual method of accounting” (pp. 88, ClA records) and this is borne out by the reports of his examiners who investigeted the “ Books and income tax returns of petitioner, The income tax returns filed by petitioner during the years in question (see BIR records) state categoriceliy that such returns ere made on the basis of scerued income and expenses. rer the purpose of this action, we will accept thet pee titioner kept its books and made its returns on the accrual basis of accounting. Consequently, 231

DECISION

CTA CASE BO, 2625 @] 6 « the principel problem is the time when the income - the amount of 32,000.00 representing igterest awarded to petitioner in the form of demages-accryed.

This brings us to the definition of the word ‘*ae- crue". The ordinary law (dictionary *teaning ts “to grow to; to be added to; te become « present right or Gemané; to rise, to happen, to come to pasa,” (1 Bouv. Law Dic. (Rawle's Third Rev. 111.) In CoJeGeg ACCKued, p. 761, it is said: “Accrues, as the pest tense or preterit of the verb, has been deo fined as meanings scquiredy erose, became Gue; be-~ ceme vested, came into existences fell dues has arie semy made or executed, meturedy oceurred; received; vested; was created; was incurred; was in existence,” (See H. Leibes * Co. ¥. Comeistioner of Internal Re~ © venue, (90 £.(24) 932.) But such e general defenition must be considered in connection with the use of the word, In other words, what is the meaning of the words “income avcéuei” es used vith reference to in- come tex returns? | Neither the Income Tax Law nor Revenue neaehen tions No, 2 defines or provides when income accrues, in Luces v. North Texas Lumber Co., 281 U.S. il, 74 Lewd, 668, it is held that Sneome Qo0e net eee crue until there is “unconditional liability” on behalf of @ party to pay it to the texpayer. in Continental Tie & be Co. Vv. United Stetes, 286 U.S.

» 232

DECISION «

CTA CASE NO. 2625

- J«

290, 76 L.Ed. 1211, it is indieated that income ac- erves, when there io a “right to payment,” in North “merican 041 Consol. v. Gurmet, 296 U.5. 417, 72 L. Ed, 1197, it is stated that “If a taxpayer receives earnings under » cleis of right and without restric- tion as to its dispesition, he has received income which he ie required to return, even though it may still be claimed thet he is not entitled to retain the money, end even though he may still be adjudged liable to restore its equivalent. Im Spring City | roundey Co. w, Commissioner, 292 U.S. 302, 78 Loud, 1200, it is seid: “Keeping accounts and asking re~ turns on the eccrval vesi«, as distinguished {rom the cash basis, import that it is the right to receive and aot the actual receipt that determines the ine clusion of the amount in gross income, When the right to receive an amount becomes fixed, the Fight accrues.” In United States ve. Sefety car Meating & Lighting Co., 297 U.S. GB, 6O LEG, 500, it is indicated that income eccruer when the liability is uncontested end certein, | in Lichtenberger-Ferquson Co, v. welch (C.CoAe8) 54 ¥,{2d), 570, it wes held thats

DECISION «

CTA CASE NO. 2625 “Under the accrual systems of account- ing where an item is definitely oscertained as to its amount, end acknowledged to be due, it hes ‘accrued*., To quote from the decision of the United States Board of Tax Appeals in . the case of Appeal of Clarence Schock, 1 8.T.As $28. ‘Under euch system of secounting receipt ef income-actuel or constructive- is not ese sential to constitute income within the sta- tutory cCefinition of income, Under an secrual system of eccounting one eccrues income, he dees not receive it. Under the receipts end Gishbursements method, one receives income and does not acerue it.° — In addition to these cases are those dealing with the time of accrual of deductions, such ss taxes, expenses, losses, and depreciation, In | United States v.woodward, 256 U.S. 633, 65 LEG. 11325 it 4s seid that a deduction accrued when it “became cue." Vtn In United states v, Anderson, 269 U.S, 422% sod & Bley 3476 it is held that @ aecuction sccrves aun all the events have ommenneil “which fix the _sinount ¢ of the cax and determine the liability of the taxpayer to pay ite" tis American Netional Co. Ve United stotet, 274 U.S. 9, TIL NG. 946, At is indicated that & éeduction is accrued hen Fates is. “incurred, In United States v. 5.5, white ‘Dental ee , Migs ~oe 274 Ue. 398, 71 L2G. 1120, it is said ' that losses “which ere tixed by identifiable events" are ecorued. in veiss v. "iener, 279 UaSe 333, 73 DECISION .

CTA CASE NO. 2625 Letd, 720, ic is seid that a “loss. @ust be actuel and present, not «rely contemplated as more or lees sure to cccur in the future.” In Lycas ¥. American Code Co, 280 U.S, 445, 74 L.Ed, 538, 67 hebehs 1010, it is seid: “Generally speaking, the income tox lew ic concerned only vith cocibes® losses, ss with resliszed ceains." ‘ee, cleo Burnet

v. Logan, 283 U.5. 404, 75 L.Dd, 1143, Surnet v.

Prom the above expressions, it is apparent that the genersl definition of “accrued” i» limi- ted when taken in connection with income returns, we may conclude that income has not accrued to « taxpayer until there erises te him a fined or unconditional sight to receive it. (HK. Lizbes & CO. Ve Commissioner of Laterne) Revenue, 90 FP, (2d) | 932.) a se far, omly the right to receive her been considered, Must we also consider the grospect of Sealisation on that right by the texpayer? in other words, when che right to receive rises, ‘should the fact that the right is or ig not cole lectible be teken into consideretion tn sorecntntie : \ whether income hac eccrued? we believe that no { \ 235 es th precision CTA CASE RO. 26253 income accrues unless there is a reasonable @x— pectancy that the right will be converted dato money or ite equivalent. Commissioner v. Brown (C.CeAe 1) 54 «2 (24) 5633 Corn Excnange Bank Ve United States (C,0.4.2) 37 F.(24) 347 Sutowobile Ins, CO. v, Commissioner (Cocede2) 72 #.(2d) 265, Come missioner v. Srooklyn &.5. Corp. (©.C.%.2) 19 —-Fel2@)' 833, 834f 1 Paul & Mertens, Law of Pederal | Income Texation, 557, ile73- jis also, American Ciger Co. ¥. Commissioner (C.C.Ae2) 66 P.(24) 425, certiorari denied 290 U.S. 699, 78 1 -8d, GOly Hele vering v. Russian Finance & Construction Cor, ‘oie Gefinition would Uiaretees soit : s to e taxpayer, | wen there arises to nim a¥ ixed or unconditional ‘all right to receive it, is there is @ reasonable exe / | : pectancy thet the right wiih be converted inte money or ite equivalent. (He Liebes & Ce. Ve Commissioner of Internal Revenue, guorae) Now going to interest which is the income item involved in the @se st bar, interest is or- dinerily accruable when the right to receive at is fixed, end not when it is ectually received; but that _ i 4s not aceruable ae long as a reasonable doubt 236

DECISIGN =

- ll « exists as to the amount. that is collectible by reason of the financial condition or insolvency ef the debtor. (‘pring “ity Co. v. Commissioner, 292, Ul. 162, 54 5.Ct, 64, H. Liebes a Cae Ve Commissioner, 9 Cir. 90 P.24 9327 Corn Exchange Bank v. United States, 2 Cir., 37 F.24, 343 Jaw waica “ater Supply So, v. Commissioner, 2 Cites 125 ¥.24. $123 Clipton Mfg. Co. v. Commissioner, 137 7.26. 290.) Seering this rule in mind, it seems clear that the interest in the entire amount of 732,000.00 swarded to petitioner in form of éa-=- mages wat not entirely accruable in 1965 unen the decision of the Supreme Court in the Sieri Valley Estates case was rendered. so The records show that the collectibility of the entire item wes still open te reasonable ques- then. As a matter of fact, es stated by respondent himeelf, Mr. Lucesan was then ia such “financial distress and unable te pay the 740,000.00 repre- eenting the 400 heads of cattle ae said and the ine terest thereon amounting to 32,000.00, oF s totel of #72,000,00", thet “an amiceble settlement was formulated whereby "r. Lycasem would liquidate the afereateted amount of ©72,000,00 in six (6) annual 2937 CTA CASE NWO, 2625 ~ 12 « installments at the rate of 712,000,000 per instale iment.“ And "In sccoerdance with the foregoing ag- reewent, petitioner received the installments for 1968, 1966 end 1967 which it duly reported as ine come for those years enc peid the Corresponding texes thereon.” (p. 88, CTA records.) The col- hectibility of the item was therefore established beyoné 211 reasenable doubt in the years 1965, 1966, 1967 (and other succeeding years) in sce cordance with the terms and conditions ef the amie cable settlement entere? into by petitioner and Mr. Lyeasen. It was only then thet the income for eech year accrued to petitioner when there prose to pétitioner « fixed of unconditions, cight te Kegeive At, coupled with e rgesonsble expectency Shet tbe :igh® souls be converted into money of Or ite equivalent. | Accordingly, the assessment of respondent dated Pgbruary 25,.1971 ageinst petitioner Siars Valley Estates, Inc., for Geficiency income tax for 1965 and 1968 in the amounts of P$,041,07 and 101.67, respectively, cannet be sustained, The warrants of levy on real property issued and which were duly served on petititoner on Septem- ber 14, 1971 ond August 21, 1974 are hezeby dec-

DECISION _

CTA CASS NO, 2625 = 13 « lared without force and legal effect, — MERZPORE, the decision eppesled from should be as it ic hereby reversed. Ko costs, SO OKXDERED, Quezon City, October 18, 1976.

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