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DEDUCTIONS AND EXEMPTIONS; DEDUCTIONS IN GENERAL and should not, therefore, be considered as business expense but as capital expenditure,

e considered as business expense but as capital expenditure, which

ZAMORA v. COLLECTOR [G.R. No. L-15290. May 31, 1963.] normally should be spread out over a reasonable period of time.
FACTS: 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 C.M. HOSKINS v. CIR G.R. No. L-28383. June 22, 1976.]
for the promotion of the Bay View Hotel and Farmacia Zamora were not allowable deductions. FACTS: Petitioner-appellant, a domestic corporation engaged in the development and management of
Mariano Zamora contends that the whole amount of the promotion expenses in his income tax returns, subdivisions, sale of subdivision lots and collection of installments due for a fee which the real estate
should be allowed and not merely one-half of it, on the ground that, while not all the itemized expenses owners pay as compensation for each of the services rendered, failed to pay the real estate broker's tax
are supported by receipts, the absence of some on its income derived from the supervision and collection fees. Consequently, the Commissioner of
supporting receipts has been sufficiently and satisfactorily established. Internal Revenue demanded the payment of the percentage tax plus surcharge, contending that said
ISSUE: In the absence of receipts, WON to allow as deduction all or merely one-half of the promotion income is subject to the real estate broker's percentage tax. On the other hand, petitioner-appellant
expenses of Mrs. Zamora claimed in Mariano Zamora's income tax returns claimed that the supervision and collection fees do not form part of its taxable gross compensation.
HELD: One-half only. Claims for the deduction of promotion expenses r entertainment expenses must ISSUE: WON the supervision and collection fees received by a real estate broker are deductible from its
also be substantiated or supported by record showing in detail the amount and nature of the expense gross compensation
incurred. Considering that the application of Mrs. Zamora for dollar allocation shows that she went HELD: No. With respect to the collection fees, the services rendered by Hoskins in collecting the
abroad on a combined medical and business trip, not all of her expenses came under the category of amounts due on the sales of lots on the installment plan are incidental to its brokerage service in selling
ordinary and necessary expenses; part thereof constituted her personal expenses. There having been no the lots. If the broker's commissions on the cash sales of lots are subject to the brokerage percentage tax,
means by which to ascertain which expense was its commissions on installment sales should likewise be taxable. As to the supervision fees for the
incurred by her in connection with the business of Mariano Zamora and which was incurred for her development and management of the subdivisions, which fees were paid out of the proceeds of the
personal benefit, the Collector and the CTA in their decisions, considered 50% of the said amount as sales of the subdivision lots, they, too, are subject to the
business expense and the other 50%, as her personal expenses. While in situations like the present, real estate broker's percentage tax. The development, management and supervision services were
absolute certainty is usually not possible, the CTA should make as close an approximate as it can, necessary to bring about the sales of the lots and were inseparably linked thereto. Hence, there is basis
bearing heavily, if it chooses, upon the taxpayer whose inexactness is of his own making. for holding that the operation of subdivisions is really incidental to the main business of the broker,
which is the sale of the lots on commission.
ESSO STANDARD v. CIR [G.R. Nos. 28508-9. July 7, 1989.]
FACTS: Petitioner ESSO claimed as ordinary and necessary expenses in the same return the margin GANCAYCO v. COLLECTOR [G.R. No. L-13325. April 20, 1961.]
fees it paid to the Central Bank on its profit remittances to its New York head office. FACTS: Petitioner Santiago Gancayco seeks the review of a decision of the Court of Tax Appeals,
ISSUE: WON the margin fees were deductible from gross income either as a tax or as an ordinary and requiring him to pay deficiency income tax. The question whether the sum is due from Gancayco as
necessary business expense deficiency income tax hinges on the validity of his claim for deduction of two (2)
HELD: Neither. The margin fees were imposed by the State in the exercise of its police power and not items, namely: (a) for farming expenses; and (b) for representation expenses.
the power of taxation. Neither are they necessary and ordinary business expenses. To be deductible as a ISSUE: WON the two claimed deductions are allowable
business expense, the expense must be paid or incurred in carrying on a trade or business. The fees HELD: No. In computing net income, no deduction shall be allowed in respect of any amount paid out
were paid for the remittance by ESSO as part of the profits to the head office in the United States, which for new buildings or for permanent improvements, or betterments made to increase the value of any
is already another distinct and separate income taxpayer. Such remittance was an expenditure property or estate. The cost of farm machinery, equipment and farm building represents a capital
necessary and proper for the conduct of its corporate affairs. investment and is not an allowable deduction as an item of expense. Hence, the farming expenses
allegedly incurred for clearing and developing the farm which were necessary to place it in a
productive state, were not an ordinary expense but a capital
CIR v. GENERAL FOODS [G.R. No. 143672. April 24, 2003.] expenditure. Accordingly, they are not deductible. As for Gancayco's claim for representation expenses,
FACTS: In its income tax return, respondent corporation claimed as deduction, among other business a fraction was disallowed. Such disallowance is justified by the record, for, apart from the absence of
expenses, the amount for media advertising for ‘Tang,’ one of its products. receipts, invoices or vouchers of the expenditures, petitioner could not specify the items constituting
ISSUE: WON the subject media advertising expense for ‘Tang’ incurred by respondent was an the same, or when or on whom or on what they were incurred.
ordinary and necessary expense fully deductible under the NIRC
HELD: Not deductible. Deductions for income tax purposes partake of the nature of tax exemptions; WESTERN MINOLCO v. CIR [G.R. No. L-61632. August 16, 1983.]
hence, must be strictly construed. To be deductible from gross income, the subject advertising expense FACTS: Petitioner is a domestic corporation engaged in mining, particularly copper concentrates for
must be ordinary and necessary. There being no hard and fast rule on the export mined from mineral lands. It was granted by the Securities and Exchange Commission, under
reasonableness of an advertising expense, the right to a deduction depends on a number of factors such Certificate of Renewal No. R-1056, authority to borrow money and issue
as but not limited to: the type and size of business in which the taxpayer is engaged; the volume and commercial papers. Pursuant to this authority, the petitioner borrowed funds from several financial
amount of its net earnings; the nature of the expenditure itself; the institutions and paid the corresponding 35% transaction tax due thereon. Petitioner applied for a
intention of the taxpayer and the general economic conditions. The amount claimed as media refund alleging that it was not liable to pay the 35% transaction tax.
advertising expense for ‘Tang’ alone was almost one-half of its total claim for marketing expenses. ISSUE: WON the 35% transaction tax is a business tax that constitutes an allowable deduction from
Furthermore, it was almost double the amount of respondent corporation's general and administrative gross income
expenses. The subject expense for the advertisement of a single product is inordinately large. Said
venture of respondent to protect its brand franchise was tantamount to efforts to establish a reputation,
HELD: No. The 35% transaction tax is imposed on interest income from commercial papers issued in National Internal Revenue Code. The CIR stood by its initial finding that Arnoldus Carpentry Shop,
the primary money market. Being a tax on interest, it is a tax on income. The petitioner who borrowed Inc. is a contractor, not a manufacturer. Arnoldus Carpentry Shop, Inc. appealed to the Court of Tax
funds from several financial institutions by issuing commercial papers merely Appeals. The CTA held that Arnoldus Carpentry Shop, Inc. is a manufacturer, effectively reversing the
withheld the 35% transaction tax before paying to the financial institutions the interests earned by them decision of the CIR.
and later remitted the same to the respondent Commissioner of Internal Revenue. Whatever collecting Issue: Whether Arnoldus Carpentry Shop, Inc. is a manufacturer or contractor. If found a
procedure is adopted does not change the nature of the tax. Furthermore, whether or not certain taxes manufacturer, the company is, therefore, not liable for the amount assessed as deficiency contractor’s
are on income is not necessarily determined by their deductibility or non-deductibility from ross tax.
income. Income in the form of dividends, capital gains on real property, shares of stock, and interests Held: Arnoldus Carpentry Shop, Inc. is a manufacturer as defined in the Tax Code and not a contractor.
on savings in bank accounts are incomes, yet they are not included in the gross income when income A contractor under Sec 205 (16) [now Sec 170 (q)] of the Tax Code is one whose activity consists
taxes are paid because these are subject to final withholding taxes. essentially of the sale of all kinds of services. The business of Arnoldus Carpentry Shop, Inc. does not
fall under this definition. The company sells goods which it keeps in stock and not services. On the
COMMISSIONER OF CUSTOMS VS PHILIPPINE ACETYLENE other hand, a manufacturer, under Sec 187 (x) [now Sec 157 (x)] of the Tax Code, is one who by physical
COMPANY or chemical process alters the exterior texture or
Facts: Philippine Acetylene Company is engaged in the manufacture of oxygen, acetylene and nitrogen, form or inner substance of any raw material or manufactured or partially manufactured product. The
and packaging of liquefied petroleum gas in cylinders and tanks. It imported from the United States a term manufacturer had been considered in its ordinary and general usage, and Arnoldus Carpentry
custombuilt liquefied petroleum gas tank. For the said importation, the company Shop, Inc. falls under this definition. The Court affirmed the decision of the CTA holding that Arnoldus
was assessed a special import tax amounting to PhP 3,683.00. The company paid the tax under protest. Carpentry Shop, Inc. is a manufacturer. The company is entitled to the
Philippine Acetylene Company argues that it is exempt from the payment of the special import tax. It tax exemption under Sec 202 (d) and (e) [now Sec 167 (d) and (e)] of the Tax Code. It is not liable for the
cites as basis for its exemption Sec 6 of RA No.1394 which states that special import taxes shall not be deficiency contractor’s tax assessed by the CIR.
imposed on machinery, equipment, accessories and spare parts, imported into the Philippines, for the
use of industries. The company maintains that it is an BANK OF THE PHILIPPINE ISLANDS VS TRINIDAD
industry as defined in Sec 6 of RA No. 1394. The Court of Tax Appeals sustained Philippine Acetylene Facts: Bank of the Philippine Islands is a domestic banking corporation, operating under a special
Company’s contention and declared the latter exempt from the payment of the charter granted by the Philippine Legislature through Act No. 1790. The charter contains a clause to the
special import tax. effect that no law shall be made or enforced imposing a charge or taxation upon BPI which shall not
Issue: Whether or not Philippine Acetylene Company may be considered engaged in an industry as apply equally to other banks of a similar type operating under similar conditions. The Collector of
contemplated in Sec 6 of RA No. 1394 and, therefore, exempt from the payment of the special import Internal Revenue collected internal revenue taxes upon BPI’s circulating notes issued by the bank for
tax. the years 1919-1921. The Philippine Legislature, through Act No. 2612, created the Philippine National
Held: Philippine Acetylene Company is not an industry as defined in Sec 6 of RA No. 1394. To be an Bank. Under Sec 18 of the PNB Charter, it is provided that the circulating notes of PNB shall be exempt
industry, the company must be engaged in some productive enterprise, not in merely packaging an from any and all taxes. The CIR did not collect taxes upon the circulating notes of PNB because of the
already finished product. The operation for which the company employs the gas tank in question does exemption granted to the latter by Sec 18 of Act No. 2612. BPI contends that BPI and PNB are banks of
not involve manufacturing or production. It is nothing but packaging; the liquefied gas, when obtained similar type and operating under similar conditions. Thus, BPI should also be entitled to the same
from the refinery, has to be placed in some kind of container to facilitate its transportation. When sold exemptions and privileges granted to PNB. Essentially, BPI argues that it should also be exempt from
to consumers, it undergoes no change or transformation, but is merely placed in smaller cylinders for the payment or taxes upon its circulating notes.
convenience. The process is certainly not Issue: Whether or not BPI and PNB are banks of similar type and operating under similar conditions.
production in any sense. The decision of the CTA is reversed and Philippine Acetylene Company is Whether or not BPI is exempt from the payment or taxes upon its circulating notes
held liable for the payment of the special import tax, as it is not an industry exempt from the payment Held: The Court noted that subsequent to the filing of the action, PNB paid to the CIR PhP 519,043.03
of such tax. as taxes upon its circulating notes. This development, according to the Court, rendered it unnecessary
to decide the question as to whether BPI and PNB are of similar type or operating under similar
COMMISSIONER OF INTERNAL REVENUE VS ARNOLDUS conditions. BPI is not exempt from the payment of taxes upon its circulating notes. It is not entitled to a
CARPENTRY SHOP, INC. refund of the payments it made for that purpose. The
Facts: Arnoldus Carpentry Shop, Inc. is a domestic corporation engaged in the business of preparing, Court used Sec 1499 of the Administrative Code of 1917 in ruling that BPI is not tax exempt. This
processing, buying, selling, exporting, importing, manufacturing, trading and dealing in cabinet shop Section allows the collection from banks of taxes on capitals, deposits, and circulation. Exemptions are
products, wood and metal home and office furniture, cabinets, doors, windows, strictly construed against the taxpayer, so unless BPI can show clearly that it has been granted the
etc., including their component parts and materials, of any and all nature and description. status of exemption, then it cannot avail itself of such entitlement. The fact that one person may not
The Commissioner of Internal Revenue conducted an investigation of the business tax liabilities of have paid or been required to pay his taxes does not exempt another from the payment of his legal
Arnoldus Carpentry Shop, Inc. After the examination, the CIR concluded that Arnoldus Carpentry taxes, or legally entitle him to a refund of any taxes which he
Shop, Inc. is an independent contractor under Sec 205 (16) [now Sec 169 (q)] of the Tax Code. As a result has paid.
of this classification, Arnoldus Carpentry Shop, Inc. was assessed deficiency tax (PhP 88,972.23) plus
charges and interest. This tax deficiency was a consequence of the 3% tax imposed on the company’s DEDUCTIONS AND EXEMPTIONS; DEDUCTIONS IN GENERAL;
gross export sales which, in turn, resulted from the CIR’s finding that categorized the company as a ALLOCATION
contractor. Arnoldus Carpentry Shop, Inc. protested the assessment maintaining that it is a YUTIVO SONS HARDWARE CO. VS COURT OF TAX APPEALS
manufacturer and therefore entitled to tax exemption on its gross export sales under Sec 202 (e) of the
Facts: Yutivo Sons Hardware Co. is a domestic corporation engaged in the importation and sale of from its gross income: (1) transfer agent’s fee, (2) stockholders relation service fee, (3) US stock listing
hardware supplies and equipment. It bought a number of cars and trucks from General Motors expenses, (4) suit expenses, (5) provision for contingencies. The
Overseas Corporation, an American corporation licensed to do business in the Philippines. As Commissioner of Internal Revenue disallowed all these items. Atlas elevated the issue to the Court of
importer, GM paid sales tax prescribed by sections 184, 185 and 186 of the Tax Code on the basis of its Tax Appeals. The CTA rendered a decision allowing the said items, except for the stockholders relation
selling price to Yutivo. Said tax being collected only once on original sales, Yutivo paid no further sales service fee and the suit expenses. Both Atlas and the CIR went to the Supreme Court to appeal the CTA
tax on its sales to the public. Southern Motors, Inc. was organized to engage in the business of selling decision. In GR No. L-26911, Atlas argues that the CTA should not have disallowed the stockholders
cars, trucks and spare parts. Its shares were subscribed in five equal proportions by the descendants of relation service fee. The corporation contends that such fee constitutes an ordinary and necessary
the founders of Yutivo. When GM withdrew from the Philippines, the cars and trucks purchased by business expense, and should, therefore, be allowed as a deductible expense from the company’s gross
Yutivo from GM were sold by Yutivo to SM which, in turn, sold them to the public in the Visayas and income. In GR No. L-26924, the CIR argues that the transfer agent’s fee and the US stock listing fee
Mindanao. GM appointed Yutivo as importer for the Visayas and Mindanao, and Yutivo continued its should not have been allowed as deductions from gross income in the absence of proof of payment for
previous arrangement of selling exclusively to SM. In the same way that GM used to pay sales taxes such expenses. The CIR also argues that the US stock listing expenses should be disallowed for not
based on its sales to Yutivo, the latter, as importer, paid sales tax on the basis of its selling price to SM, being ordinary and necessary and not incurred in trade or business, as required under Sec 30 (a) (1) of
and since such sales tax, as already stated, is collected only once on original sales, SM paid no sales tax the National Internal Revenue Code. The CIR also contends that the correct amount of disallowance for
on its sales to the public. Yutivo was investigated by the CIR and was assessed deficiency sales suit expenses should be PhP 17,499.98 and not PhP 6,666.65.
tax plus surcharge. The CIR claimed that the taxable sales were the retail sales by SM to the public and Issue: In GR No. L-26911, whether or not the expenses paid for the services rendered by a public
not the sales at wholesale made by Yutivo to the latter inasmuch as SM and Yutivo were one and the relations firm, P. K. Macker & Co., labeled as stockholders relation service fee is an allowable
same corporation, the former being the subsidiary of the latter. Yutivo alleged the following before the deduction as business expense. In GR No. L-26924, whether or not the transfer agent’s fee and the US
Court of Tax Appeals: (1) that there is no valid ground to disregard the corporate personality of SM and stock listing fee should have been allowed as deduction in the absence of proof of payments. Whether
to hold that it is an adjunct of petitioner Yutivo; (2) that assuming that the separate personality of SM or not the US stock listing expenses should be disallowed for not being ordinary and necessary and not
may be disregarded, the sales tax already incurred in trade or business. Whether PhP 17,499.98 or PhP 6,666.65 is the correct amount of
paid by Yutivo should first be deducted from the selling price of SM in computing the sales tax due on disallowance for suit expenses.
each vehicle; and (3) that the surcharge has been erroneously imposed by the CIR. The CTA ruled in Held: GR No. L-26911. Under Sec 30 (a) (1) of the Tax Code, three conditions have to be complied with
favor of CIR and ruled that the creation of SM is for Yutivo to evade taxes, as it is before a business expense is allowed as a deduction from gross income: (1) the expense must be
owned and controlled by Yutivo and is a mere subsidiary, branch, adjunct conduit, instrumentality or ordinary and necessary, (2) it must be paid or incurred within the taxable year, and (3) it must be paid
alter ego of the latter. or incurred in carrying a trade or business. The Court sustained the ruling of the CTA that the
Issue: Whether or not SM has a personality separate and distinct from Yutivo. expenditure paid to P. K. Macker & Co. denominated as stockholders relation service fee is not an
Held: It is an elementary and fundamental principle of corporation law that a corporation is an entity ordinary expense. The fee was paid to the PR firm as ompensation
separate and distinct from its stockholders and from other corporations to which it may be connected. for services carrying on the selling campaign in an effort to sell Atlas’ additional capital stock. Such is
However, "when the notion of legal entity is used to defeat public convenience, not an ordinary expense because, according to the Court, expenses relating to the recapitalization and
justify wrong, protect fraud, or defend crime," the law will regard the corporation as an association of reorganization of a corporation, the cost of obtaining stock subscription,
persons, or in the case of two corporations merge them into one. When the corporation is the "mere promotion expenses, and commission or fees paid for the sale of stock reorganization are capital
alter ego or business conduit of a person, it may be disregarded." expenditures. The stockholders relation service fee is not deductible from Atlas’ gross income.
However, SM was not organized purposely as a tax evasion device. Moreover, it runs counter to the GR No. L-26924. The Court agreed with the CTA that the CIR cannot raise the issue of payment for the
fact that there was no tax to evade. The intention to minimize taxes, when used in the context of fraud, first time on appeal. The fact of payment was never controverted by the CIR during the proceedings.
must be proved to exist by clear and convincing evidence amounting to more than mere Failure to assert a question within a reasonable time warrants a presumption that the party entitled to
preponderance, and cannot be justified by a mere speculation. This is because fraud is never lightly to assert it either has abandoned or declined to assert it. The Court held that the US stock listing fee is an
be presumed. The SC however agreed that SM was actually owned and controlled by petitioner as to ordinary and necessary business expense and was correctly allowed by the CTA as a deduction. The
make it a mere subsidiary or branch of the latter created for the purpose of selling the vehicles at retail stock listing fee is paid annually to a stock exchange for the privilege of having Atlas’ stock listed. A
and maintaining stores for spare parts as well as service repair shops. Consideration of various other single payment made to the stock exchange is considered a capital expenditure (Domes Mines case).
circumstances, especially when taken together, indicates that Yutivo treated SM merely as its However, payments to the stock exchange made annually or in a recurring manner are considered
department or adjunct. For one thing, the accounting system maintained by Yutivo shows that it ordinary and necessary business expenses (Chesapeake Corporation case). The fees paid by Atlas
maintained a high degree of control over SM accounts. All transactions between Yutivo and SM are partake of the latter. The Court reiterated that it is well-settled that litigation expenses incurred in
recorded and effected by mere debit or credit entries against the reciprocal account maintained in their defense or protection of title are capital in nature and not deductible. The Court sustained the CIR that
respective books of accounts and indicate the dependency of SM as branch upon Yutivo. the correct amount of disallowance for litigation or suit expenses is PhP 17,499.98.

ATLAS CONSOLIDATED MINING & DEVT CORP VS Facts: Visayan Cebu Terminal Co. Inc. is a corporation organized for the purpose of handling arrastre
COMMISSIONER OF INTERNAL REVENUE operations in the port of Cebu. Visayan filed its income tax return for 1951 claiming the following items
Facts: Atlas Consolidated Mining & Devt Corp is a corporation engaged in the mining industry. It was as deductions from the company’s gross income: (1) salaries, (2) representation
assessed deficiency income tax for the year 1958 as a result of the disallowance of certain items claimed expenses (PhP 75,855.88), and (3) miscellaneous expenses. The Collector of Internal Revenue disallowed
by the company as deductions from its gross income. Atlas claimed the following items as deductible the entire amount of representation expenses. The Court of Tax Appeals allowed
representation expenses but set the limit at PhP 10,000.00. bonus participation which in our opinion cannot constitute indebtedness within the meaning of the law
Issue: Whether or not the full amount of representation expenses should be allowed as a deduction because while they constitute an obligation on the part of the corporation, it is not the latter's fault if
from Visayan’s gross income. they remained unclaimed. The willingness of the corporation to pay interest thereon cannot be
Held: The Court sustained the Tax Court in holding that representation expenses fall under the considered a justification to warrant deduction.
category of business expenses which are allowable deductions from gross income if they meet the
following requisites laid down in the Tax Code—they must be ordinary and necessary expense paid or ALHAMBRA CIGAR & CIGARETTE MANUFACTURING COMPANY,
incurred in carrying on any trade or business and they must meet the test of reasonableness in amount. petitioner-appellant, vs. THE COMMISSIONER OF INTERNAL
The Court further agreed with the computation made by the CTA. Because of the company’s failure to REVENUE, respondent-appellee.
provide evidence for all such expenses (the corporation claims that the supporting papers were [G.R. No. L-23226. November 28, 1967.]
destroyed when the house of the company treasurer, where the records were kept was burned), the Facts: The petitioner claimed as deductible expense for income tax purposes salaries, bonuses,
Court should determine from all available data the amount properly deductible as representation commissions and director’s fees paid to A. P. Kuenzle and H. A. Streiff, who were the President and
expenses. The Court sustained the finding of the CTA that PhP 10,000.00 may be considered reasonably Vice-President, respectively, of the petitioner. The Commissioner of Internal Revenue
necessary as the company’s representation expenses based on figures presented during the disallowed a portion of the bonus, commission and director’s fees as deductions. Hence was assessed
proceedings. for deficiency income tax.
Issue: WON the bonuses, director’s fees and commissions are valid deductions for income tax
REVENUE Held: No. Whenever a controversy arises on the deductibility, for purposes of income tax, of certain
Facts: Petitioner claimed as a deduction for income tax purposes for the years 1950, 1951 and 1952 items for alleged compensation officers of a corporation, it is necessary to determine whether "personal
salaries, directors' fees and bonuses of its non-resident president and vice-president; bonuses of some services" have been "actually rendered" by said officers, and, in the
of its resident officers and employees; and interests on earned but unpaid affirmative, what is the "reasonable allowance" therefor. As correctly held by the court of tax appeals,
salaries and bonuses of its officers and employees. Petitioner gave to its non-resident president and vice The bonus paid to each of said officers was reduced to the amount equivalent to that paid to Mr. W.
president for the years 1950 and 1951 bonuses equal to 133-1/2% of their annual salaries and bonuses Eggmann, the resident Treasurer and Manager of petitioner. Petitioner seeks to justify the increase in
equal to 125 2/3% for the year 1952. Petitioner however gave its resident officers and employees higher the salaries of Messrs. Kuenzle and Streiff on the ground of increased costs of living. The said officers of
bonuses on the alleged reason because of their valuable contribution to the business of the corporation petitioner are, however, non-residents of the Philippines.
which has made it possible for it to realize huge profits during the aforesaid years. The respondent As to commissions and directors' fees there is no evidence of any particular service rendered by them to
disallowed the said deductions hence they were assessed for deficiency income taxes. Upon re- petitioner to warrant payment of commissions. There is also no justification for the payment of the
examination by the respondents, they allowed as deductions all items comprising directors' fees and director’s fees. Being non-resident President and Vice- President of Petitioner corporation of which they
salaries of the non-resident president and vice president, but disallowing the bonuses insofar as they are the controlling stockholders, said commissions and directors' fees, payment of which was based on
exceed the salaries of the recipients, as well as the interests on earned but unpaid salaries and bonuses. a certain percentage of the annual profits of petitioner, are in the nature of dividend distributions.
Issue: WON the excessive bonuses and interest should be allowed as a deduction for income tax
Held: No. Bonuses to employees made in good faith and as additional compensation for the services AGUINALDO INDUSTRIES CORPORATION (FISHING NETS
actually rendered by the employees are deductible, provided such payments, when added to the DIVISION) vs. COMMISSIONER OF INTERNAL REVENUE and THE
stipulated salaries, do not exceed a reasonable compensation for the services COURT OF TAX APPEALS
rendered" Requisites for deductibility of employee bonuses: (1) the payment of the bonuses is in fact Facts: Upon investigation of petitioner's 1957 income tax returns of its Fish Nets Division, the Bureau of
compensation; (2) it must be for personal services actually rendered; and (3) the bonuses, when added Internal Revenue examiner found that the amount of P61,187.48 was deducted from the gross income
to the salaries, are "reasonable . . . when measured by the amount and quality of the services performed as additional remuneration paid to the officers of petitioner and that such amount was taken from the
with relation to the business of the particular taxpayer". There is no fixed test for determining the net profit which petitioner derived from an isolated transaction (sale of a parcel of its land) which is not
reasonableness of a given bonus as compensation. Deductible amount of bonuses is not limited to the in the course of or carrying on of petitioner's trade or business. The examiner recommended
amount of salary of its recipient. The prevailing circumstances disallowance of the deduction, but petitioner insisted
should be considered. However In this case, the bonuses given to resident employees were higher than otherwise, claiming that the payment of the allowance or bonus was pursuant to its by-laws. The Court
its non-resident officers on the reason that the resident officers and employees had performed their of Tax Appeals held the petitioner liable for deficiency income tax plus surcharge and interest
duty well and rendered efficient service. It does not necessarily follow that they should be given greater Issue: WON the profit derived from the sale of its land is tax-exempt income under Republic Act No.
amount of additional compensation in the form of bonuses than what was given to the non-resident 901
officers. The non-resident officers had rendered the same amount of efficient personal service and Held: No. Petitioner may not raise the question of tax exemption for the first time on review where
contribution to deserve equal treatment in compensation and such question was not raised at the administrative forum
other emoluments with the particularity that their liberation yearly salaries had been much smaller. Issue: WON the bonus given to the officers of petitioner as share in the profit realized from the sale of
Interest should also be disallowed. . Under the law, in order that interest may be deductible, it must be the land is deductible expense for tax purposes
paid "on indebtedness" (Section 30, (b) (1) of the National Internal Revenue Code). It is therefore Held: No. The bonus given should be considered as deductible for income tax purposes only if
imperative to show that there is an existing indebtedness which may be subjected to the payment of payment was made for service actually rendered and it is reasonable and necessary. The records show
interest. Here the items involved are unclaimed salaries and that the sale was effected through a broker who was paid by petitioner a commission for his services.
On the other hand, there is absolutely no evidence of any service actually rendered by petitioner's
officers which could be the basis of a grant to them of a bonus out of the profit derived from the sale. incurred in the administration or management of petitioner's investments are not allowable business
Thus, the payment of a bonus to them out of the gain expenses inasmuch as they were not incurred in 'carrying on any trade or business' within the
realized from the sale cannot be considered as a selling expense; nor can it be deemed reasonable and contemplation of Section 30 (a)(1) of the Revenue
necessary so as to make it deductible for tax purposes. Code. Hence, were assessed for deficiency income taxes.
Issue: WON administrative expenses should be considered as a deduction/allocated to its interest and
COLLECTOR OF INTERNAL REVENUE, petitioner, vs. GOODRICH dividend income for income tax purposes.
INTERNATIONAL RUBBER CO., respondent. Held: No. the principle of allocating expenses is grounded on the premise that the taxable income was
[G.R. No. L-22265. December 22, 1967.] derived from carrying on a trade or business, as distinguished from mere receipt of interests and
Facts: The CIR disallowed the bad debts and representation expense claimed as deduction of the dividends from one's investments, the Court of Tax Appeals correctly ruled that
respondent for tax purposes. According to Goodrich the claim for deduction of the representation said income should not share in the allocation of administrative expenses. Hospital de San Juan De
expense is based upon receipts issued, not by the entities in which the alleged expenses had been Dios, Inc., according to its Articles of Incorporation, was established for purposes "which are
incurred, but by the officers of Goodrich who allegedly paid them. To collect for the alleged bad debts, benevolent, charitable and religious, and not for financial gain". It is not carrying on a trade or business
the respondent sent demand letters. There were subsequent collections after the debts have been for the word "business" in its ordinary and common use means "human efforts which have for their end
written. living or reward; it is not commonly used as descriptive of charitable, religious, educational or social
Issue: WON the representation expense are valid deductions. agencies" or "any particular occupation or employment habitually engaged in especially for livelihood
Held: No. If the expenses had really been incurred, receipts or chits would have been issued by the or gain" or "activities where profit is the purpose or livelihood is the motive."
entities to which the payments had been made, and it would have been easy for Goodrich or its officers
to produce such receipts. Those issued by said officers merely attest to their claim that they had FELIX MONTENEGRO, INC., petitioner, vs. COMMISSIONER OF
incurred and paid said expenses. They do not establish payment of said alleged expenses to the entities INTERNAL REVENUE, respondent.
in which the same are said to have been incurred. [C.T.A. CASE NO. 695. April 30, 1969.]
Issue: WON the bad debts are valid deduction for income tax purposes Facts: The CIR disallowed salaries of some of its officers, value of medicines, campaign contribution
Held: No. The ascertainment of worthlessness of bad debts requires proof of two facts: (1) that the and miscellaneous expense as deduction for income tax purposes hence the petitioner was assessed for
taxpayer did in fact ascertain the debt to be worthless in the year the deduction is sought; and (2) in so deficiency income taxes. The deduction of salaires was disallowed
doing, he acted in good faith. Good faith is not enough. The taxpayer must show because the said officers are also stockholders of the corporation and that their salaries are excessive
that he had reasonably investigated the relevant facts and had drawn a reasonable inference from the compared to those of officers of other corporation holding similar positions and doing the same volume
information thus obtained by him. In this case, there were payments made after it has been written off of business.
and proves that there is undue haste in claiming it as bad debts. Respondent has not proven that said Issue: WON the salaries and expenses should be allowed as a deduction.
debts were worthless. There is no evidence that thedebtors cannot pay them. Held: Yes. The general rule is that the employer is given a wide latitude of discretion in the amount of
salaries paid to the employees. A corporation has the right to fix the compensation of its employees
COLLECTOR OF INTERNAL REVENUE, petitioner, vs. ALBERTO M. .There is no comparative study of the profits of the two enterprises in relation to
K. JAMIR, respondent. other concerns similarly situated. Neither is there any comparative study of the peculiar situation of the
[G.R. No. L-16552. March 30, 1962.] two enterprises in relation to other concerns, nor is there a comparison of the nature and volume of the
Facts: The CIR assessed the respondent for deficiency income taxes. The Petitioner claimed that the work performed by the officers involved. Since no two business enterprises are exactly in the same
respondent under declared its income based on the expenditure method. The petitioner considered as situation, negligible differences in salaries cannot reasonably show that the salary is excessive or that
an undeclared income so much of respondents expenditures for said months as was in excess of his profits are channeled to the stockholders thru salaries.
reported income for the same months Issue: WON the value of medicines is a deductible loss
Issue: WON the expenditure method was properly applied. Held: No. Aside from self serving testimonial evidence, no other evidence was presented to
Held: No. The "expenditures method" of determining income should be applied by deducting the substantiate this claim of petitioner. There is not even a list of the medicines, their value, and their
aggregate yearly expenditures from the declared yearly income, not the expenditures incurred each expiry dates. The deductible as loss on the ground that the aforesaid medicines were no
month from the declared income therefor. In this case the respondent properly explained that the longer fit for sale as the dates of their efficacy have expired should be disallowed.
income derived from the advances from customers were entered in his books of account in subsequent Issue: WON campaign contribution should be allowed as a deduction.
months. Held: No. Amount expended for political campaign purposes or payments to campaign funds are not
Issue: WON the deduction for car depreciation and driver’s expense is proper. deductible either as business expenses or as contribution
Held: Yes. In this case, the car was used by Jamir for both personal and business purposes, the lower
court allowed, as deductions, three-fourths (3/4) of said amounts, the car having been used by Jamir COLLECTOR V. PHILIPPINE EDUCATION CO.
"more for business than for personal purposes". FACTS: Respondent lost all its pre-war books of accounts and records, with the exception of a copy of
the trial balance sheet. It employed an accounting firm and paid it the sum of P 13, 045.48. to prepare
HOSPITAL DE SAN JUAN DE DIOS, INC. vs. COMMISSIONER OF and prove it’s war damage claim. In filing its income tax return respondent
INTERNAL REVENUE claimed said sum as deduction under section 30 of the NIRC. Petitioner disallowed the same and
Facts: Petitioner is engaged in both taxable and non-taxable operations. For the years 1952 to 1955, the instead assessed additional P2,405.14 as deficiency income tax. CTA reversed upon appeal and declared
petitioner allocated its administrative expenses. The respondent disallowed, however, the interests and respondent exempt from the deficiency income tax in question.
dividends from sharing in the allocation of administrative expenses on the ground that the expenses
ISSUE: Whether or not the expense in question was ordinary and necessary and whether or not it was commence to run in this incident. It should be recalled that while the herein petitioner originally
paid or incurred in carrying on respondent’s business. assessed the respondent-claimant for alleged gift tax liabilities, the said assessment was subsequently
HELD: Yes. The law does not say that the expense must be for or on account of transactions in one’s abandoned and in its lieu, a new one was prepared and served on the respondent-taxpayer. In this new
trade or business. Ordinarily an expense will be considered necessary where the expenditure is assessment, the petitioner charged the said respondent with an entirely new liability and for a
appropriate and helpful in the development of the taxpayer’s business. It is sufficient that the expense substantially different amount from the first. While initially the petitioner assessed the respondent for
were incurred for purposes proper to the conduct of the corporate affairs or for the purpose of realizing donee's gift tax in the amount of P170,002.74, in the
a profit or of minimizing a loss. The fee in question was paid by the respondent to recover its lost assets subsequent assessment the latter was asked to pay P191,591.62 for delinquent estate and inheritance
occasioned by the war and thereby to be so rehabilitated as to be able to carry on its business. Also, it tax. Considering that it is the interest paid on this latter-assessed estate and inheritance tax that
should be noted that even if there is no law exempting the proceeds of war damage claims from taxes, respondent Palanca is claiming refund for, then the thirty-day period under the abovementioned
the war damage compensation would still not be subject to tax, not being an income. Compensation for section of Republic Act 1125 should be computed from the receipt of the final denial by the Bureau of
injury to capital is never income. Internal Revenue of the said claim. In the second place, the claim at bar refers to the alleged
DOCTRINE: To carry on its business the taxpayer not only must have sufficient assets but must preserve the overpayment by respondent Palanca of his 1955 income tax. Inasmuch as the said account was paid by
same and recover any that should be lost. The fee or expense paid to recover its lost assets occasioned by the war him by installment, then the computation of the two year prescriptive period, under Section 306 of the
and thereby to be so rehabilitated as to be able to carry on its business is not required that it must be for or on National Internal Revenue Code, should be from the date of the last installment.
account of transactions in one’s trade or business. DOCTRINE: 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.
CIR v. PALANCA FACTS: Respondent conveyed by way of gifts to her four children, namely, Antonio, Benito, Carmen
FACTS: Don Carlos Palanca, Sr. donated in favor of his son, the petitioner, herein shares of stock in La and Mauro, all surnamed Prieto, real property with a total assessed value of P892,497.50. After the
Tondeña, Inc. amounting to 12,500 shares. For failure to file a return on the donation within the filing of the gift tax returns on or about February 1, 1954, the petitioner CIR appraised the real property
statutory period, the petitioner was assessed the sums of P97,691.23, P24,442.81 and P47,868.70 as gift donated for gift tax purposes at P1,231,268.00, and assessed the total sum of P117,706.50 as donor's gift
tax, 25% surcharge and interest, respectively, which he paid on June 22, 1955. The petitioner filed with tax, interest and compromises due thereon. Of the total sum of P117,706.50 paid by respondent on April
the BIR his income tax return for the calendar year 1955, claiming, among others, a deduction for 29, 1954, the sum of P55,978.65 represents the total interest on account of deliquency. This sum of
interest amounting to P9,706.45 and reporting a taxable income of P65,982.12. On the basis of this P55,978.65 was claimed as deduction, among others, by respondent in her 1954 income tax return.
return, he was assessed the sum of P21,052.91, as income tax, which he paid, as follows: Petitioner filed Petitioner, however,
an amended return for the calendar year 1955, claiming therein an additional deduction in the amount disallowed the claim and as a consequence of such disallowance assessed respondent for 1954 the total
of P47,868.70 representing interest paid on the donee's gift tax, thereby reporting a taxable net income sum of P21,410.38 as deficiency income tax due on the aforesaid P55,978.65, including interest up to
of P18,113.42 and a tax due thereon in the sum of P3,167.00. The claim for deduction was based on the March 31, 1957, surcharge and compromise for the late payment. Under the law, for interest to be
provisions of Section 30(b) (1) of the Tax Code, which authorizes the deduction from gross income of deductible, it must be shown that there be an indebtedness, that there should be interest upon it, and
interest paid within the taxable year on indebtedness. A claim for the refund of alleged overpaid that what is claimed as an interest deduction should have been paid or accrued within the year. It is
income taxes for the year 1955 amounting to P17,885.01, which is the difference between the amount of here conceded that the interest paid by respondent was in consequence of the late payment of her
P21,052.01 he paid as income taxes under his original return and of P3,167.00, was filed together with donor's tax, and the same was paid within the year it is sought to be declared.
this amended return. BIR denied the claim. On August 12, 1958, the petitioner once more filed an ISSUE/S: Whether or not such interest was paid upon an indebtedness within the contemplation of
amended income tax return for the calendar year 1955, claiming, in addition to the interest deduction of section 30 (b) (1) of the Tax Code.
P9,076.45 appearing in his original return, a deduction in the amount of P60,581.80, representing HELD: Yes. The term "indebtedness" as used in the Tax Code of the United States containing similar
interest on the estate and inheritance taxes on the 12,500 shares of stock, thereby reporting a net taxable provisions as in the above-quoted section has been defined as an unconditional and legally enforceable
income for 1955 in the amount of P5,400.32 and an income tax due thereon in the sum of P428.00. Again obligation for the payment of money. Although taxes already due have not, strictly speaking, the same
this was denied. CTA reversed. concept as debts, they are, however, obligations that may be considered as such. The term "debt" is
ISSUE/S: 1) Whether the amount paid by respondent Palanca for interest on his delinquent estate and properly used in a comprehensive sense as embracing not merely money due by contract but whatever
inheritance tax is deductible from the gross income for that year under Section 30 (b) (1) of the Revenue one is bound to render to another, either for contract, or the requirement of the law. It follows that the
Code; 2) Whether the claim for refund has prescribed. interest paid by herein respondent for the late payment of her donor's tax is deductible from her gross
HELD: 1) Yes. While "taxes" and "debts" are distinguishable legal concepts, in certain cases as in the income under section 30(b) of the Tax Code above quoted. This conclusion finds support in the
suit at bar, on account of their nature, the distinction becomes inconsequential. We do not see any established jurisprudence in the United States after whose laws our Income Tax Law has been
element in this case which can justify a departure from or abandonment of the doctrine in the Prieto patterned. Thus, under sec. 23(b) of the Internal Revenue Code of 1939, as amended , which contains
case. In both this and the said case, the taxpayer sought the allowance as deductible items from the similarly
gross income of the amounts paid by them as interests on delinquent tax liabilities. Of course, what was worded provisions as sec. 30(b) of our Tax Code, the uniform ruling is that interest on taxes is interest
involved in the cited case was the donor's tax while the present suit pertains to interest paid on the on indebtedness and is deductible.
estate and inheritance tax. This difference, however, submits no appreciable consequence to the DOCTRINE: The term "indebtedness" as used in the Tax Code of the United States containing similar
rationale of this Court's previous determination that provisions as in the abovequoted section has been defined as an unconditional and legally enforceable
interests on taxes should be considered as interests on indebtedness within the meaning of Section obligation for the payment of money.
30(b) (1) of the Tax Code. 2) No. The 30-day period under Section 11 of Republic Act 1125 did not even
PAPER INDUSTRIES V CA a taxpayer's right to elect one or the other tax treatment of such interest payments. Accordingly, the
FACTS: Petitioner is registered with the BOI as a preferred pioneer enterprise with respect to its general rule that interest payments on a legally demandable loan are deductible from gross income
integrated pulp and paper mill, and as a preferred non-pioneer enterprise with respect to its integrated must be applied. We conclude that the CTA and the Court of Appeals did not err in allowing the
plywood and veneer mills. It received from the CIR two (2) letters of assessment deductions of Picop's 1977 interest payments on its loans for capital equipment against its gross income
and demand (a) one for deficiency transaction tax and for documentary and science stamp tax; and (b) for 1977. 4) After prolonged consideration and analysis of this matter, the Court is unable to agree with
the other for deficiency income tax for 1977, for an aggregate amount of P88,763,255.00. Picop protested the CTA and Court of Appeals on the deductibility of RPPM's accumulated losses against Picop's 1977
the assessment of deficiency transaction tax and documentary and science stamp taxes. These protests gross income. It is important to note at the outset that in our jurisdiction, the ordinary rule — that is,
were not formally acted upon by respondent CIR. On 26 September 1984, the CIR issued a warrant of the rule applicable in respect of corporations not
distraint on personal property and a warrant of levy on real property against Picop, to enforce registered with the BOI as a preferred pioneer enterprise — is that net operating losses cannot be carried
collection of the contested assessments; in effect, the CIR denied Picop's protests. Thereupon, Picop over. Under our Tax Code, both in 1977 and at present, losses may be deducted from gross income only
went before the CTA. Picop and the CIR both went to the Supreme Court on separate Petitions for if such losses were actually sustained in the same year that they are deducted or charged off. Thus it is
Review of the above decision of the CTA. In two (2) Resolutions dated 7 February 1990 and 19 February that R.A. No. 5186 introduced the carry-over of net operating
1990, respectively, the Court referred the two (2) Petitions to the Court of Appeals. The Court of losses as a very special incentive to be granted only to registered pioneer enterprises and only with
Appeals consolidated the two (2) cases and rendered a decision, dated 31 August 1992, which further respect to their registered operations. In the instant case, to allow the deduction claimed by Picop
reduced the liability of Picop to P6,338,354.70. Picop now maintains that it is not liable at all to pay any would be to permit one corporation or enterprise, Picop, to benefit from the operating
of the losses accumulated by another corporation or enterprise, RPPM. In effect, to grant Picop's claimed
assessments or any part thereof. It assails the propriety of the thirty-five percent (35%) deficiency deduction would be to permit Picop to purchase a tax deduction and RPPM to peddle its accumulated
transaction tax which the Court of Appeals held due from it in the amount of P3,578,543.51. Picop also operating losses. We consider and so hold that there is nothing in Section 7 (c) of
questions the imposition by the Court of Appeals of the deficiency income tax of P1,481,579.15, R.A. No. 5186 which either requires or permits such a result. Indeed, that result makes non-sense of the
resulting from disallowance of certain claimed financial guarantee expenses and claimed year-end legislative purpose which may be seen clearly to be projected by Section 7 (c), R.A. No. 5186. We
adjustments of sales and cost of sales figures by Picop's external auditors. 3 The CIR, upon the other conclude that the deduction claimed by Picop in the amount of P44,196,106.00 in its 1977 Income Tax
hand, insists that the Court of Appeals erred in Return must be disallowed. 5) We must support the CTA and the Court of Appeals in their foregoing
finding Picop not liable for surcharge and interest on unpaid transaction tax and for documentary and rulings. A taxpayer has the burden of proving entitlement to a claimed
science stamp taxes and in allowing Picop to claim as deductible expenses. deduction. Even Picop's own vouchers were not submitted in evidence and the BIR Examiners denied
ISSUE/S: 1) Whether Picop is liable for the thirty-five percent (35%) transaction tax; 2) Whether Picop is that such vouchers and other documents had been exhibited to them. Moreover, cash vouchers can
liable for interest and surcharge on unpaid transaction tax; 3) Whether Picop is entitled to deduct only confirm the fact of disbursement but not necessarily the purpose thereof.
against current income interest payments on loans for the purchase of machinery and equipment; 4) 6) The CIR has made out at least a prima facie case that Picop had understated its sales and overstated its
Whether Picop is entitled to deduct against current income net operating losses incurred by Rustan cost of sales as set out in its Income Tax Return. For the CIR has a right to assume that Picop's Books of
Pulp and Paper Mills, Inc; 5) Whether Picop is entitled to deduct against current income certain claimed Accounts speak the truth in this case since, as already noted,
financial guarantee expenses; 6) Whether Picop had understated its sales and overstated its cost of sales they embody what must appear to be admissions against Picop's own interest.
for 1977; 7) Whether Picop is liable for the corporate development tax of five percent (5%) of its income 7) The adjusted net income of Picop for 1977, as will be seen below, is P48,687,355.00. Its net worth
for 1977. figure or total stockholders' equity as reflected in its Audited Financial Statements for 1977 is
HELD: 1) We agree with the CTA and the Court of Appeals that Picop's tax exemption under R.A. No. P464,749,528.00. Since its adjusted net income for 1977 thus exceeded ten percent (10%) of its net worth,
5186, as amended, does not include exemption from the thirty-five percent (35%) transaction tax. In the Picop must be held liable for the five percent (5%) corporate development tax in the amount of
first place, the thirty-five percent (35%) transaction tax is an income tax, that is, it is a tax on the interest P2,434,367.75.
income of the lenders or creditors. It is thus clear that the transaction tax is an income tax and as such, in DOCTRINE: It is thus clear that the transaction tax is an income tax and
any event, falls outside the scope of the tax exemption granted to registered pioneer enterprises by as such, in any event, falls outside the scope of the tax exemption
Section 8 of R.A. No. 5186, as amended. 2) Section 51 (c) and (e) of the 1977 Tax Code did not authorize granted to registered pioneer enterprises by Section 8 of R.A. No. 5186,
the imposition of a surcharge and penalty interest for failure to pay the thirtyfive percent (35%) as amended.
transaction tax imposed under Section 210 (b) of the same Code. The corresponding provision in the
current Tax Code very CIR v. ITOGON-SUYOC MINES, INC.
clearly embraces failure to pay all taxes imposed in the Tax Code, without any regard to the Title of the FACTS: Respondent Itogon-Suyoc Mines, Inc., the taxpayer involved, duly paid in full its liability
Code where provisions imposing particular taxes are textually located. Tax exemptions are, to be sure, according to its income tax return for the fiscal year 1960-61. Instead, it deducted right away the
to be "strictly construed," that is, they are not to be extended beyond the ordinary and reasonable amount represented by claim for refund filed eight (8) months back, for the previous year's income tax,
intendment of the language actually used by the legislative authority in granting the exemption. The for which it was not liable at all, so it alleged, as it suffered a loss instead, a claim subsequently
issuance of debenture bonds is certainly conceptually distinct from pulping and paper manufacturing favorably acted on by petitioner Commissioner of Internal Revenue but after the date of such payment
operations. But no one contends that issuance of bonds was a principal or regular business activity of of the 1960-1961 tax. Accordingly, an interest in the amount of P1,512.83
Picop; only banks or other financial institutions are in the was charged by petitioner Commissioner of Internal Revenue on the sum withheld on the ground that
regular business of raising money by issuing bonds or other instruments to the general public. no deduction on such refund should be allowed before its approval. When the matter was taken up
3) We have already noted that our 1977 NIRC does not prohibit the deduction of interest on a loan before the Court of Tax Appeals, the above assessment representing interest was
incurred for acquiring machinery and equipment. Neither does our 1977 NIRC compel the set aside in the decision of September 30, 1965.
capitalization of interest payments on such a loan. The 1977 Tax Code is simply silent on
ISSUE/S: Whether CTA should not have absolved respondent corporation "from liability to pay the COLLECTOR v. FISHER
sum of P1,512.83 as 1% monthly interest for delinquency in the payment of income tax for the fiscal Facts: This case relates to the determination and settlement of the hereditary estate left by the deceased
year 1960-1961." Walter G. Stevenson, and the laws applicable thereto. Walter G. Stevenson (born in the Philippines on
HELD: No. It could not be error for the Court of Tax Appeals, considering the admitted fact of August 9, 1874 of British parents and married in the City of Manila on January 23, 1909 to Beatrice
overpayment, entitling respondent to refund, to hold that petitioner should not repose an interest on Mauricia Stevenson another British subject) died on February 22, 1951 in San Francisco, California,
the aforesaid sum of P13,155.20 "which after all was paid to and received by the government U.S.A. whereto he and his wife moved and established their permanent residence since May 10, 1945.
even before the incidence of the tax in question." It would be, according to the Court of Tax Appeals, In his will executed in San Francisco on May 22, 1947, and which was duly probated in the Superior
"unfair and unjust" to do so. We agree but we go farther. The imposition of such an interest by Court of California on April 11, 1951, Stevenson instituted his wife Beatrice as his sole heiress to the
petitioner is not supported by law. following real and personal properties acquired by the spouses while residing in the Philippines.
The National Internal Revenue Code provides that interest upon the amount determined as a Issue: 1. Whether or not the estate is entitled to the following deductions: P8,604.39 for judicial and
deficiency shall be assessed and shall be paid upon notice and demand from the Commissioner of administration expenses; P2,086.52 for funeral expenses; P652.50 for real estate taxes; and
Internal Revenue. There is no question respondent was entitled to a refund. Instead of waiting for the P10,0,22.47 representing the amount of indebtedness allegedly incurred by the decedent during his
sum involved to be delivered to it, it deducted the said amount from the tax that it had to pay. That it lifetime
had a right to do according to the law. It is true a doubt could have arisen due to the fact that as of the 2. Whether or not the estate is entitled to the payment of interest on the amount it claims to have
time such a deduction was made, the Commissioner of Internal Revenue had not as yet approved such overpaid the government and to be refundable to it.
a refund. It is an admitted fact though that respondent was clearly entitled to it, and petitioner did not Held: 1. YES. An examination of the record discloses, however, that the foregoing items were
allege otherwise. Nor could he do so. Under all the circumstances disclosed therefore, the applicability considered deductible by the Tax Court on the basis of their approval by the probate court to which
of the legal provision allowing such a deduction from the amount of the tax to be paid cannot be said expenses, we may presume, had also been presented for consideration. It is to be
disputed. supposed that the probate court would not have approved said items were they not supported by
DOCTRINE: It could not be error for the Court of Tax Appeals, considering the admitted fact of overpayment, evidence presented by the estate. In allowing the items in question, the Tax Court had before it the
entitling respondent to refund, to hold that petitioner should not repose an interest on the aforesaid sum of pertinent order of the probate court which was submitted in evidence by respondents. (Exh. "AA-2", p.
P13,155.20 "which after all was paid to and received by the government even before the incidence of the tax in 100, record). As the Tax Court said, it found no basis for departing from the findings of the probate
question." court, as it must have been satisfied that those expenses were actually incurred. Under the
circumstances, we see no ground to reverse this finding of fact which, under Republic Act of California
CASTRO v. COLLECTOR National Association, which it would appear, that while still living, Walter G. Stevenson obtained we
Facts: This is an appeal from a decision of the Court of Tax Appeals (in its C.T.A. Case 141) holding are not inclined to pass upon the claim of respondents in respect to the
petitioner Maria B. Castro liable under the War Profits Tax Law, Republic Act No. 55, and ordering her additional amount of P86.52 for funeral expenses which was disapproved by the court a quo for lack of
to pay a deficiency war profits tax (including surcharges and interest) in the evidence. In connection with the deduction of P652.50 representing the amount of realty taxes paid in
amount of P1,360,514.66, and costs. Castro was previously acquitted in the criminal case instituted 1951 on the decedent's two parcels of land in Baguio City, which respondents claim was disallowed by
against her for violation of the War Profits Tax Law. the Tax Court, we find that this claim has in fact been allowed.
Issue: WON the acquittal is a bar to the collection of the taxes assessed, and specially of the 50% 2. NO. Respondent's claim for interest on the amount allegedly overpaid, if any actually results after a
surcharge recomputation on the basis of this decision is hereby denied in line with our recent decision in Collector
Held: NO. With regard to the tax proper, the state correctly points out in its brief that the acquittal in of Internal Revenue v. St. Paul's Hospital (G.R. No. L-12127, May 29, 1959) wherein we held that, "in the
the criminal case could not operate to discharge petitioner from the duty to pay the tax, since that duty absence of a statutory provision clearly or expressly directing or authorizing such payment, and none
is imposed by statute prior to and independently of any attempts on the part of the taxpayer to evade has been cited by respondents, the National Government cannot be required to pay interest."
payment. The obligation to pay the tax is not a mere consequence of the felonious acts charged in the
information, nor is it a mere civil liability derived from crime that would be wiped out by the judicial DEDUCTIONS AND EXMEPTIONS; ALLOWABLE DEDUCTIONS;
declaration that the criminal acts charged did not exist. As to the 50% surcharge, the very United States TAXES
Supreme Court that rendered the Coffey decision has subsequently pointed out that additions of this CIR v. LEDNICKY
kind to the main tax are not penalties but civil administrative sanctions, provided primarily as a Facts: V. E. Lednicky and Maria Valero Lednicky, are husband and wife, both American citizens
safeguard for the protection of the state revenue and to reimburse the government for the heavy residing in the Philippines, and have derived all their income from Philippine sources for the taxable
expense of investigation and the loss resulting from the taxpayer's fraud (Helvering vs. Mitchell, 303 years under question. [GR L-18286] In compliance with local law, the spouses, on 27
U.S. 390, 82 L. Ed. 917; Spies vs. U.S. 317 U.S. 492). This is made plain by the fact that such surcharges March 1957, filed their income tax return for 1956, reporting therein a gross income of P1,017,287.65 and
are enforceable, like the primary tax itself, by distraint or civil suit, and that they are provided in a a net income of P733,809.44 on which the amount of P317,395.41 was assessed after deducting P4,805.59
section of R.A. No. 55 (section 5) that is separate and distinct from that providing for criminal as withholding tax. Pursuant to the Commissioner of Internal Revenue’s assessment notice, the spouses
prosecution (section 7). We conclude that the defense of jeopardy and estoppel by reason of the paid the total amount of P326,247.41, inclusive of the withheld taxes, on 15 April 1957. On 17 March
petitioner's acquittal is 1959, the spouses filed an amended income tax return for 1956. The amendment consists in a claimed
untenable and without merit. Whether or not there was fraud committed by the taxpayer justifying the deduction of P205,939.24 paid in 1956 to the US government as federal income tax for 1956.
imposition of the surcharge is an issue of fact to be inferred from the evidence and surrounding Simultaneously with the filing of the amended return, the spouses requested the refund of P112,437.90.
circumstances; and the finding of its existence by the Tax Court is conclusive upon us. (Gutierrez v. When the Commissioner of Internal Revenue failed to answer the claim for refund, the spouses filed
Collector, G.R. No. L-9771, May 31, 1951 ; Perez vs. Collector, supra). their petition with the tax court on 11 April 1959 as CTA Case 646. [GR L-18165] On 28 February 1956,
the spouses filed their domestic income tax return for 1955, reporting a gross income of P1,771,124.63
and a net income of P1,052,550.67. On 19 April 1956, they filed an amended income tax return, the only as an alternative or substitute to his right to claim a tax credit for such foreign income taxes under
amendment upon the original being a lesser net income of P1,012,554.51, and, on the basis of this section 30 (c) (3) and (4); so that unless the alien resident has a right to claim such tax credit if he so
amended return, they paid P570,252.00, inclusive of withholding taxes. After audit, the Commissioner chooses, he is precluded from deducting the foreign income taxes from his gross income. For it is
determined a deficiency of P16,116.00, which amount the spouses paid on 5 December 1956. Back in obvious that in prescribing that such deduction shall be allowed in the case of a taxpayer who does not
1955, however, the spouses filed with the US Internal Revenue Agent in Manila their Federal income signify in his return his desire to have to any extent the benefits of paragraph (3) (relating to credits for
tax return for the years 1947, 1951, 1952, 1953 and 1954 on income from Philippine sources on a cash taxes paid to foreign countries), the statute assumes that the taxpayer in question also may signify his
basis. Payment of these federal income taxes, including penalties and delinquency interest in the desire, to claim a tax credit and waive the deduction; otherwise, the foreign taxes would always be
amount of $264,588.82, were made in 1955 to the US Director of Internal Revenue, Baltimore, Maryland, deductible, and their mention in the list of nondeductible items in Section 30 (c) might as well have
through the National City Bank of New York, Manila Branch. Exchange and bank charges in remitting been omitted, or at least expressly limited to taxes on income from sources outside the Philippine
payment totaled P4,143.91. On 11 August 1958 the said respondents amended their Philippines income Islands. Had the law intended that foreign income taxes could be deducted from gross income in any
tax return for 1955 to including US Federal income taxes, interest accruing up to 15 May 1955, and event, regardless of the
exchange and bank charges, totaling P516,345.15 and therewith filed a claim for refund of the sum of taxpayer’s right to claim a tax credit, it is the latter right that should be conditioned upon the taxpayer’s
P166,384.00, which was later reduced to P150,269.00. The spouses brought suit in the Tax Court, which waiving the deduction; in which case the right to reduction under subsection (c-1-B) would have been
was docketed therein as CTA Case 570. [GR 21434] The facts are similar to above cases but refer to the made absolute or unconditional (by omitting foreign taxes from the enumeration of non- deductions),
spouses’ income tax returns for 1957, filed on 28 February 1958, and for which the spouses paid a total while the right to a tax credit under subsection (c-3) would have been expressly conditioned upon the
sum of P196,799.65. In 1959, they filed an amended return for 1957, claiming deduction of P190,755.80, taxpayer’s not claiming any deduction under subsection (c-1).
representing taxes paid to the US Government on income derived wholly from Philippine sources. On 5. Danger of double credit does not exist if taxpayer cannot claim benefit from either headings at his
the strength thereof, spouses seek refund of P90,520.75 as overpayment (CTA Case 783). The Tax Court option The purpose of the law is to prevent the taxpayer from claiming twice the benefits of his
decided for the spouses. payment of foreign taxes, by deduction from gross income (subs. c-1) and by tax credit (subs. c-3). This
Issue: WON there should be a refund for the spouses danger of double credit certainly can not exist if the taxpayer can not claim benefit under either of these
Held: NO. The Supreme Court reversed the decisions of the Court of Tax Appeals, and affirmed the headings at his option, so that he must be entitled to a tax credit (the spouses admittedly are not so
disallowance of the refunds claimed by the spouses, with costs against said spouses. entitled because all their income is derived from Philippine sources), or the option to deduct from gross
1. Section 30 (c-1) of the Philippine Internal Revenue Code Section 30 (c) (1) (Deduction from gross income disappears altogether.
income) provides that “in computing net income there shall be allowed as deductions: (c) Taxes: (1) In 6. When double taxation; Tax income should accrue to benefit of the Philippines
general. — Taxes paid or accrued within the taxable year, except (A) The income tax provided for Double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same
under this Title; (B) Income, war-profits, and excess profits taxes imposed by the authority of any governmental entity (cf. Manila vs. Interisland Gas Service, 52 Off. Gaz. 6579, Manuf. Life Ins. Co. vs.
foreign country; but this deduction shall be allowed in the case of a taxpayer who does not signify in Meer, 89 Phil. 357). In the present case, while the taxpayers would have to pay two taxes on the same
his return his desire to have to any extent the benefits of income, the Philippine government only receives the proceeds of one tax. As between the Philippines,
paragraph (3) of this subsection (relating to credit for taxes of foreign countries); (C) Estate, inheritance where the income was earned and where the taxpayer is domiciled, and the United States, where that
and gift taxes; and (D) Taxes assessed against local benefits of a kind tending to increase the value of income was not earned and where the taxpayer did not reside, it is indisputable that justice and equity
the property assessed.” demand that the tax on the income should accrue to the benefit of the Philippines. Any relief from the
2. Paragraph (c) (3) (b) of the Tax Code; Credits against tax for taxes of foreign countries alleged double taxation should come from the United States, and not from the Philippines, since the
Paragraph 3 (B) of the subsection (Credits against tax for taxes of foreign countries), reads: “If the former’s right to burden the taxpayer is solely predicated on his citizenship, without contributing to the
taxpayer signifies in his return his desire to have the benefits of this paragraph, the tax imposed by this production of the wealth that is being taxed. To allow an alien resident to deduct from his gross income
Title shall be credited with (B) Alien resident of the Philippines. — In the case of an alien resident of the whatever taxes he pays to his own government amounts to conferring on the latterpower to reduce the
Philippines, the amount of any such taxes paid or accrued during the taxable year to any foreign tax income of the Philippine government simply by increasing the tax rates on the alien resident.
country, if the foreign country of which such alien resident is a citizen or subject, in imposing such Everytime the rate of taxation imposed upon an alien resident is increased by his own government, his
taxes, allows a similar credit to citizens of the Philippines residing in deduction from Philippine taxes would correspondingly increase, and the proceeds for the Philippines
such country;” diminished, thereby subordinating our own taxes to those levied by a foreign government. Such a
3. Paragraph (c) (4) of the Tax Code; Limitation on credit The tax credit so authorized is limited under result is incompatible with the status of the Philippines as an independent and sovereign state.
paragraph 4 (A and B) of the same subsection, in the following terms: “Par. (c) (4) Limitation on credit.
— The amount of the credit taken under this section shall be subject to each of the following limitations: GUTIERREZ v. COLLECTOR
(A) The amount of the credit in respect to the tax paid or accrued to any country shall not exceed the Facts: Maria Morales was the registered owner of an agricultural land designated as Lot No. 724-C of
same proportion of the tax against which such credit is taken, which the taxpayer’s net income from the cadastral survey of Mabalacat, Pampanga. The Republic of the Philippines, at the request of the
sources within such country taxable under this Title bears to his entire net income for the same taxable U.S.Government and pursuant to the terms of the Military Bases Agreement of March 14, 1947,
year; and (B) The total amount of the credit shall not exceed the same proportion of the tax against instituted condemnation proceedings in the Court of the First Instance of Pampanga, docketed, as Civil
which such credit is taken, which the taxpayer’s net income from sources without the Philippines Case No. 148, for the purpose of expropriating the lands owned by Maria Morales and others needed
taxable under this Title bears to his entire net income for the same taxable year.” for the expansion of the Clark Field Air Base. t the commencement of the action, the Republic of the
4. Law’s intent that right to deduct income taxes paid to foreign government taken as an alternative Philippines, therein plaintiff deposited with the Clerk of the Court of First Instance of Pampanga the
or substitute to claim of tax credit for such foreign income tax Construction and wording of Section 30 sum of P156,960, which was provisionally fixed as the value of the lands sought to be expropriated, in
(c) (1) (B) of the Internal Revenue Act shows the law’s intent that the right to deduct income taxes paid order that it could take immediate possession of the same. On January 27, 1949, upon order of the
to foreign government from the taxpayer’s gross income is given Court, the sum of P34,580 (PNB Check 721520-Exh. R) was paid by the Provincial treasurer of
Pampanga to Maria Morales out of the original deposit of P156,960 made by therein plaintiff. After due such as the taxpayer, the amount so received by the taxpayer would then properly be reportable as
hearing, the Court of First Instance of Pampanga rendered decision dated November 29, 1949, wherein income of the taxpayer in the year it is received.
it fixed as just compensation P2,500 per hectare for some of the lots and P3,000 per hectare for the (b) Disallowance of losses in or bad debts of Palawan Manganese Mines, Inc. (1951). — The taxpayer appeals
others, which values were based on the reports of the Commission on Appraisal whose members were from the Tax Court's disallowance of its writing off in 1951 as a loss or bad debt the sum of P353,134.25,
chosen by both parties and by the Court, which took into consideration the different conditions which it had advanced or loaned to Palawan Manganese Mines, Inc. Pursuant to the agreement
affecting, the value of the condemned properties in making their findings. mentioned above, petitioner gave to Palawan Manganese Mines, Inc. yearly advances starting from
In virtue of said decision, defendant Maria Morales was to receive the amount of P94,305.75 as 1945, which advances amounted to P587,308.07 by the end of 1951. Despite these advances and the
compensation for Lot No. 724-C which was one of the expropriated lands. Sometime in 1950, the resumption of operations by Palawan Manganese
spouses Blas Gutierrez and Maria Morales received the sum of P59.785.75 presenting the balance Mines, Inc., it continued to suffer losses. By 1951, petitioner became convinced that those advances
remaining in their favor after deducting the amount of P34,580 already withdrawn from the could no longer be recovered. While it continued to give advances, it decided to write off as worthless
compensation to them. In a notice of assessment dated January 28, 1953, the Collector of the sum of P353,134.25. Under the circumstances, was the sum of P353,134.25
Internal Revenue demanded of the petitioners the payment of P8,481 as alleged deficiency income tax properly claimed by petitioner as deduction in its income tax return for 1951, either as losses or bad
for the year 1950, inclusive of surcharges and penalties. The CIR contended that petitioners-appellants debts? It will be noted that in giving advances to Palawan Manganese Mine Inc., petitioner did not
failed to include from their gross income, in filing their income tax return for 1950, the amount of expect to be repaid. It is true that some testimonial evidence was presented to show that there was
P94,305.75 which they had received as compensation for their land taken by the Government by some agreement that the advances would be repaid, but no documentary evidence was presented to
expropriation proceedings. It is the contention of respondent Collector of Internal Revenue that such this effect. The memorandum agreement signed by the parties appears to be very clear that the
transfer of property, for taxation purposes, is "sale" and that the income derived therefrom is taxable. consideration for the advances made by petitioner was 15% of the net profits of Palawan Manganese
The lower court exonerated petitioners from the 50 per cent surcharge Mines, Inc. In other words, if there were no earnings or profits, there was no obligation to repay those
imposed on the latter, on the ground that the taxpayers' income tax return for 1950 is false and/or advances. It has been held that the voluntary advances made without expectation of repayment do not
fraudulent. result in deductible losses. The Tax Court's is allowance of the write-off was proper. The Solicitor
Issue: WON petitioners should pay surcharge Held: NO. It should be noted that the Court of Tax General has rightly pointed out that the taxpayer has taken an "ambiguous position " and "has not
Appeals found that the evidence did not warrant the imposition of said surcharge because definitely taken a stand on whether
the petitioners therein acted in good faith and without intent to defraud the Government. the amount involved is claimed as losses or as bad debts but insists that it is either a loss or a bad debt."
The question of fraud is a question of fact which frequently requires a nicely balanced judgement to 4 We sustain the government's position that the advances made by the taxpayer to its 100% subsidiary,
answer. All the facts and circumstances surrounding the conduct of the tax payer's business and all the Palawan Manganese Mines, Inc. amounting to P587,308,07 as of 1951 were
facts incident to the preparation of the alleged fraudulent return should be considered. (Mertens, investments and not loans. 5 (c) Disallowance of losses in Balamban Coal Mines (1950 and
Federal Income Taxation, Chapter 55). The question of fraud being a question of fact and the lower 1951). — The Court sustains the Tax Court's disallowance of the sums of P8,989.76 and P27,732.66 spent
court having made the finding that "the evidence of this case does not warrant the imposition of the 50 by the taxpayer for the operation of its Balamban coal mines in Cebu in 1950 and 1951, respectively,
per cent surcharge", We are constrained to refrain from giving any consideration to the question raised and claimed as losses in the taxpayer's returns for said years. The Tax Court correctly held that the
by the Solicitor General, for it is already settled in this jurisdiction that in passing upon petitions to losses "are deductible in 1952, when the mines were abandoned, and not in 1950 and 1951, when they
review decisions of the Court of Tax Appeals, We have to confine ourselves to questions of law. were still in operation." 9 The taxpayer's claim that these expeditions should be allowed as losses for
the corresponding years that they were incurred,
DEDUCTIONS AND EXEMPTIONS; ALLOWABLE DEDUCTIONS; because it made no sales of coal during said years, since the promised road or outlet through which the
LOSSES coal could be transported from the mines to the provincial road was not constructed, cannot be
FERNANDEZ HERMANOS v. CIR sustained. Some definite event must fix the time when the loss is sustained, and here it was the event of
Facts: These four appeals involve two decisions of the Court of Tax Appeals determining the taxpayer's actual abandonment of the mines in 1952. (d) and (e) Allowance of losses in Hacienda Dalupiri (1950 to
income tax liability for the years 1950 to 1954 and for the year 1957. Both the taxpayer and the 1954) and Hacienda Samal (1951-1952). — The Tax Court overruled the Commissioner's disallowance of
Commissioner of Internal Revenue, as petitioner and respondent in the cases a quo respectively, these items of losses thus: Petitioner deducted losses in the operation of its Hacienda Dalupiri the sums
appealed from the Tax Court's decisions, insofar as their respective contentions on particular tax items of P17,418.95 in 1950, P29,125.82 in 1951, P26,744.81 in 1952, P21,932.62 in 1953, and P42,938.56 in 1954.
were therein resolved against them. These deductions were disallowed by respondent on the ground that the farm was operated solely for
Issue: Proper/Improper Allowances/Disallowances of Losses pleasure or as a
Held: Re allowances/disallowances of losses. hobby and not for profit. This conclusion is based on the fact that the farm was operated continuously
(a) Allowance of losses in Mati Lumber Co. (1950). — The Commissioner of Internal Revenue questions the at a loss. From the evidence, we are convinced that the Hacienda Dalupiri was operated by petitioner
Tax Court's allowance of the taxpayer's writing off as worthless securities in its 1950 return the sum of for business and not pleasure. It was mainly a cattle farm, although a few race horses were also raised.
P8,050.00 representing the cost of shares of stock of Mati Lumber Co. acquired by the taxpayer on It does not appear that the farm was used by petitioner for entertainment, social activities, or other
January 1, 1948, on the ground that the worthlessness of said stock in the year 1950 had not been clearly nonbusiness purposes. Therefore, it is entitled to deduct expenses and losses in connection with the
established. The Commissioner contends that although the said Company was no longer in operation operation of said farm. (See 1955 PH Fed. Taxes, Par. 13, 63, citing G.C.M. 21103, CB 1939- 1, p.164)
in 1950, it still had its sawmill and equipment which must be of considerable value. There was Section 100 of Revenue Regulations No. 2, otherwise known as the Income Tax Regulations, authorizes
adequate basis for the writing off of the stock as worthless securities. Assuming that the Company farmers to determine their gross income on the basis of inventories. Said regulations provide: "If gross
would later somehow realize some proceeds from its sawmill and equipment, which were still existing income is ascertained by inventories, no deduction can be made for livestock or products lost during
as claimed by the Commissioner, and that such proceeds would later be distributed to its stockholders the year, whether purchased for resale, produced on the farm, as such losses will be reflected in the
inventory by reducing the amount of livestock or products on hand at the close of the year." Evidently,
petitioner determined its income or losses in the operation of said farm on the basis of inventories. We them involved a taxpayer who had, as in the present case, obtained a final judgment against third persons
quote from the memorandum of counsel for petitioner: "The Taxpayer deducted from its income tax for reimbursement of payments made. In those cases, there was either no legally enforceable right at all or
returns for the years from 1950 to 1954 inclusive, the corresponding yearly losses sustained in the such claimed right was still to be, or being, litigated. On the other hand, the rule is that loss deduction
operation of Hacienda Dalupiri, which losses represent the excess of its yearly expenditures over the will be denied if there is a measurable right to compensation for the loss, with ultimate collection
receipts; that is, the losses represent the difference between the sales of livestock and the actual cash reasonably clear. So where there is reasonable ground for reimbursement, the taxpayer must seek his
disbursements or expenses." (Pages 21-22, Memorandum for Petitioner.) As the Hacienda Dalupiri was redress and may not secure a loss deduction until he establishes that no recovery may be had.9 In other
operated by petitioner for business and since it sustained losses in its operation, which losses were words, as the Tax Court put it, the taxpayer (petitioner) must exhaust his remedies first to recover or
determined by means of inventories authorized under Section 100 of Revenue Regulations No. 2, it was reduce his loss. But assuming that there was no reasonable expectation of recovery, still no loss
error for respondent to have disallowed the deduction of said losses. The same is true with respect to deduction can be had. Sec. 30 (d) (2) of the Tax Code requires a charge-off as one of the conditions for
loss sustained in the operation of the Hacienda Samal for the years 1951 and 1952. 10 The loss deduction: In the case of a corporation, all losses actually sustained and charged-off within the taxable
Commissioner questions that the losses sustained by the taxpayer were properly based on the year and not compensated for by
inventory method of accounting. He concedes, however, "that the regulations referred to does not insurance or otherwise. Mertens12 states only four (4) requisites because the United States
specify how the inventories are to be made. The Tax Court, however, felt satisfied with the evidence Internal Revenue Code of 193913 has no charge-off requirement. Sec. 23(f) thereof provides merely: In
presented by the taxpayer ... which merely consisted of an alleged physical count of the number of the the case of a corporation, losses sustained during the taxable year and not compensated for by
livestock in Hacienda Dalupiri for the years involved." 11 The Tax Court was satisfied with the method insurance or otherwise. Petitioner, who had the burden of proof14 failed to adduce evidence that there
adopted by the taxpayer as a farmer breeding livestock, reporting on the basis of receipts and was a charge-off in connection with the P44,490.00—or P30,600.00 — which it paid to Galang
disbursements. We find no Compelling reason to disturb its findings. Machinery.


Facts: Petitioner Plaridel Surety & Insurance Co., is a domestic corporation engaged in the bonding Facts: Petitioners mad a 53% equity investment in First CBC Capital (Asia) Limited to the amount of
business. On November 9, 1950, petitioner, as surety, and Constancio San Jose, as principal, solidarily P16,227,851.80 consisting of 106,000 shares with par value of P100 per share.
executed a performance bond in the penal sum of P30,600.00 in favor of the P. L. Galang Machinery Subsequently, First CBC was found to be insolvent. Petitioners, with the approval of the BSP, wrote off
Co., Inc., to secure the performance of San Jose's contractual obligation to produce and supply logs to as worthless its investment in the company and treated it as a bad debt or ordinary loss deductible
the latter. To afford itself adequate protection against loss or damage on the performance bond, from its gross income. The Commissioner of Internal Revenue disallowed the deduction saying that the
petitioner required San Jose and one Ramon Cuervo to execute an indemnity agreement obligating investment could not be considered "worthless" since First CBC could still exercise its financing and
themselves, solidarily, to indemnify petitioner for whatever liability it may incur by reason of said investment activities even if it was no longer licensed as a depository. Even assuming that the securities
performance bond. Accordingly, San Jose constituted a chattel mortgage on logging machineries and had become worthless, it still cannot be considered as a "bad debt" or expense since there is no
other movables in petitioner's favor1 while Ramon Cuervo executed a real estate mortgage.2 San Jose indebtedness between petitioner and First CBC. It should be classified as a "capital loss."
later failed to deliver the logs to Galang Machinery3 and the latter sued on the performance bond. On Held: The SC found in favor of respondents.
October 1, 1952, the Court of First Instance adjudged San Jose and petitioner liable; it also directed San 1. Not and indebtedness. An equity investment in shares of stock cannot be considered as an
Jose and Cuervo to reimburse petitioner for whatever amount it would pay Galang Machinery. The indebtedness of First CBC Capital to China Bank. The former has no obligation to repay the latter the
Court of Appeals, on June 17, 1955, affirmed the judgment of the lower court. The same judgment was amount invested. The amount China Bank invested in First CBC is, in fact, an
likewise affirmed by this Court4 on January 11, 1957 except for a slight modification apropos the award asset.
of attorney's fees. In its income tax return for the year 1957, petitioner claimed the said 2. Capital asset, not ordinary. Capital assets are defined in the negative by Sec 33(1) of the NIRC as
amount of P44,490.00 as deductible loss from its gross income and, accordingly, paid the amount of property held by the TP exclusive of items primarily for the sale to customers in the ordinary course of
P136.00 as its income tax for 1957. The Commissioner of Internal Revenue disallowed the claimed business, or property used in trade or business. Hence, securities, such as equity holdings, are ordinary
deduction of P44,490.00 and assessed against petitioner the sum of P8,898.00, plus interest, as deficiency assets only in the hands of a dealer, or a person actively engaged in trading in the same for his own
income tax for the year 1957. Petitioner filed its protest which was denied. Whereupon, appeal was account.
taken to the Tax Court, petitioner insisting that the P44,490.00 which it paid to Galang Machinery was a 3. Section 29(d)(4)(B) of the NIRC treats the worthlessness of the securities held as capital assets as a
deductible loss. loss resulting from the sale or exchange of capital assets. Strictly speaking, no sale occurs when
Issue: WON the amount Plaridel paid to Galang Machinery is a deductible loss securities held as capital assets become worthless. Nonetheless, the law treats it as a loss from a sale just
Held: NO. There is no question that the year in which the petitioner Insurance Co. effected payment to the same.
Galang Machinery pursuant to a final decision occurred in 1957. However, under the same court 4. Section 33 of the NIRC provides that the capital loss sustained can only be deducted from any capital
decision, San Jose and Cuervo were obligated to reimburse petitioner for whatever gain derived within the taxable year. The same provision enumerates assets which are not subject to the
payments it would make to Galang Machinery. Clearly, petitioner's loss is compensable otherwise (than said limitation but equity holdings are not one of them.
by insurance). It should follow, then, that the loss deduction can not be claimed in 1957. Now,
petitioner's submission is that its case is an exception. Citing Cu Unjieng Sons, Inc. v. Board of Tax THE CITY LUMBER, INC V DOMINGO
Appeals,6 and American cases also, petitioner argues that even if there is a right to compensation by Facts: Respondent Domingo made an assessment on an additional income of petitioners in the amount
insurance or otherwise, the deduction can be taken in the year of actual loss where the possibility of of P16, 678.63 coming from: 1. the sale of plywood, kegs of nails, and GI sheets amouting to P 7,902.07,
recovery is remote. The pronouncement, however to this effect in the Cu Unjieng case is not as 2. a cash credit balance of P7,896.80 Petitioner assails the validity of the assessment alleging that the
authoritative as petitioner would have it since it was there found that the taxpayer had no legal right to inventory in question was not sold but were lost to looters during a fire which occurred in the city. To
compensation either by insurance or otherwise.7 And the American cases cited8 are not in point. None of this end, petitioner presented the testimony of the Chief of Police of Dumaguete City affirming the
occurrence of the fire. Also, the petitioner claimed that the cash credit balance appearing in their books not hereto fore repealed and not inconsistent with...this Law this Law." By virtue of
was actually a loan secured by petitioners. this saving clause, Section 1579 of the Revised Administrative Code finds application to Act 2833.
HELD:The assessments were valid. 1. The alleged loss of the plywood and kegs of nails was never 2. Fox v Edwards is not controlling since the law specifically applied therein did not require the lodging
reported in the books of the petitioner nor in the petitioner's ITR for that year. Such conduct of the of a protest concurrently with the payment for a TP to retain such right to protest. (NOTE fr digester: I
petitioner proves that such loss never occurred. 2. Similarly, there was neither any record in petitioner's did not find anything on losses or bad debts in this case. I may have overlooked it.)
books nor any receipt or other piece of evidence to show receipt of the supposed loan.
Facts: RA 35 granted a four-year tax exemption from all internal revenue taxes to enterprises, directly PHILIPPINE REFINING COMPANY V COURT OF APPEALS
payable by such enterprise or person, which shall engage in new and necessary industries. Petitioner Facts: In 1985, petitioner filed its ITR where it claimed 16 items amounting to P713,070.93 as bad debts
corporation was engaged in: 1. the manufacture of wire fences; 2. the manufacture of steel nails; 3. the and therefor deductible. Subsequently, the Commissioner for Internal Revenue disallowed such
manufacture of steel bars, rods, and other allied products deductions and assessed petitioner to pay a deficiency tax for the year of 1985. Petitioner paid the
of which the last two were covered by RA 35 In 1953 and 1954, petitioner filed its ITR showing a net deficiency tax under protest which the Commissioner denied.
income of P34,386.58 and P58,329.00, respectively, derived solely from its wire fence manufacturing Upon a petition for review, the CTA modified the findings of the Commissioner by reducing the
business. It was accordingly assessed P12,750 in taxes which it paid. subsequently, it filed an amended deficiency tax assessment on the basis that three of the sixteen supposed bad debts could be allowed as
ITR for the same taxable years showing that it actually incurred a loss of P871,407.37 and P104,956.29, deductions. The CA later on agreed with the CTA.
respectively. The losses were arrived at by consolidating the gross income and the gross allowable Held: The SC upheld the ruling of the CA which it found to be in accordance with the SC's ruling in
deductions of its three industries. Petitioner thus filed for a refund of the P12,750 it initially paid in Collector v Goodrich. It held the petitioner failed to substantiate the “worthlessness” of the 13 debts
taxes on the theory that since it is a corporation organized with a single capital to answer for all its which it claimed as deductions. As per the ruling in Collector v Goodrich, to qualify as a bad debt, a TP
financial obligations, the gross income from both tax-exempt and non-exempt industries and its must show: 1. that there is a valid and subsisting debt;
liability should be based on the difference between its consolidated gross income and its consolidated 2. that the debt must be actually ascertained to be worthless and uncollectible durring the taxable year;
allowable deductions. 3. the debt must be charged off during the taxable year; and
Held: Petition has no merit; Marcelo Steel cannot consolidate. 1. The purpose of RA 35 is to encourage 4. the debt must arise from the business or trade of the TP.
the establishment of new and necessary industries for the economic growth of the country. In effect, it In addition, the Court said, before a debt can be considered worthless, the TP must also show that it is
grants a subsidy to entrepreneurs who blaze a trail in a new industry since there are greater risks indeed uncollectible even in the future. Furthermore, the TP must undertake several steps to prove that
involved in the same and an ROI is usually not immediately forthcoming. As such, a tax exemption he exerted diligent efforts to collect the debt:
granted to an entrepreneur engaged in a tax-exempt industry cannot be extended to benefit non- 1. sending statements of accounts to the debtors; 2. sending of collection letters; 3. giving the account to
exempt industries in which the same entrepreneur is concurrently engaged. The justification is simply a lawyer for collection; and
not there since such industries are, presumably, already deriving profits from its operations. 2. Single 4. filing a collection case in court. In the case at bar, the petitioner miserably failed to show any of the
capital - The fact that all three industries are organized under a single capital is of no moment. It is clear foregoing. The only piece of evidence it offered to show the worthlessness of the debts was the
that the law intended that tax exempt testimony of the company's financial adviser or accountant. The Court found that this lacked the
and non-exempt industries be treated separately as reflected in EO 341, series 0f 1950, which was required probity to establish that the accounts it claimed as bad debts were indeed worthless. Apart
incorporated in RA 901, a later incarnation of the same law. from such testimony, the petitioner failed to introduce even a single iota of evidence to bolster its claim
PHILIPPINE SUGAR ESTATE CORP V COLLECTOR OF INTERNAL of worthlessness. (NOTE: In the rest of the case, the Court presents the allegation of the petitioner as to
REVENUE why it could not collect on any of the 13 debts followed by
Facts: Petitioner owned shares of stock in several different companies and 154 liberty bonds at par a statement how the petitioner failed to introduce evidence to substantiate such allegation.)
value of P100 each. It received certain sums from said corporation representing dividends on its shares
of stock as well as interst on the said liberty bonds. Petitioner filed its ITR inclusive Collector of Internal Revenue v Goodrich International Rubber Co.
of the sums above-stated for which it was assessed an amount in taxes. It paid said amount without (21 SCRA 1336; No. L-22265)
protest. Subsequently, petitioner filed a demand for refund. In the letter-demand, the ground for the Facts: In 1951 and 1952, respondent Goodrich filed it ITR in which it claimed an aggregate amount
refund invoked was the illegality o the collection since the dividends and interest were exempt from (consisting of 18 individual accounts) of P50,455.41 as deductible for being bad debts. The Collector of
payment of income tax. Although in the present petition, the ground invoked is that the income tax on Internal Revenue disallowed the deductions and accordingly assessed Goodrich accordingly. Goodrich
dividends had already been paid at the source. Respondent denied the claim for refund because protested the assessment and subsequently filed an appeal
plaintiff failed to lodge a protest concurrently when it paid its tax liability as per Sec 1579 of the with the CTA which allowed the deductions for bad debts. Hence, this appeal by the Government.
Revised Administrative Code, as amended by Act No. 3685. Plaintiff Held: Petition is partially meritorious. Some of the items claimed by Goodrich can rightfully be written
countered by saying that the applicable law is Act No. 2833 which requires no protest. In addition, it off as bad debts. The SC rejected the claim for deduction of 10 items because Goodrich
invoked the ruling in Fox v Edwards wherein it was ruled that any unduly paid income tax may be failed to establish that that the debts were actually worthless or that it had reasonable grounds to
refunded without the necessity of a protest. believe them to be so in 1951. The law permits the deduction of debts “actually ascertained to be
Held: The SC found in favor of the Collector. worthless within the taxable year,” obviously to prevent arbitrary action by the TP to unduly avoid tax
1.Controlling law - There is no need to distinguish between the two laws in this case. Section 19 of Act liability. Good faith on the part of the TP is not enough. He must furthermore show that he had
2833 provides that "all administrative, special, and general provisions of law, including laws in relation reasonably investigated the relevant facts and had drawn a reasonable inference from the information
to the assessment, remission, collection, and refund of internal revenue taxes thus obtained by him. At any rate, respondent failed to prove that the debts were indeed worthless and
that the debtors had no ability to pay them. On the contrary, of these 10 accounts some payments were purchased a lot located inQuezon City for P68,959.00 on January 19, 1944, which they sold for P94,000
actually made (some in full) after they had been characterized as bad debts and written off. The Court on February 9, 1951. The CTA ordered the estate of the late Felicidad Zamora (represented by
however ruled that 8 of the 18 claimed bad debts can be Esperanza A. Zamora, as special administratrix of her estate), to pay the sum of P235.50, representing
allowed as deductions. Common among these 8 was the action of Goodrich in persistently demanding alleged deficiency income tax and surcharge due from said estate.
payment from its debtors; it's endorsement of the accounts to counsel for collection; the pursuit of legal First issue – disallowance of the entire promotion expenses incurred by Mrs. Zamora
remedies for the collection on these debts; and the continuing failure/clear inability of the debtors to Petitioner: The CTA erred in disallowing P10,478.50 as promotion expenses incurred by his wife for the
pay off their obligations. promotion of the BayView Hotel and Farmacia Zamora. He contends that the whole amount of
P20,957.00 as promotion expenses should be allowed and not merely one-half of it. on the ground that,
DEDUCTIONS AND EXEMPTIONS; ALLOWABLE DEDUCTIONS; while not all the itemized expenses are supported by receipts, the absence of some supporting receipts
DEPRECIATION has been sufficiently and satisfactorily established - to purchase machinery for a new Tiki-Tiki plant,
BASILAN ESTATES, INC. v. CIR and to observe hotel management in modern hotels.
Facts: Basilan Estates, Inc. claimed deductions for the depreciation of its assets on the basis of their Respondents: Mrs. Zamora obtained only the sum of P5,000.00 from the Central Bank and that in her
acquisition cost. As of January 1, 1950 it changed the depreciable value of said assets by increasing it to application for dollar allocation, she stated that she was going abroad on a combined medical and
conform with the increase in cost for their replacement. Accordingly, from 1950 to business trip, which facts were not denied by Mariano Zamora. The alleged expenses were not
1953 it deducted from gross income the value of depreciation computed on the reappraised value. CIR supported by receipts. Mrs. Zamora could not even remember how much money she had when she left
disallowed the deductions claimed by petitioner, consequently assessing the latter of deficiency income abroad in 1951, and how the alleged amount of P20,957.00 was spent. There having been no means by
taxes. which to ascertain which expense was incurred by her in
Issue:Whether or not the depreciation shall be determined on the acquisition cost rather than the connection with the business of Mariano Zamora and which was incurred for her personal benefit, the
reappraised value of the assets. respondents considered 50% of the said amount of P20,957.00 as business expenses and the other 50%,
Held: Yes. The following tax law provision allows a deduction from gross income for depreciation but as her personal expenses.
limits the recovery to the capital invested in the asset being depreciated: (1)In general. — A reasonable Held: The 50% allocation is very fair to Zamora, there being no receipt to explain the alleged business
allowance for deterioration of property arising out of its use or employment in the business or trade, or expenses as well as the personal expenses that might have been incurred. While in situations like the
out of its not being used: Provided, That when the allowance authorized under this subsection shall present, absolute certainty is usually no possible, the CTA should make as close an approximation as it
equal the capital invested by the taxpayer . . . no further allowance shall be made. . . . The income tax can, bearing heavily, if it chooses, upon the taxpayer whose inexactness is of his own making. Section
law does not authorize the depreciation of an asset beyond its acquisition cost. Hence, a deduction over 30, of the Tax Code, provides that in computing net income, there shall be allowed as deductions all the
and above such cost cannot be claimed and allowed. The reason is that deductions from gross income ordinary and necessary expenses paid or incurred during the taxable year, in carrying on any trade or
are privileges, not matters of right. They are not created by implication but upon clear expression in the business. Since promotion expenses constitute one of the deductions in conducting a business, same
law. Depreciation is the gradual diminution in the useful value of tangible property resulting from must testify these requirements. Claim for the deduction of promotion expenses or entertainment
wear and tear and normal obsolescense. It commences with the acquisition of the property and its expenses must also be substantiated or supported by record showing in detail the amount and nature
owner is not bound to see his property gradually waste, without making provision out of earnings for of the expenses incurred.
its replacement. The recovery, free of income tax, of an amount more than the invested capital in an Second issue – disallowance/reduction of the rate of depreciation of Bayview Hotel (from 3.5% to
asset will transgress the underlying purpose of a depreciation allowance. For then what the taxpayer 2.5%)
would recover will be, not only the acquisition cost, but also some profit. Recovery in due time thru Petitioner: Contends that 1) the Ermita district is becoming a commercial district, 2) the hotel has no
depreciation of investment made is the philosophy behind depreciation allowance; the idea of profit on room for improvement, and(3) the changing modes in architecture, styles of furniture and decorative
the investment made has never been the underlying reason for the allowance of a deduction for designs, "must meet the taste of a fickle public". Also,the reference to Bulletin F, a publication by the
depreciation. IRS, should have been first proved as law to be subject of judicial notice.
Held: The CTA was approximately correct in holding that the rate of depreciation must be 2.5%. An
Zamora v. CIR average hotel building’s estimated useful life is 5 years, but inasmuch as it also depends on the use and
Facts: These are 4 cases regarding deficiency income taxes allegedly incurred by the Zamoras. location, change in population and other, it is allowed a deprecation rate of 2.5% which corresponds to
Cases Nos. L-15290 and L-15280:Mariano Zamora, owner of the Bay View Hotel and Farmacia Zamora, a useful life of 40 years. It is true that Bulletin F has no binding force, but it has a strong persuasive
Manila, filed his income tax returns the years 1951 and 1952. The Collector of Internal Revenue found effect considering that the same has been the result of scientific studies and observation for a long
that he failed to file his return of the capital gains derived from the sale of certain real properties and period in the United States after whose Income Tax Law ours is patterned." Verily, courts are permitted
claimed deductions which were not allowable. The CTA reduced the sum due Zamora and on appeal, to look into and investigate the antecedents or the legislative history of the statutes involved.
petitioner alleged that the CTA erred in disallowing the promotion expenses incurred by his wife for Third issue-the undeclared capital gains derived from the sales in 1951 of certain real properties in
promotion of the above businesses, depreciation of the Bayview Hotel Bldg, and in applying the Malate, Manila and in Quezon City, acquired during the Japanese occupation.
Ballantyne scale of values for determining the cost of his Manila property. The CIR, on the other hand, Held: The CTA’s appraisal in this case is correct. Consequently, the total undeclared income of
claimed that the CTA erred in reducing the amounts and giving credence to the uncorroborated petitioners derived from the sales of the Manila and Quezon City properties in 1951 is P17,111.75
testimony of Mariano Zamora that he bought the said real property in question during the Japanese (P1,750.00 plus P15,361.75), 50% of which in the sum of P8,555.88 is taxable, the said properties being
occupation, partly in Philippine currency and partly in Japanese war notes. Cases Nos. L-15289 and L- capital assets held for more than one year. The cost basis of property acquired in Japanese war notes is
15281 Mariano Zamora and his deceased sister Felicidad Zamora, bought a piece of land located in the equivalent of the war notes in genuine Philippine currency in accordance with the Ballantyne Scale
Manila on May 16, 1944, for P132,000.00 and sold it for P75,000.00 on March 5, 1951. They also of values, and that the determination of the gain derived or loss sustained in the sale of such property is
not affected by the decline at the time of sale, in the purchasing power of the Philippine currency. It
was found by the CTA that the purchase price of P132,000.00 was not entirely paid in Japanese War expenses is the amount-paid to Benguet as mine operator, which amount is computed as 50% of “net
notes but ½ thereof or P66,000.00 was in Philippine currency. This being the case, the Ballantyne Scale income.” The
of values, which was the result Consolidated deducts as an expense 50% of cash receipts minus disbursements, but does not deduct at
of an impartial scientific study, adopted and given judicial recognition, should be applied. As the value the end of each calendar year what the Commissioner alleges is "50% of the share of Benguet" in the
of the Japanese war notes in May, 1944 when the Manila property was bought, was 1 ½ of the genuine "accounts receivable." However, it deducts Benguet's 50% if and when the "accounts receivable" are
Philippine Peso (Ballantyne Scale), and since the gain derived or loss sustained in actually paid. It would seem, therefore, that Consolidated has been deducting a portion of this expense
the disposition of this property is to reckoned in terms of Philippine Peso, the value of the Japanese war (Benguet's share as mine operator) on the "cash & carry" basis. The question is whether or not the
notes used in the purchase of the property, must be reduced in terms of the genuine Philippine Peso to accounting system used by Consolidated justifies such a treatment of this item; and if not, whether said
determine the cost of acquisition. It, therefore, results that since the sum of P66,000.00 in Japanese war method used by Consolidated, and characterized by the Commissioner as a "hybrid method," may be
notes in May, 1944 is equivalent to P5,500.00 in Philippine currency (P66,000.00 divided by 12), the allowed under the provisions of the NIRC.
acquisition cost of the property in question is P66,000.00 plus P5,500.00 or P71,500.00 and that as the Issue: WON Consolidated’s accounting method is allowed
property was sold for P75,000.00 in 1951, the owners thereof Mariano and Felicidad Zamora derived a Held: YES. It is said that accounting methods for tax purposes comprise a set of rules for determining
capital gain of P3,500.00or P1,750.00 each. For the Quezon City property, the CTA was correct in giving when and how to report income and deductions. The U.S. Internal Revenue Code allows each taxpayer
credence to to adopt the accounting method most suitable to his business, and requires only that taxable income
Zamora’s testimony that the same was purchased inPhilippine currency, because it is quite incredible generally be based on the method of accounting regularly employed in keeping the taxpayer's books,
that real property with an assessed value of P46,910.00 should have been soldin Japanese war notes provided that the method clearly reflects income.
with an equivalent value in Philippine currency of only P17,239.75. Thus, the gain derived from the sale A deduction cannot be accrued until an actual liability is incurred, even if payment has not been made.
isP15,361.75, after deducting from the selling price the cost of acquisition in the sum of P68,959.00 and Here we have to distinguish between (1) the method of accounting used by Consolidated in determining
the expense of sale in the sum of P9,679.25. its net income for tax purposes; and (2) the method of computation agreed upon between Consolidated and
Disposition: The petitions are dismissed, and the decision appealed from is affirmed. Benguet in determining the amount of compensation that was to be paid by the former to the latter. The
parties, being free to do so, had contracted that in the method of computing compensation the basis
DEDUCTIONS AND EXEMPTIONS; ALLOWABLE DEDUCTIONS; were "cash receipts" and "cash payments." Once determined in accordance with the stipulated bases
DEPLETION and procedure, then the amount due Benguet for each month accrued at the end of that month, whether
CONSOLIDATED MINES V CTA Consolidated had made payment or not. To make Consolidated deduct as an expense one-half of the
Facts: Cosolidated Mines filed a refund for overpayments of income taxes for the year 1951. However, "Accounts Receivable" would, in effect, be equivalent to giving Benguet a right which it did not have
after investigation of the BIR, instead of having a refund, the company was instead assessed for under the contract, and to substitute for the parties' choice a mode of computation of compensation
deficiency income taxes for the years 1953, 1954, and 1956, with 5% surcharge not contemplated by them.
and 1% monthly interest. According to the investigation, (A) for the years 1951 to 1954 (1) the Company ON DEPLETION:
had not accrued as an expense the share in the company profits of Benguet Consolidated Mines as The first issue raised by Consolidated is with respect to the rate of mine depletion used by the Court of
operator of the Consolidated's mines, although for income tax purposes the Consolidated had reported Tax Appeals. The Tax Code provides that in computing net income there shall be allowed as deduction,
income and expenses on the accrual basis; (2) depletion and depreciation expenses had been in the case of mines, a reasonable allowance for depletion thereof not to exceed the market value in the
overcharged; and (3) the claims for audit and legal fees and miscellaneous expenses for 1953 and 1954 mine of the product thereof which has been mined and sold during the year for which the return is
had not been properly substantiated; and that (B) for the year 1956 (1) the Company had overstated its made [Sec. 30(g) (1) (B)]. As an income tax concept, depletion is wholly a creation of the statute —
claim for depletion; and (2) certain claims for miscellaneous expenses were not duly supported by “solely a matter of legislative grace.” Hence, the taxpayer has the burden of justifying the allowance of
evidence Background info: Consolidated and Benguet entered into a development agreement whereby any deduction claimed. As in connection
Consolidated, as the owner of several mining claims, allowed Benguet to explore, develop, mine, with all other tax controversies, the burden of proof to show that a disallowance of depletion by the
concentrate, and Commissioner is incorrect or that an allowance made is inadequate is upon the taxpayer, and this is
market the ore in the mining claims. In the agreement, it was provided that benguet is to provide the true with respect to the value of the property constituting the basis of the deduction. This burden-of-
funds necessary for the expenses until such time the properties are on a profit producing basis, to be proof rule has been frequently applied and a value claimed has been disallowed for lack of evidence.
reimbursed by consolidated. Once profit is derived, expenditures from its own resources shall be Here, SC considered the evidence presented (testimony of Eligio Garcia
charged against the subsequent gross income of the properties. During the time Benguet is being and the Report to Stockholders (which includes the Balance Sheet as of 1946), geological report on the
reimbursed for all its expenditures, the net profits resulting from the operation of the claims shall be estimated amount of ore in the claims, etc.) it set forth a very detailed computation of the depletion
divided 90% to Benguet and 10% to Consolidated. Such division of net profits shall be based on the rate, determining the value of each component of the formula of depletion, viz: Rate of Depletion Per
receipts, and expenditures during each calendar year, and Unit = Cost of Mine Property / Estimated ore Deposit of Product Mined and sold
shall continue until such time as the 90% of the net profits pertaining to Benguet hereunder shall equal - depletion is different from depreciation In determining the amount of cost depletion allowable the
the amount of such expenditures. “After Benguet has been fully reimbursed for its expenditures, the following three facts are essential, namely, (1) the basis of the property, (2) the estimated total
net profits from the operation shall be divided between Benguet and Consolidated share and share recoverable units in the property; and (3) the number of units recovered during the taxable year in
alike, it being understood however, that the net profits as the term is used in this agreement shall be question. As used as an element in cost depletion, basis means the dollar amount of the
computed by deducting from gross income all operating expenses and all disbursements of any nature taxpayer's capital or investment in the property which he is entitled to recover tax free during the
whatsoever as may be made in order to carry out the terms of this agreement.” It appears that by 1953 period he is removing the mineral in the deposit.
Benguet had completely recouped its advances, because they were then dividing the profits share and Disposition Decision modified
share alike. Consolidated used the accrual method of accounting in computing its income. One of its
Footnotes in the case that are helpful: While taxable income is based on the method of accounting used their respective holdings in installment for a period of 10 years, it would nevertheless not make the
by the taxpayer, it will almost always differ from accounting income. This is so vendor Roxas y Cia. a real estate dealer during the 10-year amortization period. It should be borne in
because of a fundamental difference in the ends the two concepts serve. Accounting attempts to match mind that the sale of the Nasugbu farm lands to the very farmers who tilled them for generations was
cost against revenue. Tax law is aimed at collecting revenue. It is quick to treat an item as income, slow not only in consonance with, but more in obedience to the request and pursuant to the policy of our
to recognize deductions or losses. Thus, the tax law will not recognize deductions for contingent future Government to allocate lands to the landless. It was the bounden duty of the Government to pay the
losses except in very limited situations. Good accounting, on the other hand, their recognition. Once agreed compensation after it had persuaded Roxas y Cia. to sell its haciendas, and to subsequently
this fundamental difference in approach is accepted, income tax accounting methods can be understood subdivide them among the farmers at very reasonable terms and prices. However, the Government
more easily. 33 Am. Jur. 2d 688. Under the accrual system income is accruable in the year in which the could not comply with its duty for lack of funds. Obligingly, Roxas y Cia. shouldered the Government's
taxpayer's right thereto becomes fixed and definite, even though it may not be actually received until a burden, went out of its way and sold lands directly to the farmers in the same way and under the same
later year, while a deduction for a liability is to be accrued and taken when the liability becomes fixed terms as would have been the case had the Government done it itself. For this magnanimous act, the
and certain, even though it may not be paid until a later year. It has been held that the basis of the municipal council of Nasugbu passed a resolution expressing the people's gratitude.
accrual system of accounting is that obligations incurred in the normal course of business will be In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale in question. Hence, pursuant
discharged in due course; that the deductions have been "paid or accrued" or "paid and incurred;" but to Section 34 of the Tax Code the lands sold to the farmers are capital assets, and the gain derived from
in order to be accruable in the taxable year, a valid obligation upon which the profit (or loss, in the case the sale thereof is capital gain, taxable only to the extent of 50%.
of a deduction) is to be determined must have existed in the year in which the obligation became
binding or enforceable. The date of the accrued right to receive income, or the obligation to pay or DEDUCTIONS AND EXEMPTIONS; NON-DEDUCTIBLE EXPENSE
expend money constituting a deductible loss, is the date that fixes liability. Gain or loss may not said to CIR v JAMIR
be fixed or accrued when the obligation is contingent upon the happening of a future event. No duty or Facts: For the year 1954, Alberto M. K. Jamir declared a gross income of P75,858.65 and claimed
liability to pay an income tax upon a transaction arises until the taxable year in which the event deductions aggregating P58,134.50, thereby showing a net income of P17,774.15, upon which he paid
constituting the condition precedent occurs under any system ofaccounting. P1,634 as income tax. The Collector of Internal Revenue, however, assessed, as
deficiency income tax due from him, the sum of P16,395. Jamir appealed to the Court of Tax Appeals,
DEDUCTIONS AND EXEMPTIONS; ALLOWABLE DEDUCTIONS; which reduced the amount due as deficiency income tax to P552.00
CHARITABLE AND OTHER CONTRIBUTIONS Issue: Whether Jamir had an undeclared income for the year 1954 aggregating P31,274.91.
ROXAS v. CTA, GR No L-25043, April 26, 1968 Held: No. It appears that, by using the so-called "expenditures method", the Government considered as
Facts: Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects, transmitted to their grandchildren an undeclared income Jamir's expenditures for February and May were in excess of his reported
by hereditary succession several properties. To manage the above-mentioned properties, said children, income for the same months. Although the Court of Tax Appeals, in effect, sanctioned the adoption of
namely, Antonio Roxas, Eduardo Roxas and Jose Roxas, formed a the "expenditures method", it held that the same should be applied by deducting the aggregate yearly
partnership called Roxas y Compania. At the conclusion of the WW2, the tenants who have all been expenditures from the declared yearly income, not the expenditures incurred each month from the
tilling the lands in Nasugbu for generations expressed their desire to purchase from Roxas y Cia. the declared income therefor. In the case at bar, Jamir's total income for the year 1954 (P75,858.65) exceeded
parcels which they actually occupied. For its part, the Government, in consonance with the (Pl7,774.15) the total deductions (P58,134.50) claimed by him. Jamir introduced evidence that the said
constitutional mandate to acquire big landed estates and apportion them among landless tenants- sums of P1,281.24 and
farmers, persuaded the Roxas brothers to part with their landholdings. Conferences were held with the P29,993.67 represented advances made to him by customers in the months of February and may, 1954,
farmers in the early part of 1948 and finally the Roxas brothers agreed to sell 13,500 hectares to the and that the income derived from the corresponding transactions were entered in his books of account
Government for distribution to actual occupants for a price of P2,079,048.47 plus P300,000.00 for survey in subsequent months, and this explanation was found by the Court of Tax Appeals to have been
and subdivision expenses. It turned out however that the Government did not have funds to cover the proven satisfactorily. The next question raised by appellant refers to Jamir's claim for car depreciation
purchase price, and so a special arrangement was made for the Rehabilitation Finance Corporation to and salary of his driver. Although petitioner had disallowed one-half (1/2) of these claims, it appearing
advance to Roxas y Cia. The amount of P1,500,000.00 as loan. Collateral for such loan were the lands that the car was used by Jamir for personal and business purposes, the lower court allowed, as
proposed to be sold to the farmers. Under the arrangement, Roxas y Cia. allowed the farmers to buy the deductions, three-fourths (3/4) of said amounts, the car having been used by Jamir "more for business
lands for the same price but by installment, and contracted with the Rehabilitation Finance Corporation than for personal purpose". Petitioner
to pay its loan from the proceeds of the yearly amortizations paid by the farmers. The CIR demanded assails this as an error, but, considering the circumstances, we agree with the deduction of ¾ by the
from Roxas y Cia the payment of deficiency income taxes resulting from the inclusion as income of lower court. It is next urged that Jamir committed fraud and the 50% surcharge should not have been
Roxas y Cia. of the unreported 50% of the net profits for 1953 and 1955 derived from the sale of the eliminated. But since Jamir did not have the undeclared income of P31,274.91, upon which the
Nasugbu farm lands to the tenants, and the disallowance of deductions from gross income of various contested assessment is mainly based, it follows necessarily that he was not guilty
business expenses and contributions claimed by Roxas y Cia. and the Roxas brothers. For the reason of the fraud and that the 50% surcharge has been properly eliminated.
that Roxas y Cia. subdivided its Nasugbu farm lands and sold Disposition: the decision appealed from is hereby affirmed.
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 Atlas Consolidated Mining v. CIR
protested the assessment but inasmuch as said protest was denied, they instituted an appeal in the CTA Facts: CIR assessed Atlas deficiency income tax for 1957 to 1958 which amounted to morethan P700K.
which sustained the assessment. Hence, this appeal. CIR asserted that in 1957, Atlas was still not entitled to exemption fromthe income tax under RA 909
Issue: Is Roxas y Cia. liable for the payment of deficiency income for the sale of Nasugbu farmlands? because the same covers only gold mines and Atlas isnot engaged in that. Atlas
Held: NO. The proposition of the CIR cannot be favorably accepted in this isolated transaction with its protested before the Sec of Finance and Sec ruled that exemption provided in RA 909 embraces all new
peculiar circumstances in spite of the fact that there were hundreds of vendees. Although they paid for mines and old mines, whether gold or other minerals. Hence, Sec recomputed and eliminated P500K+
in 1957 and reduced P215K to P39K in 1958. Atlas appealed to this assessments assailing the : the 5 yr period for judicial action should be counted from May 12 50, the date of original assessment
disallowance of the following items: transfer agent􀀀s fees, stockholders relation service fee, US stock SC: Section 316 provides: The civil remedies for the collection of internal revenue taxes, fees, or charges,
listing expenses, suit expenses, provision for contingency. CTA disallowed the items except the and any increment thereto resulting from delinquency shall be (a) by distraint of goods, chattels, or
stockholders relation service fee and suit expenses. Also CTA ruled that the exemption from payment effects, and other personal property of whatever character, including stocks and other securities, debts,
of the corporate income tax of Atlas was good only up to the first quarter of 1958, hence it computed for credits, bank accounts, and interest in and rights to personal property, and by levy upon real property;
its net taxable income for the remaining ¾ of the year. Atlas appealed asserting that the annual public and (b) by judicial action. Either of these remedies or both simultaneously may be pursued in the
relations expense is a deductible expense from gross income because it is an ordinary and necessary discretion of the authorities charged with the collection of such taxes. No exemption shall be allowed
business expense. against the internal revenue taxes in any case.
Issue: WON this fee paid for the services rendered by a public relations firm in the US labeled as : Deduction for expenses may be allowed, however in this case, Gancayco was not able to prove any
stockholders relation service fee is an allowable deduction. expense as there were no receipts or other proofs. CTA AFFIRMED
Held: No. it is a capital expenditure and not an ordinary expense. The principle is recognized that
when a taxpayer claims a deduction, he must point to some specific provision of the statute in which DEDUCTIONS AND EXEMPTIONS; NON-DEDUCTIBLE EXPENSES;
that deduction is authorized and must be able to prove that he is entitled to the deduction which the ILLEGAL EXPENSES
law allows. As previously adverted to, the law allowing expenses as deduction from gross income for CALANOC V COLLECTOR
purposes of the income tax is Section 30 (a) (1) of the National Internal Revenue which allows a Facts:
deduction of "all the ordinary and necessary expenses paid or Calanoc was authorized to solicit and receive contributions for the orphans and destitute kids of the
incurred during the taxable year in carrying on any trade or business." An item of expenditure, in order Child Welfare Workers Club of the Social Welfare Commission.
to be deductible under this section of the statute, must fall squarely within its language. We come, then, Dec 1949, Calanoc financed and promoted a boxing exhibition at the Rizal Memorial Stadium for said
to the statutory test of deductibility where it is axiomatic that to be deductible as a business expense, charitable purpose
three conditions are imposed, namely: (1) the expense must be ordinary and necessary, (2) it must be He applied for exemption from payment of the amusement tax as provided in Sec 260 NIRC
paid or incurred within the taxable year, and (3) it must be paid or incurred in carrying in a trade or CIR investigated the tax case of Calanoc and it was found that there was gross sale of Php 26,553,
business. In addition, not only must the taxpayer meet the expenditure of 25,157 and profit of 1,375.30
business test, he must substantially prove by evidence or records the deductions claimed under the Profit was remitted to Social Welfare Commission.
law, otherwise, the same will be disallowed. The mere allegation of the taxpayer that an item of CIR demanded Calanoc oto pay 533
expense is ordinary and necessary does not justify its deduction. Assuming that the expenditure is Sec of Finance denied the application of Calanoc for exemption from payment of amusement tax
ordinary and necessary in the operation of the taxpayer's business, the answer to the question as to CTA: Affirmed the assessment of 7k Calanoc; denies receving a stadium fee of 1k
whether the expenditure is an allowable deduction as a business expense must be determined from the : Although it was shown that 1k was paid by O-OSO Beverages
nature of the expenditure itself, which in turn depends on the extent and permanency of the work : His accountant is dead
accomplished by the expenditure. The expenditure of P25,523.14 paid to P.K. Macker & Co. as SC: the items of expenditures for deduction are exorbitant and not supported by receipts
compensation for services carrying on the selling campaign in an effort to sell Atlas' additional capital CTA Affirmed
stock of P3,325,000 is not an ordinary
expense in line with the decision of U.S. Board of Tax Appeals in the case of Harrisburg Hospital Inc. 3M PHILIPPINES, INC., petitioner, vs. COMMISSIONER OF
vs. Commissioner of Internal Revenue. Accordingly, as found by the Court of Tax Appeals, the said INTERNAL REVENUE, respondent. [G.R. No. 82833. September 26,
expense is not deductible from Atlas gross income in 1958 because expenses relating to 1) 1988.]
recapitalization and reorganization of the corporation, 2) the cost of obtaining stock subscription Facts: The petitioner claimed as deductions for income tax purposes "business expenses" in the form of
3)promotion expenses and 4) commission or fees paid for the sale of stock reorganization are capital royalty payments to its foreign licensor which the respondent Commissioner of Internal Revenue
expenditures. The burden of proof that the expenses incurred are ordinary and necessary is onthe disallowed. The petitioner claimed the following deductions royalties and technical service fees and
taxpayer. The claimed business expense must also be supported by appropriate documents such as pre-operational cost of tape coater. The amount was not allowed as entire deduction. The petitioner
invoices, official receipts, and contracts, to be made available in case of a tax audit by the Bureau of argues that the law applicable to its case is only Section 29(a)(1) of the Tax Code and not Circular No.
Internal Revenue. 393 of the Central Bank.
Issue: WON the royalty payments are valid deductible expense. WON the Tax Code is applicable.
GANCAYCO V COLLECTOR Held: No. Although the Tax Code allows payments of royalty to be deducted from gross income as
Facts: business expenses, it is CB Circular No. 393 that defines what royalty payments are proper. Improper
Gancayco filed his Income tax Return (ITR) for 1949. payments of royalty are not deductible as legitimate business expenses. Section 3-c of CB Circular No.
CIR notified him that his liability is Php 9.793.62, which he paid 1950 393 provides for payment of royalties only on commodities manufactured by the licensee under the
CIR after a year wrote to Gancayco saying that there was tax due from him for a total of Php royalty agreement not on the wholesale price of finished products imported by the licensee from the
29,554.05 licensor. entral Bank Circulars, like CB Circular No. 393 (dated December 7, 1973, published in the
Gancayco asked for reconsideration and the tax assessed wasreduced Official Gazette issue of December 17, 1973 [69 O.G. No. 51, p. 11737] issued by the Central Bank in the
CIR issued a warrant of distraint for the deficient liability exercise of fits authority under the Central Bank Act, duly published in the Official Gazette, have the
Gancayco filed petition with CTA force and effect of law (Cases cited) and
CTA: Required Gancayco to pay Php 16, 860.31 for tax deficiency in1949 binding on everybody.
Gancayco: the right to collect the deficiency income tax is barred by thestatute of limitations.
DEDUCTIONS AND EXEMPTIONS; PERSONAL EXEMPTIONS or main support. Partial support not amounting to chief support will not entitle the taxpayer to claim
COLLECTOR OF INTERNAL REVENUE, petitioner, vs. ORLANDO V. exemption as a head of a family. Regulation No. section 11
CALSADO and COURT OF TAX APPEALS, respondents. [G.R. No. L-
10293. February 27, 1959.]
Facts: The appellant refused to recognize the appellee as head of a family within the meaning of section
(b) of the National Internal Revenue Code (Commonwealth Act No. 466, as amended by Republic Act
No. 590) and assessed him for deficiency taxes. According to the respondent-appellee he has a brother
below 21 years old mainly dependent upon him for support.
Issue: WON the respondent is classified as head of the family.
Held: Yes. For an unmarried individual to fall within the term "head of a family" under Section 23 (b) of
the National Internal Revenue Code, it is enough that he has either of the following who is dependent
upon him for his chief support: a father or mother or both, one or more brothers or sisters, one or more
legitimate, recognized natural or adopted children, provided such brother, sister or child is less than 21
years of age. The fact that the father is still alive and continues to exercise parental authority over his
minor children is of no moment. All that the law requires in order that an unmarried individual may be
considered as head of a family is that the relatives enumerated be dependent upon him for their chief
support. *Under RA 9504 Regardless of the classification, the allowed personal exemption is Php50,000.

In the matter of the adoption of the minor MARCIAL ELEUTERIO RESABA. LUIS SANTOS-YÑIGO
and LIGIA MIGUEL DE SANTOSYÑIGO, petitioners-appellees, vs. REPUBLIC OF THE
No. L-6294. June 28, 1954.]
Facts: The petitioners adopted a child while they have two legitimate children of their own. The said
children were born after the agreement for adoption was executed by petitioners and the parents of the
Issue: WON the adoption is valid
Held: Yes. The purpose of adoption is to afford to persons who have no child of their own the
consolation of having one by creating, through legal fiction, the relation of paternity and filiation where
none exists by blood relationship. This purpose rejects the idea of adoption by persons who have
children of their own, for otherwise, conflicts, friction, and differences may arise resulting from the
infiltration of foreign element into a family which already counts with children upon whom the parents
can shower their paternal love and affection. While the adoption agreement was executed at a time
when the law applicable to adoption is Rule 100 of the Rules of Court, which does not prohibit persons
who have legitimate children from adopting, such
agreement can not have the effect of establishing the relation of paternity and filiation by fiction of law
without the sanction of court. The only valid adoption in this jurisdiction is that one made through
court, or in pursuance of the procedure laid down by the rule. *For tax purposes - A head of family is
an individual who actually supports and maintains in one household one or more individuals, who are
closely connected with him by blood relationship, relationship by
marriage, or by adoption, and whose right to exercise family control and provide for these dependent
individuals is based upon some moral or legal obligation. In the absence of continuous actual residence
together, whether or not a person with dependent relatives is a head of a family within the meaning of
the statute must depend on the character of the separation. If a father is absent on business, or a child or
other dependent is away at school or on a visit, the common home being still maintained, the
additional exemption applies. If, moreover, through force of circumstances a parent is obliged to
maintain his dependent children
with relatives or in a boarding house while he lives elsewhere, the additional exemption may still
apply. If, however, without necessity, the dependent continuously makes his home elsewhere, his
benefactor is not the head of a family, irrespective of the question of support. A resident alien with
children abroad is not thereby entitled to credit as the head of a family. Chief support means principal