Felix L·~Ontenegro, Inc., et al. vs. Cohhissioner of I Nternal Revenue

DECISION -

CTA CASE No . 695 2 ground that the requirements of Sec . 7 of the Internal Revenue Hanual were not compli ed vlith in the making of the questioned assessment . · In a letter of respond- e.nt dated April 16, 1959 and received by petitioner on April 27, 1959, the former denied the protest . Not satisfied with the aforesaid denial , peti- tioner ' s counsel wrote a lette~dated April 30, 1959 and received by respondent on the same date, request- ing again a reconsideration for the reasons that : 11 (a) the investigation and verification procedures taken by the internal revenue officers of the 1953 income tax return of the taxpayer were in gross viola- tio.n of the pertinent law, and the rules and regula- tions issued by the Commissioner (then Collector) of Internal Revenue and approved by the Secretary of Fi- nance; (b) the items disallowed by the investigating examiner are deductible under section 30, and allied provisions , of the National Internal Revenue Code; and (.c) the assessment of alleged 1953 deficiency in- come ·tax against our client is barred by prescription . II This requ.est was denied by respondent cbn his letter dated August 26 , 1959 aad received by .petitioner on September 7, 1959.

On September 8, 1959, petitioner interposed this appeal to this Court . The issues to be resolved are as follows : fl • ..

(1) ( 2) (3) 3 Whether or not this Court has jurisdiction to entertain the instant appeal;

\'ihether or not the right of the respondent to assess the tax in this case has already pre~cribed ;

1i hether or not the assessment by respondent is null and void because of defects in pro- cedure; and (4) Whether or not the disallovJance of t he items claimed by peti- tioner from its 1953- income tax return is justified.

The issue of juri.sdiction \vas raised by respond:.. ent only in his memorandum submitted to this Court . Sin,ce this issue inay be raised at any stage of the proceeding, we must therefore resolve it . It should be noted that th.e assessment dated October 24-, 1958 was received by petitioner on October 28 , 1958.

The aforesaid assessment was protested by . it in a letter dated November 4, 1958. This protest was denied by respondent in his letter. dated ·April 16, 1959 and received by petitioner on April 27 , 1959. 'l 1his letter of April 16 , 1959 is the decision of the respondent that is appealable to this court because it is the decision on a . disputed assessment .

(Com-

missioner of Internal Revenue vs Leonardo s. Villa and The Court of Tax Appeals , G. R. No. 1-23988 , Jan- uary 2, 1968. )

The receipt , t herefore, of the said •

4 letter by petitioner on April 27, 1959, marked the start of the statutory thirty (30) day ~eriod pro- vided in Section 11 of Republic Act No. 1125. In a letter of petitioner dated April 30 , 1959 and received by respondent on the same date , the form- er requested a reconsideration of the decision of the latter requiring petitioner to pay the sum of i2,179. 00 as deficiency income tax for the year 1953.

From

April 27 , 1959 to April 30, 1959, only three (3) days haM·: been consumed by petitioner.

The statutory period resumed its flight on September 7, 1959 when petitioner received the denial of respondent dated August 26, 1969.

This petition was filed on September 8, 1959. From September 7, 1959 to the date of the filing of the appeal on September 8, 1959, petitioner used another one (1) day .

Thus only four days of the thirty-day period for appeal had been consumed by pe- titioner when d.t interposed the present appeal which is necessarily on time .

We find no merit in respondent ' s contention that the letter of petitioner dated ipril 30 , 1959, was pro forma and did not interrupt the thirty- day period to appeal .

A reading of petitioner ' s letter dated April 30, 1959, discloses that the second request for reconsideration v1as based on the additional grounds of prescription and deductibility of the disallowed ..

5 items which had not been raised before.. The afore- said reconsideration v.Jas obviously not pro foriDc'l.. viith respect to the issue of prescription .of' the assessment, the law applicable reads as follows: 11Sec. 331.- Period of limitation uuon assessment and collection.- Except as provided in the succeeding section, internal-revenue taxes ~~1~ be assessed within five_xears Rlter the return was filed, and no proceeding in court -vli tb.- out assessment for the collsction of such taxes shall be begun after the ex- piration of such period.

For the pur- poses of this section a return filed before the last day prescribed by lavl for filing thereof shall be considered as filed on such last day; Provided, That this limitation shall not apply ro-cases already investigated prior to the approv- al of this Code.u

(National Internal

Revenue Code .

Underlining supplied.)

.It is not disputed that the income tax return of petitioner for the fiscal year ending Jur;,e 30, 1953 was filed by it on Octooer 28, 1953 and the deficien- cy assessment dated October 24, 1958 vJas received by petitioner on October 28, 1958, or exactly five

(5) years from the date of filing the return. vJe use · the date of receipt because there is no evidence as to the date of mailing.

Clearly, the assessment had not prescrib·::;d when it was made . \!J'i th regards to the third issue, petitioner con- tends that. the assessment is illegal because it was issued by a provincial revenue officer who had no authority to rnake and issue the same. ~'I e find this contention to be devoid of merit.

It should be noted ..

6 that the assessment was made and issued by a provin- cial revenue officer on behalf of the Regional Direct- or.

A provincial revenue officer is authorized by the Regional Directors to sign t heir .names in those cases where an assessment is about to prescribe.

This

is a standard procedure adopted in the Bureau of In- ternal Revenue .

An assessment thus made is, therefore, as valid. as if it W.e'na personally made by either a

Regional Director or the Commissioner of Internal

Revenue himself .

Petitioner contends further that the assessment is illegal because the procedure set forth in the In- ternal Revenu·e Nanual on 1.- udit and Investigation was not followed by respondent in arriving at the afore- said assessment .

1~le find this contention equally un- . meritorious .

The Internal Revenue Hanual on Audit and

Investigation is a set of rules and regulations for the performance of auditing and investigative func - tions , and such being the case, it is only for the in- ternal administration of t he office , a guide to the employees or subordinate officers for the efficient operat~on of the office .

A violation thereof may have repercussions on the subordinate officers but will not affect the legality of the assessment . They are not jurisdictional matters and deviations from the afore- said procedure do not render an assessment invalid or illegal .

7 With respect to the last issue, we shall first take up the disallowed salaries of some officers and employees . of petitioner corporation. Respondent reduced the salar.ies of the manager of lumber concession, sugar farm superintendent and clerk in the lumber yard, in the total amount of ¥4-, 600 . 00 because this sum is allegedly profits of the corporation distributed in the gu.ise of salaries .

This contention is premised on the allegations that Baid officers are also stockholders of t he corpora- tion and t~2t t heir sala!ies are excessive compared to those of officers of other corporations holding similar positions and doing the same volume of business. The general rule is tha t the employer is given a wide l atitude of discretion in t he amount of salaries paid to t he employees .

A corporation has the right to fix the compensation of its employees (Ledesma vs Col- lector of Internal Revenue , 4-2 Phil. 912) . A breakdown of the reduction is perl~ps enough to show tha t the reduction is without f oundation.

Respondent reduced the salary of the sugar farm manager from ¥19,600. 00 to ~18 , ooo . oo , and that of a clerk in the lumber yard who works seven days a week , including Sundays , from ~3 , 600 . 00 to i 3,00o. oo, because they are allegedly ex- cessive compared to salaries of officers or employees of other corporations similarly situated and thus the excess is a disguised distribution of profit .

Respond-

ent reduced the salary of petitioner ' s manager of lum- ber concession from i~9 , 600 . 00 to ~7 , 200 . 00 , represent- ing a cut of ~2 , 4-0o . oo , for the same reasQn.

(I

•

8 There is no comparative study of the profits of the two enterprises in relation to other concerns similarly situated.

Neither is t here any comparative study of the peculiar situation of the two enterprises in relation to other concerns , nor .is there a comparison of the nature and volume of the work performed by the officers in- volved .

Since no two business enterprises are exactly in the same situation, negl.igible differences in sala- ries cannot reasonably show that the ··salary is excessive or that profits are cr~nneled to the stockholders thru salaries .

Respondent ' s reduct.ion would rather appear as arbitrary spec.ially in the light of' the fact t hat peti- tioner reported a net income of i:70,653 . 29 and i lt, 6oo. oo is , in a manner of speaking, but a mere drop in the bucket with respect to profits~ Petitioner clai~s that the value of medicines in the total sum of §i.tlt, 278. llt is deductible as loss on the ground that the aforesaid medicines were no longer fit for sale as the dates of t heir efficacy have expired (~ pp . 2lt- 26, t . s . n. , Hay 13 , 1963) • . Aside from self- serving testimonial evidence, no other evidence was pre- sented to substantiate this claim of petitioner • • There is not even a list of th~ medicines, their value, and their expiry dates .

Under the circumstance, we are con- strained to . sustain the disallowance of this alleged loss. Respondent disallowed the deduction of the amount of 1<1 , 000 . 00 \vhich petitioner contributed for the candi- dacy of Congressman Lorenzo Teves (~ PPo 31-33, t.s .n., 1•1ay 13, 1963) .

Amounts expended for political campaign ...

DECISION -

CTA CASE

~o . 695 9 purposes or payments to campaign funds are not deduct- ible eit·her as business expenses or as contribution (Nertens, Law of Federal Income Taxation, 1960 Ed. , Vol. 4, Chap . 25, pp . 384-388) .

Lastly, t he miscellaneous expenses in the total amount of ~1 , 018 . 58 , claimed by petitioner as deduc- tion , were properly disallowed by respondent . It appears that t he aforesaid miscellaneous expenses are not· sup- _ ported by receipts or by any other documentary evidence . The mere testimony of petitioner ' s Vice Presi~ent is not enough to warrant t heii deduction. Under the foregoing premises , p e tition~r ' s tax liability is ~1 , 259 . 00 , computed as follows: Net income per return •••••••••• • •••••••

Add:

Unallowable deductions - Loss in the reduction of merchandise inventory to market •••••••••••••••• i:4, 278.14 Contribution to the candi- dacy of Congressman Lo- renzo Teves ••• • •• •• •• l,ooo. oo Hiscellaneous expenses classified personal & _ no supporting receipts .• 1 , 018 . 58 Net income per investigation •• ••• ••. •.• Less : Personal & additional exemptions Net income subject to tax ••••••••••••• Tax due •••••••••.•••••.••••••••••••••• Less: Tax already assessed •••••••••••• Balance still due •••••••• • •••••••••••• ~·JHEREFO~E , the dec.ision appealed from is hereby modified .

Petitioner is hereby ordered to pay re- spondent the amount of i'l,259. 00 as deficiency income tax for the fiscal year ending June 30, 1953. · If the deficiency tax is not pa~d in full within thirty (30)

I

/<

DECISION -

CTA :~ASE No. 695 10 days from the date t his decision becomes final and execut ory, petitioner shall pay a surcharge of five per cent (5%) of the unpaid amount plus interest at the rate of one per cent (1%) a month, computed from the date this decision becomes final until paid , provided that the max.imum amount that may be collected as interest shall not exceed t he amount corresponding to a period of three (3) years .

itiith costs against petitioner.

S 0 ORD:&"'iED • Quezon City, April 30, 1969.

HONJ-1.N ~1 . ffi1!ALI

Presiding

Judge

L 1 ~·

RAt'-10N 1 .

).VAJ: CE£1 1.

Associate Judge

rZ:_ ,;.._&_, @Zr ~ISL.AO R. ~ALVAREZ

Associate Judge

I