Manotok Realty Incorporated vs. Commissioner of Internal Revenue

DECISION

Thas ‘5 petition secking for the withdr ow and cancellation of an assessment for aileged deficien y n et r i988 in °’ amount of RPSis, 708.243, inclusive of surcharge, interest and compromise peva’ty, “ting fron the disallowance of the amoiunt of PS61,254. 28 claimed by titione:> as fire las anid clan * om ifs incom f vaxable yeir 1968.

The factual backdrop of the case are as fol’ows:

Fetitionver is a corporetion duly organized = an’ existing under the laws of the Philippines and is ety vypents avong other, in the business of leasing Apartment units.

On pei? 17, 9, Pel tion filed it An I Income Tax Return for the taxable year ended Decemiur Si, 1 =xh. CY and pe’o' ine tax ain the amoint of P1862, 786.27.

DECISION C.T.A. CASE NO. 5485 2 l ':392 ~ Petitioner received a Pre- Assessment ~otice , dated Januar y 20, 19 92 <Exh ..

Ll'

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issued oy the Respondent fo~ alleged deficien~y income tax assessment for 1988 in the amount of P1,436,710.36, exclusive of in t erest.

Petitioner then f i led a protest 1992 , ex plaini n g in d etail the fi ndings o f Re spondent and contendi n g that there is actually no deficien c y i ncome t a x due for the said year. On Mc-n~ch 16, Respondent issued · ~ssessment Notice No. 22-6-000605-88 (Exh.

L)~ demanding pay ment of the amoun t o f P2,403,736.54, detailed as follows: Net Income disclosed by the return as audited Add:

Discrepancies:

Undeclared inco•e Taxes & licenses-unsupported Service fee-unsupported Fire loss-unsupported not properly presented to BIR Salaries and bonus- overstated Legal audit-EWT Depreciation-no lapsing schedule Total Adjustment Net Income per investigat i on Less:

Personal and add'l exemption Amount subject to tax Inco•e Tax due thereon Less:

Amount already assessed BALANCE Add: 20~ per annum Compromise Surcharge

TOTAL INCOME TAX DUE

P1,0381 617.20 303,877.97 282,894.40 361,254.28 142,131.35 59,586.60 643,467.12 P1,017,287.89 2,831,828. 92 P3, 849, 116.81 P3,849,116.81 Pl, 347,191.00 356,050.76 p 991,140.24 892,026.18 25,000.00 495,570.12 P2,403,736.54 DECISION C.T.A. CASE NO. 5485 3 Apt" i 1 :1. ~ 1992, and received by Respondent on Apr"i 1 7, 1992 <Exh. G), reiterated its objections and explanations contained in its Protest of February :1.0, requested for a review of the subj2ct assQssment. Respondent, howevet", sent to Petitioner" a dated September 9, M), demandin~ payment of the P2,403,736.54 within ten (10' days from receipt of said lettet·"; othet··wise.1 accot"dinr.~ to Respondent, it shall be constrained to refer the case to :tts Coll~.::~ction Enforcement Division for the issuance of warrants o~ distraint and levy to enforce collection. Petitioner replied through a letter dated Oct abet" 19, :1.992 <Exh. H), requesting again for a reinvestigation of its ca.se.

Respondent accomodated Petitioner's request invited thE!

c:onfet-- enc~e to refute the validity of its findings (Annex J, Petition fat~ Revi~?w).

On . .Januat"Y ;:=~o, 1994, Petitioner received Assessment Notice No.

FAN-2-88-93-005890 <Exh.

by Res pond <'!nt on Decem bet" 9, ! 993, this time lowet·"ing the assessment to only P313~508.23, computed as follows: Basic ndd ::

TOT11L ~=.:51. Sun~haqJ e i~OY. p. a ..

Intet"est Compromise penalty

AMOUNT DUE & COLLECTIBLE

P-1.26,439.00 31, E,()~3" -,5 1 1.1·7 ~ 1.~5'3. 1.~8 B., 000. 00 P.313. 5()8u 23 DECISION C.T.A. CASE NO. 5485 - 4 - follot'>~ing day~ . .Ja.nU-3Y'Y 1 '394, Petit i one1·' allegedly went to t he BIR office and was informed that the "Fil·'e Los·:;"

claimed by Petitioner as deduction fro~ its income for·· 198f.:l was disallowed a~~ the SC.\mE:' 'should have be en d ed '..tct ed from its income for 1987. Petitione1·' then wr·ote a lc~ttet' to Respondent on again asking for a reconsideration and cancellation of t'le assessment (Exh. I). Cln Janua·r·y 20, 1997, Petitioner''·;

lette1·' of Januat'Y Respondent .···I.

.::. ~' 1994·, an swet'ed asking Petitioner to present any docu mentary evidence that will shm-J that the latter filed a claim for fire insurance so that the same may be considered in reinvestigating the d1.1e fo·r· 1988 and th.:::tt fai lur•e to submit the said will the a.ssessment final ard unappealable <Exh. 01. Petit i onet', in dated 1997, Rt::o s pond ent that the not and that they have not received a ny compensation. In view of this circumstance, Petitioner requested for a t'econs idet·at ion and cancellation of the subject In reply to Petitioner' s letter of February 3, 1997~ Respon d ent explained that f :i. t'e loss C -'i:"!Tl only i:l(?.

considered as a deduction in the year actually incurred, unless thet-·e is a claim fo1·' fit' t?

:i. n ·:;:.It'·'=' nc1=-, and it(# DECISION C.T.A. CASE NO. 5485 - 5 - appearing therefore that Petitioner did not 1nsure the Sect ian E:9 (d) ( 2) of the National I nt !·?l·'na.l Revenue Code shall apply.

Respondent then gave Petitioner' a pet' i od of ten ( 1 (l) days to settle its tax liability <E:-<h.

p) " Petit i onet' then elevated it::; case !::Jefot·e this Co ,_wt on i=i pr' :i. 1 7 1997, a~:;kinL] for' the cancellat ion ,;,\nd ,. ' wi thc:lt·awal of the assessment amounting to P313,508.23, on that the right of Respondent to collect had already prescribed, since collection is b e i n g e n f m' c e d more than three (3) years after the Assessment Notice was issul~d on Decf?mber·· ':3, 199.3; a.nd that the latest assessment issued by Res pon•j ent is er··r·oneou.s, because it i:Ja.sed on actual facts., it appearing that a fit'e '"'hich occtwed on ;~t)'} urits of Petitioner resulting in casualty loss. Respondent claimed by way of Special and Affirmative Defenses that: "5.

The d*?duction of f:it"'E~ los ·::;e'5 cL::\imE~c!

by petitioner should be disallowed.

Since petitioner did not insure the property lost t~rough fire, Section 29(d) (2) of the National Inter·nal Revf~nue Codr~ applies.

Under' the provisions of said section, the requisites far deductibility of losses are as follows: 1 ..

The los'"' must of DECISION C.T.A. CASE NO. 5485 - 6 - 2.

It must have been a2tually sustained or suffered during t~e t<::\xa.b1.e ';/(~~0\l";

3.

It must be evidenced by a closed and completed transaction; and It must not :::>e compensated by insurance or otherwise. Since petitioner failed to comply with the second and third requisites above, it cannot clai m the particular deductions in issue. 6.

Likewise, petitioner failed to file a Declaration of Loss before the nearest Revenue District Office within 45 days from the date of occurence of the casualty as mandated by R:?venue Reg1.tJ.at ions No. L:::-.. 77.

7.

Revenue Hegulation No.

1.2-77 is a valid exercise of the Respondent's rule-making power as provided for under Section 254 of the National Internal Revenue Code, to wit: "Sec.

•=::45.

Autho~~ity of Secretary of Finance to promulgate rules and regulations.-The Secretary of Finance upon recommendation of the Commissioner shall promulgate all needful rules and regulations for the effective enforcement of the pl·'ovisions of this code .. :-<:x><" 8.

1\lat :i. ona.l Simi L::1~~ly, I nt et·'na 1 Sect ion L• ( i) of the valid enactment and Regulation No. 12-77. Revenue Code upholds the implementation of Revenue Said section provides: "Section '+.

Specific pt~ ovisions to be contained in regulations.-The regulations o f the Bureau of Internal Hevenue =;hall, amon~~ oth(:?t' thingsj contain provisions specifying, prescribing, or defining: XXX

X>< X

" ( i) The mannet' returns, information, shall be prepared and t~e tax collected and 3.S thr> condition~;

XXX in ~"Jhich t<::iY and t'epol·~t s ~-'epCl··'t ed <::ind paid, as well u.nc:er' wh :ich DECISION C.T.A. CASE NO. 5485 - 7 - evidence of payment shall be furnished the taxpayer, and the preparation and publication of tax statistics;"

=\4 A revenue regulation, the issuance of which is authorized by statute, has ths force and effect of law (Article 7, Civil Code;

Arches v. Bellosillo, #0 SCRA Ge).

10. Petitioner’s claim that respondent’s - right to collect the subject deficiency income tax has prescribed, is wntenable. This is because although the Assessment Notice was issued on December 9, 1993, petitioner requested for reconsideration/reinvestigation of said assessment, which request was granted by respondent, thus, suspending the running of the statute of limitations regarding the collection of taxes as enunciated under Section 224 of the National Internal Revenue Code.

il. Tax Assessments by tax examiners are presumed correct and made in good faith. It is the taxpayer’s duty to prove otherwise. (Sy Po

v. Court of Tax Appeals, 164 SCRA S243; Si Am-— Jur Ge0-G21). Petitioner in this case failed to overcome said presumption. "

The issues, therefore, We are tasked to resolve are:

i: Whether or not the right of the Respondent to collect the tax had already prescribed; and im Whether or not the fire loss incurred by Petitioner in 1987 may be allowed as deductible loss for i988.

a After acareful study of the facts attendant to the case at bar, We find for the Respondent.

With reference to the first issue, Petitioner contended that when Respondent wrote to Petitioner = on January 20, 1997, his right to collect had already iv

DECIS ION

C.T. A. CASE NO. 5485 - 8 - sir-ice m or·e than three years have pas~ed s ~ rce he revised his assessment on December 9, 1993. tha.t Pet :it i orH~l·' y·eque:;ted for a reconsideration of said assessment on <Exhibit "I"), which WD.S Respondent Commissioner in a letter dated January 20, 1997 <E:-<hibit "0").

Under Section 224 of the Tax Code, both these actions have the effect of suspending the running of the statute of limitation5 Sec.

224 Suspension of statute.-The runnin g of the thus~ r~unn i ng ~:; t: at ut e of of limitation provided in Sections 203 and 223 on the makin g of assessments and the beqinning o f distraint or levy or a proceedin g in Court for collection, in res pect of a n v deficiencv, shall be suscended for the period during which the Commissioner is prohibited from making the assessment or beginning distrai n t or levy or a proce e ding in Court and for sixty days thereafter;

when the taxpayer requests for a reinvesti gation which is granted by the Commissioner; xxx But Petitioner argued that the Januar· y of Re~:. pondent did not :in effect 1 ':197 C'' r·einvestigation o f P e t i t i o n e t' ' s ca.se but to impose '"' condition the t' e i n v e s t i g ·:?. t i o n .. Accot'cling to P&~titionet'~ in order to suspend the period to collect, the r'(~qu.est for reinvestigation be £want eel.

We clo not .rg1···<:e.

DECISION C.T.A. CASE NO. 5485 - 9 - The 1397 le~ter of Respondent is ~ereby reproduced for easy reference: ''Th :i. ·";

Jan u,::wy ;=:L:- 1 P313? 508. ;=.::3 of i"lanotok Asses·;;ment December~ 9, refers to your letter-p~ot@st dated 1994, against the assesssment of representing deficiency inccme tax Realty, Inc. for' the year 1988 under' Notice No. FAN-2-88-92-005890, dated 1993.

In said protest you consistently maintained that the fire loss 2mounting to P361,254.30 suffered by the subject taxpayer in 1987 be considered as a deductior from its 1988 income tax return.

In this connection, we would like to empasize (sic) that the fire losses are generally deductible in the year ,::.ct ua 11 y i ncl .. tn·-ed.

Hm"-ie vel·', 1 ., you.

co u. J. d present to us any documentary evidence purporting to show that you.

filed a claim for fire insurance, we will consider the same in reinvestigating the taxes due for 1988;

otherwise, failure on your part to submit the said requirement, the assessment subject of your protest shall become final and unappE~a.l ab l c ..

In view thereof, you are hereby given a period of five (5) day~ from receipt hereof to comply with the said requirement and for this purpose you. may submit the same to the Chief?

Legal Division at the 7th Floor BIR Bldg., Anda Cit'cle~ Por-t ~~r-ec-t, Manila."

A close scrutiny of the above-quoted letter would reveal P!::>titionet' v.Jas t' e q u i ,~ e d t o submit the documentary evidence sho11'1 that it filed a claim fen' insurance precisely because Petitioner's request for cancellation of the assessment was under reconsideration and ~·Jould bt'-' vit;z .. l to on Ot' not to withdraw the assessment.

It is to be noted that as a genet'al losses must be claimed as DECISION C. T. A. CASE NO. 5485 - 10 - C!t"ciUI:t ion :i.n the the le>~~s must lil-<ewise be evidenced by a closed and completed tl·'an~:;,,.ct ion .. In the Respondent could have denied outright Petitioner's request for reconsideration lOS~;

sust,;~ined in 1 '387 a.nd deductible only in 1987 but because Petitioner' s case may fall ur:del"' the exception, as when there i n s 'J 1·' an c e , Respondent required Petitioner to submit ~he additional evidence which, unfortunately, Petitioner did not have.

Petitioner' s contention, t h ere f ore, that requ2st for reinvestigation was no t did not su.spend the per·iocl to collect, lac~< s basis.

We proceed to the second issue. i ~; no dispute that a fire loss was sustained. The only que•;tion for dete rm inat ion is wh ether or not a fi Y'e loss sustained in 1987 may be allowed as a deduction on the following year 1988 . Fat·' pur poses of clarity, We shall elwell on r'equisites " loss" ma y be dt.'dU.Ct(?d f "r"'Dill income::

L The loss must be that 2.

I t must have been actually ta:-<abl e year·;

or suffered during the of the sustained It must be evidenced by a closed and completed transaction; and the

DECIS ION

C.T. A. CASE NO. 5485 - 1 1 4 ..

It nF.tst not compensated I~)'/ insurance or otherwise. on the -1= • , or~ego 1 ng 7 We with Respondent ~>Jhen it disallowed the fire loss claimed by Petitioner. The loss was susta.ined in 1987 and is already evide~ced by 2 clcsGd and completed transact :i. on .. :J.s of 1987, the not h.::wing been insca~ed and the amount of loss h.:~ving been reasonably ascertained of s-3icl it should have been properly claimed as deduction in 1987.

~or its non-compliance, Petitioner puts the bla~e on R(:! s pond ent' s and confusing v e rbal order requiring the presentation of of Pt=:t it; iOTlf.'"r',! failed to identify the officers who gave d :i r~ect ion.

It c.::mnot therefore expect this Court to rely on mere allegations to suit their purpose. Even assuming that erroneous instruction was given, Petitioner should have e xerted efforts to veri f y the veracity of the statements of the said officers. The law is too clear to excuse Pet itioner from compliance therewith. R e '; p o n d e n t likewise disallowed the fire l~ss elaime~ by Petitioner as deduction for its failure to comply with Section 3 of Revenue Regulations 12-77, which states: "SEC Declaration of forty-five days after the loss.

d-':'lt (0 r~o bber~v < ' l-Ji. thin of theft OY' occurrence of casualty o r embezz 1 ement, a taxpayer~ ~>-Jho :.u~;tai'lec:l l 0::; ·:;

DECISION C. T. A. CASE NO. 5485 - 12 - therefrom and w~o a dedu.ct ion for~ :~ntends to t'•e taxable claim the loss as year in which the loss sust.:::1.i "V?d declaration of less District Officer.

sh.,:;~.ll v-1ith the f i. 1:0 Slt~O\'n Revenue The sworn declarat1cn loss shall contain , among other things, fol~owing information: (a) The of the event giving rise to the loss and the time of its occurrence;

(b) A desct~iption of the damaged property and its location; (c) The items needed to compute the loss su.ch as cost or oth?r basi: of the property; depreciation allowed or allowable if any;

val~e of pt~opet~ty befol'f:? and after~ the event;

cost of r':2pair·;

(d) Amount of other compensation t'eceivable.

in sur·ance ·r~ecE• :i. veci of ~vidence to support these items should be fur·nished, if ,:;:l.Vailable ..

E><amples at'e pu:r-'ch.:::1:,e contracts and deeds, receipted bills for improvement, and pictures and competent appraisals of the property before and after the ca. s t_ta 1 t: y ..

!!

Petitioner admitted in :i.ts lette1··' to Respondent, cla.ted Je:1.nuar·y < E:<h.

indeed, failed to declare its loss within 45 days after the occurrence of the fire as provided in RR 12-77, thus: "While it is that procedure is for us BIR, we did not do to report said fire to the so.

We apologize for oLr igno~ance and while it is true that we may have committed a procedural error, the ract remains f :i.l·'C' that we had incurred a justifiable deduction. X

X X"

DECISION C.T.A. CASE NO. 5485 Under Sec. 4 of the same Revenue Regulation, the failure to submit the said declaration of loss within the period prescribed in these regulations will result in the disallowante of the casualty loss claimed in the taxpayer’ s income tax return. Please note that the said reguirement was issued pursuant to Section 29(d) (3) ‘now Section 34) of the National Internal Revenue Code. (Emphasis supplied?>.

Verily, Petitioner’s failure to comply with the aforesaid regulation prove fatal to its case.

WHEREFORE, premises considered, Petitioner is hereby ORDERED to PAY Respondent the amount of F315, 508.23, plus 20% annual interest from December 93, 19935 until fully paid, pursuant to Section 249 of the Tax Code.

lye th Pe eg 0. ho RA eedoies udqe

WE CONCUR:

i _ / ERNESTO D. ACOSTA / Presiding Judas Associate Midge i!

DECISION C.T.A. CASE NO. 5485

CERTIFICATION I

I hereby certify that the above decision was reached after due consultation with the members of the Court of Tax Appeals in accordance with Section 14, Article VIII of the Constitution.

ERNESTO D. ACOSTA Presiding Judge f';