CTA Case No. 65 (Decision)

.. . .REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS MANIL.A BLAS GUTD Z and IA MORALES, Petiti n ra,. - v rsu � C.t .A. C S8 NO. 65 COLLECTOR OF l!ITEB!IAL , \~~ '(, q \ Resp ndent. ~4 ~ x- - - - - - - - - - - - - - - - -x DECISIO !his is appe 1 interp se b;r tha petitioners Blaa Guti rrez and Maria ralea tt-. a decisi of the resp4tn- de t Collector - f Int rnal R&-nn: dated Janu.a17 28, 1953, / holding the former liable for �the pqaent f the unt .r P8,48l.OO, all&eedly due the eve nt a deficienc1 in- - - c tax inclusive ��' surchar s t r the calendar 1 ar 1950. the t act� r the oaae adJaitt d either in t pleadin s r the parties r d~ establ ished durin the h arinl of tb ca�. .. The public o� th PhilippiD s, pursuant to the 1947 Milita17 Base � instituted rch 4, 1948, condemnation p eeedin s r pare ls r land 1ocat d at Mabalacat, p a, inc1udin Iat N � 72.4-C t the balacat Cadastre, b ncing t the herein petitioners Blaa Gutierrez and ria ra1es. The c deJmation proce din s ~ainst the petition rs was d c- keted as CiYi1 Case o. 148 of' the Court f' First Instance or Paapanca. up n co ncewent r the action, the plain- tift, Republic t the Philippines, in rder that it could take boaediate pesseasi n t the lands, d p sited with the Court of First lnst c of Paapan a n March 41 1948, the sua t ~156,960. 00 as the price provisi nalq fixed t�r the land xp priated (Exhibit "C"). In c omitT ~iJ ,;. 4 6 // --If.(-

;' / mclSION- C.T.A. CASE NO. 65 -2- with the order t' the said Court i1sued n J'UU&1'7 26., 1949~ authorisinc tho withdrawal ot thi1 Ullcontested deposit tor the laada to be expropriated (IH pap 4, Deci11n, Ezhibit �E�) on Januai7 -n, 1949, the 8Uil or P34, 5SO.oo out ot the orichal court depe1it t Pl56,560.00 in Civil Cal8 Jo. l4S ot tbe l1rapuca Court ot F1r1t Instance, wa� paid b;r tbt Pre- vincial Treanrer to one ot the petitioner.� herein, Maria M.ral�� per PIIB Check Jo . 7~51520 dated Januar;r Z1, 1949 (Certiticatien, Exhibit �R�, petitioner). After due hearinc, the Court. of First Instance' of Pa�- panp relldorod a ~ciaion ill Nnabor 29, 1949, avardinc t� tho potitionors herein tho aua ot 194,305.75 a1 just co.peD- 18.tion of their expropriated propertJ,. In order to avoid turther litication,. oxpon88s and dolq that~ be cau10d bJ all appeal troa said dociaien, both partie� entered into a cupron88 acreo�llt vhorob;r the <aoteJldants, bc1ud.in� the petitioner� heroin, waiftd their richt to clai:a c naoquo11t1al duace� and the ript to c llect intoro1t e.n the ...unt de- posited b;r plaintitt with the said Court of' Firat Instdco ud nbseque11t1T withdraw bJ def'olldants. This joint c-- � prense was tubaitted ror apprnal b;r tho said Court on J8.11- WU7 7, 1950 ud was approftd n Januar.r �9, 1950. Thu1 ....tiM in Jumai7 1950, the deteDd&Dtl .nov petitioner� in tho in1ta.Dt ca" wre paid h f'u11 the aMUD.t of' P59,785.75, ropre88ntinc the balance or the aw.rd in their taT r attor creditinc the deposit vhich va� paid t thea on Juuarr 2:1, 1949. OR Jall11al'7 28, 1953, the respondent Collector &888a88d and dell8lldod f'ro� the petitioner� the 8Uil of' P8,481. 00 aa allepd doticienq inco� tax for the calendar rear 1950, 47

DECISION � C.T. A. CASE NO. 65 -) - b.clus1Te t .urcharpa (pace 6, BIR recorda) c aputed &I to~- ava: Receipta, ric. ail1 - - - - - - - - - - - - ... - Bece~pta, jitDeT eperttien - - - - - - - - - - Total receipts per investication - - - - - - t.aat Operatinc expenaea - - - - - - - - - - NET U>SS PER IRVESTIGATION - - - - - - - - - - SCBED!JII �O" et Share, Fara-496 canna palq 0 PlO, OO P. 41 960, 00 a C&YU - � - � - � - - - - � - � - - - - - Ltses Operatinr expen��� - - - - - - - - - - l 1 5ll.QQ NET INCOME PER INVESTIGATION - - - - - - - � - - P. 31 427,00 �CHSDtlLI �p� (X.q !em Capital Gaina) a Greet Re ceipta, Sale t laad (1950) --�--- Jl94,305. 75 ttl Coat o (1928) - - ... - P-28, 291.7) r IaDd lapre~nta - - - - - - � 81 500,00 SUbdivisi a, etc. - - - - - �.&&O.QQ 451 Qll.7l RET GAIN ON SAlE OF LAND - - - - .. - - - - - ... - P491 294.02 CAPI7AL G IN (l/2 o� P49,294.02) P2J,.s647,01 SUMMAR% Net Ince., larldnc - - - - .. - - ... 3142'1.00 et Inco�, !and Sale - - - - - - - 2.41 647.01 et Inc..., B8ntala - - - - - - - - 600,00 P30.520, 01 101,70 et Inco�, S.epatake 1 - - ... - - - ... ...1.1..8-46-,0-0 P)0;218~31 X.aaa X.aMa, SChedule 'B" ... � 1,ooo.og NET INCOME PER S'l'IGATI ON - - ... - - - - - - Z'/,218,)1 Ltaaa Pe.ra nal lu11ptiena - - - - - - - - - TQTAL TWBIE DfCOME 1'az due A P271218,)1 - - - - - - P5.785,00r t.a11 .AMunt alrea"" paid - - - - ~ll. 00 DEFICIENCY TAX- - - - - - - - - - P5,54:00 Adda 50% Surcbar - - - - - - - - 2.827.00 TarAL AMOURT DlJ& - - - - - - - P8,ft81: 00 'l'he aaid inco� tax ...., .nt waa received b7 the peti- tioner� en Febru.r'J 18, 1953, On March 51 1953, the petitioners throuch their ceunHl, Attor.DeJ latae1 rales wrote the respondent requeatinc that the aaMsaent be vithdravn, Calloelled or reconaidered vhich requeat

CISIOH .. C. T�� CASE NO. 6S :t in a letter &.ted AprU 261 19541. v1th his waminct: r, "lo are req ated to ur 70ur elie ta t pt1T the ao t f P81 4Sl.OO plus penalti a vith 15 cbqa atter reeeipt here etherwi~� this moe' will pro- ceed t the colleetiG th re t thn q re�cli.J a pr vi d bT J.d. (p. 2,. i it I) sponde t.�e lAtter ot enial t April 26� 1954 s received h7 the petiti ners n .Mtq Z7; 1954. In pl.7 tb reto, petitio ra J 25,. 1954, requested in vritinc c se re ie c J.l!Qllrw.u:ue. This requea vas cOllditiOJllil.llT accepted aubj et te titi era' quisitea e:f Depart at t inance Or r � 213, pert.ine t p rtio ot which re da� aa f 11 va: req at for .re-inveaticati n r :re- Dlli-� aati . f' a taz aaaea. .nt shall be dlt !a vritin& under oath or the taxpqer concerned d shall � - eiticalq state the und or pounds relied up a f .r t reYisi et the as�aDeDt, c iJWPillded b7 such � nta d ether nide.nees relied in auppert ot the requeat. As a pneral rule, th C.llecter er Internal Reftnue will direct a n-1n- veat1 atio 0 t Ca en.:cy after the pqaent f' one-halt er the total ���� nt a ainst the taxpqer and pon til b7 h1a et a bond to cuarantee t pqaellt of the balance t the tax aaaeated, to ether vith the in-ere nt thereto. z z x x x x " Thi conditional ac ptanc s iy:ed 1>,- petitioners n Jan- rr 61 1955. Petiti ners rejected said c nditional acceptance, inste d advised the resp de t of their intent! n t � appeal t the c urt t tax Appeal o JanU1117 1 , 1955. This petiti t � r revi w a ace r<lincl1 tiled with thiJJ Court Jars. rr 20, 1955. In the � swer tile bef'�re this Court bJ' the respondent J t the petiti .D. tor reviev, the queati n a _ ther�, t juris- icti wa raised as special .defense. Since this queati 1ft c uld t be res lved witho.ut th presentatio r supportiq 49

? DECISION - C. T. A. CASE NO. 65 -5- eTidence, this Court decided to defer ~solution r the 8~ untU atter the trial n the rits. !be respondent in his � orandull qcues that this Court baa no jurisdiction over the case inaaucb aa the petition r r review vas filed. b.r the peti- tioners be7ond the .3 dq regle�nt&r7 period provided tor in Republic Act 1125. Petiti nera do n t queation the u.theatical co :utati n t the aaounts included in the atoreaaid aaMaaent of Janua.17 28, 1953. However, thq raiee in iaaue the lecalitT of includ- inc the iteas under Schedule 11D" (Io Tera Capital Gains) as taxable inco � Petitioners contend that inco derived fro� �xpropriation proceedincs are tax exempt, 'trantin arrm-endo ~ the7 are not so exe ted, then the purchas power of currenq should be taken into consideration in the coaputation or aina r loa s for taxation purposes; and that the incoll8 froa this particular expropriation proceedinc should be dee d includible / either in 1948 or in 1949 and not 1n 1950 as claiJIIed b.r the res- poudent. Petitioners further contend that th97 should n t be aade to pay- the 50~ surcharge de nded by' respondents. In res , ve have therefore the tollowin issues t re- solves (1) H'as the Court jurisdiction to tr.r this case? (2) AsWilinl that this Court baa jurisdiction; is the incOM derived rroa expropriation pursuant to the exerci r the g vernaent �a right of eainent dollain taxable inco�? (3) It said incoM is taxable, h w should it be taxeds (a} Aa .capital or ordinaey cain? (b) Should p:urchasinc power of currency - be take int accoUilt in the co.~~putation of ains or losses? (c) In what ,-ear should this inco be dee.ed includible for taxation purposes? � (4) Should the petitioners be 11ade to pq the 50~ surchar~e demanded b.r respondent? ,:� 50 - t::L:;;"?L<..l -

DECISION .. C. T. A. CASE O. 6; .. 6 .~ We shall proceed to resolve the issues 1a ll:tiU'B� . The respondent �s as�a.-nt all.d de:und for p~qaent vas received b,- petitioner s on. Februa.ry 18., 1953. On March '51 1953, the petitioners Milt respondent a letter aakinr 'the reTisioJl of the asaesaent u.de. Respondent ' s denial was received b;y peti- tioners on May Z'1, 1954. A bid tor re�arinc and reinTeati�a- tion b7 the Ce.ference Statt of the Bureau ot Internal J:lewnue vas de by the petitioners o.n June 25, 19541 Tiz lline (9) dqs a.tter the creation et this Court under Republic Act No. 1125. !his vas hoveTer, in tum denied by the respondent in a l&tter dated Deoeaber 29, 19541 unless petitioners complied vith cer- tain conditions set therei.B. This last �ntioned letter w.s received by the petitioner� on Januar'1 6, 1955. The petitioners retllaed to co q with the cOl).diti ons aet in said denial and instead filed this petition for reTiev on Januar;r 20, 1955. In resolTinc this issue of Jurildiction ve should bear 1rt 1dnd that the Ceurt of Tax Appeals vas created on June 16. - 1954., when Republic Act No. 1125 be~ lav. lt all the facts or this case happened arte:r,- the creation of the C.urt of Tax Ap-- *� peals, then f'oU.vinc this Court resolution in the Case of . Bustos "'� Collector, CTA Case No. 1391 Juq 22,. 1955; ve should .tart countin� the l""�Dnin� of the period within vhich -to appeal tru. the �aent petitie.nera ~ceived the respondent �� denial to their pet~tion tor reconsideration. But auch is not the situa� tion in the cawe at bar. Before the creation ot this Court, pe- titioners could not have exercised their re�dJ' to re'Viev on ap- peal the aaaea nt 11ade by the responde;nt. We can not therefore start countin! the period to appeal troa Mrq Z7 , 1954, tor it is eTident that at that tt.e the petitioners could not have come to ll 51 j7

DECISION - C.T�� C SE NO. 65 - 7- t is Court 'Which vas then ot yet in existence. Whil public Act 1125 was approved and too r effect on June 16, 1954, it was no until J~ 21, 1954 when the duly cons- tituted ourt provided for t e rul s by which cases within its jurisdiction caul ha. bee filed before it. Jt being the in- tention of t o le.isla.ture tha.t ri ht and justice should prevail, i n .fairness to the taxpayers, the determination of the 3 ~ period to ppe 1 shoul be counted fro the ti e that petitioners could havs ctually availed of their edy to such a pe 1. At could have b en availed of on July 21, 1954, the petitioners d previously requested for a r hearin of t eir case . T erefore , there was no deci ion as yet that could have been appealed to this Cou1�t . It was nly on January 6, 1955, when ., the petitioners received t e denial to their requeat or a re- hearinc tha th runnin of th riod to appe 1 der s ctio 11 of public Act 1125 be an. January 6, 1954 to January 20, 1955, whon this ition for revi w was filed with this Court, only fourteen (14) dqs have elapsed. This we believe and so hold is well within the 3 day r gle entary p riod set by section 11 of :public Act No . 1125 , and therefore this Court has jurisdic- tion to hear and deter e this petition for review. Inas uch as this Court has jurisdiction to pass upon the rits of this case , w will now proceed to consider the other issu s. In connection with the second issue , the petitioners con- � tend that the income derived f ro� the expropriatio of th ir propert is ot t ble because- (1) inco fro the expropria- tion of property pursuant to the exercis of the gover ent ' s , ri t of e ent do in is not taxable inca d (2) the i n- co in this particular expropriation is exeapt fro taxation

DECISION - C. T. A. CASE O. 65 - 8- b7 virtue of the proTiaions of section 29 {b} (6) .of our Tax Cod when taken in relation vith the proTisions of the 1947 tT. s . -P. I . Millta17 Ba s Acre��nt. Petitioners -.de an in- terestinc and le�cttv" dissertation on the ctU'f'erence between "sales� and �expropriation�. They insist that "expropriation I d s not co.e within the purYiev of "sales" as conte:.plated b7 our Tax Code, hence, accojdinc to thea, incoM f'roa an xpro- priation� unlike cain froa a "sale" should be exeapt froa taxa- tion. This is a question of first i:apread.on in this juri adic- tion. vever, the vaicht of authorities in the United States, f'roa which our tax lava han been pattel'll8d; eatablish that inc<me troa �expropriation" is taxable 1ncOM1 and that "expro- priation" is vithin the purYiev of' the tera "sales or exchan " as used in the Ubited States Intemal Re'ienue Code. "Sec. 21e 08 - Iepd ACQuired in COpd'Dftion Rtpceedipga s Upon conde.nation of propert,y the condeJID&tion award for property taken, the aw.rd for aeTerance Qa.ages to and a special benefit aaaeaaent leTied acainst the reaaininc portioD. of the lot or parcel or real estate af'f'ected1 c nstitute a aincle proceedinc; the results of' which are to be ealgu1ateQ as an e;tintx tor �te- Q!ral ingo� tax purposes. � (v, l. 3 Martella �taw: f' Federal Incae Taxation", P�� .366) (uder- scorillc supplied) "The takinc of propert7 b;r condeJID&tion aD.d the pq:aent of just coapensation theref re is a 1tsale" or "exchan " within the aeaninc or 18ct1on 117 {a) of the Revenue Act of 19.36, and ~ tm Ylat tnaagtion is capital Dr� " (David s. Brown. v. C , 1942, 42 BTA 139 (under- scorfnc supplied} �The income arisin~ fra.a a ondewaation sale r real estate has been held to b& derived from a sale or exchance and conaequentq UpbJ,.e ~ capi- tAl gina rates. " (C � v. Kieselbacil, 1942, CCA 3d, ~127 F 2d 359) (underscorin~ supplied)

�, ll&CISIOI ... C. T.A. CASE o. 6S All the fore in c elusion ich hold that income ex- propriation i ee d a J taxable co , ha 1 toll d in the r recent case ' of I.aphaa v. u.s. (1949, 40 AFl'R 1370) and in Kne1pp v. u.s. I (1949, 85 F ppl. 902). that "expropriatio .doe . ot t jHo r, l c within the purview of "sal " as conte late in ur T f Co t evertb less, der s etio 29 (a) of o Te.x C de� gairls I arisinc fro expropriation would co titute taxable inc011e � I "dealings 1 property � � � � � � win out of tb J � � � � � � t such propert7, 8 or s "inco~~e derived tro ~ v ,t . We believe that the words ttinco� troa a:ay aourc v. t.ever", .is � broa enouch to eover th gains contemplated ere. The disclo a le~i lativ polic7 to i elude all inc ot xpre.ssl7 ex.upte as w1thin t cla s of t irrespeoti 8 of the vol~al'7 or involunta%7 a.cti r the tax- . ~:r in produci.n the gain. The di:tterenee. therefore; between ~ "sales" or " xpropriation11, if t re is s ot in rived f'rom xpr pr tion the claas t taxable incae r our revenue laws.] Petiti rs also c ntend bat the rived trOll the exp priation or their land is exe11.pt t ro taxation in view o.� .. :::�-� 54 !1 '

DECISION � C. T. A. CASE NO. 65 - 10- the proviti ona or Mction 29 (b), (6) or our Tax CoO.. vhe taken in relati~n with the pertiaent prniaiont ot the 1947 U. S.-P. I . Ba,., Militarr Acree� t , particularl.7 .Articles XII and II r said cre�Jtent. Here is the prorlsion of law i.n'Yoked by' the pe- titio~ras "Sec. 29. (a) x x x x x (b) lxcluaion tro mat iDcw r- The tollovinc iteas shall not be incl uded in croa1 inc011e and shall be exeapt. f'roa taxation Ullder thit Title - X lt X X lt - (6) Inco e;empt Wlder treatY:- Incolll8 of aJV' ki.Jld to the extent required by 8:JJ:f treatT obli- cation bindi nc upon the gover.n.eat of the Philippines. n In relation to the aforecited, Articles XX II and XII or the U. s.-P. I. Militarr Bases Acreeaent provide r �ARTICI& XXII CO Et.fNATI O OR EXPROPRIATION 1. Whenenr it is neces ry to acquire by condellll&tion or exprOpriation proceedinlfS real pro- perty beloncinc to private persons, assoc ia tion, or corporations located in ba a nailed in Annex " 11 and Annex 8 B11 iJ:i or der to e&rr7 out the purpo18S or t his a eMnt,. the Philippines will institute and pre..cute such condeanation proceed a in ac- cordance with the lava or the Phi lippines. The United States acrees to rei.Jlburse the Philippines for all t he reaa~mable expense�, da:aages, and costa thereb,y incurred, inclddinc the value of the pro- perty a s deterained by' the Court. In addit1Cil 1 subject to the mutual a e nts of the two cov- er.uents, the United states shall -reblburse the Phil ippines tor the asonable costa ot trans- portation and re-.oval or 8:JJ:f occupants displaced or ejected by reason or the condellll&tio or ex- propriation. " X .Xlt lt% X X ' " TICIE I II INT AL ~ VENUE TAX EXIMPZION (1) No Jleaber of the United States .A.nled P'orcea except Filipino citize.J111 servinc in the Philippines in coD.rlection with the ba�s and re- sidin~ in the Philippines b7 reaso.n only of such j;C 55

DECISIO - C. T.A. CASE O. 65 - 11 - aerviee, or his dependenta, ahall be liable to pq incoll tax in the Philippines except 1 res- pect of inc derived fro� Philippine sources. (2) No pation.a.l of the Unit d States ser- ving in the Philippines in eo nection llith the cons- truction, Jlaintenanc , operation or defens of the bases and residinc in the Phi llppines by reason onl.7 or such -.pl01Jle.nt, or his spouse and ainor chil- drfn and dependent parents or either spouse, shall be liable to pq inco e tax in the Philippines ex- cept in respect ot inc- derived troa Philippine sources or s urces other than the United States. (l) o per so referred t in para raphs 1 and 2 of this said Article s be liable to pq the govern:aent or local authorities or the Phil- ippines 8If1 poll or residence tax, or a ports or e orts duties, or e:ar other tax on personal pro- pert7 iaported for his own use provided, that pri- vate owned vehicles shall be subject to ~nt ot the follovin only: vhen certified as beinc used tor ~litar,r purposes b7 appropriate United States Authorities, the no 1 license plate tee; othel'\oo vise, the ormal license and cistration fees. (4) national of the UDited States, or corp- oration organized under the lavs of the Unit ed states, shall be liable to pq inc tax in the Phi lippines in respect or a~ profits derived under a contract made in the United states with the goT- er.aaent or the united ates in connection with the construction, 11aintenance, operation a.ad defense or the bases, or an:r tax in the nature or a license in respect of a:r17 servic& or work f, r the United States in connecti on with the conatruction; inte- nance, operation and defense of ~he b ses." XXXXXX We can readil7 see t the above quoted provisions of lav that the contention of the petitioners is untenable. while it is true , that our National Internal Revenue Code exempts in- co:ae or ~ kind to the extent required by aey treat7 obli~ation bind upon the covernaent or the Philippines tro incoae taxea, it is evident however, that no exeaption the a.forecited Article XXII of our Milltar;r sea Acree nt , which refer� to the obll ation or the United Stat es to defrq or rei�- burse t he reasonable expenses, daJI8. es and costs vhich the Phil- 56

DECISION - C. T.A. CASE NO. 65 - 12- ippihe cover.n.ent ~ incur 1n condemnation proceedincs pur- auant to said treat,-. Said article does not at all provide or in Jl1 vq sue sts that inco f'roa upropriatio proceed- in s is tax ea-.pt. Likewise, Article XII of' the M1llta17 Bases :reuent :aakes o ntion of considerinc incoM derived froa expro- priation as tax exempt. � Besides the tax exeaption ua.der Arti- cle XII is applicable o~ to the followinc a (1) ~~e�bers of the ited States &1"II,Y vho are not lipinoa, (2) u.tionals of the United States and {J) corporations or anised in and residents of the United States. Petitioners, beinc Filipino are therefore excluded from the benefits that -.y be derived from ~s pariicular provision of the Militar'1' Bases e118nt. /We are therefore of the opinion and ao hold that inco� derind tr the expropriation or private propert,. pursuant to tb covermaent ' s right or elliJlent do�in is not tax exempt. In order that such incoM ~ be considered tax exempt , there �ust J be a clear provision or lav to t~t effect. �Provisions crantinc special tax exeaption are to be construed strictly. On the theo17 that the taxinc power is essential to the erl.stence of ccwer.maents and that exemptinc provisions are �t- ters r crace &Jld favor. there is an haplied pre- sua.ption favor of taxation rather than ex.ap- iion. Those vho seek an exeaption tro a tax ~~t rest it on re than a doubt or 8llbicuity. Exe�ptions can 11ot rest on �re ilaplications. The taxing power can not be relinquished unless the intention to do so is expres�d in clear and un- aabi ous teras. Exemptions are ever granted on interence alone . " (1 Mtrte. a �Iav of deral In- co Taxation� 68-69) "An exe11ption fro� taxation in order io cone- titute ._ contract bindin on the covel"''lJJeBt, aust be clear~ ud unequivocably expres�d� Ever;r :reasonable doubt ahould be resolved inst all exeaption and in favor or the taxin& power or the state. The intention to grant such t..unity aust be clear be1ond reasonable doubt, and the lancua e

D. CISlO - C�.T. A. C� SE NO. 65 ... 13 .. �l �l �I d st dait of o other re sonable construction. " (Cleo s V. Fortupliza v . Collector,. e . Or. Special Case o. 2924, ecide b7 eTA; J � 12, 1955) Sinee, as we hold ere, t inc deri d fro expropria- tion t property is taxable, the next issues ised �b,r pet!- tion rs a orollarr to our .f'inding are- (1} whether the currency- alue or the pure sin p r ot the at th the of cquisition and disposition of th property should be take into consideration i he eo:aputation f in d I profits; and {2) when the gains or pr fits sho:uld b d e d received r r ineo tax purp s s, that is, (a) in l94S en the expropriation proce din s were iated, or (b) 1n 1949 when the initial pqaent dep sited in court, or (o} in 1950 he the .f'inal ~nt was actua.~ 1"9eeive by r paid t tb p titionerst pursuant to th final jud e t. ~re discussing the propositi ns advanced b.1 the peti� tio rs& ulQ. like to t~ss what we hav . ntio ed rlier that th i ht or uthorities hold that ain derived fro co d tion proc edings are con idered as capital gain and ot ordinary i co for purposes ot ta.x.a:Hr ~ (Pavid � Brown � ., &:a~o~~'*&; Co 1/, Kie lbach; suRf&; Ie.pha.a v. U. �, &prf&J 11A reas 11able ru1 to apply in th ca. of in- voluntary conversions ould be to treat s capital ransaction tho in vhich there is an actual tranS'"' fer of' propert,- to another. x :x x tt - a- rested rule vill also furnish support for the deci~ sions boldine that a. gain or loss .in the case of pro- perty which ha~ been taken in condemnation proceed� in s repre ented capital cains or loss. " ( rtens law f deral Inco Taxation, Vol. 3~c paces 726- 7'21) In co ction with th co tation th taxable inco , � t petitioner contends that the purchasit g power of' the pes? or 58

�DECISION - C. T.A. CASE NO. 6S - 14 - � shoul,d be taken into account in the determination o:f tbe gains or losses :from the expropriation o� the property. On this �subject,. ve cite the pertinent _provisi on� of our Jnco Tax Iawt �see. 35. Deteraination o� �ain or loss fro the sale or other disposition' or proper.ty.- (a) X X X X X (b) In the case �f property acquired after March 1st. 1913, the cost thereof if such property as acquired b;r purchase or the fair Barket va.lue or rice as or the date of the acquisition if the same a acquired by gratuitous title. " The law is very clear, explicit, and needs no furthe r interpretation. Nowhere does it speak of the purchasinc power of the peso. The provision or lav contain no words or phrases ' trom vhich can locicalq infer that the purchasinc power ot currency should be taken into accoukt in the computation of gains or losses. To read into these provisions the interpre- tation desired by the petitioners would render meaningless the accepted concept of the term "fair �rket price or value� of �J such property "The J.ancua.ce of the law is plain and unaa- bipous and its aeaning clee.r and urodstakable. There is therefore , no room to extend such pri- vileges to other s , other than those enu.erated, for to flO elsewhere in 18arch of conjecture in order to extend the act vould be nn atte�pt to elude it, a aethod which, �i t once admitted, would be a clear perversion of the true intent and aeaninc of the law. 11 (21 C. L. 957) In the United States, currency value or the purchasinfl pover o� 110ne;r is not used as a basis in the determination of taxable ains or profits. 'l'hus in the case of Bates v . u. s., 108 F 2d_, 4Cil (CCA 7th, 1939) , it vas held that: lfThe reduction aade in t}?.e stat uto17 cold con- tent of the dollar in 1933 is not a factor in the determination of gains or losses fl"'li the sale of p:ropert7 purchased prior to such reduction-. n 59 Of

DECISION- C. T.A. C SE NO. 65 - 15- The of'~cited treatis~ on incowe taxation, Mertens Law of ederal Inco.e Taxation (Vol. 3, pp. 357-:359) a es with the f'oregoin& view: "The eost of property is the basis to be used in deterainin& ain~ or loss from the sale or other disposition of thereof1 increased or decreased, ac- cording to certain require ents, for expenditures and losses, and re yunts char eable to capital account , and for depreciation and depletion allowed vith re sp ct to such property � � � � � � � Bow- ever such costs can not be fictitioualJ or arti- ficially created by the taxpayer as a means of tax avoidance. " we believe aad ao hold therefore that the currency value of n y or the purchasin power of �t e peso at the time of ac... quisition and of disposal should hot be taken into consider&- tion in the computation of gains or losses of petitioners in � the expropriation of their propert,-. The next question to be resolved is - when should this taxabl~ inco be deemed effective tor taxation purposes? In other words; in what taxable year is th incooe deri.ed fro expropriation of petitioners property actually to be ihcluded in �ro�a inco e? Petitioners contend that the income they derived fr the expropriation should be dee ed received either in 194S; follo ing tho accrual et od or in 1949, when they bee e entitled to receive the inco e and in fact actually received more than 25% of the total ount as initial payment tor the expro riated prop rty. On the other band, respondent contends that the total &liOUDt awarded to the petitioners as just compensation or the pro.pert;r expropriated should be treated as inco e for the ;rear 19501 on the gr ound that the Court entered the final decree in fo

DECISION .. C.T.A. CASE NO. 65 - 16- tb expropriation . roceedings in 1950 and it s actuall.Jr in that rear that petitioners received the tinal a110unt to co� plete the P94, 305. 75 awarded. Besides, accordinr; to respondent , the petitioners should not be allowed to change their � thod of accountin without previous permission. from the Collector of Internal Revenue . Let us reviev the salient facts of the case pertinent to this issue. E:z:propriation proceedin s were started on hbruaq 251 1948. The deposit of Pl56, 9PQ. OO coverinc ~he pro'YisioD&l price of the vhole property involved vas �de on 1-Jarch 41 1948, and pursuant to the order of the Court of First Instance of Pampanp1 the petitioners withdrew the SUil ot P)4, 580. 00 which pertained to petitioners Oil JaDua:t7 2!1' 1949. The Court or First Instance of Paapan handed dow ita decision on the ex- propriation proceedin s on Nove�ber 291 1949. 01'1 Januaey 9, 19501 the joint petition of waiver and compro:aiae was filed b)" the ~overnment and the property owners including the petitioners herein. The balance or the award in the IJIOUDt of �59; 785. 75 was received ey the petitioners ao�tU. in Januar;r, 1950. The pertinent rules regardinc the period when incoM is to be r eported is found in sections 38 d )9 of the ational Internal P.evenue Code 1 which state as follows: ttSec � .38. General rule . - The llet inco shall- be c omputesi upon the taxp&Y'er �s annual accounting period (fiscal rear or calendar 7ear, as the case may be) in accordance vith the methods ot accounting r ecularly emplored in keepin the books of such taz- pqer; b~t if no suoh thod of accountin bas bee11 e plo ed, or if the thod ��pl07ed does not reflect the true inca., the coaputatio11 shall be aade in accordance with such method �as in the opinion of the 6ollector of Internal Revenue does clearly re- flect the income . If' the taxpayer's annual account- inc period is other than a fiscal 7ear1 a s defined in sec. 84, or i f t he taxpa1er bas no annual account- ?J v 61

DECISION- C. T�� CASE NO. 65 - 17- ~ period, or does not keep the books, or if the tax- pa,-er .is an individual, the et incou shall be com- puted on the basis of the calendar year. ~ '*Sec. .39. Period in which iteaa of erosa in- come included.- The amount of all items of gross ineoM shall be included in the cross �income of the taxable year in which received by the taxpaJer. unleaa, under .athods of accounting pel'llitt.ed UAder c. - .38,. a:ti.3' such unta are to be proper~ accounted or as of a ditferent period. x. x x x x " From the torecoin provisions we note that the inco is &tterained pnerau,- accordin to the athods of accountin ce��rallJ followed by the t&Xp81er. In the iaple entation of the aforecited �ection .38, it is provided in section 168 of Revenue Regulations No. 2 ( Incoae Tax Regulationa; published o.G, February 10, 1940, .39 .325) the taxpqer 118Y not chance troa one accountinc period to another vitthout previous perai..- sion of the Collector at Iater.aal Beve.ue, Accord . to the records of the Bureau ot InterDa.l venue, the incoae tax returns of the petitioners have beea filed on the basis of actual receipts and disbursements, otherwise ,r ferred to as the "cash 'baaia" arstea of ac.countinc� Hence , in viev of the aforecited rules, the petitioner u.y not be allowed to chance troa the "cash basis� .athod to another. Onder petiti oners a ethod of reportinf 1ncolll8 the ain frca the expropriation in this case, would therefore be subject to incoae tax .in 1950� the 7ear it was actually reali$ed or received by the � Of course we obsene that a portion of the price was received in 1949. A... suaing aroendo that thil!! J18Y be considered in determinin� the existence of a 1ain, w find that there was no gain in fact in that year, as- the nount of ft:34,5SO. OO then received was not even sufficient to cover the cost or basis of the propert7 ex- propriated vhich w.s found to be P45. 011.75. The aaount re- � iP 62

DECISIOB ..,. C. T.A. OASE o. 65 .... 18. c ived in 1949 vas a � re turn or a capital (Fisher v. Tri- nidad:'- 1922, 43 Phil. , 97.3}. re v r, ag1-ee with r e spondent that th bett r rule to .toll in conde tio proc din� tO co 1 doc inoo � o the ta:mb1 t year t Court red it r expropriatio pro odin a. The profits o� City �Of e York for property cond ed to et er with intere t on the award, constituted taxable inco � Th profit and the interest are t bl in t rear the Court tered the final decree w rein t ti unt which the ~a;yer roeei: ed." (Ba.ltiaore th J n 0 io ilroo.d Co. v. Co � , 29 B1' .368; J h J. ' Bl ias., 27 BT 80.3; . s~ Trust Co. of ew rk T . der on 65 _ d. 2d 57S) In this p rticulnr case therefore; since� the decree of the Court in the expro riation ca final in 1950, th gain alis the rr hould b d d realised in 1950 l ch r; In th nt ov i revie ,. the respond t ed the 5 surehar provided for i aeetion. 72 t the Tax Code . 'fh petitio rs ve prot ted to t is impos1ti t fil tal r vron inc t returh. The titio er cla. t did ot include tb items involved hereii'l their inc t ax returns tor the calendar Jear 1950 or that of the i or 7 a.r ; 1n th ir honest belief that the inco wa <>:t.t axable co sider... in t t th e vas der ive f'ro: expropr iatio , an involunt8.1'7 act , .and t t t inco tax a the alre ~ take to account i th d: termination of the "just compensat1on� id to thell bf t he gove~ent . Further.mor , petitione rs belie~� that t hey re xe t der the litar;r Bases A reeaent. believ that th re could not have been deli rat or i11tul intent o the 63

DECISION - C. T . A ~ CASE NO. 65 - 19 - part of the petitioners to defraud the cover.aaent or its re- venues, b7 concealinc the incoll8 derived �roa the exprop?iation of their propertr, consideri.B the publicit;r attendant to auch expropriation proceedin s~ Findinc t~t the petitioners acted in cood faith and without intent to defraud the overnaent, on crounds of equit1, � w believe and so hold that the 50% surcharce 11q not be i:aposed upon the petitioners. In fiae , we are of the opinion and so hold, that this Court baa jurisdiction to hear and deteraine this case; that the cain derived b.1 tbe �petitioners tro the expropriation or their pro- pertr constituted taxable i.Bcae and as such taxable as a capital �aiD; and that the said ain vas, uader the circuastances herein, t~ble in 1950 vheft it vas realised. However, the evidence or this case do not �rrant _the iaposition of the 50% ~urchar e . FOR ALL THE FOR:3GOING, we find and so hold that the aaees,._ Mnt or the respondent should be as it is hereb7 liOdified and the petitioners are herebJ required to pay the sum of Ft~ , 654. 00 as deficie11q inco tax, with costs against the petitioners. SO ORDERED. ila, Au st 31, 1955. ~/~~ MARIAlfO ifABIE ~dine Jud&e _ I concura Associate Jud e Roan {, 1 Ullali did not take part- - 64 in the proceediftl8� .�