r. ~, et al. vs. RUBEN B. ANCHETA in is capac i ty as Commissi oner of Internal Revenue

DECISION -

CTA CAS ~ NO. 3393 - 3 - 6.

That 01 or before December 15 , 1980 , t he peti t.i oner received a let.t er from t:he acting Commi ssioner of I nternal Revenue dated November 14 , 1980 t ogether with i ncome assessment. not ices f or t he years 1976 and 1977 demanding that peti- . tioner pay on or before December 15, 1980 the amount. of Pl,615.9G and P9, 287 ,297.Sl as deficiency assessments for the years 1976 and 1977 respec t ively.

A copy of the letter of the Acting Commissioner of Int ernal Revenue dated November 14, 1980 is attached hereto marked as Annex "A", and copies of the assessment nc· t.ices for the years 1976 and 1977 are attached hereto mar ked Annexes "A-1" and "A-2" respecti vely .

· · 7.

That on December 15 , 1980, the peti t.ioner wrote t he Bureau of Internal Revenue that he was paying the deficiency income asses sment f or t he year 1976 but denying t hat he -had any . undeclared income f or the year 1977 and r equested t hat the assessment for 197 7 be made to await final court decision on the C <l S ' f i led against him f or f iling an al l ~ g~d l y fraudulent return.

A copy of t he peti - .

titione·r 's. letter dated December 15 , 198 0 is attached hereto, fllarked Annex "B" and made part hereof e .

8.

That on November 11, 1981 , t he petitioner r eceived from Acting Commis- sioner of I nt ernal Revenue Romulo Villa a letter dated Oc tober 8 I 1981 stating in reply to his December 15, 1980 l etter protest that "the amount . of P7,020,000. 00 representing that por tion of Mellon Bank 's. erroneous r emittance which you were able to dispose , is defi nite ly taxable" .

A

copy of s a id l ett er is attached hereto marked as Annex "C" and made an integral part hereof .

-... ~ ..

I n specifically denying t he allegation i n paragraph 9 of t he petition for r eview "That the · decision of the Acting Commissioner of Internal 201 • . \~

DECISION -

CTA CASE NO . 3393 - .4 - .l Revenue on t he petitioner v s. protest on the def i - . ciency inco'me tax assessment. f or t he year 1977 is against the law considering t.h a ~-- the amount. of US$1 ,000 ,000.00 temitted allegedly by mistake to his wife is not subject to i ncome tax" , for being mere opinion or conclusion on the par t of peti- tioner , and err on e o~ s, re spondent avers i n his answer as Special and Affirmative De fE nses:

SPECihL AND AFFIRMATIVE DEFENSES

3.

Section 29( a) pf the Tax Code provides:

"Sec . 29.

Gross Income . -

(a) General defi nition . -.:. .'G.r oss income • ·.i ncludes gains , profits, and i ncome der ived from s alar ies, wages, or compensation for p~r­ sonal services of whatevr·t ki.nd and in whatever form paid, or fr om professions, vocations, trades , businesses , comm~rce, sales , or dealings in property, whethe r real or pe rs ona l~ growing out of the ownership or use of or i nter est. in such property , also fr om i nterests , r ents , dividends , secur i t ie.s, of t he t ransac tion of business carr ied or f or gain or profit, gains, pro- . fits,and i ncome derived from any source whatever . "

4.

Section 21 of the National

I nternal Revenue Code provides tha t a tax is i mposed upon t he taxable net i ncome r eceived during each taxable year from all sources by every i ndividual, whether a c itizen of the Philippines residing t herein or an alien r esiding in the Philippines .

Ne t · ncome under t he Tax Code means the gross income computed under Sect i on 29 of t he Code l ess the deductions allowed by l aw;

I) 0 I )

1:;..

~ • DECISION -.

CTA CASE NO, 3393

5. The U.S. $1,000,000.00 received by petitioner from the Mellon Bank clear- . ly falls under gross income as defined in Section 29(a) and therefore, subject to income tax as provided for under Section 21 of the National Internal Revenue Codec;

6. A taxpayer, who received earnings, under a Claim of right and without restriction as to its disposition, has received income which he is required to return, even though it may still be claimed that he is not en-. titled to retain the money and even though he may still be adjudged liable to restore its equivalent. (U.S. vs. Ellis R. Lewis, 340 U.S. 590-592);

7. The respondent’s deficiency income tax assessment issued against petitioner in the amount of 2B9,287,297.51 for the calendar year 1977 was issued in accordance with law and Baia ing revenue regulations; and

8. All presumptions are in favor of the correctness of the assessment. (Inter=-. provincial Autobus Co., Inc. vs. Collector of Internal Revenue, G.R. No. L~6741, Jan. 31, 1956, 52 0.G. (11) p. 791).

As shown in Annex "A" of the petition for review, the deficiency income tax for the year 1977, which is contested by petitioner, is computed as follows:

L212

Net income per return ee © eo ee ow oF 48,053.38 Add: Undeclared income eo 0 ee © © oe 6 7,020,000.00 Net. income per investigation oe © «© 2 0 B7,068,053.38 Less: Personal & additional exemptions . 5,000.00 Net taxable income . « 2 « 6 © © ¢ « e21,063,053.38 Income tax due thereon © 0 © 6 0 ow ow 0 H4,899,377.00 Less: Amount already assessed ... . 10,762.00 Adds 50% surcharge ©eeeeee ee e 2,444,308.00 14% int. fr. 3-15-78 to 7-31-80 . . 1,627,573.95 20% int. fr. 7-31-80 to 11-30-80. . 326,800.56 TOTAL AMOUNT DUE & COLLECTIBLE . . .. e« £2248. 297 228 DECISION -.

The records of the case reveal that most, if not all, of the US$999,000.00 mistakenly remitted to Mr. & Mrs. Melchor J. Javier, Jr. by the Mellon Bank, N.A. have already been irretrievably spent by them as follows: (p. 78, BIR records; pp.

CTA records.) | l.

2.

3.

4.

5.

6.

7.

8.

9.

Purchase of 160 acre lot in

California City ---------

Bank deposits = --=-----=- =.

Money market placements (approx.) = Legal fees <-= <= 8-2 285272.

Hospitalization and last. illness OF Lather 4° = 6 = 6 & 3S Se Fur.

Dole outs to relatives and friends- .

Household expenses ---- = -- =, Gambling losses = hie & ee eee a Others (US$120,000.00) ------ 38-39, B3,250,000.00 550,000.00 _ 1,300,000.00 600,000.00 150,000.00 315,000.00 60,000.00 280,000.00 900,090.00 B7,405,000.00

VVVVVVVUYVVUVY

Petitioner's position is that the amount received by him from the Mellon Bank, N.A. “is not ‘income*® as the term is defined in Section 29 Internal Revenue Code because the neither compensation for services Or profits realized from business perty;

and that under the rule of

of the National

said amount is rendered nor gains or dealings in pro- .

ejusdem generis, the phrase ‘and income derived from any source what- _ soever’ found in the definition of ‘gross income' | 204

DECI SI O

CTA CASE

O.

3.93 - .7 refers t:o cornpe:ns a t.~ion for se:r:\l i ces r ender:e a nd g,ains or piofi t:s from business o · eal ings in proper ty, and cannot::. be interpre te:d to me·an or i nclude • r.ec eipts 1 from any sourc.e what.soever". (p . 1 04 1 CTA r e:co r ds .)

"To be consider ed i.nc:ome • a • receipt 8 _must have been either (a ) _actively sought. by the r.ec:ipie:n 1 sue. as. wages., salar:ies and c ornpe:ns.ation f or. ser vices or f or. the ex:e rcise of one's profe:s.sion , vocation , trade , bus i ness , cornme rc.e , sal e s or dealings in prope:x t .y, or (b) produced or de:r i ved from the recipient' s, ownership or. use of prope~r ty , such as. tents , i nterests and di'Jidends..

The amount i n que·st i on was neither act ively s ousht. by the petitioner., t.o r: the product or fr uits- of h i s proper ty ._ It is a ur_ec:eipt' _but not an • i_ncorne ' ."

{J1. l OS., CTA rec.)

Peti tioner: concedes 1111 tha t unlawful gains , garnb- ling winnings , etc. a r e subje.ct. to income t a" although such r e·ce i pts a r:e no t specifically mentioned i n t he def inition of gross i ncome 119 • (I?

1 06., CTA r ecor ds. )

And rightly so.

As a rnatte:r of fact , i n the Un i ted States fr:om which Sec:t.ion 29 (a ) _of t he Tax. Code was copied a lmost verbatim f rom simi lar: provisi ons of the Un i ted Sta tes I nte rna eve n e Code (former - ly Se·c t ion 22@ ), and of the r egulations iss.ued· in .

20 5 •

DECISION -

CTA CASE NO, 3392 ~ 8 =) connection therewith, it has been held that unlaw- ful gains as those from ransom money paid toa ._ kidnaper (Humphreys vs. Commissioner, 42 B.T.A. 857, affirmed, 7 Cir., 125 F. 2d 340); fraudulent misapplied moneys of a client. by an attorney (United States vs. Wampler, D.C.a, ) F. Supp. 796); graft. (Chadick vs. United States, 5 Cir., 77 F. 2d 961, certiorari denied, 296 U.S. 609, 80 L. Ed. 432)7 lotteries (Droge vs. Commissioner, 35 B.T.A. 8293 Huntington vs. Commissioner, 35 B.T.A. 8353 Voyer vse Commissioner, 4 B.T.A. 1192); illegal prize fighting pictures (Rickard vs. Commissioner, 15 B.T.A. 316); unlawful insurance policies (Patterson vs. Anderson, D.Ca, 20 Fa Supp. 79°), race-track bookmaking (M*Kenna vs. Commissioner, 1 BoT.A. 3293. card playing (Weiner vs. Commissioner, 10 B.T.A. 905); illicit traffic in liquor (United States vs. Sullivan, 274 U.S. 259; 71 L. Ed. 1037) constitute taxable income, In an attempt to stay clear of such decisions, however, petitioner would take refuge in the lack of any effort on his part, allegedly, to seek the gain involved herein, Petitioner misses the point.

The controlling statute is Section 29(a) Of the National internal Revenue Code before its amendment.

20b DECISION - .

CTA CASE NO

39 " .. . 9 - by Batas Pambansa Bl g . 135e It defines ~ gro s s i ncome" , which t e r m is employed i n Section 28 (also before its amendment by Batas Pambansa Blg . 135 .as part of the definiti on of "net i n- come" subject to income tax under Sect.ion 21 in t he case of i ndividuals and Section 24 in the c ase of corporations.

The defi nition combines a descriptive list of broad scope enumerating ..... '""'· various activities giving rise to items of income \'lith the catchall phrase"gains, profits and i ncome derived from any source whatever 111 • The defini t i on is in sweepi ng terms .· Thus , ·i nsofar as per tinent hereto , "Gross i ncome i ncludes gains, profits , and i ncome derived from x

X

x d eul t ~gs in pro- .

perty x

X

growing out of the ownership or use of cr interest in such proper ty1 also from

X

X

x gains , profits , and i ncome dez:ived from any source whatever "' .

T e broad sweep of this language i ndicates t he purpose of Congress to use the full measure of i ts t ax i ng power within those definable categories .

(Helvering vs. Clifford, 309 u. s. 331 , 334; 60 S o Ct. 554 , 556 7 84 L.

Ed ~

788 .) .

Accordingl y t h Government may tax , not only owner ship, but any right or pr ivilege t hat i s a 20 '?

..

' ,~

DECISI ON -

- 10 - constituent of ownership Liabil 'ty roay r est upon the enj oyment by the taxpayer of privileges .,'"'· and benEfits so s ubstantial and i mportant as to make it r easonable and jus t to deal with him as if he were the owner , and to t ax him on that basis.

(Burne t vs . Wells , 289 u.s. 670 , 678 ~ 53 s . ct. 761 , 76 4 ~ 77 L. Ed . 1439.) . Although t axes are public duties attached t o the owner ship of proper ty , t he state should be able to exact their perfor mance without being compel led to t ake sides in pr ivate controve r s ies . Possession is general prima f acie evidence pf owner ship , and is perhaps i ndeed the sour ce of the concept itself, t hough the time is l ong past when it ~n s synonymous with it.

It would be intoler abl e that the tax mus t - be assessed against b<;>th t he putative tortfeasor and the claimant; collection of t he revenue c a not be delayed, nor should the Treasury b~ compelled to decide when a possessor •s. claims are without. l egal warrant (Nat ional City Bank of New York vs . Helver i ng , 2 Cir., 98 F. 2d 93, 96.) Now , to t he c ase a t bar.

Her e , petitioner ' s asserti on of complete domin ion over Mellon Bank 0 • er r oneous remitt ance of f unds to his wife , his

J·

exercise f ow er ship over t hem t o the ext ent of • disposing of almost every cen t avo of t he funds , and 203 •

DECISIO

CTA CASE NO.

393 - ll - his consequent t rans f er of possession , use and title t o tHe r ecipi ~n ts as to make them t he owne~ s .....

the r eof , were f or all i ntents and purpos es exer - . cise and enjoyment of rights and privileges tha t are constituents of ownership.

He demonstrat ed positivel y and unequivocally his right to dispose of the Mellon Bank'~ funds , and he did even spend them , almos t to t he l ast centavo, beycnd all chance of t heir recove r y .

This was clear l y a use of t he Mell on B ank 0 ~ f unds by pe tition~r f or his own enj oyment and benefi t j us t as amply and fully as though he had title to t hem.

Such enjoyment and exercise by petitioner of "privileges and benefits so substantial and important as t o w - ~c it r eason- able and just to deal with him as if e were t he - owner, and t o t ax him on that basis" (Burne t ·vs & .

Well s , .e_upr a) '· can have no different t ax conse- quences when the f unds ar e ear ned i n p lawful manner t han when t hey are derived f r om illegal sources . An unlawfu l ga in , as well as a l awfu l one , constitutes t axable i ncome when i ts r ecipient has such control over i t hat, as a practical matter, he derives readil y realizable economic va lue from it (Burnet vs . Wells , 289 US 670, 678 1 77 L. Ed . 143 9 ~ 44 ; Corl i s vs . Bowe s , 281 US 376 , 378r 74 L. Ed.

16 , 917.)

That occurs when c ash , as 20 ~ •

- .12 - here , is del i vered by i ts owner t o t he taxpayer in a manner which allows the recipien freedom ....

""(.

to dispose of it a t will p' even though it may have been obtained by fr aud or mistake and is fr eedom t o use it may be assailable by someone with a better t it.le to i t .

(Rutkin vs . Uni ted States , 343 US 131 , 37: 96 L. Ed . 835 , S39 o) .

Such ga ins are t axable i n t he year during which they are reali zedo This statutory policy is i nvoked in t he i nterest of order l y adminisbati on .

(Rutkin

vs. United States , supr.ao ) . Coll ection of the r eve- nue c annot be delayed, nor sbould t he Government be compelled to decide when a possessor ' • claims are wi thou t l egal warrant .

(National Ci~ y Bank vs .

Helver ing LeA 2g7 98 F 2d 93 , 96 .) . Ther e is no adequate r eason why apsailable unlawful gains should be treated differently in this r espect fr om assai l ~ able lawful gains ~ Certainly t here i~ no r eason for t reating t hem more leniently .

United States

vs . Sull ivan, 274 US 259, 263 f 71 L. Ed . 1037, 1039 . )

As· to peti t i oner 0 • allegation (par. 5, petition for r eview) .tha t i n the f ootnote of his 1977 i ncome tax r eturn he stated tha t he ~ wa s r ecipient of some money r eceive rom a r oad which he presumed to be 210 • •

DECISION -

CTA CASE O. 3393 - .13 - a gift bu tu~ned out t o be an error and is now subject of litigationw, and his submissi on • t hat any assessment covering this matter should await final cour t decis i on" · (p • . a,· CTA r ecords)'· there is nothing in the National I nt e r nal Revenue Code .... ""'· which expressly r equires, as a condition of t he exi st- ence of a t axable gain , that there also be an absence of a definite , unconditional obligat ion t o r epay or r e tur n t hat which would otherwise c onEtitute a gain. In t he case of National City Bank of New York vs . Helvering , supra , 98 F. 2d 9S, t he taxpayer was t axed on bonds which he had unlawfully withheld from t he corporation of which .he was an officer . These bonds wer e the property of t he corpor ation i n the sense that it could have reclaimed them. r ~~ Cour t said - "But there are several cases in which persons have been t axed upon property which could be r ecovered .

f rom t hem.

For example, t he l ender upon usurious i nter est - if on an accr ual basis - must i nclude hi s apparent profi t in his retu rn , though pos sibly he may be all owed to deduc t it as a loss if t he borrower reclaims it.

(Barker vs. Magruder, 68 App. o.c. 211 , * 95 F. 2d 22 . )

Again, when a r ailroad collects too * The fac t t hat. i nter est is usurious under the l aw , and may be r ecovered bac k by t he borrowe , does not preven it f rom being incom , hen received , t o a t axpayer on t he cash bas is . Likewi se , the t.ax- ability of an accrual of usurious i nteres t i s not affected because of i ts illegal ity.. If in a sub- .

sequent year the amount becomes uncollectible , or a l oss is sustained in r e spect t hereof , a deducti on · on account thereof i s t hen allowable . (Umali , R. M., Reviewer in Taxation, 198 0 ed., pp . 87-~8 , ci t ing 1955 PH Fed . Taxes , Par . 8010. ) 211 • •

I • •

-,~ ~ \ \ .. '.

.:.:.-....

DECISION - .

.1 l arge f ares the excess i s i ncome , t hough the passengers !'have a t heoretical r ight. of resti tu- .. ""· tione (Chicago, R. I. & P ~R . Co. vs . Commissioner , 7 Cir . 47 F. 2d . 990 We note t hat in t he .deficiency i ncome tax assessment under consideration , r espondent. furthe r request ed petitioner to pay 50' surcharge as pro- . vided for in Section 72 of th~ Tax coea, in addi t i on to t,he de f iciency i ncome tax of P4 , 888, 615 .. 00 and interest due t hereon.

Since petiti oner filed his income tax r eturn for taxable year 1977, the · SO% surcharge was i mposed, i n all .p robability, by r es- pondent because he considered t he r eturn fi l ed f alse or fr a udu~ent .

This additi onal requ ~ cmen t, to our mind , i s much less called f or because petitioner , - as stated earlier, reflect ed in his 1977 return a .

footnote t hat "Taxpayer was r ecipient of some money r ece i ved from ab,oad which he pre sume~ to be gift but t urned out ~ be an error and i s now subject of litigation" From t his , ~~ can har dly be said t hat there was actual and i ntentional f raud, consisting of deception willfully and deliberately done or r e- sorted t o by etiti oner in order to induce t he over nmen to give up some legal r ight , or the 212 · • • latter, que to a false return, was placed at a disadvantage so as to prevent its lawful agents : from proper assessment of. tax liabilities (Aznar vs. Court of Tax Appeals, L~20569, August 23, 1974, 56 SCRA 519), because petitioner literally "laid his cards on the table" for respondent toa examine. Error or mistake of fact or law is not fraud. (Insular Lumber vs. Collector, L-7190, April 28, 1956.) Besides, Section 29 is not too plain and simple to understand. . Since the question involved in this case is of first impression in this jurisdiction, under the circumstances, the 50% surcharge imposed in the deficiency assessment should be deleted.

With the foregoing conclusions arrived at, the 1977 deficiency income tax liability of peti- tioner is hereby computed as follows:

Net income per return . » 0 e o B 48,053.38 Add: Undeclared income . . . « __7,020,000.00 Net income per investigation. - B7,068,053.38 Lesss Personal & additional exemptions . »« » « « « e 5,000.00 Net taxable income . . . « « » B7,063,053.38 Income tax due thereon . . » o B4,899,377.00 Less: Amount already assessed , 10,762.00 Balance . 6 e P4,888,615.00 Add: 14% interest from 3- L5- 78 to J- ~31-80 e e e¢ @ a 6 1,625,464.48 20% interest from 8-l- ~80 to ll-14-80 . 2. 6 56 «© « o 282,453.32 TOTAL AMOUNT DUE & COLLECTIBLE. B6,796,532.80

VVVYVVVVVVUVY

« . '

DECISION -

CTA CASE NO ~ 3393

- 16 - Accordingly, petitioner Me l chor Je J avi er , Jr . is he r eby o~der ed to pay to responden t Commi ssi oner ~ .....

of I nternal Revenue t he sum of P6 , 796 , 532.80 as deficiency i ncome tax for 1977 , plus 10% sur charge and 20% per annum i nteres t f rom November 14, 1980 up t o f ull payment thereof but no t o exceed the amount correspond i ng t o three years pur suant t o Sect i on Sl(e) ~f t he Natlpnal I nter~ a l R~venu e Code as amendeq by Presidentiat Decree No s 1705. WHER~FO ~ , t he decision appealed fr om i s mod ~ fied as i nqip~t~p in ~he above opinion of the ' • . !

'· Court .

With cost e~ . '· ' SO ORDERED.

Quezon City , Metro Manila , J~:.: · 27, 1983 .

~ Q_

·)

AMANTE F~

Presidi ng J udge

WE CONCUR :

-::!::~~ .~ ~~

Associate Ju~UIN

• ' ' [.

I

I

I