BIR Ruling

October 17, 1997 MEMORANDUM FOR: The Commissioner This refers to the assessment of ATTY. FELIPE L. GOZON involving the amount of P630,960.99 representing deficiency income tax for the year 1987 covered by Assessment Notice No. 103616-87 dated January 21, 1991, which is subject of herein protest and/or request for cancellation with an alternative prayer for compromise and/or abatement on the ground that said assessment is erroneous, without basis, or at the very least, is of doubtful validity, as per taxpayer's letter dated August 9, 1995. aisadc Records show that herein taxpayer computed his income tax liability for the year 1987, as follows: Gross Compensation Income Allowances-RBS, Inc. P300,000.00 Bonus-RBS, Inc. 150.000.00 Total P450,000.00 Income from Business/Practice of Profession Management bonus-RBS. Inc P125,000.00 Director's compensation 85,000.00 Director's fee-Marcopper Mining Corp. 4,000.00 Director's fee-Glory Freight Int'l. 12,000.00 Partner's share-Gozon, Fernandez, Defensor and Associates 620,221.76 P846,221.76 Less: Itemized deductions: Taxes & licenses P28,650.58 Charitable & other contributions 385,909.39 Representations and association dues 138,239.52 Travelling and transportation 371,064.38 Other expenses 36,706.00 Totals deductions P960,619.87 Net income from business/practice of profession (114,398.11) Total P335,601.89 Less: Total exemptions 21,000.00 Amount subject to tax 314,601.89 Income tax due 68,410.00 Less: withholding taxes 67,600.00 Tax payment P810.00 Records further show that on January 29, 1992, the Chief, Accounts Receivable Billing Division informed the taxpayer of his income tax deficiency in the amount of P630,960.99. Warrant of Distraint and/or levy was likewise served upon the taxpayer on March 4, 1993. cdta Said deficiency income tax for 1987 was computed as follows: Net Income Per Return P335,601.89 Add: Business loss-not deductible from compensation income 114,398.11 Management bonus 125,000.00 Director's compensation 85,000.00 Director's fee-Marcopper 4,000.00 Director's fee-Glory Freight Int'l. 12,000.00 Partner's share-Already net of deductions 620,221.76 Net income per pre-audit P1,296,221.76 Less: Personal Exemption 21,000.00 Adjusted Taxable Net Income P1,275,221.76 ========== Tax due thereon P395,502.00 Less: Tax Credits 68,410.00 Balance of Tax due P325,091.00 Add: 25% surcharge 81,272.75 Interest from 4-16-88 224,597.24 Total Amount due and collectible P630,990.99 ========= In assailing the validity of the aforesaid assessment, herein taxpayer laid down the following arguments in support of his stand that the deficiency income tax assessment is erroneous and/or of doubtful validity, to wit: 1. The disallowance of the amount of P620,221.76 as a personal expense, which actually represents his partner's share in the law firm GFDA in 1987 was clearly erroneous because said amount was already reported as income in his 1987 income tax return and was never claimed as a personal expense; 2. That the director's fees, bonuses and allowance were already reported and included as part of his gross income in Schedule 2, Section D of his 1987 ITR; hence, it was clearly erroneous to characterize such fees, bonus and allowance as additional income because the same were already reported and included as part of his gross income in 1987. Moreover, the same cannot be made to fall under "gross compensation income" because there was no employer-employee relationship between the taxpayer and the payor-corporations to speak of; 3. The failure to deduct the amount of P10,722.59 paid on November 15, 1990 as deficiency income tax, inclusive of increments, from the deficiency income tax assessment, covered by C.R. No. B 21198702 dated November 15, 1990. A close perusal of the income tax return filed as well as the pre-audit sheet would readily show that the examiner erred in the tax treatment of the above items of discrepancy, which were disallowed as deductions and considered as additional income after audit, but which were never claimed as deductions by herein taxpayer, but were already declared as part of his professional income. The failure to deduct the amount of P10,772.59 paid on November 15, 1990 as deficiency income tax for the same year is another point of error. cdti On the other hand, the taxpayer is not entirely without fault. An analysis of the composition of his income from profession as per return, shows that the management bonus, director's compensation. director's fees, etc. except his partner's share, should have been declared as part of his gross compensation income and not as professional income, in accordance with existing jurisprudence on the matter. Moreover, Section 2, paragraph 2 of Revenue Regulations No. 12-86, expressly provides: "The name by which the remuneration for services is designated is immaterial. Thus, salaries, wages, emoluments and honoraria, bonuses, allowance (such as transportation, representation, entertainment and the like), fringe benefits (monetary and non-monetary), fees, including director's fees , taxable pensions and retirement pay, and other income of a similar nature constitute compensation income ." Under the circumstances, the claimed itemized deductions of P960,619.87 may be allowed from the declared business income (distributive partnership share of P620,221.76) in its entirety, considering that these are legitimate business expenses under the Tax Code. However, these expenses nor any balance thereof, may not be deducted from the compensation income pursuant to then Section 29 of the Tax Code. It is our view that this contributory negligence or mistake on the part of the taxpayer however does not render the assessment made by our examiner less erroneous so to speak, as to make it fall outside the ambit of the phrase "that the assessment is of doubtful validity." Based on the foregoing, there is no doubt that the assessment made by the investigating examiner was clearly erroneous and hence, is of doubtful validity. However, we find the taxpayer's offer to pay 10% of the revised assessment less the increments, to be without merit as a recomputation made by this Office shows that herein taxpayer is still liable to pay the total amount of P352,684.98 as shown below: Gross Compensation Income Allowance P300,000.00 Bonus 150,000.00 Management bonus 125,000.00 Directors Compensation 85,000.00 Marcopper Mining Corp. Director's fee 4,000.00 Glory Freight Int'l Director's fee 12,000.00 676,000.00 Total P676,000.00 Income from Business/Practice of Profession 620,221.76 Less: Itemized deductions 960,619.87 Net loss (P340,398.11) Less: Total exemptions 21,000.00 Amount subject to tax P655,000.00 Tax due: P176,425.00 Less: Tax Credits P68,410.00 Payment 10,722.59 79,132.59 Balance of Tax Due P97,292.41 Add: Surcharge P24,323.10 Interest 231,069.47 231,069.47 Deficiency income tax P352,684.98 All premises considered, it is respectfully recommended that herein taxpayer be required to pay the amount of P97,292.41 (basic tax less increments) as compromise payment, in full and final settlement of the aforesaid assessment, pursuant to Section 204 of the Tax Code. LibLex Respectfully submitted: (SGD.) RODULFO L. SALAZAR Chief, Appellate Division I CONCUR: (SGD.) SIXTO S. ESQUIVIAS IV OIC, Assistant Commissioner (Legal Service) Recommendation-APPROVED: (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue