G.R. Nos. L-21551, L-21557, L-24972 & L-24978. September 30, 1969.
FERNANDEZ HERMANOS, INC., petitioner, vs. COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents. (L-21551)

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. FERNANDEZ HERMANOS, INC., and COURT OF TAX APPEALS, respondents. (L-21557)
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. FERNANDEZ HERMANOS INC., and the COURT OF TAX APPEALS, respondents. (L-24972)
FERNANDEZ HERMANOS, INC., petitioner, vs. THE COMMISSIONER OF INTERNAL REVENUE, and HON. ROMAN A. UMALI, COURT OF TAX APPEALS, respondents. (L-24978)

FACTS

These are four consolidated appeals from two decisions of the Court of Tax Appeals (CTA) concerning the income tax liability of Fernandez Hermanos, Inc. (taxpayer), a domestic investment corporation, for the years 1950-1954 and 1957. The Commissioner of Internal Revenue assessed deficiency income taxes for 1950-1954 based on disallowances of various claimed deductions and adjustments. The CTA, in its decision for CTA Case No. 787, partially sustained and partially overruled the Commissioner’s assessments, modifying the total deficiency to P123,436.00. Both parties appealed the CTA’s rulings adverse to them. The main issues involve the correctness of the CTA’s rulings on specific disputed items (losses, depreciation, net worth increase, and gain on sale) and the prescription of the government’s right to collect. A separate CTA decision for 1957 (CTA Case No. 1389) disallowed the taxpayer’s claimed depletion deduction for its coal mining property, which was also appealed.

ISSUE

The primary issues are: (1) The correctness of the CTA’s rulings on the disputed items for 1950-1954, specifically: (a) allowance/disallowance of various losses; (b) disallowance of excessive depreciation on houses; (c) disallowance of taxable increase in net worth for 1950 and 1951; (d) disallowance of gain from sale of real property in 1950; and (2) Whether the government’s right to collect the deficiency taxes for 1950-1954 had prescribed. A secondary issue from the 1957 case is: (3) The correctness of the CTA’s disallowance of the taxpayer’s claimed depletion deduction.

RULING

The Supreme Court affirmed the CTA’s judgments with modifications regarding the crediting of certain losses.
1. On the disputed items for 1950-1954:
* Loss in Mati Lumber Co. (1950): The Court affirmed the CTA’s allowance of the P8,050.00 loss. The finding that the company was completely insolvent in 1950 provided adequate basis for writing off the stock as a worthless security.
* Loss/Bad Debt from Palawan Manganese Mines, Inc. (1951): The Court affirmed the CTA’s disallowance of the P353,134.25 deduction. The advances were made under a memorandum agreement stipulating repayment only from 15% of net profits. Since there were no profits, there was no enforceable debt to become worthless. The advances were considered voluntary contributions without expectation of repayment.
* Losses in Balamban Coal Mines (1950 & 1951): The Court affirmed the CTA’s allowance of these losses (P8,989.76 for 1950 and P27,732.66 for 1951). The losses were operational and deductible under the Tax Code.
* Losses in Hacienda Dalupiri (1950-1954): The Court affirmed the CTA’s allowance of these losses. The hacienda was operated as a business for profit, and the annual losses were deductible.
* Losses in Hacienda Samal (1951 & 1952): The Court reversed the CTA’s disallowance and allowed the losses (P8,380.25 for 1951 and P7,621.73 for 1952), totaling P16,001.98. The property was acquired and operated with a profit motive, making the losses deductible. However, since the losses were disallowed for 1951 and 1952, they should be credited to the taxpayer for 1953, the year the property was sold.
* Excessive Depreciation on Houses: The Court affirmed the CTA’s disallowance. The taxpayer failed to substantiate its claimed useful life of 10 years for the houses. The Commissioner’s determination of a 20-year useful life, based on the taxpayer’s own past practice and accepted standards, was upheld.
* Taxable Increase in Net Worth (1950 & 1951): The Court affirmed the CTA’s disallowance of these adjustments. The net worth method was unjustified as the taxpayer’s books were reliable and there was no evidence of unexplained wealth. The increases were sufficiently explained by non-taxable items like revaluation surplus and equity investments.
* Gain from Sale of Real Property (1950): The Court affirmed the CTA’s disallowance of the P11,147.26 assessment. The property was not held primarily for sale to customers, and the gain was correctly treated as a non-taxable capital gain.
2. On Prescription: The Court held that the government’s right to collect had not prescribed. The taxpayer’s execution of a waiver (Form 1.9) on March 28, 1956, extending the period for assessment and collection until December 31, 1957, was valid and binding. The assessments issued on December 28, 1956, were timely.
3. On the 1957 Depletion Deduction: The Court affirmed the CTA’s disallowance. The taxpayer’s method of deducting 1/5 of the cost of the coal mines annually was not a proper depletion allowance under the Tax Code. Depletion is based on the exhaustion of the mineral deposit through production, not a straight-line deduction of capital investment.
DISPOSITIVE:
The judgment of the CTA in Cases L-21551 and L-21557 was affirmed, modified by crediting the disallowed losses from Hacienda Samal for 1951 and 1952 (P16,001.98) to the taxpayer for the year 1953. The judgment of the CTA in Cases L-24972 and L-24978 was affirmed in toto. No costs.