CTA Case No. 3365 (Decision)

.. U.t:l'tJIH..tl: O'f ;m: I�I-41Ul'J't!" .,.., ~OURf OF TAX ~lt'E.Al~ QlJ~LON 0 '!Y /. JOSE M. SORIANO AND THE TRUST FOR JOSE M. SORIANO, JR., THE TRUST FOR CARMEN PAZ SORIANO, AND THE TRUST FOR PETER I' FERNANDO SORIANO, ALL MINORS AND REPRESENTED BY MRS. CARMEN M. SORIANO, Petitioner s , - versus - C.T.A. CASE NO. 3365 THE COMJ.\iiSS IONER OF' INTERNAL REVENUE , Respondent. X- - - - - - - �- - x DE C I S I 0 N This is a JUdlcial claim fo r r e fun d in the grand total amount of Pl , 681,771.25, consi st in g of ~1,270,5 65 . 21 a lleg edly due to Jose M. Soriano (h ereinaf ter referred to as JMS for brevity), and Pl37,068.68 to each of th iee living trusts, namely, Jose Soriano , Jr., Carm~n Paz Soriano and Peter Fernando Soriano , all minor children of JMS, or a total sum of P4ll,206.04. In this judicial claim for r etund only petitione r s presented their exhibits and memorandum. On the part of respondent Commissioner of Internal Revenue , during the triai of this case, he presented only Exh. 1, which i s \ 1...00

- -- -�-----.. ...-....... DECISION - CTA CASE NO. 3365 -- 2 -- the computation of the allowable income t ax refund- ability of petitioner JMS a nd his thr e e tru s ts prepared ,, by respondent's representatives, Arturo S.P. Guevarra, Chief of the Sector Audit Review Div ision {hereinaf t e r referred to as SARD for short) of the Se ctor Operations Office of said respondent, as his sole evidence inte r- posed against the full grant of the claim for refund , and there a fter submitted the case for decis i on ge ne rally based, in addition, on the r e cord s a nd the pleadings . He h a d not, in effect, su t.1 rnitte c1 a memor a ndum in this case since the memorandum previously submitted thru counsel in this case was withdr a wn. It appears that JMS is a U.S. citizen, or a non - resident alien of the Ph ilippin e s. He had his home in the United States since during World Wa r II or sinc e 1941, where his wife and f a mily lived. He n e ver m~ in- tained a home in the Philippines. Prior to January ~, 1980 , he filed his income tax return as a nonreside nt alien engaged in tr ade and busine s s in the Philippines. (Deposition, Ne w York, JMS, pp. 13 and 14.) Also , before said date and year, he came to attend the meetings of the board of directors and ~tockholders of several corpor a tions of which h e wa s \ ') 0 h. .�.ll

DECISION - CTA CASE NO. 3365 - 3- an officer and leaving immediately thereafter. He averaged ten trips a year~ and his stay here is no more �, than 167 days a year. He left the Philippines for the last time in December, l97~ and sinc e t hen he has not visited nor even stepped on Philippine soil. (Deposition, ibid, pp. 3, 9 , 13-14.) . Neither did he maintain an office nor conducted a ny business after December, 1979 in the Philippines. As early as 1978, JMS had been expressing the desire to retire from the Philippines. l Exh. B , p. 26 , BIR rec . ) Effective January 1, 1980, he sent circular letters to the several corporations of which he was a / director;officer announcing his resignation. (Deposition, 2� � cit . , p. 3; Exhs . A, A- 1 to A-13.) JMS had been recording and returning his income and expenses on the cash basis of accounting. On December 10, l969, JMS created three indenture or liv ing trust for each one of his three minor children, herein petitioners, namely , Jose Soriano, Jr., Peter Fernando Sor iano and Carmen Pa z Soriano. (Exh s. G, H, H-6, H-7, H-8 & 0; Deposition, 2�� cit:_.) Among the appointed trustees in each one of these trusts of his mino!r children was the mother of JMS , Dona Carmen M. \ 9Q -� h.! {._,

DECISION - - 4- CTA CASE NO. 3365 J. Soriano and Anthony M. Macleod, both aliens and non- residents in the Philippines in 1980. Neither did .. these minor children or trusts, and their aforesaid trustees, have any office nor conducted any trade or business in the Philippines. The trusts were created under the laws of the United States. In January, 1980, JMS on his own behalf and those of his children, the said living trusts, sold a number class B common shares in Andres Soriano Corporation. ~ee Exhs. A, A-1 to A-4, F , F-1, G, G-1, H, I, I-1, I-2, J (back portion), K (see column Balance, Deposition, op. cit., pp. 3-4, 9-100) i. Exhs. G, G-1 to G-4, H, H-1 to H-9, P, Q, BIR rec., pp. 29-37, 81-89, 9i/ as follows: Shares of stock Snares ot stock Total Owned by JMS Owned by 3 trustees Shares Acquired before: Nov./1970 1, 736,800 shs.: 490,400 shs .: 2,227,200 shs. Acquired afte r Nov./1970 :16,493,131 shs.:4,464,269 shs.:20,057,400 shs. =~~~~~~~~~~=~Q~~ ~~~~~~gg~=~Q~~ ~~~~~~~gQQ=~Q~~ The sale took place abroad and each share was sold tor $0.54347826086 U.S . dollars. Waylong, N.H. Ltd. New Hebrides bought 14,490,000 sharesi an d Wardley (Vila) Ltd . , New Hebrides, bought 8,694 , 000 shares. (Exhs . A, A-1 to I A-4i' Deposition,~� cit.i Exhs. G, G-l,to G-4, H, H-1 \ 20 3

DECISION - - !) - CTA CAS E NO. 3365 J' to H-9 . ) The exchange rate use d by respondent a nd .. pe titio ner wa s $1 : P7~40999985617 (D e po si ti.on, S2�� ~i L r pp. 4-7 , Exhs. B, C , D, D-1 . ) In view of the sale of t he afo r esaid shares , JMS a nd the three t rusts, through their r e p rese ntati ves in the Ph1lipp i nes , r eque sted the of fice of respondent to compute the income tax, ~~ stock tran saction ta x and documentary stamp tax that may be d ue from s uch trans- ac tion. The reque s t was made on Janu ary 2~, 1~80. (Depo sition, �2� cit. , pp. 6-8; Exh. E. ) The respondent obliged and computation of the taxes due were made in J anuary 22 , 1980 (Deposition , �F2� .�.~t..; Exb. E-1) which sn ows the taxes which petiti o ners must pay and wn ic n was actually and in fact paid by them, itemi zed below as follows: 'I ncome Tax on pr e- ' ~% stock tr ans - 'Doc. �Stamp Tax 'Nov./70 shs . ' act ion tax on ' on all s hs . sold ~post Nov ./70 1 pr e and post Nov. /7 0' - - - - --- - - - -1 S hs . ~ 1 4 I JMS I f.l2 , 664,269.00 fl 206, 054 . 38 I p 28 ,9 80.00 I3 Trusts ' ~ 6 -9 1, 4 2 6-.0 0- - _,_ ~- - - ~ - _,_ .L The income t ax ~ue on the sa le of t he p re-November , 1970 share s in tne amounts of P2,664, 269 .0 0 and P691,426.00, were paid under Otficial Receipts Nos . A 3158751 tExh. L: \

DECISION - CTA ~A~E NO. 3365 - 6- se~ a1sC?_ L-1) and A 3E)8752 {Exh. L-2; see also L-3 ), both dated January 23, 1980. The ~% transaction tax on post November , 1970 ,, shares in the amount of P206 , 054 .38 was paid under O. R. No. A3158752 dated January 23, 1980 and the documentary stamp tax was likewibe paid. Petitioner do not quest1on 1n tnis case the correctness of tn e ~' stock transaction tax and tne documentary stamp tax paid. Only the overpayment of tne income tax due is involved 1n this case and which was the proper subJect of this juaic1al cla1m for refund . This claim tor refund basically arose from the fact that there was error in reporting the number of sh ares so ld by pe t1tioner to respondent who was re- quested to compute the tax to be paid by them in that, instead of reporting only 2,227,20 0 shares sold, the number of shares computed and g:ven to respondent as sold was 2,717 , 600 s hares , which is over and above the correct nuni.Jer of shares sold by 490,000 shares. This arose because 490,000 shares sold were reported twice and thi s error by petit1oner was relayed to respondent. (Debosition, op . c1 t ., Exhs . K and K-1; see also Exhs . \ 2.cu;.J

DECISION - CTA CASE NO. J365 - 7- f', F-1 to F-2; Deposit1on, op. cit., pp. 8-9.) . Secondarily, these claims for refund arose from res- pendent's application of Section 21 of the Tax Code, which is applicable to non-resident alien engaged in business 1n the Pnilippines instead ot Section 2L(bJ thereof wherein the entire income is subject to a flat rate of 30% because petitioners are non-resident aliens not engagea in business in the Philippines. JMS and the 3 trust filed their 1980 income tax returns on January 23, 19~0 to comply with the Central Bank request. JMS showed an income tax due of ~2,664,269 and that for the 3 trusts showed income tax due of !i691,426. (Deposition, 2E� cit., pp. 5-6, Exh. B & C.) As earlier stated, these taxes were paid at the time of filing of the returns on Janua ry 23, i980. {Deposition, ~. c it. , pp . 5-6 ; EX h s . B , B-1 I B- 2 I c f c-1 , c- 2 :) These income tax returns were amended o~ March 25, 19~1, to show the tollowing refundable amounts due each of the petitioners. tDepos1tion 1 �2� cit., pp. 11-12, Exhs. I, J, J-1, J-4J 1 viz: JMS ~112701565 . 21 JMS 1 Jr. 137,068.68 137,068.68 Peter Fernando s. 1371068.68 ~1~g~~~ZZ1:::~~ Carmen Paz S. \ 20 8

DECISION - CTA CASE NO~ 3365 - 8- On the basi~ of their amended returns filed on March 25, 1981 aforesaid, showing t he said refundable amounts, petitio~ers filed writte n claims for their '� refund dated July 22, 1~81. (Deposition, 2�� cit., p. 12; Exns. K and K-1.) without waiting for tne decision of respondent on the claims for refund, petitioners, on August 14, 1981, filed their judicial claim with this Court. During the hearing of this case tne BIR record s were withdrawn f r om the Court, and which was placed under the charge of the Sector Operating Office (SOO) and which accordingly insbucted its Sector Audit Re view Divisbn (SARD), to act on the claims for refund. SARD submitted a memo ra ndum to s a id Sector Operations Office (SOO) .dated January 23, 1985, which was submi tted as Exhibit 1 (pp. 107-109, CTA rec., see pp. 104-105~ CTA rec. for clearer typewritten copy or reproduct1on; see also Exh. M, pp. 308-31.0, BIR rec.) .for respondent Com- missioner of Inte rn al ~evenue in this case as stated earlier in this decision. Said Exhibit 1 is the sole and only evidence presented by respondent. Exhibit 1 (see Exh. M, ibid.) .of respondent i~ hereunder rep roduced I in this decision in full: \

- - - .... ~---- DECISION - - 9- CTA CASE NO. 3365 ~� LUNGSOD NG UUEZON January ~3, ~985 Memorandum for: t. The Acting Commissioner re: JOSE M. SORIANO, et al Claim for Tax Refund, etc. This case refers to tne claims for tax refund filed by Mr. Jose M. boriano and the trusts cr eated for nis three (3) ~inor child- ren for alleged overpayment of income tax for the year 1980. The report of examination submi t ted by our revenue examiner revealed the following: Income Tax Deficiency t:itock Transaction Tax vose M. Sor1ano (~1,261,193.97) ~6,050.24 Trust for Jose Soriano, Jr. ( 131,044.40) 485.28 Trust for Carmen Paz 485.28 Soriano 131,044.41) 485.28 ~rust for Peter Fernando ~1~~Qg~Q~ Sor1ano 131,044.41) To t a 1 j~1~g~~~J~~~1~b Tne taxpayers being non-residents were taxed on their gross income at the rate of thirty percent {30~). The overpayment of income tax resulted from the classification ot the shares of stock according to its acquisition date . Those stocks acquired before November 0~, 1970 when sold were sub- jected to tax to the extent of 50% thereof. Wnile those dcquired after Novemoer 05, 1970 were subjected to tax at the rate of ~ of 1% of the gross selling price. The taxpayer's counsel r e quested that the deficiency stock transaction tax be deducted from their claim. \ 20 8

DECISION - - 10 - CT1\ CASE NO. 3365 J� Ho wever , befor e we ac t on the cla1m, a fi n a l rev1ew o n tne items decla red an incomL was made. Mr. Jose M. Soriano's 19~0 income tax return, lEx hi bit 1, page 25 of t he docket revealed .tne fo llowing income and withheld \'/ere: Schedu l e 4 D1vidend s In terest Tax Withheld ~1,0 67~565 .29 Fi73, 66 7. 76 I n ter est , Misc . ___l�.Q..r.ljl._66 To t a 1 ~~~~~~~~Qg ~~~ Schedule 6 Bonus ~1 ,794 ,688.79 D1r ector's fee ~~~z~~~g~~=~~ To t a 1 tichedule 7 Cap ital Gains (50 %) Tne tax on the d i vidends is in tne natu r e ot a f1nal tax and no t creditable, hence divide nds should no t be part ot the gr oss inc ome . A recom- putatlon of tne tax due from the parties a re as tallows: JOSE M. SORIANO Net income per in vestigation - - - - - ~6,457,5 05 . 48 Less: Dividends subJ ect: to final tax - - __...L�06 7 ~ 56 5. 2~ ~ a1ance ~5 ,389, 9 40.19 Add: 50% ca p ital gains - Central 235.05 Azucarera de Don Pedro - - - - - 50% capital gains - Sale of equipment - �-� - �- - - - -- 12,499.50 To t a 1 ?5,352 ,674.74 Less : 50~ Cap i ta l Losses P icop Debe n ture Bonds sold P1cop shares s o ld Net income per review I I ~ 'J'.fu'i. uP...~.

DECISION - CTA CASE �0. 3365 �- l l - 30% tax due - - - - - - - - - - - - - - ~1,594,344.00 Less: Withho1dlng t a x credits claimed 1. W-2 Bonus - - - - - ~ 264,000 . 00 2 . F1743 - D1rector~ fee 99,045.79 3. Withhold1ng tax on PICOP ;, Debenture Bold sold 3,513.66 4 . Pre pa i d income tax - 2.t..�.�.i.t.26~t~-...Q_Q...lr..Q) 0_Ji 28 :J_;?_ Excess Payment - - - - -- �- - - - - - - ��� -(,?1~_6 1 4f~1..:._~5,) Less: btock Transaction tax 6,050.2~ Delinquency tax on Dividends: Dividends received .~?..!_061__2_6~). 2~. 30% tax due th6teon P 320,269.58 Less : \"i i thhe ld - - ___.........;;.l;.C:}_..L.66 7...:....7 6 Delinquency tax P 146,601.82 Interest ~1-01-81 t o 1-02-84)- - - 87,961.09 10% surcharge - - - 14,660. 10 compromi se '-"--�-�-- 300.00 . --�~��----� ___ NET lNCUME TAX . E~UNDAB LE Jose Jr. Carme n Paz ............._. Peter To tal Fernand o Net income per 1111,132,275.9.9 P377v424.00 Investiqation fi377 , 424.99 '�1.377,425.00 13(.1,6~)2 . 72 46f217.57 46,217.~)7 T-'ess: Dividends 46 , 217.S7 p 394,588 . 24 416.08 - - PF- . ~f9~ i9TL-f:-r-6o-��--~7�t-::�-4o2o -~�-��-��-L.d.2.~.:..!1 (final tax) ii'331-;2 0 7 � 42 -~l._~O r 4 ?5 .....~! ~==~2J~~~~~~Q 416.08 30% ta>K: due thereon it��~92.~l_62.00 !.:.2 3 0.�dl:l.J:..!.t\ 1 230,475 . 34 2.23 -~J;4I Less: Withho1dlng f:l131,529.42 _ _*_1�.~~..? 2'}_ P131.529.42 tax credits ~~~~~Q~~~~1 --�-~~LU.tl 1. interest 416.08 gl~b ~ Q1~~~i :l. Prepaid tax 230,475.33 ~� 2-30 f.~�]_: 41 'l'otal 1ncome Tax Kefund- able tJJ.31 , 529.41 Less: StocK trans- action ta}<: _____...!�15. 2.�. Net Incone Tax Refundable ~1~~~Q~~~~~ Tne amount ot income tax refun1able is as follmvs: ,Jose M. So.r iano -� f!l , l.0y9ll.l2 Jose Soriano, Jr. - - - 1.31,044.13 Carmen Paz Sor1ano - - - - 131,04; 1.14 \ Peter Fernando Soriano ,____]._~~1..!. . .9.:!.~ .:.1.~. Tot. a1 2 1 fl

DECISiON - CTA CA~E NO. 3365 - 12 - I t 1s re specttulLy recommended that tne total claim tor refund in the amount of PL,6~4,325.19 ~hich was reduced to Pl,574,043.53 after the deduct1on of the additionaL stock transaction tax in the amount of P7,506.0B be given to the tax- payers. ARTURO :s.P. GUEVARA Cnief, Sector Audit Review Division Recommending ApprovaL: VlCTUR A. DEOFENIO, JR. Chief, Sector Operations Office Approved: RUBEN B. ANCHETA Acting Commis s ioner Exhibit 1 shows that , cased on a c omputation of the Chiet , Sector Audit Review Division lSARD) concurred in by the Cniet, Sector Operations Offi c e (S OO}, pet1tione r s had, out of tnen total alleged cla1rn of Pl,681,771.25, ~. ~� ohows a total refundabLe income tax due them in th.e sum j of Pl,574,043.53, as computed by respondent's representative, wh1ch i s quoted, for emphas 1s as follows: Jose M. Soriano ~1 ,180,9 11.12 Jose Soriano, Jr. --- 131,044.13 carmen Pai ~oriano 131,044 . 14 Peter Fernando - - - � - 13 1 ,0 4 4.14 To t a 1 -~ --,., - - - - P__l J__57_ 4_ l. -0�4��3- �-.-5�3-� According to petit1oners, ana assai~ing the compu- 1 tation made by respondent's representat1ve 1n said \ 2'1 1

DECISION - �- 13 �- C~A CaSE NO. 3365 ... Exnib1t L of tne ref ndable amount of income tax paid and claimed oy peti.tionersv the1:e are blatant errors corrun1 tted in the appl ica t1on of tne ldw and in the mathematical addition dnd subtraction in Exhibit 1. Ex hibit 1 had, in the view of petitioners, resulted 1n the following adverse effects 01 the claims for refund of petitioners: 1. Reduced the refundable dmount due JMS by the interest imposed on the alleged late payment of ehe capital gain s deficiency income tax. in the :;um of �tB 7, 961.09; surcharge of Pl4 , 660 . 18; and fl300.00 comp romise penalty, or a total of ~102,921.27; 2. Erroneoue finding of the existence of an allegea defic1ency ~ stock transaction tax in the total ~urn of P7 ,506.0Bi and 3. Mathematical errors committed in adding items of capital loss deduction re- sulting in inflated net taxable income and income tax due ot petit1oners, thereby re- ducing their claims for refund. we exam1nea sa1d Exhiuit 1 taking as basis the grouhds adduced by pet1tioners and found these not only \

�D1:.Cib ION -� CTA CaSE NO. 3365 -� 14 �~ legally correct and impeccably s ound bu t hi ghly depend- able, reliable and unassailabl e as well. Consequently, there be ing subs t ant ial e rror s committed by the r epre - 1 � sentative of re spondent the r e in 1 the said computation of petitioners' refundable claims in Exhibit l becomes illegal a nd un r e liable. We shall minutely d i sc u s s those errors previously pointed out by petitione r s, which shall not render Exhib it lf as a true and correct basis for the de t ermination of the amount of income tax due for r efunds to petitioners. On the first alleged e rror, petitioners asse rt that this total amount of ~102 ,921.27 shou ld be added back t o tne refundable amo unt claimed by petitioners. Pet itioners contend that tne SARD in the ir computation, in Exhibit 1 (~~ al.s� E}{i1. M, pp. 3 0!:5 -�310 , BIR rec.) e xcluded from gr�oss income the dividends r eceived by JivlS in the amount of Ell.,067,565 . 29 f rom ti1e net income per investigation in the sum ot P6 ,45 7 ,505. 48 1n 19 8 0. Tnereupon, the SARD, as a con sequence, determined a delinquency i nterests of �87 ,9 61.09, lU % surcharge of ~14,660.18, and c o mpromise penalty o f P300 . UO or a total of ~102,921 . 27 tE x h. M-2, p. 309, HIR rec.) which sa1Jd total amount and to this extent reduces the refund claim of petit1oners. \

DECISION �- CTA CASE NO. 3J65 - 15 - It was error on the part of SARD to dedu ct the divide~ds received by JMS in the amount of ~1,067,565.29~ The amount of dividends received by JMS,as dividend under Section 22(b) .of the National Internal Revenue Code, is par t of his income as a non-re siden t alien not engaged in business in the Philippines and which was subject to a tax at a f lat rate of 30% and the 30% tax due of Pl73,667.76 on the dividends of Plf067,565.29 having been witnheld (see Schedule 4, 1980 Income Tax Return of JMS, Annex E, p. 17, CTA rec.) such with- holding of the tax on the dividends and payment thereof is in accordance w1th the l aw tSec. 22(bJ .of the Tax Code), wnicn provides that fromwnon-resident alien not e ngaged in trade or business in the Philippines, there shall be levied, collected and paid for each taxable within the...l:]il ippines xx as :i.n terest, .9.iviq.~_nd�_, rents, salaries, wages, premiums, annuities, compensations, remunerations , emoluments or other fixed or determinable annual or periodical or casual gains, profits, and in- come, and cap1tal ga1ns (except capital gains realized by non-resident investors from buying and;or selling shares of stock of Philippine corporations listed in ~ "'>l�.f..'t. 'i~.''

DECISION - CTA CASE NO. 3365 - 16 - the dollar or any acceptable fore ign currency board - - --- - of such income': in accord with ge neral accounting p ract ices and proce- dures to add the amount of dividends received as part of gross income in the compu ta ti on ot the claim tor refund, and after arriving at the total gross income , i t will then be s t bject to a fla t rate of 30 % as afore - said to arrive at the tax due, and from which the amount of tax withheld s hall be deducted. Consequently, there was neither a n apparent nor actual o r real deficiency withholding tax, per the e vidence before Us, since t he amount of ~173,667.76 was previously withheld from the dividends from the Andres Soriano Corporation, San Migu<~l Co rporation, and Ce nb:al Azucarera cte Don P~dro a nd we rightly p resume h ad been paid over by thern ' to the Bureau of Internal Revenue (An nex A, p. 19 , CTA rec . ), and the liability to do so, or to otherwise finally remit the s ame being in these corporation s which has control, receipt, custody, disposal or payment there- of. There being no def1ciency tax that is due on the di vidend s recei ved by J MS , i t naturally fol low s that I there c ould not be validly imposed delinquency interest due on tne tax on d ividends in the amount of P87,961. 09, \

DECISiON - C'l'l-\. CA:.:>E NU. 3 3 6 5 -� 17 - 10% surc11arge of Pl4 ,660.18 the r .. on, and a cornpromi<�e penalty of P30U.OU . ~ith resEect to the compromise penalty charge of �300.00, it cannot particularly be legally imposed without the agreement or censer t o f tne taxpayer, like petitioners in this case. (Luxa1 e Pro�- ducts, Inc. vs. Comm. , CTA No. 1922~ Sept . 30, 1971; Coll . vs. UST , GR L-12250 & L-12259, May 27, 1959~ Phil. Int. Fair vs. Coll., GR L - 1~928 ~ L-12932, M� rch 31 , 1962; Rizal Motors, Inc. vs. Comm., CTA Case No. 198S, Dec. 27, 1972.) On tne second 1 lleged error, pet1tioners contend that respondent's repre sentative , in finding a defi- ciency io the payme n t of th~ ~% stocK transact1on tax in Exhibit ~, had unduly reducej the refundable claim . cy rtock transfer tax of P6,050.24 for JMS und Fl,455.84 due from the three trusts, or a total of P7,506.08 (see 2nd par., Exh. M & 1, pp. 310v DIR rec. & pp. 107-109~ CTA rec. 1 respectively) . They argue and points out that in unilaterally offsetting their refundable income taxes by P7 , 506.08, this would be a procedural error because in order that this amo� nt can be deducted 1t should have been set out tirst in an a2sescment. Petit'oners insist ! that tne offsetting in ~xh ibit l by respondent's repre- \ 21 ~'

DJ~:CIS ION - - 18 -� CTA CASE NO. 3365 �' sentative in the SARD is an unconscionable buse of power and this act is not valid or legal. Petitioners assertion is correct. The act of the SARD is not in accordancewith due process and th e tax law and , hence, the deduction of this alleged defi- ciency of ~ stock transaction tax in Exhibit 16 in the sum of ~7,506.08 against the amount of income tax refundable to petitioner is invalid and ill_gal. It is qu i te fundamental that the first or preliminary step to find a taxpayer a liability for a tax is for the Commissioner of Internal Revenue or any of his de puties, or any duly authorized representatives, to make and issue an assessment in a regular manner against a �taxpaye r notifying him in writing that a tax i s due in a definite or specific amount and containing a demand for the pay- ment of said tax or def i ciency therein. (Sees. 3 �& 16, Tax Code: Alhambra Cigar & Cigarette Mfg. Co. vs. Cell., Uy , 50 OG 5L61; Coll . vs. Benipayo, 4 SCRA 182, cited in Epifanio Gonzales & Celestina Robledo-Gonr.ales,_1J~t.~onal Internal Revenue Code of__3- 9"I_?_, Ar:_not~~ e~_, 19 �79 Re '. Ed. , pp. 10-11; Cochingyan vs. Comm., CTA (Re s.) 2339, Jan. 15, 197l, citing Comm. vs. CTA, GR L-21483, April 28, 1968.) \ 21 7

DECISION - - 19 - CTA CASE NO. 3365 I" When this assessment of a re ven ue tax is i ssued , t hen the taxpayer sha ll be afforded proper due process by giving to said taxpaye r the right and privilege to dis-� � pute the assessment and wherein shall be given the r igh t to an administrative hearing where he can then present his evidence against said assessment. After the admi- nistrative hea ring is c losed , then the Commissione r will rende r a decision on the disputed assessmentr and which decision wi ll become final, executory ana demandable if aaverse to tne taxpayer and the lR tter did not appeal for fin al judicial dete rmi nation in the Court of Tax Appe al s . {Republic vs. Manila Port Service , GR L-18208, Nov. 27, 1964; Sections 7 a nd 11, Rep . Act No. 1125: 1977, Anno_!:ated , 9.12.� ciJ::.) Only und e r this circt.:mstance ot finality c a n a tax be collected, as fi nally determined by the Commissi oner of Inte r nal Revenue or by the courts of justice, un'j the said tax be deducted from, or be used to offset a ref und favorably due to the taxpayer. Bu t e ven so , the cour t s of justice c annot presume a taxpayer's liability for a tax simply because of the existence o t an asse ssment aga in st him, without more , since an assess- � \

DECISION - CTA CASE NO. 3365 - 20 - rnent not based on actual facts established by evidence presented by respondent Commissioner cannot st.and the searching te s t of judicial scrutiny. (Benipayo vs. Cell., GR 13656, Jan . 31, 1962;Liberty Ins. Corp . vs Comm., CTA 3551 & 3599 , Oct. 15, 1986.) Coming tinally to the third error put forward by petitioners allegedly committed by SARD in Exhibit 1 (Exh. M, QE.� cit.) .this alleged error refer.s t.o the item of capital loss arising from the sale of PICOP debenture bonds and shares of P31,750.00 and P56,444.53r respect1vely, or: in the total sum of P88,194.53. It was pointed out by petitioners that v1hen this total amount of cap ital lo ss of P88,J.94.53 (se,~ Exh. 1. & M-1. ,. p. 309, BIR rec.)was deducted from the amoun t of P5 , 352,6 74.74 as petitioners' alleged gross income, the resultant sum in the computation arrived at by SXRD wa s l'il5,3L4,480.2l. (Exh . M-1, ibid.) which is mathematically e rroneous, and the correct result should have been P5,264,480.21. The difference or error being in the sum of PSO,OOO.OO , petitioners then strongly contended, which to our mind is correct, that the alleged income tax due for JMS was unduly inflated and correspondingly red~ces his claim for refund by Pl5,000.00 in excess \ ') 1 ..... '""'...1. "�'

DECISION �- eTA CASE NO. 3365 -� 21 �- taxr since at 30% tax flat rate imposed on the gross income of petitioners, the tax due on the erroneous amount of PSO,OOO.OO would be PlS,OOO.OO which is in- deed an excess tax. And, as observed by petitioners, to which we tully concur, this is inexcusable or irre- versible error on the part of the Chief of the SAKD in computing the petitioners claims for income tax refund as found in Exhibit 1 for respondent. Consequently, since the judicial claims for refund were based upon incontrovertible ~vidence, we shall then entirely rely upon the computation of petitioners wh1ch is not only bas.d upon the correct application of the provisions of the Tax Code but upon actual ~acts long presented to the respondent, among which are the amended income tax returns of petitioners, which were not debunked by the latter except only as regards those he found in Ex- hibi t 1, which was aforesaid successfully and s:-hsfactor ily assailed and brought clearly to the attention of this Court � . We are reproducing in this decis1onr in its entirety, the computation which was not debunked by respondent's representative, with the exception only of thos~ found in ~xh. 1, which was,atoresa1d, successfully and satis- I factor~ly assailed by petit1oners. We are therefore, �'l

DECISION -� - 22 ... CTA CASE NO. 3365 ~�� reproducing in our decision , the computation of peti- tioners of the 1ncome tax due to them as refund, found on page 7 of their memorand1m (p. 118 , CTA rec.), and t, which we s ub stan ti ally adopt as part of our own: Petitioners- Dpn-NYC-Exhs. l to J-2(a) -ITE-M-S ,JMS 3 TRUSTS _L.J..:.C2.!:~lL Gross Income lll,794p688.79 Bonus 1,06!,565.29 138,652 . 72 Dividends 180 f 741.. 66 7,859.61. Interest & Misc. Income Cap1tal Galr!S 50% Sale of Anscor shares ~3,478,894.49 930,371.16 Central Azu~ carer a 235.05 Sale of Equip-� ment 12,499.50 ~fd)J, 629 ._04 Less: Capital Loss 50% PICOP Deben- ture Bonds 31,750 . 00) PICOP shares (__. 56 1j_46.5.}) <~--~12...4 . 53) Net Income Taxabl e Tax Due - 301& l'll,933,929.00 �1 323 ,064.00 Less: Tax Credits 1 , 248.24 41,595.82 BIR Form W-2 ~ 264,000.00 " " 1743 272,713.55 W/tax-P ICOP Debenture bonds 3,513.66 BIR Form 1743 div. 173,667.76 Prepaid inco~e tax on capital ga ins�-2, 66~..t1-~.ZG.QQ Anscor shs. Income Tax Refundable - \

. .~ DECISIUN - CTA CASE NO. 3365 - 23 - WH~REFO RE , respondent is h~reby ordered to refund to petitioners the total sum of Pl,681,771.27 as income tax erroneously paid in 1980, itemized and computed as ~, follows: JOSE M. SOHIANO Pl,270,565.21 THE TRUSTS FOR JOSE M. SORIANO~ JR., CAI{MEN PAZ SORIANO, AND PETER FERNANDO SORIANO T0 TAL No pronouncement as to costs. SO ORDERED. Quezon City, Metro Manila, April 15, 1987. WE CONCUR: . a~e-~.--:-M+t�-;;/:.:iJ!.~v/) AMANTE LLER l?residin Judge a;O/~~ 1 f ~;6)z~ H~YES l A~~1ate �.rud<,:;V \