CTA Case No. 646 (Decision)

�-�....--- V. E~ LEDNI(.;KY and MARIA VALERO LEDNICKY, Petitioners, - versus - C. T. A. CASE NO. 646 COMlvl iSSIOl.JEH OF INTERNAL REVE UE , rl.espondent. X- - - ~ - ~ - - - ~ ~ ~ - X DECISIO The petitioners herein, V. E. Lednicky and Maria Valero Lednicky, husband and wife, both Ame - rica n vcitizens and residents of the Philippine s, seek by this appeal for the refund of the sum of ~1 12,437.90, which they claim to have overpaid as I. income tax for the year 1956, resulting from the de- du c tion of the amount of ~205,939.24 whic h was paid by them in 1956 as foreign income tax. The peti- tioners also claim for the payment of interest on the amount of ~ 1121 437 . 90, at the rat e of six per c ent (6~) a year from the date of payment. (Exh. B, pp. 5- 6, BI. rec.) The salient facts are not controverted. In 19561 all the inc ome of �' the spouses was derived from sources within the Philippines. On March 27, 1957 , the petitioners filed their 1956 income tax return reporting a gross income of ~1~017 , 287.65 and a net income of ~733 1 809o44, on which the amount of� 322,201.00 was assessed! less I

DECISION - C.T.A. CASE NO. 646 - 2- ~4 1 805 . 59 in withholding tax , or a net income tax due and payable of ~31 7,395.41 for the year 1956. (Par. 31 Petition , & Par . 1, Answer; Exho A, pp., 7 & 11 1 BIR rec.) On April 15 , 1959, the petitioners, pursuant to respondent's asses sment notic e No. A-31462- 56 , paid �326 , 247 . 41~ as evidenced by Offic ial Receipts No s. 764592 and 764593 for ~8 , 852.00 and ~3 17 1 395.41, res- pectively. Hence , the total sum of income tax paid for the year 1956, including the withholding tax of i"4_.805. 59 1 amounted to :il~33 1,053.00. (Par. 4 , Petition, & Par . 1~ Answer.) On March 17 , 1959 1 the petitioners filed an amended income tax return ~ for 1956 reporting the same gross inc ome of ~1 1 017, 287., 65 reported in their ori- ginal income tax return, but a smaller net income of 527,870.20 on which the sum of 213;809 . 51 is due as income tax after deducting �4J805.59 as withholding tax . ( Exh. C , pp. 1 & 4 , BIR rec.) The only differenc e between the original and the amended income tax r eturns is the claim to a deduction in the amended return of the sum of 205,939.24 paid in 1956 to the u.s. Govern- ment as federal inc ome tax . Simultaneously with the filing of the amended inc ome tax return for 1956 on Marc h 17 , 1959, the pe � titioners also filed a writte n~ claim for refund of the sum of ~ 112,437. 90, plus six per c ent ( 61o) interest a year from the date of payment . ( Exh. B, pp. 5- 6, BIR rec. ) ' ,j;)

DECISION ... C.T.A. CASE NO. 646 -3- In view of respondent's failure to answer the claim for refund 1 and inasm~ch as the two-year period prescr ibed by Section 306 of the National Internal Revenue Code within� which to file the action in court to recover the income tax allegedly erroneously col- lected by the respondent was to expire on April 15, 1960,. the petitioners filed the in st�ant 11 Petition for Review and Refund of Inc ome Taxv on April 11 1 1959. As correctly stated by the respondent Commis- sioner of Internal rlevenue, the vlegal issue in this case is identical to that involved in C.T . A. Case No. 570 which is (was then) pending decision by this Honor- able Court 1 L, e ., whether or not income tax paid to the U. S. Revenue Servic e in 1956 is deductible from Phil - ippine gross income earned in the same year by an Ame- rican resident who has no income other than that de- rived from Philippine sourcesv. (Pe 1, Memorandum for the Respondent; Po 103, CTA rec.) The case referred to by the respondent (C.T.A. Case No. 570) is between the same parties as in the ..l.nstant case, who are also re- presented by the same attorneys, and involve the same kind of tax and practically the same facts, the only difference being the taxable year under review. The petitioners claim the disputed deduction under Section 30 {c) (1) (B) of the National Internal Revenue Code which provides as follows:

DECISION - C. T. A. CASE NO . 646 -4- ' 1 EC . 30. Deductions from gross in- come.- In computing net income there shall be allowed as deductions - X X X (c) Taxes: (1) In general: Taxes paid or accrued within the taxable year, except - X X X (B) Income , war ...profits , and excess ... profits taxes imposed by the authority of any foreign country; but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his de- sire to have to any extent the benefits of paragraph (3) of this subsection (relating to credit for taxes of foreign countries);" Interpreting and applying the above-quoted pro- vision of the Tax Code to C.T.A. Case No. 570 (V. E. Lednicky and Maria Valero Lednicky vso Collector of In- ternal Revenue) which was decided by this Court on De c- ember 29, 1960~ we saids "A peru sa l of the above - quoted codal provision yields the unmistakable conclusion that a taxpayer. Who does not indicate in his return a desire to have the benefits of credit for taxes of foreign countries, shall be entitled to a deduction claim for income , war-profits, and excess-profits taxes im- posed by authority of a foreign country and paid or accrued within the taxable yearo In the case at bar, it is admitted that the petitioners paid U. S. Federal income taxes in 1955 and did not indicate in their 1955 re - amended tax return that they desired to enjoy the benefits of credit for ' the income taxes they paid to the United States govern- ment. Clearly , they are entitled to deduct from their gross income for the year 1955 the amount of ~471,867.32 paid as U. So Federal income taxes . '1 And we ruled further that: I

DECISION - C. T. A. CASE NO. 646 - 5- 11 X x x even on the assumption arguendo that the petitioners are not entitled to any credit for the taxes paid to the United States gover nment J still, they should be allowed a dedu c tion therefor o11 Con s idering that no valid and s t r ong argument wa s advanc ed by the re spondent Commissioner of Internal Revenue to justify a departure from our ruling in C. I.A. Case No . 570, supr a ., we are of the opinion and so hold that the petitioners in the case at bar are entitled to a dedu ction in their 1956 inc ome tax return of the amount of i--205 , 939 . 24 whic h wa s paid to the u. s. government a s Federal inc ome tax, and as a consequence of said dedu c tion, they s hould be refunded the sum of ~112, 437.90 , as er - roneously c ollec ted 1956 inc ome tax. However J with regard to the c laim of the peti- tioners for the payment of interest on -t he amount re - fundable , it shall suffic e to state that the late st de - c isions of the Supreme Court in point i s to the effect that the government c annot be required to pay interest on national internal revenue taxes whic h were erroneously or illegally c ollected by the Commiss ioner of Internal Revenue. (Collector of Internal rlevenue vs o Sweeney , G. R. No . L~l2178 J Aug . 21 , 1959; Colle c tor of Internal Revenue vs. St . Paul ' s Ho s pital of Iloilo ,� G.R. No . L- 12127 , May 25 , 1959 . ) WHEREFORE. , in view of the foregoing considera - ti-on s, the re s pondent Commiss ioner of Internal rle venue i s hereby ordered to refund to petitioner s v. E. Led -

DECISIOi - C. T� � SE 1 0. 646 - 6- nicky and Maria Valero Lednicky the sum of ~ 112,437.9 , without interest, as overpayment of income tax for the year 1956. v ithout pronouncement as to costs. SO ORDErlED. Manila , March 2, 1961. EC U: ~� ~ Pr siding Judge