MANOTOK REALTY INCORPORATED v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHIL: PPINES COURT OF TAX APPEALS QUEZON CITY ttlANOTOK REALTY INCORPORATED, Pet itioner, - v :?rsus - C. T.A. CASE NO . 5485 COMMISS I ONER OF INTERNAL Pro mul gated: REV ENUE, Re sponden t. . OCT 18_.1999~+.4~~~ --- -- ---x DECISION petition seeking for the withdr0w~l and cancellation of an .::\ssessment .:::!"\ ...... def:: c:::i. t��nc ;.t I ~.. f l! f. :i. 98f:~ in ',,' 1nclusive of surcharge, interest and compromise pP~a'ty, r ,,. . . ' . t; .i. n g ft'�.i 111 the disallo!tJance of ~0 .'.. claimed by Petitioner as The factual backdrop of the case are as fol}Gws: {:"�r-~ i"; i t i f' ., , r� ,.. 1s a corpordtion duly Dr' gan i z e d an c e ~< 1 st ing undet' the 1 a\\IS of the Ph i '.L i ppine~ ancl .I �:; l ea::. i ng c :... (.1 I ,,~ .,, ::_, n ~I other' '�' in the b:_, ?., iness of apartment un1ts. ,::n�: ., i -�; _..I;. I ncome Tax Re t urn for the t axab 1 e yPal~ ended Decemi L�l"' ��:;-�j ,_.,;:, "1. ::: xh. C! Jn the amo \nt of P1Bi=�, 786. i=~7.

DECISION C.T.A. CASE NO. 5485 2 l ':392 ~ Petitioner received a Pre- Assessment ~otice , dated Januar y 20, 1 9 92 <Exh .. Ll' '} 'I issued oy the Respondent fo~ alleged deficien~y income tax assessment for 1988 in the amount of P1,436,710.36, exclusive of in t erest. Petitioner then f i led a protest 1992 , ex plaini n g in d e tail the fi ndings o f Re sponde nt and con te ndi n g that there is actually no deficien c y i ncome t a x due for the said year. On Mc-n~ch 16 , Respondent issued � ~ssessment Notice No. 22-6-0006 0 5-88 (Exh. L)~ demanding pay ment of the amoun t o f P2 ,403,736.54, detailed as follows: Net Income disclosed by P1,0381 617.20 P1,017,287.89 the return as audited 303,877.97 282,894.40 2,831,828. 92 Add: Discrepancies: P3, 849, 116.81 361,254.28 P3,849,116.81 Undeclared inco�e 142,131.35 Pl, 347,191.00 59,586.60 Taxes & licenses-unsupported 643,467.12 356,050.76 p 991,140.24 Service fee-unsupported Fire loss-unsupported 892,026.18 25,000.00 not properly presented to BIR Salaries and bonus- overstated 495,570.12 Legal audit-EWT P2,403,736.54 Depreciation-no lapsing schedule Total Adjustment Net Inc ome per investigat i on Less: Personal and add'l exemption Amount subject to tax Inco�e Tax due thereon Less: Amount already assessed BALANCE Add: 20~ per annum Compromise Surcharge TOTAL INCOME TAX DUE

DECISION C.T.A. CASE NO. 5485 3 Apt" i 1 :1. ~ 1992, and received by Respondent on Apr"i 1 7, 1992 <Exh. G), reiterated its objections and explanations contained in its Protest of February :1.0, requested for a review of the subj2ct assQssment. Respondent, howevet", sent to Petitioner" a dated September 9, M), demandin~ payment of the P2,403,736.54 within ten (10' days from receipt of said lettet�"; othet��wise.1 accot"dinr.~ to Respondent, it shall be constrained to refer the case to :tts Coll~.::~ction Enforcement Division for the issuance of warrants o~ distraint and levy to enforce collection. Petitioner replied through a letter dated Oct abet" 19, :1.992 <Exh. H), requesting again for a reinvestigation of its ca.se. Respondent accomodated Petitioner's request invited thE! c:onfet-- enc~e to refute the validity of its findings (Annex J, Petition fat~ Revi~?w). On . Januat"Y ;:=~o, 1994, Petitioner received Assessment Notice No. FAN-2-88-93-005890 <Exh. by Res pond <'!nt on Decem bet" 9, ! 993, this time lowet�"ing the assessment to only P313~508.23, computed as follows: Basic P-1.26,439.00 ndd :: ~=.:51. Sun~haqJ e 31, E,()~3" -,5 i~OY. p. a .. Intet"est 1 1.1�7 ~ 1.~5'3. 1.~8 B., 000. 00 Compromise penalty P.313. 5()8u 23 TOT11L AMOUNT DUE & COLLECTIBLE

DECISION C.T.A. CASE NO. 5 4 85 - 4- follot'>~ing day~ .Ja.nU-3Y'Y 1 '394, Petit i one1�' allegedly went to t he BIR office and was informed that the "Fil�'e Los�:;" claimed by Petitioner as deduction fro~ its income for�� 198f.:l was disallowed a~~ the SC.\mE:' 'should have be en d ed '..tct ed from its income for 1987. Petitione1�' then wr�ote a lc~ttet' to Respondent on again asking for a reconsideration and cancellation of t'le assessment (Exh. I). Cln Janua�r�y 20, 1997, Respondent an swet'ed Petitioner''�; lette1�' of Januat'Y ..:�:�.�I.~' 1994�, asking Petitioner to present any docu mentary evidence that will shm-J that the latter filed a claim for fire insurance so that the same may be considered in reinvestigating the d1.1e fo�r� 1988 and th.:::tt fai lur�e to submit the said will the a.ssessment final ard unappealable <Exh. 01. Petit i onet', in dated 1997, Rt::o s pond ent that the not and that they have not received a ny compensation. In view of this circumstance, Petitioner requested for a t'econs idet�at ion and cancellation of the subject In reply to Petitioner ' s letter of February 3, 1997~ Respon d ent explained that f :i. t'e loss C -'i:"!Tl only i:l(?. considered as a it (# deduction in the year actually incurred, unless thet-�e is a claim fo1�' fit' t? :i. n �:;:.It'�'=' nc1=-, and

DECISION C.T.A. CASE NO. 5 4 85 - 5- appearing therefore that Petitioner did not 1nsure the Sect ian E:9 (d) ( 2) of the National I nt !�?l�'na.l Revenue Code shall apply. Respondent then gave Petitioner' a pet' i od of ten ( 1(l) days to settle its tax liability <E:-<h. p) " Petit i onet' then elevated it::; case !::Jefot�e this Co ,_wt on i=i pr' :i. 1 '7,. 1997, a~:;kinL] for' the cancellat ion ,;,\nd wi thc:lt�awal of the assessment amounting to P313,508.23, on that the right of Respondent to collect had already prescribed, since collection is b e i n g e n f m'c ed more than three (3) years after the Assessment Notice was issul~d on Decf?mber�� ':3, 199.3; a.nd that the latest assessment issued by Res pon�j ent is er��r�oneou.s, because it i:Ja.sed on actual facts., it appearing that a fit'e '"'hich occtwed on ;~t)'} urits of Petitioner resulting in casualty loss. Respondent claimed by way of Special and Affirmative Defenses that: "5. The d*?duction of f:it"'E~ los �::;e'5 cL::\imE~c! by petitioner should be disallowed. Since petitioner did not insure the property lost t~rough fire, Section 29(d) (2) of the National Inter�nal Revf~nue Codr~ applies. Under' the provisions of said section, the requisites far deductibility of losses are as follows: 1 .. The los'"' must of

DECISION C.T.A. CAS E NO. 5 4 85 - 6- 2. It must have been a2tually sustained or suffered during t~e t<::\xa.b1.e ';/(~~0\l"; 3. It must be evidenced by a closed and completed transaction; and It must not :::>e compensated by insurance or otherwise. Since petitioner failed to comply with the second and third requisites above, it cannot clai m the particular deductions in issue. 6. Likewise, petitioner failed to file a Declaration of Loss before the nearest Revenue District Office within 45 days from the date of occurence of the casualty as mandated by R:?venue Reg1.tJ.at ions No. L:::-. 77. 7. Revenue Hegulation No. 1.2-77 is a valid exercise of the Respondent's rule-making power as provided for under Section 254 of the National Internal Revenue Code, to wit: "Sec. �=::45. Autho~~ity of Secretary of Finance to promulgate rules and regulations.-The Secretary of Finance upon recommendation of the Commissioner shall promulgate all needful rules and regulations for the effective enforcement of the pl�'ovisions of this code .. :-<:x><" 8. Simi L::1~~ly, Sect ion L� ( i) of the 1\lat :i. ona.l I nt et�'na 1 Revenue Code upholds the valid enactment and implementation of Revenue Regulation No. 12-77. Said section provides: '+. "Section Specific pt~ ovisions to be contained in regulations.-The regulations o f the Bureau of Internal Hevenue =;hall, amon~~ oth(:?t' thingsj contain provisions specifying, prescribing, or defining: XXX X>< X XXX " ( i) The mannet' in ~"Jhich t<::iY returns, information, and t'epol�~t s shall be prepared and ~-'epCl��'t ed <::ind t~e tax collected and paid, as well 3.S thr> condition~; u.nc:er' wh :ich

DECISION C.T .A. CASE NO. 5 4 85 - 7- evidence of payment sh<..".ll bt� ftwn 1shed the taxpayer~~ -~ncJ th:-? t -::\X pr~epa1�~,:1t ion and pub:. ic~-:d; ion of st3tlstics;" ':3 � (-.) -r~ e v e n u e t~ e g u. 1at i o n , the issuance of ~-1hich i�; .:.\utl10t'izecl b~' st.:Y~�.tte, 1- a s t h ::- f o t' c r~ ar.d E~ffect of law <Ar~ticle 7, Civil Code; Arches v. Bellosillo, 20 SCRA 32). 10. Petitioner's claim that respondent's right to collect the subject deficiency income tax has prescribed, is untenable. This is because all~Gugh th~ n~s~~cment Notice was issued on December 9, 1993, petitioner 1�' e q u e s t e d f o t' ~ e con s .i. d i? t' a. t i c n It' e ~ n v e s t i gat i on of said assessment, which r~equest was gt~anted :) y r' (~ s p o �1 d r:� n t , 1; 1' u s ., s �.:. s p e n d i n g t h e t~ u n n :i. n g c f the statute of limitations regarding the collect1on of t~xes as enunciated un~er Secticn 224 of the National Internal Revenue Code. 11. Tax Assessments by tax examiners are presumed correct and made in good faith. It is the taxpayer's duty to prove otherwise. <Sy Po v. Cour~t of Tax Appeals, lEA SCRA 5~=�4; 51 Qm- Jur' E20�-62U. Petitionet' in this c.:1�;e ~-.,ilPd to ovet~come said pt~esumption. '' The i s sues, the t' e f o t' e., l.J e <::n� e -!;asked t o t~ e so ::. v e -:7H' e : 1. Whether' Or' not the t':i.gh�~ of the al r'ead y Re;poncient to c)lJ.ect thP t.:Ol}( h-3d pl�'e scl-~ 1 bed; anc' 2. Whether or not the fire loss incurred by Petit1oner in 1987 may be allowed as a deductible loss for 1988. Aft e t' a cat' e f u 1 study of the facts attendant tc t~e case at bar, We find for the Respondent. l.J it h issue, P e t i t; ~ o n P r� contended that when Respondent wrote to Pet;tioner on J�anuat'Y 20, 1997' his right to collect had already

DECIS I ON C.T. A. CASE NO. 5 4 85 - 8- sir-ice mor�e than three years have pas~ed s ~ rce he revised his assessment on December 9, 1993. tha.t Pet :it i orH~l�' y�eque:;ted for a reconsideration of said assessment on <Exhibit "I"), which WD.S Respondent Commissioner in a letter dated January 20, 1997 <E:-<hibit "0"). Under Section 224 of the Tax Code, both these actions have the effect of suspending the running of the statute of limitation5 thus~ Sec. 224 Suspension of r~unn i ng of statute .-The runnin g of the ~:; t: at ut e of limitation provided in Sections 203 and 223 on the makin g of assessments and the beqinning o f distraint or levy or a proceedin g in Court for collection, in res p ect of a n v deficiencv, shall be suscended for the period during which the Commissioner is prohibited from making the assessment or beginning distrai n t or levy or a proce e ding in Court and for sixty days thereafter; when the taxpayer requests for a reinvesti gation which is granted by the Commissioner; xxx But Petitioner argued that the Januar� y 1 ':197 of Re~:. pondent did not :in effect C'' r�einvestigation o f P e t i t i o n e t' ' s ca.se but to impose '"' condition the t' e i n v e s t i g �:?.t i o n . Accot'cling to P&~titionet'~ in order to suspend the period to collect, the r'(~qu.est for reinvestigation be �want eel. We clo not . rg1���<:e.

DECISION C.T.A. CASE NO. 5485 - 9- The 1397 le~ter of Respondent is ~ereby reproduced for easy reference: ''Th :i. �"; refers to your letter-p~ot@st dated Jan u,::wy ;=:L:- 1 1994, against the assesssment of P313? 508. ;=.::3 representing deficiency inccme tax of i"lanotok Realty, Inc. for' the year 1988 under' Asses�;;ment Notice No. FAN-2-88-92-005890, dated December~ 9, 1993. In said protest you consistently maintained that the fire loss 2mounting to P361,254.30 suffered by the subject taxpayer in 1987 be considered as a deductior from its 1988 income tax return. In this connection, we would like to empasize (sic) that the fire losses are generally deductible in the year ,::.ct ua 11 y i ncl..tn�-ed. Hm"-ie vel�', 1 ., you. co u. J. d present to us any documentary evidence purporting to show that you. filed a claim for fire insurance, we will consider the same in reinvestigating the taxes due for 1988; otherwise, failure on your part to submit the said requirement, the assessment subject of your protest shall become final and unappE~a.l ab l c . In view thereof, you are hereby given a period of five (5) day~ from receipt hereof to comply with the said requirement and for this purpose you. may submit the same to the Chief? Legal Division at the 7th Floor BIR Bldg., Anda Cit'cle~ Por-t ~~r-ec-t, Manila." A close scrutiny of the above-quoted letter would reveal P!::>titionet' v.Jas t' e q u i ,~ e d t o submit the documentary evidence sho11'1 that it filed a claim fen' insurance precisely because Petitioner's request for cancellation of the assessment was under reconsideration and ~�Jould bt'-' vit;z. l to on Ot' not to withdraw the assessment. It is to be noted that as a genet'al losses must be claimed as

DECISION C. T. A. CASE NO. 5 4 85 - 10 - C!t"ciUI:t ion :i.n the the le>~~s must lil-<ewise be evidenced by a closed and completed tl�'an~:;,,.ct ion .. In the Respondent could have denied outright Petitioner's request for reconsideration lOS~; sust,;~ined in 1'387 a.nd deductible only in 1987 but because Petitioner ' s case may fall ur:del"' the exception, as when there i n s 'J 1�'an c e , Respondent required Petitioner to submit ~he additional evidence which, unfortunately, Petitioner did not have. Petitioner' s contention, t h ere f ore, that requ2st for reinvestigation was no t did not su.spend the per�iocl to collect, lac~< s basis. We proceed to the second issue. i ~; no dispute that a fire loss was sustained. The only que�;tion for dete rm ina t ion is wh ether or not a fi Y'e loss sustained in 1987 may be allowed as a deduction on the following year 1988 . Fat�' pu r poses of clarity, We shall elwell on the r'equisites " loss" ma y be dt.'dU.Ct(?d f "r"'Dill income:: L The loss must be that of the 2. I t must have been actually sustained or suffered during the ta:-<abl e year�; It must be evidenced by a closed and completed transaction; and

DECIS I ON C.T. A. CASE NO. 5485 - 11 4 .. It nF.tst not compensated I~)'/ insurance or otherwise. , ng -1= or~ego 1� We on the 7 with Respondent ~>Jhen it disallowed the fire loss claimed by Petitioner. The loss was susta.ined in 1987 and is already evide~ced by 2 clcsGd and completed transact :i. on ..:J.s of 1987, the not h.::wing been insca~ed and the amount of loss h.:~ving been reasonably ascertained of s-3icl it should have been properly claimed as deduction in 1987. ~or its non-compliance, Petitioner puts the bla~e on R(:! s pond ent' s and confusing v e rbal order requiring the presentation of of Pt=:t it; iOTlf.'"r',! failed to identify the officers who gave d :i r~ect ion. It c.::mnot therefore expect this Court to rely on mere allegations to suit their purpose. Even assuming that erroneous instruction was given, Petitioner should have e xerted efforts to veri f y the veracity of the statements of the said officers. The law is too clear to excuse Pet itioner from compliance therewith. Re '; p o n d e n t likewise disallowed the fire l~ss elaime~ by Petitioner as deduction for its failure to comply with Section 3 of Revenue Regulations 12-77, which states: "SEC Declaration of loss. l-Ji. thin forty-five days after the d-':'lt (0 of occurrence of casualty o r r~o bber~v theft OY' embezz 1 ement, a taxpayer~ ~>-Jho :.u~< ;'tai'lec:l l 0::; �:;

DECISION C. T. A. CASE NO. 5 4 85 - 12 - therefrom and w~o :~ntends to claim the loss as a dedu.ct ion for~ t'�e taxable year in which the loss sust.:::1.i "V?d sh.,:;~.ll f i. 1:0 Slt~O\'n declaration of less v-1ith the Revenue District Officer. The sworn declarat1cn of loss shall contain , among other things, fol~owing information: (a) The of the event giving rise to the loss and the time of its occurrence; (b) A desct~iption of the damaged property and its location; (c) The items needed to compute the loss su.ch as cost or oth?r basi: of the property; depreciation allowed or allowable if any; val~e of pt~opet~ty befol'f:? and after~ the event; cost of r':2pair�; (d) Amount of in sur�ance �r~ecE� :i. veci other compensation t'eceivable. ~vidence to support these items should be fur�nished, if ,:;:l.Vailable .. E><amples at'e pu:r-'ch.:::1:,e contracts and deeds, receipted bills for improvement, and pictures and competent appraisals of the property before and after the ca. s t_ta 1 t: y .. !! Petitioner admitted in :i.ts lette1��' to Respondent, cla.ted Je:1.nuar�y <E:<h. indeed, failed to declare its loss within 45 days after the occurrence of the fire as provided in RR 12-77, thus: "While it is that procedure is for us to report said fire to the BIR, we did not do so. We apologize for oLr igno~ance and while it is true that we may have committed a procedural error, the ract remains that we had incurred a f :i.l�'C' justifiable deduction. X X X"

DECISION C.T. A. CASE NO. 5 4 85 - 13 - llndet' Sec. "i� of tr�e s.am(:> R2venue Regu~.:..~t 1cn, t! ~~ to submit th~ said decl:Jl'a.t �.on of loc:~ v-Jitl-i.n .:."-,;, p erJod orescr1bed in these re g ~lations wil_ result �n tbe d i sa.ll o~-.J ance of the casual":;v loss clai med in the income tax return. Ple~se ~ate that the said wa~ iss~ed pursLant to Section 29(d) { 7\ :now .-...; , Section 34) of the National Revenue Code. (~mpbasis supplierl). Petitioner's ~ailure to comply wit h the aforesaid regulation prove fatal to 1ts cdse. WHEREFORE , pre~ises considered, Pet:tioner is hereby ORDERED to PAY Res~ondPnt the amount of ~313,508.23, plus 20% annual interest f t' a m De c e mb e r' '3 , 1 '? S .-::; ' m t i � paid, pursuant to Section 24'3 of the Tax Code. SO ORDERED . /}~ t }/ RAM N 0. DE~YRA t g ' ~ ::; ..... �~ 0 L ~�. -:.;\ C~l-~ -' 0 WE CONCUR: L-IQ.~ E~NES T O D. ACOSTA I ng,iJ'� ! Pt�e�::; i d i dg<' ' 1 . � ' ::J f4ssjciate udge

�. DECISION C.T.A. CASE NO . 5 4 85 - 14 - CERTIFICATION I het~eby cet~tify that tre above decision We'\"" 1�eached ,C\ ..GE-'"~ du::. con~;ull;.::ttion ~--Jith the membet~s of th Court o-:- Tax Appeals in accordance with Section 13, Article VIII of the C~nstitution. L ~'- D.__t-_ ERNESTO D. ACOSTA P .-- e " i ding J ud;; t.