CTA Case No. 756 (Decision)

~EPUBLJC; OF THE PHILIPPINl!<ll COURT OF TAX APP:E~LI 'QUEZON CITY P.AZ EREZ GA11CIA~ C. T. A.� CASE No . 756 Petitioner, - versus - CONNISSIONER OF INTERNAL REVENUE, Respondent . x- - - - - - - - - - -x DECISION This is an appeal from th.3 decision of respondent holding pe titioner liable for the sums of ~21,882 . 00 and i2 , 7ll . OO as deficiency income tax for 1951 and 1952, re~pectively . Petitioner is a real property ovmer of uezon prov- is ince and engaged in business as copra dealer . After the death of her first husband , Abelardo Fajardo, with whom she had two children , she contracted , on April~lo , 1947 , a second marriage w.i th Tomas Garcia . Due to the latter ' s repeated cot1jugal infidelities and abandonment of the conju; al dwelling, petitioner filed a petition for legal separation which vJas granted by the Court of First Instance of ' uezon on June 1 , 1955, on the ground that Tomas Garcia 11led a life of extravagance and vice devoted to 'vJine , women and song and gambling ' 11 � (i3ee E.xhs . H to E- 4 , pp . 8o- 8l.t- , CTA rec . ) Ii'or the years 1951 and 1952 , p etitioner filed her income tax returns on 1'1arch 31 , 1952 and Earch 1 , 1953 ,

DECISION - . CTA CASE No . 756 ~ ' 2 reporting therein taxable net incomes in the sums of f:32 , 120. 9C and !18 , 568 . 54 , respectively � .After in- vestigation and examina tion of said income tax r e- turns , respondent , in a letter dated January 2~ , 1958, \ assessed against petitioner the sums of ~21 , 8 82 . 00 and !t2,7ll . OO as defici ency income tax for 1951 and 1952 , respectively , computed and itemized as follows: 42- J-682- 51 Net income per return ��������� it-36 , 320 . 90 Add : l . Undeclared salary of hus- 6,ooo .oo band , Tomas Gar cia �.���� 2 . Bad debts writ t en off (not declared as income before) .........�..... 2 , 32l o00 3 . Under�declared income on real estate sales ������� 30 , 860 . 36 4. Interest income received by the children due from deposits vli th the Phil . ~~at . Bank , Lucena Branch ......�.......... 139. 27 Total net income per inves- tigation ������ � ..��������� � � i:7 5' 641 . 53 Less Exemptions ~ Personal - ~3 , 000 . 00 Additional - 1 , 200 . 00 4 , 200 . 00 Taxable net income ������� �� .�� if71 ' 41+1 . 53 Income tax due thereon �������� ~23 , 483 .. 00 Less: Amount already assessed � �1L8+,, 85~~.- 0oo0 Deficiency income tax �������� 50~~ surcharge �����.������������ 7 , 2s4 . oo TOT .L Al~OUNT STILL DUE �������� iz21, 8 2 . 00 Lf-2-:-A- 474- 52 Net income per return ��������� �12 , 768 . 54 Add: 1 . undeclared salary of hus- band, Tomas Garcia ������ 6, ooo . oo

DECISION - CT.L- C . SE NO o 756 3 2. \~ages of coc onu t pl anters � ~1 , 779 . 63 3. Inter est income received by chil dren from de- posits with t he hil . Nat . Bank, Lucena Branch . . . . . . . . . . . . . . . . . . . 107 . 79 Total net income per inves - tiga t i on ������� . �.����.����� 120, 655 . 96 Less: Exemptions Personal - F3 , 000. 00 -dditional 1 , 200 . 00 4-,200 . 00 Net income subject to tax ����� �16 ,455 -96 Income tax due thereon �������� f~ 2, 769 . 00 Less : Amount al ready assessed ~62 . 00 Deficiency t ax due ������������ � 1 , o?. oo 50% Surcharge ���������������� 904. oo TOTAL A.HOUNT STILL DUE ������� t- 2,'Zl l . OO (Exh . 10 , pp . 34- 35, BIR rec . ; Exhs . 7 & 9, pp . 2~ & 26 , BIR rec . ) Dissatisfied with the above ass essment , petition- er , in a letter dated February 24, 1958 , contested the same and asked for its withdrawal . In a letter dated July 31 , 1958, resp ondent informed petitioner that a reinvestigation would be made provided she executed a waiver of the statute of limitations . Failing to get any reply from petitioner , respondent, on February 2, 1960, wrote a l etter denying pe titioner's protest and reiterated his previous demand for the payment of the def iciency income tax . On February 15, 1960 , petition- er wrote another letter t o respondent reiterating her prote ~ t contained in her l etter of February 24 , 1958, which protest wa s again de nied by responde nt in a let- ter dated February 24 , 1960. From t his denial, peti- tioner ins tituted , on March 9, 1960, the instant pet i -

DECISION - CTA CASE No . 756 tion for review. The issues involved in this case are summarized as follows: 1 . 1methe~ or not the right of the Government to assess the deficiency in- come tax for 1951 has already pre- scribed; and 2. ihether or not the deficiency in- come tax assessment is in accordance with law. Petitioner contends that the right of respondent to assess the deficiency income tax for the yaar 1951 has already prescribed under Section 331 of the Revenue Code , inasmuch as from March 31, 1952, the date her in- come tax return for said year was filed , to January 2~, 1958 , when the deficiency income tax assessment was issued, more than five years had elapsed . On the other hand, respondent avers that since petitioner ' s income tax return for 1951 vJas fraudulent, he has ten years from the discovery of the fraud on i::Iarch 30 , 1955 with- in which to assess said tax, pursuant to Section 332(a)' of the ~evenue Code. Hespondent cited the following circumstances al- 1eged1y constituting fraud in the filing of petitioner ' s income tax return for 1951 - (a) The petitioner and her husband instaad of filing a consolidated return for the taxable year 1951 as husband and wife , filed separate returns and each

DECISION - CTA CASE No . 756 5 claimed a personal exemption of i-3 , 000 . 00 each, or a total of ~6 , 000 . 00 ; (b) etitioner charged off the amount of ~2 , 32l o 00 as alleged uncollec ted bad debts which , she admitted during the trial , as unsupported by any evidence, hence , ficti- tious�' and ) ( c) The acquisition cost of the copra l and converted into a subdivision was over- stated resulting in the understatement of net gain . (Respondent ' s1'-1emorandum , p . 132, CT.A rec . ) Petitioner claims that she did not file a consoli- . dated return for the year 1951 because during that year she and her husband 11had virtually been separated de facto 11 and she was not in a position to determine his income and other activities . ( ee ...espondent ' s Nemo- randum, p . 96 , CTA rec . ) The filing by petitioner of a separate income tax return is sought to be justified under Section 45(d) of the Revenue Code which provides - ( d) Husband and wife . - In the case of married persons , whether ci t izens , resident or nonresident aliens, only one consolidated return for the taxable year shall be filed by either spouse to cover the income of both spouses; but wher e it is impracticable for the spouses to file one consol idated return, each spouse may file his separate return of income , but the returns so filed shall be consolidated for the purpose of the tax pre- scrib�:=d under this Title . (Underlining sup- plied. ) Indeed, the above provision authorizes the filing of a separate return of income if it is impracticable for the spouses to file a consolidated return . The

DECISION - CTA CASE No . 756 6 word "impracticable" has been defined as "not practi- cable, incapable of being performed or accomplished by the means employed or at command , or infeasible . tt (See �~-Jebster ' s New Int ' l Dictionary Ll954/ , p . 1251 . ) It appears that during the year in question , Tomas Garcia had repeatedly abandoned the conjugal dwelling and had led a life of profligacy and philan- dering; and although he continued to live with peti- tioner and to receive an annual salary of ~6 , ooo . oo, as administrator of her copra plantation, the spouses apparently were not living harmoniously, as in fact the pettition of the wife for legal separation was granted by the Court of First Instance of Quezon . Under these circumstances, it can hardly be concluded that the filing by petitioner of her income tax return inde- pendently of her husband was unwarranted, that is , as - suming that her husband had taxable income in that year, which , as will hereafter be shown, is not the case . ) It is true that in petitioner ' s return she claimed a personal exemption of i3 , 000 . 00 as a married person and the husband also claimed an exemption of ~3 , 000 . 00 as husband of petitioner, but this circumstance is not to be considered as indicative of an intention to de- fraud the Governrr1ent of lawful revenue. Neither spouse could have done otherwise because they were married

DECISION - CTA CASE No . 756 7 persons who were not then legally separated. And it could not have had any adverse effect on the Govern- ment because the law mal-;:es it an obligation of the Bureau of Internal Revenue to consolidate the returns of the spouses and to compute the income tax on the basis of the consolidated income . ( There is , however, one important point which must be considered, and that is , whether or not there was any legal obligation on the part of the husband to file an income tax return. Is the compensation paid by the wife to the husband , or vice versa, for services rendered to the other , taxable income to the payee? Ve are of the I opinion that the salary paid by one spouse to the other is not taxable income to the payee; and neither may it be treated as a deductible expense on the part of the payor . 11.Jhat should have been done in this case is for respondent to disallow the deduction of the salary paid by petitioner to her husband in her income tax return, if a deduction for said amount was claimed by petition- er. Considering the confused situation brought about not only by petitioner; who can hardly be blamed for failure to understand the law, bllt also by the examiner of the Bureau of Internal Revenue who investigated the case , the commission of fraud in filing an income tax return apart from that of her husband can hardly be at.tributed I

DECISION - C'l: CASE No . 756 8 to petitioner. ) In connection with the amount of ~2 , 321 . 00 charged off as bad debts, it cannot likewise be con- cluded that petitioner ' s failure to substantiate the same makes it fictitious and fraudulent . For as tes- tified by petitioner she had already forgotten the names of her tenants and other persons to whom she had extended the loans, and that she could no longer produce the documents evidencing them because they were retained by her accountant who prepared her in- come tax return and whose vJhereabouts she can not now determine : (Pp . 14-16 , 22, 27-29 , t . s . n. ) Responde~t has not contradicted this testimony and we have no reason to doubt its veracity . Moreover , considering that said loans must have been granted prior to 1951 and that petitioner ' s life had been burdened with multifarious business problems and marital troubl es , it is possible that she could no longer recollect the details of said transaction~ . Under Section 337 of the Revenue Code , a taxpayer is required to preserve his books of accounts and records only for a period of five years from the date of the last entry . (See Basilan Estates , Inc . v . Commissioner , G. R. No . 1-22492 , Sept. 5, 1967 . ) etitioner inherited real properties from her

I DECISION - CTJ. C 'E No . 756 9 father , the late Don Filemon Perez, who died in 1944. In 1951 , she sold several residential lots with a total area of around 2, 000 square meters for !166 , 056 . 22 (see Exh . 3 , supra ; p . 29 , t . s . n .). In her income tax return for said year, she deducted the amount of ~33 , 000 . 00 , which she claimed as the acquisition cost of the lots, from the selling price of ~66 , 056 . 22 , and from the resulting difference of j)J3, 056 . 00, which she treated as a long term capital gain, she declared a taxable gain of ~16,528 . 11 (50% of i33 , 056 . 22) . On the basis of said return, respondent claims that peti- tioner fraudulent ly overstated the acquisition cost of said lots since the cost thereof , as found by his examiner , was only ~12 , 707 . 75, thus resulting in the understatement of net gain. vJe agree with the contention of respondent that in computing the gain derived from the sale of said lots , petitioner should have considered its appraised value for purposes of the inheritance tax instead of its fair market value at the time of the death of the decedent, pursuant to the Revenue Code and the regula- tions implementing it . ( ee Sec . 35Lb/ , Revenue Code; Sec . 139, Rev . Regs. No. 2. ) Nonetheless, we do not think that this fact alone constitutes fraud in the filing of the return in the absence of positive and I

~:ECISIO N - CTA C.t-\BE Ho . 756 10 convincing proof tha t it vias deliberately or inten- tionall y made to reduce her tax liabilities . Another basis of r espondent for imputing fraud in the filing of the ret urn is - (c) The acquisition cost of the copra l a nd converted into a subdivision was over- stated resulting in the understatement of net gain . ( Respondent r s l:emorandtl.ID , su-o ra .) Fr aud is a question of fact and the circumstances constituting the sane must be alleged and proved. Since respondent l imited hims elf to the mere allega- tion of fr aud without showing evil mo tive or intent to evade tax on the part of petitioner , its imposition cannot be sustained . It is a cardinal rule in t axation that fra ud is a gues ti on of fact and the ci rcums tances c onstituting it must be a lleged. and �oroved (Commi ssioner of In- t ernal Revenue v . Gonzal es, e t al . , . R. I~o . L-194-95, November 24-, 1966 ) . Fraud is never presumed because it is a serious charge (Yutivo ~ons Hardware Co . v. Court of ~ax ~ppeals , et al ., G. R. No . L- 13203, Jan . 28, 1961); it must be all eged and nroved , &t least satisfactoril y if not concl us ively by one who alleges its exist- ence ( ~e Roda v. Balk , 48 hil . l 4; De Santos v . Bank of t he P. I ., 66 hil . 38 ; L3nz i & Co . v . Bastida , 63 hil . 16 ; Arroyo v . Granada and Centero , 18 hil . 484- ; Gomez v . Dominr;o , CTA Case No. 1168, Feb . 15, 1964) . l�:oreover , the burden of proof in t 2x cases involving fraud will not be sustained where r2 nondent i ntro- duces no affirmat ive evidence but rests loantl~vr aoln inferences to be drawn from col- facts (Balter , Fraud under Federal

DECI ION - . CTA C.&SE No . 756 ; ' ll Tax Law, par . 112, 1953 ed . i l'l..Yala Securi- ties Corporation v . CoiT~iss1oner of Inter- nal Revenue, C~A No. 1346, June 20 , 1968) . And since a 11false or fraudulent return 1.vith intent to evade t s.x 11 involves a state of mind , .there must be an ac t 1J.al evil motive o~ intent to evade taxes or wilful- ly acted contrary to the truth and with the taxpayer ' s knowled 2,e of the falsi tv of the declaration . To be considered are all of the facts and circumstances incident to the preparation of the alleged fraudulent return (Balter , Fraud under Federal Tax Law, par . 113 , 1953 ed . ) . (~state of \/illiam J . Shaw, et al . vs. Comm. of Int . ~~ev . , CTA Case 779, Aug . 23, 1968; Under- lining supplied . ) On the other hand, a reasonable infere nce can be drawn from the facts and circumstances of this case that t he overstatement of the acquisition cost of the lots stemmed from petitioner's mistake in the interpre- tation of a difficult questi on of law and her honest reliance on the advice of her accountant. Taxation is a complicated matter , at least f rom the viewpoint of the layman . (See Brinker vs . Colle, CT� Case 366 , July 17, 1959. ) Not many persons are conversant with the in- tricate provisions of the Revenue Code and the regula- tions implementing them, and to an ordinary layman , like petitioner herein, honest mistakes in the interpreta- tion of the law are to be expected . Respondent cited the case of The Collector of In- .ternal Revenue vs . Pedro Bautista , 105 Phil . 1326, un- published, to support his assertion of fraud . � e be-

DECISION CTA CASE No . 756 12 lieve that said case is not applicable to the case at bar because the taxpayer therein never disputed the imposition of the fraud penalty. Noreover , the intent to evade the tax was clearly established in that case which is not so in the present case. On the basis of tb3 foregoing findings , we hold that no fraud was committed by petitioner in the filing of her income tax return for 1951. There be- ing no fraud, the Government has only 5 years from the filing of the return 1.vithin which to assess the tax , pursuant to Sec tion 331 of the Revenue Code . From March 31 , 1952 , vlhen the income tax return for 1951 was filed , to January 2 t:- , 1958, when the assess- ment ~,.ras issued, more than five years had elapsed , hence , the right of the Government to assess has already prescribed . Since the assessment of the defi- ciency income tax for 1951 is already barred by the statute of limitations, there is no deficiency in respect thereof . (See Sec . 14, Rep . Act No . 11 25. ) For the year 1952, the disputed items are as follows - 1 . Undeclared salary of hus- band . ��.��� � ��.������� o ~6 , ooo . oo 2. Wages of coconut planters �� 1 , 779 . 63 3~ . Interest income from PNB ��� 107 . 79 (

DECISION - 0 CTA CASE No . 756 13 As stated in connection with the 1951 deficiency income tax assessment, the salary of !�6,000 . 00 paid by petitioner to her husband is not a taxable income to the husband and neither is it a deductible expense on the pi rt of the wife . vJe ta1\:e it, however, that the said amount was deducted by petitioner from her gross income in 1952, and for this reason, the same should have been merely disallowed as such deduction. Although the ultimate effect is the same, we have de- cided to treat said item as a nondeductib).e expense and not as an undeclared income . Petitioner incurred expenses in the amount of i:l,779.63 in connection with the planting of young co- conut trees. Respondent disallovJed these expenses on the ground that they are capital expenditures. The expenses incurred in the planting of coconut trees resulted in the acquisition of an asset which has an economically useful life of many years. It cannot be ' questioned that coconut trees thrive for many years. Consequently, the disallowance of said expenses should be sustained. Respondent included , as part of petitioner ' s net income for 19 52 , the interest received by her children from their deposits with the Philippine National Bank , Lucena Branch , in the amount of ;?:107 .69, pursuant to

DECISION - CTA CASE 1~o . 756 14 Section 45(e) of the Revenue Code which provides - (e) Return of parent to include income of children . - The income of un- married minors derived from property re- ceived from a living parent shall be included in the return of the parent, except (1) when the gift tax has been paid on such p~operty , or (2) when the transfer of such property is exem~t from the gift tax. The facts bearing on the said amount of �107 . 79, representing interest on baru~ depos its of petition- er ' s two minor children , are quite vague . Respond- ent has assumed that the deposits of the tvJO minor children in the branch of the Philippine National Bank in Lucena were gifts coming from petitioner , and from this the conclusion has been drawn that the deposits came from p etitioner as gifts . Assuming the correct- ness of this conclusion, the said amount of ~107 . 79 as interest on said deposits cannot be considered tax- able income to petitioner. In order that the income derived by unmarried minor children from property re- ceived as a gift fr om a living parent may be taxable to the latter, the gift must be subject to the gift tax and such tax has not been paid . (See Sec. 45( e) , Revenue Code, quoted above.) Obviously , ~he bank deposit of each of said two minor children could not have amounted to i5,ooo. oo . Under the law, gifts made by parents to each of their children not exceed-

DECISION CTA CASE No . 756 15 i ng ~5 , 000 . 00 are exempt from the gift tax . (See Sees . 109 and 110 , Revenue Code.) Las t l y , t her e is no basis for respondent to im- pose the 5o;& surcharge on petitioner 1 s income tax return for 1952. The facts surrounding the filing of petitioner ' s 1952 income tax return are similar to the facts related to the 1951 re t urn. vfrlErtEFORE , the decision appealed from is hereby modified . Petitioner is declared not liable for any deficiency income tax for 1951 but is liable for the sum of il,782 . 00 as deficiency income tax for 1952, comput ed as follows ~ Net income per return � � .���� � .� Add unallowable deductions - Salary paid to husband Tomas Garcia .� tp , OOO . OO Wages of coconut planters ����� � 1 , 779 . 63 Net income ������� � ������������ Less exemptions : Personal �������� ~3,000 . 00 Additional .����� 1,200. 00 lt,200 . 00 Net taxable income � � ��� � � � � . � � itl6,348 . lz Income tax due ��� �. . .� � � .�� � � � i~ 2 , 7~.1+ . oo Less amount already as- sessed and paid �����.������� ~eficiancy tax � � � ���. .� �� � � ��� 962 . 00 Accordingly, petitioner is hereby ordered to pay the aforesaid sum of ~1 , 782 . 00 representing defi- ciency income tax for 1952. If the said amount is not paid within thirty days from the date this deci-

DECISlON - CTA CASE No . 756 16 sion becomes final and executory , petitioner shall also be liable for the surcharge of 57; and 1% month- ly interest as provided in Section 51(e) of the National Internal evenue Code, subject to the l imita- tion prescribed therein . No costs . SO OIDERED . Quezon City, July 31 , 1969 . <---<;;~----.en--'?t--L~ ROivl.AN N . ill'L- LI Pres ic.ing Judge I CONCUR: ~ jt__._ . -!10i.IJ L . V CEIJ ~ .1 ssociate Judge