G.R. No.

L-13912
September 30, 1960
THE COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
CONSUELO L. VDA. DE PRIETO, respondent.
Office of the Solicitor General Edilberto Barot, Solicitor F.R. Rosete and Special Atty. B.
Gatdula, Jr. for petitioner.
Formilleza and Latorre for respondent.
GUTIERREZ DAVID, J.:
This is an appeal from a decision of the Court of tax Appeals reversing the decision of
the Commissioner of Internal Revenue which held herein respondent 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.
The case was submitted for decision in the court below upon a stipulation of facts,
which for brevity is summarized as follows:
On December 4, 1945, the respondent conveyed by way of gifts to her four children,
namely, Antonio, Benito, Carmen and Mauro, all surnamed Prieto, 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 petitioner 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, interest and compromises due thereon. Of the
total sum of P117,706.50 paid by respondent on April 29, 1954, the sum of
P55,978.65 represents the total interest on account of deliquency. This sum of
P55,978.65 was claimed as deduction, among others, by respondent in her
1954 income tax return. Petitioner, however, disallowed the claim and as a
consequence of such disallowance assessed respondent 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.
Under the law, for interest to be deductible, it must be shown that there be an
indebtedness, that there should be interest upon it, and that what is claimed as an
interest deduction should have been paid or accrued within the year. It is here conceded
that the interest paid by respondent was in consequence of the late payment of her
donor's tax, and the same was paid within the year it is sought to be declared. The only
question to be determined, as stated by the parties, is whether or not such interest was
paid upon an indebtedness within the contemplation of section 30 (b) (1) of the Tax
Code, the pertinent part of which reads:
SEC. 30 Deductions from gross income. In computing net income there shall
be allowed as deductions
xxx
xxx
xxx
(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.
The term "indebtedness" as used in the Tax Code of the United States containing similar
provisions as in the above-quoted section has been defined as an unconditional and
legally enforceable obligation for the payment of money. (Federal Taxes Vol. 2, p.
13,019, Prentice-Hall, Inc.; Merten's Law of Federal Income Taxation, Vol. 4, p. 542.)

Within the meaning of that definition, it is apparent that a tax may be considered an
indebtedness. As stated by this Court in the case of Santiago Sambrano vs. Court of Tax
Appeals and Collector of Internal Revenue (101 Phil., 1; 53 Off. Gaz., 4839)
Although taxes already due have not, strictly speaking, the same concept as
debts, they are, however, obligations that may be considered as such.
The term "debt" is properly used in a comprehensive sense as embracing not
merely money due by contract but whatever one is bound to render to another,
either for contract, or the requirement of the law. (Camben vs. Fink Coule and
Coke Co. 61 LRA 584)
Where statute imposes a personal liability for a tax, the tax becomes, at least in
a board sense, a debt. (Idem).
A tax is a debt for which a creditor's bill may be brought in a proper case.
(State vs. Georgia Co., 19 LRA 485).
It follows that the interest paid by herein respondent for the late payment of
her donor's tax is deductible from her gross income under section 30(b) of the
Tax Code above quoted.
The above conclusion finds support in the established jurisprudence in the United States
after whose laws our Income Tax Law has been patterned. Thus, under sec. 23(b) of the
Internal Revenue Code of 1939, as amended1 , which contains similarly worded
provisions as sec. 30(b) of our Tax Code, the uniform ruling is that interest on taxes is
interest on indebtedness and is deductible. (U.S. vs. Jaffray, 306 U.S. 276. See also
Lustig vs. U.S., 138 F. Supp. 870; Commissioner of Internal Revenue vs. Bryer, 151 F. 2d
267, 34 AFTR 151; Penrose vs. U.S. 18 F. Supp. 413, 18 AFTR 1289; Max Thomas Davis,
et al. vs. Commissioner of Internal Revenue, 46 U.S. Boared of Tax Appeals Reports, p.
663, citing U.S. vs. Jaffray, 6 Tax Court of United States Reports, p. 255;
Armour vs.Commissioner of Internal Revenue, 6 Tax Court of the United States Reports,
p. 359; The Koppers Coal Co. vs.Commissioner of Internal Revenue, 7 Tax Court of
United States Reports, p. 1209; Toy vs. Commissioner of Internal Revenue;
Lucas vs. Comm., 34 U.S. Board of Tax Appeals Reports, 877; Evens and Howard Fire
Brick Co. vs. Commissioner of Internal Revenue, 3 Tax Court of United States Reports, p.
62). The rule applies even though the tax is nondeductible. (Federal Taxes, Vol. 2,
Prentice Hall, sec. 163, 13,022; see also Merten's Law of Federal Income Taxation, Vol. 5,
pp. 23-24.)
To sustain the proposition that the interest payment in question is not deductible for the
purpose of computing respondent's net income, petitioner relies heavily on section 80 of
Revenue Regulation No. 2 (known as Income Tax Regulation) promulgated by the
Department of Finance, 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 court below, however, held section 80 as
inapplicable to the instant case because while it implements sections 30(c) of the Tax
Code governing deduction of taxes, the respondent taxpayer seeks to come under
section 30(b) of the same Code providing for deduction of interest on indebtedness. We
find the lower court's ruling to be correct. Contrary to petitioner's belief, the portion of
section 80 of Revenue Regulation No. 2 under consideration has been part and parcel of
the development to the law on deduction of taxes in the United States. (See Capital
Bldg. and Loan Assn. vs. Comm., 23 BTA 848. Thus, Mertens in his treatise says:
"Penalties are to be distinguished from taxes and they are not deductible under the
heading of taxs." . . . Interest on state taxes is not deductible as taxes." (Vol. 5, Law on

Federal Income Taxation, pp. 22-23, sec. 27.06, citing cases.) This notwithstanding,
courts in that jurisdiction, however, have invariably held that interest on deficiency
taxes are deductible, not as taxes, but as interest. (U.S. vs. Jaffray, et al., supra; see also
Mertens, sec. 26.09, Vol. 4, p. 552, and cases cited therein.) Section 80 of Revenue
Regulation No. 2, therefore, merely incorporated the established application of the tax
deduction statute in the United States, where deduction of "taxes" has always been
limited to taxes proper and has never included interest on delinquent taxes, penalties
and surcharges.
To give to the quoted portion of section 80 of our Income Tax Regulations the meaning
that the petitioner gives it would run counter to the provision of section 30(b) of the Tax
Code and the construction given to it by courts in the United States. Such effect would
thus make the regulation invalid for a "regulation which operates to create a rule out of
harmony with the statute, is a mere nullity." (Lynch vs. Tilden Produce Co., 265 U.S. 315;
Miller vs.U.S., 294 U.S. 435.) As already stated, section 80 implements only section
30(c) of the Tax Code, or the provision allowing deduction of taxes, while herein
respondent seeks to be allowed deduction under section 30(b), which provides for
deduction of interest on indebtedness.
In conclusion, we are of the opinion and so hold that 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) of the same Code.
In view of the foregoing, the decision sought to be reviewed is affirmed, without
pronouncement as to costs.
Bengzon, Bautista Angelo, Labrador, Barrera, Paredes, and Dizon, JJ., concur.
Paras, C. J., Concepcion, and Reyes, J.B.L., JJ., concur in the result.

G.R. Nos. L-18169, L-18262 & L-21434

July 31, 1964
COMMISSIONER OF INTERNAL REVENUES, petitioner,
vs.
V.E. LEDNICKY and MARIA VALERO LEDNICKY, respondents.
Office of the Solicitor General for petitioner.
Ozaeta, Gibbs and Ozaeta for respondents.
REYES, J.B.L., J.:
The above-captioned cases were elevated to this Court under separate petitions by the
Commissioner for review of the corresponding decisions of the Court of Tax Appeals.
Since these cases involve the same parties and issues akin to each case presented,
they are herein decided jointly.
The respondents, V. E. Lednicky and Maria Valero Lednicky, are husband and wife,
respectively, both American citizens residing in the Philippines, and have derived all
their income from Philippine sources for the taxable years in question.
In compliance with local law, the aforesaid respondents, on 27 March 1957, filed their
income tax return for 1956, reporting therein a gross income of P1,017,287. 65 and a
net income of P733,809.44 on which the amount of P317,395.4 was assessed after
deducting P4,805.59 as withholding tax. Pursuant to the petitioner's assessment notice,
the respondents paid the total amount of P326,247.41, inclusive of the withheld taxes,
on 15 April 1957.

On 17 March 1959, the respondents Lednickys filed an amended income tax return for
1956. The amendment consists in a claimed deduction of P205,939.24 paid in 1956 to
the United States government as federal income tax for 1956. Simultaneously with the
filing of the amended return, the respondents requested the refund of P112,437.90.
When the petitioner Commissioner of Internal Revenue failed to answer the claim for
refund, the respondents filed their petition with the Tax Court on 11 April 1959 as CTA
Case No. 646, which is now G. R. No. L-18286 in the Supreme Court.
G. R. No. L-18169 (formerly CTA Case No. 570) is also a claim for refund in the amount
of P150,269.00, as alleged overpaid income tax for 1955, the facts of which are as
follows:
On 28 February 1956, the same respondents-spouses filed their domestic income tax
return for 1955, reporting a gross income of P1,771,124.63 and a net income of
P1,052,550.67. On 19 April 1956, they filed an amended income tax return, the
amendment upon the original being a lesser net income of P1,012,554.51, and, on the
basis of this amended return, they paid P570,252.00, inclusive of withholding taxes.
After audit, the petitioner determined a deficiency of P16,116.00, which amount, the
respondents paid on 5 December 1956.
Back in 1955, however, the Lednickys filed with the U.S. Internal Revenue Agent in
Manila their federal income tax return for the years 1947, 1951, 1952, 1953, and 1954
on income from Philippine sources on a cash basis. Payment of these federal income
taxes, including penalties and delinquency interest in the amount of P264,588.82, were
made in 1955 to the U.S. Director of Internal Revenue, Baltimore, Maryland, through the
National City Bank of New York, Manila Branch. Exchange and bank charges in remitting
payment totaled P4,143.91.
Wherefore, the parties respectfully pray that the foregoing stipulation of facts be
admitted and approved by this Honorable Court, without prejudice to the parties
adducing other evidence to prove their case not covered by this stipulation of facts.
On 11 August 1958, the said respondents amended their Philippine income tax return
for 1955 to include the following deductions:
1wph1.t

U.S. Federal income taxes

Interest accrued up to May 15, 1955
Exchange and bank charges
Total

P471,867.32
40,333.92
4,143.91
P516,345.15

and therewith filed a claim for refund of the sum of P166,384.00, which was later
reduced to P150,269.00.
The respondents Lednicky brought suit in the Tax Court, which was docketed therein as
CTA Case No. 570.
In G. R. No. 21434 (CTA Case No. 783), the facts are similar, but refer to respondents
Lednickys' income tax return for 1957, filed on 28 February 1958, and for which
respondents paid a total sum of P196,799.65. In 1959, they filed an amended return for
1957, claiming deduction of P190,755.80, representing taxes paid to the U.S.
Government on income derived wholly from Philippine sources. On the strength thereof,
respondents seek refund of P90 520.75 as overpayment. The Tax Court again decided
for respondents.
The common issue in all three cases, and one that is of first impression in this
jurisdiction, is whether a citizen of the United States residing in the Philippines, who
derives income wholly from sources within the Republic of the Philippines, may deduct

from his gross income the income taxes he has paid to the United States government
for the taxable year on the strength of section 30 (C-1) of the Philippine Internal
Revenue Code, reading as follows:
SEC. 30. Deduction from gross income. In computing net income there shall be
allowed as deductions
(a) ...
(b) ...
(c) Taxes:
(1) In general. Taxes paid or accrued within the taxable year,
except
(A) The income tax provided for under this Title;
(B) Income, war-profits, and excess profits taxes imposed by
the authority of any foreign country; but this deduction shall
be allowed in the case of a taxpayer who does not signify in
his return his desire to have to any extent the benefits of
paragraph (3) of this subsection (relating to credit for foreign
countries);
(C) Estate, inheritance and gift taxes; and
(D) Taxes assessed against local benefits of a kind tending to
increase the value of the property assessed. (Emphasis
supplied)
The Tax Court held that they may be deducted because of the undenied fact that
the respondent spouses did not "signify" in their income tax return a desire to
avail themselves of the benefits of paragraph 3 (B) of the subsection, which
reads:
Par. (c) (3) Credits against tax for taxes of foreign countries. If the
taxpayer signifies in his return his desire to have the benefits of this
paragraph, the tax imposed by this Title shall be credited with
(A) ...;
(B) Alien resident of the Philippines. In the case of an alien
resident of the Philippines, the amount of any such taxes paid or
accrued during the taxable year to any foreign country, if the
foreign country of which such alien resident is a citizen or subject,
in imposing such taxes, allows a similar credit to citizens of the
Philippines residing in such country;
It is well to note that the tax credit so authorized is limited under paragraph 4 (A
and B) of the same subsection, in the following terms:
Par. (c) (4) Limitation on credit. The amount of the credit taken under
this section shall be subject to each of the following limitations:
(A) The amount of the credit in respect to the tax paid or accrued to
any country shall not exceed the same proportion of the tax against
which such credit is taken, which the taxpayer's net income from
sources within such country taxable under this Title bears to his
entire net income for the same taxable year; and
(B) The total amount of the credit shall not exceed the same
proportion of the tax against which such credit is taken, which the
taxpayer's net income from sources without the Philippines taxable
under this Title bears to his entire net income for the same taxable
year.

We agree with appellant Commissioner that the Construction and wording

of Section 30 (c) (1) (B) of the Internal Revenue Act shows the law's intent
that the right to deduct income taxes paid to foreign government from the
taxpayer's gross income is given only as an alternative or substitute to his
right to claim a tax credit for such foreign income taxes under section 30
(c) (3) and (4); so that unless the alien resident has a right to claim such
tax credit if he so chooses, he is precluded from deducting the foreign
income taxes from his gross income. For it is obvious that in prescribing
that such deduction shall be allowed in the case of a taxpayer who does
not signify in his return his desire to have to any extent the benefits of
paragraph (3) (relating to credits for taxes paid to foreign countries), the
statute assumes that the taxpayer in question also may signify his desire
to claim a tax credit and waive the deduction; otherwise, the foreign taxes
would always be deductible, and their mention in the list of non-deductible
items in Section 30(c) might as well have been omitted, or at least
expressly limited to taxes on income from sources outside the Philippine
Islands.
Had the law intended that foreign income taxes could be deducted from
gross income in any event,regardless of the taxpayer's right to claim a tax
credit, it is the latter right that should be conditioned upon the taxpayer's
waiving the deduction; in which Case the right to reduction under
subsection (c-1-B) would have been made absolute or unconditional (by
omitting foreign taxes from the enumeration of non-deductions), while the
right to a tax credit under subsection (c-3) would have been expressly
conditioned upon the taxpayer's not claiming any deduction under
subsection (c-1). In other words, if the law had been intended to operate
as contended by the respondent taxpayers and by the Court of Tax
Appeals section 30 (subsection (c-1) instead of providing as at present:
SEC. 30. Deduction from gross income. In computing net income there shall be
allowed as deductions
(a) ...
(b) ...
(c) Taxes:
(1) In general. Taxes paid or accrued within the taxable year,
except
(A) The income tax provided for under this Title;
(B) Income, war-profits, and excess profits taxes imposed by
the authority of any foreign country; but this deduction shall
be allowed in the case of a taxpayer who does not signify in
his return his desire to have to any extent the benefits of
paragraph (3) of this subsection (relating to credit for taxes
of foreign countries);
(C) Estate, inheritance and gift taxes; and
(D) Taxes assessed against local benefits of a kind tending to
increase the value of the property assessed.
would have merely provided:
SEC. 30. Decision from grow income. In computing net income there shall be
allowed as deductions:
(a) ...
(b) ...

(c) Taxes paid or accrued within the taxable year, EXCEPT

(A) The income tax provided for in this Title;
(B) Omitted or else worded as follows:
Income, war profits and excess profits taxes imposed by authority of any
foreign country on income earned within the Philippines if the taxpayer
does not claim the benefits under paragraph 3 of this subsection;
(C) Estate, inheritance or gift taxes;
(D) Taxes assessed against local benefits of a kind tending to increase the
value of the property assessed.
while subsection (c-3) would have been made conditional in the following or equivalent
terms:
(3) Credits against tax for taxes of foreign countries. If the taxpayer has not
deducted such taxes from his gross income but signifies in his return his desire to
have the benefits of this paragraph, the tax imposed by Title shall be credited
with ... (etc.).
Petitioners admit in their brief that the purpose of the law is to prevent the taxpayer
from claiming twice the benefits of his payment of foreign taxes, by deduction from
gross income (subs. c-1) and by tax credit (subs. c-3). This danger of double credit
certainly can not exist if the taxpayer can not claim benefit under either of these
headings at his option, so that he must be entitled to a tax credit (respondent taxpayers
admittedly are not so entitled because all their income is derived from Philippine
sources), or the option to deduct from gross income disappears altogether.
Much stress is laid on the thesis that if the respondent taxpayers are not allowed to
deduct the income taxes they are required to pay to the government of the United
States in their return for Philippine income tax, they would be subjected to double
taxation. What respondents fail to observe is that double taxation becomes obnoxious
only where the taxpayer is taxed twice for the benefit of the same governmental
entity (cf. Manila vs. Interisland Gas Service, 52 Off. Gaz. 6579; Manuf. Life Ins. Co. vs.
Meer, 89 Phil. 357). In the present case, while the taxpayers would have to pay two
taxes on the same income, the Philippine government only receives the proceeds of one
tax. As between the Philippines, where the income was earned and where the taxpayer
is domiciled, and the United States, where that income was not earned and where the
taxpayer did not reside, it is indisputable that justice and equity demand that the tax on
the income should accrue to the benefit of the Philippines. Any relief from the alleged
double taxation should come from the United States, and not from the Philippines, since
the former's right to burden the taxpayer is solely predicated on his citizenship, without
contributing to the production of the wealth that is being taxed.
Aside from not conforming to the fundamental doctrine of income taxation that the right
of a government to tax income emanates from its partnership in the production of
income, by providing the protection, resources, incentive, and proper climate for such
production, the interpretation given by the respondents to the revenue law provision in
question operates, in its application, to place a resident alien with only domestic
sources of income in an equal, if not in a better, position than one who has both
domestic and foreign sources of income, a situation which is manifestly unfair and short
of logic.
Finally, to allow an alien resident to deduct from his gross income whatever taxes he
pays to his own government amounts to conferring on the latter the power to reduce
the tax income of the Philippine government simply by increasing the tax rates on the
alien resident. Everytime the rate of taxation imposed upon an alien resident is
increased by his own government, his deduction from Philippine taxes would

correspondingly increase, and the proceeds for the Philippines diminished, thereby
subordinating our own taxes to those levied by a foreign government. Such a result is
incompatible with the status of the Philippines as an independent and sovereign state.
IN VIEW OF THE FOREGOING, the decisions of the Court of Tax Appeals are reversed,
and, the disallowance of the refunds claimed by the respondents Lednicky is affirmed,
with costs against said respondents-appellees.
Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Paredes, Regala and
Makalintal, JJ., concur.