2.
On December 4, 1945, Consuelo gave her four children, Antonio,
CIR v. Consuelo Vda. De Prieto (Vi)
September 30, 1960| Gutierrez David, J. | Deductions - Interest
PETITIONER: THE COMMISSIONER OF INTERNAL REVENUE
RESPONDENTS: CONSUELO L. VDA. DE PRIETO
SUMMARY: Consuelo Vda. de Prieto gave real property to her 4 children.
The Commissioner of Internal Revenue appraised the property donated at
P1,231,268.00, and assessed the total sum of P117,706.50 as donor's gift
tax, interest and compromises due thereon. Of the total sum of P117,706.50
paid by Consuelo, the sum of P55,978.65 represents the total interest on
account of delinquency. This sum of P55,978.65 was claimed as a deduction
on her 1954 income tax return. CIR disallowed the claim and as a
consequence, assessed Consuelo for 1954 the total sum of P21,410.38 as
deficiency income tax due on the aforesaid P55,978.65, including interest
up to March 31, 1957, surcharge and compromise for the late payment.
Issue: Whether the interest for late payment is deductible from gross
income – YES. For interest to be deductible, it must be shown that: (1) there
be an indebtedness, (2) that there should be interest upon it, and (3) that
what is claimed as an interest deduction should have been paid or
accrued within the year. The interest paid by Consuelo was because of the
late payment of her donor's tax, and the same was paid within the year it is
sought to be deducted. US defines indebtedness as an unconditional and
legally enforceable obligation for the payment of money. Under this
definition, a tax can be considered an indebtedness. It follows that interest
paid by Consuelo for the late payment of her donor's tax is deductible from
her gross income (interest on taxes is interest on indebtedness so it should
be deductible).
DOCTRINE: Although interest payment for delinquent taxes is not
deductible as tax under Section 30 (c) of the Tax Code and section 80 of the
Income Tax Regulations, the taxpayer is not precluded thereby from
claiming said interest payment as deduction under section 30 (b).
(interest payment for delinquent taxes is not deductible as tax but the
taxpayer is not precluded thereby from claiming said payment as
deduction on account of interest on indebtedness.)
FACTS:
1. This is an appeal from a decision of the Court of Tax Appeals
reversing the decision of the Commissioner of Internal Revenue
which held Consuelo L. Vda. de Prieto liable for the payment of the
sum of P21,410.38 as deficiency income tax, plus penalties and
monthly interest.
Benito, Carmen, and Mauro, real property with a total assessed
value of P892,497.50. After the filing of the gift tax returns on or
about February 1, 1954, the Commissioner of Internal Revenue
appraised the real property donated for gift tax purposes at
P1,231,268.00 and assessed the total sum of P117,706.50 as donor's
gift tax, interests and compromises due thereon.
3. Of the total sum of P117,706.50 paid by Consuelo on April 29, 1954,
P55,978.65 represents the total interest on account of delinquency
(the P55k was already included in the computation of P117k). The
P55,978.65 was claimed as a deduction in her 1954 income tax
return. CIR disallowed the deduction and as a consequence, assessed
Consuelo for P21,410.38 deficiency income tax due on the
P55,978.65, including interest up to March 31, 1957, surcharge and
compromise for the late payment.
ISSUES:
1. Whether the interest paid by Consuelo for late payment of tax is
deductible from gross income – YES
RATIO:
1. For interest to be deductible, it must be shown that: (1) there be an
indebtedness, (2) that there should be interest upon it, and (3)
that what is claimed as an interest deduction should have been
paid or accrued within the year.
2. The interest paid by Consuelo was because of the late payment of
her donor's tax, and the same was paid within the year it is sought to
be deducted. The question is whether the interest was paid upon
an indebtedness under Section 30(b)(1) of the tax code which
says:
Sec. 30 Deductions from gross income. — In computing net income
there shall be allowed as deductions
(b) Interest
(1) In general. — The amount of interest paid within the taxable
year on indebtedness, except on indebtedness incurred or continued to
purchase or carry obligations the interest upon which is exempt from
taxation as income under this Title."
3. The tax code of the US defines indebtedness as an unconditional
and legally enforceable obligation for the payment of money.
Under this definition, a tax can be considered an indebtedness.
4. In Sambrano v. CTA, the court said that "Although taxes already due
have not, strictly speaking, the same concept as debts, they are,
however, obligations that may be considered as such.”
5. Thus, the uniform ruling is that interest on taxes is interest on
indebtedness and is deductible. Therefore, the interest paid by
Consuelo for the late payment of her donor's tax is deductible
from her gross income under section 30 (b) of the Tax Code.
6. CIR claims that it should not be deductible under Section 80 of
Revenue Regulation No. 2 (Income Tax Regulation) which provides
that "the word 'taxes' means taxes proper and no deductions should
be allowed for amounts representing interest, surcharge, or penalties
incident to delinquency." The CTA said Section 80 is inapplicable
because while it implements Section 30(c) of the Tax Code
governing deduction of taxes, Consuelo argues based on Section
30(b) providing for deduction of interest on indebtedness.
7. In conclusion, although interest payment for delinquent taxes is not
deductible as tax under Section 30(c) of the Tax Code and Section
80 of the Income Tax Regulations, the taxpayer is not precluded
from claiming the interest payment as deduction under section 30(b)
of the same Code.