CTA Case No. 3520 (Decision)

RIPUBLIC Of THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY PACIFIC BANKING CORPORATI ON, Petition e r ~ -versus - C.T.A. CASE NO. 3520 COMMISSIONER OF INTERNAL REVENUE, Responde nt . X- - - - - - - - - - - - X DEC I S I 0 N This is an appeal by petitioner~ a duly r egistered domes ti c c o rpo r ation e ngaged in the business of banking from a decision of respondent Commissioner of In ternal Revenue dis a llowing deductions of certain items repres enting cred itable miscellaneo u s e :�: pe n ses , donations, c orrection of prior year's bo nuses and interest e :~pense on indebtedness incurr-ed to purchase tax- e xempt obligations. In two letters both dated November 16, 1981, (CTA rec. pp. 8 - 11) , respondent assessed and demanded from petitioner the aggregate amount of F'1 1,729 ,839.44 as defici ency income ta}les for the years 1976, 1977, 1978 and for withholding tax on dividends for the year 1976, the computation of which is broken down as follows:

DECISION CTA CASE NO. 3520 - 2- Net Income per retum Add: LnallOM3.ble deducticn: Inte r-est EHpense F'5 ~ ~i2.2 ~ El8t.) � 77 Taxes (surcharges) 5~ 8 1().()4 Misce llaneo...ts Expense -----��-9.~.Z.%~.!'.t:~~ T 0 TAL F'5 ~ 5.?8 ~ 436.81 Less: 1976 bc:nus disallo,..,ed in 1971 ..._!.s~l~.s1?4 ...~ Net incc:me per investigaticr1 E..~.1JI _~-;?..s . ~!s:. ~ . 5E;! Tax due therecn F' 8 ~ 7Z'S, TZ'?. 75 Less: Incone t<uc already .:~ssessed ...... J!,.!I.~'-9~~-!Q:.> Balance p 656 ~769.75 Add : Max im...un interest 0:\ t 4:.21. - ......_.~zg.~ G.4}.~ ~.> TOll~ PMJ...NT IX.E {*H) CCl...l.ECTI E-t...E F~. ,.,.,,.~t?:~l::?,t..:~~~~ Net Income per retum p 8~920,267.19 Add: Lhall~ble dedLtc:ticn : -. :t~. !! .1:!.~!1 -~'!1....9.:1,. E:Z;?.,,_.,};:~_.} ! E.3.9..!. .'!.~~~ Interest Expe?nSe P9 ~ 745,47ll�.91 p 8,455~452.00 Correcticn of prior ... .. ::;,:,.!,;;E.! ,,.1,_1G!..~ years bc:nus 3 ,661 '951.98 F' 5~084,::::~)4.0() Dcnation (E:<c:essive) 6,.167.72 1 ,6.31 ,214 . (X> Net incO'Tle per investiga t:icn __ ........?..'�? !I.~:Z:�>..2<2 Ta:-: due thereon p 7 435 794 . 00 ::::,.;::c; ~c':::=:::~:::=.-..o;;=::::::::"= Less: Income tax alread y a s sessed Balance Add: 14/. int. �fr. 4-16- 7B t o 7-~.::: 1-B:> :2<)"/. int. fr. 8-1- S) to 4- 16-81 TOTPL Pl'O.J\IT DLE P4't> CCU...ECTia.E 1st Gk..tarter� Pmo...tnt subject to tax E :::�..,.~'!.P....!!.Q2 � Tax due thereon p :3 ,849.60 Add: surcharge maxinum ihterest at 42"1. 962.40 ---.!......~,1.6 .. 82 2nd Cl.tarter {.m:x_tnt SLtbj ec t to tax E--~!L4~h ...~ 6,428.83 Ta:�: due thereon F� 3~849.60 Add: SLircharge 962.40 max iiJUitl interest at 42'"1. _._:l:.!lg_!Q.!.~

DECISION CTA CASE NO. 3520 - 3- 3rd ()...larter� Pm::ll.U1t subject to ta>: F' ... -~...s19!;! '!9Q Ta:-: due therecn p 3,849.60 Add: surcharge 962 .40 maxim..un interest at 42"/. _._.J.__,.61.9.~ID 6~428.B3 Add: Compromise penalty -��---������-���--�������~�9Q.~_()Q TOT?'L ~T IX.E PU> Ol....LECTIR.E f.--====J:~.a ~~~~ Net Income per return Pdd: l..hall~ble deduc:ticn: Inter-est E:<pense F'12~ 945~847 .::::4 M.iscellaneo...1s Expense 5 ~ 887 .99 Chari table c:c:ntribut .ion . ���� --:::). !1...5~~. �-~)(_:l . . .;1._:?..\.~1.~~ ';~-!.;g: Net income per investigation f.:._.~J. �:~.,;~.~~..'!~~.l1 Ta}: due therecn p 2~323~407.00 Add: 14/. int. fr. 4-16-79 t o 7-~.H-80 419 ~ 96.3. 75 20/. int. fr. 8-1-80 to 1.1--16- 81 --��-�- -� ~~!I.P.?~...!.~ TOT?'L PM:X..NT IX.E MID a.LLECT I ELE r;~~~~~l;'�~~,~~?:,~~l In other wor ds~ thP- tote~ l de �f .iciency income t .a:-: due a nd collecti ble 'fr�om p e t.i ticme r- �fot- t he y ear 1976 i s F'932~61 3.05~ P7~435~794.00 for 1977 a nd F'3~342 ~045.90 for 1978; a nd the total amoLmt d ue and c ol lee: ti b le from peti tioner repr- e n ting the 1976 withholding ta x o n dividends is P19~386.49 These amounts total to P 11~729~839.44. In another lette1~ date d May 24~ 198 2~ (CTA r ec:. p. 21)~ respondent further- assessed and demanded from petitioner an additional def ic:ienc:y inc ome ta}: of P1,171~5 10.32 for the year 1977 as computed below:

DEC ISION CTA CASE NO. 3520 - 4- Compensation/fringe benefits P27 ,923~571.46 per 1977 income ta:< return __.;?.1_, 4.~ ~ZZ!:I:�?9_ Less: Compensation/fr-inge benefits per 1977-1976 consolidated E.-~--'-~~,Z9Q-~ .9Z statement of earnings and expenses p"-�r~-w~-329:cii5 Discrepa~ncy _,.,,.,_, ~:&.d2!.~.<~.~ Income tax due therec::J�I F' 1 , :599 , 7:!0. (X) ~d: Corporate dev. tan: Total ta:{ due �- ..... _._.t?;~~ZE.l.~. ! QQ Less: Over-payment per 19'77 F' 749~949 .00 income tax return 74 ,994.90 Deficiency Income TaH due Add: 10 Sl.ll'". f or late payment 240,823.62 14% i.nt. fr . 4- 15-78 to 'J-31-EKl 2-:1'% int. fr. 8- 1- B) to 4-15-81 Tota\l artnlf'1t due and collectible Th r-ough a letter- d ate d December- 24, 1981, (CTA r-ec . , p. 14), petitioner-, protested t he first a s sessment dated November 16, 1981. Two days later, (December- 18, 1981 )~ p e titioner r-e mitted the wit hhol di n g taxes on divid e nds i n the t ot al amount of P32,344.15 (E){h. A- 1 a nd B- 1, pp. 77-78, CTA r�ec. ) � Then on March 22. 1982, petitioner likewise paid the sum of Pl6,865.46 (p. 81, CTA rec. ) re pr-ese n ting the applicable in c ome taxes on a ll dona ti ons, ta:.:es and misce 11 an eoLls e:�:penses whic h were disallowed in the above assessments. (CTA r-ec. , pp. 18, 19, 20. ) Subsequently, in a letter dated August 19, 1982 ( CTA rec., p. 22 ) , petitioner pr-otested the second assessment for 1977. Respondent , in its

DEC ISION CTA CASE NO. 3520 - 5- l r:> tter dated August 31~ 1982~ (CTA rec., p.25) issued a final decis ion by demanding from petitioner payment of the total sum of P11~7 10 ,452.95 as deficiency income tax for t he years 1976, 1977 and 1978. Reproduced below ~s the letter of respondent: Re: PACIFIC BANKI NG CORPOR ATI6N 1976 , 1977 and 1979 Deficiency Income Tax "This has refel,.. !'!)nce to your lette r� of p rotes t dated DecPmber 24~ 1981 filed on behalf of your client, PACIFIC BANKING CORPORATION~ against o ur 1976~1977 and 1978 deficiency income ta x assessments in the aggregate income tax of P11~710,452.95, subje ct of two letters of demand both dated November 16~ 198.1." "Records s how that the d eficiency income tax was broug ht about by the disallowances of taxes, miscellaneous eJ{penses~ donations, correction of prior year� s bon LIS in the amount of P3~661,951.98 for the year 1977 and disallowance of interest expenses on inde btedness incurred or continued to purc hase or carry obligations the interest of which is t.a:<�-�e~��P.mpt purs uant to Section 30(b)(i) of the Tax Code as amended. It appears that your client was aggreable to the d isal lowance only of dc.ma tions, taxes and misce 11 aneous expenses." "The question rii:\ised in your pt-otest with regards to the disallowance of int.e t-es t expense is also the same issue on other tax cases awaiting the final decision of the coLtrt. " "In view thereof, a nd since no fina l adverse decision has yet been issued

DECISION CTA CASE NO. 3520 - 6- t h ereon~ i t i s h ere b y re q ues t ~d th a t your c l ient be adv i sed to settle fu ll y the a f o r-esa i d as ses~oan e nt without furth er� de l a y." " Thi s i s our �f i.na l de cisi on o n the matter >~ Hx . 11 Ve ry tr u l y y ours, ( SGD . ) RUBE N 8. ANCHET A Ac ti ng Comm issione r" Hen ce~ thi s appe a l by the peti t ioner . Petiti o n e r p<:li d t liP. wi t h ho l ding taH on d ivi d ends d ec l are d in 1.9 "/. 6 ( F'19. 386 .4 c~~ E:<h. A-�� 1 ) 197 7 (P12~ 9 57.66~ Ex h . ' B-1 ) ~ t he t a:�:es c on-esponding to misce 11 aneous e:�:p en ses and ta:<es d i s allowed in 1976 ( P7~728 . 3 6 ~ Exh. C- 1) t he ta>: correspo nding t o don ation disal l owed i n 1977 (P3~ 419.03, Exh. D- 1) an d to mi s ce ll a n eo u s e x penses a nd charitabl e con tr ibuti ons disa llowed i n 1978 I n one of t he hear i nqs on Febr u at-y 19 ~ 1986~ p et:i. t i on ~;H� ma nif es te d that t he mai n po r tion of t he as s essmen t i n vo l ved herei n ~ t ha t is ~ i ntere st e :-: pe nse h as alread y been s u bm i tte d t o a c omp ro mise . Pe titi oner f ur t her a llege d that it has a lready pa i d the t a x t he reof a nd wha t remained wer e other item$ in volving q uestion s of law. ( CTA r e c. ~ p. 64. ) Apparent l y , t he i s s u e is n ow limited to whet her the interest e xp ense s hould be disa ll o we d.

- DECISION CTA CASE NO. 3520 - 7- The evidence submit ted by respondent cons isted of E:-:h ibi ts 2~ a nd whic h show the rec omputation of the i ncome ta}: 1iabi 1i ty on the disallowed interest expense based on t he Bureau of Internal Revenue -Bank (-?t��s Assoc i atio n of the Philipppines Comprom ise nqree ment. By virtue of the Bureau of Interna l Revenue - Bankers Association of t he Phi 1i ppines Compromise Agreement, the petitioner is liable to pay the deficiency income ta:-: of P87~908.63~ P2 35 ~867.00, and P259.00 for t he yer.\rs 1976, 1977, and 1978, respectively!' which t .o"te:, ls-, F'~T-2 4!1034.63 (E !< h. 2!' 3 and 4) . Petitioner does not contest the correctne ss of respondent ' s recomputa t ion based on the said �compromise agreement. Due to this recent turn of events, the question with which this Court is now faced is whether or not to consider and respec t the BIR-BAP c ompromise agreement e ntered by the parties. In general, compr�omises are allowed and enforceable provided t hese two requisites are present: first, that the subject matter is not prohibited; and second, that the person entering into it is duly authorize d. ton

DECISION CTA CASE NO . 3520 - 8- Under Articles 2034 and 2035 of th e New Civi l Code, tax liability is among the items that can be c ompromised. Moreover, in the National I nternal Revenue Code , the Commissioner of Internal Reve nu e is authorized t o under cr~ rta in co nditions~ into a compromise of both the civil and criminal liabilities of t he ta xpayer (Sec. 295, 1977 NIRC, now Sec. Hence, the c on tr�acts to which he e n t.e t- s :i. n to a r� e en �f ot-ceab l e A S against t he government . The BIR- BAP compr omise agreement entered by t he petitioner, Pacifi c Banking Corporation a nd r espondent Commi ssioner of Internal Revenue po ssesses the two abov ~- mentioned re quisites to mak e it enforc eabl e . WHEREFORE, pe�ti t i oner Pacific Banking Corporation is hereby liable for the sum o f P342 , 034. 63 on disa l l owed interest expense based on t he BIR- BAP compromise agreement. With costs against pe t itioner. SO ORDERED. Que ~o n City , Me tro Manila, May 991. � ~UIN 10.1.

DEC I SION -- 9 - CTA CASE NO. 3520 WE CONCUR: ec ~Q, Q~ ERNESTO D. ACOSTA Associa t e Judg e CERT IFICATION I hereby certi fy t ha t thi$ de ci s ion was r eached after due c o nsultation amo ng t h e memb e rs of t he Court of Ta x Appea l s in accord anc e with Section 13, Article VII I of t he Con s t i t ution. �s iding .Judqe Court of Tax Appe a l s 10?