TAXATION CASE DIGESTS

DEDUCTIONS FROM GROSS INCOME

A. INTEREST

CASE:  THE COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. CONSUELO L. VDA. DE PRIETO, respondent. G.R. No. L-13912   September 30, 1960

FACTS:

            Respondent Vda. de Prieto conveyed by way of gifts a real property to her children. The Commissioner of Internal Revenue appraised the property donated at P1,231,268.00, and assessed the total sum of P117,706.50 as donor's gift tax, interest and compromises due thereon. Of the total sum of P117,706.50 paid by respondent on April 29, 1954, the sum of P55,978.65 represents the total interest on account of deliquency. Said sum was claimed as deduction, among others, by respondent in her 1954 income tax return. Petitioner disallowed the claim and as a consequence of such disallowance assessed respondent for 1954 deficiency income tax due on the aforesaid P55,978.65, including interest 1957, surcharge and compromise for the late payment.

ISSUE:

            Whether or not interest paid for the late payment of tax is deductible from gross income.

HELD:

            YES. For interest to be deductible, it must be shown that: (1) there be an indebtedness, (2) there should be interest upon it, and (3) what is claimed as an interest deduction should have been paid or accrued within the year. In this case, the last two requirements are undisputed. The only question is if interest on account of late payments of taxes be considered as indebtedness.  Indebtedness has been defined as an unconditional and legally enforceable obligation for the payment of money. Within the meaning of that definition, it is apparent that a tax may be considered indebtedness.  Although taxes already due have not, strictly speaking, the same concept as debts, they are, however, obligations that may be considered as such. Where statute imposes a personal liability for a tax, the tax becomes, at least in a board sense, a debt. It follows that the interest paid by herein respondent for the late payment of her donor's tax is deductible from her gross income.

In conclusion, interest payment for delinquent taxes is not deductible as tax but the taxpayer is not precluded thereby from claiming said payment as deduction on account of interest.