2.

On December 4, 1945, Consuelo gave her four children, Antonio,

CIR v. Consuelo Vda. De Prieto (Vi)
Benito, Carmen, and Mauro, real property with a total assessed
September 30, 1960| Gutierrez David, J. | Deductions - Interest value of P892,497.50. After the filing of the gift tax returns on or
PETITIONER: THE COMMISSIONER OF INTERNAL REVENUE about February 1, 1954, the Commissioner of Internal Revenue
RESPONDENTS: CONSUELO L. VDA. DE PRIETO appraised the real property donated for gift tax purposes at
SUMMARY: Consuelo Vda. de Prieto gave real property to her 4 children. P1,231,268.00 and assessed the total sum of P117,706.50 as donor's
The Commissioner of Internal Revenue appraised the property donated at gift tax, interests and compromises due thereon.
P1,231,268.00, and assessed the total sum of P117,706.50 as donor's gift 3. Of the total sum of P117,706.50 paid by Consuelo on April 29, 1954,
tax, interest and compromises due thereon. Of the total sum of P117,706.50 P55,978.65 represents the total interest on account of delinquency
paid by Consuelo, the sum of P55,978.65 represents the total interest on (the P55k was already included in the computation of P117k). The
account of delinquency. This sum of P55,978.65 was claimed as a deduction P55,978.65 was claimed as a deduction in her 1954 income tax
on her 1954 income tax return. CIR disallowed the claim and as a return. CIR disallowed the deduction and as a consequence, assessed
consequence, assessed Consuelo for 1954 the total sum of P21,410.38 as Consuelo for P21,410.38 deficiency income tax due on the
deficiency income tax due on the aforesaid P55,978.65, including interest P55,978.65, including interest up to March 31, 1957, surcharge and
up to March 31, 1957, surcharge and compromise for the late payment. compromise for the late payment.
Issue: Whether the interest for late payment is deductible from gross ISSUES:
income – YES. For interest to be deductible, it must be shown that: (1) there 1. Whether the interest paid by Consuelo for late payment of tax is
be an indebtedness, (2) that there should be interest upon it, and (3) that deductible from gross income – YES
what is claimed as an interest deduction should have been paid or RATIO:
accrued within the year. The interest paid by Consuelo was because of the 1. For interest to be deductible, it must be shown that: (1) there be an
late payment of her donor's tax, and the same was paid within the year it is indebtedness, (2) that there should be interest upon it, and (3)
sought to be deducted. US defines indebtedness as an unconditional and that what is claimed as an interest deduction should have been
legally enforceable obligation for the payment of money. Under this paid or accrued within the year.
definition, a tax can be considered an indebtedness. It follows that interest 2. The interest paid by Consuelo was because of the late payment of
paid by Consuelo for the late payment of her donor's tax is deductible from her donor's tax, and the same was paid within the year it is sought to
her gross income (interest on taxes is interest on indebtedness so it should be deducted. The question is whether the interest was paid upon
be deductible). an indebtedness under Section 30(b)(1) of the tax code which
DOCTRINE: Although interest payment for delinquent taxes is not says:
deductible as tax under Section 30 (c) of the Tax Code and section 80 of the Sec. 30 Deductions from gross income. — In computing net income
there shall be allowed as deductions
Income Tax Regulations, the taxpayer is not precluded thereby from
(b) Interest
claiming said interest payment as deduction under section 30 (b). (1) In general. — The amount of interest paid within the taxable
(interest payment for delinquent taxes is not deductible as tax but the year on indebtedness, except on indebtedness incurred or continued to
taxpayer is not precluded thereby from claiming said payment as purchase or carry obligations the interest upon which is exempt from
deduction on account of interest on indebtedness.) taxation as income under this Title."
FACTS: 3. The tax code of the US defines indebtedness as an unconditional
1. This is an appeal from a decision of the Court of Tax Appeals and legally enforceable obligation for the payment of money.
reversing the decision of the Commissioner of Internal Revenue Under this definition, a tax can be considered an indebtedness.
which held Consuelo L. Vda. de Prieto liable for the payment of the 4. In Sambrano v. CTA, the court said that "Although taxes already due
sum of P21,410.38 as deficiency income tax, plus penalties and have not, strictly speaking, the same concept as debts, they are,
monthly interest. however, obligations that may be considered as such.”
5. Thus, the uniform ruling is that interest on taxes is interest on
indebtedness and is deductible. Therefore, the interest paid by
Consuelo for the late payment of her donor's tax is deductible
from her gross income under section 30 (b) of the Tax Code.
6. CIR claims that it should not be deductible under Section 80 of
Revenue Regulation No. 2 (Income Tax Regulation) which provides
that "the word 'taxes' means taxes proper and no deductions should
be allowed for amounts representing interest, surcharge, or penalties
incident to delinquency." The CTA said Section 80 is inapplicable
because while it implements Section 30(c) of the Tax Code
governing deduction of taxes, Consuelo argues based on Section
30(b) providing for deduction of interest on indebtedness.
7. In conclusion, 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
from claiming the interest payment as deduction under section 30(b)
of the same Code.