1 May 2016
With some reluctance, Ric lent his kumpare (male friend) his all-stainless jeep overnight. His kumpare parked the jeep at the side street fronting their house for the night. While kumpare slept, a very strong storm landed and knocked down a tree that fell on the jeep, wrecking the hood and the engine underneath. Ric was shocked upon personally receiving the news from his kumpare but was comforted by the thought that he could compel his kumpare to pay. After all, the jeep would have been safely tucked in Ric’s garage had his kumpare not borrowed it. Ric suffered an aftershock when his kumpare refused to pay. After consulting a lawyer-friend, he got another aftershock upon learning that his kumpare could not be liable because the damage was caused by an act of God.
Under Philippine law, the kumpare is considered a possessor in good faith, as he used the vehicle with the permission of the owner. The way for him to be liable is if he commits negligence in the use of the car. While kumpare does not have a parking garage, street parking is not prohibited in that area, and is otherwise safe to do for anyone. The healthy tree falling on the jeep could not have been foreseen. With no one at fault, the owner bears the loss unless the property is insured and acts of God are covered in the policy.
The rule is rather complex when the type of property lot fortuitously involves business records, especially in the midst of tax examination. For example, upon receiving a tax assessment and before you could file a protest, a super storm brought tremendous flash floods that destroyed all of the company’s physical accounting records. Can the Bureau of Internal Revenue (BIR) sustain the assessment because you have no documents to support your protest? The answer is in two parts. First, if the BIR was able to dutifully conduct an examination, then there is a presumption of validity of the assessment, and the burden is on the taxpayer to prove otherwise. The burden stays with the taxpayer even if records are lost without his fault, but the type of evidence allowed will be altered. This is a case where the BIR cannot be too picky and must accept secondary evidence, even reconstructed evidence.
Taxpayers cannot however necessarily take advantage of lost documents without their fault. In a US tax case, the federal tax office lost some original corporate documents submitted by a taxpayer (so this happens not only in the Philippines). The taxpayer claimed the transaction could not be assessed now because the documents to support its investment write-off was lost by the tax office, and without the taxpayer’s fault. The court looked at other evidence, such as the board resolutions of the company. Since no board resolution on this write-off was made, nor a merely fleeting reference to this write-off decision was made by the board, the US tax court sustained the assessment.
What if the taxpayer lost all accounting records and documents through an act of God before BIR examination? Can the BIR then use the financial statements filed with the SEC as evidence, disallow 50 percent of the expenses and call it a fair deal because the taxpayer cannot present any document anyway? In this case, the assessment cannot enjoy a presumption of validity because there was no actual examination yet. The BIR is not prevented though from issuing assessments using other evidence already in the possession of the BIR, such as data about the company’s returns and sales made to the company by third parties.
If the BIR pursues such assessment, the taxpayer can defend itself with very loose alternative evidence, including oral testimonies and reasonable estimates. This is in line with the popularized US tax case that produced the Cohan rule, where the taxpayer, under special circumstances, was allowed to prove that he incurred expenses even if the primary documents to prove them were lost. In that case, the receipts were missing, but expenses were allowed on reasonableness and fairness. It is with more reason that the principle should be applied when documents are lost fortuitously due to natural disaster.
One damage to property that does not merely result to losses or a mess-up of accounting and tax records is one serious enough to take lives. I am talking about damage to buildings caused by violent earthquake. It is quite timely to be reminded of the leading Supreme Court case that arose out of the collapse of the popular Ruby Tower in Binondo during the 1968 earthquake that registered a 7.6 intensity at the epicenter in Quezon. A construction company was sued because the building they had just constructed at that time stooped down on its front side, on the verge of collapse. Despite a violent earthquake being clearly an act of God, the company was made to pay up due to design issues and not implementing the proper specifications (columns materially lacked reinforcement, contraband construction joints, over-spacing of spiral hoops, etc.). The formula for liability simply put is: acts of God + acts of man = fault of man.
What is also interesting evidence considered by the court then, which can be key especially today, is the performance of the other buildings in the area. A Supreme Court justice eloquently stated: “We are not convinced…that from the thousands of structures in Manila, God singled out the blameless PBA building in Intramuros and around six or seven other buildings in various parts of the city for collapse.”
It is worth noting, based on more current events, that when the 8.9 intensity (at the epicenter) earthquake hit Japan that caused the incredible tsunami, it was reported that zero buildings collapsed in badly shaken city of Tokyo. Building codes continue to be tightened in Japan, and earthquake technology continue to be devolved. Today, a Japanese company is looking at a design where the building stands partially on water with rubber bearings to cut the earthquake impact in half. I mention this because Japan, being the most prone to strong earthquakes is at number one spot, while the Philippines is reportedly at number 5.
We have no choice but to emulate what Japan is doing to save lives, as Japan is our seatmate in the “ring of fire.” Our own building codes and its implementation must continuously be tightened. Even just for once, and on this area, we need to be corruption-free. The best incentive for any government official or entrepreneur involved should be to imagine it is their children, their family in that building. When a violent quake and intensified aftershocks end, you do not want your children and your family under the rubble. You would want every above-level thing humanly possible to be done, to keep that building standing. We can survive violent acts of God, but we begin by killing corrupt acts of man.
Alexander B. Cabrera is the chairman and senior partner of Isla Lipana & Co./PwC Philippines . He also chairs the Educated Marginalized Entrepreneurs Resource Generation (EMERGE) program of the Management Association of the Philippines (MAP). Email your comments and questions to aseasyasABC@ph.pwc.com. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.