Bibiano v.
CA (Vi) installment payments of the land discounted by AYALA itself, on the same
Feb. 10, 2000| Quisumbing, J. | Installment basis – Accounting. Period
PETITIONER: BIBIANO V. BAÑAS, JR.
RESPONDENTS: CA, AQUILINO T. LARIN, RODOLFO TUAZON
AND PROCOPIO TALON
SUMMARY: Bibiano V. Bañas Jr, sold to Ayala Investment Corporation
(AYALA), 128,265 sqm of land located at Bayanan, Muntinlupa, for
P2,308,770. The Deed of Sale provided that upon the signing of the contract
AYALA shall pay P461,754 and the balance of P1,847,016 to be paid in
four equal consecutive annual installments. The same day, AYALA issued
a promissory note covering the amount of the installments. Bibiano
discounted the promissory note with AYALA, for its face value of
P1,847,016.00. AYALA issued 9 checks to Bibiano, all dated February 20,
1976 (which is the date of the sale), drawn against BPI with the uniform
amount of P205,224.00. From 1977 until 1979, Bibiano reported an income
of P230,877 as gain from sale of capital asset. In his 1980 income tax
amnesty return, Bibiano also reported the same amount of P230,877.00 as
the realized gain on the sale for the year. Revenue Director Mauro Calaguio
authorized their tax examiners, Rodolfo Tuazon and Procopio Talon to
examine the books and records of petitioner for the year 1976. They
discovered that Bibiano had no outstanding receivable from the 1976 land
sale to AYALA (because AYALA paid everything by checks) and
concluded that the sale was cash and the entire profit should have been
taxable in 1976 since the income was wholly derived in 1976. Aquilino
Larin, Regional Director of Manila after Calaguio, filed a criminal
complaint for tax evasion against Bibiano. On July 1, 1981, news items
appeared in Evening Express, Evening Post, and Bulletin Today, which
mentioned Bibiano's false income tax return on the sale of land to AYALA.
Because of the complaint for tax evasion and the news reports, Bibiano filed
with the RTC of Manila an action for damages against respondents Larin,
Tuazon and Talon for extortion and malicious publication of the BIR's tax
audit report. The trial court decided in favor of Larin, et. al. and awarded
them damages. CA affirmed. ISSUE: Whether the payment should be taxed
on a cash basis? Yes, it should be taxed as if it were paid on a cash basis
and not in installment. It should have been reported as income on the day
that Bibiano discounted the promissory note and received AYALA’s
checks. The SC affirmed the CA. The Court ruled that although the proceeds
of a discounted promissory note are not considered part of the initial
payment, still it must be included as taxable income for the year it was
converted to cash. When Bibiano had the promissory notes covering the
day of the sale, he was no longer entitled to report the sale as a sale on
installment, because it became a taxable disposition and Bibiano was
required by law to report in his ITR the income gained from the discounting.
According to the Court, what Bibiano did is an attempt to circumvent
paying income taxes gained from the sale of the land to AYALA in 1976.
The Court deleted the award of actual damages to Larin for lack of basis
because the records of the case did not contain a statement of the amount of
the actual damages they sustained. The Court stressed that actual damages
cannot be allowed unless supported by evidence. The Court, however,
agreed that there was sufficient basis for the award of moral and exemplary
damages in favor of respondent Larin because Bibiano's actions against
Larin were "unwarranted and baseless," since the criminal charges filed
against him in the Tanodbayan and City Fiscal's Office were all dismissed.
DOCTRINE: In installment accounting method, first, report the initial
payment during the year it was paid then report the installments during the
year that it is subsequently paid. But, when a promissory note is given as
payment and it is discounted in the same day and given, it is considered as
income the day it is discounted and should be reported as income for that
year.
FACTS:
1. Bibiano V. Bañas Jr. (Bibiano) sold to Ayala Investment
Corporation (AYALA), 128,265 sqm of land located at Bayanan,
Muntinlupa, for P2,308,770.00. The Deed of Sale provided that
upon the signing of the contract AYALA shall pay P461,754.00.
The balance of P1,847,016.00 pesos was to be paid in 4 equal
consecutive annual installments, with 12% interest per annum.
AYALA issued one promissory note covering four equal annual
installments. Each periodic payment of P461,754.00 pesos shall be
payable starting on February 20, 1977, and every year after, or until
February 20, 1980 (that’s 4 years after).
2. On the same day as the sale, Bibiano discounted the promissory note
with AYALA, for its face value of P1,847,016.00, evidenced by a
Deed of Assignment signed by the Bibiano and AYALA. AYALA
issued 9 checks to petitioner, all dated February 20, 1976, drawn
against Bank of the Philippine Islands with the uniform amount of
P205,224.00.
3. 1976 ITR – Bibiano reported the P461,754 (initial payment)
 Each ITR from 1977-1979 – Bibiano reported the P230,877 as gain
from sale of capital asset (installments)
1980 Income tax amnesty return – He reported the same amount2nd Issue
of P230,877.00 as realized gain on disposition of capital asset for
the year.
4. Revenue Director Mauro Calaguio authorized tax examiners,
Rodolfo Tuazon and Procopio Talon to examine the books and records of
Bibiano for 1976. They discovered that he had no outstanding receivable
from the 1976 land sale to AYALA (because AYALA already paid it through
checks on the same day as the sale when its promissory note was discounted)
and concluded that the sale was cash and the entire profit should have
been taxable in 1976 since the income was wholly derived in 1976. Tuazon
and Talon declared a deficiency of P2,095,915 and recommended deficiency
tax assessment for P2,473,673.
5. Aquilino Larin became Regional Director of Manila, Region IV-A
(replaced Calaguio in #4) and said that there was a deficiency tax assessment
of P936,598.50 (reduced the report of Tuazon and Talon. He informed
Bibiano who still insisted that it was paid on installments, then filed a 3 Issue
rd
criminal complaint for tax evasion against Bibiano.
6. In 1981, Bibiano filed Amnesty Tax Returns and still did not
acknowledge that the payment was on cash basis.
7. News items appeared in Evening Express, Evening Post, and
Bulletin Today, which mentioned Bibiano's false income tax return about the
sale to Ayala. Because of these, Bibiano filed with the RTC of Manila an
action for damages against Larin, Tuazon, and Talon for extortion and
malicious publication of the BIR's tax audit report. The trial court decided in
favor of Larin, et. al. and awarded them damages. CA affirmed RTC.
ISSUES:
1. Whether CA erred that there was no extortion attempt by BIR
officials. – NO
2. Whether he is immune from prosecution because of the tax
amnesties he availed in PD 1740 and 1840 – NO
3. Whether the promissory note should be declared cash
transaction for purposes of taxation – YES
RATIO:
1 Issue
st
1. No – this involves findings of fact which should not be disturbed by
the Court. (So SC agrees w/ CA that not liable for extortion)
1. PD 1740 says an individual who, for any or all of the taxable years
1974 to 1979, failed to file a return is allowed to file a return for
each of the said taxable years and accurately declare the true and
correct income to pay tax. PD 1840 also grants amnesty.
2. Tax amnesty is a general pardon to taxpayers who want to start a
clean tax slate. It also gives the government a chance to collect
uncollected tax from tax evaders without having to go through the
tedious process of a tax case. To avail of a tax amnesty granted by
the government, and to be immune from suit on its delinquencies,
the taxpayer must have voluntarily disclosed his previously
untaxed income and must have paid the corresponding tax on
such previously untaxed income. But Bibiano, in filing the tax
amnesty refused that it was on cash basis and said it was on
installments.
1. Bibiano asserts that it was paid on installment based on the deed of
sale. and claims Sec. 43 of the NIRC and Sec. 175 of RR No. 2
Sec 43 - if initial payments do not exceed 25% of the selling price,
the income may, under regulations prescribed by the Minister of
Finance, be returned on the basis and in the manner prescribed
RR 2 – amount of mortgage shall be included in “Selling price” but
not part of initial payment
2. Bibiano said he should be allowed to return as income in the taxable
years, the installments by the deed of sale. He also said that he religiously
reported his yearly income from the sale. He said that “initial payment”
does not include those amounts still to be payable.
3. Larin et. al., on the other hand, say that taxation is a matter of
substance and not of form. Returns are scrutinized to determine if transactions
are what they are and not declared to evade taxes.
4. When income is spread over several installment payments
through the years, the taxable income goes down and the tax due also
decreases. When payment is in lump sum, the tax for the year increases.
Ultimately, a declaration that a sale is on installment diminishes
government taxes for the year of initial installment as against a
declaration of cash sale where taxes to the government is larger.
5. General Rule: the whole profit accruing from a sale of property is
taxable as income in the year the sale is made.
But/Exception: if not all of the sale price is received during such
year, and a statute provides that income shall be taxable in the year
in which it is "received," the profit from an installment sale is to be
divided between the years in which such installments are paid
and received.
6. In an installment sale, the subsequent payments are reported using
the installment method by reporting it in the respective year it was realized.
But, if the seller disposes the entire installment obligation by discounting the
bill or the promissory note, he must report the balance of the income from the
discounting on the same year. (so if you discount a promissory note, report it
from that time as income and not anymore by installments). Payment was
already received by Bibiano so there already was a gain which he should have
reported the year he received it.
7. The Court ruled that although the proceeds of a discounted
promissory note are not considered part of initial payment, it still must be
included as taxable income for the year it was converted to cash. When
petitioner had the promissory notes covering the succeeding installment
payments of the land issued by AYALA, discounted by AYALA itself, on
the same day of the sale, he lost entitlement to report the sale as a sale on
installment, since, a taxable disposition resulted and Bibiano was required by
law to report in his returns the income derived from the discounting.
According to the Court, what Bibiano did is an attempt to circumvent the rule
on payment of income taxes gained from the sale of the land to AYALA for
the year 1976.