Q Il Jorge Magaz vs. Collector of Internal Revenue, et al.

DECISION

Qn October 19, 1957, the petitioners in the two cases entitled above, with the conformity of the res- pondent, filed @ motion for # joint hearing which wes granted by the Court because of the common interests ‘of the former and the identity of the factual and legal issues involved in the two cases. This decision, therefore, covers the two cases. | In C.T.A. Case No. 354, petitioners Helene Aobain Mageaz and Jorge Magez, are spouses, citizens of Spain and non-residents in the Philippines, while in CeTeAe Case No. 355, petitioner Alain Jaulerry, is 4 einer, a citizen of France and is also @ non-resident in the Philippines. (Par. le Partial Stipulation of Facts, PP. 22-28, CTA rec., hereinafter cited as STIFACTS,) They instituted their reepective petitions for review 103 wr CASES NOS, 354 & 355 — 7 for the recovery from the respondent of income taxes alleged to have been erponeously paid by them for the year 1954, It appears that in the Last #111 and Testament of the late Don Enrique Roxas Argellies, © Spanish Gitizen who died on September 8, 1957, whtle domiciled in the City of Mantla, and who left considerable pro perties situated in the Philippines, petitioners Helene Rebain Magaz and Alain Jaulerry, were namec as the unf- versal heirs of the said decedent's estate. The said Last Will and Testament was duly adwitted to probate by the Gourt of First Instance of Menila, end the Ayala y Compafiia, a duly registered general copartnership orga- nized and existing under the lews of the Philfppines, was appointed administrator of the estate, (Par. 2, STIFACTS.)

Pursuent +o an instrument of "Partition", (pp. 47052, Sit rec.) signed and filed wy «ne lewyers of the estate, with the conformity of the odministreter of the estate anc Alfonso Zobel] who was then acting as the jue dicial guerdian of universal] heirs Helene Aobain Magaz and Alain Jaulerry, and duly approved by the Court of First Instence of “anila on Lecember 93, 1952 (p. 46, BIK rec.), an undfvided holf of all the reel and per~ sonal properties of the decedent wes adiud& sted to each of the petitioners, Helene Kobein Magaz and Aléin Jau- lerry. (Par. 3, STIFACTS, ) 404 DECISION « C.T.A.

CASES NOS, 354 & 355 «je In accordance with the terms of the "Partition", said instrument becane effective on December 31, 1952, so that from January 1, 1953, all the income, interests and dividends of @ny kind and nature, corresponding to the properties of decedent tnhefited by the petitioners, have pertained directly, in equal sheres, to them as uni- versal heirs, In consideration of this adjudication to the petitioners, they bound themselves, among other things, as follows:

“Each heir will pay one-half (1/2) of all tance taxes Corresponding to the amounts paid FACTS, ) The estate and inheritance tex return was duly filed by the administrator of the estate of the late finrique Roxas Argellies. Upon investigation and verification thereof, the respondent determined and assessed the amounts of #666,665.04 and #2,004,180.58 as estate and inheritence taxes due thereon, or the total sum of #2,670,845.62, In accordance with law, these taxes were due and payable on June & 1954 and September &, 1954, respectively. (Par. 5, STIFACTS., ) Qn February 2, 1954, the etterneys of the estate and ef the universal heirs, the petitioners herein, wrote the respondent “that the payment on the due date of the said taxes, would impose undue hardship upon the estate or any of the heirs", and requested the respondent te 105 aa DECISION - C.T.A.

CASES NOS, 354 & 355 ate allow the payment ef the assessed taxes in install- ments, in accerdance with the provisions ef Section 95 (b) ef the National Internal Rarvesine Cede. (Exh. J, also marked ae Exh, 1, pp. 4445, SIA rec.)

On March 1, 1934, after an exchange of corres- pendence, the respondent, subject to certain condit fons which were complied with by the petitionems agreed that the estate and inheritance taxes due on the tranaemission of the estate of the late Enrique Roxas Argeliies, be . paid in installments over a period ef four (4) years. (Par. 6, STIFACTS; see Exh. K, alse marked as Exh. 2; Exh. Ly also marked ee Exh. 35 Exh. My leo marked 4s Exh. 4, pp. 36-43, SIA rec.) .

| Since the calendar year 1953, the petitioners have been duly filing their respective income tex ree turns, and have been reporting their respective shares ef the income and expenses from the preperties they have inherited from the deceased Enrique Roxas Argellies. In their income tax returns for the year 1954, each of the petitioners cleimed as interest deduction #25, 213.73, said amount being one half ef the tetal amount of #30,427.46 paid by way of interest on the extended pay- ments ef the estate and inheritance taxes. The income taxes due as per said returns were timely paid by the petitioners. (Per. 8, STIFACTS.)

| Upon examination by reepondent’s examiner of petie tieners® 1954 income tax returns, the amounté ef 106 DECISION « G.T.A, CASES NOS, 354 & 355 e Se #2, 213.73 which each respectively claimed ae interest deductions were disallowed, and on April 3, 1956, the respondent assessed against and demanded from petie tioners Helene Robain Magaz and Alain Jaulerry the amounts ef § 14,104.00 and 2#14,12%.00, respectively, as deficiency income taxes for the year 1954. (Par. 9 STIPACTS; Exh. C, also marked as Exh. 9, pp. 35-36, BIR rec.)

On May 6, 1956, the petitioners paid under pro- test the above-mentioned deficiency income tanes sssessed against then. (Per. 10, STIFACTS), and on July 20, 1956, they filed their joint claim fer the refund of the sums of #14,104.00 and #14,120.00 which each paid. (Par. il, STIPACTS; Exh. F, pp. 34-6], SIA rec.) In a letter- decision dated January M, 1957, which was received by the petitioners on February 1, 1957, the respondent denied their claim fer refund. (Par. 12, STIFACTS; Exh. G, also marked as Exh. 6, pp. 62°63, SIR rec.) Net being agree- able with the decision ef the respondent, the petitioners on February 28, 1957, filed their respective petitions for review, The issues in these cases,as correctly stated by both the petitioners and the respendent, ere es follows:

l. Whether or not the interests paid by the peti« tioners pursuent to Section 99 (a) ef the Tax Code on the extended payments ef the eetete and inheritance taxes are deductible under Section 30 (b) of the same Code; and 107 DECISION - C.T.A.

-6° 2, Whether or not the payment of the interests Claimed by the petitioners as deductions in their res- pective income tax returns were actually wade by then or by Apala y Compafifa as administrator of the estate of the late Enrique Hoxas Aryellies.

with regard to the first iseue, the respondent now admits correctness ef the contention of the petitioners that the intereets paid by them in accerd- ance with the provisions ef Section 99 (a) of the Tax Code constitute interest payments within the purview of Section 30 (b) of the Tax Code, and therefore, de- ductible for income tax purposes.) This contention of the petitioners which we find to be meritorious finds sup- port in the recent case of the Commissioner of Internal Revenue vs. Consuelo L. Vda. de Prieto, G A. New L-13912, promulgated on September KX, 19604 wherein the Supreme Court ruled thats “The term ‘indebtedness* as used in the Tex Code of the Un{ted States containing si- miler provisions as in the aboveequoted sec- tion hag been defined as an unc itional and legally enforceable obligation for the mnt of money, (Federal Taxes, Vol. 2 Pe 13,019, Prentice-iall, Inc. | “Yertens' Law of Federal Income Taxation, Vol. 4, p. 542.)

Within the meaning of that definition, it {s apparent thet «a tax =i be considered an in« debtedness. xxx x It follows that the interest paid by herein respondent for the late payment of her donor*s tax is deductible from her gross income under Section 30 (b) of the Tax Code above quoted, * Therefore, we hold and so declare that the interests in question are deductible from the gross income of the petitioners in computing their net income for taxable year 1954, = 108 por DECISION - C.T.A.

CASES NOS. 334 & 355 «7 «= With regard to the second issue, we note from the instrument ef "Partition" (Exh. A, pp. 47°52, BIR rec.) which was filed by the aduinistrator of the estate with the coniormity of the judicial guardian of the petitioners, and duly approved by the Court of First Instance of Manila (Exh. 8, also marked as Exh, 5, Pe 46 SIR rec.), thet the said document of "“Parti- tion” took "effect as of December 31, 1952, in such a manner thet from January 1, 1953, all the income, {ine terest and dividends of 4ny Kind and nature corres- ponding te the real estate, shares and other securities of the Estate, shall pertain directly to the universal heirs" - the petitioners in the cases at ber, and to carry out this stipuletion, the administrator “shall Open two accounts in the names of HELENE ROBAIN and ALAIN JAULERAY e3 of January 1, 1953, and shall credit and debit said two accounts for ail income and payments corresponding to the heirs". 3aid document of "Parti- tion* also provided that “Each heir shall pay one-half (1/2) of all the estate and inheritance taxes due to the Philippine Government, including the inheritance taxes corresponding to the amounts paid to the Legatees”.

From the above-quoted provisions of the document of “Partition”, taken together with the other testte monial and documentary evadenpes presented by the parties, we conclude and so hold that the interests in question were the direct Ifsbilities of the petitioners herein - the only universal heirs of the late Enrique Roxas Argel- ao | 109 gee DECISION «+ C.T.As CASES NOS, 354 & 355 «a @ =» lies. Said interests on the extended payments of the estate and inheritance taxes were paid by the petitioners, and therefore, they have the right to Claim the sasue a6 Sllowable deductions in their rese pective {ncome tax returns.

| t0 eur aind, for income *ax purposes, the estate of the deceased Enrique Aoxas Argellies, was already settled and the period of administration terminated a3 of Deceuver 31, 1952. Nence, the estate ef the decedent could not have claiued the questioned deductions in 1954. On the other hand, from January 1, 1955, the petitioners herein were the ones requires to report for income tax assecenent their respective shares of the income from the pro=- perties of the decedent. Accordingly, they are also entitled to claim the corresponding legally sllowable deductions from the gross income in order to arrive at the carrect taxable net income.)

WHEREFORE, in view of the foregoing considerae tions, the resfondent Commissioner of Internal Kee } venue is hereby ordered to refund to petitioner Helene Robain Magaz the sum of #14,104.00; and to petitioner Alain Jaulerry, the amount of #14,120.00, respectively, without interest, @s erroneously collected deiictency income taxes for the year 1984. “{thout pronouncement CASES NOS, 354 @ 355 as to costs, SO OMDERED, Manila, Philippines, May 11, 1961.

WE CONCUR:

Presiding Judge

ROMAN M, UMALT ‘

Associate Judge