BIR Ruling

February 5, 1997 MEMORANDUM FOR: The Commissioner We have before us for resolution the protested internal revenue tax case of LA PAZ INVESTMENT AND REALTY CORPORATION involving the amounts of P11,001,648.41 and P26,084.45 representing respective deficiency income and expanded withholding taxes for taxable year 1987, inclusive of increments, and covered by Assessment Notice Nos. FAS-1-87-92-003618 and FAS-1-87-92-003619, both dated August 24, 1992. LLpr The aforesaid assessments arose out of the original investigation conducted by Revenue Officer Eliseio A. Alameda of the then Industry Audit Division of this Bureau. The details of such assessments is presented herein below: A . 1987 Deficiency Income Tax Net Loss Per Return (P 712,090.00) Add: Disallowances Salaries, Wages & Bonuses P618,177.00 Employees' Benefits 16,474.00 Deferred Rental Income 16,494.00 Loans Payable 13,466,382.00 14,117,527.00 Net Income Per Investigation 13,405,437.00 =========== Income Tax Due Thereon P4,691,903.00 B. 1987 Deficiency Expanded Withholding Tax Basic Tax (Rental, Professional Fees, Labor Contract P 9,764.43 Add: Surcharge 2,441.10 Interest 11,178.92 Compromise Penalty 2,700.00 Total Amount Due & Collectible P 26,084.45 ======== We discuss hereunder our position on the merits as well as the demerits of the above tax assessments. A. On the 1987 Deficiency Income Tax It can be easily gleaned from the above reproduction of the 1987 deficiency income tax assessment that the same arose primarily from the disallowance of some expenses claimed by the taxpayer as deductible from its gross income for 1987 and the classification/treatment of its loan payable amounting to P13,466,382.00 as additional taxable income for the same year. prll It can be observed that the loan payable carries the bulk of the assessment, such that, if its validity is upheld, then the assessment, in general, will logically stand the test of scrutiny. Corollarily, should its validity fail, then the assessment in total will be rendered moot for lack of sufficient basis, shown as follows: Net Loss Per Return (P 712,090.00) Add: Disallowances Salaries, Wages & Bonuses P 618,177.00 Employees' Benefits 16,474.00 Refund Rental Income 16,494.00 651,145.00 NET LOSS PER INVESTIGATION (P60,945.00) For exigency, we shall therefore consider only the following issue, to wit: ISSUE: We are faced with the question as to whether or not the Bureau acted properly in classifying/treating the aforesaid loan payable as additional taxable income of herein protestant-taxpayer for taxable year 1987. The drive of the Bureau's argument in treating the loan as additional income is that the said loan remains outstanding for considerable period of time, and that it appears that subject taxpayer has no definite intention of paying the same. (Please refer to Examiner's Investigation Report, p. 70; Docket) While we find the above argument to be legally tenable, it is submitted that the same would hold water only if it can be shown by concrete and satisfactory evidence that the creditor or the person who extended the loan to herein taxpayer has abandoned its right to collect; or has cancelled, remitted or condoned the loan. In the absence of substantial evidence to show the contrary, the amount of P13,466,382.00 reflected in the taxpayer's 1987 Balance Sheet as loan payable should continuously be considered as such. In this instant case, taxpayer was able to submit, to the satisfaction of this Office, documentary evidence indubitably showing that the herein taxpayer's lender/creditor has not abandoned or waived its right or intention to recover the loan. Up to September of 1992 (believed to be on going up to the present), La Paz Investment & Realty Corporation was engaged in a protracted litigation against its creditor over the subject loan. (Please refer to attached Order on Civil Case No. 1150 entitled Weissholding International vs. La Paz Investment and Realty Corporation) It can, therefore, be safely said that through the aforesaid court litigation, herein taxpayer's creditor has manifested its zealous initiative to recover the loan. With these matters clearly established, this Office finds the disallowance of the above-referred loan payable totally devoid of merit. cdta B. On the 1987 Deficiency Expanded Withholding Tax of P26,084.45. This was never disputed or protested by herein taxpayer and therefore, it has to be sustained. CONCLUSION/RECOMMENDATION Predicated on all the foregoing, the Legal Service, through its Appellate Division, respectfully recommends the following: 1. That the above-discussed 1987 deficiency income tax assessment issued against LA PAZ INVESTMENT & REALTY CORPORATION be withdrawn and cancelled for lack of merit; 2. That the original 1987 deficiency expanded withholding tax assessment of P26,084.45 be sustained; and 3. That upon payment of the amount mentioned in the next preceding paragraph by the taxpayer, this internal revenue tax case of LA PAZ INVESTMENT & REALTY CORPORATION be considered CLOSED and TERMINATED. Respectfully submitted: (SGD.) RODULFO L. SALAZAR Chief, Appellate Division I CONCUR: (SGD.) ALICIA L. TOMACRUZ Head Rev . Executive Assistant Legal Service Recommendation-APPROVED: (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue