CIR vs.

Spouses Lednicky
FACTS:
V. E. Lednicky and Maria Valero Lednicky, are husband and wife, both American citizens residing in the Philippines,
and hae deried all their income from Philippine sources for the ta!able years under "uestion. #$% L&'()(*+ ,n compliance
with local law, the spouses, on )- March './-, filed their income ta! return for './*, reporting therein a gross income of
P',0'-,)(-.*/ and a net income of P-11,(0..22 on which the amount of P1'-,1./.2' was assessed after deducting
P2,(0/./. as withholding ta!.
Pursuant to the 3,%4s assessment notice, the spouses paid the total amount of P1)*,)2-.2', inclusie of the withheld
ta!es. ,n './., the spouses filed an amended income ta! return for './*, which consists in a claimed deduction of
P)0/,.1..)2 paid in './* to the 56 goernment as federal income ta! for './*. 6imultaneously with the filing of the
amended return, the spouses re"uested the refund of P''),21-..0.
7hen the 3,% failed to answer the claim for refund, the spouses filed their petition with the 8a! 3ourt.
9n )( :ebruary './*, the spouses filed their domestic income ta! return for './/, reporting a gross
income of P',--',')2.*1 and a net income of P',0/),//0.*-.
9n '. April './*, they filed an amended income ta! return, the amendment being a lesser net income of
P',0'),//2./', and, on the basis of this amended return, they paid P/-0,)/).00, inclusie of withholding ta!es.
After audit, the 3ommissioner determined a deficiency of P'*,''*.00, which amount the spouses then paid.
;ack in './/, howeer, the spouses filed with the 56 ,nternal %eenue Agent in Manila their :ederal income ta!
return for the years '.2-, './', './), './1 and './2 on income from Philippine sources on a cash basis. Payment of these
federal income ta!es, including penalties and delin"uency interest in the amount of <)*2,/((.(), were made in '.// to the
56 =irector of ,nternal %eenue, ;altimore, Maryland, through the >ational 3ity ;ank of >ew ?ork, Manila ;ranch. E!change
and bank charges in remitting payment totaled P2,'21..'. 9n '' August './( the said respondents amended their
Philippines income ta! return for '.// to including 56 :ederal income ta!es, interest accruing up to '/ May './/, and
e!change and bank charges, totaling P/'*,12/.'/ and therewith filed a claim for refund of the sum of P'**,1(2.00, which
was later reduced to P'/0,)*..00. 8he facts are similar to aboe cases but refer to the spouses4 income ta! returns for
'./-,filed on )( :ebruary './(, and for which the spouses paid a total sum of P'.*,-...*/. ,n './., they filed an amended
return for './-, claiming deduction of P'.0,-//.(0, representing ta!es paid to the 56 $oernment on income deried wholly
from Philippine sources. 9n the strength thereof, spouses seek refund of
P.0,/)0.-/ as oerpayment @38A 3ase -(1A.
8he 8a! 3ourt decide for the spouses. 8he 3ommissioner thus appealed to the 6upreme 3ourt.
ISSUES:
'. May a 56 citizen residing in the Philippines @resident alienA who deries income wholly from sources within the
Philippines deduct from his gross income the income ta!es he paid to the 56 goernment for the said ta!able yearB
). ,s there double ta!ationB
HELD:
'. >9. A resident alien who deries income wholly from sources within the Philippines may not deduct from his
gross income the income ta!es he paid to the 56 goernment for said ta!able year.
8he purpose of the law is to preent the ta!payer from claiming twice the benefits of his payment of
foreign ta!es, by deduction from gross income @subs. c&'A and by ta! credit @subs. c&1A. 8his danger of double
credit certainly can not e!ist if the ta!payer can not claim benefit under either of these headings at his option,
so that he must be entitled to a ta! credit @the spouses admittedly are not so entitled because all their income is
deried from Philippine sourcesA, or the option to deduct from gross income disappears altogether.
). >9. =ouble ta!ation becomes obno!ious only where the ta!payer is ta!ed twice for the benefit of the
same goernmental entity. ,n the present case, while the ta!payers would hae to pay two ta!es on the same
income, the Philippine goernment only receies the proceeds of one ta!. As between the Philippines, where the
income was earned and where the ta!payer is domiciled, and the 5nited 6tates, where that income was not
earned and where the ta!payer did not reside, it is indisputable that Custice and e"uity demand that the ta! on
the income should accrue to the benefit of the Philippines.
Any relief from the alleged double ta!ation should
come from the 5nited 6tates, and not from the Philippines, since the former4s right to burden the ta!payer is
solely predicated on his citizenship, without contributing to the production of the wealth that is being ta!ed. 8he
fundamental doctrine of income ta!ation proides that the right of a goernment to ta! income
emanates from its partnership in the production of income, by proiding the protection, resources, incenties,
and proper climate for such production.
8he interpretation gien by the spouses to the reenue law proision in "uestion operates, in its
application, to place a resident alien with only domestic sources of income in an e"ual, 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.
8o allow an alien resident to deduct from his gross income whateer ta!es he pays to his own
goernment amounts to conferring on the latter power to reduce the ta! income of the Philippine goernment
simply by increasing the ta! rates on the alien resident. Eerytime the rate of ta!ation imposed upon an alien
resident is increased by his own goernment, his deduction from Philippine ta!es would correspondingly
increase, and the proceeds for the Philippines diminished, thereby subordinating our own ta!es to those leied
by a foreign goernment. 6uch a result is incompatible with the status of the Philippines as an independent
and soereign state.