Unnumbered BIR Ruling

January 27, 1998 MEMORANDUM FOR: The Commissioner This refers to the protested tax case of Mr . SERGIO F . ANGELES of No. 19 Everwealth Compound I, Quirino Highway, Baesa, Quezon City, involving the amount of P24,320,920.48, surcharge and interest included, as deficiency income tax for the year 1992 covered by Assessment Notice No. C-1-92-IT-081-95, dated November 20, 1995. FACTS Mr. Sergio F. Angeles, a practicing lawyer, was the subject of Confidential Information No. 64-92, dated June 13, 1992, which implicated him with three (3) other taxpayers for tax evasion (See page 22, docket). One of his clients, the Estate of Hermogenes Z. Lopez, was included in the aforesaid confidential information and was assessed deficiency estate tax in the amount of P3,021,804.24. After reinvestigation, the deficiency estate tax liability was reduced to P366,318.75. As early as July 28, 1992, the Intelligence and Investigation Office (now the Tax Fraud Division), acting on the confidential information, requested copies of taxpayer's income tax returns for the period 1988 to 1990, from various offices of the BIR. The same elicited the following results: 1. The Revenue Information Systems Services, Inc. (now the ISOS) reported that the taxpayer has no record for 1988 and 1989 and that the partial list of processed 1990 individual ITR's does not show his name (p. 19); 2. The Revenue District Office No. 30, North Quezon City, reported that its office show no return filed under the name of the taxpayer for the year 1990 (p. 17); 3. The Revenue Region No. 4B-1, Quezon City, said that the taxpayer is not included in the Master List of the Records Unit of the Administrative Branch in the Region for the years 1988 and 1989 (p. 16). Based on these initial findings, Letter of Authority No. 002526, dated September 17, 1992, was issued directing Revenue Officers Victor B. De Jesus, Rex Paul R. Recoter, Raul Vincente L. Recto and Rosendo R. Corales to examine the books of accounts and other accounting records of Mr. Sergio F. Angeles, for income tax purposes, covering the period 1988 to 1991 (p. 10). On December 1, 1992, Mr. Angeles wrote the BIR in response to the request of the examiners for the production of certain documents, a portion of his letter (p. 43) is reproduced hereunder: "As I already intimated to your Internal Revenue Officers Mr. Rex Paul R. Recoter and Mr. Victor B. de Jesus, I have no income to speak of for the previous years in my profession. Because in the latest stage of my practice of law I have been selective in handling cases. Practically all the cases I have handled involve real properties with professional fees on contingent basis. Fortunately, I have won after many years of court battle two (2) land cases. And in this current year of 1992, my clients and I sold portions of the parcels of land we recovered as shown by the corresponding deeds of sale herein enclosed as Annexes "A" and "B"; thus, I will have to declare my income from the said sale for the coming year 1993." The investigation conducted for the period 1988 to 1991 yielded negative results but the examiners, in their memorandum report dated July 27, 1993 (p. 10), requested the issuance of another Letter of Authority, this time for the year 1992, as they were able to gather evidence that the taxpayer realized taxable income in 1992. The 1992 income tax return of Mr. Angeles, stamped received by the BIR on April 15, 1993, showed that he received a parcel of land as income but it did not indicate the details as to the area of the land received, its value and whether or not the corresponding income tax was paid (p. 118). In addition, the examiners were able to obtain a document whereby the heirs of Hermogenes Lopez, through a Deed of Conveyance dated March 3, 1992 (p. 81), transferred to Mr. Angeles as payment for his professional services, 97,444 square meters of a parcel of land located in Sumulong Highway, Antipolo, Rizal. On October 7, 1994, Letter of Authority No. 52174 was issued authorizing Revenue Officers Angelito G. Ursabia & Von Joseph D. Mangalindan, headed by Eliseo A. Alameda, to conduct an investigation on the 1992 income tax liability of Mr. Angeles. On November 3, 1994 and February 17, 1995, Mr. Angeles wrote the BIR explaining that the 97,444 sq. m. parcel of land given to him is actually part of the 194,888 sq.m. parcel of land which is the subject of several pending court cases. But though the land is still subject of litigation, Mr. Angeles claimed that he, together with three other persons, namely Rogelio Amurao, Marcelino E. Lopez and Pedrito Patapat, were able to sell 140,029 sq.m. (of the 194,888 sq.m.) to Primex Corporation on March 9, 1992 (see pages 197 & 271). A notice of a proposed deficiency income tax assessment, dated August 7, 1995, was sent to Mr. Angeles, who replied in a letter dated August 21, 1995, expressing disagreement with the findings of the examiners. He cited at least eleven (11) cases allegedly involving the 194,888 sq.m. land and explained how his three (3) associates came to be part owners of the 140,029 sq.m. sold to Primex Corporation. Also attached as his evidence were receipts showing alleged payment of the capital gains and documentary stamp taxes (p. 400). Obviously not satisfied with the explanation given, the examiners, in their memorandum report dated August 30, 1995 (p. 403), recommended the issuance of a formal assessment notice based on the finding that Mr. Angeles did not pay income tax on the 97,444 sq. m. parcel of land he received for professional services rendered to the heirs of Hermogenes Lopez. On November 30, 1995, Assessment Notice No. C-1-92-IT-081-95 was issued against the subject taxpayer demanding payment of the amount of P24,320,920.48 as deficiency income tax for the year 1992. The details of the assessment is shown hereunder: Income from Profession (97,444 x 400) P38,977,600.00 Less: 10% Optional deduction (1/1/92 to 7/27/92) P2,221,189.00 40% Optional deduction (7/28/92 to 12/31/92) 6,706,238.00 8,927,472.00 Net Income P30,050,128.00 Less: Personal Exemption 18,000.00 Taxable Income P30,032,128.00 Tax Due 8,966,238.00 Add: 50% Surcharge 4,483,119.00 25% Surcharge 2,241,559.50 20% Interest 4-15-93 to 1-15-96 8,630,003.98 DEFICIENCY INCOME TAX P24,320,920.48 The taxpayer strongly protested the above assessment, in his letter-protest dated January 19, 1996, on the basis of alleged factual considerations. Taxpayer claims that 97,444 sq.m. parcel of land is co-owned by himself with his three (3) other associates namely, Rogelio Amurao, Atty. Pedrito Patapat and Marcelino Lopez. He presented various documents, to wit: 1. A document entitled "Kasunduan", dated June 6, 1983, executed by the heirs of Hermogenes Lopez, namely Marcelino, Felisa, Zoilo and Leonardo Lopez and taxpayer showing that he was asked by the heirs to handle the recovery of ownership of a parcel of land identified under Plan H-128612, containing an area of 194,888 sq.m., situated at Sumulong Highway, Barrio De la Paz, Antipolo, Rizal whereby he will be given one half () of the subject land as attorney's fees on a contingent basis (Annex D of protest); 2. "Agreement", dated May 31, 1984, by taxpayer and Rogelio Amurao whereby he agreed to share one half () of his attorney's fees in consideration of the latter acting as financier in the recovery of the land (Annex E); 3. "Affidavit", dated December, 1984, by Marcelino Lopez acting on behalf of his co-heirs recognizing the past professional services rendered by Atty. Pedrito Patapat and giving him 4 hectares of the subject land (194,888 sq.m.) (Annex F); 4. "Memorandum of Agreement", dated February 17, 1985, by Angeles, Amurao, Patapat and M. Lopez showing ownership in equal shares of the subject 194,888 sq.m. land (Annex G). 5. "Deed of Conditional Sale", dated September 12, 1989, executed by the co-owners of the 194,888 sq.m. land, selling 140,029 sq.m. to Primex Corporation at P280.00 per sq.m. or a total consideration of P39,208,120.00 (Annex I); 6. "Deed of Conveyance", dated March 3, 1992, executed by the heirs of H. Lopez giving the taxpayer 97,444 sq.m. as attorney's fees (Annex M); 7. "Deed of Absolute Sale", dated March 9, 1992, executed by taxpayer and Amurao (allegedly on behalf of the 2 other co-owners) and Primex Corporation involving the same 140,029 sq.m., adopting the terms provided in the previous sale dated September 12, 1989 (Annex J); 8. "Supplement to Answer with Compulsory Counterclaim" filed by taxpayer and the other co-owners, in Civil Case No. 60754 entitled Primex Corporation vs. Marcelino et. al. praying that Primex be ordered to pay the remaining balance of the purchase price in the sale executed between them (Annex K); 9. Payment of capital gains taxes and other assessments on the conveyance to the taxpayer of 97,444 sq.m. (Annex N to N-2); 10. Payment of capital gains taxes and other assessments on the sale to Primex Corporation of 140,029 sq.m. (Annex O to O-2). The taxpayer has two (2) different arguments based on the foregoing evidences. The first is that he is not liable to income tax because although he (with his associates) was able to sell his property, the buyer, Primex Corp. refuses to pay the balance of the purchase price (in the amount of P13,965,314.15) because of several cited pending court cases involving the ownership of the land sold. And as the initial payments/installments were spent to handle the recovery of ownership of the land, there is no income to speak of which would make him liable for income tax. Hence, the assessment is premature. The second argument, and which we prefer to cite in verbatim is (p. 4 of protest): "the above-payments of the capital gains taxes in the conveyance by my clients in my favor and conveyance by me in favor of the buyer the 9 plus hectares are ipso facto payment of our income tax." To better appreciate and understand the facts of the case, a conference hearing was called by this office whereby the examiners and the taxpayer were each given the chance to prove their respective cases. Marcelino Lopez, Rogelio Amurao and Pedrito Patapat submitted their affidavits and testified as witnesses for the taxpayer. Their testimony essentially confirmed the fact of co-ownership among the four of them, in equal shares, of the 194,888 sq.m. parcel of land identified under Plan H-128612, located at Barrio De la Paz, Antipolo, Rizal. LLcd On March 19 and July 8, 1997, the taxpayer submitted a memorandum wherein he pleaded additional evidence in support of his case. These evidences are: 1. A copy of the decision of the Land Management Bureau (LMB), dated December 10, 1990, cancelling the Homestead Patent of Plan H-128612 containing an area of 194,888 sq.m. under the name of the Heirs of Hermogenes Lopez in favor of the Heirs of Elino Adia (Annex F of taxpayer's memorandum); 2. A copy of the decision of the Court of Appeals, dated February 26, 1993, in CA-G.R. SP No. 27602, entitled "Marcelino Lopez, et al. vs. The Land Management Bureau et al." affirming the decision of the Land Management Bureau dated December 10, 1990 (Annex F); 3. A copy of the decision of the Secretary of the Department of Environment & Natural Resources, dated January 5, 1995, also affirming in toto the decision of the Land Management Bureau dated December 10, 1990 (Annex J). It should be remembered that the land which the taxpayer received as attorney's fees from the Heirs of H. Lopez was taken from this 194,888 sq.m. land. And as the heirs of Elino Adia, by virtue of the aforecited decisions, were allegedly able to secure certificates of title in their name, there is the possibility that he may be required to return the land which he had received as attorney's fees. Hence, taxpayer believes that he should not be liable to income tax. The examiners, on their own part, submitted a memorandum as to why the questioned assessment should be sustained. DISCUSSION This office, after thoroughly evaluating the evidences submitted, believes that the case at bar involves the resolution of the following issues: 1. Whether or not the taxpayer received taxable income in the year 1992 which would make him liable for deficiency income tax. 2. If yes, how much income did the taxpayer actually received. I. On the first issue, we find that the taxpayer received taxable income in 1992 and is therefore liable to deficiency income tax. The term taxable income is defined under Section 27 in relation to Section 28(a) of the Tax Code, as amended, which provides: "Sec. 27. Taxable Income . The term "taxable income" means the pertinent items of gross income specified in this Code, less the deductions, if any, authorized by such types of income by this Code or other special laws: Provided, that for purposes of Section 21(b) "taxable income" means gross income from all sources without the Philippines less the deductions allowed in Section 29(m). Sec. 28. Gross income . (a) General definition . Gross income means all income from whatever source derived, including (but not limited to) the following items: (1) Compensation for services, including fees, commissions, and similar items; xxx xxx xxx" Items of income and expenditures which, as gross income and deductions, are elements in the computation of net income, need not be in the form of cash. It is sufficient that such items be appraised in terms of money (Sec. 37, Revenue Regulation No. 2). In the case at bar, the taxpayer received taxable income in the form of a parcel of land which the Heirs of Hermogenes Lopez, thru the Deed of Conveyance dated March 3, 1992, gave him as payment of his attorney's fees. This conveyance, which is actually the basis of the assessment, was not even disputed by the taxpayer in his letter-protest. The taxpayer's receipt of income is bolstered by the fact that he subsequently sold the land given to him as payment for his services. One of the attributes of ownership is the right to dispose of the property (Article 428 of the New Civil Code). Hence, the sale/disposition of the property confirms the fact that the taxpayer received income because he exercised ownership over the land which was given to him as attorney's fees. The taxpayer's argument that there is no income yet because the buyer (Primex) in the sale executed by them refuses to pay the balance of the purchase price is devoid of any legal basis. The receipt of the land by the taxpayer and his subsequent sale (with his associates of 140,029 sq.m.) to Primex are two different and distinct transactions. The BIR is interested only with the land which the taxpayer received as income. The fact that he later on decided to sell the land, but in the process, does not get paid for it, is no longer the BIR's concern. It is already a private matter between the seller and the buyer. With respect to the decision of the LMB, dated December 10, 1990 and which was affirmed by the Court of Appeals & the Secretary of DENR, the taxpayer has not presented any evidence actually requiring him to return the land he received as attorney's fees. The taxpayer claims that the issue as to the true ownership of the 194,888 square meter land from which his attorney's fees were taken is still the subject of court litigation. Hence, until such time that a final decision is rendered thereon, this office believes that his liability for deficiency income tax should stand. Such gains are taxable in the year during which they are realized. This statutory policy is invoked in the interest of orderly administration (Rutkin vs. United States, 343 US 131, 137; 96 L- Ed. 835,839). Collection of the revenue cannot be delayed, nor should the Government be compelled to decide when a possessor's claims are without legal warrant (National City Bank vs. Helvering [CA 2d] 98 F 2d 93, 96). II. On the issue as to the amount of income (or area of land) earned/received, this office submits that the taxpayer in reality received only a total area of 48,722 sq.m. although the conveyance, dated March 3, 1992, showed 97,444 sq.m.. The evidences which support this fact are the "Agreement" dated May 31, 1984, whereby Amurao, who financed the expenses in the recovery of the 194,888 sq.m. land, got one-half () of the taxpayer's attorney's fees and the "Memorandum of Agreement" dated February 17, 1985 executed by the taxpayer, Rogelio Amurao, Pedrito Patapat and Marcelino Lopez proving co-ownership of the 194,888 sq.m. land. This was also corroborated by the taxpayer's witnesses who appeared in the conference hearing conducted by this office. The assessment under consideration involves the imposition of a 50% surcharge because the examiners considered the return filed as false or fraudulent. This office however believes the contrary. Fraud, to warrant the fraud penalty, cannot be presumed but should be actual, not merely constructive (Aznar vs. Court of Appeals, 58 SCRA 519). It might be noteworthy that in the examiners' findings, no iota of evidence was presented to show fraud. The return filed wherein the taxpayer reflected "Received in kind (parcel of land)" cannot either be considered false. If at all, it may only be regarded as incomplete due to the lack of details as to its location, total area and value. Such being the case, we find no reason to impose the 50% surcharge. RECOMMENDATION Based on the foregoing premises and in accordance with Section 21(f) of the Tax Code, as amended, this Office finds Atty. Sergio F. Angeles liable to deficiency income tax for the year 1992 in the amount of P8,215,562.00, computed as follows: LexLib Income from profession (48,722 x 400) P19,488,800.00 Less: 40% Optional Deduction 7,795,520.00 Net Income P11,693,280.00 Less: Personal Exemption Married 18,000.00 Taxable Income P11,675,280.00 Tax Due 3,459,184.00 Add: 25% Surcharge 864,796.00 20% Interest from 4-15-93 to 10-15-97 3,891,582.00 DEFICIENCY INCOME TAX P8,215,562.00 =========== Respectfully submitted: (SGD.) RODULFO L. SALAZAR Chief, Appellate Division I CONCUR: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal & Enforcement Group Recommendation APPROVED (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue