CTA Case No. 3678

DECISION

— “property walls, whether due the national or municipal governments, shall be for the account o the LESSEE including such taxes, assessments and any other imposts on the buildings, installations, . improvement or (achonery on the leased property. '* For the years 1976, 1977 and 1978, petitioner paid the real property taxes due from the leased properties, = The official receipts were in the name of petitioner. The lessee, Frocter & Gamble PMC, reimbursed the amount of real property taxes paid by petitioner in accordance with the terms agreed upon in the contract of lease. The real property taxes were never deducted from the gross income of petitioner.

On December 21, 1981, betitioner received from the Bureau of Internal Revenue two assessment letters both dated October 14, 1981 one for alleged fo4 deficiency ineeme taxes in the total amount of F300, 938.83 and the other for deficiency business taxes in the total amount of P14,698.20 both the fiscal years ending June 30, 1976, 1977 and 1978. On January #0,!' 1982, petitioner filed &@ protest with pwapent to the alleged Deficiency Income Tax Assessments for 1976-1978, in the sum of = Exhs. 6G, G-1i to G-38.

3 Exhs. ©, A-i to A-7, pp. 5-9, CTA record.

' t 24 ~ 3 = P3000, 936.00, + But it did not contest the Deficiency Business Tax Assessments for the same period. In fact, petitioner even admits liability with regard to the business tax assessments totalling’ P14, 698. 20. Petitioner paid the amount of F14,698.20, representing deficiency fixed taxes for the years 1976-1978, evidenced by Revenue Tax. Receint No. 10033105 and Confirmation Rehui pt No.

10402241 dated October #0, 1982.5 The income tax assessments for the years 1976, 1977 and 1978 are itemized as follows:

1976 Net taxable incose per return Pe, 135, 106. 48 Add: Unallowable deductions and/or additional incose . .

Real estate taxes P 71,855. 11 Docusentary/science taxes © _ 15,503.00 __ 87,358.11 Net taxable income per investigation Pe, 222, 464.59 Tax due thereon P 767,863. 00 Less: Taxes already paid per return © , ___137, 287,00 Deficiency incose tax P 30,576, 00 : 14% interest (42% maxieus) - __¥2,841,92 P43, 417.92 1977 Net taxable incose per return P2, 664, B81. 73 Add: Unallowable deductions and/or additional : income om ;

Real estate taxes * __ 248, 063.13 Net taxable incore per investigation Pe, 912, 944, 86 ¢ ry Cores et stan tere cont ot tote a te tees ngeeneenagses hemeget swt LEE HEF SNe temeNraR eben * Exhs. B and B-i, pp. 10-12, CTA record. >: = p. £02, BIR record.

246 | ao a Tax due thereon P1, 020, 704. 00 Less: Taxes already paid per return 932,064.00 Deficiency incowe tax P 8B, 140.00 44% int. fr, 10/16/77 to 7/31/80 34, 474, 80 20% int. fr. 8/1/80 to 10/16/80 (sax. 3 years) 3,662.39 PP 126,277.19 13.78 Net taxable income per financial statesent P2, 734, 659. 00 Add: Unallowable deductions and/or additional - incowe Real estate taxes _ 80, 703.16 Net taxable incose per investigation Pe, B15, 362. 16 Tax due thereon Pi, 116, 145, 00 Less: Taxes already paid per return 1,028, 198.00 Deficiency incone tax P 87,947.00 {4% int. fr. 10/16/78 to 7/31/80 22, 052. F2 20% int. fr. 0/1/80 to 10/16/81 (wax. 3 years) “21,263.80 131,263.72 Total Amount Due and Collectible p 300,938, 83 On August #5, 1983, petitioner received a copy of the Wanrant of Distraint of Fersonal Property — and Warrant af Levy. on neat Property issued ey Deputy Commissioner Tomas CC. Toledo.” The service of the warrants is tantamount to the decision of respondent denying its protest. Thus, on September £6, 1983, petitioner filed a petition for review with preliminary injunction with respect to the allened deficiency income tax assessments for 1976- 1978.

‘ne Petitioner alleged that the real estate taxes paid for the years 1976, 1977 and 1978, although reimbursed by the lessee, was never claimed as a t ' ‘4 oe ponte tn 7 pp. 207-210, BIR record.

24% deduction. The reimbursement did not result in any taxable income on the part of the petitioner.

fs venurds the disallowed documentary stamps taxes, petitioner allened that these were actually incurred and paid on certificates of stock issued by the corporation for stock dividends duly declared to its stockholders. Therefore, the same should be allowed as a valid deduction to gross income, Respondent contends that petitioner claimed as a deduction from its gross income payments for real estate taxes in the amounts of P71,855. 11, P248,063.13 and F80,703.16 for the fiscal years ending June 30, 1976, June 30, 1977 and June 30, 1978, respectively, and the documentary bangs tax of FiS,503.00 for thal tice year ending June 30, 1976. Fetitianer has the burden of proof to show that i le entitied to the deductions claised. . Ati presumptions are in favor of the careubhneas of tax assessments.

The records of respondents , show that the assessments ieeued” abated petitioner was brolght .

about as a result of an examination conducted. by respondent's revenue examiner pursuant to Letter of Authority No. G1iSiz7RR dated March 3,, 1980. The nertinent portion of the "FINDINGS" of respondent's 240 a -examiner dated May 23, 1980 is presented hereunder, : to wit:

"1. Subject corporation was formed on June 14, 1974.

Be That the said corporation has three (3) major stockholders namely, | Avala Corp., AEA Dev. Corp. and Practer & Gamble FMC, who controls 99.99% of subject corporation.

3. That subject corporation entered into a contract of lease with Frocter & Gamble PMC, one of the stockholders of the firm,

4. That the lease contract etinpulates that all municipal, city and national taxes due on said property leased shall be borne by the Lessee.

ia That all real estate taxes were paid by Program Realty & Dev. Corp. which were later charged to and subsequently reimbursed by PMC, the lessee.

6. That the real estate tax receipts had Program Realty & Dev. Corp. as payor of the taxes.

ra That a stock dividend = and increase in capitalization were effected in 1977 and the correspdnding documentary & Science Stamp taxes due thereon paid by Ayala Corp. and subsequently charged to and paid by the respective stockholders.

8. That subject taxpayer has never paid the Privilege (sic) tax as a Real - Estate Dealer.

9. That Procter (sic).& Gamble PMC, having a sizeable investment in subject corporation receives a regular quarterly dividend which is subject to the 10% Final Tax while claiming totally the rental expenses paid to the Lessor to we eee rtettemee a antennae eet mee Leip tee nee eH seen 8 * p. 166, BIR record.

which x Tw they are part owners, thereby reducing their tax liability."

Respondent pointed as basis for the assessment

Section 74

¥ ‘of Revenue Regulation No. &, the text of which is cited hereunder, to wit:

"SEC. 74, Rentals. - Where a leasehold is acquired for business Hnurposes for a specified SUM, the ;

purchaser may take as a deduction in his return an aliquot part of such sum each year, lease based on the number of years the has to run. Taxes paid by a tenant to or for a landiord for business property are additional rent and constitute a deductible item ta _ the tenant and taxable income to the Jandlord, the amount of the tax being deductible by the latter. The cost borne by a lessee in erecting buildings or making permanent improvements on ground of which he is lessee is held to be a capital investment and not deductible as a business expense. In order to return t to such taxpayer: his investment of capital, an annual déduction may be made from gross income’ of an amount equal to the cost of such improvements divided by the number of years remaining of the term of lease, and such deduction shall be in lieu of a deduction for depreciation. If the remainder of the term of lease is qreater than the probable life of the buildings erected, or of the improvements made, this deduction shall take the form of an allowance for depreciation. " (Italics provided.)

After

evidence, ' the presentation of petitioner’s respondent waived His right to present his evidence. Instead he submitted the case based on the pleadings and the BIR records.

24, age r

DECISION 4

C.T.A. CASE NO. 3678:

ee The isstes presented for resolution are as follows:

1. Whether or not the documentary and science stamos taxes paid for the issuance of stock dividends in 1976 eget aieen a valid deduction to petitioner’s Sense ieaees and a Whéther or Mot reimbursements by lessee of real property taxds Said by petitioner on the real property subject matter of the ‘lease contract constitute additionad income of the petitioner for the years 1976, 1977 and 19786.

We shall first discuss the first issue. The rule is documentary” and science stamp taxes are deductible husdnest expenses. [See Section 30(c) (1) NTRC. The records of this case will reveal that petitioner did not deduct the documentary and science stamp taxes paid on the issuance of stock dividends for the year ending June 30, 1976.

Nowhere in@the Audited Financial Statements of

petitioner, particularly the Income Statement ending June 30, 1976, nor in its Income Tax Return will show that the, total Seeune of P1S, 503. 00, representing ‘the ddécumentary and science stamp taxes paid for 1976, @was ever deducted in its gross income for that saregy ests “240

DECISION

C.7.A. CASE NO. 3678 - 9- Unen re-investigation the findings of the secon examiner show that "the documentary and science stamps amounting to FPIS,503.00 incurred for stock dividends duly | dactered and issued to stockholders in 1976 is a valid deduction against the taxpayer’s income. "®? However, after careful examination, the Court found that the amount thus paid was not deducted from petitioner's gross income for 1976. Therefore, the documentary and science stamp taxes should not have been disallowed cansideringa that the same was never claimed as a deduction.

For while it ais true that documentary and science stamp taxes are valid deductions to gross income, nothing in the Mudie of this case show that the... same were deducted by netitioner. | Respondent did not even interposed any chjection to netitioner’s formal offer af evidence in support of its case. Neither did he present any evidence to rebut the evidence of petitioner. As a matter of fact, respondent merely submitted the case based on the pleadings and the records of this case.

We see no reason, therefore, why the documentary and science stamp taxes were disallowed 2 Exh. L-l, p. £61, BIR record.

Pana)

toe ef

DECISION

Cc.T.A. CASE NO. 3678 by resnandent when it fact it was not even claimed ag oa deduction.

With resmect to the second issue, it would be best te cite the transaction that gave rise to the alleged deficiency income tax assessments for 1976- 19748. Fetitioner leases real properties to Procter & Gamble PMC. It was agreed upon by whe parties that taxes incurred and imposed on the leased properties shall be for the account of -the lessee. When metitioner paid the real property taxes for the Jeased properties it owned, petitioner sought for the reimbursement of the amounts paid therefor. The lessee reimbursed the amounts thus paid. The real oroperty tates were never deducted by netitioner from its diveas income. The Income Statements of metitioner for the period ending June 39, i976 to June SO, 1978 did not reflect as an expense the real property taxes naicd for that period, The same is true with the Income Tax Returns of petitioner covering the same period which is the subject matter of this case.

Since the amounts paid by the lessee are mere reimbursements on real mioceete taxes paid by petitioner there seems to be no basis why these should be treated as additional income considering that the real property taxes were. never deducted

OO

a eat

| », from the oross income. Note that the amount reimbursed by the dLessee did not inure to the hane fit of petitidaner but in favor of the aovernment who vicdeeed the taxes paid for real properties leased. ;

Taxes paid on weal properties shall be borne by the lessee pursiant to the provision of the contract of lease. Thus, reimbursements of taxes made hy the lessee form part of rent expenses. Ordinarily, the reimbursements shall form part of rental income on the, part of the lessor. At the same time, the lessor can claim as a valid deduction from its gross income the amount of real property taxes paidy However, because of the peculiar Geneuge Se of this case, vnetitioner did not deduct the amount of real property taxes it paid for the years 1976, 1977 and 1978 £Therefore, it is apparent that nothing was gained from this . transaction since ngéhing was deductéd from gross income, It would have been different if petitioner actually deducted the amount of real property taxes paid and did not record and report as part of its income the amount reimbursed by the lessee. In that case, .petitioner would have gained from the transaction by not reporting as additional rental income the amount reimbursed.

201

- 12 - What was paid by petitioner to the government in terms of real property taxes were merely reimbursed by the lessee. Thus, it was not necessary for the petitioner to deduct the real Property taxes aS an expense. We are even persuaded by the findings of Revenue Examiner, Mr. Edgar Claveria, in his report on the re- investigation of petitioner's case, pertinent portion af which is hereunder reproduced:+° "2. The reimbursements made by the lessee to the taxpayer for real estate taxes on the real property subject of the lease constitute an additional income to the taxpayer for 1976, 1977 & 1978 but the undersituned examiner see no reason why the. previous examiner allowed it only as an income when the amount of the tax is an expense and being deductible by the taxpayer hence, giving rise to no additional taxable income."

We agree with the second findings as reported above. The first examiner failed to consider the taxes paid for real property as an expense on the part of the lessor. This conclusion does not run counter to the provision of Section 74 of Revenue Regulation No. 2@ for it aihachh aka "Taxes paid by ‘a tenant to or for a landlord for business property are additional rent and constitute a deductible item to the tenant and taxable income to the 40 Exh, L-2, p. 261, BIR record.

) a

- 13 =- landlord. the amount of the tax being deductible by the Jatter, " tf the reimbursements for taxes made by the lessee forms part of additional income on the mart of the lessor the same shall also be allowed as a deduction on the part of the lessor. THUS» it states "the amount af tax being deductible -hvy the latter (the landiord)." There beino no deductians claimed by the lessor (herein netitianer) there annears to be no additional income earned. Tt is clear that the additional amounts received hy the lessor are mere reimbursements and nothing more.

WHEREFORE, the petition for review is hereby GRANTED. The deficiency income tax assessments ' issued by respondent for the years ending June 30, 1976. June 30, 1977 and June 30, 1978, in the total amount of P300,938.83, are hereby cancelled. The

Warrant of Distraint on Personal Property and the

Warrant of Levy on Real Property are hereby lifted permanently. No costs. |

Cum Cur

ERNESTO D. ACOSTA

Presiding Judge

14 -

WE CONCUR:

~k f

~ANUEL

Judge

~pit /~ RAMON 0. DE(~

A

Associate Ju ge CERTl:Fl:CRT:tON

I

hereby certify that this decision was reac hed after due consultation among the members of th e Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution. ~~Q.~ ERNESTO D. ACOSTA Pt"esiding Judge

Court of Tax Appeals

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