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    CIR v. Lednicky

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    Aran Khristian Mendoza
    This document summarizes three Supreme Court cases regarding whether American citizens residing in the Philippines could deduct foreign income taxes paid to the US from their Philippine taxable income. The Tax Court initially ruled in favor of the taxpayers. However, the Supreme Court ultimately ruled that based on Section 30 of the Philippine tax code, taxpayers could not deduct foreign taxes paid unless they were eligible for a foreign tax credit, which did not apply in this case. Allowing the deduction would essentially subject Philippine tax revenues to the tax rates of foreign governments.

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    CIR v. Lednicky

    Uploaded by

    Aran Khristian Mendoza
    32 views19 pages
    This document summarizes three Supreme Court cases regarding whether American citizens residing in the Philippines could deduct foreign income taxes paid to the US from their Philippine taxable income. The Tax Court initially ruled in favor of the taxpayers. However, the Supreme Court ultimately ruled that based on Section 30 of the Philippine tax code, taxpayers could not deduct foreign taxes paid unless they were eligible for a foreign tax credit, which did not apply in this case. Allowing the deduction would essentially subject Philippine tax revenues to the tax rates of foreign governments.

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    This document summarizes three Supreme Court cases regarding whether American citizens residing in the Philippines could deduct foreign income taxes paid to the US from their Philippine taxable income. The Tax Court initially ruled in favor of the taxpayers. However, the Supreme Court ultimately ruled that based on Section 30 of the Philippine tax code, taxpayers could not deduct foreign taxes paid unless they were eligible for a foreign tax credit, which did not apply in this case. Allowing the deduction would essentially subject Philippine tax revenues to the tax rates of foreign governments.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    32 views19 pages

    CIR v. Lednicky

    Uploaded by

    Aran Khristian Mendoza
    This document summarizes three Supreme Court cases regarding whether American citizens residing in the Philippines could deduct foreign income taxes paid to the US from their Philippine taxable income. The Tax Court initially ruled in favor of the taxpayers. However, the Supreme Court ultimately ruled that based on Section 30 of the Philippine tax code, taxpayers could not deduct foreign taxes paid unless they were eligible for a foreign tax credit, which did not apply in this case. Allowing the deduction would essentially subject Philippine tax revenues to the tax rates of foreign governments.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 19

    CIR v.

    Lednicky
    G.R. Nos. L-18169, L-18286, & L-21434. July 31, 1964.
    FACTS

    Respondents V. E. Lednicky and Maria Valero


    Lednicky are husband and wife, both American
    citizens residing in the Philippines, and have
    derived all their income from Philippine sources
    for the taxable years in question.
    FACTS
    G. R. No. L-18286

    Respondents filed their income tax return for 1956, reporting therein a gross income
    of P1,017,287.65 and a net income of P733,809.44 on which the amount of
    P317,395.4 was assessed after deducting P4,805.59 as withholding tax.

    Pursuant to petitioner's assessment notice, respondents paid the total amount of


    P326,247.41, inclusive of the withheld taxes.

    Thereafter, respondents 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, respondents requested the refund of P112,437.90.

    When petitioner failed to answer the claim for refund, respondents filed their petition
    with the Tax Court.
    G.R. No. L-18169
    After audit, petitioner determined a
    Respondents-spouses filed their deficiency of P16,116.00 which amount
    domestic income tax return for 1955, respondents paid.
    reporting a gross income of
    P1,771,124.63 and a net income of
    P1,052,550.67.

    They filed an amended income tax return; the


    Back in 1955, however, respondents filed with
    amendment upon the original being a lesser
    the U.S. Internal Revenue Agent in Manila their
    net income of P1,012,554.51 and on the basis
    federal income tax return for the years 1947,
    of this amended return, they paid P570,252.00
    1951, 1952, 1953, and 1954 on income from
    inclusive of withholding taxes.
    Philippine sources on a cash basis.
    P264,588.82 P150,269.00
    Exchange and bank
    Payment of these federal Claim for Refund
    charges in remitting
    income taxes, including
    payment
    penalties & delinquency Respondents amended
    interests
    P4,143.91 their Philippine income
    tax return for 1955 to
    Made in 1955 to the
    include the necessary
    U.S. Director of
    deductions and
    Internal Revenue
    therewith filed a claim
    (Baltimore, Maryland)
    for refund of the sum of
    through the National
    P166,384.00, which was
    City Bank of New York
    later reduced to
    (Manila Branch).
    P150,269.00, as alleged
    overpaid income tax for
    1955.
    G.R. No. L- 21434

    Respondents filed their income tax return for 1957


    and 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.

    Respondents seek refund of P90,520.75 as


    overpayment.
    RULING OF THE TAX COURT

    IN FAVOR OF THE RESPONDENTS

    The Tax Court decided for respondents in all the


    aforementioned cases.
    ISSUE
    Whether or not a citizen of the US residing in the
    Philippines, who derives income wholly from sources
    within the Philippines, may deduct from his gross
    income the income taxes he has paid to the US
    government for the taxable year.
    RULING OF THE SUPREME COURT
    No, a citizen of the US residing in the Philippines,
    who derives income wholly from sources within
    the Philippines, may not deduct from his gross
    income the income taxes he has paid to the US
    government for the taxable year.
    Section 30 (c-1) of the Philippine
    Internal Revenue Code
    “SEC. 30. Deduction from gross income. — In computing net income there shall be allowed as deductions —

    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;

    (3)Credits against tax 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 —

    Job description
    (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 residing in such country;
    Section 30 (c-1) of the Philippine
    Internal Revenue Code

    (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.

    Job inheritance
    (C) Estate, description
    and gift taxes; and

    (D) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed.
    The Construction and wording of Section 30 (c) (1) (B) of the Internal Revenue Code
    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.
    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 cannot
    exist if the taxpayer cannot claim benefit under either of these
    headings at his option, so that he must be entitled to a tax
    credit, or the option to deduct from gross income disappears
    altogether.
    Much stress is laid on the thesis that if 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.
    APPLICATION
    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.
    STATE PARTNERSHIP THEORY

    The fundamental doctrine of income taxation


    provides 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.
    Interpretation cannot result to an
    absurd situation

    The interpretation given by the spouses


    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.
    Erroneous
    interpretation
    would
    To allow an alien resident to deduct from his gross
    subrogate income whatever taxes he pays to his own
    Philippine government amounts to conferring on the latter
    power to reduce the tax income of the Philippine
    taxes to
    government simply by increasing the tax rates on
    those levied the alien resident.
    by a foreign
    government
    End of
    Presentation

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