CTA Case No. 320

yt eines oo fm ——— ae ee wee ee es, RZPUBLIC O rt PHILIPPINES

COURT OF 1AX APPEALS

MANILA

Petitioner, e Wersus = C. TA. CASE NO, 320

COLLECTGR OF LTERWAL

REVENUE, Hn 7 54 Aespondent, ZXKeeweaeeeaeevseencee jt

DEGISTON

The petitfoner filed his income tex returns for the Galender years 1947, 1948, 1949 and 19TO on Febe ruary 2%, 1948, February 78, 1949, February ™, 1950 and Bebruery 27, 1959, respectively (Exhibits "A" & "1", BIR vec. p. (22) Dl; Exhibits "8" & *S", BIR rec. po (14) 15) Exhibits "C* 4 “S", BIR rec. p. (8) 93 Exe hibits "D" 4 "4", SIA prec, p. (2) 5), claiming as deo d@auctions, smceny others, {tems representing expenses for repairs of houses, depreciations, bad debts, and sundry expenses, Sometime in 19], the Bureau of Internal Kevenve Sesued Income Tax Assessment hotice No, AinA-36-51/47, impeting “an income tex for the amount of expenses (#9,004,34)* the petitioner incurred in the zvepair of his house (Exhibits "0" & "li-A", BIR rec. p, (2) 24). In a letter dated December 14, 1951 and addressed to the respondent, thru the Deputy Provincial Ireasurer of san Fernande, Le Unten, the petitioner requested for a cee Consideration of the sssesement (Exhibits "0" & "1l-A"), Net receiving a reply thereto, the petitioner, on May 278 of?

a

DECI ICN «

oe Se 2, i955, wrote tw the Municipal Treasurer of san Fer- nando, La Unton, reiterating his request for reconsideree tion (Exhibits "P" 4 "ll", p. (26) 4}.

Upon investigation (éxhivit "“liedel", Jii rec. p.

(27) 26; see alse 21K rec. p. (29) 2%), Sid examiner Elpidio P, Kivere, on July ld, 1954, recommended to the Provinctal Revenve Agent of San Fernando, La Union, the denial of the petitioner’s request fer reconsiceration of the 1947 essessment, and the essessment of income taxes for the years 19471990 in the total amount of ©2,758,16, plus compromise penalty for violation of Rev. Neg. No, Vel in the amount of #900,00 (Exhibit "12", SIR rec. De

(28) 27). ;

Meanwhile, on July 7, i954, ixaminer Aivere tube mitted his reports of examinations of the petitioner's income tax returns for the years irom 1947 to 1950 (Exe hibit 12<A, SIX rec. p. (24) 23; see alse pp. (16) 17,

(10) 12, (4) 5, STK rec.). These reports of exaatnations were later returned for further investigetion (Lxhibit "Q", BIA rec. pe (33) 32). Upon reinvestigetion, Examiner Aivers submitted his reports of examinations, recommending the folleving assessments against tae petitioner:

Lgaz

Net Income per peturn @eeseetzreevesSeeeecoeaeceaneeee i 2, 746,39

Add: Disallowances:

le Repairs to be capitalized:

prolly POEPAITS cevececscsceccee 9,144.22 iaene lew he Geprecifatica allowance pe | ala ove 90442 8,139.50

2. Depreciation on old fully depreciated buflding SCeOCSeF BECEHESEOOE _.._ S40 GO 2709 272 DEC IGN o Gelohe CAE NO, 390 Net income per Imvestigatlen cccscescovscvcesres

Less: Pereonal ¢

LONE ccoonsecoeevcocoeeesece Inc cam ect te ROK coccccsevscessovessecsece | Amount ef PHROHHEOHSOOHEHCOHESOCADOBOOEHE ;

(Exhibit "8°, BIA EOC. De (32) 31.)

42.438 Net Incom per return CHOSCOEHOOHS LOSE ROSOCOOES

= Disallowances:

. of old building y deprec tated eoeccecseses © 330,00 os Aepairs te be capitalized:

Of repeaters cesece 61,561.00 tase to. fous. 106010 1,404.90 ‘ epece .

Be Bad GOOtS socccccscccccccenccces ingome per investigation eeeecccscccscccvece s Personal exemptions .ccccccccescccscescese ineome subject to tax cocvcrscesccorsccoesecs Of Income AK GUS ceccccccccosenecccecoce (Bxhabit "9", BIR ree. op. (19) 2.)

ii £242 oem ver ae ©4600 0O000 288006080400 CRC®e

i. Damnoeaenaen of old fully depreciated butlding sesccseos # 180.0 > Bad dents SOCCER OHOR COLO OEEOOOOS 52, GO a General ge ge ~ an e139 of car from the Reliance MOTORS, INC. covcecesccssccccccecccesece Net income per InVEStigation cessccscesececses Less: Personal « LOMS sccesecosccvcrececees Net incowe subject to Po CCOCEDOOEHEEOOLODLOC®E | inc ome ty be edediaeation) s2-02000.

(Exhabtt "5", BIR sec. pe (13) 14.)

i e 1289 Net income per returm COCDCOOOHTET OLE LOOLES COED

Adds Disallowancess

280 © 2,903.85 —teiltats » 1,282.99 1,104.13 rieese?-t ert 65.32 ® 2,857,65

PY

DEC Is IGN «

GeTohe CABER WO, 320 aa 1, General expenses, med'cnl prefeseton WLLNGUL VOUC ARE ccccesvevccccesseseseses & 654,10 2 Generei wAperieehs, meu Gas peotess fon Wi cGl VOUCHOT ..cccsveeweweesecsecoeses B.CO

3. Genesal expenses, seuical profession WLELUUL VOUCHOE cecosene>: sceccceneceses te Met income per investigation se.cc.sesceseccesee e ® Lesss Personal og ogee POCORHSCHREOEESEE LOOSE Net income subject to tax seccoscsevesvscsesers Amount Of InGame Cex Ge cecececccevccsesesrecs .

{Exhidrt "10", BIR rec. p. 7.)

Gn Pebruery 9, i955, the respondent isevec taz assesement netices of the petitioner's tncewm tex lite bilities in the foliowing smounts:

papenenens amgans Expipip

Due Year ' Nge

De Joc. a yuelaes | ~ 9763 ,51 1947 Tr Bte7e7141 52-04-64" o7,14 1 9AL *Toa” BMeo7= 1636954 949 907 . oF 1949 Uy Pee MeoTe2lglataha0h( 49 47 195 "Faig® Ga February ly, iy <a ~/ et petitiones at turned to the respondent the tax sssessuent notices, and cequested ene lightenment e@ to ho <se essessments were arrived at (fixe hibit "F", CTA cec., ». ll). “ithout answering the sequest, the reepondent, om <cplewoer 14, 1206, issued & waxzpant of distraiat and levy a.cloel the peoperties of Lhe petitioner te satiafy the emount of .1,5.5.i0, sepeesenting Licome tax for the years 14 /-l)5., plus the legal incresents thereed (Exhibit "6", “li receg po “)e In pursuance of this warrant ef disicaint and levy, the municipal treasurer of San Ferasnde, La viv, oi eepleaver iy, ivno, alstrained end levied the petitioner's cesideniias acuse (axnieit “HY, 281 270

Lev [ON =

CelsAe CAE NO, 320 oe 5S « CTA re¢e pe 16).

On September 22, 1956, the petitioner filed before this Court a petition fer review, seeking, smong other things, to restrain the respondent from executing the wasrant of distraint and levy and from selling his real property, particularly, his residential heuse, Cn the dneidental questicn of whether or net the respondent should be enjoined from executing the warrant ef distreint and devy on the properties ef the petitioner, this Court, in Ate vesolution ef Octeber 17, 1956, held that the right ef the respondent to collect the elleged income tax liabi- lity fa question through summery methods was barred by prese eviption, and therefore, declered mull and void the warrent of distreint and ievy issued by the respondent om September MM, 1956 a8 having been issued in vicletion es Section S1(¢) of the Revenue Code, Consequently, it ordered the respene dent and/or his representetive to desist from taking turther proceedings thereunder and to return to the petitioner the preperty seized, the sele at public auction ef which was eet for tctober 2%, 1956 (CTA rec., pp. Be3l).

On March 17, 1959, the petitzoner filed e metion for Admpave to amend his petition for review te the end that the weal aatter in dispute and all metters in the actien in dise- pute may be completely determined in a single preseeding. Finding the motion meritorious, this Gourt, on March 18, 1969, admitted the amended petition for review. On April 8, 1969, the respondent itied his answer thereto.

282 Geta. CASE NO. 390 2 The issues in this case may be briefly summarized as follows:

(1) Whether or net the right of the respondent to assess the income taxes due froa the petitioner Antonio BR. Querel for the calendar years 1947 and 1948 hes pres- eribeds }

(2) Whether or not the assessments nade by the rese- pendent with respect te the income taxes of the petitioner fer the calendar years 1949 and 1950 are legal; and

(3) Whether or not the petitioner 10 Liable for 5G% eurcharge on the alleged income tax for the calendar year The petitioner contends that, inasmuch as more than five years have elapsed from the time he filed his incone tax returns for the calendar years 1947 and 1948 on Febe ruary 9%, 1948 and February 26, 1949, respectively, up to the time when the respondent assessed the corresponding income taxes, the right of the letter to assess said taxes hes already prescribed under 2:ection 331 of the National Internal Revenue Cede, On the other hand, the r espendent argues that the income tax returns filed by the taxpayer were falee, end therefore, under the provisions of section 332 of the Tax Code, his right te assess the same has not presertbed. | The pertinent provisions relied upon by the parties are queted hereunder:

PSG

DECE IOI oe Cols Ae CADE NO, 320 aeept if section, internale revenue tenes shall be assessed withia five years after the return was filed, and no oye in court without essesement far collection ef such taxes shall be begun after the expiretion of such period. fee the purpoees of this section e return ffled before the last day prescribed oy law for the filing thereof shall be const as filed on such last day: Se Enos tais ifaitetion shall not apoly to cases already investigated prior to the approval of this Cede.”

"SEC. 337, t return with Intent te evede tex or oe eco @ return, the tax may be assessed, or 4 preceeding ins curt for she-cellection of such tex may be begun without assessment, at any tine within ten ame after tne discovery of the falsity, sud, Or omission, x x x’ The present issue of prescription turns upon ihe question of whether or not the petitioner's reiunns ice 1947 and 1948 wore false or fraudulent with Intent to evade the payment of taxes.

Zt is contended, on oehalf of the respondent, that the 1947 net income of the petitioner in the sua of #8, 746.89 was false Lecwuse the same was e¥idently undege dselazed, This contention is based upon the rationale thet, on September 9, 1947, the petitioner wes able to buy @ Ford car for #2,000,.00 while his son was still teking up medicine; that considering his social standing (being @ne of the prominent families) in the commaity, his net tncome of 52,746.58) could hardly meet his family's living @Qliewance icz one years that the petitioner accumulated, during the years prior to 1991, real estate holdings with 284

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DEC IG -

GeleAe GBE NO, 3H ® totel assessed value of #46,1%.00; that the sum of #230,06, claimed in the 1947 return as bed debts, was fictitious beceuse the petitioner was on the “ectual receipts” basis and, therefore, he could not possibly have “receivables” in his books of accounts from which Said bad debts could be deducted; and that the “sundries” in the sum of 300,00 and the ®9,004.%4, claimed as dee ductions under Schedules "8" and "E* of the 1947 return, point to the falsity of the said return.

AS wegards the 1946 return, ft ts equally contended that the same was false with intent to evade the payment of taxes for the reason that the deductions claimed therein, except the {tems consisting of expense for the purchase of seeds and taxes, were efgher fictitious or inflated with the evident purpose of minimizing, if not altogether evad- ing, the payment of legitimate income tax.

We Gennot agree te the proposition that the peti~ tionen*’s return for 1947 was false or fraudulent with in= tent to evade the payment of taxes, The fact that the petitioner reported a net income of 2,746.89 in 1947, and bought « cer for ©2,006,00 while his son was still Studying medicine does not establish the falsity or fraud of the return, In the absence of « showing that the pur- chase price of the car and the expenses incurred {in the studies of the som came or could have come from the peti- tioner’s income in 1947, The pretense thet the petitioner’s net income in 1947 wes underdeclared and, therefore, false because the same could hardly meet his fanily*s living allowance for © 285 :

266 ee —— = a

DEC BIW «

GoTeAe CADE NO, 320 -9« one year is without merit. There is no showing as to how much the petitionez spent for his family's living in 1947, or thet his family’s living allowance was so big as to warrant the conclusion that his net income in the said year wes underdeclared. in default of such showing, we cannot conclude that the petitioner's net income in 1947 was underdeciared, The accugulation by the petitioner of real estate holdings with a total assessed value of #46,125.00 {s not indicative of the falsity or underdeclaration of the peti tioner*s reported Income fn 1947, in the absence of a proof } that the seal estate holdings were acquired or could have | been acquired with money earned by the petitioner in 1947, The mexe fact that the 1947 return was wade on the | besis of actual receipts and payments, and therefore, the | petitioner could not possibly have receivables from which the bad debts may be deducted does not necessarily este- blish the fictitiousness or non-existence of the bad debts, The lack of receivables serves only as 2 ground for the disallowance of the claimed deduction for bac debts, | Similarly, the were fact that the petitioner clained ' as deductions sundries amounting toe *300,00 and the cost | of the repair of 4 house In the sum of ©9,004.34 dees not warrant the conclusion that the 1947 return was false or 7 fraudulent with intent to evade the payment of taxes, There =| aust be a clear and convincing evidence thet there was an. ! intent te evade the payment of taxes, 1 Relative te the respondent*s imputation that the 1948 return was false with intent to evade the payment of texes / 286

DUCT IO «

GeToAe CME NC, 320 -i0- we find ne evidentiary basis therefor.

Vraud is newer presumed, (Le Koda ve Lélk, et ales 48 Phil, 104; be Santos v. Sank of the Philippine Islands, 66 Phil, 38; La Cia, General de Tabecos v, Abad, 13 Phil. | 391; Wenzt & Co, v, Yastida, 63 Phil, 16; Avroyo v. Granade & Gentero, 18 Phil, 484.) It ts fundamental that the fact of fraud mist be proved by the Commissioner by clear and convincing evidence (Soyett v. Commissioner 204 F(2d) 206, Getfifiths v. Commissioner SO F(2d) 782), In the cease at bar, the respondent fatled to prove clearly end convincingly that the petitioner's returns for 1947 end 1948 were false ee fraudulent with intent to evade the payment of taxes, Finally, ft {s to bé observed that the Income tex @Seessment notices for the calendar years 1947 and 1948 do not indicate thet the fraud penalty of Ste was imposed om the petitioner. Lven ixaminer Aivera dic not recommend, in nis reports of exautsations of the returns for the scatd years, the imposition of the iraud penalty, ihese observae tions Strongly belic the respondent's tmputction of fraud in the filing of the petitioner's returns ior 1947 and 3948, Moreover, the fact that the fraud penalty ot Sue 5® aot sought to ve collected from the petitioner is an adaission that the respondent himself does not oelleve thet the former is guilty of fraud (see Central Azucarersa de Taglac v. soliector of Internal ievenue, \.I./A. Case Ne. 75, Kovember &, 1956).

Having ruled that the returns for the years 1947 and 1946 were not false or fraudulent with Intent to evade the " 287

PEF

SS St

bec biG,

Seles GABE NOg 390

elil- payment of taxes, it follows that the provisions of Sec tion 331 of the Tex Code should be applied for the purpose ef determining whether or not the right of the respondent to assess the mneome tax Liabilities of the petitioner for ey eer The petitioner*s contention that the right of the | respondent to assess the 1947 Income tax has prescribed is without merit. It must be observed that the Initial ascesement on said tax was effected sometime in 1951, ar within five years from the filing of the 1947 return. “Gut due to the petitioner’s request for reconsideration, his tax liability for 1947 was reinvestigated, thus affording the petitioner an opportunity to dispute the correctness of the assesement. Waving persuaded the respondent to make the re-investigation, which resulted in the final assessment of February 9, 1955, it would be unfair for petitioner to claim that the right of the respondent to determine said tax Liability is now barred by law, ) To uphold the view of the petitioner would be lending aid to his evasion ef tax liability on the mere technical ground of prescription (see The Collector of Internal Revenue vs. Suyoe Consolidated Mining Company, et ale, Ge Ae Noe Lwl1527, November %, 1958), With vegard to the incane taxes for 1946, we find that the right of respondent to assess the same has alveady prescribed, the assesement netice therefor having been issued on February 9, 1955 or 5 years, 11 months and 1© Gays after the filing of the income tex return.

We Come now to the question of whether or not the assessments made by the respondent with resmect to the 288 LECS iGi « GteAe COE NO, SR -l2« income taxes of the petitioner for 1949 and 1950 are legal.

It is wellesettled in this jurisdiction that an as- sessment is presumed to be correct. The taxpayer hes the butden of proving that the same is incorrect or illegal (Interprovincial Autobus Gos, Int. vs. Collector of Ine ternal Revenud, Goh. Noo L~6741, January 31, 1956). the Instant case, the petitioner limited himself to the propositions that the right of the respondent to assess the 1947 and 1948 income taxes has prescribed and that the 1949 and 1950 assessments were incorrect or illegal, thereby refusing to sssuae the burden of proving the incor= rectness or illegality of the assesaments for the years 1947 and 1948, Consequently, in default of evidence over- throwing the presumption of its correctness or illegslity, we teke it that the sssessment for 1947 ts correct or legals Let us now go into the disputed items of the 1949 and 1950 assessments.

224256 Due

In the 1949 return, the petitioner claimed a depre- Giation deduction of #180,.00 on « house of strony materials which was acquired by him in 1937, -: This claim was tetelly disallowed on the ground that the building was selready fully depreciated in 1947, It is incontrovertible that the building in question wes eGquized by the petitioner in 1937, Therefore, its depreciable life lasted only 10 years, or until 1947, (be viously, 85 cogrectiy determined by the respondent, the petitioner could no longer claim deprecistion deduction for the building in 1949, 289

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LEC IGN «

CotsAs CBE NO, 390 elg-« The petitioner alse Claimed a deduction, consisting of bad debte, in the totel amount of #520,00, The res- pondent totally disellowed this claim for the reasen thet there were no “secerds of accounts receivable nor letters of " To clain bed debt deductions under the lew, the debts que to the taxpayer should be (1) sctually escertained to be worthless and (9) charged off within the same taxable year. (Sec, 30(e) (1), National Internal Sevenue Catie; Shangkuan v, Collector of Internal Sevenue, C.1,A, Case Ne, 19, March 23, 1955). The petitioner's conclusion that these debts were worthless or uncollectivle because the debters told his collector that they were poor and could not pay the same is not suff to establish their worth- lesoness or uncollectibility.” A mere statement by the debtor thet he is unable to pay, uneccaupaenied by the creditor's investigation of such inability, is net suffie Gient to sustain « bad debt deduction, (Hutehisen v. Come missioners 13 BTA 1187; T.T, Word Supply, 41 BTA 965,) [In the case et bar, the petitioner did net conduct an inquiry Gr investigetion to ascertain the inability of his debtors to pay. Consequently, we are constrained to effizm the disallowance of the petitionerts claim for bed debt deduce tions. | The petitioner claimed as deductions sundry expenses totalling §1,212.40, of which the sum of #404,13 was dis- allowed on the ground that the expenses were not supported by papers or vouchers, 290 26/ WEDS ICN « lf CeleA, CASE NG, 390 ob e« Section 3O{a) (1) of the Tex Code authorizes the deduction from gross Income of all the ordinary and ne~ cessary expenses paid or incurred during the taxable year in Carrying on any trade or business, It fs incusbent upon the taxpayer te prove that the expenses claimed as deduction are ordinary and necessary.

The petitioner did net shew thet the sundry expenses of 1,212.40 were wholly ordinary and necessary. And in defeult of supporting papers or vouchers, we cannet ascer~ tain whether the same were wholly ordinary or necessary } Similarly, we are constrained to affirm the respondent*s determination disallowing the deduction claim in the amount of 9404.13 as presumptively correct or legal.

The respondent added to the taxable income of the petitioner the sum of #8,000,0G, the purchase price of @ Suick car which the latter bought from the Aeliance Aotors, Inc. in 1949, He presumed that the #6,000,00 wes undeclared income in 1949, thereby Imposing « SO% surcharge on the amount of income tax due.

AS testified: by the petitioner, the ¥8,060,00 with which he purchased the Suick car caue from his pre=war Savings deposit in the Postal Savings Bank (tsSe%e, Pe 11); proceeds from his insurance policy with the Sun Life As-@ Surence Co, of Canada which matured in 1942 and was settled in 1946 (tesens, Pe 12 ; see also Exhibit “J", CTA rec. Ps 106); rental recefpts fron the U.S, Army for the occu pation of his land in Rosario and Agoo, La Union (teSsme» Pe 145 See also Exhibit "Jel", CTA rec. p. 107), and his 291 ee

DECIS 1G «

Color, GSE NO, 399 « 15 « wife's preewar sevings account with Monte de Piedad (t.s. mo, Pe 153 see also Exhibit "Iel", CTA ree. p. 164), This testimonial evidence {ts not contradicted. Having been shown, without contradiction, thet the #8,000,CO was an income earned prior to 1949, the same could act be taxed in 1949,

2220_ dE TUN

In the 19% return, the petittoner claimed the fole lewing deductions: sundry expenses {fn business or profese Sion = P1,949,90 (Schedule 8B of Exhibits "D" & "4"); total expeness in farming » #1,163.% (Schedule C of Exhibits “° & "4°)) and total expenses incurred in rental propere ties ~ 71,033.70 (Schedule E of Exhibits "D" 4 "4"), G& the ground that thesa expenses were not supported by papers @ vouchers, the respondent disallowed thea to the exteat ef #654.10, £305.00 and £172.40, respectively, Again, it may be stated thet the petittoner did not shew that the claimed expense deductions for 1980 were wholly ordinary and necessary, And in the absence of supe peeting pepers or vouchers, we cannot deteraine whether said expenses were crdinary end necessary or otherwise, In view of this situation, we have no other alternative, but te affirm the respondent*s disallowance of the expenses te the extent cf the respective amounts of P654.10, #305,00 and #172,60 on the ground that the respondent's deterainae tion is presumed to be correct.

In connection with the third issue of whether or act the petitfoner is liable for 5G) suxcharge, it is the theery of the respondent that the money with which the 292

P74

we SS aT aR S GeT.A. CASE WO, 32D Buick car was purchased wae undeclared incave for 1949, Since the purchese price of the car wes satisfacterlly shown to have come frem earnings made prior te 1949, and should not therefore be declared in the 1949 return, the imposition of the fraud penalty ef 50 lacks legal basis, TH VIEW CF ALL THE FURBGOING, the decision appealed fzom is hereby nodiifted, [he petitioner is ordered to pay te the respondent or his suthorized representetive the eum of #798,.26, computed in Annex "A" herect, pivs Ss surcharge for lete payment and interest at the rete of 1% per month from Marth 16, 1955. Without special pre- neuncement ss to costs, SO GWEHED, ‘ Manila, Cetober 7, 1959.

Presiding Sudce

I abstain:

a "Oakes, tos

Associate Judge

293

ATi

QUE SAS

A247

Net Income per TEtUEN seccccccceccccsccecccsce | 2g 746.89 Adds D owancess we ftalized (v9 29,00%622) e s sar pease hte oe ocon82 on 2 aeons aa a err 8,103.92 ation on 0.

fully LEtOd seccccsvecsecccccsscs ee Net income per TFAINdIngs cccoceccsscevcvsescces Pils Lees: Personal @xemptson secccccsccscccsvesee cen A 4.24.2 inc eme ah. — seccccvecvcscecoenccses © 1,282.99 Depreciation. of bye full fated building - ® 180,00

3. Bad : D sosvecscvccesccrvce BW. 00 GONexral OXPENSOS ecscccceccces anu fi i3 Net income per ELNAINGS. cocscccccccscesseserce rei Less: Persenal e TIONS scccvccccescoscvece aw hee LO Met iacone subject tO tax cecescccsccvccsocse a_i ,-2, Amount Of InGome tax Gie cocccccsecessservcces eumennmeetiien y rf 0 e 1288 INGOMS POT TOCUTN caccccscccscccescccesce © 29857,65 fsallowances:

General @XP@RSES ceccsecsccse § 654.10 xpenses on farming ceerseseoe _ Pee

per Bt

Ss eevevecveosooseoece Net income subject to tax secccoveccscssccccee Amount of tax COSCSSCOS OOH HOOHSHOHEROLOHOS

2UeeeaL

Income tax due for 1947 seccccccccccccccvncee * 748.80 Income tax due for 1950 ccccccccccscosccevces =n 46 Total tax due CHCHHHOCTOESHEHLECOHSOHO HORE HSOO® 4726.26

AL