CTA Case No. 224 (Decision)

EP G. > � Cv , . e'titioner, - V Sllw - � � I.S o. 2:?4- CTUR F ' H ;,)ponde t. E C IS I 0 hi i an PP al frcm t e decision of the Col- lector {no c ission r) o Internal \CV n ue d and- in of p .tltioner, ic.nte � i nco, the pay .e of th a ount of 5, 989 . 9' re pre~en in ficiency - - i co t x for th calend r ye r 191t9, plus 5, sur- ch r e, 1nt rest t t r of 1 p r onth and 40.00 as p n lty f or 1 te p y nt of th tax . Petitio ..er owns th co tr lil int r s in the 0 . LU ity ub1ishers, c . , a fa ily corpor - ion, a c. tt.le Foun tiOtl lle e . On bruary 2 0 , 1 5u CExt1illi t - 1, C.lA r c . p. 1,;6)' he f'led his inco e tax r t rn or 1~ 9, d cl ri 1 therein ne't il co of �9 ,~ . 59 on hic h te id a tax in . the su of 230 . 4 (see .ibit B, CT rec . p . 158) . fter udit, ex 1 tion verif catiOt of petition r�s 1 co tax ret urn, tog t er with his books of ccounts n pertin 1t papers, re por~ ent d.et r ine a t def'icier.cy of 5,989. 9;. 7Lis ta deficiency ses;,) ent, which r sulted from the disal- low ce of depreci tion and the inclusio of alle ed � un cclared inco �e, is co puted s foll0\15: 279

... 2 - ~et incom per return ������������� Add a o�C!allowed df'pr elation: House at Novaliches, Caloocan ��� 800 . 00 Residenc at ~.. t a . _a, ila ����� 900 . 00 Undeclare income: Ro yal . .1 ' S � � � � � � � � � � � � � � � � � � � � � � � 580 . 00 ental,one LTE off set press ������ 7,200 . 00 l-7et profi on sale of book s s old by Co unity Publishers , I nc ���� 8,693. 45 Adc i tion to p l arJ� b ld � J.g (cons- truction made by Community Pub-- 1 s her s , Inc.) �...���..�.�.��.�� 2 , 901 , 07 Sal ry of petitioner' s wife from Com ' r.i t y '?� l _s ; r �J ' I l C . � � � �� � 48o . co Pro otional expenses of petitione r ' s wi . � ���������� � ��������.���..�� 3 , 6 00 . 00 Salary of wife from Foundation Col- leee ������������������������ ���� 2 ,4oo . oo et income from Found tion Colle e 2, 924 . 89 Net income per i nve r ti htion ��� 4o, o4o. oo Less: Perso al exemption ....... 4,~00 , 00 A~et � ncoi!'le s ub jnct t o t ~ . . . . . . 3g , 24o . oo Tax aue thereon ................ , 220 .40 Less: ~ Llotmt lr f' a .y s ed � � 2~L) , 4~ Deficiency income tax due ������ 5,9 9. 9 eti tioner pr otested t he asses s r� ent . His protest having been de ied , he file d t he instant ppe 1 . In hi pet ition for review, he r ised the issue of pres- cription o t he ri ght of the Com issioner of Inter- nal Revenue to col ect t e ef i c tency inc~me t x in question . hi~ Court , in a resolut ion dat~d Ju l y 7, 1958, re solvea th issue a ai s t pe titioner . The issu s to be r esolved in this case are. / 1 . Whether or n ot pe ti t i oner may properly cla� a ded uc tion f or t he depreciation of hi s hou ~es in 'ov lichesr, Calooc ur and Sta . An, 1anila; 2 , Whether or ~t the ~ colle t ed royalties, r Jntal of: LTE offset press and pro it on ;; he sale of books in the res pective s~s o { ~58o . c o , 7 ,2 00 . 00 and 8, 693 . 1+5 d ue peti t ioner from th Community Publishers, Inc . sho ld be co sidc red ~ s constr uct- ' ively rece ived by hi in 1949; 280

- 3- � 11/h t her or n t the co t of n additiona l c o � tr '.l ct_o.l ma e by t e Co ..i t y Publishers, I nc. in t e buil in, belon ~ in to p titio ei s ho uld be t r eated as nco e to hi ; 4. w ~eth r or n ot pe iti on .r i led t o d clare ~ ~1 r i n r ece i ved by his wi f f r o t h Co uni t y Publis hers , I nc . and t he Foun ation College; ./ � hether or r..o t amo unts r c e lv d by peti - tion r ' wife fr he Cornr:unity P1 bl h rs, Inc . all edly r present i n r imburs ment o pr ono ti onal expenses should be consid red as a lar y income t o the r~if ; a nd 6 . thcr or not pr ofi ts re al i zed by the Fo ur~a t ion Co l e e s houl d be re por t e as pe ti- t! ne r' s income . Th iss ues will be d is cus s ed a n dis po s ed of i n seri tim. 1 . D pr e c i t ion . Respond nt disa ll ed petitio r ' ~ claim fo r de pre c ia t � on deduc t i on on t h l a tt r ' house i n Novallc he s , Caloocan , on the r oun t hat h ho us e was ot used n bu ines s . Li k ewise , t he e pr c i ation d d uc tion c i wed on the house in S ta . na , a ila , was dis nllow c bec aus e 1t was use �1 y pe titi oner as hi s resid nc � he oval t c hes h s wa s c t ua lly rented t o t he Armed orce s of the Philippin es , but no ren t als were ever paid du to 1 ck or eunds . Pe titioner never used the said pr operty s his residence . ~e had no intention of convertin he pro perty fo r

- 4- pers onal use . Since the proper ty was never occu- pie by titioner s a reside ce but, on the con- tr r y , "'as rented t o the rmed Forc es f the Phil - ippines , the s id properti w s use in tr de or bu i ne ss . .-'ft - ere f ct t at petit ' on r received no rental due to the inability of th les s ee to pay would not c hange he z:.a. ture of the use of said pro- pcrty . The deduction for depr elation should co - s e que tly be 11 wed in pursuance of the prov~sions of par a r h (f ) , se c tion 3 of the 'I'ax C d � s r spect the ho "C ln Sta. Ana, t.he f c t s show th t a por t i on o it w s used by potitio er a s his re i ence and a po t1on was re n ted b the Co ur L . � ubl ishers, ll c . to house its sto ck room , bin ery e.nu printi g department . Said house was / used both l'or personal and b siLess p rp s . � ere a pro per t y i devoted t o .e s n 1 e:nd at th same t ime t o bus iness uses , ther mus b an p ortion- ment so that deprec � nt �on will b 11mitld to t h.e proportion of business t tot� 1 use ( see Jar:,ir vs . Collec or of I 1 t,erna1 I. ~ven.ue , C A Ca se �o . 443, Nov. 28 , 19;9 ~ff ' d in G. R. I� � 1-16:~52, " r eb 30, 1962; Sec. 23 . 11a, Vol . 4 , La n 1�� eral Income Taxa. tion , erte s , c i tin Bobe:r�t H. o t o ery , 3 7 BT 232; Gr enberg s. IUdd 11, 59- 2 'IC, par. 9555 (D .. C. . D. Cnl., 19:J9). Co .'� ider i ng t hat t ! e re t .d por tio n w s nsed by the corpor- a tion as ii.C'" E tocl:room, b 1 ~c1 .r y E:.ll printir:t; de - par t ent, n . hnlf of the c l uim f' or depr ec .: ation s hould be allo vJ �

- 5- 2 . Royal ties , ent al o pr ss , refit on b oks : he amounts of ? 0 . 00 , 7 , 20 . and � 8, 693. 45 r preset..ting r oyalties, rental of one LTE offset pres an profits from the le of titioner ' s book , respec tive ly , ere due petitio~ r from th Community Pub ishers, I nc . , but w ic h he di ~ not ac- tu lly r ceive in 1949 becau e the cor poration re- quested him not to collect the sarue . P ti t ioner now conten s tha sai mounts s hould not be treated as income for 1949 as t hey were a ctu l y received by i m in 19/2 � In this connec tio , it must be state th t pe titioner r ported his � come on the basis of ac ual rece ipts and pa Lents . / The i come whi c h is subjec to a an ' s unf ttered command an which he is free to en oy at hts own option is taxed to him as his inco e whether he sees fiv t o enj oy i or n t (C rliss vs . Bo ers , 281 US 376 , 74 ed 916 , 918 ) . H may not d libcrat y t rn his b c on income a.n t hus select the year in which he will r port it (l amilton Nat . Bank of Chat- tanoo a, 29 B1 63 , 67). ut , when a taxpayer reports his i ncome on the basis of a tual receipts an pa y- cnts , h h he power t o " �termi n t he tim wr e items b come income . S uc h a po er produces a tell- ing ndva~ta e to him beca se of t he s iftin s cale f t r tes , the v r yi tr ,atment of capital gains and losse... , an 1:he possible bar of t tl t� t te of limitations . n it was to nc.bl t r~ (. omru ic: sio r to circumvent the avoidanc and possiul ' oV&sion

� ... t t r o c l c.p 1 1 r- c . 1pt s t of ( � yl ' D � 12 11 21, 19 8) . t t th '1 tt d 0 1 eli e to b - 11 h r ct o hi on . It 1r pl c , h cor or tio ith. which to ce un 1�I 0 l e �, r. b .ln t c int r 1n r rc to . 1 cr llsu ly r ot pl c th t 0 (. ou 0 in ei' � n top or ~ t to � on 16 7). 5 pr - rl i 0 co OJ t.r uc ~. l lJ! 1V � � n t0 : r on r o .~ ., :il i of r, � , r p 1d or y 0 r t ~..io, ( 2, 1 . 07 ) on t 1 tt r 1 orcr to she -, r d 0 1c in h c.di 1or. 1 c tr ti. 1 ilt th corpor tiox b - c v tvr w

- 7- lon � 1h ost of th ~ ditional co tr uc tion s ho uld not . tr ate as incom . of p tit ner . 1 s a lle ged by p ti ion r .n uncontr d iet d by r .s pondent , th d itio 1 cons r ction n quest on was fo r t he u a nd ccount o t h corporati n . It b lo d t o the cor por 1o � s~c bein th c as , it ~ould be i ~o per and ine quit ble o t re t th cos t of the construe- tio in co of petition r . o do so would be t n- t ount t t a in , p ti ion r for a earned income . ~. y of p titian r ' ~f~ th Co ~unity ublishers, an ound tion Coll g : po nt c ont nc s h.. t. p titian r did not de- cl� e t h sal r i c r cei e by 1 wif fro th Co - m~t Publi her ..,, me . and th 'ounda.tion Coll ge i n te r'"spectiv ~u t of 480 . 00 and 2 , 4 J. oo. On th otter h n , p t1v1 n.l' m i t i s tba t th se mounts . wer r por t tu-;d .r chedul of i .... 5.ncome t ax r t urn f or 1949 a n ex in tion f .Pe titio er 1 i J.C O � tu. r tnr (l!.xbibi t n 11 ) dis - c l ose t hat h do cl red the ount of 7, 2 0 . 00 as 1 r y r ive f r o th corpor tion r th olle e. ut th r is 10 i.dic tion th .rein s to wtle h.r or not the sL d c lar . w ~ r ceive by him and b hi ~ wife . r o th e t r � 1 1 e w h v no t-lay of knowin and e ini te fin 1 s o w ~ether or not hi wi f 1 lar1e w r ac tu lly r e porte there in. l e pr es nte no other evid e ~ c or ~he point . ?he � ss sent f r spondent is pr s ed prima f ci correct an th bur en of provin t he incor r ect-

- 8- ness or ~lle ali � y of the a s s es sment lies on the tax- pa er ( Interpr ov incial Aut obus Co . , Inc. vs . Col lec- tor of I ternal Rev nue, G. R. No . L-6741, January 31, 1956) . Petitioner f ailed to show error i n respondent's fi nding vri t h r espect t o the items in que sti on . He nce, res pondent ' s deter mination is sust ined . 5. Promotional expen e of wife , 3, 6 o. o : Re spondent urges upon us t l1a t , since pe titione r' s wife ne ver participa ted in t he prom tion of t he busi- ess of the Communi ty Pu lishers, Inc ., payments re gu- larly made to her as r imbur sement f r bus ines s pr omo- tion expense in the amount of 150 . 00 every iddle and end of the month or 3 , 600 . 0 J ear l y s ho uld be cons id- ered as s a l ary income . s the C mn un i y Publis hers, Inc. was ( :!.n 1949) a fa mily c orporation , f r om which peti tioner ' s wife rece ived a s ala ry f or services ren- dered i n 1949 i n t he amount of ~48o . oo , we do not f ind it ill og i cal to c onclude hat she pa rti cipated in t he busines s promoti on of the f amily corporation f or the ex pen s e s of hic h s he was r e imburs ed i n t he s id year i n t he amount of �3 , 600 . 00 . B t t he f ac t that pay- m~nt was made to pet itioner' s wife regular l y at �150 . 00 ev er f i f teen d a ys constrain~ t he conclus i on t hat the re imbur sements wer e not for ad a ces made by a-s . Sinco t o the corporation. Rather , we conclude that these so-called r imburs ments we re allowance s to her which pr ope rly should have be en re t ur ~ed in 1949 ( see Da e S. Jos eph , 1 1�Ct1 105� De c. 12 , 892-1*' ; R. 1 . Cot t ingt a , 15 TCH 987, Dec. 21, 885(M).

... f~ .... 6 . .Profi ts f r "> I'o ..~.da ior Co lege; � � nally , responde tre ted the profits in the of P2,924. 89 realized by the oun t ion College as income o e t itioner . But , petition r ssails this t eat. ent on th gr oun that he coll , e has not d clared any i vid nd nor istr ibuted pr r�ts to its embers . He also alleges t hat the college is non- stock an non- profi t corporation devoted exc lusively to .ducational purpo es and is exe pt fr o the pay en of i ncome ax under sec tion 2? (e) of the ~ Co e . e can ot sustain the termin tion respon- dent . It is n dispute' that s id refits in the s� of 2,92 . 89 were not distr i butee ong t he owners of the c lle � Petitioner never rece i ved nor was credite with the amount . Th ere fa ct that peti- tioner o s the contrcl lin i nteres t in th colle e does ot subro ate him in the colle .e ' s pl ce as to a e the earnings of he college his ow~ 1 co e . Th collep.e, b ing a c orpora tion , has personality of its ow , dis tinct nd s par t fro ~ hat of pe i loner . 1.~ t h res p c t to t e co pro i se penalty i posed by respo 1 ent in the amount of ~l.to . oo , it has been held ti e r.. a� n that th Cc is s ioL r of Inter - nal e e ue as no au.thority to impose an e u.a.nd pay ent of his penalty i he bs !Ce of ~n a r ee- ent tbereo � 287

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