Liboro v. Commissioner of Internal Revenue

SPECIAL SIXTH DIVISION [CA-G.R. SP No. 25152. June 18, 1993.] (C.T.A. Case No. 4270) RENATO L. LIBORO , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS , respondents . D E C I S I O N PURISIMA , J p : Brought on July 12, 1991, this petition or review seeks the reversal of the Decision of the Court of Tax Appeals in C.T.A. Case No. 4270, dismissing petitioner's petition for review of the assessment of deficiency income tax for his 1980 income. On June 20, 1991, the Court denied petitioner's "Motion For Extension Of Time To File Petition For Review"; holding that such motion was filed out of time because the period for filing a petition for review is not extendible. On July 18, 1991, We denied petitioner's "Motion For Reconsideration To Admit Petition For Review" for lack merit. But petitioner went to the Supreme Court on a "Petitioner For Certiorari". Docketed as G.R. No. 101132, the petition was granted. Our assailed Resolution was set aside and We were directed to admit petitioner's petition for review. So, on March 4, 1993, We admitted the petition for review under consideration and gave the Solicitor General, as counsel for respondents, ten (10) days to comment. Respondents' Comment having been sent in by the Solicitor General on April 20, 1993, the case ripened for this disposition. The antecedent facts are well recited in the decision of the Court of Tax Appeals, thus: "Petitioner for the year 1980 declared loss of P18,115.64, incurred in earning P94,500.00 as professional fees, from his partnership share or income from the Altavas, Liboro & Daza Law Office. Respondent Commissioner of Internal Revenue disallowed the deduction on the ground that loss is not connected different from the business from which petitioner earned his partnership share of P55,085.01. Accordingly, petitioner was assessed as 1980 deficiency income tax in a letter dated November 30, 1985 with a demand for the payment of P14,009.84 computed as follows: Net income per return as audited P38,063.84 Proposed unallowable deduction and additional income: Schedule 1 Schedular loss (BP Blg. 41 not deductible) 18,115.64 Medicare Excess (P1,985.40 P1,000.00) 985.40 19,101.04 Proposed Adjusted income 57,164.88 Less: Personal and add'l exemption 6,000.00 Net income subject to tax 51,164.88 Income tax due thereon 14,273.00 Less: Amount already assessed/paid 6,595.43 Deficiency income tax 7,677.57 Plus interests 4,606.54 P12,284.11 Plus: Expanded Withholding Tax on Rental of: P18,332.28 x 5% P916.61 25% surcharge 229.15 Interests 549.97 Compromise 30.00 1,725.73 TOTAL DEFICIENCY TAX DUE P14,009.84 On December 19, 1985, petitioner protested the deficiency assessment as consequenced by the disallowance of the loss. Respondent denied the same on May 11, 1988 for lack of legal basis and the inapplicability of the availed Tax Amnesty under Executive Order No. 41 which only covers tax liabilities for the years 1981 to 1985." Is the amount of P18,115.64 in question, petitioner's alleged loss with respect to his professional fees of P94,500.00, as an individual or private law practitioner in his law office, deductible as loss from his income of P55,085.01 as a partner of the Altavas, Liboro and Daza Law Office for the same year? In a nutshell, such as the pivot of inquiry and crucial issue here. We resolve the issue in the negative. The Resolution appealed from accords with law and jurisprudence. As aptly cited by respondents, the law in point is Section 30 (d) (1) (A) of the Tax Code, as amended by Batas Pambansa Blg. 41, to wit: "Section 30. Deduction from gross income . In computing taxable income subject to tax under Sec. 21 (a); 24 (a), (b) and (c); and 25 (a) (1), there shall be allowed as deductions the items specified in paragraphs (a) to (i) of this section. xxx xxx xxx (d) Losses (1) By individuals In the case of Individual actually sustained during the taxable year and not compensated for by insurance or otherwise. (A) If incurred in trade, profession or business, Provided, however, that a loss representing the excess of the income of allowable expenses and of the deductions directly or approximately attributable or related to the production or earning of such income from a particular line of business or activity, shall not be allowed as a deduction from or offset against income derived from other sources;. . . Revenue Memorandum Circular No. 16-80, dated April 10, 1980, issued in implementation of the aforecited law, reads: "1. Non-deductibility of net operating loss sustained in one line of business (including practice of profession) from gross income derived from other sources . "The law disallows deduction of losses incurred in connection with an individual's business and such losses represent the excess over the business income, of allowable expenses and other deductions directly or approximately attributable to the production or earning of such income." Following the aforecited law and implementing Circular, it is decisively clear that the loss of P18,115.84 allegedly sustained by petitioner in his private law practice cannot be deducted from his share of P55,055.01 in the net income of the Altavas, Liboro & Daza Law Office, of which he is a partner. The disallowance of subject loss as a deduction is grounded on the fact that the income of petitioner from his private and individual law practice, and his share in the income of the Altavas, Liboro & Daza Law Office, are derived from different sources. Although the sources of income of petitioner are both practice of law; as explained by the Solicitor General, for taxation purposes it is not the nature of the business but the number of business establishments which determine the applicability of Section 30 (d) (1) (A) of the Tax Code. To rule otherwise is to defeat the very purpose of Batas Pambansa Blg. 41. As pointed by respondents, the following explanatory note to the aforecited amendatory legislation militates against petitioner's posture. "The proposal prohibits deduction of net loss sustained by individual in the operation of one line of business or other category of income producing activity from gross or net income derived from other lines of business or other categories of income. At present our income tax system is predominantly global or unitary. Under this system, if a taxpayer engages in one line of activity, whether business of non-business, where his expenses and other deductions exceed his gross income, the resulting net loss is allowed to be off-set against the income from other sources of activities. This system has been unscrupulous individuals by creating sham business from which they manage to create artificial or paper losses for purposes of reducing their taxable net income from other sources. An example of such a scheme is an individual with substantial professional income who purportedly engages in farming or agricultural business wherein a loss is sustained. Under the present law, net loss from farming or agriculture can be used to reduce his taxable professional income. This example can be extended to other individual taxpayers deriving substantial taxpayers deriving substantial passive income such as dividends, interest or royalties where taxability can immensely be reduced. . . ." It is thus beyond cavil that the case of petitioner is within the ambit of Section 30 (d) (1) (A) of the tax Code, as amended by batas Pambansa Blg. 41; petitioner having derived income from his individual practice of law, and from their law firm, as a partner. As stressed by the Solicitor General, the primordial objective of batas Pambansa Blg. 41 is to prevent "unscrupulous individuals from creating sham businesses from which they can manage to create artificial or paper losses for the purpose of reducing their taxable net income from other sources." Equally meritorious and sustainable is respondent's invocation of the equitable principle of estoppel. Petitioner is precluded by estoppel from asserting that his income as a private law practitioner and his share of income as a partner of Altavas, Liboro & Daza Law Office, come from the same line of business or source. As a private law practitioner, petitioner has his own clients distinct from those assisted by him as a partner of the law firm. It should be noted that even in his income tax returns, petitioner separated the income of P94,500.00 derived from his individual practice of law, reported under Schedule 1 of his Individual Income Tax Returns, from his share of P55,085.05 in the net income of Altavas, Liboro & Daza Law Office, stated under Schedule 4 of his (petitioner's) Individual Income Tax Returns. And petitioner having prepared his Individual Income Tax Returns and the 1980 Income Tax Returns of their law firm, he is now estopped from treating both income as derived from one and the same source. On this point, We quote with approval the following disquisition by the Court of Tax Appeals: "Let it suffice, the sprouting impression precipitately broached by the petitioner that the two sums of gross income reflected in Schedules 1 and 4 in the Income Tax Returns belong to one and the same line of business or activity can hardly be reassuring prospect that can easily be reconciled with the statutory intendment. Going by the provision of Section 30, supra, the net operating loss which comes from a particular line of business or activity including the practice of a profession, cannot be allowed as a deduction from income of other sources. Such distinction has to be taken insofar as the question of taxation is concerned. And, brought to bear upon the circumstances obtaining, the loss of P18,115.64 allegedly suffered by the petitioner in earning his professional fees of P94,500.00 as an individual law practitioner should not be permitted to shelter his share or income of P55,085.01 in the Altavas, Liboro and Daza Law Office. This seems to be the import and sense of the statute as the two sums of gross income (Schedules 1 and 4) were derived from different sources. Ludicrous and expedient piffle, indeed, if the gross income of the petitioner may not validly be infused cognizance as derived from pursuits much closer to separate treatment than a single activity within the legal contemplation, unless petitioner is unwilling to take the responsibilities or simply unable to discern what they are. Petitioner's posture comes as a convenient crutch for an obvious shortcoming. Certainly the law requires no more and expects no less, hence, the deficiency assessment must be confirmed." WHEREFORE, finding no reversible error in the appealed Decision of the Court of Tax Appeals, upholding the deficiency assessment made by the Commissioner of Internal Revenue, the same is hereby AFFIRMED; and the instant petition for review on certiorari is DISMISSED. No pronouncement as to costs. SO ORDERED. Elbinias and Guerrero * , JJ ., concur. Footnotes * In Lieu of Justice Angelina S. Gutierrez who is on leave.