Hospicio De San Jose vs. C.T.&. Case No. 4660 Commissioner of Internal Revenue

DECISION

CTA CASE NO. 4660 - 2 - 2) Deficiency Expanded Withholding Tax 3) Deficiency Privilege Tax 1981 1982 1983 1981 1982 1983 1.407.~ 1.317.~ 1.229.~ 298.•7 278.•7 268.87 Petitioner protested the said assessments in a letter dated May 26, 1987, alleging the · following points:

(a) That the expanded withholding tax on professional fees and security guard services were remitted and paid, although late, together .with the penalties and interests thereon: (b) That losses from operations are deductible under Sec.

30(d)(1)(c) of the Tax Code, as authoritatively interpreted in a ruling is sued by the Respondent on December 16, 1966.

Assuming for the sake of ar gument that s uch ruling were to be revoked, the same can be done only prospectively;

(c) That t he contributions for the board and lodging of the orphans and other residents did no t constit u te income; ( d) That t h ere was no factual basis for the assess ment for deficiency expa nded withholding - ) - DECISION CTA CASE NO. 4660 - 3 - tax, because the same had been paid, although belatedly, together with the penalties and ~ " interest incident to l ate payment; ( e) That there was no legal basis for the assessme nt of th e deficiency privilege tax be ca use the taxpayer was not engaged in the busi ness of providing bo ar d and lodging to the orphans and other indigent residents. Responde nt, in a l etter dated July 29, 1991, received by Petitioner on September 23,1991, resolved petitio ner 's protest by - ( a) revoking the dQflciency assessments for expanded withhold ing tax and privilege tax; (b) deletin g con ributions for board and lodging of the residents as part of gross inco me; and (c) insist·ng on the dis all owances of expenses for professional fees and sec urity guard serv i ces and of operating losses. As a result, Re s pondent mad e reassessments of petitioner's the defici e ncy income taxes for 1981, 1982 and 1983 in t he re s pective amounts of P434,33o • .:.:..~ .• P 2 82,9 2 8 . .. ~~ and P365,233.~. A I o - • -

DEC I SIO N

CTA CA SE NO. 4 660 - 4 - Respondent, in her answer, cited the c a se of Hos p iclo de San Jose vs. Commission e r of Internal ~ Reve n ue , CTA Case No.

4224 .

involving t h e "' same issue , and alleged that the inte nt of Section 27 o f the NIR C by the in se rt ion of t he phrase "regard l ess of the disposition made of such income" is to tax the income from rea and personal properties or from any activi y conducted 'for profit of exempt organizations even if u ~ gd for religious, charitable a nd other exempt ~urpose.

In other words, the taxable i ncome o f suc h organiza tion should be treated as separate and distinct from their tax exempt income for purp oses of taxatio n .

Ac cordingly , the lo ss suf f ered by Petitioner fro m its fully exe mpt op eration can not be allowed as deduc tion from its taxable income. Furt hermore, reliance by petitioner on the · ruling of Dec.

1 5 .

1 966 by the BIR is not in ,I acco r d a nce with law and the government is not pr ec lu ded from collec ti n g such tax which is legally due it citing cases of Hilado vs.

Collector of Intern a l Revenue, 100 Phil .

28 8 (1956), Zapata Marine Services, ltd. S.A. vs. Court of Tax Appea l s . et al. . G.R. No. 800.116, (April 18, 1988).

DECISION CTA CASE NO. 4660 - 5 - The issues to be resolved by this court are as follows:

(1) Whether or not the operating losses from tax exe mpt activities of petitio ner may be d educted fro m its taxeble income: (2) Assu ming that the BIR Ruling of December 1 5, 1966 may · be revoked, whether or not the revocation may be done re troactively: (3) Whether or not expenses for professional fees and security guard services are deductible from gross income for failure to with hold taxes on t im e.

The first two issue s have already been answere d by this court in a similar case involving the same partie s.

This is in the case of Hospiclo de San of Internal .!3_.~.Y. .~_I)_~-~ .. ! ......... !3 • .!:! ... ~ .. P. .. .9_!)5!.~ .. !:1-.~ ,

C • T • A •

C a s e N o • 4 2 2 4 , F e b r u a r y 28, 1991, Wh en a p pea l ed to the Cou rt of Appeals, the h igher co urt, in Commissio ner of Internal .. _ ................................................ _ ..... ____________ _ .. ~ .h.~ ...... !:.~ .. L.! • .!:: ... 1: ...... g_.f ..... I .. !~ .... -.. ~-I2 .P. .. ~~ -t~. , C A- G • R • S P N o • 2 6 3 6 6 , J u 1 y 2, 199 2, affirmed in toto the decision of this court .

Said court h as this to say: 1 ') "':1 .( DECISION CTA CASE NO. 4660 - 6 - "It is clear from the foregoing interpretation t hat the legi s lative intent in amending the proviso in Section 27 by the insertion of the phrase "regardless of the disposition made of such income" is to tax income from · real and personal properties or from any activity conducted for profit of exempt or ganizations even if used for re ligiou s , charitable or other e xempt purpose.

In other words, the taxable income of s uch organizations should be treated a s separate and distinct from their tax - exempt income for purposes of t ax ation .

In which ca s e, the deficit incurred in the tax - exempt operations canno be s t off agai nst the income from ta xa ble operations.

The subsequent deletion of the s ubject provision from sub s ection(e) of Section 27 by Pre s idential Decree No .

1457 which took effect on June 11, 1978 and the tran s position of the same as the last paragraph of t he same Section to cover all exempt organizations under that Section, lends support to our conclusio n.

Conformably, the loss suffered by pet! loner from "ts fully exempt operation cannot be allowed as a deduction from its taxable income.

On the second i s sue of retroactivity, the same was likewise re s olved in favor of the government. H owe v e r • 'f o r rea s on of good faith and justice, Petitioner s hould not be ubject to the amount of interest for relying in good faith in the SIR's previous ruling.

The cou r t ruled as followsz Neverthele ss .

We do not fi nd sai d a s ses s rnen to be a retroactive revoco!}tion of the ruling. h ence Section 327 (formerly Section

338- A

now Section 246) of the National I ntern al Revenue Code is inapplicable.

Well-established is the 1 . ) l"•j - C . I ~ DECISION CTA CASE NO. 4660 - 7 - rule that the government is never estopped from collecting taxes because of mistBk es or errors on the part of its agents, in line with the doctrine laid down in the case of Hilado vs. Collector of InternBl Revenue, 100 Phil. 288 (1956), as follows: "With regard to the co ntention that General Circular No.

V- 139

cannot be given retroactiv effect because thBt would affect and obliterate the vested right acquired by petitioner under the previou~ circ ula r , suffice it to say that Genera l Circular V-123, having been issued on a wrong constl"uction of the law, cannot give rise to a vested r ig ht t hat ca n be invoked by the tBxpayer. The reason is obvious: a vested r ight can not spring from a wrong ·nterpreta tion.

This is too clear to require elaboration. "It seems too clear for serious argument that an administrative. offic er can not change a law enac ted by Congress.

A regulation that is merely a n interpretation of the statute when once dete rm ined to have been erroneous becomes nullity.

An erroneous constr uct ion of the law by the Treasury D partment or the Co llector of Interna l Revenue does no t pl" eclude or estop the government from collecti ng tax which is l egally due". On t h e third i ss ue, this court believes thl!lt Revenue M mor and um Order No.

38-83 dated November 14, 1983, entitled ''Guidelines for Allowances of ) ·' DECISION CTA CASE NO. 4660 Deductions for Certain Income Payments Under Section 30(1) of the Tax Code", should apply in the final resolution of this issue. The pertinent provisions thereof are as follows:

Guidelines for Applying Section 30(1) An amount claimed as deduction on which a tax is supposed to have been withheld under Sections 64 and 93 shall be allowed Af in the course of his audit and/or investigation, the examiner discovers that:

otnanssaesennne 3.1/1 No withholding of creditable or final tax was made but the payee reported the income and the withholding agent/taxpayer pays during the original audit and investigation the surcharges, interest and penalties incident to the failure to withhold the tax.

3.1/2 No withholding or creditable or final tax was made and the recipient- payee failed to report the income on due date thereof, but the withholding sHeeentosbonaten agent pays during the original audit and investigation the amount supposed to have been withheld, inclusive of surcharges, interest and penalties incident to his failure to withhold.

sivatorsonssasanuenbanvanscnuentateeeasrnseneauesti vbvennanatsatne¥*4nntil ne aanttaestesetenssenastiece obtanetacnet Len bet MethanneeaneeteonseH 3.1/3 The withholding agent erroneously underwithheld the tax but pays during the original audit and investigation the difference in the amount supposed te have been withheld, inclusive of surcharges, interest and penalties incident to such error. (Underscoring supplied.)

DECISION CTA CASE NO . 4660 - 9 - Cl e arly under said regulation, if the proper withhold ing tax is paid durin g the period of original audit and investigation, the amount claimed as deduction s h all be al owed. The records of the case will . hat th deficiency expanded withholding tax n the amoun of P1,407.~ for 1981.

P1,317 •. ! .. ~.

for 1.982 and Pl.229 •.. ~~ for 1983, were paid by the Pe oner on August 19, 1985 inclusive o ·f intere$t, surc harg e and compromise penalties under Confirmation Receipt (C.R.)

Nos.

7280780, 728 078 1, 7280783 and 7280784 for 1981 , C. R Nos. 7280785, 7280787, 7280789 and 7280783 for 1982 and C. R.

Nos . 7280793, 7280794. 7280795 ~nd 7280796 for 1983.

sa~d payments were made during the progres s of the 'nvestigation. Accordingly, ·he foregoin as e sments sho uld ·' be r ecomputed by ex c luding theref rom the expenses for pro f essio nal f $ and ourity guard services as well as the interest imposed on the basic income tax.

Petitioner•e tax l~ ~b1lit1 e for the years in question shou ld heref-ore be recomputed as follows: Rtcoaputation of Dtfleltney Ineo11 Tax: 1981 Ul2 uu Met incoae/(loss) per return 2,003,927.18 ( 829,792.33) ( 585.971.21) DECISION CTA CASE NO. 4660 - 10 - Add: Net loss on exempt operations 1,930,610.88 2,021,081.71 2,094,324.22 Net income per Court's computation 3,942,538.06 1,191,289.38 = 1,507,352.94 Less: Income subject to final tax Bividend 138,509.76 325,140.28 486,649.18 Interest 2,961,466.80 286,733.10 © 290, 294.22 Total 3,099,976.56 611,873.34 776,943.40 Adjusted net income $42,561.50 679,416.04 730,409.58 Tax due "204,096.52 192,798.61 248,643.34 Less: Taxes vithheld 18,227.88 20,753.52 21,922.32 Deficiency income tax 266,668.72 172,042.09 223,721.02

WHEREFORE, in view of all the foregoing, Petitioner is ordered to pay the amounts of P266,668.72, P172,042.°° and P223,721.02 as deficiency income tax for taxable years 1961, 1982 and 1983, respectively, or a total of P662,431.%?.

WE CONCUR:

UE ssoci K. GRUBA e Judge Associate Judge DECISION CTA CASE NO. 4660 - 11 - C E R T I F I C A T I 0 N I hereby certify that this decision was reac hed after due consultation among the members of the Court of Tax Appeals in accordance with Section 13.

Article VIII of the Constitution . e ..... ,;::-\Q .. Q~ ERNESTO D. ACOSTA Presiding Judge Court of Tax Appeals .f I \ t~ i ' 1 )