CTA Case No. 2735 (Decision)

�PUBLIC OP T HE PHILIPP INES COURT OF TAX APPEALS QUEZON CITY FRANK ROBERTSON , Petitioner , - versus - C . T . A . CAS E NO. 2 7 3 5 COMM I SS IONER OF I NTERNAL C .T.A. CASE NO . 2 736 REVENU E , C . T . A. CASE NO. 2 7 38 Resp ond e nt. C .T .A. CASE NO. 2739 :X - - ------X .... J AMES W. ROBERTSON , Petiti oner, �.. ' versus - 'COHMISSIONER OF INTERNAL REVENUE , Respondent . X- - - - - - - - -X ROBERT H. CATHEY , Peti t i oner, - versus - COMMI SS IONER OF I NTERNAL REVEN U E , Res p ondent. X~~- - - - - - ~- - X JOHN L . GARRI SON, Petitioner, - versus - COMMI SS IONER OF INT ET~ ~~AL REV ENU E , Respond e. :t. x� - � - � - � - - ---- -�X D t, I S I 0 N Th e abo ve entit ~ ed case s come before Us on simi l ar or identical f act situations on a question i nvol ving . a judicia l det ermi nation of t h e scope of the t a x I 269 '

DECI SI ON - CTA CASES NOSe 2735, 2736, 2738, & 2739 - 2- exemption provision in Article XI I, P~r . 2, of the RP-US Mil itary Bases Agr eement of 1947 , quoted as � follows: "2. No national of the United States serving in or employed in t he Phi lippines in connection with the construction, main- . tenance, .ope ration or defense of the bases and residing in the Phi lippines by reason � ' only of s u ch employment , or h is spouse and minor children and dependent parents of either spouse, shall be liable to pay in- come tax in the Philippines except in res- pect of income .derived from Phi lippine s ourc e or source s other than the United States sources ." The records in brief show that - Petiti o ner Frank Robertson (CTA. Case� No. 2 7 3 5 ) is an American c itizen born in the Philippines on July 8, 1924. He resided in the Philippines until repatriated to the United States in 1945 and took residence at Long Bea ch, Ca lifornia. Soon after he was employed by .�- t he u. s. Federal Government with a job at the u. s . Navy � His work brought him to the u. s . Navy's various install- ations � overseas with ~ventu al assignment a t the u.s. Naval Ship Repair F~cil ~ : ~ at Subic Ba y, Olongapo~ Philippines, in 1962 . Like his brother FranK Robertson, petitioner James Robe rtson (CTA. Case� No. 273 6 ) was bor n in the Philippines on De cember 22, l918 .and had s ince resided in this country until repatriated to the United States in 1945 270

DECISION - CTA CAS ES NOS . 2735, 2736, 2738, .& 2739 - 3- and there , established his domici l e . He landed a j ob with the u. s. Navy Shipyard at Long Beach, Cal ifornia . ' as a u.s . Federal Civil Service employee. He returned to the Philippines in 1958 with assignment at. t he u.s. Naval Base at Subic Bay, Olongapo, and has since r e - mained thru 1972. In CTA Cas�e No�. 2738� pe titioner Robert H. Cathey is a United States born c iti zen who first came to the Philippi n~s with the� u.s . liberation force in 1944, and upon discharge from the military service in 1946 turned a u . s . Navy's civilian employee with station at Makati, Metro Man ila. Peti t:j.oner John Garrison (CTA Case� No�. 2739 ) i s a Philippine born American citizen alsQ repatriated to the United States in 1945 establishing his domicile a t San Francisco , California . Soon after he was employed �- by the .u . s . Federal Government in its mi li tary install- ations . He returned . to the Philippi nes in 1952 assigned a t the u. s . Naval Base, Subic Bay, Philippine s. All told, .the peti t ioners are ci t izens of the United States ; holder~ of American passport s and admitted as Special Temporary Visitors unde r Section 9 (a) visa of the Philippine Immigration Act of 1940, as amended : civilian employees in the u .s . Military Base in the Phili ppines in c onnecti on with i ts construction, ma in- tenance, operation, and defense ; and incomes are solely 271

DECISION - CTA CASES NOS. 2 735, 2736, 2738, & 2739 - 4- derived from salaries from the u.s. government by reason of their employment in the u.s . Base s in the Philippines. Sometime in March, 1970, the Philippine Mi litary Liaison Officer at the u.s. Naval Base at Subic Bay submitted a ~i st of the Filipinos working at the ba se ~. I together with a handful of American citizens including the petitioners who we re deemed " habitual " residents of � the Philippines prior to their employment at the u. s . bases . The report had for particulars the peti- tioner s � e arnings in 1969, as follows : Frank Robertson - - - $12,045.84 James. w. Robertson - 14,985 . 54 Rober t H. Ca they - - - 9,855 . 20 John .L . Garr ison - - - 15 , 288 . 00 I n the light of a recent ruling of the respondent Commissioner of Interna l Revenue prov i di~g among other s that, .~~ Americans presently working in t he U. S . Bases in the Philippines who were e ither born i n t h e Philippines or were r e: :. ; den t s of this countr y prior to .their employment in : td bases, are not included among those exempt f r om income tax by virtue of the fore g oing provis i on of the Mil i ta r y Bases Agr e ement" (BIR Ruling No . 70 - 30 dated May 28, .1970), petitioners were advised to file t heir i ncome tax returns under 272

. DECISI ON - CTA CASES NOS. 2735 8 2736, 2738, & 2739 - 5- Section 45(a) (1) (b ) of the Tax Code , as amended, whi ch r equires every alien r es iding in the Philippines, regardless of whether the gross i ncome was deri ved f r om sources within or outside t he Philippines . And , for ignori ng and f a iling complianc e, petitioners were cri m,ina lly prosecuted upon sepa r a te informations for ~� the said violation in the Court of First Instance of Zambales and Olong apo City, and wer~ subsequently f ound guilty as charged . Despite conviction, petitioners still refused t o file their income tax r e turns. The respondent pre- pared the petitioners ' respective returns based on the 1969 earnings in the absence of records of incomes f or th e subsequent year s thru 1972 under a~thority of Sect ion 51 (b ) of the Tax Code, providing, i �n�ter� a'lia, that, "The Coriuni ss i one r of �Internal Revenue shal l make the return from his own knowl edge a nd f r~m such inform- a tion as he can obta-in through test i mony or otherwise, .. and"shall be prima facie gooo and s ufficient for all l e ga l purposes . " Accor<iingly, .in separate letters and assessment notice s a ll , ' rted Jul y 31, 197 4, .the r es- p onde nt a.ssessed and dema nded from the petitione rs deficiency income taxes for the t axabl e years 1969 to 19 7 2 including interests and s ur charges in the follow- ing amounts : 273 - .~ ,

--- 1' �. DECISION - CTA CASES NOS. 2735 , 2736, 2738 , & 2739 - 6- Frank Robertson Fl 1 32,750 .6 5 190 , 433 .17 James w. Robertson - Robert H. Cathey 92 ,013.17 � J ohn L . Garri s on 196 ,7 54 . 32 Petitioners' r equests for r e investigation of the said assessment were to no avail _as the same were den i ed '� ' by the r espondent on July 30, .19 75 . Hence, these appeals . By and large, petitioners hold on to t he propo- s i tion that t he i ncomessubje ct of the a ssessme~ts consti- tute their salaries from t he United States government as American citizens a nd Federal Civil Se rvice employees, working in the Philippines in connecti on with tle cons- truction, ma intenance , operation or d erense of the u.s . mi litar y bases and res idi ng in the Phi lippines by reason � thereof , .and c onsequently said . incares are exempt f r om income tax pursuant ~ 1 Article XII, par .;".. 2 of the R.P. u.s. Mil it ary Bases~�� �eement dated 14 March 19 47 . Responden t demur~ ' because u nder th e said pro v i- sion, only nationals o: "he Un ited Sta te s who are work - ing in the u .s . Bases c res iding in the Philippi nes b y r eason on ly of suer :mployme nt enjoy tax ~xemption. When the American nati c :1 als we r e a lready r esidi ng in the Philippines �pri or t o their emp l oyment, it .is clear 274

.. � DECISION - CTA CASES NOS . 2735, 2736, 2738, & 27 39 - 7- that they did not reside here by reason of t heir employ- ment in the base. " ( BIR Ruling No. 70-30, May 2 8 , 1970) . The case presents no dispute as to the simple material f a c t s but the par ties see m trying to get t h e better of each other over by a quibble on the effective a pplication o f the t ax exempt ion clause in the Agreement . '� ' Determinative of the sense and extent of t he cover- a ge of the pri vilege which appear implicit i n meaning and explicit in terms under Article XII , par . 2 of the Military Bases Agreement are the requis i tes to the availmen t of the tax exemption, viz : 1) nat ional s of the Unit ed States , 2) emp loyed i n conne c t ion with t he construction , maint e nance, operation or defense of the b-ases , 3) r esiding in the Phil i ppines }j'y reason of such employment, and 4) incomes derived from the United State s Governme n t. And , i t app ears man if es t that inso- � fa r as the prov ision ;_s b rought t o bear upon the c i rcum- stances obtai ning, pf t tioner s � cases can readi l y s l ip i nto that c ubby-hole the tax shelter contemplat ed in the prov i sion . Th~ seemed t o be where the peti- tioners s t ood with reE . ~t to the en j oyment of the pr ivi lege as t hen cons\ ~d a nd i mp lemen t e d s in c e the Agr eement ' s effecti v i t y J : ~ 194 7 u n til t h e r esponden t Commissioner of Internal hevenue r e ndered such entitle- ment pa~se � in 1970 . Pet iti oners 1 residency status 275 \

DECISION - CTA CASES NOS. 2735 , 273 6, 2738& & 2739 - 8- had been tacked to situs of birth in the Phi l ippines. A constraint that appea rs n e ither he r e ~or t here in the Agreement. The pas t _becomes prologue, so to speak . We find nothing in the said tre aty provision that justified the lifting of the tax exemption privi- . lege. . �of the pet i tioners . Respondent has grafted a meaning other than that conveyed by the p lain and clear tenor of the Agreement . An examination of the words us ed and the circumstances in wh ich they were used, shows the bas i c intendment "to exempt all u. s. citizens working in the Mil itary Bases from the burden of paying Philippine Inco~e Tax wi thout distinction as to whether � born l ocally or born in their country of origin e 11 Moreover , the r uling has altered a satisfactorily . settled applicatioD of the exemption clause and has fallen short of mea �1ring up t o the . famil~iar principle of I nternational La that , "The obl i gation to fulfill . in good faith a tre; ~ engagement requires that the stipulations be obse !d in their spirit a s well as according t o their 1~ er and that what has been pro mised be performed w~ JOut evasion , or subterfuge , honestly and to the bL ~ t of the abi li ty of the party which made the promise . " (Kunz , The Mea ning and Range of the Norm Pa.cta� Sunt S erv anda , 29 A.J ei. L. 180 (1945): j 276 ., I

DECISION - CTA CASES NOS. 2735 8 2736, 2738 , & 2739 - 9- cited in Freidmann, Lissitzyn , Pugh , I nt ernational Law (1969 ) 329) e Somehow, the rul ing becomes an anacoluthon and a persifl age . I t be ars r epeating as so disclosed in the records that the petitioners t ogether with famil i es upon r epa- triation i n 1945 had s i nce acqui r ed domicile and resi - '' dency in the United States. And, obtained employment with the United States Federal Service e Not unti l after several years of a hiatus , peti tioners did return to the Phi l ippines not so much of honori ng a pledge nor of sentimental journey but by reason of taking up assigned duties wi t h t he Uni t ed States mi litary bases i n the Phi.lippines where they were gainful ly employed �. by t he u . s . Federa l Government The ~i t uation of t he petitioners i s ofno .d i ff eren t mold as of t he rest o f the u.s. c i v i lian employees who continued t o enjoy the be nefits of tax exempti on under the bgreement s Pe t itione rs � circumst ances befo r e the questioned ruling remained obtaining t hru t he taxable years 1969- 19 7 2 . It appea r s t ' 0 much o f a s tretch to ho ld pe ti - t i oners s traight-ja. ~ted t o an i rre v ers i b l e si t us of birth c onstraint and by r eas on ther eof deny a l to- gethe r a ny opportunity t o a s e r endi pitous enj oyment of a t ax re l ief accorded i n the Agreement. Such a r andom quirk of a pi r ouet te i n the tax treatment falls ~77 I J.

'' DECISION - CTA CASES NOS. 2735, 2736, 27 38, & 2739 - 10 - sharply at odds with the shared expectations of the high contracting parti e s . This Court wi ll n o t deem . itself authorized to depart from the p l ain meaning of the tax e~emp tion provision , so explicit in t erms and so searching i n extent . This does not however foreclose the possibility of petitioners � c oming to roost i n the country c ontingent upon t he t e rmina tion of the ir tour of duty , but only then may the bridge be � crossed f o r t ax pu r poses . The ho l d ing i n � the� Reagan Case (L-2 6379 , Decembe r 27, 1969, 30 SCRA 968 ) cited by the responden t simply infused vigor to the exercise of Philippine soverei gn authori ty .over t he u . s. Bases which seems t o have �enervated in to impotency, a s thus , " to. r ender the truth unmistakable , that the areas covered by t he United States Military Baf � �s are not fore ign terri t ory .. in both the political and 'og r aphi c sense ." Thus , the u . s . military bases ar1 1ot f oreign soil or terri - tory for purposes of income ~x legislat ion, except to certa in tax matters cover by appropriate exemptions as so prov ide d i n Art ic le XI- - t he RP-US Mili tary Bases Ag re ement . As earlier die ~sed , the cases of pe titi o ners come within the impo~ and scope of the exception. .. The cited cons olidated decision of the Court of {Z78 I,

DECISION - CTA CASES NOS . 2735 , 2736 , 2738 , & 2739 - 11 - First Instance of Zambales and Olongapo City dated May 28, 19 7 3, hardly presents a gripping precedent . The petitioners were indicted f or non- filing of their r espective i nc ome tax r eturns f or 1969 ; whereas the cases under review refe r to the non-payment of i ncome ta~e~ for the years 1969 -1 9 72, otherwise payable by the petitioners if not for the tax exempt ion accorded them by the Agreement . The situation in the case at bar is of a different prestat ion. We accordingly ho l d t hat t he pe t i tion ers hav e establ i shed their rights under t he pert inent provi sions of Article XII, par . 2 of the Military Bases Agreement and are entitle~ t o the exempt i on from Ph i lippine taxes on salaries by reason of their empl oyment as American citi zens and Federal Service empl oyee s worki ng in the Philippines in connection with t he construct i on, main- te n ance, operation and defense o f t he u .~ . mi l itary bases .i n the Phi ' i ppines , as income deri ved f r om Un ited Stat es Governmen: UPON THE VIl WE TAKE OF THE CASES , the assess- ments for deficiel , income taxes for the taxabl e y ears l 9q9- 1972 iL �sive of intere sts and pena l ties aga inst t h e p et itic .ars : . ' 279

DECISION - CTA CASES NOS. 2735 1 2736, 2738, & 2739 - 12 - �._, Frank Robertson (CTA Case No. 2735) - J?l32,750 65 ; Janes ~J. Robertson (CTA Case No . 2736) - J?l90,433 . 17 ~ Robert H. Cathey (CTA Case No. 2738) - J? 92,013.17~ and John L. Garrison (CTA Case No. 2739) - J?196,7 54.32 are he reby set aside and c ancel l ed . No costs . SO ORDERED. Quezon City, Metro Manila, December 14, 1984 . WE CONCUR: �...- CONS'TANTE � ROAQ1: ~ssociate J udg� 280