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CIR v. Vda. De Prieto


G.R. No. L-13912 Sept. 30, 1960 J. Gutierrez David
petitioners
Commissioner of Internal Revenue
respondents
Consuelo L. Vda. De Prieto
summary
Respondent donated real property to her children. She paid the assessed donors gift
tax, which assessment included interest on account of delinquency. The following
year, in her income tax return, respondent claimed the interest as a deduction. The
CIR disallowed the deduction, but the CTA reversed and allowed it. The SC affirmed
the CTA decision. Interest on tax is interest on indebtedness and is thus deductible.
US Tax Code (which our provisions are based on) contemplates tax as an
indebtedness. Jurisprudence has also held the same; although taxes arent
conceptually the same as debts, they may be considered as such.
facts of the case
Respondent conveyed as gifts to her four children Antonio, Benito, Carmen, and Mauro (like, so conyo
names) real property with total assessed value of P892,497.50.
The gift tax returns was filed. The CIR appraised respondents real property donation for gift tax purposes
at P1,231,268, and assessed P117,706.50 as donors gift tax, interest and compromises due. The assessment
was duly paid by respondent. Take note that P55,978.65 of the assessed P117,706.50 represented the total
interest on account of delinquency.
That sum of P55,978.65 (total interest on account of delinquency) was then claimed as a deduction by
respondent in her 1954 income tax return. The CIR, however, disallowed the deduction claim and assessed
respondent for 1954 the sum of P21,410.38 as deficiency income tax on the aforesaid P55,978.65. It included
interest, surcharge, and compromise for the late payment.
The CTA reversed the the CIR decision.

issue
WON the interest paid by respondent (the P55K++) was paid upon an indebtedness within the contemplation
of Sec 30(B)(1)
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of the Tax Code. YES. CTA affirmed.
[Dispositive] 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.

ratio
Under the law, for interest to be deductible, it must be shown that (1) there be an indebtedness, (2) there should be interest upon it, (3)
and that what is claimed as an interest deduction should have been paid or accrued within the year. In this case, ALL three are present
and admitted by both parties. It is just the interpretation of the interest paid that is in issue here and WON it falls within the
contemplation of the law.

Interest on tax, such as that paid by respondent for the late payment of donors tax, is interest on
indebtedness and is thus deductible.
o Meaning of indebtedness in the US Tax Code (which contains similar provisions as ours) an
unconditional and legally enforceable obligation for the payment of money.
Within that definition, it is apparent that a tax may be considered an indebtedness.
o Sambrano vs CTA&CIR

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SEC. 30 Deductions from gross income. In computing net income there shall be allowed as deductions
x x x x x x x x x
(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.

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Although taxes already due arent the same concept as debts, they are however, obligations which
may be considered as such.
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.
Where statute imposes a personal liability for a tax, the tax becomes, at least in a board sense, a
debt.
A tax is a debt for which a creditor's bill may be brought in a proper case.

[Argument of CIR] Look at Sec. 80 of Revenue Regulation #2 of the DOF!! the word `taxes' means taxes
proper and no deductions should be allowed for amounts representing interest, surcharge, or penalties
incident to delinquency."

SC Nope. That revenue regulation merely incorporates the established application of the tax deduction
statute in the US, where deduction of "taxes" has always been limited to taxes proper and has never
included interest on delinquent taxes, penalties and surcharges.
o In any case, lower court was correct when it held that Sec. 80 is inapplicable to the instant case. Sec. 80
implements sections 30(c) of the Tax Code governing deduction of taxes; here, respondent seeks to
come under section 30(b) providing for deduction of interest on indebtedness.
o To follow the interpretation of the CIR of Sec. 80 would contravene Sec. 30(B) of the Tax Code and the
construction of said law by US Courts. A regulation which operates to create a rule not in harmony
with the statute is a mere nullity.