CTA Case No. 2275 (Decision)

V IW-~.;.~I E'l'TA K Ll\..\>.J,. HL.,, PetJ.ti:::H c.:::�., THE COI-1MlSSICNER INTEHNAI.. RY\lENUE, Respondent <� X- - - - - - - - - - - - - X D .E C 1 S I 0 N Thio suit is b ~ought by petitioner Marietta Kalaw. Inca for recovery of the a~ount of P30,462.,00 as alleged overpaid income tax for 1968~ Reapondent 0 however, denied the claim for refund and interposed a~ countercleim deficiency assessment for income and personal holding company taxes in the amounts of ?14,185s96 and P74,304~17� respectively 1 both for 19681$ Ae born~ out by the pleadings submitted by the pa� ties and records of the Bureau of Internal Revenue pertaining to this case. it appears that petitioner is a duly registered d1mestic corpo- located at 1200 1>... Elccobo St,, Errrdta 6 l\1ani.la~ On April 14, 1969 . patition~r filed its in~ome �

De. L:.l ~;I ON CTA C~S~ NO. 2~73 .... ~ /\ ... 0 51 9 57 7 4/1�1/69 f-'"2(1(, b36c00 A-�0519629 7/1.5/59 �- 20., ~1J6.CO .... -~~~� ..-..--~-�.-..-.. 1' 0 'I' (Exhs~ ~ & E-1~ Petitioner's Envelopab) ~.)om'L':t:ime on E'ebrua.xy 2:; 197 0 ~ res.pondeni: directed an examiner to con(uct .n invescigatioxl (Ezh .. lp p . -:1.41., BIR rec.,; As a consequence thersof, respondent in a etter dated Sept~mber 30. 1970 1 informed pet i- t!oner about a proposed asbessment to wit~ Deficiency Incomo Tax Under Seca 24 of the Tax Code - - - - - - - - P12,022~ 0 0 Additional Tax en Personal Holdj.ng Co pany Under Sec~ 63 of the Tax . ~--:~1 ~ I9.2~t.1. : Code �~ ~� -� rr 0 '.1' /\ L with an advise that an informal conference within thR next ten (10) days may be requested should t~_re be any obje~tio1 ;o t~e proposed sasessmcn �� ( .xh ~ 8, Pe 150~ BIR rec., FoldGr 1 ) followe~ by a notice dated January 29, 1971 in-

DEC:U.,J..ON c:CA CAS:;: I\!0 2 2'1 ~i corfe�ence within the next ten (lC) days if thcr~ is any serious objection to the px0poz0d asaeas- (Exh. lOu p. 151, B!R recee Folder �t \. -'"I On February 8p 1971, counsel for petition~~ of having an informal conference on the data it requested, pecitioner, on February 16, 19?1 filed n amended ir-come tax re�� .i)..:::-n fer 1968 n:d':1ect.ing thereon the amount of ~45,150a50 ss its net income 5 and sho 1.rJing an ovt:~rpayment. of P30 1 t162,.00. (Exho .. On l�.pr:U 15ll 1971., pe�:.:i.t:.l.oner tiled wit.h re~p~ndent a claim tor r0furd of the amount of P30D462~00 which represents the difference between t.he tax !)reviou~3ly pa�id of i:'~<(.l,072 .. 00 a~1d the t.m;: li~bi.lity of F-10,610.00 on the 9aound thc1\. i t reported as capital gains tho amount of P221,134o6S instead of PB9,624~6B actually received in 1968. lt alleged that tte original income tax return ... . "'.~ .... .~

DECISION CT A C/. ;.::, f, "1': C..i ~ ;c:;::J::i with this Court~ ( ,~!.:-' o0 1-4"",,. CI.~... A... ra._ -,. ,, \.f Or.. ,J~r;L1ttry ���. f3 11 1972, F{ 8 .,l<:?.! l'1U :.:-:xemir1r~.r F'CiS't:or Oscayn had already investi~ated nd verified the claim of petitioner and re .o~nended to the Chief~ Finan ing~ Real Estat~ & TrsrsfLr Taxes (Audi ) DiviBion 1 that thi amount Jf P29,~85e00 representing over-payme::-rt of .' ncome tax in 1968 be refunded. (Exhsa B-3, B-3-A, PP~ 47-48Q BlR rec~ 0 Folder II.) Befo e complete reso l tion of the claim0 however, tho indtant casf~ 1r1<:w schedule for h. a r:lng by t.h.ir:J Court, and during the tria . thereof, the parties presented t.:.ho:tr ev:1.dr~nce ora:.. an- documentary Q It. appears , that on Decembar 27, 19731 respondent assess .d and demanded from p-titicn .r �the payme 1t of deficiency income tax for . 968 in the amount of i"14, 195.96t details of which are as fol lov.rs : Net income per return n D Q D ~ .. � 0 � P154 066 ., 20 Add: Unall)wa~le deductions% 1,. Interest expens_ ~ � " . P221)594e30 2 .. Loss on sale of fixed assets ~..i.t.4 08 &1~ ~~...91. ,_�? Net income per investigationo 9 o G & � o F1J1. 068o85 " � " � o -�s~3"o�"4.,do Tc'l.X due thereon ,. .. e w Less~ Amount already assessed ~ � � ~ ~ 41.072.00 a a 1 a n c ,;:- � & e 0 e " � ~ � � ~- 1 2;'022 ..00 Add: ~'1% mo ., .ir::t .. fr .. 4-16�-6. t .o '�-16-~ 72 ~ _.:1-~l.!hk.9�.

D~:.CISION �� C'J..\!~ CA~lE .NO 2 2 7 5 ..� 5 - Total �:linomi�~~ t::�:.bj 2ct �co ta ~~ G a;� :) .a 45% personal holding compa.y t::.~Y~- dtie thf:r"!on. e~ c � p 62,969.,6�~ Addz ~% ~o. int~ f r . -1--16�~�.:9 t..o <:1~16-72 ~-J:L1'Il.:t;t..?.l TOTAL A10UNT DUE & CO~LECTIBLE (ExhQ 1 , pl~ 309 310~ BIR re Coa Fold er 1~. The quest ..on therefor of vhother P'~t.i t.im"l,D.i: j_s lc a ll y entith�. to tile refu~ d of overpa:!.d income tax for 1968 4 s int!rl ced with the follo~ing issu~s 9 to w:i.�t t lo Wh 3 he- or not petitioner haa cha~ged its method of reporting income and expens0s in 1968; ( to ~es2sor-s.WhEedthgearf b rn ot the sale of the Tca~ rs do Kalm-.� c.nd l�!c-1riano 'J:. Kalaw is a bonBfide transgction, the los. of whjc on the part of pe~itioner is a deduc~ ible expenses; and 3. ~hether or not petitioner is a personal holding company pursuant to Section 63 in re 1 at1on to Sections 64 and 65 of the Revenue Codeo Before going into the meri ~s of the case, we wil l first thre3h out tie preliminary q ue stion of prescription taised by respo dentD In opposing petitioner's appeal , respo ..d ~nt cont.~ndo thc.t t.ht~ instant ' petitio~ wa~ filed with this Court beyond the two year peri.od pi"cvid _d in ~ ; ecti.on 306 (no'l.v ~ ec 292) of the Rev~nue Code G Apparently~ res- "cndent assurned �that the countin9 of tha tv o ye' r 2 3 �1

.. DEClSlOiJ .... CTA CASE lHJ 2::.:75 instant pet!t1Gn having been filed only ,n April 150 1971,. While pctj.tioner Respondent misses the p0into did file its income tax return for the taxable year 1968 on .April 1.'1:., . 969 11 i t pal�~\ the ta.x dt.le thereon Jn l:.'.-70 equal inetr-Jllmant.~>o- the fi.nal nay ~ ment thereof Lppears to have been made on July 15. 1969 .. (See Exhso . & 9# supra0) A similar situation had already been considered by the Supreme Court which held that when the tax is paid in i .stall- ments, the prescri tive period provided in Section 306 of the RevenLe Code should be count ~ from t~he date of the: fi.nal paym~~nt. ,. (Call~ v. Priet. , Inasmuch as the i nstant petition was f il ed on April 15 , 1971, it is obvious that the same ~as filed ~ithin the time prescribed by lawo Hence, this Court has juriscUc:tiono We will now discuss the issue of whether or not petitioner has changed ite method of repnrting income and expenses in 1968 o Petitioner contends that i t has been regul~rly reporting on cash basi~. owever, in the preparation rapresenting gni~s on ~apital as et was reported 23S

.. D:::.CISION C..~..'A. C>...;E NO. 2~n5 .., 7 �� year. It - amona-ment c~ ~. ts return o n Februery 16 8 1971 to reflect its true net incom'3� In Sllf.Jpor-t t.hereof pet: ition:..r Bubrnittc~d as Fxh o "A~- 6" he air:e .c:;ment to ite 1969 nc;tuL�n which reflected the capital gains actually realized for that year. petitioner who had been adopting the cash basis of reporting income and ex~cnses, had witlout _prev iou.:- f;ermission chc:,ng ed its rne thod of a.ccoun t> ing in 1968 in violation of Section 168 of Revenue ~egulations No. 2o This is b&sed en the fact that for the said year~ petitioner returned the entire (accrued ) amount of capi tal gains i nstead o f the amount .:c.ctuaJ.ly received i n the same y <::ar, b ad it been reporting on cash basiso Respondent also argues that due to petitioner's cha1ge of its method of accounting, the disallowance of the amount of ~22,594.30 9 as interest expense which corn .'31-ond t.o the year 1969 g ~ s proper v The conte! ltion of resrx~nd ent:. that petitiorH3r c hanged i ts method of accounting in viol2tion o{ , ,. c. j; C:�. 2. ~ .: , . ." h - _\ \., rJ (>\.1 t-.. rne r. .t �i:.., ii"lC.l U~a t 236

,~ l \,_, -1 i~come of P154,066c20 on the ba~iG of wh!c~ i t to ~41,072 ~ 00~ This return ~~s however 1 amended the original r~turn that petitioners !lftcd f~o~ ~e likewise find the argument of respondent th� t due to pet tioner 3 s change i n its method of accour.t ing !J the arr.:.) Lm t of I-' 2 2. ~ 59 4. :~ 0 a:~ :tn t~e.r-e :.:; t: sxpense which correspond tl the year 1969 iD propar. wi ~hout me:c1 to P104,267.87, thereby deleting the amount of ~22,594-.30,. This zeeadj wtment. render� furLhfH: discuss!o~ of the interest exponsa 6 unnecessaryo The issue o. the disallcwanca of the los~ of

.. We disagree with potition~r~ The pertinent �-��e�-�uQ .n:.. Clv�- ?1~.- �ior��. -i.m,, S(.�.ct1on ~,(h) (~l v M~ ~ ~����n�'~-� ' ' " ' v � d . - : . c~�..~,;;,.na.,~: . �J _ -�" ..;.;. �. , .. , "tJhtch provides: SEC. 3lo Items not deductible. - In cornpl.lti g net inc~;n\e-~ru)""'<f~:t.ion ?."hall ln. any case~- ,,~wed in respect o f - XXXXX :v:xxxx (b) !:.2.�.~ e ~..f r...9!!L.J3a.t~..2.L.~c.c h~.~ l?.. 9.E_.P.�2..E..~.r~:.J:.... - In comput:.:i.nr; net. :1.nco.M1 no deduction shall in any case be allowed in respect of losses from sales or excha.g~s of property~ directly or indirectl y; XXXXX (2) Except in the case of d15tributions in liquidation, betw.en an individual end a corpon1t.ion rr.ore t.hen fifty .�..~"!.� cent:u.In 1n vallJ(:t o: t~hr~: outr~t.anc"in9 stock 'oi~WT11~c:h is owned, directly o � indirectlyp by or for such incH .. -dual: It will be noted" that the !oases hera involved ts no i~ a consec._uer~ce of a d:.k-tr.ibut.:.l.o~:~ in 1 :!.qu.idation ~nd Messrs~ Edgardo T. Kalew clnd Maximo Te Kalaw 8 directly or indire~tly the outstanding stock of � 238

4 LE:CI[.;IC�N C1'.A c;:~:�~.c4 NC' u ;?. 2 '7 5 We now como to the issue of not: petitioner is a perso1al ~olding compa.y subiect to the adCit1ona l tax en undistributec net income unde .c t' 1e law o for purposes of the ircome tax law pertin2nt to taxation under ~action 27 of the R8 venuJ Code� a banl duly lie nse to do �usines- as such in the Philippines, a life insurance company, or a foreign personal holdin9 company as defined in Section 67 of the same code, if (1 ) a t leas t 80% of itD gross incomd fer the taxable year is a personal holding company jncom~ as defi~ed in Section 65 thLr.ofr and (2) at any time during the las~ half of tho t:axabl" yc,~ar� m�... re t:han 50% :tn Vi.'!.lue o 2 1 ts out.stancUng st.ock L:~ owne:da di.rect.ly or :Lndir:~ ctlyl~ by any or for not more han 5 individuals . Sec~ 64{a) and (b) of the Rev~nue Coda.) holding com � any~ � any corporation which fo_ the mPnt, and {b) the stock o wnership requirement I ,....., � \ . �J f~. �-~~ 0 239

J 1 ~� and ~tcck o~~ers ~P .~rl �r that pet1t1cnEr h a s a~en~ad i ts return fer 1968 on Fcbrua y 16, 197ls The f.gures indicat~d : d t i :3 f i ~~d (I /�.:s sho~vn in the :~mend e d return., the c;ross Cc.lir~s or Lor;~aeo �ro1:: bt~1 m or ~xch~ ~ ~a o~ rro~erty o t t e � the C :". ~ ' �"J ' o' � ~ rl . �, n � " o �� " '" o ' . l ' j 1 'j' 8 3 "' l; GJ .,.. '! ') ""''l \

.' Gains or Losses from Exchange of Capital Rentals & Royalties Dj.v:tdendrJ Othe:r SOUXC:tH; " TOTAL GH0~33 INCG1E Even a cursor;t exam i nat.ior. of t:he abov~ fi.guresu wid1 the disallowqnce of the amount nf P13,783 08 the rentals amounting to Pl64, �191 .. 55 const.l tu� e more than 50% of the gross i ncom (��...1,..r!:.;. pot:J. 'c ione r,. nnd, becaus~~ of t~he provision of Sect.i.on 65 (h) of. t e Revenue Code in relation to Secti n 6 of the same Code 0 said amount of ~164.491.55 inspite of b ing rentals can not be co~"nsi~ered as personal tolding company incomeo f-'lorf~OVf:r!J as sumi.r g .2.t-:~L~�!JS:.4.9.iJ that: all the items other than rents are considered personal holding company j_ncome., the sum tot. al then~of would on~y amount to Pl74,592~99 ~1ich 1s less than 80% of the total gross income of P339�184a54a Clearl y ther~fcre~ th e gross tncome requirement of Section 64(a) ~1) of the Reve~uc ~cd~ h~~ not be~n satisfied~ With this C)ncluslon, ve need �

D :=:r' L:; I en ... CT'.t\ C~>~::_::.F. !~C��;\1 2275 .., 13 - to the stock ownership raquir~mento For all the foregoing- the con~utation of the amount refundable to petitioner for the year 1968 is as tallows: Net income per amended return � � � P45,159~50 Add: Unallowable deduction: Gains fr�m sale of proper~y ot.ber than capi �taJ. a.sset.s � . ~]_.OS, .. ,. .., ... ., t .?..fLt.-2.4?-:.2.!3.. Net ta;.wble income Ta.x: dur~ thereon -'1'1:7'45"':,0() Arr.oun t a.l.L, ''��'- '.1 l �c. :l(' �11,072 .. 00 Accordingky. respondent Commissioner of Internal Revenue is 1ereby ordered to refund to or grant a tax credit in favor o~ petitioner Marietta Kalawg Inc .. the ar�~cdmt. of 7:'26, 2 37 . 00 as overpaid income ta... for 1968. for d ficiency inco.e t~x is hereby modified as indicated in the above opinion of the ~ourt and the assessment f:or. 1~er.sona1 holcUng corrpany j_ncome declared null n.nC.. vo.id, ,., i t.hout 1- renouncement as to costs., ... Uf'ZOrl �~':Lt.y., t-lay 26 �. 1901. / / �'�~ee7.A...~.. ~; ~ � , ". ,. ! I "'"' �� , ,.,.. .... I I"" ,.. .., .... , -~ ' '\l..i:'~"--- .i. \.,-\,..�1-J_/ c- . � '"!. .~~ s c� Lit. C' u l _: ~, 3 t~ �.;;; /