BIR Ruling No. 097-65

August 20, 1965 BIR RULING NO. 097-65 1st Indorsement Returned to the Chief, Income Tax Division, thru the Revenue Operations Head (Assessment), the papers relative to the letter of Messrs. Vicente M. Gomez & Associates, dated June 4, 1965 requesting information as to how their client, the ARMI CORPORATION, will report the income that will be derived from its building, the GIL-ARMI APARTMENT HOTEL, which is proposed to be leased under the following terms and conditions, viz: "1. The lease shall be for a period of 50 years; cdi "2. The rental for the 50-year period shall be payable in advance as follows: a. 20% upon execution of the lease contract; b. The balance, in sixty (60) consecutive equal monthly installments with interest at 12% per annum on the balance. "3. The lessee shall have the option to cancel the lease contract and vacate the building after it shall have paid the full consideration of the lease: Provided, that should the cancellation to be made within the first 10 years of the term of the lease, the lessee shall be entitled to a refund corresponding to the rental for the 11th up to the 50th year only, the rental corresponding to the period between the date of cancellation and the 10th year being forfeited in favor of the lessor: Provided, further, that the refund contemplated herein shall be made by the lessor within the 11th year of the contract should the aforesaid cancellation be made before the first 10 years of the term thereof shall have expired and within the succeeding year after the year of cancellation should the same be made after the first 10 years of the lease contract." The advance rental received upon the execution of the lease contract and the balance thereof which is to be paid within the 5-year period are taxable in full in the year received pursuant to Section 39 of the Tax Code, as amplified by Section 170 of Revenue Regulations No. 2, and cannot be apportioned over the term of the lease. Section 39 of the Tax Code reads as follows: "Section 39. Period in which items of gross income included . The amounts of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under section 38, any such amounts are to be properly accounted for as of a different period. . . ." And Section 170 of Revenue Regulations No. 2, otherwise known as the Income Tax Regulations, provides as follows: "Sec. 17. When included in gross income . Except as otherwise provided in section 39 in the case of the death of a taxpayer, gains, profits, and income are to be included in the gross income for the taxable year in which they are received by the taxpayer, unless they are included as of a different period in accordance with the approved method of accounting followed by him. . . ." This would be the rule irrespective of whether the taxpayer reports his income and expenses on the accrual or on the cash basis. With respect to the question of whether or not a refund or a tax credit could be made for the income tax that it shall have overpaid in the event the lessee cancels the contract and vacates the premises in accordance with the provision of the abovementioned contract, it is informed that refund or tax credit of the income tax paid thereon, could no longer be possible inasmuch as the Commissioner of Internal Revenue may credit or refund taxes only when erroneously or illegally received. cdtech (SGD.) BENJAMIN N. TABIOS Acting Commissioner of Internal Revenue