CTA Case No. 4954 (Decision)

- .. REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY BPI SECURITIES CORPORATION, Petitioner, - versus - C.I.A. CASE NO. 4954 COMMISSIONER OF Promulgated: INTERNAL REVENUE, OCT 251995~ Respondent. ,/ . X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - X DECISION This cas~ involv~s an app~al from th~ d~cision of r~spond~nt Commission~r of Internal R~v~nu~ affirming tb~ disputed ass~ssm~nts of all~g~ d~fici~ncy incom~ and p~rc~ntag~ tax~s for the y~ar 1987, in th~ amounts of P302.823.79 and P9,377.73, r~sp~ctiv~ly. Petitioner is a dom~stic corporation duly organiz~d and ~xisting und~r th~ laws of th~ Philippin~s. P~tition~r is a subsidiary of th~ Bank of th~ Philippin~ Islands. It is primary ~ngaged in busin~ss as a stock brok~r and d~al~r in s~curiti~s. On March 19, 1991, r~pond~nt issu~d Ass~ssm~nt Notic~ against p~tition~r for alleg~d D~fici~ncy Incom~. P~rc~ntag~ and Docum~ntary Stamp Tax~s for tb~ y~ar 1987 by virtu~ of tb~ 1382

........ DHCISIDN- C.TA. CASH NO. 4954 report of investigation conducted on its books under Letter of Authority No. oo 17812 NA (Exh. 1, p. 1 BIR record). dated August 22, 1988, regarding its income and business tax liability for the calendar year ending December 31. 1987. On May 17, 1991. petitioner through its counsel protested the assessments and requested for their cancellation and revocation. On January 6, 1993, respondent, through her Head, Revenue Executive Assistant (Collection). Director II, denied petitioner's protest on tl1e alleged Deficiency Income Tax and Percentage Tax Assessments for failure on the part of petitioner to substantiate its allegations during the reinvestigation ot its case. However. the Deficiency Documentary Stamps Tax Assessment for 1987 in the amount of P277,402.50, inclusive of 25% surcharge and compromise penalty, has been cancelled by tl1e Commissioner of Internal Revenue. This constituted respondent's final decision on the matter which was received by petitioner on January 19, 1993. Thus, on February 16, 1993, petitioner filed an appeal by way of this Petition for Review. Tlle Deficiency Income and Percentage Tax Assessments against petitioner for the year ending December 31, 1987, in the sum of P302,523.79 and P9,377.73, respectively, are computed as follows: DEFICIENCY INGOME TAX- 1987 Net Income per Return p 1,2 19,978.00 Add: Unallowable deduction 430.135.41 1) Accounts written-off p 1,650,113.41 (No supporting papers) . Net Income per Investigation 1383

DHCISION- C.TA. CASH NO. 4R Tax Due Thereon p 577.540.00 Less: Tax Due Per Return 426.992.00 Deficiency Income Tax p 150.548.00 25% Surcharge 37.637.00 20% Interest fr. 4/ 16/88 to 3/ 15/91 106,638.79 Compromise Penalty 8.000.00 Amount Still Due p 302,823.79 DEFICIENCY PERCENTAGE TAX -1987 Penalties for late filing and payment of Percentage tax (Second Quarter Amended) Due Date (2nd Qtr.) July 20, 1987 Date Paid September 3. 1987 Basic Tax p 15,276.00 25% Surcharge P 3,819.00 2,558.73 20 % Interest fr. 7/20/87 to 3/15/9,1 3.000.00 9,377.73 Compromise Amount Still Due p The issuance of the above-cited assessments were explained by the Revenue Examiner in her Memorandum for the Commissioner, dated July 6, 1990 (Exh. 2, pp. 163-166, BIR records). The Deficiency Income Tax Assessment resulted to the disallowance of bad debts written off by petitioner in December 1987, amounting to P430, 135.41 on account of its failure to substantiate the same. While the Deficiency Percentage Tax Assessment was arrived at due to the late filing and payment of the additional percentage tax for the second quarter of 1987. The payment of percentage tax for the second quarter of 1987 was due on July 2o, 1987 but tlle tax on the additional gross receipts as dealers in securities amounting to 6% of P254,600.00 or

DHCISION- C.T.A. CASE NO. 4954 -Paw4- P 15,276.00 was paid only on September 3, 1937. Thus, for the �late payment of the additional percentage tax, surcharge and interest was found due from petitioner pursuant to Section 243 of the Tax Code. This was reiterated by the same Revenue Officer in her Memorandum Report, dated February 1, 199 t addressed to the Chief, Banks, Financing and Insurance Division, in response to the protest filed by petitioner, pertinent portion of said report reads as follows: (pp. 191-192, BIR records) "After going over the protest letter, Ule undersigned noted the following: 1) Deficiency Income Tax ........... P2 80.868.2 5 Subject taxpayer claimed as deduction bad debts Volritten off 'Which was disallowed by the undersigned in compliance With the requisites of deductibility of Bad Debts under Sec. 291 (sic) of the Tax Code 'Which states that before a bad debt may be deducted from gross income, the following requisites must concur: (1) There must be an existing indebtedness; (2) Such debt must be ascertained to be worthless; and (3) said debt must be actually charged off With (sic) the taxable year 'When it was ascertained to be worthless. Subject taxpayer had not established either that debts are actually worthless or that it had reasonable grounds to believe them to be so. 'It is noted that, in violation of Revenue Regulations No. 2, Section 102, respondent had not attached to its income tax return a statement shoWing the propriety of the deductions thereon made for alleged bad debts.' (Collector of Internal Revenue vs. Goodrich International Rubber Co., L- 22265, Dec. 22, 1967, 21 SCRA 1336.) 138[1

------ DHCJSION- C.TA. CASE NO. 4951 - Page5- As for the alleged documents presented as stated in their protest letter, the undersigned has not received any single document in relation to that issue considering the ample period of time given to them. All the related records and documents were attached herewith and were made as integral part of the docket. 2) XXX XXX XXX. 3) Penalties for late payment of P7.273.46 Percentage tax - While it is true that the 2nd Quarter percentage tax return was filed on time and that the basis of the assessment was the amended return filed, Sec. 248 of Tax Code provides that - If the tax is not paid "Y'lithin the time prescribed for its payment, the amount of the tax shall be increased by a surcharge of twenty-five (25~) per centum, the increment to be part of the tax and the entire amount (tax & surcharge) shall be subject to inte-rest at the rate of twenty (20~) per cent per annum. The said amount was being assessed for late payment of tax within the time prescribed for its payment." As special and� affirmative defenses, respondent, among others. alleged in her answer to U1e Petition for Review that the disallowance of bad debts expense in the amount of P430, 135.41, was correct for failure on the part of petitioner to substantiate tlle same; that petitioner failed to establish the fact that the debts were actually worthless, pursuant to Section 102 of Revenue Regulations No. 2; that petitioner is liable to pay surcharge and interest due to the late payment of the additional percentage tax for U1e second quarter of 1987, pursuant to Section 248 of the 138G

DECISION- C.T.A. CASE NO. 4951 Tax Code; and that all presumptions are in favor of the correctness of tlle tax assessments issued. The question posed itself as to whether or not the Deficiency Income and Percentage Tax Assessments has legal basis to stand on. As corollary issues the consequential questions particularly presented for resolutions are: ( 1) Whether or not the disallowance by respondent of the claimed deduction for bad debts in tlle amount of P4,933.25 is proper; and (2) Whether or not petitioner is liable to pay surcharge and interest for tlle late payment of the additional percentage tax for tlle second quarter of 19&7. We shall tackle tl1e first corollary issue with respect to the disallowance of the bad debts expense claimed by petitioner in the amount of P430, 135.41. During the hearings conducted in this case, petitioner through its counsel manifested its conformity to the disallowance of the first three bad debts expense. Thus, limiting its argument to only one bad debt disallowance in the amount of P4,933.25, pertaining to the outstanding account of Mr. Felipe Ysraet a client of petitioner. It was ascertained during the hearing of October 13. 1993. that Mr. Felipe Ysrael has a margin of account with petitioner. A margin of account is an accommodation extended by petitioner to its clients whereby the latter buys shares of stocks to be financed by petitioner. Tlle shares stands as. collateral for the accommodation extended by petitioner to the buyer-client. The

DHCJSION- C.T.A. CASE NO. 4954 value of the securities bought is usually twice the amount of the margin accommodation. Mr. Israel's margin of accommodation with petitioner amounted toP 118.3&4.94 plus an accrued interest of P 19,707.32, or a total of P 13&,092.26. To satisfy the payment of the outstanding amount of P 13&,092.26, petitioner sold au the shares of Mr. Ysrael in Interport and Trans-Asia Securities for a consideration of P 133.159.01. There remains a balance of P4,933.25 still unsatisfied, computed as follows: (Exh. B) BPI SECURITIES CORP.- 19&7 WRITE-OFF OF F. YSRAEL ACCOUNT: Receivable p 11&.3&4.94 Accrued Interest 19.707.32 Total p 13&,092.26 Less, Proceeds of sale of 133.159.01 Interport and Trans-Asia shares Balance p 4.933.25 This amount was written off as bad debt for the year 19&7. To prove that the amount of P4,933.25 was correctly deducted as a bad debt expense from the gross income of petitioner, petitioner's counsel presented and offered the following evidence to substantiate the same: 1) Exh. A - Pro-forma Margin of Agreement between petitioner and its clients for the purpose of showing that petitioner extends credit to its customers whereby petitioner has 1388

DHCJSION- C.T.A. CASE NO. 4Clil - PaJP8- authority to unload or sell tlle securities bought by its customers When tlle value of tllese securities goes below a certain margin; 2) Exh. B - Computation of Bad Debt account of Mr. Felipe Ysrael to show how tlle amount of P4,933.25 was arrived at; and 3) Exll. c - BPI �s Recommendation for Write Off, dated December 15. 1987. signed by one Mr. Malixi, Regional/Area/Dept./Div. Head of BPI, then Asst. Vice-Pres. of BPI Securities Corp. (Exh. C- 1); and Exh. C-2 - The circumstance necessitating tlle deduction of P4,933.25 to show tlle steps taken before tlle write off of the unpaid balance of Mr. Ysraet to wit: "COLLECTION EFFORTS TAKEN & PROSPECTS OF RECOVERY: Facts and information gathered showed that client is insolvent, and has no more leviable assets. Debit balance reached a high of P 118,384.94. After reversal of accrued interest in suspense for P 19,707.32 and selling of his Interport and Trans-Asia shares tlle balance is now down to P4,933.25." What are the requisites for a valid deduction of bad debts? Section 30(e)( 1) of the 1987 National Internal Revenue Code provides as follows: �ce). Bad Debts. - ( 1) I.a ge.aeral. - Debts due to the taxpayer actually ascertained to be worthless and charged off within the taxable year except those not connected with profession, trade or business and those sustained in a transaction entered into between parties mentioned under Section 31 (b) of this Code... 1089

DECISION- C.T.A. CASE NO. 4954 - Page9- The requisites for deductibility of bad debts are: ( 1) There must be an existing indebtedness; (2) The debt must be ascertained to be worthless as when the debtor is insolvent; (3) It must be actually charged-off within the taxable year; and (4) The debt must be connected with one's profession, trade or business. Before a taxpayer may charge off and deduct a debt, he must ascertain and be able to demonstrate, with a reasonable degree of certainty, the uncollectibility of the debt. The Commissioner of Internal Revenue will consider all pertinent evidence, including the value of the collateral, if any, securing the debt and the financial condition of the debtor in determining wbether a debt is worthless. Thus, where the surrounding circumstances indicate that a debt is worthless and uncollectible and that legal action to enforce payment would in all probability not result in the satisfaction of execution on a judgment, a showing of those facts will be sufficient evidence of the worthlessness of the debt for the purpose of deduction (Sec. 102, Rev. Regs. No. 2). In the case of Philippine Refining Company vs_ Commissioner of Internal Revenue.. CTA Case No_ 4408.. February 3.. 1993, we ruled: "Our statute permits the deduction of debts 'actually ascertained to be worthless within the t3.xable year�, to prevent arbitrary action by the taxpayer to unduly avoid tax liability. The 1~90'

DHCISION- C.TA. CASE NO. 49.it -Paw: to- requirement of ascertainment of worthlessness requires proof of two facts: ( 1) that the taxpayer did in fact ascertain the debt to be worthless in the year for which the deduction was sought; and (2) that, in doing so, he acted in good faith. Good faith.on the part of the taxpayer is not enough. He must show also that he had reasonably investigated the relevant facts and had drawn a reasonable inference from the information thus obtained by him. (Collector vs_ Goodrich International R.ubber Co... 2 1 SCR.A 1336.. December 26.. 1967)_ The creditor must be able to demonstrate that the debt is not only uncollectible but also appears uncollectible at any time in the future. So, 'Where the recovery is merely doubtful, deduction will not be allowed. The following steps should be followed: � 1. sending of statements of accounts; 2. sending of collection letters; 3. giving the account to a lawyer for collection; and 4. filing a collecti<m case in court." In the case at bar, the only evidence presented by petitioner to determine the worthlessness of the debt in question was the document marked as "Exh. C" - Recommendation for write-off. :Petitioner alleged that the client is insolvent and has no more leviable assets. Considering that the amount was only minimal, the same was written off as a bad debt account. Petitioner in its letter to the BIR, dated August 17, 1990 (pp. 179-181, BIR records), alleged that it has .on record documents to establish the worthlessness of the written-off accounts. It went further to state that cases were filed in Court against delinquent debtors a.fter demands for payment were unjustifiably ignoroo. 1381

DECISION- C.T.A. CASH NO. 49.)1 - Pawtt - According to petitioner, these documents are readily available for the BIR ey..aminer�s re-examination. There is patently an absence of such document pointed out by petitioner. No letter of demand nor civil suits. for collection� were ever presented to the examiner nor to this Court except the Recommendation to Write-Off the account of Felipe Ysmael in the amount P4,933.25, being a very minimal amount. Nothing in the record will prove that indeed Mr. Felipe Ysmael is insolvent. If at all, the only reason why U1e account of Mr. Ysmael was written- off v>~as because it involves a very minimal amount and to subject it to the rigidity of a collection suit would be highly impractical and inconvenient for petitioner. A debt is not worthless simply because it is of doubtful value or difficult for collection. (White v _Comm.,. TC Memo 1971- 13.. 3 Mertens.. Law of Federal Income Taxation.. Chap_ 30,. P- 167,. ( 1995).1 The burden of proof is on the taxpayer to show not only that the debt is worthless but also that it became worthless during the taxable year. (Caliguiuri v _ Comm... 549 F'2d 1155-> The burden accorded U1e taxpayer can be overcome if the taxpayer can point to some certain event or events occurring within the. taxable year which evidences the worthlessness of the debt. (Hunsaker v_ Comm... 615 F'3d 1253-> Many worthless debt deductions have been denied for failure of proof similar to U1e case on hand. Thus, for failure to overcome the burden of proof with respect to the worthlessness of the account of Mr. Felipe Ysmael the Court sees no reason why it has to reverse the findings of respondent with respect to the disallowance of bad 13~32

DE'CISION- C.T.A. CASH NO. 4954 - Paget2- debts resulting to the Deficiency Income Tax Assessment against petitioner for the year 1987. However. the Deficiency Income Tax Assessment for 1987, in the amount of P302,823.79, should be reduced by P8,000.00, representing the Compromise Penalty. No compromise agreement has been reached by both parties considering that this case was actually appealed to this Court. It is a well settled doctrine that compromise penalty cannot be imposed or collected 'hithout the agreement and conformity of the taxpayer. (Collector of Internal Revenue v _ University of Santo Tomas.. et. at.. G.R. Nos. L-11274 & L-11280.. November 28.. 1958.. 104 Phil. 1062 Unrep.; the Co11ector of Internal Revenue v _Bautista.. et. at... G.H.. Nos. L-12 250 & 12259.. May 27.. 1959.. 105 Phil. 1326 Unrep.; The Philippines International Fair.. Inc. v _ Co11ector of Internal Revenue.. G.B.. Nos. L-12928 & L-12932.. March 31.. 1962.. 4 SCRA 774; Wonder Mechanical :Engineering Corporation represented by Mr _ Lucio Quijano.. President & General Manager.. v _The Hon. Court of Tax Appeals and The Bureau of Internal Revenue being represented by The Commissioner of Internal Revenue.. G.R. Nos. L- 22805 & L-27858.. June 30.. 1975.. 64 SCH.A 555.) The D~S-ficiency Income Tax for 1987 should therefore be P294,823.79. YVe now go to the second corollary issue of whether or not petitioner is liable to pay Deficiency Percentage Tax for late payment of it.s Additional Second Quarter Percentage Tax which was due on Ju.ly 20, 1987 but was paid only on September 3, 1987. 1383

IJF.CISION - C.TA. CASE NO. 4954 - Page13- There is no dispute that petitioner filed its original Second ' Quarter Percentage Tax Return on time, that is, on July 20, 1937. However, an amendment v.,ras later filed, on September 3. 1987 (Exll. D-1. p. 33, BIR record). indicating an additional Gross Receipts for the Second Quarter of 1987 in tlle amount of P254,600.00, representing income as dealer in securities. The corresponding tax of P 15,2 76.00 was paid on September 3, 1937 under CB Confirmation Receipt No. B 12&02126. However, petitioner contended that when it filed an Amended Percentage Tax Return on September 3, 1937, tlle Commissioner did not impose any surcharge, interest or compromise penalty. Petitioner added that an amendment is not synonymous to late filing. We disagree witll petitioner. Section 16(a) of t11e National Internal Revenue Code gives tlle Commissioner of Internal Revenue tlle power to examine the returns filed and assess the correct amount of tax. , Likewise, Section 232 (3) of t11e same Code provides for tlle imposition of 25% surcharge, as an addition to tlle tax, for failure to pay tlle tax witllin the time prescribed for its payment. In tllis case, tlle percentage tax of P 15,2 76.00 paid on the additional gross receipts of P254,600.00, as dealer in securities, for tlle second quarter of 19&7 sh<)Uld have been declared and paid on July 20, 1937 but the same vvas filed and paid only on September 3. 1937 which is -way beyond tlle time prescribed by law. Therefore, respondent was correct in imposing t11e corresponding surcharge and interest. However, in connection Y.lit11 tlle discussion witll respect to the compromise penalty in the Deficiency Income Tax Assessment for 1394

DECISION- C.TA. CASE NO. 4951 - Patf14- 198 7, t11~ Court adopts t11~ sa.m~ conclusion r~a.ch~d by t11~ Supr~m~ Court in t11~ cas~s pr~vious1y cited. H~nc~. p~tition~r cannot b~ subj~ct~d to pay th~ compromis~ p~na.1ty of P3.000.00, impos~d by r~spond~nt in a.ss~ssing it for D~fici~ncy P~rcentag~ Tax in 19&7, V?ithout its cons~nt. P~tition~r in its last ditch to ov~rturn th~ Defici~ncy P~rc~ntag~ Tax Ass~ssm~nt (issu~d on March 19, 1991) invoked pr~scription as its d~f~ns~. It contend~d that the a.ssessm~nt was issu~d b~yond t11~ thr~e (3) y~a.r period to a.ss~ss under S~ction 268 of tll~ National Internal Rev~nue Code. Respondent disputes tllis by pres~nting as evid~nce the Waiver of the Statute of Limitations (Exll. 3, p. 189, BIR record) sllowing that petitioner tluougll its President sign~d th~ Waiver and duly a.cc~pted by r~spond~nt in order to stop t11e running of the prescriptive period to a.ss~ss and to give ample time for t11e ~:xaminer to conduct a. r~investiga.tion. Provid~d, however, that tl1e p~riod to assess, as agr~~d upon by the parti~s, shall not be later than March, 1991. Th~ 19() 7 D~ficiency P~rc~ntag~ Tax ass~ssm~nt notic~ vJas issu~d by respond~nt on Marcil 19, 1991 still within t11~ p~riod agreed upon. Tbis is bolster~d by t11e fact that p~tition~r in a l~tt~r address~d to t11~ BIR, dated July 30, 1991 (p. 218, BIR r~ord), ~xecuted anot11~r Waiv~r (p. 2 17, BIR record), on July 30, 1991, valid up to January, 1992. With t.h~ waivers signed by petitioner, it cannot now invoke prescription on t11e period for respondent to assess. Section 271 of the National Internal Revenu~ Cod~ is clear on this point, to wit: 1085

- IJF.CISION - C.TA. CASH NO. 4954 - Pa.get5- �sEC. 271. . SU~.llsi0./1 of IU.ll.lli.llg of statute. - The running of the statute of limitation provided in Sections 268 and 269 on the making of assessment and tlle beginning of distraint or levy or a proceeding in court for collection, in respect of any deficiency, shall be suspended for the period during which the Commissioner is prohibited from making the assessment or beginning distraint or levy or a proceeding in court and for sixty days thereafter; V�lhen the taxpayer requests for a reinvestigation which is granted by the Commissioner; when the taxpayer cannot be located in the address given by him in the return filed upon which a tax is being assessed or collected: Pr..'>vided, That, if the taxpayer informs the Commissioner of any change in address, the running of tlle statute of limitations will not be suspended; when the warrant of distraint and levy is duly served upon the taxpayer, his authorized representative, or a member of his household with sufficient discretion, and no property could be located; and when the taxpayer is out of the Philippines." WHEREFORE~ in view of the foregoing, the petition for review is hereby DISMISSED for lack of merit. However, respondent's decision, dated January 6, 1993, is hereby MODIFIED with respect to the imposition of the compromise penalty there being no agreement to its imposition. Accordingly, petitioner is ordered to pay the respondent the amounts of P294,e.23.79, representing Deficiency Income Tax for 1987 and P6,377.73. repr-esenting Deficiency Percentage Tax for 1987, or a total of P30 1,201.52 plus 20% interest until the amount is fully paid, pursuant to Section 283(c)(3) [now 249(c)(3)] of the National Internal Revenue Code, as amended. Costs of suit against petitioner.

- DHCISJ.ON- C.TA. CASE NO. 4954 - Pa~t6- SO ORDERED. WE CONCUR: . ct~CQ. ~ ERNE 0 D. ACOSTA P ~siding Judge . ~ ~J..f I RAMON 0. DE VETjA I Associate Judge I I I L CERTIFICATION I hereby certify tl1at this decision was reached after due consultation between the members of the Court of Tax Appeals in accordance witll Section 13. Article VI II of the Constitution. ~~w .. ~ ERN.I!STO D. ACOSTA Court of Tax Appeals Presiding Judge