COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. V. E. LEDNICKY AND MARIA VALERO LEDNICKY, RESPONDENTS.

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 under 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 Pl,017,287.65 and a net income of P733.809.44 on which the
amount of P317,395.41 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 PI 12,437.90.

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 F150,269.00, 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 Pl,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,l 16.00,
which amount the respondents paid on 5 December 1956.

Back in 1955, however, the Lednickys filed with the U.S. Internal
Ilevonnc 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 $264,588.82, 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.

On 11 August 1958 the said respondents amended their Philippines income tax return for 1955 to include the following deductions:

U.S. Federal income taxes	P471.867.32
Interest accrued up to May 15, 1955	40,333.92
Exchange and bank Charges	4,14391
Total	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. 173, the facts are similar but
refer to respondents Lednickys income tax returns for 1957, filed on
February 28, 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 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.” (Italics supplied)

The Tax Court hold that they may be deducted because of the undenied
fact that the respondent spouses did not “signify” in their income tax
returns a desire to avail themselves of the benefits of paragraph 3 (B)
of the subsection, which reads:

“Par. (c) (3) Credits against tux 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 rending 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) (8) 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-l-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. Deductions from gross 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 worked 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, 99 Phil., 847; 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, incentives, 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 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, Reyes, J. B. L., Regala and Makalintal, JJ., concur.