CTA Case No. 3051 (Decision)

', �~ v.P �JBL1C O-r TUll: iUJLi i'l' I'\'Y~:O .~OURT OF T.AX A?PEAJ-S MUTUAL SECURITY & INSURANCE CORPORATION, Petitioner, - versus - C.T .A. CASE NO. 3051 THE HONORABLE COMMISSIONER j OF INTERNAL REVENUE, Respondent. X- - - - - - - - - - - - - X DECI S I 0 N This is an appeal from the decision of the Commissioner of Internal Revenue dated December 7, 1979, denying the request for reinvestigation or reconsideration of the defic iency income tax assessment issued on August 15 1 1978 against peti- tioner for the taxable year 1975 ,in the sum of P30.669.88, inclusive of interest. Petitioner� a domestic corporation, is organ- ized under the laws of the Philippineso It is engaged in non-life insura nce policies . Its mai n source of income ar~ premiumsJcommissions, inter- ests and dividends. In 1977, it was subjected to an i nvestigation for income tax deficiencies for 50 (

DECISION CTA CASE NO. 3051 - 2- the years 1975 and 1976. The investigation that was conducted yielded to the discovery that i n its income tax return for 1975, petitioner claimed for bad debts the total amount of ~91,793.30 1 which the investigating e xaminers had disallowed. (Exh. 3, p . 66, BIR rec.) These apparently con- sisted of marine premiums receivables due from March, 1957 to December, .1964 in the total sum of ~6,793.30 1 ~nd accounts receivables from the Mutual Construction Supply in the sum of ~85 1 000 ., oo, or a grand total of ~91,793.30. (Exh. 2 1 PPo 59 - 60, BIR rec.). The sum of ~6,793.30 was a receivable due from a related company, and ~85,000.00 was receivable from an alleged related company that was dissolved. Furthermore, said amount o f P85 1 000o00 was not originally taken up as income of petitioner since i t was a loan to one of its officers, who i nvested the same amount i n the s'aid dissolved corporation. (Exh o 3 1 p. 66 1 BIR reco ; also page 95 1 BIR r ec.) The total sum of P91,793.30 claimed. as bad debt was disallowed as the alleged debtors were still solvent in 1975, the taxable year in question. (Exhu 3 1 p. 66, BIR rec.) On August 15, 1 978, respondent Acting Co m- missioner of Interna l Revenue, ~ssessed against

DECISION CTA CASE N08 3051 - 3- and demanded from petitioner the payment of the sum of E130 1 669o88 1 as deficiency income tax for 1975, inclusive of 14% interest thereon from April 16 1 1976 to August 15, 1978 (Exh. 4., p. 122., BIR rec.) computed as follows: Net income per return - - - - - - - - P 9,9~4.33 Add: Unallowable deduction - Bad debts written off - - - - - 911793.30 Net incorre :r;er investigation - - - - I%101, 707.00 Tax due thereon- � ~-------- P 25,597.00 less: Arrount paid - - - - - - -- - 2,479.00 Deficiency tax - - - - - - - - - ... - E1 23.,118.00 Add: 14% annual interest from � 4-16-76 to 8-15-78 - - - - - 7;551~88 'IOTAL AMOUNT DUE - - ~ - - - - � - ..,. I% . 30 1 669~88 On Augus t 22., 1979, petitioner thru counsel, requested for reinvestigation or reconsideration of the above assessment asserting that the debts or accounts referred to above became worthless because the same were uncollectible but petitioner nev~r presented any evidence showing the ir uncollect- ibility. (pp. 150-153., BIR rec.) ' On December 27 , 1979 1 respondent denied peti- tioner�s request for reinvestigation and/or recon- sideration and held that the assessment it issued was correct. (p . 162, BIR rec.) Respondent rea- soned out his denial by stating thus , and which we hereby quote: 11 The records of this case show that the aforesaid assessment is based

DECISION CTA CASE NO. 3051 - 4- on the disallowance of the amount of E191,793.30 claimed by your client as bad debts. The reasons for the dis- allowance are ttat the debtors coh- cerned we re not declared insolvent and that the accounts receivable of i'185,0 00 .00 which formed part of the amount written off were not really receivables from customers but was originally a loan to an officer who invested the same amount in a corpo- ration which was allegedly dissolved. These findings of this Office show that the amount of ~91,793.30 cannot be legally claimed as bad debt deduc- tion.11 Hence , .this appeal. During the hearing, petitioner presented the following as its exhibits: Exhibit A refers to the letter of assessment dat '2 d August 15 1 .1978 of respondent (p. 7 1 CTA rec.) 1 .and which is the same as the Exhibit 4 for respondent � . Exhibit B refers to the Income Tax Notice requesting petitioner to pay the.assessment of E130,669 .88 on September 15, 1978. Finally, Exhibit C refers to the letter of request for reinvestigation or reconsideration . and, which cited merely, .without more, the legal jurisprudence found in American cases to bolster its position that its claims for bad debt in question was deductible. Jr:o . J

DECISION CTA CASE NO. 3 05 1 - 5- The r e after , no ot:her evide;:;ce was presented by petitioner in view of the non-appear~nce of counsel for petitioner during the hearing, at which time the respondent Commissioner o f I nternal Revenue was ordered by this Court to present his evidence and his witness, Examiner Modesta D. Na jera, who te st ified before this Court and de clared as follows: On the d ate this case wa s set for hearing,. petitioner failed to a ppear in spite of due notice. Respondent, thus, presented evidence ex-parte . Wi tness for respondent te stified , to wit : 11 Q. You stated a while ago that you recommended deficiency assessment here based s olel y on disallowance of clai med deduction for bad debts. Will you please inform the Honorable Co urt your basis f or the disall owance of t he said claimed deduc- tion?11 11 A. We foll o wed the revenue regulations. Before a b ad debt could be allowed as a deduction, it should be written off in t h e books, and then, secondly, the amount of the account is declared worthl ess. In this c ase, the taxpayer failed to show that the accounts involved are already worthless . 11 11 X X X X XX X X X. 11 11 Q. By 'worthless � 1 j ust what do you mean?" 50 .-4

DECISION - CTA CASE NO. 3051 - 6- "A. By worthless, .there is no more .��� the taxpaye r is already insolvent, or there is no more hope for collec- tion. 11 11 X X X X XX X X X 11 � "Q. � By the way . did you ascer- tain the names of the alleged debto�rs which the petitioner in this case :f_laimed to be indebted_ to i t ? 11 "A. Yes , they are in fact listed here. and most of them are from the related company, Florenc~o Reyes and Co., Inc. Hence, som:e are individuals assured like this Teresa Ignacio Who is also an officer of the company. 11 11 X X X XXX X X X 11 "Q. Would it be safe for me to say that at the time y ou investigated this case this Florencio Reyes and company - is a going concern? 11 11A. I believe so � 11 11 Q. How about this Mutual Cons- truction Supply which under this list has indebtedness in the amount of Ei85,000.00 to the petitioner. What relation has this company to the petitioner in this case? 11 "A. It is also a related company of � the J.nsurance company ... "Q. Did you try to check the finan- cial position of the said com- pany at the time? 11 50 ~

DECISION CTA CASE NO . 3051 - 7- 11 A. we asked from the taxpayer because they were the ones who have to prove whether that company is already dissolved, because t hey alleged that it is already dissolved. 11 11 Q. What did t he taxpa yer te ll you when you ask t hem about t he. ���.�� 11 A. They did not present any Q_roof. 11 (Ern pha s is supplied; Hearing July 20. 1981. pp. 8-11, tsn.) By the above t e stimonial evidence� it was shown that petitioner did not present a ny proof to support its claim f or allowance of the bad debts. either administratively or judicially. The testimony will bear out the f act that petitioner had extended the alleged loans to related companies and/or to its own officers. This finds support to the c on- elusion reach ed during the administrative i nvesti- gation that the alleged loans were' in reality a loan to one of its officers and which was invested in a related company or accomodatio ns given to i ts officers. Moreover , it is a f u nd amental tenet o f l a w that the det erminat i on by the Commiss ioner of Internal Revenue of the deficiency assessment is presumptively correct. And this cor r e ctnes s 50 C

DECISION - CTA CASE NO. 3051 - 8- o� the assessment goes deep into the act of dis- allowance of the claim of petitioner for bad debt in its 1975 income tax return. Considering thus, i t is, therefo~ incumbent upon pet itione r to prove its claim for bad debts. Since there was no evi- dence presented by petitioner in this case show- ing the basis for the allowance thereof, i.e., to show {1) that there is an outstanding valid debt or unconditional obligation to pay the taxpayer, or an existence of debtor-creditor relationship (Jacob Mertens, Jr., Law of Federa l Income Taxation , 1972 Ed., Vol .. 5 1 Chapter 30, pp. 0-10); (2 ) that the said debt is worthless, or tha t the debtors can not pay their indebtedness ; (3) that the debt was actually ascertained to be bad or worthles s because of the improbability of their collection during the particular taxable year in q uestion; and (4) that the same was charged off in the tax- payer's books in the said taxable year , the bad debt disallowance made by respondent is, there- fore, in accordance with law. The assessment . must of necessity have to stan.d. WHEREFORE, the decision appealed from holding pet i tioner liable for defici e ncy income tax for

DECISION - CTA CASE NO. 3051 - 9- the year 1975 1 in the sum of ~30,669.88, inclusive of penalties, is hereby affirmed. Petitioner Mutual Security 2nd Insurance Corpo- ration is hereby ordered to pay the amount of ~30,669 .8 8, plus the surcharge and legal interest, provided that the maximum amount that may be col- lected shall in no case exceed the amount correspond- ing to a period of three years pursuant to Section 51(e) of the National Internal Revenue Code of 1977, as amended. With costs against petitioner. SO ORDERED. Quezon City, Metro Manila, December 7, 1982. d � ROAQUIN Judge CO;:t AN~E /SSOCl WE CONCUR: / ~~AM;ANtTE/F:J~1z1/ Presiding Judge ~ Judge