Facts: Goodrich claimed for deductions based upon receipts issued, not by entities in which the alleged expenses had been
incurred, but by the officers of Goodrich who allegedly paid for them.
The Commissioner disallowed deductions in the amount of P50, 455.41 (for the year 1951) for bad debts and P30, 188.88 (for year
1952) for representation expenses.
Goodrich appealed from the said assessment to the Court of Tax Appeals (CTA) which allowed the deduction for bad debts but
disallowing the alleged representation expenses. CTA amended its decision allowing the deduction of representation expenses.
The Government appealed to the SC. The alleged bad debts are the following:
1. Portillo's Auto Seat Cover
630.31
2. Visayan Rapid Transit
17,810.26
3. Bataan Auto Seat Cover
373.13
4. Tres Amigos Auto Supply
1,370.31
5. P. C. Teodorolawphil
650.00
6. Ordnance Service, P.A.
386.42
7. Ordnance Service, P.C.
796.26
8. National land Settlement Administration
3,020.76
9. National Coconut Corporation
644.74
10. Interior Caltex Service Station
1,505.87
11. San Juan Auto Supply
4,530.64
12. P A C S A
45.36
13. Philippine Naval Patrol
14.18
14. Surplus Property Commission
277.68
15. Alverez Auto Supply
285.62
16. Lion Shoe Store
1,686.93
17. Ruiz Highway Transit
2,350.00
18. Esquire Auto Seat Cover
3,536.94
TOTAL
50, 455.41*
Issue: Whether or not these bad debts are properly deducted.
Held: The claim for deduction for debt numbers 1-10 is REJECTED. Goodrich has not established either that the debts are actually
worthless or that it had reasonable grounds to believe them to be so.
NIRC permits the deduction of debts actually ascertained to be worthless within the taxable year obviously to prevent arbitrary
action by the taxpayer, to unduly avoid tax liability.
The requirement of ascertainment of worthlessness require proof of 2 facts:
1.
That the taxpayer did in fact ascertain the debt to be worthless
2.
That he did so, in good faith.
Good faith on the part of the taxpayer is not enough. He must also how that he had reasonably investigated the relevant facts and
had drawn a reasonable inference from the information obtained by him. In the case, Goodrich has not adequately made such
showing.
The payments made, after being characterized as bad debts, merely stresses the undue haste with which the same had been
written off. Goodrich has not proven that said debts were worthless. There was no evidence that the debtors cannot pay them.
SC held that the claim for bad debts are allowed but only up to P22, 627.35. (Those from Debts 11-18)
Upon a petition for review, the CTA modified the findings of the Commissioner by reducing the deficiency tax assessment on the
basis that three of the sixteen supposed bad debts could be allowed as deductions. The CA later on agreed with the CTA.
Issue: WoN the Phil Refining Company is liable for a deficiency tax as a result of disallowance of bad debts as deductible items?
Held: The SC upheld the ruling of the CA which it found to be in accordance with the SC's ruling in Collector v Goodrich. It held the
petitioner failed to substantiate the worthlessness of the 13 debts which it claimed as deductions. As per the ruling in Collector
v Goodrich, to qualify as a bad debt, a TP must show: 1. that there is a valid and subsisting debt;
2. that the debt must be actually ascertained to be worthless and uncollectible during the taxable year;
3. the debt must be charged off during the taxable year; and
4. the debt must arise from the business or trade of the TP.
In addition, the Court said, before a debt can be considered worthless, the TP must also show that it is indeed uncollectible even
in the future. Furthermore, the TP must undertake several steps to prove that he exerted diligent efforts to collect the debt:
1. sending statements of accounts to the debtors; 2. sending of collection letters; 3. giving the account to a lawyer for collection;
and 4. filing a collection case in court. In the case at bar, the petitioner miserably failed to show any of the foregoing.
The only piece of evidence it offered to show the worthlessness of the debts was the testimony of the company's financial adviser
or accountant. The Court found that this lacked the required probity to establish that the accounts it claimed as bad debts were
indeed worthless. Apart from such testimony, the petitioner failed to introduce even a single iota of evidence to bolster its claim
of worthlessness. (NOTE: In the rest of the case, the Court presents the allegation of the petitioner as to why it could not collect
on any of the 13 debts followed by a statement how the petitioner failed to introduce evidence to substantiate such allegation.)
ROXAS V. CTA
Facts: Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects, transmitted to their grandchildren by hereditary succession
several properties. To manage the above-mentioned properties, said children, namely, Antonio Roxas, Eduardo Roxas and Jose
Roxas, formed a partnership called Roxas y Compania. At the conclusion of the WW2, the tenants who have all been tilling the
lands in Nasugbu for generations expressed their desire to purchase from Roxas y Cia. the parcels which they actually occupied.
For its part, the Government, in consonance with the constitutional mandate to acquire big landed estates and apportion them
among landless tenants-farmers, persuaded the Roxas brothers to part with their landholdings. Conferences were held with the
farmers in the early part of 1948 and finally the Roxas brothers agreed to sell 13,500 hectares to the Government for distribution
to actual occupants for a price of P2,079,048.47 plus P300,000.00 for survey and subdivision expenses. It turned out however that
the Government did not have funds to cover the purchase price, and so a special arrangement was made for the Rehabilitation
Finance Corporation to advance to Roxas y Cia. The amount of P1,500,000.00 as loan. Collateral for such loan were the lands
proposed to be sold to the farmers. Under the arrangement, Roxas y Cia. allowed the farmers to buy the lands for the same price
but by installment, and contracted with the Rehabilitation Finance Corporation to pay its loan from the proceeds of the yearly
amortizations paid by the farmers. The CIR demanded from Roxas y Cia the payment of deficiency income taxes resulting from the
inclusion as income of Roxas y Cia. of the unreported 50% of the net profits for 1953 and 1955 derived from the sale of the Nasugbu
farm lands to the tenants, and the disallowance of deductions from gross income of various business expenses and contributions
claimed by Roxas y Cia. and the Roxas brothers. For the reason that Roxas y Cia. subdivided its Nasugbu farm lands and sold them
to the farmers on installment, the Commissioner considered the partnership as engaged in the business of real estate, hence, 100%
of the profits derived therefrom was taxed. The Roxas brothers protested the assessment but inasmuch as said protest was denied,
they instituted an appeal in the CTA which sustained the assessment. Hence, this appeal.
Issue: Is Roxas y Cia. liable for the payment of deficiency income for the sale of Nasugbu farmlands?
Held: NO. The proposition of the CIR cannot be favorably accepted in this isolated transaction with its peculiar circumstances in
spite of the fact that there were hundreds of vendees. Although they paid for their respective holdings in installment for a period
of 10 years, it would nevertheless not make the vendor Roxas y Cia. a real estate dealer during the 10-year amortization period. It
should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled them for generations was not only
in consonance with, but more in obedience to the request and pursuant to the policy of our Government to allocate lands to the
landless. It was the bounden duty of the Government to pay the agreed compensation after it had persuaded Roxas y Cia. to sell
its haciendas, and to subsequently subdivide them among the farmers at very reasonable terms and prices. However, the
Government could not comply with its duty for lack of funds. Obligingly, Roxas y Cia. shouldered the Government's burden, went
out of its way and sold lands directly to the farmers in the same way and under the same terms as would have been the case had
the Government done it itself. For this magnanimous act, the municipal council of Nasugbu passed a resolution expressing the
people's gratitude.
In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale in question. Hence, pursuant to Section 34 of the Tax
Code the lands sold to the farmers are capital assets, and the gain derived from the sale thereof is capital gain, taxable only to the
extent of 50%.