CTA Case No. 4660 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY HOSPICIO DE SAN ~OSE. Petitioner, -ve rsus - C.T.A. CASE NO. 4660 COMMISSIONER OF INTERNAL REVENUE. Respondent. X- - - - - - - - - - - - - - X DEc I sI 0 N Thi s Petition for Review concerns a deficiency income tax assessments against Petitioner for the taxable year s 1981, 1982 and 1983 in the amounts of Pll34,33o. _:._:. , P 2 8 2 � 9 2 8 . _':._~ and P365,233.~, respecti v ely . inclusive of the sixty (60%) per cent:um maximum d e fi c i e n c y inte re st. It appears from the records of the case that on April 15 , 1987 , Respondent ha s originally assessed Petition e r the following tax liabilities: K i n d o f T a x ..MO o000_ _, _ _ , .._ _ _ __ .. Year I n v o l v e d M ..__, _ _ _ __ _ __ Amount Due . 1) Deficiency Income 1981 P560.064.~ Tax 1982 368,714.~ 1983 287,469.~

- DECISION CTA CASE NO. 4660 - 2- 2) Deficiency Expanded 1981 1.407.~ Withholding Tax 1982 1.317.~ 1983 1.229.~ 3) Deficiency Privilege 1981 298.�7 Tax 1982 278.�7 1983 268.87 Petitioner protested the said assessments in a letter dated May 26, 1987, alleging the � following points: (a) That the expanded withholding tax on professional fees and security guard services were remitted and paid, although late, together .with the penalties and interests thereon: (b) That losses from operations are deductible under Sec. 30(d)(1)(c) of the Tax Code, as authoritatively interpreted in a ruling is sued by the Respondent on December 16, 1966. Assuming for the sake of ar gument that s uch ) ruling were to be revoked, the same can be done only prospectively; (c) That t he contributions for the board and lodging of the orphans and other residents did no t constit u te income; ( d) That t h ere was no factual basis for the assess ment for deficiency expa nded withholding

- DECISION CTA CASE NO. 4660 - 3- tax, because the sa me had been paid, although belatedly, together with the penalties and ~ interest incident to l ate payment; " ( e) That there was no legal basis for the assessme nt of th e deficiency privilege tax be ca use the taxpayer was not engaged in the bu si ness of providing bo ar d and lodging to the orphans and other indigent residents. Responde n t, in a l et ter dated July 29, 1991, received by Petitioner on September 23,1991, resolved petitio ner 's protest by - ( a) revoking the dQflciency assessments for expanded withhold ing tax and privilege tax; (b) deletin g con ributions for board and lodging of the residents as part of gross inco me; and (c) insist�ng on the d is all owances of expenses for professional fees and sec urity guard serv i ces and of operating losses. As a result, Re s pondent mad e reassessments of petitioner's the defici e ncy income taxes for 1981, 1982 and 1983 in t he re s pective amounts of P434,33o � .:.:..~.� P 2 82,9 2 8 . ..~~ and P365,233.~.

DEC I SIO N CTA CA SE NO. 4 660 - 4- Respondent, in her answer, cited the c a se of Hos p iclo de San Jose vs. Commissio n e r of Internal ~ "' Re ve n ue , CTA Case No. 4224 . involving t h e sa me issue , and alleged that the inte nt of Section 27 o f the NIR C by the in se rt ion of t he phrase "regard l ess of the disposition made of such income" is to tax the income from rea and personal properties or from any activi y conducted 'for profit of exempt organizations even if u ~ gd for religious, charitable a nd o ther exempt ~urpose. In other words, the taxable i ncome o f suc h organiza tion should be treated as separate and distinct from their tax exempt income for purp oses of taxatio n . Ac cordingly , the lo ss suf f ered by Petitioner fro m its fully exe mpt op eration can not be allowed as deduc tion from its taxable income. Furt h er more, reliance by petitioner on the � ruling of Dec. 1 5 . 1 966 by the BIR is not in ,I acco r d a nce with law and the government is not pr ec lu ded from collec ti n g such tax which is legally due it cit ing cases of Hilado vs. Collector of Intern a l Revenue, 100 Phil . 28 8 (1956), Zapata Marine Services, ltd. S.A. vs. Court of Tax Appea l s . et al. . G.R. No. 800.116, (April 18, 1988).

DECISION CTA CASE NO. 4660 - 5- The issues to be resolved by this court are as follows: (1) Whether or not the operating losses from tax exe mpt activities of petitio ner may be d educted fro m its taxeble income: (2) Assu ming that the BIR Ruling of December 1 5, 1966 may � be revoked, whether or not the revocation may be done re troactiv ely: (3) Whether or not expenses for professional fees and security guard services are deductible from gross income for failure to with hold taxes on t im e. The first two issue s have already been answere d by this court in a si milar case in volving the same partie s. This is in the case of Hospiclo de San of Internal .!3_.~.Y..~_I)_~-~. !.........!3�.!:!...~..P...9_!)5!.~. !:1-.~ , C � T � A � C a s e N o � 4 2 2 4 , F e b r u a r y 28, 1991, Wh en a p pea l ed to the Cou rt of Appeals, _____________ the h igher co urt, in .C._....o......m........m.........i....s....s.....i...o....._n.....er of Internal , .~.h.~......!:.~..L.!�.!::...1:.... g_.f.... I .!~.. -.~-I2.P..~~ -t~. CA- G � R � S P N o � 2 6 3 6 6 , J u 1 y 2, 199 2, affirmed in toto the decision of this court . Said court h as this to say: 1 ') "':1 .(

DECISION CTA CASE NO. 4660 - 6- "It is clear from the foregoing interpretation t hat the legi s lative intent in amending the proviso in Section 27 by the insertion of the phrase "regardless of the disposition made of such income" is to tax income from � real and personal properties or from any activity conducted for profit of exempt or ganizations even if used for re ligiou s , charitable or other e xempt purpose. In other words, the taxable income of s uch organizations should be treated a s separate and distinct from their tax - exempt income for purposes of t ax ation . In which ca s e, the deficit incurred in the tax - exempt operations canno be s t off agai nst the income from ta xa ble operations. The subsequent deletion of the s ubject provision from sub s ection(e) of Section 27 by Pre s idential Decree No . 1457 which took effect on June 11, 1978 and the tran s position of the same as the last paragraph of t he same Section to cover all exempt organizations under that Section, lends support to our conclusio n. Conformably, the loss suffered by pet! loner from "ts fully exempt operation cannot be allowed as a deduction from its taxable income. On the second i s sue of retroactivity, the same was likewise re s olved in favor of the government. H owe v e r � 'f o r rea s on of good faith and justice, Petitioner s hould not be ubject to the amount of interest for relying in good faith in the SIR's previous ruling. The cou r t ruled as followsz Neverthele ss . We do not fi nd sai d a s ses s rnen to be a retroactive revoco!}tion of the ruling. h ence Section 327 (formerly Section 338 - A now Section 246) of the National I ntern al Revenue Code is inapplicable. Well-established is the 1 .) l"�j -

) DECISION CTA CASE NO. 4660 - 7- rule that the government is never estopped from collecting taxes because of mistBk es or errors on the part of its agents, in line with the doctrine laid down in the case of Hilado vs. Collector of InternBl Revenue, 100 Phil. 288 (1956), as follows: "With regard to the co ntention that General Circular No. V- 139 cannot be given retroactiv effect because thBt would affect and obliterate the vested right acquired by petitioner under the previou~ circ ula r , suffice it to say that Genera l Circular V-123, having been issued on a wrong constl"uction of the law, cannot give rise to a vested r ig ht t hat ca n be invoked by the tBxpayer. The reason is obvious: a vested r ight can not spring from a wrong �nterpreta tion. This is too clear to require elaboration. "It seems too clear for serious argument that an administrative. offic er can not change a law enac ted by Congress. A regulation that is merely a n interpretation of the statute wh en once dete rm ined to have been erroneous becomes nullity. An erroneous constr uct ion of the law by the Treasury D partment or the Co llector of Interna l Revenue does no t pl" eclude or estop the government from collecti ng tax which is l egally due". On t h e third i ss u e, this court b eliev es thl!lt Revenue M mor and um Order No. 38-83 dated November 14, 1983, entitled ''Guidelines for Allowances of �'

DECISION CTA CASE NO . 4660 - 8- Dedu ctions for Certain Income Payments Under Section 30 (1) of the Tax Code", should apply in the final resolution of this issue. The pertinent provisions thereof are as follows: .~..~.A-~. ~.! .!.D. ~.~.......f.9....!:......~..P..P..1Y.. !..r.:!..9..--~-~..�.!: i .2D___1P.l_!.1 An amount claimed as deduction on which a tax is supposed to have been withheld under Sectio n s 54 and 93 ~..b.~]._l be allowed .!..f... _...~-~........~-~..~......9...9..~.!.-~.~......-.~...f......b} ~---� a u d i t a i1 d I o r_ .!.D.Y..~-~..!:-~..9.~_!:.1..9.. ~. . !..................!:.~ ~--. . .---~�~. ~-'!-1 f n e r di s c o ~ that: 3.1/1 No withholding of credita ble or final tax was made but the payee reported the income an d the withholding agent/taxpayer pays during the origina l audit and investigatio n the surcharges, interest and penalties incident to the failure to withhold the tax. 3.1/2 No withholding or creditable or fina l tax was made and the recipient- payee failed to report the income on d u e d a t e t h e r e o f � .P..~_t;__!~__wi t h h o -Ld i n 9. .~..9. ~. ~-.!......l?.:..~..Y-~-. -..~.~!.'J.!..l..SL....!i.~. ~-�---�~!...9..!.!!..~ 1 a u d i t -~..IJ. 9. . . .1.:.~Y.. ~.El.~J...9..~..!...~. 9...!2.......~.b.!......~-~'l.L.~~~e d .!:..9.......b. ~.~.~-........!?....~..~.!.!.........'::'J.!b..t! e 1 d .~.... i n c 1 u s i v e o f .?....~.r..s. t!.~L9.~.~.'-���. ����-!.D..!:..~..r...~.~-!:.._~.!.!..9.__ p e n a !_t 1 e s ..~..D.�J ..9.~.1J..!......_t..9.. ....bJ...~.......f..~.!..!..~..t-~...!:...~---~ l t h h o 1 d � 3.1/3 The withholding agent erroneously underwithheld the tax but pays during the original audit and investigation ,J the difference in the amoun t supposed to ha ve been withheld. inclusive of surcharges, interest and penalties incident to such error. (Underscoring s upplied.)

DECISION CTA CASE NO . 4660 - 9- Cl e arly under said regulation, if the proper withhold ing tax is paid durin g the period of original audit and investigation, the amount claimed as deduction s h all be al owed. The records of the case will . hat th deficiency expanded withholding tax n the amoun of P1,407.~ for 1981. P1,317 � .! . ~. for 1.982 and Pl.229 �..~~ for 1983, were paid by the Pe oner on August 19, 1985 inclusive o �f intere$t, surc harg e and compromise penalties under Confirmation Receipt (C.R.) Nos. 7280780, 728 078 1, 7280783 and 7280784 for 1981 , C. R Nos. 7280785, 7280787, 7280789 and 7280783 for 1982 and C. R. Nos . 7280793, 7280794. 7280795 ~nd 7280796 for 1983. sa~d payments were made during the progres s of the 'nvestigation. Accordingly, � he foregoin as e sments sho uld �' be r ecomputed by ex c luding theref rom the expenses for pro f essio nal f $ and ourity guard services as well as the interest imposed on the basic income tax. Petitioner�e tax l~ ~b1lit1 e for the years in question shou ld heref-ore be recomputed as follows: Rtcoaputation of Dtfleltney Ineo11 Tax: Ul2 uu 1981 Met incoae/(loss) per return 2,003,927.18 ( 829,792.33) ( 585.971.21)

DECISION CTA CASE NO. 4660 - 10 - Add: Net loss on exetpt operations .!.!..~-~.....!.~.~.~.!..~! !!.!.?!t.!1t:l! .?..t!~.t, 32~..:.!! Ntt incote ptr Court's cotputation .~.!.!~~..!!..~~ 1,517,352.94 Less: Incote subject to final tax !.oU1,219.31 138,509.76 ~ Dividend 325,141.24 Interest h~~~-t.~~J.:.!! "' 416,54,.11 Total !t.!J..!!.~I..~~~! .~!!!_733.1! ~91.~.22 Adjusted net incote ....~~,~~~. s.~ 611,173.34 284,8~6 . 52 579,416.14 !!!J.!!!41 Tax due U2,795.61 Less: Taxes withheld -... ..!..!!.?..?..~~! _20,751=.52 730,409.54 Deficiency incote tax ::::.~~.t.!:~-~-~.:!..~ ~!..!..J4!...�n 245,643.34 21,922.32 ill_,721.12 WHEREFORE. in view of all the foregoing. Petitioner is ordered t:o pay the amounts of P266.668._7a. P172.042.!! and P223. 721.02 as deficiency !ncaa. tax for taxable years 1981. 1982 and 1983. respectively. or a total of P662.431.�a. SO ORDERED. Qu ez on City , Metro Manila, De c ember 24, 1993. 0 ...,_;xz Q, Q~ \RNESTO 0. ACOSTA Presiding Judge WE CONCUR: ~. K. GRUBA ssoci e Judge Jn~ t: l fl. J~~=A / I . Rt.;;;';; 0 . (DE . Asso c iate I i

DECISION CTA CASE NO. 4660 - 11 - C E RT I F I CAT I 0 N I hereby certify that this decision was reac hed after due consultation among the members of the Court of Tax Appeals in accordance with Section 13. Article VIII of the Constitution . e.....,;::-\Q.. Q~ ERNESTO D. ACOSTA Presiding Judge Court of Tax Appeals ) .f I \ t~ i ' 1