COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. CARLOS PALANCA, JR., RESPONDENT.

This is an appeal by the
Government from the decision of the Court of Tax Appeals in CTA Case No. 571
ordering the petitioner to refund to the respondent the amount of P20,624.01 representing alleged overpayment of income taxes for
the calendar year 1955.

The facts are:

“Sometime in July, 1950, the late
Don Carlos Palanca, Sr. donated in favor of his son,
the petitioner, herein, shares of stock in La Tondeña,
Inc. amounting to P12,500 shares. For failure to file a
return on the donation within the statutory period, the petitioner was assessed
the sums of P97,691.23, P24,442.81 and P47,868.70 as gift tax, 25% surcharge and
interest, respectively, which he paid on June 22, 1955.

“On March 1,
1956 , the petitioner filed with the
Bureau of Internal Revenue his income tax return for the calendar year 1955,
claiming, among others, a deduction for interest amounting to P9,706.45 and
reporting a taxable income of P65,982.12. On the basis of this return, he was
assessed the sum of P21,052.91, as income tax, which he
paid, as follows:

Taxes withheld by La Tondeña Inc. from Mr. Palanca’s wage	P 13,172.41
Payment under Income Tax Receipt No. 677359 dated May 11, 1956	3,939.80
Payment under Income Tax Receipt No. 742334 dated August 14, 1956	3,939.80
Total	P 21,052.01

“Subsequently, on
November 10,
1956, the
petitioner filed an amended return for the calendar year 1955, claiming therein
an additional deduction in the amount of P47,868.70
representing interest paid on the donee’s gift tax,
thereby reporting a taxable net income of P18,113.42 and a tax due thereon in
the sum of P3,167.00. The claim for deduction was based on the provisions of
Section 30 (b) (1) of the Tax Code, which authorizes the deduction from gross
income of interest paid within the taxable year on indebtedness. A claim for the
refund of alleged overpaid income taxes for the year 1955 amounting to P17,885.01, which is the difference between the amount of
P21,052.01 he paid as income taxes under his original return and of P3,167.00,
was filed together with this amended return. In a communication dated
June 20, 1957 , the respondent (BIR) denied the
claim for refund.

“On August
27, 1957,
the petitioner reiterated his claim for refund, and at
the same time requested that the case be elevated to the Appellate Division of
the Bureau of Internal Revenue for decision. The reiterated claim was denied on
October 14,
1957.

“On November
2, 1957,
the petitioner requested that the case be referred to the Conference Staff of
the Bureau of Internal Revenue for review. Later, on November 6,
1957, he
requested the respondent to hold his action on the case in abeyance until after
the Court of Tax Appeals renders its decision on a similar case. And on
November 7,
1957, the
respondent denied the claim for the refund of the sum of P17,885.01.

“Meanwhile, the Bureau of
Internal Revenue considered the transfer of 12,500 shares of stock of La Tondeña, Inc. to be a transfer in contemplation of death
pursuant to Section 88 (b) of the National Internal Revenue Code. Consequently,
the respondent assessed against the petitioner the sum of P191,591.62 as estate and inheritance taxes on the transfer of
said 12,500 shares of stock. The amount of P170,002.74
paid on June 22,
1955 by
the petitioner as gift tax, including interest and surcharge, under Official
Receipt No. 2855 was applied to his estate and inheritance tax liability. On the
tax liability of P191,591.62, the petitioner paid the
amount of P60,581.80 as interest for delinquency as follows:

1% monthly interest on P76,724.38 September 2, 1952 to February 16, 1955	P22,633.69
1% monhtly interest on P71,264.77 February 16, 1955 to March 31, 1955	1,068.97
1% monhtly interest on P114,867.24 September 2, 1952 to April 16, 1953	4,287.99
1% monhtly interest on P50,882.77 March31, 1955 to June 22, 1955	1,372.48
1% monhtly interest on P119,155.23 April 16, 1953 to June 22, 1955	31,218.67
Total	P60,581.80

“On August 12, 1958, the
petitioner once more filed an amended income tax return for the calendar year
1955, claiming, in addition to the interest deduction of P9,076.45 appearing in his original return, a deduction in the
amount of P60,581.80, representing interest on the estate and inheritance taxes
on the 12,500 shares of stock, thereby reporting a net taxable income for 1955
in the amount of P5,400.32 and an income tax due thereon in the sum of P428.00.
Attached to this amended return was a letter of the petitioner, dated
August 11,
1958,
wherein he requested the refund of P20,624.01 which is
the difference between the amounts of P21,052.01 he paid as income tax under his
original return and of P428.00.

“Without waiting for the
respondent’s decision on this claim for refund, the petitioner filed his
petition for review before this Court on August 13,
1958. On
July 24,
1959, the
respondent denied the petitioner’s request for the refund of the sum of P20,624.01.”

The Commissioner of Internal
Revenue now seeks the reversal of the Court of Tax Appeal’s ruling on the
aforementioned petition for review. Specifically, he takes issue with the said
court’s determination that the amount paid by respondent Palanca for interest on his delinquent estate and
inheritance tax is deductible from the gross income for that year under Section
30 (b) (1) of the Revenue Code, and, that said respondent’8 claim for refund
therefore has not prescribed.

On the first point, the
Commissioner urges that a tax is not an indebtedness.
Citing American cases, he argues that there is a material and fundamental
distinction between a “tax” and a “debt.” (Meriwether v. Garrett, 102 U.S. 427;
Liberty Mutual Ins. Co. vs. Johnson Shipyards Corporation, 5 AFTR pp. 5504,
5507; City of Camden v. Allen, 26 N.J. Law, p. 398). He adopts the view that
“debts are due to the government in its corporate capacity, while taxes are due
to the government in its sovereign capacity. A debt is a sum of money due upon
contract express or implied or one which is evidenced by a judgment. Taxes are
imposts levied by government for its support or some special purpose which the
government has recognized.” In view of the distinction, then, the Commissioner
submits that the deductibility of “interest on indebtedness” from a person’s
income tax under Section 30 (b) (1) cannot extend to “interest on taxes.”

We find for the respondents.
While “taxes” and “debts” are distinguishable legal concepts, in certain cases
as in the suit at bar, on account of their nature, the distinction become
inconsequential. This qualification is recognized even in the
United
States. Thus,

“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
requirements of the law.(Camden vs. Fink Coule and
Coke Co., 61 ALR 584).

“Where statutes impose a personal
liability for a tax, the tax becomes at least in a broad sense, a debt.”
(Idem)

“Some American authorities hold
that, especially for remedial purposes, Federal taxes are debts.” (Tax
Commission v. National Malleable Castings Co., 35 ALR 1448)

In our jurisdiction, the rule is
settled that although taxes already due have not, strictly speaking, the same
concept as debts, they are, however, obligations that may be considered as such.
(Sambrano v. Court of Tax Appeals,
G. R. No. L-8652, March 30,
1957)
In a more recent case, Commissioner of Internal Revenue
v. Prieto. G. R. No. L-13912, September 30, 1960, we
explicitly announced that while the distinction between “taxes” and “debts” was
recognized in this jurisdiction, the variance in their legal conception does not
extend to the interests paid on them, at least insofar as Section 30(b)(1) of
the National Internal Revenue Code is concerned. Thus,

“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 deducted. 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 – x x x x x
‘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 the unconditional and legally
enforceable obligation for the payment of money. (Federal
Taxes Vol. 2, p. 13,019, Prentice Hall, Inc.; Merterns‘ 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, xxx (Underscoring supplied) ‘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.’”

We do not see any element in this
case which can justify a departure from or abandonment of the doctrine in the
Prieto case above. In both this and the said case, the
taxpayer sought the allowance as deductible items from the gross income of the
amounts paid by them as interests on delinquent tax liabilities. Of course, what
was involved in the cited case was the donor’s tax while the present suit
pertains to interest paid on the estate and inheritance tax. This difference,
however, submits no appreciable consequence to the rationale of this Court’s
previous determination that interests on taxes should be considered as interests
on indebtedness within the meaning of Section 30(b)(1) of the Tax Code. The
interpretation we have placed upon the said section was predicated on the
congressional intent, not on the nature of the tax for which the interest was
paid.

On the issue of prescription:
There were actually two claims for refund filed by the herein respondent, Carlos
Palanca, Jr., anent the case at bar. The first one was
on November 10,
1956,
when he filed a claim for refund on the interest paid by him on the donee’s gift tax of P17,885.01, as
originally demanded by the Bureau of Internal Revenue. The second one was the
one filed by him on August 12, 1958 , which was a claim for refund on
the interest paid by him on the estate and inheritance tax assessed by the same
Bureau in the amount of P20,624.01. Actually, this second assessment by the
Bureau was for the same transaction as that for which they assessed respondent
Palanca the above donee’s
gift tax. The Bureau, however, on further consideration, decided that the
donation of the stocks in question was made in contemplation of death, and
hence, should be assessed as an inheritance. Thus the second
assessment. The first claim was denied by the petitioner for the first
time on June 20, 1957 . Thereafter, the said denial was
twice reiterated: on October 14,
1957 and
November 7,
1957,
upon respondent Palanca’s plea for the reconsideration
of the ruling of June 20, 1957 . The second claim was filed with
the Court of Tax Appeals on August 13, 1958 , or even before the same had been
denied by the petitioner. Respondent Palanca’s second
claim was denied by the latter only on July 24,
1959.

The petitioner contends that
under Section 11 of Republic Act 1124,^[1]
the herein claimant’s claim for refund has prescribed since the same was filed
outside the 30-day period provided for therein. According to the petitioner, the
said prescriptive period commenced to run on October
14, 1947
when the denial by the Bureau of Internal Revenue of the respondent Palanca’s claim for refund, under his letter of
November 10, 1956 , became final. Considering that
the case was filed with the Court of Tax Appeals only on August 13, 1958 , then it is urged that the same
had prescribed.

The petitioner also invokes
prescription, at least with respect to the sum of P17,112.21, under Section 306 of the Tax Code.^[2] He claims that for the calendar year 1955,
respondent Palanca paid his income tax as follows:

Taxes withheld by La Tondeña Inc. from Mr. Palanca’s wages	P13,172.41
Payment under Income Tax Receipt No. 677395 dated May 11, 1956	3,939.89
Payment under Income Tax Receipt No 742334 dated August 14, 1956	3,939.89
Total	P21,952.01

Therefore, the petitioner
contends, the amounts paid by claimant Palanca under
his withheld tax and under Receipt No. 677395 dated May 11,
1956 may
no longer be refunded since the claim therefore was filed in court only on
August 13, 1958 , or beyond two years of their
payment.

We find the petitioner’s
contention on prescription untenable.

In the first place, the 30-day
period under Section 11 of Republic Act 1125 did not even commence to run in
this incident. It should be recalled that while the herein petitioner originally
assessed the respondent-claimant for alleged gift tax liabilities, the said
assessment was subsequently abandoned and in its lieu, a new one was prepared
and served on the respondent-taxpayer. In this new assessment, the petitioner
charged the said respondent with an entirely new liability and for a
substantially different amount from the first. While initially the petitioner
assessed the respondent for donee’s gift tax in the
amount of P170,002.74, in the subsequent assessment the
latter was asked to pay P191,591.62 for delinquent estate and inheritance tax.
Considering that it is the interest paid on this latter-assessed estate and
inheritance tax that respondent Palanca is claiming
refund for, then the 30-day period under the
abovementioned section of Republic Act 1125 should be computed from the receipt
of the final denial by the Bureau of Internal Revenue of the said claim. As has
earlier been recited, respondent Palanca’s claim in
this incident was filed with the Court of Tax Appeals even before it had been
denied by the herein petitioner or the Bureau of Internal Revenue. The case was
filed with the said court on August 13,
1958
while the petitioner denied the claim subject of the said case only on
July 24,
1959.

In the second place, the claim at
bar refers to the alleged overpayment by respondent Palanca of his 1955 income tax. Inasmuch as the said account
was paid by him by installment, then the computation of the 2-year prescriptive
period, under Section 306 of the National Internal Revenue Code, should be from
the date of the last installment. (Antonio Prieto et al vs. Collector of Internal Revenue, G. R.
No. L-11976, August 29,
1961)
Respondent Palanca paid the last installment on his
1955 income tax account on August 14, 1956 . His claim for refund of the
alleged overpayment on it was filed with the court on August 13,
1958. It
was, therefore, still timely instituted.

WHEREFORE, the decision appealed from is
affirmed in full, without pronouncement on costs.

Concepcion, C.J., Reyes, J. B. L., Dizon, Makalintal, Bengzon, J. P., Zaldivar,
Sanchez
and Ruiz Castro, JJ., concur.