BIR Ruling

January 2, 1997 Engr. Estanislao B. Bodiongan, Sr. Lam-an, Ozamiz City S i r : In connection with your letter dated November 5, 1996 wherein you offered to pay the amounts of P212,321.17 and P50,523.66 or the aggregate amount of P262,844.83 as compromise and as full and complete settlement of your 1990 deficiency income and value-added tax liabilities, please be informed that after giving judicious consideration of the facts and circumstances of the case, this Office finds your offer of compromise as meritorious and therefore, accepts the same. Accordingly, you are requested to pay the amount of P262,844.83 to the Revenue District Officer, BIR District Office No. 100-Ozamiz City, within five (5) days from receipt hereof. It is to be understood that the above-referred tax liabilities shall only be considered closed and terminated upon presentation to this Office of satisfactory proof of full and complete payment of the agreed compromise amount of P262,844.83 I hope you will be guided accordingly. Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue January 2, 1997 MEMORANDUM FOR: The Commissioner Placed before us for immediate resolution the offer of Engr. Estanislao B. Bodiongan, owner/proprietor of Bodiongan Construction, with business address at Lam-an, Ozamis City, to settle through compromise agreement his internal revenue tax case involving the amounts of P2,264,288.49 and P856,473.07 representing alleged deficiency income and value-added taxes for taxable year 1990, inclusive of increments; and covered respectively by Assessment Nos. 100-11-90-001704 and RR 16-100-90-VAT-3372, both dated May 26, 1994. It appears from the records that the Bureau, through its Revenue Region No. 16 Cagayan de Oro City issued the following deficiency tax assessments against the above-referred taxpayer, to wit: 1990 Deficiency Income Tax Net Income Per Return P238,279.79 Add: Adjustments 1. Undeclared Income P2,712,864.45 2. Disallowed Expenses: Light & Power 40,000.00 Travelling Expenses 48,000.00 Taxes & Licenses 20,100.00 2,820,964.45 Net Income After Investigation P 3,059,244.24 Less: Personal Exemption 15,000.00 Adjusted Taxable Income P3,044,244.24 =========== Tax Due Thereon P1,014,660.00 Less: Tax Payment 43,262.14 Basic Deficiency P971,397.86 Add: Surcharge 50% 485,698.93 Interest 807,191.70 Income Tax Still Due & Collectible P2,264,288.49 =========== 1990 Deficiency VAT Gross Receipts Subject to Tax P3,705,068.66 ========== Output Tax P336,824.42 Add: Surcharge 50% 168,412.20 Interest 351,236.44 Total VAT Still Due and Collectible P856,473.07 ========= The foregoing assessments were primarily based on the contention that during the taxable year 1990, herein taxpayer failed to report for income and value-added tax purposes his income from the construction of the Halapitan Community High School, Halapitan, San Fernando, Bukidnon. Taxpayer duly protested the assessment. Our Regional Director, however, instead of giving due course to the said protest, immediately instituted seizure and forfeiture proceedings against the properties of Engr. Bodiongan, and on November 14, 1995, the following properties were declared forfeited in favor of the government, viz: aisadc 1. Residential lot located at Baadero, Ozamis City, with a lot area of 123 sq. m. and with a market value of P12,300.00 under Tax Declaration No. 11190; 2. Residential lot situated at Baadero, Ozamis city with a lot area of 27 sq.m., and with a market value of P2,700.00 per Tax Declaration No. 11191; and 3. A Commercial lot situated at Aguada, Ozamis city with a lot area of 590 sq.m. with a market value of P261,070.00 per Tax Declaration No. 05463. Taxpayer assailed the validity of the above assessments and the eventual forfeiture of his properties anchoring his protestation primarily on the following legal and factual arguments, viz: 1. The alleged income from the construction of Halapitan Community High School was not really his but that of Atty. Henry S. Oaminal; and 2. That granting for the sake of argument that the disputed income was really his, the subject assessments became patently and obviously erroneous on account of the Bureau's failure to take into consideration the cost/expenses incurred in the construction of Halapitan Community High School. cdt In apparent change of heart or may be in utter desperation, taxpayer, on November 5, 1996 filed a letter-request offering to settle the above deficiency assessments through compromise agreement by offering to pay the respective amounts of P212,321.17 and P50,523.66 or the aggregate amount of P262,844.83 as complete and full settlement of his 1990 income and value-added tax liabilities. Given the foregoing as factual setting, the issue to be resolved now is whether or not this instant case could still be settled through compromise agreement. It is our considered view that the same should be resolved in favor of herein taxpayer. Under Section 204 of the Tax Code, as amended, the Commissioner of Internal Revenue may compromise civil liability for internal revenue taxes only in two cases, viz: 1. Where the assessment is of doubtful validity; and 2. In case of insolvency of the taxpayer. After a thorough evaluation of the records of this instant case, this Office has come to the inexorable conclusion that the same, on the ground of doubtful validity of the assessments, can be settled through compromise agreement. cdta We relied on the following pertinent considerations as decisive justifications to the above conclusion, to wit: On the vital issue raised by Engr. Bodiongan failure of the Bureau to take into consideration the equivalent cost/expenses incurred in the construction of Halapitan Community High School, we find this contention to be totally correct. Subject assessments clearly showed that the alleged construction income allegedly received by the taxpayer from the construction of the said Community High School was used as the exclusive tax base in the computation of the alleged 1990 income and value-added tax liabilities of Engr. Bodiongan. It might be through sheer oversight that this gravous error was committed by our people from Revenue Region 16 Cagayan de Oro City. Against this established factual backdrop, the stage is now set for the determination of the equivalent cost/expenses incurred in the construction of the above-named High School. We believe that the authority on the matter is Department Order No. 30 Series of 1991 dated January 30, 1991 of the Bureau of Construction, Department of Public Works and Highways. Said Order clearly provides, among others, the policies, rules, regulations and procedures relative to contractor's maximum allowable profit margin, to wit: Direct Cost of the Project Contractor's Profit (% of Direct Cost) UP to P1 Million 15% Above P1 Million to P5 Million 14% Above P5 Million to P10 Million 13% Above P10 Million to P20 Million 12% Above P20 Million to P50 Million 11% Above P50 Million 10% From the foregoing, it is safe to conclude that a herein taxpayer is legally entitled to a cost allowance of 86% (100%-14% allowable profit percentage) of the total cost of the project. Predicated on this finding, herein taxpayer may be held accountable to pay the following 1990 deficiency tax assessment, viz: cdti A. Deficiency Income Tax P382,065.34 Net Income Per Return P238,279.79 Add: Adjustments 1. Understated Income P2,712,864.45 Less: Cost of Construction 86% 2,333,063.43 Balance P379,801.02 2. Add: Disallowance's Light & Power 40,000.00 Travelling Expenses 48,000.00 Taxes & Licenses 20,100.00 487,901.02 Adjusted Taxable Income P726,180.81 Less: Personal Exemption 15,000.00 Taxable Net Income P711,180.81 ========= Tax Due Thereon P196,088.28 Less: Tax Payment 43,262.14 Income Tax Still Due P152,826.14 Add: Surcharge 38,206.53 Interest 191,032.67 Total Income Tax Due P382,065.34 ========= B. Deficiency VAT P117,888.54 Amount subject to VAT P3,705,068.66 ========== Output Tax Due Thereon P336,824.42 Less: Input Tax (86%) 289,669.00 VAT Still Due P47,155.42 Add: Surcharge 11,788.85 Interest 58,944.27 Total VAT Due P117,888.54 ========= Under RMO No. 45-93 promulgated on September 29, 1993, as amended by RMO No. 54-93 dated December 1, 1993, all internal revenue taxes for which formal deficiency assessments for any and/or all taxable years up to 1992 have been issued may be the subject of compromise settlement provided the interested taxpayer may at least pay 50% of the amount assessed. Applying the above enunciated policy to the case at bar, taxpayer should at least pay the respective amounts of P191,032.67 and P58,944.27 or the aggregate amount of P249,976.94 as full and complete settlement of his 1990 income and value-added tax liabilities, computed as follows: A. For 1990 Deficiency Income Tax Total Income Tax Found To Be Still Due and Collectible P382,065.34 Multiplied by compromise rate 50% COMPROMISE SETTLEMENT P191,032.67 ========= B. For 1990 Deficiency VAT Total VAT Found To Be Still Due and Collectible P117,888.54 Multiplied by compromise rate 50% COMPROMISE SETTLEMENT P58,944.27 ========= However, since herein protestant-taxpayer was offering P262,844.83 as compromise settlement, an amount obviously higher than that what was provided for under the aforecited RMOs', it would be to the Bureau's advantage if we accept the same as compromise settlement. CONCLUSION Premised on all the foregoing discussion of facts, law and jurisprudence, the Legal Service, through its Appellate Division, respectfully recommends the following: 1. That the aggregate amount of P262,844.83 be accepted as full and complete settlement of ENGR. ESTANISLAO B. BODIONGAN, SR's 1990 income and value-added tax liabilities; 2. That upon payment of the total amount of P262,844.83, the above-deficiency tax assessments be considered CLOSED AND TERMINATED; and; 3. Finally, that upon closing and termination of this instant case, the properties of herein taxpayer which were forfeited in favor of the government as a consequence of the above-referred assessments be immediately returned to him as legally and rightfully expected under the circumstances. cdll Respectfully submitted: (SGD.) RODULFO L. SALAZAR Chief, Appellate Division By: (SGD.) GLEN A. GERALDINO Asst. Chief, Appellate Division I CONCUR: (SGD.) ALICIA P. CLEMENO Assistant Commissioner Legal Service By: (SGD.) ALICIA L. TOMACRUZ Head Revenue Executive Assistant Legal Service Recommendation-APPROVED: LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue