Halili v CIR (136 SCRA 112)

Facts:

The cases involve disputes regarding claims for overtime of more than five hundred bus drivers and conductors of Halili Transit. Litigation initially commenced with the filing of a complaint for overtime with the CIR. The disputes were eventually settled when the contending parties reached an Agreement where the Administratrix would transfer to the employees the title to a tract of land in Caloocan, Rizal. The parcel of land was eventually registered in the name of the Union.

The Union, through Atty. Benjamin C. Pineda, filed an urgent motion with the Ministry of Labor and Employment (MOLE) requesting for authority to sell and dispose of the property. Union President Amado Lopez, in a letter, informed J.C. Espinas and Associates that the general membership of the said Union had authorized a 20% contingent fee for the law firm based on whatever amount would be awarded the Union.

Atty. Jose C. Espinas, (the original counsel) established the award of 897 workers' claim. When Atty. Pineda appeared for the Union in these cases, still an associate of the law firm, his appearance carried the firm name B.C. Pineda and Associates," giving the impression that he was the principal lawyer in these cases.

Atty. Pineda joined the law firm of Atty. Espinas in 1965 when these cases were pending resolution. He always held office in the firm's place at Puyat Building, except in 1966 to 1967 when he transferred to the Lakas ng Manggagawa Offices. During this one-year stint at the latter office, Atty. Pineda continued handling the case with the arrangement that he would report the developments to the Espinas firm. When he rejoined the law firm in 1968, he continued working on these cases and using the Puyat Building office as his address in the pleadings.

When Atty. Pineda rejoined the Espinas firm in 1968, he did not reveal to his partners (he was made the most senior partner) that he had a retainer's contract. He stayed with the law firm until 1974 and still did not divulge the 1967 retainer's contract. Only the officers of the Union knew of the contract.

The alleged retainer's contract between Atty. Pineda and the Union appears anomalous and even illegal as well as unethical considering that-

1. The contract was executed only between Atty. Pineda and the officers of the Union chosen by about 125 members only. It was not a contract with the general membership.

2. The contingent fee of 30% for those who were still working with Halili Transit and the 45% fee for those who were no longer working worked to the prejudice of the latter group who should and were entitled to more benefits. Thus, too, when the alleged retainer's contract was executed in 1967, the Halili Transit had already stopped operations in Metro Manila. By then, Atty. Pineda knew that all the workers would be out of work which would mean that the 45% contingent fee would apply to all.

3. The contract which retroactively took effect on January 1, 1966, was executed when Atty. Espinas was still handling the appeal of Halili Transit in the main case before the Supreme Court.

4. When Atty. Pineda filed his motion for approval of his attorney's lien with Arbiter Valenzuela on February 8, 1983, he did not attach the retainer's contract.

5. The retainer's contract was not even notarized.

A prospective buyer, the Manila Memorial Park Cemetery, Inc. objected in view of PD 1529 which requires no less than an order from a court of competent jurisdiction as authority to sell property in trust.

Atty. Pineda, without authority from the Supreme Court but relying on the earlier authority given him by the Ministry of Labor, filed another urgent motion, praying that the Union be authorized to sell the lot. The sale was finally consummated, resulting in the execution of an escrow agreement.

When Atty. Jose C. Espinas (herein movant and alleged original counsel for the Union) learned of the sale and apportionment of the proceeds from past Union president Amado Lopez, he requested Labor Arbiter Raymundo Valenzuela to allow him to look into the records of the case. The latter, however, told him that the records of the case were missing. Thereupon, Atty. Espinas requested Director Pascual Reyes of the NLRC to locate the records.

Issue:

a.Whether or not Atty. Pineda and Arbiter Valenzuela should be held in contempt.

b. Whether or not Atty. Pineda should be disbarred.

Held:

a. YES. Contempt of court is a defiance of the authority, justice or dignity of the court; such conduct as tends to bring the authority and administration of the law into disrespect or to interfere with or prejudice parties litigant or their witnesses during litigation.

The power to punish for contempt is inherent in all courts and is essential to the preservation of order in judicial proceedings and to the enforcement of judgments, orders, and mandates of the court, and consequently, to the due administration of justice.

In the Slade Perkins case, "the exercise of the power to punish contempt has a twofold aspect, namely (1) the proper punishment of the guilty party for his disrespect to the court or its order; and (2) to compel his performance of some act or duty required of him by the court which he refuses to perform. Due to this twofold aspect of the exercise of the power to punish them, contempts are classified as civil or criminal.

A civil contempt is the failure to do something ordered to be done by a court or a judge for the benefit of the opposing party therein.

A criminal contempt, is conduct directed against the authority and dignity of a court or of a judge, as in unlawfully assailing or discrediting the authority or dignity of the court or judge, or in doing a duly forbidden act.

b. YES. Under Section 27 of Rule 138 of the Revised Rules of Court which provides:

Sec. 27. Attorneys removed or suspended by Supreme Court on what grounds.—A member of the bar may be removed or suspended from his office as attorney by the Supreme Court for any deceit, malpractice, or other gross misconduct in such office, grossly immoral conduct, or by reason of his conviction of a crime involving moral turpitude, or for any violation of the oath which he is required to take before admission to practice, or for a willful disobedience of any lawful order of a superior court, or for corrupt or willfully appearing as an attorney for a party to a case without authority so to do. The practice of soliciting cases at law for the purpose of gain, either personally or through paid agents or brokers, constitutes malpractice.

The Court may suspend or disbar a lawyer for any conduct on his part showing his unfitness for the confidence and trust which characterize the attorney and client relations, and the practice of law before the courts, or showing such a lack of personal honesty or of good moral character as to render him unworthy of public confidence.

In the case, the expeditious manner by which Arbiter Valenzuela granted Atty. Pineda's motion for such authority to sell the property make the entire transaction dubious and irregular.

Significantly Atty. Pineda's act of filing a motion praying for authority to sell was by itself an admission on his part that he did not possess the authority to sell the property. He could not and did not even wait for valid authority but instead previously obtained the same from the labor arbiter whom he knew was not empowered to so authorize.

The 45% attorney's lien on the award of those union members who were no longer working and the 30% lien on the benefits of those who were still working as provided for in the alleged retainer's contract are also very exorbitant and unconscionable.

*Atty. Pineda is found guilty of indirect contempt of court for which he is sentenced to imprisonment and directed to show cause why he should not be disbarred.

Nunez v Ricafort (382 SCRA 381)

Facts:

An administrative complaint was by Soledad Nuñez, a septuagenarian represented by her attorney-in-fact Ananias B. Co, Jr., seeking the disbarment of Atty. Romulo Ricafort on the ground of grave misconduct.

Sometime in October 1982, Soledad authorized Atty. Ricafort to sell her two parcels of land located in Legazpi City for P40,000. She agreed to the lawyer 10% of the price as commission. Atty. Ricafort succeeded in selling the lots, but despite Soledad’s repeated demands, he did not turn over the proceeds of the sale. This forced Soledad to file an action for a sum of money before the RTC, Quezon City.

The court rendered its decision ordering the Atty. to pay Soledad the sum of P16,000 as principal obligation, with at the legal rate from the date of the commencement of the action.

An appeal to the CA was made. However, the appeal was dismissed for failure to pay the required docket fee within the reglementary period despite notice.

Soledad filed a motion for the issuance of an alias writ of execution. But it appears that only a partial satisfaction of the P16,000 judgment was made, leaving P13,800 unsatisfied. In payment for the latter, Atty. issued four postdated checks but was dishonored because the account against which they were drawn was closed.

Hence, Soledad was forced to file four criminal complaints for violation of B.P. Blg. 22 before the MTC, Quezon City.

In a joint affidavit, Atty. Ricafort admitted having drawn and issued said four postdated checks in favor of Soledad. Allegedly believing in good faith that said checks had already been encashed by Soledad, he subsequently closed his checking account in China Banking Corporation, Legazpi City, from which said four checks were drawn. He was not notified that the checks were dishonored. Had he been notified, he would have made the necessary arrangements with the bank.

The court required Atty. to comment on the complaint. But he never did despite the favorable action on his three motions for extension of time to file the comment. His failure to do so compelled Soledad to file a motion to cite Atty. in contempt on the ground that his strategy to file piecemeal motions for extension of time to submit the comment “smacks of a delaying tactic scheme that is unworthy of a member of the bar and a law dean.”

The IBP findings show that the Atty. had no intention to “honor” the money judgment against him. It recommended that Atty. be declared “guilty of misconduct in his dealings with complainant” and be suspended from the practice of law for at least one year and pay the amount of the checks issued to the complainant.

Issue:

Whether or not Atty. Romulo Ricafort is guilty of grave misconduct in his dealings with complainant.

Held:

YES.  There is a blatant violation of Rule 1:01 of Canon 1 of the Code of Professional Responsibility which provides:

A lawyer shall not engage in unlawful, dishonest and immoral or deceitful conduct.

By violating Rule 1:01 of Canon 1 of the Code of Professional Responsibility, Atty. diminished public confidence in the law and the lawyers. Instead of promoting such confidence and respect, he miserably failed to live up to the standards of the legal profession.

His act of issuing bad checks in satisfaction of the alias writ of execution for money judgment rendered by the trial court was a clear attempt to defeat the ends of justice. His failure to make good the checks despite demands and the criminal cases for violation of B.P. Blg. 22 showed his continued defiance of judicial processes, which he, as an officer of the court, was under continuing duty to uphold.

To further demonstrate his very low regard for the courts and judicial processes, he even had the temerity of making a mockery of the court’s generosity to him. We granted his three motions for extension of time to file his comment on the complaint in this case. Yet, not only did he fail to file the comment, he as well did not even bother to explain such failure notwithstanding our resolution declaring him as having waived the filing of the comment. To the SC, Atty. openly showed a high degree of irresponsibility amounting to willful disobedience to its lawful orders.

Atty. Ricafort then knowingly and willfully violated Rules 12.04 and 12:03 of Canon 12 of the Code of Professional Responsibility stating that:

Lawyers should avoid any action that would unduly delay a case, impede the execution of a judgment or misuse court processes; and that lawyers, after obtaining extensions of time to file pleadings, memoranda or briefs, should not let the period lapse without submitting the same or offering an explanation for their failure to do so.

The SC indefinitely suspended Atty. Ricafort from the practice of law and directed to pay Soledad P13,800.

Dumo v Espinas

Facts:

Spouses Dumo are the owners-possessors of a parcel of sandy beach resort in Bauang, La Union.  Severa J. Espinas filed a "Quieting of Title and/or Ownership and Possession against spouses Sandy and Presnida Saldana, subject matter of the case being the same resort.

Although a decision has been rendered against the defendants in the case against spouses Saldana, the the same was not enforced.

Disgruntled with the refusal of the sheriff to put them in possession over the questioned real property, and in open defiance with the official action taken by the sheriff, all defendants acting for the interest of Espinas took it upon themselves, employing force, intimidation, and threat, to enter the property.

Despite protests made by Spouses Dumo, who were there then present and visibly outnumbered by defendants and their agents who were armed with sticks, bolos, hammers, and other deadly weapons, successfully drove out plaintiffs, and took over the premises

It was alleged that the defendants were boasting aloud that they were under instructions by the "judge" to do just that – to forcibly enter and take over the premises. While inside the premises, they demolished and totally tore down all the improvements.

Spouses Dumo prayed for the payment of actual, moral and exemplary damages. The MTC rendered judgment holding that petitioners were able to prove their right of possession over the subject property.

Respondents appealed the case to the RTC of Bauang, La Union. The RTC reversed and set aside the Decision of the MTC. It also ruled that as regards damages, the only damage that can be recovered is the fair rental value or the reasonable compensation for the use and occupation of the leased property.

Spouses Dumo filed a petition for review with the CA. The CA held that the MTC correctly found that the petitioners were in possession of the subject land and agreed with the ruling of the RTC that in forcible entry and unlawful detainer cases, the only damage that can be recovered is the fair rental value or the reasonable compensation for the use and occupation of the property concerned.

Issue:

Whether or not the the CA erred in holding that the only damage that can be recovered is the fair rental value for use of the property.

Held:

No. The CA is correct. There is no basis for the MTC to award actual, moral and exemplary damages in view of the settled rule that in ejectment cases, the only damage that can be recovered is the fair rental value or the reasonable compensation for the use and occupation of the property.

The reason for this is that in such cases, the only issue raised in ejectment cases is that of rightful possession; hence, the damages which could be recovered are those which the plaintiff could have sustained as a mere possessor, or those caused by the loss of the use and occupation of the property, and not the damages which he may have suffered but which have no direct relation to his loss of material possession.

Although the MTC’s order for the reimbursement to petitioners of their alleged lost earnings over beach resort could have been considered as compensation for their loss of the use and occupation of the property while it was in the possession of the respondents, records do not show any evidence to sustain the same. 

Quinagoran v CA

Facts:

The heirs of Juan dela Cruz, represented by Senen dela Cruz filed a Complaint for Recovery of Portion of Registered Land with Compensation and Damages against Victorino Quinagoran before the RTC Cagayan. They alleged that they are the co-owners of a  a parcel of land at Centro, Piat, Cagayan, which they inherited from the late Juan dela Cruz.   

Quinagoran started occupying a house on the north-west portion of the property, by tolerance of the heirs. The heirs asked petitioner to remove the house as they planned to construct a commercial building on the property but petitioner refused, claiming ownership over the lot.

The heirs prayed for the reconveyance and surrender of the disputed lot and to be paid the amount of P5,000.00 monthly until the property is vacated.

 Quinagoran filed a Motion to Dismiss claiming that the RTC has no jurisdiction over the case under Republic Act (R.A.) No. 7691, which expanded the exclusive original jurisdiction of the Municipal Trial Court (MTC)  to include all civil actions which involve title to, or possession of, real property, or any interest therein which does not exceed P20,000.00.  He argued that since the lot which he owns adjacent to the contested property has an assessed value of P1,730, the assessed value of the lot under controversy would not be more than the said amount. He likewise avers that it is an indispensable requirement that the complaint should allege the assessed value of the property involved.

The heirs maintain that the contention of petitioner in his Motion to Dismiss before the RTC that the assessed value of the disputed lot is below P20,000.00 is based on the assessed value of an adjacent property and no documentary proof was shown to support the said allegation. It also contended that the tax declaration which petitioner presented, together with his Supplemental Reply before the CA, and on the basis of which he claims that the disputed property's assessed value is only P551.00, should also not be given credence as the said tax declaration reflects the amount of P56,100.or the entire property.

 The RTC denied petitioner's Motion to Dismiss on the basis that the action is accion publicciana and therefore, its jurisdiction lies in the RTC, regardless of the value of the property.  The CA affirmed decision of the RTC.

Issue:

Whether or not the RTC has jurisdiction over all cases of recovery of possession regardless of the value of the property involved?

Held:

NO. Jurisdiction lies in the MTC.

The doctrine that all cases of recovery of possession or accion publiciana lies with the RTC regardless of the value of the property -- no longer holds true.  As things now stand, a distinction must be made between those properties the assessed value of which is below P20,000.00, if outside Metro Manila; and P50,000.00, if within.

         Republic Act No. 7691 expressly provides:

 SEC. 19. Jurisdiction in civil cases – Regional Trial Courts shall exercise exclusive original jurisdiction:

 (2) In all civil actions which involve the title to or possession of, real property, or any interest therein, where the assessed value of the property involved exceeds Twenty thousand pesos (P20,000.00) or, for civil actions in Metro Manila, where such value exceeds Fifty thousand pesos (P50,000.00) except for forcible entry into and unlawful detainer of lands or buildings, original jurisdiction over which is conferred upon the Metropolitan Trial Courts, Municipal Trial Courts, and Municipal Circuit Trial Courts.

            In Atuel v. Valdez,  the Court likewise expressly stated that:

            Jurisdiction over an accion publiciana is vested in a court of general jurisdiction.  Specifically, the regional trial court exercises exclusive original jurisdiction “in all civil actions which involve x x x possession of real property.”  However, if the assessed value of the real property involved does not exceed P50,000.00 in Metro Manila, and P20,000.00 outside of Metro Manila, the municipal trial court exercises jurisdiction over actions to recover possession of real property.

         In the case, Quinagoran maintains that there should be such an allegation of the assessed value of the real property to determine jurisdiction. However, nowhere in said complaint was the assessed value of the subject property ever mentioned.  There is therefore no showing on the face of the complaint that the RTC has exclusive jurisdiction over the action of the respondents. Absent any allegation in the complaint of the assessed value of the property, it cannot be determined whether the RTC or the MTC has original and exclusive jurisdiction over the petitioner's action. The courts cannot take judicial notice of the assessed or market value of the land.

        Considering that the respondents failed to allege in their complaint the assessed value of the subject property, the RTC seriously erred in denying the motion to dismiss.  Consequently, all proceedings in the RTC are null and void. The CA also erred in affirming the RTC. 

THE PAQUETE HABANA, 175 U.S. 677 (1900)

Facts:
These are two appeals from decrees of the district court of the United States for the southern district of Florida condemning two fishing vessels and their cargoes as prize of war.

Each vessel was a fishing smack, running in and out of Havana, and regularly engaged in fishing on the coast of Cuba. It sailed under the Spanish flag and was owned by a Spanish subject of Cuban birth, living in the city of Havana. It was commanded by a subject of Spain, also residing in Havana. Her master and crew had no interest in the vessel, but were entitled to share her catch.

Her cargo consisted of fresh fish, caught by her crew from the sea, put on board as they were caught, and kept and sold alive. Until stopped by the blockading squadron she had no knowledge of the existence of the war or of any blockade. She had no arms or ammunition on board, and made on attempt to run the blockade after she knew of its existence, nor any resistance at the time of the capture.

The Paquete Habana (1st vessel) was a sloop and had a crew of three Cubans, including the master, who had a fishing license from the Spanish government, and no other commission or license. She left Havana and was captured by the United States gunboat Castine.

The Lola (2nd vessel) was a schooner and had a crew of six Cubans, including the master, and no commission or license. She was stopped by the United States steamship Cincinnati, and was warned not to go into Havana, but was told that she would be allowed to land at Bahia Honda. She then set for Bahia Honda, but on the next morning, when near that port, was captured by the United States steamship Dolphin.

Both the fishing vessels were brought by their captors into Key West. A libel for the condemnation of each vessel and her cargo as prize of war was filed. Each vessel was sold by auction (the Paquete Habana for the sum of $490 and the Lola for the sum of $800). There was no other evidence in the record of the value of either vessel or of her cargo.

Issue:

Whether or not the fishing smacks were subject to capture during the war with Spain.

Held:

No. By an ancient usage among civilized nations, beginning centuries ago, and gradually ripening into a rule of international law, coast fishing vessels, pursuing their vocation of catching and bringing in fresh fish, have been recognized as exempt, with their cargoes and crews, from capture as prize of war. (The case then discussed instances throughout history where fishing vessels were captured.)

It will be convenient to refer to some leading French treatises on international law as determined by the general consent of civilized nations.

'Enemy ships,' say Pistoye and Duverdy, in their Treatise on Maritime Prizes, published in 1855, 'are good prize. Not all, however; for it results from the unanimous accord of the maritime powers that an exception should be made in favor of coast fishermen. Such fishermen are respected by the enemy so long as they devote themselves exclusively to fishing.'

De Cussy, in his work on the Phases and Leading Cases of the Maritime Law of Nations, affirms in the clearest language the exemption from capture of fishing boats, saying, that 'in time of war the freedom of fishing is respected by belligerents; fishing boats are considered as neutral; in law, as in principle, they are not subject either to capture or to confiscation.

Ortolan, in the fourth edition of his Regles Internationales et Diplomatie de la Mer, after stating the general rule that the vessels and cargoes of subjects of the enemy are lawful prize, says: 'Nevertheless, custom admits an exception in favor of boats engaged in the coast fishery; these boats, as well as their crews, are free from capture and exempt from all hostilities. The coast-fishing industry is, in truth, wholly pacific, and of much less importance in regard to the national wealth that it may produce than maritime commerce or the great fisheries. Peaceful and wholly inoffensive, those who carry it on, may be called the harvesters of the territorial seas, since they confine themselves to gathering in the products thereof; they are for the most part poor families who seek in this calling hardly more than the means of gaining their livelihood.' Again, after observing that there are very few solemn public treaties which make mention of the immunity of fishing boats in time of war, he says: 'From another point of view the custom which sanctions this immunity is not so general that it can be considered as making an absolute international rule; but it has been so often put in practice, and, besides, it accords so well with the rule in use in wars on land, in regard to peasants and husbandmen, to whom coast fishermen may be likened, that it will doubtless continue to be followed in maritime wars to come. (A lot of opinions of other writers were also included which will not be mentioned in this digest)

This review of the precedents and authorities on the subject appears to us abundantly to demonstrate that at the present day, by the general consent of the civilized nations of the world, and independently of any express treaty or other public act, it is an established rule of international law, founded on considerations of humanity to a poor and industrious order of men, and of the mutual convenience of belligerent states, that coast fishing vessels, with their implements and supplies, cargoes and crews, unarmed and honestly pursuing their peaceful calling of catching and bringing in fresh fish, are exempt from capture as prize of war.

The exemption, of course, does not apply to coast fishermen or their vessels if employed for a warlike purpose, or in such a way as to give aid or information to the enemy; nor when military or naval operations create a necessity to which all private interests must give way.

Nor has the exemption been extended to ships or vessels employed on the high sea in taking whales or seals or cod or other fish which are not brought fresh to market, but are salted or otherwise cured and made a regular article of commerce.

This rule of international law is one which prize courts administering the law of nations are bound to take judicial notice of, and to give effect to, in the absence of any treaty or other public act of their own government in relation to the matter.

By the practice of all civilized nations, vessels employed only for the purposes of discovery or science are considered as exempt from the contingencies of war, and therefore not subject to capture. It has been usual for the government sending out such an expedition to give notice to other powers; but it is not essential.

To this subject in more than one aspect are singularly applicable the words uttered by Mr. Justice Strong, speaking for this court: 'Undoubtedly no single nation can change the law of the sea. The law is of universal obligation and no statute of one or two nations can create obligations for the world. Like all the laws of nations, it rests upon the common consent of civilized communities. It is of force, not because it was prescribed by any superior power, but because it has been generally accepted as a rule of conduct. Whatever may have been its origin, whether in the usages of navigation, or in the ordinances of maritime states, or in both, it has become the law of the sea only by the concurrent sanction of those nations who may be said to constitute the commercial world. Many of the usages which prevail, and which have the force of law, doubtless originated in the positive prescriptions of some single state, which were at first of limited effect, but which, when generally accepted, became of universal obligation.'

In the case, each vessel was of a moderate size, such as is not unusual in coast fishing smacks, and was regularly engaged in fishing on the coast of Cuba. The crew of each were few in number, had no interest in the vessel, and received, in return for their toil and enterprise, two thirds of her catch, the other third going to her owner by way of compensation for her use. Each vessel went out from Havana to her fishing ground, and was captured when returning along the coast of Cuba. The cargo of each consisted of fresh fish, caught by her crew from the sea, and kept alive on board. Although one of the vessels extended her fishing trip, we cannot doubt that each was engaged in the coast fishery, and not in a commercial adventure, within the rule of international law.

The case was adjudged that the capture was unlawful and without probable cause ordered that the proceeds of the sale of the vessel, together with the proceeds of any sale of her cargo, be restored to the claimant, with damages and costs.

C. M. Hoskins & Co. Inc. v Commissioner of Internal Revenue

Facts:

Hoskins, a domestic corporation engaged in the real estate business as broker, managing agents and administrators, filed its income tax return (ITR) showing a net income of P92,540.25 and a tax liability of P18,508 which it paid.

CIR disallowed 4 items of deductions in the ITR. Court of Tax Appeals upheld the disallowance of an item which was paid to Mr. C. Hoskins representing 50% of supervision fees earned and set aside the disallowance of the other 3 items.

Issue:

Whether or not the disallowance of the 4 items were proper.

Held:

NOT deductible.  It did not pass the test of reasonableness which is:

General rule, bonuses to employees made in good faith and as additional compensation for services actually rendered by the employees are deductible, provided such payments, when added to the salaries do not exceed the compensation for services rendered.

The conditions precedent to the deduction of bonuses to employees are:

·         Payment of bonuses is in fact compensation

·         Must be for personal services actually rendered

·         Bonuses when added to salaries are reasonable when measured by the amount and quality of services performed with relation to the business of the particular taxpayer.

There is no fixed test for determining the reasonableness of a given bonus as compensation. This depends upon many factors.

In the case, Hoskins fails to pass the test. CTA was correct in holding that the payment of the company to Mr. Hoskins of the sum P99,977.91 as 50% share of supervision fees received by the company was inordinately large and could not be treated as an ordinary and necessary expenses allowed for deduction.

China Banking Corporation v CA

Facts:

China Banking Corporation made a 53% equity investment (P16,227,851.80) in the First CBC Capital – a Hongkong subsidiary engaged in financing and investment with “deposit-taking” function.

It was shown that CBC has become insolvent so China Banking wrote-off its investment as worthless and treated it as a bad debt or as an ordinary loss deductible from its gross income.

CIR disallowed the deduction on the ground that the investment should not be classified as being worthless. It also held that assuming that the securities were worthless, then they should be classified as a capital loss and not as a bad debt since there was no indebtedness between China Banking and CBC.

Issue:

Whether or not the investment should be classified as a capital loss.

Held:

Yes.  Section 29.d.4.B of the NIRC contains provisions on securities becoming worthless. It conveys that capital loss normally requires the concurrence of 2 conditions:

a.       there is a sale or exchange

b.      the thing sold or exchanges is a capital asset.

When securities become worthless, there is strictly no sale or exchange but the law deems it to be a loss. These are allowed to be deducted only to the extent of capital gains and not from any other income of the taxpayer. A similar kind of treatment is given by the NIRC on the retirement of certificates of indebtedness with interest coupons or in registered form, short sales and options to buy or sell property where no sale or exchange strictly exists. In these cases, The NIRC dispenses with the standard requirements.

There is ordinary loss when the property sold is not a capital asset.

In the case, CBC as an investee corporation, is a subsidiary corporation of China Banking whose shares in CBC are not intended for purchase or sale but as an investment. An equity investment is a capital asset of the investor. Unquestionably, any loss is a capital loss to the investor.

--

Additional notes:

*The loss cannot be deductible as bad debt since the shares of stock do not constitute a loan extended by it to its subsidiary or a debt subject to obligatory repayment by the latter.