Ulbspublic of the Fuilipping. Court of Tax Appeals Orerik City Pampanga Sucar Mills vs. ~ C.F.A Case No, et al.

DECISION

This is an appeal from the decision of res~ pondent. Commissioner of Internal Revenue dated April 5, 1955 demanding payment of the sum of P97,280.00, P69,502.00 and P12,788,00 as defi- ciency income taxes for the years 1951, 1952 and 1953, respectively (pp. 241-244, BIR rec.),: com puted as follows:

L951

Net income per original investication P429,965,30

Deduct: ‘

Depreciation on new assets acouired from 1946 to 1948 655,867.82 Error in addition 19502 Totel P56,946.74 Bad debts pre-war Planters account P157,938.93 Crop loan 8,790.78 * £p166,729.71 Less: .- .

Mr. Jose Yulo acct.126,629,76 40,099.95 16,846.79 Net Income per reinvestigation P413,118.51 Tax cue thereon .« » « + «*ete e+ © © @ @ P_ 97,290,000 393 -~

DECISI ON

CTA CASE NO. 599 - 2 - 1952 Net income per original investigation

Deduct :

1?412,060.29 Depreciation on a ssets acquired in 1947 to 1948 Error in addition Net inc6me per reinvestigation Tax due thereon • • • • • • • •

Less:

Tax already as sessed Deficiency tax due • • • • p 50 q .'2 6 9 " 8 7 7,049 .00 • ~ • • • e • • • • • • • • 57,318.87 P354,74J:.42 p 91,327.00 21·,825.00 f+ 69,502.00 1953 - Net income pPr origine l investiy~tion

Deduct:

P/.81 1 544.20 P17.l 1 74U 0 82

Net

Tax

Inventory u dju ~;t.rr11 ~ nt Depreciation on as ~ ets acqui red from 1946 to 1948 Error in addition income per ~einvestigatio n due thereon • • • • • • • • • 47,691.50 ...

___1,~.164.20 • • • • • 220¢604,52 p 63~939 .68 ~ 12,788,.00 f

I

~ ..

As borne out by the records, petitioner is a corporation organized and exi s ting under the laws of the Republic of the Philippines. At that time of organization, it has as its principal office at Del Carmen, Floridabli3.nca, P.ampanga and v>'as engaged in ..

the milling and processing of sugar into finished products. · In the early part of 1955, an examiner of the Bureau of Internal Revenue investigated petitioner and examined its bcoke of accounts. Accordingly, b ased on the investigdtion, respondent wrote pe€i- .

tioner a letter dated April 5 1 1955, enclosing there- in three assessruent nvtices namely: No. 40-ECAR- 5-54-51 for 1?111,491. 00; and No9 40-ACR-7-54-52 .3 9 · l l

DECISION =

CTA CASE NO. 599 aw 3 = e for P85,552.00; and No. 40=FCAR-5~54~53 for P71,672.00 (See Annexes “A", "C", & "D", Petition for Review, pp. 12-24, CTA rec.), demanding from the latter the nayment of the aforesaid amounts representing the alleged deficiency income taxes due from peti- tioner for the years 1951, 1952 and 1953, respectively, computed as fcllows:

1951 Net loss per return . 2. « 0 « «© © « « @ e (P557,922,.06) Add: the following disallowances -

1. War Damage Losses . . P660,150.91

2. Preewar loans to planters written off 168,309.48 ‘ 3, Depreciation es © 139,379.57

4. Loss on sale of assets _20,047.40 _987,887,36 Net income ps per investigation eo «© © ec = P429,965430 TAX DUR THEREON 4 3 2 sw 6 ee eo we ow) 6P1D1,491,30 1952 Net income as per return «6 « e e © « e « P106,517.00 Adds: Inventory adjustment ..« « « « « » 171, 748,82 Depreciation e@eee oe @ e - 132, 318,38 Loss on assets fully depreciated e 1,476.09 Net income as per investiyation . « « « « £412,060,29 Tax due thereon $3 tb we eli sewe oo » PAIS 00 Less tax already assessed . «6 « « + «© « e« -_21,825,00 Deficiency income tax due ,¢ . « « e e e « FP P_85,552200

Los

Net loss as per return 6 « « © © «© © « e (BP 38,107.00) Add: Bad debts written off (pre-war account) , P188,950.00 Depreciation ¢ « « o #e 130,515.12 Undeclared sale of Gepreciated assets o eo 3,186,008 332,651.20 Net income as per investigation .« « « « e P284,544,20 TAX DUE THEREON eo 2 © © © © © © ee 8 P-71,672.00 Not convinced of the legality of the assesse ments, petitioner filed a protest with respondent

DECISION

CTA CASE NO. 599 - 4 - on December 13, 1955 (pp. 293-297, BIR rec.) on the ground that respondent's field exnminer has misinterpreted various questions of fact and law with respect to this case, and reque~ting respondent either to withdraw said assessments, or to instruct his field examiners to conduct a reinvestigation. In a letter dated June 1, 1955 (p. 189, BIR rec.), respondent reque~ted peti l i,;nt: r 1..:.0 execute a waivt::r on the running or the statute of the limitations .

up to December 31, 1957, which petitioner did, as evidenced by the waiver petitioner had executed and sign~d thru its respaDsihle officer. {po 194, BIR rec.)

On October 18 1 1955, after a careful study of the case, res~ondent wrote a letter to petitioner reducing the assessments of the alleged deficiency income taxes for the years 1951, 1952 end 1953 to • P97,Z8o.oo, P69 1 502a00 and Pl2,788.00, respectively, , which revised assessments were received by petitioner on October 18 1 1955.

(pp. 287-286, BIR rec.)

On December 9, 1955 1 petitioner again ~ro- tested the assessments OA the gr0und that the amounts of deficienc~ asse ss~e nts were not arrived at by respondent on the bases of a just a~preciation of the facts and law invclved, 2nd, therefore,

39G

DECISICN -~

CTA CASE NO. 599 requested for another reinvestication, (pp. 249 to 253, BIR rec.)

Consequently, respondent conducted another reinvestigation and rendered his decision on Sep- tember 26, 1958 (pé 361, BIR rec.), which was received by petiticner on Octcber 29, 1958, Respendent, in a memoranaum dated June 23, 1958 addressed to the Regional Director, San Fere nando, Pampanga (pp. 343-347, BIR rec.) has Listed down the disallowed items claimed by petitioner in the taxable years in question.

1951 Prej-war planters acccunts ; , written off £206,409 ,43 Depreciation on cost of rehabilitation 82,432.83 Loss on ssle of asset 20,047,890 War damage losses 660,150.91 1952 Depreciation on cost of rehabilitation P 74,999,51 Loss of assets fully .

depreciated 1,476,09 1° 5 3 Depreciation on cost of rehabilitaticn P 81,659,382 Undeclared sale of depreciated assets 3,186,08 Bad debts written off 168,950,900 a Respondent, in a letter dated September 26, 1958 (pe 361, BIR rec.), informed petitioner that with

Cad

a) .

DEC131C 'J -

CTA ~hS E NC. 599 - 6 - r egards t o its deficienc y income tax liabi l ities for the yea r s 19 51 , 1952 and 1953 in the total and amount of P179 1 570 . 00/ t hat <1fter a tho.rough re- i nvestigation and study of the case, he came to the conclusion t h at no valid r~asons exist to warran t modification of the previous asses~ment against t~ e petitioner a nd that pe~ition~r failed to substantiAte or justify the ~tnrPnc Dtion c d deductions i u i ts inc.Hne tax r0U1r n.s for the years 1951, 195?. and 19 53 .

At thisjunc ture , it should be stated that assessment s are presumed to be correct unless th8 contrary i s shown , and the burden of proof rest L" upon the taxpayer to ov e r c ome this presumption. The determination, however, of R deficiency by the government is onl y p r i~a fa c ie correct.

(Gu-

tierrez vs. Collec tor o f Internal Revenue, L-19537,

May

~0, 1967, 14 SCR~ 33 ; Tan GuR~ vs . Court of Tax Appeal s, L-23676, .'\pril 27, 1967, '19 :::>C:RA 903; . Republic v~. Ph~ l ipp i ne Rabbit Bus Line , Inc. L-26862, March 30 , 1970, 32 s cqA 211.)

In view of the afores a i d legal pr ~s umption and the d efense of re::,;;ondF;nt t 'h a t t he a hcve i t.erns of 11eduction ; Are dis~lllowc31Jle rwc,:> uf.e in the bvo reinvestigations conducted by hi 3 office, no justi- ficati c n <?xis t ed to w.:trr c'mt 1\toclificai::i on o f the 3!) ,j .,

DECISICl'J

CTA CASL NO. 599 - 7 - qu€stioned deficiency assessment, t he court will now proceed t o assess the evidence of ~he partie s present ed, not only in the heari nn before thP appellate division of the Rureau of Internal Revenue butalso before this Court. We will then determine whether petitioner has properly subs- t antiated h is claimed deductions fo r his 1951, 1952 abd 1953 i ncome t ax returns.

At thP outset, hear- inqs before t his Court partakes o f a trial de · ~ and shall thPrefor recieve P.Vidence, summon witnPSSPs, and give both parties, the government and the taxpayer, opportuni t y t o present and araue their sides in order that the true anrl ~ orrect amount of the tax liabil ity mav be fi nally deter- mined and decided.

(Collector of Internal Revenue

vs. Ratangas Transportati on Companv & Laguna Tayabas ~us Companv, L-9692, January 6, 1958, 102 Phil. S2 2 .} .

We shall now discu ~s the disallowed items i n the order listed by respondent in his memorandum and ascertain whether or not petitioner is entitled to these deductions;

Petitioner did no~ go to trial but admitted the findings o f facts of the respondent. ThG i~es are as fol::.ows:

(a) WhethPr or not the uncollected portion 3 9 ..

..

DECI SIOt,·r C~A CASS KO . 599 - 8 - of pre-war loans is deductibl e a s b~d debts for in come tax purposes :

(b) Whether or not depreciation of pre-war assets is deducti ble in any l 2xable year at the option of the tax~ayer:

(c) Whether or net the yre- war losses may be claimed duLing the t axable years after the war; and,

(d) Whether or not a loss on the sale of ful l y depr eciated capital a s sets is deduc tible.

~ r e-war Plnnters Loan written off as bad debts in 1951 - ~208,409 , 43 The records show that petitionPr granted p r e- war loans to the sugar planters numbering, all in all, two hundred thirty fou r (23 4 ) loans.

Peti-

tioner alleged thet after the war, it exertPd efforts to collect said loans.

Written demands were made to the planters-debtors. As pointed out by petitioner, it found cut later that scme of the planters-borrowers h•ere either dead or their whereahouts c a n not be located. While the others, who survived the war, could not pay bec ause they were victims of the ravages of World ~ar II. Pet itioner's unpaid pre-w~r loans to the planters •ere written off in 1951 based on its belief t hat after the 1,-.;a r, the polanters-del."'~tcr ~ lvere no longer in a position to pay their full indebtedness on account o :=: the ·vJidcspread, <1.lmo:; L c on,plete ..

,

I

DECI:::>ImJ

CTA CASE NO. 599 - 9 - devastation c aused by the war to the nation's pr.oducti ve p o·.Ner.

Pe titioner clc< imed that because of this state of c<ffair then exist.ing, .it was con- fronted wi t h the choice of either retarding the reh2bilitQtion of its businr~s by insisting en complete payment of said lodns by the planters- debtors, or to writ e off the pre-war unp~id loans ~s bad debts.

PHtiti oner w~s, thPrefore, forced by circumstances tu implement the seco nd choice, i.e. to consider the pre-war lo2ns to planter~ as debts v.rhich has become bad in 19 51. So thu t i n the year 1951, petitioner 2nd some surviving planters entered into a milling c o n t ract wherein the indebtedness o f the pl2nters were reduced to the extent of t b.e difference Letween the full pre- war indebtedness and the amount granted as their w3.r damage claim, and tl 12t tlJis difference between the full pre-war accounts and their rHrtuced indebtert- !less is the unco l lected acccnnts 2nd claimed as bad debts.

The provision of the milli!lg contract (p. 6, Petition ~0 r Review, Po 6, CTA rec.) entered into ~y ~ nd between pAtitioners ~ nd rlantErs-bo rrowers .

contained the fol l owing stipulation i-1~3 herein quoted below:

DECISICN

CT~ CASE NO. 599 - 10 - 11 4 •

SETTLEMENTS OF PRE-vlAR ACCOUN'1'S

11lt is exp res3ly stipulated that: at the o utbreak of the war in December, 1941, the PLANTER was indebted to the CENTH/~L .

(petitioner) in the sum of ~ .

and it is hereby agreed that said indebted- ness of the PLANTER shall be reduced to the total pe r centage thereof that the war damage commission ;nay be used in the p3y- ment of th8 approved war damage claim.

Example:

If the total percent ~ge used by the war d~mage commission in paying war damage claims is 10% of the ~p rr o v0rt clAim, and the recogriz.e~d prf~-,....,ar indebt:cdness of the f•lrmt.ers is l-~1, ooo.no, thf:'ir ;, .:1id indebtednes:.:; shall be rcuuccd to 40% or P4oo.oo.

11 l t is however, expressly s tipulated that 4% of the entire sugar production of the plantation to be taken out of the rlanters 1 participation shal l be retained by the central to be applied to the liqui- dation of the reduced indetedness of the planters, as herein above provided, until such reduced indebtedness shall have been fully paid ...

Petitioner, in s upport of its contention that the indebtedness written off are allowable , cited Mertens as authority, stating that - 11 The diffPr- ence between the face amount of the ncte anct the amount received i n compromise is an a llowable bad debt deduction, provided the debtor has no assets out of which the entire amount may be collected. The deduction is allowable even though the tax- · payer executes releas~s from the obligation, p ro- vided that s uch releases are executed after bona fide determinuticn of worthlessness hy the

DECISION

CTA CASE NO. 599 - 11 - taxpayer."

(Jacob Mertens, Jr. Law of Federal Income Taxation, Vol. 51 2 Ed. p. 447.)

On the basis of the above ~rovisi0n of the milling -contract , petitioner had considered as deductible the difference between the full pre- war indebtedness and the war darqage payments to the planters- borrowers as bad debts in the amount of P20f3 1 409. 113.

On the o ther hand, rt;spondt::nt r.l<dms that the amount of P208,409 . 43 1 representjng pre- · wa~ accounts to planters written off in the taxable year 1951, should be disallowed as deductible bad debt.

Respondent asserts that petitioner failed to substantiate its claim by showing that the planters- debtors were incapable of paying their indebtedness.

Respondent nlleged that the planters had s uffici ent income and properties with · whic h to pay their obligations as this was sho"Vm b y the fact that plnntcrs-d'ebtors have e xecuted a new milling contract wi th the p~t i tione r, and the government had ~t res sed the fact t hat the debts were even partially settled. (p. 3, Resp's Memo ., p. 224 1 CTA rec.)

.• We find the c ontent ion of res ~ondent untenable. A partially s ettled debt wh i ch has b ~ en previously 40 3

DECISION

C~A CASE NO. 599 - 12 - charged off within a taxable year es deductibl e b ad debt can be cl~ imed as deduction in the year it was sustained ..

The reporting made by petitioner of income recoveries f r om bad debts in his subsequent income tax returns, i. e .. , in 1953 1 1954 and 1955 in the amounts of P35,16S .. oo, P 35, 168 .,0 0 and P33,186.oo, respec tively (p. 345, BIR rec.) wil l only show thnt it hils no intention to defrd url the State of its lawful revenue ..

The contention of respund~nt will not n~ga te the glaring facts clearly in petitioner's memo- randum dated June 7 1 1978 to the effec t that after the war, petitioner had exerted all efforts to col lect said loans and that written demands were made to the planters-borrowers for the payment thereofo According to petitioner, many of the planters-borrowers were e i ther dead or coula no longer be located.

Those plante{s that surv i ved the war ~ere in no position to meet t heir obli- gations on account generally of the almost complete des~ruction c£ the nation's productive power of w1d ch the plantArs are net pxcepted ., Peti t ioner 1 · further 1 ma ir. t;, j.ncc1 the. L : ~ he j n<Jbi.l i ty of the planters -borrowers to pay their obligations was caused by the war, and that despite written 4 0 ·~ ..

DECISI C;l~ - CTA CASE NO . §99 - 13 - demands against the borrowers, no payments were made by then .

Al l these circumstances brought the petition8r to decide c:tnd in fuct treated the loons us bad d8bts which it now clai~s to be ded uctible as of the yPar 1951, which this Court find;, meritorio us. It is a ccrrh.IOD kiiO'JIIlP.dqe that the devastating Aff8cts cf tile last I•Jcrld the clc>irn of petit ioner of its writting off tile bad debts for the loans of its pre- war planters in seid year.

As admitted by bo th parties , the debts were incurred before the 8dvent of the Second World War which had bP.en very destructive tc many. planters and their credi t ors al i ke and have ad- ve r-sely affected them both fillcmcialJ y.

These

condj tions cot1lo not have made possible the early settlement of their indebtedness. Indeed, no .

one was spare~ frcm th e r a v 2ges ~nd losses caused by thP. war.

ln a lesser dcgr8e of siLuation , wh8re a debt w2 s cons iclerPc3 ':Jc ·r t hle:.;:.;, it was t ::;ken judicial notice by t~. e Court th ;1t <J 'Dus iness depre ~s ion will require a less specific performance to prove that a given c3 Pb~ is v.IOrthless."

(See

Higginbothans

Baily Log3r, 8 BTA 566 , 579.)

It

.· 40r!'

DECI3ION -

CTA CASE NOe 599

- 14 - was therefore, correct for petitioner to, instead of waiting for an opportunity for these planters to pay their debts wh :i.ch was not then_possible, reduce the planter's indebtedness by cnterina i nto a new milling contract, and the reduced indebtedness of the pl ~ nte rs written off by peti- tioner as bad debts.

And it could not be good managemr-:>nt to keep the unpaid ilCcotm 1.·i nlive, which are !:;ubjt·ct tu cLiim:; fu1· Lhuir p .1yrncnt frurit yec1r· to year, which indeed call s for ~o r e expenditures. This Court had ruled, in several cases, that it is foolish to spend good money to recover the bad accounts.

And, moreover, in order thdt a tax- payer 1nay be entitled to deuucticns , the law. ('lees .

not reouire him to be an incorrigibl e optimist. (Goodrich International Rubber co. vs. Collector of Internal Revenue, CTA Case No. 4~8, June B, 1963;

G.R~ No. L-22265 1 Dec. 22 1 1967 1 2J.

~CRA, modified ' in G.R. No. L-22 6 5 Dec. 22 , 1967, 21 SCRA 1336; El Porvenir Rubber Products, Jnce vs. Vera, CTA Cases ~ ! 0 s. 1702 and 1705 1 J uly 26, 19o9 .) Bad debts writt§n off in 1953 - rl88 1 950.00 Petit:ior.Pr clc:.imed this arc,ot.mc a ~ b<1d dcJ; ts .

in it~ ir.corne tax return i~ 1953. This item was disallowed by re!;r.)ondl'I"1t as shown i n his rr.emorandum dated June 23, 1958 addressed to the Regional

40 G

DECI SIOJ'J -

CTA CASE NO. 599 - 15 - Director, San Fernando, Pampanya. (?p. 345-347, ~IR rec.)

Respondent, in disallowing the claim for aforesaid bad rlebt deduction, asserted that the disallowed pre-war accounts sho~ld have been written off in the year petitioner st3rted its mill!ng operations.

Respondent also argued that pEtitioner started fl1 i 11 i n q ope r ctl ion s in 1. h 1: y etJ r 1 91 7 ,:; n d it h i1 c1 taY..en s ix y ea r s to deterrnin(~ whett:er:- Lht~ debts are collectible or not.

Respondent 2lso stated .

\ that, in a subs~q~ent reinvestigation made, pe- titioner had reported as miscellaneous income partial recoveries of these pre-war accounts in the years 1953-55.

(p.

345~ BIR rec.)

Respondent, therefore, insisted that the s2id accounts should have been written off at the beginning of their operations, i.e., i~nediately after t he war. Bad .debts, in order to be deductible, should be actually ascertained to he worthless in a particular year and charged off in th~t taxable ye ~ r in its bocl<:s of nccounts, and, tb .J.t. before the debt may be charged off, and consequently deduct said debt, it must be ascertnined and demonstrated in a reasonabl e degree of certainty of thP uncollectibility of the debt.

407

DEJelSION -

CTA CASE NO. 599 - 16 - Contrarily, peti t ioner, in a letter dated December 20 1 1955, had clP-arly shmvn the validity of i ts claim for the allo,4ance of bad debts for the tax~ble year 1953.

Petitioner listed do~n the breakdown of thi s bad debts items (pp. 299-30 2, BIR rec.) as follows:

(a) Accounts less than F50 .. 00 not circulari:r.ed

(b) Account circul <- ,rL~Pd \•rith lett-ers rr-:'turncd rn<trkl ~ d (C:lecc<J!>C!d) or whcre<.~b('ut.: ; unknown

(c) Accounts circularized with letters received by addre2see but no reply received by petitioner

(d) Accounts circularized with letters received and a cJ<-nmvledged by ::~ddres.see but claiming no i~debtedness

(e) Accounts circuli=1rized 1.Vf10Se letters on which return receipt w2s no~ received an~ have nu knowledge if a<..klressE:e received thE::

letter T o t a 1 ? 1,.325 .. 42 70,785.04 2,837.40 Pl80 1 277.18 Plus written off 42% of indebtedness of · planters "''hO signed rnill ing con~ract during 1952-1953 8,672, 82 F-'188,950.04 l\ccordinrJ to peti t i cner, the i +:ems (a) N.

(b) represent v::ric ,ls· individual accounts 'A'h.i.ch were quite small, the expenses incurred for the collection of these i terns ·,vould be ')ro~>sly un- proportionate to the amounts to be collectedo

DECISION -

CTA CASE NO. 599 - 17 - Items (c) 1

(d) and (e) reoresent accounts of debtors whose whereabout are unknown and failed to receive letters of demand.

Some of the

debtors refused to pay 3 claiming no indevtedness and some alleging the reasons that they (debtors- planters) do not have any account of fertilizers as no fertilizers were given to them by petitioner and/or thdt sujd fertili~er were eithe r taken back by petitioner before the war and which were later confiscated by the Japanese.

Petitioner has ascertained that the inabilitv of the planters-borrowers to pay their obligations consisting of pre-war loans was due to the damages sustained by them during t he last war and that despite petitioner's written demands, no payment has been made by them.

Petitioner, therefore, c oncludes that the deductions for bad debt is justified.

This ·court finds the contention of res ~ ondent untenable.

In the first plac e, res ponoe nt 1 s exa- miner admitted in the reinvestigation renort that efforts were indeed exerted by petitioner to ascertain the worthlessness of the debt as shown convincingly in a let~er dated December 20, 1955 addressed to res pondent Collector (now Commissioner) of Internal Revenue.

(pp . 347, 343.

BI R r ec .)

Respondent can not now Le allowed to claim that petiticner . 4 0 !_ 1

I

DECISICN

CTA CASE NO. 599 - 18 - had failed in its efforts to present evidence sho~ing that the planters-borrowers were indeed inc apable of meeting thei r obligations • . ~ere,

I

it has been shown that the planter s loan accounts were actually and duly ascertained in the year they were claimed as deductible, i . e., in 1951 and 1953 as bad and th~t these deductions were made in utmost good faith.

Tn the light of the High Court deci s i on, it had ruled thus "xxx Our statute pArmits the deduction of debts actually ascertained tn be worthless within the taxable year; obviously, to prevent arbitrary action by the taxpayer, to unduly avoid tax liability .

The requirement of ascertainment of worthlessnAss requires proof of two facts:

(1) that the taxpayer did in fact ascertain the debt to be worthless, in the year for which the deduction is sought; anrl (2) that i n doino sc, he acted in good faith.

(Collector of

Internal Revenue vs. Goodrich International Rubber Co., 21 SCRA, 1336 1 1341.) As to the claim of re spondent that ~he partial settlement or collection of d e bts by thP debtors- planters are evidence against or deterrents to thP deduction of bad deb ts in t he income tax returns of petiticner finds no support in law. This Court held that the subsequent collection of a bad debt oreviously charged off in a prior year does not render the deduction unallowablea

41. 0

DECISICl~

CTA c::...sL i~O. 599 - 19 - Respondent'~ ~ain a rgument in di::;allowing the d educti on of th.:; alleged bad debts is that petiti 2ner was abl e to collect Home of the debts or parts the::rC:of in s ubscc1uent ~rears, whicl-1 fJrovPd that the debts were not uncollectible in the years they were sc d ecl2red and charged off by peti~icPer.

Tha t a debt previo usly found to be worthl eGs and char9ed off in a prior year , was s~bnequ ently collected do e .s not rer.dPr the dr><:Juc"lion IJ r, - unallowuble or ill8~ :1. (Philiprdne Trust CrJmJ '·"'1ny v s . Coll Pctor of Internal Hevf ~ nu P 1 C''i.'t\ CcJ[..; f;

~~ 0 • 16 7, J anu i.J ry 30 1 1961.)

The taxpayer need n o t wait uncertain future eve nts, nor wait until some turn of d1e wheel of fortune may bring the debtors affluence 0

(Jacob

Mertew:; Jr., Lav1 .2.f Federal l 0 c o me T a x -=1. t i o ..:'2 1 Vo 1 • 5 1 Ch ·::l p .. 3 0 1 p • l 2 3 • ) It is the re .o~~ , onc.len t 1 s opinion that the pre-war accounts of t~e deb tors-p 1 a nters~cu1d be written off in the year the C' .lrc.:.,any started their milling opera tions in 1947 or imrrcd iately after the war.

This claim cannot be H u ~tainPd .

The · charging of f of a partial ly wcrlhless debt ' need not ue pr.ysic::tl ly !ila·-, e .i r. the :'cAr it bec0mes ~o~thlPS~ o The word ~~barged-o f f within poi !'lting to Lh e ur:c;:; llec U t i1 i tv of the d er.,ts rather t.h <• n j ust the r:oc;uiremellt of -'" nl p hy s i cA l ( .

.

.

I

u · c: • . , ; ·· · -, ~· . · ~ r' · , . 41 1

DECISTUr

CTA CASE NO. 599 Ire, Law of Federal Income Taxation, Vol. 5, Chapter 30, Pe 36.)

Depreciation allowance for the years 1951, the resoective an P62,132.603, 174,959, 1 and 731,659.42 L £ ‘ gPo7« é 3.in amounts of Petitioner claims that the expenses incurred to rehalLilitate its pre-wer assets are capital expenditures, Accordingly, to petitioner, sten- Gard principles of acccunting sanction the depre- ciation allowances on the said capital expenditures. (Pp, 295-296, BIR rec.) Fetitioner further claims that these rehlbilitation expenses can re allocated as depreciation allowances to par= ticul.er croup of assets, wichout vroof that the said expenses were in fact used for that respec tive sreup cf assets to which the depreciation allowances were alloceted. (en. 295-296, BIR rec.) Petiticner arqucs that te recuire petitioner te prove that the atlocatec Dy PeENses, which were in fact agplicd or a group cf assets, would be requiring it to perform the most diificilt, if not the most impossiile tiing. In support of peti- tienerts contention, Ait cited the fc llowing authority:-:

"It is not necessary cf ccurse to allocate the expenditures in minutiae ._ to each individual piece of property where 412 DECISIC!. -

CTA ©

1975, Memo.

rehabi Voy oa ey nag DAGT, BO. BO !

NO

be { items releies to séeverel depreciating properties, it is suirficient if the expenditures are Giviced by reasoneble ANportionment process on a percentage basis among the severel properties benefited." (Jacob Mertens, Law of Féderal Income Taxation, Vol. 4, £. 60.)

Responcent, in a memcerandcum Gated June ll, had listed down, in detail (rc. 4, Resp. » PPe 225-226, CTA rec.) the following dlitecion expenses incurred by petiticner on dts ascets, to wit:

(Pp.

distr

Entry

werei General expenses = varicus P653,037.57 Cost of sale cf sugar 60% of the total cust of sale

Noe

s as estimated by the manager 596,195.,t6

3. Generel expenses = various 1,320.27 4, General expenses - Caiage 3, 986,38

5. General exvenses ~ club me:s 449,71 §. General erynenses = hospital 6,706.46 7 General expenses - in maintenance in rrecess 2, B73 027 Toa t al Fi, 316,669.47 The above enount of rehabilitation expenses 4—5, Resp. Memo, pp. 22542246, CTA rec.) were jbuted to the following assgts, as per Jcurnal No. 299, on Septerber 20, 1946.

1. Land imsorcvemenus 4,202.43 2 Builéeing eculpmenats 268, 786,86

2. Macnineries equipment 712,678,790 4, Railresd ecuipment 241,829,60

5. Agricultural Machineries 290,920.62

6. Furniture & Fixtures 3,932,681

7. sutotruck travelers 38,723.23 Total £1,316,669.47 On this score, yesovoncert as. ros Umat.

n petitioner started milling after the DE:Cl.SlON CTA CASE NO. 599 - 22 - · world War II, or in 1947.

Respondent observed that pet.i tioner had capitalized the general expenses by treating thP. same as rehabilitation _expenses and apportioning these expenses to various assets accounts, and depreciated these rehabilitation expPnses in accordance with a ratP. of deoreciation for each item.

Respondent attacked this nrocedure, which was adooted by petitioner, a nd maintained, after reinvestigation, that these genera l or reha- bilitation expenses are not capital expenditu~es subject to depreciation allowances as these ex- penses did not increase the value of petitioner's assets.

Respondent concludes therPfore that the dPpreciation allowances are imp roper and cannot be depreci a ted .

We find the stand taken by petitioner un- tenable.

Jn the first p lace, thPre is no law or jurisprudence which suppo r ts the legality of the manner in .which petitioner tr ~ ated, f o r depreciation allowances purvoses, the aforesaid general or rehabilit~Lion expenses.

Although it may be said that the rehabilitation expenses partakes of the nature of capital expenditures, it cannot be depreciable unless added to the cost and inrreasinq thereby the value of the assets of petitio ner . 41 ;~

DECISION -

CTA ChE NO. 599 Rxpenditures may constitute capital investments, but that does not necessarily , mean that all capital investment must he included in the capital sum recoverable by depreciation, To be so included, they must either enter into the cost of wasting or depreciating property cr must be rea- sonably attributable to such property (Jacob Mertens, Jr., Law of Fedcoral Income Taxation, Vol, 4, Chap, 23, p. 102, The rehabilitation expenses of petitioner not b- being cepital expenditures which increased tne value cf the company's properties or constitute improvement of the as.ets to which they are . allocated, they can not be allowed es depreciation allowances, We will now consider the war Gamage losses. in the sum of F660,150.51] claimed as ceduction In its 1951 income tax return, petitioner claimed as deduction the «mount cf p660,150.91 as war Ganage losses, Resceondent asserted that the lessees are Geductibl? only during the taxable years in which these lesses were sustained, Res- poncent cited, in sunppert of his position, the ruling of the Secretery of Justice in Opinicn No, 162, series of L252 dated August 23, 1952 and General Circular Mo, Val39. Responvent further urge us that the claim of petiticner for deduction for its war losses in 1951 cannot he allowed since pom — ane

DECISION -

CTA CASE NO. 599 - 24 - t hese losses were sustained during the Japanese occupation (citi ng the case cf Hi lado vs. Coll . o f Int . Rev. , G. R. No. · L- 9408g Oct. 31~ 1956, 100 Phil. 288) and not i n 1951.

This Court finds the respondent•s claim of disallowanc e of the war damage losses in accor dance with law.

This issue has been s q uarely settled t hus 11 X x x.

The q Uf: [;;tion in r- ~ : g•1rd t o the deductibility of war losses h a~ already been settled by the Supreme Court in two . cases.

"It has been he l d that a loss s ustained in 1 945 as a result of military operations by the United States fer the liberation o f thP Philippines was not compensated fo r by i nsur ance or othArwi sR, within the mean i nn of Sec tion 30(d) of the Revenue Code, and, thPrefore s uch loss is deductible o~ly in the year s ustained . ;x x x.

(Yulo vs.

Aran e t a , CTA Case No. 84 1 July 8, 1958: citinq Cu Unjieng v . B.T.A., GR No . L-6296 . Sen tember 29 , 1956 ; Hilado v. Col l . of Int. Rev., 100 Ph i l o 288 , ££• c i t.) See also Conso l idated Hines , Inc. vs. Commi s sioner, _CTA Case Nos o 56 5 and 578, May 6, 1961.) Respondenf 1 s dec ision disallowing'th ~ war damage losses claimed by petitioner is, there forP 1 sustained ..

~es on the salP of its assets in the amount s:>.L.E_2 0, 047 o80 in 1951. Respondent disallowed this item of ~20 1 047 . 80 allegedly incurred by petitioner on the sale of its assets in 1951 on the ground t hAt s a i d a ~ se ts at the time of th e sale had already been f ully

41 G

DECISIC. - CTA CASE NO. 599 depreciated, . Anent this issue, petitioner maintains thet normal depreciation cannot be taken acainst the pwner of the property who had absvlutely no ccntrol over it. Petitioner further claims that no depre- cietion srould be taken during a forced stoppage in operations occasioned by the war. (pp. 178- 175, BIR rece) The contention of petlitdoner is not tencble. In the first plece, petitioner failed to subs- tantiate this claim of loss in the sale of its assets, As correctly meintained by resi ondent, since the as.ets in guestion were depreciated whcn the same was @lready in use ane which depreciation occurred continuously even when idle or tempora- rily not used, and after heving been fully Cepre- ciated in value, a sale, tnereafter made of the acsets will not bring about a Joss resulting from the sale subject cf clainu for allowance. The Claim for losses in the sale of the assets in the sun of £20,047,89 cannot be susteined.

Losses on the sale of assets fully depreciated in the sum of £1,476,0° {cr 1952, again, petiticrer claims that normal depre- ciation cannot be taken egainst its assets, the saine having been in the rossessicn of the Japonece AG?

DECISICN —

CTA CASH NO. 599 Ferees for whien it had no centrel. ie have already decided this in the imueciately nre- ceding issue cf the deductibility of the loss on the sele of petitioner's asset in rhe sum ef P20,047.80, Moreover, where the calvage valve plus ite derreciation of the asset up to the time of the sale exceeds the nrenerties' selling price, there will be no loss, (Jacob Mertens, Jr.e, Law of Federal Income Taxation, Vol. 5, Chap. 28, p. 51.) we therefore find ressendent's act of dis- allewing the loss in the sale of depreciated -assets in the aincunt of 1:1,476.99 in 1952 to be correct.

Undeclared séle of Cepreciated assets in the sum of F3,1€6,08 for the year 1953.6 Responcent acvain econ ends, just as on the two (2) preceding disses, trat in tic scale of depreciated as vets, loss As net recernized since the investment had been fully reecverec by way of depreciation, Respondent mainteins, further, that gain may insteed be realized as a4 result of the scale of the Jeorecisted asvets.

For the came oround cf the Alsallewance cf the losses on tre immedictely preceding issues, i.e, concerning the disallowance by us of the losse 19] ar = ee - 4 arising from the ssle cf che assets Fuily

DECISION -

CTA CASE NO. 599 ee ee we depreciated,/eguaily uphold respondent's determina- tionthat the undeclared sale of depreciated assets in the amount of P3,166,98 is not deductible and, hence, includible as income subject to tax for 1953, Accordingly, petitioner's income tax lia- bility for the two years 1951 and 1953 is recom puted as follows:

i2sl1 Net loss per return (P577,922.,06)

Ada:

War Jamage Losses P660,150.91 Depreciation 139,379.57 Loss on sale of assets 20,947.40.

Total F819,577.88

Deduct:

Depreciation on

new assets acquired from 1946 to 1948 £56,867.82 Error in addition 7&.92 56,946.74 762,631.14 Net inceme as per investioetion P204,709.08 Tax due thereon: ‘ 4 @£ B204,709 OU e P51,177.27 x 16% =P8,186,36€ 3/4 of 190,000.00 = P75,960.00 x 20% =15,0C00,00 ‘ P204,709,08 — P126,177.27 = £78,531,81 x 28% ‘ =21,988.90 Pi5,177.,00 2233 Net loss ver return (F38,107.00)

Add:

Depreciation P1380 pad eelZ Undeclared sale of Gepreciated assets 3,186,08 133g 701.29 Total 295,594.20 Deduct: , inventery adjustment P171, 746,82 Depreciation on assets acquired frem 1946 to 1948 AT, 691050 Efror in additicn 1,164.20 220,604,50 Net loss (2125, 010, 32) 419

DECISION =

CTA CACE NO, 599 ~- 28 Petitioner is liable for 1952 income tax in the amount of P69,502.00 as determined previously by respondent Commissioner of Internal Revenue.

WHEREFORE, the decision of respondent appealed from is hereby modified, Petitioner is, therefore, ordered to pay the amounts of P45,177.00 and P69,502.00 or a total cf #114,679.00 as deficiency income taxes for the years 1951 and°1952 respectively, plus the surcharge and interest which have accruea thereon pursuant to Section 5l1(e) of the Tax ‘Code as amended, With costs,

Lo |

CON? TALTIY/C, RO&LUII (associate Judge

WE CONCUR:

AMANTE FALUDOR

Judge

Fresidine

REYES

420