CTA Case No. 287

DECISION

This is @ petition for review of the decision of the respondent holding the petitioner liable for the payment of #16,860.31, as deficiency income tax for the year 1949. Iwo preliminary questions were raised before the hearing on the nerits. Petitioner sought the cancellation of the sale at public auction of certain real properties levied upon by respondent, and the latter sought to have the appeal dismissed on the ground that the appeal wes filed beyond the thirty- day period prescribed in Section 11 of Republic Act Ne. 1125. These questions were resolved in our reso- lutions of August 27, 1956 and October 27, 1956. The case is now before us for consideration on the merits.

The {ssues raised are: (1) whether the suas of #27,459,.00, as alleged faraing expenses, and *6,893,45, as alleged entertainment and representation expenses, are deductible from the gross income of petitioner for 1949, and (2) whether or not the right of respondent to collect the deficiency tax of #16,860.31 has pres- eribed.

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DECISION -

C.T.A. CASE NO, 287 =-2« In all the pleedings and memoranda submitted by the parties it does not appear how the deficiency in- come tax of #16,860.31 was arrived at. Since the parties have designated it as merely the deficiency income tax for 1949, we will assume that it is the de- ficiency income tax proper, exclusive of any surcharge and interest, and thet assuming that the disallowance of the sums of 27,459.00 and ?8,893.45 by respondent is proper, the deficiency tax of #16,860.31 has been correctly computed.

The first item disallowed is the sum of #27,459.00, designated by the parties as “farming expenses". In the income tax return of petitioner, it is identified as expenses for “Labor, milling, etc." This amount was disallowed on the ground that it was spent in clearing and developing the Hacienda San Miguel of petitioner necessary te bring the hacienda into @ productive state, the said hacienda having been acquired only in the same year (1949). Petitioner admits that said amount was spent “in the development and cultivation of (his) pro- perty at San Miguel, Tabaco, Albay." (Exhibit M.)

Section 30 (a) (1) of the National Internal Ae- venue Code allows the deduction from gross income of all the ordinary and necessary expenses paid er incurred during the taxable year in carrying on a trade or business. In the case of farmers, the regulations enumerate the {tems which are generally allowed as deductions and those which are not deductible but may be capitalized, Section 75 of Kevenue Regulations No. 2, 39 0. G. 325, provides:

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DECISION -

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DECISION -

CeT.A-e CASE NO, 287 oe 4 @ No evidence has been presented as to the nature of the said “farming expenses" other than the bare state- ment of petitioner that they were spent for the "deve- lopment and cultivation of (his) property." No speci- fication has been made as to the actual amount spent for purchase of tools, equipment or materials, or the amount tire amount was spent exclusively for clearing and developing the fara which were necessary to place it in a productive state. It is not, therefore, an ordi-~- nary expense but a capital expenditure. Accordingly, it is not deductible but it may be amortized, in ac- cordance with Section 75 of Kevenue Regulations No. 2, cited above. See also Section 31 of the Revenue Code which provides that in computing net income, no deduc- tion shall in any case be allowed in respect of any amount paid out for new buildings or for permanent Laprovements, or betterments made to increase the value of any property or estate.

In order that an {tem of expenditure may be de- ductible, it is required thet eech year’s return, so far as practicable, both as to gross income and deduc- tions therefrom, should be complete in itself, and tax- payers are expected to make every reasonable effort to ascertain the facts necessary to make a correct return. (Sec. 76, Rev. Regulations No. 2.) Petitioner having failed to comply with this requirement, we agree with respondent that the claimed deduction must be disallowed.

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DECISION -

C.T.A. CASE NO. 287

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The second item of #8,893.31 represents alleged entertainment and representation expenses. Counsel for petitioner has apparently confused this amount with the amount of #31,121.77 which was claimed as entertainment and representation expenses of $, Gan- G8yGO,. Ing. Of the said amount of 731,121.77, 5% was allowed by respondent. (See Exh, Hel.) The in- come tax case of S, Gagcayco, Inc. is not in issue here.

The sum of #8,893.31 claimed as entertainment and representation expenses by petitioner in his individual capacity was disallowed by respondent on the ground that the expenses were personal and not deductible under Sec- tion 31 (a) (1) of the Revenue Code. Ho evidence has also been presented as to when the amount was spent, whether on one occasion or on several occasions; the person or persons entertained; the relation of such per- son or persons with petitioner; the amount spent in each occasion; and whether or not the business of petitioner was directly or indirectly benefited by such expenses. In order to qualify¢ for deduction, it must be clearly shown that the amount claimed to have been spent for entertainment and representation must have been both ordinary and necessary expenses for the promotion of the business. Petitioner failed to adduce any evidence te prove the deductibility of said amount.

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DECIS Ici «

G.T.A. CASE NO, 287 “6 it of income or profit (Deputy vs. Used. mag L. Ed. 416 Pont, we Welch vs. Helvering, Le Ed. 212). In connection wi : oe an bag < ee od Int. fev Nes Ss ppe sist, 859e) (We are, however, asked to apply the rule leid down in the case of Cohan v. Commissioner, 39 F (2d) 540, $ AFTRA 10552, where it was held that in case of the impossibility of determining the precise amount spent for entertainwent and representation, it fs the duty of the court to aske a detemmination, even if the result be merely an approxtiaation. . that ¢as9 it was held:

taining actors, employees, and, he 3 S, as naively adds, dramatic critics. He had

DECISION -

GeTeA. CASE NO, 287

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that he had spent eleven thousand dollars in this fashion durfag the first six months of 1921, twenty-two thousand aeliars, vet- ween July first, 1921, snd June thirtieth 1922, and as auch for his following fiscal ae fifty-five thousand dollars all. Board refused to allow him any part of this, on the ground that it was Lupos- Sible to tell how auch he hac in fact spent, in the absence of any items or details. The question is how far this refusal is past sete in view of the finding that he spent much ang that the sums were al- lowable expenses. Absolute certainty in such matters is usually a enc is not necessary; the Board should make a5 pao Bagh 4 tion ss ao bear ing heav chooses upon taxpa whose titude is of his own at ll But to allow nething at ail appears to us inconsistent with saying that some- thing was spent. True, we do not know how many trips Cohen made, nor how large his enterteinments were; yet there was obviously some basis fcr computations, ff necessary by drawing upon the Soard's miniawn of though the treveling expenses of a single trip. Tt ts not fatal that the result will inevitably be speculative; many tant decisions wust be auch, se think there is no parity between the Cohan case and this case. In the former, these was evidence of the emount of the expenses, the persons entertained, and the necessity of entertaining such persons. In this case, there is no such evidence, It is merely clained that the amount of *6,8935.31 was spent for enteriain- ment and representation, No account or any detail has been given upon which to base an estimate of the anount which may be allowed as a deduction. )

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DECISION -

C.T.A. CASE WO, 287 i ie We had occasion recently to apply the rule laid down tn the Cohan case, In Visayan Cebu Ter- minal Co., Inc. v. Collector of Internal Aevenue, CeT.A. Case Ho, 128, June 29, 1957, the sum of #75,855.82 was claimed as a deduction for repre- sentation expenses, fhe entire amount was disallowed by the Collector on the groune that the disbursements partook of dividend distributions, Evidence was pre- sented to the effect that at least part of the amount was spent to entertain customers and for payment of hotel and accommodation charges of the officers of the corporation while traveling for the business of the corperation. In deciding to allow the deduction of @ part of the amount claimed, this Court stated: *As to how the amounts claimed by the eificers and members of the Soard were spent, Casco testified that, with respect to the ee ee ee ee eee Sa Ls ny aa

DEC TS ION «

G.T.A. CASE NO, 287 o9= was for representation expenses of » While the portion S Ros Ceenee Sy Saperone pares for There is also no parity between the case of the Visayan Cebu Terminal and this case, The sole allegation that an amount was spent for entertain- ment and representation does not supply any reason- able basis for estimating the amount deductible under the law. We are, therefore, constrained to affirm the disallowance wade by respondent of the entire amount.

We now come to the second issue whether or not the right of respendent to collect the deficiency in- come tax for 1949 has prescribed, The law prescribes two remedfes for the collec- tion of interne] revenue taxes, viz.; “(a) by dis- traint of goods, chettels, or effects, and other per- sonal property of whatever character, including stocks and other securities, debts, credits, bank accounts, and interest {n and rights te personal property, and by levy upon real property and interest in or rights to real property; and (b) by judicial action, Either of these remedies or both simultaneously may be pur- sued in the discretion of the authorities charged DN ei nein ti i lk ia Blk ed

DECISION -

G.T.A. CASE NO, 387

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with the collection of such taxes.” (Sec, 316, fe- venue Code.} Collection of internal revenue texes in general by distraint of levy and by judicial action may be pursued by the Collector of Internal Revenue within the periods of limitation provided in Sections 331 and 332 of the Revenue Code. However, with res~ pect te income taxes, collection by distraint or levy may be effected only within three years efter the re- turn was filed, or, in case of & faflure to file 4 ree turn, from the date the same was due, (Sec. 61 (d), id.) After the three-year period, the collection of income tax by distraint and levy is illegal and void. (Collector of Int. Kev. v. Avelino, GA. No. L-9202, Hove 19, 1956; Collector of Int. fev. v. lieyes, GH. Court of Tax Appeals, G.R. No, L-8652, March 30, 1957.) In such case, collection may be effected only by judi- ¢ial action within the perfods of linftation prescribed in Sections 331 and 332, This has been the cons{stent opinion of this Court which has been followed and ob- served in @ long line of decisions.

l. After three years from the filing of an income tax return, the Government cannot collect tncome tax by dfstraint and levy but it may do so by —_— action with five years from the the return was filled, if there was no assessment, or —s tive from the date of assessment. (Intestete tate of A. fT. a, ate Civil Case No, ° o 1956; Chua Joy v. Col- ef Int. Revs, CoTeAe Noe 245, 2 the Canlas, 1956; Republic of the Phil.

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DECTS TON «

CeT.A. CASE NO, 287 « jle dated Mining Co. Vv; aa age of Int. Heve, Sept. 27 Selane v.

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Transp. Co Se oere She Cnyere Reet Se file his income tax me tag Bh Bago ne of In- Revenue ma the tax within ten Sows che Gute of daecnuen the lector of Int. Rev.» CaTA. No. Sd lieve 23, 1~9996, Oct. 15, 1957.

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In case of fraud, waieial collected without cssesszent oy. juste tea years from discovery of the fraud, or within ‘ace years of o {f an assess- ment made. Reyes. Ve gg a of Int. Reve, C.T.A. No, 42, Ege 955, affirmed dn Go. No. 1-685, Jan. 3h $, fab, 3, 984; serez 13, 1956; Wile 24,1957.

In this case, petitioner filed his 1949 income tax return on May 10, 1950. After three years from that date, or frou Muy li, 1953, any warrant of dis- traint and levy issued by respondent te enforce col- dection of the deficiency income tax assessed against petitioner for the year 1949 is illegal and void. How- ever, since the deficiency tax was assessed on April 8, 1953, collection thereof may be enforced by judi« cial action within five years from said date, The five-yeer period is to be counted from April 8, 1953, and not from May 14, 1951, the date of the originel 621 — bog a

DEC TS ION -

CoTeAe CASE NO, 287 = 12 « assessment, because the latter assessment was super- seded by the one issued on April 3, 1953, which re duced the original assessment. (Suyoc Consolidated Mining Co, Ve tor of Int. Hev., C.I.A. No. 189, Sept. 27, 1956.) ‘ Judicial action having been insti- . tuted by petitioner himeelf when he appealed to this — Court on June 14, 1956, the right of the government — to collect the said deficiency income tax has not prescribed. (Alhambra Cigar & Cigarette Mfg. Co. v. Collector of Int. Reve, C.TeA. Wo. 143, Jan. 31, 1957; Jose Ng Suy v. Collector of Int. Kev... C.I.A. Wo. 321, July 1, 1957; Bohol Land Transportation Co. v. Collector of Int. Reve, C.TeA. No. 261, Sept. 25, 1957.)

FOR THE FOREGOING CONS IDERATIONS, the decision appealed {s hereby affirmed, Petitioner is hereby re- quired to pay the sum of 716,860.31, plus the corres- ponding surcharge and interest from the date of deli- quency. With costs ageinst petitioner.

SC ORDERED, Manila, November 14, 1957, | i i i ;

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Presiding” Judge

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