SUBA (Detailed) - Gutierrez v. CIR

Gutierrez v. CIR. CTA Case No.
65, August 31, 1955

DOCTRINE: The words “income from any source whatever”, is broad enough to cover
expropriation. These words disclose a legislative policy to include all income not
expressly exempted. The difference therefore, between “sales” or “expropriation”, if
there is any does not in any way remove income derived from expropriation from the
class of taxable income.
FACTS: The government, pursuant to the 1947 Military Bases Agreement with the US
instituted on March 4, 1948, condemnation proceedings of parcels of land located at
Mabalacat, Pampanga, including Lot No. 724-C, belonging to petitioners Blas Gutierrez
and Maria Morales. The government deposited with the CFI the sum of 156,960 php in
order to immediately take possession of the lands. The petitioners were eventually
awarded 94,305.75 php as just compensation. On Jan. 28, 1953, the respondent
Collector assessed and demanded from the petitioners the sum of 8,481 php as alleged
deficiency income tax for 1950. Petitioners do not question the amount but they raise
the issue of the legality of including the items under Schedule “D” (Long Term Capital
Gains) as taxable income. They also contend that income derived from expropriation
proceedings are tax exempt, and that granting arguendo they are not so exempted, then
the purchasing power of currency should be taken into consideration in the computation
of gains or losses for taxation purposes; and that the income from this should be
deemed included either in 1948 or 1949 and not in 1950. Lastly, they also contend that
they should not be made to pay the 50% surcharge.
ISSUE: 1. Whether or not the income from the expropriation of property pursuant to the
government’s exercise of the right of eminent domain is taxable. 2. Whether or not the
income in expropriation is exempt from taxation by virtue of section 29 (b) (6) of our Tax
Code when taken in relation with the provisions of the 1947 US-PH Military Bases
Agreement. 3.
HELD: 1. Yes, it is taxable. The weight of authorities in the US, from which PH tax laws
have been patterned, establish that income from “expropriation” is taxable income, and
that “expropriation” is within the purview of the term “sales or exchange” as used in the
US Internal Revenue Code. However, granting arguendo, that “expropriation” does not
come within the purview of “sales” as contemplated in our Tax Code, nevertheless,
under Sec. 29(a) of our Tax Code, gains arising from expropriation would constitute
taxable income from “dealings in property… growing out of the ownership… of such
property,” or as “income derived from any source whatever.” This section outlines the
various sources of gross income. Hence, the Court believes that the words “income
from any source whatever”, is broad enough to cover the gains contemplated in this
case. These words disclose a legislative policy to include all income not expressly
exempted. The difference therefore, between “sales” or “expropriation”, if there is any
does not in any way remove income derived from expropriation from the class of taxable
income.
2. While it is true that the NIRC exempts income of any kind to the extent required by
any treaty obligation binding upon the government of the Philippines from income taxes,
it is evident however, that no exemption may be claimed under Art XXII of the Military
Bases Agreement, which refers to the obligation of the US to defray or reimburse the
reasonable expenses, damages and costs which the PH government may incur in
condemnation proceedings pursuant to the said treaty. Likewise, Art. XII of the treaty
makes no mention of considering income derived from expropriation as tax exempt.
Besides the tax exemption under Art. XII is applicable only to the following: (1) members
of the US Army who are not Filipinos, (2) nationals of the US and (3) corporations
organized in and residents of the US. Petitioners do not come within any of these
exemptions.
OTHER ISSUES:
1. Whether or not the currency value or the purchasing power of the peso at the
time of acquisition and disposition of the property should be taken into
consideration in the computation of gains and profts.
2. When should the gains or profits be deemed received for income tax purposes?
(a) in 1948 when the expropriation proceedings were initiated, or (b) in 1949
when the initial payment was deposited in court, or (c) in 1950 when the final
payment was actually received by or paid pursuant to the final judgment.
HELD:
1. The weight of authorities hold that gain derived from condemnation proceedings
are considered as capital gains and not ordinary income for purposes of taxation.
Nowhere in Sec. 35 of the Income Tax Law speaks of the purchasing power of
the peso as a factor in determining the computation of gains or losses. The
actual cost of the property should be the basis.
2. The pertinent rules regarding the period when income is to be reported is found
in Secs. 38 and 39 of the NIRC. From the foregoing provisions the income is
determined generally according to the methods of accounting generally followed
by the taxpayer. In the implementation of Sec. 38, it is provided in Sec. 168 of
Revenue Regulations No. 2 which states that the taxpayer may not change from
one accounting period to another without previous permission of the CIR.
According to the records of the BIR, the income tax returns of the petitioners
have been filed on the basis of actual receipts and disbursements, otherwise
referred to as the “cash basis” system of accounting. Hence, in view of the
aforecited rules, the petitioner may not be allowed to change from the “cash
basis” method to another. Under petitioner’s method of reporting income, the
gain from the expropriation in this case, would therefore be subject to income tax
in 1950, the year it was actually realized or received by them. Of course, the
Court observes that a portion of the price was received in 1949. Assuming
arguendo that this may be considered in determining the existence of a gain, the
Court finds that there was no gain in fact in that year, as the amount of 34,580
php was not even sufficient to cover the cost or basis of the property which was
found to be 45,011.75 php. Moreover, the better view would be to consider the
income taxable in the year when the Court entered its final decree on the
expropriation proceedings.
Lastly, the petitioners acted in good faith and without intent to defraud the
government in believing that they were tax exempt, so they should not be held
liable for the 50% surcharge.

SUBA (Detailed) - Gutierrez v. CIR

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Gutierrez v. CIR. CTA Case No.

65, August 31, 1955

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