G.R. No. L-21520. December 11, 1967
PLARIDEL SURETY & INSURANCE COMPANY, PETITIONER, VS. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
BENGZON, J.P., J.:
Petitioner Plaridel Surety &
Insurance Co., is a domestic corporation engaged in the bonding business. On November
9, 1950, petitioner,
as surety, and Constancio San Jose, as principal, solidarily executed a performance
bond in the penal sum of P30,600.00 in favor of the P.L. Galang
Machinery Co., Inc., to secure the performance of San Jose‘s contractual obligation to produce and
supply logs to the latter.
To afford itself adequate protection against loss or damage on
the performance bond, petitioner required San Jose
and one Ramon Cuervo to execute an indemnity
agreement obligating themselves, solidarily, to indemnify
petitioner for whatever liability it may incur by reason of said performance
bond. Accordingly, San
Jose constituted a chattel mortgage on logging
machineries and other movables in petitioner’s favor[1]
while Ramon Cuervo executed a real estate mortgage.[2]
San Jose later failed
to deliver the logs to Galang Machinery[3]
and the latter sued on the performance bond.
On October 1, 1952,
the Court of First Instance adjudged San Jose
and petitioner liable; it also directed San Jose
and Cuervo to reimburse petitioner for whatever amount it would pay Galang Machinery.
The Court of Appeals, on June 17, 1955, affirmed the judgment of the lower court. The same judgment was likewise affirmed by
this Court[4] on January 11, 1957 except
for a slight modification apropos the
award of attorney’s fees.
On February 19 and March
20, 1957, petitioner effected payment in
favor of Galang Machinery in the total sum of P44,490.00 pursuant to the final
decision.
In its income tax return for the year 1957, petitioner claimed the said amount of P44,490.00 as deductible loss from its
gross income and, accordingly, paid the amount of P136.00 as its income tax for 1957.
The Commissioner of Internal Revenue disallowed the claimed deduction
of P44,490.00 and assessed
against petitioner the sum of P8,898.00,
plus interest, as deficiency income tax for the year 1957. Petitioner
filed its protest which was denied.
Whereupon, appeal was taken to the Tax Court, petitioner insisting that
the P44,490.00 which it paid to Galang Machinery was a deductible loss.
The Tax Court dismissed the appeal, ruling that petitioner was
duly compensated for otherwise than
by insurance – thru
the mortgages in its favor executed by San Jose
and Cuervo – and it had not yet exhausted all its available remedies, especially
as against Cuervo, to minimize its loss. When its motion to reconsider was denied,
petitioner elevated the present appeal.
Of the sum of P44,490.00, the amount of P30,600.00 –
which is the principal sum stipulated in the performance bond – is being
claimed as loss deduction under Sec. 30(d)(2) of the Tax Code and P10,000.00 –
which is the interest that had accrued on the principal sum – is now being
claimed as interest deduction under Sec. 30(b)(1).
Loss is deductible only in the taxable year it actually happens
or is sustained. However, if it is
compensable by insurance or otherwise, deduction for the loss suffered is
postponed to a subsequent year, which, to be precise, is that year in which it
appears that no compensation at all can be had, or that there is remaining or
net loss, i.e., no full compensation.[5]
There is no question that the year in which the petitioner
Insurance Co. effected payment to Galang Machinery
pursuant to a final decision occurred in 1957. However, under the same court decision, San Jose and Cuervo
were obligated to reimburse petitioner for whatever payments it would make to Galang Machinery.
Clearly, petitioner’s loss is compensable otherwise (than by
insurance). It should
follow, then, that the loss deduction can not be claimed in 1957.
Now, petitioner’s submission is that its case is an
exception. Citing Cu Unjieng
Sons, Inc. v. Board of Tax Appeals,[6]
and American cases also, petitioner argues that even if there is a right to
compensation by insurance or otherwise, the deduction can be taken in the year
of actual loss
where the possibility of recovery is remote. The pronouncement, however, to this effect in
the Cu Unjieng case is not as authoritative as petitioner would
have it since it was there found that the taxpayer had no legal right to
compensation either by insurance or otherwise.[7]
And the American cases cited[8]
are not in point. None of them
involved a taxpayer who had, as in the present case, obtained a final
judgment against third persons for reimbursement of payments made. In those cases, there was either no legally
enforceable right at all or such claimed right was still to be, or being,
litigated.
On the other hand, the rule is that loss deduction will be denied
if there is a measurable right to compensation for the loss, with ultimate
collection reasonably clear. So where
there is reasonable ground for reimbursement, the taxpayer must seek his
redress and may not secure a loss deduction until he establishes that no
recovery may be had.[9]
In other words, as the Tax Court put it, the taxpayer (petitioner) must exhaust his remedies
first to recover or reduce his loss.
It is on record that petitioner had not exhausted its remedies,
especially against Ramon Cuervo who was solidarily liable with San Jose
for reimbursement to it. Upon being
prodded by the Tax Court to go after Cuervo, Hermogenes Dimaguiba, president
of petitioner corporation, said that they would[10]
but no evidence was submitted that anything was really done on the
matter. Moreover, petitioner’s evidence
on remote possibility of recovery is fatally wanting. Its right to reimbursement is not only
secured by the mortgages executed by San Jose
and Cuervo but also by a final and executory judgment in the civil case itself. Thus, other properties of San
Jose and Cuervo were subject
to levy and execution. But no writ of execution, satisfied or
unsatisfied, was ever submitted. Neither has it been established that Cuervo was insolvent.
The only evidence on record on the point is Dimaguiba’s
testimony that he does not really know if Cuervo
has other properties.[11]
This is not substantial proof of insolvency.
Thus, it was too premature for petitioner to claim a loss deduction.
But assuming that there was no reasonable expectation of
recovery, still no loss deduction can be had.
Sec. 30(d)(2) of the Tax Code requires a charge-off as one of the
conditions for loss deduction:
“In the case of a corporation, all losses actually sustained and
charged-off within the taxable year and not compensated for by insurance
or otherwise.” (Stress supplied)
Mertens[12]
states only four (4) requisites because the United States Internal Revenue Code
of 1939[13]
has no charge-off requirement. Sec.
23(f) thereof provides merely:
“In the case of a corporation, losses sustained during the
taxable year and not compensated for by insurance or otherwise.”
Petitioner, who had the burden of proof[14]
failed to adduce evidence that there was a
charge-off in connection with
the P44,490.00 – or P30,600.00 –
which it paid to Galang Machinery.
In connection with the claimed interest deduction of P10,000.00, the Solicitor
General correctly points out that this question was never raised before the Tax
Court. Petitioner, thru counsel, had
admitted before said court[15]
and in the memorandum
it filed[16]
that the only issue in the case was whether the entire P44,490.00 paid by it was or
was not a deductible loss under Sec. 30(d)(2) of the Tax Code. Even in petitioner’s return, the P44,490.00
was claimed wholly as losses on its bonds.[17]
The alleged interest deduction not having been properly litigated as an issue
before the Tax Court, it is now too late to raise and assert it before this
Court.
WHEREFORE, the appealed decision is, as it is hereby,
affirmed. Costs against petitioner Plaridel Surety & Insurance Co.
SO ORDERED.
Concepcion, C.J., Reyes, JBL, Dizon, Makalintal, Zaldivar, Sanchez, Ruiz Castro, Angeles, and Fernando, JJ., concur.
[1]
Exh. K, C.T.A. Records, pp. 71-72.
[2]
Exh. L, C.T.A. Records, pp. 74-76.
[3]
Short for P.L. Galang Machinery Co., Inc.
[4]
Plaridel Surety & Insurance Co., Inc. v.
P.L. Galang Machinery Co., Inc., 100 Phil. 679.
[5]
See: Sec. 30(d)(2), Int. Rev.
Code; Rev. Regulations No. 2, Secs. 94 & 96; Cu Unjieng
Sons, Inc. v. Board of Tax Appeals, 100 Phil. 1.
[6]
Supra, Note 5.
[7]
100 Phil. 1, at 15-19, 23.
[8]
Petitioner’s brief, p. 18.
[9]
5 Mertens (1956
ed.), Chap. 28, pp. 19, 21.
[10]
Sessions of Sept. 18, 1962, T.S.N., pp. 49-51.
[11]
Ibid., T.S.N., pp.
52-53.
[12]
5 Mertens (1956 ed.), Chap. 28, p. 9.
[13]
26 U.S.C.A, 10.
[14]
5 Mertens (1956 ed.), Chap. 28, pp. 7-8.
[15]
Session of Sept. 17, 1962,
T.S.N., p. 2.
[16]
C.T.A. Records, p. 83.
[17]
See B.I.R. Records, pp. 5, 8, 14-16, 20, 22.