CIVPRO DIGESTS: PP 16-29 (of syllabus)

Amos, Migs, Jauro, Anna, Dars, Stef, Clar, Army, KT, Gabo, Siocs 2D

Optional Treatment of Interest Expense PALANCA V CIR (GR L-16626) While the distinction between "taxes" and "debts" was recognized in this jurisdiction, the variance in their legal conception does not extend to the interests paid on them, at least insofar as Section 30 (b) (1) of the National Internal Revenue Code is concerned. Thus, under the law, for interest to be deductible, it must be shown that there be an indebtedness, that there should be interest upon it, and that what is claimed as an interest deduction should have been paid or accrued within the year. FACTS: y July 1950, Don Carlos Palanca, Sr., donated to his son Carlos Jr., shares of stock in La Tondea, Inc. amounting to 12,500 shares. Carlos Jr. failed to file a return on the donation within the statutory period so Carlos Jr. was assessed P97,691.23 (gift tax), P24,442.81 (25% surcharge), P47,868.70 (interest), which he paid on June 22, 1955. y March 1,1956, Carlos Jr. filed with BIR his ITR for 1955 claiming a deduction for interest of P9,706.45 and reporting a taxable income of P65,982.12. He was assessed P21,052.01 as income tax. November 1956, Carlos Jr. filed an amended return for 1955, claiming an additional deduction of P47,868.70 (allegedly the interest paid on the donees gift tax based on Sec.30(b)(1) of the Tax Code) so taxable income is P18,113.42 (not P65,982.12) and tax due thereon in sum of P3,167.00. He claimed for a refund of P17,885.01 (P21,052.01 P3,167.00) BIR denied. Carlos Jr. reiterated claim for refund, BIR denied BIR considered the donation by Carlos Sr. as a transfer in contemplation of death so Carlos Jr. was assessed P191,591.62 as estate and inheritance taxes. Carlos paid P17,002.74 on June 22, 1955 as gift tax (includes interest and surcharge) which was applied to his estate and y

inheritance tax liability. Petitioner paid P60,581.80 as interest for delinquency. August 1958, Carlos Jr. filed again an amended ITR for 1955 claiming the following: As interest deductions: P9,706.45 (as in the original ITR) + P60,581.80 (interest on the estate and inheritance taxes); Net Taxable income: P5,400.32; Income tax due: P428.00; claimed a refund of P20,624.01 (P21,052.01 P428) Even before BIR ruled on his claim, Carlos Jr. filed petition for review before CTA CTA: BIR should refund Carlos P20,624.01

y ISSUE:

WON there is a difference between indebtedness and taxes to determine the deductible interest HELD: NO. The CIR seeks the reversal of the Court of Tax Appeal's ruling on the aforementioned petition for review. Specifically, he takes issue with the said court's determination that the amount paid by respondent Palanca for interest on his delinquent estate and inheritance tax is deductible from the gross income for that year under Section 30 (b) (1) of the Revenue Code. CIR urges that a tax is not an indebtedness. He adopts the view that "debts are due to the government in its corporate capacity, while taxes are due to the government in its sovereign capacity. A debt is a sum of money due upon contract express or implied or one which is evidenced by a judgment. Taxes are imposts levied by government for its support or some special purpose which the government has recognized." In view of the distinction, then, the Commissioner submits that the deductibility of "interest on indebtedness" from a person's income tax under Section 30(b) (1) cannot extend to "interest on taxes." While "taxes" and "debts" are distinguishable legal concepts, in certain cases as in the suit at bar, on account of their nature, the distinction becomes inconsequential. The term "debt" is properly

CIVPRO DIGESTS: PP 16-29 (of syllabus)

Amos, Migs, Jauro, Anna, Dars, Stef, Clar, Army, KT, Gabo, Siocs 2D

used in a comprehensive sense as embracing not merely money due by contract, but whatever one is bound to render to another, either for contract or the requirements of the law. (Camden vs. Fink Coule and Coke Co., 61 ALR 584). Where statutes impose a personal liability for a tax, the tax becomes at least in a broad sense, a debt. In our jurisdiction, the rule is settled that although taxes already due have not, strictly speaking, the same concept as debts, they are, however obligations that may be considered as such. (Sambrano vs. Court of Tax Appeals, G.R. no. L-8652, March 30, 1957). In a more recent case Commissioner of Internal Revenue vs. Prieto, G.R. No. L-13912, September 30, 1960, we explicitly announced that while the distinction between "taxes" and "debts" was recognized in this jurisdiction, the variance in their legal conception does not extend to the interests paid on them, at least insofar as Section 30 (b) (1) of the National Internal Revenue Code is concerned. Thus, under the law, for interest to be deductible, it must be shown that there be an indebtedness, that there should be interest upon it, and that what is claimed as an interest deduction should have been paid or accrued within the year. It is here conceded that the interest paid by respondent was in consequence of the late payment of her donor's tax, and the same was paid within the year it is sought to be deducted. In both this and the Prieto case, the taxpayer sought the allowance as deductible items from the gross income of the amounts paid by them as interests on delinquent tax liabilities. Of course, what was involved in the cited case was the donor's tax while the present suit pertains to interest paid on the estate and inheritance tax. This difference, however, submits no appreciable consequence to the rationale of this Court's previous determination that interests on taxes should be considered as interests on indebtedness within the

meaning of Section 30(b) (1) of the Tax Code. The interpretation we have placed upon the said section was predicated on the congressional intent, not on the nature of the tax for which the interest was paid.

CIVPRO DIGESTS: PP 16-29 (of syllabus)

Amos, Migs, Jauro, Anna, Dars, Stef, Clar, Army, KT, Gabo, Siocs 2D

Depreciation ZAMORA VS. COLLECTOR Since promotion expenses constitute one of the deductions in conducting a business, same must testify these requirements. Claim for the deduction of promotion expenses or entertainment expenses must also be substantiated or supported by record showing in detail the amount and nature of the expenses incurred. FACTS: y Mariano Zamora, owner of the Bay View Hotel and Farmacia Zamora, Manila, filed his income tax returns. The Collector of Internal Revenue found that the promotion expenses incurred by his wife for the promotion of the Bay View Hotel and Farmacia Zamora were not allowable deductions.

substantiated or supported by record showing in detail the amount and nature of the expenses incurred. Considering, that the application of Mrs. Zamora for dollar allocation shows that she went abroad on a combined medical and business trip, not all of her expenses came under the category of ordinary and necessary expenses; part thereof constituted her personal expenses. There having been no means by which to ascertain which expense was incurred by her in connection with the business of Mariano Zamora and which was incurred for her personal benefit, the Collector and the CTA in their decisions, considered 50% of the said amount of P20,957.00 as business expenses and the other 50%, as her personal expenses. We hold that said allocation is very fair to Mariano Zamora, there having been no receipt whatsoever, submitted to explain the alleged business expenses, or proof of the connection which said expenses had to the business or the reasonableness of the said amount of P20,957.00. While in situations like the present, absolute certainty is usually no possible, the CTA should make as close an approximation as it can, bearing heavily, if it chooses, upon the taxpayer whose inexactness is of his own making. In the case of Visayan Cebu Terminal Co., Inc. v. Collector of Int. Rev., G.R. No. L-12798, May 30, 1960, it was declared that representation expenses fall under the category of business expenses which are allowable deductions from gross income, if they meet the conditions prescribed by law, particularly section 30 (a) [1], of the Tax Code; that to be deductible, said business expenses must be ordinary and necessary expenses paid or incurred in carrying on any trade or business; that those expenses must also meet the further test of reasonableness in amount; that when some of the representation expenses claimed by the taxpayer were evidenced by vouchers or chits, but others were without vouchers or chits, documents or supporting papers; that there is no more than oral proof to the effect that payments have been made for representation expenses allegedly made by the taxpayer and about the general nature of such alleged expenses; that accordingly, it is not possible to determine the actual amount covered by supporting papers and the amount without supporting papers, the court should determine

Mariano Zamora contends that the whole amount of the promotion expenses in his income tax returns, should be allowed and not merely one-half of it, on the ground that, while not all the itemized expenses are supported by receipts, the absence of some supporting receipts has been sufficiently and satisfactorily established.

ISSUE: In the absence of receipts, WON to allow as deduction all or merely one-half of the promotion expenses of Mrs. Zamora claimed in Mariano Zamora's income tax returns HELD: One-half only. Section 30, of the Tax Code, provides that in computing net income, there shall be allowed as deductions all the ordinary and necessary expenses paid or incurred during the taxable year, in carrying on any trade or business. Since promotion expenses constitute one of the deductions in conducting a business, same must testify these requirements. Claim for the deduction of promotion expenses or entertainment expenses must also be

CIVPRO DIGESTS: PP 16-29 (of syllabus)

Amos, Migs, Jauro, Anna, Dars, Stef, Clar, Army, KT, Gabo, Siocs 2D

from all available data, the amount properly deductible as representation expenses. In view hereof, We are of the opinion that the CTA, did not commit error in allowing as promotion expenses of Mrs. Zamora claimed in Mariano Zamora's 1951 income tax returns, merely one-half or P10,478.50.