CIR v.
Lednicky,
11 SCRA 603, 31 Jul. 1964
*Income tax on resident aliens
FACTS:
Respondent 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.
In GR NO. L-18286, the aforesaid respondents, on 27 March 1957, 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 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 P112,437.90. When the petitioner Commissioner of Internal Revenue
failed to answer the claim for refund, the respondents filed their petition with the Tax
Court.
In GR No. L-18169, the case is also a claim for refund in the amount of P150,269.00, as
alleged overpaid income tax for 1955. 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 P1,012,554.51, 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 P16,116.00, which amount, the respondents paid on 5 December 1956.
Back in 1955, however, the Lednickys filed with the U.S. Internal Revenue 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 P264,588.82, were
made in 1955. On 11 August 1958, the said respondents amended their Philippine
income tax return for 1955 to include the several deductions and therewith filed a claim
for refund of the sum of P166,384.00, which was later reduced to P150,269.00.
In G.R. No. 21434 (CTA Case No. 783), the facts are similar, but refer to respondents
Lednickys' income tax return for 1957, filed on 28 February 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.
ISSUE:
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.
HELD:
An alien resident who derives income wholly from sources within the Philippines may
not deduct from gross income the income taxes he paid to his home country for the
taxable year. The right to deduct foreign income taxes paid given only where alternative
right to tax credit exists.
Section 30 of the NIRC, Gross Income “Par. C (3): Credits against tax per 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 shall be credited with: Paragraph (B), Alien resident of the
Philippines; and, Paragraph C (4), Limitation on credit.”
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 the power to reduce the tax
income of the Philippine government simply by increasing the tax rates on the alien
resident. Every time 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.
Double taxation becomes obnoxious only where the taxpayer is taxed twice for the
benefit of the same governmental entity. 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.
