Assessment Against Ker & Co., Ltd., for Income Tax Deficiency

February 6, 1959 BIR RULING NO. 084-59 5th Indorsement Returned to the Regional Director, Manila, the herein papers of the case of Ker & Co., Ltd. with the following information. cdt Taxes paid in prior years which were claimed and allowed as deductions from gross income for said years but were subsequently refunded should be included in gross income for the year in which they were received if the taxpayer's system of accounting is on the cash basis and in the year the refund was ordered if his system of accounting is on the accrual basis. This rule stems from the provisions of Sections 29(a), 30(c)(5), and Section 39 of the Tax Code and Section 51 of the Income Tax Regulations as well as the decisions of the courts in the United States on this point. (Houbigant Inc. 31 B.T.A. 954; Chevy Chase Land Co. 34 B.T.A. 150; Charles W. Nash 34 B.T.A. 675; Dixie Margarine Co. 38 B.T.A. 471; Grace M. Barnett 39 B.T.A. 864; Estate of William H. Block 39 B.T.A. 339; Walter M. Marston 41 B.T.A. 847; Burnet v. Sanford & Brooks Co. 282 U.S. 359). The reason for the foregoing rule was aptly stated thus "Broadly stated, the reason for the rule is that where unforeseen events later disclose that deductions were improperly taken from gross income in prior years, or amounts were improperly omitted from gross income, and adjustment of the tax liability for such prior years cannot be made because barred by limitations, or is impractical for other reasons, the amounts subsequently received, recovered, or canceled must then be included in gross income to offset such deduction or commission." (Dixie Margarine Co., supra). "Income tax liability must be determined for annual periods on the basis of the facts as they existed in each period. When recovery or some other event which is in consistent with what has been done in the past occurs, adjustment must be made in reporting income for the year in which the change occurs. No other system would be practical in view of the statute of limitations, the obvious administrative difficulties involved, and the lack of finality in income tax liability, which would result. The foregoing principles, which have been established by the following cases, require that the refund here be included in the income of this estate for the year of recovery. . . ."(p. 341, Estate of William H. Block, supra). In view of the foregoing considerations, the assessment against Ker & Co., Ltd., for deficiency income tax stands and steps for collection thereof should be taken immediately. prcd (SGD.) JOSE ARAAS Commissioner of Internal Revenue