DEDUCTIONS AND EXEMPTIONS DEDUCTIONS IN GENERALZAMORA v COLLECTOR [GR No L-15290 May 31 1963]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 for the promotion of the Bay View Hotel and Farmacia Zamora were not allowable deductions Mariano Zamora contends that the whole amount of the promotion expenses in his income tax returns should be allowed and not merely one-half of it on the ground that while not all the itemized expenses are supported by receipts the absence of somesupporting receipts has been sufficiently and satisfactorily established ISSUE In the absence of receipts WON to allow as deduction all or merely one-half of the promotion expenses of Mrs Zamora claimed in Mariano Zamoras income tax returnsHELD One-half only Claims for the deduction of promotion expenses r entertainment expenses must also be substantiated or supported by record showing in detail the amount and nature of the expense incurred Considering that the application of Mrs Zamora for dollar allocation shows that she went abroad on a combined medical and business trip not all of her expenses came under the category of ordinary and necessary expenses part thereof constituted her personal expenses There having been no means by which to ascertain which expense wasincurred by her in connection with the business of Mariano Zamora and which was incurred for her personal benefit the Collector and the CTA in their decisions considered 50 of the said amount as business expense and the other 50 as her personal expenses While in situations like the present absolute certainty is usually not possible the CTA should make as close an approximate as it can bearing heavily if it chooses upon the taxpayer whose inexactness is of his own making

ESSO STANDARD v CIR [GR Nos 28508-9 July 7 1989]FACTS Petitioner ESSO claimed as ordinary and necessary expenses in the same return the margin fees it paid to the Central Bank on its profit remittances to its New York head officeISSUE WON the margin fees were deductible from gross income either as a tax or as an ordinary and necessary business expense HELD Neither The margin fees were imposed by the State in the exercise of its police power and not the power of taxation Neither are they necessary and ordinary business expenses To be deductible as a business expense the expense must be paid or incurred in carrying on a trade or business The fees were paid for the remittance by ESSO as part of the profits to the head office in the United States which is already another distinct and separate income taxpayer Such remittance was an expenditure necessary and proper for the conduct of its corporate affairs

CIR v GENERAL FOODS [GR No 143672 April 24 2003]FACTS In its income tax return respondent corporation claimed as deduction among other business expenses the amount for media advertising for lsquoTangrsquo one of its productsISSUE WON the subject media advertising expense for lsquoTangrsquo incurred by respondent was an ordinary and necessary expense fully deductible under the NIRCHELD Not deductible Deductions for income tax purposes partake of the nature of tax exemptions hence must be strictly construed To be deductible from gross income the subject advertising expense must be ordinary and necessary There being no hard and fast rule on thereasonableness of an advertising expense the right to a deduction depends on a number of factors such as but not limited to the type and size of business in which the taxpayer is engaged the volume and amount of its net earnings the nature of the expenditure itself theintention of the taxpayer and the general economic conditions The amount claimed as media advertising expense for lsquoTangrsquo alone was almost one-half of its total claim for marketing expenses Furthermore it was almost double the amount of respondent corporations general and administrative 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 and should not therefore be considered as business expense but as capital expenditure which normally should be spread out over a reasonable period of time

CM HOSKINS v CIR GR No L-28383 June 22 1976]FACTS Petitioner-appellant a domestic corporation engaged in the development and management of subdivisions sale of subdivision lots and collection of installments due for a fee which the real estate owners pay as compensation for each of the services rendered failed to pay the real estate brokers tax on its income derived from the supervision and collection fees Consequently the Commissioner of Internal Revenue demanded the payment of the percentage tax plus surcharge contending that said income is subject to the real estate brokers percentage tax On the other hand petitioner-appellant claimed that the supervision and collection fees do not form part of its taxable gross compensationISSUE WON the supervision and collection fees received by a real estate broker are deductible from its gross compensation HELD No With respect to the collection fees the services rendered by Hoskins in collecting the amounts due on the sales of lots on the installment plan are incidental to its brokerage service in selling the lots If the brokers commissions on the cash sales of lots are subject to the brokerage percentage tax its commissions on installment sales should likewise be taxable As to the supervision fees for the development and management of the subdivisions which fees were paid out of the proceeds of the sales of the subdivision lots they too are subject to thereal estate brokers percentage tax The development management and supervision services were necessary to bring about the sales of the lots and were inseparably linked thereto Hence there is basis 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

GANCAYCO v COLLECTOR [GR No L-13325 April 20 1961]FACTS Petitioner Santiago Gancayco seeks the review of a decision of the Court of Tax Appeals requiring him to pay deficiency income tax The question whether the sum is due from Gancayco as deficiency income tax hinges on the validity of his claim for deduction of two (2)items namely (a) for farming expenses and (b) for representation expensesISSUE WON the two claimed deductions are allowableHELD No In computing net income no deduction shall be allowed in respect of any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate The cost of farm machinery equipment and farm building represents a capital 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 capitalexpenditure Accordingly they are not deductible As for Gancaycos claim for representation expenses a fraction was disallowed Such disallowance is justified by the record for apart from the absence of receipts invoices or vouchers of the expenditures petitioner could not specify the items constituting the same or when or on whom or on what they were incurred

WESTERN MINOLCO v CIR [GR No L-61632 August 16 1983]FACTS Petitioner is a domestic corporation engaged in mining particularly copper concentrates for export mined from mineral lands It was granted by the Securities and Exchange Commission under Certificate of Renewal No R-1056 authority to borrow money and issuecommercial papers Pursuant to this authority the petitioner borrowed funds from several financial institutions and paid the corresponding 35 transaction tax due thereon Petitioner applied for a refund alleging that it was not liable to pay the 35 transaction taxISSUE WON the 35 transaction tax is a business tax that constitutes an allowable deduction from gross incomeHELD No The 35 transaction tax is imposed on interest income from commercial papers issued in the primary money market Being a tax on interest it is a tax on income The petitioner who borrowed funds from several financial institutions by issuing commercial papers merelywithheld the 35 transaction tax before paying to the financial institutions the interests earned by them and later remitted the same to the respondent Commissioner of Internal Revenue Whatever collecting procedure is adopted does not change the nature of the tax Furthermore whether or not certain taxes are on income is not necessarily determined by their deductibility or non-deductibility from ross income Income in the form of dividends capital gains on real

property shares of stock and interests on savings in bank accounts are incomes yet they are not included in the gross income when income taxes are paid because these are subject to final withholding taxes

COMMISSIONER OF CUSTOMS VS PHILIPPINE ACETYLENECOMPANYFacts Philippine Acetylene Company is engaged in the manufacture of oxygen acetylene and nitrogen and packaging of liquefied petroleum gas in cylinders and tanks It imported from the United States a custombuilt liquefied petroleum gas tank For the said importation the companywas assessed a special import tax amounting to PhP 368300 The company paid the tax under protest Philippine Acetylene Company argues that it is exempt from the payment of the special import tax It cites as basis for its exemption Sec 6 of RA No1394 which states that special import taxes shall not be imposed on machinery equipment accessories and spare parts imported into the Philippines for the use of industries The company maintains that it is anindustry as defined in Sec 6 of RA No 1394 The Court of Tax Appeals sustained Philippine Acetylene Companyrsquos contention and declared the latter exempt from the payment of thespecial import taxIssue Whether or not Philippine Acetylene Company may be considered engaged in an industry as contemplated in Sec 6 of RA No 1394 and therefore exempt from the payment of the special import taxHeld Philippine Acetylene Company is not an industry as defined in Sec 6 of RA No 1394 To be an industry the company must be engaged in some productive enterprise not in merely packaging an already finished product The operation for which the company employs the gas tank in question does not involve manufacturing or production It is nothing but packaging the liquefied gas when obtained from the refinery has to be placed in some kind of container to facilitate its transportation When sold to consumers it undergoes no change or transformation but is merely placed in smaller cylinders for convenience The process is certainly notproduction in any sense The decision of the CTA is reversed and Philippine Acetylene Company is held liable for the payment of the special import tax as it is not an industry exempt from the payment of such tax

COMMISSIONER OF INTERNAL REVENUE VS ARNOLDUSCARPENTRY SHOP INCFacts Arnoldus Carpentry Shop Inc is a domestic corporation engaged in the business of preparing processing buying selling exporting importing manufacturing trading and dealing in cabinet shop products wood and metal home and office furniture cabinets doors windowsetc including their component parts and materials of any and all nature and descriptionThe Commissioner of Internal Revenue conducted an investigation of the business tax liabilities of Arnoldus Carpentry Shop Inc After the examination the CIR concluded that Arnoldus Carpentry Shop Inc is an independent contractor under Sec 205 (16) [now Sec 169 (q)] of the Tax Code As a result of this classification Arnoldus Carpentry Shop Inc was assessed deficiency tax (PhP 8897223) plus charges and interest This tax deficiency was a consequence of the 3 tax imposed on the companyrsquos gross export sales which in turn resulted from the CIRrsquos finding that categorized the company as a contractor Arnoldus Carpentry Shop Inc protested the assessment maintaining that it is a manufacturer and therefore entitled to tax exemption on its gross export sales under Sec 202 (e) of the National Internal Revenue Code The CIR stood by its initial finding that Arnoldus Carpentry Shop Inc is a contractor not a manufacturer Arnoldus Carpentry Shop Inc appealed to the Court of Tax Appeals The CTA held that Arnoldus Carpentry Shop Inc is a manufacturer effectively reversing the decision of the CIRIssue Whether Arnoldus Carpentry Shop Inc is a manufacturer or contractor If found a manufacturer the company is therefore not liable for the amount assessed as deficiency contractorrsquos taxHeld Arnoldus Carpentry Shop Inc is a manufacturer as defined in the Tax Code and not a contractor A contractor under Sec 205 (16) [now Sec 170 (q)] of the Tax Code is one whose activity consists 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 other hand a manufacturer under Sec 187 (x) [now Sec 157 (x)] of the Tax Code is one who by physical or chemical process alters the exterior texture orform or inner substance of any raw material or manufactured or partially manufactured product The term manufacturer had been considered in its ordinary and general usage and Arnoldus Carpentry Shop Inc falls under this definition The Court affirmed the decision of the CTA holding that Arnoldus Carpentry Shop Inc is a manufacturer The company is entitled to thetax exemption under Sec 202 (d) and (e) [now Sec 167 (d) and (e)] of the Tax Code It is not liable for the deficiency contractorrsquos tax assessed by the CIR

BANK OF THE PHILIPPINE ISLANDS VS TRINIDADFacts Bank of the Philippine Islands is a domestic banking corporation operating under a special charter granted by the Philippine Legislature through Act No 1790 The charter contains a clause to the effect that no law shall be made or enforced imposing a charge or taxation upon BPI which shall not apply equally to other banks of a similar type operating under similar conditions The Collector of Internal Revenue collected internal revenue taxes upon BPIrsquos circulating notes issued by the bank for the years 1919-1921 The Philippine Legislature through Act No 2612 created the Philippine National Bank Under Sec 18 of the PNB Charter it is provided that the circulating notes of PNB shall be exempt from any and all taxes The CIR did not collect taxes upon the circulating notes of PNB because of the exemption granted to the latter by Sec 18 of Act No 2612 BPI contends that BPI and PNB are banks of similar type and operating under similar conditions Thus BPI should also be entitled to the same exemptions and privileges granted to PNB Essentially BPI argues that it should also be exempt from the payment or taxes upon its circulating notes Issue Whether or not BPI and PNB are banks of similar type and operating under similar conditions Whether or not BPI is exempt from the payment or taxes upon its circulating notesHeld The Court noted that subsequent to the filing of the action PNB paid to the CIR PhP 51904303 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 conditions BPI is not exempt from the payment of taxes upon its circulating notes It is not entitled to a refund of the payments it made for that purpose TheCourt used Sec 1499 of the Administrative Code of 1917 in ruling that BPI is not tax exempt This Section allows the collection from banks of taxes on capitals deposits and circulation Exemptions are strictly construed against the taxpayer so unless BPI can show clearly that it has been granted the status of exemption then it cannot avail itself of such entitlement The fact that one person may not have paid or been required to pay his taxes does not exempt another from the payment of his legal taxes or legally entitle him to a refund of any taxes which hehas paid

DEDUCTIONS AND EXEMPTIONS DEDUCTIONS IN GENERALALLOCATIONYUTIVO SONS HARDWARE CO VS COURT OF TAX APPEALSFacts Yutivo Sons Hardware Co is a domestic corporation engaged in the importation and sale of hardware supplies and equipment It bought a number of cars and trucks from General Motors Overseas Corporation an American corporation licensed to do business in the Philippines Asimporter GM paid sales tax prescribed by sections 184 185 and 186 of the Tax Code on the basis of its selling price to Yutivo Said tax being collected only once on original sales Yutivo paid no further sales tax on its sales to the public Southern Motors Inc was organized to engage in the business of selling cars trucks and spare parts Its shares were subscribed in five equal proportions by the descendants of the founders of Yutivo When GM withdrew from the Philippines the cars and trucks purchased by Yutivo from GM were sold by Yutivo to SM which in turn sold them to the public in the Visayas and Mindanao GM appointed Yutivo as importer for the Visayas and Mindanao and Yutivo continued its previous arrangement of selling exclusively to SM In the same way that GM used to pay sales taxes based on its sales to Yutivo the latter as importer paid sales tax on the basis of its selling price to SM and since such sales tax as already stated is collected only once on original sales SM paid no sales tax on its sales to the public Yutivo was investigated by the CIR and was assessed deficiency salestax plus surcharge The CIR claimed that the taxable sales were the retail sales by SM to the public and not the sales at wholesale made by Yutivo to the latter inasmuch as SM and Yutivo

were one and the same corporation the former being the subsidiary of the latter Yutivo alleged the following before the Court of Tax Appeals (1) that there is no valid ground to disregard the corporate personality of SM and to hold that it is an adjunct of petitioner Yutivo (2) that assuming that the separate personality of SM may be disregarded the sales tax alreadypaid by Yutivo should first be deducted from the selling price of SM in computing the sales tax due on each vehicle and (3) that the surcharge has been erroneously imposed by the CIR The CTA ruled in favor of CIR and ruled that the creation of SM is for Yutivo to evade taxes as it isowned and controlled by Yutivo and is a mere subsidiary branch adjunct conduit instrumentality or alter ego of the latter Issue Whether or not SM has a personality separate and distinct from YutivoHeld It is an elementary and fundamental principle of corporation law that a corporation is an entity separate and distinct from its stockholders and from other corporations to which it may be connected However when the notion of legal entity is used to defeat public conveniencejustify wrong protect fraud or defend crime the law will regard the corporation as an association of persons or in the case of two corporations merge them into one When the corporation is the mere alter ego or business conduit of a person it may be disregardedHowever SM was not organized purposely as a tax evasion device Moreover it runs counter to the fact that there was no tax to evade The intention to minimize taxes when used in the context of fraud must be proved to exist by clear and convincing evidence amounting to more than mere preponderance and cannot be justified by a mere speculation This is because fraud is never lightly to be presumed The SC however agreed that SM was actually owned and controlled by petitioner as to make it a mere subsidiary or branch of the latter created for the purpose of selling the vehicles at retail and maintaining stores for spare parts as well as service repair shops Consideration of various other circumstances especially when taken together indicates that Yutivo treated SM merely as its department or adjunct For one thing the accounting system maintained by Yutivo shows that it maintained a high degree of control over SM accounts All transactions between Yutivo and SM are recorded and effected by mere debit or credit entries against the reciprocal account maintained in their respective books of accounts and indicate the dependency of SM as branch upon Yutivo

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSORDINARYNECESSARY BUSINESS EXPENSESATLAS CONSOLIDATED MINING amp DEVT CORP VSCOMMISSIONER OF INTERNAL REVENUEFacts Atlas Consolidated Mining amp Devt Corp is a corporation engaged in the mining industry It was assessed deficiency income tax for the year 1958 as a result of the disallowance of certain items claimed by the company as deductions from its gross income Atlas claimed the following items as deductible from its gross income (1) transfer agentrsquos fee (2) stockholders relation service fee (3) US stock listing expenses (4) suit expenses (5) provision for contingencies TheCommissioner of Internal Revenue disallowed all these items Atlas elevated the issue to the Court of Tax Appeals The CTA rendered a decision allowing the said items except for the stockholders relation service fee and the suit expenses Both Atlas and the CIR went to the Supreme Court to appeal the CTA decision In GR No L-26911 Atlas argues that the CTA should not have disallowed the stockholders relation service fee The corporation contends that such fee constitutes an ordinary and necessary business expense and should therefore be allowed as a deductible expense from the companyrsquos gross income In GR No L-26924 the CIR argues that the transfer agentrsquos fee and the US stock listing fee should not have been allowed as deductions from gross income in the absence of proof of payment for such expenses The CIR also argues that the US stock listing expenses should be disallowed for not being ordinary and necessary and not incurred in trade or business as required under Sec 30 (a) (1) of the National Internal Revenue Code The CIR also contends that the correct amount of disallowance for suit expenses should be PhP 1749998 and not PhP 666665Issue In GR No L-26911 whether or not the expenses paid for the services rendered by a public relations firm P K Macker amp Co labeled as stockholders relation service fee is an allowable deduction as business expense In GR No L-26924 whether or not the transfer agentrsquos fee and the US stock listing fee should have been allowed as deduction in the absence of proof of payments Whether or not the US stock listing expenses should be disallowed for not

being ordinary and necessary and not incurred in trade or business Whether PhP 1749998 or PhP 666665 is the correct amount of disallowance for suit expensesHeld GR No L-26911 Under Sec 30 (a) (1) of the Tax Code three conditions have to be complied with before a business expense is allowed as a deduction from gross income (1) the expense must be ordinary and necessary (2) it must be paid or incurred within the taxable year and (3) it must be paid or incurred in carrying a trade or business The Court sustained the ruling of the CTA that the expenditure paid to P K Macker amp Co denominated as stockholders relation service fee is not an ordinary expense The fee was paid to the PR firm as ompensationfor services carrying on the selling campaign in an effort to sell Atlasrsquo additional capital stock Such is not an ordinary expense because according to the Court expenses relating to the recapitalization and reorganization of a corporation the cost of obtaining stock subscriptionpromotion expenses and commission or fees paid for the sale of stock reorganization are capital expenditures The stockholders relation service fee is not deductible from Atlasrsquo gross incomeGR No L-26924 The Court agreed with the CTA that the CIR cannot raise the issue of payment for the first time on appeal The fact of payment was never controverted by the CIR during the proceedings Failure to assert a question within a reasonable time warrants a presumption that the party entitled to assert it either has abandoned or declined to assert it The Court held that the US stock listing fee is an ordinary and necessary business expense and was correctly allowed by the CTA as a deduction The stock listing fee is paid annually to a stock exchange for the privilege of having Atlasrsquo stock listed A single payment made to the stock exchange is considered a capital expenditure (Domes Mines case) However payments to the stock exchange made annually or in a recurring manner are considered ordinary and necessary business expenses (Chesapeake Corporation case) The fees paid by Atlas partake of the latter The Court reiterated that it is well-settled that litigation expenses incurred in defense or protection of title are capital in nature and not deductible The Court sustained the CIR that the correct amount of disallowance for litigation or suit expenses is PhP 1749998

VISAYAN CEBU TERMINAL CO INC VS COLLECTOR OFINTERNAL REVENUEFacts Visayan Cebu Terminal Co Inc is a corporation organized for the purpose of handling arrastre operations in the port of Cebu Visayan filed its income tax return for 1951 claiming the following items as deductions from the companyrsquos gross income (1) salaries (2) representationexpenses (PhP 7585588) and (3) miscellaneous expenses The Collector of Internal Revenue disallowed the entire amount of representation expenses The Court of Tax Appeals allowedrepresentation expenses but set the limit at PhP 1000000Issue Whether or not the full amount of representation expenses should be allowed as a deduction from Visayanrsquos gross incomeHeld The Court sustained the Tax Court in holding that representation expenses fall under the category of business expenses which are allowable deductions from gross income if they meet the following requisites laid down in the Tax Codemdashthey must be ordinary and necessary expense paid or incurred in carrying on any trade or business and they must meet the test of reasonableness in amount The Court further agreed with the computation made by the CTA Because of the companyrsquos failure to provide evidence for all such expenses (the corporation claims that the supporting papers were destroyed when the house of the company treasurer where the records were kept was burned) the Court should determine from all available data the amount properly deductible as representation expenses The Court sustained the finding of the CTA that PhP 1000000 may be considered reasonably necessary as the companyrsquos representation expenses based on figures presented during the proceedings

KUENZLE amp STREIFF INC vs THE COLLECTOR OF INTERNALREVENUEFacts Petitioner claimed as a deduction for income tax purposes for the years 1950 1951 and 1952 salaries directors fees and bonuses of its non-resident president and vice-president bonuses of some of its resident officers and employees and interests on earned but unpaidsalaries and bonuses of its officers and employees Petitioner gave to its non-resident president and vice president for the years 1950 and 1951 bonuses equal to 133-12 of their annual salaries and bonuses equal to 125 23 for the year 1952 Petitioner however gave its resident

officers and employees higher bonuses on the alleged reason because of their valuable contribution to the business of the corporation which has made it possible for it to realize huge profits during the aforesaid years The respondent disallowed the said deductions hence they were assessed for deficiency income taxes Upon re-examination by the respondents they allowed as deductions all items comprising directors fees and salaries of the non-resident president and vice president but disallowing the bonuses insofar as they exceed the salaries of the recipients as well as the interests on earned but unpaid salaries and bonusesIssue WON the excessive bonuses and interest should be allowed as a deduction for income tax purposesHeld No Bonuses to employees made in good faith and as additional compensation for the services actually rendered by the employees are deductible provided such payments when added to the stipulated salaries do not exceed a reasonable compensation for the servicesrendered Requisites for deductibility of employee bonuses (1) the payment of the bonuses is in fact compensation (2) it must be for personal services actually rendered and (3) the bonuses when added to the salaries are reasonable when measured by the amount and quality of the services performed with relation to the business of the particular taxpayer There is no fixed test for determining the reasonableness of a given bonus as compensation Deductible amount of bonuses is not limited to the amount of salary of its recipient The prevailing circumstancesshould be considered However In this case the bonuses given to resident employees were higher than its non-resident officers on the reason that the resident officers and employees had performed their duty well and rendered efficient service It does not necessarily follow that they should be given greater amount of additional compensation in the form of bonuses than what was given to the non-resident officers The non-resident officers had rendered the same amount of efficient personal service and contribution to deserve equal treatment in compensation andother emoluments with the particularity that their liberation yearly salaries had been much smaller Interest should also be disallowed Under the law in order that interest may be deductible it must be paid on indebtedness (Section 30 (b) (1) of the National Internal Revenue Code) It is therefore imperative to show that there is an existing indebtedness which may be subjected to the payment of interest Here the items involved are unclaimed salaries andbonus participation which in our opinion cannot constitute indebtedness within the meaning of the law because while they constitute an obligation on the part of the corporation it is not the latters fault if they remained unclaimed The willingness of the corporation to pay interest thereon cannot be considered a justification to warrant deduction

ALHAMBRA CIGAR amp CIGARETTE MANUFACTURING COMPANYpetitioner-appellant vs THE COMMISSIONER OF INTERNALREVENUE respondent-appellee[GR No L-23226 November 28 1967]Facts The petitioner claimed as deductible expense for income tax purposes salaries bonuses commissions and directorrsquos fees paid to A P Kuenzle and H A Streiff who were the President and Vice-President respectively of the petitioner The Commissioner of Internal Revenuedisallowed a portion of the bonus commission and directorrsquos fees as deductions Hence was assessed for deficiency income taxIssue WON the bonuses directorrsquos fees and commissions are valid deductions for income tax purposesHeld No Whenever a controversy arises on the deductibility for purposes of income tax of certain items for alleged compensation officers of a corporation it is necessary to determine whether personal services have been actually rendered by said officers and in theaffirmative what is the reasonable allowance therefor As correctly held by the court of tax appeals The bonus paid to each of said officers was reduced to the amount equivalent to that paid to Mr W Eggmann the resident Treasurer and Manager of petitioner Petitioner seeks to justify the increase in the salaries of Messrs Kuenzle and Streiff on the ground of increased costs of living The said officers of petitioner are however non-residents of the PhilippinesAs to commissions and directors fees there is no evidence of any particular service rendered by them to petitioner to warrant payment of commissions There is also no justification for the payment of the directorrsquos fees Being non-resident President and Vice- President of Petitioner corporation of which they are the controlling stockholders said commissions and directors fees

payment of which was based on a certain percentage of the annual profits of petitioner are in the nature of dividend distributions

AGUINALDO INDUSTRIES CORPORATION (FISHING NETSDIVISION) vs COMMISSIONER OF INTERNAL REVENUE and THECOURT OF TAX APPEALSFacts Upon investigation of petitioners 1957 income tax returns of its Fish Nets Division the Bureau of Internal Revenue examiner found that the amount of P6118748 was deducted from the gross income as additional remuneration paid to the officers of petitioner and that such amount was taken from the net profit which petitioner derived from an isolated transaction (sale of a parcel of its land) which is not in the course of or carrying on of petitioners trade or business The examiner recommended disallowance of the deduction but petitioner insistedotherwise claiming that the payment of the allowance or bonus was pursuant to its by-laws The Court of Tax Appeals held the petitioner liable for deficiency income tax plus surcharge and interestIssue WON the profit derived from the sale of its land is tax-exempt income under Republic Act No 901Held No Petitioner may not raise the question of tax exemption for the first time on review where such question was not raised at the administrative forumIssue WON the bonus given to the officers of petitioner as share in the profit realized from the sale of the land is deductible expense for tax purposesHeld No The bonus given should be considered as deductible for income tax purposes only if payment was made for service actually rendered and it is reasonable and necessary The records show 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 petitioners officers which could be the basis of a grant to them of a bonus out of the profit derived from the sale Thus the payment of a bonus to them out of the gainrealized from the sale cannot be considered as a selling expense nor can it be deemed reasonable and necessary so as to make it deductible for tax purposes

COLLECTOR OF INTERNAL REVENUE petitioner vs GOODRICHINTERNATIONAL RUBBER CO respondent[GR No L-22265 December 22 1967]Facts The CIR disallowed the bad debts and representation expense claimed as deduction of the respondent for tax purposes According to Goodrich the claim for deduction of the representation expense is based upon receipts issued not by the entities in which the alleged expenses had been incurred but by the officers of Goodrich who allegedly paid them To collect for the alleged bad debts the respondent sent demand letters There were subsequent collections after the debts have been writtenIssue WON the representation expense are valid deductions Held No If the expenses had really been incurred receipts or chits would have been issued by the 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 incurred and paid said expenses They do not establish payment of said alleged expenses to the entities in which the same are said to have been incurredIssue WON the bad debts are valid deduction for income tax purposesHeld No The ascertainment of worthlessness of bad debts requires proof of two facts (1) that the taxpayer did in fact ascertain the debt to be worthless in the year the deduction is sought and (2) in so doing he acted in good faith Good faith is not enough The taxpayer must showthat he had reasonably investigated the relevant facts and had drawn a reasonable inference from the information thus obtained by him In this case there were payments made after it has been written off and proves that there is undue haste in claiming it as bad debts Respondent has not proven that said debts were worthless There is no evidence that thedebtors cannot pay them

COLLECTOR OF INTERNAL REVENUE petitioner vs ALBERTO MK JAMIR respondent

[GR No L-16552 March 30 1962]Facts The CIR assessed the respondent for deficiency income taxes The Petitioner claimed that the respondent under declared its income based on the expenditure method The petitioner considered as an undeclared income so much of respondents expenditures for said months as was in excess of his reported income for the same monthsIssue WON the expenditure method was properly applied Held No The expenditures method of determining income should be applied by deducting the aggregate yearly expenditures from the declared yearly income not the expenditures incurred each month from the declared income therefor In this case the respondent properly explained that the income derived from the advances from customers were entered in his books of account in subsequent months Issue WON the deduction for car depreciation and driverrsquos expense is properHeld Yes In this case the car was used by Jamir for both personal and business purposes the lower court allowed as deductions three-fourths (34) of said amounts the car having been used by Jamir more for business than for personal purposes

HOSPITAL DE SAN JUAN DE DIOS INC vs COMMISSIONER OFINTERNAL REVENUEFacts Petitioner is engaged in both taxable and non-taxable operations For the years 1952 to 1955 the petitioner allocated its administrative expenses The respondent disallowed however the interests and dividends from sharing in the allocation of administrative expenses on the ground that the expenses incurred in the administration or management of petitioners investments are not allowable business expenses inasmuch as they were not incurred in carrying on any trade or business within the contemplation of Section 30 (a)(1) of the RevenueCode Hence were assessed for deficiency income taxesIssue WON administrative expenses should be considered as a deductionallocated to its interest and dividend income for income tax purposesHeld No the principle of allocating expenses is grounded on the premise that the taxable income was derived from carrying on a trade or business as distinguished from mere receipt of interests and dividends from ones investments the Court of Tax Appeals correctly ruled thatsaid income should not share in the allocation of administrative expenses Hospital de San Juan De Dios Inc according to its Articles of Incorporation was established for purposes which are benevolent charitable and religious and not for financial gain It is not carrying on a trade or business for the word business in its ordinary and common use means human efforts which have for their end living or reward it is not commonly used as descriptive of charitable religious educational or social agencies or any particular occupation or employment habitually engaged in especially for livelihood or gain or activities where profit is the purpose or livelihood is the motive

FELIX MONTENEGRO INC petitioner vs COMMISSIONER OFINTERNAL REVENUE respondent[CTA CASE NO 695 April 30 1969]Facts The CIR disallowed salaries of some of its officers value of medicines campaign contribution and miscellaneous expense as deduction for income tax purposes hence the petitioner was assessed for deficiency income taxes The deduction of salaires was disallowedbecause the said officers are also stockholders of the corporation and that their salaries are excessive compared to those of officers of other corporation holding similar positions and doing the same volume of businessIssue WON the salaries and expenses should be allowed as a deductionHeld 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 There is no comparative study of the profits of the two enterprises in relation toother concerns similarly situated Neither is there any comparative study of the peculiar situation of the two enterprises in relation to other concerns nor is there a comparison of the nature and volume of the work performed by the officers involved Since no two business enterprises are exactly in the same situation negligible differences in salaries cannot reasonably show that the salary is excessive or that profits are channeled to the stockholders thru salariesIssue WON the value of medicines is a deductible loss

Held No Aside from self serving testimonial evidence no other evidence was presented to substantiate this claim of petitioner There is not even a list of the medicines their value and their expiry dates The deductible as loss on the ground that the aforesaid medicines were nolonger fit for sale as the dates of their efficacy have expired should be disallowedIssue WON campaign contribution should be allowed as a deductionHeld No Amount expended for political campaign purposes or payments to campaign funds are not deductible either as business expenses or as contribution

COLLECTOR V PHILIPPINE EDUCATION COFACTS 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 04548 to prepare and prove itrsquos war damage claim In filing its income tax return respondentclaimed said sum as deduction under section 30 of the NIRC Petitioner disallowed the same and instead assessed additional P240514 as deficiency income tax CTA reversed upon appeal and declared respondent exempt from the deficiency income tax in questionISSUE Whether or not the expense in question was ordinary and necessary and whether or not it was paid or incurred in carrying on respondentrsquos businessHELD Yes The law does not say that the expense must be for or on account of transactions in onersquos trade or business Ordinarily an expense will be considered necessary where the expenditure is appropriate and helpful in the development of the taxpayerrsquos business It is sufficient that the expense were incurred for purposes proper to the conduct of the corporate affairs or for the purpose of realizing a profit or of minimizing a loss The fee in question was paid by the respondent to recover its lost assets occasioned by the war and thereby to be so rehabilitated as to be able to carry on its business Also it should be noted that even if there is no law exempting the proceeds of war damage claims from taxes the war damage compensation would still not be subject to tax not being an income Compensation for injury to capital is never incomeDOCTRINE To carry on its business the taxpayer not only must have sufficient assets but must preserve the same and recover any that should be lost The fee or expense paid to recover its lost assets occasioned by the war 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 account of transactions in onersquos trade or business

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSINTEREST EXPENSECIR v PALANCAFACTS Don Carlos Palanca Sr donated in favor of his son the petitioner herein shares of stock in La Tondentildea Inc amounting to 12500 shares For failure to file a return on the donation within the statutory period the petitioner was assessed the sums of P9769123 P2444281 and P4786870 as gift tax 25 surcharge and interest respectively which he paid on June 22 1955 The petitioner filed with the BIR his income tax return for the calendar year 1955 claiming among others a deduction for interest amounting to P970645 and reporting a taxable income of P6598212 On the basis of this return he was assessed the sum of P2105291 as income tax which he paid as follows Petitioner filed an amended return for the calendar year 1955 claiming therein an additional deduction in the amount of P4786870 representing interest paid on the donees gift tax thereby reporting a taxable net income of P1811342 and a tax due thereon in the sum of P316700 The claim for deduction was based on the provisions of Section 30(b) (1) of the Tax Code which authorizes the deduction from gross income of interest paid within the taxable year on indebtedness A claim for the refund of alleged overpaid income taxes for the year 1955 amounting to P1788501 which is the difference between the amount of P2105201 he paid as income taxes under his original return and of P316700 was filed together with this amended return BIR denied the claim On August 12 1958 the petitioner once more filed an amended income tax return for the calendar year 1955 claiming in addition to the interest deduction of P907645 appearing in his original return a deduction in the amount of P6058180 representing interest on the estate and inheritance taxes on the 12500 shares of stock thereby reporting a net taxable income for 1955 in the amount of P540032 and an income tax due thereon in the sum of P42800 Again this was denied CTA reversed

ISSUES 1) Whether the amount paid by respondent Palanca for interest on his delinquent estate and inheritance tax is deductible from the gross income for that year under Section 30 (b) (1) of the Revenue Code 2) Whether the claim for refund has prescribedHELD 1) Yes 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 We do not see any element in this case which can justify a departure from or abandonment of the doctrine in the Prieto case In both this and the said case the taxpayer sought the allowance as deductible items from the gross income of the amounts paid by them as interests on delinquent tax liabilities Of course what was involved in the cited case was the donors tax while the present suit pertains to interest paid on the estate and inheritance tax This difference however submits no appreciable consequence to the rationale of this Courts previous determination thatinterests on taxes should be considered as interests on indebtedness within the meaning of Section 30(b) (1) of the Tax Code 2) No The 30-day period under Section 11 of Republic Act 1125 did not even commence to run in this incident It should be recalled that while the herein petitioner originally assessed the respondent-claimant for alleged gift tax liabilities the said assessment was subsequently abandoned and in its lieu a new one was prepared and served on the respondent-taxpayer In this new assessment the petitioner charged the said respondent with an entirely new liability and for a substantially different amount from the first While initially the petitioner assessed the respondent for donees gift tax in the amount of P17000274 in thesubsequent assessment the latter was asked to pay P19159162 for delinquent estate and inheritance tax Considering that it is the interest paid on this latter-assessed estate and inheritance tax that respondent Palanca is claiming refund for then the thirty-day period under the abovementioned section of Republic Act 1125 should be computed from the receipt of the final denial by the Bureau of Internal Revenue of the said claim In the second place the claim at bar refers to the alleged overpayment by respondent Palanca of his 1955 income tax Inasmuch as the said account was paid by him by installment then the computation of the two year prescriptive period under Section 306 of the National Internal Revenue Code should be from the date of the last installmentDOCTRINE 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 VIUDA DE PRIETOFACTS Respondent conveyed by way of gifts to her four children namely Antonio Benito Carmen and Mauro all surnamed Prieto real property with a total assessed value of P89249750 After the filing of the gift tax returns on or about February 1 1954 the petitioner CIR appraised the real property donated for gift tax purposes at P123126800 and assessed the total sum of P11770650 as donors gift tax interest and compromises due thereon Of the total sum of P11770650 paid by respondent on April 29 1954 the sum of P5597865 represents the total interest on account of deliquency This sum of P5597865 was claimed as deduction among others by respondent in her 1954 income tax return Petitioner howeverdisallowed the claim and as a consequence of such disallowance assessed respondent for 1954 the total sum of P2141038 as deficiency income tax due on the aforesaid P5597865 including interest up to March 31 1957 surcharge and compromise for the late payment Under the law for interest to be deductible it must be shown that there be an indebtedness that there should be interest upon it and that what is claimed as an interest deduction should have been paid or accrued within the year It is here conceded that the interest paid by respondent was in consequence of the late payment of her donors tax and the same was paid within the year it is sought to be declaredISSUES Whether or not such interest was paid upon an indebtedness within the contemplation of section 30 (b) (1) of the Tax Code HELD Yes The term indebtedness as used in the Tax Code of the United States containing similar provisions as in the above-quoted section has been defined as an unconditional and legally enforceable obligation for the payment of money Although taxes already due have not strictly speaking the same concept as debts they are however obligations that may be considered as such The term debt is properly used in a comprehensive sense as embracing not merely money due by contract but whatever one is bound to render to another either for contract or the requirement of the law It follows that the interest paid by herein respondent for the late payment of her donors tax is deductible from her gross income under section 30(b) of

the Tax Code above quoted This conclusion finds support in the established jurisprudence in the United States after whose laws our Income Tax Law has been patterned Thus under sec 23(b) of the Internal Revenue Code of 1939 as amended which contains similarlyworded provisions as sec 30(b) of our Tax Code the uniform ruling is that interest on taxes is interest on indebtedness and is deductibleDOCTRINE The term indebtedness as used in the Tax Code of the United States containing similar provisions as in the abovequoted section has been defined as an unconditional and legally enforceable obligation for the payment of money

PAPER INDUSTRIES V CAFACTS Petitioner is registered with the BOI as a preferred pioneer enterprise with respect to its integrated pulp and paper mill and as a preferred non-pioneer enterprise with respect to its integrated plywood and veneer mills It received from the CIR two (2) letters of assessmentand demand (a) one for deficiency transaction tax and for documentary and science stamp tax and (b) the other for deficiency income tax for 1977 for an aggregate amount of P8876325500 Picop protested the assessment of deficiency transaction tax and documentary and science stamp taxes These protests were not formally acted upon by respondent CIR On 26 September 1984 the CIR issued a warrant of distraint on personal property and a warrant of levy on real property against Picop to enforce collection of the contested assessments in effect the CIR denied Picops protests Thereupon Picop went before the CTA Picop and the CIR both went to the Supreme Court on separate Petitions for Review of the above decision of the CTA In two (2) Resolutions dated 7 February 1990 and 19 February 1990 respectively the Court referred the two (2) Petitions to the Court of Appeals The Court of Appeals consolidated the two (2) cases and rendered a decision dated 31 August 1992 which further reduced the liability of Picop to P633835470 Picop now maintains that it is not liable at all to pay any of theassessments or any part thereof It assails the propriety of the thirty-five percent (35) deficiency transaction tax which the Court of Appeals held due from it in the amount of P357854351 Picop also questions the imposition by the Court of Appeals of the deficiency income tax of P148157915 resulting from disallowance of certain claimed financial guarantee expenses and claimed year-end adjustments of sales and cost of sales figures by Picops external auditors 3 The CIR upon the other hand insists that the Court of Appeals erred infinding Picop not liable for surcharge and interest on unpaid transaction tax and for documentary and science stamp taxes and in allowing Picop to claim as deductible expensesISSUES 1) Whether Picop is liable for the thirty-five percent (35) transaction tax 2) Whether Picop is liable for interest and surcharge on unpaid transaction tax 3) Whether Picop is entitled to deduct against current income interest payments on loans for the purchase of machinery and equipment 4) Whether Picop is entitled to deduct against current income net operating losses incurred by Rustan Pulp and Paper Mills Inc 5) Whether Picop is entitled to deduct against current income certain claimed financial guarantee expenses 6) Whether Picop had understated its sales and overstated its cost of sales for 1977 7) Whether Picop is liable for the corporate development tax of five percent (5) of its income for 1977 HELD 1) We agree with the CTA and the Court of Appeals that Picops tax exemption under RA No 5186 as amended does not include exemption from the thirty-five percent (35) transaction tax In the first place the thirty-five percent (35) transaction tax is an income tax that is it is a tax on the interest income of the lenders or creditors It is thus clear that the transaction tax is an income tax and as such in any event falls outside the scope of the tax exemption granted to registered pioneer enterprises by Section 8 of RA No 5186 as amended 2) Section 51 (c) and (e) of the 1977 Tax Code did not authorize the imposition of a surcharge and penalty interest for failure to pay the thirtyfive percent (35) transaction tax imposed under Section 210 (b) of the same Code The corresponding provision in the current Tax Code veryclearly embraces failure to pay all taxes imposed in the Tax Code without any regard to the Title of the Code where provisions imposing particular taxes are textually located Tax exemptions are to be sure to be strictly construed that is they are not to be extended beyond the ordinary and reasonable intendment of the language actually used by the legislative authority in granting the exemption The issuance of debenture bonds is certainly conceptually distinct from pulping and paper manufacturing operations But no one contends that issuance of bonds was a principal or regular business activity of Picop only banks or other financial institutions are in the

regular business of raising money by issuing bonds or other instruments to the general public3) We have already noted that our 1977 NIRC does not prohibit the deduction of interest on a loan incurred for acquiring machinery and equipment Neither does our 1977 NIRC compel the capitalization of interest payments on such a loan The 1977 Tax Code is simply silent ona taxpayers right to elect one or the other tax treatment of such interest payments Accordingly the general rule that interest payments on a legally demandable loan are deductible from gross income must be applied We conclude that the CTA and the Court of Appeals did not err in allowing the deductions of Picops 1977 interest payments on its loans for capital equipment against its gross income for 1977 4) After prolonged consideration and analysis of this matter the Court is unable to agree with the CTA and Court of Appeals on the deductibility of RPPMs accumulated losses against Picops 1977 gross income It is important to note at the outset that in our jurisdiction the ordinary rule mdash that is the rule applicable in respect of corporations notregistered with the BOI as a preferred pioneer enterprise mdash is that net operating losses cannot be carried over Under our Tax Code both in 1977 and at present losses may be deducted from gross income only if such losses were actually sustained in the same year that they are deducted or charged off Thus it is that RA No 5186 introduced the carry-over of net operatinglosses as a very special incentive to be granted only to registered pioneer enterprises and only with respect to their registered operations In the instant case to allow the deduction claimed by Picop would be to permit one corporation or enterprise Picop to benefit from the operatinglosses accumulated by another corporation or enterprise RPPM In effect to grant Picops claimed deduction would be to permit Picop to purchase a tax deduction and RPPM to peddle its accumulated operating losses We consider and so hold that there is nothing in Section 7 (c) ofRA No 5186 which either requires or permits such a result Indeed that result makes non-sense of the legislative purpose which may be seen clearly to be projected by Section 7 (c) RA No 5186 We conclude that the deduction claimed by Picop in the amount of P4419610600 in its 1977 Income Tax Return must be disallowed 5) We must support the CTA and the Court of Appeals in their foregoing rulings A taxpayer has the burden of proving entitlement to a claimeddeduction Even Picops own vouchers were not submitted in evidence and the BIR Examiners denied that such vouchers and other documents had been exhibited to them Moreover cash vouchers can only confirm the fact of disbursement but not necessarily the purpose thereof6) The CIR has made out at least a prima facie case that Picop had understated its sales and overstated its cost of sales as set out in its Income Tax Return For the CIR has a right to assume that Picops Books of Accounts speak the truth in this case since as already notedthey embody what must appear to be admissions against Picops own interest7) The adjusted net income of Picop for 1977 as will be seen below is P4868735500 Its net worth figure or total stockholders equity as reflected in its Audited Financial Statements for 1977 is P46474952800 Since its adjusted net income for 1977 thus exceeded ten percent (10) of its net worth Picop must be held liable for the five percent (5) corporate development tax in the amount of P243436775 DOCTRINE It is thus clear that the transaction tax is an income tax andas such in any event falls outside the scope of the tax exemptiongranted to registered pioneer enterprises by Section 8 of RA No 5186as amended

CIR v ITOGON-SUYOC MINES INCFACTS Respondent Itogon-Suyoc Mines Inc the taxpayer involved duly paid in full its liability according to its income tax return for the fiscal year 1960-61 Instead it deducted right away the amount represented by claim for refund filed eight (8) months back for the previous years income tax for which it was not liable at all so it alleged as it suffered a loss instead a claim subsequently favorably acted on by petitioner Commissioner of Internal Revenue but after the date of such payment of the 1960-1961 tax Accordingly an interest in the amount of P151283was charged by petitioner Commissioner of Internal Revenue on the sum withheld on the ground that no deduction on such refund should be allowed before its approval When the matter was taken up before the Court of Tax Appeals the above assessment representing interest wasset aside in the decision of September 30 1965ISSUES Whether CTA should not have absolved respondent corporation from liability to pay the sum of P151283 as 1 monthly interest for delinquency in the payment of income tax for the fiscal year 1960-1961

HELD No It could not be error for the Court of Tax Appeals considering the admitted fact of overpayment entitling respondent to refund to hold that petitioner should not repose an interest on the aforesaid sum of P1315520 which after all was paid to and received by the governmenteven before the incidence of the tax in question It would be according to the Court of Tax Appeals unfair and unjust to do so We agree but we go farther The imposition of such an interest by petitioner is not supported by lawThe National Internal Revenue Code provides that interest upon the amount determined as a deficiency shall be assessed and shall be paid upon notice and demand from the Commissioner of Internal Revenue There is no question respondent was entitled to a refund Instead of waiting for the sum involved to be delivered to it it deducted the said amount from the tax that it had to pay That it 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 time such a deduction was made the Commissioner of Internal Revenue had not as yet approved such a refund It is an admitted fact though that respondent was clearly entitled to it and petitioner did not allege otherwise Nor could he do so Under all the circumstances disclosed therefore the applicability of the legal provision allowing such a deduction from the amount of the tax to be paid cannot be disputed DOCTRINE It could not be error for the Court of Tax Appeals considering the admitted fact of overpayment entitling respondent to refund to hold that petitioner should not repose an interest on the aforesaid sum of P1315520 which after all was paid to and received by the government even before the incidence of the tax in question

CASTRO v COLLECTORFacts This is an appeal from a decision of the Court of Tax Appeals (in its CTA Case 141) holding petitioner Maria B Castro liable under the War Profits Tax Law Republic Act No 55 and ordering her to pay a deficiency war profits tax (including surcharges and interest) in theamount of P136051466 and costs Castro was previously acquitted in the criminal case instituted against her for violation of the War Profits Tax LawIssue WON the acquittal is a bar to the collection of the taxes assessed and specially of the 50 surchargeHeld NO With regard to the tax proper the state correctly points out in its brief that the acquittal in the criminal case could not operate to discharge petitioner from the duty to pay the tax since that duty is imposed by statute prior to and independently of any attempts on the part of the taxpayer to evade 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 declaration that the criminal acts charged did not exist As to the 50 surcharge the very United States Supreme Court that rendered the Coffey decision has subsequently pointed out that additions of this kind to the main tax are not penalties but civil administrative sanctions provided primarily as a safeguard for the protection of the state revenue and to reimburse the government for the heavy expense of investigation and the loss resulting from the taxpayers fraud (Helvering vs Mitchell 303 US 390 82 L Ed 917 Spies vs US 317 US 492) This is made plain by the fact that such surcharges are enforceable like the primary tax itself by distraint or civil suit and that they are provided in a section of RA No 55 (section 5) that is separate and distinct from that providing for criminal prosecution (section 7) We conclude that the defense of jeopardy and estoppel by reason of the petitioners acquittal isuntenable and without merit Whether or not there was fraud committed by the taxpayer justifying the imposition of the surcharge is an issue of fact to be inferred from the evidence and surrounding circumstances and the finding of its existence by the Tax Court is conclusive upon us (Gutierrez v Collector GR No L-9771 May 31 1951 Perez vs Collector supra)

COLLECTOR v FISHERFacts This case relates to the determination and settlement of the hereditary estate left by the deceased Walter G Stevenson and the laws applicable thereto Walter G Stevenson (born in the Philippines on August 9 1874 of British parents and married in the City of Manila on January 23 1909 to Beatrice Mauricia Stevenson another British subject) died on February 22 1951 in San Francisco California USA whereto he and his wife moved and established their permanent residence since May 10 1945 In his will executed in San Francisco on May 22 1947 and which was duly probated in the Superior Court of California on April 11 1951

Stevenson instituted his wife Beatrice as his sole heiress to the following real and personal properties acquired by the spouses while residing in the PhilippinesIssue 1 Whether or not the estate is entitled to the following deductions P860439 for judicial and administration expenses P208652 for funeral expenses P65250 for real estate taxes andP1002247 representing the amount of indebtedness allegedly incurred by the decedent during his lifetime 2 Whether or not the estate is entitled to the payment of interest on the amount it claims to have overpaid the government and to be refundable to itHeld 1 YES An examination of the record discloses however that the foregoing items were considered deductible by the Tax Court on the basis of their approval by the probate court to which said expenses we may presume had also been presented for consideration It is to besupposed that the probate court would not have approved said items were they not supported by evidence presented by the estate In allowing the items in question the Tax Court had before it the pertinent order of the probate court which was submitted in evidence by respondents (Exh AA-2 p 100 record) As the Tax Court said it found no basis for departing from the findings of the probate 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 National Association which it would appear that while still living Walter G Stevenson obtained we are not inclined to pass upon the claim of respondents in respect to theadditional amount of P8652 for funeral expenses which was disapproved by the court a quo for lack of evidence In connection with the deduction of P65250 representing the amount of realty taxes paid in 1951 on the decedents two parcels of land in Baguio City which respondents claim was disallowed by the Tax Court we find that this claim has in fact been allowed2 NO Respondents claim for interest on the amount allegedly overpaid if any actually results after a recomputation on the basis of this decision is hereby denied in line with our recent decision in Collector of Internal Revenue v St Pauls Hospital (GR No L-12127 May 29 1959) wherein we held that in the absence of a statutory provision clearly or expressly directing or authorizing such payment and none has been cited by respondents the National Government cannot be required to pay interest

DEDUCTIONS AND EXMEPTIONS ALLOWABLE DEDUCTIONSTAXESCIR v LEDNICKYFacts V E Lednicky and Maria Valero Lednicky are husband and wife both American citizens residing in the Philippines and have derived all their income from Philippine sources for the taxable years under question [GR L-18286] In compliance with local law the spouses on 27March 1957 filed their income tax return for 1956 reporting therein a gross income of P101728765 and a net income of P73380944 on which the amount of P31739541 was assessed after deducting P480559 as withholding tax Pursuant to the Commissioner of Internal Revenuersquos assessment notice the spouses paid the total amount of P32624741 inclusive of the withheld taxes on 15 April 1957 On 17 March 1959 the spouses filed an amended income tax return for 1956 The amendment consists in a claimed deduction of P20593924 paid in 1956 to the US government as federal income tax for 1956 Simultaneously with the filing of the amended return the spouses requested the refund of P11243790 When the Commissioner of Internal Revenue failed to answer the claim for refund the spouses filedtheir 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 P177112463 and a net income of P105255067 On 19 April 1956 they filed an amended income tax return the amendment upon the original being a lesser net income of P101255451 and on the basis of this amended return they paid P57025200 inclusive of withholding taxes After audit the Commissioner determined a deficiency of P1611600 which amount the spouses paid on 5 December 1956 Back in 1955 however the spouses filed with the US Internal Revenue Agent in Manila their Federal income tax return for the years 1947 1951 1952 1953 and 1954 on income from Philippine sources on a cash basis Payment of these federal income taxes including penalties and delinquency interest in the amount of $26458882 were made in 1955 to the US Director of Internal Revenue Baltimore Maryland through the National City Bank of New York Manila Branch Exchange and bank charges in

remitting payment totaled P414391 On 11 August 1958 the said respondents amended their Philippines income tax return for 1955 to including US Federal income taxes interest accruing up to 15 May 1955 and exchange and bank charges totaling P51634515 and therewith filed a claim for refund of the sum of P16638400 which was later reduced to P15026900 The spouses brought suit in the Tax Court which was docketed therein as CTA Case 570 [GR 21434] The facts are similar to above cases but refer to the spousesrsquo income tax returns for 1957 filed on 28 February 1958 and for which the spouses paid a total sum of P19679965 In 1959 they filed an amended return for 1957 claiming deduction of P19075580 representing taxes paid to the US Government on income derived wholly from Philippine sources On the strength thereof spouses seek refund of P9052075 as overpayment (CTA Case 783) The Tax Court decided for the spousesIssue WON there should be a refund for the spousesHeld NO The Supreme Court reversed the decisions of the Court of Tax Appeals and affirmed the disallowance of the refunds claimed by the spouses with costs against said spouses1 Section 30 (c-1) of the Philippine Internal Revenue Code Section 30 (c) (1) (Deduction from gross income) provides that ldquoin computing net income there shall be allowed as deductions (c) Taxes (1) In general mdash Taxes paid or accrued within the taxable year except (A) The income tax provided for under this Title (B) Income war-profits and excess profits taxes imposed by the authority of any foreign country but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits ofparagraph (3) of this subsection (relating to credit for taxes of foreign countries) (C) Estate inheritance and gift taxes and (D) Taxes assessed against local benefits of a kind tending to increase the value of the property assessedrdquo2 Paragraph (c) (3) (b) of the Tax Code Credits against tax for taxes of foreign countriesParagraph 3 (B) of the subsection (Credits against tax for taxes of foreign countries) reads ldquoIf the taxpayer signifies in his return his desire to have the benefits of this paragraph the tax imposed by this Title shall be credited with (B) Alien resident of the Philippines mdash In the case of an alien resident of the Philippines the amount of any such taxes paid or accrued during the taxable year to any foreign country if the foreign country of which such alien resident is a citizen or subject in imposing such taxes allows a similar credit to citizens of the Philippines residing insuch countryrdquo3 Paragraph (c) (4) of the Tax Code Limitation on credit The tax credit so authorized is limited under paragraph 4 (A and B) of the same subsection in the following terms ldquoPar (c) (4) Limitation on credit mdash The amount of the credit taken under this section shall be subject to each of the following limitations (A) The amount of the credit in respect to the tax paid or accrued to any country shall not exceed the same proportion of the tax against which such credit is taken which the taxpayerrsquos net income from sources within such country taxable under this Title bears to his entire net income for the same taxable year and (B) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken which the taxpayerrsquos net income from sources without the Philippines taxable under this Title bears to his entire net income for the same taxable yearrdquo4 Lawrsquos intent that right to deduct income taxes paid to foreign government taken as an alternative or substitute to claim of tax credit for such foreign income tax Construction and wording of Section 30 (c) (1) (B) of the Internal Revenue Act shows the lawrsquos intent that the right to deduct income taxes paid to foreign government from the taxpayerrsquos gross income is givenonly as an alternative or substitute to his right to claim a tax credit for such foreign income taxes under section 30 (c) (3) and (4) so that unless the alien resident has a right to claim such tax credit if he so chooses he is precluded from deducting the foreign income taxes from his gross income For it is obvious that in prescribing that such deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) (relating to credits for taxes paid to foreign countries) the statute assumes that the taxpayer in question also may signify his desire to claim a tax credit and waive the deduction otherwise the foreign taxes would always be deductible and their mention in the list of nondeductible items in Section 30 (c) might as well have been omitted or at least expressly limited to taxes on income from sources outside the Philippine Islands Had the law intended that foreign income taxes could be deducted from gross income in any event regardless of thetaxpayerrsquos right to claim a tax credit it is the latter right that should be conditioned upon the taxpayerrsquos waiving the deduction in which case the right to reduction under subsection (c-1-B)

would have been made absolute or unconditional (by omitting foreign taxes from the enumeration of non- deductions) while the right to a tax credit under subsection (c-3) would have been expressly conditioned upon the taxpayerrsquos not claiming any deduction under subsection (c-1)5 Danger of double credit does not exist if taxpayer cannot claim benefit from either headings at his option The purpose of the law is to prevent the taxpayer from claiming twice the benefits of his payment of foreign taxes by deduction from gross income (subs c-1) and by tax credit (subs c-3) This danger of double credit certainly can not exist if the taxpayer can not claim benefit under either of these headings at his option so that he must be entitled to a tax credit (the spouses admittedly are not so entitled because all their income is derived from Philippine sources) or the option to deduct from gross income disappears altogether6 When double taxation Tax income should accrue to benefit of the PhilippinesDouble taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity (cf Manila vs Interisland Gas Service 52 Off Gaz 6579 Manuf Life Ins Co vs Meer 89 Phil 357) In the present case while the taxpayers would have to pay two taxes on the same income the Philippine government only receives the proceeds of one tax As between the Philippines where the income was earned and where the taxpayer is domiciled and the United States where that income was not earned and where the taxpayer did not reside it is indisputable that justice and equity demand that the tax on the income should accrue to the benefit of the Philippines Any relief from the alleged double taxation should come from the United States and not from the Philippines since the formerrsquos right to burden the taxpayer is solely predicated on his citizenship without contributing to the production of the wealth that is being taxed To allow an alien resident to deduct from his gross income whatever taxes he pays to his own government amounts to conferring on the latterpower to reduce the tax income of the Philippine government simply by increasing the tax rates on the alien resident Everytime the rate of taxation imposed upon an alien resident is increased by his own government his deduction from Philippine taxes would correspondingly increase and the proceeds for the Philippines diminished thereby subordinating our own taxes to those levied by a foreign government Such a result is incompatible with the status of the Philippines as an independent and sovereign state

GUTIERREZ v COLLECTORFacts Maria Morales was the registered owner of an agricultural land designated as Lot No 724-C of the cadastral survey of Mabalacat Pampanga The Republic of the Philippines at the request of the USGovernment and pursuant to the terms of the Military Bases Agreement of March 14 1947 instituted condemnation proceedings in the Court of the First Instance of Pampanga docketed as Civil Case No 148 for the purpose of expropriating the lands owned by Maria Morales and others needed for the expansion of the Clark Field Air Base t the commencement of the action the Republic of the Philippines therein plaintiff deposited with the Clerk of the Court of First Instance of Pampanga the sum of P156960 which was provisionally fixed as the value of the lands sought to be expropriated in order that it could take immediate possession of the same On January 27 1949 upon order of the Court the sum of P34580 (PNB Check 721520-Exh R) was paid by the Provincial treasurer of Pampanga to Maria Morales out of the original deposit of P156960 made by therein plaintiff After due hearing the Court of First Instance of Pampanga rendered decision dated November 29 1949 wherein it fixed as just compensation P2500 per hectare for some of the lots and P3000 per hectare for the others which values were based on the reports of the Commission on Appraisal whose members were chosen by both parties and by the Court which took into consideration the different conditions affecting the value of the condemned properties in making their findingsIn virtue of said decision defendant Maria Morales was to receive the amount of P9430575 as compensation for Lot No 724-C which was one of the expropriated lands Sometime in 1950 the spouses Blas Gutierrez and Maria Morales received the sum of P5978575 presenting the balance remaining in their favor after deducting the amount of P34580 already withdrawn from the compensation to them In a notice of assessment dated January 28 1953 the Collector ofInternal Revenue demanded of the petitioners the payment of P8481 as alleged deficiency income tax for the year 1950 inclusive of surcharges and penalties The CIR contended that petitioners-appellants failed to include from their gross income in filing their income tax return for 1950 the amount of P9430575 which they had received as compensation for their land

taken by the Government by expropriation proceedings It is the contention of respondent Collector of Internal Revenue that such transfer of property for taxation purposes is sale and that the income derived therefrom is taxable The lower court exonerated petitioners from the 50 per cent surchargeimposed on the latter on the ground that the taxpayers income tax return for 1950 is false andor fraudulentIssue WON petitioners should pay surcharge Held NO It should be noted that the Court of Tax Appeals found that the evidence did not warrant the imposition of said surcharge becausethe petitioners therein acted in good faith and without intent to defraud the GovernmentThe question of fraud is a question of fact which frequently requires a nicely balanced judgement to answer All the facts and circumstances surrounding the conduct of the tax payers business and all the facts incident to the preparation of the alleged fraudulent return should be considered (Mertens Federal Income Taxation Chapter 55) The question of fraud being a question of fact and the lower court having made the finding that the evidence of this case does not warrant the imposition of the 50 per cent surcharge We are constrained to refrain from giving any consideration to the question raised by the Solicitor General for it is already settled in this jurisdiction that in passing upon petitions to review decisions of the Court of Tax Appeals We have to confine ourselves to questions of law

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSLOSSESFERNANDEZ HERMANOS v CIRFacts These four appeals involve two decisions of the Court of Tax Appeals determining the taxpayers income tax liability for the years 1950 to 1954 and for the year 1957 Both the taxpayer and the Commissioner of Internal Revenue as petitioner and respondent in the cases a quo respectively appealed from the Tax Courts decisions insofar as their respective contentions on particular tax items were therein resolved against themIssue ProperImproper AllowancesDisallowances of LossesHeld Re allowancesdisallowances of losses(a) Allowance of losses in Mati Lumber Co (1950) mdash The Commissioner of Internal Revenue questions the Tax Courts allowance of the taxpayers writing off as worthless securities in its 1950 return the sum of P805000 representing the cost of shares of stock of Mati Lumber Co acquired by the taxpayer on January 1 1948 on the ground that the worthlessness of said stock in the year 1950 had not been clearly established The Commissioner contends that although the said Company was no longer in operation in 1950 it still had its sawmill and equipment which must be of considerable value There was adequate basis for the writing off of the stock as worthless securities Assuming that the Company would later somehow realize some proceeds from its sawmill and equipment which were still existing as claimed by the Commissioner and that such proceeds would later be distributed to its stockholders such as the taxpayer the amount so received by the taxpayer would then properly be reportable as income of the taxpayer in the year it is received(b) Disallowance of losses in or bad debts of Palawan Manganese Mines Inc (1951) mdash The taxpayer appeals from the Tax Courts disallowance of its writing off in 1951 as a loss or bad debt the sum of P35313425 which it had advanced or loaned to Palawan Manganese Mines Inc Pursuant to the agreement mentioned above petitioner gave to Palawan Manganese Mines Inc yearly advances starting from 1945 which advances amounted to P58730807 by the end of 1951 Despite these advances and the resumption of operations by Palawan ManganeseMines Inc it continued to suffer losses By 1951 petitioner became convinced that those advances could no longer be recovered While it continued to give advances it decided to write off as worthless the sum of P35313425 Under the circumstances was the sum of P35313425properly claimed by petitioner as deduction in its income tax return for 1951 either as losses or bad debts It will be noted that in giving advances to Palawan Manganese Mine Inc petitioner did not expect to be repaid It is true that some testimonial evidence was presented to show that there was some agreement that the advances would be repaid but no documentary evidence was presented to this effect The memorandum agreement signed by the parties appears to be very clear that the consideration for the advances made by petitioner was 15 of the net profits of Palawan Manganese Mines Inc In other words if there were no earnings or profits there

was no obligation to repay those advances It has been held that the voluntary advances made without expectation of repayment do not result in deductible losses The Tax Courts is allowance of the write-off was proper The Solicitor General has rightly pointed out that the taxpayer has taken an ambiguous position and has not definitely taken a stand on whetherthe amount involved is claimed as losses or as bad debts but insists that it is either a loss or a bad debt 4 We sustain the governments position that the advances made by the taxpayer to its 100 subsidiary Palawan Manganese Mines Inc amounting to P58730807 as of 1951 wereinvestments and not loans 5 (c) Disallowance of losses in Balamban Coal Mines (1950 and1951) mdash The Court sustains the Tax Courts disallowance of the sums of P898976 and P2773266 spent by the taxpayer for the operation of its Balamban coal mines in Cebu in 1950 and 1951 respectively and claimed as losses in the taxpayers returns for said years The Tax Court correctly held that the losses are deductible in 1952 when the mines were abandoned and not in 1950 and 1951 when they were still in operation 9 The taxpayers claim that these expeditions should be allowed as losses for the corresponding years that they were incurredbecause it made no sales of coal during said years since the promised road or outlet through which the coal could be transported from the mines to the provincial road was not constructed cannot be sustained Some definite event must fix the time when the loss is sustained and here it was the event of actual abandonment of the mines in 1952 (d) and (e) Allowance of losses in Hacienda Dalupiri (1950 to 1954) and Hacienda Samal (1951-1952) mdash The Tax Court overruled the Commissioners disallowance of these items of losses thus Petitioner deducted losses in the operation of its Hacienda Dalupiri the sums of P1741895 in 1950 P2912582 in 1951 P2674481 in 1952 P2193262 in 1953 and P4293856 in 1954 These deductions were disallowed by respondent on the ground that the farm was operated solely for pleasure or as ahobby and not for profit This conclusion is based on the fact that the farm was operated continuously at a loss From the evidence we are convinced that the Hacienda Dalupiri was operated by petitioner for business and not pleasure It was mainly a cattle farm although a few race horses were also raised It does not appear that the farm was used by petitioner for entertainment social activities or other nonbusiness purposes Therefore it is entitled to deduct expenses and losses in connection with the operation of said farm (See 1955 PH Fed Taxes Par 13 63 citing GCM 21103 CB 1939- 1 p164) Section 100 of Revenue Regulations No 2 otherwise known as the Income Tax Regulations authorizes farmers to determine their gross income on the basis of inventories Said regulations provide If gross income is ascertained by inventories no deduction can be made for livestock or products lost during 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 quote from the memorandum of counsel for petitioner The Taxpayer deducted from its income tax returns for the years from 1950 to 1954 inclusive the corresponding yearly losses sustained in the operation of Hacienda Dalupiri which losses represent the excess of its yearly expenditures over the receipts that is the losses represent the difference between the sales of livestock and the actual cash disbursements or expenses (Pages 21-22 Memorandum for Petitioner) As the Hacienda Dalupiri was operated by petitioner for business and since it sustained losses in its operation which losses were determined by means of inventories authorized under Section 100 of Revenue Regulations No 2 it was error for respondent to have disallowed the deduction of said losses The same is true with respect to loss sustained in the operation of the Hacienda Samal for the years 1951 and 1952 10 The Commissioner questions that the losses sustained by the taxpayer were properly based on the inventory method of accounting He concedes however that the regulations referred to does not specify how the inventories are to be made The Tax Court however felt satisfied with the evidence presented by the taxpayer which merely consisted of an alleged physical count of the number of the livestock in Hacienda Dalupiri for the years involved 11 The Tax Court was satisfied with the method adopted by the taxpayer as a farmer breeding livestock reporting on the basis of receipts and disbursements We find no Compelling reason to disturb its findings

PLARIDEL SURETY v CIRFacts Petitioner Plaridel Surety amp Insurance Co is a domestic corporation engaged in the bonding business On November 9 1950 petitioner as surety and Constancio San Jose as principal solidarily executed a performance bond in the penal sum of P3060000 in favor of the

P L Galang Machinery Co Inc to secure the performance of San Joses contractual obligation to produce and supply logs to the latter To afford itself adequate protection against loss or damage on the performance bond petitioner required San Jose and one Ramon Cuervo to execute an indemnity agreement obligating themselves solidarily to indemnify petitioner for whatever liability it may incur by reason of said performance bond Accordingly San Jose constituted a chattel mortgage on logging machineries and other movables in petitioners favor1 while Ramon Cuervo executed a real estate mortgage2 San Jose later failed to deliver the logs to Galang Machinery3 and the latter sued on the performance bond On October 1 1952 the Court of First Instance adjudged San Jose and petitioner liable it also directed San Jose and Cuervo to reimburse petitioner for whatever amount it would pay Galang Machinery The Court of Appeals on June 17 1955 affirmed the judgment of the lower court The same judgment waslikewise affirmed by this Court4 on January 11 1957 except for a slight modification apropos the award of attorneys fees In its income tax return for the year 1957 petitioner claimed the saidamount of P4449000 as deductible loss from its gross income and accordingly paid the amount of P13600 as its income tax for 1957 The Commissioner of Internal Revenue disallowed the claimed deduction of P4449000 and assessed against petitioner the sum of P889800 plus interest as deficiency income tax for the year 1957 Petitioner filed its protest which was denied Whereupon appeal was taken to the Tax Court petitioner insisting that the P4449000 which it paid to Galang Machinery was a deductible lossIssue WON the amount Plaridel paid to Galang Machinery is a deductible lossHeld NO There is no question that the year in which the petitioner Insurance Co effected payment to Galang Machinery pursuant to a final decision occurred in 1957 However under the same court decision San Jose and Cuervo were obligated to reimburse petitioner for whateverpayments it would make to Galang Machinery Clearly petitioners loss is compensable otherwise (than by insurance) It should follow then that the loss deduction can not be claimed in 1957 Now petitioners submission is that its case is an exception Citing Cu Unjieng Sons Inc v Board of Tax Appeals6 and American cases also petitioner argues that even if there is a right to compensation by insurance or otherwise the deduction can be taken in the year of actual loss where the possibility of recovery is remote The pronouncement however to this effect in the Cu Unjieng case is not as authoritative as petitioner would have it since it was there found that the taxpayer had no legal right to compensation either by insurance or otherwise7 And the American cases cited8 are not in point None of them involved a taxpayer who had as in the present case obtained a final judgment against third persons for reimbursement of payments made In those cases there was either no legally enforceable right at all or such claimed right was still to be or being litigated On the other hand the rule is that loss deduction will be denied if there is a measurable right to compensation for the loss with ultimate collectionreasonably clear So where there is reasonable ground for reimbursement the taxpayer must seek his redress and may not secure a loss deduction until he establishes that no recovery may be had9 In other words as the Tax Court put it the taxpayer (petitioner) must exhaust his remedies first to recover or reduce his loss But assuming that there was no reasonable expectation of recovery still no loss deduction can be had Sec 30 (d) (2) of the Tax Code requires a charge-off as one of the conditions for loss deduction In the case of a corporation all losses actually sustained and charged-off within the taxable year and not compensated for byinsurance or otherwise Mertens12 states only four (4) requisites because the United StatesInternal Revenue Code of 193913 has no charge-off requirement Sec 23(f) thereof provides merely In the case of a corporation losses sustained during the taxable year and not compensated for by insurance or otherwise Petitioner who had the burden of proof14 failed to adduce evidence that there was a charge-off in connection with the P4449000mdashor P3060000 mdash which it paid to Galang Machinery

CHINA BANKING CORPORATION V COURT OF APPEALSFacts Petitioners mad a 53 equity investment in First CBC Capital (Asia) Limited to the amount of P1622785180 consisting of 106000 shares with par value of P100 per shareSubsequently First CBC was found to be insolvent Petitioners with the approval of the BSP wrote off as worthless its investment in the company and treated it as a bad debt or ordinary loss deductible from its gross income The Commissioner of Internal Revenue disallowed the deduction saying that the investment could not be considered worthless since First CBC could still exercise its financing and investment activities even if it was no longer licensed as a

depository Even assuming that the securities had become worthless it still cannot be considered as a bad debt or expense since there is no indebtedness between petitioner and First CBC It should be classified as a capital lossHeld The SC found in favor of respondents1 Not and indebtedness An equity investment in shares of stock cannot be considered as an indebtedness of First CBC Capital to China Bank The former has no obligation to repay the latter the amount invested The amount China Bank invested in First CBC is in fact anasset2 Capital asset not ordinary Capital assets are defined in the negative by Sec 33(1) of the NIRC as property held by the TP exclusive of items primarily for the sale to customers in the ordinary course of business or property used in trade or business Hence securities such as equity holdings are ordinary assets only in the hands of a dealer or a person actively engaged in trading in the same for his own account3 Section 29(d)(4)(B) of the NIRC treats the worthlessness of the securities held as capital assets as a loss resulting from the sale or exchange of capital assets Strictly speaking no sale occurs when securities held as capital assets become worthless Nonetheless the law treats it as a loss from a sale just the same4 Section 33 of the NIRC provides that the capital loss sustained can only be deducted from any capital gain derived within the taxable year The same provision enumerates assets which are not subject to the said limitation but equity holdings are not one of them

THE CITY LUMBER INC V DOMINGOFacts Respondent Domingo made an assessment on an additional income of petitioners in the amount of P16 67863 coming from 1 the sale of plywood kegs of nails and GI sheets amouting to P 790207 2 a cash credit balance of P789680 Petitioner assails the validity of the assessment alleging that the inventory in question was not sold but were lost to looters during a fire which occurred in the city To 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 was actually a loan secured by petitionersHELDThe assessments were valid 1 The alleged loss of the plywood and kegs of nails was never reported in the books of the petitioner nor in the petitioners ITR for that year Such conduct of the petitioner proves that such loss never occurred 2 Similarly there was neither any record in petitioners books nor any receipt or other piece of evidence to show receipt of the supposed loan

MARCELO STEEL CROP V COLLECTOR OF INTERNAL REVENUEFacts RA 35 granted a four-year tax exemption from all internal revenue taxes to enterprises directly payable by such enterprise or person which shall engage in new and necessary industries Petitioner corporation was engaged in 1 the manufacture of wire fences 2 the manufacture of steel nails 3 the manufacture of steel bars rods and other allied productsof which the last two were covered by RA 35 In 1953 and 1954 petitioner filed its ITR showing a net income of P3438658 and P5832900 respectively derived solely from its wire fence manufacturing business It was accordingly assessed P12750 in taxes which it paid subsequently it filed an amended ITR for the same taxable years showing that it actually incurred a loss of P87140737 and P10495629 respectively The losses were arrived at by consolidating the gross income and the gross allowable deductions of its three industries Petitioner thus filed for a refund of the P12750 it initially paid in taxes on the theory that since it is a corporation organized with a single capital to answer for all its financial obligations the gross income from both tax-exempt and non-exempt industries and its liability should be based on the difference between its consolidated gross income and its consolidated allowable deductionsHeld Petition has no merit Marcelo Steel cannot consolidate 1 The purpose of RA 35 is to encourage the establishment of new and necessary industries for the economic growth of the country In effect it grants a subsidy to entrepreneurs who blaze a trail in a new industry since there are greater risks involved in the same and an ROI is usually not immediately forthcoming As such a tax exemption granted to an entrepreneur engaged in a tax-exempt industry cannot be extended to benefit non-exempt industries in which the same entrepreneur is concurrently

engaged The justification is simply not there since such industries are presumably already deriving profits from its operations 2 Single capital - The fact that all three industries are organized under a single capital is of no moment It is clear that the law intended that tax exemptand non-exempt industries be treated separately as reflected in EO 341 series 0f 1950 which was incorporated in RA 901 a later incarnation of the same lawPHILIPPINE SUGAR ESTATE CORP V COLLECTOR OF INTERNALREVENUEFacts Petitioner owned shares of stock in several different companies and 154 liberty bonds at par 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 inclusiveof the sums above-stated for which it was assessed an amount in taxes It paid said amount without protest Subsequently petitioner filed a demand for refund In the letter-demand the ground for the refund invoked was the illegality o the collection since the dividends and interest were exempt from payment of income tax Although in the present petition the ground invoked is that the income tax on dividends had already been paid at the source Respondent denied the claim for refund because plaintiff failed to lodge a protest concurrently when it paid its tax liability as per Sec 1579 of the Revised Administrative Code as amended by Act No 3685 Plaintiffcountered by saying that the applicable law is Act No 2833 which requires no protest In addition it invoked the ruling in Fox v Edwards wherein it was ruled that any unduly paid income tax may be refunded without the necessity of a protestHeld The SC found in favor of the Collector1Controlling law - There is no need to distinguish between the two laws in this case Section 19 of Act 2833 provides that all administrative special and general provisions of law including laws in relation to the assessment remission collection and refund of internal revenue taxesnot hereto fore repealed and not inconsistent withthis Law areapplicableto this Law By virtue of this saving clause Section 1579 of the Revised Administrative Code finds application to Act 28332 Fox v Edwards is not controlling since the law specifically applied therein did not require the lodging of a protest concurrently with the payment for a TP to retain such right to protest (NOTE fr digester I did not find anything on losses or bad debts in this case I may have overlooked it)

DEDUCTIONS AND EXEPTIONS ALLOWABLE DEDUCTIONS BADDEBTSPHILIPPINE REFINING COMPANY V COURT OF APPEALSFacts In 1985 petitioner filed its ITR where it claimed 16 items amounting to P71307093 as bad debts and therefor deductible Subsequently the Commissioner for Internal Revenue disallowed such deductions and assessed petitioner to pay a deficiency tax for the year of 1985 Petitioner paid the deficiency tax under protest which the Commissioner deniedUpon a petition for review the CTA modified the findings of the Commissioner by reducing the deficiency tax assessment on the basis that three of the sixteen supposed bad debts could be allowed as deductions The CA later on agreed with the CTAHeld The SC upheld the ruling of the CA which it found to be in accordance with the SCs ruling in Collector v Goodrich It held the petitioner failed to substantiate the ldquoworthlessnessrdquo of the 13 debts which it claimed as deductions As per the ruling in Collector v Goodrich to qualify as a bad debt a TP must show 1 that there is a valid and subsisting debt2 that the debt must be actually ascertained to be worthless and uncollectible durring the taxable year3 the debt must be charged off during the taxable year and4 the debt must arise from the business or trade of the TPIn addition the Court said before a debt can be considered worthless the TP must also show that it is indeed uncollectible even in the future Furthermore the TP must undertake several steps to prove that he exerted diligent efforts to collect the debt1 sending statements of accounts to the debtors 2 sending of collection letters 3 giving the account to a lawyer for collection and4 filing a collection case in court In the case at bar the petitioner miserably failed to show any of the foregoing The only piece of evidence it offered to show the worthlessness of the debts was the testimony of the companys financial adviser or accountant The Court found that this lacked the required probity to establish that the accounts it claimed as bad debts were indeed

worthless Apart from such testimony the petitioner failed to introduce even a single iota of evidence to bolster its claim of worthlessness (NOTE In the rest of the case the Court presents the allegation of the petitioner as to why it could not collect on any of the 13 debts followed bya statement how the petitioner failed to introduce evidence to substantiate such allegation)

Collector of Internal Revenue v Goodrich International Rubber Co(21 SCRA 1336 No L-22265)Facts In 1951 and 1952 respondent Goodrich filed it ITR in which it claimed an aggregate amount (consisting of 18 individual accounts) of P5045541 as deductible for being bad debts The Collector of Internal Revenue disallowed the deductions and accordingly assessed Goodrich accordingly Goodrich protested the assessment and subsequently filed an appealwith the CTA which allowed the deductions for bad debts Hence this appeal by the GovernmentHeld Petition is partially meritorious Some of the items claimed by Goodrich can rightfully be written off as bad debts The SC rejected the claim for deduction of 10 items because Goodrichfailed to establish that that the debts were actually worthless or that it had reasonable grounds to believe them to be so in 1951 The law permits the deduction of debts ldquoactually ascertained to be worthless within the taxable yearrdquo obviously to prevent arbitrary action by the TP to unduly avoid tax liability Good faith on the part of the TP is not enough He must furthermore show that he had reasonably investigated the relevant facts and had drawn a reasonable inference from the information 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 actually made (some in full) after they had been characterized as bad debts and written off The Court however ruled that 8 of the 18 claimed bad debts can beallowed as deductions Common among these 8 was the action of Goodrich in persistently demanding payment from its debtors its endorsement of the accounts to counsel for collection the pursuit of legal remedies for the collection on these debts and the continuing failureclear inability of the debtors to pay off their obligations

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSDEPRECIATIONBASILAN ESTATES INC v CIRFacts Basilan Estates Inc claimed deductions for the depreciation of its assets on the basis of their acquisition cost As of January 1 1950 it changed the depreciable value of said assets by increasing it to conform with the increase in cost for their replacement Accordingly from 1950 to1953 it deducted from gross income the value of depreciation computed on the reappraised value CIR disallowed the deductions claimed by petitioner consequently assessing the latter of deficiency income taxesIssueWhether or not the depreciation shall be determined on the acquisition cost rather than the reappraised value of the assetsHeld Yes The following tax law provision allows a deduction from gross income for depreciation but limits the recovery to the capital invested in the asset being depreciated (1)In general mdash A reasonable allowance for deterioration of property arising out of its use or employment in the business or trade or out of its not being used Provided That when the allowance authorized under this subsection shall equal the capital invested by the taxpayer no further allowance shall be made The income tax law does not authorize the depreciation of an asset beyond its acquisition cost Hence a deduction over and above such cost cannot be claimed and allowed The reason is that deductions from gross income are privileges not matters of right They are not created by implication but upon clear expression in the law Depreciation is the gradual diminution in the useful value of tangible property resulting from wear and tear and normal obsolescense It commences with the acquisition of the property and its owner is not bound to see his property gradually waste without making provision out of earnings for its replacement The recovery free of income tax of an amount more than the invested capital in an asset will transgress the underlying purpose of a depreciation allowance For then what the taxpayer would recover will be not only the acquisition cost but also some profit Recovery in due time thru depreciation of investment made is the philosophy behind depreciation allowance the idea of profit on the investment made has never been the underlying reason for the allowance of a deduction for depreciation

Zamora v CIRFacts These are 4 cases regarding deficiency income taxes allegedly incurred by the ZamorasCases Nos L-15290 and L-15280Mariano Zamora owner of the Bay View Hotel and Farmacia Zamora Manila filed his income tax returns the years 1951 and 1952 The Collector of Internal Revenue found that he failed to file his return of the capital gains derived from the sale of certain real properties and claimed deductions which were not allowable The CTA reduced the sum due Zamora and on appeal petitioner alleged that the CTA erred in disallowing the promotion expenses incurred by his wife for promotion of the above businesses depreciation of the Bayview Hotel Bldg and in applying the Ballantyne scale of values for determining the cost of his Manila property The CIR on the other hand claimed that the CTA erred in reducing the amounts and giving credence to the uncorroborated testimony of Mariano Zamora that he bought the said real property in question during the Japanese occupation partly in Philippine currency and partly in Japanese war notes Cases Nos L-15289 and L-15281 Mariano Zamora and his deceased sister Felicidad Zamora bought a piece of land located in Manila on May 16 1944 for P13200000 and sold it for P7500000 on March 5 1951 They also purchased a lot located inQuezon City for P6895900 on January 19 1944 which they sold for P94000 on February 9 1951 The CTA ordered the estate of the late Felicidad Zamora (represented byEsperanza A Zamora as special administratrix of her estate) to pay the sum of P23550 representing alleged deficiency income tax and surcharge due from said estateFirst issue ndash disallowance of the entire promotion expenses incurred by Mrs ZamoraPetitioner The CTA erred in disallowing P1047850 as promotion expenses incurred by his wife for the promotion of the BayView Hotel and Farmacia Zamora He contends that the whole amount of P2095700 as promotion expenses should be allowed and not merely one-half of it on the ground that while not all the itemized expenses are supported by receipts the absence of some supporting receipts has been sufficiently and satisfactorily established - to purchase machinery for a new Tiki-Tiki plant and to observe hotel management in modern hotelsRespondents Mrs Zamora obtained only the sum of P500000 from the Central Bank and that in her application for dollar allocation she stated that she was going abroad on a combined medical and business trip which facts were not denied by Mariano Zamora The alleged expenses were not supported by receipts Mrs Zamora could not even remember how much money she had when she left abroad in 1951 and how the alleged amount of P2095700 was spent There having been no means by which to ascertain which expense was incurred by her inconnection with the business of Mariano Zamora and which was incurred for her personal benefit the respondents considered 50 of the said amount of P2095700 as business expenses and the other 50 as her personal expensesHeld The 50 allocation is very fair to Zamora there being no receipt to explain the alleged business expenses as well as the personal expenses that might have been incurred While in situations like the present absolute certainty is usually no possible the CTA should make as close an approximation as it can bearing heavily if it chooses upon the taxpayer whose inexactness is of his own making Section 30 of the Tax Code provides that in computing net income there shall be allowed as deductions all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business Since promotion expenses constitute one of the deductions in conducting a business same must testify these requirements Claim for the deduction of promotion expenses or entertainment expenses must also be substantiated or supported by record showing in detail the amount and nature of the expenses incurredSecond issue ndash disallowancereduction of the rate of depreciation of Bayview Hotel (from 35 to 25)Petitioner Contends that 1) the Ermita district is becoming a commercial district 2) the hotel has no room for improvement and(3) the changing modes in architecture styles of furniture and decorative designs must meet the taste of a fickle public Alsothe reference to Bulletin F a publication by the IRS should have been first proved as law to be subject of judicial noticeHeld The CTA was approximately correct in holding that the rate of depreciation must be 25 An average hotel buildingrsquos estimated useful life is 5 years but inasmuch as it also depends on the use and location change in population and other it is allowed a deprecation rate of 25 which corresponds to a useful life of 40 years It is true that Bulletin F has no binding force but it has a strong persuasive effect considering that the same has been the result of scientific studies

and observation for a long period in the United States after whose Income Tax Law ours is patterned Verily courts are permitted to look into and investigate the antecedents or the legislative history of the statutes involvedThird issue-the undeclared capital gains derived from the sales in 1951 of certain real properties in Malate Manila and in Quezon City acquired during the Japanese occupationHeld The CTArsquos appraisal in this case is correct Consequently the total undeclared income of petitioners derived from the sales of the Manila and Quezon City properties in 1951 is P1711175 (P175000 plus P1536175) 50 of which in the sum of P855588 is taxable the said properties being capital assets held for more than one year The cost basis of property acquired in Japanese war notes is the equivalent of the war notes in genuine Philippine currency in accordance with the Ballantyne Scale 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 P13200000 was not entirely paid in Japanese War notes but frac12 thereof or P6600000 was in Philippine currency This being the case the Ballantyne Scale of values which was the resultof an impartial scientific study adopted and given judicial recognition should be applied As the value of the Japanese war notes in May 1944 when the Manila property was bought was 1 frac12 of the genuine Philippine Peso (Ballantyne Scale) and since the gain derived or loss sustained inthe disposition of this property is to reckoned in terms of Philippine Peso the value of the Japanese war notes used in the purchase of the property must be reduced in terms of the genuine Philippine Peso to determine the cost of acquisition It therefore results that since the sum of P6600000 in Japanese war notes in May 1944 is equivalent to P550000 in Philippine currency (P6600000 divided by 12) the acquisition cost of the property in question is P6600000 plus P550000 or P7150000 and that as the property was sold for P7500000 in 1951 the owners thereof Mariano and Felicidad Zamora derived a capital gain of P350000or P175000 each For the Quezon City property the CTA was correct in giving credence toZamorarsquos testimony that the same was purchased inPhilippine currency because it is quite incredible that real property with an assessed value of P4691000 should have been soldin Japanese war notes with an equivalent value in Philippine currency of only P1723975 Thus the gain derived from the sale isP1536175 after deducting from the selling price the cost of acquisition in the sum of P6895900 and the expense of sale in the sum of P967925Disposition The petitions are dismissed and the decision appealed from is affirmed

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSDEPLETIONCONSOLIDATED MINES V CTAFacts Cosolidated Mines filed a refund for overpayments of income taxes for the year 1951 However after investigation of the BIR instead of having a refund the company was instead assessed for deficiency income taxes for the years 1953 1954 and 1956 with 5 surchargeand 1 monthly interest According to the investigation (A) for the years 1951 to 1954 (1) the Company had not accrued as an expense the share in the company profits of Benguet Consolidated Mines as operator of the Consolidateds mines although for income tax purposes the Consolidated had reported income and expenses on the accrual basis (2) depletion and depreciation expenses had been overcharged and (3) the claims for audit and legal fees and miscellaneous expenses for 1953 and 1954 had not been properly substantiated and that (B) for the year 1956 (1) the Company had overstated its claim for depletion and (2) certain claims for miscellaneous expenses were not duly supported by evidence Background info Consolidated and Benguet entered into a development agreement whereby Consolidated as the owner of several mining claims allowed Benguet to explore develop mine concentrate andmarket the ore in the mining claims In the agreement it was provided that benguet is to provide the funds necessary for the expenses until such time the properties are on a profit producing basis to be reimbursed by consolidated Once profit is derived expenditures from its own resources shall be charged against the subsequent gross income of the properties During the time Benguet is being reimbursed for all its expenditures the net profits resulting from the operation of the claims shall be divided 90 to Benguet and 10 to Consolidated Such division of net profits shall be based on the receipts and expenditures during each calendar year and

shall continue until such time as the 90 of the net profits pertaining to Benguet hereunder shall equal the amount of such expenditures ldquoAfter Benguet has been fully reimbursed for its expenditures the net profits from the operation shall be divided between Benguet and Consolidated share and share alike it being understood however that the net profits as the term is used in this agreement shall be computed by deducting from gross income all operating expenses and all disbursements of any nature whatsoever as may be made in order to carry out the terms of this agreementrdquo It appears that by 1953 Benguet had completely recouped its advances because they were then dividing the profits share and share alike Consolidated used the accrual method of accounting in computing its income One of its expenses is the amount-paid to Benguet as mine operator which amount is computed as 50 of ldquonet incomerdquo TheConsolidated deducts as an expense 50 of cash receipts minus disbursements but does not deduct at the end of each calendar year what the Commissioner alleges is 50 of the share of Benguet in the accounts receivable However it deducts Benguets 50 if and when the accounts receivable are actually paid It would seem therefore that Consolidated has been deducting a portion of this expense (Benguets share as mine operator) on the cash amp carry basis The question is whether or not the accounting system used by Consolidated justifies such a treatment of this item and if not whether said method used by Consolidated and characterized by the Commissioner as a hybrid method may be allowed under the provisions of the NIRCIssue WON Consolidatedrsquos accounting method is allowedHeld YES It is said that accounting methods for tax purposes comprise a set of rules for determining when and how to report income and deductions The US Internal Revenue Code allows each taxpayer to adopt the accounting method most suitable to his business and requires only that taxable income generally be based on the method of accounting regularly employed in keeping the taxpayers books provided that the method clearly reflects incomeA deduction cannot be accrued until an actual liability is incurred even if payment has not been made Here we have to distinguish between (1) the method of accounting used by Consolidated in determining its net income for tax purposes and (2) the method of computation agreed upon between Consolidated and 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 were cash receipts and cash payments Once determined in accordance with the stipulated bases and procedure then the amount due Benguet for each month accrued at the end of that month whether Consolidated had made payment or not To make Consolidated deduct as an expense one-half of the Accounts Receivable would in effect be equivalent to giving Benguet a right which it did not have under the contract and to substitute for the parties choice a mode of computation of compensationnot contemplated by themON DEPLETIONThe first issue raised by Consolidated is with respect to the rate of mine depletion used by the Court of Tax Appeals The Tax Code provides that in computing net income there shall be allowed as deduction in the case of mines a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof which has been mined and sold during the year for which the return is made [Sec 30(g) (1) (B)] As an income tax concept depletion is wholly a creation of the statute mdash ldquosolely a matter of legislative gracerdquo Hence the taxpayer has the burden of justifying the allowance of any deduction claimed As in connectionwith all other tax controversies the burden of proof to show that a disallowance of depletion by the Commissioner is incorrect or that an allowance made is inadequate is upon the taxpayer and this is true with respect to the value of the property constituting the basis of the deduction This burden-of-proof rule has been frequently applied and a value claimed has been disallowed for lack of evidence Here SC considered the evidence presented (testimony of Eligio Garciaand the Report to Stockholders (which includes the Balance Sheet as of 1946) geological report on the estimated amount of ore in the claims etc) it set forth a very detailed computation of the depletion rate determining the value of each component of the formula of depletion viz Rate of Depletion Per Unit = Cost of Mine Property Estimated ore Deposit of Product Mined and sold- depletion is different from depreciation In determining the amount of cost depletion allowable the following three facts are essential namely (1) the basis of the property (2) the estimated total recoverable units in the property and (3) the number of units recovered during the taxable year in question As used as an element in cost depletion basis means the dollar amount of the

taxpayers capital or investment in the property which he is entitled to recover tax free during the period he is removing the mineral in the depositDisposition Decision modifiedFootnotes in the case that are helpful While taxable income is based on the method of accounting used by the taxpayer it will almost always differ from accounting income This is sobecause of a fundamental difference in the ends the two concepts serve Accounting attempts to match cost against revenue Tax law is aimed at collecting revenue It is quick to treat an item as income slow to recognize deductions or losses Thus the tax law will not recognize deductions for contingent future losses except in very limited situations Good accounting on the other hand their recognition Once this fundamental difference in approach is accepted income tax accounting methods can be understood more easily 33 Am Jur 2d 688 Under the accrual system income is accruable in the year in which the taxpayers right thereto becomes fixed and definite even though it may not be actually received until a later year while a deduction for a liability is to be accrued and taken when the liability becomes fixed and certain even though it may not be paid until a later year It has been held that the basis of the accrual system of accounting is that obligations incurred in the normal course of business will be discharged in due course that the deductions have been paid or accrued or paid and incurred but in order to be accruable in the taxable year a valid obligation upon which the profit (or loss in the case 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 expend money constituting a deductible loss is the date that fixes liability Gain or loss may not said to be fixed or accrued when the obligation is contingent upon the happening of a future event No duty or liability to pay an income tax upon a transaction arises until the taxable year in which the event constituting the condition precedent occurs under any system ofaccounting

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSCHARITABLE AND OTHER CONTRIBUTIONSROXAS v CTA GR No L-25043 April 26 1968Facts Don Pedro Roxas and Dona Carmen Ayala Spanish subjects transmitted to their grandchildren by hereditary succession several properties To manage the above-mentioned properties said children namely Antonio Roxas Eduardo Roxas and Jose Roxas formed apartnership called Roxas y Compania At the conclusion of the WW2 the tenants who have all been tilling the lands in Nasugbu for generations expressed their desire to purchase from Roxas y Cia the parcels which they actually occupied For its part the Government in consonance with the constitutional mandate to acquire big landed estates and apportion them among landless tenants-farmers persuaded the Roxas brothers to part with their landholdings Conferences were held with the farmers in the early part of 1948 and finally the Roxas brothers agreed to sell 13500 hectares to the Government for distribution to actual occupants for a price of P207904847 plus P30000000 for survey and subdivision expenses It turned out however that the Government did not have funds to cover the purchase price and so a special arrangement was made for the Rehabilitation Finance Corporation to advance to Roxas y Cia The amount of P150000000 as loan Collateral for such loan were the lands proposed to be sold to the farmers Under the arrangement Roxas y Cia allowed the farmers to buy the lands for the same price but by installment and contracted with the Rehabilitation Finance Corporationto pay its loan from the proceeds of the yearly amortizations paid by the farmers The CIR demanded from Roxas y Cia the payment of deficiency income taxes resulting from the inclusion as income of Roxas y Cia of the unreported 50 of the net profits for 1953 and 1955 derived from the sale of the Nasugbu farm lands to the tenants and the disallowance of deductions from gross income of various business expenses and contributions claimed by Roxas y Cia and the Roxas brothers For the reason that Roxas y Cia subdivided its Nasugbu farm lands and soldthem to the farmers on installment the Commissioner considered the partnership as engaged in the business of real estate hence 100 of the profits derived therefrom was taxed The Roxas brothers protested the assessment but inasmuch as said protest was denied they instituted an appeal in the CTA which sustained the assessment Hence this appealIssue Is Roxas y Cia liable for the payment of deficiency income for the sale of Nasugbu farmlandsHeld NO The proposition of the CIR cannot be favorably accepted in this isolated transaction with its peculiar circumstances in spite of the fact that there were hundreds of vendees Although

they paid for their respective holdings in installment for a period of 10 years it would nevertheless not make the vendor Roxas y Cia a real estate dealer during the 10-year amortization period It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled them for generations was not only in consonance with but more in obedience to the request and pursuant to the policy of our Government to allocate lands to the landless It was the bounden duty of the Government to pay the agreed compensation after it had persuaded Roxas y Cia to sell its haciendas and to subsequently subdivide them among the farmers at very reasonable terms and prices However the Government could not comply with its duty for lack of funds Obligingly Roxas y Cia shouldered the Governments burden went out of its way and sold lands directly to the farmers in the same way and under the same terms as would have been the case had the Government done it itself For this magnanimous act the municipal council of Nasugbu passed a resolution expressing the peoples gratitudeIn fine Roxas y Cia cannot be considered a real estate dealer for the sale in question Hence pursuant to Section 34 of the Tax Code the lands sold to the farmers are capital assets and the gain derived from the sale thereof is capital gain taxable only to the extent of 50

DEDUCTIONS AND EXEMPTIONS NON-DEDUCTIBLE EXPENSECIR v JAMIRFacts For the year 1954 Alberto M K Jamir declared a gross income of P7585865 and claimed deductions aggregating P5813450 thereby showing a net income of P1777415 upon which he paid P1634 as income tax The Collector of Internal Revenue however assessed asdeficiency income tax due from him the sum of P16395 Jamir appealed to the Court of Tax Appeals which reduced the amount due as deficiency income tax to P55200Issue Whether Jamir had an undeclared income for the year 1954 aggregating P3127491Held No It appears that by using the so-called expenditures method the Government considered as an undeclared income Jamirs expenditures for February and May were in excess of his reported income for the same months Although the Court of Tax Appeals in effect sanctioned the adoption of the expenditures method it held that the same should be applied by deducting the aggregate yearly expenditures from the declared yearly income not the expenditures incurred each month from the declared income therefor In the case at bar Jamirs total income for the year 1954 (P7585865) exceeded (Pl777415) the total deductions (P5813450) claimed by him Jamir introduced evidence that the said sums of P128124 andP2999367 represented advances made to him by customers in the months of February and may 1954 and that the income derived from the corresponding transactions were entered in his books of account in subsequent months and this explanation was found by the Court of Tax Appeals to have been proven satisfactorily The next question raised by appellant refers to Jamirs claim for car depreciation and salary of his driver Although petitioner had disallowed one-half (12) of these claims it appearing that the car was used by Jamir for personal and business purposes the lower court allowed as deductions three-fourths (34) of said amounts the car having been used by Jamir more for business than for personal purpose Petitionerassails this as an error but considering the circumstances we agree with the deduction of frac34 by the lower court It is next urged that Jamir committed fraud and the 50 surcharge should not have been eliminated But since Jamir did not have the undeclared income of P3127491 upon which the contested assessment is mainly based it follows necessarily that he was not guiltyof the fraud and that the 50 surcharge has been properly eliminatedDisposition the decision appealed from is hereby affirmed

Atlas Consolidated Mining v CIRFacts CIR assessed Atlas deficiency income tax for 1957 to 1958 which amounted to morethan P700K CIR asserted that in 1957 Atlas was still not entitled to exemption fromthe income tax under RA 909 because the same covers only gold mines and Atlas isnot engaged in that Atlasprotested before the Sec of Finance and Sec ruled that exemption provided in RA 909 embraces all new 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 disallowance of the following items transfer agent1048576s fees stockholders relation service fee US stock listing expenses suit expenses provision for contingency CTA disallowed the items except the stockholders relation service fee and suit expenses Also CTA ruled that the exemption from payment of the corporate income tax of Atlas

was good only up to the first quarter of 1958 hence it computed for its net taxable income for the remaining frac34 of the year Atlas appealed asserting that the annual public relations expense is a deductible expense from gross income because it is an ordinary and necessarybusiness expenseIssue WON this fee paid for the services rendered by a public relations firm in the US labeled as stockholders relation service fee is an allowable deductionHeld 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 that deduction is authorized and must be able to prove that he is entitled to the deduction which the law allows As previously adverted to the law allowing expenses as deduction from gross income for purposes of the income tax is Section 30 (a) (1) of the National Internal Revenue which allows a deduction of all the ordinary and necessary expenses paid orincurred during the taxable year in carrying on any trade or business An item of expenditure in order to be deductible under this section of the statute must fall squarely within its language We come then to the statutory test of deductibility where it is axiomatic that to be deductible as a business expense three conditions are imposed namely (1) the expense must be ordinary and necessary (2) it must be paid or incurred within the taxable year and (3) it must be paid or incurred in carrying in a trade or business In addition not only must the taxpayer meet thebusiness test he must substantially prove by evidence or records the deductions claimed under the law otherwise the same will be disallowed The mere allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its deduction Assuming that the expenditure is ordinary and necessary in the operation of the taxpayers business the answer to the question as to whether the expenditure is an allowable deduction as a business expense must be determined from the nature of the expenditure itself which in turn depends on the extent and permanency of the work accomplished by the expenditure The expenditure of P2552314 paid to PK Macker amp Co as compensation for services carrying on the selling campaign in an effort to sell Atlas additional capital stock of P3325000 is not an ordinaryexpense in line with the decision of US Board of Tax Appeals in the case of Harrisburg Hospital Inc vs Commissioner of Internal Revenue Accordingly as found by the Court of Tax Appeals the said expense is not deductible from Atlas gross income in 1958 because expenses relating to 1) recapitalization and reorganization of the corporation 2) the cost of obtaining stock subscription 3)promotion expenses and 4) commission or fees paid for the sale of stock reorganization are capital expenditures The burden of proof that the expenses incurred are ordinary and necessary is onthe taxpayer The claimed business expense must also be supported by appropriate documents such as invoices official receipts and contracts to be made available in case of a tax audit by the Bureau of Internal Revenue

GANCAYCO V COLLECTORFacts1048576 Gancayco filed his Income tax Return (ITR) for 19491048576 CIR notified him that his liability is Php 979362 which he paid 19501048576 CIR after a year wrote to Gancayco saying that there was tax due from him for a total of Php 29554051048576 Gancayco asked for reconsideration and the tax assessed wasreduced1048576 CIR issued a warrant of distraint for the deficient liability1048576 Gancayco filed petition with CTACTA Required Gancayco to pay Php 16 86031 for tax deficiency in1949Gancayco the right to collect the deficiency income tax is barred by thestatute of limitations the 5 yr period for judicial action should be counted from May 12 50 the date of original assessment SC Section 316 provides The civil remedies for the collection of internal revenue taxes fees or charges and any increment thereto resulting from delinquency shall be (a) by distraint of goods chattels or effects and other personal property of whatever character including stocks and other securities debts credits bank accounts and interest in and rights to personal property and by levy upon real property and (b) by judicial action Either of these remedies or both simultaneously may be pursued in the discretion of the authorities charged with the collection of such taxes No exemption shall be allowed against the internal revenue taxes in any case

Deduction for expenses may be allowed however in this case Gancayco was not able to prove any expense as there were no receipts or other proofs CTA AFFIRMED

DEDUCTIONS AND EXEMPTIONS NON-DEDUCTIBLE EXPENSESILLEGAL EXPENSESCALANOC V COLLECTORFacts1048576 Calanoc was authorized to solicit and receive contributions for the orphans and destitute kids of the Child Welfare Workers Club of the Social Welfare Commission1048576 Dec 1949 Calanoc financed and promoted a boxing exhibition at the Rizal Memorial Stadium for said charitable purpose1048576 He applied for exemption from payment of the amusement tax as provided in Sec 260 NIRC1048576 CIR investigated the tax case of Calanoc and it was found that there was gross sale of Php 26553 expenditure of 25157 and profit of 1375301048576 Profit was remitted to Social Welfare Commission1048576 CIR demanded Calanoc oto pay 5331048576 Sec of Finance denied the application of Calanoc for exemption from payment of amusement taxCTA Affirmed the assessment of 7k Calanoc denies receving a stadium fee of 1k Although it was shown that 1k was paid by O-OSO Beverages His accountant is dead SC the items of expenditures for deduction are exorbitant and not supported by receiptsCTA Affirmed

3M PHILIPPINES INC petitioner vs COMMISSIONER OFINTERNAL REVENUE respondent [GR No 82833 September 261988]Facts The petitioner claimed as deductions for income tax purposes business expenses in the form of royalty payments to its foreign licensor which the respondent Commissioner of Internal Revenue disallowed The petitioner claimed the following deductions royalties and technical service fees and pre-operational cost of tape coater The amount was not allowed as entire deduction The petitioner argues that the law applicable to its case is only Section 29(a)(1) of the Tax Code and not Circular No 393 of the Central BankIssue WON the royalty payments are valid deductible expense WON the Tax Code is applicableHeld No Although the Tax Code allows payments of royalty to be deducted from gross income as business expenses it is CB Circular No 393 that defines what royalty payments are proper Improper payments of royalty are not deductible as legitimate business expenses Section 3-c of CB Circular No 393 provides for payment of royalties only on commodities manufactured by the licensee under the royalty agreement not on the wholesale price of finished products imported by the licensee from the licensor entral Bank Circulars like CB Circular No 393 (dated December 7 1973 published in the Official Gazette issue of December 17 1973 [69 OG No 51 p 11737] issued by the Central Bank in the exercise of fits authority under the Central Bank Act duly published in the Official Gazette have the force and effect of law (Cases cited) andbinding on everybody

DEDUCTIONS AND EXEMPTIONS PERSONAL EXEMPTIONSCOLLECTOR OF INTERNAL REVENUE petitioner vs ORLANDO VCALSADO and COURT OF TAX APPEALS respondents [GR 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 supportIssue WON the respondent is classified as head of the familyHeld 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 Php50000

In the matter of the adoption of the minor MARCIAL ELEUTERIO RESABA LUIS SANTOS-YNtildeIGO and LIGIA MIGUEL DE SANTOSYNtildeIGO petitioners-appellees vs REPUBLIC OF THE PHILIPPINES oppositor-appellantTAX ON CORPORATIONS BASES AND RATESRESIDENT FOREIGN CORPORATIONS TAXABLE INCOME [GRNo 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 minorIssue WON the adoption is validHeld 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 suchagreement 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 bymarriage 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 childrenwith 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 or main support Partial support not amounting to chief support will not entitle the taxpayer to claim exemption as a head of a family Regulation No section 11

property shares of stock and interests on savings in bank accounts are incomes yet they are not included in the gross income when income taxes are paid because these are subject to final withholding taxes

COMMISSIONER OF CUSTOMS VS PHILIPPINE ACETYLENECOMPANYFacts Philippine Acetylene Company is engaged in the manufacture of oxygen acetylene and nitrogen and packaging of liquefied petroleum gas in cylinders and tanks It imported from the United States a custombuilt liquefied petroleum gas tank For the said importation the companywas assessed a special import tax amounting to PhP 368300 The company paid the tax under protest Philippine Acetylene Company argues that it is exempt from the payment of the special import tax It cites as basis for its exemption Sec 6 of RA No1394 which states that special import taxes shall not be imposed on machinery equipment accessories and spare parts imported into the Philippines for the use of industries The company maintains that it is anindustry as defined in Sec 6 of RA No 1394 The Court of Tax Appeals sustained Philippine Acetylene Companyrsquos contention and declared the latter exempt from the payment of thespecial import taxIssue Whether or not Philippine Acetylene Company may be considered engaged in an industry as contemplated in Sec 6 of RA No 1394 and therefore exempt from the payment of the special import taxHeld Philippine Acetylene Company is not an industry as defined in Sec 6 of RA No 1394 To be an industry the company must be engaged in some productive enterprise not in merely packaging an already finished product The operation for which the company employs the gas tank in question does not involve manufacturing or production It is nothing but packaging the liquefied gas when obtained from the refinery has to be placed in some kind of container to facilitate its transportation When sold to consumers it undergoes no change or transformation but is merely placed in smaller cylinders for convenience The process is certainly notproduction in any sense The decision of the CTA is reversed and Philippine Acetylene Company is held liable for the payment of the special import tax as it is not an industry exempt from the payment of such tax

COMMISSIONER OF INTERNAL REVENUE VS ARNOLDUSCARPENTRY SHOP INCFacts Arnoldus Carpentry Shop Inc is a domestic corporation engaged in the business of preparing processing buying selling exporting importing manufacturing trading and dealing in cabinet shop products wood and metal home and office furniture cabinets doors windowsetc including their component parts and materials of any and all nature and descriptionThe Commissioner of Internal Revenue conducted an investigation of the business tax liabilities of Arnoldus Carpentry Shop Inc After the examination the CIR concluded that Arnoldus Carpentry Shop Inc is an independent contractor under Sec 205 (16) [now Sec 169 (q)] of the Tax Code As a result of this classification Arnoldus Carpentry Shop Inc was assessed deficiency tax (PhP 8897223) plus charges and interest This tax deficiency was a consequence of the 3 tax imposed on the companyrsquos gross export sales which in turn resulted from the CIRrsquos finding that categorized the company as a contractor Arnoldus Carpentry Shop Inc protested the assessment maintaining that it is a manufacturer and therefore entitled to tax exemption on its gross export sales under Sec 202 (e) of the National Internal Revenue Code The CIR stood by its initial finding that Arnoldus Carpentry Shop Inc is a contractor not a manufacturer Arnoldus Carpentry Shop Inc appealed to the Court of Tax Appeals The CTA held that Arnoldus Carpentry Shop Inc is a manufacturer effectively reversing the decision of the CIRIssue Whether Arnoldus Carpentry Shop Inc is a manufacturer or contractor If found a manufacturer the company is therefore not liable for the amount assessed as deficiency contractorrsquos taxHeld Arnoldus Carpentry Shop Inc is a manufacturer as defined in the Tax Code and not a contractor A contractor under Sec 205 (16) [now Sec 170 (q)] of the Tax Code is one whose activity consists 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 other hand a manufacturer under Sec 187 (x) [now Sec 157 (x)] of the Tax Code is one who by physical or chemical process alters the exterior texture orform or inner substance of any raw material or manufactured or partially manufactured product The term manufacturer had been considered in its ordinary and general usage and Arnoldus Carpentry Shop Inc falls under this definition The Court affirmed the decision of the CTA holding that Arnoldus Carpentry Shop Inc is a manufacturer The company is entitled to thetax exemption under Sec 202 (d) and (e) [now Sec 167 (d) and (e)] of the Tax Code It is not liable for the deficiency contractorrsquos tax assessed by the CIR

BANK OF THE PHILIPPINE ISLANDS VS TRINIDADFacts Bank of the Philippine Islands is a domestic banking corporation operating under a special charter granted by the Philippine Legislature through Act No 1790 The charter contains a clause to the effect that no law shall be made or enforced imposing a charge or taxation upon BPI which shall not apply equally to other banks of a similar type operating under similar conditions The Collector of Internal Revenue collected internal revenue taxes upon BPIrsquos circulating notes issued by the bank for the years 1919-1921 The Philippine Legislature through Act No 2612 created the Philippine National Bank Under Sec 18 of the PNB Charter it is provided that the circulating notes of PNB shall be exempt from any and all taxes The CIR did not collect taxes upon the circulating notes of PNB because of the exemption granted to the latter by Sec 18 of Act No 2612 BPI contends that BPI and PNB are banks of similar type and operating under similar conditions Thus BPI should also be entitled to the same exemptions and privileges granted to PNB Essentially BPI argues that it should also be exempt from the payment or taxes upon its circulating notes Issue Whether or not BPI and PNB are banks of similar type and operating under similar conditions Whether or not BPI is exempt from the payment or taxes upon its circulating notesHeld The Court noted that subsequent to the filing of the action PNB paid to the CIR PhP 51904303 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 conditions BPI is not exempt from the payment of taxes upon its circulating notes It is not entitled to a refund of the payments it made for that purpose TheCourt used Sec 1499 of the Administrative Code of 1917 in ruling that BPI is not tax exempt This Section allows the collection from banks of taxes on capitals deposits and circulation Exemptions are strictly construed against the taxpayer so unless BPI can show clearly that it has been granted the status of exemption then it cannot avail itself of such entitlement The fact that one person may not have paid or been required to pay his taxes does not exempt another from the payment of his legal taxes or legally entitle him to a refund of any taxes which hehas paid

DEDUCTIONS AND EXEMPTIONS DEDUCTIONS IN GENERALALLOCATIONYUTIVO SONS HARDWARE CO VS COURT OF TAX APPEALSFacts Yutivo Sons Hardware Co is a domestic corporation engaged in the importation and sale of hardware supplies and equipment It bought a number of cars and trucks from General Motors Overseas Corporation an American corporation licensed to do business in the Philippines Asimporter GM paid sales tax prescribed by sections 184 185 and 186 of the Tax Code on the basis of its selling price to Yutivo Said tax being collected only once on original sales Yutivo paid no further sales tax on its sales to the public Southern Motors Inc was organized to engage in the business of selling cars trucks and spare parts Its shares were subscribed in five equal proportions by the descendants of the founders of Yutivo When GM withdrew from the Philippines the cars and trucks purchased by Yutivo from GM were sold by Yutivo to SM which in turn sold them to the public in the Visayas and Mindanao GM appointed Yutivo as importer for the Visayas and Mindanao and Yutivo continued its previous arrangement of selling exclusively to SM In the same way that GM used to pay sales taxes based on its sales to Yutivo the latter as importer paid sales tax on the basis of its selling price to SM and since such sales tax as already stated is collected only once on original sales SM paid no sales tax on its sales to the public Yutivo was investigated by the CIR and was assessed deficiency salestax plus surcharge The CIR claimed that the taxable sales were the retail sales by SM to the public and not the sales at wholesale made by Yutivo to the latter inasmuch as SM and Yutivo

were one and the same corporation the former being the subsidiary of the latter Yutivo alleged the following before the Court of Tax Appeals (1) that there is no valid ground to disregard the corporate personality of SM and to hold that it is an adjunct of petitioner Yutivo (2) that assuming that the separate personality of SM may be disregarded the sales tax alreadypaid by Yutivo should first be deducted from the selling price of SM in computing the sales tax due on each vehicle and (3) that the surcharge has been erroneously imposed by the CIR The CTA ruled in favor of CIR and ruled that the creation of SM is for Yutivo to evade taxes as it isowned and controlled by Yutivo and is a mere subsidiary branch adjunct conduit instrumentality or alter ego of the latter Issue Whether or not SM has a personality separate and distinct from YutivoHeld It is an elementary and fundamental principle of corporation law that a corporation is an entity separate and distinct from its stockholders and from other corporations to which it may be connected However when the notion of legal entity is used to defeat public conveniencejustify wrong protect fraud or defend crime the law will regard the corporation as an association of persons or in the case of two corporations merge them into one When the corporation is the mere alter ego or business conduit of a person it may be disregardedHowever SM was not organized purposely as a tax evasion device Moreover it runs counter to the fact that there was no tax to evade The intention to minimize taxes when used in the context of fraud must be proved to exist by clear and convincing evidence amounting to more than mere preponderance and cannot be justified by a mere speculation This is because fraud is never lightly to be presumed The SC however agreed that SM was actually owned and controlled by petitioner as to make it a mere subsidiary or branch of the latter created for the purpose of selling the vehicles at retail and maintaining stores for spare parts as well as service repair shops Consideration of various other circumstances especially when taken together indicates that Yutivo treated SM merely as its department or adjunct For one thing the accounting system maintained by Yutivo shows that it maintained a high degree of control over SM accounts All transactions between Yutivo and SM are recorded and effected by mere debit or credit entries against the reciprocal account maintained in their respective books of accounts and indicate the dependency of SM as branch upon Yutivo

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSORDINARYNECESSARY BUSINESS EXPENSESATLAS CONSOLIDATED MINING amp DEVT CORP VSCOMMISSIONER OF INTERNAL REVENUEFacts Atlas Consolidated Mining amp Devt Corp is a corporation engaged in the mining industry It was assessed deficiency income tax for the year 1958 as a result of the disallowance of certain items claimed by the company as deductions from its gross income Atlas claimed the following items as deductible from its gross income (1) transfer agentrsquos fee (2) stockholders relation service fee (3) US stock listing expenses (4) suit expenses (5) provision for contingencies TheCommissioner of Internal Revenue disallowed all these items Atlas elevated the issue to the Court of Tax Appeals The CTA rendered a decision allowing the said items except for the stockholders relation service fee and the suit expenses Both Atlas and the CIR went to the Supreme Court to appeal the CTA decision In GR No L-26911 Atlas argues that the CTA should not have disallowed the stockholders relation service fee The corporation contends that such fee constitutes an ordinary and necessary business expense and should therefore be allowed as a deductible expense from the companyrsquos gross income In GR No L-26924 the CIR argues that the transfer agentrsquos fee and the US stock listing fee should not have been allowed as deductions from gross income in the absence of proof of payment for such expenses The CIR also argues that the US stock listing expenses should be disallowed for not being ordinary and necessary and not incurred in trade or business as required under Sec 30 (a) (1) of the National Internal Revenue Code The CIR also contends that the correct amount of disallowance for suit expenses should be PhP 1749998 and not PhP 666665Issue In GR No L-26911 whether or not the expenses paid for the services rendered by a public relations firm P K Macker amp Co labeled as stockholders relation service fee is an allowable deduction as business expense In GR No L-26924 whether or not the transfer agentrsquos fee and the US stock listing fee should have been allowed as deduction in the absence of proof of payments Whether or not the US stock listing expenses should be disallowed for not

being ordinary and necessary and not incurred in trade or business Whether PhP 1749998 or PhP 666665 is the correct amount of disallowance for suit expensesHeld GR No L-26911 Under Sec 30 (a) (1) of the Tax Code three conditions have to be complied with before a business expense is allowed as a deduction from gross income (1) the expense must be ordinary and necessary (2) it must be paid or incurred within the taxable year and (3) it must be paid or incurred in carrying a trade or business The Court sustained the ruling of the CTA that the expenditure paid to P K Macker amp Co denominated as stockholders relation service fee is not an ordinary expense The fee was paid to the PR firm as ompensationfor services carrying on the selling campaign in an effort to sell Atlasrsquo additional capital stock Such is not an ordinary expense because according to the Court expenses relating to the recapitalization and reorganization of a corporation the cost of obtaining stock subscriptionpromotion expenses and commission or fees paid for the sale of stock reorganization are capital expenditures The stockholders relation service fee is not deductible from Atlasrsquo gross incomeGR No L-26924 The Court agreed with the CTA that the CIR cannot raise the issue of payment for the first time on appeal The fact of payment was never controverted by the CIR during the proceedings Failure to assert a question within a reasonable time warrants a presumption that the party entitled to assert it either has abandoned or declined to assert it The Court held that the US stock listing fee is an ordinary and necessary business expense and was correctly allowed by the CTA as a deduction The stock listing fee is paid annually to a stock exchange for the privilege of having Atlasrsquo stock listed A single payment made to the stock exchange is considered a capital expenditure (Domes Mines case) However payments to the stock exchange made annually or in a recurring manner are considered ordinary and necessary business expenses (Chesapeake Corporation case) The fees paid by Atlas partake of the latter The Court reiterated that it is well-settled that litigation expenses incurred in defense or protection of title are capital in nature and not deductible The Court sustained the CIR that the correct amount of disallowance for litigation or suit expenses is PhP 1749998

VISAYAN CEBU TERMINAL CO INC VS COLLECTOR OFINTERNAL REVENUEFacts Visayan Cebu Terminal Co Inc is a corporation organized for the purpose of handling arrastre operations in the port of Cebu Visayan filed its income tax return for 1951 claiming the following items as deductions from the companyrsquos gross income (1) salaries (2) representationexpenses (PhP 7585588) and (3) miscellaneous expenses The Collector of Internal Revenue disallowed the entire amount of representation expenses The Court of Tax Appeals allowedrepresentation expenses but set the limit at PhP 1000000Issue Whether or not the full amount of representation expenses should be allowed as a deduction from Visayanrsquos gross incomeHeld The Court sustained the Tax Court in holding that representation expenses fall under the category of business expenses which are allowable deductions from gross income if they meet the following requisites laid down in the Tax Codemdashthey must be ordinary and necessary expense paid or incurred in carrying on any trade or business and they must meet the test of reasonableness in amount The Court further agreed with the computation made by the CTA Because of the companyrsquos failure to provide evidence for all such expenses (the corporation claims that the supporting papers were destroyed when the house of the company treasurer where the records were kept was burned) the Court should determine from all available data the amount properly deductible as representation expenses The Court sustained the finding of the CTA that PhP 1000000 may be considered reasonably necessary as the companyrsquos representation expenses based on figures presented during the proceedings

KUENZLE amp STREIFF INC vs THE COLLECTOR OF INTERNALREVENUEFacts Petitioner claimed as a deduction for income tax purposes for the years 1950 1951 and 1952 salaries directors fees and bonuses of its non-resident president and vice-president bonuses of some of its resident officers and employees and interests on earned but unpaidsalaries and bonuses of its officers and employees Petitioner gave to its non-resident president and vice president for the years 1950 and 1951 bonuses equal to 133-12 of their annual salaries and bonuses equal to 125 23 for the year 1952 Petitioner however gave its resident

officers and employees higher bonuses on the alleged reason because of their valuable contribution to the business of the corporation which has made it possible for it to realize huge profits during the aforesaid years The respondent disallowed the said deductions hence they were assessed for deficiency income taxes Upon re-examination by the respondents they allowed as deductions all items comprising directors fees and salaries of the non-resident president and vice president but disallowing the bonuses insofar as they exceed the salaries of the recipients as well as the interests on earned but unpaid salaries and bonusesIssue WON the excessive bonuses and interest should be allowed as a deduction for income tax purposesHeld No Bonuses to employees made in good faith and as additional compensation for the services actually rendered by the employees are deductible provided such payments when added to the stipulated salaries do not exceed a reasonable compensation for the servicesrendered Requisites for deductibility of employee bonuses (1) the payment of the bonuses is in fact compensation (2) it must be for personal services actually rendered and (3) the bonuses when added to the salaries are reasonable when measured by the amount and quality of the services performed with relation to the business of the particular taxpayer There is no fixed test for determining the reasonableness of a given bonus as compensation Deductible amount of bonuses is not limited to the amount of salary of its recipient The prevailing circumstancesshould be considered However In this case the bonuses given to resident employees were higher than its non-resident officers on the reason that the resident officers and employees had performed their duty well and rendered efficient service It does not necessarily follow that they should be given greater amount of additional compensation in the form of bonuses than what was given to the non-resident officers The non-resident officers had rendered the same amount of efficient personal service and contribution to deserve equal treatment in compensation andother emoluments with the particularity that their liberation yearly salaries had been much smaller Interest should also be disallowed Under the law in order that interest may be deductible it must be paid on indebtedness (Section 30 (b) (1) of the National Internal Revenue Code) It is therefore imperative to show that there is an existing indebtedness which may be subjected to the payment of interest Here the items involved are unclaimed salaries andbonus participation which in our opinion cannot constitute indebtedness within the meaning of the law because while they constitute an obligation on the part of the corporation it is not the latters fault if they remained unclaimed The willingness of the corporation to pay interest thereon cannot be considered a justification to warrant deduction

ALHAMBRA CIGAR amp CIGARETTE MANUFACTURING COMPANYpetitioner-appellant vs THE COMMISSIONER OF INTERNALREVENUE respondent-appellee[GR No L-23226 November 28 1967]Facts The petitioner claimed as deductible expense for income tax purposes salaries bonuses commissions and directorrsquos fees paid to A P Kuenzle and H A Streiff who were the President and Vice-President respectively of the petitioner The Commissioner of Internal Revenuedisallowed a portion of the bonus commission and directorrsquos fees as deductions Hence was assessed for deficiency income taxIssue WON the bonuses directorrsquos fees and commissions are valid deductions for income tax purposesHeld No Whenever a controversy arises on the deductibility for purposes of income tax of certain items for alleged compensation officers of a corporation it is necessary to determine whether personal services have been actually rendered by said officers and in theaffirmative what is the reasonable allowance therefor As correctly held by the court of tax appeals The bonus paid to each of said officers was reduced to the amount equivalent to that paid to Mr W Eggmann the resident Treasurer and Manager of petitioner Petitioner seeks to justify the increase in the salaries of Messrs Kuenzle and Streiff on the ground of increased costs of living The said officers of petitioner are however non-residents of the PhilippinesAs to commissions and directors fees there is no evidence of any particular service rendered by them to petitioner to warrant payment of commissions There is also no justification for the payment of the directorrsquos fees Being non-resident President and Vice- President of Petitioner corporation of which they are the controlling stockholders said commissions and directors fees

payment of which was based on a certain percentage of the annual profits of petitioner are in the nature of dividend distributions

AGUINALDO INDUSTRIES CORPORATION (FISHING NETSDIVISION) vs COMMISSIONER OF INTERNAL REVENUE and THECOURT OF TAX APPEALSFacts Upon investigation of petitioners 1957 income tax returns of its Fish Nets Division the Bureau of Internal Revenue examiner found that the amount of P6118748 was deducted from the gross income as additional remuneration paid to the officers of petitioner and that such amount was taken from the net profit which petitioner derived from an isolated transaction (sale of a parcel of its land) which is not in the course of or carrying on of petitioners trade or business The examiner recommended disallowance of the deduction but petitioner insistedotherwise claiming that the payment of the allowance or bonus was pursuant to its by-laws The Court of Tax Appeals held the petitioner liable for deficiency income tax plus surcharge and interestIssue WON the profit derived from the sale of its land is tax-exempt income under Republic Act No 901Held No Petitioner may not raise the question of tax exemption for the first time on review where such question was not raised at the administrative forumIssue WON the bonus given to the officers of petitioner as share in the profit realized from the sale of the land is deductible expense for tax purposesHeld No The bonus given should be considered as deductible for income tax purposes only if payment was made for service actually rendered and it is reasonable and necessary The records show 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 petitioners officers which could be the basis of a grant to them of a bonus out of the profit derived from the sale Thus the payment of a bonus to them out of the gainrealized from the sale cannot be considered as a selling expense nor can it be deemed reasonable and necessary so as to make it deductible for tax purposes

COLLECTOR OF INTERNAL REVENUE petitioner vs GOODRICHINTERNATIONAL RUBBER CO respondent[GR No L-22265 December 22 1967]Facts The CIR disallowed the bad debts and representation expense claimed as deduction of the respondent for tax purposes According to Goodrich the claim for deduction of the representation expense is based upon receipts issued not by the entities in which the alleged expenses had been incurred but by the officers of Goodrich who allegedly paid them To collect for the alleged bad debts the respondent sent demand letters There were subsequent collections after the debts have been writtenIssue WON the representation expense are valid deductions Held No If the expenses had really been incurred receipts or chits would have been issued by the 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 incurred and paid said expenses They do not establish payment of said alleged expenses to the entities in which the same are said to have been incurredIssue WON the bad debts are valid deduction for income tax purposesHeld No The ascertainment of worthlessness of bad debts requires proof of two facts (1) that the taxpayer did in fact ascertain the debt to be worthless in the year the deduction is sought and (2) in so doing he acted in good faith Good faith is not enough The taxpayer must showthat he had reasonably investigated the relevant facts and had drawn a reasonable inference from the information thus obtained by him In this case there were payments made after it has been written off and proves that there is undue haste in claiming it as bad debts Respondent has not proven that said debts were worthless There is no evidence that thedebtors cannot pay them

COLLECTOR OF INTERNAL REVENUE petitioner vs ALBERTO MK JAMIR respondent

[GR No L-16552 March 30 1962]Facts The CIR assessed the respondent for deficiency income taxes The Petitioner claimed that the respondent under declared its income based on the expenditure method The petitioner considered as an undeclared income so much of respondents expenditures for said months as was in excess of his reported income for the same monthsIssue WON the expenditure method was properly applied Held No The expenditures method of determining income should be applied by deducting the aggregate yearly expenditures from the declared yearly income not the expenditures incurred each month from the declared income therefor In this case the respondent properly explained that the income derived from the advances from customers were entered in his books of account in subsequent months Issue WON the deduction for car depreciation and driverrsquos expense is properHeld Yes In this case the car was used by Jamir for both personal and business purposes the lower court allowed as deductions three-fourths (34) of said amounts the car having been used by Jamir more for business than for personal purposes

HOSPITAL DE SAN JUAN DE DIOS INC vs COMMISSIONER OFINTERNAL REVENUEFacts Petitioner is engaged in both taxable and non-taxable operations For the years 1952 to 1955 the petitioner allocated its administrative expenses The respondent disallowed however the interests and dividends from sharing in the allocation of administrative expenses on the ground that the expenses incurred in the administration or management of petitioners investments are not allowable business expenses inasmuch as they were not incurred in carrying on any trade or business within the contemplation of Section 30 (a)(1) of the RevenueCode Hence were assessed for deficiency income taxesIssue WON administrative expenses should be considered as a deductionallocated to its interest and dividend income for income tax purposesHeld No the principle of allocating expenses is grounded on the premise that the taxable income was derived from carrying on a trade or business as distinguished from mere receipt of interests and dividends from ones investments the Court of Tax Appeals correctly ruled thatsaid income should not share in the allocation of administrative expenses Hospital de San Juan De Dios Inc according to its Articles of Incorporation was established for purposes which are benevolent charitable and religious and not for financial gain It is not carrying on a trade or business for the word business in its ordinary and common use means human efforts which have for their end living or reward it is not commonly used as descriptive of charitable religious educational or social agencies or any particular occupation or employment habitually engaged in especially for livelihood or gain or activities where profit is the purpose or livelihood is the motive

FELIX MONTENEGRO INC petitioner vs COMMISSIONER OFINTERNAL REVENUE respondent[CTA CASE NO 695 April 30 1969]Facts The CIR disallowed salaries of some of its officers value of medicines campaign contribution and miscellaneous expense as deduction for income tax purposes hence the petitioner was assessed for deficiency income taxes The deduction of salaires was disallowedbecause the said officers are also stockholders of the corporation and that their salaries are excessive compared to those of officers of other corporation holding similar positions and doing the same volume of businessIssue WON the salaries and expenses should be allowed as a deductionHeld 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 There is no comparative study of the profits of the two enterprises in relation toother concerns similarly situated Neither is there any comparative study of the peculiar situation of the two enterprises in relation to other concerns nor is there a comparison of the nature and volume of the work performed by the officers involved Since no two business enterprises are exactly in the same situation negligible differences in salaries cannot reasonably show that the salary is excessive or that profits are channeled to the stockholders thru salariesIssue WON the value of medicines is a deductible loss

Held No Aside from self serving testimonial evidence no other evidence was presented to substantiate this claim of petitioner There is not even a list of the medicines their value and their expiry dates The deductible as loss on the ground that the aforesaid medicines were nolonger fit for sale as the dates of their efficacy have expired should be disallowedIssue WON campaign contribution should be allowed as a deductionHeld No Amount expended for political campaign purposes or payments to campaign funds are not deductible either as business expenses or as contribution

COLLECTOR V PHILIPPINE EDUCATION COFACTS 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 04548 to prepare and prove itrsquos war damage claim In filing its income tax return respondentclaimed said sum as deduction under section 30 of the NIRC Petitioner disallowed the same and instead assessed additional P240514 as deficiency income tax CTA reversed upon appeal and declared respondent exempt from the deficiency income tax in questionISSUE Whether or not the expense in question was ordinary and necessary and whether or not it was paid or incurred in carrying on respondentrsquos businessHELD Yes The law does not say that the expense must be for or on account of transactions in onersquos trade or business Ordinarily an expense will be considered necessary where the expenditure is appropriate and helpful in the development of the taxpayerrsquos business It is sufficient that the expense were incurred for purposes proper to the conduct of the corporate affairs or for the purpose of realizing a profit or of minimizing a loss The fee in question was paid by the respondent to recover its lost assets occasioned by the war and thereby to be so rehabilitated as to be able to carry on its business Also it should be noted that even if there is no law exempting the proceeds of war damage claims from taxes the war damage compensation would still not be subject to tax not being an income Compensation for injury to capital is never incomeDOCTRINE To carry on its business the taxpayer not only must have sufficient assets but must preserve the same and recover any that should be lost The fee or expense paid to recover its lost assets occasioned by the war 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 account of transactions in onersquos trade or business

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSINTEREST EXPENSECIR v PALANCAFACTS Don Carlos Palanca Sr donated in favor of his son the petitioner herein shares of stock in La Tondentildea Inc amounting to 12500 shares For failure to file a return on the donation within the statutory period the petitioner was assessed the sums of P9769123 P2444281 and P4786870 as gift tax 25 surcharge and interest respectively which he paid on June 22 1955 The petitioner filed with the BIR his income tax return for the calendar year 1955 claiming among others a deduction for interest amounting to P970645 and reporting a taxable income of P6598212 On the basis of this return he was assessed the sum of P2105291 as income tax which he paid as follows Petitioner filed an amended return for the calendar year 1955 claiming therein an additional deduction in the amount of P4786870 representing interest paid on the donees gift tax thereby reporting a taxable net income of P1811342 and a tax due thereon in the sum of P316700 The claim for deduction was based on the provisions of Section 30(b) (1) of the Tax Code which authorizes the deduction from gross income of interest paid within the taxable year on indebtedness A claim for the refund of alleged overpaid income taxes for the year 1955 amounting to P1788501 which is the difference between the amount of P2105201 he paid as income taxes under his original return and of P316700 was filed together with this amended return BIR denied the claim On August 12 1958 the petitioner once more filed an amended income tax return for the calendar year 1955 claiming in addition to the interest deduction of P907645 appearing in his original return a deduction in the amount of P6058180 representing interest on the estate and inheritance taxes on the 12500 shares of stock thereby reporting a net taxable income for 1955 in the amount of P540032 and an income tax due thereon in the sum of P42800 Again this was denied CTA reversed

ISSUES 1) Whether the amount paid by respondent Palanca for interest on his delinquent estate and inheritance tax is deductible from the gross income for that year under Section 30 (b) (1) of the Revenue Code 2) Whether the claim for refund has prescribedHELD 1) Yes 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 We do not see any element in this case which can justify a departure from or abandonment of the doctrine in the Prieto case In both this and the said case the taxpayer sought the allowance as deductible items from the gross income of the amounts paid by them as interests on delinquent tax liabilities Of course what was involved in the cited case was the donors tax while the present suit pertains to interest paid on the estate and inheritance tax This difference however submits no appreciable consequence to the rationale of this Courts previous determination thatinterests on taxes should be considered as interests on indebtedness within the meaning of Section 30(b) (1) of the Tax Code 2) No The 30-day period under Section 11 of Republic Act 1125 did not even commence to run in this incident It should be recalled that while the herein petitioner originally assessed the respondent-claimant for alleged gift tax liabilities the said assessment was subsequently abandoned and in its lieu a new one was prepared and served on the respondent-taxpayer In this new assessment the petitioner charged the said respondent with an entirely new liability and for a substantially different amount from the first While initially the petitioner assessed the respondent for donees gift tax in the amount of P17000274 in thesubsequent assessment the latter was asked to pay P19159162 for delinquent estate and inheritance tax Considering that it is the interest paid on this latter-assessed estate and inheritance tax that respondent Palanca is claiming refund for then the thirty-day period under the abovementioned section of Republic Act 1125 should be computed from the receipt of the final denial by the Bureau of Internal Revenue of the said claim In the second place the claim at bar refers to the alleged overpayment by respondent Palanca of his 1955 income tax Inasmuch as the said account was paid by him by installment then the computation of the two year prescriptive period under Section 306 of the National Internal Revenue Code should be from the date of the last installmentDOCTRINE 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 VIUDA DE PRIETOFACTS Respondent conveyed by way of gifts to her four children namely Antonio Benito Carmen and Mauro all surnamed Prieto real property with a total assessed value of P89249750 After the filing of the gift tax returns on or about February 1 1954 the petitioner CIR appraised the real property donated for gift tax purposes at P123126800 and assessed the total sum of P11770650 as donors gift tax interest and compromises due thereon Of the total sum of P11770650 paid by respondent on April 29 1954 the sum of P5597865 represents the total interest on account of deliquency This sum of P5597865 was claimed as deduction among others by respondent in her 1954 income tax return Petitioner howeverdisallowed the claim and as a consequence of such disallowance assessed respondent for 1954 the total sum of P2141038 as deficiency income tax due on the aforesaid P5597865 including interest up to March 31 1957 surcharge and compromise for the late payment Under the law for interest to be deductible it must be shown that there be an indebtedness that there should be interest upon it and that what is claimed as an interest deduction should have been paid or accrued within the year It is here conceded that the interest paid by respondent was in consequence of the late payment of her donors tax and the same was paid within the year it is sought to be declaredISSUES Whether or not such interest was paid upon an indebtedness within the contemplation of section 30 (b) (1) of the Tax Code HELD Yes The term indebtedness as used in the Tax Code of the United States containing similar provisions as in the above-quoted section has been defined as an unconditional and legally enforceable obligation for the payment of money Although taxes already due have not strictly speaking the same concept as debts they are however obligations that may be considered as such The term debt is properly used in a comprehensive sense as embracing not merely money due by contract but whatever one is bound to render to another either for contract or the requirement of the law It follows that the interest paid by herein respondent for the late payment of her donors tax is deductible from her gross income under section 30(b) of

the Tax Code above quoted This conclusion finds support in the established jurisprudence in the United States after whose laws our Income Tax Law has been patterned Thus under sec 23(b) of the Internal Revenue Code of 1939 as amended which contains similarlyworded provisions as sec 30(b) of our Tax Code the uniform ruling is that interest on taxes is interest on indebtedness and is deductibleDOCTRINE The term indebtedness as used in the Tax Code of the United States containing similar provisions as in the abovequoted section has been defined as an unconditional and legally enforceable obligation for the payment of money

PAPER INDUSTRIES V CAFACTS Petitioner is registered with the BOI as a preferred pioneer enterprise with respect to its integrated pulp and paper mill and as a preferred non-pioneer enterprise with respect to its integrated plywood and veneer mills It received from the CIR two (2) letters of assessmentand demand (a) one for deficiency transaction tax and for documentary and science stamp tax and (b) the other for deficiency income tax for 1977 for an aggregate amount of P8876325500 Picop protested the assessment of deficiency transaction tax and documentary and science stamp taxes These protests were not formally acted upon by respondent CIR On 26 September 1984 the CIR issued a warrant of distraint on personal property and a warrant of levy on real property against Picop to enforce collection of the contested assessments in effect the CIR denied Picops protests Thereupon Picop went before the CTA Picop and the CIR both went to the Supreme Court on separate Petitions for Review of the above decision of the CTA In two (2) Resolutions dated 7 February 1990 and 19 February 1990 respectively the Court referred the two (2) Petitions to the Court of Appeals The Court of Appeals consolidated the two (2) cases and rendered a decision dated 31 August 1992 which further reduced the liability of Picop to P633835470 Picop now maintains that it is not liable at all to pay any of theassessments or any part thereof It assails the propriety of the thirty-five percent (35) deficiency transaction tax which the Court of Appeals held due from it in the amount of P357854351 Picop also questions the imposition by the Court of Appeals of the deficiency income tax of P148157915 resulting from disallowance of certain claimed financial guarantee expenses and claimed year-end adjustments of sales and cost of sales figures by Picops external auditors 3 The CIR upon the other hand insists that the Court of Appeals erred infinding Picop not liable for surcharge and interest on unpaid transaction tax and for documentary and science stamp taxes and in allowing Picop to claim as deductible expensesISSUES 1) Whether Picop is liable for the thirty-five percent (35) transaction tax 2) Whether Picop is liable for interest and surcharge on unpaid transaction tax 3) Whether Picop is entitled to deduct against current income interest payments on loans for the purchase of machinery and equipment 4) Whether Picop is entitled to deduct against current income net operating losses incurred by Rustan Pulp and Paper Mills Inc 5) Whether Picop is entitled to deduct against current income certain claimed financial guarantee expenses 6) Whether Picop had understated its sales and overstated its cost of sales for 1977 7) Whether Picop is liable for the corporate development tax of five percent (5) of its income for 1977 HELD 1) We agree with the CTA and the Court of Appeals that Picops tax exemption under RA No 5186 as amended does not include exemption from the thirty-five percent (35) transaction tax In the first place the thirty-five percent (35) transaction tax is an income tax that is it is a tax on the interest income of the lenders or creditors It is thus clear that the transaction tax is an income tax and as such in any event falls outside the scope of the tax exemption granted to registered pioneer enterprises by Section 8 of RA No 5186 as amended 2) Section 51 (c) and (e) of the 1977 Tax Code did not authorize the imposition of a surcharge and penalty interest for failure to pay the thirtyfive percent (35) transaction tax imposed under Section 210 (b) of the same Code The corresponding provision in the current Tax Code veryclearly embraces failure to pay all taxes imposed in the Tax Code without any regard to the Title of the Code where provisions imposing particular taxes are textually located Tax exemptions are to be sure to be strictly construed that is they are not to be extended beyond the ordinary and reasonable intendment of the language actually used by the legislative authority in granting the exemption The issuance of debenture bonds is certainly conceptually distinct from pulping and paper manufacturing operations But no one contends that issuance of bonds was a principal or regular business activity of Picop only banks or other financial institutions are in the

regular business of raising money by issuing bonds or other instruments to the general public3) We have already noted that our 1977 NIRC does not prohibit the deduction of interest on a loan incurred for acquiring machinery and equipment Neither does our 1977 NIRC compel the capitalization of interest payments on such a loan The 1977 Tax Code is simply silent ona taxpayers right to elect one or the other tax treatment of such interest payments Accordingly the general rule that interest payments on a legally demandable loan are deductible from gross income must be applied We conclude that the CTA and the Court of Appeals did not err in allowing the deductions of Picops 1977 interest payments on its loans for capital equipment against its gross income for 1977 4) After prolonged consideration and analysis of this matter the Court is unable to agree with the CTA and Court of Appeals on the deductibility of RPPMs accumulated losses against Picops 1977 gross income It is important to note at the outset that in our jurisdiction the ordinary rule mdash that is the rule applicable in respect of corporations notregistered with the BOI as a preferred pioneer enterprise mdash is that net operating losses cannot be carried over Under our Tax Code both in 1977 and at present losses may be deducted from gross income only if such losses were actually sustained in the same year that they are deducted or charged off Thus it is that RA No 5186 introduced the carry-over of net operatinglosses as a very special incentive to be granted only to registered pioneer enterprises and only with respect to their registered operations In the instant case to allow the deduction claimed by Picop would be to permit one corporation or enterprise Picop to benefit from the operatinglosses accumulated by another corporation or enterprise RPPM In effect to grant Picops claimed deduction would be to permit Picop to purchase a tax deduction and RPPM to peddle its accumulated operating losses We consider and so hold that there is nothing in Section 7 (c) ofRA No 5186 which either requires or permits such a result Indeed that result makes non-sense of the legislative purpose which may be seen clearly to be projected by Section 7 (c) RA No 5186 We conclude that the deduction claimed by Picop in the amount of P4419610600 in its 1977 Income Tax Return must be disallowed 5) We must support the CTA and the Court of Appeals in their foregoing rulings A taxpayer has the burden of proving entitlement to a claimeddeduction Even Picops own vouchers were not submitted in evidence and the BIR Examiners denied that such vouchers and other documents had been exhibited to them Moreover cash vouchers can only confirm the fact of disbursement but not necessarily the purpose thereof6) The CIR has made out at least a prima facie case that Picop had understated its sales and overstated its cost of sales as set out in its Income Tax Return For the CIR has a right to assume that Picops Books of Accounts speak the truth in this case since as already notedthey embody what must appear to be admissions against Picops own interest7) The adjusted net income of Picop for 1977 as will be seen below is P4868735500 Its net worth figure or total stockholders equity as reflected in its Audited Financial Statements for 1977 is P46474952800 Since its adjusted net income for 1977 thus exceeded ten percent (10) of its net worth Picop must be held liable for the five percent (5) corporate development tax in the amount of P243436775 DOCTRINE It is thus clear that the transaction tax is an income tax andas such in any event falls outside the scope of the tax exemptiongranted to registered pioneer enterprises by Section 8 of RA No 5186as amended

CIR v ITOGON-SUYOC MINES INCFACTS Respondent Itogon-Suyoc Mines Inc the taxpayer involved duly paid in full its liability according to its income tax return for the fiscal year 1960-61 Instead it deducted right away the amount represented by claim for refund filed eight (8) months back for the previous years income tax for which it was not liable at all so it alleged as it suffered a loss instead a claim subsequently favorably acted on by petitioner Commissioner of Internal Revenue but after the date of such payment of the 1960-1961 tax Accordingly an interest in the amount of P151283was charged by petitioner Commissioner of Internal Revenue on the sum withheld on the ground that no deduction on such refund should be allowed before its approval When the matter was taken up before the Court of Tax Appeals the above assessment representing interest wasset aside in the decision of September 30 1965ISSUES Whether CTA should not have absolved respondent corporation from liability to pay the sum of P151283 as 1 monthly interest for delinquency in the payment of income tax for the fiscal year 1960-1961

HELD No It could not be error for the Court of Tax Appeals considering the admitted fact of overpayment entitling respondent to refund to hold that petitioner should not repose an interest on the aforesaid sum of P1315520 which after all was paid to and received by the governmenteven before the incidence of the tax in question It would be according to the Court of Tax Appeals unfair and unjust to do so We agree but we go farther The imposition of such an interest by petitioner is not supported by lawThe National Internal Revenue Code provides that interest upon the amount determined as a deficiency shall be assessed and shall be paid upon notice and demand from the Commissioner of Internal Revenue There is no question respondent was entitled to a refund Instead of waiting for the sum involved to be delivered to it it deducted the said amount from the tax that it had to pay That it 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 time such a deduction was made the Commissioner of Internal Revenue had not as yet approved such a refund It is an admitted fact though that respondent was clearly entitled to it and petitioner did not allege otherwise Nor could he do so Under all the circumstances disclosed therefore the applicability of the legal provision allowing such a deduction from the amount of the tax to be paid cannot be disputed DOCTRINE It could not be error for the Court of Tax Appeals considering the admitted fact of overpayment entitling respondent to refund to hold that petitioner should not repose an interest on the aforesaid sum of P1315520 which after all was paid to and received by the government even before the incidence of the tax in question

CASTRO v COLLECTORFacts This is an appeal from a decision of the Court of Tax Appeals (in its CTA Case 141) holding petitioner Maria B Castro liable under the War Profits Tax Law Republic Act No 55 and ordering her to pay a deficiency war profits tax (including surcharges and interest) in theamount of P136051466 and costs Castro was previously acquitted in the criminal case instituted against her for violation of the War Profits Tax LawIssue WON the acquittal is a bar to the collection of the taxes assessed and specially of the 50 surchargeHeld NO With regard to the tax proper the state correctly points out in its brief that the acquittal in the criminal case could not operate to discharge petitioner from the duty to pay the tax since that duty is imposed by statute prior to and independently of any attempts on the part of the taxpayer to evade 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 declaration that the criminal acts charged did not exist As to the 50 surcharge the very United States Supreme Court that rendered the Coffey decision has subsequently pointed out that additions of this kind to the main tax are not penalties but civil administrative sanctions provided primarily as a safeguard for the protection of the state revenue and to reimburse the government for the heavy expense of investigation and the loss resulting from the taxpayers fraud (Helvering vs Mitchell 303 US 390 82 L Ed 917 Spies vs US 317 US 492) This is made plain by the fact that such surcharges are enforceable like the primary tax itself by distraint or civil suit and that they are provided in a section of RA No 55 (section 5) that is separate and distinct from that providing for criminal prosecution (section 7) We conclude that the defense of jeopardy and estoppel by reason of the petitioners acquittal isuntenable and without merit Whether or not there was fraud committed by the taxpayer justifying the imposition of the surcharge is an issue of fact to be inferred from the evidence and surrounding circumstances and the finding of its existence by the Tax Court is conclusive upon us (Gutierrez v Collector GR No L-9771 May 31 1951 Perez vs Collector supra)

COLLECTOR v FISHERFacts This case relates to the determination and settlement of the hereditary estate left by the deceased Walter G Stevenson and the laws applicable thereto Walter G Stevenson (born in the Philippines on August 9 1874 of British parents and married in the City of Manila on January 23 1909 to Beatrice Mauricia Stevenson another British subject) died on February 22 1951 in San Francisco California USA whereto he and his wife moved and established their permanent residence since May 10 1945 In his will executed in San Francisco on May 22 1947 and which was duly probated in the Superior Court of California on April 11 1951

Stevenson instituted his wife Beatrice as his sole heiress to the following real and personal properties acquired by the spouses while residing in the PhilippinesIssue 1 Whether or not the estate is entitled to the following deductions P860439 for judicial and administration expenses P208652 for funeral expenses P65250 for real estate taxes andP1002247 representing the amount of indebtedness allegedly incurred by the decedent during his lifetime 2 Whether or not the estate is entitled to the payment of interest on the amount it claims to have overpaid the government and to be refundable to itHeld 1 YES An examination of the record discloses however that the foregoing items were considered deductible by the Tax Court on the basis of their approval by the probate court to which said expenses we may presume had also been presented for consideration It is to besupposed that the probate court would not have approved said items were they not supported by evidence presented by the estate In allowing the items in question the Tax Court had before it the pertinent order of the probate court which was submitted in evidence by respondents (Exh AA-2 p 100 record) As the Tax Court said it found no basis for departing from the findings of the probate 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 National Association which it would appear that while still living Walter G Stevenson obtained we are not inclined to pass upon the claim of respondents in respect to theadditional amount of P8652 for funeral expenses which was disapproved by the court a quo for lack of evidence In connection with the deduction of P65250 representing the amount of realty taxes paid in 1951 on the decedents two parcels of land in Baguio City which respondents claim was disallowed by the Tax Court we find that this claim has in fact been allowed2 NO Respondents claim for interest on the amount allegedly overpaid if any actually results after a recomputation on the basis of this decision is hereby denied in line with our recent decision in Collector of Internal Revenue v St Pauls Hospital (GR No L-12127 May 29 1959) wherein we held that in the absence of a statutory provision clearly or expressly directing or authorizing such payment and none has been cited by respondents the National Government cannot be required to pay interest

DEDUCTIONS AND EXMEPTIONS ALLOWABLE DEDUCTIONSTAXESCIR v LEDNICKYFacts V E Lednicky and Maria Valero Lednicky are husband and wife both American citizens residing in the Philippines and have derived all their income from Philippine sources for the taxable years under question [GR L-18286] In compliance with local law the spouses on 27March 1957 filed their income tax return for 1956 reporting therein a gross income of P101728765 and a net income of P73380944 on which the amount of P31739541 was assessed after deducting P480559 as withholding tax Pursuant to the Commissioner of Internal Revenuersquos assessment notice the spouses paid the total amount of P32624741 inclusive of the withheld taxes on 15 April 1957 On 17 March 1959 the spouses filed an amended income tax return for 1956 The amendment consists in a claimed deduction of P20593924 paid in 1956 to the US government as federal income tax for 1956 Simultaneously with the filing of the amended return the spouses requested the refund of P11243790 When the Commissioner of Internal Revenue failed to answer the claim for refund the spouses filedtheir 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 P177112463 and a net income of P105255067 On 19 April 1956 they filed an amended income tax return the amendment upon the original being a lesser net income of P101255451 and on the basis of this amended return they paid P57025200 inclusive of withholding taxes After audit the Commissioner determined a deficiency of P1611600 which amount the spouses paid on 5 December 1956 Back in 1955 however the spouses filed with the US Internal Revenue Agent in Manila their Federal income tax return for the years 1947 1951 1952 1953 and 1954 on income from Philippine sources on a cash basis Payment of these federal income taxes including penalties and delinquency interest in the amount of $26458882 were made in 1955 to the US Director of Internal Revenue Baltimore Maryland through the National City Bank of New York Manila Branch Exchange and bank charges in

remitting payment totaled P414391 On 11 August 1958 the said respondents amended their Philippines income tax return for 1955 to including US Federal income taxes interest accruing up to 15 May 1955 and exchange and bank charges totaling P51634515 and therewith filed a claim for refund of the sum of P16638400 which was later reduced to P15026900 The spouses brought suit in the Tax Court which was docketed therein as CTA Case 570 [GR 21434] The facts are similar to above cases but refer to the spousesrsquo income tax returns for 1957 filed on 28 February 1958 and for which the spouses paid a total sum of P19679965 In 1959 they filed an amended return for 1957 claiming deduction of P19075580 representing taxes paid to the US Government on income derived wholly from Philippine sources On the strength thereof spouses seek refund of P9052075 as overpayment (CTA Case 783) The Tax Court decided for the spousesIssue WON there should be a refund for the spousesHeld NO The Supreme Court reversed the decisions of the Court of Tax Appeals and affirmed the disallowance of the refunds claimed by the spouses with costs against said spouses1 Section 30 (c-1) of the Philippine Internal Revenue Code Section 30 (c) (1) (Deduction from gross income) provides that ldquoin computing net income there shall be allowed as deductions (c) Taxes (1) In general mdash Taxes paid or accrued within the taxable year except (A) The income tax provided for under this Title (B) Income war-profits and excess profits taxes imposed by the authority of any foreign country but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits ofparagraph (3) of this subsection (relating to credit for taxes of foreign countries) (C) Estate inheritance and gift taxes and (D) Taxes assessed against local benefits of a kind tending to increase the value of the property assessedrdquo2 Paragraph (c) (3) (b) of the Tax Code Credits against tax for taxes of foreign countriesParagraph 3 (B) of the subsection (Credits against tax for taxes of foreign countries) reads ldquoIf the taxpayer signifies in his return his desire to have the benefits of this paragraph the tax imposed by this Title shall be credited with (B) Alien resident of the Philippines mdash In the case of an alien resident of the Philippines the amount of any such taxes paid or accrued during the taxable year to any foreign country if the foreign country of which such alien resident is a citizen or subject in imposing such taxes allows a similar credit to citizens of the Philippines residing insuch countryrdquo3 Paragraph (c) (4) of the Tax Code Limitation on credit The tax credit so authorized is limited under paragraph 4 (A and B) of the same subsection in the following terms ldquoPar (c) (4) Limitation on credit mdash The amount of the credit taken under this section shall be subject to each of the following limitations (A) The amount of the credit in respect to the tax paid or accrued to any country shall not exceed the same proportion of the tax against which such credit is taken which the taxpayerrsquos net income from sources within such country taxable under this Title bears to his entire net income for the same taxable year and (B) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken which the taxpayerrsquos net income from sources without the Philippines taxable under this Title bears to his entire net income for the same taxable yearrdquo4 Lawrsquos intent that right to deduct income taxes paid to foreign government taken as an alternative or substitute to claim of tax credit for such foreign income tax Construction and wording of Section 30 (c) (1) (B) of the Internal Revenue Act shows the lawrsquos intent that the right to deduct income taxes paid to foreign government from the taxpayerrsquos gross income is givenonly as an alternative or substitute to his right to claim a tax credit for such foreign income taxes under section 30 (c) (3) and (4) so that unless the alien resident has a right to claim such tax credit if he so chooses he is precluded from deducting the foreign income taxes from his gross income For it is obvious that in prescribing that such deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) (relating to credits for taxes paid to foreign countries) the statute assumes that the taxpayer in question also may signify his desire to claim a tax credit and waive the deduction otherwise the foreign taxes would always be deductible and their mention in the list of nondeductible items in Section 30 (c) might as well have been omitted or at least expressly limited to taxes on income from sources outside the Philippine Islands Had the law intended that foreign income taxes could be deducted from gross income in any event regardless of thetaxpayerrsquos right to claim a tax credit it is the latter right that should be conditioned upon the taxpayerrsquos waiving the deduction in which case the right to reduction under subsection (c-1-B)

would have been made absolute or unconditional (by omitting foreign taxes from the enumeration of non- deductions) while the right to a tax credit under subsection (c-3) would have been expressly conditioned upon the taxpayerrsquos not claiming any deduction under subsection (c-1)5 Danger of double credit does not exist if taxpayer cannot claim benefit from either headings at his option The purpose of the law is to prevent the taxpayer from claiming twice the benefits of his payment of foreign taxes by deduction from gross income (subs c-1) and by tax credit (subs c-3) This danger of double credit certainly can not exist if the taxpayer can not claim benefit under either of these headings at his option so that he must be entitled to a tax credit (the spouses admittedly are not so entitled because all their income is derived from Philippine sources) or the option to deduct from gross income disappears altogether6 When double taxation Tax income should accrue to benefit of the PhilippinesDouble taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity (cf Manila vs Interisland Gas Service 52 Off Gaz 6579 Manuf Life Ins Co vs Meer 89 Phil 357) In the present case while the taxpayers would have to pay two taxes on the same income the Philippine government only receives the proceeds of one tax As between the Philippines where the income was earned and where the taxpayer is domiciled and the United States where that income was not earned and where the taxpayer did not reside it is indisputable that justice and equity demand that the tax on the income should accrue to the benefit of the Philippines Any relief from the alleged double taxation should come from the United States and not from the Philippines since the formerrsquos right to burden the taxpayer is solely predicated on his citizenship without contributing to the production of the wealth that is being taxed To allow an alien resident to deduct from his gross income whatever taxes he pays to his own government amounts to conferring on the latterpower to reduce the tax income of the Philippine government simply by increasing the tax rates on the alien resident Everytime the rate of taxation imposed upon an alien resident is increased by his own government his deduction from Philippine taxes would correspondingly increase and the proceeds for the Philippines diminished thereby subordinating our own taxes to those levied by a foreign government Such a result is incompatible with the status of the Philippines as an independent and sovereign state

GUTIERREZ v COLLECTORFacts Maria Morales was the registered owner of an agricultural land designated as Lot No 724-C of the cadastral survey of Mabalacat Pampanga The Republic of the Philippines at the request of the USGovernment and pursuant to the terms of the Military Bases Agreement of March 14 1947 instituted condemnation proceedings in the Court of the First Instance of Pampanga docketed as Civil Case No 148 for the purpose of expropriating the lands owned by Maria Morales and others needed for the expansion of the Clark Field Air Base t the commencement of the action the Republic of the Philippines therein plaintiff deposited with the Clerk of the Court of First Instance of Pampanga the sum of P156960 which was provisionally fixed as the value of the lands sought to be expropriated in order that it could take immediate possession of the same On January 27 1949 upon order of the Court the sum of P34580 (PNB Check 721520-Exh R) was paid by the Provincial treasurer of Pampanga to Maria Morales out of the original deposit of P156960 made by therein plaintiff After due hearing the Court of First Instance of Pampanga rendered decision dated November 29 1949 wherein it fixed as just compensation P2500 per hectare for some of the lots and P3000 per hectare for the others which values were based on the reports of the Commission on Appraisal whose members were chosen by both parties and by the Court which took into consideration the different conditions affecting the value of the condemned properties in making their findingsIn virtue of said decision defendant Maria Morales was to receive the amount of P9430575 as compensation for Lot No 724-C which was one of the expropriated lands Sometime in 1950 the spouses Blas Gutierrez and Maria Morales received the sum of P5978575 presenting the balance remaining in their favor after deducting the amount of P34580 already withdrawn from the compensation to them In a notice of assessment dated January 28 1953 the Collector ofInternal Revenue demanded of the petitioners the payment of P8481 as alleged deficiency income tax for the year 1950 inclusive of surcharges and penalties The CIR contended that petitioners-appellants failed to include from their gross income in filing their income tax return for 1950 the amount of P9430575 which they had received as compensation for their land

taken by the Government by expropriation proceedings It is the contention of respondent Collector of Internal Revenue that such transfer of property for taxation purposes is sale and that the income derived therefrom is taxable The lower court exonerated petitioners from the 50 per cent surchargeimposed on the latter on the ground that the taxpayers income tax return for 1950 is false andor fraudulentIssue WON petitioners should pay surcharge Held NO It should be noted that the Court of Tax Appeals found that the evidence did not warrant the imposition of said surcharge becausethe petitioners therein acted in good faith and without intent to defraud the GovernmentThe question of fraud is a question of fact which frequently requires a nicely balanced judgement to answer All the facts and circumstances surrounding the conduct of the tax payers business and all the facts incident to the preparation of the alleged fraudulent return should be considered (Mertens Federal Income Taxation Chapter 55) The question of fraud being a question of fact and the lower court having made the finding that the evidence of this case does not warrant the imposition of the 50 per cent surcharge We are constrained to refrain from giving any consideration to the question raised by the Solicitor General for it is already settled in this jurisdiction that in passing upon petitions to review decisions of the Court of Tax Appeals We have to confine ourselves to questions of law

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSLOSSESFERNANDEZ HERMANOS v CIRFacts These four appeals involve two decisions of the Court of Tax Appeals determining the taxpayers income tax liability for the years 1950 to 1954 and for the year 1957 Both the taxpayer and the Commissioner of Internal Revenue as petitioner and respondent in the cases a quo respectively appealed from the Tax Courts decisions insofar as their respective contentions on particular tax items were therein resolved against themIssue ProperImproper AllowancesDisallowances of LossesHeld Re allowancesdisallowances of losses(a) Allowance of losses in Mati Lumber Co (1950) mdash The Commissioner of Internal Revenue questions the Tax Courts allowance of the taxpayers writing off as worthless securities in its 1950 return the sum of P805000 representing the cost of shares of stock of Mati Lumber Co acquired by the taxpayer on January 1 1948 on the ground that the worthlessness of said stock in the year 1950 had not been clearly established The Commissioner contends that although the said Company was no longer in operation in 1950 it still had its sawmill and equipment which must be of considerable value There was adequate basis for the writing off of the stock as worthless securities Assuming that the Company would later somehow realize some proceeds from its sawmill and equipment which were still existing as claimed by the Commissioner and that such proceeds would later be distributed to its stockholders such as the taxpayer the amount so received by the taxpayer would then properly be reportable as income of the taxpayer in the year it is received(b) Disallowance of losses in or bad debts of Palawan Manganese Mines Inc (1951) mdash The taxpayer appeals from the Tax Courts disallowance of its writing off in 1951 as a loss or bad debt the sum of P35313425 which it had advanced or loaned to Palawan Manganese Mines Inc Pursuant to the agreement mentioned above petitioner gave to Palawan Manganese Mines Inc yearly advances starting from 1945 which advances amounted to P58730807 by the end of 1951 Despite these advances and the resumption of operations by Palawan ManganeseMines Inc it continued to suffer losses By 1951 petitioner became convinced that those advances could no longer be recovered While it continued to give advances it decided to write off as worthless the sum of P35313425 Under the circumstances was the sum of P35313425properly claimed by petitioner as deduction in its income tax return for 1951 either as losses or bad debts It will be noted that in giving advances to Palawan Manganese Mine Inc petitioner did not expect to be repaid It is true that some testimonial evidence was presented to show that there was some agreement that the advances would be repaid but no documentary evidence was presented to this effect The memorandum agreement signed by the parties appears to be very clear that the consideration for the advances made by petitioner was 15 of the net profits of Palawan Manganese Mines Inc In other words if there were no earnings or profits there

was no obligation to repay those advances It has been held that the voluntary advances made without expectation of repayment do not result in deductible losses The Tax Courts is allowance of the write-off was proper The Solicitor General has rightly pointed out that the taxpayer has taken an ambiguous position and has not definitely taken a stand on whetherthe amount involved is claimed as losses or as bad debts but insists that it is either a loss or a bad debt 4 We sustain the governments position that the advances made by the taxpayer to its 100 subsidiary Palawan Manganese Mines Inc amounting to P58730807 as of 1951 wereinvestments and not loans 5 (c) Disallowance of losses in Balamban Coal Mines (1950 and1951) mdash The Court sustains the Tax Courts disallowance of the sums of P898976 and P2773266 spent by the taxpayer for the operation of its Balamban coal mines in Cebu in 1950 and 1951 respectively and claimed as losses in the taxpayers returns for said years The Tax Court correctly held that the losses are deductible in 1952 when the mines were abandoned and not in 1950 and 1951 when they were still in operation 9 The taxpayers claim that these expeditions should be allowed as losses for the corresponding years that they were incurredbecause it made no sales of coal during said years since the promised road or outlet through which the coal could be transported from the mines to the provincial road was not constructed cannot be sustained Some definite event must fix the time when the loss is sustained and here it was the event of actual abandonment of the mines in 1952 (d) and (e) Allowance of losses in Hacienda Dalupiri (1950 to 1954) and Hacienda Samal (1951-1952) mdash The Tax Court overruled the Commissioners disallowance of these items of losses thus Petitioner deducted losses in the operation of its Hacienda Dalupiri the sums of P1741895 in 1950 P2912582 in 1951 P2674481 in 1952 P2193262 in 1953 and P4293856 in 1954 These deductions were disallowed by respondent on the ground that the farm was operated solely for pleasure or as ahobby and not for profit This conclusion is based on the fact that the farm was operated continuously at a loss From the evidence we are convinced that the Hacienda Dalupiri was operated by petitioner for business and not pleasure It was mainly a cattle farm although a few race horses were also raised It does not appear that the farm was used by petitioner for entertainment social activities or other nonbusiness purposes Therefore it is entitled to deduct expenses and losses in connection with the operation of said farm (See 1955 PH Fed Taxes Par 13 63 citing GCM 21103 CB 1939- 1 p164) Section 100 of Revenue Regulations No 2 otherwise known as the Income Tax Regulations authorizes farmers to determine their gross income on the basis of inventories Said regulations provide If gross income is ascertained by inventories no deduction can be made for livestock or products lost during 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 quote from the memorandum of counsel for petitioner The Taxpayer deducted from its income tax returns for the years from 1950 to 1954 inclusive the corresponding yearly losses sustained in the operation of Hacienda Dalupiri which losses represent the excess of its yearly expenditures over the receipts that is the losses represent the difference between the sales of livestock and the actual cash disbursements or expenses (Pages 21-22 Memorandum for Petitioner) As the Hacienda Dalupiri was operated by petitioner for business and since it sustained losses in its operation which losses were determined by means of inventories authorized under Section 100 of Revenue Regulations No 2 it was error for respondent to have disallowed the deduction of said losses The same is true with respect to loss sustained in the operation of the Hacienda Samal for the years 1951 and 1952 10 The Commissioner questions that the losses sustained by the taxpayer were properly based on the inventory method of accounting He concedes however that the regulations referred to does not specify how the inventories are to be made The Tax Court however felt satisfied with the evidence presented by the taxpayer which merely consisted of an alleged physical count of the number of the livestock in Hacienda Dalupiri for the years involved 11 The Tax Court was satisfied with the method adopted by the taxpayer as a farmer breeding livestock reporting on the basis of receipts and disbursements We find no Compelling reason to disturb its findings

PLARIDEL SURETY v CIRFacts Petitioner Plaridel Surety amp Insurance Co is a domestic corporation engaged in the bonding business On November 9 1950 petitioner as surety and Constancio San Jose as principal solidarily executed a performance bond in the penal sum of P3060000 in favor of the

P L Galang Machinery Co Inc to secure the performance of San Joses contractual obligation to produce and supply logs to the latter To afford itself adequate protection against loss or damage on the performance bond petitioner required San Jose and one Ramon Cuervo to execute an indemnity agreement obligating themselves solidarily to indemnify petitioner for whatever liability it may incur by reason of said performance bond Accordingly San Jose constituted a chattel mortgage on logging machineries and other movables in petitioners favor1 while Ramon Cuervo executed a real estate mortgage2 San Jose later failed to deliver the logs to Galang Machinery3 and the latter sued on the performance bond On October 1 1952 the Court of First Instance adjudged San Jose and petitioner liable it also directed San Jose and Cuervo to reimburse petitioner for whatever amount it would pay Galang Machinery The Court of Appeals on June 17 1955 affirmed the judgment of the lower court The same judgment waslikewise affirmed by this Court4 on January 11 1957 except for a slight modification apropos the award of attorneys fees In its income tax return for the year 1957 petitioner claimed the saidamount of P4449000 as deductible loss from its gross income and accordingly paid the amount of P13600 as its income tax for 1957 The Commissioner of Internal Revenue disallowed the claimed deduction of P4449000 and assessed against petitioner the sum of P889800 plus interest as deficiency income tax for the year 1957 Petitioner filed its protest which was denied Whereupon appeal was taken to the Tax Court petitioner insisting that the P4449000 which it paid to Galang Machinery was a deductible lossIssue WON the amount Plaridel paid to Galang Machinery is a deductible lossHeld NO There is no question that the year in which the petitioner Insurance Co effected payment to Galang Machinery pursuant to a final decision occurred in 1957 However under the same court decision San Jose and Cuervo were obligated to reimburse petitioner for whateverpayments it would make to Galang Machinery Clearly petitioners loss is compensable otherwise (than by insurance) It should follow then that the loss deduction can not be claimed in 1957 Now petitioners submission is that its case is an exception Citing Cu Unjieng Sons Inc v Board of Tax Appeals6 and American cases also petitioner argues that even if there is a right to compensation by insurance or otherwise the deduction can be taken in the year of actual loss where the possibility of recovery is remote The pronouncement however to this effect in the Cu Unjieng case is not as authoritative as petitioner would have it since it was there found that the taxpayer had no legal right to compensation either by insurance or otherwise7 And the American cases cited8 are not in point None of them involved a taxpayer who had as in the present case obtained a final judgment against third persons for reimbursement of payments made In those cases there was either no legally enforceable right at all or such claimed right was still to be or being litigated On the other hand the rule is that loss deduction will be denied if there is a measurable right to compensation for the loss with ultimate collectionreasonably clear So where there is reasonable ground for reimbursement the taxpayer must seek his redress and may not secure a loss deduction until he establishes that no recovery may be had9 In other words as the Tax Court put it the taxpayer (petitioner) must exhaust his remedies first to recover or reduce his loss But assuming that there was no reasonable expectation of recovery still no loss deduction can be had Sec 30 (d) (2) of the Tax Code requires a charge-off as one of the conditions for loss deduction In the case of a corporation all losses actually sustained and charged-off within the taxable year and not compensated for byinsurance or otherwise Mertens12 states only four (4) requisites because the United StatesInternal Revenue Code of 193913 has no charge-off requirement Sec 23(f) thereof provides merely In the case of a corporation losses sustained during the taxable year and not compensated for by insurance or otherwise Petitioner who had the burden of proof14 failed to adduce evidence that there was a charge-off in connection with the P4449000mdashor P3060000 mdash which it paid to Galang Machinery

CHINA BANKING CORPORATION V COURT OF APPEALSFacts Petitioners mad a 53 equity investment in First CBC Capital (Asia) Limited to the amount of P1622785180 consisting of 106000 shares with par value of P100 per shareSubsequently First CBC was found to be insolvent Petitioners with the approval of the BSP wrote off as worthless its investment in the company and treated it as a bad debt or ordinary loss deductible from its gross income The Commissioner of Internal Revenue disallowed the deduction saying that the investment could not be considered worthless since First CBC could still exercise its financing and investment activities even if it was no longer licensed as a

depository Even assuming that the securities had become worthless it still cannot be considered as a bad debt or expense since there is no indebtedness between petitioner and First CBC It should be classified as a capital lossHeld The SC found in favor of respondents1 Not and indebtedness An equity investment in shares of stock cannot be considered as an indebtedness of First CBC Capital to China Bank The former has no obligation to repay the latter the amount invested The amount China Bank invested in First CBC is in fact anasset2 Capital asset not ordinary Capital assets are defined in the negative by Sec 33(1) of the NIRC as property held by the TP exclusive of items primarily for the sale to customers in the ordinary course of business or property used in trade or business Hence securities such as equity holdings are ordinary assets only in the hands of a dealer or a person actively engaged in trading in the same for his own account3 Section 29(d)(4)(B) of the NIRC treats the worthlessness of the securities held as capital assets as a loss resulting from the sale or exchange of capital assets Strictly speaking no sale occurs when securities held as capital assets become worthless Nonetheless the law treats it as a loss from a sale just the same4 Section 33 of the NIRC provides that the capital loss sustained can only be deducted from any capital gain derived within the taxable year The same provision enumerates assets which are not subject to the said limitation but equity holdings are not one of them

THE CITY LUMBER INC V DOMINGOFacts Respondent Domingo made an assessment on an additional income of petitioners in the amount of P16 67863 coming from 1 the sale of plywood kegs of nails and GI sheets amouting to P 790207 2 a cash credit balance of P789680 Petitioner assails the validity of the assessment alleging that the inventory in question was not sold but were lost to looters during a fire which occurred in the city To 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 was actually a loan secured by petitionersHELDThe assessments were valid 1 The alleged loss of the plywood and kegs of nails was never reported in the books of the petitioner nor in the petitioners ITR for that year Such conduct of the petitioner proves that such loss never occurred 2 Similarly there was neither any record in petitioners books nor any receipt or other piece of evidence to show receipt of the supposed loan

MARCELO STEEL CROP V COLLECTOR OF INTERNAL REVENUEFacts RA 35 granted a four-year tax exemption from all internal revenue taxes to enterprises directly payable by such enterprise or person which shall engage in new and necessary industries Petitioner corporation was engaged in 1 the manufacture of wire fences 2 the manufacture of steel nails 3 the manufacture of steel bars rods and other allied productsof which the last two were covered by RA 35 In 1953 and 1954 petitioner filed its ITR showing a net income of P3438658 and P5832900 respectively derived solely from its wire fence manufacturing business It was accordingly assessed P12750 in taxes which it paid subsequently it filed an amended ITR for the same taxable years showing that it actually incurred a loss of P87140737 and P10495629 respectively The losses were arrived at by consolidating the gross income and the gross allowable deductions of its three industries Petitioner thus filed for a refund of the P12750 it initially paid in taxes on the theory that since it is a corporation organized with a single capital to answer for all its financial obligations the gross income from both tax-exempt and non-exempt industries and its liability should be based on the difference between its consolidated gross income and its consolidated allowable deductionsHeld Petition has no merit Marcelo Steel cannot consolidate 1 The purpose of RA 35 is to encourage the establishment of new and necessary industries for the economic growth of the country In effect it grants a subsidy to entrepreneurs who blaze a trail in a new industry since there are greater risks involved in the same and an ROI is usually not immediately forthcoming As such a tax exemption granted to an entrepreneur engaged in a tax-exempt industry cannot be extended to benefit non-exempt industries in which the same entrepreneur is concurrently

engaged The justification is simply not there since such industries are presumably already deriving profits from its operations 2 Single capital - The fact that all three industries are organized under a single capital is of no moment It is clear that the law intended that tax exemptand non-exempt industries be treated separately as reflected in EO 341 series 0f 1950 which was incorporated in RA 901 a later incarnation of the same lawPHILIPPINE SUGAR ESTATE CORP V COLLECTOR OF INTERNALREVENUEFacts Petitioner owned shares of stock in several different companies and 154 liberty bonds at par 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 inclusiveof the sums above-stated for which it was assessed an amount in taxes It paid said amount without protest Subsequently petitioner filed a demand for refund In the letter-demand the ground for the refund invoked was the illegality o the collection since the dividends and interest were exempt from payment of income tax Although in the present petition the ground invoked is that the income tax on dividends had already been paid at the source Respondent denied the claim for refund because plaintiff failed to lodge a protest concurrently when it paid its tax liability as per Sec 1579 of the Revised Administrative Code as amended by Act No 3685 Plaintiffcountered by saying that the applicable law is Act No 2833 which requires no protest In addition it invoked the ruling in Fox v Edwards wherein it was ruled that any unduly paid income tax may be refunded without the necessity of a protestHeld The SC found in favor of the Collector1Controlling law - There is no need to distinguish between the two laws in this case Section 19 of Act 2833 provides that all administrative special and general provisions of law including laws in relation to the assessment remission collection and refund of internal revenue taxesnot hereto fore repealed and not inconsistent withthis Law areapplicableto this Law By virtue of this saving clause Section 1579 of the Revised Administrative Code finds application to Act 28332 Fox v Edwards is not controlling since the law specifically applied therein did not require the lodging of a protest concurrently with the payment for a TP to retain such right to protest (NOTE fr digester I did not find anything on losses or bad debts in this case I may have overlooked it)

DEDUCTIONS AND EXEPTIONS ALLOWABLE DEDUCTIONS BADDEBTSPHILIPPINE REFINING COMPANY V COURT OF APPEALSFacts In 1985 petitioner filed its ITR where it claimed 16 items amounting to P71307093 as bad debts and therefor deductible Subsequently the Commissioner for Internal Revenue disallowed such deductions and assessed petitioner to pay a deficiency tax for the year of 1985 Petitioner paid the deficiency tax under protest which the Commissioner deniedUpon a petition for review the CTA modified the findings of the Commissioner by reducing the deficiency tax assessment on the basis that three of the sixteen supposed bad debts could be allowed as deductions The CA later on agreed with the CTAHeld The SC upheld the ruling of the CA which it found to be in accordance with the SCs ruling in Collector v Goodrich It held the petitioner failed to substantiate the ldquoworthlessnessrdquo of the 13 debts which it claimed as deductions As per the ruling in Collector v Goodrich to qualify as a bad debt a TP must show 1 that there is a valid and subsisting debt2 that the debt must be actually ascertained to be worthless and uncollectible durring the taxable year3 the debt must be charged off during the taxable year and4 the debt must arise from the business or trade of the TPIn addition the Court said before a debt can be considered worthless the TP must also show that it is indeed uncollectible even in the future Furthermore the TP must undertake several steps to prove that he exerted diligent efforts to collect the debt1 sending statements of accounts to the debtors 2 sending of collection letters 3 giving the account to a lawyer for collection and4 filing a collection case in court In the case at bar the petitioner miserably failed to show any of the foregoing The only piece of evidence it offered to show the worthlessness of the debts was the testimony of the companys financial adviser or accountant The Court found that this lacked the required probity to establish that the accounts it claimed as bad debts were indeed

worthless Apart from such testimony the petitioner failed to introduce even a single iota of evidence to bolster its claim of worthlessness (NOTE In the rest of the case the Court presents the allegation of the petitioner as to why it could not collect on any of the 13 debts followed bya statement how the petitioner failed to introduce evidence to substantiate such allegation)

Collector of Internal Revenue v Goodrich International Rubber Co(21 SCRA 1336 No L-22265)Facts In 1951 and 1952 respondent Goodrich filed it ITR in which it claimed an aggregate amount (consisting of 18 individual accounts) of P5045541 as deductible for being bad debts The Collector of Internal Revenue disallowed the deductions and accordingly assessed Goodrich accordingly Goodrich protested the assessment and subsequently filed an appealwith the CTA which allowed the deductions for bad debts Hence this appeal by the GovernmentHeld Petition is partially meritorious Some of the items claimed by Goodrich can rightfully be written off as bad debts The SC rejected the claim for deduction of 10 items because Goodrichfailed to establish that that the debts were actually worthless or that it had reasonable grounds to believe them to be so in 1951 The law permits the deduction of debts ldquoactually ascertained to be worthless within the taxable yearrdquo obviously to prevent arbitrary action by the TP to unduly avoid tax liability Good faith on the part of the TP is not enough He must furthermore show that he had reasonably investigated the relevant facts and had drawn a reasonable inference from the information 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 actually made (some in full) after they had been characterized as bad debts and written off The Court however ruled that 8 of the 18 claimed bad debts can beallowed as deductions Common among these 8 was the action of Goodrich in persistently demanding payment from its debtors its endorsement of the accounts to counsel for collection the pursuit of legal remedies for the collection on these debts and the continuing failureclear inability of the debtors to pay off their obligations

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSDEPRECIATIONBASILAN ESTATES INC v CIRFacts Basilan Estates Inc claimed deductions for the depreciation of its assets on the basis of their acquisition cost As of January 1 1950 it changed the depreciable value of said assets by increasing it to conform with the increase in cost for their replacement Accordingly from 1950 to1953 it deducted from gross income the value of depreciation computed on the reappraised value CIR disallowed the deductions claimed by petitioner consequently assessing the latter of deficiency income taxesIssueWhether or not the depreciation shall be determined on the acquisition cost rather than the reappraised value of the assetsHeld Yes The following tax law provision allows a deduction from gross income for depreciation but limits the recovery to the capital invested in the asset being depreciated (1)In general mdash A reasonable allowance for deterioration of property arising out of its use or employment in the business or trade or out of its not being used Provided That when the allowance authorized under this subsection shall equal the capital invested by the taxpayer no further allowance shall be made The income tax law does not authorize the depreciation of an asset beyond its acquisition cost Hence a deduction over and above such cost cannot be claimed and allowed The reason is that deductions from gross income are privileges not matters of right They are not created by implication but upon clear expression in the law Depreciation is the gradual diminution in the useful value of tangible property resulting from wear and tear and normal obsolescense It commences with the acquisition of the property and its owner is not bound to see his property gradually waste without making provision out of earnings for its replacement The recovery free of income tax of an amount more than the invested capital in an asset will transgress the underlying purpose of a depreciation allowance For then what the taxpayer would recover will be not only the acquisition cost but also some profit Recovery in due time thru depreciation of investment made is the philosophy behind depreciation allowance the idea of profit on the investment made has never been the underlying reason for the allowance of a deduction for depreciation

Zamora v CIRFacts These are 4 cases regarding deficiency income taxes allegedly incurred by the ZamorasCases Nos L-15290 and L-15280Mariano Zamora owner of the Bay View Hotel and Farmacia Zamora Manila filed his income tax returns the years 1951 and 1952 The Collector of Internal Revenue found that he failed to file his return of the capital gains derived from the sale of certain real properties and claimed deductions which were not allowable The CTA reduced the sum due Zamora and on appeal petitioner alleged that the CTA erred in disallowing the promotion expenses incurred by his wife for promotion of the above businesses depreciation of the Bayview Hotel Bldg and in applying the Ballantyne scale of values for determining the cost of his Manila property The CIR on the other hand claimed that the CTA erred in reducing the amounts and giving credence to the uncorroborated testimony of Mariano Zamora that he bought the said real property in question during the Japanese occupation partly in Philippine currency and partly in Japanese war notes Cases Nos L-15289 and L-15281 Mariano Zamora and his deceased sister Felicidad Zamora bought a piece of land located in Manila on May 16 1944 for P13200000 and sold it for P7500000 on March 5 1951 They also purchased a lot located inQuezon City for P6895900 on January 19 1944 which they sold for P94000 on February 9 1951 The CTA ordered the estate of the late Felicidad Zamora (represented byEsperanza A Zamora as special administratrix of her estate) to pay the sum of P23550 representing alleged deficiency income tax and surcharge due from said estateFirst issue ndash disallowance of the entire promotion expenses incurred by Mrs ZamoraPetitioner The CTA erred in disallowing P1047850 as promotion expenses incurred by his wife for the promotion of the BayView Hotel and Farmacia Zamora He contends that the whole amount of P2095700 as promotion expenses should be allowed and not merely one-half of it on the ground that while not all the itemized expenses are supported by receipts the absence of some supporting receipts has been sufficiently and satisfactorily established - to purchase machinery for a new Tiki-Tiki plant and to observe hotel management in modern hotelsRespondents Mrs Zamora obtained only the sum of P500000 from the Central Bank and that in her application for dollar allocation she stated that she was going abroad on a combined medical and business trip which facts were not denied by Mariano Zamora The alleged expenses were not supported by receipts Mrs Zamora could not even remember how much money she had when she left abroad in 1951 and how the alleged amount of P2095700 was spent There having been no means by which to ascertain which expense was incurred by her inconnection with the business of Mariano Zamora and which was incurred for her personal benefit the respondents considered 50 of the said amount of P2095700 as business expenses and the other 50 as her personal expensesHeld The 50 allocation is very fair to Zamora there being no receipt to explain the alleged business expenses as well as the personal expenses that might have been incurred While in situations like the present absolute certainty is usually no possible the CTA should make as close an approximation as it can bearing heavily if it chooses upon the taxpayer whose inexactness is of his own making Section 30 of the Tax Code provides that in computing net income there shall be allowed as deductions all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business Since promotion expenses constitute one of the deductions in conducting a business same must testify these requirements Claim for the deduction of promotion expenses or entertainment expenses must also be substantiated or supported by record showing in detail the amount and nature of the expenses incurredSecond issue ndash disallowancereduction of the rate of depreciation of Bayview Hotel (from 35 to 25)Petitioner Contends that 1) the Ermita district is becoming a commercial district 2) the hotel has no room for improvement and(3) the changing modes in architecture styles of furniture and decorative designs must meet the taste of a fickle public Alsothe reference to Bulletin F a publication by the IRS should have been first proved as law to be subject of judicial noticeHeld The CTA was approximately correct in holding that the rate of depreciation must be 25 An average hotel buildingrsquos estimated useful life is 5 years but inasmuch as it also depends on the use and location change in population and other it is allowed a deprecation rate of 25 which corresponds to a useful life of 40 years It is true that Bulletin F has no binding force but it has a strong persuasive effect considering that the same has been the result of scientific studies

and observation for a long period in the United States after whose Income Tax Law ours is patterned Verily courts are permitted to look into and investigate the antecedents or the legislative history of the statutes involvedThird issue-the undeclared capital gains derived from the sales in 1951 of certain real properties in Malate Manila and in Quezon City acquired during the Japanese occupationHeld The CTArsquos appraisal in this case is correct Consequently the total undeclared income of petitioners derived from the sales of the Manila and Quezon City properties in 1951 is P1711175 (P175000 plus P1536175) 50 of which in the sum of P855588 is taxable the said properties being capital assets held for more than one year The cost basis of property acquired in Japanese war notes is the equivalent of the war notes in genuine Philippine currency in accordance with the Ballantyne Scale 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 P13200000 was not entirely paid in Japanese War notes but frac12 thereof or P6600000 was in Philippine currency This being the case the Ballantyne Scale of values which was the resultof an impartial scientific study adopted and given judicial recognition should be applied As the value of the Japanese war notes in May 1944 when the Manila property was bought was 1 frac12 of the genuine Philippine Peso (Ballantyne Scale) and since the gain derived or loss sustained inthe disposition of this property is to reckoned in terms of Philippine Peso the value of the Japanese war notes used in the purchase of the property must be reduced in terms of the genuine Philippine Peso to determine the cost of acquisition It therefore results that since the sum of P6600000 in Japanese war notes in May 1944 is equivalent to P550000 in Philippine currency (P6600000 divided by 12) the acquisition cost of the property in question is P6600000 plus P550000 or P7150000 and that as the property was sold for P7500000 in 1951 the owners thereof Mariano and Felicidad Zamora derived a capital gain of P350000or P175000 each For the Quezon City property the CTA was correct in giving credence toZamorarsquos testimony that the same was purchased inPhilippine currency because it is quite incredible that real property with an assessed value of P4691000 should have been soldin Japanese war notes with an equivalent value in Philippine currency of only P1723975 Thus the gain derived from the sale isP1536175 after deducting from the selling price the cost of acquisition in the sum of P6895900 and the expense of sale in the sum of P967925Disposition The petitions are dismissed and the decision appealed from is affirmed

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSDEPLETIONCONSOLIDATED MINES V CTAFacts Cosolidated Mines filed a refund for overpayments of income taxes for the year 1951 However after investigation of the BIR instead of having a refund the company was instead assessed for deficiency income taxes for the years 1953 1954 and 1956 with 5 surchargeand 1 monthly interest According to the investigation (A) for the years 1951 to 1954 (1) the Company had not accrued as an expense the share in the company profits of Benguet Consolidated Mines as operator of the Consolidateds mines although for income tax purposes the Consolidated had reported income and expenses on the accrual basis (2) depletion and depreciation expenses had been overcharged and (3) the claims for audit and legal fees and miscellaneous expenses for 1953 and 1954 had not been properly substantiated and that (B) for the year 1956 (1) the Company had overstated its claim for depletion and (2) certain claims for miscellaneous expenses were not duly supported by evidence Background info Consolidated and Benguet entered into a development agreement whereby Consolidated as the owner of several mining claims allowed Benguet to explore develop mine concentrate andmarket the ore in the mining claims In the agreement it was provided that benguet is to provide the funds necessary for the expenses until such time the properties are on a profit producing basis to be reimbursed by consolidated Once profit is derived expenditures from its own resources shall be charged against the subsequent gross income of the properties During the time Benguet is being reimbursed for all its expenditures the net profits resulting from the operation of the claims shall be divided 90 to Benguet and 10 to Consolidated Such division of net profits shall be based on the receipts and expenditures during each calendar year and

shall continue until such time as the 90 of the net profits pertaining to Benguet hereunder shall equal the amount of such expenditures ldquoAfter Benguet has been fully reimbursed for its expenditures the net profits from the operation shall be divided between Benguet and Consolidated share and share alike it being understood however that the net profits as the term is used in this agreement shall be computed by deducting from gross income all operating expenses and all disbursements of any nature whatsoever as may be made in order to carry out the terms of this agreementrdquo It appears that by 1953 Benguet had completely recouped its advances because they were then dividing the profits share and share alike Consolidated used the accrual method of accounting in computing its income One of its expenses is the amount-paid to Benguet as mine operator which amount is computed as 50 of ldquonet incomerdquo TheConsolidated deducts as an expense 50 of cash receipts minus disbursements but does not deduct at the end of each calendar year what the Commissioner alleges is 50 of the share of Benguet in the accounts receivable However it deducts Benguets 50 if and when the accounts receivable are actually paid It would seem therefore that Consolidated has been deducting a portion of this expense (Benguets share as mine operator) on the cash amp carry basis The question is whether or not the accounting system used by Consolidated justifies such a treatment of this item and if not whether said method used by Consolidated and characterized by the Commissioner as a hybrid method may be allowed under the provisions of the NIRCIssue WON Consolidatedrsquos accounting method is allowedHeld YES It is said that accounting methods for tax purposes comprise a set of rules for determining when and how to report income and deductions The US Internal Revenue Code allows each taxpayer to adopt the accounting method most suitable to his business and requires only that taxable income generally be based on the method of accounting regularly employed in keeping the taxpayers books provided that the method clearly reflects incomeA deduction cannot be accrued until an actual liability is incurred even if payment has not been made Here we have to distinguish between (1) the method of accounting used by Consolidated in determining its net income for tax purposes and (2) the method of computation agreed upon between Consolidated and 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 were cash receipts and cash payments Once determined in accordance with the stipulated bases and procedure then the amount due Benguet for each month accrued at the end of that month whether Consolidated had made payment or not To make Consolidated deduct as an expense one-half of the Accounts Receivable would in effect be equivalent to giving Benguet a right which it did not have under the contract and to substitute for the parties choice a mode of computation of compensationnot contemplated by themON DEPLETIONThe first issue raised by Consolidated is with respect to the rate of mine depletion used by the Court of Tax Appeals The Tax Code provides that in computing net income there shall be allowed as deduction in the case of mines a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof which has been mined and sold during the year for which the return is made [Sec 30(g) (1) (B)] As an income tax concept depletion is wholly a creation of the statute mdash ldquosolely a matter of legislative gracerdquo Hence the taxpayer has the burden of justifying the allowance of any deduction claimed As in connectionwith all other tax controversies the burden of proof to show that a disallowance of depletion by the Commissioner is incorrect or that an allowance made is inadequate is upon the taxpayer and this is true with respect to the value of the property constituting the basis of the deduction This burden-of-proof rule has been frequently applied and a value claimed has been disallowed for lack of evidence Here SC considered the evidence presented (testimony of Eligio Garciaand the Report to Stockholders (which includes the Balance Sheet as of 1946) geological report on the estimated amount of ore in the claims etc) it set forth a very detailed computation of the depletion rate determining the value of each component of the formula of depletion viz Rate of Depletion Per Unit = Cost of Mine Property Estimated ore Deposit of Product Mined and sold- depletion is different from depreciation In determining the amount of cost depletion allowable the following three facts are essential namely (1) the basis of the property (2) the estimated total recoverable units in the property and (3) the number of units recovered during the taxable year in question As used as an element in cost depletion basis means the dollar amount of the

taxpayers capital or investment in the property which he is entitled to recover tax free during the period he is removing the mineral in the depositDisposition Decision modifiedFootnotes in the case that are helpful While taxable income is based on the method of accounting used by the taxpayer it will almost always differ from accounting income This is sobecause of a fundamental difference in the ends the two concepts serve Accounting attempts to match cost against revenue Tax law is aimed at collecting revenue It is quick to treat an item as income slow to recognize deductions or losses Thus the tax law will not recognize deductions for contingent future losses except in very limited situations Good accounting on the other hand their recognition Once this fundamental difference in approach is accepted income tax accounting methods can be understood more easily 33 Am Jur 2d 688 Under the accrual system income is accruable in the year in which the taxpayers right thereto becomes fixed and definite even though it may not be actually received until a later year while a deduction for a liability is to be accrued and taken when the liability becomes fixed and certain even though it may not be paid until a later year It has been held that the basis of the accrual system of accounting is that obligations incurred in the normal course of business will be discharged in due course that the deductions have been paid or accrued or paid and incurred but in order to be accruable in the taxable year a valid obligation upon which the profit (or loss in the case 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 expend money constituting a deductible loss is the date that fixes liability Gain or loss may not said to be fixed or accrued when the obligation is contingent upon the happening of a future event No duty or liability to pay an income tax upon a transaction arises until the taxable year in which the event constituting the condition precedent occurs under any system ofaccounting

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSCHARITABLE AND OTHER CONTRIBUTIONSROXAS v CTA GR No L-25043 April 26 1968Facts Don Pedro Roxas and Dona Carmen Ayala Spanish subjects transmitted to their grandchildren by hereditary succession several properties To manage the above-mentioned properties said children namely Antonio Roxas Eduardo Roxas and Jose Roxas formed apartnership called Roxas y Compania At the conclusion of the WW2 the tenants who have all been tilling the lands in Nasugbu for generations expressed their desire to purchase from Roxas y Cia the parcels which they actually occupied For its part the Government in consonance with the constitutional mandate to acquire big landed estates and apportion them among landless tenants-farmers persuaded the Roxas brothers to part with their landholdings Conferences were held with the farmers in the early part of 1948 and finally the Roxas brothers agreed to sell 13500 hectares to the Government for distribution to actual occupants for a price of P207904847 plus P30000000 for survey and subdivision expenses It turned out however that the Government did not have funds to cover the purchase price and so a special arrangement was made for the Rehabilitation Finance Corporation to advance to Roxas y Cia The amount of P150000000 as loan Collateral for such loan were the lands proposed to be sold to the farmers Under the arrangement Roxas y Cia allowed the farmers to buy the lands for the same price but by installment and contracted with the Rehabilitation Finance Corporationto pay its loan from the proceeds of the yearly amortizations paid by the farmers The CIR demanded from Roxas y Cia the payment of deficiency income taxes resulting from the inclusion as income of Roxas y Cia of the unreported 50 of the net profits for 1953 and 1955 derived from the sale of the Nasugbu farm lands to the tenants and the disallowance of deductions from gross income of various business expenses and contributions claimed by Roxas y Cia and the Roxas brothers For the reason that Roxas y Cia subdivided its Nasugbu farm lands and soldthem to the farmers on installment the Commissioner considered the partnership as engaged in the business of real estate hence 100 of the profits derived therefrom was taxed The Roxas brothers protested the assessment but inasmuch as said protest was denied they instituted an appeal in the CTA which sustained the assessment Hence this appealIssue Is Roxas y Cia liable for the payment of deficiency income for the sale of Nasugbu farmlandsHeld NO The proposition of the CIR cannot be favorably accepted in this isolated transaction with its peculiar circumstances in spite of the fact that there were hundreds of vendees Although

they paid for their respective holdings in installment for a period of 10 years it would nevertheless not make the vendor Roxas y Cia a real estate dealer during the 10-year amortization period It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled them for generations was not only in consonance with but more in obedience to the request and pursuant to the policy of our Government to allocate lands to the landless It was the bounden duty of the Government to pay the agreed compensation after it had persuaded Roxas y Cia to sell its haciendas and to subsequently subdivide them among the farmers at very reasonable terms and prices However the Government could not comply with its duty for lack of funds Obligingly Roxas y Cia shouldered the Governments burden went out of its way and sold lands directly to the farmers in the same way and under the same terms as would have been the case had the Government done it itself For this magnanimous act the municipal council of Nasugbu passed a resolution expressing the peoples gratitudeIn fine Roxas y Cia cannot be considered a real estate dealer for the sale in question Hence pursuant to Section 34 of the Tax Code the lands sold to the farmers are capital assets and the gain derived from the sale thereof is capital gain taxable only to the extent of 50

DEDUCTIONS AND EXEMPTIONS NON-DEDUCTIBLE EXPENSECIR v JAMIRFacts For the year 1954 Alberto M K Jamir declared a gross income of P7585865 and claimed deductions aggregating P5813450 thereby showing a net income of P1777415 upon which he paid P1634 as income tax The Collector of Internal Revenue however assessed asdeficiency income tax due from him the sum of P16395 Jamir appealed to the Court of Tax Appeals which reduced the amount due as deficiency income tax to P55200Issue Whether Jamir had an undeclared income for the year 1954 aggregating P3127491Held No It appears that by using the so-called expenditures method the Government considered as an undeclared income Jamirs expenditures for February and May were in excess of his reported income for the same months Although the Court of Tax Appeals in effect sanctioned the adoption of the expenditures method it held that the same should be applied by deducting the aggregate yearly expenditures from the declared yearly income not the expenditures incurred each month from the declared income therefor In the case at bar Jamirs total income for the year 1954 (P7585865) exceeded (Pl777415) the total deductions (P5813450) claimed by him Jamir introduced evidence that the said sums of P128124 andP2999367 represented advances made to him by customers in the months of February and may 1954 and that the income derived from the corresponding transactions were entered in his books of account in subsequent months and this explanation was found by the Court of Tax Appeals to have been proven satisfactorily The next question raised by appellant refers to Jamirs claim for car depreciation and salary of his driver Although petitioner had disallowed one-half (12) of these claims it appearing that the car was used by Jamir for personal and business purposes the lower court allowed as deductions three-fourths (34) of said amounts the car having been used by Jamir more for business than for personal purpose Petitionerassails this as an error but considering the circumstances we agree with the deduction of frac34 by the lower court It is next urged that Jamir committed fraud and the 50 surcharge should not have been eliminated But since Jamir did not have the undeclared income of P3127491 upon which the contested assessment is mainly based it follows necessarily that he was not guiltyof the fraud and that the 50 surcharge has been properly eliminatedDisposition the decision appealed from is hereby affirmed

Atlas Consolidated Mining v CIRFacts CIR assessed Atlas deficiency income tax for 1957 to 1958 which amounted to morethan P700K CIR asserted that in 1957 Atlas was still not entitled to exemption fromthe income tax under RA 909 because the same covers only gold mines and Atlas isnot engaged in that Atlasprotested before the Sec of Finance and Sec ruled that exemption provided in RA 909 embraces all new 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 disallowance of the following items transfer agent1048576s fees stockholders relation service fee US stock listing expenses suit expenses provision for contingency CTA disallowed the items except the stockholders relation service fee and suit expenses Also CTA ruled that the exemption from payment of the corporate income tax of Atlas

was good only up to the first quarter of 1958 hence it computed for its net taxable income for the remaining frac34 of the year Atlas appealed asserting that the annual public relations expense is a deductible expense from gross income because it is an ordinary and necessarybusiness expenseIssue WON this fee paid for the services rendered by a public relations firm in the US labeled as stockholders relation service fee is an allowable deductionHeld 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 that deduction is authorized and must be able to prove that he is entitled to the deduction which the law allows As previously adverted to the law allowing expenses as deduction from gross income for purposes of the income tax is Section 30 (a) (1) of the National Internal Revenue which allows a deduction of all the ordinary and necessary expenses paid orincurred during the taxable year in carrying on any trade or business An item of expenditure in order to be deductible under this section of the statute must fall squarely within its language We come then to the statutory test of deductibility where it is axiomatic that to be deductible as a business expense three conditions are imposed namely (1) the expense must be ordinary and necessary (2) it must be paid or incurred within the taxable year and (3) it must be paid or incurred in carrying in a trade or business In addition not only must the taxpayer meet thebusiness test he must substantially prove by evidence or records the deductions claimed under the law otherwise the same will be disallowed The mere allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its deduction Assuming that the expenditure is ordinary and necessary in the operation of the taxpayers business the answer to the question as to whether the expenditure is an allowable deduction as a business expense must be determined from the nature of the expenditure itself which in turn depends on the extent and permanency of the work accomplished by the expenditure The expenditure of P2552314 paid to PK Macker amp Co as compensation for services carrying on the selling campaign in an effort to sell Atlas additional capital stock of P3325000 is not an ordinaryexpense in line with the decision of US Board of Tax Appeals in the case of Harrisburg Hospital Inc vs Commissioner of Internal Revenue Accordingly as found by the Court of Tax Appeals the said expense is not deductible from Atlas gross income in 1958 because expenses relating to 1) recapitalization and reorganization of the corporation 2) the cost of obtaining stock subscription 3)promotion expenses and 4) commission or fees paid for the sale of stock reorganization are capital expenditures The burden of proof that the expenses incurred are ordinary and necessary is onthe taxpayer The claimed business expense must also be supported by appropriate documents such as invoices official receipts and contracts to be made available in case of a tax audit by the Bureau of Internal Revenue

GANCAYCO V COLLECTORFacts1048576 Gancayco filed his Income tax Return (ITR) for 19491048576 CIR notified him that his liability is Php 979362 which he paid 19501048576 CIR after a year wrote to Gancayco saying that there was tax due from him for a total of Php 29554051048576 Gancayco asked for reconsideration and the tax assessed wasreduced1048576 CIR issued a warrant of distraint for the deficient liability1048576 Gancayco filed petition with CTACTA Required Gancayco to pay Php 16 86031 for tax deficiency in1949Gancayco the right to collect the deficiency income tax is barred by thestatute of limitations the 5 yr period for judicial action should be counted from May 12 50 the date of original assessment SC Section 316 provides The civil remedies for the collection of internal revenue taxes fees or charges and any increment thereto resulting from delinquency shall be (a) by distraint of goods chattels or effects and other personal property of whatever character including stocks and other securities debts credits bank accounts and interest in and rights to personal property and by levy upon real property and (b) by judicial action Either of these remedies or both simultaneously may be pursued in the discretion of the authorities charged with the collection of such taxes No exemption shall be allowed against the internal revenue taxes in any case

Deduction for expenses may be allowed however in this case Gancayco was not able to prove any expense as there were no receipts or other proofs CTA AFFIRMED

DEDUCTIONS AND EXEMPTIONS NON-DEDUCTIBLE EXPENSESILLEGAL EXPENSESCALANOC V COLLECTORFacts1048576 Calanoc was authorized to solicit and receive contributions for the orphans and destitute kids of the Child Welfare Workers Club of the Social Welfare Commission1048576 Dec 1949 Calanoc financed and promoted a boxing exhibition at the Rizal Memorial Stadium for said charitable purpose1048576 He applied for exemption from payment of the amusement tax as provided in Sec 260 NIRC1048576 CIR investigated the tax case of Calanoc and it was found that there was gross sale of Php 26553 expenditure of 25157 and profit of 1375301048576 Profit was remitted to Social Welfare Commission1048576 CIR demanded Calanoc oto pay 5331048576 Sec of Finance denied the application of Calanoc for exemption from payment of amusement taxCTA Affirmed the assessment of 7k Calanoc denies receving a stadium fee of 1k Although it was shown that 1k was paid by O-OSO Beverages His accountant is dead SC the items of expenditures for deduction are exorbitant and not supported by receiptsCTA Affirmed

3M PHILIPPINES INC petitioner vs COMMISSIONER OFINTERNAL REVENUE respondent [GR No 82833 September 261988]Facts The petitioner claimed as deductions for income tax purposes business expenses in the form of royalty payments to its foreign licensor which the respondent Commissioner of Internal Revenue disallowed The petitioner claimed the following deductions royalties and technical service fees and pre-operational cost of tape coater The amount was not allowed as entire deduction The petitioner argues that the law applicable to its case is only Section 29(a)(1) of the Tax Code and not Circular No 393 of the Central BankIssue WON the royalty payments are valid deductible expense WON the Tax Code is applicableHeld No Although the Tax Code allows payments of royalty to be deducted from gross income as business expenses it is CB Circular No 393 that defines what royalty payments are proper Improper payments of royalty are not deductible as legitimate business expenses Section 3-c of CB Circular No 393 provides for payment of royalties only on commodities manufactured by the licensee under the royalty agreement not on the wholesale price of finished products imported by the licensee from the licensor entral Bank Circulars like CB Circular No 393 (dated December 7 1973 published in the Official Gazette issue of December 17 1973 [69 OG No 51 p 11737] issued by the Central Bank in the exercise of fits authority under the Central Bank Act duly published in the Official Gazette have the force and effect of law (Cases cited) andbinding on everybody

DEDUCTIONS AND EXEMPTIONS PERSONAL EXEMPTIONSCOLLECTOR OF INTERNAL REVENUE petitioner vs ORLANDO VCALSADO and COURT OF TAX APPEALS respondents [GR 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 supportIssue WON the respondent is classified as head of the familyHeld 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 Php50000

In the matter of the adoption of the minor MARCIAL ELEUTERIO RESABA LUIS SANTOS-YNtildeIGO and LIGIA MIGUEL DE SANTOSYNtildeIGO petitioners-appellees vs REPUBLIC OF THE PHILIPPINES oppositor-appellantTAX ON CORPORATIONS BASES AND RATESRESIDENT FOREIGN CORPORATIONS TAXABLE INCOME [GRNo 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 minorIssue WON the adoption is validHeld 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 suchagreement 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 bymarriage 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 childrenwith 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 or main support Partial support not amounting to chief support will not entitle the taxpayer to claim exemption as a head of a family Regulation No section 11

were one and the same corporation the former being the subsidiary of the latter Yutivo alleged the following before the Court of Tax Appeals (1) that there is no valid ground to disregard the corporate personality of SM and to hold that it is an adjunct of petitioner Yutivo (2) that assuming that the separate personality of SM may be disregarded the sales tax alreadypaid by Yutivo should first be deducted from the selling price of SM in computing the sales tax due on each vehicle and (3) that the surcharge has been erroneously imposed by the CIR The CTA ruled in favor of CIR and ruled that the creation of SM is for Yutivo to evade taxes as it isowned and controlled by Yutivo and is a mere subsidiary branch adjunct conduit instrumentality or alter ego of the latter Issue Whether or not SM has a personality separate and distinct from YutivoHeld It is an elementary and fundamental principle of corporation law that a corporation is an entity separate and distinct from its stockholders and from other corporations to which it may be connected However when the notion of legal entity is used to defeat public conveniencejustify wrong protect fraud or defend crime the law will regard the corporation as an association of persons or in the case of two corporations merge them into one When the corporation is the mere alter ego or business conduit of a person it may be disregardedHowever SM was not organized purposely as a tax evasion device Moreover it runs counter to the fact that there was no tax to evade The intention to minimize taxes when used in the context of fraud must be proved to exist by clear and convincing evidence amounting to more than mere preponderance and cannot be justified by a mere speculation This is because fraud is never lightly to be presumed The SC however agreed that SM was actually owned and controlled by petitioner as to make it a mere subsidiary or branch of the latter created for the purpose of selling the vehicles at retail and maintaining stores for spare parts as well as service repair shops Consideration of various other circumstances especially when taken together indicates that Yutivo treated SM merely as its department or adjunct For one thing the accounting system maintained by Yutivo shows that it maintained a high degree of control over SM accounts All transactions between Yutivo and SM are recorded and effected by mere debit or credit entries against the reciprocal account maintained in their respective books of accounts and indicate the dependency of SM as branch upon Yutivo

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSORDINARYNECESSARY BUSINESS EXPENSESATLAS CONSOLIDATED MINING amp DEVT CORP VSCOMMISSIONER OF INTERNAL REVENUEFacts Atlas Consolidated Mining amp Devt Corp is a corporation engaged in the mining industry It was assessed deficiency income tax for the year 1958 as a result of the disallowance of certain items claimed by the company as deductions from its gross income Atlas claimed the following items as deductible from its gross income (1) transfer agentrsquos fee (2) stockholders relation service fee (3) US stock listing expenses (4) suit expenses (5) provision for contingencies TheCommissioner of Internal Revenue disallowed all these items Atlas elevated the issue to the Court of Tax Appeals The CTA rendered a decision allowing the said items except for the stockholders relation service fee and the suit expenses Both Atlas and the CIR went to the Supreme Court to appeal the CTA decision In GR No L-26911 Atlas argues that the CTA should not have disallowed the stockholders relation service fee The corporation contends that such fee constitutes an ordinary and necessary business expense and should therefore be allowed as a deductible expense from the companyrsquos gross income In GR No L-26924 the CIR argues that the transfer agentrsquos fee and the US stock listing fee should not have been allowed as deductions from gross income in the absence of proof of payment for such expenses The CIR also argues that the US stock listing expenses should be disallowed for not being ordinary and necessary and not incurred in trade or business as required under Sec 30 (a) (1) of the National Internal Revenue Code The CIR also contends that the correct amount of disallowance for suit expenses should be PhP 1749998 and not PhP 666665Issue In GR No L-26911 whether or not the expenses paid for the services rendered by a public relations firm P K Macker amp Co labeled as stockholders relation service fee is an allowable deduction as business expense In GR No L-26924 whether or not the transfer agentrsquos fee and the US stock listing fee should have been allowed as deduction in the absence of proof of payments Whether or not the US stock listing expenses should be disallowed for not

being ordinary and necessary and not incurred in trade or business Whether PhP 1749998 or PhP 666665 is the correct amount of disallowance for suit expensesHeld GR No L-26911 Under Sec 30 (a) (1) of the Tax Code three conditions have to be complied with before a business expense is allowed as a deduction from gross income (1) the expense must be ordinary and necessary (2) it must be paid or incurred within the taxable year and (3) it must be paid or incurred in carrying a trade or business The Court sustained the ruling of the CTA that the expenditure paid to P K Macker amp Co denominated as stockholders relation service fee is not an ordinary expense The fee was paid to the PR firm as ompensationfor services carrying on the selling campaign in an effort to sell Atlasrsquo additional capital stock Such is not an ordinary expense because according to the Court expenses relating to the recapitalization and reorganization of a corporation the cost of obtaining stock subscriptionpromotion expenses and commission or fees paid for the sale of stock reorganization are capital expenditures The stockholders relation service fee is not deductible from Atlasrsquo gross incomeGR No L-26924 The Court agreed with the CTA that the CIR cannot raise the issue of payment for the first time on appeal The fact of payment was never controverted by the CIR during the proceedings Failure to assert a question within a reasonable time warrants a presumption that the party entitled to assert it either has abandoned or declined to assert it The Court held that the US stock listing fee is an ordinary and necessary business expense and was correctly allowed by the CTA as a deduction The stock listing fee is paid annually to a stock exchange for the privilege of having Atlasrsquo stock listed A single payment made to the stock exchange is considered a capital expenditure (Domes Mines case) However payments to the stock exchange made annually or in a recurring manner are considered ordinary and necessary business expenses (Chesapeake Corporation case) The fees paid by Atlas partake of the latter The Court reiterated that it is well-settled that litigation expenses incurred in defense or protection of title are capital in nature and not deductible The Court sustained the CIR that the correct amount of disallowance for litigation or suit expenses is PhP 1749998

VISAYAN CEBU TERMINAL CO INC VS COLLECTOR OFINTERNAL REVENUEFacts Visayan Cebu Terminal Co Inc is a corporation organized for the purpose of handling arrastre operations in the port of Cebu Visayan filed its income tax return for 1951 claiming the following items as deductions from the companyrsquos gross income (1) salaries (2) representationexpenses (PhP 7585588) and (3) miscellaneous expenses The Collector of Internal Revenue disallowed the entire amount of representation expenses The Court of Tax Appeals allowedrepresentation expenses but set the limit at PhP 1000000Issue Whether or not the full amount of representation expenses should be allowed as a deduction from Visayanrsquos gross incomeHeld The Court sustained the Tax Court in holding that representation expenses fall under the category of business expenses which are allowable deductions from gross income if they meet the following requisites laid down in the Tax Codemdashthey must be ordinary and necessary expense paid or incurred in carrying on any trade or business and they must meet the test of reasonableness in amount The Court further agreed with the computation made by the CTA Because of the companyrsquos failure to provide evidence for all such expenses (the corporation claims that the supporting papers were destroyed when the house of the company treasurer where the records were kept was burned) the Court should determine from all available data the amount properly deductible as representation expenses The Court sustained the finding of the CTA that PhP 1000000 may be considered reasonably necessary as the companyrsquos representation expenses based on figures presented during the proceedings

KUENZLE amp STREIFF INC vs THE COLLECTOR OF INTERNALREVENUEFacts Petitioner claimed as a deduction for income tax purposes for the years 1950 1951 and 1952 salaries directors fees and bonuses of its non-resident president and vice-president bonuses of some of its resident officers and employees and interests on earned but unpaidsalaries and bonuses of its officers and employees Petitioner gave to its non-resident president and vice president for the years 1950 and 1951 bonuses equal to 133-12 of their annual salaries and bonuses equal to 125 23 for the year 1952 Petitioner however gave its resident

officers and employees higher bonuses on the alleged reason because of their valuable contribution to the business of the corporation which has made it possible for it to realize huge profits during the aforesaid years The respondent disallowed the said deductions hence they were assessed for deficiency income taxes Upon re-examination by the respondents they allowed as deductions all items comprising directors fees and salaries of the non-resident president and vice president but disallowing the bonuses insofar as they exceed the salaries of the recipients as well as the interests on earned but unpaid salaries and bonusesIssue WON the excessive bonuses and interest should be allowed as a deduction for income tax purposesHeld No Bonuses to employees made in good faith and as additional compensation for the services actually rendered by the employees are deductible provided such payments when added to the stipulated salaries do not exceed a reasonable compensation for the servicesrendered Requisites for deductibility of employee bonuses (1) the payment of the bonuses is in fact compensation (2) it must be for personal services actually rendered and (3) the bonuses when added to the salaries are reasonable when measured by the amount and quality of the services performed with relation to the business of the particular taxpayer There is no fixed test for determining the reasonableness of a given bonus as compensation Deductible amount of bonuses is not limited to the amount of salary of its recipient The prevailing circumstancesshould be considered However In this case the bonuses given to resident employees were higher than its non-resident officers on the reason that the resident officers and employees had performed their duty well and rendered efficient service It does not necessarily follow that they should be given greater amount of additional compensation in the form of bonuses than what was given to the non-resident officers The non-resident officers had rendered the same amount of efficient personal service and contribution to deserve equal treatment in compensation andother emoluments with the particularity that their liberation yearly salaries had been much smaller Interest should also be disallowed Under the law in order that interest may be deductible it must be paid on indebtedness (Section 30 (b) (1) of the National Internal Revenue Code) It is therefore imperative to show that there is an existing indebtedness which may be subjected to the payment of interest Here the items involved are unclaimed salaries andbonus participation which in our opinion cannot constitute indebtedness within the meaning of the law because while they constitute an obligation on the part of the corporation it is not the latters fault if they remained unclaimed The willingness of the corporation to pay interest thereon cannot be considered a justification to warrant deduction

ALHAMBRA CIGAR amp CIGARETTE MANUFACTURING COMPANYpetitioner-appellant vs THE COMMISSIONER OF INTERNALREVENUE respondent-appellee[GR No L-23226 November 28 1967]Facts The petitioner claimed as deductible expense for income tax purposes salaries bonuses commissions and directorrsquos fees paid to A P Kuenzle and H A Streiff who were the President and Vice-President respectively of the petitioner The Commissioner of Internal Revenuedisallowed a portion of the bonus commission and directorrsquos fees as deductions Hence was assessed for deficiency income taxIssue WON the bonuses directorrsquos fees and commissions are valid deductions for income tax purposesHeld No Whenever a controversy arises on the deductibility for purposes of income tax of certain items for alleged compensation officers of a corporation it is necessary to determine whether personal services have been actually rendered by said officers and in theaffirmative what is the reasonable allowance therefor As correctly held by the court of tax appeals The bonus paid to each of said officers was reduced to the amount equivalent to that paid to Mr W Eggmann the resident Treasurer and Manager of petitioner Petitioner seeks to justify the increase in the salaries of Messrs Kuenzle and Streiff on the ground of increased costs of living The said officers of petitioner are however non-residents of the PhilippinesAs to commissions and directors fees there is no evidence of any particular service rendered by them to petitioner to warrant payment of commissions There is also no justification for the payment of the directorrsquos fees Being non-resident President and Vice- President of Petitioner corporation of which they are the controlling stockholders said commissions and directors fees

payment of which was based on a certain percentage of the annual profits of petitioner are in the nature of dividend distributions

AGUINALDO INDUSTRIES CORPORATION (FISHING NETSDIVISION) vs COMMISSIONER OF INTERNAL REVENUE and THECOURT OF TAX APPEALSFacts Upon investigation of petitioners 1957 income tax returns of its Fish Nets Division the Bureau of Internal Revenue examiner found that the amount of P6118748 was deducted from the gross income as additional remuneration paid to the officers of petitioner and that such amount was taken from the net profit which petitioner derived from an isolated transaction (sale of a parcel of its land) which is not in the course of or carrying on of petitioners trade or business The examiner recommended disallowance of the deduction but petitioner insistedotherwise claiming that the payment of the allowance or bonus was pursuant to its by-laws The Court of Tax Appeals held the petitioner liable for deficiency income tax plus surcharge and interestIssue WON the profit derived from the sale of its land is tax-exempt income under Republic Act No 901Held No Petitioner may not raise the question of tax exemption for the first time on review where such question was not raised at the administrative forumIssue WON the bonus given to the officers of petitioner as share in the profit realized from the sale of the land is deductible expense for tax purposesHeld No The bonus given should be considered as deductible for income tax purposes only if payment was made for service actually rendered and it is reasonable and necessary The records show 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 petitioners officers which could be the basis of a grant to them of a bonus out of the profit derived from the sale Thus the payment of a bonus to them out of the gainrealized from the sale cannot be considered as a selling expense nor can it be deemed reasonable and necessary so as to make it deductible for tax purposes

COLLECTOR OF INTERNAL REVENUE petitioner vs GOODRICHINTERNATIONAL RUBBER CO respondent[GR No L-22265 December 22 1967]Facts The CIR disallowed the bad debts and representation expense claimed as deduction of the respondent for tax purposes According to Goodrich the claim for deduction of the representation expense is based upon receipts issued not by the entities in which the alleged expenses had been incurred but by the officers of Goodrich who allegedly paid them To collect for the alleged bad debts the respondent sent demand letters There were subsequent collections after the debts have been writtenIssue WON the representation expense are valid deductions Held No If the expenses had really been incurred receipts or chits would have been issued by the 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 incurred and paid said expenses They do not establish payment of said alleged expenses to the entities in which the same are said to have been incurredIssue WON the bad debts are valid deduction for income tax purposesHeld No The ascertainment of worthlessness of bad debts requires proof of two facts (1) that the taxpayer did in fact ascertain the debt to be worthless in the year the deduction is sought and (2) in so doing he acted in good faith Good faith is not enough The taxpayer must showthat he had reasonably investigated the relevant facts and had drawn a reasonable inference from the information thus obtained by him In this case there were payments made after it has been written off and proves that there is undue haste in claiming it as bad debts Respondent has not proven that said debts were worthless There is no evidence that thedebtors cannot pay them

COLLECTOR OF INTERNAL REVENUE petitioner vs ALBERTO MK JAMIR respondent

[GR No L-16552 March 30 1962]Facts The CIR assessed the respondent for deficiency income taxes The Petitioner claimed that the respondent under declared its income based on the expenditure method The petitioner considered as an undeclared income so much of respondents expenditures for said months as was in excess of his reported income for the same monthsIssue WON the expenditure method was properly applied Held No The expenditures method of determining income should be applied by deducting the aggregate yearly expenditures from the declared yearly income not the expenditures incurred each month from the declared income therefor In this case the respondent properly explained that the income derived from the advances from customers were entered in his books of account in subsequent months Issue WON the deduction for car depreciation and driverrsquos expense is properHeld Yes In this case the car was used by Jamir for both personal and business purposes the lower court allowed as deductions three-fourths (34) of said amounts the car having been used by Jamir more for business than for personal purposes

HOSPITAL DE SAN JUAN DE DIOS INC vs COMMISSIONER OFINTERNAL REVENUEFacts Petitioner is engaged in both taxable and non-taxable operations For the years 1952 to 1955 the petitioner allocated its administrative expenses The respondent disallowed however the interests and dividends from sharing in the allocation of administrative expenses on the ground that the expenses incurred in the administration or management of petitioners investments are not allowable business expenses inasmuch as they were not incurred in carrying on any trade or business within the contemplation of Section 30 (a)(1) of the RevenueCode Hence were assessed for deficiency income taxesIssue WON administrative expenses should be considered as a deductionallocated to its interest and dividend income for income tax purposesHeld No the principle of allocating expenses is grounded on the premise that the taxable income was derived from carrying on a trade or business as distinguished from mere receipt of interests and dividends from ones investments the Court of Tax Appeals correctly ruled thatsaid income should not share in the allocation of administrative expenses Hospital de San Juan De Dios Inc according to its Articles of Incorporation was established for purposes which are benevolent charitable and religious and not for financial gain It is not carrying on a trade or business for the word business in its ordinary and common use means human efforts which have for their end living or reward it is not commonly used as descriptive of charitable religious educational or social agencies or any particular occupation or employment habitually engaged in especially for livelihood or gain or activities where profit is the purpose or livelihood is the motive

FELIX MONTENEGRO INC petitioner vs COMMISSIONER OFINTERNAL REVENUE respondent[CTA CASE NO 695 April 30 1969]Facts The CIR disallowed salaries of some of its officers value of medicines campaign contribution and miscellaneous expense as deduction for income tax purposes hence the petitioner was assessed for deficiency income taxes The deduction of salaires was disallowedbecause the said officers are also stockholders of the corporation and that their salaries are excessive compared to those of officers of other corporation holding similar positions and doing the same volume of businessIssue WON the salaries and expenses should be allowed as a deductionHeld 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 There is no comparative study of the profits of the two enterprises in relation toother concerns similarly situated Neither is there any comparative study of the peculiar situation of the two enterprises in relation to other concerns nor is there a comparison of the nature and volume of the work performed by the officers involved Since no two business enterprises are exactly in the same situation negligible differences in salaries cannot reasonably show that the salary is excessive or that profits are channeled to the stockholders thru salariesIssue WON the value of medicines is a deductible loss

Held No Aside from self serving testimonial evidence no other evidence was presented to substantiate this claim of petitioner There is not even a list of the medicines their value and their expiry dates The deductible as loss on the ground that the aforesaid medicines were nolonger fit for sale as the dates of their efficacy have expired should be disallowedIssue WON campaign contribution should be allowed as a deductionHeld No Amount expended for political campaign purposes or payments to campaign funds are not deductible either as business expenses or as contribution

COLLECTOR V PHILIPPINE EDUCATION COFACTS 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 04548 to prepare and prove itrsquos war damage claim In filing its income tax return respondentclaimed said sum as deduction under section 30 of the NIRC Petitioner disallowed the same and instead assessed additional P240514 as deficiency income tax CTA reversed upon appeal and declared respondent exempt from the deficiency income tax in questionISSUE Whether or not the expense in question was ordinary and necessary and whether or not it was paid or incurred in carrying on respondentrsquos businessHELD Yes The law does not say that the expense must be for or on account of transactions in onersquos trade or business Ordinarily an expense will be considered necessary where the expenditure is appropriate and helpful in the development of the taxpayerrsquos business It is sufficient that the expense were incurred for purposes proper to the conduct of the corporate affairs or for the purpose of realizing a profit or of minimizing a loss The fee in question was paid by the respondent to recover its lost assets occasioned by the war and thereby to be so rehabilitated as to be able to carry on its business Also it should be noted that even if there is no law exempting the proceeds of war damage claims from taxes the war damage compensation would still not be subject to tax not being an income Compensation for injury to capital is never incomeDOCTRINE To carry on its business the taxpayer not only must have sufficient assets but must preserve the same and recover any that should be lost The fee or expense paid to recover its lost assets occasioned by the war 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 account of transactions in onersquos trade or business

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSINTEREST EXPENSECIR v PALANCAFACTS Don Carlos Palanca Sr donated in favor of his son the petitioner herein shares of stock in La Tondentildea Inc amounting to 12500 shares For failure to file a return on the donation within the statutory period the petitioner was assessed the sums of P9769123 P2444281 and P4786870 as gift tax 25 surcharge and interest respectively which he paid on June 22 1955 The petitioner filed with the BIR his income tax return for the calendar year 1955 claiming among others a deduction for interest amounting to P970645 and reporting a taxable income of P6598212 On the basis of this return he was assessed the sum of P2105291 as income tax which he paid as follows Petitioner filed an amended return for the calendar year 1955 claiming therein an additional deduction in the amount of P4786870 representing interest paid on the donees gift tax thereby reporting a taxable net income of P1811342 and a tax due thereon in the sum of P316700 The claim for deduction was based on the provisions of Section 30(b) (1) of the Tax Code which authorizes the deduction from gross income of interest paid within the taxable year on indebtedness A claim for the refund of alleged overpaid income taxes for the year 1955 amounting to P1788501 which is the difference between the amount of P2105201 he paid as income taxes under his original return and of P316700 was filed together with this amended return BIR denied the claim On August 12 1958 the petitioner once more filed an amended income tax return for the calendar year 1955 claiming in addition to the interest deduction of P907645 appearing in his original return a deduction in the amount of P6058180 representing interest on the estate and inheritance taxes on the 12500 shares of stock thereby reporting a net taxable income for 1955 in the amount of P540032 and an income tax due thereon in the sum of P42800 Again this was denied CTA reversed

ISSUES 1) Whether the amount paid by respondent Palanca for interest on his delinquent estate and inheritance tax is deductible from the gross income for that year under Section 30 (b) (1) of the Revenue Code 2) Whether the claim for refund has prescribedHELD 1) Yes 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 We do not see any element in this case which can justify a departure from or abandonment of the doctrine in the Prieto case In both this and the said case the taxpayer sought the allowance as deductible items from the gross income of the amounts paid by them as interests on delinquent tax liabilities Of course what was involved in the cited case was the donors tax while the present suit pertains to interest paid on the estate and inheritance tax This difference however submits no appreciable consequence to the rationale of this Courts previous determination thatinterests on taxes should be considered as interests on indebtedness within the meaning of Section 30(b) (1) of the Tax Code 2) No The 30-day period under Section 11 of Republic Act 1125 did not even commence to run in this incident It should be recalled that while the herein petitioner originally assessed the respondent-claimant for alleged gift tax liabilities the said assessment was subsequently abandoned and in its lieu a new one was prepared and served on the respondent-taxpayer In this new assessment the petitioner charged the said respondent with an entirely new liability and for a substantially different amount from the first While initially the petitioner assessed the respondent for donees gift tax in the amount of P17000274 in thesubsequent assessment the latter was asked to pay P19159162 for delinquent estate and inheritance tax Considering that it is the interest paid on this latter-assessed estate and inheritance tax that respondent Palanca is claiming refund for then the thirty-day period under the abovementioned section of Republic Act 1125 should be computed from the receipt of the final denial by the Bureau of Internal Revenue of the said claim In the second place the claim at bar refers to the alleged overpayment by respondent Palanca of his 1955 income tax Inasmuch as the said account was paid by him by installment then the computation of the two year prescriptive period under Section 306 of the National Internal Revenue Code should be from the date of the last installmentDOCTRINE 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 VIUDA DE PRIETOFACTS Respondent conveyed by way of gifts to her four children namely Antonio Benito Carmen and Mauro all surnamed Prieto real property with a total assessed value of P89249750 After the filing of the gift tax returns on or about February 1 1954 the petitioner CIR appraised the real property donated for gift tax purposes at P123126800 and assessed the total sum of P11770650 as donors gift tax interest and compromises due thereon Of the total sum of P11770650 paid by respondent on April 29 1954 the sum of P5597865 represents the total interest on account of deliquency This sum of P5597865 was claimed as deduction among others by respondent in her 1954 income tax return Petitioner howeverdisallowed the claim and as a consequence of such disallowance assessed respondent for 1954 the total sum of P2141038 as deficiency income tax due on the aforesaid P5597865 including interest up to March 31 1957 surcharge and compromise for the late payment Under the law for interest to be deductible it must be shown that there be an indebtedness that there should be interest upon it and that what is claimed as an interest deduction should have been paid or accrued within the year It is here conceded that the interest paid by respondent was in consequence of the late payment of her donors tax and the same was paid within the year it is sought to be declaredISSUES Whether or not such interest was paid upon an indebtedness within the contemplation of section 30 (b) (1) of the Tax Code HELD Yes The term indebtedness as used in the Tax Code of the United States containing similar provisions as in the above-quoted section has been defined as an unconditional and legally enforceable obligation for the payment of money Although taxes already due have not strictly speaking the same concept as debts they are however obligations that may be considered as such The term debt is properly used in a comprehensive sense as embracing not merely money due by contract but whatever one is bound to render to another either for contract or the requirement of the law It follows that the interest paid by herein respondent for the late payment of her donors tax is deductible from her gross income under section 30(b) of

the Tax Code above quoted This conclusion finds support in the established jurisprudence in the United States after whose laws our Income Tax Law has been patterned Thus under sec 23(b) of the Internal Revenue Code of 1939 as amended which contains similarlyworded provisions as sec 30(b) of our Tax Code the uniform ruling is that interest on taxes is interest on indebtedness and is deductibleDOCTRINE The term indebtedness as used in the Tax Code of the United States containing similar provisions as in the abovequoted section has been defined as an unconditional and legally enforceable obligation for the payment of money

PAPER INDUSTRIES V CAFACTS Petitioner is registered with the BOI as a preferred pioneer enterprise with respect to its integrated pulp and paper mill and as a preferred non-pioneer enterprise with respect to its integrated plywood and veneer mills It received from the CIR two (2) letters of assessmentand demand (a) one for deficiency transaction tax and for documentary and science stamp tax and (b) the other for deficiency income tax for 1977 for an aggregate amount of P8876325500 Picop protested the assessment of deficiency transaction tax and documentary and science stamp taxes These protests were not formally acted upon by respondent CIR On 26 September 1984 the CIR issued a warrant of distraint on personal property and a warrant of levy on real property against Picop to enforce collection of the contested assessments in effect the CIR denied Picops protests Thereupon Picop went before the CTA Picop and the CIR both went to the Supreme Court on separate Petitions for Review of the above decision of the CTA In two (2) Resolutions dated 7 February 1990 and 19 February 1990 respectively the Court referred the two (2) Petitions to the Court of Appeals The Court of Appeals consolidated the two (2) cases and rendered a decision dated 31 August 1992 which further reduced the liability of Picop to P633835470 Picop now maintains that it is not liable at all to pay any of theassessments or any part thereof It assails the propriety of the thirty-five percent (35) deficiency transaction tax which the Court of Appeals held due from it in the amount of P357854351 Picop also questions the imposition by the Court of Appeals of the deficiency income tax of P148157915 resulting from disallowance of certain claimed financial guarantee expenses and claimed year-end adjustments of sales and cost of sales figures by Picops external auditors 3 The CIR upon the other hand insists that the Court of Appeals erred infinding Picop not liable for surcharge and interest on unpaid transaction tax and for documentary and science stamp taxes and in allowing Picop to claim as deductible expensesISSUES 1) Whether Picop is liable for the thirty-five percent (35) transaction tax 2) Whether Picop is liable for interest and surcharge on unpaid transaction tax 3) Whether Picop is entitled to deduct against current income interest payments on loans for the purchase of machinery and equipment 4) Whether Picop is entitled to deduct against current income net operating losses incurred by Rustan Pulp and Paper Mills Inc 5) Whether Picop is entitled to deduct against current income certain claimed financial guarantee expenses 6) Whether Picop had understated its sales and overstated its cost of sales for 1977 7) Whether Picop is liable for the corporate development tax of five percent (5) of its income for 1977 HELD 1) We agree with the CTA and the Court of Appeals that Picops tax exemption under RA No 5186 as amended does not include exemption from the thirty-five percent (35) transaction tax In the first place the thirty-five percent (35) transaction tax is an income tax that is it is a tax on the interest income of the lenders or creditors It is thus clear that the transaction tax is an income tax and as such in any event falls outside the scope of the tax exemption granted to registered pioneer enterprises by Section 8 of RA No 5186 as amended 2) Section 51 (c) and (e) of the 1977 Tax Code did not authorize the imposition of a surcharge and penalty interest for failure to pay the thirtyfive percent (35) transaction tax imposed under Section 210 (b) of the same Code The corresponding provision in the current Tax Code veryclearly embraces failure to pay all taxes imposed in the Tax Code without any regard to the Title of the Code where provisions imposing particular taxes are textually located Tax exemptions are to be sure to be strictly construed that is they are not to be extended beyond the ordinary and reasonable intendment of the language actually used by the legislative authority in granting the exemption The issuance of debenture bonds is certainly conceptually distinct from pulping and paper manufacturing operations But no one contends that issuance of bonds was a principal or regular business activity of Picop only banks or other financial institutions are in the

regular business of raising money by issuing bonds or other instruments to the general public3) We have already noted that our 1977 NIRC does not prohibit the deduction of interest on a loan incurred for acquiring machinery and equipment Neither does our 1977 NIRC compel the capitalization of interest payments on such a loan The 1977 Tax Code is simply silent ona taxpayers right to elect one or the other tax treatment of such interest payments Accordingly the general rule that interest payments on a legally demandable loan are deductible from gross income must be applied We conclude that the CTA and the Court of Appeals did not err in allowing the deductions of Picops 1977 interest payments on its loans for capital equipment against its gross income for 1977 4) After prolonged consideration and analysis of this matter the Court is unable to agree with the CTA and Court of Appeals on the deductibility of RPPMs accumulated losses against Picops 1977 gross income It is important to note at the outset that in our jurisdiction the ordinary rule mdash that is the rule applicable in respect of corporations notregistered with the BOI as a preferred pioneer enterprise mdash is that net operating losses cannot be carried over Under our Tax Code both in 1977 and at present losses may be deducted from gross income only if such losses were actually sustained in the same year that they are deducted or charged off Thus it is that RA No 5186 introduced the carry-over of net operatinglosses as a very special incentive to be granted only to registered pioneer enterprises and only with respect to their registered operations In the instant case to allow the deduction claimed by Picop would be to permit one corporation or enterprise Picop to benefit from the operatinglosses accumulated by another corporation or enterprise RPPM In effect to grant Picops claimed deduction would be to permit Picop to purchase a tax deduction and RPPM to peddle its accumulated operating losses We consider and so hold that there is nothing in Section 7 (c) ofRA No 5186 which either requires or permits such a result Indeed that result makes non-sense of the legislative purpose which may be seen clearly to be projected by Section 7 (c) RA No 5186 We conclude that the deduction claimed by Picop in the amount of P4419610600 in its 1977 Income Tax Return must be disallowed 5) We must support the CTA and the Court of Appeals in their foregoing rulings A taxpayer has the burden of proving entitlement to a claimeddeduction Even Picops own vouchers were not submitted in evidence and the BIR Examiners denied that such vouchers and other documents had been exhibited to them Moreover cash vouchers can only confirm the fact of disbursement but not necessarily the purpose thereof6) The CIR has made out at least a prima facie case that Picop had understated its sales and overstated its cost of sales as set out in its Income Tax Return For the CIR has a right to assume that Picops Books of Accounts speak the truth in this case since as already notedthey embody what must appear to be admissions against Picops own interest7) The adjusted net income of Picop for 1977 as will be seen below is P4868735500 Its net worth figure or total stockholders equity as reflected in its Audited Financial Statements for 1977 is P46474952800 Since its adjusted net income for 1977 thus exceeded ten percent (10) of its net worth Picop must be held liable for the five percent (5) corporate development tax in the amount of P243436775 DOCTRINE It is thus clear that the transaction tax is an income tax andas such in any event falls outside the scope of the tax exemptiongranted to registered pioneer enterprises by Section 8 of RA No 5186as amended

CIR v ITOGON-SUYOC MINES INCFACTS Respondent Itogon-Suyoc Mines Inc the taxpayer involved duly paid in full its liability according to its income tax return for the fiscal year 1960-61 Instead it deducted right away the amount represented by claim for refund filed eight (8) months back for the previous years income tax for which it was not liable at all so it alleged as it suffered a loss instead a claim subsequently favorably acted on by petitioner Commissioner of Internal Revenue but after the date of such payment of the 1960-1961 tax Accordingly an interest in the amount of P151283was charged by petitioner Commissioner of Internal Revenue on the sum withheld on the ground that no deduction on such refund should be allowed before its approval When the matter was taken up before the Court of Tax Appeals the above assessment representing interest wasset aside in the decision of September 30 1965ISSUES Whether CTA should not have absolved respondent corporation from liability to pay the sum of P151283 as 1 monthly interest for delinquency in the payment of income tax for the fiscal year 1960-1961

HELD No It could not be error for the Court of Tax Appeals considering the admitted fact of overpayment entitling respondent to refund to hold that petitioner should not repose an interest on the aforesaid sum of P1315520 which after all was paid to and received by the governmenteven before the incidence of the tax in question It would be according to the Court of Tax Appeals unfair and unjust to do so We agree but we go farther The imposition of such an interest by petitioner is not supported by lawThe National Internal Revenue Code provides that interest upon the amount determined as a deficiency shall be assessed and shall be paid upon notice and demand from the Commissioner of Internal Revenue There is no question respondent was entitled to a refund Instead of waiting for the sum involved to be delivered to it it deducted the said amount from the tax that it had to pay That it 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 time such a deduction was made the Commissioner of Internal Revenue had not as yet approved such a refund It is an admitted fact though that respondent was clearly entitled to it and petitioner did not allege otherwise Nor could he do so Under all the circumstances disclosed therefore the applicability of the legal provision allowing such a deduction from the amount of the tax to be paid cannot be disputed DOCTRINE It could not be error for the Court of Tax Appeals considering the admitted fact of overpayment entitling respondent to refund to hold that petitioner should not repose an interest on the aforesaid sum of P1315520 which after all was paid to and received by the government even before the incidence of the tax in question

CASTRO v COLLECTORFacts This is an appeal from a decision of the Court of Tax Appeals (in its CTA Case 141) holding petitioner Maria B Castro liable under the War Profits Tax Law Republic Act No 55 and ordering her to pay a deficiency war profits tax (including surcharges and interest) in theamount of P136051466 and costs Castro was previously acquitted in the criminal case instituted against her for violation of the War Profits Tax LawIssue WON the acquittal is a bar to the collection of the taxes assessed and specially of the 50 surchargeHeld NO With regard to the tax proper the state correctly points out in its brief that the acquittal in the criminal case could not operate to discharge petitioner from the duty to pay the tax since that duty is imposed by statute prior to and independently of any attempts on the part of the taxpayer to evade 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 declaration that the criminal acts charged did not exist As to the 50 surcharge the very United States Supreme Court that rendered the Coffey decision has subsequently pointed out that additions of this kind to the main tax are not penalties but civil administrative sanctions provided primarily as a safeguard for the protection of the state revenue and to reimburse the government for the heavy expense of investigation and the loss resulting from the taxpayers fraud (Helvering vs Mitchell 303 US 390 82 L Ed 917 Spies vs US 317 US 492) This is made plain by the fact that such surcharges are enforceable like the primary tax itself by distraint or civil suit and that they are provided in a section of RA No 55 (section 5) that is separate and distinct from that providing for criminal prosecution (section 7) We conclude that the defense of jeopardy and estoppel by reason of the petitioners acquittal isuntenable and without merit Whether or not there was fraud committed by the taxpayer justifying the imposition of the surcharge is an issue of fact to be inferred from the evidence and surrounding circumstances and the finding of its existence by the Tax Court is conclusive upon us (Gutierrez v Collector GR No L-9771 May 31 1951 Perez vs Collector supra)

COLLECTOR v FISHERFacts This case relates to the determination and settlement of the hereditary estate left by the deceased Walter G Stevenson and the laws applicable thereto Walter G Stevenson (born in the Philippines on August 9 1874 of British parents and married in the City of Manila on January 23 1909 to Beatrice Mauricia Stevenson another British subject) died on February 22 1951 in San Francisco California USA whereto he and his wife moved and established their permanent residence since May 10 1945 In his will executed in San Francisco on May 22 1947 and which was duly probated in the Superior Court of California on April 11 1951

Stevenson instituted his wife Beatrice as his sole heiress to the following real and personal properties acquired by the spouses while residing in the PhilippinesIssue 1 Whether or not the estate is entitled to the following deductions P860439 for judicial and administration expenses P208652 for funeral expenses P65250 for real estate taxes andP1002247 representing the amount of indebtedness allegedly incurred by the decedent during his lifetime 2 Whether or not the estate is entitled to the payment of interest on the amount it claims to have overpaid the government and to be refundable to itHeld 1 YES An examination of the record discloses however that the foregoing items were considered deductible by the Tax Court on the basis of their approval by the probate court to which said expenses we may presume had also been presented for consideration It is to besupposed that the probate court would not have approved said items were they not supported by evidence presented by the estate In allowing the items in question the Tax Court had before it the pertinent order of the probate court which was submitted in evidence by respondents (Exh AA-2 p 100 record) As the Tax Court said it found no basis for departing from the findings of the probate 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 National Association which it would appear that while still living Walter G Stevenson obtained we are not inclined to pass upon the claim of respondents in respect to theadditional amount of P8652 for funeral expenses which was disapproved by the court a quo for lack of evidence In connection with the deduction of P65250 representing the amount of realty taxes paid in 1951 on the decedents two parcels of land in Baguio City which respondents claim was disallowed by the Tax Court we find that this claim has in fact been allowed2 NO Respondents claim for interest on the amount allegedly overpaid if any actually results after a recomputation on the basis of this decision is hereby denied in line with our recent decision in Collector of Internal Revenue v St Pauls Hospital (GR No L-12127 May 29 1959) wherein we held that in the absence of a statutory provision clearly or expressly directing or authorizing such payment and none has been cited by respondents the National Government cannot be required to pay interest

DEDUCTIONS AND EXMEPTIONS ALLOWABLE DEDUCTIONSTAXESCIR v LEDNICKYFacts V E Lednicky and Maria Valero Lednicky are husband and wife both American citizens residing in the Philippines and have derived all their income from Philippine sources for the taxable years under question [GR L-18286] In compliance with local law the spouses on 27March 1957 filed their income tax return for 1956 reporting therein a gross income of P101728765 and a net income of P73380944 on which the amount of P31739541 was assessed after deducting P480559 as withholding tax Pursuant to the Commissioner of Internal Revenuersquos assessment notice the spouses paid the total amount of P32624741 inclusive of the withheld taxes on 15 April 1957 On 17 March 1959 the spouses filed an amended income tax return for 1956 The amendment consists in a claimed deduction of P20593924 paid in 1956 to the US government as federal income tax for 1956 Simultaneously with the filing of the amended return the spouses requested the refund of P11243790 When the Commissioner of Internal Revenue failed to answer the claim for refund the spouses filedtheir 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 P177112463 and a net income of P105255067 On 19 April 1956 they filed an amended income tax return the amendment upon the original being a lesser net income of P101255451 and on the basis of this amended return they paid P57025200 inclusive of withholding taxes After audit the Commissioner determined a deficiency of P1611600 which amount the spouses paid on 5 December 1956 Back in 1955 however the spouses filed with the US Internal Revenue Agent in Manila their Federal income tax return for the years 1947 1951 1952 1953 and 1954 on income from Philippine sources on a cash basis Payment of these federal income taxes including penalties and delinquency interest in the amount of $26458882 were made in 1955 to the US Director of Internal Revenue Baltimore Maryland through the National City Bank of New York Manila Branch Exchange and bank charges in

remitting payment totaled P414391 On 11 August 1958 the said respondents amended their Philippines income tax return for 1955 to including US Federal income taxes interest accruing up to 15 May 1955 and exchange and bank charges totaling P51634515 and therewith filed a claim for refund of the sum of P16638400 which was later reduced to P15026900 The spouses brought suit in the Tax Court which was docketed therein as CTA Case 570 [GR 21434] The facts are similar to above cases but refer to the spousesrsquo income tax returns for 1957 filed on 28 February 1958 and for which the spouses paid a total sum of P19679965 In 1959 they filed an amended return for 1957 claiming deduction of P19075580 representing taxes paid to the US Government on income derived wholly from Philippine sources On the strength thereof spouses seek refund of P9052075 as overpayment (CTA Case 783) The Tax Court decided for the spousesIssue WON there should be a refund for the spousesHeld NO The Supreme Court reversed the decisions of the Court of Tax Appeals and affirmed the disallowance of the refunds claimed by the spouses with costs against said spouses1 Section 30 (c-1) of the Philippine Internal Revenue Code Section 30 (c) (1) (Deduction from gross income) provides that ldquoin computing net income there shall be allowed as deductions (c) Taxes (1) In general mdash Taxes paid or accrued within the taxable year except (A) The income tax provided for under this Title (B) Income war-profits and excess profits taxes imposed by the authority of any foreign country but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits ofparagraph (3) of this subsection (relating to credit for taxes of foreign countries) (C) Estate inheritance and gift taxes and (D) Taxes assessed against local benefits of a kind tending to increase the value of the property assessedrdquo2 Paragraph (c) (3) (b) of the Tax Code Credits against tax for taxes of foreign countriesParagraph 3 (B) of the subsection (Credits against tax for taxes of foreign countries) reads ldquoIf the taxpayer signifies in his return his desire to have the benefits of this paragraph the tax imposed by this Title shall be credited with (B) Alien resident of the Philippines mdash In the case of an alien resident of the Philippines the amount of any such taxes paid or accrued during the taxable year to any foreign country if the foreign country of which such alien resident is a citizen or subject in imposing such taxes allows a similar credit to citizens of the Philippines residing insuch countryrdquo3 Paragraph (c) (4) of the Tax Code Limitation on credit The tax credit so authorized is limited under paragraph 4 (A and B) of the same subsection in the following terms ldquoPar (c) (4) Limitation on credit mdash The amount of the credit taken under this section shall be subject to each of the following limitations (A) The amount of the credit in respect to the tax paid or accrued to any country shall not exceed the same proportion of the tax against which such credit is taken which the taxpayerrsquos net income from sources within such country taxable under this Title bears to his entire net income for the same taxable year and (B) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken which the taxpayerrsquos net income from sources without the Philippines taxable under this Title bears to his entire net income for the same taxable yearrdquo4 Lawrsquos intent that right to deduct income taxes paid to foreign government taken as an alternative or substitute to claim of tax credit for such foreign income tax Construction and wording of Section 30 (c) (1) (B) of the Internal Revenue Act shows the lawrsquos intent that the right to deduct income taxes paid to foreign government from the taxpayerrsquos gross income is givenonly as an alternative or substitute to his right to claim a tax credit for such foreign income taxes under section 30 (c) (3) and (4) so that unless the alien resident has a right to claim such tax credit if he so chooses he is precluded from deducting the foreign income taxes from his gross income For it is obvious that in prescribing that such deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) (relating to credits for taxes paid to foreign countries) the statute assumes that the taxpayer in question also may signify his desire to claim a tax credit and waive the deduction otherwise the foreign taxes would always be deductible and their mention in the list of nondeductible items in Section 30 (c) might as well have been omitted or at least expressly limited to taxes on income from sources outside the Philippine Islands Had the law intended that foreign income taxes could be deducted from gross income in any event regardless of thetaxpayerrsquos right to claim a tax credit it is the latter right that should be conditioned upon the taxpayerrsquos waiving the deduction in which case the right to reduction under subsection (c-1-B)

would have been made absolute or unconditional (by omitting foreign taxes from the enumeration of non- deductions) while the right to a tax credit under subsection (c-3) would have been expressly conditioned upon the taxpayerrsquos not claiming any deduction under subsection (c-1)5 Danger of double credit does not exist if taxpayer cannot claim benefit from either headings at his option The purpose of the law is to prevent the taxpayer from claiming twice the benefits of his payment of foreign taxes by deduction from gross income (subs c-1) and by tax credit (subs c-3) This danger of double credit certainly can not exist if the taxpayer can not claim benefit under either of these headings at his option so that he must be entitled to a tax credit (the spouses admittedly are not so entitled because all their income is derived from Philippine sources) or the option to deduct from gross income disappears altogether6 When double taxation Tax income should accrue to benefit of the PhilippinesDouble taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity (cf Manila vs Interisland Gas Service 52 Off Gaz 6579 Manuf Life Ins Co vs Meer 89 Phil 357) In the present case while the taxpayers would have to pay two taxes on the same income the Philippine government only receives the proceeds of one tax As between the Philippines where the income was earned and where the taxpayer is domiciled and the United States where that income was not earned and where the taxpayer did not reside it is indisputable that justice and equity demand that the tax on the income should accrue to the benefit of the Philippines Any relief from the alleged double taxation should come from the United States and not from the Philippines since the formerrsquos right to burden the taxpayer is solely predicated on his citizenship without contributing to the production of the wealth that is being taxed To allow an alien resident to deduct from his gross income whatever taxes he pays to his own government amounts to conferring on the latterpower to reduce the tax income of the Philippine government simply by increasing the tax rates on the alien resident Everytime the rate of taxation imposed upon an alien resident is increased by his own government his deduction from Philippine taxes would correspondingly increase and the proceeds for the Philippines diminished thereby subordinating our own taxes to those levied by a foreign government Such a result is incompatible with the status of the Philippines as an independent and sovereign state

GUTIERREZ v COLLECTORFacts Maria Morales was the registered owner of an agricultural land designated as Lot No 724-C of the cadastral survey of Mabalacat Pampanga The Republic of the Philippines at the request of the USGovernment and pursuant to the terms of the Military Bases Agreement of March 14 1947 instituted condemnation proceedings in the Court of the First Instance of Pampanga docketed as Civil Case No 148 for the purpose of expropriating the lands owned by Maria Morales and others needed for the expansion of the Clark Field Air Base t the commencement of the action the Republic of the Philippines therein plaintiff deposited with the Clerk of the Court of First Instance of Pampanga the sum of P156960 which was provisionally fixed as the value of the lands sought to be expropriated in order that it could take immediate possession of the same On January 27 1949 upon order of the Court the sum of P34580 (PNB Check 721520-Exh R) was paid by the Provincial treasurer of Pampanga to Maria Morales out of the original deposit of P156960 made by therein plaintiff After due hearing the Court of First Instance of Pampanga rendered decision dated November 29 1949 wherein it fixed as just compensation P2500 per hectare for some of the lots and P3000 per hectare for the others which values were based on the reports of the Commission on Appraisal whose members were chosen by both parties and by the Court which took into consideration the different conditions affecting the value of the condemned properties in making their findingsIn virtue of said decision defendant Maria Morales was to receive the amount of P9430575 as compensation for Lot No 724-C which was one of the expropriated lands Sometime in 1950 the spouses Blas Gutierrez and Maria Morales received the sum of P5978575 presenting the balance remaining in their favor after deducting the amount of P34580 already withdrawn from the compensation to them In a notice of assessment dated January 28 1953 the Collector ofInternal Revenue demanded of the petitioners the payment of P8481 as alleged deficiency income tax for the year 1950 inclusive of surcharges and penalties The CIR contended that petitioners-appellants failed to include from their gross income in filing their income tax return for 1950 the amount of P9430575 which they had received as compensation for their land

taken by the Government by expropriation proceedings It is the contention of respondent Collector of Internal Revenue that such transfer of property for taxation purposes is sale and that the income derived therefrom is taxable The lower court exonerated petitioners from the 50 per cent surchargeimposed on the latter on the ground that the taxpayers income tax return for 1950 is false andor fraudulentIssue WON petitioners should pay surcharge Held NO It should be noted that the Court of Tax Appeals found that the evidence did not warrant the imposition of said surcharge becausethe petitioners therein acted in good faith and without intent to defraud the GovernmentThe question of fraud is a question of fact which frequently requires a nicely balanced judgement to answer All the facts and circumstances surrounding the conduct of the tax payers business and all the facts incident to the preparation of the alleged fraudulent return should be considered (Mertens Federal Income Taxation Chapter 55) The question of fraud being a question of fact and the lower court having made the finding that the evidence of this case does not warrant the imposition of the 50 per cent surcharge We are constrained to refrain from giving any consideration to the question raised by the Solicitor General for it is already settled in this jurisdiction that in passing upon petitions to review decisions of the Court of Tax Appeals We have to confine ourselves to questions of law

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSLOSSESFERNANDEZ HERMANOS v CIRFacts These four appeals involve two decisions of the Court of Tax Appeals determining the taxpayers income tax liability for the years 1950 to 1954 and for the year 1957 Both the taxpayer and the Commissioner of Internal Revenue as petitioner and respondent in the cases a quo respectively appealed from the Tax Courts decisions insofar as their respective contentions on particular tax items were therein resolved against themIssue ProperImproper AllowancesDisallowances of LossesHeld Re allowancesdisallowances of losses(a) Allowance of losses in Mati Lumber Co (1950) mdash The Commissioner of Internal Revenue questions the Tax Courts allowance of the taxpayers writing off as worthless securities in its 1950 return the sum of P805000 representing the cost of shares of stock of Mati Lumber Co acquired by the taxpayer on January 1 1948 on the ground that the worthlessness of said stock in the year 1950 had not been clearly established The Commissioner contends that although the said Company was no longer in operation in 1950 it still had its sawmill and equipment which must be of considerable value There was adequate basis for the writing off of the stock as worthless securities Assuming that the Company would later somehow realize some proceeds from its sawmill and equipment which were still existing as claimed by the Commissioner and that such proceeds would later be distributed to its stockholders such as the taxpayer the amount so received by the taxpayer would then properly be reportable as income of the taxpayer in the year it is received(b) Disallowance of losses in or bad debts of Palawan Manganese Mines Inc (1951) mdash The taxpayer appeals from the Tax Courts disallowance of its writing off in 1951 as a loss or bad debt the sum of P35313425 which it had advanced or loaned to Palawan Manganese Mines Inc Pursuant to the agreement mentioned above petitioner gave to Palawan Manganese Mines Inc yearly advances starting from 1945 which advances amounted to P58730807 by the end of 1951 Despite these advances and the resumption of operations by Palawan ManganeseMines Inc it continued to suffer losses By 1951 petitioner became convinced that those advances could no longer be recovered While it continued to give advances it decided to write off as worthless the sum of P35313425 Under the circumstances was the sum of P35313425properly claimed by petitioner as deduction in its income tax return for 1951 either as losses or bad debts It will be noted that in giving advances to Palawan Manganese Mine Inc petitioner did not expect to be repaid It is true that some testimonial evidence was presented to show that there was some agreement that the advances would be repaid but no documentary evidence was presented to this effect The memorandum agreement signed by the parties appears to be very clear that the consideration for the advances made by petitioner was 15 of the net profits of Palawan Manganese Mines Inc In other words if there were no earnings or profits there

was no obligation to repay those advances It has been held that the voluntary advances made without expectation of repayment do not result in deductible losses The Tax Courts is allowance of the write-off was proper The Solicitor General has rightly pointed out that the taxpayer has taken an ambiguous position and has not definitely taken a stand on whetherthe amount involved is claimed as losses or as bad debts but insists that it is either a loss or a bad debt 4 We sustain the governments position that the advances made by the taxpayer to its 100 subsidiary Palawan Manganese Mines Inc amounting to P58730807 as of 1951 wereinvestments and not loans 5 (c) Disallowance of losses in Balamban Coal Mines (1950 and1951) mdash The Court sustains the Tax Courts disallowance of the sums of P898976 and P2773266 spent by the taxpayer for the operation of its Balamban coal mines in Cebu in 1950 and 1951 respectively and claimed as losses in the taxpayers returns for said years The Tax Court correctly held that the losses are deductible in 1952 when the mines were abandoned and not in 1950 and 1951 when they were still in operation 9 The taxpayers claim that these expeditions should be allowed as losses for the corresponding years that they were incurredbecause it made no sales of coal during said years since the promised road or outlet through which the coal could be transported from the mines to the provincial road was not constructed cannot be sustained Some definite event must fix the time when the loss is sustained and here it was the event of actual abandonment of the mines in 1952 (d) and (e) Allowance of losses in Hacienda Dalupiri (1950 to 1954) and Hacienda Samal (1951-1952) mdash The Tax Court overruled the Commissioners disallowance of these items of losses thus Petitioner deducted losses in the operation of its Hacienda Dalupiri the sums of P1741895 in 1950 P2912582 in 1951 P2674481 in 1952 P2193262 in 1953 and P4293856 in 1954 These deductions were disallowed by respondent on the ground that the farm was operated solely for pleasure or as ahobby and not for profit This conclusion is based on the fact that the farm was operated continuously at a loss From the evidence we are convinced that the Hacienda Dalupiri was operated by petitioner for business and not pleasure It was mainly a cattle farm although a few race horses were also raised It does not appear that the farm was used by petitioner for entertainment social activities or other nonbusiness purposes Therefore it is entitled to deduct expenses and losses in connection with the operation of said farm (See 1955 PH Fed Taxes Par 13 63 citing GCM 21103 CB 1939- 1 p164) Section 100 of Revenue Regulations No 2 otherwise known as the Income Tax Regulations authorizes farmers to determine their gross income on the basis of inventories Said regulations provide If gross income is ascertained by inventories no deduction can be made for livestock or products lost during 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 quote from the memorandum of counsel for petitioner The Taxpayer deducted from its income tax returns for the years from 1950 to 1954 inclusive the corresponding yearly losses sustained in the operation of Hacienda Dalupiri which losses represent the excess of its yearly expenditures over the receipts that is the losses represent the difference between the sales of livestock and the actual cash disbursements or expenses (Pages 21-22 Memorandum for Petitioner) As the Hacienda Dalupiri was operated by petitioner for business and since it sustained losses in its operation which losses were determined by means of inventories authorized under Section 100 of Revenue Regulations No 2 it was error for respondent to have disallowed the deduction of said losses The same is true with respect to loss sustained in the operation of the Hacienda Samal for the years 1951 and 1952 10 The Commissioner questions that the losses sustained by the taxpayer were properly based on the inventory method of accounting He concedes however that the regulations referred to does not specify how the inventories are to be made The Tax Court however felt satisfied with the evidence presented by the taxpayer which merely consisted of an alleged physical count of the number of the livestock in Hacienda Dalupiri for the years involved 11 The Tax Court was satisfied with the method adopted by the taxpayer as a farmer breeding livestock reporting on the basis of receipts and disbursements We find no Compelling reason to disturb its findings

PLARIDEL SURETY v CIRFacts Petitioner Plaridel Surety amp Insurance Co is a domestic corporation engaged in the bonding business On November 9 1950 petitioner as surety and Constancio San Jose as principal solidarily executed a performance bond in the penal sum of P3060000 in favor of the

P L Galang Machinery Co Inc to secure the performance of San Joses contractual obligation to produce and supply logs to the latter To afford itself adequate protection against loss or damage on the performance bond petitioner required San Jose and one Ramon Cuervo to execute an indemnity agreement obligating themselves solidarily to indemnify petitioner for whatever liability it may incur by reason of said performance bond Accordingly San Jose constituted a chattel mortgage on logging machineries and other movables in petitioners favor1 while Ramon Cuervo executed a real estate mortgage2 San Jose later failed to deliver the logs to Galang Machinery3 and the latter sued on the performance bond On October 1 1952 the Court of First Instance adjudged San Jose and petitioner liable it also directed San Jose and Cuervo to reimburse petitioner for whatever amount it would pay Galang Machinery The Court of Appeals on June 17 1955 affirmed the judgment of the lower court The same judgment waslikewise affirmed by this Court4 on January 11 1957 except for a slight modification apropos the award of attorneys fees In its income tax return for the year 1957 petitioner claimed the saidamount of P4449000 as deductible loss from its gross income and accordingly paid the amount of P13600 as its income tax for 1957 The Commissioner of Internal Revenue disallowed the claimed deduction of P4449000 and assessed against petitioner the sum of P889800 plus interest as deficiency income tax for the year 1957 Petitioner filed its protest which was denied Whereupon appeal was taken to the Tax Court petitioner insisting that the P4449000 which it paid to Galang Machinery was a deductible lossIssue WON the amount Plaridel paid to Galang Machinery is a deductible lossHeld NO There is no question that the year in which the petitioner Insurance Co effected payment to Galang Machinery pursuant to a final decision occurred in 1957 However under the same court decision San Jose and Cuervo were obligated to reimburse petitioner for whateverpayments it would make to Galang Machinery Clearly petitioners loss is compensable otherwise (than by insurance) It should follow then that the loss deduction can not be claimed in 1957 Now petitioners submission is that its case is an exception Citing Cu Unjieng Sons Inc v Board of Tax Appeals6 and American cases also petitioner argues that even if there is a right to compensation by insurance or otherwise the deduction can be taken in the year of actual loss where the possibility of recovery is remote The pronouncement however to this effect in the Cu Unjieng case is not as authoritative as petitioner would have it since it was there found that the taxpayer had no legal right to compensation either by insurance or otherwise7 And the American cases cited8 are not in point None of them involved a taxpayer who had as in the present case obtained a final judgment against third persons for reimbursement of payments made In those cases there was either no legally enforceable right at all or such claimed right was still to be or being litigated On the other hand the rule is that loss deduction will be denied if there is a measurable right to compensation for the loss with ultimate collectionreasonably clear So where there is reasonable ground for reimbursement the taxpayer must seek his redress and may not secure a loss deduction until he establishes that no recovery may be had9 In other words as the Tax Court put it the taxpayer (petitioner) must exhaust his remedies first to recover or reduce his loss But assuming that there was no reasonable expectation of recovery still no loss deduction can be had Sec 30 (d) (2) of the Tax Code requires a charge-off as one of the conditions for loss deduction In the case of a corporation all losses actually sustained and charged-off within the taxable year and not compensated for byinsurance or otherwise Mertens12 states only four (4) requisites because the United StatesInternal Revenue Code of 193913 has no charge-off requirement Sec 23(f) thereof provides merely In the case of a corporation losses sustained during the taxable year and not compensated for by insurance or otherwise Petitioner who had the burden of proof14 failed to adduce evidence that there was a charge-off in connection with the P4449000mdashor P3060000 mdash which it paid to Galang Machinery

CHINA BANKING CORPORATION V COURT OF APPEALSFacts Petitioners mad a 53 equity investment in First CBC Capital (Asia) Limited to the amount of P1622785180 consisting of 106000 shares with par value of P100 per shareSubsequently First CBC was found to be insolvent Petitioners with the approval of the BSP wrote off as worthless its investment in the company and treated it as a bad debt or ordinary loss deductible from its gross income The Commissioner of Internal Revenue disallowed the deduction saying that the investment could not be considered worthless since First CBC could still exercise its financing and investment activities even if it was no longer licensed as a

depository Even assuming that the securities had become worthless it still cannot be considered as a bad debt or expense since there is no indebtedness between petitioner and First CBC It should be classified as a capital lossHeld The SC found in favor of respondents1 Not and indebtedness An equity investment in shares of stock cannot be considered as an indebtedness of First CBC Capital to China Bank The former has no obligation to repay the latter the amount invested The amount China Bank invested in First CBC is in fact anasset2 Capital asset not ordinary Capital assets are defined in the negative by Sec 33(1) of the NIRC as property held by the TP exclusive of items primarily for the sale to customers in the ordinary course of business or property used in trade or business Hence securities such as equity holdings are ordinary assets only in the hands of a dealer or a person actively engaged in trading in the same for his own account3 Section 29(d)(4)(B) of the NIRC treats the worthlessness of the securities held as capital assets as a loss resulting from the sale or exchange of capital assets Strictly speaking no sale occurs when securities held as capital assets become worthless Nonetheless the law treats it as a loss from a sale just the same4 Section 33 of the NIRC provides that the capital loss sustained can only be deducted from any capital gain derived within the taxable year The same provision enumerates assets which are not subject to the said limitation but equity holdings are not one of them

THE CITY LUMBER INC V DOMINGOFacts Respondent Domingo made an assessment on an additional income of petitioners in the amount of P16 67863 coming from 1 the sale of plywood kegs of nails and GI sheets amouting to P 790207 2 a cash credit balance of P789680 Petitioner assails the validity of the assessment alleging that the inventory in question was not sold but were lost to looters during a fire which occurred in the city To 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 was actually a loan secured by petitionersHELDThe assessments were valid 1 The alleged loss of the plywood and kegs of nails was never reported in the books of the petitioner nor in the petitioners ITR for that year Such conduct of the petitioner proves that such loss never occurred 2 Similarly there was neither any record in petitioners books nor any receipt or other piece of evidence to show receipt of the supposed loan

MARCELO STEEL CROP V COLLECTOR OF INTERNAL REVENUEFacts RA 35 granted a four-year tax exemption from all internal revenue taxes to enterprises directly payable by such enterprise or person which shall engage in new and necessary industries Petitioner corporation was engaged in 1 the manufacture of wire fences 2 the manufacture of steel nails 3 the manufacture of steel bars rods and other allied productsof which the last two were covered by RA 35 In 1953 and 1954 petitioner filed its ITR showing a net income of P3438658 and P5832900 respectively derived solely from its wire fence manufacturing business It was accordingly assessed P12750 in taxes which it paid subsequently it filed an amended ITR for the same taxable years showing that it actually incurred a loss of P87140737 and P10495629 respectively The losses were arrived at by consolidating the gross income and the gross allowable deductions of its three industries Petitioner thus filed for a refund of the P12750 it initially paid in taxes on the theory that since it is a corporation organized with a single capital to answer for all its financial obligations the gross income from both tax-exempt and non-exempt industries and its liability should be based on the difference between its consolidated gross income and its consolidated allowable deductionsHeld Petition has no merit Marcelo Steel cannot consolidate 1 The purpose of RA 35 is to encourage the establishment of new and necessary industries for the economic growth of the country In effect it grants a subsidy to entrepreneurs who blaze a trail in a new industry since there are greater risks involved in the same and an ROI is usually not immediately forthcoming As such a tax exemption granted to an entrepreneur engaged in a tax-exempt industry cannot be extended to benefit non-exempt industries in which the same entrepreneur is concurrently

engaged The justification is simply not there since such industries are presumably already deriving profits from its operations 2 Single capital - The fact that all three industries are organized under a single capital is of no moment It is clear that the law intended that tax exemptand non-exempt industries be treated separately as reflected in EO 341 series 0f 1950 which was incorporated in RA 901 a later incarnation of the same lawPHILIPPINE SUGAR ESTATE CORP V COLLECTOR OF INTERNALREVENUEFacts Petitioner owned shares of stock in several different companies and 154 liberty bonds at par 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 inclusiveof the sums above-stated for which it was assessed an amount in taxes It paid said amount without protest Subsequently petitioner filed a demand for refund In the letter-demand the ground for the refund invoked was the illegality o the collection since the dividends and interest were exempt from payment of income tax Although in the present petition the ground invoked is that the income tax on dividends had already been paid at the source Respondent denied the claim for refund because plaintiff failed to lodge a protest concurrently when it paid its tax liability as per Sec 1579 of the Revised Administrative Code as amended by Act No 3685 Plaintiffcountered by saying that the applicable law is Act No 2833 which requires no protest In addition it invoked the ruling in Fox v Edwards wherein it was ruled that any unduly paid income tax may be refunded without the necessity of a protestHeld The SC found in favor of the Collector1Controlling law - There is no need to distinguish between the two laws in this case Section 19 of Act 2833 provides that all administrative special and general provisions of law including laws in relation to the assessment remission collection and refund of internal revenue taxesnot hereto fore repealed and not inconsistent withthis Law areapplicableto this Law By virtue of this saving clause Section 1579 of the Revised Administrative Code finds application to Act 28332 Fox v Edwards is not controlling since the law specifically applied therein did not require the lodging of a protest concurrently with the payment for a TP to retain such right to protest (NOTE fr digester I did not find anything on losses or bad debts in this case I may have overlooked it)

DEDUCTIONS AND EXEPTIONS ALLOWABLE DEDUCTIONS BADDEBTSPHILIPPINE REFINING COMPANY V COURT OF APPEALSFacts In 1985 petitioner filed its ITR where it claimed 16 items amounting to P71307093 as bad debts and therefor deductible Subsequently the Commissioner for Internal Revenue disallowed such deductions and assessed petitioner to pay a deficiency tax for the year of 1985 Petitioner paid the deficiency tax under protest which the Commissioner deniedUpon a petition for review the CTA modified the findings of the Commissioner by reducing the deficiency tax assessment on the basis that three of the sixteen supposed bad debts could be allowed as deductions The CA later on agreed with the CTAHeld The SC upheld the ruling of the CA which it found to be in accordance with the SCs ruling in Collector v Goodrich It held the petitioner failed to substantiate the ldquoworthlessnessrdquo of the 13 debts which it claimed as deductions As per the ruling in Collector v Goodrich to qualify as a bad debt a TP must show 1 that there is a valid and subsisting debt2 that the debt must be actually ascertained to be worthless and uncollectible durring the taxable year3 the debt must be charged off during the taxable year and4 the debt must arise from the business or trade of the TPIn addition the Court said before a debt can be considered worthless the TP must also show that it is indeed uncollectible even in the future Furthermore the TP must undertake several steps to prove that he exerted diligent efforts to collect the debt1 sending statements of accounts to the debtors 2 sending of collection letters 3 giving the account to a lawyer for collection and4 filing a collection case in court In the case at bar the petitioner miserably failed to show any of the foregoing The only piece of evidence it offered to show the worthlessness of the debts was the testimony of the companys financial adviser or accountant The Court found that this lacked the required probity to establish that the accounts it claimed as bad debts were indeed

worthless Apart from such testimony the petitioner failed to introduce even a single iota of evidence to bolster its claim of worthlessness (NOTE In the rest of the case the Court presents the allegation of the petitioner as to why it could not collect on any of the 13 debts followed bya statement how the petitioner failed to introduce evidence to substantiate such allegation)

Collector of Internal Revenue v Goodrich International Rubber Co(21 SCRA 1336 No L-22265)Facts In 1951 and 1952 respondent Goodrich filed it ITR in which it claimed an aggregate amount (consisting of 18 individual accounts) of P5045541 as deductible for being bad debts The Collector of Internal Revenue disallowed the deductions and accordingly assessed Goodrich accordingly Goodrich protested the assessment and subsequently filed an appealwith the CTA which allowed the deductions for bad debts Hence this appeal by the GovernmentHeld Petition is partially meritorious Some of the items claimed by Goodrich can rightfully be written off as bad debts The SC rejected the claim for deduction of 10 items because Goodrichfailed to establish that that the debts were actually worthless or that it had reasonable grounds to believe them to be so in 1951 The law permits the deduction of debts ldquoactually ascertained to be worthless within the taxable yearrdquo obviously to prevent arbitrary action by the TP to unduly avoid tax liability Good faith on the part of the TP is not enough He must furthermore show that he had reasonably investigated the relevant facts and had drawn a reasonable inference from the information 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 actually made (some in full) after they had been characterized as bad debts and written off The Court however ruled that 8 of the 18 claimed bad debts can beallowed as deductions Common among these 8 was the action of Goodrich in persistently demanding payment from its debtors its endorsement of the accounts to counsel for collection the pursuit of legal remedies for the collection on these debts and the continuing failureclear inability of the debtors to pay off their obligations

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSDEPRECIATIONBASILAN ESTATES INC v CIRFacts Basilan Estates Inc claimed deductions for the depreciation of its assets on the basis of their acquisition cost As of January 1 1950 it changed the depreciable value of said assets by increasing it to conform with the increase in cost for their replacement Accordingly from 1950 to1953 it deducted from gross income the value of depreciation computed on the reappraised value CIR disallowed the deductions claimed by petitioner consequently assessing the latter of deficiency income taxesIssueWhether or not the depreciation shall be determined on the acquisition cost rather than the reappraised value of the assetsHeld Yes The following tax law provision allows a deduction from gross income for depreciation but limits the recovery to the capital invested in the asset being depreciated (1)In general mdash A reasonable allowance for deterioration of property arising out of its use or employment in the business or trade or out of its not being used Provided That when the allowance authorized under this subsection shall equal the capital invested by the taxpayer no further allowance shall be made The income tax law does not authorize the depreciation of an asset beyond its acquisition cost Hence a deduction over and above such cost cannot be claimed and allowed The reason is that deductions from gross income are privileges not matters of right They are not created by implication but upon clear expression in the law Depreciation is the gradual diminution in the useful value of tangible property resulting from wear and tear and normal obsolescense It commences with the acquisition of the property and its owner is not bound to see his property gradually waste without making provision out of earnings for its replacement The recovery free of income tax of an amount more than the invested capital in an asset will transgress the underlying purpose of a depreciation allowance For then what the taxpayer would recover will be not only the acquisition cost but also some profit Recovery in due time thru depreciation of investment made is the philosophy behind depreciation allowance the idea of profit on the investment made has never been the underlying reason for the allowance of a deduction for depreciation

Zamora v CIRFacts These are 4 cases regarding deficiency income taxes allegedly incurred by the ZamorasCases Nos L-15290 and L-15280Mariano Zamora owner of the Bay View Hotel and Farmacia Zamora Manila filed his income tax returns the years 1951 and 1952 The Collector of Internal Revenue found that he failed to file his return of the capital gains derived from the sale of certain real properties and claimed deductions which were not allowable The CTA reduced the sum due Zamora and on appeal petitioner alleged that the CTA erred in disallowing the promotion expenses incurred by his wife for promotion of the above businesses depreciation of the Bayview Hotel Bldg and in applying the Ballantyne scale of values for determining the cost of his Manila property The CIR on the other hand claimed that the CTA erred in reducing the amounts and giving credence to the uncorroborated testimony of Mariano Zamora that he bought the said real property in question during the Japanese occupation partly in Philippine currency and partly in Japanese war notes Cases Nos L-15289 and L-15281 Mariano Zamora and his deceased sister Felicidad Zamora bought a piece of land located in Manila on May 16 1944 for P13200000 and sold it for P7500000 on March 5 1951 They also purchased a lot located inQuezon City for P6895900 on January 19 1944 which they sold for P94000 on February 9 1951 The CTA ordered the estate of the late Felicidad Zamora (represented byEsperanza A Zamora as special administratrix of her estate) to pay the sum of P23550 representing alleged deficiency income tax and surcharge due from said estateFirst issue ndash disallowance of the entire promotion expenses incurred by Mrs ZamoraPetitioner The CTA erred in disallowing P1047850 as promotion expenses incurred by his wife for the promotion of the BayView Hotel and Farmacia Zamora He contends that the whole amount of P2095700 as promotion expenses should be allowed and not merely one-half of it on the ground that while not all the itemized expenses are supported by receipts the absence of some supporting receipts has been sufficiently and satisfactorily established - to purchase machinery for a new Tiki-Tiki plant and to observe hotel management in modern hotelsRespondents Mrs Zamora obtained only the sum of P500000 from the Central Bank and that in her application for dollar allocation she stated that she was going abroad on a combined medical and business trip which facts were not denied by Mariano Zamora The alleged expenses were not supported by receipts Mrs Zamora could not even remember how much money she had when she left abroad in 1951 and how the alleged amount of P2095700 was spent There having been no means by which to ascertain which expense was incurred by her inconnection with the business of Mariano Zamora and which was incurred for her personal benefit the respondents considered 50 of the said amount of P2095700 as business expenses and the other 50 as her personal expensesHeld The 50 allocation is very fair to Zamora there being no receipt to explain the alleged business expenses as well as the personal expenses that might have been incurred While in situations like the present absolute certainty is usually no possible the CTA should make as close an approximation as it can bearing heavily if it chooses upon the taxpayer whose inexactness is of his own making Section 30 of the Tax Code provides that in computing net income there shall be allowed as deductions all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business Since promotion expenses constitute one of the deductions in conducting a business same must testify these requirements Claim for the deduction of promotion expenses or entertainment expenses must also be substantiated or supported by record showing in detail the amount and nature of the expenses incurredSecond issue ndash disallowancereduction of the rate of depreciation of Bayview Hotel (from 35 to 25)Petitioner Contends that 1) the Ermita district is becoming a commercial district 2) the hotel has no room for improvement and(3) the changing modes in architecture styles of furniture and decorative designs must meet the taste of a fickle public Alsothe reference to Bulletin F a publication by the IRS should have been first proved as law to be subject of judicial noticeHeld The CTA was approximately correct in holding that the rate of depreciation must be 25 An average hotel buildingrsquos estimated useful life is 5 years but inasmuch as it also depends on the use and location change in population and other it is allowed a deprecation rate of 25 which corresponds to a useful life of 40 years It is true that Bulletin F has no binding force but it has a strong persuasive effect considering that the same has been the result of scientific studies

and observation for a long period in the United States after whose Income Tax Law ours is patterned Verily courts are permitted to look into and investigate the antecedents or the legislative history of the statutes involvedThird issue-the undeclared capital gains derived from the sales in 1951 of certain real properties in Malate Manila and in Quezon City acquired during the Japanese occupationHeld The CTArsquos appraisal in this case is correct Consequently the total undeclared income of petitioners derived from the sales of the Manila and Quezon City properties in 1951 is P1711175 (P175000 plus P1536175) 50 of which in the sum of P855588 is taxable the said properties being capital assets held for more than one year The cost basis of property acquired in Japanese war notes is the equivalent of the war notes in genuine Philippine currency in accordance with the Ballantyne Scale 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 P13200000 was not entirely paid in Japanese War notes but frac12 thereof or P6600000 was in Philippine currency This being the case the Ballantyne Scale of values which was the resultof an impartial scientific study adopted and given judicial recognition should be applied As the value of the Japanese war notes in May 1944 when the Manila property was bought was 1 frac12 of the genuine Philippine Peso (Ballantyne Scale) and since the gain derived or loss sustained inthe disposition of this property is to reckoned in terms of Philippine Peso the value of the Japanese war notes used in the purchase of the property must be reduced in terms of the genuine Philippine Peso to determine the cost of acquisition It therefore results that since the sum of P6600000 in Japanese war notes in May 1944 is equivalent to P550000 in Philippine currency (P6600000 divided by 12) the acquisition cost of the property in question is P6600000 plus P550000 or P7150000 and that as the property was sold for P7500000 in 1951 the owners thereof Mariano and Felicidad Zamora derived a capital gain of P350000or P175000 each For the Quezon City property the CTA was correct in giving credence toZamorarsquos testimony that the same was purchased inPhilippine currency because it is quite incredible that real property with an assessed value of P4691000 should have been soldin Japanese war notes with an equivalent value in Philippine currency of only P1723975 Thus the gain derived from the sale isP1536175 after deducting from the selling price the cost of acquisition in the sum of P6895900 and the expense of sale in the sum of P967925Disposition The petitions are dismissed and the decision appealed from is affirmed

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSDEPLETIONCONSOLIDATED MINES V CTAFacts Cosolidated Mines filed a refund for overpayments of income taxes for the year 1951 However after investigation of the BIR instead of having a refund the company was instead assessed for deficiency income taxes for the years 1953 1954 and 1956 with 5 surchargeand 1 monthly interest According to the investigation (A) for the years 1951 to 1954 (1) the Company had not accrued as an expense the share in the company profits of Benguet Consolidated Mines as operator of the Consolidateds mines although for income tax purposes the Consolidated had reported income and expenses on the accrual basis (2) depletion and depreciation expenses had been overcharged and (3) the claims for audit and legal fees and miscellaneous expenses for 1953 and 1954 had not been properly substantiated and that (B) for the year 1956 (1) the Company had overstated its claim for depletion and (2) certain claims for miscellaneous expenses were not duly supported by evidence Background info Consolidated and Benguet entered into a development agreement whereby Consolidated as the owner of several mining claims allowed Benguet to explore develop mine concentrate andmarket the ore in the mining claims In the agreement it was provided that benguet is to provide the funds necessary for the expenses until such time the properties are on a profit producing basis to be reimbursed by consolidated Once profit is derived expenditures from its own resources shall be charged against the subsequent gross income of the properties During the time Benguet is being reimbursed for all its expenditures the net profits resulting from the operation of the claims shall be divided 90 to Benguet and 10 to Consolidated Such division of net profits shall be based on the receipts and expenditures during each calendar year and

shall continue until such time as the 90 of the net profits pertaining to Benguet hereunder shall equal the amount of such expenditures ldquoAfter Benguet has been fully reimbursed for its expenditures the net profits from the operation shall be divided between Benguet and Consolidated share and share alike it being understood however that the net profits as the term is used in this agreement shall be computed by deducting from gross income all operating expenses and all disbursements of any nature whatsoever as may be made in order to carry out the terms of this agreementrdquo It appears that by 1953 Benguet had completely recouped its advances because they were then dividing the profits share and share alike Consolidated used the accrual method of accounting in computing its income One of its expenses is the amount-paid to Benguet as mine operator which amount is computed as 50 of ldquonet incomerdquo TheConsolidated deducts as an expense 50 of cash receipts minus disbursements but does not deduct at the end of each calendar year what the Commissioner alleges is 50 of the share of Benguet in the accounts receivable However it deducts Benguets 50 if and when the accounts receivable are actually paid It would seem therefore that Consolidated has been deducting a portion of this expense (Benguets share as mine operator) on the cash amp carry basis The question is whether or not the accounting system used by Consolidated justifies such a treatment of this item and if not whether said method used by Consolidated and characterized by the Commissioner as a hybrid method may be allowed under the provisions of the NIRCIssue WON Consolidatedrsquos accounting method is allowedHeld YES It is said that accounting methods for tax purposes comprise a set of rules for determining when and how to report income and deductions The US Internal Revenue Code allows each taxpayer to adopt the accounting method most suitable to his business and requires only that taxable income generally be based on the method of accounting regularly employed in keeping the taxpayers books provided that the method clearly reflects incomeA deduction cannot be accrued until an actual liability is incurred even if payment has not been made Here we have to distinguish between (1) the method of accounting used by Consolidated in determining its net income for tax purposes and (2) the method of computation agreed upon between Consolidated and 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 were cash receipts and cash payments Once determined in accordance with the stipulated bases and procedure then the amount due Benguet for each month accrued at the end of that month whether Consolidated had made payment or not To make Consolidated deduct as an expense one-half of the Accounts Receivable would in effect be equivalent to giving Benguet a right which it did not have under the contract and to substitute for the parties choice a mode of computation of compensationnot contemplated by themON DEPLETIONThe first issue raised by Consolidated is with respect to the rate of mine depletion used by the Court of Tax Appeals The Tax Code provides that in computing net income there shall be allowed as deduction in the case of mines a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof which has been mined and sold during the year for which the return is made [Sec 30(g) (1) (B)] As an income tax concept depletion is wholly a creation of the statute mdash ldquosolely a matter of legislative gracerdquo Hence the taxpayer has the burden of justifying the allowance of any deduction claimed As in connectionwith all other tax controversies the burden of proof to show that a disallowance of depletion by the Commissioner is incorrect or that an allowance made is inadequate is upon the taxpayer and this is true with respect to the value of the property constituting the basis of the deduction This burden-of-proof rule has been frequently applied and a value claimed has been disallowed for lack of evidence Here SC considered the evidence presented (testimony of Eligio Garciaand the Report to Stockholders (which includes the Balance Sheet as of 1946) geological report on the estimated amount of ore in the claims etc) it set forth a very detailed computation of the depletion rate determining the value of each component of the formula of depletion viz Rate of Depletion Per Unit = Cost of Mine Property Estimated ore Deposit of Product Mined and sold- depletion is different from depreciation In determining the amount of cost depletion allowable the following three facts are essential namely (1) the basis of the property (2) the estimated total recoverable units in the property and (3) the number of units recovered during the taxable year in question As used as an element in cost depletion basis means the dollar amount of the

taxpayers capital or investment in the property which he is entitled to recover tax free during the period he is removing the mineral in the depositDisposition Decision modifiedFootnotes in the case that are helpful While taxable income is based on the method of accounting used by the taxpayer it will almost always differ from accounting income This is sobecause of a fundamental difference in the ends the two concepts serve Accounting attempts to match cost against revenue Tax law is aimed at collecting revenue It is quick to treat an item as income slow to recognize deductions or losses Thus the tax law will not recognize deductions for contingent future losses except in very limited situations Good accounting on the other hand their recognition Once this fundamental difference in approach is accepted income tax accounting methods can be understood more easily 33 Am Jur 2d 688 Under the accrual system income is accruable in the year in which the taxpayers right thereto becomes fixed and definite even though it may not be actually received until a later year while a deduction for a liability is to be accrued and taken when the liability becomes fixed and certain even though it may not be paid until a later year It has been held that the basis of the accrual system of accounting is that obligations incurred in the normal course of business will be discharged in due course that the deductions have been paid or accrued or paid and incurred but in order to be accruable in the taxable year a valid obligation upon which the profit (or loss in the case 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 expend money constituting a deductible loss is the date that fixes liability Gain or loss may not said to be fixed or accrued when the obligation is contingent upon the happening of a future event No duty or liability to pay an income tax upon a transaction arises until the taxable year in which the event constituting the condition precedent occurs under any system ofaccounting

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSCHARITABLE AND OTHER CONTRIBUTIONSROXAS v CTA GR No L-25043 April 26 1968Facts Don Pedro Roxas and Dona Carmen Ayala Spanish subjects transmitted to their grandchildren by hereditary succession several properties To manage the above-mentioned properties said children namely Antonio Roxas Eduardo Roxas and Jose Roxas formed apartnership called Roxas y Compania At the conclusion of the WW2 the tenants who have all been tilling the lands in Nasugbu for generations expressed their desire to purchase from Roxas y Cia the parcels which they actually occupied For its part the Government in consonance with the constitutional mandate to acquire big landed estates and apportion them among landless tenants-farmers persuaded the Roxas brothers to part with their landholdings Conferences were held with the farmers in the early part of 1948 and finally the Roxas brothers agreed to sell 13500 hectares to the Government for distribution to actual occupants for a price of P207904847 plus P30000000 for survey and subdivision expenses It turned out however that the Government did not have funds to cover the purchase price and so a special arrangement was made for the Rehabilitation Finance Corporation to advance to Roxas y Cia The amount of P150000000 as loan Collateral for such loan were the lands proposed to be sold to the farmers Under the arrangement Roxas y Cia allowed the farmers to buy the lands for the same price but by installment and contracted with the Rehabilitation Finance Corporationto pay its loan from the proceeds of the yearly amortizations paid by the farmers The CIR demanded from Roxas y Cia the payment of deficiency income taxes resulting from the inclusion as income of Roxas y Cia of the unreported 50 of the net profits for 1953 and 1955 derived from the sale of the Nasugbu farm lands to the tenants and the disallowance of deductions from gross income of various business expenses and contributions claimed by Roxas y Cia and the Roxas brothers For the reason that Roxas y Cia subdivided its Nasugbu farm lands and soldthem to the farmers on installment the Commissioner considered the partnership as engaged in the business of real estate hence 100 of the profits derived therefrom was taxed The Roxas brothers protested the assessment but inasmuch as said protest was denied they instituted an appeal in the CTA which sustained the assessment Hence this appealIssue Is Roxas y Cia liable for the payment of deficiency income for the sale of Nasugbu farmlandsHeld NO The proposition of the CIR cannot be favorably accepted in this isolated transaction with its peculiar circumstances in spite of the fact that there were hundreds of vendees Although

they paid for their respective holdings in installment for a period of 10 years it would nevertheless not make the vendor Roxas y Cia a real estate dealer during the 10-year amortization period It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled them for generations was not only in consonance with but more in obedience to the request and pursuant to the policy of our Government to allocate lands to the landless It was the bounden duty of the Government to pay the agreed compensation after it had persuaded Roxas y Cia to sell its haciendas and to subsequently subdivide them among the farmers at very reasonable terms and prices However the Government could not comply with its duty for lack of funds Obligingly Roxas y Cia shouldered the Governments burden went out of its way and sold lands directly to the farmers in the same way and under the same terms as would have been the case had the Government done it itself For this magnanimous act the municipal council of Nasugbu passed a resolution expressing the peoples gratitudeIn fine Roxas y Cia cannot be considered a real estate dealer for the sale in question Hence pursuant to Section 34 of the Tax Code the lands sold to the farmers are capital assets and the gain derived from the sale thereof is capital gain taxable only to the extent of 50

DEDUCTIONS AND EXEMPTIONS NON-DEDUCTIBLE EXPENSECIR v JAMIRFacts For the year 1954 Alberto M K Jamir declared a gross income of P7585865 and claimed deductions aggregating P5813450 thereby showing a net income of P1777415 upon which he paid P1634 as income tax The Collector of Internal Revenue however assessed asdeficiency income tax due from him the sum of P16395 Jamir appealed to the Court of Tax Appeals which reduced the amount due as deficiency income tax to P55200Issue Whether Jamir had an undeclared income for the year 1954 aggregating P3127491Held No It appears that by using the so-called expenditures method the Government considered as an undeclared income Jamirs expenditures for February and May were in excess of his reported income for the same months Although the Court of Tax Appeals in effect sanctioned the adoption of the expenditures method it held that the same should be applied by deducting the aggregate yearly expenditures from the declared yearly income not the expenditures incurred each month from the declared income therefor In the case at bar Jamirs total income for the year 1954 (P7585865) exceeded (Pl777415) the total deductions (P5813450) claimed by him Jamir introduced evidence that the said sums of P128124 andP2999367 represented advances made to him by customers in the months of February and may 1954 and that the income derived from the corresponding transactions were entered in his books of account in subsequent months and this explanation was found by the Court of Tax Appeals to have been proven satisfactorily The next question raised by appellant refers to Jamirs claim for car depreciation and salary of his driver Although petitioner had disallowed one-half (12) of these claims it appearing that the car was used by Jamir for personal and business purposes the lower court allowed as deductions three-fourths (34) of said amounts the car having been used by Jamir more for business than for personal purpose Petitionerassails this as an error but considering the circumstances we agree with the deduction of frac34 by the lower court It is next urged that Jamir committed fraud and the 50 surcharge should not have been eliminated But since Jamir did not have the undeclared income of P3127491 upon which the contested assessment is mainly based it follows necessarily that he was not guiltyof the fraud and that the 50 surcharge has been properly eliminatedDisposition the decision appealed from is hereby affirmed

Atlas Consolidated Mining v CIRFacts CIR assessed Atlas deficiency income tax for 1957 to 1958 which amounted to morethan P700K CIR asserted that in 1957 Atlas was still not entitled to exemption fromthe income tax under RA 909 because the same covers only gold mines and Atlas isnot engaged in that Atlasprotested before the Sec of Finance and Sec ruled that exemption provided in RA 909 embraces all new 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 disallowance of the following items transfer agent1048576s fees stockholders relation service fee US stock listing expenses suit expenses provision for contingency CTA disallowed the items except the stockholders relation service fee and suit expenses Also CTA ruled that the exemption from payment of the corporate income tax of Atlas

was good only up to the first quarter of 1958 hence it computed for its net taxable income for the remaining frac34 of the year Atlas appealed asserting that the annual public relations expense is a deductible expense from gross income because it is an ordinary and necessarybusiness expenseIssue WON this fee paid for the services rendered by a public relations firm in the US labeled as stockholders relation service fee is an allowable deductionHeld 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 that deduction is authorized and must be able to prove that he is entitled to the deduction which the law allows As previously adverted to the law allowing expenses as deduction from gross income for purposes of the income tax is Section 30 (a) (1) of the National Internal Revenue which allows a deduction of all the ordinary and necessary expenses paid orincurred during the taxable year in carrying on any trade or business An item of expenditure in order to be deductible under this section of the statute must fall squarely within its language We come then to the statutory test of deductibility where it is axiomatic that to be deductible as a business expense three conditions are imposed namely (1) the expense must be ordinary and necessary (2) it must be paid or incurred within the taxable year and (3) it must be paid or incurred in carrying in a trade or business In addition not only must the taxpayer meet thebusiness test he must substantially prove by evidence or records the deductions claimed under the law otherwise the same will be disallowed The mere allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its deduction Assuming that the expenditure is ordinary and necessary in the operation of the taxpayers business the answer to the question as to whether the expenditure is an allowable deduction as a business expense must be determined from the nature of the expenditure itself which in turn depends on the extent and permanency of the work accomplished by the expenditure The expenditure of P2552314 paid to PK Macker amp Co as compensation for services carrying on the selling campaign in an effort to sell Atlas additional capital stock of P3325000 is not an ordinaryexpense in line with the decision of US Board of Tax Appeals in the case of Harrisburg Hospital Inc vs Commissioner of Internal Revenue Accordingly as found by the Court of Tax Appeals the said expense is not deductible from Atlas gross income in 1958 because expenses relating to 1) recapitalization and reorganization of the corporation 2) the cost of obtaining stock subscription 3)promotion expenses and 4) commission or fees paid for the sale of stock reorganization are capital expenditures The burden of proof that the expenses incurred are ordinary and necessary is onthe taxpayer The claimed business expense must also be supported by appropriate documents such as invoices official receipts and contracts to be made available in case of a tax audit by the Bureau of Internal Revenue

GANCAYCO V COLLECTORFacts1048576 Gancayco filed his Income tax Return (ITR) for 19491048576 CIR notified him that his liability is Php 979362 which he paid 19501048576 CIR after a year wrote to Gancayco saying that there was tax due from him for a total of Php 29554051048576 Gancayco asked for reconsideration and the tax assessed wasreduced1048576 CIR issued a warrant of distraint for the deficient liability1048576 Gancayco filed petition with CTACTA Required Gancayco to pay Php 16 86031 for tax deficiency in1949Gancayco the right to collect the deficiency income tax is barred by thestatute of limitations the 5 yr period for judicial action should be counted from May 12 50 the date of original assessment SC Section 316 provides The civil remedies for the collection of internal revenue taxes fees or charges and any increment thereto resulting from delinquency shall be (a) by distraint of goods chattels or effects and other personal property of whatever character including stocks and other securities debts credits bank accounts and interest in and rights to personal property and by levy upon real property and (b) by judicial action Either of these remedies or both simultaneously may be pursued in the discretion of the authorities charged with the collection of such taxes No exemption shall be allowed against the internal revenue taxes in any case

Deduction for expenses may be allowed however in this case Gancayco was not able to prove any expense as there were no receipts or other proofs CTA AFFIRMED

DEDUCTIONS AND EXEMPTIONS NON-DEDUCTIBLE EXPENSESILLEGAL EXPENSESCALANOC V COLLECTORFacts1048576 Calanoc was authorized to solicit and receive contributions for the orphans and destitute kids of the Child Welfare Workers Club of the Social Welfare Commission1048576 Dec 1949 Calanoc financed and promoted a boxing exhibition at the Rizal Memorial Stadium for said charitable purpose1048576 He applied for exemption from payment of the amusement tax as provided in Sec 260 NIRC1048576 CIR investigated the tax case of Calanoc and it was found that there was gross sale of Php 26553 expenditure of 25157 and profit of 1375301048576 Profit was remitted to Social Welfare Commission1048576 CIR demanded Calanoc oto pay 5331048576 Sec of Finance denied the application of Calanoc for exemption from payment of amusement taxCTA Affirmed the assessment of 7k Calanoc denies receving a stadium fee of 1k Although it was shown that 1k was paid by O-OSO Beverages His accountant is dead SC the items of expenditures for deduction are exorbitant and not supported by receiptsCTA Affirmed

3M PHILIPPINES INC petitioner vs COMMISSIONER OFINTERNAL REVENUE respondent [GR No 82833 September 261988]Facts The petitioner claimed as deductions for income tax purposes business expenses in the form of royalty payments to its foreign licensor which the respondent Commissioner of Internal Revenue disallowed The petitioner claimed the following deductions royalties and technical service fees and pre-operational cost of tape coater The amount was not allowed as entire deduction The petitioner argues that the law applicable to its case is only Section 29(a)(1) of the Tax Code and not Circular No 393 of the Central BankIssue WON the royalty payments are valid deductible expense WON the Tax Code is applicableHeld No Although the Tax Code allows payments of royalty to be deducted from gross income as business expenses it is CB Circular No 393 that defines what royalty payments are proper Improper payments of royalty are not deductible as legitimate business expenses Section 3-c of CB Circular No 393 provides for payment of royalties only on commodities manufactured by the licensee under the royalty agreement not on the wholesale price of finished products imported by the licensee from the licensor entral Bank Circulars like CB Circular No 393 (dated December 7 1973 published in the Official Gazette issue of December 17 1973 [69 OG No 51 p 11737] issued by the Central Bank in the exercise of fits authority under the Central Bank Act duly published in the Official Gazette have the force and effect of law (Cases cited) andbinding on everybody

DEDUCTIONS AND EXEMPTIONS PERSONAL EXEMPTIONSCOLLECTOR OF INTERNAL REVENUE petitioner vs ORLANDO VCALSADO and COURT OF TAX APPEALS respondents [GR 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 supportIssue WON the respondent is classified as head of the familyHeld 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 Php50000

In the matter of the adoption of the minor MARCIAL ELEUTERIO RESABA LUIS SANTOS-YNtildeIGO and LIGIA MIGUEL DE SANTOSYNtildeIGO petitioners-appellees vs REPUBLIC OF THE PHILIPPINES oppositor-appellantTAX ON CORPORATIONS BASES AND RATESRESIDENT FOREIGN CORPORATIONS TAXABLE INCOME [GRNo 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 minorIssue WON the adoption is validHeld 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 suchagreement 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 bymarriage 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 childrenwith 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 or main support Partial support not amounting to chief support will not entitle the taxpayer to claim exemption as a head of a family Regulation No section 11

officers and employees higher bonuses on the alleged reason because of their valuable contribution to the business of the corporation which has made it possible for it to realize huge profits during the aforesaid years The respondent disallowed the said deductions hence they were assessed for deficiency income taxes Upon re-examination by the respondents they allowed as deductions all items comprising directors fees and salaries of the non-resident president and vice president but disallowing the bonuses insofar as they exceed the salaries of the recipients as well as the interests on earned but unpaid salaries and bonusesIssue WON the excessive bonuses and interest should be allowed as a deduction for income tax purposesHeld No Bonuses to employees made in good faith and as additional compensation for the services actually rendered by the employees are deductible provided such payments when added to the stipulated salaries do not exceed a reasonable compensation for the servicesrendered Requisites for deductibility of employee bonuses (1) the payment of the bonuses is in fact compensation (2) it must be for personal services actually rendered and (3) the bonuses when added to the salaries are reasonable when measured by the amount and quality of the services performed with relation to the business of the particular taxpayer There is no fixed test for determining the reasonableness of a given bonus as compensation Deductible amount of bonuses is not limited to the amount of salary of its recipient The prevailing circumstancesshould be considered However In this case the bonuses given to resident employees were higher than its non-resident officers on the reason that the resident officers and employees had performed their duty well and rendered efficient service It does not necessarily follow that they should be given greater amount of additional compensation in the form of bonuses than what was given to the non-resident officers The non-resident officers had rendered the same amount of efficient personal service and contribution to deserve equal treatment in compensation andother emoluments with the particularity that their liberation yearly salaries had been much smaller Interest should also be disallowed Under the law in order that interest may be deductible it must be paid on indebtedness (Section 30 (b) (1) of the National Internal Revenue Code) It is therefore imperative to show that there is an existing indebtedness which may be subjected to the payment of interest Here the items involved are unclaimed salaries andbonus participation which in our opinion cannot constitute indebtedness within the meaning of the law because while they constitute an obligation on the part of the corporation it is not the latters fault if they remained unclaimed The willingness of the corporation to pay interest thereon cannot be considered a justification to warrant deduction

ALHAMBRA CIGAR amp CIGARETTE MANUFACTURING COMPANYpetitioner-appellant vs THE COMMISSIONER OF INTERNALREVENUE respondent-appellee[GR No L-23226 November 28 1967]Facts The petitioner claimed as deductible expense for income tax purposes salaries bonuses commissions and directorrsquos fees paid to A P Kuenzle and H A Streiff who were the President and Vice-President respectively of the petitioner The Commissioner of Internal Revenuedisallowed a portion of the bonus commission and directorrsquos fees as deductions Hence was assessed for deficiency income taxIssue WON the bonuses directorrsquos fees and commissions are valid deductions for income tax purposesHeld No Whenever a controversy arises on the deductibility for purposes of income tax of certain items for alleged compensation officers of a corporation it is necessary to determine whether personal services have been actually rendered by said officers and in theaffirmative what is the reasonable allowance therefor As correctly held by the court of tax appeals The bonus paid to each of said officers was reduced to the amount equivalent to that paid to Mr W Eggmann the resident Treasurer and Manager of petitioner Petitioner seeks to justify the increase in the salaries of Messrs Kuenzle and Streiff on the ground of increased costs of living The said officers of petitioner are however non-residents of the PhilippinesAs to commissions and directors fees there is no evidence of any particular service rendered by them to petitioner to warrant payment of commissions There is also no justification for the payment of the directorrsquos fees Being non-resident President and Vice- President of Petitioner corporation of which they are the controlling stockholders said commissions and directors fees

payment of which was based on a certain percentage of the annual profits of petitioner are in the nature of dividend distributions

AGUINALDO INDUSTRIES CORPORATION (FISHING NETSDIVISION) vs COMMISSIONER OF INTERNAL REVENUE and THECOURT OF TAX APPEALSFacts Upon investigation of petitioners 1957 income tax returns of its Fish Nets Division the Bureau of Internal Revenue examiner found that the amount of P6118748 was deducted from the gross income as additional remuneration paid to the officers of petitioner and that such amount was taken from the net profit which petitioner derived from an isolated transaction (sale of a parcel of its land) which is not in the course of or carrying on of petitioners trade or business The examiner recommended disallowance of the deduction but petitioner insistedotherwise claiming that the payment of the allowance or bonus was pursuant to its by-laws The Court of Tax Appeals held the petitioner liable for deficiency income tax plus surcharge and interestIssue WON the profit derived from the sale of its land is tax-exempt income under Republic Act No 901Held No Petitioner may not raise the question of tax exemption for the first time on review where such question was not raised at the administrative forumIssue WON the bonus given to the officers of petitioner as share in the profit realized from the sale of the land is deductible expense for tax purposesHeld No The bonus given should be considered as deductible for income tax purposes only if payment was made for service actually rendered and it is reasonable and necessary The records show 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 petitioners officers which could be the basis of a grant to them of a bonus out of the profit derived from the sale Thus the payment of a bonus to them out of the gainrealized from the sale cannot be considered as a selling expense nor can it be deemed reasonable and necessary so as to make it deductible for tax purposes

COLLECTOR OF INTERNAL REVENUE petitioner vs GOODRICHINTERNATIONAL RUBBER CO respondent[GR No L-22265 December 22 1967]Facts The CIR disallowed the bad debts and representation expense claimed as deduction of the respondent for tax purposes According to Goodrich the claim for deduction of the representation expense is based upon receipts issued not by the entities in which the alleged expenses had been incurred but by the officers of Goodrich who allegedly paid them To collect for the alleged bad debts the respondent sent demand letters There were subsequent collections after the debts have been writtenIssue WON the representation expense are valid deductions Held No If the expenses had really been incurred receipts or chits would have been issued by the 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 incurred and paid said expenses They do not establish payment of said alleged expenses to the entities in which the same are said to have been incurredIssue WON the bad debts are valid deduction for income tax purposesHeld No The ascertainment of worthlessness of bad debts requires proof of two facts (1) that the taxpayer did in fact ascertain the debt to be worthless in the year the deduction is sought and (2) in so doing he acted in good faith Good faith is not enough The taxpayer must showthat he had reasonably investigated the relevant facts and had drawn a reasonable inference from the information thus obtained by him In this case there were payments made after it has been written off and proves that there is undue haste in claiming it as bad debts Respondent has not proven that said debts were worthless There is no evidence that thedebtors cannot pay them

COLLECTOR OF INTERNAL REVENUE petitioner vs ALBERTO MK JAMIR respondent

[GR No L-16552 March 30 1962]Facts The CIR assessed the respondent for deficiency income taxes The Petitioner claimed that the respondent under declared its income based on the expenditure method The petitioner considered as an undeclared income so much of respondents expenditures for said months as was in excess of his reported income for the same monthsIssue WON the expenditure method was properly applied Held No The expenditures method of determining income should be applied by deducting the aggregate yearly expenditures from the declared yearly income not the expenditures incurred each month from the declared income therefor In this case the respondent properly explained that the income derived from the advances from customers were entered in his books of account in subsequent months Issue WON the deduction for car depreciation and driverrsquos expense is properHeld Yes In this case the car was used by Jamir for both personal and business purposes the lower court allowed as deductions three-fourths (34) of said amounts the car having been used by Jamir more for business than for personal purposes

HOSPITAL DE SAN JUAN DE DIOS INC vs COMMISSIONER OFINTERNAL REVENUEFacts Petitioner is engaged in both taxable and non-taxable operations For the years 1952 to 1955 the petitioner allocated its administrative expenses The respondent disallowed however the interests and dividends from sharing in the allocation of administrative expenses on the ground that the expenses incurred in the administration or management of petitioners investments are not allowable business expenses inasmuch as they were not incurred in carrying on any trade or business within the contemplation of Section 30 (a)(1) of the RevenueCode Hence were assessed for deficiency income taxesIssue WON administrative expenses should be considered as a deductionallocated to its interest and dividend income for income tax purposesHeld No the principle of allocating expenses is grounded on the premise that the taxable income was derived from carrying on a trade or business as distinguished from mere receipt of interests and dividends from ones investments the Court of Tax Appeals correctly ruled thatsaid income should not share in the allocation of administrative expenses Hospital de San Juan De Dios Inc according to its Articles of Incorporation was established for purposes which are benevolent charitable and religious and not for financial gain It is not carrying on a trade or business for the word business in its ordinary and common use means human efforts which have for their end living or reward it is not commonly used as descriptive of charitable religious educational or social agencies or any particular occupation or employment habitually engaged in especially for livelihood or gain or activities where profit is the purpose or livelihood is the motive

FELIX MONTENEGRO INC petitioner vs COMMISSIONER OFINTERNAL REVENUE respondent[CTA CASE NO 695 April 30 1969]Facts The CIR disallowed salaries of some of its officers value of medicines campaign contribution and miscellaneous expense as deduction for income tax purposes hence the petitioner was assessed for deficiency income taxes The deduction of salaires was disallowedbecause the said officers are also stockholders of the corporation and that their salaries are excessive compared to those of officers of other corporation holding similar positions and doing the same volume of businessIssue WON the salaries and expenses should be allowed as a deductionHeld 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 There is no comparative study of the profits of the two enterprises in relation toother concerns similarly situated Neither is there any comparative study of the peculiar situation of the two enterprises in relation to other concerns nor is there a comparison of the nature and volume of the work performed by the officers involved Since no two business enterprises are exactly in the same situation negligible differences in salaries cannot reasonably show that the salary is excessive or that profits are channeled to the stockholders thru salariesIssue WON the value of medicines is a deductible loss

Held No Aside from self serving testimonial evidence no other evidence was presented to substantiate this claim of petitioner There is not even a list of the medicines their value and their expiry dates The deductible as loss on the ground that the aforesaid medicines were nolonger fit for sale as the dates of their efficacy have expired should be disallowedIssue WON campaign contribution should be allowed as a deductionHeld No Amount expended for political campaign purposes or payments to campaign funds are not deductible either as business expenses or as contribution

COLLECTOR V PHILIPPINE EDUCATION COFACTS 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 04548 to prepare and prove itrsquos war damage claim In filing its income tax return respondentclaimed said sum as deduction under section 30 of the NIRC Petitioner disallowed the same and instead assessed additional P240514 as deficiency income tax CTA reversed upon appeal and declared respondent exempt from the deficiency income tax in questionISSUE Whether or not the expense in question was ordinary and necessary and whether or not it was paid or incurred in carrying on respondentrsquos businessHELD Yes The law does not say that the expense must be for or on account of transactions in onersquos trade or business Ordinarily an expense will be considered necessary where the expenditure is appropriate and helpful in the development of the taxpayerrsquos business It is sufficient that the expense were incurred for purposes proper to the conduct of the corporate affairs or for the purpose of realizing a profit or of minimizing a loss The fee in question was paid by the respondent to recover its lost assets occasioned by the war and thereby to be so rehabilitated as to be able to carry on its business Also it should be noted that even if there is no law exempting the proceeds of war damage claims from taxes the war damage compensation would still not be subject to tax not being an income Compensation for injury to capital is never incomeDOCTRINE To carry on its business the taxpayer not only must have sufficient assets but must preserve the same and recover any that should be lost The fee or expense paid to recover its lost assets occasioned by the war 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 account of transactions in onersquos trade or business

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSINTEREST EXPENSECIR v PALANCAFACTS Don Carlos Palanca Sr donated in favor of his son the petitioner herein shares of stock in La Tondentildea Inc amounting to 12500 shares For failure to file a return on the donation within the statutory period the petitioner was assessed the sums of P9769123 P2444281 and P4786870 as gift tax 25 surcharge and interest respectively which he paid on June 22 1955 The petitioner filed with the BIR his income tax return for the calendar year 1955 claiming among others a deduction for interest amounting to P970645 and reporting a taxable income of P6598212 On the basis of this return he was assessed the sum of P2105291 as income tax which he paid as follows Petitioner filed an amended return for the calendar year 1955 claiming therein an additional deduction in the amount of P4786870 representing interest paid on the donees gift tax thereby reporting a taxable net income of P1811342 and a tax due thereon in the sum of P316700 The claim for deduction was based on the provisions of Section 30(b) (1) of the Tax Code which authorizes the deduction from gross income of interest paid within the taxable year on indebtedness A claim for the refund of alleged overpaid income taxes for the year 1955 amounting to P1788501 which is the difference between the amount of P2105201 he paid as income taxes under his original return and of P316700 was filed together with this amended return BIR denied the claim On August 12 1958 the petitioner once more filed an amended income tax return for the calendar year 1955 claiming in addition to the interest deduction of P907645 appearing in his original return a deduction in the amount of P6058180 representing interest on the estate and inheritance taxes on the 12500 shares of stock thereby reporting a net taxable income for 1955 in the amount of P540032 and an income tax due thereon in the sum of P42800 Again this was denied CTA reversed

ISSUES 1) Whether the amount paid by respondent Palanca for interest on his delinquent estate and inheritance tax is deductible from the gross income for that year under Section 30 (b) (1) of the Revenue Code 2) Whether the claim for refund has prescribedHELD 1) Yes 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 We do not see any element in this case which can justify a departure from or abandonment of the doctrine in the Prieto case In both this and the said case the taxpayer sought the allowance as deductible items from the gross income of the amounts paid by them as interests on delinquent tax liabilities Of course what was involved in the cited case was the donors tax while the present suit pertains to interest paid on the estate and inheritance tax This difference however submits no appreciable consequence to the rationale of this Courts previous determination thatinterests on taxes should be considered as interests on indebtedness within the meaning of Section 30(b) (1) of the Tax Code 2) No The 30-day period under Section 11 of Republic Act 1125 did not even commence to run in this incident It should be recalled that while the herein petitioner originally assessed the respondent-claimant for alleged gift tax liabilities the said assessment was subsequently abandoned and in its lieu a new one was prepared and served on the respondent-taxpayer In this new assessment the petitioner charged the said respondent with an entirely new liability and for a substantially different amount from the first While initially the petitioner assessed the respondent for donees gift tax in the amount of P17000274 in thesubsequent assessment the latter was asked to pay P19159162 for delinquent estate and inheritance tax Considering that it is the interest paid on this latter-assessed estate and inheritance tax that respondent Palanca is claiming refund for then the thirty-day period under the abovementioned section of Republic Act 1125 should be computed from the receipt of the final denial by the Bureau of Internal Revenue of the said claim In the second place the claim at bar refers to the alleged overpayment by respondent Palanca of his 1955 income tax Inasmuch as the said account was paid by him by installment then the computation of the two year prescriptive period under Section 306 of the National Internal Revenue Code should be from the date of the last installmentDOCTRINE 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 VIUDA DE PRIETOFACTS Respondent conveyed by way of gifts to her four children namely Antonio Benito Carmen and Mauro all surnamed Prieto real property with a total assessed value of P89249750 After the filing of the gift tax returns on or about February 1 1954 the petitioner CIR appraised the real property donated for gift tax purposes at P123126800 and assessed the total sum of P11770650 as donors gift tax interest and compromises due thereon Of the total sum of P11770650 paid by respondent on April 29 1954 the sum of P5597865 represents the total interest on account of deliquency This sum of P5597865 was claimed as deduction among others by respondent in her 1954 income tax return Petitioner howeverdisallowed the claim and as a consequence of such disallowance assessed respondent for 1954 the total sum of P2141038 as deficiency income tax due on the aforesaid P5597865 including interest up to March 31 1957 surcharge and compromise for the late payment Under the law for interest to be deductible it must be shown that there be an indebtedness that there should be interest upon it and that what is claimed as an interest deduction should have been paid or accrued within the year It is here conceded that the interest paid by respondent was in consequence of the late payment of her donors tax and the same was paid within the year it is sought to be declaredISSUES Whether or not such interest was paid upon an indebtedness within the contemplation of section 30 (b) (1) of the Tax Code HELD Yes The term indebtedness as used in the Tax Code of the United States containing similar provisions as in the above-quoted section has been defined as an unconditional and legally enforceable obligation for the payment of money Although taxes already due have not strictly speaking the same concept as debts they are however obligations that may be considered as such The term debt is properly used in a comprehensive sense as embracing not merely money due by contract but whatever one is bound to render to another either for contract or the requirement of the law It follows that the interest paid by herein respondent for the late payment of her donors tax is deductible from her gross income under section 30(b) of

the Tax Code above quoted This conclusion finds support in the established jurisprudence in the United States after whose laws our Income Tax Law has been patterned Thus under sec 23(b) of the Internal Revenue Code of 1939 as amended which contains similarlyworded provisions as sec 30(b) of our Tax Code the uniform ruling is that interest on taxes is interest on indebtedness and is deductibleDOCTRINE The term indebtedness as used in the Tax Code of the United States containing similar provisions as in the abovequoted section has been defined as an unconditional and legally enforceable obligation for the payment of money

PAPER INDUSTRIES V CAFACTS Petitioner is registered with the BOI as a preferred pioneer enterprise with respect to its integrated pulp and paper mill and as a preferred non-pioneer enterprise with respect to its integrated plywood and veneer mills It received from the CIR two (2) letters of assessmentand demand (a) one for deficiency transaction tax and for documentary and science stamp tax and (b) the other for deficiency income tax for 1977 for an aggregate amount of P8876325500 Picop protested the assessment of deficiency transaction tax and documentary and science stamp taxes These protests were not formally acted upon by respondent CIR On 26 September 1984 the CIR issued a warrant of distraint on personal property and a warrant of levy on real property against Picop to enforce collection of the contested assessments in effect the CIR denied Picops protests Thereupon Picop went before the CTA Picop and the CIR both went to the Supreme Court on separate Petitions for Review of the above decision of the CTA In two (2) Resolutions dated 7 February 1990 and 19 February 1990 respectively the Court referred the two (2) Petitions to the Court of Appeals The Court of Appeals consolidated the two (2) cases and rendered a decision dated 31 August 1992 which further reduced the liability of Picop to P633835470 Picop now maintains that it is not liable at all to pay any of theassessments or any part thereof It assails the propriety of the thirty-five percent (35) deficiency transaction tax which the Court of Appeals held due from it in the amount of P357854351 Picop also questions the imposition by the Court of Appeals of the deficiency income tax of P148157915 resulting from disallowance of certain claimed financial guarantee expenses and claimed year-end adjustments of sales and cost of sales figures by Picops external auditors 3 The CIR upon the other hand insists that the Court of Appeals erred infinding Picop not liable for surcharge and interest on unpaid transaction tax and for documentary and science stamp taxes and in allowing Picop to claim as deductible expensesISSUES 1) Whether Picop is liable for the thirty-five percent (35) transaction tax 2) Whether Picop is liable for interest and surcharge on unpaid transaction tax 3) Whether Picop is entitled to deduct against current income interest payments on loans for the purchase of machinery and equipment 4) Whether Picop is entitled to deduct against current income net operating losses incurred by Rustan Pulp and Paper Mills Inc 5) Whether Picop is entitled to deduct against current income certain claimed financial guarantee expenses 6) Whether Picop had understated its sales and overstated its cost of sales for 1977 7) Whether Picop is liable for the corporate development tax of five percent (5) of its income for 1977 HELD 1) We agree with the CTA and the Court of Appeals that Picops tax exemption under RA No 5186 as amended does not include exemption from the thirty-five percent (35) transaction tax In the first place the thirty-five percent (35) transaction tax is an income tax that is it is a tax on the interest income of the lenders or creditors It is thus clear that the transaction tax is an income tax and as such in any event falls outside the scope of the tax exemption granted to registered pioneer enterprises by Section 8 of RA No 5186 as amended 2) Section 51 (c) and (e) of the 1977 Tax Code did not authorize the imposition of a surcharge and penalty interest for failure to pay the thirtyfive percent (35) transaction tax imposed under Section 210 (b) of the same Code The corresponding provision in the current Tax Code veryclearly embraces failure to pay all taxes imposed in the Tax Code without any regard to the Title of the Code where provisions imposing particular taxes are textually located Tax exemptions are to be sure to be strictly construed that is they are not to be extended beyond the ordinary and reasonable intendment of the language actually used by the legislative authority in granting the exemption The issuance of debenture bonds is certainly conceptually distinct from pulping and paper manufacturing operations But no one contends that issuance of bonds was a principal or regular business activity of Picop only banks or other financial institutions are in the

regular business of raising money by issuing bonds or other instruments to the general public3) We have already noted that our 1977 NIRC does not prohibit the deduction of interest on a loan incurred for acquiring machinery and equipment Neither does our 1977 NIRC compel the capitalization of interest payments on such a loan The 1977 Tax Code is simply silent ona taxpayers right to elect one or the other tax treatment of such interest payments Accordingly the general rule that interest payments on a legally demandable loan are deductible from gross income must be applied We conclude that the CTA and the Court of Appeals did not err in allowing the deductions of Picops 1977 interest payments on its loans for capital equipment against its gross income for 1977 4) After prolonged consideration and analysis of this matter the Court is unable to agree with the CTA and Court of Appeals on the deductibility of RPPMs accumulated losses against Picops 1977 gross income It is important to note at the outset that in our jurisdiction the ordinary rule mdash that is the rule applicable in respect of corporations notregistered with the BOI as a preferred pioneer enterprise mdash is that net operating losses cannot be carried over Under our Tax Code both in 1977 and at present losses may be deducted from gross income only if such losses were actually sustained in the same year that they are deducted or charged off Thus it is that RA No 5186 introduced the carry-over of net operatinglosses as a very special incentive to be granted only to registered pioneer enterprises and only with respect to their registered operations In the instant case to allow the deduction claimed by Picop would be to permit one corporation or enterprise Picop to benefit from the operatinglosses accumulated by another corporation or enterprise RPPM In effect to grant Picops claimed deduction would be to permit Picop to purchase a tax deduction and RPPM to peddle its accumulated operating losses We consider and so hold that there is nothing in Section 7 (c) ofRA No 5186 which either requires or permits such a result Indeed that result makes non-sense of the legislative purpose which may be seen clearly to be projected by Section 7 (c) RA No 5186 We conclude that the deduction claimed by Picop in the amount of P4419610600 in its 1977 Income Tax Return must be disallowed 5) We must support the CTA and the Court of Appeals in their foregoing rulings A taxpayer has the burden of proving entitlement to a claimeddeduction Even Picops own vouchers were not submitted in evidence and the BIR Examiners denied that such vouchers and other documents had been exhibited to them Moreover cash vouchers can only confirm the fact of disbursement but not necessarily the purpose thereof6) The CIR has made out at least a prima facie case that Picop had understated its sales and overstated its cost of sales as set out in its Income Tax Return For the CIR has a right to assume that Picops Books of Accounts speak the truth in this case since as already notedthey embody what must appear to be admissions against Picops own interest7) The adjusted net income of Picop for 1977 as will be seen below is P4868735500 Its net worth figure or total stockholders equity as reflected in its Audited Financial Statements for 1977 is P46474952800 Since its adjusted net income for 1977 thus exceeded ten percent (10) of its net worth Picop must be held liable for the five percent (5) corporate development tax in the amount of P243436775 DOCTRINE It is thus clear that the transaction tax is an income tax andas such in any event falls outside the scope of the tax exemptiongranted to registered pioneer enterprises by Section 8 of RA No 5186as amended

CIR v ITOGON-SUYOC MINES INCFACTS Respondent Itogon-Suyoc Mines Inc the taxpayer involved duly paid in full its liability according to its income tax return for the fiscal year 1960-61 Instead it deducted right away the amount represented by claim for refund filed eight (8) months back for the previous years income tax for which it was not liable at all so it alleged as it suffered a loss instead a claim subsequently favorably acted on by petitioner Commissioner of Internal Revenue but after the date of such payment of the 1960-1961 tax Accordingly an interest in the amount of P151283was charged by petitioner Commissioner of Internal Revenue on the sum withheld on the ground that no deduction on such refund should be allowed before its approval When the matter was taken up before the Court of Tax Appeals the above assessment representing interest wasset aside in the decision of September 30 1965ISSUES Whether CTA should not have absolved respondent corporation from liability to pay the sum of P151283 as 1 monthly interest for delinquency in the payment of income tax for the fiscal year 1960-1961

HELD No It could not be error for the Court of Tax Appeals considering the admitted fact of overpayment entitling respondent to refund to hold that petitioner should not repose an interest on the aforesaid sum of P1315520 which after all was paid to and received by the governmenteven before the incidence of the tax in question It would be according to the Court of Tax Appeals unfair and unjust to do so We agree but we go farther The imposition of such an interest by petitioner is not supported by lawThe National Internal Revenue Code provides that interest upon the amount determined as a deficiency shall be assessed and shall be paid upon notice and demand from the Commissioner of Internal Revenue There is no question respondent was entitled to a refund Instead of waiting for the sum involved to be delivered to it it deducted the said amount from the tax that it had to pay That it 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 time such a deduction was made the Commissioner of Internal Revenue had not as yet approved such a refund It is an admitted fact though that respondent was clearly entitled to it and petitioner did not allege otherwise Nor could he do so Under all the circumstances disclosed therefore the applicability of the legal provision allowing such a deduction from the amount of the tax to be paid cannot be disputed DOCTRINE It could not be error for the Court of Tax Appeals considering the admitted fact of overpayment entitling respondent to refund to hold that petitioner should not repose an interest on the aforesaid sum of P1315520 which after all was paid to and received by the government even before the incidence of the tax in question

CASTRO v COLLECTORFacts This is an appeal from a decision of the Court of Tax Appeals (in its CTA Case 141) holding petitioner Maria B Castro liable under the War Profits Tax Law Republic Act No 55 and ordering her to pay a deficiency war profits tax (including surcharges and interest) in theamount of P136051466 and costs Castro was previously acquitted in the criminal case instituted against her for violation of the War Profits Tax LawIssue WON the acquittal is a bar to the collection of the taxes assessed and specially of the 50 surchargeHeld NO With regard to the tax proper the state correctly points out in its brief that the acquittal in the criminal case could not operate to discharge petitioner from the duty to pay the tax since that duty is imposed by statute prior to and independently of any attempts on the part of the taxpayer to evade 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 declaration that the criminal acts charged did not exist As to the 50 surcharge the very United States Supreme Court that rendered the Coffey decision has subsequently pointed out that additions of this kind to the main tax are not penalties but civil administrative sanctions provided primarily as a safeguard for the protection of the state revenue and to reimburse the government for the heavy expense of investigation and the loss resulting from the taxpayers fraud (Helvering vs Mitchell 303 US 390 82 L Ed 917 Spies vs US 317 US 492) This is made plain by the fact that such surcharges are enforceable like the primary tax itself by distraint or civil suit and that they are provided in a section of RA No 55 (section 5) that is separate and distinct from that providing for criminal prosecution (section 7) We conclude that the defense of jeopardy and estoppel by reason of the petitioners acquittal isuntenable and without merit Whether or not there was fraud committed by the taxpayer justifying the imposition of the surcharge is an issue of fact to be inferred from the evidence and surrounding circumstances and the finding of its existence by the Tax Court is conclusive upon us (Gutierrez v Collector GR No L-9771 May 31 1951 Perez vs Collector supra)

COLLECTOR v FISHERFacts This case relates to the determination and settlement of the hereditary estate left by the deceased Walter G Stevenson and the laws applicable thereto Walter G Stevenson (born in the Philippines on August 9 1874 of British parents and married in the City of Manila on January 23 1909 to Beatrice Mauricia Stevenson another British subject) died on February 22 1951 in San Francisco California USA whereto he and his wife moved and established their permanent residence since May 10 1945 In his will executed in San Francisco on May 22 1947 and which was duly probated in the Superior Court of California on April 11 1951

Stevenson instituted his wife Beatrice as his sole heiress to the following real and personal properties acquired by the spouses while residing in the PhilippinesIssue 1 Whether or not the estate is entitled to the following deductions P860439 for judicial and administration expenses P208652 for funeral expenses P65250 for real estate taxes andP1002247 representing the amount of indebtedness allegedly incurred by the decedent during his lifetime 2 Whether or not the estate is entitled to the payment of interest on the amount it claims to have overpaid the government and to be refundable to itHeld 1 YES An examination of the record discloses however that the foregoing items were considered deductible by the Tax Court on the basis of their approval by the probate court to which said expenses we may presume had also been presented for consideration It is to besupposed that the probate court would not have approved said items were they not supported by evidence presented by the estate In allowing the items in question the Tax Court had before it the pertinent order of the probate court which was submitted in evidence by respondents (Exh AA-2 p 100 record) As the Tax Court said it found no basis for departing from the findings of the probate 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 National Association which it would appear that while still living Walter G Stevenson obtained we are not inclined to pass upon the claim of respondents in respect to theadditional amount of P8652 for funeral expenses which was disapproved by the court a quo for lack of evidence In connection with the deduction of P65250 representing the amount of realty taxes paid in 1951 on the decedents two parcels of land in Baguio City which respondents claim was disallowed by the Tax Court we find that this claim has in fact been allowed2 NO Respondents claim for interest on the amount allegedly overpaid if any actually results after a recomputation on the basis of this decision is hereby denied in line with our recent decision in Collector of Internal Revenue v St Pauls Hospital (GR No L-12127 May 29 1959) wherein we held that in the absence of a statutory provision clearly or expressly directing or authorizing such payment and none has been cited by respondents the National Government cannot be required to pay interest

DEDUCTIONS AND EXMEPTIONS ALLOWABLE DEDUCTIONSTAXESCIR v LEDNICKYFacts V E Lednicky and Maria Valero Lednicky are husband and wife both American citizens residing in the Philippines and have derived all their income from Philippine sources for the taxable years under question [GR L-18286] In compliance with local law the spouses on 27March 1957 filed their income tax return for 1956 reporting therein a gross income of P101728765 and a net income of P73380944 on which the amount of P31739541 was assessed after deducting P480559 as withholding tax Pursuant to the Commissioner of Internal Revenuersquos assessment notice the spouses paid the total amount of P32624741 inclusive of the withheld taxes on 15 April 1957 On 17 March 1959 the spouses filed an amended income tax return for 1956 The amendment consists in a claimed deduction of P20593924 paid in 1956 to the US government as federal income tax for 1956 Simultaneously with the filing of the amended return the spouses requested the refund of P11243790 When the Commissioner of Internal Revenue failed to answer the claim for refund the spouses filedtheir 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 P177112463 and a net income of P105255067 On 19 April 1956 they filed an amended income tax return the amendment upon the original being a lesser net income of P101255451 and on the basis of this amended return they paid P57025200 inclusive of withholding taxes After audit the Commissioner determined a deficiency of P1611600 which amount the spouses paid on 5 December 1956 Back in 1955 however the spouses filed with the US Internal Revenue Agent in Manila their Federal income tax return for the years 1947 1951 1952 1953 and 1954 on income from Philippine sources on a cash basis Payment of these federal income taxes including penalties and delinquency interest in the amount of $26458882 were made in 1955 to the US Director of Internal Revenue Baltimore Maryland through the National City Bank of New York Manila Branch Exchange and bank charges in

remitting payment totaled P414391 On 11 August 1958 the said respondents amended their Philippines income tax return for 1955 to including US Federal income taxes interest accruing up to 15 May 1955 and exchange and bank charges totaling P51634515 and therewith filed a claim for refund of the sum of P16638400 which was later reduced to P15026900 The spouses brought suit in the Tax Court which was docketed therein as CTA Case 570 [GR 21434] The facts are similar to above cases but refer to the spousesrsquo income tax returns for 1957 filed on 28 February 1958 and for which the spouses paid a total sum of P19679965 In 1959 they filed an amended return for 1957 claiming deduction of P19075580 representing taxes paid to the US Government on income derived wholly from Philippine sources On the strength thereof spouses seek refund of P9052075 as overpayment (CTA Case 783) The Tax Court decided for the spousesIssue WON there should be a refund for the spousesHeld NO The Supreme Court reversed the decisions of the Court of Tax Appeals and affirmed the disallowance of the refunds claimed by the spouses with costs against said spouses1 Section 30 (c-1) of the Philippine Internal Revenue Code Section 30 (c) (1) (Deduction from gross income) provides that ldquoin computing net income there shall be allowed as deductions (c) Taxes (1) In general mdash Taxes paid or accrued within the taxable year except (A) The income tax provided for under this Title (B) Income war-profits and excess profits taxes imposed by the authority of any foreign country but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits ofparagraph (3) of this subsection (relating to credit for taxes of foreign countries) (C) Estate inheritance and gift taxes and (D) Taxes assessed against local benefits of a kind tending to increase the value of the property assessedrdquo2 Paragraph (c) (3) (b) of the Tax Code Credits against tax for taxes of foreign countriesParagraph 3 (B) of the subsection (Credits against tax for taxes of foreign countries) reads ldquoIf the taxpayer signifies in his return his desire to have the benefits of this paragraph the tax imposed by this Title shall be credited with (B) Alien resident of the Philippines mdash In the case of an alien resident of the Philippines the amount of any such taxes paid or accrued during the taxable year to any foreign country if the foreign country of which such alien resident is a citizen or subject in imposing such taxes allows a similar credit to citizens of the Philippines residing insuch countryrdquo3 Paragraph (c) (4) of the Tax Code Limitation on credit The tax credit so authorized is limited under paragraph 4 (A and B) of the same subsection in the following terms ldquoPar (c) (4) Limitation on credit mdash The amount of the credit taken under this section shall be subject to each of the following limitations (A) The amount of the credit in respect to the tax paid or accrued to any country shall not exceed the same proportion of the tax against which such credit is taken which the taxpayerrsquos net income from sources within such country taxable under this Title bears to his entire net income for the same taxable year and (B) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken which the taxpayerrsquos net income from sources without the Philippines taxable under this Title bears to his entire net income for the same taxable yearrdquo4 Lawrsquos intent that right to deduct income taxes paid to foreign government taken as an alternative or substitute to claim of tax credit for such foreign income tax Construction and wording of Section 30 (c) (1) (B) of the Internal Revenue Act shows the lawrsquos intent that the right to deduct income taxes paid to foreign government from the taxpayerrsquos gross income is givenonly as an alternative or substitute to his right to claim a tax credit for such foreign income taxes under section 30 (c) (3) and (4) so that unless the alien resident has a right to claim such tax credit if he so chooses he is precluded from deducting the foreign income taxes from his gross income For it is obvious that in prescribing that such deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) (relating to credits for taxes paid to foreign countries) the statute assumes that the taxpayer in question also may signify his desire to claim a tax credit and waive the deduction otherwise the foreign taxes would always be deductible and their mention in the list of nondeductible items in Section 30 (c) might as well have been omitted or at least expressly limited to taxes on income from sources outside the Philippine Islands Had the law intended that foreign income taxes could be deducted from gross income in any event regardless of thetaxpayerrsquos right to claim a tax credit it is the latter right that should be conditioned upon the taxpayerrsquos waiving the deduction in which case the right to reduction under subsection (c-1-B)

would have been made absolute or unconditional (by omitting foreign taxes from the enumeration of non- deductions) while the right to a tax credit under subsection (c-3) would have been expressly conditioned upon the taxpayerrsquos not claiming any deduction under subsection (c-1)5 Danger of double credit does not exist if taxpayer cannot claim benefit from either headings at his option The purpose of the law is to prevent the taxpayer from claiming twice the benefits of his payment of foreign taxes by deduction from gross income (subs c-1) and by tax credit (subs c-3) This danger of double credit certainly can not exist if the taxpayer can not claim benefit under either of these headings at his option so that he must be entitled to a tax credit (the spouses admittedly are not so entitled because all their income is derived from Philippine sources) or the option to deduct from gross income disappears altogether6 When double taxation Tax income should accrue to benefit of the PhilippinesDouble taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity (cf Manila vs Interisland Gas Service 52 Off Gaz 6579 Manuf Life Ins Co vs Meer 89 Phil 357) In the present case while the taxpayers would have to pay two taxes on the same income the Philippine government only receives the proceeds of one tax As between the Philippines where the income was earned and where the taxpayer is domiciled and the United States where that income was not earned and where the taxpayer did not reside it is indisputable that justice and equity demand that the tax on the income should accrue to the benefit of the Philippines Any relief from the alleged double taxation should come from the United States and not from the Philippines since the formerrsquos right to burden the taxpayer is solely predicated on his citizenship without contributing to the production of the wealth that is being taxed To allow an alien resident to deduct from his gross income whatever taxes he pays to his own government amounts to conferring on the latterpower to reduce the tax income of the Philippine government simply by increasing the tax rates on the alien resident Everytime the rate of taxation imposed upon an alien resident is increased by his own government his deduction from Philippine taxes would correspondingly increase and the proceeds for the Philippines diminished thereby subordinating our own taxes to those levied by a foreign government Such a result is incompatible with the status of the Philippines as an independent and sovereign state

GUTIERREZ v COLLECTORFacts Maria Morales was the registered owner of an agricultural land designated as Lot No 724-C of the cadastral survey of Mabalacat Pampanga The Republic of the Philippines at the request of the USGovernment and pursuant to the terms of the Military Bases Agreement of March 14 1947 instituted condemnation proceedings in the Court of the First Instance of Pampanga docketed as Civil Case No 148 for the purpose of expropriating the lands owned by Maria Morales and others needed for the expansion of the Clark Field Air Base t the commencement of the action the Republic of the Philippines therein plaintiff deposited with the Clerk of the Court of First Instance of Pampanga the sum of P156960 which was provisionally fixed as the value of the lands sought to be expropriated in order that it could take immediate possession of the same On January 27 1949 upon order of the Court the sum of P34580 (PNB Check 721520-Exh R) was paid by the Provincial treasurer of Pampanga to Maria Morales out of the original deposit of P156960 made by therein plaintiff After due hearing the Court of First Instance of Pampanga rendered decision dated November 29 1949 wherein it fixed as just compensation P2500 per hectare for some of the lots and P3000 per hectare for the others which values were based on the reports of the Commission on Appraisal whose members were chosen by both parties and by the Court which took into consideration the different conditions affecting the value of the condemned properties in making their findingsIn virtue of said decision defendant Maria Morales was to receive the amount of P9430575 as compensation for Lot No 724-C which was one of the expropriated lands Sometime in 1950 the spouses Blas Gutierrez and Maria Morales received the sum of P5978575 presenting the balance remaining in their favor after deducting the amount of P34580 already withdrawn from the compensation to them In a notice of assessment dated January 28 1953 the Collector ofInternal Revenue demanded of the petitioners the payment of P8481 as alleged deficiency income tax for the year 1950 inclusive of surcharges and penalties The CIR contended that petitioners-appellants failed to include from their gross income in filing their income tax return for 1950 the amount of P9430575 which they had received as compensation for their land

taken by the Government by expropriation proceedings It is the contention of respondent Collector of Internal Revenue that such transfer of property for taxation purposes is sale and that the income derived therefrom is taxable The lower court exonerated petitioners from the 50 per cent surchargeimposed on the latter on the ground that the taxpayers income tax return for 1950 is false andor fraudulentIssue WON petitioners should pay surcharge Held NO It should be noted that the Court of Tax Appeals found that the evidence did not warrant the imposition of said surcharge becausethe petitioners therein acted in good faith and without intent to defraud the GovernmentThe question of fraud is a question of fact which frequently requires a nicely balanced judgement to answer All the facts and circumstances surrounding the conduct of the tax payers business and all the facts incident to the preparation of the alleged fraudulent return should be considered (Mertens Federal Income Taxation Chapter 55) The question of fraud being a question of fact and the lower court having made the finding that the evidence of this case does not warrant the imposition of the 50 per cent surcharge We are constrained to refrain from giving any consideration to the question raised by the Solicitor General for it is already settled in this jurisdiction that in passing upon petitions to review decisions of the Court of Tax Appeals We have to confine ourselves to questions of law

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSLOSSESFERNANDEZ HERMANOS v CIRFacts These four appeals involve two decisions of the Court of Tax Appeals determining the taxpayers income tax liability for the years 1950 to 1954 and for the year 1957 Both the taxpayer and the Commissioner of Internal Revenue as petitioner and respondent in the cases a quo respectively appealed from the Tax Courts decisions insofar as their respective contentions on particular tax items were therein resolved against themIssue ProperImproper AllowancesDisallowances of LossesHeld Re allowancesdisallowances of losses(a) Allowance of losses in Mati Lumber Co (1950) mdash The Commissioner of Internal Revenue questions the Tax Courts allowance of the taxpayers writing off as worthless securities in its 1950 return the sum of P805000 representing the cost of shares of stock of Mati Lumber Co acquired by the taxpayer on January 1 1948 on the ground that the worthlessness of said stock in the year 1950 had not been clearly established The Commissioner contends that although the said Company was no longer in operation in 1950 it still had its sawmill and equipment which must be of considerable value There was adequate basis for the writing off of the stock as worthless securities Assuming that the Company would later somehow realize some proceeds from its sawmill and equipment which were still existing as claimed by the Commissioner and that such proceeds would later be distributed to its stockholders such as the taxpayer the amount so received by the taxpayer would then properly be reportable as income of the taxpayer in the year it is received(b) Disallowance of losses in or bad debts of Palawan Manganese Mines Inc (1951) mdash The taxpayer appeals from the Tax Courts disallowance of its writing off in 1951 as a loss or bad debt the sum of P35313425 which it had advanced or loaned to Palawan Manganese Mines Inc Pursuant to the agreement mentioned above petitioner gave to Palawan Manganese Mines Inc yearly advances starting from 1945 which advances amounted to P58730807 by the end of 1951 Despite these advances and the resumption of operations by Palawan ManganeseMines Inc it continued to suffer losses By 1951 petitioner became convinced that those advances could no longer be recovered While it continued to give advances it decided to write off as worthless the sum of P35313425 Under the circumstances was the sum of P35313425properly claimed by petitioner as deduction in its income tax return for 1951 either as losses or bad debts It will be noted that in giving advances to Palawan Manganese Mine Inc petitioner did not expect to be repaid It is true that some testimonial evidence was presented to show that there was some agreement that the advances would be repaid but no documentary evidence was presented to this effect The memorandum agreement signed by the parties appears to be very clear that the consideration for the advances made by petitioner was 15 of the net profits of Palawan Manganese Mines Inc In other words if there were no earnings or profits there

was no obligation to repay those advances It has been held that the voluntary advances made without expectation of repayment do not result in deductible losses The Tax Courts is allowance of the write-off was proper The Solicitor General has rightly pointed out that the taxpayer has taken an ambiguous position and has not definitely taken a stand on whetherthe amount involved is claimed as losses or as bad debts but insists that it is either a loss or a bad debt 4 We sustain the governments position that the advances made by the taxpayer to its 100 subsidiary Palawan Manganese Mines Inc amounting to P58730807 as of 1951 wereinvestments and not loans 5 (c) Disallowance of losses in Balamban Coal Mines (1950 and1951) mdash The Court sustains the Tax Courts disallowance of the sums of P898976 and P2773266 spent by the taxpayer for the operation of its Balamban coal mines in Cebu in 1950 and 1951 respectively and claimed as losses in the taxpayers returns for said years The Tax Court correctly held that the losses are deductible in 1952 when the mines were abandoned and not in 1950 and 1951 when they were still in operation 9 The taxpayers claim that these expeditions should be allowed as losses for the corresponding years that they were incurredbecause it made no sales of coal during said years since the promised road or outlet through which the coal could be transported from the mines to the provincial road was not constructed cannot be sustained Some definite event must fix the time when the loss is sustained and here it was the event of actual abandonment of the mines in 1952 (d) and (e) Allowance of losses in Hacienda Dalupiri (1950 to 1954) and Hacienda Samal (1951-1952) mdash The Tax Court overruled the Commissioners disallowance of these items of losses thus Petitioner deducted losses in the operation of its Hacienda Dalupiri the sums of P1741895 in 1950 P2912582 in 1951 P2674481 in 1952 P2193262 in 1953 and P4293856 in 1954 These deductions were disallowed by respondent on the ground that the farm was operated solely for pleasure or as ahobby and not for profit This conclusion is based on the fact that the farm was operated continuously at a loss From the evidence we are convinced that the Hacienda Dalupiri was operated by petitioner for business and not pleasure It was mainly a cattle farm although a few race horses were also raised It does not appear that the farm was used by petitioner for entertainment social activities or other nonbusiness purposes Therefore it is entitled to deduct expenses and losses in connection with the operation of said farm (See 1955 PH Fed Taxes Par 13 63 citing GCM 21103 CB 1939- 1 p164) Section 100 of Revenue Regulations No 2 otherwise known as the Income Tax Regulations authorizes farmers to determine their gross income on the basis of inventories Said regulations provide If gross income is ascertained by inventories no deduction can be made for livestock or products lost during 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 quote from the memorandum of counsel for petitioner The Taxpayer deducted from its income tax returns for the years from 1950 to 1954 inclusive the corresponding yearly losses sustained in the operation of Hacienda Dalupiri which losses represent the excess of its yearly expenditures over the receipts that is the losses represent the difference between the sales of livestock and the actual cash disbursements or expenses (Pages 21-22 Memorandum for Petitioner) As the Hacienda Dalupiri was operated by petitioner for business and since it sustained losses in its operation which losses were determined by means of inventories authorized under Section 100 of Revenue Regulations No 2 it was error for respondent to have disallowed the deduction of said losses The same is true with respect to loss sustained in the operation of the Hacienda Samal for the years 1951 and 1952 10 The Commissioner questions that the losses sustained by the taxpayer were properly based on the inventory method of accounting He concedes however that the regulations referred to does not specify how the inventories are to be made The Tax Court however felt satisfied with the evidence presented by the taxpayer which merely consisted of an alleged physical count of the number of the livestock in Hacienda Dalupiri for the years involved 11 The Tax Court was satisfied with the method adopted by the taxpayer as a farmer breeding livestock reporting on the basis of receipts and disbursements We find no Compelling reason to disturb its findings

PLARIDEL SURETY v CIRFacts Petitioner Plaridel Surety amp Insurance Co is a domestic corporation engaged in the bonding business On November 9 1950 petitioner as surety and Constancio San Jose as principal solidarily executed a performance bond in the penal sum of P3060000 in favor of the

P L Galang Machinery Co Inc to secure the performance of San Joses contractual obligation to produce and supply logs to the latter To afford itself adequate protection against loss or damage on the performance bond petitioner required San Jose and one Ramon Cuervo to execute an indemnity agreement obligating themselves solidarily to indemnify petitioner for whatever liability it may incur by reason of said performance bond Accordingly San Jose constituted a chattel mortgage on logging machineries and other movables in petitioners favor1 while Ramon Cuervo executed a real estate mortgage2 San Jose later failed to deliver the logs to Galang Machinery3 and the latter sued on the performance bond On October 1 1952 the Court of First Instance adjudged San Jose and petitioner liable it also directed San Jose and Cuervo to reimburse petitioner for whatever amount it would pay Galang Machinery The Court of Appeals on June 17 1955 affirmed the judgment of the lower court The same judgment waslikewise affirmed by this Court4 on January 11 1957 except for a slight modification apropos the award of attorneys fees In its income tax return for the year 1957 petitioner claimed the saidamount of P4449000 as deductible loss from its gross income and accordingly paid the amount of P13600 as its income tax for 1957 The Commissioner of Internal Revenue disallowed the claimed deduction of P4449000 and assessed against petitioner the sum of P889800 plus interest as deficiency income tax for the year 1957 Petitioner filed its protest which was denied Whereupon appeal was taken to the Tax Court petitioner insisting that the P4449000 which it paid to Galang Machinery was a deductible lossIssue WON the amount Plaridel paid to Galang Machinery is a deductible lossHeld NO There is no question that the year in which the petitioner Insurance Co effected payment to Galang Machinery pursuant to a final decision occurred in 1957 However under the same court decision San Jose and Cuervo were obligated to reimburse petitioner for whateverpayments it would make to Galang Machinery Clearly petitioners loss is compensable otherwise (than by insurance) It should follow then that the loss deduction can not be claimed in 1957 Now petitioners submission is that its case is an exception Citing Cu Unjieng Sons Inc v Board of Tax Appeals6 and American cases also petitioner argues that even if there is a right to compensation by insurance or otherwise the deduction can be taken in the year of actual loss where the possibility of recovery is remote The pronouncement however to this effect in the Cu Unjieng case is not as authoritative as petitioner would have it since it was there found that the taxpayer had no legal right to compensation either by insurance or otherwise7 And the American cases cited8 are not in point None of them involved a taxpayer who had as in the present case obtained a final judgment against third persons for reimbursement of payments made In those cases there was either no legally enforceable right at all or such claimed right was still to be or being litigated On the other hand the rule is that loss deduction will be denied if there is a measurable right to compensation for the loss with ultimate collectionreasonably clear So where there is reasonable ground for reimbursement the taxpayer must seek his redress and may not secure a loss deduction until he establishes that no recovery may be had9 In other words as the Tax Court put it the taxpayer (petitioner) must exhaust his remedies first to recover or reduce his loss But assuming that there was no reasonable expectation of recovery still no loss deduction can be had Sec 30 (d) (2) of the Tax Code requires a charge-off as one of the conditions for loss deduction In the case of a corporation all losses actually sustained and charged-off within the taxable year and not compensated for byinsurance or otherwise Mertens12 states only four (4) requisites because the United StatesInternal Revenue Code of 193913 has no charge-off requirement Sec 23(f) thereof provides merely In the case of a corporation losses sustained during the taxable year and not compensated for by insurance or otherwise Petitioner who had the burden of proof14 failed to adduce evidence that there was a charge-off in connection with the P4449000mdashor P3060000 mdash which it paid to Galang Machinery

CHINA BANKING CORPORATION V COURT OF APPEALSFacts Petitioners mad a 53 equity investment in First CBC Capital (Asia) Limited to the amount of P1622785180 consisting of 106000 shares with par value of P100 per shareSubsequently First CBC was found to be insolvent Petitioners with the approval of the BSP wrote off as worthless its investment in the company and treated it as a bad debt or ordinary loss deductible from its gross income The Commissioner of Internal Revenue disallowed the deduction saying that the investment could not be considered worthless since First CBC could still exercise its financing and investment activities even if it was no longer licensed as a

depository Even assuming that the securities had become worthless it still cannot be considered as a bad debt or expense since there is no indebtedness between petitioner and First CBC It should be classified as a capital lossHeld The SC found in favor of respondents1 Not and indebtedness An equity investment in shares of stock cannot be considered as an indebtedness of First CBC Capital to China Bank The former has no obligation to repay the latter the amount invested The amount China Bank invested in First CBC is in fact anasset2 Capital asset not ordinary Capital assets are defined in the negative by Sec 33(1) of the NIRC as property held by the TP exclusive of items primarily for the sale to customers in the ordinary course of business or property used in trade or business Hence securities such as equity holdings are ordinary assets only in the hands of a dealer or a person actively engaged in trading in the same for his own account3 Section 29(d)(4)(B) of the NIRC treats the worthlessness of the securities held as capital assets as a loss resulting from the sale or exchange of capital assets Strictly speaking no sale occurs when securities held as capital assets become worthless Nonetheless the law treats it as a loss from a sale just the same4 Section 33 of the NIRC provides that the capital loss sustained can only be deducted from any capital gain derived within the taxable year The same provision enumerates assets which are not subject to the said limitation but equity holdings are not one of them

THE CITY LUMBER INC V DOMINGOFacts Respondent Domingo made an assessment on an additional income of petitioners in the amount of P16 67863 coming from 1 the sale of plywood kegs of nails and GI sheets amouting to P 790207 2 a cash credit balance of P789680 Petitioner assails the validity of the assessment alleging that the inventory in question was not sold but were lost to looters during a fire which occurred in the city To 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 was actually a loan secured by petitionersHELDThe assessments were valid 1 The alleged loss of the plywood and kegs of nails was never reported in the books of the petitioner nor in the petitioners ITR for that year Such conduct of the petitioner proves that such loss never occurred 2 Similarly there was neither any record in petitioners books nor any receipt or other piece of evidence to show receipt of the supposed loan

MARCELO STEEL CROP V COLLECTOR OF INTERNAL REVENUEFacts RA 35 granted a four-year tax exemption from all internal revenue taxes to enterprises directly payable by such enterprise or person which shall engage in new and necessary industries Petitioner corporation was engaged in 1 the manufacture of wire fences 2 the manufacture of steel nails 3 the manufacture of steel bars rods and other allied productsof which the last two were covered by RA 35 In 1953 and 1954 petitioner filed its ITR showing a net income of P3438658 and P5832900 respectively derived solely from its wire fence manufacturing business It was accordingly assessed P12750 in taxes which it paid subsequently it filed an amended ITR for the same taxable years showing that it actually incurred a loss of P87140737 and P10495629 respectively The losses were arrived at by consolidating the gross income and the gross allowable deductions of its three industries Petitioner thus filed for a refund of the P12750 it initially paid in taxes on the theory that since it is a corporation organized with a single capital to answer for all its financial obligations the gross income from both tax-exempt and non-exempt industries and its liability should be based on the difference between its consolidated gross income and its consolidated allowable deductionsHeld Petition has no merit Marcelo Steel cannot consolidate 1 The purpose of RA 35 is to encourage the establishment of new and necessary industries for the economic growth of the country In effect it grants a subsidy to entrepreneurs who blaze a trail in a new industry since there are greater risks involved in the same and an ROI is usually not immediately forthcoming As such a tax exemption granted to an entrepreneur engaged in a tax-exempt industry cannot be extended to benefit non-exempt industries in which the same entrepreneur is concurrently

engaged The justification is simply not there since such industries are presumably already deriving profits from its operations 2 Single capital - The fact that all three industries are organized under a single capital is of no moment It is clear that the law intended that tax exemptand non-exempt industries be treated separately as reflected in EO 341 series 0f 1950 which was incorporated in RA 901 a later incarnation of the same lawPHILIPPINE SUGAR ESTATE CORP V COLLECTOR OF INTERNALREVENUEFacts Petitioner owned shares of stock in several different companies and 154 liberty bonds at par 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 inclusiveof the sums above-stated for which it was assessed an amount in taxes It paid said amount without protest Subsequently petitioner filed a demand for refund In the letter-demand the ground for the refund invoked was the illegality o the collection since the dividends and interest were exempt from payment of income tax Although in the present petition the ground invoked is that the income tax on dividends had already been paid at the source Respondent denied the claim for refund because plaintiff failed to lodge a protest concurrently when it paid its tax liability as per Sec 1579 of the Revised Administrative Code as amended by Act No 3685 Plaintiffcountered by saying that the applicable law is Act No 2833 which requires no protest In addition it invoked the ruling in Fox v Edwards wherein it was ruled that any unduly paid income tax may be refunded without the necessity of a protestHeld The SC found in favor of the Collector1Controlling law - There is no need to distinguish between the two laws in this case Section 19 of Act 2833 provides that all administrative special and general provisions of law including laws in relation to the assessment remission collection and refund of internal revenue taxesnot hereto fore repealed and not inconsistent withthis Law areapplicableto this Law By virtue of this saving clause Section 1579 of the Revised Administrative Code finds application to Act 28332 Fox v Edwards is not controlling since the law specifically applied therein did not require the lodging of a protest concurrently with the payment for a TP to retain such right to protest (NOTE fr digester I did not find anything on losses or bad debts in this case I may have overlooked it)

DEDUCTIONS AND EXEPTIONS ALLOWABLE DEDUCTIONS BADDEBTSPHILIPPINE REFINING COMPANY V COURT OF APPEALSFacts In 1985 petitioner filed its ITR where it claimed 16 items amounting to P71307093 as bad debts and therefor deductible Subsequently the Commissioner for Internal Revenue disallowed such deductions and assessed petitioner to pay a deficiency tax for the year of 1985 Petitioner paid the deficiency tax under protest which the Commissioner deniedUpon a petition for review the CTA modified the findings of the Commissioner by reducing the deficiency tax assessment on the basis that three of the sixteen supposed bad debts could be allowed as deductions The CA later on agreed with the CTAHeld The SC upheld the ruling of the CA which it found to be in accordance with the SCs ruling in Collector v Goodrich It held the petitioner failed to substantiate the ldquoworthlessnessrdquo of the 13 debts which it claimed as deductions As per the ruling in Collector v Goodrich to qualify as a bad debt a TP must show 1 that there is a valid and subsisting debt2 that the debt must be actually ascertained to be worthless and uncollectible durring the taxable year3 the debt must be charged off during the taxable year and4 the debt must arise from the business or trade of the TPIn addition the Court said before a debt can be considered worthless the TP must also show that it is indeed uncollectible even in the future Furthermore the TP must undertake several steps to prove that he exerted diligent efforts to collect the debt1 sending statements of accounts to the debtors 2 sending of collection letters 3 giving the account to a lawyer for collection and4 filing a collection case in court In the case at bar the petitioner miserably failed to show any of the foregoing The only piece of evidence it offered to show the worthlessness of the debts was the testimony of the companys financial adviser or accountant The Court found that this lacked the required probity to establish that the accounts it claimed as bad debts were indeed

worthless Apart from such testimony the petitioner failed to introduce even a single iota of evidence to bolster its claim of worthlessness (NOTE In the rest of the case the Court presents the allegation of the petitioner as to why it could not collect on any of the 13 debts followed bya statement how the petitioner failed to introduce evidence to substantiate such allegation)

Collector of Internal Revenue v Goodrich International Rubber Co(21 SCRA 1336 No L-22265)Facts In 1951 and 1952 respondent Goodrich filed it ITR in which it claimed an aggregate amount (consisting of 18 individual accounts) of P5045541 as deductible for being bad debts The Collector of Internal Revenue disallowed the deductions and accordingly assessed Goodrich accordingly Goodrich protested the assessment and subsequently filed an appealwith the CTA which allowed the deductions for bad debts Hence this appeal by the GovernmentHeld Petition is partially meritorious Some of the items claimed by Goodrich can rightfully be written off as bad debts The SC rejected the claim for deduction of 10 items because Goodrichfailed to establish that that the debts were actually worthless or that it had reasonable grounds to believe them to be so in 1951 The law permits the deduction of debts ldquoactually ascertained to be worthless within the taxable yearrdquo obviously to prevent arbitrary action by the TP to unduly avoid tax liability Good faith on the part of the TP is not enough He must furthermore show that he had reasonably investigated the relevant facts and had drawn a reasonable inference from the information 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 actually made (some in full) after they had been characterized as bad debts and written off The Court however ruled that 8 of the 18 claimed bad debts can beallowed as deductions Common among these 8 was the action of Goodrich in persistently demanding payment from its debtors its endorsement of the accounts to counsel for collection the pursuit of legal remedies for the collection on these debts and the continuing failureclear inability of the debtors to pay off their obligations

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSDEPRECIATIONBASILAN ESTATES INC v CIRFacts Basilan Estates Inc claimed deductions for the depreciation of its assets on the basis of their acquisition cost As of January 1 1950 it changed the depreciable value of said assets by increasing it to conform with the increase in cost for their replacement Accordingly from 1950 to1953 it deducted from gross income the value of depreciation computed on the reappraised value CIR disallowed the deductions claimed by petitioner consequently assessing the latter of deficiency income taxesIssueWhether or not the depreciation shall be determined on the acquisition cost rather than the reappraised value of the assetsHeld Yes The following tax law provision allows a deduction from gross income for depreciation but limits the recovery to the capital invested in the asset being depreciated (1)In general mdash A reasonable allowance for deterioration of property arising out of its use or employment in the business or trade or out of its not being used Provided That when the allowance authorized under this subsection shall equal the capital invested by the taxpayer no further allowance shall be made The income tax law does not authorize the depreciation of an asset beyond its acquisition cost Hence a deduction over and above such cost cannot be claimed and allowed The reason is that deductions from gross income are privileges not matters of right They are not created by implication but upon clear expression in the law Depreciation is the gradual diminution in the useful value of tangible property resulting from wear and tear and normal obsolescense It commences with the acquisition of the property and its owner is not bound to see his property gradually waste without making provision out of earnings for its replacement The recovery free of income tax of an amount more than the invested capital in an asset will transgress the underlying purpose of a depreciation allowance For then what the taxpayer would recover will be not only the acquisition cost but also some profit Recovery in due time thru depreciation of investment made is the philosophy behind depreciation allowance the idea of profit on the investment made has never been the underlying reason for the allowance of a deduction for depreciation

Zamora v CIRFacts These are 4 cases regarding deficiency income taxes allegedly incurred by the ZamorasCases Nos L-15290 and L-15280Mariano Zamora owner of the Bay View Hotel and Farmacia Zamora Manila filed his income tax returns the years 1951 and 1952 The Collector of Internal Revenue found that he failed to file his return of the capital gains derived from the sale of certain real properties and claimed deductions which were not allowable The CTA reduced the sum due Zamora and on appeal petitioner alleged that the CTA erred in disallowing the promotion expenses incurred by his wife for promotion of the above businesses depreciation of the Bayview Hotel Bldg and in applying the Ballantyne scale of values for determining the cost of his Manila property The CIR on the other hand claimed that the CTA erred in reducing the amounts and giving credence to the uncorroborated testimony of Mariano Zamora that he bought the said real property in question during the Japanese occupation partly in Philippine currency and partly in Japanese war notes Cases Nos L-15289 and L-15281 Mariano Zamora and his deceased sister Felicidad Zamora bought a piece of land located in Manila on May 16 1944 for P13200000 and sold it for P7500000 on March 5 1951 They also purchased a lot located inQuezon City for P6895900 on January 19 1944 which they sold for P94000 on February 9 1951 The CTA ordered the estate of the late Felicidad Zamora (represented byEsperanza A Zamora as special administratrix of her estate) to pay the sum of P23550 representing alleged deficiency income tax and surcharge due from said estateFirst issue ndash disallowance of the entire promotion expenses incurred by Mrs ZamoraPetitioner The CTA erred in disallowing P1047850 as promotion expenses incurred by his wife for the promotion of the BayView Hotel and Farmacia Zamora He contends that the whole amount of P2095700 as promotion expenses should be allowed and not merely one-half of it on the ground that while not all the itemized expenses are supported by receipts the absence of some supporting receipts has been sufficiently and satisfactorily established - to purchase machinery for a new Tiki-Tiki plant and to observe hotel management in modern hotelsRespondents Mrs Zamora obtained only the sum of P500000 from the Central Bank and that in her application for dollar allocation she stated that she was going abroad on a combined medical and business trip which facts were not denied by Mariano Zamora The alleged expenses were not supported by receipts Mrs Zamora could not even remember how much money she had when she left abroad in 1951 and how the alleged amount of P2095700 was spent There having been no means by which to ascertain which expense was incurred by her inconnection with the business of Mariano Zamora and which was incurred for her personal benefit the respondents considered 50 of the said amount of P2095700 as business expenses and the other 50 as her personal expensesHeld The 50 allocation is very fair to Zamora there being no receipt to explain the alleged business expenses as well as the personal expenses that might have been incurred While in situations like the present absolute certainty is usually no possible the CTA should make as close an approximation as it can bearing heavily if it chooses upon the taxpayer whose inexactness is of his own making Section 30 of the Tax Code provides that in computing net income there shall be allowed as deductions all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business Since promotion expenses constitute one of the deductions in conducting a business same must testify these requirements Claim for the deduction of promotion expenses or entertainment expenses must also be substantiated or supported by record showing in detail the amount and nature of the expenses incurredSecond issue ndash disallowancereduction of the rate of depreciation of Bayview Hotel (from 35 to 25)Petitioner Contends that 1) the Ermita district is becoming a commercial district 2) the hotel has no room for improvement and(3) the changing modes in architecture styles of furniture and decorative designs must meet the taste of a fickle public Alsothe reference to Bulletin F a publication by the IRS should have been first proved as law to be subject of judicial noticeHeld The CTA was approximately correct in holding that the rate of depreciation must be 25 An average hotel buildingrsquos estimated useful life is 5 years but inasmuch as it also depends on the use and location change in population and other it is allowed a deprecation rate of 25 which corresponds to a useful life of 40 years It is true that Bulletin F has no binding force but it has a strong persuasive effect considering that the same has been the result of scientific studies

and observation for a long period in the United States after whose Income Tax Law ours is patterned Verily courts are permitted to look into and investigate the antecedents or the legislative history of the statutes involvedThird issue-the undeclared capital gains derived from the sales in 1951 of certain real properties in Malate Manila and in Quezon City acquired during the Japanese occupationHeld The CTArsquos appraisal in this case is correct Consequently the total undeclared income of petitioners derived from the sales of the Manila and Quezon City properties in 1951 is P1711175 (P175000 plus P1536175) 50 of which in the sum of P855588 is taxable the said properties being capital assets held for more than one year The cost basis of property acquired in Japanese war notes is the equivalent of the war notes in genuine Philippine currency in accordance with the Ballantyne Scale 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 P13200000 was not entirely paid in Japanese War notes but frac12 thereof or P6600000 was in Philippine currency This being the case the Ballantyne Scale of values which was the resultof an impartial scientific study adopted and given judicial recognition should be applied As the value of the Japanese war notes in May 1944 when the Manila property was bought was 1 frac12 of the genuine Philippine Peso (Ballantyne Scale) and since the gain derived or loss sustained inthe disposition of this property is to reckoned in terms of Philippine Peso the value of the Japanese war notes used in the purchase of the property must be reduced in terms of the genuine Philippine Peso to determine the cost of acquisition It therefore results that since the sum of P6600000 in Japanese war notes in May 1944 is equivalent to P550000 in Philippine currency (P6600000 divided by 12) the acquisition cost of the property in question is P6600000 plus P550000 or P7150000 and that as the property was sold for P7500000 in 1951 the owners thereof Mariano and Felicidad Zamora derived a capital gain of P350000or P175000 each For the Quezon City property the CTA was correct in giving credence toZamorarsquos testimony that the same was purchased inPhilippine currency because it is quite incredible that real property with an assessed value of P4691000 should have been soldin Japanese war notes with an equivalent value in Philippine currency of only P1723975 Thus the gain derived from the sale isP1536175 after deducting from the selling price the cost of acquisition in the sum of P6895900 and the expense of sale in the sum of P967925Disposition The petitions are dismissed and the decision appealed from is affirmed

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSDEPLETIONCONSOLIDATED MINES V CTAFacts Cosolidated Mines filed a refund for overpayments of income taxes for the year 1951 However after investigation of the BIR instead of having a refund the company was instead assessed for deficiency income taxes for the years 1953 1954 and 1956 with 5 surchargeand 1 monthly interest According to the investigation (A) for the years 1951 to 1954 (1) the Company had not accrued as an expense the share in the company profits of Benguet Consolidated Mines as operator of the Consolidateds mines although for income tax purposes the Consolidated had reported income and expenses on the accrual basis (2) depletion and depreciation expenses had been overcharged and (3) the claims for audit and legal fees and miscellaneous expenses for 1953 and 1954 had not been properly substantiated and that (B) for the year 1956 (1) the Company had overstated its claim for depletion and (2) certain claims for miscellaneous expenses were not duly supported by evidence Background info Consolidated and Benguet entered into a development agreement whereby Consolidated as the owner of several mining claims allowed Benguet to explore develop mine concentrate andmarket the ore in the mining claims In the agreement it was provided that benguet is to provide the funds necessary for the expenses until such time the properties are on a profit producing basis to be reimbursed by consolidated Once profit is derived expenditures from its own resources shall be charged against the subsequent gross income of the properties During the time Benguet is being reimbursed for all its expenditures the net profits resulting from the operation of the claims shall be divided 90 to Benguet and 10 to Consolidated Such division of net profits shall be based on the receipts and expenditures during each calendar year and

shall continue until such time as the 90 of the net profits pertaining to Benguet hereunder shall equal the amount of such expenditures ldquoAfter Benguet has been fully reimbursed for its expenditures the net profits from the operation shall be divided between Benguet and Consolidated share and share alike it being understood however that the net profits as the term is used in this agreement shall be computed by deducting from gross income all operating expenses and all disbursements of any nature whatsoever as may be made in order to carry out the terms of this agreementrdquo It appears that by 1953 Benguet had completely recouped its advances because they were then dividing the profits share and share alike Consolidated used the accrual method of accounting in computing its income One of its expenses is the amount-paid to Benguet as mine operator which amount is computed as 50 of ldquonet incomerdquo TheConsolidated deducts as an expense 50 of cash receipts minus disbursements but does not deduct at the end of each calendar year what the Commissioner alleges is 50 of the share of Benguet in the accounts receivable However it deducts Benguets 50 if and when the accounts receivable are actually paid It would seem therefore that Consolidated has been deducting a portion of this expense (Benguets share as mine operator) on the cash amp carry basis The question is whether or not the accounting system used by Consolidated justifies such a treatment of this item and if not whether said method used by Consolidated and characterized by the Commissioner as a hybrid method may be allowed under the provisions of the NIRCIssue WON Consolidatedrsquos accounting method is allowedHeld YES It is said that accounting methods for tax purposes comprise a set of rules for determining when and how to report income and deductions The US Internal Revenue Code allows each taxpayer to adopt the accounting method most suitable to his business and requires only that taxable income generally be based on the method of accounting regularly employed in keeping the taxpayers books provided that the method clearly reflects incomeA deduction cannot be accrued until an actual liability is incurred even if payment has not been made Here we have to distinguish between (1) the method of accounting used by Consolidated in determining its net income for tax purposes and (2) the method of computation agreed upon between Consolidated and 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 were cash receipts and cash payments Once determined in accordance with the stipulated bases and procedure then the amount due Benguet for each month accrued at the end of that month whether Consolidated had made payment or not To make Consolidated deduct as an expense one-half of the Accounts Receivable would in effect be equivalent to giving Benguet a right which it did not have under the contract and to substitute for the parties choice a mode of computation of compensationnot contemplated by themON DEPLETIONThe first issue raised by Consolidated is with respect to the rate of mine depletion used by the Court of Tax Appeals The Tax Code provides that in computing net income there shall be allowed as deduction in the case of mines a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof which has been mined and sold during the year for which the return is made [Sec 30(g) (1) (B)] As an income tax concept depletion is wholly a creation of the statute mdash ldquosolely a matter of legislative gracerdquo Hence the taxpayer has the burden of justifying the allowance of any deduction claimed As in connectionwith all other tax controversies the burden of proof to show that a disallowance of depletion by the Commissioner is incorrect or that an allowance made is inadequate is upon the taxpayer and this is true with respect to the value of the property constituting the basis of the deduction This burden-of-proof rule has been frequently applied and a value claimed has been disallowed for lack of evidence Here SC considered the evidence presented (testimony of Eligio Garciaand the Report to Stockholders (which includes the Balance Sheet as of 1946) geological report on the estimated amount of ore in the claims etc) it set forth a very detailed computation of the depletion rate determining the value of each component of the formula of depletion viz Rate of Depletion Per Unit = Cost of Mine Property Estimated ore Deposit of Product Mined and sold- depletion is different from depreciation In determining the amount of cost depletion allowable the following three facts are essential namely (1) the basis of the property (2) the estimated total recoverable units in the property and (3) the number of units recovered during the taxable year in question As used as an element in cost depletion basis means the dollar amount of the

taxpayers capital or investment in the property which he is entitled to recover tax free during the period he is removing the mineral in the depositDisposition Decision modifiedFootnotes in the case that are helpful While taxable income is based on the method of accounting used by the taxpayer it will almost always differ from accounting income This is sobecause of a fundamental difference in the ends the two concepts serve Accounting attempts to match cost against revenue Tax law is aimed at collecting revenue It is quick to treat an item as income slow to recognize deductions or losses Thus the tax law will not recognize deductions for contingent future losses except in very limited situations Good accounting on the other hand their recognition Once this fundamental difference in approach is accepted income tax accounting methods can be understood more easily 33 Am Jur 2d 688 Under the accrual system income is accruable in the year in which the taxpayers right thereto becomes fixed and definite even though it may not be actually received until a later year while a deduction for a liability is to be accrued and taken when the liability becomes fixed and certain even though it may not be paid until a later year It has been held that the basis of the accrual system of accounting is that obligations incurred in the normal course of business will be discharged in due course that the deductions have been paid or accrued or paid and incurred but in order to be accruable in the taxable year a valid obligation upon which the profit (or loss in the case 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 expend money constituting a deductible loss is the date that fixes liability Gain or loss may not said to be fixed or accrued when the obligation is contingent upon the happening of a future event No duty or liability to pay an income tax upon a transaction arises until the taxable year in which the event constituting the condition precedent occurs under any system ofaccounting

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSCHARITABLE AND OTHER CONTRIBUTIONSROXAS v CTA GR No L-25043 April 26 1968Facts Don Pedro Roxas and Dona Carmen Ayala Spanish subjects transmitted to their grandchildren by hereditary succession several properties To manage the above-mentioned properties said children namely Antonio Roxas Eduardo Roxas and Jose Roxas formed apartnership called Roxas y Compania At the conclusion of the WW2 the tenants who have all been tilling the lands in Nasugbu for generations expressed their desire to purchase from Roxas y Cia the parcels which they actually occupied For its part the Government in consonance with the constitutional mandate to acquire big landed estates and apportion them among landless tenants-farmers persuaded the Roxas brothers to part with their landholdings Conferences were held with the farmers in the early part of 1948 and finally the Roxas brothers agreed to sell 13500 hectares to the Government for distribution to actual occupants for a price of P207904847 plus P30000000 for survey and subdivision expenses It turned out however that the Government did not have funds to cover the purchase price and so a special arrangement was made for the Rehabilitation Finance Corporation to advance to Roxas y Cia The amount of P150000000 as loan Collateral for such loan were the lands proposed to be sold to the farmers Under the arrangement Roxas y Cia allowed the farmers to buy the lands for the same price but by installment and contracted with the Rehabilitation Finance Corporationto pay its loan from the proceeds of the yearly amortizations paid by the farmers The CIR demanded from Roxas y Cia the payment of deficiency income taxes resulting from the inclusion as income of Roxas y Cia of the unreported 50 of the net profits for 1953 and 1955 derived from the sale of the Nasugbu farm lands to the tenants and the disallowance of deductions from gross income of various business expenses and contributions claimed by Roxas y Cia and the Roxas brothers For the reason that Roxas y Cia subdivided its Nasugbu farm lands and soldthem to the farmers on installment the Commissioner considered the partnership as engaged in the business of real estate hence 100 of the profits derived therefrom was taxed The Roxas brothers protested the assessment but inasmuch as said protest was denied they instituted an appeal in the CTA which sustained the assessment Hence this appealIssue Is Roxas y Cia liable for the payment of deficiency income for the sale of Nasugbu farmlandsHeld NO The proposition of the CIR cannot be favorably accepted in this isolated transaction with its peculiar circumstances in spite of the fact that there were hundreds of vendees Although

they paid for their respective holdings in installment for a period of 10 years it would nevertheless not make the vendor Roxas y Cia a real estate dealer during the 10-year amortization period It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled them for generations was not only in consonance with but more in obedience to the request and pursuant to the policy of our Government to allocate lands to the landless It was the bounden duty of the Government to pay the agreed compensation after it had persuaded Roxas y Cia to sell its haciendas and to subsequently subdivide them among the farmers at very reasonable terms and prices However the Government could not comply with its duty for lack of funds Obligingly Roxas y Cia shouldered the Governments burden went out of its way and sold lands directly to the farmers in the same way and under the same terms as would have been the case had the Government done it itself For this magnanimous act the municipal council of Nasugbu passed a resolution expressing the peoples gratitudeIn fine Roxas y Cia cannot be considered a real estate dealer for the sale in question Hence pursuant to Section 34 of the Tax Code the lands sold to the farmers are capital assets and the gain derived from the sale thereof is capital gain taxable only to the extent of 50

DEDUCTIONS AND EXEMPTIONS NON-DEDUCTIBLE EXPENSECIR v JAMIRFacts For the year 1954 Alberto M K Jamir declared a gross income of P7585865 and claimed deductions aggregating P5813450 thereby showing a net income of P1777415 upon which he paid P1634 as income tax The Collector of Internal Revenue however assessed asdeficiency income tax due from him the sum of P16395 Jamir appealed to the Court of Tax Appeals which reduced the amount due as deficiency income tax to P55200Issue Whether Jamir had an undeclared income for the year 1954 aggregating P3127491Held No It appears that by using the so-called expenditures method the Government considered as an undeclared income Jamirs expenditures for February and May were in excess of his reported income for the same months Although the Court of Tax Appeals in effect sanctioned the adoption of the expenditures method it held that the same should be applied by deducting the aggregate yearly expenditures from the declared yearly income not the expenditures incurred each month from the declared income therefor In the case at bar Jamirs total income for the year 1954 (P7585865) exceeded (Pl777415) the total deductions (P5813450) claimed by him Jamir introduced evidence that the said sums of P128124 andP2999367 represented advances made to him by customers in the months of February and may 1954 and that the income derived from the corresponding transactions were entered in his books of account in subsequent months and this explanation was found by the Court of Tax Appeals to have been proven satisfactorily The next question raised by appellant refers to Jamirs claim for car depreciation and salary of his driver Although petitioner had disallowed one-half (12) of these claims it appearing that the car was used by Jamir for personal and business purposes the lower court allowed as deductions three-fourths (34) of said amounts the car having been used by Jamir more for business than for personal purpose Petitionerassails this as an error but considering the circumstances we agree with the deduction of frac34 by the lower court It is next urged that Jamir committed fraud and the 50 surcharge should not have been eliminated But since Jamir did not have the undeclared income of P3127491 upon which the contested assessment is mainly based it follows necessarily that he was not guiltyof the fraud and that the 50 surcharge has been properly eliminatedDisposition the decision appealed from is hereby affirmed

Atlas Consolidated Mining v CIRFacts CIR assessed Atlas deficiency income tax for 1957 to 1958 which amounted to morethan P700K CIR asserted that in 1957 Atlas was still not entitled to exemption fromthe income tax under RA 909 because the same covers only gold mines and Atlas isnot engaged in that Atlasprotested before the Sec of Finance and Sec ruled that exemption provided in RA 909 embraces all new 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 disallowance of the following items transfer agent1048576s fees stockholders relation service fee US stock listing expenses suit expenses provision for contingency CTA disallowed the items except the stockholders relation service fee and suit expenses Also CTA ruled that the exemption from payment of the corporate income tax of Atlas

was good only up to the first quarter of 1958 hence it computed for its net taxable income for the remaining frac34 of the year Atlas appealed asserting that the annual public relations expense is a deductible expense from gross income because it is an ordinary and necessarybusiness expenseIssue WON this fee paid for the services rendered by a public relations firm in the US labeled as stockholders relation service fee is an allowable deductionHeld 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 that deduction is authorized and must be able to prove that he is entitled to the deduction which the law allows As previously adverted to the law allowing expenses as deduction from gross income for purposes of the income tax is Section 30 (a) (1) of the National Internal Revenue which allows a deduction of all the ordinary and necessary expenses paid orincurred during the taxable year in carrying on any trade or business An item of expenditure in order to be deductible under this section of the statute must fall squarely within its language We come then to the statutory test of deductibility where it is axiomatic that to be deductible as a business expense three conditions are imposed namely (1) the expense must be ordinary and necessary (2) it must be paid or incurred within the taxable year and (3) it must be paid or incurred in carrying in a trade or business In addition not only must the taxpayer meet thebusiness test he must substantially prove by evidence or records the deductions claimed under the law otherwise the same will be disallowed The mere allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its deduction Assuming that the expenditure is ordinary and necessary in the operation of the taxpayers business the answer to the question as to whether the expenditure is an allowable deduction as a business expense must be determined from the nature of the expenditure itself which in turn depends on the extent and permanency of the work accomplished by the expenditure The expenditure of P2552314 paid to PK Macker amp Co as compensation for services carrying on the selling campaign in an effort to sell Atlas additional capital stock of P3325000 is not an ordinaryexpense in line with the decision of US Board of Tax Appeals in the case of Harrisburg Hospital Inc vs Commissioner of Internal Revenue Accordingly as found by the Court of Tax Appeals the said expense is not deductible from Atlas gross income in 1958 because expenses relating to 1) recapitalization and reorganization of the corporation 2) the cost of obtaining stock subscription 3)promotion expenses and 4) commission or fees paid for the sale of stock reorganization are capital expenditures The burden of proof that the expenses incurred are ordinary and necessary is onthe taxpayer The claimed business expense must also be supported by appropriate documents such as invoices official receipts and contracts to be made available in case of a tax audit by the Bureau of Internal Revenue

GANCAYCO V COLLECTORFacts1048576 Gancayco filed his Income tax Return (ITR) for 19491048576 CIR notified him that his liability is Php 979362 which he paid 19501048576 CIR after a year wrote to Gancayco saying that there was tax due from him for a total of Php 29554051048576 Gancayco asked for reconsideration and the tax assessed wasreduced1048576 CIR issued a warrant of distraint for the deficient liability1048576 Gancayco filed petition with CTACTA Required Gancayco to pay Php 16 86031 for tax deficiency in1949Gancayco the right to collect the deficiency income tax is barred by thestatute of limitations the 5 yr period for judicial action should be counted from May 12 50 the date of original assessment SC Section 316 provides The civil remedies for the collection of internal revenue taxes fees or charges and any increment thereto resulting from delinquency shall be (a) by distraint of goods chattels or effects and other personal property of whatever character including stocks and other securities debts credits bank accounts and interest in and rights to personal property and by levy upon real property and (b) by judicial action Either of these remedies or both simultaneously may be pursued in the discretion of the authorities charged with the collection of such taxes No exemption shall be allowed against the internal revenue taxes in any case

Deduction for expenses may be allowed however in this case Gancayco was not able to prove any expense as there were no receipts or other proofs CTA AFFIRMED

DEDUCTIONS AND EXEMPTIONS NON-DEDUCTIBLE EXPENSESILLEGAL EXPENSESCALANOC V COLLECTORFacts1048576 Calanoc was authorized to solicit and receive contributions for the orphans and destitute kids of the Child Welfare Workers Club of the Social Welfare Commission1048576 Dec 1949 Calanoc financed and promoted a boxing exhibition at the Rizal Memorial Stadium for said charitable purpose1048576 He applied for exemption from payment of the amusement tax as provided in Sec 260 NIRC1048576 CIR investigated the tax case of Calanoc and it was found that there was gross sale of Php 26553 expenditure of 25157 and profit of 1375301048576 Profit was remitted to Social Welfare Commission1048576 CIR demanded Calanoc oto pay 5331048576 Sec of Finance denied the application of Calanoc for exemption from payment of amusement taxCTA Affirmed the assessment of 7k Calanoc denies receving a stadium fee of 1k Although it was shown that 1k was paid by O-OSO Beverages His accountant is dead SC the items of expenditures for deduction are exorbitant and not supported by receiptsCTA Affirmed

3M PHILIPPINES INC petitioner vs COMMISSIONER OFINTERNAL REVENUE respondent [GR No 82833 September 261988]Facts The petitioner claimed as deductions for income tax purposes business expenses in the form of royalty payments to its foreign licensor which the respondent Commissioner of Internal Revenue disallowed The petitioner claimed the following deductions royalties and technical service fees and pre-operational cost of tape coater The amount was not allowed as entire deduction The petitioner argues that the law applicable to its case is only Section 29(a)(1) of the Tax Code and not Circular No 393 of the Central BankIssue WON the royalty payments are valid deductible expense WON the Tax Code is applicableHeld No Although the Tax Code allows payments of royalty to be deducted from gross income as business expenses it is CB Circular No 393 that defines what royalty payments are proper Improper payments of royalty are not deductible as legitimate business expenses Section 3-c of CB Circular No 393 provides for payment of royalties only on commodities manufactured by the licensee under the royalty agreement not on the wholesale price of finished products imported by the licensee from the licensor entral Bank Circulars like CB Circular No 393 (dated December 7 1973 published in the Official Gazette issue of December 17 1973 [69 OG No 51 p 11737] issued by the Central Bank in the exercise of fits authority under the Central Bank Act duly published in the Official Gazette have the force and effect of law (Cases cited) andbinding on everybody

DEDUCTIONS AND EXEMPTIONS PERSONAL EXEMPTIONSCOLLECTOR OF INTERNAL REVENUE petitioner vs ORLANDO VCALSADO and COURT OF TAX APPEALS respondents [GR 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 supportIssue WON the respondent is classified as head of the familyHeld 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 Php50000

In the matter of the adoption of the minor MARCIAL ELEUTERIO RESABA LUIS SANTOS-YNtildeIGO and LIGIA MIGUEL DE SANTOSYNtildeIGO petitioners-appellees vs REPUBLIC OF THE PHILIPPINES oppositor-appellantTAX ON CORPORATIONS BASES AND RATESRESIDENT FOREIGN CORPORATIONS TAXABLE INCOME [GRNo 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 minorIssue WON the adoption is validHeld 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 suchagreement 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 bymarriage 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 childrenwith 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 or main support Partial support not amounting to chief support will not entitle the taxpayer to claim exemption as a head of a family Regulation No section 11

[GR No L-16552 March 30 1962]Facts The CIR assessed the respondent for deficiency income taxes The Petitioner claimed that the respondent under declared its income based on the expenditure method The petitioner considered as an undeclared income so much of respondents expenditures for said months as was in excess of his reported income for the same monthsIssue WON the expenditure method was properly applied Held No The expenditures method of determining income should be applied by deducting the aggregate yearly expenditures from the declared yearly income not the expenditures incurred each month from the declared income therefor In this case the respondent properly explained that the income derived from the advances from customers were entered in his books of account in subsequent months Issue WON the deduction for car depreciation and driverrsquos expense is properHeld Yes In this case the car was used by Jamir for both personal and business purposes the lower court allowed as deductions three-fourths (34) of said amounts the car having been used by Jamir more for business than for personal purposes

HOSPITAL DE SAN JUAN DE DIOS INC vs COMMISSIONER OFINTERNAL REVENUEFacts Petitioner is engaged in both taxable and non-taxable operations For the years 1952 to 1955 the petitioner allocated its administrative expenses The respondent disallowed however the interests and dividends from sharing in the allocation of administrative expenses on the ground that the expenses incurred in the administration or management of petitioners investments are not allowable business expenses inasmuch as they were not incurred in carrying on any trade or business within the contemplation of Section 30 (a)(1) of the RevenueCode Hence were assessed for deficiency income taxesIssue WON administrative expenses should be considered as a deductionallocated to its interest and dividend income for income tax purposesHeld No the principle of allocating expenses is grounded on the premise that the taxable income was derived from carrying on a trade or business as distinguished from mere receipt of interests and dividends from ones investments the Court of Tax Appeals correctly ruled thatsaid income should not share in the allocation of administrative expenses Hospital de San Juan De Dios Inc according to its Articles of Incorporation was established for purposes which are benevolent charitable and religious and not for financial gain It is not carrying on a trade or business for the word business in its ordinary and common use means human efforts which have for their end living or reward it is not commonly used as descriptive of charitable religious educational or social agencies or any particular occupation or employment habitually engaged in especially for livelihood or gain or activities where profit is the purpose or livelihood is the motive

FELIX MONTENEGRO INC petitioner vs COMMISSIONER OFINTERNAL REVENUE respondent[CTA CASE NO 695 April 30 1969]Facts The CIR disallowed salaries of some of its officers value of medicines campaign contribution and miscellaneous expense as deduction for income tax purposes hence the petitioner was assessed for deficiency income taxes The deduction of salaires was disallowedbecause the said officers are also stockholders of the corporation and that their salaries are excessive compared to those of officers of other corporation holding similar positions and doing the same volume of businessIssue WON the salaries and expenses should be allowed as a deductionHeld 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 There is no comparative study of the profits of the two enterprises in relation toother concerns similarly situated Neither is there any comparative study of the peculiar situation of the two enterprises in relation to other concerns nor is there a comparison of the nature and volume of the work performed by the officers involved Since no two business enterprises are exactly in the same situation negligible differences in salaries cannot reasonably show that the salary is excessive or that profits are channeled to the stockholders thru salariesIssue WON the value of medicines is a deductible loss

Held No Aside from self serving testimonial evidence no other evidence was presented to substantiate this claim of petitioner There is not even a list of the medicines their value and their expiry dates The deductible as loss on the ground that the aforesaid medicines were nolonger fit for sale as the dates of their efficacy have expired should be disallowedIssue WON campaign contribution should be allowed as a deductionHeld No Amount expended for political campaign purposes or payments to campaign funds are not deductible either as business expenses or as contribution

COLLECTOR V PHILIPPINE EDUCATION COFACTS 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 04548 to prepare and prove itrsquos war damage claim In filing its income tax return respondentclaimed said sum as deduction under section 30 of the NIRC Petitioner disallowed the same and instead assessed additional P240514 as deficiency income tax CTA reversed upon appeal and declared respondent exempt from the deficiency income tax in questionISSUE Whether or not the expense in question was ordinary and necessary and whether or not it was paid or incurred in carrying on respondentrsquos businessHELD Yes The law does not say that the expense must be for or on account of transactions in onersquos trade or business Ordinarily an expense will be considered necessary where the expenditure is appropriate and helpful in the development of the taxpayerrsquos business It is sufficient that the expense were incurred for purposes proper to the conduct of the corporate affairs or for the purpose of realizing a profit or of minimizing a loss The fee in question was paid by the respondent to recover its lost assets occasioned by the war and thereby to be so rehabilitated as to be able to carry on its business Also it should be noted that even if there is no law exempting the proceeds of war damage claims from taxes the war damage compensation would still not be subject to tax not being an income Compensation for injury to capital is never incomeDOCTRINE To carry on its business the taxpayer not only must have sufficient assets but must preserve the same and recover any that should be lost The fee or expense paid to recover its lost assets occasioned by the war 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 account of transactions in onersquos trade or business

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSINTEREST EXPENSECIR v PALANCAFACTS Don Carlos Palanca Sr donated in favor of his son the petitioner herein shares of stock in La Tondentildea Inc amounting to 12500 shares For failure to file a return on the donation within the statutory period the petitioner was assessed the sums of P9769123 P2444281 and P4786870 as gift tax 25 surcharge and interest respectively which he paid on June 22 1955 The petitioner filed with the BIR his income tax return for the calendar year 1955 claiming among others a deduction for interest amounting to P970645 and reporting a taxable income of P6598212 On the basis of this return he was assessed the sum of P2105291 as income tax which he paid as follows Petitioner filed an amended return for the calendar year 1955 claiming therein an additional deduction in the amount of P4786870 representing interest paid on the donees gift tax thereby reporting a taxable net income of P1811342 and a tax due thereon in the sum of P316700 The claim for deduction was based on the provisions of Section 30(b) (1) of the Tax Code which authorizes the deduction from gross income of interest paid within the taxable year on indebtedness A claim for the refund of alleged overpaid income taxes for the year 1955 amounting to P1788501 which is the difference between the amount of P2105201 he paid as income taxes under his original return and of P316700 was filed together with this amended return BIR denied the claim On August 12 1958 the petitioner once more filed an amended income tax return for the calendar year 1955 claiming in addition to the interest deduction of P907645 appearing in his original return a deduction in the amount of P6058180 representing interest on the estate and inheritance taxes on the 12500 shares of stock thereby reporting a net taxable income for 1955 in the amount of P540032 and an income tax due thereon in the sum of P42800 Again this was denied CTA reversed

ISSUES 1) Whether the amount paid by respondent Palanca for interest on his delinquent estate and inheritance tax is deductible from the gross income for that year under Section 30 (b) (1) of the Revenue Code 2) Whether the claim for refund has prescribedHELD 1) Yes 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 We do not see any element in this case which can justify a departure from or abandonment of the doctrine in the Prieto case In both this and the said case the taxpayer sought the allowance as deductible items from the gross income of the amounts paid by them as interests on delinquent tax liabilities Of course what was involved in the cited case was the donors tax while the present suit pertains to interest paid on the estate and inheritance tax This difference however submits no appreciable consequence to the rationale of this Courts previous determination thatinterests on taxes should be considered as interests on indebtedness within the meaning of Section 30(b) (1) of the Tax Code 2) No The 30-day period under Section 11 of Republic Act 1125 did not even commence to run in this incident It should be recalled that while the herein petitioner originally assessed the respondent-claimant for alleged gift tax liabilities the said assessment was subsequently abandoned and in its lieu a new one was prepared and served on the respondent-taxpayer In this new assessment the petitioner charged the said respondent with an entirely new liability and for a substantially different amount from the first While initially the petitioner assessed the respondent for donees gift tax in the amount of P17000274 in thesubsequent assessment the latter was asked to pay P19159162 for delinquent estate and inheritance tax Considering that it is the interest paid on this latter-assessed estate and inheritance tax that respondent Palanca is claiming refund for then the thirty-day period under the abovementioned section of Republic Act 1125 should be computed from the receipt of the final denial by the Bureau of Internal Revenue of the said claim In the second place the claim at bar refers to the alleged overpayment by respondent Palanca of his 1955 income tax Inasmuch as the said account was paid by him by installment then the computation of the two year prescriptive period under Section 306 of the National Internal Revenue Code should be from the date of the last installmentDOCTRINE 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 VIUDA DE PRIETOFACTS Respondent conveyed by way of gifts to her four children namely Antonio Benito Carmen and Mauro all surnamed Prieto real property with a total assessed value of P89249750 After the filing of the gift tax returns on or about February 1 1954 the petitioner CIR appraised the real property donated for gift tax purposes at P123126800 and assessed the total sum of P11770650 as donors gift tax interest and compromises due thereon Of the total sum of P11770650 paid by respondent on April 29 1954 the sum of P5597865 represents the total interest on account of deliquency This sum of P5597865 was claimed as deduction among others by respondent in her 1954 income tax return Petitioner howeverdisallowed the claim and as a consequence of such disallowance assessed respondent for 1954 the total sum of P2141038 as deficiency income tax due on the aforesaid P5597865 including interest up to March 31 1957 surcharge and compromise for the late payment Under the law for interest to be deductible it must be shown that there be an indebtedness that there should be interest upon it and that what is claimed as an interest deduction should have been paid or accrued within the year It is here conceded that the interest paid by respondent was in consequence of the late payment of her donors tax and the same was paid within the year it is sought to be declaredISSUES Whether or not such interest was paid upon an indebtedness within the contemplation of section 30 (b) (1) of the Tax Code HELD Yes The term indebtedness as used in the Tax Code of the United States containing similar provisions as in the above-quoted section has been defined as an unconditional and legally enforceable obligation for the payment of money Although taxes already due have not strictly speaking the same concept as debts they are however obligations that may be considered as such The term debt is properly used in a comprehensive sense as embracing not merely money due by contract but whatever one is bound to render to another either for contract or the requirement of the law It follows that the interest paid by herein respondent for the late payment of her donors tax is deductible from her gross income under section 30(b) of

the Tax Code above quoted This conclusion finds support in the established jurisprudence in the United States after whose laws our Income Tax Law has been patterned Thus under sec 23(b) of the Internal Revenue Code of 1939 as amended which contains similarlyworded provisions as sec 30(b) of our Tax Code the uniform ruling is that interest on taxes is interest on indebtedness and is deductibleDOCTRINE The term indebtedness as used in the Tax Code of the United States containing similar provisions as in the abovequoted section has been defined as an unconditional and legally enforceable obligation for the payment of money

PAPER INDUSTRIES V CAFACTS Petitioner is registered with the BOI as a preferred pioneer enterprise with respect to its integrated pulp and paper mill and as a preferred non-pioneer enterprise with respect to its integrated plywood and veneer mills It received from the CIR two (2) letters of assessmentand demand (a) one for deficiency transaction tax and for documentary and science stamp tax and (b) the other for deficiency income tax for 1977 for an aggregate amount of P8876325500 Picop protested the assessment of deficiency transaction tax and documentary and science stamp taxes These protests were not formally acted upon by respondent CIR On 26 September 1984 the CIR issued a warrant of distraint on personal property and a warrant of levy on real property against Picop to enforce collection of the contested assessments in effect the CIR denied Picops protests Thereupon Picop went before the CTA Picop and the CIR both went to the Supreme Court on separate Petitions for Review of the above decision of the CTA In two (2) Resolutions dated 7 February 1990 and 19 February 1990 respectively the Court referred the two (2) Petitions to the Court of Appeals The Court of Appeals consolidated the two (2) cases and rendered a decision dated 31 August 1992 which further reduced the liability of Picop to P633835470 Picop now maintains that it is not liable at all to pay any of theassessments or any part thereof It assails the propriety of the thirty-five percent (35) deficiency transaction tax which the Court of Appeals held due from it in the amount of P357854351 Picop also questions the imposition by the Court of Appeals of the deficiency income tax of P148157915 resulting from disallowance of certain claimed financial guarantee expenses and claimed year-end adjustments of sales and cost of sales figures by Picops external auditors 3 The CIR upon the other hand insists that the Court of Appeals erred infinding Picop not liable for surcharge and interest on unpaid transaction tax and for documentary and science stamp taxes and in allowing Picop to claim as deductible expensesISSUES 1) Whether Picop is liable for the thirty-five percent (35) transaction tax 2) Whether Picop is liable for interest and surcharge on unpaid transaction tax 3) Whether Picop is entitled to deduct against current income interest payments on loans for the purchase of machinery and equipment 4) Whether Picop is entitled to deduct against current income net operating losses incurred by Rustan Pulp and Paper Mills Inc 5) Whether Picop is entitled to deduct against current income certain claimed financial guarantee expenses 6) Whether Picop had understated its sales and overstated its cost of sales for 1977 7) Whether Picop is liable for the corporate development tax of five percent (5) of its income for 1977 HELD 1) We agree with the CTA and the Court of Appeals that Picops tax exemption under RA No 5186 as amended does not include exemption from the thirty-five percent (35) transaction tax In the first place the thirty-five percent (35) transaction tax is an income tax that is it is a tax on the interest income of the lenders or creditors It is thus clear that the transaction tax is an income tax and as such in any event falls outside the scope of the tax exemption granted to registered pioneer enterprises by Section 8 of RA No 5186 as amended 2) Section 51 (c) and (e) of the 1977 Tax Code did not authorize the imposition of a surcharge and penalty interest for failure to pay the thirtyfive percent (35) transaction tax imposed under Section 210 (b) of the same Code The corresponding provision in the current Tax Code veryclearly embraces failure to pay all taxes imposed in the Tax Code without any regard to the Title of the Code where provisions imposing particular taxes are textually located Tax exemptions are to be sure to be strictly construed that is they are not to be extended beyond the ordinary and reasonable intendment of the language actually used by the legislative authority in granting the exemption The issuance of debenture bonds is certainly conceptually distinct from pulping and paper manufacturing operations But no one contends that issuance of bonds was a principal or regular business activity of Picop only banks or other financial institutions are in the

regular business of raising money by issuing bonds or other instruments to the general public3) We have already noted that our 1977 NIRC does not prohibit the deduction of interest on a loan incurred for acquiring machinery and equipment Neither does our 1977 NIRC compel the capitalization of interest payments on such a loan The 1977 Tax Code is simply silent ona taxpayers right to elect one or the other tax treatment of such interest payments Accordingly the general rule that interest payments on a legally demandable loan are deductible from gross income must be applied We conclude that the CTA and the Court of Appeals did not err in allowing the deductions of Picops 1977 interest payments on its loans for capital equipment against its gross income for 1977 4) After prolonged consideration and analysis of this matter the Court is unable to agree with the CTA and Court of Appeals on the deductibility of RPPMs accumulated losses against Picops 1977 gross income It is important to note at the outset that in our jurisdiction the ordinary rule mdash that is the rule applicable in respect of corporations notregistered with the BOI as a preferred pioneer enterprise mdash is that net operating losses cannot be carried over Under our Tax Code both in 1977 and at present losses may be deducted from gross income only if such losses were actually sustained in the same year that they are deducted or charged off Thus it is that RA No 5186 introduced the carry-over of net operatinglosses as a very special incentive to be granted only to registered pioneer enterprises and only with respect to their registered operations In the instant case to allow the deduction claimed by Picop would be to permit one corporation or enterprise Picop to benefit from the operatinglosses accumulated by another corporation or enterprise RPPM In effect to grant Picops claimed deduction would be to permit Picop to purchase a tax deduction and RPPM to peddle its accumulated operating losses We consider and so hold that there is nothing in Section 7 (c) ofRA No 5186 which either requires or permits such a result Indeed that result makes non-sense of the legislative purpose which may be seen clearly to be projected by Section 7 (c) RA No 5186 We conclude that the deduction claimed by Picop in the amount of P4419610600 in its 1977 Income Tax Return must be disallowed 5) We must support the CTA and the Court of Appeals in their foregoing rulings A taxpayer has the burden of proving entitlement to a claimeddeduction Even Picops own vouchers were not submitted in evidence and the BIR Examiners denied that such vouchers and other documents had been exhibited to them Moreover cash vouchers can only confirm the fact of disbursement but not necessarily the purpose thereof6) The CIR has made out at least a prima facie case that Picop had understated its sales and overstated its cost of sales as set out in its Income Tax Return For the CIR has a right to assume that Picops Books of Accounts speak the truth in this case since as already notedthey embody what must appear to be admissions against Picops own interest7) The adjusted net income of Picop for 1977 as will be seen below is P4868735500 Its net worth figure or total stockholders equity as reflected in its Audited Financial Statements for 1977 is P46474952800 Since its adjusted net income for 1977 thus exceeded ten percent (10) of its net worth Picop must be held liable for the five percent (5) corporate development tax in the amount of P243436775 DOCTRINE It is thus clear that the transaction tax is an income tax andas such in any event falls outside the scope of the tax exemptiongranted to registered pioneer enterprises by Section 8 of RA No 5186as amended

CIR v ITOGON-SUYOC MINES INCFACTS Respondent Itogon-Suyoc Mines Inc the taxpayer involved duly paid in full its liability according to its income tax return for the fiscal year 1960-61 Instead it deducted right away the amount represented by claim for refund filed eight (8) months back for the previous years income tax for which it was not liable at all so it alleged as it suffered a loss instead a claim subsequently favorably acted on by petitioner Commissioner of Internal Revenue but after the date of such payment of the 1960-1961 tax Accordingly an interest in the amount of P151283was charged by petitioner Commissioner of Internal Revenue on the sum withheld on the ground that no deduction on such refund should be allowed before its approval When the matter was taken up before the Court of Tax Appeals the above assessment representing interest wasset aside in the decision of September 30 1965ISSUES Whether CTA should not have absolved respondent corporation from liability to pay the sum of P151283 as 1 monthly interest for delinquency in the payment of income tax for the fiscal year 1960-1961

HELD No It could not be error for the Court of Tax Appeals considering the admitted fact of overpayment entitling respondent to refund to hold that petitioner should not repose an interest on the aforesaid sum of P1315520 which after all was paid to and received by the governmenteven before the incidence of the tax in question It would be according to the Court of Tax Appeals unfair and unjust to do so We agree but we go farther The imposition of such an interest by petitioner is not supported by lawThe National Internal Revenue Code provides that interest upon the amount determined as a deficiency shall be assessed and shall be paid upon notice and demand from the Commissioner of Internal Revenue There is no question respondent was entitled to a refund Instead of waiting for the sum involved to be delivered to it it deducted the said amount from the tax that it had to pay That it 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 time such a deduction was made the Commissioner of Internal Revenue had not as yet approved such a refund It is an admitted fact though that respondent was clearly entitled to it and petitioner did not allege otherwise Nor could he do so Under all the circumstances disclosed therefore the applicability of the legal provision allowing such a deduction from the amount of the tax to be paid cannot be disputed DOCTRINE It could not be error for the Court of Tax Appeals considering the admitted fact of overpayment entitling respondent to refund to hold that petitioner should not repose an interest on the aforesaid sum of P1315520 which after all was paid to and received by the government even before the incidence of the tax in question

CASTRO v COLLECTORFacts This is an appeal from a decision of the Court of Tax Appeals (in its CTA Case 141) holding petitioner Maria B Castro liable under the War Profits Tax Law Republic Act No 55 and ordering her to pay a deficiency war profits tax (including surcharges and interest) in theamount of P136051466 and costs Castro was previously acquitted in the criminal case instituted against her for violation of the War Profits Tax LawIssue WON the acquittal is a bar to the collection of the taxes assessed and specially of the 50 surchargeHeld NO With regard to the tax proper the state correctly points out in its brief that the acquittal in the criminal case could not operate to discharge petitioner from the duty to pay the tax since that duty is imposed by statute prior to and independently of any attempts on the part of the taxpayer to evade 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 declaration that the criminal acts charged did not exist As to the 50 surcharge the very United States Supreme Court that rendered the Coffey decision has subsequently pointed out that additions of this kind to the main tax are not penalties but civil administrative sanctions provided primarily as a safeguard for the protection of the state revenue and to reimburse the government for the heavy expense of investigation and the loss resulting from the taxpayers fraud (Helvering vs Mitchell 303 US 390 82 L Ed 917 Spies vs US 317 US 492) This is made plain by the fact that such surcharges are enforceable like the primary tax itself by distraint or civil suit and that they are provided in a section of RA No 55 (section 5) that is separate and distinct from that providing for criminal prosecution (section 7) We conclude that the defense of jeopardy and estoppel by reason of the petitioners acquittal isuntenable and without merit Whether or not there was fraud committed by the taxpayer justifying the imposition of the surcharge is an issue of fact to be inferred from the evidence and surrounding circumstances and the finding of its existence by the Tax Court is conclusive upon us (Gutierrez v Collector GR No L-9771 May 31 1951 Perez vs Collector supra)

COLLECTOR v FISHERFacts This case relates to the determination and settlement of the hereditary estate left by the deceased Walter G Stevenson and the laws applicable thereto Walter G Stevenson (born in the Philippines on August 9 1874 of British parents and married in the City of Manila on January 23 1909 to Beatrice Mauricia Stevenson another British subject) died on February 22 1951 in San Francisco California USA whereto he and his wife moved and established their permanent residence since May 10 1945 In his will executed in San Francisco on May 22 1947 and which was duly probated in the Superior Court of California on April 11 1951

Stevenson instituted his wife Beatrice as his sole heiress to the following real and personal properties acquired by the spouses while residing in the PhilippinesIssue 1 Whether or not the estate is entitled to the following deductions P860439 for judicial and administration expenses P208652 for funeral expenses P65250 for real estate taxes andP1002247 representing the amount of indebtedness allegedly incurred by the decedent during his lifetime 2 Whether or not the estate is entitled to the payment of interest on the amount it claims to have overpaid the government and to be refundable to itHeld 1 YES An examination of the record discloses however that the foregoing items were considered deductible by the Tax Court on the basis of their approval by the probate court to which said expenses we may presume had also been presented for consideration It is to besupposed that the probate court would not have approved said items were they not supported by evidence presented by the estate In allowing the items in question the Tax Court had before it the pertinent order of the probate court which was submitted in evidence by respondents (Exh AA-2 p 100 record) As the Tax Court said it found no basis for departing from the findings of the probate 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 National Association which it would appear that while still living Walter G Stevenson obtained we are not inclined to pass upon the claim of respondents in respect to theadditional amount of P8652 for funeral expenses which was disapproved by the court a quo for lack of evidence In connection with the deduction of P65250 representing the amount of realty taxes paid in 1951 on the decedents two parcels of land in Baguio City which respondents claim was disallowed by the Tax Court we find that this claim has in fact been allowed2 NO Respondents claim for interest on the amount allegedly overpaid if any actually results after a recomputation on the basis of this decision is hereby denied in line with our recent decision in Collector of Internal Revenue v St Pauls Hospital (GR No L-12127 May 29 1959) wherein we held that in the absence of a statutory provision clearly or expressly directing or authorizing such payment and none has been cited by respondents the National Government cannot be required to pay interest

DEDUCTIONS AND EXMEPTIONS ALLOWABLE DEDUCTIONSTAXESCIR v LEDNICKYFacts V E Lednicky and Maria Valero Lednicky are husband and wife both American citizens residing in the Philippines and have derived all their income from Philippine sources for the taxable years under question [GR L-18286] In compliance with local law the spouses on 27March 1957 filed their income tax return for 1956 reporting therein a gross income of P101728765 and a net income of P73380944 on which the amount of P31739541 was assessed after deducting P480559 as withholding tax Pursuant to the Commissioner of Internal Revenuersquos assessment notice the spouses paid the total amount of P32624741 inclusive of the withheld taxes on 15 April 1957 On 17 March 1959 the spouses filed an amended income tax return for 1956 The amendment consists in a claimed deduction of P20593924 paid in 1956 to the US government as federal income tax for 1956 Simultaneously with the filing of the amended return the spouses requested the refund of P11243790 When the Commissioner of Internal Revenue failed to answer the claim for refund the spouses filedtheir 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 P177112463 and a net income of P105255067 On 19 April 1956 they filed an amended income tax return the amendment upon the original being a lesser net income of P101255451 and on the basis of this amended return they paid P57025200 inclusive of withholding taxes After audit the Commissioner determined a deficiency of P1611600 which amount the spouses paid on 5 December 1956 Back in 1955 however the spouses filed with the US Internal Revenue Agent in Manila their Federal income tax return for the years 1947 1951 1952 1953 and 1954 on income from Philippine sources on a cash basis Payment of these federal income taxes including penalties and delinquency interest in the amount of $26458882 were made in 1955 to the US Director of Internal Revenue Baltimore Maryland through the National City Bank of New York Manila Branch Exchange and bank charges in

remitting payment totaled P414391 On 11 August 1958 the said respondents amended their Philippines income tax return for 1955 to including US Federal income taxes interest accruing up to 15 May 1955 and exchange and bank charges totaling P51634515 and therewith filed a claim for refund of the sum of P16638400 which was later reduced to P15026900 The spouses brought suit in the Tax Court which was docketed therein as CTA Case 570 [GR 21434] The facts are similar to above cases but refer to the spousesrsquo income tax returns for 1957 filed on 28 February 1958 and for which the spouses paid a total sum of P19679965 In 1959 they filed an amended return for 1957 claiming deduction of P19075580 representing taxes paid to the US Government on income derived wholly from Philippine sources On the strength thereof spouses seek refund of P9052075 as overpayment (CTA Case 783) The Tax Court decided for the spousesIssue WON there should be a refund for the spousesHeld NO The Supreme Court reversed the decisions of the Court of Tax Appeals and affirmed the disallowance of the refunds claimed by the spouses with costs against said spouses1 Section 30 (c-1) of the Philippine Internal Revenue Code Section 30 (c) (1) (Deduction from gross income) provides that ldquoin computing net income there shall be allowed as deductions (c) Taxes (1) In general mdash Taxes paid or accrued within the taxable year except (A) The income tax provided for under this Title (B) Income war-profits and excess profits taxes imposed by the authority of any foreign country but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits ofparagraph (3) of this subsection (relating to credit for taxes of foreign countries) (C) Estate inheritance and gift taxes and (D) Taxes assessed against local benefits of a kind tending to increase the value of the property assessedrdquo2 Paragraph (c) (3) (b) of the Tax Code Credits against tax for taxes of foreign countriesParagraph 3 (B) of the subsection (Credits against tax for taxes of foreign countries) reads ldquoIf the taxpayer signifies in his return his desire to have the benefits of this paragraph the tax imposed by this Title shall be credited with (B) Alien resident of the Philippines mdash In the case of an alien resident of the Philippines the amount of any such taxes paid or accrued during the taxable year to any foreign country if the foreign country of which such alien resident is a citizen or subject in imposing such taxes allows a similar credit to citizens of the Philippines residing insuch countryrdquo3 Paragraph (c) (4) of the Tax Code Limitation on credit The tax credit so authorized is limited under paragraph 4 (A and B) of the same subsection in the following terms ldquoPar (c) (4) Limitation on credit mdash The amount of the credit taken under this section shall be subject to each of the following limitations (A) The amount of the credit in respect to the tax paid or accrued to any country shall not exceed the same proportion of the tax against which such credit is taken which the taxpayerrsquos net income from sources within such country taxable under this Title bears to his entire net income for the same taxable year and (B) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken which the taxpayerrsquos net income from sources without the Philippines taxable under this Title bears to his entire net income for the same taxable yearrdquo4 Lawrsquos intent that right to deduct income taxes paid to foreign government taken as an alternative or substitute to claim of tax credit for such foreign income tax Construction and wording of Section 30 (c) (1) (B) of the Internal Revenue Act shows the lawrsquos intent that the right to deduct income taxes paid to foreign government from the taxpayerrsquos gross income is givenonly as an alternative or substitute to his right to claim a tax credit for such foreign income taxes under section 30 (c) (3) and (4) so that unless the alien resident has a right to claim such tax credit if he so chooses he is precluded from deducting the foreign income taxes from his gross income For it is obvious that in prescribing that such deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) (relating to credits for taxes paid to foreign countries) the statute assumes that the taxpayer in question also may signify his desire to claim a tax credit and waive the deduction otherwise the foreign taxes would always be deductible and their mention in the list of nondeductible items in Section 30 (c) might as well have been omitted or at least expressly limited to taxes on income from sources outside the Philippine Islands Had the law intended that foreign income taxes could be deducted from gross income in any event regardless of thetaxpayerrsquos right to claim a tax credit it is the latter right that should be conditioned upon the taxpayerrsquos waiving the deduction in which case the right to reduction under subsection (c-1-B)

would have been made absolute or unconditional (by omitting foreign taxes from the enumeration of non- deductions) while the right to a tax credit under subsection (c-3) would have been expressly conditioned upon the taxpayerrsquos not claiming any deduction under subsection (c-1)5 Danger of double credit does not exist if taxpayer cannot claim benefit from either headings at his option The purpose of the law is to prevent the taxpayer from claiming twice the benefits of his payment of foreign taxes by deduction from gross income (subs c-1) and by tax credit (subs c-3) This danger of double credit certainly can not exist if the taxpayer can not claim benefit under either of these headings at his option so that he must be entitled to a tax credit (the spouses admittedly are not so entitled because all their income is derived from Philippine sources) or the option to deduct from gross income disappears altogether6 When double taxation Tax income should accrue to benefit of the PhilippinesDouble taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity (cf Manila vs Interisland Gas Service 52 Off Gaz 6579 Manuf Life Ins Co vs Meer 89 Phil 357) In the present case while the taxpayers would have to pay two taxes on the same income the Philippine government only receives the proceeds of one tax As between the Philippines where the income was earned and where the taxpayer is domiciled and the United States where that income was not earned and where the taxpayer did not reside it is indisputable that justice and equity demand that the tax on the income should accrue to the benefit of the Philippines Any relief from the alleged double taxation should come from the United States and not from the Philippines since the formerrsquos right to burden the taxpayer is solely predicated on his citizenship without contributing to the production of the wealth that is being taxed To allow an alien resident to deduct from his gross income whatever taxes he pays to his own government amounts to conferring on the latterpower to reduce the tax income of the Philippine government simply by increasing the tax rates on the alien resident Everytime the rate of taxation imposed upon an alien resident is increased by his own government his deduction from Philippine taxes would correspondingly increase and the proceeds for the Philippines diminished thereby subordinating our own taxes to those levied by a foreign government Such a result is incompatible with the status of the Philippines as an independent and sovereign state

GUTIERREZ v COLLECTORFacts Maria Morales was the registered owner of an agricultural land designated as Lot No 724-C of the cadastral survey of Mabalacat Pampanga The Republic of the Philippines at the request of the USGovernment and pursuant to the terms of the Military Bases Agreement of March 14 1947 instituted condemnation proceedings in the Court of the First Instance of Pampanga docketed as Civil Case No 148 for the purpose of expropriating the lands owned by Maria Morales and others needed for the expansion of the Clark Field Air Base t the commencement of the action the Republic of the Philippines therein plaintiff deposited with the Clerk of the Court of First Instance of Pampanga the sum of P156960 which was provisionally fixed as the value of the lands sought to be expropriated in order that it could take immediate possession of the same On January 27 1949 upon order of the Court the sum of P34580 (PNB Check 721520-Exh R) was paid by the Provincial treasurer of Pampanga to Maria Morales out of the original deposit of P156960 made by therein plaintiff After due hearing the Court of First Instance of Pampanga rendered decision dated November 29 1949 wherein it fixed as just compensation P2500 per hectare for some of the lots and P3000 per hectare for the others which values were based on the reports of the Commission on Appraisal whose members were chosen by both parties and by the Court which took into consideration the different conditions affecting the value of the condemned properties in making their findingsIn virtue of said decision defendant Maria Morales was to receive the amount of P9430575 as compensation for Lot No 724-C which was one of the expropriated lands Sometime in 1950 the spouses Blas Gutierrez and Maria Morales received the sum of P5978575 presenting the balance remaining in their favor after deducting the amount of P34580 already withdrawn from the compensation to them In a notice of assessment dated January 28 1953 the Collector ofInternal Revenue demanded of the petitioners the payment of P8481 as alleged deficiency income tax for the year 1950 inclusive of surcharges and penalties The CIR contended that petitioners-appellants failed to include from their gross income in filing their income tax return for 1950 the amount of P9430575 which they had received as compensation for their land

taken by the Government by expropriation proceedings It is the contention of respondent Collector of Internal Revenue that such transfer of property for taxation purposes is sale and that the income derived therefrom is taxable The lower court exonerated petitioners from the 50 per cent surchargeimposed on the latter on the ground that the taxpayers income tax return for 1950 is false andor fraudulentIssue WON petitioners should pay surcharge Held NO It should be noted that the Court of Tax Appeals found that the evidence did not warrant the imposition of said surcharge becausethe petitioners therein acted in good faith and without intent to defraud the GovernmentThe question of fraud is a question of fact which frequently requires a nicely balanced judgement to answer All the facts and circumstances surrounding the conduct of the tax payers business and all the facts incident to the preparation of the alleged fraudulent return should be considered (Mertens Federal Income Taxation Chapter 55) The question of fraud being a question of fact and the lower court having made the finding that the evidence of this case does not warrant the imposition of the 50 per cent surcharge We are constrained to refrain from giving any consideration to the question raised by the Solicitor General for it is already settled in this jurisdiction that in passing upon petitions to review decisions of the Court of Tax Appeals We have to confine ourselves to questions of law

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSLOSSESFERNANDEZ HERMANOS v CIRFacts These four appeals involve two decisions of the Court of Tax Appeals determining the taxpayers income tax liability for the years 1950 to 1954 and for the year 1957 Both the taxpayer and the Commissioner of Internal Revenue as petitioner and respondent in the cases a quo respectively appealed from the Tax Courts decisions insofar as their respective contentions on particular tax items were therein resolved against themIssue ProperImproper AllowancesDisallowances of LossesHeld Re allowancesdisallowances of losses(a) Allowance of losses in Mati Lumber Co (1950) mdash The Commissioner of Internal Revenue questions the Tax Courts allowance of the taxpayers writing off as worthless securities in its 1950 return the sum of P805000 representing the cost of shares of stock of Mati Lumber Co acquired by the taxpayer on January 1 1948 on the ground that the worthlessness of said stock in the year 1950 had not been clearly established The Commissioner contends that although the said Company was no longer in operation in 1950 it still had its sawmill and equipment which must be of considerable value There was adequate basis for the writing off of the stock as worthless securities Assuming that the Company would later somehow realize some proceeds from its sawmill and equipment which were still existing as claimed by the Commissioner and that such proceeds would later be distributed to its stockholders such as the taxpayer the amount so received by the taxpayer would then properly be reportable as income of the taxpayer in the year it is received(b) Disallowance of losses in or bad debts of Palawan Manganese Mines Inc (1951) mdash The taxpayer appeals from the Tax Courts disallowance of its writing off in 1951 as a loss or bad debt the sum of P35313425 which it had advanced or loaned to Palawan Manganese Mines Inc Pursuant to the agreement mentioned above petitioner gave to Palawan Manganese Mines Inc yearly advances starting from 1945 which advances amounted to P58730807 by the end of 1951 Despite these advances and the resumption of operations by Palawan ManganeseMines Inc it continued to suffer losses By 1951 petitioner became convinced that those advances could no longer be recovered While it continued to give advances it decided to write off as worthless the sum of P35313425 Under the circumstances was the sum of P35313425properly claimed by petitioner as deduction in its income tax return for 1951 either as losses or bad debts It will be noted that in giving advances to Palawan Manganese Mine Inc petitioner did not expect to be repaid It is true that some testimonial evidence was presented to show that there was some agreement that the advances would be repaid but no documentary evidence was presented to this effect The memorandum agreement signed by the parties appears to be very clear that the consideration for the advances made by petitioner was 15 of the net profits of Palawan Manganese Mines Inc In other words if there were no earnings or profits there

was no obligation to repay those advances It has been held that the voluntary advances made without expectation of repayment do not result in deductible losses The Tax Courts is allowance of the write-off was proper The Solicitor General has rightly pointed out that the taxpayer has taken an ambiguous position and has not definitely taken a stand on whetherthe amount involved is claimed as losses or as bad debts but insists that it is either a loss or a bad debt 4 We sustain the governments position that the advances made by the taxpayer to its 100 subsidiary Palawan Manganese Mines Inc amounting to P58730807 as of 1951 wereinvestments and not loans 5 (c) Disallowance of losses in Balamban Coal Mines (1950 and1951) mdash The Court sustains the Tax Courts disallowance of the sums of P898976 and P2773266 spent by the taxpayer for the operation of its Balamban coal mines in Cebu in 1950 and 1951 respectively and claimed as losses in the taxpayers returns for said years The Tax Court correctly held that the losses are deductible in 1952 when the mines were abandoned and not in 1950 and 1951 when they were still in operation 9 The taxpayers claim that these expeditions should be allowed as losses for the corresponding years that they were incurredbecause it made no sales of coal during said years since the promised road or outlet through which the coal could be transported from the mines to the provincial road was not constructed cannot be sustained Some definite event must fix the time when the loss is sustained and here it was the event of actual abandonment of the mines in 1952 (d) and (e) Allowance of losses in Hacienda Dalupiri (1950 to 1954) and Hacienda Samal (1951-1952) mdash The Tax Court overruled the Commissioners disallowance of these items of losses thus Petitioner deducted losses in the operation of its Hacienda Dalupiri the sums of P1741895 in 1950 P2912582 in 1951 P2674481 in 1952 P2193262 in 1953 and P4293856 in 1954 These deductions were disallowed by respondent on the ground that the farm was operated solely for pleasure or as ahobby and not for profit This conclusion is based on the fact that the farm was operated continuously at a loss From the evidence we are convinced that the Hacienda Dalupiri was operated by petitioner for business and not pleasure It was mainly a cattle farm although a few race horses were also raised It does not appear that the farm was used by petitioner for entertainment social activities or other nonbusiness purposes Therefore it is entitled to deduct expenses and losses in connection with the operation of said farm (See 1955 PH Fed Taxes Par 13 63 citing GCM 21103 CB 1939- 1 p164) Section 100 of Revenue Regulations No 2 otherwise known as the Income Tax Regulations authorizes farmers to determine their gross income on the basis of inventories Said regulations provide If gross income is ascertained by inventories no deduction can be made for livestock or products lost during 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 quote from the memorandum of counsel for petitioner The Taxpayer deducted from its income tax returns for the years from 1950 to 1954 inclusive the corresponding yearly losses sustained in the operation of Hacienda Dalupiri which losses represent the excess of its yearly expenditures over the receipts that is the losses represent the difference between the sales of livestock and the actual cash disbursements or expenses (Pages 21-22 Memorandum for Petitioner) As the Hacienda Dalupiri was operated by petitioner for business and since it sustained losses in its operation which losses were determined by means of inventories authorized under Section 100 of Revenue Regulations No 2 it was error for respondent to have disallowed the deduction of said losses The same is true with respect to loss sustained in the operation of the Hacienda Samal for the years 1951 and 1952 10 The Commissioner questions that the losses sustained by the taxpayer were properly based on the inventory method of accounting He concedes however that the regulations referred to does not specify how the inventories are to be made The Tax Court however felt satisfied with the evidence presented by the taxpayer which merely consisted of an alleged physical count of the number of the livestock in Hacienda Dalupiri for the years involved 11 The Tax Court was satisfied with the method adopted by the taxpayer as a farmer breeding livestock reporting on the basis of receipts and disbursements We find no Compelling reason to disturb its findings

PLARIDEL SURETY v CIRFacts Petitioner Plaridel Surety amp Insurance Co is a domestic corporation engaged in the bonding business On November 9 1950 petitioner as surety and Constancio San Jose as principal solidarily executed a performance bond in the penal sum of P3060000 in favor of the

P L Galang Machinery Co Inc to secure the performance of San Joses contractual obligation to produce and supply logs to the latter To afford itself adequate protection against loss or damage on the performance bond petitioner required San Jose and one Ramon Cuervo to execute an indemnity agreement obligating themselves solidarily to indemnify petitioner for whatever liability it may incur by reason of said performance bond Accordingly San Jose constituted a chattel mortgage on logging machineries and other movables in petitioners favor1 while Ramon Cuervo executed a real estate mortgage2 San Jose later failed to deliver the logs to Galang Machinery3 and the latter sued on the performance bond On October 1 1952 the Court of First Instance adjudged San Jose and petitioner liable it also directed San Jose and Cuervo to reimburse petitioner for whatever amount it would pay Galang Machinery The Court of Appeals on June 17 1955 affirmed the judgment of the lower court The same judgment waslikewise affirmed by this Court4 on January 11 1957 except for a slight modification apropos the award of attorneys fees In its income tax return for the year 1957 petitioner claimed the saidamount of P4449000 as deductible loss from its gross income and accordingly paid the amount of P13600 as its income tax for 1957 The Commissioner of Internal Revenue disallowed the claimed deduction of P4449000 and assessed against petitioner the sum of P889800 plus interest as deficiency income tax for the year 1957 Petitioner filed its protest which was denied Whereupon appeal was taken to the Tax Court petitioner insisting that the P4449000 which it paid to Galang Machinery was a deductible lossIssue WON the amount Plaridel paid to Galang Machinery is a deductible lossHeld NO There is no question that the year in which the petitioner Insurance Co effected payment to Galang Machinery pursuant to a final decision occurred in 1957 However under the same court decision San Jose and Cuervo were obligated to reimburse petitioner for whateverpayments it would make to Galang Machinery Clearly petitioners loss is compensable otherwise (than by insurance) It should follow then that the loss deduction can not be claimed in 1957 Now petitioners submission is that its case is an exception Citing Cu Unjieng Sons Inc v Board of Tax Appeals6 and American cases also petitioner argues that even if there is a right to compensation by insurance or otherwise the deduction can be taken in the year of actual loss where the possibility of recovery is remote The pronouncement however to this effect in the Cu Unjieng case is not as authoritative as petitioner would have it since it was there found that the taxpayer had no legal right to compensation either by insurance or otherwise7 And the American cases cited8 are not in point None of them involved a taxpayer who had as in the present case obtained a final judgment against third persons for reimbursement of payments made In those cases there was either no legally enforceable right at all or such claimed right was still to be or being litigated On the other hand the rule is that loss deduction will be denied if there is a measurable right to compensation for the loss with ultimate collectionreasonably clear So where there is reasonable ground for reimbursement the taxpayer must seek his redress and may not secure a loss deduction until he establishes that no recovery may be had9 In other words as the Tax Court put it the taxpayer (petitioner) must exhaust his remedies first to recover or reduce his loss But assuming that there was no reasonable expectation of recovery still no loss deduction can be had Sec 30 (d) (2) of the Tax Code requires a charge-off as one of the conditions for loss deduction In the case of a corporation all losses actually sustained and charged-off within the taxable year and not compensated for byinsurance or otherwise Mertens12 states only four (4) requisites because the United StatesInternal Revenue Code of 193913 has no charge-off requirement Sec 23(f) thereof provides merely In the case of a corporation losses sustained during the taxable year and not compensated for by insurance or otherwise Petitioner who had the burden of proof14 failed to adduce evidence that there was a charge-off in connection with the P4449000mdashor P3060000 mdash which it paid to Galang Machinery

CHINA BANKING CORPORATION V COURT OF APPEALSFacts Petitioners mad a 53 equity investment in First CBC Capital (Asia) Limited to the amount of P1622785180 consisting of 106000 shares with par value of P100 per shareSubsequently First CBC was found to be insolvent Petitioners with the approval of the BSP wrote off as worthless its investment in the company and treated it as a bad debt or ordinary loss deductible from its gross income The Commissioner of Internal Revenue disallowed the deduction saying that the investment could not be considered worthless since First CBC could still exercise its financing and investment activities even if it was no longer licensed as a

depository Even assuming that the securities had become worthless it still cannot be considered as a bad debt or expense since there is no indebtedness between petitioner and First CBC It should be classified as a capital lossHeld The SC found in favor of respondents1 Not and indebtedness An equity investment in shares of stock cannot be considered as an indebtedness of First CBC Capital to China Bank The former has no obligation to repay the latter the amount invested The amount China Bank invested in First CBC is in fact anasset2 Capital asset not ordinary Capital assets are defined in the negative by Sec 33(1) of the NIRC as property held by the TP exclusive of items primarily for the sale to customers in the ordinary course of business or property used in trade or business Hence securities such as equity holdings are ordinary assets only in the hands of a dealer or a person actively engaged in trading in the same for his own account3 Section 29(d)(4)(B) of the NIRC treats the worthlessness of the securities held as capital assets as a loss resulting from the sale or exchange of capital assets Strictly speaking no sale occurs when securities held as capital assets become worthless Nonetheless the law treats it as a loss from a sale just the same4 Section 33 of the NIRC provides that the capital loss sustained can only be deducted from any capital gain derived within the taxable year The same provision enumerates assets which are not subject to the said limitation but equity holdings are not one of them

THE CITY LUMBER INC V DOMINGOFacts Respondent Domingo made an assessment on an additional income of petitioners in the amount of P16 67863 coming from 1 the sale of plywood kegs of nails and GI sheets amouting to P 790207 2 a cash credit balance of P789680 Petitioner assails the validity of the assessment alleging that the inventory in question was not sold but were lost to looters during a fire which occurred in the city To 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 was actually a loan secured by petitionersHELDThe assessments were valid 1 The alleged loss of the plywood and kegs of nails was never reported in the books of the petitioner nor in the petitioners ITR for that year Such conduct of the petitioner proves that such loss never occurred 2 Similarly there was neither any record in petitioners books nor any receipt or other piece of evidence to show receipt of the supposed loan

MARCELO STEEL CROP V COLLECTOR OF INTERNAL REVENUEFacts RA 35 granted a four-year tax exemption from all internal revenue taxes to enterprises directly payable by such enterprise or person which shall engage in new and necessary industries Petitioner corporation was engaged in 1 the manufacture of wire fences 2 the manufacture of steel nails 3 the manufacture of steel bars rods and other allied productsof which the last two were covered by RA 35 In 1953 and 1954 petitioner filed its ITR showing a net income of P3438658 and P5832900 respectively derived solely from its wire fence manufacturing business It was accordingly assessed P12750 in taxes which it paid subsequently it filed an amended ITR for the same taxable years showing that it actually incurred a loss of P87140737 and P10495629 respectively The losses were arrived at by consolidating the gross income and the gross allowable deductions of its three industries Petitioner thus filed for a refund of the P12750 it initially paid in taxes on the theory that since it is a corporation organized with a single capital to answer for all its financial obligations the gross income from both tax-exempt and non-exempt industries and its liability should be based on the difference between its consolidated gross income and its consolidated allowable deductionsHeld Petition has no merit Marcelo Steel cannot consolidate 1 The purpose of RA 35 is to encourage the establishment of new and necessary industries for the economic growth of the country In effect it grants a subsidy to entrepreneurs who blaze a trail in a new industry since there are greater risks involved in the same and an ROI is usually not immediately forthcoming As such a tax exemption granted to an entrepreneur engaged in a tax-exempt industry cannot be extended to benefit non-exempt industries in which the same entrepreneur is concurrently

engaged The justification is simply not there since such industries are presumably already deriving profits from its operations 2 Single capital - The fact that all three industries are organized under a single capital is of no moment It is clear that the law intended that tax exemptand non-exempt industries be treated separately as reflected in EO 341 series 0f 1950 which was incorporated in RA 901 a later incarnation of the same lawPHILIPPINE SUGAR ESTATE CORP V COLLECTOR OF INTERNALREVENUEFacts Petitioner owned shares of stock in several different companies and 154 liberty bonds at par 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 inclusiveof the sums above-stated for which it was assessed an amount in taxes It paid said amount without protest Subsequently petitioner filed a demand for refund In the letter-demand the ground for the refund invoked was the illegality o the collection since the dividends and interest were exempt from payment of income tax Although in the present petition the ground invoked is that the income tax on dividends had already been paid at the source Respondent denied the claim for refund because plaintiff failed to lodge a protest concurrently when it paid its tax liability as per Sec 1579 of the Revised Administrative Code as amended by Act No 3685 Plaintiffcountered by saying that the applicable law is Act No 2833 which requires no protest In addition it invoked the ruling in Fox v Edwards wherein it was ruled that any unduly paid income tax may be refunded without the necessity of a protestHeld The SC found in favor of the Collector1Controlling law - There is no need to distinguish between the two laws in this case Section 19 of Act 2833 provides that all administrative special and general provisions of law including laws in relation to the assessment remission collection and refund of internal revenue taxesnot hereto fore repealed and not inconsistent withthis Law areapplicableto this Law By virtue of this saving clause Section 1579 of the Revised Administrative Code finds application to Act 28332 Fox v Edwards is not controlling since the law specifically applied therein did not require the lodging of a protest concurrently with the payment for a TP to retain such right to protest (NOTE fr digester I did not find anything on losses or bad debts in this case I may have overlooked it)

DEDUCTIONS AND EXEPTIONS ALLOWABLE DEDUCTIONS BADDEBTSPHILIPPINE REFINING COMPANY V COURT OF APPEALSFacts In 1985 petitioner filed its ITR where it claimed 16 items amounting to P71307093 as bad debts and therefor deductible Subsequently the Commissioner for Internal Revenue disallowed such deductions and assessed petitioner to pay a deficiency tax for the year of 1985 Petitioner paid the deficiency tax under protest which the Commissioner deniedUpon a petition for review the CTA modified the findings of the Commissioner by reducing the deficiency tax assessment on the basis that three of the sixteen supposed bad debts could be allowed as deductions The CA later on agreed with the CTAHeld The SC upheld the ruling of the CA which it found to be in accordance with the SCs ruling in Collector v Goodrich It held the petitioner failed to substantiate the ldquoworthlessnessrdquo of the 13 debts which it claimed as deductions As per the ruling in Collector v Goodrich to qualify as a bad debt a TP must show 1 that there is a valid and subsisting debt2 that the debt must be actually ascertained to be worthless and uncollectible durring the taxable year3 the debt must be charged off during the taxable year and4 the debt must arise from the business or trade of the TPIn addition the Court said before a debt can be considered worthless the TP must also show that it is indeed uncollectible even in the future Furthermore the TP must undertake several steps to prove that he exerted diligent efforts to collect the debt1 sending statements of accounts to the debtors 2 sending of collection letters 3 giving the account to a lawyer for collection and4 filing a collection case in court In the case at bar the petitioner miserably failed to show any of the foregoing The only piece of evidence it offered to show the worthlessness of the debts was the testimony of the companys financial adviser or accountant The Court found that this lacked the required probity to establish that the accounts it claimed as bad debts were indeed

worthless Apart from such testimony the petitioner failed to introduce even a single iota of evidence to bolster its claim of worthlessness (NOTE In the rest of the case the Court presents the allegation of the petitioner as to why it could not collect on any of the 13 debts followed bya statement how the petitioner failed to introduce evidence to substantiate such allegation)

Collector of Internal Revenue v Goodrich International Rubber Co(21 SCRA 1336 No L-22265)Facts In 1951 and 1952 respondent Goodrich filed it ITR in which it claimed an aggregate amount (consisting of 18 individual accounts) of P5045541 as deductible for being bad debts The Collector of Internal Revenue disallowed the deductions and accordingly assessed Goodrich accordingly Goodrich protested the assessment and subsequently filed an appealwith the CTA which allowed the deductions for bad debts Hence this appeal by the GovernmentHeld Petition is partially meritorious Some of the items claimed by Goodrich can rightfully be written off as bad debts The SC rejected the claim for deduction of 10 items because Goodrichfailed to establish that that the debts were actually worthless or that it had reasonable grounds to believe them to be so in 1951 The law permits the deduction of debts ldquoactually ascertained to be worthless within the taxable yearrdquo obviously to prevent arbitrary action by the TP to unduly avoid tax liability Good faith on the part of the TP is not enough He must furthermore show that he had reasonably investigated the relevant facts and had drawn a reasonable inference from the information 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 actually made (some in full) after they had been characterized as bad debts and written off The Court however ruled that 8 of the 18 claimed bad debts can beallowed as deductions Common among these 8 was the action of Goodrich in persistently demanding payment from its debtors its endorsement of the accounts to counsel for collection the pursuit of legal remedies for the collection on these debts and the continuing failureclear inability of the debtors to pay off their obligations

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSDEPRECIATIONBASILAN ESTATES INC v CIRFacts Basilan Estates Inc claimed deductions for the depreciation of its assets on the basis of their acquisition cost As of January 1 1950 it changed the depreciable value of said assets by increasing it to conform with the increase in cost for their replacement Accordingly from 1950 to1953 it deducted from gross income the value of depreciation computed on the reappraised value CIR disallowed the deductions claimed by petitioner consequently assessing the latter of deficiency income taxesIssueWhether or not the depreciation shall be determined on the acquisition cost rather than the reappraised value of the assetsHeld Yes The following tax law provision allows a deduction from gross income for depreciation but limits the recovery to the capital invested in the asset being depreciated (1)In general mdash A reasonable allowance for deterioration of property arising out of its use or employment in the business or trade or out of its not being used Provided That when the allowance authorized under this subsection shall equal the capital invested by the taxpayer no further allowance shall be made The income tax law does not authorize the depreciation of an asset beyond its acquisition cost Hence a deduction over and above such cost cannot be claimed and allowed The reason is that deductions from gross income are privileges not matters of right They are not created by implication but upon clear expression in the law Depreciation is the gradual diminution in the useful value of tangible property resulting from wear and tear and normal obsolescense It commences with the acquisition of the property and its owner is not bound to see his property gradually waste without making provision out of earnings for its replacement The recovery free of income tax of an amount more than the invested capital in an asset will transgress the underlying purpose of a depreciation allowance For then what the taxpayer would recover will be not only the acquisition cost but also some profit Recovery in due time thru depreciation of investment made is the philosophy behind depreciation allowance the idea of profit on the investment made has never been the underlying reason for the allowance of a deduction for depreciation

Zamora v CIRFacts These are 4 cases regarding deficiency income taxes allegedly incurred by the ZamorasCases Nos L-15290 and L-15280Mariano Zamora owner of the Bay View Hotel and Farmacia Zamora Manila filed his income tax returns the years 1951 and 1952 The Collector of Internal Revenue found that he failed to file his return of the capital gains derived from the sale of certain real properties and claimed deductions which were not allowable The CTA reduced the sum due Zamora and on appeal petitioner alleged that the CTA erred in disallowing the promotion expenses incurred by his wife for promotion of the above businesses depreciation of the Bayview Hotel Bldg and in applying the Ballantyne scale of values for determining the cost of his Manila property The CIR on the other hand claimed that the CTA erred in reducing the amounts and giving credence to the uncorroborated testimony of Mariano Zamora that he bought the said real property in question during the Japanese occupation partly in Philippine currency and partly in Japanese war notes Cases Nos L-15289 and L-15281 Mariano Zamora and his deceased sister Felicidad Zamora bought a piece of land located in Manila on May 16 1944 for P13200000 and sold it for P7500000 on March 5 1951 They also purchased a lot located inQuezon City for P6895900 on January 19 1944 which they sold for P94000 on February 9 1951 The CTA ordered the estate of the late Felicidad Zamora (represented byEsperanza A Zamora as special administratrix of her estate) to pay the sum of P23550 representing alleged deficiency income tax and surcharge due from said estateFirst issue ndash disallowance of the entire promotion expenses incurred by Mrs ZamoraPetitioner The CTA erred in disallowing P1047850 as promotion expenses incurred by his wife for the promotion of the BayView Hotel and Farmacia Zamora He contends that the whole amount of P2095700 as promotion expenses should be allowed and not merely one-half of it on the ground that while not all the itemized expenses are supported by receipts the absence of some supporting receipts has been sufficiently and satisfactorily established - to purchase machinery for a new Tiki-Tiki plant and to observe hotel management in modern hotelsRespondents Mrs Zamora obtained only the sum of P500000 from the Central Bank and that in her application for dollar allocation she stated that she was going abroad on a combined medical and business trip which facts were not denied by Mariano Zamora The alleged expenses were not supported by receipts Mrs Zamora could not even remember how much money she had when she left abroad in 1951 and how the alleged amount of P2095700 was spent There having been no means by which to ascertain which expense was incurred by her inconnection with the business of Mariano Zamora and which was incurred for her personal benefit the respondents considered 50 of the said amount of P2095700 as business expenses and the other 50 as her personal expensesHeld The 50 allocation is very fair to Zamora there being no receipt to explain the alleged business expenses as well as the personal expenses that might have been incurred While in situations like the present absolute certainty is usually no possible the CTA should make as close an approximation as it can bearing heavily if it chooses upon the taxpayer whose inexactness is of his own making Section 30 of the Tax Code provides that in computing net income there shall be allowed as deductions all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business Since promotion expenses constitute one of the deductions in conducting a business same must testify these requirements Claim for the deduction of promotion expenses or entertainment expenses must also be substantiated or supported by record showing in detail the amount and nature of the expenses incurredSecond issue ndash disallowancereduction of the rate of depreciation of Bayview Hotel (from 35 to 25)Petitioner Contends that 1) the Ermita district is becoming a commercial district 2) the hotel has no room for improvement and(3) the changing modes in architecture styles of furniture and decorative designs must meet the taste of a fickle public Alsothe reference to Bulletin F a publication by the IRS should have been first proved as law to be subject of judicial noticeHeld The CTA was approximately correct in holding that the rate of depreciation must be 25 An average hotel buildingrsquos estimated useful life is 5 years but inasmuch as it also depends on the use and location change in population and other it is allowed a deprecation rate of 25 which corresponds to a useful life of 40 years It is true that Bulletin F has no binding force but it has a strong persuasive effect considering that the same has been the result of scientific studies

and observation for a long period in the United States after whose Income Tax Law ours is patterned Verily courts are permitted to look into and investigate the antecedents or the legislative history of the statutes involvedThird issue-the undeclared capital gains derived from the sales in 1951 of certain real properties in Malate Manila and in Quezon City acquired during the Japanese occupationHeld The CTArsquos appraisal in this case is correct Consequently the total undeclared income of petitioners derived from the sales of the Manila and Quezon City properties in 1951 is P1711175 (P175000 plus P1536175) 50 of which in the sum of P855588 is taxable the said properties being capital assets held for more than one year The cost basis of property acquired in Japanese war notes is the equivalent of the war notes in genuine Philippine currency in accordance with the Ballantyne Scale 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 P13200000 was not entirely paid in Japanese War notes but frac12 thereof or P6600000 was in Philippine currency This being the case the Ballantyne Scale of values which was the resultof an impartial scientific study adopted and given judicial recognition should be applied As the value of the Japanese war notes in May 1944 when the Manila property was bought was 1 frac12 of the genuine Philippine Peso (Ballantyne Scale) and since the gain derived or loss sustained inthe disposition of this property is to reckoned in terms of Philippine Peso the value of the Japanese war notes used in the purchase of the property must be reduced in terms of the genuine Philippine Peso to determine the cost of acquisition It therefore results that since the sum of P6600000 in Japanese war notes in May 1944 is equivalent to P550000 in Philippine currency (P6600000 divided by 12) the acquisition cost of the property in question is P6600000 plus P550000 or P7150000 and that as the property was sold for P7500000 in 1951 the owners thereof Mariano and Felicidad Zamora derived a capital gain of P350000or P175000 each For the Quezon City property the CTA was correct in giving credence toZamorarsquos testimony that the same was purchased inPhilippine currency because it is quite incredible that real property with an assessed value of P4691000 should have been soldin Japanese war notes with an equivalent value in Philippine currency of only P1723975 Thus the gain derived from the sale isP1536175 after deducting from the selling price the cost of acquisition in the sum of P6895900 and the expense of sale in the sum of P967925Disposition The petitions are dismissed and the decision appealed from is affirmed

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSDEPLETIONCONSOLIDATED MINES V CTAFacts Cosolidated Mines filed a refund for overpayments of income taxes for the year 1951 However after investigation of the BIR instead of having a refund the company was instead assessed for deficiency income taxes for the years 1953 1954 and 1956 with 5 surchargeand 1 monthly interest According to the investigation (A) for the years 1951 to 1954 (1) the Company had not accrued as an expense the share in the company profits of Benguet Consolidated Mines as operator of the Consolidateds mines although for income tax purposes the Consolidated had reported income and expenses on the accrual basis (2) depletion and depreciation expenses had been overcharged and (3) the claims for audit and legal fees and miscellaneous expenses for 1953 and 1954 had not been properly substantiated and that (B) for the year 1956 (1) the Company had overstated its claim for depletion and (2) certain claims for miscellaneous expenses were not duly supported by evidence Background info Consolidated and Benguet entered into a development agreement whereby Consolidated as the owner of several mining claims allowed Benguet to explore develop mine concentrate andmarket the ore in the mining claims In the agreement it was provided that benguet is to provide the funds necessary for the expenses until such time the properties are on a profit producing basis to be reimbursed by consolidated Once profit is derived expenditures from its own resources shall be charged against the subsequent gross income of the properties During the time Benguet is being reimbursed for all its expenditures the net profits resulting from the operation of the claims shall be divided 90 to Benguet and 10 to Consolidated Such division of net profits shall be based on the receipts and expenditures during each calendar year and

shall continue until such time as the 90 of the net profits pertaining to Benguet hereunder shall equal the amount of such expenditures ldquoAfter Benguet has been fully reimbursed for its expenditures the net profits from the operation shall be divided between Benguet and Consolidated share and share alike it being understood however that the net profits as the term is used in this agreement shall be computed by deducting from gross income all operating expenses and all disbursements of any nature whatsoever as may be made in order to carry out the terms of this agreementrdquo It appears that by 1953 Benguet had completely recouped its advances because they were then dividing the profits share and share alike Consolidated used the accrual method of accounting in computing its income One of its expenses is the amount-paid to Benguet as mine operator which amount is computed as 50 of ldquonet incomerdquo TheConsolidated deducts as an expense 50 of cash receipts minus disbursements but does not deduct at the end of each calendar year what the Commissioner alleges is 50 of the share of Benguet in the accounts receivable However it deducts Benguets 50 if and when the accounts receivable are actually paid It would seem therefore that Consolidated has been deducting a portion of this expense (Benguets share as mine operator) on the cash amp carry basis The question is whether or not the accounting system used by Consolidated justifies such a treatment of this item and if not whether said method used by Consolidated and characterized by the Commissioner as a hybrid method may be allowed under the provisions of the NIRCIssue WON Consolidatedrsquos accounting method is allowedHeld YES It is said that accounting methods for tax purposes comprise a set of rules for determining when and how to report income and deductions The US Internal Revenue Code allows each taxpayer to adopt the accounting method most suitable to his business and requires only that taxable income generally be based on the method of accounting regularly employed in keeping the taxpayers books provided that the method clearly reflects incomeA deduction cannot be accrued until an actual liability is incurred even if payment has not been made Here we have to distinguish between (1) the method of accounting used by Consolidated in determining its net income for tax purposes and (2) the method of computation agreed upon between Consolidated and 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 were cash receipts and cash payments Once determined in accordance with the stipulated bases and procedure then the amount due Benguet for each month accrued at the end of that month whether Consolidated had made payment or not To make Consolidated deduct as an expense one-half of the Accounts Receivable would in effect be equivalent to giving Benguet a right which it did not have under the contract and to substitute for the parties choice a mode of computation of compensationnot contemplated by themON DEPLETIONThe first issue raised by Consolidated is with respect to the rate of mine depletion used by the Court of Tax Appeals The Tax Code provides that in computing net income there shall be allowed as deduction in the case of mines a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof which has been mined and sold during the year for which the return is made [Sec 30(g) (1) (B)] As an income tax concept depletion is wholly a creation of the statute mdash ldquosolely a matter of legislative gracerdquo Hence the taxpayer has the burden of justifying the allowance of any deduction claimed As in connectionwith all other tax controversies the burden of proof to show that a disallowance of depletion by the Commissioner is incorrect or that an allowance made is inadequate is upon the taxpayer and this is true with respect to the value of the property constituting the basis of the deduction This burden-of-proof rule has been frequently applied and a value claimed has been disallowed for lack of evidence Here SC considered the evidence presented (testimony of Eligio Garciaand the Report to Stockholders (which includes the Balance Sheet as of 1946) geological report on the estimated amount of ore in the claims etc) it set forth a very detailed computation of the depletion rate determining the value of each component of the formula of depletion viz Rate of Depletion Per Unit = Cost of Mine Property Estimated ore Deposit of Product Mined and sold- depletion is different from depreciation In determining the amount of cost depletion allowable the following three facts are essential namely (1) the basis of the property (2) the estimated total recoverable units in the property and (3) the number of units recovered during the taxable year in question As used as an element in cost depletion basis means the dollar amount of the

taxpayers capital or investment in the property which he is entitled to recover tax free during the period he is removing the mineral in the depositDisposition Decision modifiedFootnotes in the case that are helpful While taxable income is based on the method of accounting used by the taxpayer it will almost always differ from accounting income This is sobecause of a fundamental difference in the ends the two concepts serve Accounting attempts to match cost against revenue Tax law is aimed at collecting revenue It is quick to treat an item as income slow to recognize deductions or losses Thus the tax law will not recognize deductions for contingent future losses except in very limited situations Good accounting on the other hand their recognition Once this fundamental difference in approach is accepted income tax accounting methods can be understood more easily 33 Am Jur 2d 688 Under the accrual system income is accruable in the year in which the taxpayers right thereto becomes fixed and definite even though it may not be actually received until a later year while a deduction for a liability is to be accrued and taken when the liability becomes fixed and certain even though it may not be paid until a later year It has been held that the basis of the accrual system of accounting is that obligations incurred in the normal course of business will be discharged in due course that the deductions have been paid or accrued or paid and incurred but in order to be accruable in the taxable year a valid obligation upon which the profit (or loss in the case 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 expend money constituting a deductible loss is the date that fixes liability Gain or loss may not said to be fixed or accrued when the obligation is contingent upon the happening of a future event No duty or liability to pay an income tax upon a transaction arises until the taxable year in which the event constituting the condition precedent occurs under any system ofaccounting

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSCHARITABLE AND OTHER CONTRIBUTIONSROXAS v CTA GR No L-25043 April 26 1968Facts Don Pedro Roxas and Dona Carmen Ayala Spanish subjects transmitted to their grandchildren by hereditary succession several properties To manage the above-mentioned properties said children namely Antonio Roxas Eduardo Roxas and Jose Roxas formed apartnership called Roxas y Compania At the conclusion of the WW2 the tenants who have all been tilling the lands in Nasugbu for generations expressed their desire to purchase from Roxas y Cia the parcels which they actually occupied For its part the Government in consonance with the constitutional mandate to acquire big landed estates and apportion them among landless tenants-farmers persuaded the Roxas brothers to part with their landholdings Conferences were held with the farmers in the early part of 1948 and finally the Roxas brothers agreed to sell 13500 hectares to the Government for distribution to actual occupants for a price of P207904847 plus P30000000 for survey and subdivision expenses It turned out however that the Government did not have funds to cover the purchase price and so a special arrangement was made for the Rehabilitation Finance Corporation to advance to Roxas y Cia The amount of P150000000 as loan Collateral for such loan were the lands proposed to be sold to the farmers Under the arrangement Roxas y Cia allowed the farmers to buy the lands for the same price but by installment and contracted with the Rehabilitation Finance Corporationto pay its loan from the proceeds of the yearly amortizations paid by the farmers The CIR demanded from Roxas y Cia the payment of deficiency income taxes resulting from the inclusion as income of Roxas y Cia of the unreported 50 of the net profits for 1953 and 1955 derived from the sale of the Nasugbu farm lands to the tenants and the disallowance of deductions from gross income of various business expenses and contributions claimed by Roxas y Cia and the Roxas brothers For the reason that Roxas y Cia subdivided its Nasugbu farm lands and soldthem to the farmers on installment the Commissioner considered the partnership as engaged in the business of real estate hence 100 of the profits derived therefrom was taxed The Roxas brothers protested the assessment but inasmuch as said protest was denied they instituted an appeal in the CTA which sustained the assessment Hence this appealIssue Is Roxas y Cia liable for the payment of deficiency income for the sale of Nasugbu farmlandsHeld NO The proposition of the CIR cannot be favorably accepted in this isolated transaction with its peculiar circumstances in spite of the fact that there were hundreds of vendees Although

they paid for their respective holdings in installment for a period of 10 years it would nevertheless not make the vendor Roxas y Cia a real estate dealer during the 10-year amortization period It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled them for generations was not only in consonance with but more in obedience to the request and pursuant to the policy of our Government to allocate lands to the landless It was the bounden duty of the Government to pay the agreed compensation after it had persuaded Roxas y Cia to sell its haciendas and to subsequently subdivide them among the farmers at very reasonable terms and prices However the Government could not comply with its duty for lack of funds Obligingly Roxas y Cia shouldered the Governments burden went out of its way and sold lands directly to the farmers in the same way and under the same terms as would have been the case had the Government done it itself For this magnanimous act the municipal council of Nasugbu passed a resolution expressing the peoples gratitudeIn fine Roxas y Cia cannot be considered a real estate dealer for the sale in question Hence pursuant to Section 34 of the Tax Code the lands sold to the farmers are capital assets and the gain derived from the sale thereof is capital gain taxable only to the extent of 50

DEDUCTIONS AND EXEMPTIONS NON-DEDUCTIBLE EXPENSECIR v JAMIRFacts For the year 1954 Alberto M K Jamir declared a gross income of P7585865 and claimed deductions aggregating P5813450 thereby showing a net income of P1777415 upon which he paid P1634 as income tax The Collector of Internal Revenue however assessed asdeficiency income tax due from him the sum of P16395 Jamir appealed to the Court of Tax Appeals which reduced the amount due as deficiency income tax to P55200Issue Whether Jamir had an undeclared income for the year 1954 aggregating P3127491Held No It appears that by using the so-called expenditures method the Government considered as an undeclared income Jamirs expenditures for February and May were in excess of his reported income for the same months Although the Court of Tax Appeals in effect sanctioned the adoption of the expenditures method it held that the same should be applied by deducting the aggregate yearly expenditures from the declared yearly income not the expenditures incurred each month from the declared income therefor In the case at bar Jamirs total income for the year 1954 (P7585865) exceeded (Pl777415) the total deductions (P5813450) claimed by him Jamir introduced evidence that the said sums of P128124 andP2999367 represented advances made to him by customers in the months of February and may 1954 and that the income derived from the corresponding transactions were entered in his books of account in subsequent months and this explanation was found by the Court of Tax Appeals to have been proven satisfactorily The next question raised by appellant refers to Jamirs claim for car depreciation and salary of his driver Although petitioner had disallowed one-half (12) of these claims it appearing that the car was used by Jamir for personal and business purposes the lower court allowed as deductions three-fourths (34) of said amounts the car having been used by Jamir more for business than for personal purpose Petitionerassails this as an error but considering the circumstances we agree with the deduction of frac34 by the lower court It is next urged that Jamir committed fraud and the 50 surcharge should not have been eliminated But since Jamir did not have the undeclared income of P3127491 upon which the contested assessment is mainly based it follows necessarily that he was not guiltyof the fraud and that the 50 surcharge has been properly eliminatedDisposition the decision appealed from is hereby affirmed

Atlas Consolidated Mining v CIRFacts CIR assessed Atlas deficiency income tax for 1957 to 1958 which amounted to morethan P700K CIR asserted that in 1957 Atlas was still not entitled to exemption fromthe income tax under RA 909 because the same covers only gold mines and Atlas isnot engaged in that Atlasprotested before the Sec of Finance and Sec ruled that exemption provided in RA 909 embraces all new 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 disallowance of the following items transfer agent1048576s fees stockholders relation service fee US stock listing expenses suit expenses provision for contingency CTA disallowed the items except the stockholders relation service fee and suit expenses Also CTA ruled that the exemption from payment of the corporate income tax of Atlas

was good only up to the first quarter of 1958 hence it computed for its net taxable income for the remaining frac34 of the year Atlas appealed asserting that the annual public relations expense is a deductible expense from gross income because it is an ordinary and necessarybusiness expenseIssue WON this fee paid for the services rendered by a public relations firm in the US labeled as stockholders relation service fee is an allowable deductionHeld 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 that deduction is authorized and must be able to prove that he is entitled to the deduction which the law allows As previously adverted to the law allowing expenses as deduction from gross income for purposes of the income tax is Section 30 (a) (1) of the National Internal Revenue which allows a deduction of all the ordinary and necessary expenses paid orincurred during the taxable year in carrying on any trade or business An item of expenditure in order to be deductible under this section of the statute must fall squarely within its language We come then to the statutory test of deductibility where it is axiomatic that to be deductible as a business expense three conditions are imposed namely (1) the expense must be ordinary and necessary (2) it must be paid or incurred within the taxable year and (3) it must be paid or incurred in carrying in a trade or business In addition not only must the taxpayer meet thebusiness test he must substantially prove by evidence or records the deductions claimed under the law otherwise the same will be disallowed The mere allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its deduction Assuming that the expenditure is ordinary and necessary in the operation of the taxpayers business the answer to the question as to whether the expenditure is an allowable deduction as a business expense must be determined from the nature of the expenditure itself which in turn depends on the extent and permanency of the work accomplished by the expenditure The expenditure of P2552314 paid to PK Macker amp Co as compensation for services carrying on the selling campaign in an effort to sell Atlas additional capital stock of P3325000 is not an ordinaryexpense in line with the decision of US Board of Tax Appeals in the case of Harrisburg Hospital Inc vs Commissioner of Internal Revenue Accordingly as found by the Court of Tax Appeals the said expense is not deductible from Atlas gross income in 1958 because expenses relating to 1) recapitalization and reorganization of the corporation 2) the cost of obtaining stock subscription 3)promotion expenses and 4) commission or fees paid for the sale of stock reorganization are capital expenditures The burden of proof that the expenses incurred are ordinary and necessary is onthe taxpayer The claimed business expense must also be supported by appropriate documents such as invoices official receipts and contracts to be made available in case of a tax audit by the Bureau of Internal Revenue

GANCAYCO V COLLECTORFacts1048576 Gancayco filed his Income tax Return (ITR) for 19491048576 CIR notified him that his liability is Php 979362 which he paid 19501048576 CIR after a year wrote to Gancayco saying that there was tax due from him for a total of Php 29554051048576 Gancayco asked for reconsideration and the tax assessed wasreduced1048576 CIR issued a warrant of distraint for the deficient liability1048576 Gancayco filed petition with CTACTA Required Gancayco to pay Php 16 86031 for tax deficiency in1949Gancayco the right to collect the deficiency income tax is barred by thestatute of limitations the 5 yr period for judicial action should be counted from May 12 50 the date of original assessment SC Section 316 provides The civil remedies for the collection of internal revenue taxes fees or charges and any increment thereto resulting from delinquency shall be (a) by distraint of goods chattels or effects and other personal property of whatever character including stocks and other securities debts credits bank accounts and interest in and rights to personal property and by levy upon real property and (b) by judicial action Either of these remedies or both simultaneously may be pursued in the discretion of the authorities charged with the collection of such taxes No exemption shall be allowed against the internal revenue taxes in any case

Deduction for expenses may be allowed however in this case Gancayco was not able to prove any expense as there were no receipts or other proofs CTA AFFIRMED

DEDUCTIONS AND EXEMPTIONS NON-DEDUCTIBLE EXPENSESILLEGAL EXPENSESCALANOC V COLLECTORFacts1048576 Calanoc was authorized to solicit and receive contributions for the orphans and destitute kids of the Child Welfare Workers Club of the Social Welfare Commission1048576 Dec 1949 Calanoc financed and promoted a boxing exhibition at the Rizal Memorial Stadium for said charitable purpose1048576 He applied for exemption from payment of the amusement tax as provided in Sec 260 NIRC1048576 CIR investigated the tax case of Calanoc and it was found that there was gross sale of Php 26553 expenditure of 25157 and profit of 1375301048576 Profit was remitted to Social Welfare Commission1048576 CIR demanded Calanoc oto pay 5331048576 Sec of Finance denied the application of Calanoc for exemption from payment of amusement taxCTA Affirmed the assessment of 7k Calanoc denies receving a stadium fee of 1k Although it was shown that 1k was paid by O-OSO Beverages His accountant is dead SC the items of expenditures for deduction are exorbitant and not supported by receiptsCTA Affirmed

3M PHILIPPINES INC petitioner vs COMMISSIONER OFINTERNAL REVENUE respondent [GR No 82833 September 261988]Facts The petitioner claimed as deductions for income tax purposes business expenses in the form of royalty payments to its foreign licensor which the respondent Commissioner of Internal Revenue disallowed The petitioner claimed the following deductions royalties and technical service fees and pre-operational cost of tape coater The amount was not allowed as entire deduction The petitioner argues that the law applicable to its case is only Section 29(a)(1) of the Tax Code and not Circular No 393 of the Central BankIssue WON the royalty payments are valid deductible expense WON the Tax Code is applicableHeld No Although the Tax Code allows payments of royalty to be deducted from gross income as business expenses it is CB Circular No 393 that defines what royalty payments are proper Improper payments of royalty are not deductible as legitimate business expenses Section 3-c of CB Circular No 393 provides for payment of royalties only on commodities manufactured by the licensee under the royalty agreement not on the wholesale price of finished products imported by the licensee from the licensor entral Bank Circulars like CB Circular No 393 (dated December 7 1973 published in the Official Gazette issue of December 17 1973 [69 OG No 51 p 11737] issued by the Central Bank in the exercise of fits authority under the Central Bank Act duly published in the Official Gazette have the force and effect of law (Cases cited) andbinding on everybody

DEDUCTIONS AND EXEMPTIONS PERSONAL EXEMPTIONSCOLLECTOR OF INTERNAL REVENUE petitioner vs ORLANDO VCALSADO and COURT OF TAX APPEALS respondents [GR 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 supportIssue WON the respondent is classified as head of the familyHeld 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 Php50000

In the matter of the adoption of the minor MARCIAL ELEUTERIO RESABA LUIS SANTOS-YNtildeIGO and LIGIA MIGUEL DE SANTOSYNtildeIGO petitioners-appellees vs REPUBLIC OF THE PHILIPPINES oppositor-appellantTAX ON CORPORATIONS BASES AND RATESRESIDENT FOREIGN CORPORATIONS TAXABLE INCOME [GRNo 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 minorIssue WON the adoption is validHeld 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 suchagreement 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 bymarriage 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 childrenwith 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 or main support Partial support not amounting to chief support will not entitle the taxpayer to claim exemption as a head of a family Regulation No section 11

ISSUES 1) Whether the amount paid by respondent Palanca for interest on his delinquent estate and inheritance tax is deductible from the gross income for that year under Section 30 (b) (1) of the Revenue Code 2) Whether the claim for refund has prescribedHELD 1) Yes 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 We do not see any element in this case which can justify a departure from or abandonment of the doctrine in the Prieto case In both this and the said case the taxpayer sought the allowance as deductible items from the gross income of the amounts paid by them as interests on delinquent tax liabilities Of course what was involved in the cited case was the donors tax while the present suit pertains to interest paid on the estate and inheritance tax This difference however submits no appreciable consequence to the rationale of this Courts previous determination thatinterests on taxes should be considered as interests on indebtedness within the meaning of Section 30(b) (1) of the Tax Code 2) No The 30-day period under Section 11 of Republic Act 1125 did not even commence to run in this incident It should be recalled that while the herein petitioner originally assessed the respondent-claimant for alleged gift tax liabilities the said assessment was subsequently abandoned and in its lieu a new one was prepared and served on the respondent-taxpayer In this new assessment the petitioner charged the said respondent with an entirely new liability and for a substantially different amount from the first While initially the petitioner assessed the respondent for donees gift tax in the amount of P17000274 in thesubsequent assessment the latter was asked to pay P19159162 for delinquent estate and inheritance tax Considering that it is the interest paid on this latter-assessed estate and inheritance tax that respondent Palanca is claiming refund for then the thirty-day period under the abovementioned section of Republic Act 1125 should be computed from the receipt of the final denial by the Bureau of Internal Revenue of the said claim In the second place the claim at bar refers to the alleged overpayment by respondent Palanca of his 1955 income tax Inasmuch as the said account was paid by him by installment then the computation of the two year prescriptive period under Section 306 of the National Internal Revenue Code should be from the date of the last installmentDOCTRINE 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 VIUDA DE PRIETOFACTS Respondent conveyed by way of gifts to her four children namely Antonio Benito Carmen and Mauro all surnamed Prieto real property with a total assessed value of P89249750 After the filing of the gift tax returns on or about February 1 1954 the petitioner CIR appraised the real property donated for gift tax purposes at P123126800 and assessed the total sum of P11770650 as donors gift tax interest and compromises due thereon Of the total sum of P11770650 paid by respondent on April 29 1954 the sum of P5597865 represents the total interest on account of deliquency This sum of P5597865 was claimed as deduction among others by respondent in her 1954 income tax return Petitioner howeverdisallowed the claim and as a consequence of such disallowance assessed respondent for 1954 the total sum of P2141038 as deficiency income tax due on the aforesaid P5597865 including interest up to March 31 1957 surcharge and compromise for the late payment Under the law for interest to be deductible it must be shown that there be an indebtedness that there should be interest upon it and that what is claimed as an interest deduction should have been paid or accrued within the year It is here conceded that the interest paid by respondent was in consequence of the late payment of her donors tax and the same was paid within the year it is sought to be declaredISSUES Whether or not such interest was paid upon an indebtedness within the contemplation of section 30 (b) (1) of the Tax Code HELD Yes The term indebtedness as used in the Tax Code of the United States containing similar provisions as in the above-quoted section has been defined as an unconditional and legally enforceable obligation for the payment of money Although taxes already due have not strictly speaking the same concept as debts they are however obligations that may be considered as such The term debt is properly used in a comprehensive sense as embracing not merely money due by contract but whatever one is bound to render to another either for contract or the requirement of the law It follows that the interest paid by herein respondent for the late payment of her donors tax is deductible from her gross income under section 30(b) of

the Tax Code above quoted This conclusion finds support in the established jurisprudence in the United States after whose laws our Income Tax Law has been patterned Thus under sec 23(b) of the Internal Revenue Code of 1939 as amended which contains similarlyworded provisions as sec 30(b) of our Tax Code the uniform ruling is that interest on taxes is interest on indebtedness and is deductibleDOCTRINE The term indebtedness as used in the Tax Code of the United States containing similar provisions as in the abovequoted section has been defined as an unconditional and legally enforceable obligation for the payment of money

PAPER INDUSTRIES V CAFACTS Petitioner is registered with the BOI as a preferred pioneer enterprise with respect to its integrated pulp and paper mill and as a preferred non-pioneer enterprise with respect to its integrated plywood and veneer mills It received from the CIR two (2) letters of assessmentand demand (a) one for deficiency transaction tax and for documentary and science stamp tax and (b) the other for deficiency income tax for 1977 for an aggregate amount of P8876325500 Picop protested the assessment of deficiency transaction tax and documentary and science stamp taxes These protests were not formally acted upon by respondent CIR On 26 September 1984 the CIR issued a warrant of distraint on personal property and a warrant of levy on real property against Picop to enforce collection of the contested assessments in effect the CIR denied Picops protests Thereupon Picop went before the CTA Picop and the CIR both went to the Supreme Court on separate Petitions for Review of the above decision of the CTA In two (2) Resolutions dated 7 February 1990 and 19 February 1990 respectively the Court referred the two (2) Petitions to the Court of Appeals The Court of Appeals consolidated the two (2) cases and rendered a decision dated 31 August 1992 which further reduced the liability of Picop to P633835470 Picop now maintains that it is not liable at all to pay any of theassessments or any part thereof It assails the propriety of the thirty-five percent (35) deficiency transaction tax which the Court of Appeals held due from it in the amount of P357854351 Picop also questions the imposition by the Court of Appeals of the deficiency income tax of P148157915 resulting from disallowance of certain claimed financial guarantee expenses and claimed year-end adjustments of sales and cost of sales figures by Picops external auditors 3 The CIR upon the other hand insists that the Court of Appeals erred infinding Picop not liable for surcharge and interest on unpaid transaction tax and for documentary and science stamp taxes and in allowing Picop to claim as deductible expensesISSUES 1) Whether Picop is liable for the thirty-five percent (35) transaction tax 2) Whether Picop is liable for interest and surcharge on unpaid transaction tax 3) Whether Picop is entitled to deduct against current income interest payments on loans for the purchase of machinery and equipment 4) Whether Picop is entitled to deduct against current income net operating losses incurred by Rustan Pulp and Paper Mills Inc 5) Whether Picop is entitled to deduct against current income certain claimed financial guarantee expenses 6) Whether Picop had understated its sales and overstated its cost of sales for 1977 7) Whether Picop is liable for the corporate development tax of five percent (5) of its income for 1977 HELD 1) We agree with the CTA and the Court of Appeals that Picops tax exemption under RA No 5186 as amended does not include exemption from the thirty-five percent (35) transaction tax In the first place the thirty-five percent (35) transaction tax is an income tax that is it is a tax on the interest income of the lenders or creditors It is thus clear that the transaction tax is an income tax and as such in any event falls outside the scope of the tax exemption granted to registered pioneer enterprises by Section 8 of RA No 5186 as amended 2) Section 51 (c) and (e) of the 1977 Tax Code did not authorize the imposition of a surcharge and penalty interest for failure to pay the thirtyfive percent (35) transaction tax imposed under Section 210 (b) of the same Code The corresponding provision in the current Tax Code veryclearly embraces failure to pay all taxes imposed in the Tax Code without any regard to the Title of the Code where provisions imposing particular taxes are textually located Tax exemptions are to be sure to be strictly construed that is they are not to be extended beyond the ordinary and reasonable intendment of the language actually used by the legislative authority in granting the exemption The issuance of debenture bonds is certainly conceptually distinct from pulping and paper manufacturing operations But no one contends that issuance of bonds was a principal or regular business activity of Picop only banks or other financial institutions are in the

regular business of raising money by issuing bonds or other instruments to the general public3) We have already noted that our 1977 NIRC does not prohibit the deduction of interest on a loan incurred for acquiring machinery and equipment Neither does our 1977 NIRC compel the capitalization of interest payments on such a loan The 1977 Tax Code is simply silent ona taxpayers right to elect one or the other tax treatment of such interest payments Accordingly the general rule that interest payments on a legally demandable loan are deductible from gross income must be applied We conclude that the CTA and the Court of Appeals did not err in allowing the deductions of Picops 1977 interest payments on its loans for capital equipment against its gross income for 1977 4) After prolonged consideration and analysis of this matter the Court is unable to agree with the CTA and Court of Appeals on the deductibility of RPPMs accumulated losses against Picops 1977 gross income It is important to note at the outset that in our jurisdiction the ordinary rule mdash that is the rule applicable in respect of corporations notregistered with the BOI as a preferred pioneer enterprise mdash is that net operating losses cannot be carried over Under our Tax Code both in 1977 and at present losses may be deducted from gross income only if such losses were actually sustained in the same year that they are deducted or charged off Thus it is that RA No 5186 introduced the carry-over of net operatinglosses as a very special incentive to be granted only to registered pioneer enterprises and only with respect to their registered operations In the instant case to allow the deduction claimed by Picop would be to permit one corporation or enterprise Picop to benefit from the operatinglosses accumulated by another corporation or enterprise RPPM In effect to grant Picops claimed deduction would be to permit Picop to purchase a tax deduction and RPPM to peddle its accumulated operating losses We consider and so hold that there is nothing in Section 7 (c) ofRA No 5186 which either requires or permits such a result Indeed that result makes non-sense of the legislative purpose which may be seen clearly to be projected by Section 7 (c) RA No 5186 We conclude that the deduction claimed by Picop in the amount of P4419610600 in its 1977 Income Tax Return must be disallowed 5) We must support the CTA and the Court of Appeals in their foregoing rulings A taxpayer has the burden of proving entitlement to a claimeddeduction Even Picops own vouchers were not submitted in evidence and the BIR Examiners denied that such vouchers and other documents had been exhibited to them Moreover cash vouchers can only confirm the fact of disbursement but not necessarily the purpose thereof6) The CIR has made out at least a prima facie case that Picop had understated its sales and overstated its cost of sales as set out in its Income Tax Return For the CIR has a right to assume that Picops Books of Accounts speak the truth in this case since as already notedthey embody what must appear to be admissions against Picops own interest7) The adjusted net income of Picop for 1977 as will be seen below is P4868735500 Its net worth figure or total stockholders equity as reflected in its Audited Financial Statements for 1977 is P46474952800 Since its adjusted net income for 1977 thus exceeded ten percent (10) of its net worth Picop must be held liable for the five percent (5) corporate development tax in the amount of P243436775 DOCTRINE It is thus clear that the transaction tax is an income tax andas such in any event falls outside the scope of the tax exemptiongranted to registered pioneer enterprises by Section 8 of RA No 5186as amended

CIR v ITOGON-SUYOC MINES INCFACTS Respondent Itogon-Suyoc Mines Inc the taxpayer involved duly paid in full its liability according to its income tax return for the fiscal year 1960-61 Instead it deducted right away the amount represented by claim for refund filed eight (8) months back for the previous years income tax for which it was not liable at all so it alleged as it suffered a loss instead a claim subsequently favorably acted on by petitioner Commissioner of Internal Revenue but after the date of such payment of the 1960-1961 tax Accordingly an interest in the amount of P151283was charged by petitioner Commissioner of Internal Revenue on the sum withheld on the ground that no deduction on such refund should be allowed before its approval When the matter was taken up before the Court of Tax Appeals the above assessment representing interest wasset aside in the decision of September 30 1965ISSUES Whether CTA should not have absolved respondent corporation from liability to pay the sum of P151283 as 1 monthly interest for delinquency in the payment of income tax for the fiscal year 1960-1961

HELD No It could not be error for the Court of Tax Appeals considering the admitted fact of overpayment entitling respondent to refund to hold that petitioner should not repose an interest on the aforesaid sum of P1315520 which after all was paid to and received by the governmenteven before the incidence of the tax in question It would be according to the Court of Tax Appeals unfair and unjust to do so We agree but we go farther The imposition of such an interest by petitioner is not supported by lawThe National Internal Revenue Code provides that interest upon the amount determined as a deficiency shall be assessed and shall be paid upon notice and demand from the Commissioner of Internal Revenue There is no question respondent was entitled to a refund Instead of waiting for the sum involved to be delivered to it it deducted the said amount from the tax that it had to pay That it 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 time such a deduction was made the Commissioner of Internal Revenue had not as yet approved such a refund It is an admitted fact though that respondent was clearly entitled to it and petitioner did not allege otherwise Nor could he do so Under all the circumstances disclosed therefore the applicability of the legal provision allowing such a deduction from the amount of the tax to be paid cannot be disputed DOCTRINE It could not be error for the Court of Tax Appeals considering the admitted fact of overpayment entitling respondent to refund to hold that petitioner should not repose an interest on the aforesaid sum of P1315520 which after all was paid to and received by the government even before the incidence of the tax in question

CASTRO v COLLECTORFacts This is an appeal from a decision of the Court of Tax Appeals (in its CTA Case 141) holding petitioner Maria B Castro liable under the War Profits Tax Law Republic Act No 55 and ordering her to pay a deficiency war profits tax (including surcharges and interest) in theamount of P136051466 and costs Castro was previously acquitted in the criminal case instituted against her for violation of the War Profits Tax LawIssue WON the acquittal is a bar to the collection of the taxes assessed and specially of the 50 surchargeHeld NO With regard to the tax proper the state correctly points out in its brief that the acquittal in the criminal case could not operate to discharge petitioner from the duty to pay the tax since that duty is imposed by statute prior to and independently of any attempts on the part of the taxpayer to evade 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 declaration that the criminal acts charged did not exist As to the 50 surcharge the very United States Supreme Court that rendered the Coffey decision has subsequently pointed out that additions of this kind to the main tax are not penalties but civil administrative sanctions provided primarily as a safeguard for the protection of the state revenue and to reimburse the government for the heavy expense of investigation and the loss resulting from the taxpayers fraud (Helvering vs Mitchell 303 US 390 82 L Ed 917 Spies vs US 317 US 492) This is made plain by the fact that such surcharges are enforceable like the primary tax itself by distraint or civil suit and that they are provided in a section of RA No 55 (section 5) that is separate and distinct from that providing for criminal prosecution (section 7) We conclude that the defense of jeopardy and estoppel by reason of the petitioners acquittal isuntenable and without merit Whether or not there was fraud committed by the taxpayer justifying the imposition of the surcharge is an issue of fact to be inferred from the evidence and surrounding circumstances and the finding of its existence by the Tax Court is conclusive upon us (Gutierrez v Collector GR No L-9771 May 31 1951 Perez vs Collector supra)

COLLECTOR v FISHERFacts This case relates to the determination and settlement of the hereditary estate left by the deceased Walter G Stevenson and the laws applicable thereto Walter G Stevenson (born in the Philippines on August 9 1874 of British parents and married in the City of Manila on January 23 1909 to Beatrice Mauricia Stevenson another British subject) died on February 22 1951 in San Francisco California USA whereto he and his wife moved and established their permanent residence since May 10 1945 In his will executed in San Francisco on May 22 1947 and which was duly probated in the Superior Court of California on April 11 1951

Stevenson instituted his wife Beatrice as his sole heiress to the following real and personal properties acquired by the spouses while residing in the PhilippinesIssue 1 Whether or not the estate is entitled to the following deductions P860439 for judicial and administration expenses P208652 for funeral expenses P65250 for real estate taxes andP1002247 representing the amount of indebtedness allegedly incurred by the decedent during his lifetime 2 Whether or not the estate is entitled to the payment of interest on the amount it claims to have overpaid the government and to be refundable to itHeld 1 YES An examination of the record discloses however that the foregoing items were considered deductible by the Tax Court on the basis of their approval by the probate court to which said expenses we may presume had also been presented for consideration It is to besupposed that the probate court would not have approved said items were they not supported by evidence presented by the estate In allowing the items in question the Tax Court had before it the pertinent order of the probate court which was submitted in evidence by respondents (Exh AA-2 p 100 record) As the Tax Court said it found no basis for departing from the findings of the probate 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 National Association which it would appear that while still living Walter G Stevenson obtained we are not inclined to pass upon the claim of respondents in respect to theadditional amount of P8652 for funeral expenses which was disapproved by the court a quo for lack of evidence In connection with the deduction of P65250 representing the amount of realty taxes paid in 1951 on the decedents two parcels of land in Baguio City which respondents claim was disallowed by the Tax Court we find that this claim has in fact been allowed2 NO Respondents claim for interest on the amount allegedly overpaid if any actually results after a recomputation on the basis of this decision is hereby denied in line with our recent decision in Collector of Internal Revenue v St Pauls Hospital (GR No L-12127 May 29 1959) wherein we held that in the absence of a statutory provision clearly or expressly directing or authorizing such payment and none has been cited by respondents the National Government cannot be required to pay interest

DEDUCTIONS AND EXMEPTIONS ALLOWABLE DEDUCTIONSTAXESCIR v LEDNICKYFacts V E Lednicky and Maria Valero Lednicky are husband and wife both American citizens residing in the Philippines and have derived all their income from Philippine sources for the taxable years under question [GR L-18286] In compliance with local law the spouses on 27March 1957 filed their income tax return for 1956 reporting therein a gross income of P101728765 and a net income of P73380944 on which the amount of P31739541 was assessed after deducting P480559 as withholding tax Pursuant to the Commissioner of Internal Revenuersquos assessment notice the spouses paid the total amount of P32624741 inclusive of the withheld taxes on 15 April 1957 On 17 March 1959 the spouses filed an amended income tax return for 1956 The amendment consists in a claimed deduction of P20593924 paid in 1956 to the US government as federal income tax for 1956 Simultaneously with the filing of the amended return the spouses requested the refund of P11243790 When the Commissioner of Internal Revenue failed to answer the claim for refund the spouses filedtheir 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 P177112463 and a net income of P105255067 On 19 April 1956 they filed an amended income tax return the amendment upon the original being a lesser net income of P101255451 and on the basis of this amended return they paid P57025200 inclusive of withholding taxes After audit the Commissioner determined a deficiency of P1611600 which amount the spouses paid on 5 December 1956 Back in 1955 however the spouses filed with the US Internal Revenue Agent in Manila their Federal income tax return for the years 1947 1951 1952 1953 and 1954 on income from Philippine sources on a cash basis Payment of these federal income taxes including penalties and delinquency interest in the amount of $26458882 were made in 1955 to the US Director of Internal Revenue Baltimore Maryland through the National City Bank of New York Manila Branch Exchange and bank charges in

remitting payment totaled P414391 On 11 August 1958 the said respondents amended their Philippines income tax return for 1955 to including US Federal income taxes interest accruing up to 15 May 1955 and exchange and bank charges totaling P51634515 and therewith filed a claim for refund of the sum of P16638400 which was later reduced to P15026900 The spouses brought suit in the Tax Court which was docketed therein as CTA Case 570 [GR 21434] The facts are similar to above cases but refer to the spousesrsquo income tax returns for 1957 filed on 28 February 1958 and for which the spouses paid a total sum of P19679965 In 1959 they filed an amended return for 1957 claiming deduction of P19075580 representing taxes paid to the US Government on income derived wholly from Philippine sources On the strength thereof spouses seek refund of P9052075 as overpayment (CTA Case 783) The Tax Court decided for the spousesIssue WON there should be a refund for the spousesHeld NO The Supreme Court reversed the decisions of the Court of Tax Appeals and affirmed the disallowance of the refunds claimed by the spouses with costs against said spouses1 Section 30 (c-1) of the Philippine Internal Revenue Code Section 30 (c) (1) (Deduction from gross income) provides that ldquoin computing net income there shall be allowed as deductions (c) Taxes (1) In general mdash Taxes paid or accrued within the taxable year except (A) The income tax provided for under this Title (B) Income war-profits and excess profits taxes imposed by the authority of any foreign country but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits ofparagraph (3) of this subsection (relating to credit for taxes of foreign countries) (C) Estate inheritance and gift taxes and (D) Taxes assessed against local benefits of a kind tending to increase the value of the property assessedrdquo2 Paragraph (c) (3) (b) of the Tax Code Credits against tax for taxes of foreign countriesParagraph 3 (B) of the subsection (Credits against tax for taxes of foreign countries) reads ldquoIf the taxpayer signifies in his return his desire to have the benefits of this paragraph the tax imposed by this Title shall be credited with (B) Alien resident of the Philippines mdash In the case of an alien resident of the Philippines the amount of any such taxes paid or accrued during the taxable year to any foreign country if the foreign country of which such alien resident is a citizen or subject in imposing such taxes allows a similar credit to citizens of the Philippines residing insuch countryrdquo3 Paragraph (c) (4) of the Tax Code Limitation on credit The tax credit so authorized is limited under paragraph 4 (A and B) of the same subsection in the following terms ldquoPar (c) (4) Limitation on credit mdash The amount of the credit taken under this section shall be subject to each of the following limitations (A) The amount of the credit in respect to the tax paid or accrued to any country shall not exceed the same proportion of the tax against which such credit is taken which the taxpayerrsquos net income from sources within such country taxable under this Title bears to his entire net income for the same taxable year and (B) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken which the taxpayerrsquos net income from sources without the Philippines taxable under this Title bears to his entire net income for the same taxable yearrdquo4 Lawrsquos intent that right to deduct income taxes paid to foreign government taken as an alternative or substitute to claim of tax credit for such foreign income tax Construction and wording of Section 30 (c) (1) (B) of the Internal Revenue Act shows the lawrsquos intent that the right to deduct income taxes paid to foreign government from the taxpayerrsquos gross income is givenonly as an alternative or substitute to his right to claim a tax credit for such foreign income taxes under section 30 (c) (3) and (4) so that unless the alien resident has a right to claim such tax credit if he so chooses he is precluded from deducting the foreign income taxes from his gross income For it is obvious that in prescribing that such deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) (relating to credits for taxes paid to foreign countries) the statute assumes that the taxpayer in question also may signify his desire to claim a tax credit and waive the deduction otherwise the foreign taxes would always be deductible and their mention in the list of nondeductible items in Section 30 (c) might as well have been omitted or at least expressly limited to taxes on income from sources outside the Philippine Islands Had the law intended that foreign income taxes could be deducted from gross income in any event regardless of thetaxpayerrsquos right to claim a tax credit it is the latter right that should be conditioned upon the taxpayerrsquos waiving the deduction in which case the right to reduction under subsection (c-1-B)

would have been made absolute or unconditional (by omitting foreign taxes from the enumeration of non- deductions) while the right to a tax credit under subsection (c-3) would have been expressly conditioned upon the taxpayerrsquos not claiming any deduction under subsection (c-1)5 Danger of double credit does not exist if taxpayer cannot claim benefit from either headings at his option The purpose of the law is to prevent the taxpayer from claiming twice the benefits of his payment of foreign taxes by deduction from gross income (subs c-1) and by tax credit (subs c-3) This danger of double credit certainly can not exist if the taxpayer can not claim benefit under either of these headings at his option so that he must be entitled to a tax credit (the spouses admittedly are not so entitled because all their income is derived from Philippine sources) or the option to deduct from gross income disappears altogether6 When double taxation Tax income should accrue to benefit of the PhilippinesDouble taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity (cf Manila vs Interisland Gas Service 52 Off Gaz 6579 Manuf Life Ins Co vs Meer 89 Phil 357) In the present case while the taxpayers would have to pay two taxes on the same income the Philippine government only receives the proceeds of one tax As between the Philippines where the income was earned and where the taxpayer is domiciled and the United States where that income was not earned and where the taxpayer did not reside it is indisputable that justice and equity demand that the tax on the income should accrue to the benefit of the Philippines Any relief from the alleged double taxation should come from the United States and not from the Philippines since the formerrsquos right to burden the taxpayer is solely predicated on his citizenship without contributing to the production of the wealth that is being taxed To allow an alien resident to deduct from his gross income whatever taxes he pays to his own government amounts to conferring on the latterpower to reduce the tax income of the Philippine government simply by increasing the tax rates on the alien resident Everytime the rate of taxation imposed upon an alien resident is increased by his own government his deduction from Philippine taxes would correspondingly increase and the proceeds for the Philippines diminished thereby subordinating our own taxes to those levied by a foreign government Such a result is incompatible with the status of the Philippines as an independent and sovereign state

GUTIERREZ v COLLECTORFacts Maria Morales was the registered owner of an agricultural land designated as Lot No 724-C of the cadastral survey of Mabalacat Pampanga The Republic of the Philippines at the request of the USGovernment and pursuant to the terms of the Military Bases Agreement of March 14 1947 instituted condemnation proceedings in the Court of the First Instance of Pampanga docketed as Civil Case No 148 for the purpose of expropriating the lands owned by Maria Morales and others needed for the expansion of the Clark Field Air Base t the commencement of the action the Republic of the Philippines therein plaintiff deposited with the Clerk of the Court of First Instance of Pampanga the sum of P156960 which was provisionally fixed as the value of the lands sought to be expropriated in order that it could take immediate possession of the same On January 27 1949 upon order of the Court the sum of P34580 (PNB Check 721520-Exh R) was paid by the Provincial treasurer of Pampanga to Maria Morales out of the original deposit of P156960 made by therein plaintiff After due hearing the Court of First Instance of Pampanga rendered decision dated November 29 1949 wherein it fixed as just compensation P2500 per hectare for some of the lots and P3000 per hectare for the others which values were based on the reports of the Commission on Appraisal whose members were chosen by both parties and by the Court which took into consideration the different conditions affecting the value of the condemned properties in making their findingsIn virtue of said decision defendant Maria Morales was to receive the amount of P9430575 as compensation for Lot No 724-C which was one of the expropriated lands Sometime in 1950 the spouses Blas Gutierrez and Maria Morales received the sum of P5978575 presenting the balance remaining in their favor after deducting the amount of P34580 already withdrawn from the compensation to them In a notice of assessment dated January 28 1953 the Collector ofInternal Revenue demanded of the petitioners the payment of P8481 as alleged deficiency income tax for the year 1950 inclusive of surcharges and penalties The CIR contended that petitioners-appellants failed to include from their gross income in filing their income tax return for 1950 the amount of P9430575 which they had received as compensation for their land

taken by the Government by expropriation proceedings It is the contention of respondent Collector of Internal Revenue that such transfer of property for taxation purposes is sale and that the income derived therefrom is taxable The lower court exonerated petitioners from the 50 per cent surchargeimposed on the latter on the ground that the taxpayers income tax return for 1950 is false andor fraudulentIssue WON petitioners should pay surcharge Held NO It should be noted that the Court of Tax Appeals found that the evidence did not warrant the imposition of said surcharge becausethe petitioners therein acted in good faith and without intent to defraud the GovernmentThe question of fraud is a question of fact which frequently requires a nicely balanced judgement to answer All the facts and circumstances surrounding the conduct of the tax payers business and all the facts incident to the preparation of the alleged fraudulent return should be considered (Mertens Federal Income Taxation Chapter 55) The question of fraud being a question of fact and the lower court having made the finding that the evidence of this case does not warrant the imposition of the 50 per cent surcharge We are constrained to refrain from giving any consideration to the question raised by the Solicitor General for it is already settled in this jurisdiction that in passing upon petitions to review decisions of the Court of Tax Appeals We have to confine ourselves to questions of law

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSLOSSESFERNANDEZ HERMANOS v CIRFacts These four appeals involve two decisions of the Court of Tax Appeals determining the taxpayers income tax liability for the years 1950 to 1954 and for the year 1957 Both the taxpayer and the Commissioner of Internal Revenue as petitioner and respondent in the cases a quo respectively appealed from the Tax Courts decisions insofar as their respective contentions on particular tax items were therein resolved against themIssue ProperImproper AllowancesDisallowances of LossesHeld Re allowancesdisallowances of losses(a) Allowance of losses in Mati Lumber Co (1950) mdash The Commissioner of Internal Revenue questions the Tax Courts allowance of the taxpayers writing off as worthless securities in its 1950 return the sum of P805000 representing the cost of shares of stock of Mati Lumber Co acquired by the taxpayer on January 1 1948 on the ground that the worthlessness of said stock in the year 1950 had not been clearly established The Commissioner contends that although the said Company was no longer in operation in 1950 it still had its sawmill and equipment which must be of considerable value There was adequate basis for the writing off of the stock as worthless securities Assuming that the Company would later somehow realize some proceeds from its sawmill and equipment which were still existing as claimed by the Commissioner and that such proceeds would later be distributed to its stockholders such as the taxpayer the amount so received by the taxpayer would then properly be reportable as income of the taxpayer in the year it is received(b) Disallowance of losses in or bad debts of Palawan Manganese Mines Inc (1951) mdash The taxpayer appeals from the Tax Courts disallowance of its writing off in 1951 as a loss or bad debt the sum of P35313425 which it had advanced or loaned to Palawan Manganese Mines Inc Pursuant to the agreement mentioned above petitioner gave to Palawan Manganese Mines Inc yearly advances starting from 1945 which advances amounted to P58730807 by the end of 1951 Despite these advances and the resumption of operations by Palawan ManganeseMines Inc it continued to suffer losses By 1951 petitioner became convinced that those advances could no longer be recovered While it continued to give advances it decided to write off as worthless the sum of P35313425 Under the circumstances was the sum of P35313425properly claimed by petitioner as deduction in its income tax return for 1951 either as losses or bad debts It will be noted that in giving advances to Palawan Manganese Mine Inc petitioner did not expect to be repaid It is true that some testimonial evidence was presented to show that there was some agreement that the advances would be repaid but no documentary evidence was presented to this effect The memorandum agreement signed by the parties appears to be very clear that the consideration for the advances made by petitioner was 15 of the net profits of Palawan Manganese Mines Inc In other words if there were no earnings or profits there

was no obligation to repay those advances It has been held that the voluntary advances made without expectation of repayment do not result in deductible losses The Tax Courts is allowance of the write-off was proper The Solicitor General has rightly pointed out that the taxpayer has taken an ambiguous position and has not definitely taken a stand on whetherthe amount involved is claimed as losses or as bad debts but insists that it is either a loss or a bad debt 4 We sustain the governments position that the advances made by the taxpayer to its 100 subsidiary Palawan Manganese Mines Inc amounting to P58730807 as of 1951 wereinvestments and not loans 5 (c) Disallowance of losses in Balamban Coal Mines (1950 and1951) mdash The Court sustains the Tax Courts disallowance of the sums of P898976 and P2773266 spent by the taxpayer for the operation of its Balamban coal mines in Cebu in 1950 and 1951 respectively and claimed as losses in the taxpayers returns for said years The Tax Court correctly held that the losses are deductible in 1952 when the mines were abandoned and not in 1950 and 1951 when they were still in operation 9 The taxpayers claim that these expeditions should be allowed as losses for the corresponding years that they were incurredbecause it made no sales of coal during said years since the promised road or outlet through which the coal could be transported from the mines to the provincial road was not constructed cannot be sustained Some definite event must fix the time when the loss is sustained and here it was the event of actual abandonment of the mines in 1952 (d) and (e) Allowance of losses in Hacienda Dalupiri (1950 to 1954) and Hacienda Samal (1951-1952) mdash The Tax Court overruled the Commissioners disallowance of these items of losses thus Petitioner deducted losses in the operation of its Hacienda Dalupiri the sums of P1741895 in 1950 P2912582 in 1951 P2674481 in 1952 P2193262 in 1953 and P4293856 in 1954 These deductions were disallowed by respondent on the ground that the farm was operated solely for pleasure or as ahobby and not for profit This conclusion is based on the fact that the farm was operated continuously at a loss From the evidence we are convinced that the Hacienda Dalupiri was operated by petitioner for business and not pleasure It was mainly a cattle farm although a few race horses were also raised It does not appear that the farm was used by petitioner for entertainment social activities or other nonbusiness purposes Therefore it is entitled to deduct expenses and losses in connection with the operation of said farm (See 1955 PH Fed Taxes Par 13 63 citing GCM 21103 CB 1939- 1 p164) Section 100 of Revenue Regulations No 2 otherwise known as the Income Tax Regulations authorizes farmers to determine their gross income on the basis of inventories Said regulations provide If gross income is ascertained by inventories no deduction can be made for livestock or products lost during 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 quote from the memorandum of counsel for petitioner The Taxpayer deducted from its income tax returns for the years from 1950 to 1954 inclusive the corresponding yearly losses sustained in the operation of Hacienda Dalupiri which losses represent the excess of its yearly expenditures over the receipts that is the losses represent the difference between the sales of livestock and the actual cash disbursements or expenses (Pages 21-22 Memorandum for Petitioner) As the Hacienda Dalupiri was operated by petitioner for business and since it sustained losses in its operation which losses were determined by means of inventories authorized under Section 100 of Revenue Regulations No 2 it was error for respondent to have disallowed the deduction of said losses The same is true with respect to loss sustained in the operation of the Hacienda Samal for the years 1951 and 1952 10 The Commissioner questions that the losses sustained by the taxpayer were properly based on the inventory method of accounting He concedes however that the regulations referred to does not specify how the inventories are to be made The Tax Court however felt satisfied with the evidence presented by the taxpayer which merely consisted of an alleged physical count of the number of the livestock in Hacienda Dalupiri for the years involved 11 The Tax Court was satisfied with the method adopted by the taxpayer as a farmer breeding livestock reporting on the basis of receipts and disbursements We find no Compelling reason to disturb its findings

PLARIDEL SURETY v CIRFacts Petitioner Plaridel Surety amp Insurance Co is a domestic corporation engaged in the bonding business On November 9 1950 petitioner as surety and Constancio San Jose as principal solidarily executed a performance bond in the penal sum of P3060000 in favor of the

P L Galang Machinery Co Inc to secure the performance of San Joses contractual obligation to produce and supply logs to the latter To afford itself adequate protection against loss or damage on the performance bond petitioner required San Jose and one Ramon Cuervo to execute an indemnity agreement obligating themselves solidarily to indemnify petitioner for whatever liability it may incur by reason of said performance bond Accordingly San Jose constituted a chattel mortgage on logging machineries and other movables in petitioners favor1 while Ramon Cuervo executed a real estate mortgage2 San Jose later failed to deliver the logs to Galang Machinery3 and the latter sued on the performance bond On October 1 1952 the Court of First Instance adjudged San Jose and petitioner liable it also directed San Jose and Cuervo to reimburse petitioner for whatever amount it would pay Galang Machinery The Court of Appeals on June 17 1955 affirmed the judgment of the lower court The same judgment waslikewise affirmed by this Court4 on January 11 1957 except for a slight modification apropos the award of attorneys fees In its income tax return for the year 1957 petitioner claimed the saidamount of P4449000 as deductible loss from its gross income and accordingly paid the amount of P13600 as its income tax for 1957 The Commissioner of Internal Revenue disallowed the claimed deduction of P4449000 and assessed against petitioner the sum of P889800 plus interest as deficiency income tax for the year 1957 Petitioner filed its protest which was denied Whereupon appeal was taken to the Tax Court petitioner insisting that the P4449000 which it paid to Galang Machinery was a deductible lossIssue WON the amount Plaridel paid to Galang Machinery is a deductible lossHeld NO There is no question that the year in which the petitioner Insurance Co effected payment to Galang Machinery pursuant to a final decision occurred in 1957 However under the same court decision San Jose and Cuervo were obligated to reimburse petitioner for whateverpayments it would make to Galang Machinery Clearly petitioners loss is compensable otherwise (than by insurance) It should follow then that the loss deduction can not be claimed in 1957 Now petitioners submission is that its case is an exception Citing Cu Unjieng Sons Inc v Board of Tax Appeals6 and American cases also petitioner argues that even if there is a right to compensation by insurance or otherwise the deduction can be taken in the year of actual loss where the possibility of recovery is remote The pronouncement however to this effect in the Cu Unjieng case is not as authoritative as petitioner would have it since it was there found that the taxpayer had no legal right to compensation either by insurance or otherwise7 And the American cases cited8 are not in point None of them involved a taxpayer who had as in the present case obtained a final judgment against third persons for reimbursement of payments made In those cases there was either no legally enforceable right at all or such claimed right was still to be or being litigated On the other hand the rule is that loss deduction will be denied if there is a measurable right to compensation for the loss with ultimate collectionreasonably clear So where there is reasonable ground for reimbursement the taxpayer must seek his redress and may not secure a loss deduction until he establishes that no recovery may be had9 In other words as the Tax Court put it the taxpayer (petitioner) must exhaust his remedies first to recover or reduce his loss But assuming that there was no reasonable expectation of recovery still no loss deduction can be had Sec 30 (d) (2) of the Tax Code requires a charge-off as one of the conditions for loss deduction In the case of a corporation all losses actually sustained and charged-off within the taxable year and not compensated for byinsurance or otherwise Mertens12 states only four (4) requisites because the United StatesInternal Revenue Code of 193913 has no charge-off requirement Sec 23(f) thereof provides merely In the case of a corporation losses sustained during the taxable year and not compensated for by insurance or otherwise Petitioner who had the burden of proof14 failed to adduce evidence that there was a charge-off in connection with the P4449000mdashor P3060000 mdash which it paid to Galang Machinery

CHINA BANKING CORPORATION V COURT OF APPEALSFacts Petitioners mad a 53 equity investment in First CBC Capital (Asia) Limited to the amount of P1622785180 consisting of 106000 shares with par value of P100 per shareSubsequently First CBC was found to be insolvent Petitioners with the approval of the BSP wrote off as worthless its investment in the company and treated it as a bad debt or ordinary loss deductible from its gross income The Commissioner of Internal Revenue disallowed the deduction saying that the investment could not be considered worthless since First CBC could still exercise its financing and investment activities even if it was no longer licensed as a

depository Even assuming that the securities had become worthless it still cannot be considered as a bad debt or expense since there is no indebtedness between petitioner and First CBC It should be classified as a capital lossHeld The SC found in favor of respondents1 Not and indebtedness An equity investment in shares of stock cannot be considered as an indebtedness of First CBC Capital to China Bank The former has no obligation to repay the latter the amount invested The amount China Bank invested in First CBC is in fact anasset2 Capital asset not ordinary Capital assets are defined in the negative by Sec 33(1) of the NIRC as property held by the TP exclusive of items primarily for the sale to customers in the ordinary course of business or property used in trade or business Hence securities such as equity holdings are ordinary assets only in the hands of a dealer or a person actively engaged in trading in the same for his own account3 Section 29(d)(4)(B) of the NIRC treats the worthlessness of the securities held as capital assets as a loss resulting from the sale or exchange of capital assets Strictly speaking no sale occurs when securities held as capital assets become worthless Nonetheless the law treats it as a loss from a sale just the same4 Section 33 of the NIRC provides that the capital loss sustained can only be deducted from any capital gain derived within the taxable year The same provision enumerates assets which are not subject to the said limitation but equity holdings are not one of them

THE CITY LUMBER INC V DOMINGOFacts Respondent Domingo made an assessment on an additional income of petitioners in the amount of P16 67863 coming from 1 the sale of plywood kegs of nails and GI sheets amouting to P 790207 2 a cash credit balance of P789680 Petitioner assails the validity of the assessment alleging that the inventory in question was not sold but were lost to looters during a fire which occurred in the city To 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 was actually a loan secured by petitionersHELDThe assessments were valid 1 The alleged loss of the plywood and kegs of nails was never reported in the books of the petitioner nor in the petitioners ITR for that year Such conduct of the petitioner proves that such loss never occurred 2 Similarly there was neither any record in petitioners books nor any receipt or other piece of evidence to show receipt of the supposed loan

MARCELO STEEL CROP V COLLECTOR OF INTERNAL REVENUEFacts RA 35 granted a four-year tax exemption from all internal revenue taxes to enterprises directly payable by such enterprise or person which shall engage in new and necessary industries Petitioner corporation was engaged in 1 the manufacture of wire fences 2 the manufacture of steel nails 3 the manufacture of steel bars rods and other allied productsof which the last two were covered by RA 35 In 1953 and 1954 petitioner filed its ITR showing a net income of P3438658 and P5832900 respectively derived solely from its wire fence manufacturing business It was accordingly assessed P12750 in taxes which it paid subsequently it filed an amended ITR for the same taxable years showing that it actually incurred a loss of P87140737 and P10495629 respectively The losses were arrived at by consolidating the gross income and the gross allowable deductions of its three industries Petitioner thus filed for a refund of the P12750 it initially paid in taxes on the theory that since it is a corporation organized with a single capital to answer for all its financial obligations the gross income from both tax-exempt and non-exempt industries and its liability should be based on the difference between its consolidated gross income and its consolidated allowable deductionsHeld Petition has no merit Marcelo Steel cannot consolidate 1 The purpose of RA 35 is to encourage the establishment of new and necessary industries for the economic growth of the country In effect it grants a subsidy to entrepreneurs who blaze a trail in a new industry since there are greater risks involved in the same and an ROI is usually not immediately forthcoming As such a tax exemption granted to an entrepreneur engaged in a tax-exempt industry cannot be extended to benefit non-exempt industries in which the same entrepreneur is concurrently

engaged The justification is simply not there since such industries are presumably already deriving profits from its operations 2 Single capital - The fact that all three industries are organized under a single capital is of no moment It is clear that the law intended that tax exemptand non-exempt industries be treated separately as reflected in EO 341 series 0f 1950 which was incorporated in RA 901 a later incarnation of the same lawPHILIPPINE SUGAR ESTATE CORP V COLLECTOR OF INTERNALREVENUEFacts Petitioner owned shares of stock in several different companies and 154 liberty bonds at par 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 inclusiveof the sums above-stated for which it was assessed an amount in taxes It paid said amount without protest Subsequently petitioner filed a demand for refund In the letter-demand the ground for the refund invoked was the illegality o the collection since the dividends and interest were exempt from payment of income tax Although in the present petition the ground invoked is that the income tax on dividends had already been paid at the source Respondent denied the claim for refund because plaintiff failed to lodge a protest concurrently when it paid its tax liability as per Sec 1579 of the Revised Administrative Code as amended by Act No 3685 Plaintiffcountered by saying that the applicable law is Act No 2833 which requires no protest In addition it invoked the ruling in Fox v Edwards wherein it was ruled that any unduly paid income tax may be refunded without the necessity of a protestHeld The SC found in favor of the Collector1Controlling law - There is no need to distinguish between the two laws in this case Section 19 of Act 2833 provides that all administrative special and general provisions of law including laws in relation to the assessment remission collection and refund of internal revenue taxesnot hereto fore repealed and not inconsistent withthis Law areapplicableto this Law By virtue of this saving clause Section 1579 of the Revised Administrative Code finds application to Act 28332 Fox v Edwards is not controlling since the law specifically applied therein did not require the lodging of a protest concurrently with the payment for a TP to retain such right to protest (NOTE fr digester I did not find anything on losses or bad debts in this case I may have overlooked it)

DEDUCTIONS AND EXEPTIONS ALLOWABLE DEDUCTIONS BADDEBTSPHILIPPINE REFINING COMPANY V COURT OF APPEALSFacts In 1985 petitioner filed its ITR where it claimed 16 items amounting to P71307093 as bad debts and therefor deductible Subsequently the Commissioner for Internal Revenue disallowed such deductions and assessed petitioner to pay a deficiency tax for the year of 1985 Petitioner paid the deficiency tax under protest which the Commissioner deniedUpon a petition for review the CTA modified the findings of the Commissioner by reducing the deficiency tax assessment on the basis that three of the sixteen supposed bad debts could be allowed as deductions The CA later on agreed with the CTAHeld The SC upheld the ruling of the CA which it found to be in accordance with the SCs ruling in Collector v Goodrich It held the petitioner failed to substantiate the ldquoworthlessnessrdquo of the 13 debts which it claimed as deductions As per the ruling in Collector v Goodrich to qualify as a bad debt a TP must show 1 that there is a valid and subsisting debt2 that the debt must be actually ascertained to be worthless and uncollectible durring the taxable year3 the debt must be charged off during the taxable year and4 the debt must arise from the business or trade of the TPIn addition the Court said before a debt can be considered worthless the TP must also show that it is indeed uncollectible even in the future Furthermore the TP must undertake several steps to prove that he exerted diligent efforts to collect the debt1 sending statements of accounts to the debtors 2 sending of collection letters 3 giving the account to a lawyer for collection and4 filing a collection case in court In the case at bar the petitioner miserably failed to show any of the foregoing The only piece of evidence it offered to show the worthlessness of the debts was the testimony of the companys financial adviser or accountant The Court found that this lacked the required probity to establish that the accounts it claimed as bad debts were indeed

worthless Apart from such testimony the petitioner failed to introduce even a single iota of evidence to bolster its claim of worthlessness (NOTE In the rest of the case the Court presents the allegation of the petitioner as to why it could not collect on any of the 13 debts followed bya statement how the petitioner failed to introduce evidence to substantiate such allegation)

Collector of Internal Revenue v Goodrich International Rubber Co(21 SCRA 1336 No L-22265)Facts In 1951 and 1952 respondent Goodrich filed it ITR in which it claimed an aggregate amount (consisting of 18 individual accounts) of P5045541 as deductible for being bad debts The Collector of Internal Revenue disallowed the deductions and accordingly assessed Goodrich accordingly Goodrich protested the assessment and subsequently filed an appealwith the CTA which allowed the deductions for bad debts Hence this appeal by the GovernmentHeld Petition is partially meritorious Some of the items claimed by Goodrich can rightfully be written off as bad debts The SC rejected the claim for deduction of 10 items because Goodrichfailed to establish that that the debts were actually worthless or that it had reasonable grounds to believe them to be so in 1951 The law permits the deduction of debts ldquoactually ascertained to be worthless within the taxable yearrdquo obviously to prevent arbitrary action by the TP to unduly avoid tax liability Good faith on the part of the TP is not enough He must furthermore show that he had reasonably investigated the relevant facts and had drawn a reasonable inference from the information 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 actually made (some in full) after they had been characterized as bad debts and written off The Court however ruled that 8 of the 18 claimed bad debts can beallowed as deductions Common among these 8 was the action of Goodrich in persistently demanding payment from its debtors its endorsement of the accounts to counsel for collection the pursuit of legal remedies for the collection on these debts and the continuing failureclear inability of the debtors to pay off their obligations

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSDEPRECIATIONBASILAN ESTATES INC v CIRFacts Basilan Estates Inc claimed deductions for the depreciation of its assets on the basis of their acquisition cost As of January 1 1950 it changed the depreciable value of said assets by increasing it to conform with the increase in cost for their replacement Accordingly from 1950 to1953 it deducted from gross income the value of depreciation computed on the reappraised value CIR disallowed the deductions claimed by petitioner consequently assessing the latter of deficiency income taxesIssueWhether or not the depreciation shall be determined on the acquisition cost rather than the reappraised value of the assetsHeld Yes The following tax law provision allows a deduction from gross income for depreciation but limits the recovery to the capital invested in the asset being depreciated (1)In general mdash A reasonable allowance for deterioration of property arising out of its use or employment in the business or trade or out of its not being used Provided That when the allowance authorized under this subsection shall equal the capital invested by the taxpayer no further allowance shall be made The income tax law does not authorize the depreciation of an asset beyond its acquisition cost Hence a deduction over and above such cost cannot be claimed and allowed The reason is that deductions from gross income are privileges not matters of right They are not created by implication but upon clear expression in the law Depreciation is the gradual diminution in the useful value of tangible property resulting from wear and tear and normal obsolescense It commences with the acquisition of the property and its owner is not bound to see his property gradually waste without making provision out of earnings for its replacement The recovery free of income tax of an amount more than the invested capital in an asset will transgress the underlying purpose of a depreciation allowance For then what the taxpayer would recover will be not only the acquisition cost but also some profit Recovery in due time thru depreciation of investment made is the philosophy behind depreciation allowance the idea of profit on the investment made has never been the underlying reason for the allowance of a deduction for depreciation

Zamora v CIRFacts These are 4 cases regarding deficiency income taxes allegedly incurred by the ZamorasCases Nos L-15290 and L-15280Mariano Zamora owner of the Bay View Hotel and Farmacia Zamora Manila filed his income tax returns the years 1951 and 1952 The Collector of Internal Revenue found that he failed to file his return of the capital gains derived from the sale of certain real properties and claimed deductions which were not allowable The CTA reduced the sum due Zamora and on appeal petitioner alleged that the CTA erred in disallowing the promotion expenses incurred by his wife for promotion of the above businesses depreciation of the Bayview Hotel Bldg and in applying the Ballantyne scale of values for determining the cost of his Manila property The CIR on the other hand claimed that the CTA erred in reducing the amounts and giving credence to the uncorroborated testimony of Mariano Zamora that he bought the said real property in question during the Japanese occupation partly in Philippine currency and partly in Japanese war notes Cases Nos L-15289 and L-15281 Mariano Zamora and his deceased sister Felicidad Zamora bought a piece of land located in Manila on May 16 1944 for P13200000 and sold it for P7500000 on March 5 1951 They also purchased a lot located inQuezon City for P6895900 on January 19 1944 which they sold for P94000 on February 9 1951 The CTA ordered the estate of the late Felicidad Zamora (represented byEsperanza A Zamora as special administratrix of her estate) to pay the sum of P23550 representing alleged deficiency income tax and surcharge due from said estateFirst issue ndash disallowance of the entire promotion expenses incurred by Mrs ZamoraPetitioner The CTA erred in disallowing P1047850 as promotion expenses incurred by his wife for the promotion of the BayView Hotel and Farmacia Zamora He contends that the whole amount of P2095700 as promotion expenses should be allowed and not merely one-half of it on the ground that while not all the itemized expenses are supported by receipts the absence of some supporting receipts has been sufficiently and satisfactorily established - to purchase machinery for a new Tiki-Tiki plant and to observe hotel management in modern hotelsRespondents Mrs Zamora obtained only the sum of P500000 from the Central Bank and that in her application for dollar allocation she stated that she was going abroad on a combined medical and business trip which facts were not denied by Mariano Zamora The alleged expenses were not supported by receipts Mrs Zamora could not even remember how much money she had when she left abroad in 1951 and how the alleged amount of P2095700 was spent There having been no means by which to ascertain which expense was incurred by her inconnection with the business of Mariano Zamora and which was incurred for her personal benefit the respondents considered 50 of the said amount of P2095700 as business expenses and the other 50 as her personal expensesHeld The 50 allocation is very fair to Zamora there being no receipt to explain the alleged business expenses as well as the personal expenses that might have been incurred While in situations like the present absolute certainty is usually no possible the CTA should make as close an approximation as it can bearing heavily if it chooses upon the taxpayer whose inexactness is of his own making Section 30 of the Tax Code provides that in computing net income there shall be allowed as deductions all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business Since promotion expenses constitute one of the deductions in conducting a business same must testify these requirements Claim for the deduction of promotion expenses or entertainment expenses must also be substantiated or supported by record showing in detail the amount and nature of the expenses incurredSecond issue ndash disallowancereduction of the rate of depreciation of Bayview Hotel (from 35 to 25)Petitioner Contends that 1) the Ermita district is becoming a commercial district 2) the hotel has no room for improvement and(3) the changing modes in architecture styles of furniture and decorative designs must meet the taste of a fickle public Alsothe reference to Bulletin F a publication by the IRS should have been first proved as law to be subject of judicial noticeHeld The CTA was approximately correct in holding that the rate of depreciation must be 25 An average hotel buildingrsquos estimated useful life is 5 years but inasmuch as it also depends on the use and location change in population and other it is allowed a deprecation rate of 25 which corresponds to a useful life of 40 years It is true that Bulletin F has no binding force but it has a strong persuasive effect considering that the same has been the result of scientific studies

and observation for a long period in the United States after whose Income Tax Law ours is patterned Verily courts are permitted to look into and investigate the antecedents or the legislative history of the statutes involvedThird issue-the undeclared capital gains derived from the sales in 1951 of certain real properties in Malate Manila and in Quezon City acquired during the Japanese occupationHeld The CTArsquos appraisal in this case is correct Consequently the total undeclared income of petitioners derived from the sales of the Manila and Quezon City properties in 1951 is P1711175 (P175000 plus P1536175) 50 of which in the sum of P855588 is taxable the said properties being capital assets held for more than one year The cost basis of property acquired in Japanese war notes is the equivalent of the war notes in genuine Philippine currency in accordance with the Ballantyne Scale 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 P13200000 was not entirely paid in Japanese War notes but frac12 thereof or P6600000 was in Philippine currency This being the case the Ballantyne Scale of values which was the resultof an impartial scientific study adopted and given judicial recognition should be applied As the value of the Japanese war notes in May 1944 when the Manila property was bought was 1 frac12 of the genuine Philippine Peso (Ballantyne Scale) and since the gain derived or loss sustained inthe disposition of this property is to reckoned in terms of Philippine Peso the value of the Japanese war notes used in the purchase of the property must be reduced in terms of the genuine Philippine Peso to determine the cost of acquisition It therefore results that since the sum of P6600000 in Japanese war notes in May 1944 is equivalent to P550000 in Philippine currency (P6600000 divided by 12) the acquisition cost of the property in question is P6600000 plus P550000 or P7150000 and that as the property was sold for P7500000 in 1951 the owners thereof Mariano and Felicidad Zamora derived a capital gain of P350000or P175000 each For the Quezon City property the CTA was correct in giving credence toZamorarsquos testimony that the same was purchased inPhilippine currency because it is quite incredible that real property with an assessed value of P4691000 should have been soldin Japanese war notes with an equivalent value in Philippine currency of only P1723975 Thus the gain derived from the sale isP1536175 after deducting from the selling price the cost of acquisition in the sum of P6895900 and the expense of sale in the sum of P967925Disposition The petitions are dismissed and the decision appealed from is affirmed

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSDEPLETIONCONSOLIDATED MINES V CTAFacts Cosolidated Mines filed a refund for overpayments of income taxes for the year 1951 However after investigation of the BIR instead of having a refund the company was instead assessed for deficiency income taxes for the years 1953 1954 and 1956 with 5 surchargeand 1 monthly interest According to the investigation (A) for the years 1951 to 1954 (1) the Company had not accrued as an expense the share in the company profits of Benguet Consolidated Mines as operator of the Consolidateds mines although for income tax purposes the Consolidated had reported income and expenses on the accrual basis (2) depletion and depreciation expenses had been overcharged and (3) the claims for audit and legal fees and miscellaneous expenses for 1953 and 1954 had not been properly substantiated and that (B) for the year 1956 (1) the Company had overstated its claim for depletion and (2) certain claims for miscellaneous expenses were not duly supported by evidence Background info Consolidated and Benguet entered into a development agreement whereby Consolidated as the owner of several mining claims allowed Benguet to explore develop mine concentrate andmarket the ore in the mining claims In the agreement it was provided that benguet is to provide the funds necessary for the expenses until such time the properties are on a profit producing basis to be reimbursed by consolidated Once profit is derived expenditures from its own resources shall be charged against the subsequent gross income of the properties During the time Benguet is being reimbursed for all its expenditures the net profits resulting from the operation of the claims shall be divided 90 to Benguet and 10 to Consolidated Such division of net profits shall be based on the receipts and expenditures during each calendar year and

shall continue until such time as the 90 of the net profits pertaining to Benguet hereunder shall equal the amount of such expenditures ldquoAfter Benguet has been fully reimbursed for its expenditures the net profits from the operation shall be divided between Benguet and Consolidated share and share alike it being understood however that the net profits as the term is used in this agreement shall be computed by deducting from gross income all operating expenses and all disbursements of any nature whatsoever as may be made in order to carry out the terms of this agreementrdquo It appears that by 1953 Benguet had completely recouped its advances because they were then dividing the profits share and share alike Consolidated used the accrual method of accounting in computing its income One of its expenses is the amount-paid to Benguet as mine operator which amount is computed as 50 of ldquonet incomerdquo TheConsolidated deducts as an expense 50 of cash receipts minus disbursements but does not deduct at the end of each calendar year what the Commissioner alleges is 50 of the share of Benguet in the accounts receivable However it deducts Benguets 50 if and when the accounts receivable are actually paid It would seem therefore that Consolidated has been deducting a portion of this expense (Benguets share as mine operator) on the cash amp carry basis The question is whether or not the accounting system used by Consolidated justifies such a treatment of this item and if not whether said method used by Consolidated and characterized by the Commissioner as a hybrid method may be allowed under the provisions of the NIRCIssue WON Consolidatedrsquos accounting method is allowedHeld YES It is said that accounting methods for tax purposes comprise a set of rules for determining when and how to report income and deductions The US Internal Revenue Code allows each taxpayer to adopt the accounting method most suitable to his business and requires only that taxable income generally be based on the method of accounting regularly employed in keeping the taxpayers books provided that the method clearly reflects incomeA deduction cannot be accrued until an actual liability is incurred even if payment has not been made Here we have to distinguish between (1) the method of accounting used by Consolidated in determining its net income for tax purposes and (2) the method of computation agreed upon between Consolidated and 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 were cash receipts and cash payments Once determined in accordance with the stipulated bases and procedure then the amount due Benguet for each month accrued at the end of that month whether Consolidated had made payment or not To make Consolidated deduct as an expense one-half of the Accounts Receivable would in effect be equivalent to giving Benguet a right which it did not have under the contract and to substitute for the parties choice a mode of computation of compensationnot contemplated by themON DEPLETIONThe first issue raised by Consolidated is with respect to the rate of mine depletion used by the Court of Tax Appeals The Tax Code provides that in computing net income there shall be allowed as deduction in the case of mines a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof which has been mined and sold during the year for which the return is made [Sec 30(g) (1) (B)] As an income tax concept depletion is wholly a creation of the statute mdash ldquosolely a matter of legislative gracerdquo Hence the taxpayer has the burden of justifying the allowance of any deduction claimed As in connectionwith all other tax controversies the burden of proof to show that a disallowance of depletion by the Commissioner is incorrect or that an allowance made is inadequate is upon the taxpayer and this is true with respect to the value of the property constituting the basis of the deduction This burden-of-proof rule has been frequently applied and a value claimed has been disallowed for lack of evidence Here SC considered the evidence presented (testimony of Eligio Garciaand the Report to Stockholders (which includes the Balance Sheet as of 1946) geological report on the estimated amount of ore in the claims etc) it set forth a very detailed computation of the depletion rate determining the value of each component of the formula of depletion viz Rate of Depletion Per Unit = Cost of Mine Property Estimated ore Deposit of Product Mined and sold- depletion is different from depreciation In determining the amount of cost depletion allowable the following three facts are essential namely (1) the basis of the property (2) the estimated total recoverable units in the property and (3) the number of units recovered during the taxable year in question As used as an element in cost depletion basis means the dollar amount of the

taxpayers capital or investment in the property which he is entitled to recover tax free during the period he is removing the mineral in the depositDisposition Decision modifiedFootnotes in the case that are helpful While taxable income is based on the method of accounting used by the taxpayer it will almost always differ from accounting income This is sobecause of a fundamental difference in the ends the two concepts serve Accounting attempts to match cost against revenue Tax law is aimed at collecting revenue It is quick to treat an item as income slow to recognize deductions or losses Thus the tax law will not recognize deductions for contingent future losses except in very limited situations Good accounting on the other hand their recognition Once this fundamental difference in approach is accepted income tax accounting methods can be understood more easily 33 Am Jur 2d 688 Under the accrual system income is accruable in the year in which the taxpayers right thereto becomes fixed and definite even though it may not be actually received until a later year while a deduction for a liability is to be accrued and taken when the liability becomes fixed and certain even though it may not be paid until a later year It has been held that the basis of the accrual system of accounting is that obligations incurred in the normal course of business will be discharged in due course that the deductions have been paid or accrued or paid and incurred but in order to be accruable in the taxable year a valid obligation upon which the profit (or loss in the case 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 expend money constituting a deductible loss is the date that fixes liability Gain or loss may not said to be fixed or accrued when the obligation is contingent upon the happening of a future event No duty or liability to pay an income tax upon a transaction arises until the taxable year in which the event constituting the condition precedent occurs under any system ofaccounting

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSCHARITABLE AND OTHER CONTRIBUTIONSROXAS v CTA GR No L-25043 April 26 1968Facts Don Pedro Roxas and Dona Carmen Ayala Spanish subjects transmitted to their grandchildren by hereditary succession several properties To manage the above-mentioned properties said children namely Antonio Roxas Eduardo Roxas and Jose Roxas formed apartnership called Roxas y Compania At the conclusion of the WW2 the tenants who have all been tilling the lands in Nasugbu for generations expressed their desire to purchase from Roxas y Cia the parcels which they actually occupied For its part the Government in consonance with the constitutional mandate to acquire big landed estates and apportion them among landless tenants-farmers persuaded the Roxas brothers to part with their landholdings Conferences were held with the farmers in the early part of 1948 and finally the Roxas brothers agreed to sell 13500 hectares to the Government for distribution to actual occupants for a price of P207904847 plus P30000000 for survey and subdivision expenses It turned out however that the Government did not have funds to cover the purchase price and so a special arrangement was made for the Rehabilitation Finance Corporation to advance to Roxas y Cia The amount of P150000000 as loan Collateral for such loan were the lands proposed to be sold to the farmers Under the arrangement Roxas y Cia allowed the farmers to buy the lands for the same price but by installment and contracted with the Rehabilitation Finance Corporationto pay its loan from the proceeds of the yearly amortizations paid by the farmers The CIR demanded from Roxas y Cia the payment of deficiency income taxes resulting from the inclusion as income of Roxas y Cia of the unreported 50 of the net profits for 1953 and 1955 derived from the sale of the Nasugbu farm lands to the tenants and the disallowance of deductions from gross income of various business expenses and contributions claimed by Roxas y Cia and the Roxas brothers For the reason that Roxas y Cia subdivided its Nasugbu farm lands and soldthem to the farmers on installment the Commissioner considered the partnership as engaged in the business of real estate hence 100 of the profits derived therefrom was taxed The Roxas brothers protested the assessment but inasmuch as said protest was denied they instituted an appeal in the CTA which sustained the assessment Hence this appealIssue Is Roxas y Cia liable for the payment of deficiency income for the sale of Nasugbu farmlandsHeld NO The proposition of the CIR cannot be favorably accepted in this isolated transaction with its peculiar circumstances in spite of the fact that there were hundreds of vendees Although

they paid for their respective holdings in installment for a period of 10 years it would nevertheless not make the vendor Roxas y Cia a real estate dealer during the 10-year amortization period It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled them for generations was not only in consonance with but more in obedience to the request and pursuant to the policy of our Government to allocate lands to the landless It was the bounden duty of the Government to pay the agreed compensation after it had persuaded Roxas y Cia to sell its haciendas and to subsequently subdivide them among the farmers at very reasonable terms and prices However the Government could not comply with its duty for lack of funds Obligingly Roxas y Cia shouldered the Governments burden went out of its way and sold lands directly to the farmers in the same way and under the same terms as would have been the case had the Government done it itself For this magnanimous act the municipal council of Nasugbu passed a resolution expressing the peoples gratitudeIn fine Roxas y Cia cannot be considered a real estate dealer for the sale in question Hence pursuant to Section 34 of the Tax Code the lands sold to the farmers are capital assets and the gain derived from the sale thereof is capital gain taxable only to the extent of 50

DEDUCTIONS AND EXEMPTIONS NON-DEDUCTIBLE EXPENSECIR v JAMIRFacts For the year 1954 Alberto M K Jamir declared a gross income of P7585865 and claimed deductions aggregating P5813450 thereby showing a net income of P1777415 upon which he paid P1634 as income tax The Collector of Internal Revenue however assessed asdeficiency income tax due from him the sum of P16395 Jamir appealed to the Court of Tax Appeals which reduced the amount due as deficiency income tax to P55200Issue Whether Jamir had an undeclared income for the year 1954 aggregating P3127491Held No It appears that by using the so-called expenditures method the Government considered as an undeclared income Jamirs expenditures for February and May were in excess of his reported income for the same months Although the Court of Tax Appeals in effect sanctioned the adoption of the expenditures method it held that the same should be applied by deducting the aggregate yearly expenditures from the declared yearly income not the expenditures incurred each month from the declared income therefor In the case at bar Jamirs total income for the year 1954 (P7585865) exceeded (Pl777415) the total deductions (P5813450) claimed by him Jamir introduced evidence that the said sums of P128124 andP2999367 represented advances made to him by customers in the months of February and may 1954 and that the income derived from the corresponding transactions were entered in his books of account in subsequent months and this explanation was found by the Court of Tax Appeals to have been proven satisfactorily The next question raised by appellant refers to Jamirs claim for car depreciation and salary of his driver Although petitioner had disallowed one-half (12) of these claims it appearing that the car was used by Jamir for personal and business purposes the lower court allowed as deductions three-fourths (34) of said amounts the car having been used by Jamir more for business than for personal purpose Petitionerassails this as an error but considering the circumstances we agree with the deduction of frac34 by the lower court It is next urged that Jamir committed fraud and the 50 surcharge should not have been eliminated But since Jamir did not have the undeclared income of P3127491 upon which the contested assessment is mainly based it follows necessarily that he was not guiltyof the fraud and that the 50 surcharge has been properly eliminatedDisposition the decision appealed from is hereby affirmed

Atlas Consolidated Mining v CIRFacts CIR assessed Atlas deficiency income tax for 1957 to 1958 which amounted to morethan P700K CIR asserted that in 1957 Atlas was still not entitled to exemption fromthe income tax under RA 909 because the same covers only gold mines and Atlas isnot engaged in that Atlasprotested before the Sec of Finance and Sec ruled that exemption provided in RA 909 embraces all new 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 disallowance of the following items transfer agent1048576s fees stockholders relation service fee US stock listing expenses suit expenses provision for contingency CTA disallowed the items except the stockholders relation service fee and suit expenses Also CTA ruled that the exemption from payment of the corporate income tax of Atlas

was good only up to the first quarter of 1958 hence it computed for its net taxable income for the remaining frac34 of the year Atlas appealed asserting that the annual public relations expense is a deductible expense from gross income because it is an ordinary and necessarybusiness expenseIssue WON this fee paid for the services rendered by a public relations firm in the US labeled as stockholders relation service fee is an allowable deductionHeld 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 that deduction is authorized and must be able to prove that he is entitled to the deduction which the law allows As previously adverted to the law allowing expenses as deduction from gross income for purposes of the income tax is Section 30 (a) (1) of the National Internal Revenue which allows a deduction of all the ordinary and necessary expenses paid orincurred during the taxable year in carrying on any trade or business An item of expenditure in order to be deductible under this section of the statute must fall squarely within its language We come then to the statutory test of deductibility where it is axiomatic that to be deductible as a business expense three conditions are imposed namely (1) the expense must be ordinary and necessary (2) it must be paid or incurred within the taxable year and (3) it must be paid or incurred in carrying in a trade or business In addition not only must the taxpayer meet thebusiness test he must substantially prove by evidence or records the deductions claimed under the law otherwise the same will be disallowed The mere allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its deduction Assuming that the expenditure is ordinary and necessary in the operation of the taxpayers business the answer to the question as to whether the expenditure is an allowable deduction as a business expense must be determined from the nature of the expenditure itself which in turn depends on the extent and permanency of the work accomplished by the expenditure The expenditure of P2552314 paid to PK Macker amp Co as compensation for services carrying on the selling campaign in an effort to sell Atlas additional capital stock of P3325000 is not an ordinaryexpense in line with the decision of US Board of Tax Appeals in the case of Harrisburg Hospital Inc vs Commissioner of Internal Revenue Accordingly as found by the Court of Tax Appeals the said expense is not deductible from Atlas gross income in 1958 because expenses relating to 1) recapitalization and reorganization of the corporation 2) the cost of obtaining stock subscription 3)promotion expenses and 4) commission or fees paid for the sale of stock reorganization are capital expenditures The burden of proof that the expenses incurred are ordinary and necessary is onthe taxpayer The claimed business expense must also be supported by appropriate documents such as invoices official receipts and contracts to be made available in case of a tax audit by the Bureau of Internal Revenue

GANCAYCO V COLLECTORFacts1048576 Gancayco filed his Income tax Return (ITR) for 19491048576 CIR notified him that his liability is Php 979362 which he paid 19501048576 CIR after a year wrote to Gancayco saying that there was tax due from him for a total of Php 29554051048576 Gancayco asked for reconsideration and the tax assessed wasreduced1048576 CIR issued a warrant of distraint for the deficient liability1048576 Gancayco filed petition with CTACTA Required Gancayco to pay Php 16 86031 for tax deficiency in1949Gancayco the right to collect the deficiency income tax is barred by thestatute of limitations the 5 yr period for judicial action should be counted from May 12 50 the date of original assessment SC Section 316 provides The civil remedies for the collection of internal revenue taxes fees or charges and any increment thereto resulting from delinquency shall be (a) by distraint of goods chattels or effects and other personal property of whatever character including stocks and other securities debts credits bank accounts and interest in and rights to personal property and by levy upon real property and (b) by judicial action Either of these remedies or both simultaneously may be pursued in the discretion of the authorities charged with the collection of such taxes No exemption shall be allowed against the internal revenue taxes in any case

Deduction for expenses may be allowed however in this case Gancayco was not able to prove any expense as there were no receipts or other proofs CTA AFFIRMED

DEDUCTIONS AND EXEMPTIONS NON-DEDUCTIBLE EXPENSESILLEGAL EXPENSESCALANOC V COLLECTORFacts1048576 Calanoc was authorized to solicit and receive contributions for the orphans and destitute kids of the Child Welfare Workers Club of the Social Welfare Commission1048576 Dec 1949 Calanoc financed and promoted a boxing exhibition at the Rizal Memorial Stadium for said charitable purpose1048576 He applied for exemption from payment of the amusement tax as provided in Sec 260 NIRC1048576 CIR investigated the tax case of Calanoc and it was found that there was gross sale of Php 26553 expenditure of 25157 and profit of 1375301048576 Profit was remitted to Social Welfare Commission1048576 CIR demanded Calanoc oto pay 5331048576 Sec of Finance denied the application of Calanoc for exemption from payment of amusement taxCTA Affirmed the assessment of 7k Calanoc denies receving a stadium fee of 1k Although it was shown that 1k was paid by O-OSO Beverages His accountant is dead SC the items of expenditures for deduction are exorbitant and not supported by receiptsCTA Affirmed

3M PHILIPPINES INC petitioner vs COMMISSIONER OFINTERNAL REVENUE respondent [GR No 82833 September 261988]Facts The petitioner claimed as deductions for income tax purposes business expenses in the form of royalty payments to its foreign licensor which the respondent Commissioner of Internal Revenue disallowed The petitioner claimed the following deductions royalties and technical service fees and pre-operational cost of tape coater The amount was not allowed as entire deduction The petitioner argues that the law applicable to its case is only Section 29(a)(1) of the Tax Code and not Circular No 393 of the Central BankIssue WON the royalty payments are valid deductible expense WON the Tax Code is applicableHeld No Although the Tax Code allows payments of royalty to be deducted from gross income as business expenses it is CB Circular No 393 that defines what royalty payments are proper Improper payments of royalty are not deductible as legitimate business expenses Section 3-c of CB Circular No 393 provides for payment of royalties only on commodities manufactured by the licensee under the royalty agreement not on the wholesale price of finished products imported by the licensee from the licensor entral Bank Circulars like CB Circular No 393 (dated December 7 1973 published in the Official Gazette issue of December 17 1973 [69 OG No 51 p 11737] issued by the Central Bank in the exercise of fits authority under the Central Bank Act duly published in the Official Gazette have the force and effect of law (Cases cited) andbinding on everybody

DEDUCTIONS AND EXEMPTIONS PERSONAL EXEMPTIONSCOLLECTOR OF INTERNAL REVENUE petitioner vs ORLANDO VCALSADO and COURT OF TAX APPEALS respondents [GR 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 supportIssue WON the respondent is classified as head of the familyHeld 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 Php50000

In the matter of the adoption of the minor MARCIAL ELEUTERIO RESABA LUIS SANTOS-YNtildeIGO and LIGIA MIGUEL DE SANTOSYNtildeIGO petitioners-appellees vs REPUBLIC OF THE PHILIPPINES oppositor-appellantTAX ON CORPORATIONS BASES AND RATESRESIDENT FOREIGN CORPORATIONS TAXABLE INCOME [GRNo 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 minorIssue WON the adoption is validHeld 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 suchagreement 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 bymarriage 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 childrenwith 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 or main support Partial support not amounting to chief support will not entitle the taxpayer to claim exemption as a head of a family Regulation No section 11

regular business of raising money by issuing bonds or other instruments to the general public3) We have already noted that our 1977 NIRC does not prohibit the deduction of interest on a loan incurred for acquiring machinery and equipment Neither does our 1977 NIRC compel the capitalization of interest payments on such a loan The 1977 Tax Code is simply silent ona taxpayers right to elect one or the other tax treatment of such interest payments Accordingly the general rule that interest payments on a legally demandable loan are deductible from gross income must be applied We conclude that the CTA and the Court of Appeals did not err in allowing the deductions of Picops 1977 interest payments on its loans for capital equipment against its gross income for 1977 4) After prolonged consideration and analysis of this matter the Court is unable to agree with the CTA and Court of Appeals on the deductibility of RPPMs accumulated losses against Picops 1977 gross income It is important to note at the outset that in our jurisdiction the ordinary rule mdash that is the rule applicable in respect of corporations notregistered with the BOI as a preferred pioneer enterprise mdash is that net operating losses cannot be carried over Under our Tax Code both in 1977 and at present losses may be deducted from gross income only if such losses were actually sustained in the same year that they are deducted or charged off Thus it is that RA No 5186 introduced the carry-over of net operatinglosses as a very special incentive to be granted only to registered pioneer enterprises and only with respect to their registered operations In the instant case to allow the deduction claimed by Picop would be to permit one corporation or enterprise Picop to benefit from the operatinglosses accumulated by another corporation or enterprise RPPM In effect to grant Picops claimed deduction would be to permit Picop to purchase a tax deduction and RPPM to peddle its accumulated operating losses We consider and so hold that there is nothing in Section 7 (c) ofRA No 5186 which either requires or permits such a result Indeed that result makes non-sense of the legislative purpose which may be seen clearly to be projected by Section 7 (c) RA No 5186 We conclude that the deduction claimed by Picop in the amount of P4419610600 in its 1977 Income Tax Return must be disallowed 5) We must support the CTA and the Court of Appeals in their foregoing rulings A taxpayer has the burden of proving entitlement to a claimeddeduction Even Picops own vouchers were not submitted in evidence and the BIR Examiners denied that such vouchers and other documents had been exhibited to them Moreover cash vouchers can only confirm the fact of disbursement but not necessarily the purpose thereof6) The CIR has made out at least a prima facie case that Picop had understated its sales and overstated its cost of sales as set out in its Income Tax Return For the CIR has a right to assume that Picops Books of Accounts speak the truth in this case since as already notedthey embody what must appear to be admissions against Picops own interest7) The adjusted net income of Picop for 1977 as will be seen below is P4868735500 Its net worth figure or total stockholders equity as reflected in its Audited Financial Statements for 1977 is P46474952800 Since its adjusted net income for 1977 thus exceeded ten percent (10) of its net worth Picop must be held liable for the five percent (5) corporate development tax in the amount of P243436775 DOCTRINE It is thus clear that the transaction tax is an income tax andas such in any event falls outside the scope of the tax exemptiongranted to registered pioneer enterprises by Section 8 of RA No 5186as amended

CIR v ITOGON-SUYOC MINES INCFACTS Respondent Itogon-Suyoc Mines Inc the taxpayer involved duly paid in full its liability according to its income tax return for the fiscal year 1960-61 Instead it deducted right away the amount represented by claim for refund filed eight (8) months back for the previous years income tax for which it was not liable at all so it alleged as it suffered a loss instead a claim subsequently favorably acted on by petitioner Commissioner of Internal Revenue but after the date of such payment of the 1960-1961 tax Accordingly an interest in the amount of P151283was charged by petitioner Commissioner of Internal Revenue on the sum withheld on the ground that no deduction on such refund should be allowed before its approval When the matter was taken up before the Court of Tax Appeals the above assessment representing interest wasset aside in the decision of September 30 1965ISSUES Whether CTA should not have absolved respondent corporation from liability to pay the sum of P151283 as 1 monthly interest for delinquency in the payment of income tax for the fiscal year 1960-1961

HELD No It could not be error for the Court of Tax Appeals considering the admitted fact of overpayment entitling respondent to refund to hold that petitioner should not repose an interest on the aforesaid sum of P1315520 which after all was paid to and received by the governmenteven before the incidence of the tax in question It would be according to the Court of Tax Appeals unfair and unjust to do so We agree but we go farther The imposition of such an interest by petitioner is not supported by lawThe National Internal Revenue Code provides that interest upon the amount determined as a deficiency shall be assessed and shall be paid upon notice and demand from the Commissioner of Internal Revenue There is no question respondent was entitled to a refund Instead of waiting for the sum involved to be delivered to it it deducted the said amount from the tax that it had to pay That it 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 time such a deduction was made the Commissioner of Internal Revenue had not as yet approved such a refund It is an admitted fact though that respondent was clearly entitled to it and petitioner did not allege otherwise Nor could he do so Under all the circumstances disclosed therefore the applicability of the legal provision allowing such a deduction from the amount of the tax to be paid cannot be disputed DOCTRINE It could not be error for the Court of Tax Appeals considering the admitted fact of overpayment entitling respondent to refund to hold that petitioner should not repose an interest on the aforesaid sum of P1315520 which after all was paid to and received by the government even before the incidence of the tax in question

CASTRO v COLLECTORFacts This is an appeal from a decision of the Court of Tax Appeals (in its CTA Case 141) holding petitioner Maria B Castro liable under the War Profits Tax Law Republic Act No 55 and ordering her to pay a deficiency war profits tax (including surcharges and interest) in theamount of P136051466 and costs Castro was previously acquitted in the criminal case instituted against her for violation of the War Profits Tax LawIssue WON the acquittal is a bar to the collection of the taxes assessed and specially of the 50 surchargeHeld NO With regard to the tax proper the state correctly points out in its brief that the acquittal in the criminal case could not operate to discharge petitioner from the duty to pay the tax since that duty is imposed by statute prior to and independently of any attempts on the part of the taxpayer to evade 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 declaration that the criminal acts charged did not exist As to the 50 surcharge the very United States Supreme Court that rendered the Coffey decision has subsequently pointed out that additions of this kind to the main tax are not penalties but civil administrative sanctions provided primarily as a safeguard for the protection of the state revenue and to reimburse the government for the heavy expense of investigation and the loss resulting from the taxpayers fraud (Helvering vs Mitchell 303 US 390 82 L Ed 917 Spies vs US 317 US 492) This is made plain by the fact that such surcharges are enforceable like the primary tax itself by distraint or civil suit and that they are provided in a section of RA No 55 (section 5) that is separate and distinct from that providing for criminal prosecution (section 7) We conclude that the defense of jeopardy and estoppel by reason of the petitioners acquittal isuntenable and without merit Whether or not there was fraud committed by the taxpayer justifying the imposition of the surcharge is an issue of fact to be inferred from the evidence and surrounding circumstances and the finding of its existence by the Tax Court is conclusive upon us (Gutierrez v Collector GR No L-9771 May 31 1951 Perez vs Collector supra)

COLLECTOR v FISHERFacts This case relates to the determination and settlement of the hereditary estate left by the deceased Walter G Stevenson and the laws applicable thereto Walter G Stevenson (born in the Philippines on August 9 1874 of British parents and married in the City of Manila on January 23 1909 to Beatrice Mauricia Stevenson another British subject) died on February 22 1951 in San Francisco California USA whereto he and his wife moved and established their permanent residence since May 10 1945 In his will executed in San Francisco on May 22 1947 and which was duly probated in the Superior Court of California on April 11 1951

Stevenson instituted his wife Beatrice as his sole heiress to the following real and personal properties acquired by the spouses while residing in the PhilippinesIssue 1 Whether or not the estate is entitled to the following deductions P860439 for judicial and administration expenses P208652 for funeral expenses P65250 for real estate taxes andP1002247 representing the amount of indebtedness allegedly incurred by the decedent during his lifetime 2 Whether or not the estate is entitled to the payment of interest on the amount it claims to have overpaid the government and to be refundable to itHeld 1 YES An examination of the record discloses however that the foregoing items were considered deductible by the Tax Court on the basis of their approval by the probate court to which said expenses we may presume had also been presented for consideration It is to besupposed that the probate court would not have approved said items were they not supported by evidence presented by the estate In allowing the items in question the Tax Court had before it the pertinent order of the probate court which was submitted in evidence by respondents (Exh AA-2 p 100 record) As the Tax Court said it found no basis for departing from the findings of the probate 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 National Association which it would appear that while still living Walter G Stevenson obtained we are not inclined to pass upon the claim of respondents in respect to theadditional amount of P8652 for funeral expenses which was disapproved by the court a quo for lack of evidence In connection with the deduction of P65250 representing the amount of realty taxes paid in 1951 on the decedents two parcels of land in Baguio City which respondents claim was disallowed by the Tax Court we find that this claim has in fact been allowed2 NO Respondents claim for interest on the amount allegedly overpaid if any actually results after a recomputation on the basis of this decision is hereby denied in line with our recent decision in Collector of Internal Revenue v St Pauls Hospital (GR No L-12127 May 29 1959) wherein we held that in the absence of a statutory provision clearly or expressly directing or authorizing such payment and none has been cited by respondents the National Government cannot be required to pay interest

DEDUCTIONS AND EXMEPTIONS ALLOWABLE DEDUCTIONSTAXESCIR v LEDNICKYFacts V E Lednicky and Maria Valero Lednicky are husband and wife both American citizens residing in the Philippines and have derived all their income from Philippine sources for the taxable years under question [GR L-18286] In compliance with local law the spouses on 27March 1957 filed their income tax return for 1956 reporting therein a gross income of P101728765 and a net income of P73380944 on which the amount of P31739541 was assessed after deducting P480559 as withholding tax Pursuant to the Commissioner of Internal Revenuersquos assessment notice the spouses paid the total amount of P32624741 inclusive of the withheld taxes on 15 April 1957 On 17 March 1959 the spouses filed an amended income tax return for 1956 The amendment consists in a claimed deduction of P20593924 paid in 1956 to the US government as federal income tax for 1956 Simultaneously with the filing of the amended return the spouses requested the refund of P11243790 When the Commissioner of Internal Revenue failed to answer the claim for refund the spouses filedtheir 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 P177112463 and a net income of P105255067 On 19 April 1956 they filed an amended income tax return the amendment upon the original being a lesser net income of P101255451 and on the basis of this amended return they paid P57025200 inclusive of withholding taxes After audit the Commissioner determined a deficiency of P1611600 which amount the spouses paid on 5 December 1956 Back in 1955 however the spouses filed with the US Internal Revenue Agent in Manila their Federal income tax return for the years 1947 1951 1952 1953 and 1954 on income from Philippine sources on a cash basis Payment of these federal income taxes including penalties and delinquency interest in the amount of $26458882 were made in 1955 to the US Director of Internal Revenue Baltimore Maryland through the National City Bank of New York Manila Branch Exchange and bank charges in

remitting payment totaled P414391 On 11 August 1958 the said respondents amended their Philippines income tax return for 1955 to including US Federal income taxes interest accruing up to 15 May 1955 and exchange and bank charges totaling P51634515 and therewith filed a claim for refund of the sum of P16638400 which was later reduced to P15026900 The spouses brought suit in the Tax Court which was docketed therein as CTA Case 570 [GR 21434] The facts are similar to above cases but refer to the spousesrsquo income tax returns for 1957 filed on 28 February 1958 and for which the spouses paid a total sum of P19679965 In 1959 they filed an amended return for 1957 claiming deduction of P19075580 representing taxes paid to the US Government on income derived wholly from Philippine sources On the strength thereof spouses seek refund of P9052075 as overpayment (CTA Case 783) The Tax Court decided for the spousesIssue WON there should be a refund for the spousesHeld NO The Supreme Court reversed the decisions of the Court of Tax Appeals and affirmed the disallowance of the refunds claimed by the spouses with costs against said spouses1 Section 30 (c-1) of the Philippine Internal Revenue Code Section 30 (c) (1) (Deduction from gross income) provides that ldquoin computing net income there shall be allowed as deductions (c) Taxes (1) In general mdash Taxes paid or accrued within the taxable year except (A) The income tax provided for under this Title (B) Income war-profits and excess profits taxes imposed by the authority of any foreign country but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits ofparagraph (3) of this subsection (relating to credit for taxes of foreign countries) (C) Estate inheritance and gift taxes and (D) Taxes assessed against local benefits of a kind tending to increase the value of the property assessedrdquo2 Paragraph (c) (3) (b) of the Tax Code Credits against tax for taxes of foreign countriesParagraph 3 (B) of the subsection (Credits against tax for taxes of foreign countries) reads ldquoIf the taxpayer signifies in his return his desire to have the benefits of this paragraph the tax imposed by this Title shall be credited with (B) Alien resident of the Philippines mdash In the case of an alien resident of the Philippines the amount of any such taxes paid or accrued during the taxable year to any foreign country if the foreign country of which such alien resident is a citizen or subject in imposing such taxes allows a similar credit to citizens of the Philippines residing insuch countryrdquo3 Paragraph (c) (4) of the Tax Code Limitation on credit The tax credit so authorized is limited under paragraph 4 (A and B) of the same subsection in the following terms ldquoPar (c) (4) Limitation on credit mdash The amount of the credit taken under this section shall be subject to each of the following limitations (A) The amount of the credit in respect to the tax paid or accrued to any country shall not exceed the same proportion of the tax against which such credit is taken which the taxpayerrsquos net income from sources within such country taxable under this Title bears to his entire net income for the same taxable year and (B) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken which the taxpayerrsquos net income from sources without the Philippines taxable under this Title bears to his entire net income for the same taxable yearrdquo4 Lawrsquos intent that right to deduct income taxes paid to foreign government taken as an alternative or substitute to claim of tax credit for such foreign income tax Construction and wording of Section 30 (c) (1) (B) of the Internal Revenue Act shows the lawrsquos intent that the right to deduct income taxes paid to foreign government from the taxpayerrsquos gross income is givenonly as an alternative or substitute to his right to claim a tax credit for such foreign income taxes under section 30 (c) (3) and (4) so that unless the alien resident has a right to claim such tax credit if he so chooses he is precluded from deducting the foreign income taxes from his gross income For it is obvious that in prescribing that such deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) (relating to credits for taxes paid to foreign countries) the statute assumes that the taxpayer in question also may signify his desire to claim a tax credit and waive the deduction otherwise the foreign taxes would always be deductible and their mention in the list of nondeductible items in Section 30 (c) might as well have been omitted or at least expressly limited to taxes on income from sources outside the Philippine Islands Had the law intended that foreign income taxes could be deducted from gross income in any event regardless of thetaxpayerrsquos right to claim a tax credit it is the latter right that should be conditioned upon the taxpayerrsquos waiving the deduction in which case the right to reduction under subsection (c-1-B)

would have been made absolute or unconditional (by omitting foreign taxes from the enumeration of non- deductions) while the right to a tax credit under subsection (c-3) would have been expressly conditioned upon the taxpayerrsquos not claiming any deduction under subsection (c-1)5 Danger of double credit does not exist if taxpayer cannot claim benefit from either headings at his option The purpose of the law is to prevent the taxpayer from claiming twice the benefits of his payment of foreign taxes by deduction from gross income (subs c-1) and by tax credit (subs c-3) This danger of double credit certainly can not exist if the taxpayer can not claim benefit under either of these headings at his option so that he must be entitled to a tax credit (the spouses admittedly are not so entitled because all their income is derived from Philippine sources) or the option to deduct from gross income disappears altogether6 When double taxation Tax income should accrue to benefit of the PhilippinesDouble taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity (cf Manila vs Interisland Gas Service 52 Off Gaz 6579 Manuf Life Ins Co vs Meer 89 Phil 357) In the present case while the taxpayers would have to pay two taxes on the same income the Philippine government only receives the proceeds of one tax As between the Philippines where the income was earned and where the taxpayer is domiciled and the United States where that income was not earned and where the taxpayer did not reside it is indisputable that justice and equity demand that the tax on the income should accrue to the benefit of the Philippines Any relief from the alleged double taxation should come from the United States and not from the Philippines since the formerrsquos right to burden the taxpayer is solely predicated on his citizenship without contributing to the production of the wealth that is being taxed To allow an alien resident to deduct from his gross income whatever taxes he pays to his own government amounts to conferring on the latterpower to reduce the tax income of the Philippine government simply by increasing the tax rates on the alien resident Everytime the rate of taxation imposed upon an alien resident is increased by his own government his deduction from Philippine taxes would correspondingly increase and the proceeds for the Philippines diminished thereby subordinating our own taxes to those levied by a foreign government Such a result is incompatible with the status of the Philippines as an independent and sovereign state

GUTIERREZ v COLLECTORFacts Maria Morales was the registered owner of an agricultural land designated as Lot No 724-C of the cadastral survey of Mabalacat Pampanga The Republic of the Philippines at the request of the USGovernment and pursuant to the terms of the Military Bases Agreement of March 14 1947 instituted condemnation proceedings in the Court of the First Instance of Pampanga docketed as Civil Case No 148 for the purpose of expropriating the lands owned by Maria Morales and others needed for the expansion of the Clark Field Air Base t the commencement of the action the Republic of the Philippines therein plaintiff deposited with the Clerk of the Court of First Instance of Pampanga the sum of P156960 which was provisionally fixed as the value of the lands sought to be expropriated in order that it could take immediate possession of the same On January 27 1949 upon order of the Court the sum of P34580 (PNB Check 721520-Exh R) was paid by the Provincial treasurer of Pampanga to Maria Morales out of the original deposit of P156960 made by therein plaintiff After due hearing the Court of First Instance of Pampanga rendered decision dated November 29 1949 wherein it fixed as just compensation P2500 per hectare for some of the lots and P3000 per hectare for the others which values were based on the reports of the Commission on Appraisal whose members were chosen by both parties and by the Court which took into consideration the different conditions affecting the value of the condemned properties in making their findingsIn virtue of said decision defendant Maria Morales was to receive the amount of P9430575 as compensation for Lot No 724-C which was one of the expropriated lands Sometime in 1950 the spouses Blas Gutierrez and Maria Morales received the sum of P5978575 presenting the balance remaining in their favor after deducting the amount of P34580 already withdrawn from the compensation to them In a notice of assessment dated January 28 1953 the Collector ofInternal Revenue demanded of the petitioners the payment of P8481 as alleged deficiency income tax for the year 1950 inclusive of surcharges and penalties The CIR contended that petitioners-appellants failed to include from their gross income in filing their income tax return for 1950 the amount of P9430575 which they had received as compensation for their land

taken by the Government by expropriation proceedings It is the contention of respondent Collector of Internal Revenue that such transfer of property for taxation purposes is sale and that the income derived therefrom is taxable The lower court exonerated petitioners from the 50 per cent surchargeimposed on the latter on the ground that the taxpayers income tax return for 1950 is false andor fraudulentIssue WON petitioners should pay surcharge Held NO It should be noted that the Court of Tax Appeals found that the evidence did not warrant the imposition of said surcharge becausethe petitioners therein acted in good faith and without intent to defraud the GovernmentThe question of fraud is a question of fact which frequently requires a nicely balanced judgement to answer All the facts and circumstances surrounding the conduct of the tax payers business and all the facts incident to the preparation of the alleged fraudulent return should be considered (Mertens Federal Income Taxation Chapter 55) The question of fraud being a question of fact and the lower court having made the finding that the evidence of this case does not warrant the imposition of the 50 per cent surcharge We are constrained to refrain from giving any consideration to the question raised by the Solicitor General for it is already settled in this jurisdiction that in passing upon petitions to review decisions of the Court of Tax Appeals We have to confine ourselves to questions of law

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSLOSSESFERNANDEZ HERMANOS v CIRFacts These four appeals involve two decisions of the Court of Tax Appeals determining the taxpayers income tax liability for the years 1950 to 1954 and for the year 1957 Both the taxpayer and the Commissioner of Internal Revenue as petitioner and respondent in the cases a quo respectively appealed from the Tax Courts decisions insofar as their respective contentions on particular tax items were therein resolved against themIssue ProperImproper AllowancesDisallowances of LossesHeld Re allowancesdisallowances of losses(a) Allowance of losses in Mati Lumber Co (1950) mdash The Commissioner of Internal Revenue questions the Tax Courts allowance of the taxpayers writing off as worthless securities in its 1950 return the sum of P805000 representing the cost of shares of stock of Mati Lumber Co acquired by the taxpayer on January 1 1948 on the ground that the worthlessness of said stock in the year 1950 had not been clearly established The Commissioner contends that although the said Company was no longer in operation in 1950 it still had its sawmill and equipment which must be of considerable value There was adequate basis for the writing off of the stock as worthless securities Assuming that the Company would later somehow realize some proceeds from its sawmill and equipment which were still existing as claimed by the Commissioner and that such proceeds would later be distributed to its stockholders such as the taxpayer the amount so received by the taxpayer would then properly be reportable as income of the taxpayer in the year it is received(b) Disallowance of losses in or bad debts of Palawan Manganese Mines Inc (1951) mdash The taxpayer appeals from the Tax Courts disallowance of its writing off in 1951 as a loss or bad debt the sum of P35313425 which it had advanced or loaned to Palawan Manganese Mines Inc Pursuant to the agreement mentioned above petitioner gave to Palawan Manganese Mines Inc yearly advances starting from 1945 which advances amounted to P58730807 by the end of 1951 Despite these advances and the resumption of operations by Palawan ManganeseMines Inc it continued to suffer losses By 1951 petitioner became convinced that those advances could no longer be recovered While it continued to give advances it decided to write off as worthless the sum of P35313425 Under the circumstances was the sum of P35313425properly claimed by petitioner as deduction in its income tax return for 1951 either as losses or bad debts It will be noted that in giving advances to Palawan Manganese Mine Inc petitioner did not expect to be repaid It is true that some testimonial evidence was presented to show that there was some agreement that the advances would be repaid but no documentary evidence was presented to this effect The memorandum agreement signed by the parties appears to be very clear that the consideration for the advances made by petitioner was 15 of the net profits of Palawan Manganese Mines Inc In other words if there were no earnings or profits there

was no obligation to repay those advances It has been held that the voluntary advances made without expectation of repayment do not result in deductible losses The Tax Courts is allowance of the write-off was proper The Solicitor General has rightly pointed out that the taxpayer has taken an ambiguous position and has not definitely taken a stand on whetherthe amount involved is claimed as losses or as bad debts but insists that it is either a loss or a bad debt 4 We sustain the governments position that the advances made by the taxpayer to its 100 subsidiary Palawan Manganese Mines Inc amounting to P58730807 as of 1951 wereinvestments and not loans 5 (c) Disallowance of losses in Balamban Coal Mines (1950 and1951) mdash The Court sustains the Tax Courts disallowance of the sums of P898976 and P2773266 spent by the taxpayer for the operation of its Balamban coal mines in Cebu in 1950 and 1951 respectively and claimed as losses in the taxpayers returns for said years The Tax Court correctly held that the losses are deductible in 1952 when the mines were abandoned and not in 1950 and 1951 when they were still in operation 9 The taxpayers claim that these expeditions should be allowed as losses for the corresponding years that they were incurredbecause it made no sales of coal during said years since the promised road or outlet through which the coal could be transported from the mines to the provincial road was not constructed cannot be sustained Some definite event must fix the time when the loss is sustained and here it was the event of actual abandonment of the mines in 1952 (d) and (e) Allowance of losses in Hacienda Dalupiri (1950 to 1954) and Hacienda Samal (1951-1952) mdash The Tax Court overruled the Commissioners disallowance of these items of losses thus Petitioner deducted losses in the operation of its Hacienda Dalupiri the sums of P1741895 in 1950 P2912582 in 1951 P2674481 in 1952 P2193262 in 1953 and P4293856 in 1954 These deductions were disallowed by respondent on the ground that the farm was operated solely for pleasure or as ahobby and not for profit This conclusion is based on the fact that the farm was operated continuously at a loss From the evidence we are convinced that the Hacienda Dalupiri was operated by petitioner for business and not pleasure It was mainly a cattle farm although a few race horses were also raised It does not appear that the farm was used by petitioner for entertainment social activities or other nonbusiness purposes Therefore it is entitled to deduct expenses and losses in connection with the operation of said farm (See 1955 PH Fed Taxes Par 13 63 citing GCM 21103 CB 1939- 1 p164) Section 100 of Revenue Regulations No 2 otherwise known as the Income Tax Regulations authorizes farmers to determine their gross income on the basis of inventories Said regulations provide If gross income is ascertained by inventories no deduction can be made for livestock or products lost during 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 quote from the memorandum of counsel for petitioner The Taxpayer deducted from its income tax returns for the years from 1950 to 1954 inclusive the corresponding yearly losses sustained in the operation of Hacienda Dalupiri which losses represent the excess of its yearly expenditures over the receipts that is the losses represent the difference between the sales of livestock and the actual cash disbursements or expenses (Pages 21-22 Memorandum for Petitioner) As the Hacienda Dalupiri was operated by petitioner for business and since it sustained losses in its operation which losses were determined by means of inventories authorized under Section 100 of Revenue Regulations No 2 it was error for respondent to have disallowed the deduction of said losses The same is true with respect to loss sustained in the operation of the Hacienda Samal for the years 1951 and 1952 10 The Commissioner questions that the losses sustained by the taxpayer were properly based on the inventory method of accounting He concedes however that the regulations referred to does not specify how the inventories are to be made The Tax Court however felt satisfied with the evidence presented by the taxpayer which merely consisted of an alleged physical count of the number of the livestock in Hacienda Dalupiri for the years involved 11 The Tax Court was satisfied with the method adopted by the taxpayer as a farmer breeding livestock reporting on the basis of receipts and disbursements We find no Compelling reason to disturb its findings

PLARIDEL SURETY v CIRFacts Petitioner Plaridel Surety amp Insurance Co is a domestic corporation engaged in the bonding business On November 9 1950 petitioner as surety and Constancio San Jose as principal solidarily executed a performance bond in the penal sum of P3060000 in favor of the

P L Galang Machinery Co Inc to secure the performance of San Joses contractual obligation to produce and supply logs to the latter To afford itself adequate protection against loss or damage on the performance bond petitioner required San Jose and one Ramon Cuervo to execute an indemnity agreement obligating themselves solidarily to indemnify petitioner for whatever liability it may incur by reason of said performance bond Accordingly San Jose constituted a chattel mortgage on logging machineries and other movables in petitioners favor1 while Ramon Cuervo executed a real estate mortgage2 San Jose later failed to deliver the logs to Galang Machinery3 and the latter sued on the performance bond On October 1 1952 the Court of First Instance adjudged San Jose and petitioner liable it also directed San Jose and Cuervo to reimburse petitioner for whatever amount it would pay Galang Machinery The Court of Appeals on June 17 1955 affirmed the judgment of the lower court The same judgment waslikewise affirmed by this Court4 on January 11 1957 except for a slight modification apropos the award of attorneys fees In its income tax return for the year 1957 petitioner claimed the saidamount of P4449000 as deductible loss from its gross income and accordingly paid the amount of P13600 as its income tax for 1957 The Commissioner of Internal Revenue disallowed the claimed deduction of P4449000 and assessed against petitioner the sum of P889800 plus interest as deficiency income tax for the year 1957 Petitioner filed its protest which was denied Whereupon appeal was taken to the Tax Court petitioner insisting that the P4449000 which it paid to Galang Machinery was a deductible lossIssue WON the amount Plaridel paid to Galang Machinery is a deductible lossHeld NO There is no question that the year in which the petitioner Insurance Co effected payment to Galang Machinery pursuant to a final decision occurred in 1957 However under the same court decision San Jose and Cuervo were obligated to reimburse petitioner for whateverpayments it would make to Galang Machinery Clearly petitioners loss is compensable otherwise (than by insurance) It should follow then that the loss deduction can not be claimed in 1957 Now petitioners submission is that its case is an exception Citing Cu Unjieng Sons Inc v Board of Tax Appeals6 and American cases also petitioner argues that even if there is a right to compensation by insurance or otherwise the deduction can be taken in the year of actual loss where the possibility of recovery is remote The pronouncement however to this effect in the Cu Unjieng case is not as authoritative as petitioner would have it since it was there found that the taxpayer had no legal right to compensation either by insurance or otherwise7 And the American cases cited8 are not in point None of them involved a taxpayer who had as in the present case obtained a final judgment against third persons for reimbursement of payments made In those cases there was either no legally enforceable right at all or such claimed right was still to be or being litigated On the other hand the rule is that loss deduction will be denied if there is a measurable right to compensation for the loss with ultimate collectionreasonably clear So where there is reasonable ground for reimbursement the taxpayer must seek his redress and may not secure a loss deduction until he establishes that no recovery may be had9 In other words as the Tax Court put it the taxpayer (petitioner) must exhaust his remedies first to recover or reduce his loss But assuming that there was no reasonable expectation of recovery still no loss deduction can be had Sec 30 (d) (2) of the Tax Code requires a charge-off as one of the conditions for loss deduction In the case of a corporation all losses actually sustained and charged-off within the taxable year and not compensated for byinsurance or otherwise Mertens12 states only four (4) requisites because the United StatesInternal Revenue Code of 193913 has no charge-off requirement Sec 23(f) thereof provides merely In the case of a corporation losses sustained during the taxable year and not compensated for by insurance or otherwise Petitioner who had the burden of proof14 failed to adduce evidence that there was a charge-off in connection with the P4449000mdashor P3060000 mdash which it paid to Galang Machinery

CHINA BANKING CORPORATION V COURT OF APPEALSFacts Petitioners mad a 53 equity investment in First CBC Capital (Asia) Limited to the amount of P1622785180 consisting of 106000 shares with par value of P100 per shareSubsequently First CBC was found to be insolvent Petitioners with the approval of the BSP wrote off as worthless its investment in the company and treated it as a bad debt or ordinary loss deductible from its gross income The Commissioner of Internal Revenue disallowed the deduction saying that the investment could not be considered worthless since First CBC could still exercise its financing and investment activities even if it was no longer licensed as a

depository Even assuming that the securities had become worthless it still cannot be considered as a bad debt or expense since there is no indebtedness between petitioner and First CBC It should be classified as a capital lossHeld The SC found in favor of respondents1 Not and indebtedness An equity investment in shares of stock cannot be considered as an indebtedness of First CBC Capital to China Bank The former has no obligation to repay the latter the amount invested The amount China Bank invested in First CBC is in fact anasset2 Capital asset not ordinary Capital assets are defined in the negative by Sec 33(1) of the NIRC as property held by the TP exclusive of items primarily for the sale to customers in the ordinary course of business or property used in trade or business Hence securities such as equity holdings are ordinary assets only in the hands of a dealer or a person actively engaged in trading in the same for his own account3 Section 29(d)(4)(B) of the NIRC treats the worthlessness of the securities held as capital assets as a loss resulting from the sale or exchange of capital assets Strictly speaking no sale occurs when securities held as capital assets become worthless Nonetheless the law treats it as a loss from a sale just the same4 Section 33 of the NIRC provides that the capital loss sustained can only be deducted from any capital gain derived within the taxable year The same provision enumerates assets which are not subject to the said limitation but equity holdings are not one of them

THE CITY LUMBER INC V DOMINGOFacts Respondent Domingo made an assessment on an additional income of petitioners in the amount of P16 67863 coming from 1 the sale of plywood kegs of nails and GI sheets amouting to P 790207 2 a cash credit balance of P789680 Petitioner assails the validity of the assessment alleging that the inventory in question was not sold but were lost to looters during a fire which occurred in the city To 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 was actually a loan secured by petitionersHELDThe assessments were valid 1 The alleged loss of the plywood and kegs of nails was never reported in the books of the petitioner nor in the petitioners ITR for that year Such conduct of the petitioner proves that such loss never occurred 2 Similarly there was neither any record in petitioners books nor any receipt or other piece of evidence to show receipt of the supposed loan

MARCELO STEEL CROP V COLLECTOR OF INTERNAL REVENUEFacts RA 35 granted a four-year tax exemption from all internal revenue taxes to enterprises directly payable by such enterprise or person which shall engage in new and necessary industries Petitioner corporation was engaged in 1 the manufacture of wire fences 2 the manufacture of steel nails 3 the manufacture of steel bars rods and other allied productsof which the last two were covered by RA 35 In 1953 and 1954 petitioner filed its ITR showing a net income of P3438658 and P5832900 respectively derived solely from its wire fence manufacturing business It was accordingly assessed P12750 in taxes which it paid subsequently it filed an amended ITR for the same taxable years showing that it actually incurred a loss of P87140737 and P10495629 respectively The losses were arrived at by consolidating the gross income and the gross allowable deductions of its three industries Petitioner thus filed for a refund of the P12750 it initially paid in taxes on the theory that since it is a corporation organized with a single capital to answer for all its financial obligations the gross income from both tax-exempt and non-exempt industries and its liability should be based on the difference between its consolidated gross income and its consolidated allowable deductionsHeld Petition has no merit Marcelo Steel cannot consolidate 1 The purpose of RA 35 is to encourage the establishment of new and necessary industries for the economic growth of the country In effect it grants a subsidy to entrepreneurs who blaze a trail in a new industry since there are greater risks involved in the same and an ROI is usually not immediately forthcoming As such a tax exemption granted to an entrepreneur engaged in a tax-exempt industry cannot be extended to benefit non-exempt industries in which the same entrepreneur is concurrently

engaged The justification is simply not there since such industries are presumably already deriving profits from its operations 2 Single capital - The fact that all three industries are organized under a single capital is of no moment It is clear that the law intended that tax exemptand non-exempt industries be treated separately as reflected in EO 341 series 0f 1950 which was incorporated in RA 901 a later incarnation of the same lawPHILIPPINE SUGAR ESTATE CORP V COLLECTOR OF INTERNALREVENUEFacts Petitioner owned shares of stock in several different companies and 154 liberty bonds at par 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 inclusiveof the sums above-stated for which it was assessed an amount in taxes It paid said amount without protest Subsequently petitioner filed a demand for refund In the letter-demand the ground for the refund invoked was the illegality o the collection since the dividends and interest were exempt from payment of income tax Although in the present petition the ground invoked is that the income tax on dividends had already been paid at the source Respondent denied the claim for refund because plaintiff failed to lodge a protest concurrently when it paid its tax liability as per Sec 1579 of the Revised Administrative Code as amended by Act No 3685 Plaintiffcountered by saying that the applicable law is Act No 2833 which requires no protest In addition it invoked the ruling in Fox v Edwards wherein it was ruled that any unduly paid income tax may be refunded without the necessity of a protestHeld The SC found in favor of the Collector1Controlling law - There is no need to distinguish between the two laws in this case Section 19 of Act 2833 provides that all administrative special and general provisions of law including laws in relation to the assessment remission collection and refund of internal revenue taxesnot hereto fore repealed and not inconsistent withthis Law areapplicableto this Law By virtue of this saving clause Section 1579 of the Revised Administrative Code finds application to Act 28332 Fox v Edwards is not controlling since the law specifically applied therein did not require the lodging of a protest concurrently with the payment for a TP to retain such right to protest (NOTE fr digester I did not find anything on losses or bad debts in this case I may have overlooked it)

DEDUCTIONS AND EXEPTIONS ALLOWABLE DEDUCTIONS BADDEBTSPHILIPPINE REFINING COMPANY V COURT OF APPEALSFacts In 1985 petitioner filed its ITR where it claimed 16 items amounting to P71307093 as bad debts and therefor deductible Subsequently the Commissioner for Internal Revenue disallowed such deductions and assessed petitioner to pay a deficiency tax for the year of 1985 Petitioner paid the deficiency tax under protest which the Commissioner deniedUpon a petition for review the CTA modified the findings of the Commissioner by reducing the deficiency tax assessment on the basis that three of the sixteen supposed bad debts could be allowed as deductions The CA later on agreed with the CTAHeld The SC upheld the ruling of the CA which it found to be in accordance with the SCs ruling in Collector v Goodrich It held the petitioner failed to substantiate the ldquoworthlessnessrdquo of the 13 debts which it claimed as deductions As per the ruling in Collector v Goodrich to qualify as a bad debt a TP must show 1 that there is a valid and subsisting debt2 that the debt must be actually ascertained to be worthless and uncollectible durring the taxable year3 the debt must be charged off during the taxable year and4 the debt must arise from the business or trade of the TPIn addition the Court said before a debt can be considered worthless the TP must also show that it is indeed uncollectible even in the future Furthermore the TP must undertake several steps to prove that he exerted diligent efforts to collect the debt1 sending statements of accounts to the debtors 2 sending of collection letters 3 giving the account to a lawyer for collection and4 filing a collection case in court In the case at bar the petitioner miserably failed to show any of the foregoing The only piece of evidence it offered to show the worthlessness of the debts was the testimony of the companys financial adviser or accountant The Court found that this lacked the required probity to establish that the accounts it claimed as bad debts were indeed

worthless Apart from such testimony the petitioner failed to introduce even a single iota of evidence to bolster its claim of worthlessness (NOTE In the rest of the case the Court presents the allegation of the petitioner as to why it could not collect on any of the 13 debts followed bya statement how the petitioner failed to introduce evidence to substantiate such allegation)

Collector of Internal Revenue v Goodrich International Rubber Co(21 SCRA 1336 No L-22265)Facts In 1951 and 1952 respondent Goodrich filed it ITR in which it claimed an aggregate amount (consisting of 18 individual accounts) of P5045541 as deductible for being bad debts The Collector of Internal Revenue disallowed the deductions and accordingly assessed Goodrich accordingly Goodrich protested the assessment and subsequently filed an appealwith the CTA which allowed the deductions for bad debts Hence this appeal by the GovernmentHeld Petition is partially meritorious Some of the items claimed by Goodrich can rightfully be written off as bad debts The SC rejected the claim for deduction of 10 items because Goodrichfailed to establish that that the debts were actually worthless or that it had reasonable grounds to believe them to be so in 1951 The law permits the deduction of debts ldquoactually ascertained to be worthless within the taxable yearrdquo obviously to prevent arbitrary action by the TP to unduly avoid tax liability Good faith on the part of the TP is not enough He must furthermore show that he had reasonably investigated the relevant facts and had drawn a reasonable inference from the information 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 actually made (some in full) after they had been characterized as bad debts and written off The Court however ruled that 8 of the 18 claimed bad debts can beallowed as deductions Common among these 8 was the action of Goodrich in persistently demanding payment from its debtors its endorsement of the accounts to counsel for collection the pursuit of legal remedies for the collection on these debts and the continuing failureclear inability of the debtors to pay off their obligations

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSDEPRECIATIONBASILAN ESTATES INC v CIRFacts Basilan Estates Inc claimed deductions for the depreciation of its assets on the basis of their acquisition cost As of January 1 1950 it changed the depreciable value of said assets by increasing it to conform with the increase in cost for their replacement Accordingly from 1950 to1953 it deducted from gross income the value of depreciation computed on the reappraised value CIR disallowed the deductions claimed by petitioner consequently assessing the latter of deficiency income taxesIssueWhether or not the depreciation shall be determined on the acquisition cost rather than the reappraised value of the assetsHeld Yes The following tax law provision allows a deduction from gross income for depreciation but limits the recovery to the capital invested in the asset being depreciated (1)In general mdash A reasonable allowance for deterioration of property arising out of its use or employment in the business or trade or out of its not being used Provided That when the allowance authorized under this subsection shall equal the capital invested by the taxpayer no further allowance shall be made The income tax law does not authorize the depreciation of an asset beyond its acquisition cost Hence a deduction over and above such cost cannot be claimed and allowed The reason is that deductions from gross income are privileges not matters of right They are not created by implication but upon clear expression in the law Depreciation is the gradual diminution in the useful value of tangible property resulting from wear and tear and normal obsolescense It commences with the acquisition of the property and its owner is not bound to see his property gradually waste without making provision out of earnings for its replacement The recovery free of income tax of an amount more than the invested capital in an asset will transgress the underlying purpose of a depreciation allowance For then what the taxpayer would recover will be not only the acquisition cost but also some profit Recovery in due time thru depreciation of investment made is the philosophy behind depreciation allowance the idea of profit on the investment made has never been the underlying reason for the allowance of a deduction for depreciation

Zamora v CIRFacts These are 4 cases regarding deficiency income taxes allegedly incurred by the ZamorasCases Nos L-15290 and L-15280Mariano Zamora owner of the Bay View Hotel and Farmacia Zamora Manila filed his income tax returns the years 1951 and 1952 The Collector of Internal Revenue found that he failed to file his return of the capital gains derived from the sale of certain real properties and claimed deductions which were not allowable The CTA reduced the sum due Zamora and on appeal petitioner alleged that the CTA erred in disallowing the promotion expenses incurred by his wife for promotion of the above businesses depreciation of the Bayview Hotel Bldg and in applying the Ballantyne scale of values for determining the cost of his Manila property The CIR on the other hand claimed that the CTA erred in reducing the amounts and giving credence to the uncorroborated testimony of Mariano Zamora that he bought the said real property in question during the Japanese occupation partly in Philippine currency and partly in Japanese war notes Cases Nos L-15289 and L-15281 Mariano Zamora and his deceased sister Felicidad Zamora bought a piece of land located in Manila on May 16 1944 for P13200000 and sold it for P7500000 on March 5 1951 They also purchased a lot located inQuezon City for P6895900 on January 19 1944 which they sold for P94000 on February 9 1951 The CTA ordered the estate of the late Felicidad Zamora (represented byEsperanza A Zamora as special administratrix of her estate) to pay the sum of P23550 representing alleged deficiency income tax and surcharge due from said estateFirst issue ndash disallowance of the entire promotion expenses incurred by Mrs ZamoraPetitioner The CTA erred in disallowing P1047850 as promotion expenses incurred by his wife for the promotion of the BayView Hotel and Farmacia Zamora He contends that the whole amount of P2095700 as promotion expenses should be allowed and not merely one-half of it on the ground that while not all the itemized expenses are supported by receipts the absence of some supporting receipts has been sufficiently and satisfactorily established - to purchase machinery for a new Tiki-Tiki plant and to observe hotel management in modern hotelsRespondents Mrs Zamora obtained only the sum of P500000 from the Central Bank and that in her application for dollar allocation she stated that she was going abroad on a combined medical and business trip which facts were not denied by Mariano Zamora The alleged expenses were not supported by receipts Mrs Zamora could not even remember how much money she had when she left abroad in 1951 and how the alleged amount of P2095700 was spent There having been no means by which to ascertain which expense was incurred by her inconnection with the business of Mariano Zamora and which was incurred for her personal benefit the respondents considered 50 of the said amount of P2095700 as business expenses and the other 50 as her personal expensesHeld The 50 allocation is very fair to Zamora there being no receipt to explain the alleged business expenses as well as the personal expenses that might have been incurred While in situations like the present absolute certainty is usually no possible the CTA should make as close an approximation as it can bearing heavily if it chooses upon the taxpayer whose inexactness is of his own making Section 30 of the Tax Code provides that in computing net income there shall be allowed as deductions all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business Since promotion expenses constitute one of the deductions in conducting a business same must testify these requirements Claim for the deduction of promotion expenses or entertainment expenses must also be substantiated or supported by record showing in detail the amount and nature of the expenses incurredSecond issue ndash disallowancereduction of the rate of depreciation of Bayview Hotel (from 35 to 25)Petitioner Contends that 1) the Ermita district is becoming a commercial district 2) the hotel has no room for improvement and(3) the changing modes in architecture styles of furniture and decorative designs must meet the taste of a fickle public Alsothe reference to Bulletin F a publication by the IRS should have been first proved as law to be subject of judicial noticeHeld The CTA was approximately correct in holding that the rate of depreciation must be 25 An average hotel buildingrsquos estimated useful life is 5 years but inasmuch as it also depends on the use and location change in population and other it is allowed a deprecation rate of 25 which corresponds to a useful life of 40 years It is true that Bulletin F has no binding force but it has a strong persuasive effect considering that the same has been the result of scientific studies

and observation for a long period in the United States after whose Income Tax Law ours is patterned Verily courts are permitted to look into and investigate the antecedents or the legislative history of the statutes involvedThird issue-the undeclared capital gains derived from the sales in 1951 of certain real properties in Malate Manila and in Quezon City acquired during the Japanese occupationHeld The CTArsquos appraisal in this case is correct Consequently the total undeclared income of petitioners derived from the sales of the Manila and Quezon City properties in 1951 is P1711175 (P175000 plus P1536175) 50 of which in the sum of P855588 is taxable the said properties being capital assets held for more than one year The cost basis of property acquired in Japanese war notes is the equivalent of the war notes in genuine Philippine currency in accordance with the Ballantyne Scale 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 P13200000 was not entirely paid in Japanese War notes but frac12 thereof or P6600000 was in Philippine currency This being the case the Ballantyne Scale of values which was the resultof an impartial scientific study adopted and given judicial recognition should be applied As the value of the Japanese war notes in May 1944 when the Manila property was bought was 1 frac12 of the genuine Philippine Peso (Ballantyne Scale) and since the gain derived or loss sustained inthe disposition of this property is to reckoned in terms of Philippine Peso the value of the Japanese war notes used in the purchase of the property must be reduced in terms of the genuine Philippine Peso to determine the cost of acquisition It therefore results that since the sum of P6600000 in Japanese war notes in May 1944 is equivalent to P550000 in Philippine currency (P6600000 divided by 12) the acquisition cost of the property in question is P6600000 plus P550000 or P7150000 and that as the property was sold for P7500000 in 1951 the owners thereof Mariano and Felicidad Zamora derived a capital gain of P350000or P175000 each For the Quezon City property the CTA was correct in giving credence toZamorarsquos testimony that the same was purchased inPhilippine currency because it is quite incredible that real property with an assessed value of P4691000 should have been soldin Japanese war notes with an equivalent value in Philippine currency of only P1723975 Thus the gain derived from the sale isP1536175 after deducting from the selling price the cost of acquisition in the sum of P6895900 and the expense of sale in the sum of P967925Disposition The petitions are dismissed and the decision appealed from is affirmed

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSDEPLETIONCONSOLIDATED MINES V CTAFacts Cosolidated Mines filed a refund for overpayments of income taxes for the year 1951 However after investigation of the BIR instead of having a refund the company was instead assessed for deficiency income taxes for the years 1953 1954 and 1956 with 5 surchargeand 1 monthly interest According to the investigation (A) for the years 1951 to 1954 (1) the Company had not accrued as an expense the share in the company profits of Benguet Consolidated Mines as operator of the Consolidateds mines although for income tax purposes the Consolidated had reported income and expenses on the accrual basis (2) depletion and depreciation expenses had been overcharged and (3) the claims for audit and legal fees and miscellaneous expenses for 1953 and 1954 had not been properly substantiated and that (B) for the year 1956 (1) the Company had overstated its claim for depletion and (2) certain claims for miscellaneous expenses were not duly supported by evidence Background info Consolidated and Benguet entered into a development agreement whereby Consolidated as the owner of several mining claims allowed Benguet to explore develop mine concentrate andmarket the ore in the mining claims In the agreement it was provided that benguet is to provide the funds necessary for the expenses until such time the properties are on a profit producing basis to be reimbursed by consolidated Once profit is derived expenditures from its own resources shall be charged against the subsequent gross income of the properties During the time Benguet is being reimbursed for all its expenditures the net profits resulting from the operation of the claims shall be divided 90 to Benguet and 10 to Consolidated Such division of net profits shall be based on the receipts and expenditures during each calendar year and

shall continue until such time as the 90 of the net profits pertaining to Benguet hereunder shall equal the amount of such expenditures ldquoAfter Benguet has been fully reimbursed for its expenditures the net profits from the operation shall be divided between Benguet and Consolidated share and share alike it being understood however that the net profits as the term is used in this agreement shall be computed by deducting from gross income all operating expenses and all disbursements of any nature whatsoever as may be made in order to carry out the terms of this agreementrdquo It appears that by 1953 Benguet had completely recouped its advances because they were then dividing the profits share and share alike Consolidated used the accrual method of accounting in computing its income One of its expenses is the amount-paid to Benguet as mine operator which amount is computed as 50 of ldquonet incomerdquo TheConsolidated deducts as an expense 50 of cash receipts minus disbursements but does not deduct at the end of each calendar year what the Commissioner alleges is 50 of the share of Benguet in the accounts receivable However it deducts Benguets 50 if and when the accounts receivable are actually paid It would seem therefore that Consolidated has been deducting a portion of this expense (Benguets share as mine operator) on the cash amp carry basis The question is whether or not the accounting system used by Consolidated justifies such a treatment of this item and if not whether said method used by Consolidated and characterized by the Commissioner as a hybrid method may be allowed under the provisions of the NIRCIssue WON Consolidatedrsquos accounting method is allowedHeld YES It is said that accounting methods for tax purposes comprise a set of rules for determining when and how to report income and deductions The US Internal Revenue Code allows each taxpayer to adopt the accounting method most suitable to his business and requires only that taxable income generally be based on the method of accounting regularly employed in keeping the taxpayers books provided that the method clearly reflects incomeA deduction cannot be accrued until an actual liability is incurred even if payment has not been made Here we have to distinguish between (1) the method of accounting used by Consolidated in determining its net income for tax purposes and (2) the method of computation agreed upon between Consolidated and 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 were cash receipts and cash payments Once determined in accordance with the stipulated bases and procedure then the amount due Benguet for each month accrued at the end of that month whether Consolidated had made payment or not To make Consolidated deduct as an expense one-half of the Accounts Receivable would in effect be equivalent to giving Benguet a right which it did not have under the contract and to substitute for the parties choice a mode of computation of compensationnot contemplated by themON DEPLETIONThe first issue raised by Consolidated is with respect to the rate of mine depletion used by the Court of Tax Appeals The Tax Code provides that in computing net income there shall be allowed as deduction in the case of mines a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof which has been mined and sold during the year for which the return is made [Sec 30(g) (1) (B)] As an income tax concept depletion is wholly a creation of the statute mdash ldquosolely a matter of legislative gracerdquo Hence the taxpayer has the burden of justifying the allowance of any deduction claimed As in connectionwith all other tax controversies the burden of proof to show that a disallowance of depletion by the Commissioner is incorrect or that an allowance made is inadequate is upon the taxpayer and this is true with respect to the value of the property constituting the basis of the deduction This burden-of-proof rule has been frequently applied and a value claimed has been disallowed for lack of evidence Here SC considered the evidence presented (testimony of Eligio Garciaand the Report to Stockholders (which includes the Balance Sheet as of 1946) geological report on the estimated amount of ore in the claims etc) it set forth a very detailed computation of the depletion rate determining the value of each component of the formula of depletion viz Rate of Depletion Per Unit = Cost of Mine Property Estimated ore Deposit of Product Mined and sold- depletion is different from depreciation In determining the amount of cost depletion allowable the following three facts are essential namely (1) the basis of the property (2) the estimated total recoverable units in the property and (3) the number of units recovered during the taxable year in question As used as an element in cost depletion basis means the dollar amount of the

taxpayers capital or investment in the property which he is entitled to recover tax free during the period he is removing the mineral in the depositDisposition Decision modifiedFootnotes in the case that are helpful While taxable income is based on the method of accounting used by the taxpayer it will almost always differ from accounting income This is sobecause of a fundamental difference in the ends the two concepts serve Accounting attempts to match cost against revenue Tax law is aimed at collecting revenue It is quick to treat an item as income slow to recognize deductions or losses Thus the tax law will not recognize deductions for contingent future losses except in very limited situations Good accounting on the other hand their recognition Once this fundamental difference in approach is accepted income tax accounting methods can be understood more easily 33 Am Jur 2d 688 Under the accrual system income is accruable in the year in which the taxpayers right thereto becomes fixed and definite even though it may not be actually received until a later year while a deduction for a liability is to be accrued and taken when the liability becomes fixed and certain even though it may not be paid until a later year It has been held that the basis of the accrual system of accounting is that obligations incurred in the normal course of business will be discharged in due course that the deductions have been paid or accrued or paid and incurred but in order to be accruable in the taxable year a valid obligation upon which the profit (or loss in the case 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 expend money constituting a deductible loss is the date that fixes liability Gain or loss may not said to be fixed or accrued when the obligation is contingent upon the happening of a future event No duty or liability to pay an income tax upon a transaction arises until the taxable year in which the event constituting the condition precedent occurs under any system ofaccounting

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSCHARITABLE AND OTHER CONTRIBUTIONSROXAS v CTA GR No L-25043 April 26 1968Facts Don Pedro Roxas and Dona Carmen Ayala Spanish subjects transmitted to their grandchildren by hereditary succession several properties To manage the above-mentioned properties said children namely Antonio Roxas Eduardo Roxas and Jose Roxas formed apartnership called Roxas y Compania At the conclusion of the WW2 the tenants who have all been tilling the lands in Nasugbu for generations expressed their desire to purchase from Roxas y Cia the parcels which they actually occupied For its part the Government in consonance with the constitutional mandate to acquire big landed estates and apportion them among landless tenants-farmers persuaded the Roxas brothers to part with their landholdings Conferences were held with the farmers in the early part of 1948 and finally the Roxas brothers agreed to sell 13500 hectares to the Government for distribution to actual occupants for a price of P207904847 plus P30000000 for survey and subdivision expenses It turned out however that the Government did not have funds to cover the purchase price and so a special arrangement was made for the Rehabilitation Finance Corporation to advance to Roxas y Cia The amount of P150000000 as loan Collateral for such loan were the lands proposed to be sold to the farmers Under the arrangement Roxas y Cia allowed the farmers to buy the lands for the same price but by installment and contracted with the Rehabilitation Finance Corporationto pay its loan from the proceeds of the yearly amortizations paid by the farmers The CIR demanded from Roxas y Cia the payment of deficiency income taxes resulting from the inclusion as income of Roxas y Cia of the unreported 50 of the net profits for 1953 and 1955 derived from the sale of the Nasugbu farm lands to the tenants and the disallowance of deductions from gross income of various business expenses and contributions claimed by Roxas y Cia and the Roxas brothers For the reason that Roxas y Cia subdivided its Nasugbu farm lands and soldthem to the farmers on installment the Commissioner considered the partnership as engaged in the business of real estate hence 100 of the profits derived therefrom was taxed The Roxas brothers protested the assessment but inasmuch as said protest was denied they instituted an appeal in the CTA which sustained the assessment Hence this appealIssue Is Roxas y Cia liable for the payment of deficiency income for the sale of Nasugbu farmlandsHeld NO The proposition of the CIR cannot be favorably accepted in this isolated transaction with its peculiar circumstances in spite of the fact that there were hundreds of vendees Although

they paid for their respective holdings in installment for a period of 10 years it would nevertheless not make the vendor Roxas y Cia a real estate dealer during the 10-year amortization period It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled them for generations was not only in consonance with but more in obedience to the request and pursuant to the policy of our Government to allocate lands to the landless It was the bounden duty of the Government to pay the agreed compensation after it had persuaded Roxas y Cia to sell its haciendas and to subsequently subdivide them among the farmers at very reasonable terms and prices However the Government could not comply with its duty for lack of funds Obligingly Roxas y Cia shouldered the Governments burden went out of its way and sold lands directly to the farmers in the same way and under the same terms as would have been the case had the Government done it itself For this magnanimous act the municipal council of Nasugbu passed a resolution expressing the peoples gratitudeIn fine Roxas y Cia cannot be considered a real estate dealer for the sale in question Hence pursuant to Section 34 of the Tax Code the lands sold to the farmers are capital assets and the gain derived from the sale thereof is capital gain taxable only to the extent of 50

DEDUCTIONS AND EXEMPTIONS NON-DEDUCTIBLE EXPENSECIR v JAMIRFacts For the year 1954 Alberto M K Jamir declared a gross income of P7585865 and claimed deductions aggregating P5813450 thereby showing a net income of P1777415 upon which he paid P1634 as income tax The Collector of Internal Revenue however assessed asdeficiency income tax due from him the sum of P16395 Jamir appealed to the Court of Tax Appeals which reduced the amount due as deficiency income tax to P55200Issue Whether Jamir had an undeclared income for the year 1954 aggregating P3127491Held No It appears that by using the so-called expenditures method the Government considered as an undeclared income Jamirs expenditures for February and May were in excess of his reported income for the same months Although the Court of Tax Appeals in effect sanctioned the adoption of the expenditures method it held that the same should be applied by deducting the aggregate yearly expenditures from the declared yearly income not the expenditures incurred each month from the declared income therefor In the case at bar Jamirs total income for the year 1954 (P7585865) exceeded (Pl777415) the total deductions (P5813450) claimed by him Jamir introduced evidence that the said sums of P128124 andP2999367 represented advances made to him by customers in the months of February and may 1954 and that the income derived from the corresponding transactions were entered in his books of account in subsequent months and this explanation was found by the Court of Tax Appeals to have been proven satisfactorily The next question raised by appellant refers to Jamirs claim for car depreciation and salary of his driver Although petitioner had disallowed one-half (12) of these claims it appearing that the car was used by Jamir for personal and business purposes the lower court allowed as deductions three-fourths (34) of said amounts the car having been used by Jamir more for business than for personal purpose Petitionerassails this as an error but considering the circumstances we agree with the deduction of frac34 by the lower court It is next urged that Jamir committed fraud and the 50 surcharge should not have been eliminated But since Jamir did not have the undeclared income of P3127491 upon which the contested assessment is mainly based it follows necessarily that he was not guiltyof the fraud and that the 50 surcharge has been properly eliminatedDisposition the decision appealed from is hereby affirmed

Atlas Consolidated Mining v CIRFacts CIR assessed Atlas deficiency income tax for 1957 to 1958 which amounted to morethan P700K CIR asserted that in 1957 Atlas was still not entitled to exemption fromthe income tax under RA 909 because the same covers only gold mines and Atlas isnot engaged in that Atlasprotested before the Sec of Finance and Sec ruled that exemption provided in RA 909 embraces all new 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 disallowance of the following items transfer agent1048576s fees stockholders relation service fee US stock listing expenses suit expenses provision for contingency CTA disallowed the items except the stockholders relation service fee and suit expenses Also CTA ruled that the exemption from payment of the corporate income tax of Atlas

was good only up to the first quarter of 1958 hence it computed for its net taxable income for the remaining frac34 of the year Atlas appealed asserting that the annual public relations expense is a deductible expense from gross income because it is an ordinary and necessarybusiness expenseIssue WON this fee paid for the services rendered by a public relations firm in the US labeled as stockholders relation service fee is an allowable deductionHeld 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 that deduction is authorized and must be able to prove that he is entitled to the deduction which the law allows As previously adverted to the law allowing expenses as deduction from gross income for purposes of the income tax is Section 30 (a) (1) of the National Internal Revenue which allows a deduction of all the ordinary and necessary expenses paid orincurred during the taxable year in carrying on any trade or business An item of expenditure in order to be deductible under this section of the statute must fall squarely within its language We come then to the statutory test of deductibility where it is axiomatic that to be deductible as a business expense three conditions are imposed namely (1) the expense must be ordinary and necessary (2) it must be paid or incurred within the taxable year and (3) it must be paid or incurred in carrying in a trade or business In addition not only must the taxpayer meet thebusiness test he must substantially prove by evidence or records the deductions claimed under the law otherwise the same will be disallowed The mere allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its deduction Assuming that the expenditure is ordinary and necessary in the operation of the taxpayers business the answer to the question as to whether the expenditure is an allowable deduction as a business expense must be determined from the nature of the expenditure itself which in turn depends on the extent and permanency of the work accomplished by the expenditure The expenditure of P2552314 paid to PK Macker amp Co as compensation for services carrying on the selling campaign in an effort to sell Atlas additional capital stock of P3325000 is not an ordinaryexpense in line with the decision of US Board of Tax Appeals in the case of Harrisburg Hospital Inc vs Commissioner of Internal Revenue Accordingly as found by the Court of Tax Appeals the said expense is not deductible from Atlas gross income in 1958 because expenses relating to 1) recapitalization and reorganization of the corporation 2) the cost of obtaining stock subscription 3)promotion expenses and 4) commission or fees paid for the sale of stock reorganization are capital expenditures The burden of proof that the expenses incurred are ordinary and necessary is onthe taxpayer The claimed business expense must also be supported by appropriate documents such as invoices official receipts and contracts to be made available in case of a tax audit by the Bureau of Internal Revenue

GANCAYCO V COLLECTORFacts1048576 Gancayco filed his Income tax Return (ITR) for 19491048576 CIR notified him that his liability is Php 979362 which he paid 19501048576 CIR after a year wrote to Gancayco saying that there was tax due from him for a total of Php 29554051048576 Gancayco asked for reconsideration and the tax assessed wasreduced1048576 CIR issued a warrant of distraint for the deficient liability1048576 Gancayco filed petition with CTACTA Required Gancayco to pay Php 16 86031 for tax deficiency in1949Gancayco the right to collect the deficiency income tax is barred by thestatute of limitations the 5 yr period for judicial action should be counted from May 12 50 the date of original assessment SC Section 316 provides The civil remedies for the collection of internal revenue taxes fees or charges and any increment thereto resulting from delinquency shall be (a) by distraint of goods chattels or effects and other personal property of whatever character including stocks and other securities debts credits bank accounts and interest in and rights to personal property and by levy upon real property and (b) by judicial action Either of these remedies or both simultaneously may be pursued in the discretion of the authorities charged with the collection of such taxes No exemption shall be allowed against the internal revenue taxes in any case

Deduction for expenses may be allowed however in this case Gancayco was not able to prove any expense as there were no receipts or other proofs CTA AFFIRMED

DEDUCTIONS AND EXEMPTIONS NON-DEDUCTIBLE EXPENSESILLEGAL EXPENSESCALANOC V COLLECTORFacts1048576 Calanoc was authorized to solicit and receive contributions for the orphans and destitute kids of the Child Welfare Workers Club of the Social Welfare Commission1048576 Dec 1949 Calanoc financed and promoted a boxing exhibition at the Rizal Memorial Stadium for said charitable purpose1048576 He applied for exemption from payment of the amusement tax as provided in Sec 260 NIRC1048576 CIR investigated the tax case of Calanoc and it was found that there was gross sale of Php 26553 expenditure of 25157 and profit of 1375301048576 Profit was remitted to Social Welfare Commission1048576 CIR demanded Calanoc oto pay 5331048576 Sec of Finance denied the application of Calanoc for exemption from payment of amusement taxCTA Affirmed the assessment of 7k Calanoc denies receving a stadium fee of 1k Although it was shown that 1k was paid by O-OSO Beverages His accountant is dead SC the items of expenditures for deduction are exorbitant and not supported by receiptsCTA Affirmed

3M PHILIPPINES INC petitioner vs COMMISSIONER OFINTERNAL REVENUE respondent [GR No 82833 September 261988]Facts The petitioner claimed as deductions for income tax purposes business expenses in the form of royalty payments to its foreign licensor which the respondent Commissioner of Internal Revenue disallowed The petitioner claimed the following deductions royalties and technical service fees and pre-operational cost of tape coater The amount was not allowed as entire deduction The petitioner argues that the law applicable to its case is only Section 29(a)(1) of the Tax Code and not Circular No 393 of the Central BankIssue WON the royalty payments are valid deductible expense WON the Tax Code is applicableHeld No Although the Tax Code allows payments of royalty to be deducted from gross income as business expenses it is CB Circular No 393 that defines what royalty payments are proper Improper payments of royalty are not deductible as legitimate business expenses Section 3-c of CB Circular No 393 provides for payment of royalties only on commodities manufactured by the licensee under the royalty agreement not on the wholesale price of finished products imported by the licensee from the licensor entral Bank Circulars like CB Circular No 393 (dated December 7 1973 published in the Official Gazette issue of December 17 1973 [69 OG No 51 p 11737] issued by the Central Bank in the exercise of fits authority under the Central Bank Act duly published in the Official Gazette have the force and effect of law (Cases cited) andbinding on everybody

DEDUCTIONS AND EXEMPTIONS PERSONAL EXEMPTIONSCOLLECTOR OF INTERNAL REVENUE petitioner vs ORLANDO VCALSADO and COURT OF TAX APPEALS respondents [GR 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 supportIssue WON the respondent is classified as head of the familyHeld 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 Php50000

In the matter of the adoption of the minor MARCIAL ELEUTERIO RESABA LUIS SANTOS-YNtildeIGO and LIGIA MIGUEL DE SANTOSYNtildeIGO petitioners-appellees vs REPUBLIC OF THE PHILIPPINES oppositor-appellantTAX ON CORPORATIONS BASES AND RATESRESIDENT FOREIGN CORPORATIONS TAXABLE INCOME [GRNo 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 minorIssue WON the adoption is validHeld 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 suchagreement 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 bymarriage 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 childrenwith 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 or main support Partial support not amounting to chief support will not entitle the taxpayer to claim exemption as a head of a family Regulation No section 11

Stevenson instituted his wife Beatrice as his sole heiress to the following real and personal properties acquired by the spouses while residing in the PhilippinesIssue 1 Whether or not the estate is entitled to the following deductions P860439 for judicial and administration expenses P208652 for funeral expenses P65250 for real estate taxes andP1002247 representing the amount of indebtedness allegedly incurred by the decedent during his lifetime 2 Whether or not the estate is entitled to the payment of interest on the amount it claims to have overpaid the government and to be refundable to itHeld 1 YES An examination of the record discloses however that the foregoing items were considered deductible by the Tax Court on the basis of their approval by the probate court to which said expenses we may presume had also been presented for consideration It is to besupposed that the probate court would not have approved said items were they not supported by evidence presented by the estate In allowing the items in question the Tax Court had before it the pertinent order of the probate court which was submitted in evidence by respondents (Exh AA-2 p 100 record) As the Tax Court said it found no basis for departing from the findings of the probate 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 National Association which it would appear that while still living Walter G Stevenson obtained we are not inclined to pass upon the claim of respondents in respect to theadditional amount of P8652 for funeral expenses which was disapproved by the court a quo for lack of evidence In connection with the deduction of P65250 representing the amount of realty taxes paid in 1951 on the decedents two parcels of land in Baguio City which respondents claim was disallowed by the Tax Court we find that this claim has in fact been allowed2 NO Respondents claim for interest on the amount allegedly overpaid if any actually results after a recomputation on the basis of this decision is hereby denied in line with our recent decision in Collector of Internal Revenue v St Pauls Hospital (GR No L-12127 May 29 1959) wherein we held that in the absence of a statutory provision clearly or expressly directing or authorizing such payment and none has been cited by respondents the National Government cannot be required to pay interest

DEDUCTIONS AND EXMEPTIONS ALLOWABLE DEDUCTIONSTAXESCIR v LEDNICKYFacts V E Lednicky and Maria Valero Lednicky are husband and wife both American citizens residing in the Philippines and have derived all their income from Philippine sources for the taxable years under question [GR L-18286] In compliance with local law the spouses on 27March 1957 filed their income tax return for 1956 reporting therein a gross income of P101728765 and a net income of P73380944 on which the amount of P31739541 was assessed after deducting P480559 as withholding tax Pursuant to the Commissioner of Internal Revenuersquos assessment notice the spouses paid the total amount of P32624741 inclusive of the withheld taxes on 15 April 1957 On 17 March 1959 the spouses filed an amended income tax return for 1956 The amendment consists in a claimed deduction of P20593924 paid in 1956 to the US government as federal income tax for 1956 Simultaneously with the filing of the amended return the spouses requested the refund of P11243790 When the Commissioner of Internal Revenue failed to answer the claim for refund the spouses filedtheir 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 P177112463 and a net income of P105255067 On 19 April 1956 they filed an amended income tax return the amendment upon the original being a lesser net income of P101255451 and on the basis of this amended return they paid P57025200 inclusive of withholding taxes After audit the Commissioner determined a deficiency of P1611600 which amount the spouses paid on 5 December 1956 Back in 1955 however the spouses filed with the US Internal Revenue Agent in Manila their Federal income tax return for the years 1947 1951 1952 1953 and 1954 on income from Philippine sources on a cash basis Payment of these federal income taxes including penalties and delinquency interest in the amount of $26458882 were made in 1955 to the US Director of Internal Revenue Baltimore Maryland through the National City Bank of New York Manila Branch Exchange and bank charges in

remitting payment totaled P414391 On 11 August 1958 the said respondents amended their Philippines income tax return for 1955 to including US Federal income taxes interest accruing up to 15 May 1955 and exchange and bank charges totaling P51634515 and therewith filed a claim for refund of the sum of P16638400 which was later reduced to P15026900 The spouses brought suit in the Tax Court which was docketed therein as CTA Case 570 [GR 21434] The facts are similar to above cases but refer to the spousesrsquo income tax returns for 1957 filed on 28 February 1958 and for which the spouses paid a total sum of P19679965 In 1959 they filed an amended return for 1957 claiming deduction of P19075580 representing taxes paid to the US Government on income derived wholly from Philippine sources On the strength thereof spouses seek refund of P9052075 as overpayment (CTA Case 783) The Tax Court decided for the spousesIssue WON there should be a refund for the spousesHeld NO The Supreme Court reversed the decisions of the Court of Tax Appeals and affirmed the disallowance of the refunds claimed by the spouses with costs against said spouses1 Section 30 (c-1) of the Philippine Internal Revenue Code Section 30 (c) (1) (Deduction from gross income) provides that ldquoin computing net income there shall be allowed as deductions (c) Taxes (1) In general mdash Taxes paid or accrued within the taxable year except (A) The income tax provided for under this Title (B) Income war-profits and excess profits taxes imposed by the authority of any foreign country but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits ofparagraph (3) of this subsection (relating to credit for taxes of foreign countries) (C) Estate inheritance and gift taxes and (D) Taxes assessed against local benefits of a kind tending to increase the value of the property assessedrdquo2 Paragraph (c) (3) (b) of the Tax Code Credits against tax for taxes of foreign countriesParagraph 3 (B) of the subsection (Credits against tax for taxes of foreign countries) reads ldquoIf the taxpayer signifies in his return his desire to have the benefits of this paragraph the tax imposed by this Title shall be credited with (B) Alien resident of the Philippines mdash In the case of an alien resident of the Philippines the amount of any such taxes paid or accrued during the taxable year to any foreign country if the foreign country of which such alien resident is a citizen or subject in imposing such taxes allows a similar credit to citizens of the Philippines residing insuch countryrdquo3 Paragraph (c) (4) of the Tax Code Limitation on credit The tax credit so authorized is limited under paragraph 4 (A and B) of the same subsection in the following terms ldquoPar (c) (4) Limitation on credit mdash The amount of the credit taken under this section shall be subject to each of the following limitations (A) The amount of the credit in respect to the tax paid or accrued to any country shall not exceed the same proportion of the tax against which such credit is taken which the taxpayerrsquos net income from sources within such country taxable under this Title bears to his entire net income for the same taxable year and (B) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken which the taxpayerrsquos net income from sources without the Philippines taxable under this Title bears to his entire net income for the same taxable yearrdquo4 Lawrsquos intent that right to deduct income taxes paid to foreign government taken as an alternative or substitute to claim of tax credit for such foreign income tax Construction and wording of Section 30 (c) (1) (B) of the Internal Revenue Act shows the lawrsquos intent that the right to deduct income taxes paid to foreign government from the taxpayerrsquos gross income is givenonly as an alternative or substitute to his right to claim a tax credit for such foreign income taxes under section 30 (c) (3) and (4) so that unless the alien resident has a right to claim such tax credit if he so chooses he is precluded from deducting the foreign income taxes from his gross income For it is obvious that in prescribing that such deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) (relating to credits for taxes paid to foreign countries) the statute assumes that the taxpayer in question also may signify his desire to claim a tax credit and waive the deduction otherwise the foreign taxes would always be deductible and their mention in the list of nondeductible items in Section 30 (c) might as well have been omitted or at least expressly limited to taxes on income from sources outside the Philippine Islands Had the law intended that foreign income taxes could be deducted from gross income in any event regardless of thetaxpayerrsquos right to claim a tax credit it is the latter right that should be conditioned upon the taxpayerrsquos waiving the deduction in which case the right to reduction under subsection (c-1-B)

would have been made absolute or unconditional (by omitting foreign taxes from the enumeration of non- deductions) while the right to a tax credit under subsection (c-3) would have been expressly conditioned upon the taxpayerrsquos not claiming any deduction under subsection (c-1)5 Danger of double credit does not exist if taxpayer cannot claim benefit from either headings at his option The purpose of the law is to prevent the taxpayer from claiming twice the benefits of his payment of foreign taxes by deduction from gross income (subs c-1) and by tax credit (subs c-3) This danger of double credit certainly can not exist if the taxpayer can not claim benefit under either of these headings at his option so that he must be entitled to a tax credit (the spouses admittedly are not so entitled because all their income is derived from Philippine sources) or the option to deduct from gross income disappears altogether6 When double taxation Tax income should accrue to benefit of the PhilippinesDouble taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity (cf Manila vs Interisland Gas Service 52 Off Gaz 6579 Manuf Life Ins Co vs Meer 89 Phil 357) In the present case while the taxpayers would have to pay two taxes on the same income the Philippine government only receives the proceeds of one tax As between the Philippines where the income was earned and where the taxpayer is domiciled and the United States where that income was not earned and where the taxpayer did not reside it is indisputable that justice and equity demand that the tax on the income should accrue to the benefit of the Philippines Any relief from the alleged double taxation should come from the United States and not from the Philippines since the formerrsquos right to burden the taxpayer is solely predicated on his citizenship without contributing to the production of the wealth that is being taxed To allow an alien resident to deduct from his gross income whatever taxes he pays to his own government amounts to conferring on the latterpower to reduce the tax income of the Philippine government simply by increasing the tax rates on the alien resident Everytime the rate of taxation imposed upon an alien resident is increased by his own government his deduction from Philippine taxes would correspondingly increase and the proceeds for the Philippines diminished thereby subordinating our own taxes to those levied by a foreign government Such a result is incompatible with the status of the Philippines as an independent and sovereign state

GUTIERREZ v COLLECTORFacts Maria Morales was the registered owner of an agricultural land designated as Lot No 724-C of the cadastral survey of Mabalacat Pampanga The Republic of the Philippines at the request of the USGovernment and pursuant to the terms of the Military Bases Agreement of March 14 1947 instituted condemnation proceedings in the Court of the First Instance of Pampanga docketed as Civil Case No 148 for the purpose of expropriating the lands owned by Maria Morales and others needed for the expansion of the Clark Field Air Base t the commencement of the action the Republic of the Philippines therein plaintiff deposited with the Clerk of the Court of First Instance of Pampanga the sum of P156960 which was provisionally fixed as the value of the lands sought to be expropriated in order that it could take immediate possession of the same On January 27 1949 upon order of the Court the sum of P34580 (PNB Check 721520-Exh R) was paid by the Provincial treasurer of Pampanga to Maria Morales out of the original deposit of P156960 made by therein plaintiff After due hearing the Court of First Instance of Pampanga rendered decision dated November 29 1949 wherein it fixed as just compensation P2500 per hectare for some of the lots and P3000 per hectare for the others which values were based on the reports of the Commission on Appraisal whose members were chosen by both parties and by the Court which took into consideration the different conditions affecting the value of the condemned properties in making their findingsIn virtue of said decision defendant Maria Morales was to receive the amount of P9430575 as compensation for Lot No 724-C which was one of the expropriated lands Sometime in 1950 the spouses Blas Gutierrez and Maria Morales received the sum of P5978575 presenting the balance remaining in their favor after deducting the amount of P34580 already withdrawn from the compensation to them In a notice of assessment dated January 28 1953 the Collector ofInternal Revenue demanded of the petitioners the payment of P8481 as alleged deficiency income tax for the year 1950 inclusive of surcharges and penalties The CIR contended that petitioners-appellants failed to include from their gross income in filing their income tax return for 1950 the amount of P9430575 which they had received as compensation for their land

taken by the Government by expropriation proceedings It is the contention of respondent Collector of Internal Revenue that such transfer of property for taxation purposes is sale and that the income derived therefrom is taxable The lower court exonerated petitioners from the 50 per cent surchargeimposed on the latter on the ground that the taxpayers income tax return for 1950 is false andor fraudulentIssue WON petitioners should pay surcharge Held NO It should be noted that the Court of Tax Appeals found that the evidence did not warrant the imposition of said surcharge becausethe petitioners therein acted in good faith and without intent to defraud the GovernmentThe question of fraud is a question of fact which frequently requires a nicely balanced judgement to answer All the facts and circumstances surrounding the conduct of the tax payers business and all the facts incident to the preparation of the alleged fraudulent return should be considered (Mertens Federal Income Taxation Chapter 55) The question of fraud being a question of fact and the lower court having made the finding that the evidence of this case does not warrant the imposition of the 50 per cent surcharge We are constrained to refrain from giving any consideration to the question raised by the Solicitor General for it is already settled in this jurisdiction that in passing upon petitions to review decisions of the Court of Tax Appeals We have to confine ourselves to questions of law

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSLOSSESFERNANDEZ HERMANOS v CIRFacts These four appeals involve two decisions of the Court of Tax Appeals determining the taxpayers income tax liability for the years 1950 to 1954 and for the year 1957 Both the taxpayer and the Commissioner of Internal Revenue as petitioner and respondent in the cases a quo respectively appealed from the Tax Courts decisions insofar as their respective contentions on particular tax items were therein resolved against themIssue ProperImproper AllowancesDisallowances of LossesHeld Re allowancesdisallowances of losses(a) Allowance of losses in Mati Lumber Co (1950) mdash The Commissioner of Internal Revenue questions the Tax Courts allowance of the taxpayers writing off as worthless securities in its 1950 return the sum of P805000 representing the cost of shares of stock of Mati Lumber Co acquired by the taxpayer on January 1 1948 on the ground that the worthlessness of said stock in the year 1950 had not been clearly established The Commissioner contends that although the said Company was no longer in operation in 1950 it still had its sawmill and equipment which must be of considerable value There was adequate basis for the writing off of the stock as worthless securities Assuming that the Company would later somehow realize some proceeds from its sawmill and equipment which were still existing as claimed by the Commissioner and that such proceeds would later be distributed to its stockholders such as the taxpayer the amount so received by the taxpayer would then properly be reportable as income of the taxpayer in the year it is received(b) Disallowance of losses in or bad debts of Palawan Manganese Mines Inc (1951) mdash The taxpayer appeals from the Tax Courts disallowance of its writing off in 1951 as a loss or bad debt the sum of P35313425 which it had advanced or loaned to Palawan Manganese Mines Inc Pursuant to the agreement mentioned above petitioner gave to Palawan Manganese Mines Inc yearly advances starting from 1945 which advances amounted to P58730807 by the end of 1951 Despite these advances and the resumption of operations by Palawan ManganeseMines Inc it continued to suffer losses By 1951 petitioner became convinced that those advances could no longer be recovered While it continued to give advances it decided to write off as worthless the sum of P35313425 Under the circumstances was the sum of P35313425properly claimed by petitioner as deduction in its income tax return for 1951 either as losses or bad debts It will be noted that in giving advances to Palawan Manganese Mine Inc petitioner did not expect to be repaid It is true that some testimonial evidence was presented to show that there was some agreement that the advances would be repaid but no documentary evidence was presented to this effect The memorandum agreement signed by the parties appears to be very clear that the consideration for the advances made by petitioner was 15 of the net profits of Palawan Manganese Mines Inc In other words if there were no earnings or profits there

was no obligation to repay those advances It has been held that the voluntary advances made without expectation of repayment do not result in deductible losses The Tax Courts is allowance of the write-off was proper The Solicitor General has rightly pointed out that the taxpayer has taken an ambiguous position and has not definitely taken a stand on whetherthe amount involved is claimed as losses or as bad debts but insists that it is either a loss or a bad debt 4 We sustain the governments position that the advances made by the taxpayer to its 100 subsidiary Palawan Manganese Mines Inc amounting to P58730807 as of 1951 wereinvestments and not loans 5 (c) Disallowance of losses in Balamban Coal Mines (1950 and1951) mdash The Court sustains the Tax Courts disallowance of the sums of P898976 and P2773266 spent by the taxpayer for the operation of its Balamban coal mines in Cebu in 1950 and 1951 respectively and claimed as losses in the taxpayers returns for said years The Tax Court correctly held that the losses are deductible in 1952 when the mines were abandoned and not in 1950 and 1951 when they were still in operation 9 The taxpayers claim that these expeditions should be allowed as losses for the corresponding years that they were incurredbecause it made no sales of coal during said years since the promised road or outlet through which the coal could be transported from the mines to the provincial road was not constructed cannot be sustained Some definite event must fix the time when the loss is sustained and here it was the event of actual abandonment of the mines in 1952 (d) and (e) Allowance of losses in Hacienda Dalupiri (1950 to 1954) and Hacienda Samal (1951-1952) mdash The Tax Court overruled the Commissioners disallowance of these items of losses thus Petitioner deducted losses in the operation of its Hacienda Dalupiri the sums of P1741895 in 1950 P2912582 in 1951 P2674481 in 1952 P2193262 in 1953 and P4293856 in 1954 These deductions were disallowed by respondent on the ground that the farm was operated solely for pleasure or as ahobby and not for profit This conclusion is based on the fact that the farm was operated continuously at a loss From the evidence we are convinced that the Hacienda Dalupiri was operated by petitioner for business and not pleasure It was mainly a cattle farm although a few race horses were also raised It does not appear that the farm was used by petitioner for entertainment social activities or other nonbusiness purposes Therefore it is entitled to deduct expenses and losses in connection with the operation of said farm (See 1955 PH Fed Taxes Par 13 63 citing GCM 21103 CB 1939- 1 p164) Section 100 of Revenue Regulations No 2 otherwise known as the Income Tax Regulations authorizes farmers to determine their gross income on the basis of inventories Said regulations provide If gross income is ascertained by inventories no deduction can be made for livestock or products lost during 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 quote from the memorandum of counsel for petitioner The Taxpayer deducted from its income tax returns for the years from 1950 to 1954 inclusive the corresponding yearly losses sustained in the operation of Hacienda Dalupiri which losses represent the excess of its yearly expenditures over the receipts that is the losses represent the difference between the sales of livestock and the actual cash disbursements or expenses (Pages 21-22 Memorandum for Petitioner) As the Hacienda Dalupiri was operated by petitioner for business and since it sustained losses in its operation which losses were determined by means of inventories authorized under Section 100 of Revenue Regulations No 2 it was error for respondent to have disallowed the deduction of said losses The same is true with respect to loss sustained in the operation of the Hacienda Samal for the years 1951 and 1952 10 The Commissioner questions that the losses sustained by the taxpayer were properly based on the inventory method of accounting He concedes however that the regulations referred to does not specify how the inventories are to be made The Tax Court however felt satisfied with the evidence presented by the taxpayer which merely consisted of an alleged physical count of the number of the livestock in Hacienda Dalupiri for the years involved 11 The Tax Court was satisfied with the method adopted by the taxpayer as a farmer breeding livestock reporting on the basis of receipts and disbursements We find no Compelling reason to disturb its findings

PLARIDEL SURETY v CIRFacts Petitioner Plaridel Surety amp Insurance Co is a domestic corporation engaged in the bonding business On November 9 1950 petitioner as surety and Constancio San Jose as principal solidarily executed a performance bond in the penal sum of P3060000 in favor of the

P L Galang Machinery Co Inc to secure the performance of San Joses contractual obligation to produce and supply logs to the latter To afford itself adequate protection against loss or damage on the performance bond petitioner required San Jose and one Ramon Cuervo to execute an indemnity agreement obligating themselves solidarily to indemnify petitioner for whatever liability it may incur by reason of said performance bond Accordingly San Jose constituted a chattel mortgage on logging machineries and other movables in petitioners favor1 while Ramon Cuervo executed a real estate mortgage2 San Jose later failed to deliver the logs to Galang Machinery3 and the latter sued on the performance bond On October 1 1952 the Court of First Instance adjudged San Jose and petitioner liable it also directed San Jose and Cuervo to reimburse petitioner for whatever amount it would pay Galang Machinery The Court of Appeals on June 17 1955 affirmed the judgment of the lower court The same judgment waslikewise affirmed by this Court4 on January 11 1957 except for a slight modification apropos the award of attorneys fees In its income tax return for the year 1957 petitioner claimed the saidamount of P4449000 as deductible loss from its gross income and accordingly paid the amount of P13600 as its income tax for 1957 The Commissioner of Internal Revenue disallowed the claimed deduction of P4449000 and assessed against petitioner the sum of P889800 plus interest as deficiency income tax for the year 1957 Petitioner filed its protest which was denied Whereupon appeal was taken to the Tax Court petitioner insisting that the P4449000 which it paid to Galang Machinery was a deductible lossIssue WON the amount Plaridel paid to Galang Machinery is a deductible lossHeld NO There is no question that the year in which the petitioner Insurance Co effected payment to Galang Machinery pursuant to a final decision occurred in 1957 However under the same court decision San Jose and Cuervo were obligated to reimburse petitioner for whateverpayments it would make to Galang Machinery Clearly petitioners loss is compensable otherwise (than by insurance) It should follow then that the loss deduction can not be claimed in 1957 Now petitioners submission is that its case is an exception Citing Cu Unjieng Sons Inc v Board of Tax Appeals6 and American cases also petitioner argues that even if there is a right to compensation by insurance or otherwise the deduction can be taken in the year of actual loss where the possibility of recovery is remote The pronouncement however to this effect in the Cu Unjieng case is not as authoritative as petitioner would have it since it was there found that the taxpayer had no legal right to compensation either by insurance or otherwise7 And the American cases cited8 are not in point None of them involved a taxpayer who had as in the present case obtained a final judgment against third persons for reimbursement of payments made In those cases there was either no legally enforceable right at all or such claimed right was still to be or being litigated On the other hand the rule is that loss deduction will be denied if there is a measurable right to compensation for the loss with ultimate collectionreasonably clear So where there is reasonable ground for reimbursement the taxpayer must seek his redress and may not secure a loss deduction until he establishes that no recovery may be had9 In other words as the Tax Court put it the taxpayer (petitioner) must exhaust his remedies first to recover or reduce his loss But assuming that there was no reasonable expectation of recovery still no loss deduction can be had Sec 30 (d) (2) of the Tax Code requires a charge-off as one of the conditions for loss deduction In the case of a corporation all losses actually sustained and charged-off within the taxable year and not compensated for byinsurance or otherwise Mertens12 states only four (4) requisites because the United StatesInternal Revenue Code of 193913 has no charge-off requirement Sec 23(f) thereof provides merely In the case of a corporation losses sustained during the taxable year and not compensated for by insurance or otherwise Petitioner who had the burden of proof14 failed to adduce evidence that there was a charge-off in connection with the P4449000mdashor P3060000 mdash which it paid to Galang Machinery

CHINA BANKING CORPORATION V COURT OF APPEALSFacts Petitioners mad a 53 equity investment in First CBC Capital (Asia) Limited to the amount of P1622785180 consisting of 106000 shares with par value of P100 per shareSubsequently First CBC was found to be insolvent Petitioners with the approval of the BSP wrote off as worthless its investment in the company and treated it as a bad debt or ordinary loss deductible from its gross income The Commissioner of Internal Revenue disallowed the deduction saying that the investment could not be considered worthless since First CBC could still exercise its financing and investment activities even if it was no longer licensed as a

depository Even assuming that the securities had become worthless it still cannot be considered as a bad debt or expense since there is no indebtedness between petitioner and First CBC It should be classified as a capital lossHeld The SC found in favor of respondents1 Not and indebtedness An equity investment in shares of stock cannot be considered as an indebtedness of First CBC Capital to China Bank The former has no obligation to repay the latter the amount invested The amount China Bank invested in First CBC is in fact anasset2 Capital asset not ordinary Capital assets are defined in the negative by Sec 33(1) of the NIRC as property held by the TP exclusive of items primarily for the sale to customers in the ordinary course of business or property used in trade or business Hence securities such as equity holdings are ordinary assets only in the hands of a dealer or a person actively engaged in trading in the same for his own account3 Section 29(d)(4)(B) of the NIRC treats the worthlessness of the securities held as capital assets as a loss resulting from the sale or exchange of capital assets Strictly speaking no sale occurs when securities held as capital assets become worthless Nonetheless the law treats it as a loss from a sale just the same4 Section 33 of the NIRC provides that the capital loss sustained can only be deducted from any capital gain derived within the taxable year The same provision enumerates assets which are not subject to the said limitation but equity holdings are not one of them

THE CITY LUMBER INC V DOMINGOFacts Respondent Domingo made an assessment on an additional income of petitioners in the amount of P16 67863 coming from 1 the sale of plywood kegs of nails and GI sheets amouting to P 790207 2 a cash credit balance of P789680 Petitioner assails the validity of the assessment alleging that the inventory in question was not sold but were lost to looters during a fire which occurred in the city To 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 was actually a loan secured by petitionersHELDThe assessments were valid 1 The alleged loss of the plywood and kegs of nails was never reported in the books of the petitioner nor in the petitioners ITR for that year Such conduct of the petitioner proves that such loss never occurred 2 Similarly there was neither any record in petitioners books nor any receipt or other piece of evidence to show receipt of the supposed loan

MARCELO STEEL CROP V COLLECTOR OF INTERNAL REVENUEFacts RA 35 granted a four-year tax exemption from all internal revenue taxes to enterprises directly payable by such enterprise or person which shall engage in new and necessary industries Petitioner corporation was engaged in 1 the manufacture of wire fences 2 the manufacture of steel nails 3 the manufacture of steel bars rods and other allied productsof which the last two were covered by RA 35 In 1953 and 1954 petitioner filed its ITR showing a net income of P3438658 and P5832900 respectively derived solely from its wire fence manufacturing business It was accordingly assessed P12750 in taxes which it paid subsequently it filed an amended ITR for the same taxable years showing that it actually incurred a loss of P87140737 and P10495629 respectively The losses were arrived at by consolidating the gross income and the gross allowable deductions of its three industries Petitioner thus filed for a refund of the P12750 it initially paid in taxes on the theory that since it is a corporation organized with a single capital to answer for all its financial obligations the gross income from both tax-exempt and non-exempt industries and its liability should be based on the difference between its consolidated gross income and its consolidated allowable deductionsHeld Petition has no merit Marcelo Steel cannot consolidate 1 The purpose of RA 35 is to encourage the establishment of new and necessary industries for the economic growth of the country In effect it grants a subsidy to entrepreneurs who blaze a trail in a new industry since there are greater risks involved in the same and an ROI is usually not immediately forthcoming As such a tax exemption granted to an entrepreneur engaged in a tax-exempt industry cannot be extended to benefit non-exempt industries in which the same entrepreneur is concurrently

engaged The justification is simply not there since such industries are presumably already deriving profits from its operations 2 Single capital - The fact that all three industries are organized under a single capital is of no moment It is clear that the law intended that tax exemptand non-exempt industries be treated separately as reflected in EO 341 series 0f 1950 which was incorporated in RA 901 a later incarnation of the same lawPHILIPPINE SUGAR ESTATE CORP V COLLECTOR OF INTERNALREVENUEFacts Petitioner owned shares of stock in several different companies and 154 liberty bonds at par 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 inclusiveof the sums above-stated for which it was assessed an amount in taxes It paid said amount without protest Subsequently petitioner filed a demand for refund In the letter-demand the ground for the refund invoked was the illegality o the collection since the dividends and interest were exempt from payment of income tax Although in the present petition the ground invoked is that the income tax on dividends had already been paid at the source Respondent denied the claim for refund because plaintiff failed to lodge a protest concurrently when it paid its tax liability as per Sec 1579 of the Revised Administrative Code as amended by Act No 3685 Plaintiffcountered by saying that the applicable law is Act No 2833 which requires no protest In addition it invoked the ruling in Fox v Edwards wherein it was ruled that any unduly paid income tax may be refunded without the necessity of a protestHeld The SC found in favor of the Collector1Controlling law - There is no need to distinguish between the two laws in this case Section 19 of Act 2833 provides that all administrative special and general provisions of law including laws in relation to the assessment remission collection and refund of internal revenue taxesnot hereto fore repealed and not inconsistent withthis Law areapplicableto this Law By virtue of this saving clause Section 1579 of the Revised Administrative Code finds application to Act 28332 Fox v Edwards is not controlling since the law specifically applied therein did not require the lodging of a protest concurrently with the payment for a TP to retain such right to protest (NOTE fr digester I did not find anything on losses or bad debts in this case I may have overlooked it)

DEDUCTIONS AND EXEPTIONS ALLOWABLE DEDUCTIONS BADDEBTSPHILIPPINE REFINING COMPANY V COURT OF APPEALSFacts In 1985 petitioner filed its ITR where it claimed 16 items amounting to P71307093 as bad debts and therefor deductible Subsequently the Commissioner for Internal Revenue disallowed such deductions and assessed petitioner to pay a deficiency tax for the year of 1985 Petitioner paid the deficiency tax under protest which the Commissioner deniedUpon a petition for review the CTA modified the findings of the Commissioner by reducing the deficiency tax assessment on the basis that three of the sixteen supposed bad debts could be allowed as deductions The CA later on agreed with the CTAHeld The SC upheld the ruling of the CA which it found to be in accordance with the SCs ruling in Collector v Goodrich It held the petitioner failed to substantiate the ldquoworthlessnessrdquo of the 13 debts which it claimed as deductions As per the ruling in Collector v Goodrich to qualify as a bad debt a TP must show 1 that there is a valid and subsisting debt2 that the debt must be actually ascertained to be worthless and uncollectible durring the taxable year3 the debt must be charged off during the taxable year and4 the debt must arise from the business or trade of the TPIn addition the Court said before a debt can be considered worthless the TP must also show that it is indeed uncollectible even in the future Furthermore the TP must undertake several steps to prove that he exerted diligent efforts to collect the debt1 sending statements of accounts to the debtors 2 sending of collection letters 3 giving the account to a lawyer for collection and4 filing a collection case in court In the case at bar the petitioner miserably failed to show any of the foregoing The only piece of evidence it offered to show the worthlessness of the debts was the testimony of the companys financial adviser or accountant The Court found that this lacked the required probity to establish that the accounts it claimed as bad debts were indeed

worthless Apart from such testimony the petitioner failed to introduce even a single iota of evidence to bolster its claim of worthlessness (NOTE In the rest of the case the Court presents the allegation of the petitioner as to why it could not collect on any of the 13 debts followed bya statement how the petitioner failed to introduce evidence to substantiate such allegation)

Collector of Internal Revenue v Goodrich International Rubber Co(21 SCRA 1336 No L-22265)Facts In 1951 and 1952 respondent Goodrich filed it ITR in which it claimed an aggregate amount (consisting of 18 individual accounts) of P5045541 as deductible for being bad debts The Collector of Internal Revenue disallowed the deductions and accordingly assessed Goodrich accordingly Goodrich protested the assessment and subsequently filed an appealwith the CTA which allowed the deductions for bad debts Hence this appeal by the GovernmentHeld Petition is partially meritorious Some of the items claimed by Goodrich can rightfully be written off as bad debts The SC rejected the claim for deduction of 10 items because Goodrichfailed to establish that that the debts were actually worthless or that it had reasonable grounds to believe them to be so in 1951 The law permits the deduction of debts ldquoactually ascertained to be worthless within the taxable yearrdquo obviously to prevent arbitrary action by the TP to unduly avoid tax liability Good faith on the part of the TP is not enough He must furthermore show that he had reasonably investigated the relevant facts and had drawn a reasonable inference from the information 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 actually made (some in full) after they had been characterized as bad debts and written off The Court however ruled that 8 of the 18 claimed bad debts can beallowed as deductions Common among these 8 was the action of Goodrich in persistently demanding payment from its debtors its endorsement of the accounts to counsel for collection the pursuit of legal remedies for the collection on these debts and the continuing failureclear inability of the debtors to pay off their obligations

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSDEPRECIATIONBASILAN ESTATES INC v CIRFacts Basilan Estates Inc claimed deductions for the depreciation of its assets on the basis of their acquisition cost As of January 1 1950 it changed the depreciable value of said assets by increasing it to conform with the increase in cost for their replacement Accordingly from 1950 to1953 it deducted from gross income the value of depreciation computed on the reappraised value CIR disallowed the deductions claimed by petitioner consequently assessing the latter of deficiency income taxesIssueWhether or not the depreciation shall be determined on the acquisition cost rather than the reappraised value of the assetsHeld Yes The following tax law provision allows a deduction from gross income for depreciation but limits the recovery to the capital invested in the asset being depreciated (1)In general mdash A reasonable allowance for deterioration of property arising out of its use or employment in the business or trade or out of its not being used Provided That when the allowance authorized under this subsection shall equal the capital invested by the taxpayer no further allowance shall be made The income tax law does not authorize the depreciation of an asset beyond its acquisition cost Hence a deduction over and above such cost cannot be claimed and allowed The reason is that deductions from gross income are privileges not matters of right They are not created by implication but upon clear expression in the law Depreciation is the gradual diminution in the useful value of tangible property resulting from wear and tear and normal obsolescense It commences with the acquisition of the property and its owner is not bound to see his property gradually waste without making provision out of earnings for its replacement The recovery free of income tax of an amount more than the invested capital in an asset will transgress the underlying purpose of a depreciation allowance For then what the taxpayer would recover will be not only the acquisition cost but also some profit Recovery in due time thru depreciation of investment made is the philosophy behind depreciation allowance the idea of profit on the investment made has never been the underlying reason for the allowance of a deduction for depreciation

Zamora v CIRFacts These are 4 cases regarding deficiency income taxes allegedly incurred by the ZamorasCases Nos L-15290 and L-15280Mariano Zamora owner of the Bay View Hotel and Farmacia Zamora Manila filed his income tax returns the years 1951 and 1952 The Collector of Internal Revenue found that he failed to file his return of the capital gains derived from the sale of certain real properties and claimed deductions which were not allowable The CTA reduced the sum due Zamora and on appeal petitioner alleged that the CTA erred in disallowing the promotion expenses incurred by his wife for promotion of the above businesses depreciation of the Bayview Hotel Bldg and in applying the Ballantyne scale of values for determining the cost of his Manila property The CIR on the other hand claimed that the CTA erred in reducing the amounts and giving credence to the uncorroborated testimony of Mariano Zamora that he bought the said real property in question during the Japanese occupation partly in Philippine currency and partly in Japanese war notes Cases Nos L-15289 and L-15281 Mariano Zamora and his deceased sister Felicidad Zamora bought a piece of land located in Manila on May 16 1944 for P13200000 and sold it for P7500000 on March 5 1951 They also purchased a lot located inQuezon City for P6895900 on January 19 1944 which they sold for P94000 on February 9 1951 The CTA ordered the estate of the late Felicidad Zamora (represented byEsperanza A Zamora as special administratrix of her estate) to pay the sum of P23550 representing alleged deficiency income tax and surcharge due from said estateFirst issue ndash disallowance of the entire promotion expenses incurred by Mrs ZamoraPetitioner The CTA erred in disallowing P1047850 as promotion expenses incurred by his wife for the promotion of the BayView Hotel and Farmacia Zamora He contends that the whole amount of P2095700 as promotion expenses should be allowed and not merely one-half of it on the ground that while not all the itemized expenses are supported by receipts the absence of some supporting receipts has been sufficiently and satisfactorily established - to purchase machinery for a new Tiki-Tiki plant and to observe hotel management in modern hotelsRespondents Mrs Zamora obtained only the sum of P500000 from the Central Bank and that in her application for dollar allocation she stated that she was going abroad on a combined medical and business trip which facts were not denied by Mariano Zamora The alleged expenses were not supported by receipts Mrs Zamora could not even remember how much money she had when she left abroad in 1951 and how the alleged amount of P2095700 was spent There having been no means by which to ascertain which expense was incurred by her inconnection with the business of Mariano Zamora and which was incurred for her personal benefit the respondents considered 50 of the said amount of P2095700 as business expenses and the other 50 as her personal expensesHeld The 50 allocation is very fair to Zamora there being no receipt to explain the alleged business expenses as well as the personal expenses that might have been incurred While in situations like the present absolute certainty is usually no possible the CTA should make as close an approximation as it can bearing heavily if it chooses upon the taxpayer whose inexactness is of his own making Section 30 of the Tax Code provides that in computing net income there shall be allowed as deductions all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business Since promotion expenses constitute one of the deductions in conducting a business same must testify these requirements Claim for the deduction of promotion expenses or entertainment expenses must also be substantiated or supported by record showing in detail the amount and nature of the expenses incurredSecond issue ndash disallowancereduction of the rate of depreciation of Bayview Hotel (from 35 to 25)Petitioner Contends that 1) the Ermita district is becoming a commercial district 2) the hotel has no room for improvement and(3) the changing modes in architecture styles of furniture and decorative designs must meet the taste of a fickle public Alsothe reference to Bulletin F a publication by the IRS should have been first proved as law to be subject of judicial noticeHeld The CTA was approximately correct in holding that the rate of depreciation must be 25 An average hotel buildingrsquos estimated useful life is 5 years but inasmuch as it also depends on the use and location change in population and other it is allowed a deprecation rate of 25 which corresponds to a useful life of 40 years It is true that Bulletin F has no binding force but it has a strong persuasive effect considering that the same has been the result of scientific studies

and observation for a long period in the United States after whose Income Tax Law ours is patterned Verily courts are permitted to look into and investigate the antecedents or the legislative history of the statutes involvedThird issue-the undeclared capital gains derived from the sales in 1951 of certain real properties in Malate Manila and in Quezon City acquired during the Japanese occupationHeld The CTArsquos appraisal in this case is correct Consequently the total undeclared income of petitioners derived from the sales of the Manila and Quezon City properties in 1951 is P1711175 (P175000 plus P1536175) 50 of which in the sum of P855588 is taxable the said properties being capital assets held for more than one year The cost basis of property acquired in Japanese war notes is the equivalent of the war notes in genuine Philippine currency in accordance with the Ballantyne Scale 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 P13200000 was not entirely paid in Japanese War notes but frac12 thereof or P6600000 was in Philippine currency This being the case the Ballantyne Scale of values which was the resultof an impartial scientific study adopted and given judicial recognition should be applied As the value of the Japanese war notes in May 1944 when the Manila property was bought was 1 frac12 of the genuine Philippine Peso (Ballantyne Scale) and since the gain derived or loss sustained inthe disposition of this property is to reckoned in terms of Philippine Peso the value of the Japanese war notes used in the purchase of the property must be reduced in terms of the genuine Philippine Peso to determine the cost of acquisition It therefore results that since the sum of P6600000 in Japanese war notes in May 1944 is equivalent to P550000 in Philippine currency (P6600000 divided by 12) the acquisition cost of the property in question is P6600000 plus P550000 or P7150000 and that as the property was sold for P7500000 in 1951 the owners thereof Mariano and Felicidad Zamora derived a capital gain of P350000or P175000 each For the Quezon City property the CTA was correct in giving credence toZamorarsquos testimony that the same was purchased inPhilippine currency because it is quite incredible that real property with an assessed value of P4691000 should have been soldin Japanese war notes with an equivalent value in Philippine currency of only P1723975 Thus the gain derived from the sale isP1536175 after deducting from the selling price the cost of acquisition in the sum of P6895900 and the expense of sale in the sum of P967925Disposition The petitions are dismissed and the decision appealed from is affirmed

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSDEPLETIONCONSOLIDATED MINES V CTAFacts Cosolidated Mines filed a refund for overpayments of income taxes for the year 1951 However after investigation of the BIR instead of having a refund the company was instead assessed for deficiency income taxes for the years 1953 1954 and 1956 with 5 surchargeand 1 monthly interest According to the investigation (A) for the years 1951 to 1954 (1) the Company had not accrued as an expense the share in the company profits of Benguet Consolidated Mines as operator of the Consolidateds mines although for income tax purposes the Consolidated had reported income and expenses on the accrual basis (2) depletion and depreciation expenses had been overcharged and (3) the claims for audit and legal fees and miscellaneous expenses for 1953 and 1954 had not been properly substantiated and that (B) for the year 1956 (1) the Company had overstated its claim for depletion and (2) certain claims for miscellaneous expenses were not duly supported by evidence Background info Consolidated and Benguet entered into a development agreement whereby Consolidated as the owner of several mining claims allowed Benguet to explore develop mine concentrate andmarket the ore in the mining claims In the agreement it was provided that benguet is to provide the funds necessary for the expenses until such time the properties are on a profit producing basis to be reimbursed by consolidated Once profit is derived expenditures from its own resources shall be charged against the subsequent gross income of the properties During the time Benguet is being reimbursed for all its expenditures the net profits resulting from the operation of the claims shall be divided 90 to Benguet and 10 to Consolidated Such division of net profits shall be based on the receipts and expenditures during each calendar year and

shall continue until such time as the 90 of the net profits pertaining to Benguet hereunder shall equal the amount of such expenditures ldquoAfter Benguet has been fully reimbursed for its expenditures the net profits from the operation shall be divided between Benguet and Consolidated share and share alike it being understood however that the net profits as the term is used in this agreement shall be computed by deducting from gross income all operating expenses and all disbursements of any nature whatsoever as may be made in order to carry out the terms of this agreementrdquo It appears that by 1953 Benguet had completely recouped its advances because they were then dividing the profits share and share alike Consolidated used the accrual method of accounting in computing its income One of its expenses is the amount-paid to Benguet as mine operator which amount is computed as 50 of ldquonet incomerdquo TheConsolidated deducts as an expense 50 of cash receipts minus disbursements but does not deduct at the end of each calendar year what the Commissioner alleges is 50 of the share of Benguet in the accounts receivable However it deducts Benguets 50 if and when the accounts receivable are actually paid It would seem therefore that Consolidated has been deducting a portion of this expense (Benguets share as mine operator) on the cash amp carry basis The question is whether or not the accounting system used by Consolidated justifies such a treatment of this item and if not whether said method used by Consolidated and characterized by the Commissioner as a hybrid method may be allowed under the provisions of the NIRCIssue WON Consolidatedrsquos accounting method is allowedHeld YES It is said that accounting methods for tax purposes comprise a set of rules for determining when and how to report income and deductions The US Internal Revenue Code allows each taxpayer to adopt the accounting method most suitable to his business and requires only that taxable income generally be based on the method of accounting regularly employed in keeping the taxpayers books provided that the method clearly reflects incomeA deduction cannot be accrued until an actual liability is incurred even if payment has not been made Here we have to distinguish between (1) the method of accounting used by Consolidated in determining its net income for tax purposes and (2) the method of computation agreed upon between Consolidated and 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 were cash receipts and cash payments Once determined in accordance with the stipulated bases and procedure then the amount due Benguet for each month accrued at the end of that month whether Consolidated had made payment or not To make Consolidated deduct as an expense one-half of the Accounts Receivable would in effect be equivalent to giving Benguet a right which it did not have under the contract and to substitute for the parties choice a mode of computation of compensationnot contemplated by themON DEPLETIONThe first issue raised by Consolidated is with respect to the rate of mine depletion used by the Court of Tax Appeals The Tax Code provides that in computing net income there shall be allowed as deduction in the case of mines a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof which has been mined and sold during the year for which the return is made [Sec 30(g) (1) (B)] As an income tax concept depletion is wholly a creation of the statute mdash ldquosolely a matter of legislative gracerdquo Hence the taxpayer has the burden of justifying the allowance of any deduction claimed As in connectionwith all other tax controversies the burden of proof to show that a disallowance of depletion by the Commissioner is incorrect or that an allowance made is inadequate is upon the taxpayer and this is true with respect to the value of the property constituting the basis of the deduction This burden-of-proof rule has been frequently applied and a value claimed has been disallowed for lack of evidence Here SC considered the evidence presented (testimony of Eligio Garciaand the Report to Stockholders (which includes the Balance Sheet as of 1946) geological report on the estimated amount of ore in the claims etc) it set forth a very detailed computation of the depletion rate determining the value of each component of the formula of depletion viz Rate of Depletion Per Unit = Cost of Mine Property Estimated ore Deposit of Product Mined and sold- depletion is different from depreciation In determining the amount of cost depletion allowable the following three facts are essential namely (1) the basis of the property (2) the estimated total recoverable units in the property and (3) the number of units recovered during the taxable year in question As used as an element in cost depletion basis means the dollar amount of the

taxpayers capital or investment in the property which he is entitled to recover tax free during the period he is removing the mineral in the depositDisposition Decision modifiedFootnotes in the case that are helpful While taxable income is based on the method of accounting used by the taxpayer it will almost always differ from accounting income This is sobecause of a fundamental difference in the ends the two concepts serve Accounting attempts to match cost against revenue Tax law is aimed at collecting revenue It is quick to treat an item as income slow to recognize deductions or losses Thus the tax law will not recognize deductions for contingent future losses except in very limited situations Good accounting on the other hand their recognition Once this fundamental difference in approach is accepted income tax accounting methods can be understood more easily 33 Am Jur 2d 688 Under the accrual system income is accruable in the year in which the taxpayers right thereto becomes fixed and definite even though it may not be actually received until a later year while a deduction for a liability is to be accrued and taken when the liability becomes fixed and certain even though it may not be paid until a later year It has been held that the basis of the accrual system of accounting is that obligations incurred in the normal course of business will be discharged in due course that the deductions have been paid or accrued or paid and incurred but in order to be accruable in the taxable year a valid obligation upon which the profit (or loss in the case 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 expend money constituting a deductible loss is the date that fixes liability Gain or loss may not said to be fixed or accrued when the obligation is contingent upon the happening of a future event No duty or liability to pay an income tax upon a transaction arises until the taxable year in which the event constituting the condition precedent occurs under any system ofaccounting

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSCHARITABLE AND OTHER CONTRIBUTIONSROXAS v CTA GR No L-25043 April 26 1968Facts Don Pedro Roxas and Dona Carmen Ayala Spanish subjects transmitted to their grandchildren by hereditary succession several properties To manage the above-mentioned properties said children namely Antonio Roxas Eduardo Roxas and Jose Roxas formed apartnership called Roxas y Compania At the conclusion of the WW2 the tenants who have all been tilling the lands in Nasugbu for generations expressed their desire to purchase from Roxas y Cia the parcels which they actually occupied For its part the Government in consonance with the constitutional mandate to acquire big landed estates and apportion them among landless tenants-farmers persuaded the Roxas brothers to part with their landholdings Conferences were held with the farmers in the early part of 1948 and finally the Roxas brothers agreed to sell 13500 hectares to the Government for distribution to actual occupants for a price of P207904847 plus P30000000 for survey and subdivision expenses It turned out however that the Government did not have funds to cover the purchase price and so a special arrangement was made for the Rehabilitation Finance Corporation to advance to Roxas y Cia The amount of P150000000 as loan Collateral for such loan were the lands proposed to be sold to the farmers Under the arrangement Roxas y Cia allowed the farmers to buy the lands for the same price but by installment and contracted with the Rehabilitation Finance Corporationto pay its loan from the proceeds of the yearly amortizations paid by the farmers The CIR demanded from Roxas y Cia the payment of deficiency income taxes resulting from the inclusion as income of Roxas y Cia of the unreported 50 of the net profits for 1953 and 1955 derived from the sale of the Nasugbu farm lands to the tenants and the disallowance of deductions from gross income of various business expenses and contributions claimed by Roxas y Cia and the Roxas brothers For the reason that Roxas y Cia subdivided its Nasugbu farm lands and soldthem to the farmers on installment the Commissioner considered the partnership as engaged in the business of real estate hence 100 of the profits derived therefrom was taxed The Roxas brothers protested the assessment but inasmuch as said protest was denied they instituted an appeal in the CTA which sustained the assessment Hence this appealIssue Is Roxas y Cia liable for the payment of deficiency income for the sale of Nasugbu farmlandsHeld NO The proposition of the CIR cannot be favorably accepted in this isolated transaction with its peculiar circumstances in spite of the fact that there were hundreds of vendees Although

they paid for their respective holdings in installment for a period of 10 years it would nevertheless not make the vendor Roxas y Cia a real estate dealer during the 10-year amortization period It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled them for generations was not only in consonance with but more in obedience to the request and pursuant to the policy of our Government to allocate lands to the landless It was the bounden duty of the Government to pay the agreed compensation after it had persuaded Roxas y Cia to sell its haciendas and to subsequently subdivide them among the farmers at very reasonable terms and prices However the Government could not comply with its duty for lack of funds Obligingly Roxas y Cia shouldered the Governments burden went out of its way and sold lands directly to the farmers in the same way and under the same terms as would have been the case had the Government done it itself For this magnanimous act the municipal council of Nasugbu passed a resolution expressing the peoples gratitudeIn fine Roxas y Cia cannot be considered a real estate dealer for the sale in question Hence pursuant to Section 34 of the Tax Code the lands sold to the farmers are capital assets and the gain derived from the sale thereof is capital gain taxable only to the extent of 50

DEDUCTIONS AND EXEMPTIONS NON-DEDUCTIBLE EXPENSECIR v JAMIRFacts For the year 1954 Alberto M K Jamir declared a gross income of P7585865 and claimed deductions aggregating P5813450 thereby showing a net income of P1777415 upon which he paid P1634 as income tax The Collector of Internal Revenue however assessed asdeficiency income tax due from him the sum of P16395 Jamir appealed to the Court of Tax Appeals which reduced the amount due as deficiency income tax to P55200Issue Whether Jamir had an undeclared income for the year 1954 aggregating P3127491Held No It appears that by using the so-called expenditures method the Government considered as an undeclared income Jamirs expenditures for February and May were in excess of his reported income for the same months Although the Court of Tax Appeals in effect sanctioned the adoption of the expenditures method it held that the same should be applied by deducting the aggregate yearly expenditures from the declared yearly income not the expenditures incurred each month from the declared income therefor In the case at bar Jamirs total income for the year 1954 (P7585865) exceeded (Pl777415) the total deductions (P5813450) claimed by him Jamir introduced evidence that the said sums of P128124 andP2999367 represented advances made to him by customers in the months of February and may 1954 and that the income derived from the corresponding transactions were entered in his books of account in subsequent months and this explanation was found by the Court of Tax Appeals to have been proven satisfactorily The next question raised by appellant refers to Jamirs claim for car depreciation and salary of his driver Although petitioner had disallowed one-half (12) of these claims it appearing that the car was used by Jamir for personal and business purposes the lower court allowed as deductions three-fourths (34) of said amounts the car having been used by Jamir more for business than for personal purpose Petitionerassails this as an error but considering the circumstances we agree with the deduction of frac34 by the lower court It is next urged that Jamir committed fraud and the 50 surcharge should not have been eliminated But since Jamir did not have the undeclared income of P3127491 upon which the contested assessment is mainly based it follows necessarily that he was not guiltyof the fraud and that the 50 surcharge has been properly eliminatedDisposition the decision appealed from is hereby affirmed

Atlas Consolidated Mining v CIRFacts CIR assessed Atlas deficiency income tax for 1957 to 1958 which amounted to morethan P700K CIR asserted that in 1957 Atlas was still not entitled to exemption fromthe income tax under RA 909 because the same covers only gold mines and Atlas isnot engaged in that Atlasprotested before the Sec of Finance and Sec ruled that exemption provided in RA 909 embraces all new 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 disallowance of the following items transfer agent1048576s fees stockholders relation service fee US stock listing expenses suit expenses provision for contingency CTA disallowed the items except the stockholders relation service fee and suit expenses Also CTA ruled that the exemption from payment of the corporate income tax of Atlas

was good only up to the first quarter of 1958 hence it computed for its net taxable income for the remaining frac34 of the year Atlas appealed asserting that the annual public relations expense is a deductible expense from gross income because it is an ordinary and necessarybusiness expenseIssue WON this fee paid for the services rendered by a public relations firm in the US labeled as stockholders relation service fee is an allowable deductionHeld 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 that deduction is authorized and must be able to prove that he is entitled to the deduction which the law allows As previously adverted to the law allowing expenses as deduction from gross income for purposes of the income tax is Section 30 (a) (1) of the National Internal Revenue which allows a deduction of all the ordinary and necessary expenses paid orincurred during the taxable year in carrying on any trade or business An item of expenditure in order to be deductible under this section of the statute must fall squarely within its language We come then to the statutory test of deductibility where it is axiomatic that to be deductible as a business expense three conditions are imposed namely (1) the expense must be ordinary and necessary (2) it must be paid or incurred within the taxable year and (3) it must be paid or incurred in carrying in a trade or business In addition not only must the taxpayer meet thebusiness test he must substantially prove by evidence or records the deductions claimed under the law otherwise the same will be disallowed The mere allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its deduction Assuming that the expenditure is ordinary and necessary in the operation of the taxpayers business the answer to the question as to whether the expenditure is an allowable deduction as a business expense must be determined from the nature of the expenditure itself which in turn depends on the extent and permanency of the work accomplished by the expenditure The expenditure of P2552314 paid to PK Macker amp Co as compensation for services carrying on the selling campaign in an effort to sell Atlas additional capital stock of P3325000 is not an ordinaryexpense in line with the decision of US Board of Tax Appeals in the case of Harrisburg Hospital Inc vs Commissioner of Internal Revenue Accordingly as found by the Court of Tax Appeals the said expense is not deductible from Atlas gross income in 1958 because expenses relating to 1) recapitalization and reorganization of the corporation 2) the cost of obtaining stock subscription 3)promotion expenses and 4) commission or fees paid for the sale of stock reorganization are capital expenditures The burden of proof that the expenses incurred are ordinary and necessary is onthe taxpayer The claimed business expense must also be supported by appropriate documents such as invoices official receipts and contracts to be made available in case of a tax audit by the Bureau of Internal Revenue

GANCAYCO V COLLECTORFacts1048576 Gancayco filed his Income tax Return (ITR) for 19491048576 CIR notified him that his liability is Php 979362 which he paid 19501048576 CIR after a year wrote to Gancayco saying that there was tax due from him for a total of Php 29554051048576 Gancayco asked for reconsideration and the tax assessed wasreduced1048576 CIR issued a warrant of distraint for the deficient liability1048576 Gancayco filed petition with CTACTA Required Gancayco to pay Php 16 86031 for tax deficiency in1949Gancayco the right to collect the deficiency income tax is barred by thestatute of limitations the 5 yr period for judicial action should be counted from May 12 50 the date of original assessment SC Section 316 provides The civil remedies for the collection of internal revenue taxes fees or charges and any increment thereto resulting from delinquency shall be (a) by distraint of goods chattels or effects and other personal property of whatever character including stocks and other securities debts credits bank accounts and interest in and rights to personal property and by levy upon real property and (b) by judicial action Either of these remedies or both simultaneously may be pursued in the discretion of the authorities charged with the collection of such taxes No exemption shall be allowed against the internal revenue taxes in any case

Deduction for expenses may be allowed however in this case Gancayco was not able to prove any expense as there were no receipts or other proofs CTA AFFIRMED

DEDUCTIONS AND EXEMPTIONS NON-DEDUCTIBLE EXPENSESILLEGAL EXPENSESCALANOC V COLLECTORFacts1048576 Calanoc was authorized to solicit and receive contributions for the orphans and destitute kids of the Child Welfare Workers Club of the Social Welfare Commission1048576 Dec 1949 Calanoc financed and promoted a boxing exhibition at the Rizal Memorial Stadium for said charitable purpose1048576 He applied for exemption from payment of the amusement tax as provided in Sec 260 NIRC1048576 CIR investigated the tax case of Calanoc and it was found that there was gross sale of Php 26553 expenditure of 25157 and profit of 1375301048576 Profit was remitted to Social Welfare Commission1048576 CIR demanded Calanoc oto pay 5331048576 Sec of Finance denied the application of Calanoc for exemption from payment of amusement taxCTA Affirmed the assessment of 7k Calanoc denies receving a stadium fee of 1k Although it was shown that 1k was paid by O-OSO Beverages His accountant is dead SC the items of expenditures for deduction are exorbitant and not supported by receiptsCTA Affirmed

3M PHILIPPINES INC petitioner vs COMMISSIONER OFINTERNAL REVENUE respondent [GR No 82833 September 261988]Facts The petitioner claimed as deductions for income tax purposes business expenses in the form of royalty payments to its foreign licensor which the respondent Commissioner of Internal Revenue disallowed The petitioner claimed the following deductions royalties and technical service fees and pre-operational cost of tape coater The amount was not allowed as entire deduction The petitioner argues that the law applicable to its case is only Section 29(a)(1) of the Tax Code and not Circular No 393 of the Central BankIssue WON the royalty payments are valid deductible expense WON the Tax Code is applicableHeld No Although the Tax Code allows payments of royalty to be deducted from gross income as business expenses it is CB Circular No 393 that defines what royalty payments are proper Improper payments of royalty are not deductible as legitimate business expenses Section 3-c of CB Circular No 393 provides for payment of royalties only on commodities manufactured by the licensee under the royalty agreement not on the wholesale price of finished products imported by the licensee from the licensor entral Bank Circulars like CB Circular No 393 (dated December 7 1973 published in the Official Gazette issue of December 17 1973 [69 OG No 51 p 11737] issued by the Central Bank in the exercise of fits authority under the Central Bank Act duly published in the Official Gazette have the force and effect of law (Cases cited) andbinding on everybody

DEDUCTIONS AND EXEMPTIONS PERSONAL EXEMPTIONSCOLLECTOR OF INTERNAL REVENUE petitioner vs ORLANDO VCALSADO and COURT OF TAX APPEALS respondents [GR 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 supportIssue WON the respondent is classified as head of the familyHeld 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 Php50000

In the matter of the adoption of the minor MARCIAL ELEUTERIO RESABA LUIS SANTOS-YNtildeIGO and LIGIA MIGUEL DE SANTOSYNtildeIGO petitioners-appellees vs REPUBLIC OF THE PHILIPPINES oppositor-appellantTAX ON CORPORATIONS BASES AND RATESRESIDENT FOREIGN CORPORATIONS TAXABLE INCOME [GRNo 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 minorIssue WON the adoption is validHeld 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 suchagreement 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 bymarriage 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 childrenwith 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 or main support Partial support not amounting to chief support will not entitle the taxpayer to claim exemption as a head of a family Regulation No section 11

would have been made absolute or unconditional (by omitting foreign taxes from the enumeration of non- deductions) while the right to a tax credit under subsection (c-3) would have been expressly conditioned upon the taxpayerrsquos not claiming any deduction under subsection (c-1)5 Danger of double credit does not exist if taxpayer cannot claim benefit from either headings at his option The purpose of the law is to prevent the taxpayer from claiming twice the benefits of his payment of foreign taxes by deduction from gross income (subs c-1) and by tax credit (subs c-3) This danger of double credit certainly can not exist if the taxpayer can not claim benefit under either of these headings at his option so that he must be entitled to a tax credit (the spouses admittedly are not so entitled because all their income is derived from Philippine sources) or the option to deduct from gross income disappears altogether6 When double taxation Tax income should accrue to benefit of the PhilippinesDouble taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity (cf Manila vs Interisland Gas Service 52 Off Gaz 6579 Manuf Life Ins Co vs Meer 89 Phil 357) In the present case while the taxpayers would have to pay two taxes on the same income the Philippine government only receives the proceeds of one tax As between the Philippines where the income was earned and where the taxpayer is domiciled and the United States where that income was not earned and where the taxpayer did not reside it is indisputable that justice and equity demand that the tax on the income should accrue to the benefit of the Philippines Any relief from the alleged double taxation should come from the United States and not from the Philippines since the formerrsquos right to burden the taxpayer is solely predicated on his citizenship without contributing to the production of the wealth that is being taxed To allow an alien resident to deduct from his gross income whatever taxes he pays to his own government amounts to conferring on the latterpower to reduce the tax income of the Philippine government simply by increasing the tax rates on the alien resident Everytime the rate of taxation imposed upon an alien resident is increased by his own government his deduction from Philippine taxes would correspondingly increase and the proceeds for the Philippines diminished thereby subordinating our own taxes to those levied by a foreign government Such a result is incompatible with the status of the Philippines as an independent and sovereign state

GUTIERREZ v COLLECTORFacts Maria Morales was the registered owner of an agricultural land designated as Lot No 724-C of the cadastral survey of Mabalacat Pampanga The Republic of the Philippines at the request of the USGovernment and pursuant to the terms of the Military Bases Agreement of March 14 1947 instituted condemnation proceedings in the Court of the First Instance of Pampanga docketed as Civil Case No 148 for the purpose of expropriating the lands owned by Maria Morales and others needed for the expansion of the Clark Field Air Base t the commencement of the action the Republic of the Philippines therein plaintiff deposited with the Clerk of the Court of First Instance of Pampanga the sum of P156960 which was provisionally fixed as the value of the lands sought to be expropriated in order that it could take immediate possession of the same On January 27 1949 upon order of the Court the sum of P34580 (PNB Check 721520-Exh R) was paid by the Provincial treasurer of Pampanga to Maria Morales out of the original deposit of P156960 made by therein plaintiff After due hearing the Court of First Instance of Pampanga rendered decision dated November 29 1949 wherein it fixed as just compensation P2500 per hectare for some of the lots and P3000 per hectare for the others which values were based on the reports of the Commission on Appraisal whose members were chosen by both parties and by the Court which took into consideration the different conditions affecting the value of the condemned properties in making their findingsIn virtue of said decision defendant Maria Morales was to receive the amount of P9430575 as compensation for Lot No 724-C which was one of the expropriated lands Sometime in 1950 the spouses Blas Gutierrez and Maria Morales received the sum of P5978575 presenting the balance remaining in their favor after deducting the amount of P34580 already withdrawn from the compensation to them In a notice of assessment dated January 28 1953 the Collector ofInternal Revenue demanded of the petitioners the payment of P8481 as alleged deficiency income tax for the year 1950 inclusive of surcharges and penalties The CIR contended that petitioners-appellants failed to include from their gross income in filing their income tax return for 1950 the amount of P9430575 which they had received as compensation for their land

taken by the Government by expropriation proceedings It is the contention of respondent Collector of Internal Revenue that such transfer of property for taxation purposes is sale and that the income derived therefrom is taxable The lower court exonerated petitioners from the 50 per cent surchargeimposed on the latter on the ground that the taxpayers income tax return for 1950 is false andor fraudulentIssue WON petitioners should pay surcharge Held NO It should be noted that the Court of Tax Appeals found that the evidence did not warrant the imposition of said surcharge becausethe petitioners therein acted in good faith and without intent to defraud the GovernmentThe question of fraud is a question of fact which frequently requires a nicely balanced judgement to answer All the facts and circumstances surrounding the conduct of the tax payers business and all the facts incident to the preparation of the alleged fraudulent return should be considered (Mertens Federal Income Taxation Chapter 55) The question of fraud being a question of fact and the lower court having made the finding that the evidence of this case does not warrant the imposition of the 50 per cent surcharge We are constrained to refrain from giving any consideration to the question raised by the Solicitor General for it is already settled in this jurisdiction that in passing upon petitions to review decisions of the Court of Tax Appeals We have to confine ourselves to questions of law

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSLOSSESFERNANDEZ HERMANOS v CIRFacts These four appeals involve two decisions of the Court of Tax Appeals determining the taxpayers income tax liability for the years 1950 to 1954 and for the year 1957 Both the taxpayer and the Commissioner of Internal Revenue as petitioner and respondent in the cases a quo respectively appealed from the Tax Courts decisions insofar as their respective contentions on particular tax items were therein resolved against themIssue ProperImproper AllowancesDisallowances of LossesHeld Re allowancesdisallowances of losses(a) Allowance of losses in Mati Lumber Co (1950) mdash The Commissioner of Internal Revenue questions the Tax Courts allowance of the taxpayers writing off as worthless securities in its 1950 return the sum of P805000 representing the cost of shares of stock of Mati Lumber Co acquired by the taxpayer on January 1 1948 on the ground that the worthlessness of said stock in the year 1950 had not been clearly established The Commissioner contends that although the said Company was no longer in operation in 1950 it still had its sawmill and equipment which must be of considerable value There was adequate basis for the writing off of the stock as worthless securities Assuming that the Company would later somehow realize some proceeds from its sawmill and equipment which were still existing as claimed by the Commissioner and that such proceeds would later be distributed to its stockholders such as the taxpayer the amount so received by the taxpayer would then properly be reportable as income of the taxpayer in the year it is received(b) Disallowance of losses in or bad debts of Palawan Manganese Mines Inc (1951) mdash The taxpayer appeals from the Tax Courts disallowance of its writing off in 1951 as a loss or bad debt the sum of P35313425 which it had advanced or loaned to Palawan Manganese Mines Inc Pursuant to the agreement mentioned above petitioner gave to Palawan Manganese Mines Inc yearly advances starting from 1945 which advances amounted to P58730807 by the end of 1951 Despite these advances and the resumption of operations by Palawan ManganeseMines Inc it continued to suffer losses By 1951 petitioner became convinced that those advances could no longer be recovered While it continued to give advances it decided to write off as worthless the sum of P35313425 Under the circumstances was the sum of P35313425properly claimed by petitioner as deduction in its income tax return for 1951 either as losses or bad debts It will be noted that in giving advances to Palawan Manganese Mine Inc petitioner did not expect to be repaid It is true that some testimonial evidence was presented to show that there was some agreement that the advances would be repaid but no documentary evidence was presented to this effect The memorandum agreement signed by the parties appears to be very clear that the consideration for the advances made by petitioner was 15 of the net profits of Palawan Manganese Mines Inc In other words if there were no earnings or profits there

was no obligation to repay those advances It has been held that the voluntary advances made without expectation of repayment do not result in deductible losses The Tax Courts is allowance of the write-off was proper The Solicitor General has rightly pointed out that the taxpayer has taken an ambiguous position and has not definitely taken a stand on whetherthe amount involved is claimed as losses or as bad debts but insists that it is either a loss or a bad debt 4 We sustain the governments position that the advances made by the taxpayer to its 100 subsidiary Palawan Manganese Mines Inc amounting to P58730807 as of 1951 wereinvestments and not loans 5 (c) Disallowance of losses in Balamban Coal Mines (1950 and1951) mdash The Court sustains the Tax Courts disallowance of the sums of P898976 and P2773266 spent by the taxpayer for the operation of its Balamban coal mines in Cebu in 1950 and 1951 respectively and claimed as losses in the taxpayers returns for said years The Tax Court correctly held that the losses are deductible in 1952 when the mines were abandoned and not in 1950 and 1951 when they were still in operation 9 The taxpayers claim that these expeditions should be allowed as losses for the corresponding years that they were incurredbecause it made no sales of coal during said years since the promised road or outlet through which the coal could be transported from the mines to the provincial road was not constructed cannot be sustained Some definite event must fix the time when the loss is sustained and here it was the event of actual abandonment of the mines in 1952 (d) and (e) Allowance of losses in Hacienda Dalupiri (1950 to 1954) and Hacienda Samal (1951-1952) mdash The Tax Court overruled the Commissioners disallowance of these items of losses thus Petitioner deducted losses in the operation of its Hacienda Dalupiri the sums of P1741895 in 1950 P2912582 in 1951 P2674481 in 1952 P2193262 in 1953 and P4293856 in 1954 These deductions were disallowed by respondent on the ground that the farm was operated solely for pleasure or as ahobby and not for profit This conclusion is based on the fact that the farm was operated continuously at a loss From the evidence we are convinced that the Hacienda Dalupiri was operated by petitioner for business and not pleasure It was mainly a cattle farm although a few race horses were also raised It does not appear that the farm was used by petitioner for entertainment social activities or other nonbusiness purposes Therefore it is entitled to deduct expenses and losses in connection with the operation of said farm (See 1955 PH Fed Taxes Par 13 63 citing GCM 21103 CB 1939- 1 p164) Section 100 of Revenue Regulations No 2 otherwise known as the Income Tax Regulations authorizes farmers to determine their gross income on the basis of inventories Said regulations provide If gross income is ascertained by inventories no deduction can be made for livestock or products lost during 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 quote from the memorandum of counsel for petitioner The Taxpayer deducted from its income tax returns for the years from 1950 to 1954 inclusive the corresponding yearly losses sustained in the operation of Hacienda Dalupiri which losses represent the excess of its yearly expenditures over the receipts that is the losses represent the difference between the sales of livestock and the actual cash disbursements or expenses (Pages 21-22 Memorandum for Petitioner) As the Hacienda Dalupiri was operated by petitioner for business and since it sustained losses in its operation which losses were determined by means of inventories authorized under Section 100 of Revenue Regulations No 2 it was error for respondent to have disallowed the deduction of said losses The same is true with respect to loss sustained in the operation of the Hacienda Samal for the years 1951 and 1952 10 The Commissioner questions that the losses sustained by the taxpayer were properly based on the inventory method of accounting He concedes however that the regulations referred to does not specify how the inventories are to be made The Tax Court however felt satisfied with the evidence presented by the taxpayer which merely consisted of an alleged physical count of the number of the livestock in Hacienda Dalupiri for the years involved 11 The Tax Court was satisfied with the method adopted by the taxpayer as a farmer breeding livestock reporting on the basis of receipts and disbursements We find no Compelling reason to disturb its findings

PLARIDEL SURETY v CIRFacts Petitioner Plaridel Surety amp Insurance Co is a domestic corporation engaged in the bonding business On November 9 1950 petitioner as surety and Constancio San Jose as principal solidarily executed a performance bond in the penal sum of P3060000 in favor of the

P L Galang Machinery Co Inc to secure the performance of San Joses contractual obligation to produce and supply logs to the latter To afford itself adequate protection against loss or damage on the performance bond petitioner required San Jose and one Ramon Cuervo to execute an indemnity agreement obligating themselves solidarily to indemnify petitioner for whatever liability it may incur by reason of said performance bond Accordingly San Jose constituted a chattel mortgage on logging machineries and other movables in petitioners favor1 while Ramon Cuervo executed a real estate mortgage2 San Jose later failed to deliver the logs to Galang Machinery3 and the latter sued on the performance bond On October 1 1952 the Court of First Instance adjudged San Jose and petitioner liable it also directed San Jose and Cuervo to reimburse petitioner for whatever amount it would pay Galang Machinery The Court of Appeals on June 17 1955 affirmed the judgment of the lower court The same judgment waslikewise affirmed by this Court4 on January 11 1957 except for a slight modification apropos the award of attorneys fees In its income tax return for the year 1957 petitioner claimed the saidamount of P4449000 as deductible loss from its gross income and accordingly paid the amount of P13600 as its income tax for 1957 The Commissioner of Internal Revenue disallowed the claimed deduction of P4449000 and assessed against petitioner the sum of P889800 plus interest as deficiency income tax for the year 1957 Petitioner filed its protest which was denied Whereupon appeal was taken to the Tax Court petitioner insisting that the P4449000 which it paid to Galang Machinery was a deductible lossIssue WON the amount Plaridel paid to Galang Machinery is a deductible lossHeld NO There is no question that the year in which the petitioner Insurance Co effected payment to Galang Machinery pursuant to a final decision occurred in 1957 However under the same court decision San Jose and Cuervo were obligated to reimburse petitioner for whateverpayments it would make to Galang Machinery Clearly petitioners loss is compensable otherwise (than by insurance) It should follow then that the loss deduction can not be claimed in 1957 Now petitioners submission is that its case is an exception Citing Cu Unjieng Sons Inc v Board of Tax Appeals6 and American cases also petitioner argues that even if there is a right to compensation by insurance or otherwise the deduction can be taken in the year of actual loss where the possibility of recovery is remote The pronouncement however to this effect in the Cu Unjieng case is not as authoritative as petitioner would have it since it was there found that the taxpayer had no legal right to compensation either by insurance or otherwise7 And the American cases cited8 are not in point None of them involved a taxpayer who had as in the present case obtained a final judgment against third persons for reimbursement of payments made In those cases there was either no legally enforceable right at all or such claimed right was still to be or being litigated On the other hand the rule is that loss deduction will be denied if there is a measurable right to compensation for the loss with ultimate collectionreasonably clear So where there is reasonable ground for reimbursement the taxpayer must seek his redress and may not secure a loss deduction until he establishes that no recovery may be had9 In other words as the Tax Court put it the taxpayer (petitioner) must exhaust his remedies first to recover or reduce his loss But assuming that there was no reasonable expectation of recovery still no loss deduction can be had Sec 30 (d) (2) of the Tax Code requires a charge-off as one of the conditions for loss deduction In the case of a corporation all losses actually sustained and charged-off within the taxable year and not compensated for byinsurance or otherwise Mertens12 states only four (4) requisites because the United StatesInternal Revenue Code of 193913 has no charge-off requirement Sec 23(f) thereof provides merely In the case of a corporation losses sustained during the taxable year and not compensated for by insurance or otherwise Petitioner who had the burden of proof14 failed to adduce evidence that there was a charge-off in connection with the P4449000mdashor P3060000 mdash which it paid to Galang Machinery

CHINA BANKING CORPORATION V COURT OF APPEALSFacts Petitioners mad a 53 equity investment in First CBC Capital (Asia) Limited to the amount of P1622785180 consisting of 106000 shares with par value of P100 per shareSubsequently First CBC was found to be insolvent Petitioners with the approval of the BSP wrote off as worthless its investment in the company and treated it as a bad debt or ordinary loss deductible from its gross income The Commissioner of Internal Revenue disallowed the deduction saying that the investment could not be considered worthless since First CBC could still exercise its financing and investment activities even if it was no longer licensed as a

depository Even assuming that the securities had become worthless it still cannot be considered as a bad debt or expense since there is no indebtedness between petitioner and First CBC It should be classified as a capital lossHeld The SC found in favor of respondents1 Not and indebtedness An equity investment in shares of stock cannot be considered as an indebtedness of First CBC Capital to China Bank The former has no obligation to repay the latter the amount invested The amount China Bank invested in First CBC is in fact anasset2 Capital asset not ordinary Capital assets are defined in the negative by Sec 33(1) of the NIRC as property held by the TP exclusive of items primarily for the sale to customers in the ordinary course of business or property used in trade or business Hence securities such as equity holdings are ordinary assets only in the hands of a dealer or a person actively engaged in trading in the same for his own account3 Section 29(d)(4)(B) of the NIRC treats the worthlessness of the securities held as capital assets as a loss resulting from the sale or exchange of capital assets Strictly speaking no sale occurs when securities held as capital assets become worthless Nonetheless the law treats it as a loss from a sale just the same4 Section 33 of the NIRC provides that the capital loss sustained can only be deducted from any capital gain derived within the taxable year The same provision enumerates assets which are not subject to the said limitation but equity holdings are not one of them

THE CITY LUMBER INC V DOMINGOFacts Respondent Domingo made an assessment on an additional income of petitioners in the amount of P16 67863 coming from 1 the sale of plywood kegs of nails and GI sheets amouting to P 790207 2 a cash credit balance of P789680 Petitioner assails the validity of the assessment alleging that the inventory in question was not sold but were lost to looters during a fire which occurred in the city To 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 was actually a loan secured by petitionersHELDThe assessments were valid 1 The alleged loss of the plywood and kegs of nails was never reported in the books of the petitioner nor in the petitioners ITR for that year Such conduct of the petitioner proves that such loss never occurred 2 Similarly there was neither any record in petitioners books nor any receipt or other piece of evidence to show receipt of the supposed loan

MARCELO STEEL CROP V COLLECTOR OF INTERNAL REVENUEFacts RA 35 granted a four-year tax exemption from all internal revenue taxes to enterprises directly payable by such enterprise or person which shall engage in new and necessary industries Petitioner corporation was engaged in 1 the manufacture of wire fences 2 the manufacture of steel nails 3 the manufacture of steel bars rods and other allied productsof which the last two were covered by RA 35 In 1953 and 1954 petitioner filed its ITR showing a net income of P3438658 and P5832900 respectively derived solely from its wire fence manufacturing business It was accordingly assessed P12750 in taxes which it paid subsequently it filed an amended ITR for the same taxable years showing that it actually incurred a loss of P87140737 and P10495629 respectively The losses were arrived at by consolidating the gross income and the gross allowable deductions of its three industries Petitioner thus filed for a refund of the P12750 it initially paid in taxes on the theory that since it is a corporation organized with a single capital to answer for all its financial obligations the gross income from both tax-exempt and non-exempt industries and its liability should be based on the difference between its consolidated gross income and its consolidated allowable deductionsHeld Petition has no merit Marcelo Steel cannot consolidate 1 The purpose of RA 35 is to encourage the establishment of new and necessary industries for the economic growth of the country In effect it grants a subsidy to entrepreneurs who blaze a trail in a new industry since there are greater risks involved in the same and an ROI is usually not immediately forthcoming As such a tax exemption granted to an entrepreneur engaged in a tax-exempt industry cannot be extended to benefit non-exempt industries in which the same entrepreneur is concurrently

engaged The justification is simply not there since such industries are presumably already deriving profits from its operations 2 Single capital - The fact that all three industries are organized under a single capital is of no moment It is clear that the law intended that tax exemptand non-exempt industries be treated separately as reflected in EO 341 series 0f 1950 which was incorporated in RA 901 a later incarnation of the same lawPHILIPPINE SUGAR ESTATE CORP V COLLECTOR OF INTERNALREVENUEFacts Petitioner owned shares of stock in several different companies and 154 liberty bonds at par 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 inclusiveof the sums above-stated for which it was assessed an amount in taxes It paid said amount without protest Subsequently petitioner filed a demand for refund In the letter-demand the ground for the refund invoked was the illegality o the collection since the dividends and interest were exempt from payment of income tax Although in the present petition the ground invoked is that the income tax on dividends had already been paid at the source Respondent denied the claim for refund because plaintiff failed to lodge a protest concurrently when it paid its tax liability as per Sec 1579 of the Revised Administrative Code as amended by Act No 3685 Plaintiffcountered by saying that the applicable law is Act No 2833 which requires no protest In addition it invoked the ruling in Fox v Edwards wherein it was ruled that any unduly paid income tax may be refunded without the necessity of a protestHeld The SC found in favor of the Collector1Controlling law - There is no need to distinguish between the two laws in this case Section 19 of Act 2833 provides that all administrative special and general provisions of law including laws in relation to the assessment remission collection and refund of internal revenue taxesnot hereto fore repealed and not inconsistent withthis Law areapplicableto this Law By virtue of this saving clause Section 1579 of the Revised Administrative Code finds application to Act 28332 Fox v Edwards is not controlling since the law specifically applied therein did not require the lodging of a protest concurrently with the payment for a TP to retain such right to protest (NOTE fr digester I did not find anything on losses or bad debts in this case I may have overlooked it)

DEDUCTIONS AND EXEPTIONS ALLOWABLE DEDUCTIONS BADDEBTSPHILIPPINE REFINING COMPANY V COURT OF APPEALSFacts In 1985 petitioner filed its ITR where it claimed 16 items amounting to P71307093 as bad debts and therefor deductible Subsequently the Commissioner for Internal Revenue disallowed such deductions and assessed petitioner to pay a deficiency tax for the year of 1985 Petitioner paid the deficiency tax under protest which the Commissioner deniedUpon a petition for review the CTA modified the findings of the Commissioner by reducing the deficiency tax assessment on the basis that three of the sixteen supposed bad debts could be allowed as deductions The CA later on agreed with the CTAHeld The SC upheld the ruling of the CA which it found to be in accordance with the SCs ruling in Collector v Goodrich It held the petitioner failed to substantiate the ldquoworthlessnessrdquo of the 13 debts which it claimed as deductions As per the ruling in Collector v Goodrich to qualify as a bad debt a TP must show 1 that there is a valid and subsisting debt2 that the debt must be actually ascertained to be worthless and uncollectible durring the taxable year3 the debt must be charged off during the taxable year and4 the debt must arise from the business or trade of the TPIn addition the Court said before a debt can be considered worthless the TP must also show that it is indeed uncollectible even in the future Furthermore the TP must undertake several steps to prove that he exerted diligent efforts to collect the debt1 sending statements of accounts to the debtors 2 sending of collection letters 3 giving the account to a lawyer for collection and4 filing a collection case in court In the case at bar the petitioner miserably failed to show any of the foregoing The only piece of evidence it offered to show the worthlessness of the debts was the testimony of the companys financial adviser or accountant The Court found that this lacked the required probity to establish that the accounts it claimed as bad debts were indeed

worthless Apart from such testimony the petitioner failed to introduce even a single iota of evidence to bolster its claim of worthlessness (NOTE In the rest of the case the Court presents the allegation of the petitioner as to why it could not collect on any of the 13 debts followed bya statement how the petitioner failed to introduce evidence to substantiate such allegation)

Collector of Internal Revenue v Goodrich International Rubber Co(21 SCRA 1336 No L-22265)Facts In 1951 and 1952 respondent Goodrich filed it ITR in which it claimed an aggregate amount (consisting of 18 individual accounts) of P5045541 as deductible for being bad debts The Collector of Internal Revenue disallowed the deductions and accordingly assessed Goodrich accordingly Goodrich protested the assessment and subsequently filed an appealwith the CTA which allowed the deductions for bad debts Hence this appeal by the GovernmentHeld Petition is partially meritorious Some of the items claimed by Goodrich can rightfully be written off as bad debts The SC rejected the claim for deduction of 10 items because Goodrichfailed to establish that that the debts were actually worthless or that it had reasonable grounds to believe them to be so in 1951 The law permits the deduction of debts ldquoactually ascertained to be worthless within the taxable yearrdquo obviously to prevent arbitrary action by the TP to unduly avoid tax liability Good faith on the part of the TP is not enough He must furthermore show that he had reasonably investigated the relevant facts and had drawn a reasonable inference from the information 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 actually made (some in full) after they had been characterized as bad debts and written off The Court however ruled that 8 of the 18 claimed bad debts can beallowed as deductions Common among these 8 was the action of Goodrich in persistently demanding payment from its debtors its endorsement of the accounts to counsel for collection the pursuit of legal remedies for the collection on these debts and the continuing failureclear inability of the debtors to pay off their obligations

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSDEPRECIATIONBASILAN ESTATES INC v CIRFacts Basilan Estates Inc claimed deductions for the depreciation of its assets on the basis of their acquisition cost As of January 1 1950 it changed the depreciable value of said assets by increasing it to conform with the increase in cost for their replacement Accordingly from 1950 to1953 it deducted from gross income the value of depreciation computed on the reappraised value CIR disallowed the deductions claimed by petitioner consequently assessing the latter of deficiency income taxesIssueWhether or not the depreciation shall be determined on the acquisition cost rather than the reappraised value of the assetsHeld Yes The following tax law provision allows a deduction from gross income for depreciation but limits the recovery to the capital invested in the asset being depreciated (1)In general mdash A reasonable allowance for deterioration of property arising out of its use or employment in the business or trade or out of its not being used Provided That when the allowance authorized under this subsection shall equal the capital invested by the taxpayer no further allowance shall be made The income tax law does not authorize the depreciation of an asset beyond its acquisition cost Hence a deduction over and above such cost cannot be claimed and allowed The reason is that deductions from gross income are privileges not matters of right They are not created by implication but upon clear expression in the law Depreciation is the gradual diminution in the useful value of tangible property resulting from wear and tear and normal obsolescense It commences with the acquisition of the property and its owner is not bound to see his property gradually waste without making provision out of earnings for its replacement The recovery free of income tax of an amount more than the invested capital in an asset will transgress the underlying purpose of a depreciation allowance For then what the taxpayer would recover will be not only the acquisition cost but also some profit Recovery in due time thru depreciation of investment made is the philosophy behind depreciation allowance the idea of profit on the investment made has never been the underlying reason for the allowance of a deduction for depreciation

Zamora v CIRFacts These are 4 cases regarding deficiency income taxes allegedly incurred by the ZamorasCases Nos L-15290 and L-15280Mariano Zamora owner of the Bay View Hotel and Farmacia Zamora Manila filed his income tax returns the years 1951 and 1952 The Collector of Internal Revenue found that he failed to file his return of the capital gains derived from the sale of certain real properties and claimed deductions which were not allowable The CTA reduced the sum due Zamora and on appeal petitioner alleged that the CTA erred in disallowing the promotion expenses incurred by his wife for promotion of the above businesses depreciation of the Bayview Hotel Bldg and in applying the Ballantyne scale of values for determining the cost of his Manila property The CIR on the other hand claimed that the CTA erred in reducing the amounts and giving credence to the uncorroborated testimony of Mariano Zamora that he bought the said real property in question during the Japanese occupation partly in Philippine currency and partly in Japanese war notes Cases Nos L-15289 and L-15281 Mariano Zamora and his deceased sister Felicidad Zamora bought a piece of land located in Manila on May 16 1944 for P13200000 and sold it for P7500000 on March 5 1951 They also purchased a lot located inQuezon City for P6895900 on January 19 1944 which they sold for P94000 on February 9 1951 The CTA ordered the estate of the late Felicidad Zamora (represented byEsperanza A Zamora as special administratrix of her estate) to pay the sum of P23550 representing alleged deficiency income tax and surcharge due from said estateFirst issue ndash disallowance of the entire promotion expenses incurred by Mrs ZamoraPetitioner The CTA erred in disallowing P1047850 as promotion expenses incurred by his wife for the promotion of the BayView Hotel and Farmacia Zamora He contends that the whole amount of P2095700 as promotion expenses should be allowed and not merely one-half of it on the ground that while not all the itemized expenses are supported by receipts the absence of some supporting receipts has been sufficiently and satisfactorily established - to purchase machinery for a new Tiki-Tiki plant and to observe hotel management in modern hotelsRespondents Mrs Zamora obtained only the sum of P500000 from the Central Bank and that in her application for dollar allocation she stated that she was going abroad on a combined medical and business trip which facts were not denied by Mariano Zamora The alleged expenses were not supported by receipts Mrs Zamora could not even remember how much money she had when she left abroad in 1951 and how the alleged amount of P2095700 was spent There having been no means by which to ascertain which expense was incurred by her inconnection with the business of Mariano Zamora and which was incurred for her personal benefit the respondents considered 50 of the said amount of P2095700 as business expenses and the other 50 as her personal expensesHeld The 50 allocation is very fair to Zamora there being no receipt to explain the alleged business expenses as well as the personal expenses that might have been incurred While in situations like the present absolute certainty is usually no possible the CTA should make as close an approximation as it can bearing heavily if it chooses upon the taxpayer whose inexactness is of his own making Section 30 of the Tax Code provides that in computing net income there shall be allowed as deductions all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business Since promotion expenses constitute one of the deductions in conducting a business same must testify these requirements Claim for the deduction of promotion expenses or entertainment expenses must also be substantiated or supported by record showing in detail the amount and nature of the expenses incurredSecond issue ndash disallowancereduction of the rate of depreciation of Bayview Hotel (from 35 to 25)Petitioner Contends that 1) the Ermita district is becoming a commercial district 2) the hotel has no room for improvement and(3) the changing modes in architecture styles of furniture and decorative designs must meet the taste of a fickle public Alsothe reference to Bulletin F a publication by the IRS should have been first proved as law to be subject of judicial noticeHeld The CTA was approximately correct in holding that the rate of depreciation must be 25 An average hotel buildingrsquos estimated useful life is 5 years but inasmuch as it also depends on the use and location change in population and other it is allowed a deprecation rate of 25 which corresponds to a useful life of 40 years It is true that Bulletin F has no binding force but it has a strong persuasive effect considering that the same has been the result of scientific studies

and observation for a long period in the United States after whose Income Tax Law ours is patterned Verily courts are permitted to look into and investigate the antecedents or the legislative history of the statutes involvedThird issue-the undeclared capital gains derived from the sales in 1951 of certain real properties in Malate Manila and in Quezon City acquired during the Japanese occupationHeld The CTArsquos appraisal in this case is correct Consequently the total undeclared income of petitioners derived from the sales of the Manila and Quezon City properties in 1951 is P1711175 (P175000 plus P1536175) 50 of which in the sum of P855588 is taxable the said properties being capital assets held for more than one year The cost basis of property acquired in Japanese war notes is the equivalent of the war notes in genuine Philippine currency in accordance with the Ballantyne Scale 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 P13200000 was not entirely paid in Japanese War notes but frac12 thereof or P6600000 was in Philippine currency This being the case the Ballantyne Scale of values which was the resultof an impartial scientific study adopted and given judicial recognition should be applied As the value of the Japanese war notes in May 1944 when the Manila property was bought was 1 frac12 of the genuine Philippine Peso (Ballantyne Scale) and since the gain derived or loss sustained inthe disposition of this property is to reckoned in terms of Philippine Peso the value of the Japanese war notes used in the purchase of the property must be reduced in terms of the genuine Philippine Peso to determine the cost of acquisition It therefore results that since the sum of P6600000 in Japanese war notes in May 1944 is equivalent to P550000 in Philippine currency (P6600000 divided by 12) the acquisition cost of the property in question is P6600000 plus P550000 or P7150000 and that as the property was sold for P7500000 in 1951 the owners thereof Mariano and Felicidad Zamora derived a capital gain of P350000or P175000 each For the Quezon City property the CTA was correct in giving credence toZamorarsquos testimony that the same was purchased inPhilippine currency because it is quite incredible that real property with an assessed value of P4691000 should have been soldin Japanese war notes with an equivalent value in Philippine currency of only P1723975 Thus the gain derived from the sale isP1536175 after deducting from the selling price the cost of acquisition in the sum of P6895900 and the expense of sale in the sum of P967925Disposition The petitions are dismissed and the decision appealed from is affirmed

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSDEPLETIONCONSOLIDATED MINES V CTAFacts Cosolidated Mines filed a refund for overpayments of income taxes for the year 1951 However after investigation of the BIR instead of having a refund the company was instead assessed for deficiency income taxes for the years 1953 1954 and 1956 with 5 surchargeand 1 monthly interest According to the investigation (A) for the years 1951 to 1954 (1) the Company had not accrued as an expense the share in the company profits of Benguet Consolidated Mines as operator of the Consolidateds mines although for income tax purposes the Consolidated had reported income and expenses on the accrual basis (2) depletion and depreciation expenses had been overcharged and (3) the claims for audit and legal fees and miscellaneous expenses for 1953 and 1954 had not been properly substantiated and that (B) for the year 1956 (1) the Company had overstated its claim for depletion and (2) certain claims for miscellaneous expenses were not duly supported by evidence Background info Consolidated and Benguet entered into a development agreement whereby Consolidated as the owner of several mining claims allowed Benguet to explore develop mine concentrate andmarket the ore in the mining claims In the agreement it was provided that benguet is to provide the funds necessary for the expenses until such time the properties are on a profit producing basis to be reimbursed by consolidated Once profit is derived expenditures from its own resources shall be charged against the subsequent gross income of the properties During the time Benguet is being reimbursed for all its expenditures the net profits resulting from the operation of the claims shall be divided 90 to Benguet and 10 to Consolidated Such division of net profits shall be based on the receipts and expenditures during each calendar year and

shall continue until such time as the 90 of the net profits pertaining to Benguet hereunder shall equal the amount of such expenditures ldquoAfter Benguet has been fully reimbursed for its expenditures the net profits from the operation shall be divided between Benguet and Consolidated share and share alike it being understood however that the net profits as the term is used in this agreement shall be computed by deducting from gross income all operating expenses and all disbursements of any nature whatsoever as may be made in order to carry out the terms of this agreementrdquo It appears that by 1953 Benguet had completely recouped its advances because they were then dividing the profits share and share alike Consolidated used the accrual method of accounting in computing its income One of its expenses is the amount-paid to Benguet as mine operator which amount is computed as 50 of ldquonet incomerdquo TheConsolidated deducts as an expense 50 of cash receipts minus disbursements but does not deduct at the end of each calendar year what the Commissioner alleges is 50 of the share of Benguet in the accounts receivable However it deducts Benguets 50 if and when the accounts receivable are actually paid It would seem therefore that Consolidated has been deducting a portion of this expense (Benguets share as mine operator) on the cash amp carry basis The question is whether or not the accounting system used by Consolidated justifies such a treatment of this item and if not whether said method used by Consolidated and characterized by the Commissioner as a hybrid method may be allowed under the provisions of the NIRCIssue WON Consolidatedrsquos accounting method is allowedHeld YES It is said that accounting methods for tax purposes comprise a set of rules for determining when and how to report income and deductions The US Internal Revenue Code allows each taxpayer to adopt the accounting method most suitable to his business and requires only that taxable income generally be based on the method of accounting regularly employed in keeping the taxpayers books provided that the method clearly reflects incomeA deduction cannot be accrued until an actual liability is incurred even if payment has not been made Here we have to distinguish between (1) the method of accounting used by Consolidated in determining its net income for tax purposes and (2) the method of computation agreed upon between Consolidated and 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 were cash receipts and cash payments Once determined in accordance with the stipulated bases and procedure then the amount due Benguet for each month accrued at the end of that month whether Consolidated had made payment or not To make Consolidated deduct as an expense one-half of the Accounts Receivable would in effect be equivalent to giving Benguet a right which it did not have under the contract and to substitute for the parties choice a mode of computation of compensationnot contemplated by themON DEPLETIONThe first issue raised by Consolidated is with respect to the rate of mine depletion used by the Court of Tax Appeals The Tax Code provides that in computing net income there shall be allowed as deduction in the case of mines a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof which has been mined and sold during the year for which the return is made [Sec 30(g) (1) (B)] As an income tax concept depletion is wholly a creation of the statute mdash ldquosolely a matter of legislative gracerdquo Hence the taxpayer has the burden of justifying the allowance of any deduction claimed As in connectionwith all other tax controversies the burden of proof to show that a disallowance of depletion by the Commissioner is incorrect or that an allowance made is inadequate is upon the taxpayer and this is true with respect to the value of the property constituting the basis of the deduction This burden-of-proof rule has been frequently applied and a value claimed has been disallowed for lack of evidence Here SC considered the evidence presented (testimony of Eligio Garciaand the Report to Stockholders (which includes the Balance Sheet as of 1946) geological report on the estimated amount of ore in the claims etc) it set forth a very detailed computation of the depletion rate determining the value of each component of the formula of depletion viz Rate of Depletion Per Unit = Cost of Mine Property Estimated ore Deposit of Product Mined and sold- depletion is different from depreciation In determining the amount of cost depletion allowable the following three facts are essential namely (1) the basis of the property (2) the estimated total recoverable units in the property and (3) the number of units recovered during the taxable year in question As used as an element in cost depletion basis means the dollar amount of the

taxpayers capital or investment in the property which he is entitled to recover tax free during the period he is removing the mineral in the depositDisposition Decision modifiedFootnotes in the case that are helpful While taxable income is based on the method of accounting used by the taxpayer it will almost always differ from accounting income This is sobecause of a fundamental difference in the ends the two concepts serve Accounting attempts to match cost against revenue Tax law is aimed at collecting revenue It is quick to treat an item as income slow to recognize deductions or losses Thus the tax law will not recognize deductions for contingent future losses except in very limited situations Good accounting on the other hand their recognition Once this fundamental difference in approach is accepted income tax accounting methods can be understood more easily 33 Am Jur 2d 688 Under the accrual system income is accruable in the year in which the taxpayers right thereto becomes fixed and definite even though it may not be actually received until a later year while a deduction for a liability is to be accrued and taken when the liability becomes fixed and certain even though it may not be paid until a later year It has been held that the basis of the accrual system of accounting is that obligations incurred in the normal course of business will be discharged in due course that the deductions have been paid or accrued or paid and incurred but in order to be accruable in the taxable year a valid obligation upon which the profit (or loss in the case 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 expend money constituting a deductible loss is the date that fixes liability Gain or loss may not said to be fixed or accrued when the obligation is contingent upon the happening of a future event No duty or liability to pay an income tax upon a transaction arises until the taxable year in which the event constituting the condition precedent occurs under any system ofaccounting

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSCHARITABLE AND OTHER CONTRIBUTIONSROXAS v CTA GR No L-25043 April 26 1968Facts Don Pedro Roxas and Dona Carmen Ayala Spanish subjects transmitted to their grandchildren by hereditary succession several properties To manage the above-mentioned properties said children namely Antonio Roxas Eduardo Roxas and Jose Roxas formed apartnership called Roxas y Compania At the conclusion of the WW2 the tenants who have all been tilling the lands in Nasugbu for generations expressed their desire to purchase from Roxas y Cia the parcels which they actually occupied For its part the Government in consonance with the constitutional mandate to acquire big landed estates and apportion them among landless tenants-farmers persuaded the Roxas brothers to part with their landholdings Conferences were held with the farmers in the early part of 1948 and finally the Roxas brothers agreed to sell 13500 hectares to the Government for distribution to actual occupants for a price of P207904847 plus P30000000 for survey and subdivision expenses It turned out however that the Government did not have funds to cover the purchase price and so a special arrangement was made for the Rehabilitation Finance Corporation to advance to Roxas y Cia The amount of P150000000 as loan Collateral for such loan were the lands proposed to be sold to the farmers Under the arrangement Roxas y Cia allowed the farmers to buy the lands for the same price but by installment and contracted with the Rehabilitation Finance Corporationto pay its loan from the proceeds of the yearly amortizations paid by the farmers The CIR demanded from Roxas y Cia the payment of deficiency income taxes resulting from the inclusion as income of Roxas y Cia of the unreported 50 of the net profits for 1953 and 1955 derived from the sale of the Nasugbu farm lands to the tenants and the disallowance of deductions from gross income of various business expenses and contributions claimed by Roxas y Cia and the Roxas brothers For the reason that Roxas y Cia subdivided its Nasugbu farm lands and soldthem to the farmers on installment the Commissioner considered the partnership as engaged in the business of real estate hence 100 of the profits derived therefrom was taxed The Roxas brothers protested the assessment but inasmuch as said protest was denied they instituted an appeal in the CTA which sustained the assessment Hence this appealIssue Is Roxas y Cia liable for the payment of deficiency income for the sale of Nasugbu farmlandsHeld NO The proposition of the CIR cannot be favorably accepted in this isolated transaction with its peculiar circumstances in spite of the fact that there were hundreds of vendees Although

they paid for their respective holdings in installment for a period of 10 years it would nevertheless not make the vendor Roxas y Cia a real estate dealer during the 10-year amortization period It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled them for generations was not only in consonance with but more in obedience to the request and pursuant to the policy of our Government to allocate lands to the landless It was the bounden duty of the Government to pay the agreed compensation after it had persuaded Roxas y Cia to sell its haciendas and to subsequently subdivide them among the farmers at very reasonable terms and prices However the Government could not comply with its duty for lack of funds Obligingly Roxas y Cia shouldered the Governments burden went out of its way and sold lands directly to the farmers in the same way and under the same terms as would have been the case had the Government done it itself For this magnanimous act the municipal council of Nasugbu passed a resolution expressing the peoples gratitudeIn fine Roxas y Cia cannot be considered a real estate dealer for the sale in question Hence pursuant to Section 34 of the Tax Code the lands sold to the farmers are capital assets and the gain derived from the sale thereof is capital gain taxable only to the extent of 50

DEDUCTIONS AND EXEMPTIONS NON-DEDUCTIBLE EXPENSECIR v JAMIRFacts For the year 1954 Alberto M K Jamir declared a gross income of P7585865 and claimed deductions aggregating P5813450 thereby showing a net income of P1777415 upon which he paid P1634 as income tax The Collector of Internal Revenue however assessed asdeficiency income tax due from him the sum of P16395 Jamir appealed to the Court of Tax Appeals which reduced the amount due as deficiency income tax to P55200Issue Whether Jamir had an undeclared income for the year 1954 aggregating P3127491Held No It appears that by using the so-called expenditures method the Government considered as an undeclared income Jamirs expenditures for February and May were in excess of his reported income for the same months Although the Court of Tax Appeals in effect sanctioned the adoption of the expenditures method it held that the same should be applied by deducting the aggregate yearly expenditures from the declared yearly income not the expenditures incurred each month from the declared income therefor In the case at bar Jamirs total income for the year 1954 (P7585865) exceeded (Pl777415) the total deductions (P5813450) claimed by him Jamir introduced evidence that the said sums of P128124 andP2999367 represented advances made to him by customers in the months of February and may 1954 and that the income derived from the corresponding transactions were entered in his books of account in subsequent months and this explanation was found by the Court of Tax Appeals to have been proven satisfactorily The next question raised by appellant refers to Jamirs claim for car depreciation and salary of his driver Although petitioner had disallowed one-half (12) of these claims it appearing that the car was used by Jamir for personal and business purposes the lower court allowed as deductions three-fourths (34) of said amounts the car having been used by Jamir more for business than for personal purpose Petitionerassails this as an error but considering the circumstances we agree with the deduction of frac34 by the lower court It is next urged that Jamir committed fraud and the 50 surcharge should not have been eliminated But since Jamir did not have the undeclared income of P3127491 upon which the contested assessment is mainly based it follows necessarily that he was not guiltyof the fraud and that the 50 surcharge has been properly eliminatedDisposition the decision appealed from is hereby affirmed

Atlas Consolidated Mining v CIRFacts CIR assessed Atlas deficiency income tax for 1957 to 1958 which amounted to morethan P700K CIR asserted that in 1957 Atlas was still not entitled to exemption fromthe income tax under RA 909 because the same covers only gold mines and Atlas isnot engaged in that Atlasprotested before the Sec of Finance and Sec ruled that exemption provided in RA 909 embraces all new 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 disallowance of the following items transfer agent1048576s fees stockholders relation service fee US stock listing expenses suit expenses provision for contingency CTA disallowed the items except the stockholders relation service fee and suit expenses Also CTA ruled that the exemption from payment of the corporate income tax of Atlas

was good only up to the first quarter of 1958 hence it computed for its net taxable income for the remaining frac34 of the year Atlas appealed asserting that the annual public relations expense is a deductible expense from gross income because it is an ordinary and necessarybusiness expenseIssue WON this fee paid for the services rendered by a public relations firm in the US labeled as stockholders relation service fee is an allowable deductionHeld 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 that deduction is authorized and must be able to prove that he is entitled to the deduction which the law allows As previously adverted to the law allowing expenses as deduction from gross income for purposes of the income tax is Section 30 (a) (1) of the National Internal Revenue which allows a deduction of all the ordinary and necessary expenses paid orincurred during the taxable year in carrying on any trade or business An item of expenditure in order to be deductible under this section of the statute must fall squarely within its language We come then to the statutory test of deductibility where it is axiomatic that to be deductible as a business expense three conditions are imposed namely (1) the expense must be ordinary and necessary (2) it must be paid or incurred within the taxable year and (3) it must be paid or incurred in carrying in a trade or business In addition not only must the taxpayer meet thebusiness test he must substantially prove by evidence or records the deductions claimed under the law otherwise the same will be disallowed The mere allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its deduction Assuming that the expenditure is ordinary and necessary in the operation of the taxpayers business the answer to the question as to whether the expenditure is an allowable deduction as a business expense must be determined from the nature of the expenditure itself which in turn depends on the extent and permanency of the work accomplished by the expenditure The expenditure of P2552314 paid to PK Macker amp Co as compensation for services carrying on the selling campaign in an effort to sell Atlas additional capital stock of P3325000 is not an ordinaryexpense in line with the decision of US Board of Tax Appeals in the case of Harrisburg Hospital Inc vs Commissioner of Internal Revenue Accordingly as found by the Court of Tax Appeals the said expense is not deductible from Atlas gross income in 1958 because expenses relating to 1) recapitalization and reorganization of the corporation 2) the cost of obtaining stock subscription 3)promotion expenses and 4) commission or fees paid for the sale of stock reorganization are capital expenditures The burden of proof that the expenses incurred are ordinary and necessary is onthe taxpayer The claimed business expense must also be supported by appropriate documents such as invoices official receipts and contracts to be made available in case of a tax audit by the Bureau of Internal Revenue

GANCAYCO V COLLECTORFacts1048576 Gancayco filed his Income tax Return (ITR) for 19491048576 CIR notified him that his liability is Php 979362 which he paid 19501048576 CIR after a year wrote to Gancayco saying that there was tax due from him for a total of Php 29554051048576 Gancayco asked for reconsideration and the tax assessed wasreduced1048576 CIR issued a warrant of distraint for the deficient liability1048576 Gancayco filed petition with CTACTA Required Gancayco to pay Php 16 86031 for tax deficiency in1949Gancayco the right to collect the deficiency income tax is barred by thestatute of limitations the 5 yr period for judicial action should be counted from May 12 50 the date of original assessment SC Section 316 provides The civil remedies for the collection of internal revenue taxes fees or charges and any increment thereto resulting from delinquency shall be (a) by distraint of goods chattels or effects and other personal property of whatever character including stocks and other securities debts credits bank accounts and interest in and rights to personal property and by levy upon real property and (b) by judicial action Either of these remedies or both simultaneously may be pursued in the discretion of the authorities charged with the collection of such taxes No exemption shall be allowed against the internal revenue taxes in any case

Deduction for expenses may be allowed however in this case Gancayco was not able to prove any expense as there were no receipts or other proofs CTA AFFIRMED

DEDUCTIONS AND EXEMPTIONS NON-DEDUCTIBLE EXPENSESILLEGAL EXPENSESCALANOC V COLLECTORFacts1048576 Calanoc was authorized to solicit and receive contributions for the orphans and destitute kids of the Child Welfare Workers Club of the Social Welfare Commission1048576 Dec 1949 Calanoc financed and promoted a boxing exhibition at the Rizal Memorial Stadium for said charitable purpose1048576 He applied for exemption from payment of the amusement tax as provided in Sec 260 NIRC1048576 CIR investigated the tax case of Calanoc and it was found that there was gross sale of Php 26553 expenditure of 25157 and profit of 1375301048576 Profit was remitted to Social Welfare Commission1048576 CIR demanded Calanoc oto pay 5331048576 Sec of Finance denied the application of Calanoc for exemption from payment of amusement taxCTA Affirmed the assessment of 7k Calanoc denies receving a stadium fee of 1k Although it was shown that 1k was paid by O-OSO Beverages His accountant is dead SC the items of expenditures for deduction are exorbitant and not supported by receiptsCTA Affirmed

3M PHILIPPINES INC petitioner vs COMMISSIONER OFINTERNAL REVENUE respondent [GR No 82833 September 261988]Facts The petitioner claimed as deductions for income tax purposes business expenses in the form of royalty payments to its foreign licensor which the respondent Commissioner of Internal Revenue disallowed The petitioner claimed the following deductions royalties and technical service fees and pre-operational cost of tape coater The amount was not allowed as entire deduction The petitioner argues that the law applicable to its case is only Section 29(a)(1) of the Tax Code and not Circular No 393 of the Central BankIssue WON the royalty payments are valid deductible expense WON the Tax Code is applicableHeld No Although the Tax Code allows payments of royalty to be deducted from gross income as business expenses it is CB Circular No 393 that defines what royalty payments are proper Improper payments of royalty are not deductible as legitimate business expenses Section 3-c of CB Circular No 393 provides for payment of royalties only on commodities manufactured by the licensee under the royalty agreement not on the wholesale price of finished products imported by the licensee from the licensor entral Bank Circulars like CB Circular No 393 (dated December 7 1973 published in the Official Gazette issue of December 17 1973 [69 OG No 51 p 11737] issued by the Central Bank in the exercise of fits authority under the Central Bank Act duly published in the Official Gazette have the force and effect of law (Cases cited) andbinding on everybody

DEDUCTIONS AND EXEMPTIONS PERSONAL EXEMPTIONSCOLLECTOR OF INTERNAL REVENUE petitioner vs ORLANDO VCALSADO and COURT OF TAX APPEALS respondents [GR 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 supportIssue WON the respondent is classified as head of the familyHeld 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 Php50000

In the matter of the adoption of the minor MARCIAL ELEUTERIO RESABA LUIS SANTOS-YNtildeIGO and LIGIA MIGUEL DE SANTOSYNtildeIGO petitioners-appellees vs REPUBLIC OF THE PHILIPPINES oppositor-appellantTAX ON CORPORATIONS BASES AND RATESRESIDENT FOREIGN CORPORATIONS TAXABLE INCOME [GRNo 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 minorIssue WON the adoption is validHeld 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 suchagreement 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 bymarriage 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 childrenwith 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 or main support Partial support not amounting to chief support will not entitle the taxpayer to claim exemption as a head of a family Regulation No section 11

was no obligation to repay those advances It has been held that the voluntary advances made without expectation of repayment do not result in deductible losses The Tax Courts is allowance of the write-off was proper The Solicitor General has rightly pointed out that the taxpayer has taken an ambiguous position and has not definitely taken a stand on whetherthe amount involved is claimed as losses or as bad debts but insists that it is either a loss or a bad debt 4 We sustain the governments position that the advances made by the taxpayer to its 100 subsidiary Palawan Manganese Mines Inc amounting to P58730807 as of 1951 wereinvestments and not loans 5 (c) Disallowance of losses in Balamban Coal Mines (1950 and1951) mdash The Court sustains the Tax Courts disallowance of the sums of P898976 and P2773266 spent by the taxpayer for the operation of its Balamban coal mines in Cebu in 1950 and 1951 respectively and claimed as losses in the taxpayers returns for said years The Tax Court correctly held that the losses are deductible in 1952 when the mines were abandoned and not in 1950 and 1951 when they were still in operation 9 The taxpayers claim that these expeditions should be allowed as losses for the corresponding years that they were incurredbecause it made no sales of coal during said years since the promised road or outlet through which the coal could be transported from the mines to the provincial road was not constructed cannot be sustained Some definite event must fix the time when the loss is sustained and here it was the event of actual abandonment of the mines in 1952 (d) and (e) Allowance of losses in Hacienda Dalupiri (1950 to 1954) and Hacienda Samal (1951-1952) mdash The Tax Court overruled the Commissioners disallowance of these items of losses thus Petitioner deducted losses in the operation of its Hacienda Dalupiri the sums of P1741895 in 1950 P2912582 in 1951 P2674481 in 1952 P2193262 in 1953 and P4293856 in 1954 These deductions were disallowed by respondent on the ground that the farm was operated solely for pleasure or as ahobby and not for profit This conclusion is based on the fact that the farm was operated continuously at a loss From the evidence we are convinced that the Hacienda Dalupiri was operated by petitioner for business and not pleasure It was mainly a cattle farm although a few race horses were also raised It does not appear that the farm was used by petitioner for entertainment social activities or other nonbusiness purposes Therefore it is entitled to deduct expenses and losses in connection with the operation of said farm (See 1955 PH Fed Taxes Par 13 63 citing GCM 21103 CB 1939- 1 p164) Section 100 of Revenue Regulations No 2 otherwise known as the Income Tax Regulations authorizes farmers to determine their gross income on the basis of inventories Said regulations provide If gross income is ascertained by inventories no deduction can be made for livestock or products lost during 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 quote from the memorandum of counsel for petitioner The Taxpayer deducted from its income tax returns for the years from 1950 to 1954 inclusive the corresponding yearly losses sustained in the operation of Hacienda Dalupiri which losses represent the excess of its yearly expenditures over the receipts that is the losses represent the difference between the sales of livestock and the actual cash disbursements or expenses (Pages 21-22 Memorandum for Petitioner) As the Hacienda Dalupiri was operated by petitioner for business and since it sustained losses in its operation which losses were determined by means of inventories authorized under Section 100 of Revenue Regulations No 2 it was error for respondent to have disallowed the deduction of said losses The same is true with respect to loss sustained in the operation of the Hacienda Samal for the years 1951 and 1952 10 The Commissioner questions that the losses sustained by the taxpayer were properly based on the inventory method of accounting He concedes however that the regulations referred to does not specify how the inventories are to be made The Tax Court however felt satisfied with the evidence presented by the taxpayer which merely consisted of an alleged physical count of the number of the livestock in Hacienda Dalupiri for the years involved 11 The Tax Court was satisfied with the method adopted by the taxpayer as a farmer breeding livestock reporting on the basis of receipts and disbursements We find no Compelling reason to disturb its findings

PLARIDEL SURETY v CIRFacts Petitioner Plaridel Surety amp Insurance Co is a domestic corporation engaged in the bonding business On November 9 1950 petitioner as surety and Constancio San Jose as principal solidarily executed a performance bond in the penal sum of P3060000 in favor of the

P L Galang Machinery Co Inc to secure the performance of San Joses contractual obligation to produce and supply logs to the latter To afford itself adequate protection against loss or damage on the performance bond petitioner required San Jose and one Ramon Cuervo to execute an indemnity agreement obligating themselves solidarily to indemnify petitioner for whatever liability it may incur by reason of said performance bond Accordingly San Jose constituted a chattel mortgage on logging machineries and other movables in petitioners favor1 while Ramon Cuervo executed a real estate mortgage2 San Jose later failed to deliver the logs to Galang Machinery3 and the latter sued on the performance bond On October 1 1952 the Court of First Instance adjudged San Jose and petitioner liable it also directed San Jose and Cuervo to reimburse petitioner for whatever amount it would pay Galang Machinery The Court of Appeals on June 17 1955 affirmed the judgment of the lower court The same judgment waslikewise affirmed by this Court4 on January 11 1957 except for a slight modification apropos the award of attorneys fees In its income tax return for the year 1957 petitioner claimed the saidamount of P4449000 as deductible loss from its gross income and accordingly paid the amount of P13600 as its income tax for 1957 The Commissioner of Internal Revenue disallowed the claimed deduction of P4449000 and assessed against petitioner the sum of P889800 plus interest as deficiency income tax for the year 1957 Petitioner filed its protest which was denied Whereupon appeal was taken to the Tax Court petitioner insisting that the P4449000 which it paid to Galang Machinery was a deductible lossIssue WON the amount Plaridel paid to Galang Machinery is a deductible lossHeld NO There is no question that the year in which the petitioner Insurance Co effected payment to Galang Machinery pursuant to a final decision occurred in 1957 However under the same court decision San Jose and Cuervo were obligated to reimburse petitioner for whateverpayments it would make to Galang Machinery Clearly petitioners loss is compensable otherwise (than by insurance) It should follow then that the loss deduction can not be claimed in 1957 Now petitioners submission is that its case is an exception Citing Cu Unjieng Sons Inc v Board of Tax Appeals6 and American cases also petitioner argues that even if there is a right to compensation by insurance or otherwise the deduction can be taken in the year of actual loss where the possibility of recovery is remote The pronouncement however to this effect in the Cu Unjieng case is not as authoritative as petitioner would have it since it was there found that the taxpayer had no legal right to compensation either by insurance or otherwise7 And the American cases cited8 are not in point None of them involved a taxpayer who had as in the present case obtained a final judgment against third persons for reimbursement of payments made In those cases there was either no legally enforceable right at all or such claimed right was still to be or being litigated On the other hand the rule is that loss deduction will be denied if there is a measurable right to compensation for the loss with ultimate collectionreasonably clear So where there is reasonable ground for reimbursement the taxpayer must seek his redress and may not secure a loss deduction until he establishes that no recovery may be had9 In other words as the Tax Court put it the taxpayer (petitioner) must exhaust his remedies first to recover or reduce his loss But assuming that there was no reasonable expectation of recovery still no loss deduction can be had Sec 30 (d) (2) of the Tax Code requires a charge-off as one of the conditions for loss deduction In the case of a corporation all losses actually sustained and charged-off within the taxable year and not compensated for byinsurance or otherwise Mertens12 states only four (4) requisites because the United StatesInternal Revenue Code of 193913 has no charge-off requirement Sec 23(f) thereof provides merely In the case of a corporation losses sustained during the taxable year and not compensated for by insurance or otherwise Petitioner who had the burden of proof14 failed to adduce evidence that there was a charge-off in connection with the P4449000mdashor P3060000 mdash which it paid to Galang Machinery

CHINA BANKING CORPORATION V COURT OF APPEALSFacts Petitioners mad a 53 equity investment in First CBC Capital (Asia) Limited to the amount of P1622785180 consisting of 106000 shares with par value of P100 per shareSubsequently First CBC was found to be insolvent Petitioners with the approval of the BSP wrote off as worthless its investment in the company and treated it as a bad debt or ordinary loss deductible from its gross income The Commissioner of Internal Revenue disallowed the deduction saying that the investment could not be considered worthless since First CBC could still exercise its financing and investment activities even if it was no longer licensed as a

depository Even assuming that the securities had become worthless it still cannot be considered as a bad debt or expense since there is no indebtedness between petitioner and First CBC It should be classified as a capital lossHeld The SC found in favor of respondents1 Not and indebtedness An equity investment in shares of stock cannot be considered as an indebtedness of First CBC Capital to China Bank The former has no obligation to repay the latter the amount invested The amount China Bank invested in First CBC is in fact anasset2 Capital asset not ordinary Capital assets are defined in the negative by Sec 33(1) of the NIRC as property held by the TP exclusive of items primarily for the sale to customers in the ordinary course of business or property used in trade or business Hence securities such as equity holdings are ordinary assets only in the hands of a dealer or a person actively engaged in trading in the same for his own account3 Section 29(d)(4)(B) of the NIRC treats the worthlessness of the securities held as capital assets as a loss resulting from the sale or exchange of capital assets Strictly speaking no sale occurs when securities held as capital assets become worthless Nonetheless the law treats it as a loss from a sale just the same4 Section 33 of the NIRC provides that the capital loss sustained can only be deducted from any capital gain derived within the taxable year The same provision enumerates assets which are not subject to the said limitation but equity holdings are not one of them

THE CITY LUMBER INC V DOMINGOFacts Respondent Domingo made an assessment on an additional income of petitioners in the amount of P16 67863 coming from 1 the sale of plywood kegs of nails and GI sheets amouting to P 790207 2 a cash credit balance of P789680 Petitioner assails the validity of the assessment alleging that the inventory in question was not sold but were lost to looters during a fire which occurred in the city To 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 was actually a loan secured by petitionersHELDThe assessments were valid 1 The alleged loss of the plywood and kegs of nails was never reported in the books of the petitioner nor in the petitioners ITR for that year Such conduct of the petitioner proves that such loss never occurred 2 Similarly there was neither any record in petitioners books nor any receipt or other piece of evidence to show receipt of the supposed loan

MARCELO STEEL CROP V COLLECTOR OF INTERNAL REVENUEFacts RA 35 granted a four-year tax exemption from all internal revenue taxes to enterprises directly payable by such enterprise or person which shall engage in new and necessary industries Petitioner corporation was engaged in 1 the manufacture of wire fences 2 the manufacture of steel nails 3 the manufacture of steel bars rods and other allied productsof which the last two were covered by RA 35 In 1953 and 1954 petitioner filed its ITR showing a net income of P3438658 and P5832900 respectively derived solely from its wire fence manufacturing business It was accordingly assessed P12750 in taxes which it paid subsequently it filed an amended ITR for the same taxable years showing that it actually incurred a loss of P87140737 and P10495629 respectively The losses were arrived at by consolidating the gross income and the gross allowable deductions of its three industries Petitioner thus filed for a refund of the P12750 it initially paid in taxes on the theory that since it is a corporation organized with a single capital to answer for all its financial obligations the gross income from both tax-exempt and non-exempt industries and its liability should be based on the difference between its consolidated gross income and its consolidated allowable deductionsHeld Petition has no merit Marcelo Steel cannot consolidate 1 The purpose of RA 35 is to encourage the establishment of new and necessary industries for the economic growth of the country In effect it grants a subsidy to entrepreneurs who blaze a trail in a new industry since there are greater risks involved in the same and an ROI is usually not immediately forthcoming As such a tax exemption granted to an entrepreneur engaged in a tax-exempt industry cannot be extended to benefit non-exempt industries in which the same entrepreneur is concurrently

engaged The justification is simply not there since such industries are presumably already deriving profits from its operations 2 Single capital - The fact that all three industries are organized under a single capital is of no moment It is clear that the law intended that tax exemptand non-exempt industries be treated separately as reflected in EO 341 series 0f 1950 which was incorporated in RA 901 a later incarnation of the same lawPHILIPPINE SUGAR ESTATE CORP V COLLECTOR OF INTERNALREVENUEFacts Petitioner owned shares of stock in several different companies and 154 liberty bonds at par 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 inclusiveof the sums above-stated for which it was assessed an amount in taxes It paid said amount without protest Subsequently petitioner filed a demand for refund In the letter-demand the ground for the refund invoked was the illegality o the collection since the dividends and interest were exempt from payment of income tax Although in the present petition the ground invoked is that the income tax on dividends had already been paid at the source Respondent denied the claim for refund because plaintiff failed to lodge a protest concurrently when it paid its tax liability as per Sec 1579 of the Revised Administrative Code as amended by Act No 3685 Plaintiffcountered by saying that the applicable law is Act No 2833 which requires no protest In addition it invoked the ruling in Fox v Edwards wherein it was ruled that any unduly paid income tax may be refunded without the necessity of a protestHeld The SC found in favor of the Collector1Controlling law - There is no need to distinguish between the two laws in this case Section 19 of Act 2833 provides that all administrative special and general provisions of law including laws in relation to the assessment remission collection and refund of internal revenue taxesnot hereto fore repealed and not inconsistent withthis Law areapplicableto this Law By virtue of this saving clause Section 1579 of the Revised Administrative Code finds application to Act 28332 Fox v Edwards is not controlling since the law specifically applied therein did not require the lodging of a protest concurrently with the payment for a TP to retain such right to protest (NOTE fr digester I did not find anything on losses or bad debts in this case I may have overlooked it)

DEDUCTIONS AND EXEPTIONS ALLOWABLE DEDUCTIONS BADDEBTSPHILIPPINE REFINING COMPANY V COURT OF APPEALSFacts In 1985 petitioner filed its ITR where it claimed 16 items amounting to P71307093 as bad debts and therefor deductible Subsequently the Commissioner for Internal Revenue disallowed such deductions and assessed petitioner to pay a deficiency tax for the year of 1985 Petitioner paid the deficiency tax under protest which the Commissioner deniedUpon a petition for review the CTA modified the findings of the Commissioner by reducing the deficiency tax assessment on the basis that three of the sixteen supposed bad debts could be allowed as deductions The CA later on agreed with the CTAHeld The SC upheld the ruling of the CA which it found to be in accordance with the SCs ruling in Collector v Goodrich It held the petitioner failed to substantiate the ldquoworthlessnessrdquo of the 13 debts which it claimed as deductions As per the ruling in Collector v Goodrich to qualify as a bad debt a TP must show 1 that there is a valid and subsisting debt2 that the debt must be actually ascertained to be worthless and uncollectible durring the taxable year3 the debt must be charged off during the taxable year and4 the debt must arise from the business or trade of the TPIn addition the Court said before a debt can be considered worthless the TP must also show that it is indeed uncollectible even in the future Furthermore the TP must undertake several steps to prove that he exerted diligent efforts to collect the debt1 sending statements of accounts to the debtors 2 sending of collection letters 3 giving the account to a lawyer for collection and4 filing a collection case in court In the case at bar the petitioner miserably failed to show any of the foregoing The only piece of evidence it offered to show the worthlessness of the debts was the testimony of the companys financial adviser or accountant The Court found that this lacked the required probity to establish that the accounts it claimed as bad debts were indeed

worthless Apart from such testimony the petitioner failed to introduce even a single iota of evidence to bolster its claim of worthlessness (NOTE In the rest of the case the Court presents the allegation of the petitioner as to why it could not collect on any of the 13 debts followed bya statement how the petitioner failed to introduce evidence to substantiate such allegation)

Collector of Internal Revenue v Goodrich International Rubber Co(21 SCRA 1336 No L-22265)Facts In 1951 and 1952 respondent Goodrich filed it ITR in which it claimed an aggregate amount (consisting of 18 individual accounts) of P5045541 as deductible for being bad debts The Collector of Internal Revenue disallowed the deductions and accordingly assessed Goodrich accordingly Goodrich protested the assessment and subsequently filed an appealwith the CTA which allowed the deductions for bad debts Hence this appeal by the GovernmentHeld Petition is partially meritorious Some of the items claimed by Goodrich can rightfully be written off as bad debts The SC rejected the claim for deduction of 10 items because Goodrichfailed to establish that that the debts were actually worthless or that it had reasonable grounds to believe them to be so in 1951 The law permits the deduction of debts ldquoactually ascertained to be worthless within the taxable yearrdquo obviously to prevent arbitrary action by the TP to unduly avoid tax liability Good faith on the part of the TP is not enough He must furthermore show that he had reasonably investigated the relevant facts and had drawn a reasonable inference from the information 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 actually made (some in full) after they had been characterized as bad debts and written off The Court however ruled that 8 of the 18 claimed bad debts can beallowed as deductions Common among these 8 was the action of Goodrich in persistently demanding payment from its debtors its endorsement of the accounts to counsel for collection the pursuit of legal remedies for the collection on these debts and the continuing failureclear inability of the debtors to pay off their obligations

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSDEPRECIATIONBASILAN ESTATES INC v CIRFacts Basilan Estates Inc claimed deductions for the depreciation of its assets on the basis of their acquisition cost As of January 1 1950 it changed the depreciable value of said assets by increasing it to conform with the increase in cost for their replacement Accordingly from 1950 to1953 it deducted from gross income the value of depreciation computed on the reappraised value CIR disallowed the deductions claimed by petitioner consequently assessing the latter of deficiency income taxesIssueWhether or not the depreciation shall be determined on the acquisition cost rather than the reappraised value of the assetsHeld Yes The following tax law provision allows a deduction from gross income for depreciation but limits the recovery to the capital invested in the asset being depreciated (1)In general mdash A reasonable allowance for deterioration of property arising out of its use or employment in the business or trade or out of its not being used Provided That when the allowance authorized under this subsection shall equal the capital invested by the taxpayer no further allowance shall be made The income tax law does not authorize the depreciation of an asset beyond its acquisition cost Hence a deduction over and above such cost cannot be claimed and allowed The reason is that deductions from gross income are privileges not matters of right They are not created by implication but upon clear expression in the law Depreciation is the gradual diminution in the useful value of tangible property resulting from wear and tear and normal obsolescense It commences with the acquisition of the property and its owner is not bound to see his property gradually waste without making provision out of earnings for its replacement The recovery free of income tax of an amount more than the invested capital in an asset will transgress the underlying purpose of a depreciation allowance For then what the taxpayer would recover will be not only the acquisition cost but also some profit Recovery in due time thru depreciation of investment made is the philosophy behind depreciation allowance the idea of profit on the investment made has never been the underlying reason for the allowance of a deduction for depreciation

Zamora v CIRFacts These are 4 cases regarding deficiency income taxes allegedly incurred by the ZamorasCases Nos L-15290 and L-15280Mariano Zamora owner of the Bay View Hotel and Farmacia Zamora Manila filed his income tax returns the years 1951 and 1952 The Collector of Internal Revenue found that he failed to file his return of the capital gains derived from the sale of certain real properties and claimed deductions which were not allowable The CTA reduced the sum due Zamora and on appeal petitioner alleged that the CTA erred in disallowing the promotion expenses incurred by his wife for promotion of the above businesses depreciation of the Bayview Hotel Bldg and in applying the Ballantyne scale of values for determining the cost of his Manila property The CIR on the other hand claimed that the CTA erred in reducing the amounts and giving credence to the uncorroborated testimony of Mariano Zamora that he bought the said real property in question during the Japanese occupation partly in Philippine currency and partly in Japanese war notes Cases Nos L-15289 and L-15281 Mariano Zamora and his deceased sister Felicidad Zamora bought a piece of land located in Manila on May 16 1944 for P13200000 and sold it for P7500000 on March 5 1951 They also purchased a lot located inQuezon City for P6895900 on January 19 1944 which they sold for P94000 on February 9 1951 The CTA ordered the estate of the late Felicidad Zamora (represented byEsperanza A Zamora as special administratrix of her estate) to pay the sum of P23550 representing alleged deficiency income tax and surcharge due from said estateFirst issue ndash disallowance of the entire promotion expenses incurred by Mrs ZamoraPetitioner The CTA erred in disallowing P1047850 as promotion expenses incurred by his wife for the promotion of the BayView Hotel and Farmacia Zamora He contends that the whole amount of P2095700 as promotion expenses should be allowed and not merely one-half of it on the ground that while not all the itemized expenses are supported by receipts the absence of some supporting receipts has been sufficiently and satisfactorily established - to purchase machinery for a new Tiki-Tiki plant and to observe hotel management in modern hotelsRespondents Mrs Zamora obtained only the sum of P500000 from the Central Bank and that in her application for dollar allocation she stated that she was going abroad on a combined medical and business trip which facts were not denied by Mariano Zamora The alleged expenses were not supported by receipts Mrs Zamora could not even remember how much money she had when she left abroad in 1951 and how the alleged amount of P2095700 was spent There having been no means by which to ascertain which expense was incurred by her inconnection with the business of Mariano Zamora and which was incurred for her personal benefit the respondents considered 50 of the said amount of P2095700 as business expenses and the other 50 as her personal expensesHeld The 50 allocation is very fair to Zamora there being no receipt to explain the alleged business expenses as well as the personal expenses that might have been incurred While in situations like the present absolute certainty is usually no possible the CTA should make as close an approximation as it can bearing heavily if it chooses upon the taxpayer whose inexactness is of his own making Section 30 of the Tax Code provides that in computing net income there shall be allowed as deductions all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business Since promotion expenses constitute one of the deductions in conducting a business same must testify these requirements Claim for the deduction of promotion expenses or entertainment expenses must also be substantiated or supported by record showing in detail the amount and nature of the expenses incurredSecond issue ndash disallowancereduction of the rate of depreciation of Bayview Hotel (from 35 to 25)Petitioner Contends that 1) the Ermita district is becoming a commercial district 2) the hotel has no room for improvement and(3) the changing modes in architecture styles of furniture and decorative designs must meet the taste of a fickle public Alsothe reference to Bulletin F a publication by the IRS should have been first proved as law to be subject of judicial noticeHeld The CTA was approximately correct in holding that the rate of depreciation must be 25 An average hotel buildingrsquos estimated useful life is 5 years but inasmuch as it also depends on the use and location change in population and other it is allowed a deprecation rate of 25 which corresponds to a useful life of 40 years It is true that Bulletin F has no binding force but it has a strong persuasive effect considering that the same has been the result of scientific studies

and observation for a long period in the United States after whose Income Tax Law ours is patterned Verily courts are permitted to look into and investigate the antecedents or the legislative history of the statutes involvedThird issue-the undeclared capital gains derived from the sales in 1951 of certain real properties in Malate Manila and in Quezon City acquired during the Japanese occupationHeld The CTArsquos appraisal in this case is correct Consequently the total undeclared income of petitioners derived from the sales of the Manila and Quezon City properties in 1951 is P1711175 (P175000 plus P1536175) 50 of which in the sum of P855588 is taxable the said properties being capital assets held for more than one year The cost basis of property acquired in Japanese war notes is the equivalent of the war notes in genuine Philippine currency in accordance with the Ballantyne Scale 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 P13200000 was not entirely paid in Japanese War notes but frac12 thereof or P6600000 was in Philippine currency This being the case the Ballantyne Scale of values which was the resultof an impartial scientific study adopted and given judicial recognition should be applied As the value of the Japanese war notes in May 1944 when the Manila property was bought was 1 frac12 of the genuine Philippine Peso (Ballantyne Scale) and since the gain derived or loss sustained inthe disposition of this property is to reckoned in terms of Philippine Peso the value of the Japanese war notes used in the purchase of the property must be reduced in terms of the genuine Philippine Peso to determine the cost of acquisition It therefore results that since the sum of P6600000 in Japanese war notes in May 1944 is equivalent to P550000 in Philippine currency (P6600000 divided by 12) the acquisition cost of the property in question is P6600000 plus P550000 or P7150000 and that as the property was sold for P7500000 in 1951 the owners thereof Mariano and Felicidad Zamora derived a capital gain of P350000or P175000 each For the Quezon City property the CTA was correct in giving credence toZamorarsquos testimony that the same was purchased inPhilippine currency because it is quite incredible that real property with an assessed value of P4691000 should have been soldin Japanese war notes with an equivalent value in Philippine currency of only P1723975 Thus the gain derived from the sale isP1536175 after deducting from the selling price the cost of acquisition in the sum of P6895900 and the expense of sale in the sum of P967925Disposition The petitions are dismissed and the decision appealed from is affirmed

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSDEPLETIONCONSOLIDATED MINES V CTAFacts Cosolidated Mines filed a refund for overpayments of income taxes for the year 1951 However after investigation of the BIR instead of having a refund the company was instead assessed for deficiency income taxes for the years 1953 1954 and 1956 with 5 surchargeand 1 monthly interest According to the investigation (A) for the years 1951 to 1954 (1) the Company had not accrued as an expense the share in the company profits of Benguet Consolidated Mines as operator of the Consolidateds mines although for income tax purposes the Consolidated had reported income and expenses on the accrual basis (2) depletion and depreciation expenses had been overcharged and (3) the claims for audit and legal fees and miscellaneous expenses for 1953 and 1954 had not been properly substantiated and that (B) for the year 1956 (1) the Company had overstated its claim for depletion and (2) certain claims for miscellaneous expenses were not duly supported by evidence Background info Consolidated and Benguet entered into a development agreement whereby Consolidated as the owner of several mining claims allowed Benguet to explore develop mine concentrate andmarket the ore in the mining claims In the agreement it was provided that benguet is to provide the funds necessary for the expenses until such time the properties are on a profit producing basis to be reimbursed by consolidated Once profit is derived expenditures from its own resources shall be charged against the subsequent gross income of the properties During the time Benguet is being reimbursed for all its expenditures the net profits resulting from the operation of the claims shall be divided 90 to Benguet and 10 to Consolidated Such division of net profits shall be based on the receipts and expenditures during each calendar year and

shall continue until such time as the 90 of the net profits pertaining to Benguet hereunder shall equal the amount of such expenditures ldquoAfter Benguet has been fully reimbursed for its expenditures the net profits from the operation shall be divided between Benguet and Consolidated share and share alike it being understood however that the net profits as the term is used in this agreement shall be computed by deducting from gross income all operating expenses and all disbursements of any nature whatsoever as may be made in order to carry out the terms of this agreementrdquo It appears that by 1953 Benguet had completely recouped its advances because they were then dividing the profits share and share alike Consolidated used the accrual method of accounting in computing its income One of its expenses is the amount-paid to Benguet as mine operator which amount is computed as 50 of ldquonet incomerdquo TheConsolidated deducts as an expense 50 of cash receipts minus disbursements but does not deduct at the end of each calendar year what the Commissioner alleges is 50 of the share of Benguet in the accounts receivable However it deducts Benguets 50 if and when the accounts receivable are actually paid It would seem therefore that Consolidated has been deducting a portion of this expense (Benguets share as mine operator) on the cash amp carry basis The question is whether or not the accounting system used by Consolidated justifies such a treatment of this item and if not whether said method used by Consolidated and characterized by the Commissioner as a hybrid method may be allowed under the provisions of the NIRCIssue WON Consolidatedrsquos accounting method is allowedHeld YES It is said that accounting methods for tax purposes comprise a set of rules for determining when and how to report income and deductions The US Internal Revenue Code allows each taxpayer to adopt the accounting method most suitable to his business and requires only that taxable income generally be based on the method of accounting regularly employed in keeping the taxpayers books provided that the method clearly reflects incomeA deduction cannot be accrued until an actual liability is incurred even if payment has not been made Here we have to distinguish between (1) the method of accounting used by Consolidated in determining its net income for tax purposes and (2) the method of computation agreed upon between Consolidated and 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 were cash receipts and cash payments Once determined in accordance with the stipulated bases and procedure then the amount due Benguet for each month accrued at the end of that month whether Consolidated had made payment or not To make Consolidated deduct as an expense one-half of the Accounts Receivable would in effect be equivalent to giving Benguet a right which it did not have under the contract and to substitute for the parties choice a mode of computation of compensationnot contemplated by themON DEPLETIONThe first issue raised by Consolidated is with respect to the rate of mine depletion used by the Court of Tax Appeals The Tax Code provides that in computing net income there shall be allowed as deduction in the case of mines a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof which has been mined and sold during the year for which the return is made [Sec 30(g) (1) (B)] As an income tax concept depletion is wholly a creation of the statute mdash ldquosolely a matter of legislative gracerdquo Hence the taxpayer has the burden of justifying the allowance of any deduction claimed As in connectionwith all other tax controversies the burden of proof to show that a disallowance of depletion by the Commissioner is incorrect or that an allowance made is inadequate is upon the taxpayer and this is true with respect to the value of the property constituting the basis of the deduction This burden-of-proof rule has been frequently applied and a value claimed has been disallowed for lack of evidence Here SC considered the evidence presented (testimony of Eligio Garciaand the Report to Stockholders (which includes the Balance Sheet as of 1946) geological report on the estimated amount of ore in the claims etc) it set forth a very detailed computation of the depletion rate determining the value of each component of the formula of depletion viz Rate of Depletion Per Unit = Cost of Mine Property Estimated ore Deposit of Product Mined and sold- depletion is different from depreciation In determining the amount of cost depletion allowable the following three facts are essential namely (1) the basis of the property (2) the estimated total recoverable units in the property and (3) the number of units recovered during the taxable year in question As used as an element in cost depletion basis means the dollar amount of the

taxpayers capital or investment in the property which he is entitled to recover tax free during the period he is removing the mineral in the depositDisposition Decision modifiedFootnotes in the case that are helpful While taxable income is based on the method of accounting used by the taxpayer it will almost always differ from accounting income This is sobecause of a fundamental difference in the ends the two concepts serve Accounting attempts to match cost against revenue Tax law is aimed at collecting revenue It is quick to treat an item as income slow to recognize deductions or losses Thus the tax law will not recognize deductions for contingent future losses except in very limited situations Good accounting on the other hand their recognition Once this fundamental difference in approach is accepted income tax accounting methods can be understood more easily 33 Am Jur 2d 688 Under the accrual system income is accruable in the year in which the taxpayers right thereto becomes fixed and definite even though it may not be actually received until a later year while a deduction for a liability is to be accrued and taken when the liability becomes fixed and certain even though it may not be paid until a later year It has been held that the basis of the accrual system of accounting is that obligations incurred in the normal course of business will be discharged in due course that the deductions have been paid or accrued or paid and incurred but in order to be accruable in the taxable year a valid obligation upon which the profit (or loss in the case 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 expend money constituting a deductible loss is the date that fixes liability Gain or loss may not said to be fixed or accrued when the obligation is contingent upon the happening of a future event No duty or liability to pay an income tax upon a transaction arises until the taxable year in which the event constituting the condition precedent occurs under any system ofaccounting

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSCHARITABLE AND OTHER CONTRIBUTIONSROXAS v CTA GR No L-25043 April 26 1968Facts Don Pedro Roxas and Dona Carmen Ayala Spanish subjects transmitted to their grandchildren by hereditary succession several properties To manage the above-mentioned properties said children namely Antonio Roxas Eduardo Roxas and Jose Roxas formed apartnership called Roxas y Compania At the conclusion of the WW2 the tenants who have all been tilling the lands in Nasugbu for generations expressed their desire to purchase from Roxas y Cia the parcels which they actually occupied For its part the Government in consonance with the constitutional mandate to acquire big landed estates and apportion them among landless tenants-farmers persuaded the Roxas brothers to part with their landholdings Conferences were held with the farmers in the early part of 1948 and finally the Roxas brothers agreed to sell 13500 hectares to the Government for distribution to actual occupants for a price of P207904847 plus P30000000 for survey and subdivision expenses It turned out however that the Government did not have funds to cover the purchase price and so a special arrangement was made for the Rehabilitation Finance Corporation to advance to Roxas y Cia The amount of P150000000 as loan Collateral for such loan were the lands proposed to be sold to the farmers Under the arrangement Roxas y Cia allowed the farmers to buy the lands for the same price but by installment and contracted with the Rehabilitation Finance Corporationto pay its loan from the proceeds of the yearly amortizations paid by the farmers The CIR demanded from Roxas y Cia the payment of deficiency income taxes resulting from the inclusion as income of Roxas y Cia of the unreported 50 of the net profits for 1953 and 1955 derived from the sale of the Nasugbu farm lands to the tenants and the disallowance of deductions from gross income of various business expenses and contributions claimed by Roxas y Cia and the Roxas brothers For the reason that Roxas y Cia subdivided its Nasugbu farm lands and soldthem to the farmers on installment the Commissioner considered the partnership as engaged in the business of real estate hence 100 of the profits derived therefrom was taxed The Roxas brothers protested the assessment but inasmuch as said protest was denied they instituted an appeal in the CTA which sustained the assessment Hence this appealIssue Is Roxas y Cia liable for the payment of deficiency income for the sale of Nasugbu farmlandsHeld NO The proposition of the CIR cannot be favorably accepted in this isolated transaction with its peculiar circumstances in spite of the fact that there were hundreds of vendees Although

they paid for their respective holdings in installment for a period of 10 years it would nevertheless not make the vendor Roxas y Cia a real estate dealer during the 10-year amortization period It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled them for generations was not only in consonance with but more in obedience to the request and pursuant to the policy of our Government to allocate lands to the landless It was the bounden duty of the Government to pay the agreed compensation after it had persuaded Roxas y Cia to sell its haciendas and to subsequently subdivide them among the farmers at very reasonable terms and prices However the Government could not comply with its duty for lack of funds Obligingly Roxas y Cia shouldered the Governments burden went out of its way and sold lands directly to the farmers in the same way and under the same terms as would have been the case had the Government done it itself For this magnanimous act the municipal council of Nasugbu passed a resolution expressing the peoples gratitudeIn fine Roxas y Cia cannot be considered a real estate dealer for the sale in question Hence pursuant to Section 34 of the Tax Code the lands sold to the farmers are capital assets and the gain derived from the sale thereof is capital gain taxable only to the extent of 50

DEDUCTIONS AND EXEMPTIONS NON-DEDUCTIBLE EXPENSECIR v JAMIRFacts For the year 1954 Alberto M K Jamir declared a gross income of P7585865 and claimed deductions aggregating P5813450 thereby showing a net income of P1777415 upon which he paid P1634 as income tax The Collector of Internal Revenue however assessed asdeficiency income tax due from him the sum of P16395 Jamir appealed to the Court of Tax Appeals which reduced the amount due as deficiency income tax to P55200Issue Whether Jamir had an undeclared income for the year 1954 aggregating P3127491Held No It appears that by using the so-called expenditures method the Government considered as an undeclared income Jamirs expenditures for February and May were in excess of his reported income for the same months Although the Court of Tax Appeals in effect sanctioned the adoption of the expenditures method it held that the same should be applied by deducting the aggregate yearly expenditures from the declared yearly income not the expenditures incurred each month from the declared income therefor In the case at bar Jamirs total income for the year 1954 (P7585865) exceeded (Pl777415) the total deductions (P5813450) claimed by him Jamir introduced evidence that the said sums of P128124 andP2999367 represented advances made to him by customers in the months of February and may 1954 and that the income derived from the corresponding transactions were entered in his books of account in subsequent months and this explanation was found by the Court of Tax Appeals to have been proven satisfactorily The next question raised by appellant refers to Jamirs claim for car depreciation and salary of his driver Although petitioner had disallowed one-half (12) of these claims it appearing that the car was used by Jamir for personal and business purposes the lower court allowed as deductions three-fourths (34) of said amounts the car having been used by Jamir more for business than for personal purpose Petitionerassails this as an error but considering the circumstances we agree with the deduction of frac34 by the lower court It is next urged that Jamir committed fraud and the 50 surcharge should not have been eliminated But since Jamir did not have the undeclared income of P3127491 upon which the contested assessment is mainly based it follows necessarily that he was not guiltyof the fraud and that the 50 surcharge has been properly eliminatedDisposition the decision appealed from is hereby affirmed

Atlas Consolidated Mining v CIRFacts CIR assessed Atlas deficiency income tax for 1957 to 1958 which amounted to morethan P700K CIR asserted that in 1957 Atlas was still not entitled to exemption fromthe income tax under RA 909 because the same covers only gold mines and Atlas isnot engaged in that Atlasprotested before the Sec of Finance and Sec ruled that exemption provided in RA 909 embraces all new 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 disallowance of the following items transfer agent1048576s fees stockholders relation service fee US stock listing expenses suit expenses provision for contingency CTA disallowed the items except the stockholders relation service fee and suit expenses Also CTA ruled that the exemption from payment of the corporate income tax of Atlas

was good only up to the first quarter of 1958 hence it computed for its net taxable income for the remaining frac34 of the year Atlas appealed asserting that the annual public relations expense is a deductible expense from gross income because it is an ordinary and necessarybusiness expenseIssue WON this fee paid for the services rendered by a public relations firm in the US labeled as stockholders relation service fee is an allowable deductionHeld 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 that deduction is authorized and must be able to prove that he is entitled to the deduction which the law allows As previously adverted to the law allowing expenses as deduction from gross income for purposes of the income tax is Section 30 (a) (1) of the National Internal Revenue which allows a deduction of all the ordinary and necessary expenses paid orincurred during the taxable year in carrying on any trade or business An item of expenditure in order to be deductible under this section of the statute must fall squarely within its language We come then to the statutory test of deductibility where it is axiomatic that to be deductible as a business expense three conditions are imposed namely (1) the expense must be ordinary and necessary (2) it must be paid or incurred within the taxable year and (3) it must be paid or incurred in carrying in a trade or business In addition not only must the taxpayer meet thebusiness test he must substantially prove by evidence or records the deductions claimed under the law otherwise the same will be disallowed The mere allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its deduction Assuming that the expenditure is ordinary and necessary in the operation of the taxpayers business the answer to the question as to whether the expenditure is an allowable deduction as a business expense must be determined from the nature of the expenditure itself which in turn depends on the extent and permanency of the work accomplished by the expenditure The expenditure of P2552314 paid to PK Macker amp Co as compensation for services carrying on the selling campaign in an effort to sell Atlas additional capital stock of P3325000 is not an ordinaryexpense in line with the decision of US Board of Tax Appeals in the case of Harrisburg Hospital Inc vs Commissioner of Internal Revenue Accordingly as found by the Court of Tax Appeals the said expense is not deductible from Atlas gross income in 1958 because expenses relating to 1) recapitalization and reorganization of the corporation 2) the cost of obtaining stock subscription 3)promotion expenses and 4) commission or fees paid for the sale of stock reorganization are capital expenditures The burden of proof that the expenses incurred are ordinary and necessary is onthe taxpayer The claimed business expense must also be supported by appropriate documents such as invoices official receipts and contracts to be made available in case of a tax audit by the Bureau of Internal Revenue

GANCAYCO V COLLECTORFacts1048576 Gancayco filed his Income tax Return (ITR) for 19491048576 CIR notified him that his liability is Php 979362 which he paid 19501048576 CIR after a year wrote to Gancayco saying that there was tax due from him for a total of Php 29554051048576 Gancayco asked for reconsideration and the tax assessed wasreduced1048576 CIR issued a warrant of distraint for the deficient liability1048576 Gancayco filed petition with CTACTA Required Gancayco to pay Php 16 86031 for tax deficiency in1949Gancayco the right to collect the deficiency income tax is barred by thestatute of limitations the 5 yr period for judicial action should be counted from May 12 50 the date of original assessment SC Section 316 provides The civil remedies for the collection of internal revenue taxes fees or charges and any increment thereto resulting from delinquency shall be (a) by distraint of goods chattels or effects and other personal property of whatever character including stocks and other securities debts credits bank accounts and interest in and rights to personal property and by levy upon real property and (b) by judicial action Either of these remedies or both simultaneously may be pursued in the discretion of the authorities charged with the collection of such taxes No exemption shall be allowed against the internal revenue taxes in any case

Deduction for expenses may be allowed however in this case Gancayco was not able to prove any expense as there were no receipts or other proofs CTA AFFIRMED

DEDUCTIONS AND EXEMPTIONS NON-DEDUCTIBLE EXPENSESILLEGAL EXPENSESCALANOC V COLLECTORFacts1048576 Calanoc was authorized to solicit and receive contributions for the orphans and destitute kids of the Child Welfare Workers Club of the Social Welfare Commission1048576 Dec 1949 Calanoc financed and promoted a boxing exhibition at the Rizal Memorial Stadium for said charitable purpose1048576 He applied for exemption from payment of the amusement tax as provided in Sec 260 NIRC1048576 CIR investigated the tax case of Calanoc and it was found that there was gross sale of Php 26553 expenditure of 25157 and profit of 1375301048576 Profit was remitted to Social Welfare Commission1048576 CIR demanded Calanoc oto pay 5331048576 Sec of Finance denied the application of Calanoc for exemption from payment of amusement taxCTA Affirmed the assessment of 7k Calanoc denies receving a stadium fee of 1k Although it was shown that 1k was paid by O-OSO Beverages His accountant is dead SC the items of expenditures for deduction are exorbitant and not supported by receiptsCTA Affirmed

3M PHILIPPINES INC petitioner vs COMMISSIONER OFINTERNAL REVENUE respondent [GR No 82833 September 261988]Facts The petitioner claimed as deductions for income tax purposes business expenses in the form of royalty payments to its foreign licensor which the respondent Commissioner of Internal Revenue disallowed The petitioner claimed the following deductions royalties and technical service fees and pre-operational cost of tape coater The amount was not allowed as entire deduction The petitioner argues that the law applicable to its case is only Section 29(a)(1) of the Tax Code and not Circular No 393 of the Central BankIssue WON the royalty payments are valid deductible expense WON the Tax Code is applicableHeld No Although the Tax Code allows payments of royalty to be deducted from gross income as business expenses it is CB Circular No 393 that defines what royalty payments are proper Improper payments of royalty are not deductible as legitimate business expenses Section 3-c of CB Circular No 393 provides for payment of royalties only on commodities manufactured by the licensee under the royalty agreement not on the wholesale price of finished products imported by the licensee from the licensor entral Bank Circulars like CB Circular No 393 (dated December 7 1973 published in the Official Gazette issue of December 17 1973 [69 OG No 51 p 11737] issued by the Central Bank in the exercise of fits authority under the Central Bank Act duly published in the Official Gazette have the force and effect of law (Cases cited) andbinding on everybody

DEDUCTIONS AND EXEMPTIONS PERSONAL EXEMPTIONSCOLLECTOR OF INTERNAL REVENUE petitioner vs ORLANDO VCALSADO and COURT OF TAX APPEALS respondents [GR 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 supportIssue WON the respondent is classified as head of the familyHeld 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 Php50000

In the matter of the adoption of the minor MARCIAL ELEUTERIO RESABA LUIS SANTOS-YNtildeIGO and LIGIA MIGUEL DE SANTOSYNtildeIGO petitioners-appellees vs REPUBLIC OF THE PHILIPPINES oppositor-appellantTAX ON CORPORATIONS BASES AND RATESRESIDENT FOREIGN CORPORATIONS TAXABLE INCOME [GRNo 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 minorIssue WON the adoption is validHeld 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 suchagreement 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 bymarriage 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 childrenwith 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 or main support Partial support not amounting to chief support will not entitle the taxpayer to claim exemption as a head of a family Regulation No section 11

depository Even assuming that the securities had become worthless it still cannot be considered as a bad debt or expense since there is no indebtedness between petitioner and First CBC It should be classified as a capital lossHeld The SC found in favor of respondents1 Not and indebtedness An equity investment in shares of stock cannot be considered as an indebtedness of First CBC Capital to China Bank The former has no obligation to repay the latter the amount invested The amount China Bank invested in First CBC is in fact anasset2 Capital asset not ordinary Capital assets are defined in the negative by Sec 33(1) of the NIRC as property held by the TP exclusive of items primarily for the sale to customers in the ordinary course of business or property used in trade or business Hence securities such as equity holdings are ordinary assets only in the hands of a dealer or a person actively engaged in trading in the same for his own account3 Section 29(d)(4)(B) of the NIRC treats the worthlessness of the securities held as capital assets as a loss resulting from the sale or exchange of capital assets Strictly speaking no sale occurs when securities held as capital assets become worthless Nonetheless the law treats it as a loss from a sale just the same4 Section 33 of the NIRC provides that the capital loss sustained can only be deducted from any capital gain derived within the taxable year The same provision enumerates assets which are not subject to the said limitation but equity holdings are not one of them

THE CITY LUMBER INC V DOMINGOFacts Respondent Domingo made an assessment on an additional income of petitioners in the amount of P16 67863 coming from 1 the sale of plywood kegs of nails and GI sheets amouting to P 790207 2 a cash credit balance of P789680 Petitioner assails the validity of the assessment alleging that the inventory in question was not sold but were lost to looters during a fire which occurred in the city To 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 was actually a loan secured by petitionersHELDThe assessments were valid 1 The alleged loss of the plywood and kegs of nails was never reported in the books of the petitioner nor in the petitioners ITR for that year Such conduct of the petitioner proves that such loss never occurred 2 Similarly there was neither any record in petitioners books nor any receipt or other piece of evidence to show receipt of the supposed loan

MARCELO STEEL CROP V COLLECTOR OF INTERNAL REVENUEFacts RA 35 granted a four-year tax exemption from all internal revenue taxes to enterprises directly payable by such enterprise or person which shall engage in new and necessary industries Petitioner corporation was engaged in 1 the manufacture of wire fences 2 the manufacture of steel nails 3 the manufacture of steel bars rods and other allied productsof which the last two were covered by RA 35 In 1953 and 1954 petitioner filed its ITR showing a net income of P3438658 and P5832900 respectively derived solely from its wire fence manufacturing business It was accordingly assessed P12750 in taxes which it paid subsequently it filed an amended ITR for the same taxable years showing that it actually incurred a loss of P87140737 and P10495629 respectively The losses were arrived at by consolidating the gross income and the gross allowable deductions of its three industries Petitioner thus filed for a refund of the P12750 it initially paid in taxes on the theory that since it is a corporation organized with a single capital to answer for all its financial obligations the gross income from both tax-exempt and non-exempt industries and its liability should be based on the difference between its consolidated gross income and its consolidated allowable deductionsHeld Petition has no merit Marcelo Steel cannot consolidate 1 The purpose of RA 35 is to encourage the establishment of new and necessary industries for the economic growth of the country In effect it grants a subsidy to entrepreneurs who blaze a trail in a new industry since there are greater risks involved in the same and an ROI is usually not immediately forthcoming As such a tax exemption granted to an entrepreneur engaged in a tax-exempt industry cannot be extended to benefit non-exempt industries in which the same entrepreneur is concurrently

engaged The justification is simply not there since such industries are presumably already deriving profits from its operations 2 Single capital - The fact that all three industries are organized under a single capital is of no moment It is clear that the law intended that tax exemptand non-exempt industries be treated separately as reflected in EO 341 series 0f 1950 which was incorporated in RA 901 a later incarnation of the same lawPHILIPPINE SUGAR ESTATE CORP V COLLECTOR OF INTERNALREVENUEFacts Petitioner owned shares of stock in several different companies and 154 liberty bonds at par 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 inclusiveof the sums above-stated for which it was assessed an amount in taxes It paid said amount without protest Subsequently petitioner filed a demand for refund In the letter-demand the ground for the refund invoked was the illegality o the collection since the dividends and interest were exempt from payment of income tax Although in the present petition the ground invoked is that the income tax on dividends had already been paid at the source Respondent denied the claim for refund because plaintiff failed to lodge a protest concurrently when it paid its tax liability as per Sec 1579 of the Revised Administrative Code as amended by Act No 3685 Plaintiffcountered by saying that the applicable law is Act No 2833 which requires no protest In addition it invoked the ruling in Fox v Edwards wherein it was ruled that any unduly paid income tax may be refunded without the necessity of a protestHeld The SC found in favor of the Collector1Controlling law - There is no need to distinguish between the two laws in this case Section 19 of Act 2833 provides that all administrative special and general provisions of law including laws in relation to the assessment remission collection and refund of internal revenue taxesnot hereto fore repealed and not inconsistent withthis Law areapplicableto this Law By virtue of this saving clause Section 1579 of the Revised Administrative Code finds application to Act 28332 Fox v Edwards is not controlling since the law specifically applied therein did not require the lodging of a protest concurrently with the payment for a TP to retain such right to protest (NOTE fr digester I did not find anything on losses or bad debts in this case I may have overlooked it)

DEDUCTIONS AND EXEPTIONS ALLOWABLE DEDUCTIONS BADDEBTSPHILIPPINE REFINING COMPANY V COURT OF APPEALSFacts In 1985 petitioner filed its ITR where it claimed 16 items amounting to P71307093 as bad debts and therefor deductible Subsequently the Commissioner for Internal Revenue disallowed such deductions and assessed petitioner to pay a deficiency tax for the year of 1985 Petitioner paid the deficiency tax under protest which the Commissioner deniedUpon a petition for review the CTA modified the findings of the Commissioner by reducing the deficiency tax assessment on the basis that three of the sixteen supposed bad debts could be allowed as deductions The CA later on agreed with the CTAHeld The SC upheld the ruling of the CA which it found to be in accordance with the SCs ruling in Collector v Goodrich It held the petitioner failed to substantiate the ldquoworthlessnessrdquo of the 13 debts which it claimed as deductions As per the ruling in Collector v Goodrich to qualify as a bad debt a TP must show 1 that there is a valid and subsisting debt2 that the debt must be actually ascertained to be worthless and uncollectible durring the taxable year3 the debt must be charged off during the taxable year and4 the debt must arise from the business or trade of the TPIn addition the Court said before a debt can be considered worthless the TP must also show that it is indeed uncollectible even in the future Furthermore the TP must undertake several steps to prove that he exerted diligent efforts to collect the debt1 sending statements of accounts to the debtors 2 sending of collection letters 3 giving the account to a lawyer for collection and4 filing a collection case in court In the case at bar the petitioner miserably failed to show any of the foregoing The only piece of evidence it offered to show the worthlessness of the debts was the testimony of the companys financial adviser or accountant The Court found that this lacked the required probity to establish that the accounts it claimed as bad debts were indeed

worthless Apart from such testimony the petitioner failed to introduce even a single iota of evidence to bolster its claim of worthlessness (NOTE In the rest of the case the Court presents the allegation of the petitioner as to why it could not collect on any of the 13 debts followed bya statement how the petitioner failed to introduce evidence to substantiate such allegation)

Collector of Internal Revenue v Goodrich International Rubber Co(21 SCRA 1336 No L-22265)Facts In 1951 and 1952 respondent Goodrich filed it ITR in which it claimed an aggregate amount (consisting of 18 individual accounts) of P5045541 as deductible for being bad debts The Collector of Internal Revenue disallowed the deductions and accordingly assessed Goodrich accordingly Goodrich protested the assessment and subsequently filed an appealwith the CTA which allowed the deductions for bad debts Hence this appeal by the GovernmentHeld Petition is partially meritorious Some of the items claimed by Goodrich can rightfully be written off as bad debts The SC rejected the claim for deduction of 10 items because Goodrichfailed to establish that that the debts were actually worthless or that it had reasonable grounds to believe them to be so in 1951 The law permits the deduction of debts ldquoactually ascertained to be worthless within the taxable yearrdquo obviously to prevent arbitrary action by the TP to unduly avoid tax liability Good faith on the part of the TP is not enough He must furthermore show that he had reasonably investigated the relevant facts and had drawn a reasonable inference from the information 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 actually made (some in full) after they had been characterized as bad debts and written off The Court however ruled that 8 of the 18 claimed bad debts can beallowed as deductions Common among these 8 was the action of Goodrich in persistently demanding payment from its debtors its endorsement of the accounts to counsel for collection the pursuit of legal remedies for the collection on these debts and the continuing failureclear inability of the debtors to pay off their obligations

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSDEPRECIATIONBASILAN ESTATES INC v CIRFacts Basilan Estates Inc claimed deductions for the depreciation of its assets on the basis of their acquisition cost As of January 1 1950 it changed the depreciable value of said assets by increasing it to conform with the increase in cost for their replacement Accordingly from 1950 to1953 it deducted from gross income the value of depreciation computed on the reappraised value CIR disallowed the deductions claimed by petitioner consequently assessing the latter of deficiency income taxesIssueWhether or not the depreciation shall be determined on the acquisition cost rather than the reappraised value of the assetsHeld Yes The following tax law provision allows a deduction from gross income for depreciation but limits the recovery to the capital invested in the asset being depreciated (1)In general mdash A reasonable allowance for deterioration of property arising out of its use or employment in the business or trade or out of its not being used Provided That when the allowance authorized under this subsection shall equal the capital invested by the taxpayer no further allowance shall be made The income tax law does not authorize the depreciation of an asset beyond its acquisition cost Hence a deduction over and above such cost cannot be claimed and allowed The reason is that deductions from gross income are privileges not matters of right They are not created by implication but upon clear expression in the law Depreciation is the gradual diminution in the useful value of tangible property resulting from wear and tear and normal obsolescense It commences with the acquisition of the property and its owner is not bound to see his property gradually waste without making provision out of earnings for its replacement The recovery free of income tax of an amount more than the invested capital in an asset will transgress the underlying purpose of a depreciation allowance For then what the taxpayer would recover will be not only the acquisition cost but also some profit Recovery in due time thru depreciation of investment made is the philosophy behind depreciation allowance the idea of profit on the investment made has never been the underlying reason for the allowance of a deduction for depreciation

Zamora v CIRFacts These are 4 cases regarding deficiency income taxes allegedly incurred by the ZamorasCases Nos L-15290 and L-15280Mariano Zamora owner of the Bay View Hotel and Farmacia Zamora Manila filed his income tax returns the years 1951 and 1952 The Collector of Internal Revenue found that he failed to file his return of the capital gains derived from the sale of certain real properties and claimed deductions which were not allowable The CTA reduced the sum due Zamora and on appeal petitioner alleged that the CTA erred in disallowing the promotion expenses incurred by his wife for promotion of the above businesses depreciation of the Bayview Hotel Bldg and in applying the Ballantyne scale of values for determining the cost of his Manila property The CIR on the other hand claimed that the CTA erred in reducing the amounts and giving credence to the uncorroborated testimony of Mariano Zamora that he bought the said real property in question during the Japanese occupation partly in Philippine currency and partly in Japanese war notes Cases Nos L-15289 and L-15281 Mariano Zamora and his deceased sister Felicidad Zamora bought a piece of land located in Manila on May 16 1944 for P13200000 and sold it for P7500000 on March 5 1951 They also purchased a lot located inQuezon City for P6895900 on January 19 1944 which they sold for P94000 on February 9 1951 The CTA ordered the estate of the late Felicidad Zamora (represented byEsperanza A Zamora as special administratrix of her estate) to pay the sum of P23550 representing alleged deficiency income tax and surcharge due from said estateFirst issue ndash disallowance of the entire promotion expenses incurred by Mrs ZamoraPetitioner The CTA erred in disallowing P1047850 as promotion expenses incurred by his wife for the promotion of the BayView Hotel and Farmacia Zamora He contends that the whole amount of P2095700 as promotion expenses should be allowed and not merely one-half of it on the ground that while not all the itemized expenses are supported by receipts the absence of some supporting receipts has been sufficiently and satisfactorily established - to purchase machinery for a new Tiki-Tiki plant and to observe hotel management in modern hotelsRespondents Mrs Zamora obtained only the sum of P500000 from the Central Bank and that in her application for dollar allocation she stated that she was going abroad on a combined medical and business trip which facts were not denied by Mariano Zamora The alleged expenses were not supported by receipts Mrs Zamora could not even remember how much money she had when she left abroad in 1951 and how the alleged amount of P2095700 was spent There having been no means by which to ascertain which expense was incurred by her inconnection with the business of Mariano Zamora and which was incurred for her personal benefit the respondents considered 50 of the said amount of P2095700 as business expenses and the other 50 as her personal expensesHeld The 50 allocation is very fair to Zamora there being no receipt to explain the alleged business expenses as well as the personal expenses that might have been incurred While in situations like the present absolute certainty is usually no possible the CTA should make as close an approximation as it can bearing heavily if it chooses upon the taxpayer whose inexactness is of his own making Section 30 of the Tax Code provides that in computing net income there shall be allowed as deductions all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business Since promotion expenses constitute one of the deductions in conducting a business same must testify these requirements Claim for the deduction of promotion expenses or entertainment expenses must also be substantiated or supported by record showing in detail the amount and nature of the expenses incurredSecond issue ndash disallowancereduction of the rate of depreciation of Bayview Hotel (from 35 to 25)Petitioner Contends that 1) the Ermita district is becoming a commercial district 2) the hotel has no room for improvement and(3) the changing modes in architecture styles of furniture and decorative designs must meet the taste of a fickle public Alsothe reference to Bulletin F a publication by the IRS should have been first proved as law to be subject of judicial noticeHeld The CTA was approximately correct in holding that the rate of depreciation must be 25 An average hotel buildingrsquos estimated useful life is 5 years but inasmuch as it also depends on the use and location change in population and other it is allowed a deprecation rate of 25 which corresponds to a useful life of 40 years It is true that Bulletin F has no binding force but it has a strong persuasive effect considering that the same has been the result of scientific studies

and observation for a long period in the United States after whose Income Tax Law ours is patterned Verily courts are permitted to look into and investigate the antecedents or the legislative history of the statutes involvedThird issue-the undeclared capital gains derived from the sales in 1951 of certain real properties in Malate Manila and in Quezon City acquired during the Japanese occupationHeld The CTArsquos appraisal in this case is correct Consequently the total undeclared income of petitioners derived from the sales of the Manila and Quezon City properties in 1951 is P1711175 (P175000 plus P1536175) 50 of which in the sum of P855588 is taxable the said properties being capital assets held for more than one year The cost basis of property acquired in Japanese war notes is the equivalent of the war notes in genuine Philippine currency in accordance with the Ballantyne Scale 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 P13200000 was not entirely paid in Japanese War notes but frac12 thereof or P6600000 was in Philippine currency This being the case the Ballantyne Scale of values which was the resultof an impartial scientific study adopted and given judicial recognition should be applied As the value of the Japanese war notes in May 1944 when the Manila property was bought was 1 frac12 of the genuine Philippine Peso (Ballantyne Scale) and since the gain derived or loss sustained inthe disposition of this property is to reckoned in terms of Philippine Peso the value of the Japanese war notes used in the purchase of the property must be reduced in terms of the genuine Philippine Peso to determine the cost of acquisition It therefore results that since the sum of P6600000 in Japanese war notes in May 1944 is equivalent to P550000 in Philippine currency (P6600000 divided by 12) the acquisition cost of the property in question is P6600000 plus P550000 or P7150000 and that as the property was sold for P7500000 in 1951 the owners thereof Mariano and Felicidad Zamora derived a capital gain of P350000or P175000 each For the Quezon City property the CTA was correct in giving credence toZamorarsquos testimony that the same was purchased inPhilippine currency because it is quite incredible that real property with an assessed value of P4691000 should have been soldin Japanese war notes with an equivalent value in Philippine currency of only P1723975 Thus the gain derived from the sale isP1536175 after deducting from the selling price the cost of acquisition in the sum of P6895900 and the expense of sale in the sum of P967925Disposition The petitions are dismissed and the decision appealed from is affirmed

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSDEPLETIONCONSOLIDATED MINES V CTAFacts Cosolidated Mines filed a refund for overpayments of income taxes for the year 1951 However after investigation of the BIR instead of having a refund the company was instead assessed for deficiency income taxes for the years 1953 1954 and 1956 with 5 surchargeand 1 monthly interest According to the investigation (A) for the years 1951 to 1954 (1) the Company had not accrued as an expense the share in the company profits of Benguet Consolidated Mines as operator of the Consolidateds mines although for income tax purposes the Consolidated had reported income and expenses on the accrual basis (2) depletion and depreciation expenses had been overcharged and (3) the claims for audit and legal fees and miscellaneous expenses for 1953 and 1954 had not been properly substantiated and that (B) for the year 1956 (1) the Company had overstated its claim for depletion and (2) certain claims for miscellaneous expenses were not duly supported by evidence Background info Consolidated and Benguet entered into a development agreement whereby Consolidated as the owner of several mining claims allowed Benguet to explore develop mine concentrate andmarket the ore in the mining claims In the agreement it was provided that benguet is to provide the funds necessary for the expenses until such time the properties are on a profit producing basis to be reimbursed by consolidated Once profit is derived expenditures from its own resources shall be charged against the subsequent gross income of the properties During the time Benguet is being reimbursed for all its expenditures the net profits resulting from the operation of the claims shall be divided 90 to Benguet and 10 to Consolidated Such division of net profits shall be based on the receipts and expenditures during each calendar year and

shall continue until such time as the 90 of the net profits pertaining to Benguet hereunder shall equal the amount of such expenditures ldquoAfter Benguet has been fully reimbursed for its expenditures the net profits from the operation shall be divided between Benguet and Consolidated share and share alike it being understood however that the net profits as the term is used in this agreement shall be computed by deducting from gross income all operating expenses and all disbursements of any nature whatsoever as may be made in order to carry out the terms of this agreementrdquo It appears that by 1953 Benguet had completely recouped its advances because they were then dividing the profits share and share alike Consolidated used the accrual method of accounting in computing its income One of its expenses is the amount-paid to Benguet as mine operator which amount is computed as 50 of ldquonet incomerdquo TheConsolidated deducts as an expense 50 of cash receipts minus disbursements but does not deduct at the end of each calendar year what the Commissioner alleges is 50 of the share of Benguet in the accounts receivable However it deducts Benguets 50 if and when the accounts receivable are actually paid It would seem therefore that Consolidated has been deducting a portion of this expense (Benguets share as mine operator) on the cash amp carry basis The question is whether or not the accounting system used by Consolidated justifies such a treatment of this item and if not whether said method used by Consolidated and characterized by the Commissioner as a hybrid method may be allowed under the provisions of the NIRCIssue WON Consolidatedrsquos accounting method is allowedHeld YES It is said that accounting methods for tax purposes comprise a set of rules for determining when and how to report income and deductions The US Internal Revenue Code allows each taxpayer to adopt the accounting method most suitable to his business and requires only that taxable income generally be based on the method of accounting regularly employed in keeping the taxpayers books provided that the method clearly reflects incomeA deduction cannot be accrued until an actual liability is incurred even if payment has not been made Here we have to distinguish between (1) the method of accounting used by Consolidated in determining its net income for tax purposes and (2) the method of computation agreed upon between Consolidated and 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 were cash receipts and cash payments Once determined in accordance with the stipulated bases and procedure then the amount due Benguet for each month accrued at the end of that month whether Consolidated had made payment or not To make Consolidated deduct as an expense one-half of the Accounts Receivable would in effect be equivalent to giving Benguet a right which it did not have under the contract and to substitute for the parties choice a mode of computation of compensationnot contemplated by themON DEPLETIONThe first issue raised by Consolidated is with respect to the rate of mine depletion used by the Court of Tax Appeals The Tax Code provides that in computing net income there shall be allowed as deduction in the case of mines a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof which has been mined and sold during the year for which the return is made [Sec 30(g) (1) (B)] As an income tax concept depletion is wholly a creation of the statute mdash ldquosolely a matter of legislative gracerdquo Hence the taxpayer has the burden of justifying the allowance of any deduction claimed As in connectionwith all other tax controversies the burden of proof to show that a disallowance of depletion by the Commissioner is incorrect or that an allowance made is inadequate is upon the taxpayer and this is true with respect to the value of the property constituting the basis of the deduction This burden-of-proof rule has been frequently applied and a value claimed has been disallowed for lack of evidence Here SC considered the evidence presented (testimony of Eligio Garciaand the Report to Stockholders (which includes the Balance Sheet as of 1946) geological report on the estimated amount of ore in the claims etc) it set forth a very detailed computation of the depletion rate determining the value of each component of the formula of depletion viz Rate of Depletion Per Unit = Cost of Mine Property Estimated ore Deposit of Product Mined and sold- depletion is different from depreciation In determining the amount of cost depletion allowable the following three facts are essential namely (1) the basis of the property (2) the estimated total recoverable units in the property and (3) the number of units recovered during the taxable year in question As used as an element in cost depletion basis means the dollar amount of the

taxpayers capital or investment in the property which he is entitled to recover tax free during the period he is removing the mineral in the depositDisposition Decision modifiedFootnotes in the case that are helpful While taxable income is based on the method of accounting used by the taxpayer it will almost always differ from accounting income This is sobecause of a fundamental difference in the ends the two concepts serve Accounting attempts to match cost against revenue Tax law is aimed at collecting revenue It is quick to treat an item as income slow to recognize deductions or losses Thus the tax law will not recognize deductions for contingent future losses except in very limited situations Good accounting on the other hand their recognition Once this fundamental difference in approach is accepted income tax accounting methods can be understood more easily 33 Am Jur 2d 688 Under the accrual system income is accruable in the year in which the taxpayers right thereto becomes fixed and definite even though it may not be actually received until a later year while a deduction for a liability is to be accrued and taken when the liability becomes fixed and certain even though it may not be paid until a later year It has been held that the basis of the accrual system of accounting is that obligations incurred in the normal course of business will be discharged in due course that the deductions have been paid or accrued or paid and incurred but in order to be accruable in the taxable year a valid obligation upon which the profit (or loss in the case 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 expend money constituting a deductible loss is the date that fixes liability Gain or loss may not said to be fixed or accrued when the obligation is contingent upon the happening of a future event No duty or liability to pay an income tax upon a transaction arises until the taxable year in which the event constituting the condition precedent occurs under any system ofaccounting

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSCHARITABLE AND OTHER CONTRIBUTIONSROXAS v CTA GR No L-25043 April 26 1968Facts Don Pedro Roxas and Dona Carmen Ayala Spanish subjects transmitted to their grandchildren by hereditary succession several properties To manage the above-mentioned properties said children namely Antonio Roxas Eduardo Roxas and Jose Roxas formed apartnership called Roxas y Compania At the conclusion of the WW2 the tenants who have all been tilling the lands in Nasugbu for generations expressed their desire to purchase from Roxas y Cia the parcels which they actually occupied For its part the Government in consonance with the constitutional mandate to acquire big landed estates and apportion them among landless tenants-farmers persuaded the Roxas brothers to part with their landholdings Conferences were held with the farmers in the early part of 1948 and finally the Roxas brothers agreed to sell 13500 hectares to the Government for distribution to actual occupants for a price of P207904847 plus P30000000 for survey and subdivision expenses It turned out however that the Government did not have funds to cover the purchase price and so a special arrangement was made for the Rehabilitation Finance Corporation to advance to Roxas y Cia The amount of P150000000 as loan Collateral for such loan were the lands proposed to be sold to the farmers Under the arrangement Roxas y Cia allowed the farmers to buy the lands for the same price but by installment and contracted with the Rehabilitation Finance Corporationto pay its loan from the proceeds of the yearly amortizations paid by the farmers The CIR demanded from Roxas y Cia the payment of deficiency income taxes resulting from the inclusion as income of Roxas y Cia of the unreported 50 of the net profits for 1953 and 1955 derived from the sale of the Nasugbu farm lands to the tenants and the disallowance of deductions from gross income of various business expenses and contributions claimed by Roxas y Cia and the Roxas brothers For the reason that Roxas y Cia subdivided its Nasugbu farm lands and soldthem to the farmers on installment the Commissioner considered the partnership as engaged in the business of real estate hence 100 of the profits derived therefrom was taxed The Roxas brothers protested the assessment but inasmuch as said protest was denied they instituted an appeal in the CTA which sustained the assessment Hence this appealIssue Is Roxas y Cia liable for the payment of deficiency income for the sale of Nasugbu farmlandsHeld NO The proposition of the CIR cannot be favorably accepted in this isolated transaction with its peculiar circumstances in spite of the fact that there were hundreds of vendees Although

they paid for their respective holdings in installment for a period of 10 years it would nevertheless not make the vendor Roxas y Cia a real estate dealer during the 10-year amortization period It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled them for generations was not only in consonance with but more in obedience to the request and pursuant to the policy of our Government to allocate lands to the landless It was the bounden duty of the Government to pay the agreed compensation after it had persuaded Roxas y Cia to sell its haciendas and to subsequently subdivide them among the farmers at very reasonable terms and prices However the Government could not comply with its duty for lack of funds Obligingly Roxas y Cia shouldered the Governments burden went out of its way and sold lands directly to the farmers in the same way and under the same terms as would have been the case had the Government done it itself For this magnanimous act the municipal council of Nasugbu passed a resolution expressing the peoples gratitudeIn fine Roxas y Cia cannot be considered a real estate dealer for the sale in question Hence pursuant to Section 34 of the Tax Code the lands sold to the farmers are capital assets and the gain derived from the sale thereof is capital gain taxable only to the extent of 50

DEDUCTIONS AND EXEMPTIONS NON-DEDUCTIBLE EXPENSECIR v JAMIRFacts For the year 1954 Alberto M K Jamir declared a gross income of P7585865 and claimed deductions aggregating P5813450 thereby showing a net income of P1777415 upon which he paid P1634 as income tax The Collector of Internal Revenue however assessed asdeficiency income tax due from him the sum of P16395 Jamir appealed to the Court of Tax Appeals which reduced the amount due as deficiency income tax to P55200Issue Whether Jamir had an undeclared income for the year 1954 aggregating P3127491Held No It appears that by using the so-called expenditures method the Government considered as an undeclared income Jamirs expenditures for February and May were in excess of his reported income for the same months Although the Court of Tax Appeals in effect sanctioned the adoption of the expenditures method it held that the same should be applied by deducting the aggregate yearly expenditures from the declared yearly income not the expenditures incurred each month from the declared income therefor In the case at bar Jamirs total income for the year 1954 (P7585865) exceeded (Pl777415) the total deductions (P5813450) claimed by him Jamir introduced evidence that the said sums of P128124 andP2999367 represented advances made to him by customers in the months of February and may 1954 and that the income derived from the corresponding transactions were entered in his books of account in subsequent months and this explanation was found by the Court of Tax Appeals to have been proven satisfactorily The next question raised by appellant refers to Jamirs claim for car depreciation and salary of his driver Although petitioner had disallowed one-half (12) of these claims it appearing that the car was used by Jamir for personal and business purposes the lower court allowed as deductions three-fourths (34) of said amounts the car having been used by Jamir more for business than for personal purpose Petitionerassails this as an error but considering the circumstances we agree with the deduction of frac34 by the lower court It is next urged that Jamir committed fraud and the 50 surcharge should not have been eliminated But since Jamir did not have the undeclared income of P3127491 upon which the contested assessment is mainly based it follows necessarily that he was not guiltyof the fraud and that the 50 surcharge has been properly eliminatedDisposition the decision appealed from is hereby affirmed

Atlas Consolidated Mining v CIRFacts CIR assessed Atlas deficiency income tax for 1957 to 1958 which amounted to morethan P700K CIR asserted that in 1957 Atlas was still not entitled to exemption fromthe income tax under RA 909 because the same covers only gold mines and Atlas isnot engaged in that Atlasprotested before the Sec of Finance and Sec ruled that exemption provided in RA 909 embraces all new 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 disallowance of the following items transfer agent1048576s fees stockholders relation service fee US stock listing expenses suit expenses provision for contingency CTA disallowed the items except the stockholders relation service fee and suit expenses Also CTA ruled that the exemption from payment of the corporate income tax of Atlas

was good only up to the first quarter of 1958 hence it computed for its net taxable income for the remaining frac34 of the year Atlas appealed asserting that the annual public relations expense is a deductible expense from gross income because it is an ordinary and necessarybusiness expenseIssue WON this fee paid for the services rendered by a public relations firm in the US labeled as stockholders relation service fee is an allowable deductionHeld 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 that deduction is authorized and must be able to prove that he is entitled to the deduction which the law allows As previously adverted to the law allowing expenses as deduction from gross income for purposes of the income tax is Section 30 (a) (1) of the National Internal Revenue which allows a deduction of all the ordinary and necessary expenses paid orincurred during the taxable year in carrying on any trade or business An item of expenditure in order to be deductible under this section of the statute must fall squarely within its language We come then to the statutory test of deductibility where it is axiomatic that to be deductible as a business expense three conditions are imposed namely (1) the expense must be ordinary and necessary (2) it must be paid or incurred within the taxable year and (3) it must be paid or incurred in carrying in a trade or business In addition not only must the taxpayer meet thebusiness test he must substantially prove by evidence or records the deductions claimed under the law otherwise the same will be disallowed The mere allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its deduction Assuming that the expenditure is ordinary and necessary in the operation of the taxpayers business the answer to the question as to whether the expenditure is an allowable deduction as a business expense must be determined from the nature of the expenditure itself which in turn depends on the extent and permanency of the work accomplished by the expenditure The expenditure of P2552314 paid to PK Macker amp Co as compensation for services carrying on the selling campaign in an effort to sell Atlas additional capital stock of P3325000 is not an ordinaryexpense in line with the decision of US Board of Tax Appeals in the case of Harrisburg Hospital Inc vs Commissioner of Internal Revenue Accordingly as found by the Court of Tax Appeals the said expense is not deductible from Atlas gross income in 1958 because expenses relating to 1) recapitalization and reorganization of the corporation 2) the cost of obtaining stock subscription 3)promotion expenses and 4) commission or fees paid for the sale of stock reorganization are capital expenditures The burden of proof that the expenses incurred are ordinary and necessary is onthe taxpayer The claimed business expense must also be supported by appropriate documents such as invoices official receipts and contracts to be made available in case of a tax audit by the Bureau of Internal Revenue

GANCAYCO V COLLECTORFacts1048576 Gancayco filed his Income tax Return (ITR) for 19491048576 CIR notified him that his liability is Php 979362 which he paid 19501048576 CIR after a year wrote to Gancayco saying that there was tax due from him for a total of Php 29554051048576 Gancayco asked for reconsideration and the tax assessed wasreduced1048576 CIR issued a warrant of distraint for the deficient liability1048576 Gancayco filed petition with CTACTA Required Gancayco to pay Php 16 86031 for tax deficiency in1949Gancayco the right to collect the deficiency income tax is barred by thestatute of limitations the 5 yr period for judicial action should be counted from May 12 50 the date of original assessment SC Section 316 provides The civil remedies for the collection of internal revenue taxes fees or charges and any increment thereto resulting from delinquency shall be (a) by distraint of goods chattels or effects and other personal property of whatever character including stocks and other securities debts credits bank accounts and interest in and rights to personal property and by levy upon real property and (b) by judicial action Either of these remedies or both simultaneously may be pursued in the discretion of the authorities charged with the collection of such taxes No exemption shall be allowed against the internal revenue taxes in any case

Deduction for expenses may be allowed however in this case Gancayco was not able to prove any expense as there were no receipts or other proofs CTA AFFIRMED

DEDUCTIONS AND EXEMPTIONS NON-DEDUCTIBLE EXPENSESILLEGAL EXPENSESCALANOC V COLLECTORFacts1048576 Calanoc was authorized to solicit and receive contributions for the orphans and destitute kids of the Child Welfare Workers Club of the Social Welfare Commission1048576 Dec 1949 Calanoc financed and promoted a boxing exhibition at the Rizal Memorial Stadium for said charitable purpose1048576 He applied for exemption from payment of the amusement tax as provided in Sec 260 NIRC1048576 CIR investigated the tax case of Calanoc and it was found that there was gross sale of Php 26553 expenditure of 25157 and profit of 1375301048576 Profit was remitted to Social Welfare Commission1048576 CIR demanded Calanoc oto pay 5331048576 Sec of Finance denied the application of Calanoc for exemption from payment of amusement taxCTA Affirmed the assessment of 7k Calanoc denies receving a stadium fee of 1k Although it was shown that 1k was paid by O-OSO Beverages His accountant is dead SC the items of expenditures for deduction are exorbitant and not supported by receiptsCTA Affirmed

3M PHILIPPINES INC petitioner vs COMMISSIONER OFINTERNAL REVENUE respondent [GR No 82833 September 261988]Facts The petitioner claimed as deductions for income tax purposes business expenses in the form of royalty payments to its foreign licensor which the respondent Commissioner of Internal Revenue disallowed The petitioner claimed the following deductions royalties and technical service fees and pre-operational cost of tape coater The amount was not allowed as entire deduction The petitioner argues that the law applicable to its case is only Section 29(a)(1) of the Tax Code and not Circular No 393 of the Central BankIssue WON the royalty payments are valid deductible expense WON the Tax Code is applicableHeld No Although the Tax Code allows payments of royalty to be deducted from gross income as business expenses it is CB Circular No 393 that defines what royalty payments are proper Improper payments of royalty are not deductible as legitimate business expenses Section 3-c of CB Circular No 393 provides for payment of royalties only on commodities manufactured by the licensee under the royalty agreement not on the wholesale price of finished products imported by the licensee from the licensor entral Bank Circulars like CB Circular No 393 (dated December 7 1973 published in the Official Gazette issue of December 17 1973 [69 OG No 51 p 11737] issued by the Central Bank in the exercise of fits authority under the Central Bank Act duly published in the Official Gazette have the force and effect of law (Cases cited) andbinding on everybody

DEDUCTIONS AND EXEMPTIONS PERSONAL EXEMPTIONSCOLLECTOR OF INTERNAL REVENUE petitioner vs ORLANDO VCALSADO and COURT OF TAX APPEALS respondents [GR 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 supportIssue WON the respondent is classified as head of the familyHeld 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 Php50000

In the matter of the adoption of the minor MARCIAL ELEUTERIO RESABA LUIS SANTOS-YNtildeIGO and LIGIA MIGUEL DE SANTOSYNtildeIGO petitioners-appellees vs REPUBLIC OF THE PHILIPPINES oppositor-appellantTAX ON CORPORATIONS BASES AND RATESRESIDENT FOREIGN CORPORATIONS TAXABLE INCOME [GRNo 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 minorIssue WON the adoption is validHeld 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 suchagreement 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 bymarriage 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 childrenwith 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 or main support Partial support not amounting to chief support will not entitle the taxpayer to claim exemption as a head of a family Regulation No section 11

worthless Apart from such testimony the petitioner failed to introduce even a single iota of evidence to bolster its claim of worthlessness (NOTE In the rest of the case the Court presents the allegation of the petitioner as to why it could not collect on any of the 13 debts followed bya statement how the petitioner failed to introduce evidence to substantiate such allegation)

Collector of Internal Revenue v Goodrich International Rubber Co(21 SCRA 1336 No L-22265)Facts In 1951 and 1952 respondent Goodrich filed it ITR in which it claimed an aggregate amount (consisting of 18 individual accounts) of P5045541 as deductible for being bad debts The Collector of Internal Revenue disallowed the deductions and accordingly assessed Goodrich accordingly Goodrich protested the assessment and subsequently filed an appealwith the CTA which allowed the deductions for bad debts Hence this appeal by the GovernmentHeld Petition is partially meritorious Some of the items claimed by Goodrich can rightfully be written off as bad debts The SC rejected the claim for deduction of 10 items because Goodrichfailed to establish that that the debts were actually worthless or that it had reasonable grounds to believe them to be so in 1951 The law permits the deduction of debts ldquoactually ascertained to be worthless within the taxable yearrdquo obviously to prevent arbitrary action by the TP to unduly avoid tax liability Good faith on the part of the TP is not enough He must furthermore show that he had reasonably investigated the relevant facts and had drawn a reasonable inference from the information 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 actually made (some in full) after they had been characterized as bad debts and written off The Court however ruled that 8 of the 18 claimed bad debts can beallowed as deductions Common among these 8 was the action of Goodrich in persistently demanding payment from its debtors its endorsement of the accounts to counsel for collection the pursuit of legal remedies for the collection on these debts and the continuing failureclear inability of the debtors to pay off their obligations

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSDEPRECIATIONBASILAN ESTATES INC v CIRFacts Basilan Estates Inc claimed deductions for the depreciation of its assets on the basis of their acquisition cost As of January 1 1950 it changed the depreciable value of said assets by increasing it to conform with the increase in cost for their replacement Accordingly from 1950 to1953 it deducted from gross income the value of depreciation computed on the reappraised value CIR disallowed the deductions claimed by petitioner consequently assessing the latter of deficiency income taxesIssueWhether or not the depreciation shall be determined on the acquisition cost rather than the reappraised value of the assetsHeld Yes The following tax law provision allows a deduction from gross income for depreciation but limits the recovery to the capital invested in the asset being depreciated (1)In general mdash A reasonable allowance for deterioration of property arising out of its use or employment in the business or trade or out of its not being used Provided That when the allowance authorized under this subsection shall equal the capital invested by the taxpayer no further allowance shall be made The income tax law does not authorize the depreciation of an asset beyond its acquisition cost Hence a deduction over and above such cost cannot be claimed and allowed The reason is that deductions from gross income are privileges not matters of right They are not created by implication but upon clear expression in the law Depreciation is the gradual diminution in the useful value of tangible property resulting from wear and tear and normal obsolescense It commences with the acquisition of the property and its owner is not bound to see his property gradually waste without making provision out of earnings for its replacement The recovery free of income tax of an amount more than the invested capital in an asset will transgress the underlying purpose of a depreciation allowance For then what the taxpayer would recover will be not only the acquisition cost but also some profit Recovery in due time thru depreciation of investment made is the philosophy behind depreciation allowance the idea of profit on the investment made has never been the underlying reason for the allowance of a deduction for depreciation

Zamora v CIRFacts These are 4 cases regarding deficiency income taxes allegedly incurred by the ZamorasCases Nos L-15290 and L-15280Mariano Zamora owner of the Bay View Hotel and Farmacia Zamora Manila filed his income tax returns the years 1951 and 1952 The Collector of Internal Revenue found that he failed to file his return of the capital gains derived from the sale of certain real properties and claimed deductions which were not allowable The CTA reduced the sum due Zamora and on appeal petitioner alleged that the CTA erred in disallowing the promotion expenses incurred by his wife for promotion of the above businesses depreciation of the Bayview Hotel Bldg and in applying the Ballantyne scale of values for determining the cost of his Manila property The CIR on the other hand claimed that the CTA erred in reducing the amounts and giving credence to the uncorroborated testimony of Mariano Zamora that he bought the said real property in question during the Japanese occupation partly in Philippine currency and partly in Japanese war notes Cases Nos L-15289 and L-15281 Mariano Zamora and his deceased sister Felicidad Zamora bought a piece of land located in Manila on May 16 1944 for P13200000 and sold it for P7500000 on March 5 1951 They also purchased a lot located inQuezon City for P6895900 on January 19 1944 which they sold for P94000 on February 9 1951 The CTA ordered the estate of the late Felicidad Zamora (represented byEsperanza A Zamora as special administratrix of her estate) to pay the sum of P23550 representing alleged deficiency income tax and surcharge due from said estateFirst issue ndash disallowance of the entire promotion expenses incurred by Mrs ZamoraPetitioner The CTA erred in disallowing P1047850 as promotion expenses incurred by his wife for the promotion of the BayView Hotel and Farmacia Zamora He contends that the whole amount of P2095700 as promotion expenses should be allowed and not merely one-half of it on the ground that while not all the itemized expenses are supported by receipts the absence of some supporting receipts has been sufficiently and satisfactorily established - to purchase machinery for a new Tiki-Tiki plant and to observe hotel management in modern hotelsRespondents Mrs Zamora obtained only the sum of P500000 from the Central Bank and that in her application for dollar allocation she stated that she was going abroad on a combined medical and business trip which facts were not denied by Mariano Zamora The alleged expenses were not supported by receipts Mrs Zamora could not even remember how much money she had when she left abroad in 1951 and how the alleged amount of P2095700 was spent There having been no means by which to ascertain which expense was incurred by her inconnection with the business of Mariano Zamora and which was incurred for her personal benefit the respondents considered 50 of the said amount of P2095700 as business expenses and the other 50 as her personal expensesHeld The 50 allocation is very fair to Zamora there being no receipt to explain the alleged business expenses as well as the personal expenses that might have been incurred While in situations like the present absolute certainty is usually no possible the CTA should make as close an approximation as it can bearing heavily if it chooses upon the taxpayer whose inexactness is of his own making Section 30 of the Tax Code provides that in computing net income there shall be allowed as deductions all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business Since promotion expenses constitute one of the deductions in conducting a business same must testify these requirements Claim for the deduction of promotion expenses or entertainment expenses must also be substantiated or supported by record showing in detail the amount and nature of the expenses incurredSecond issue ndash disallowancereduction of the rate of depreciation of Bayview Hotel (from 35 to 25)Petitioner Contends that 1) the Ermita district is becoming a commercial district 2) the hotel has no room for improvement and(3) the changing modes in architecture styles of furniture and decorative designs must meet the taste of a fickle public Alsothe reference to Bulletin F a publication by the IRS should have been first proved as law to be subject of judicial noticeHeld The CTA was approximately correct in holding that the rate of depreciation must be 25 An average hotel buildingrsquos estimated useful life is 5 years but inasmuch as it also depends on the use and location change in population and other it is allowed a deprecation rate of 25 which corresponds to a useful life of 40 years It is true that Bulletin F has no binding force but it has a strong persuasive effect considering that the same has been the result of scientific studies

and observation for a long period in the United States after whose Income Tax Law ours is patterned Verily courts are permitted to look into and investigate the antecedents or the legislative history of the statutes involvedThird issue-the undeclared capital gains derived from the sales in 1951 of certain real properties in Malate Manila and in Quezon City acquired during the Japanese occupationHeld The CTArsquos appraisal in this case is correct Consequently the total undeclared income of petitioners derived from the sales of the Manila and Quezon City properties in 1951 is P1711175 (P175000 plus P1536175) 50 of which in the sum of P855588 is taxable the said properties being capital assets held for more than one year The cost basis of property acquired in Japanese war notes is the equivalent of the war notes in genuine Philippine currency in accordance with the Ballantyne Scale 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 P13200000 was not entirely paid in Japanese War notes but frac12 thereof or P6600000 was in Philippine currency This being the case the Ballantyne Scale of values which was the resultof an impartial scientific study adopted and given judicial recognition should be applied As the value of the Japanese war notes in May 1944 when the Manila property was bought was 1 frac12 of the genuine Philippine Peso (Ballantyne Scale) and since the gain derived or loss sustained inthe disposition of this property is to reckoned in terms of Philippine Peso the value of the Japanese war notes used in the purchase of the property must be reduced in terms of the genuine Philippine Peso to determine the cost of acquisition It therefore results that since the sum of P6600000 in Japanese war notes in May 1944 is equivalent to P550000 in Philippine currency (P6600000 divided by 12) the acquisition cost of the property in question is P6600000 plus P550000 or P7150000 and that as the property was sold for P7500000 in 1951 the owners thereof Mariano and Felicidad Zamora derived a capital gain of P350000or P175000 each For the Quezon City property the CTA was correct in giving credence toZamorarsquos testimony that the same was purchased inPhilippine currency because it is quite incredible that real property with an assessed value of P4691000 should have been soldin Japanese war notes with an equivalent value in Philippine currency of only P1723975 Thus the gain derived from the sale isP1536175 after deducting from the selling price the cost of acquisition in the sum of P6895900 and the expense of sale in the sum of P967925Disposition The petitions are dismissed and the decision appealed from is affirmed

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSDEPLETIONCONSOLIDATED MINES V CTAFacts Cosolidated Mines filed a refund for overpayments of income taxes for the year 1951 However after investigation of the BIR instead of having a refund the company was instead assessed for deficiency income taxes for the years 1953 1954 and 1956 with 5 surchargeand 1 monthly interest According to the investigation (A) for the years 1951 to 1954 (1) the Company had not accrued as an expense the share in the company profits of Benguet Consolidated Mines as operator of the Consolidateds mines although for income tax purposes the Consolidated had reported income and expenses on the accrual basis (2) depletion and depreciation expenses had been overcharged and (3) the claims for audit and legal fees and miscellaneous expenses for 1953 and 1954 had not been properly substantiated and that (B) for the year 1956 (1) the Company had overstated its claim for depletion and (2) certain claims for miscellaneous expenses were not duly supported by evidence Background info Consolidated and Benguet entered into a development agreement whereby Consolidated as the owner of several mining claims allowed Benguet to explore develop mine concentrate andmarket the ore in the mining claims In the agreement it was provided that benguet is to provide the funds necessary for the expenses until such time the properties are on a profit producing basis to be reimbursed by consolidated Once profit is derived expenditures from its own resources shall be charged against the subsequent gross income of the properties During the time Benguet is being reimbursed for all its expenditures the net profits resulting from the operation of the claims shall be divided 90 to Benguet and 10 to Consolidated Such division of net profits shall be based on the receipts and expenditures during each calendar year and

shall continue until such time as the 90 of the net profits pertaining to Benguet hereunder shall equal the amount of such expenditures ldquoAfter Benguet has been fully reimbursed for its expenditures the net profits from the operation shall be divided between Benguet and Consolidated share and share alike it being understood however that the net profits as the term is used in this agreement shall be computed by deducting from gross income all operating expenses and all disbursements of any nature whatsoever as may be made in order to carry out the terms of this agreementrdquo It appears that by 1953 Benguet had completely recouped its advances because they were then dividing the profits share and share alike Consolidated used the accrual method of accounting in computing its income One of its expenses is the amount-paid to Benguet as mine operator which amount is computed as 50 of ldquonet incomerdquo TheConsolidated deducts as an expense 50 of cash receipts minus disbursements but does not deduct at the end of each calendar year what the Commissioner alleges is 50 of the share of Benguet in the accounts receivable However it deducts Benguets 50 if and when the accounts receivable are actually paid It would seem therefore that Consolidated has been deducting a portion of this expense (Benguets share as mine operator) on the cash amp carry basis The question is whether or not the accounting system used by Consolidated justifies such a treatment of this item and if not whether said method used by Consolidated and characterized by the Commissioner as a hybrid method may be allowed under the provisions of the NIRCIssue WON Consolidatedrsquos accounting method is allowedHeld YES It is said that accounting methods for tax purposes comprise a set of rules for determining when and how to report income and deductions The US Internal Revenue Code allows each taxpayer to adopt the accounting method most suitable to his business and requires only that taxable income generally be based on the method of accounting regularly employed in keeping the taxpayers books provided that the method clearly reflects incomeA deduction cannot be accrued until an actual liability is incurred even if payment has not been made Here we have to distinguish between (1) the method of accounting used by Consolidated in determining its net income for tax purposes and (2) the method of computation agreed upon between Consolidated and 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 were cash receipts and cash payments Once determined in accordance with the stipulated bases and procedure then the amount due Benguet for each month accrued at the end of that month whether Consolidated had made payment or not To make Consolidated deduct as an expense one-half of the Accounts Receivable would in effect be equivalent to giving Benguet a right which it did not have under the contract and to substitute for the parties choice a mode of computation of compensationnot contemplated by themON DEPLETIONThe first issue raised by Consolidated is with respect to the rate of mine depletion used by the Court of Tax Appeals The Tax Code provides that in computing net income there shall be allowed as deduction in the case of mines a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof which has been mined and sold during the year for which the return is made [Sec 30(g) (1) (B)] As an income tax concept depletion is wholly a creation of the statute mdash ldquosolely a matter of legislative gracerdquo Hence the taxpayer has the burden of justifying the allowance of any deduction claimed As in connectionwith all other tax controversies the burden of proof to show that a disallowance of depletion by the Commissioner is incorrect or that an allowance made is inadequate is upon the taxpayer and this is true with respect to the value of the property constituting the basis of the deduction This burden-of-proof rule has been frequently applied and a value claimed has been disallowed for lack of evidence Here SC considered the evidence presented (testimony of Eligio Garciaand the Report to Stockholders (which includes the Balance Sheet as of 1946) geological report on the estimated amount of ore in the claims etc) it set forth a very detailed computation of the depletion rate determining the value of each component of the formula of depletion viz Rate of Depletion Per Unit = Cost of Mine Property Estimated ore Deposit of Product Mined and sold- depletion is different from depreciation In determining the amount of cost depletion allowable the following three facts are essential namely (1) the basis of the property (2) the estimated total recoverable units in the property and (3) the number of units recovered during the taxable year in question As used as an element in cost depletion basis means the dollar amount of the

taxpayers capital or investment in the property which he is entitled to recover tax free during the period he is removing the mineral in the depositDisposition Decision modifiedFootnotes in the case that are helpful While taxable income is based on the method of accounting used by the taxpayer it will almost always differ from accounting income This is sobecause of a fundamental difference in the ends the two concepts serve Accounting attempts to match cost against revenue Tax law is aimed at collecting revenue It is quick to treat an item as income slow to recognize deductions or losses Thus the tax law will not recognize deductions for contingent future losses except in very limited situations Good accounting on the other hand their recognition Once this fundamental difference in approach is accepted income tax accounting methods can be understood more easily 33 Am Jur 2d 688 Under the accrual system income is accruable in the year in which the taxpayers right thereto becomes fixed and definite even though it may not be actually received until a later year while a deduction for a liability is to be accrued and taken when the liability becomes fixed and certain even though it may not be paid until a later year It has been held that the basis of the accrual system of accounting is that obligations incurred in the normal course of business will be discharged in due course that the deductions have been paid or accrued or paid and incurred but in order to be accruable in the taxable year a valid obligation upon which the profit (or loss in the case 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 expend money constituting a deductible loss is the date that fixes liability Gain or loss may not said to be fixed or accrued when the obligation is contingent upon the happening of a future event No duty or liability to pay an income tax upon a transaction arises until the taxable year in which the event constituting the condition precedent occurs under any system ofaccounting

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSCHARITABLE AND OTHER CONTRIBUTIONSROXAS v CTA GR No L-25043 April 26 1968Facts Don Pedro Roxas and Dona Carmen Ayala Spanish subjects transmitted to their grandchildren by hereditary succession several properties To manage the above-mentioned properties said children namely Antonio Roxas Eduardo Roxas and Jose Roxas formed apartnership called Roxas y Compania At the conclusion of the WW2 the tenants who have all been tilling the lands in Nasugbu for generations expressed their desire to purchase from Roxas y Cia the parcels which they actually occupied For its part the Government in consonance with the constitutional mandate to acquire big landed estates and apportion them among landless tenants-farmers persuaded the Roxas brothers to part with their landholdings Conferences were held with the farmers in the early part of 1948 and finally the Roxas brothers agreed to sell 13500 hectares to the Government for distribution to actual occupants for a price of P207904847 plus P30000000 for survey and subdivision expenses It turned out however that the Government did not have funds to cover the purchase price and so a special arrangement was made for the Rehabilitation Finance Corporation to advance to Roxas y Cia The amount of P150000000 as loan Collateral for such loan were the lands proposed to be sold to the farmers Under the arrangement Roxas y Cia allowed the farmers to buy the lands for the same price but by installment and contracted with the Rehabilitation Finance Corporationto pay its loan from the proceeds of the yearly amortizations paid by the farmers The CIR demanded from Roxas y Cia the payment of deficiency income taxes resulting from the inclusion as income of Roxas y Cia of the unreported 50 of the net profits for 1953 and 1955 derived from the sale of the Nasugbu farm lands to the tenants and the disallowance of deductions from gross income of various business expenses and contributions claimed by Roxas y Cia and the Roxas brothers For the reason that Roxas y Cia subdivided its Nasugbu farm lands and soldthem to the farmers on installment the Commissioner considered the partnership as engaged in the business of real estate hence 100 of the profits derived therefrom was taxed The Roxas brothers protested the assessment but inasmuch as said protest was denied they instituted an appeal in the CTA which sustained the assessment Hence this appealIssue Is Roxas y Cia liable for the payment of deficiency income for the sale of Nasugbu farmlandsHeld NO The proposition of the CIR cannot be favorably accepted in this isolated transaction with its peculiar circumstances in spite of the fact that there were hundreds of vendees Although

they paid for their respective holdings in installment for a period of 10 years it would nevertheless not make the vendor Roxas y Cia a real estate dealer during the 10-year amortization period It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled them for generations was not only in consonance with but more in obedience to the request and pursuant to the policy of our Government to allocate lands to the landless It was the bounden duty of the Government to pay the agreed compensation after it had persuaded Roxas y Cia to sell its haciendas and to subsequently subdivide them among the farmers at very reasonable terms and prices However the Government could not comply with its duty for lack of funds Obligingly Roxas y Cia shouldered the Governments burden went out of its way and sold lands directly to the farmers in the same way and under the same terms as would have been the case had the Government done it itself For this magnanimous act the municipal council of Nasugbu passed a resolution expressing the peoples gratitudeIn fine Roxas y Cia cannot be considered a real estate dealer for the sale in question Hence pursuant to Section 34 of the Tax Code the lands sold to the farmers are capital assets and the gain derived from the sale thereof is capital gain taxable only to the extent of 50

DEDUCTIONS AND EXEMPTIONS NON-DEDUCTIBLE EXPENSECIR v JAMIRFacts For the year 1954 Alberto M K Jamir declared a gross income of P7585865 and claimed deductions aggregating P5813450 thereby showing a net income of P1777415 upon which he paid P1634 as income tax The Collector of Internal Revenue however assessed asdeficiency income tax due from him the sum of P16395 Jamir appealed to the Court of Tax Appeals which reduced the amount due as deficiency income tax to P55200Issue Whether Jamir had an undeclared income for the year 1954 aggregating P3127491Held No It appears that by using the so-called expenditures method the Government considered as an undeclared income Jamirs expenditures for February and May were in excess of his reported income for the same months Although the Court of Tax Appeals in effect sanctioned the adoption of the expenditures method it held that the same should be applied by deducting the aggregate yearly expenditures from the declared yearly income not the expenditures incurred each month from the declared income therefor In the case at bar Jamirs total income for the year 1954 (P7585865) exceeded (Pl777415) the total deductions (P5813450) claimed by him Jamir introduced evidence that the said sums of P128124 andP2999367 represented advances made to him by customers in the months of February and may 1954 and that the income derived from the corresponding transactions were entered in his books of account in subsequent months and this explanation was found by the Court of Tax Appeals to have been proven satisfactorily The next question raised by appellant refers to Jamirs claim for car depreciation and salary of his driver Although petitioner had disallowed one-half (12) of these claims it appearing that the car was used by Jamir for personal and business purposes the lower court allowed as deductions three-fourths (34) of said amounts the car having been used by Jamir more for business than for personal purpose Petitionerassails this as an error but considering the circumstances we agree with the deduction of frac34 by the lower court It is next urged that Jamir committed fraud and the 50 surcharge should not have been eliminated But since Jamir did not have the undeclared income of P3127491 upon which the contested assessment is mainly based it follows necessarily that he was not guiltyof the fraud and that the 50 surcharge has been properly eliminatedDisposition the decision appealed from is hereby affirmed

Atlas Consolidated Mining v CIRFacts CIR assessed Atlas deficiency income tax for 1957 to 1958 which amounted to morethan P700K CIR asserted that in 1957 Atlas was still not entitled to exemption fromthe income tax under RA 909 because the same covers only gold mines and Atlas isnot engaged in that Atlasprotested before the Sec of Finance and Sec ruled that exemption provided in RA 909 embraces all new 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 disallowance of the following items transfer agent1048576s fees stockholders relation service fee US stock listing expenses suit expenses provision for contingency CTA disallowed the items except the stockholders relation service fee and suit expenses Also CTA ruled that the exemption from payment of the corporate income tax of Atlas

was good only up to the first quarter of 1958 hence it computed for its net taxable income for the remaining frac34 of the year Atlas appealed asserting that the annual public relations expense is a deductible expense from gross income because it is an ordinary and necessarybusiness expenseIssue WON this fee paid for the services rendered by a public relations firm in the US labeled as stockholders relation service fee is an allowable deductionHeld 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 that deduction is authorized and must be able to prove that he is entitled to the deduction which the law allows As previously adverted to the law allowing expenses as deduction from gross income for purposes of the income tax is Section 30 (a) (1) of the National Internal Revenue which allows a deduction of all the ordinary and necessary expenses paid orincurred during the taxable year in carrying on any trade or business An item of expenditure in order to be deductible under this section of the statute must fall squarely within its language We come then to the statutory test of deductibility where it is axiomatic that to be deductible as a business expense three conditions are imposed namely (1) the expense must be ordinary and necessary (2) it must be paid or incurred within the taxable year and (3) it must be paid or incurred in carrying in a trade or business In addition not only must the taxpayer meet thebusiness test he must substantially prove by evidence or records the deductions claimed under the law otherwise the same will be disallowed The mere allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its deduction Assuming that the expenditure is ordinary and necessary in the operation of the taxpayers business the answer to the question as to whether the expenditure is an allowable deduction as a business expense must be determined from the nature of the expenditure itself which in turn depends on the extent and permanency of the work accomplished by the expenditure The expenditure of P2552314 paid to PK Macker amp Co as compensation for services carrying on the selling campaign in an effort to sell Atlas additional capital stock of P3325000 is not an ordinaryexpense in line with the decision of US Board of Tax Appeals in the case of Harrisburg Hospital Inc vs Commissioner of Internal Revenue Accordingly as found by the Court of Tax Appeals the said expense is not deductible from Atlas gross income in 1958 because expenses relating to 1) recapitalization and reorganization of the corporation 2) the cost of obtaining stock subscription 3)promotion expenses and 4) commission or fees paid for the sale of stock reorganization are capital expenditures The burden of proof that the expenses incurred are ordinary and necessary is onthe taxpayer The claimed business expense must also be supported by appropriate documents such as invoices official receipts and contracts to be made available in case of a tax audit by the Bureau of Internal Revenue

GANCAYCO V COLLECTORFacts1048576 Gancayco filed his Income tax Return (ITR) for 19491048576 CIR notified him that his liability is Php 979362 which he paid 19501048576 CIR after a year wrote to Gancayco saying that there was tax due from him for a total of Php 29554051048576 Gancayco asked for reconsideration and the tax assessed wasreduced1048576 CIR issued a warrant of distraint for the deficient liability1048576 Gancayco filed petition with CTACTA Required Gancayco to pay Php 16 86031 for tax deficiency in1949Gancayco the right to collect the deficiency income tax is barred by thestatute of limitations the 5 yr period for judicial action should be counted from May 12 50 the date of original assessment SC Section 316 provides The civil remedies for the collection of internal revenue taxes fees or charges and any increment thereto resulting from delinquency shall be (a) by distraint of goods chattels or effects and other personal property of whatever character including stocks and other securities debts credits bank accounts and interest in and rights to personal property and by levy upon real property and (b) by judicial action Either of these remedies or both simultaneously may be pursued in the discretion of the authorities charged with the collection of such taxes No exemption shall be allowed against the internal revenue taxes in any case

Deduction for expenses may be allowed however in this case Gancayco was not able to prove any expense as there were no receipts or other proofs CTA AFFIRMED

DEDUCTIONS AND EXEMPTIONS NON-DEDUCTIBLE EXPENSESILLEGAL EXPENSESCALANOC V COLLECTORFacts1048576 Calanoc was authorized to solicit and receive contributions for the orphans and destitute kids of the Child Welfare Workers Club of the Social Welfare Commission1048576 Dec 1949 Calanoc financed and promoted a boxing exhibition at the Rizal Memorial Stadium for said charitable purpose1048576 He applied for exemption from payment of the amusement tax as provided in Sec 260 NIRC1048576 CIR investigated the tax case of Calanoc and it was found that there was gross sale of Php 26553 expenditure of 25157 and profit of 1375301048576 Profit was remitted to Social Welfare Commission1048576 CIR demanded Calanoc oto pay 5331048576 Sec of Finance denied the application of Calanoc for exemption from payment of amusement taxCTA Affirmed the assessment of 7k Calanoc denies receving a stadium fee of 1k Although it was shown that 1k was paid by O-OSO Beverages His accountant is dead SC the items of expenditures for deduction are exorbitant and not supported by receiptsCTA Affirmed

3M PHILIPPINES INC petitioner vs COMMISSIONER OFINTERNAL REVENUE respondent [GR No 82833 September 261988]Facts The petitioner claimed as deductions for income tax purposes business expenses in the form of royalty payments to its foreign licensor which the respondent Commissioner of Internal Revenue disallowed The petitioner claimed the following deductions royalties and technical service fees and pre-operational cost of tape coater The amount was not allowed as entire deduction The petitioner argues that the law applicable to its case is only Section 29(a)(1) of the Tax Code and not Circular No 393 of the Central BankIssue WON the royalty payments are valid deductible expense WON the Tax Code is applicableHeld No Although the Tax Code allows payments of royalty to be deducted from gross income as business expenses it is CB Circular No 393 that defines what royalty payments are proper Improper payments of royalty are not deductible as legitimate business expenses Section 3-c of CB Circular No 393 provides for payment of royalties only on commodities manufactured by the licensee under the royalty agreement not on the wholesale price of finished products imported by the licensee from the licensor entral Bank Circulars like CB Circular No 393 (dated December 7 1973 published in the Official Gazette issue of December 17 1973 [69 OG No 51 p 11737] issued by the Central Bank in the exercise of fits authority under the Central Bank Act duly published in the Official Gazette have the force and effect of law (Cases cited) andbinding on everybody

DEDUCTIONS AND EXEMPTIONS PERSONAL EXEMPTIONSCOLLECTOR OF INTERNAL REVENUE petitioner vs ORLANDO VCALSADO and COURT OF TAX APPEALS respondents [GR 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 supportIssue WON the respondent is classified as head of the familyHeld 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 Php50000

In the matter of the adoption of the minor MARCIAL ELEUTERIO RESABA LUIS SANTOS-YNtildeIGO and LIGIA MIGUEL DE SANTOSYNtildeIGO petitioners-appellees vs REPUBLIC OF THE PHILIPPINES oppositor-appellantTAX ON CORPORATIONS BASES AND RATESRESIDENT FOREIGN CORPORATIONS TAXABLE INCOME [GRNo 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 minorIssue WON the adoption is validHeld 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 suchagreement 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 bymarriage 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 childrenwith 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 or main support Partial support not amounting to chief support will not entitle the taxpayer to claim exemption as a head of a family Regulation No section 11

and observation for a long period in the United States after whose Income Tax Law ours is patterned Verily courts are permitted to look into and investigate the antecedents or the legislative history of the statutes involvedThird issue-the undeclared capital gains derived from the sales in 1951 of certain real properties in Malate Manila and in Quezon City acquired during the Japanese occupationHeld The CTArsquos appraisal in this case is correct Consequently the total undeclared income of petitioners derived from the sales of the Manila and Quezon City properties in 1951 is P1711175 (P175000 plus P1536175) 50 of which in the sum of P855588 is taxable the said properties being capital assets held for more than one year The cost basis of property acquired in Japanese war notes is the equivalent of the war notes in genuine Philippine currency in accordance with the Ballantyne Scale 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 P13200000 was not entirely paid in Japanese War notes but frac12 thereof or P6600000 was in Philippine currency This being the case the Ballantyne Scale of values which was the resultof an impartial scientific study adopted and given judicial recognition should be applied As the value of the Japanese war notes in May 1944 when the Manila property was bought was 1 frac12 of the genuine Philippine Peso (Ballantyne Scale) and since the gain derived or loss sustained inthe disposition of this property is to reckoned in terms of Philippine Peso the value of the Japanese war notes used in the purchase of the property must be reduced in terms of the genuine Philippine Peso to determine the cost of acquisition It therefore results that since the sum of P6600000 in Japanese war notes in May 1944 is equivalent to P550000 in Philippine currency (P6600000 divided by 12) the acquisition cost of the property in question is P6600000 plus P550000 or P7150000 and that as the property was sold for P7500000 in 1951 the owners thereof Mariano and Felicidad Zamora derived a capital gain of P350000or P175000 each For the Quezon City property the CTA was correct in giving credence toZamorarsquos testimony that the same was purchased inPhilippine currency because it is quite incredible that real property with an assessed value of P4691000 should have been soldin Japanese war notes with an equivalent value in Philippine currency of only P1723975 Thus the gain derived from the sale isP1536175 after deducting from the selling price the cost of acquisition in the sum of P6895900 and the expense of sale in the sum of P967925Disposition The petitions are dismissed and the decision appealed from is affirmed

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSDEPLETIONCONSOLIDATED MINES V CTAFacts Cosolidated Mines filed a refund for overpayments of income taxes for the year 1951 However after investigation of the BIR instead of having a refund the company was instead assessed for deficiency income taxes for the years 1953 1954 and 1956 with 5 surchargeand 1 monthly interest According to the investigation (A) for the years 1951 to 1954 (1) the Company had not accrued as an expense the share in the company profits of Benguet Consolidated Mines as operator of the Consolidateds mines although for income tax purposes the Consolidated had reported income and expenses on the accrual basis (2) depletion and depreciation expenses had been overcharged and (3) the claims for audit and legal fees and miscellaneous expenses for 1953 and 1954 had not been properly substantiated and that (B) for the year 1956 (1) the Company had overstated its claim for depletion and (2) certain claims for miscellaneous expenses were not duly supported by evidence Background info Consolidated and Benguet entered into a development agreement whereby Consolidated as the owner of several mining claims allowed Benguet to explore develop mine concentrate andmarket the ore in the mining claims In the agreement it was provided that benguet is to provide the funds necessary for the expenses until such time the properties are on a profit producing basis to be reimbursed by consolidated Once profit is derived expenditures from its own resources shall be charged against the subsequent gross income of the properties During the time Benguet is being reimbursed for all its expenditures the net profits resulting from the operation of the claims shall be divided 90 to Benguet and 10 to Consolidated Such division of net profits shall be based on the receipts and expenditures during each calendar year and

shall continue until such time as the 90 of the net profits pertaining to Benguet hereunder shall equal the amount of such expenditures ldquoAfter Benguet has been fully reimbursed for its expenditures the net profits from the operation shall be divided between Benguet and Consolidated share and share alike it being understood however that the net profits as the term is used in this agreement shall be computed by deducting from gross income all operating expenses and all disbursements of any nature whatsoever as may be made in order to carry out the terms of this agreementrdquo It appears that by 1953 Benguet had completely recouped its advances because they were then dividing the profits share and share alike Consolidated used the accrual method of accounting in computing its income One of its expenses is the amount-paid to Benguet as mine operator which amount is computed as 50 of ldquonet incomerdquo TheConsolidated deducts as an expense 50 of cash receipts minus disbursements but does not deduct at the end of each calendar year what the Commissioner alleges is 50 of the share of Benguet in the accounts receivable However it deducts Benguets 50 if and when the accounts receivable are actually paid It would seem therefore that Consolidated has been deducting a portion of this expense (Benguets share as mine operator) on the cash amp carry basis The question is whether or not the accounting system used by Consolidated justifies such a treatment of this item and if not whether said method used by Consolidated and characterized by the Commissioner as a hybrid method may be allowed under the provisions of the NIRCIssue WON Consolidatedrsquos accounting method is allowedHeld YES It is said that accounting methods for tax purposes comprise a set of rules for determining when and how to report income and deductions The US Internal Revenue Code allows each taxpayer to adopt the accounting method most suitable to his business and requires only that taxable income generally be based on the method of accounting regularly employed in keeping the taxpayers books provided that the method clearly reflects incomeA deduction cannot be accrued until an actual liability is incurred even if payment has not been made Here we have to distinguish between (1) the method of accounting used by Consolidated in determining its net income for tax purposes and (2) the method of computation agreed upon between Consolidated and 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 were cash receipts and cash payments Once determined in accordance with the stipulated bases and procedure then the amount due Benguet for each month accrued at the end of that month whether Consolidated had made payment or not To make Consolidated deduct as an expense one-half of the Accounts Receivable would in effect be equivalent to giving Benguet a right which it did not have under the contract and to substitute for the parties choice a mode of computation of compensationnot contemplated by themON DEPLETIONThe first issue raised by Consolidated is with respect to the rate of mine depletion used by the Court of Tax Appeals The Tax Code provides that in computing net income there shall be allowed as deduction in the case of mines a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof which has been mined and sold during the year for which the return is made [Sec 30(g) (1) (B)] As an income tax concept depletion is wholly a creation of the statute mdash ldquosolely a matter of legislative gracerdquo Hence the taxpayer has the burden of justifying the allowance of any deduction claimed As in connectionwith all other tax controversies the burden of proof to show that a disallowance of depletion by the Commissioner is incorrect or that an allowance made is inadequate is upon the taxpayer and this is true with respect to the value of the property constituting the basis of the deduction This burden-of-proof rule has been frequently applied and a value claimed has been disallowed for lack of evidence Here SC considered the evidence presented (testimony of Eligio Garciaand the Report to Stockholders (which includes the Balance Sheet as of 1946) geological report on the estimated amount of ore in the claims etc) it set forth a very detailed computation of the depletion rate determining the value of each component of the formula of depletion viz Rate of Depletion Per Unit = Cost of Mine Property Estimated ore Deposit of Product Mined and sold- depletion is different from depreciation In determining the amount of cost depletion allowable the following three facts are essential namely (1) the basis of the property (2) the estimated total recoverable units in the property and (3) the number of units recovered during the taxable year in question As used as an element in cost depletion basis means the dollar amount of the

taxpayers capital or investment in the property which he is entitled to recover tax free during the period he is removing the mineral in the depositDisposition Decision modifiedFootnotes in the case that are helpful While taxable income is based on the method of accounting used by the taxpayer it will almost always differ from accounting income This is sobecause of a fundamental difference in the ends the two concepts serve Accounting attempts to match cost against revenue Tax law is aimed at collecting revenue It is quick to treat an item as income slow to recognize deductions or losses Thus the tax law will not recognize deductions for contingent future losses except in very limited situations Good accounting on the other hand their recognition Once this fundamental difference in approach is accepted income tax accounting methods can be understood more easily 33 Am Jur 2d 688 Under the accrual system income is accruable in the year in which the taxpayers right thereto becomes fixed and definite even though it may not be actually received until a later year while a deduction for a liability is to be accrued and taken when the liability becomes fixed and certain even though it may not be paid until a later year It has been held that the basis of the accrual system of accounting is that obligations incurred in the normal course of business will be discharged in due course that the deductions have been paid or accrued or paid and incurred but in order to be accruable in the taxable year a valid obligation upon which the profit (or loss in the case 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 expend money constituting a deductible loss is the date that fixes liability Gain or loss may not said to be fixed or accrued when the obligation is contingent upon the happening of a future event No duty or liability to pay an income tax upon a transaction arises until the taxable year in which the event constituting the condition precedent occurs under any system ofaccounting

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSCHARITABLE AND OTHER CONTRIBUTIONSROXAS v CTA GR No L-25043 April 26 1968Facts Don Pedro Roxas and Dona Carmen Ayala Spanish subjects transmitted to their grandchildren by hereditary succession several properties To manage the above-mentioned properties said children namely Antonio Roxas Eduardo Roxas and Jose Roxas formed apartnership called Roxas y Compania At the conclusion of the WW2 the tenants who have all been tilling the lands in Nasugbu for generations expressed their desire to purchase from Roxas y Cia the parcels which they actually occupied For its part the Government in consonance with the constitutional mandate to acquire big landed estates and apportion them among landless tenants-farmers persuaded the Roxas brothers to part with their landholdings Conferences were held with the farmers in the early part of 1948 and finally the Roxas brothers agreed to sell 13500 hectares to the Government for distribution to actual occupants for a price of P207904847 plus P30000000 for survey and subdivision expenses It turned out however that the Government did not have funds to cover the purchase price and so a special arrangement was made for the Rehabilitation Finance Corporation to advance to Roxas y Cia The amount of P150000000 as loan Collateral for such loan were the lands proposed to be sold to the farmers Under the arrangement Roxas y Cia allowed the farmers to buy the lands for the same price but by installment and contracted with the Rehabilitation Finance Corporationto pay its loan from the proceeds of the yearly amortizations paid by the farmers The CIR demanded from Roxas y Cia the payment of deficiency income taxes resulting from the inclusion as income of Roxas y Cia of the unreported 50 of the net profits for 1953 and 1955 derived from the sale of the Nasugbu farm lands to the tenants and the disallowance of deductions from gross income of various business expenses and contributions claimed by Roxas y Cia and the Roxas brothers For the reason that Roxas y Cia subdivided its Nasugbu farm lands and soldthem to the farmers on installment the Commissioner considered the partnership as engaged in the business of real estate hence 100 of the profits derived therefrom was taxed The Roxas brothers protested the assessment but inasmuch as said protest was denied they instituted an appeal in the CTA which sustained the assessment Hence this appealIssue Is Roxas y Cia liable for the payment of deficiency income for the sale of Nasugbu farmlandsHeld NO The proposition of the CIR cannot be favorably accepted in this isolated transaction with its peculiar circumstances in spite of the fact that there were hundreds of vendees Although

they paid for their respective holdings in installment for a period of 10 years it would nevertheless not make the vendor Roxas y Cia a real estate dealer during the 10-year amortization period It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled them for generations was not only in consonance with but more in obedience to the request and pursuant to the policy of our Government to allocate lands to the landless It was the bounden duty of the Government to pay the agreed compensation after it had persuaded Roxas y Cia to sell its haciendas and to subsequently subdivide them among the farmers at very reasonable terms and prices However the Government could not comply with its duty for lack of funds Obligingly Roxas y Cia shouldered the Governments burden went out of its way and sold lands directly to the farmers in the same way and under the same terms as would have been the case had the Government done it itself For this magnanimous act the municipal council of Nasugbu passed a resolution expressing the peoples gratitudeIn fine Roxas y Cia cannot be considered a real estate dealer for the sale in question Hence pursuant to Section 34 of the Tax Code the lands sold to the farmers are capital assets and the gain derived from the sale thereof is capital gain taxable only to the extent of 50

DEDUCTIONS AND EXEMPTIONS NON-DEDUCTIBLE EXPENSECIR v JAMIRFacts For the year 1954 Alberto M K Jamir declared a gross income of P7585865 and claimed deductions aggregating P5813450 thereby showing a net income of P1777415 upon which he paid P1634 as income tax The Collector of Internal Revenue however assessed asdeficiency income tax due from him the sum of P16395 Jamir appealed to the Court of Tax Appeals which reduced the amount due as deficiency income tax to P55200Issue Whether Jamir had an undeclared income for the year 1954 aggregating P3127491Held No It appears that by using the so-called expenditures method the Government considered as an undeclared income Jamirs expenditures for February and May were in excess of his reported income for the same months Although the Court of Tax Appeals in effect sanctioned the adoption of the expenditures method it held that the same should be applied by deducting the aggregate yearly expenditures from the declared yearly income not the expenditures incurred each month from the declared income therefor In the case at bar Jamirs total income for the year 1954 (P7585865) exceeded (Pl777415) the total deductions (P5813450) claimed by him Jamir introduced evidence that the said sums of P128124 andP2999367 represented advances made to him by customers in the months of February and may 1954 and that the income derived from the corresponding transactions were entered in his books of account in subsequent months and this explanation was found by the Court of Tax Appeals to have been proven satisfactorily The next question raised by appellant refers to Jamirs claim for car depreciation and salary of his driver Although petitioner had disallowed one-half (12) of these claims it appearing that the car was used by Jamir for personal and business purposes the lower court allowed as deductions three-fourths (34) of said amounts the car having been used by Jamir more for business than for personal purpose Petitionerassails this as an error but considering the circumstances we agree with the deduction of frac34 by the lower court It is next urged that Jamir committed fraud and the 50 surcharge should not have been eliminated But since Jamir did not have the undeclared income of P3127491 upon which the contested assessment is mainly based it follows necessarily that he was not guiltyof the fraud and that the 50 surcharge has been properly eliminatedDisposition the decision appealed from is hereby affirmed

Atlas Consolidated Mining v CIRFacts CIR assessed Atlas deficiency income tax for 1957 to 1958 which amounted to morethan P700K CIR asserted that in 1957 Atlas was still not entitled to exemption fromthe income tax under RA 909 because the same covers only gold mines and Atlas isnot engaged in that Atlasprotested before the Sec of Finance and Sec ruled that exemption provided in RA 909 embraces all new 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 disallowance of the following items transfer agent1048576s fees stockholders relation service fee US stock listing expenses suit expenses provision for contingency CTA disallowed the items except the stockholders relation service fee and suit expenses Also CTA ruled that the exemption from payment of the corporate income tax of Atlas

was good only up to the first quarter of 1958 hence it computed for its net taxable income for the remaining frac34 of the year Atlas appealed asserting that the annual public relations expense is a deductible expense from gross income because it is an ordinary and necessarybusiness expenseIssue WON this fee paid for the services rendered by a public relations firm in the US labeled as stockholders relation service fee is an allowable deductionHeld 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 that deduction is authorized and must be able to prove that he is entitled to the deduction which the law allows As previously adverted to the law allowing expenses as deduction from gross income for purposes of the income tax is Section 30 (a) (1) of the National Internal Revenue which allows a deduction of all the ordinary and necessary expenses paid orincurred during the taxable year in carrying on any trade or business An item of expenditure in order to be deductible under this section of the statute must fall squarely within its language We come then to the statutory test of deductibility where it is axiomatic that to be deductible as a business expense three conditions are imposed namely (1) the expense must be ordinary and necessary (2) it must be paid or incurred within the taxable year and (3) it must be paid or incurred in carrying in a trade or business In addition not only must the taxpayer meet thebusiness test he must substantially prove by evidence or records the deductions claimed under the law otherwise the same will be disallowed The mere allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its deduction Assuming that the expenditure is ordinary and necessary in the operation of the taxpayers business the answer to the question as to whether the expenditure is an allowable deduction as a business expense must be determined from the nature of the expenditure itself which in turn depends on the extent and permanency of the work accomplished by the expenditure The expenditure of P2552314 paid to PK Macker amp Co as compensation for services carrying on the selling campaign in an effort to sell Atlas additional capital stock of P3325000 is not an ordinaryexpense in line with the decision of US Board of Tax Appeals in the case of Harrisburg Hospital Inc vs Commissioner of Internal Revenue Accordingly as found by the Court of Tax Appeals the said expense is not deductible from Atlas gross income in 1958 because expenses relating to 1) recapitalization and reorganization of the corporation 2) the cost of obtaining stock subscription 3)promotion expenses and 4) commission or fees paid for the sale of stock reorganization are capital expenditures The burden of proof that the expenses incurred are ordinary and necessary is onthe taxpayer The claimed business expense must also be supported by appropriate documents such as invoices official receipts and contracts to be made available in case of a tax audit by the Bureau of Internal Revenue

GANCAYCO V COLLECTORFacts1048576 Gancayco filed his Income tax Return (ITR) for 19491048576 CIR notified him that his liability is Php 979362 which he paid 19501048576 CIR after a year wrote to Gancayco saying that there was tax due from him for a total of Php 29554051048576 Gancayco asked for reconsideration and the tax assessed wasreduced1048576 CIR issued a warrant of distraint for the deficient liability1048576 Gancayco filed petition with CTACTA Required Gancayco to pay Php 16 86031 for tax deficiency in1949Gancayco the right to collect the deficiency income tax is barred by thestatute of limitations the 5 yr period for judicial action should be counted from May 12 50 the date of original assessment SC Section 316 provides The civil remedies for the collection of internal revenue taxes fees or charges and any increment thereto resulting from delinquency shall be (a) by distraint of goods chattels or effects and other personal property of whatever character including stocks and other securities debts credits bank accounts and interest in and rights to personal property and by levy upon real property and (b) by judicial action Either of these remedies or both simultaneously may be pursued in the discretion of the authorities charged with the collection of such taxes No exemption shall be allowed against the internal revenue taxes in any case

Deduction for expenses may be allowed however in this case Gancayco was not able to prove any expense as there were no receipts or other proofs CTA AFFIRMED

DEDUCTIONS AND EXEMPTIONS NON-DEDUCTIBLE EXPENSESILLEGAL EXPENSESCALANOC V COLLECTORFacts1048576 Calanoc was authorized to solicit and receive contributions for the orphans and destitute kids of the Child Welfare Workers Club of the Social Welfare Commission1048576 Dec 1949 Calanoc financed and promoted a boxing exhibition at the Rizal Memorial Stadium for said charitable purpose1048576 He applied for exemption from payment of the amusement tax as provided in Sec 260 NIRC1048576 CIR investigated the tax case of Calanoc and it was found that there was gross sale of Php 26553 expenditure of 25157 and profit of 1375301048576 Profit was remitted to Social Welfare Commission1048576 CIR demanded Calanoc oto pay 5331048576 Sec of Finance denied the application of Calanoc for exemption from payment of amusement taxCTA Affirmed the assessment of 7k Calanoc denies receving a stadium fee of 1k Although it was shown that 1k was paid by O-OSO Beverages His accountant is dead SC the items of expenditures for deduction are exorbitant and not supported by receiptsCTA Affirmed

3M PHILIPPINES INC petitioner vs COMMISSIONER OFINTERNAL REVENUE respondent [GR No 82833 September 261988]Facts The petitioner claimed as deductions for income tax purposes business expenses in the form of royalty payments to its foreign licensor which the respondent Commissioner of Internal Revenue disallowed The petitioner claimed the following deductions royalties and technical service fees and pre-operational cost of tape coater The amount was not allowed as entire deduction The petitioner argues that the law applicable to its case is only Section 29(a)(1) of the Tax Code and not Circular No 393 of the Central BankIssue WON the royalty payments are valid deductible expense WON the Tax Code is applicableHeld No Although the Tax Code allows payments of royalty to be deducted from gross income as business expenses it is CB Circular No 393 that defines what royalty payments are proper Improper payments of royalty are not deductible as legitimate business expenses Section 3-c of CB Circular No 393 provides for payment of royalties only on commodities manufactured by the licensee under the royalty agreement not on the wholesale price of finished products imported by the licensee from the licensor entral Bank Circulars like CB Circular No 393 (dated December 7 1973 published in the Official Gazette issue of December 17 1973 [69 OG No 51 p 11737] issued by the Central Bank in the exercise of fits authority under the Central Bank Act duly published in the Official Gazette have the force and effect of law (Cases cited) andbinding on everybody

DEDUCTIONS AND EXEMPTIONS PERSONAL EXEMPTIONSCOLLECTOR OF INTERNAL REVENUE petitioner vs ORLANDO VCALSADO and COURT OF TAX APPEALS respondents [GR 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 supportIssue WON the respondent is classified as head of the familyHeld 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 Php50000

In the matter of the adoption of the minor MARCIAL ELEUTERIO RESABA LUIS SANTOS-YNtildeIGO and LIGIA MIGUEL DE SANTOSYNtildeIGO petitioners-appellees vs REPUBLIC OF THE PHILIPPINES oppositor-appellantTAX ON CORPORATIONS BASES AND RATESRESIDENT FOREIGN CORPORATIONS TAXABLE INCOME [GRNo 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 minorIssue WON the adoption is validHeld 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 suchagreement 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 bymarriage 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 childrenwith 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 or main support Partial support not amounting to chief support will not entitle the taxpayer to claim exemption as a head of a family Regulation No section 11

taxpayers capital or investment in the property which he is entitled to recover tax free during the period he is removing the mineral in the depositDisposition Decision modifiedFootnotes in the case that are helpful While taxable income is based on the method of accounting used by the taxpayer it will almost always differ from accounting income This is sobecause of a fundamental difference in the ends the two concepts serve Accounting attempts to match cost against revenue Tax law is aimed at collecting revenue It is quick to treat an item as income slow to recognize deductions or losses Thus the tax law will not recognize deductions for contingent future losses except in very limited situations Good accounting on the other hand their recognition Once this fundamental difference in approach is accepted income tax accounting methods can be understood more easily 33 Am Jur 2d 688 Under the accrual system income is accruable in the year in which the taxpayers right thereto becomes fixed and definite even though it may not be actually received until a later year while a deduction for a liability is to be accrued and taken when the liability becomes fixed and certain even though it may not be paid until a later year It has been held that the basis of the accrual system of accounting is that obligations incurred in the normal course of business will be discharged in due course that the deductions have been paid or accrued or paid and incurred but in order to be accruable in the taxable year a valid obligation upon which the profit (or loss in the case 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 expend money constituting a deductible loss is the date that fixes liability Gain or loss may not said to be fixed or accrued when the obligation is contingent upon the happening of a future event No duty or liability to pay an income tax upon a transaction arises until the taxable year in which the event constituting the condition precedent occurs under any system ofaccounting

DEDUCTIONS AND EXEMPTIONS ALLOWABLE DEDUCTIONSCHARITABLE AND OTHER CONTRIBUTIONSROXAS v CTA GR No L-25043 April 26 1968Facts Don Pedro Roxas and Dona Carmen Ayala Spanish subjects transmitted to their grandchildren by hereditary succession several properties To manage the above-mentioned properties said children namely Antonio Roxas Eduardo Roxas and Jose Roxas formed apartnership called Roxas y Compania At the conclusion of the WW2 the tenants who have all been tilling the lands in Nasugbu for generations expressed their desire to purchase from Roxas y Cia the parcels which they actually occupied For its part the Government in consonance with the constitutional mandate to acquire big landed estates and apportion them among landless tenants-farmers persuaded the Roxas brothers to part with their landholdings Conferences were held with the farmers in the early part of 1948 and finally the Roxas brothers agreed to sell 13500 hectares to the Government for distribution to actual occupants for a price of P207904847 plus P30000000 for survey and subdivision expenses It turned out however that the Government did not have funds to cover the purchase price and so a special arrangement was made for the Rehabilitation Finance Corporation to advance to Roxas y Cia The amount of P150000000 as loan Collateral for such loan were the lands proposed to be sold to the farmers Under the arrangement Roxas y Cia allowed the farmers to buy the lands for the same price but by installment and contracted with the Rehabilitation Finance Corporationto pay its loan from the proceeds of the yearly amortizations paid by the farmers The CIR demanded from Roxas y Cia the payment of deficiency income taxes resulting from the inclusion as income of Roxas y Cia of the unreported 50 of the net profits for 1953 and 1955 derived from the sale of the Nasugbu farm lands to the tenants and the disallowance of deductions from gross income of various business expenses and contributions claimed by Roxas y Cia and the Roxas brothers For the reason that Roxas y Cia subdivided its Nasugbu farm lands and soldthem to the farmers on installment the Commissioner considered the partnership as engaged in the business of real estate hence 100 of the profits derived therefrom was taxed The Roxas brothers protested the assessment but inasmuch as said protest was denied they instituted an appeal in the CTA which sustained the assessment Hence this appealIssue Is Roxas y Cia liable for the payment of deficiency income for the sale of Nasugbu farmlandsHeld NO The proposition of the CIR cannot be favorably accepted in this isolated transaction with its peculiar circumstances in spite of the fact that there were hundreds of vendees Although

they paid for their respective holdings in installment for a period of 10 years it would nevertheless not make the vendor Roxas y Cia a real estate dealer during the 10-year amortization period It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled them for generations was not only in consonance with but more in obedience to the request and pursuant to the policy of our Government to allocate lands to the landless It was the bounden duty of the Government to pay the agreed compensation after it had persuaded Roxas y Cia to sell its haciendas and to subsequently subdivide them among the farmers at very reasonable terms and prices However the Government could not comply with its duty for lack of funds Obligingly Roxas y Cia shouldered the Governments burden went out of its way and sold lands directly to the farmers in the same way and under the same terms as would have been the case had the Government done it itself For this magnanimous act the municipal council of Nasugbu passed a resolution expressing the peoples gratitudeIn fine Roxas y Cia cannot be considered a real estate dealer for the sale in question Hence pursuant to Section 34 of the Tax Code the lands sold to the farmers are capital assets and the gain derived from the sale thereof is capital gain taxable only to the extent of 50

DEDUCTIONS AND EXEMPTIONS NON-DEDUCTIBLE EXPENSECIR v JAMIRFacts For the year 1954 Alberto M K Jamir declared a gross income of P7585865 and claimed deductions aggregating P5813450 thereby showing a net income of P1777415 upon which he paid P1634 as income tax The Collector of Internal Revenue however assessed asdeficiency income tax due from him the sum of P16395 Jamir appealed to the Court of Tax Appeals which reduced the amount due as deficiency income tax to P55200Issue Whether Jamir had an undeclared income for the year 1954 aggregating P3127491Held No It appears that by using the so-called expenditures method the Government considered as an undeclared income Jamirs expenditures for February and May were in excess of his reported income for the same months Although the Court of Tax Appeals in effect sanctioned the adoption of the expenditures method it held that the same should be applied by deducting the aggregate yearly expenditures from the declared yearly income not the expenditures incurred each month from the declared income therefor In the case at bar Jamirs total income for the year 1954 (P7585865) exceeded (Pl777415) the total deductions (P5813450) claimed by him Jamir introduced evidence that the said sums of P128124 andP2999367 represented advances made to him by customers in the months of February and may 1954 and that the income derived from the corresponding transactions were entered in his books of account in subsequent months and this explanation was found by the Court of Tax Appeals to have been proven satisfactorily The next question raised by appellant refers to Jamirs claim for car depreciation and salary of his driver Although petitioner had disallowed one-half (12) of these claims it appearing that the car was used by Jamir for personal and business purposes the lower court allowed as deductions three-fourths (34) of said amounts the car having been used by Jamir more for business than for personal purpose Petitionerassails this as an error but considering the circumstances we agree with the deduction of frac34 by the lower court It is next urged that Jamir committed fraud and the 50 surcharge should not have been eliminated But since Jamir did not have the undeclared income of P3127491 upon which the contested assessment is mainly based it follows necessarily that he was not guiltyof the fraud and that the 50 surcharge has been properly eliminatedDisposition the decision appealed from is hereby affirmed

Atlas Consolidated Mining v CIRFacts CIR assessed Atlas deficiency income tax for 1957 to 1958 which amounted to morethan P700K CIR asserted that in 1957 Atlas was still not entitled to exemption fromthe income tax under RA 909 because the same covers only gold mines and Atlas isnot engaged in that Atlasprotested before the Sec of Finance and Sec ruled that exemption provided in RA 909 embraces all new 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 disallowance of the following items transfer agent1048576s fees stockholders relation service fee US stock listing expenses suit expenses provision for contingency CTA disallowed the items except the stockholders relation service fee and suit expenses Also CTA ruled that the exemption from payment of the corporate income tax of Atlas

was good only up to the first quarter of 1958 hence it computed for its net taxable income for the remaining frac34 of the year Atlas appealed asserting that the annual public relations expense is a deductible expense from gross income because it is an ordinary and necessarybusiness expenseIssue WON this fee paid for the services rendered by a public relations firm in the US labeled as stockholders relation service fee is an allowable deductionHeld 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 that deduction is authorized and must be able to prove that he is entitled to the deduction which the law allows As previously adverted to the law allowing expenses as deduction from gross income for purposes of the income tax is Section 30 (a) (1) of the National Internal Revenue which allows a deduction of all the ordinary and necessary expenses paid orincurred during the taxable year in carrying on any trade or business An item of expenditure in order to be deductible under this section of the statute must fall squarely within its language We come then to the statutory test of deductibility where it is axiomatic that to be deductible as a business expense three conditions are imposed namely (1) the expense must be ordinary and necessary (2) it must be paid or incurred within the taxable year and (3) it must be paid or incurred in carrying in a trade or business In addition not only must the taxpayer meet thebusiness test he must substantially prove by evidence or records the deductions claimed under the law otherwise the same will be disallowed The mere allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its deduction Assuming that the expenditure is ordinary and necessary in the operation of the taxpayers business the answer to the question as to whether the expenditure is an allowable deduction as a business expense must be determined from the nature of the expenditure itself which in turn depends on the extent and permanency of the work accomplished by the expenditure The expenditure of P2552314 paid to PK Macker amp Co as compensation for services carrying on the selling campaign in an effort to sell Atlas additional capital stock of P3325000 is not an ordinaryexpense in line with the decision of US Board of Tax Appeals in the case of Harrisburg Hospital Inc vs Commissioner of Internal Revenue Accordingly as found by the Court of Tax Appeals the said expense is not deductible from Atlas gross income in 1958 because expenses relating to 1) recapitalization and reorganization of the corporation 2) the cost of obtaining stock subscription 3)promotion expenses and 4) commission or fees paid for the sale of stock reorganization are capital expenditures The burden of proof that the expenses incurred are ordinary and necessary is onthe taxpayer The claimed business expense must also be supported by appropriate documents such as invoices official receipts and contracts to be made available in case of a tax audit by the Bureau of Internal Revenue

GANCAYCO V COLLECTORFacts1048576 Gancayco filed his Income tax Return (ITR) for 19491048576 CIR notified him that his liability is Php 979362 which he paid 19501048576 CIR after a year wrote to Gancayco saying that there was tax due from him for a total of Php 29554051048576 Gancayco asked for reconsideration and the tax assessed wasreduced1048576 CIR issued a warrant of distraint for the deficient liability1048576 Gancayco filed petition with CTACTA Required Gancayco to pay Php 16 86031 for tax deficiency in1949Gancayco the right to collect the deficiency income tax is barred by thestatute of limitations the 5 yr period for judicial action should be counted from May 12 50 the date of original assessment SC Section 316 provides The civil remedies for the collection of internal revenue taxes fees or charges and any increment thereto resulting from delinquency shall be (a) by distraint of goods chattels or effects and other personal property of whatever character including stocks and other securities debts credits bank accounts and interest in and rights to personal property and by levy upon real property and (b) by judicial action Either of these remedies or both simultaneously may be pursued in the discretion of the authorities charged with the collection of such taxes No exemption shall be allowed against the internal revenue taxes in any case

Deduction for expenses may be allowed however in this case Gancayco was not able to prove any expense as there were no receipts or other proofs CTA AFFIRMED

DEDUCTIONS AND EXEMPTIONS NON-DEDUCTIBLE EXPENSESILLEGAL EXPENSESCALANOC V COLLECTORFacts1048576 Calanoc was authorized to solicit and receive contributions for the orphans and destitute kids of the Child Welfare Workers Club of the Social Welfare Commission1048576 Dec 1949 Calanoc financed and promoted a boxing exhibition at the Rizal Memorial Stadium for said charitable purpose1048576 He applied for exemption from payment of the amusement tax as provided in Sec 260 NIRC1048576 CIR investigated the tax case of Calanoc and it was found that there was gross sale of Php 26553 expenditure of 25157 and profit of 1375301048576 Profit was remitted to Social Welfare Commission1048576 CIR demanded Calanoc oto pay 5331048576 Sec of Finance denied the application of Calanoc for exemption from payment of amusement taxCTA Affirmed the assessment of 7k Calanoc denies receving a stadium fee of 1k Although it was shown that 1k was paid by O-OSO Beverages His accountant is dead SC the items of expenditures for deduction are exorbitant and not supported by receiptsCTA Affirmed

3M PHILIPPINES INC petitioner vs COMMISSIONER OFINTERNAL REVENUE respondent [GR No 82833 September 261988]Facts The petitioner claimed as deductions for income tax purposes business expenses in the form of royalty payments to its foreign licensor which the respondent Commissioner of Internal Revenue disallowed The petitioner claimed the following deductions royalties and technical service fees and pre-operational cost of tape coater The amount was not allowed as entire deduction The petitioner argues that the law applicable to its case is only Section 29(a)(1) of the Tax Code and not Circular No 393 of the Central BankIssue WON the royalty payments are valid deductible expense WON the Tax Code is applicableHeld No Although the Tax Code allows payments of royalty to be deducted from gross income as business expenses it is CB Circular No 393 that defines what royalty payments are proper Improper payments of royalty are not deductible as legitimate business expenses Section 3-c of CB Circular No 393 provides for payment of royalties only on commodities manufactured by the licensee under the royalty agreement not on the wholesale price of finished products imported by the licensee from the licensor entral Bank Circulars like CB Circular No 393 (dated December 7 1973 published in the Official Gazette issue of December 17 1973 [69 OG No 51 p 11737] issued by the Central Bank in the exercise of fits authority under the Central Bank Act duly published in the Official Gazette have the force and effect of law (Cases cited) andbinding on everybody

DEDUCTIONS AND EXEMPTIONS PERSONAL EXEMPTIONSCOLLECTOR OF INTERNAL REVENUE petitioner vs ORLANDO VCALSADO and COURT OF TAX APPEALS respondents [GR 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 supportIssue WON the respondent is classified as head of the familyHeld 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 Php50000

In the matter of the adoption of the minor MARCIAL ELEUTERIO RESABA LUIS SANTOS-YNtildeIGO and LIGIA MIGUEL DE SANTOSYNtildeIGO petitioners-appellees vs REPUBLIC OF THE PHILIPPINES oppositor-appellantTAX ON CORPORATIONS BASES AND RATESRESIDENT FOREIGN CORPORATIONS TAXABLE INCOME [GRNo 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 minorIssue WON the adoption is validHeld 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 suchagreement 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 bymarriage 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 childrenwith 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 or main support Partial support not amounting to chief support will not entitle the taxpayer to claim exemption as a head of a family Regulation No section 11

was good only up to the first quarter of 1958 hence it computed for its net taxable income for the remaining frac34 of the year Atlas appealed asserting that the annual public relations expense is a deductible expense from gross income because it is an ordinary and necessarybusiness expenseIssue WON this fee paid for the services rendered by a public relations firm in the US labeled as stockholders relation service fee is an allowable deductionHeld 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 that deduction is authorized and must be able to prove that he is entitled to the deduction which the law allows As previously adverted to the law allowing expenses as deduction from gross income for purposes of the income tax is Section 30 (a) (1) of the National Internal Revenue which allows a deduction of all the ordinary and necessary expenses paid orincurred during the taxable year in carrying on any trade or business An item of expenditure in order to be deductible under this section of the statute must fall squarely within its language We come then to the statutory test of deductibility where it is axiomatic that to be deductible as a business expense three conditions are imposed namely (1) the expense must be ordinary and necessary (2) it must be paid or incurred within the taxable year and (3) it must be paid or incurred in carrying in a trade or business In addition not only must the taxpayer meet thebusiness test he must substantially prove by evidence or records the deductions claimed under the law otherwise the same will be disallowed The mere allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its deduction Assuming that the expenditure is ordinary and necessary in the operation of the taxpayers business the answer to the question as to whether the expenditure is an allowable deduction as a business expense must be determined from the nature of the expenditure itself which in turn depends on the extent and permanency of the work accomplished by the expenditure The expenditure of P2552314 paid to PK Macker amp Co as compensation for services carrying on the selling campaign in an effort to sell Atlas additional capital stock of P3325000 is not an ordinaryexpense in line with the decision of US Board of Tax Appeals in the case of Harrisburg Hospital Inc vs Commissioner of Internal Revenue Accordingly as found by the Court of Tax Appeals the said expense is not deductible from Atlas gross income in 1958 because expenses relating to 1) recapitalization and reorganization of the corporation 2) the cost of obtaining stock subscription 3)promotion expenses and 4) commission or fees paid for the sale of stock reorganization are capital expenditures The burden of proof that the expenses incurred are ordinary and necessary is onthe taxpayer The claimed business expense must also be supported by appropriate documents such as invoices official receipts and contracts to be made available in case of a tax audit by the Bureau of Internal Revenue

GANCAYCO V COLLECTORFacts1048576 Gancayco filed his Income tax Return (ITR) for 19491048576 CIR notified him that his liability is Php 979362 which he paid 19501048576 CIR after a year wrote to Gancayco saying that there was tax due from him for a total of Php 29554051048576 Gancayco asked for reconsideration and the tax assessed wasreduced1048576 CIR issued a warrant of distraint for the deficient liability1048576 Gancayco filed petition with CTACTA Required Gancayco to pay Php 16 86031 for tax deficiency in1949Gancayco the right to collect the deficiency income tax is barred by thestatute of limitations the 5 yr period for judicial action should be counted from May 12 50 the date of original assessment SC Section 316 provides The civil remedies for the collection of internal revenue taxes fees or charges and any increment thereto resulting from delinquency shall be (a) by distraint of goods chattels or effects and other personal property of whatever character including stocks and other securities debts credits bank accounts and interest in and rights to personal property and by levy upon real property and (b) by judicial action Either of these remedies or both simultaneously may be pursued in the discretion of the authorities charged with the collection of such taxes No exemption shall be allowed against the internal revenue taxes in any case

Deduction for expenses may be allowed however in this case Gancayco was not able to prove any expense as there were no receipts or other proofs CTA AFFIRMED

DEDUCTIONS AND EXEMPTIONS NON-DEDUCTIBLE EXPENSESILLEGAL EXPENSESCALANOC V COLLECTORFacts1048576 Calanoc was authorized to solicit and receive contributions for the orphans and destitute kids of the Child Welfare Workers Club of the Social Welfare Commission1048576 Dec 1949 Calanoc financed and promoted a boxing exhibition at the Rizal Memorial Stadium for said charitable purpose1048576 He applied for exemption from payment of the amusement tax as provided in Sec 260 NIRC1048576 CIR investigated the tax case of Calanoc and it was found that there was gross sale of Php 26553 expenditure of 25157 and profit of 1375301048576 Profit was remitted to Social Welfare Commission1048576 CIR demanded Calanoc oto pay 5331048576 Sec of Finance denied the application of Calanoc for exemption from payment of amusement taxCTA Affirmed the assessment of 7k Calanoc denies receving a stadium fee of 1k Although it was shown that 1k was paid by O-OSO Beverages His accountant is dead SC the items of expenditures for deduction are exorbitant and not supported by receiptsCTA Affirmed

3M PHILIPPINES INC petitioner vs COMMISSIONER OFINTERNAL REVENUE respondent [GR No 82833 September 261988]Facts The petitioner claimed as deductions for income tax purposes business expenses in the form of royalty payments to its foreign licensor which the respondent Commissioner of Internal Revenue disallowed The petitioner claimed the following deductions royalties and technical service fees and pre-operational cost of tape coater The amount was not allowed as entire deduction The petitioner argues that the law applicable to its case is only Section 29(a)(1) of the Tax Code and not Circular No 393 of the Central BankIssue WON the royalty payments are valid deductible expense WON the Tax Code is applicableHeld No Although the Tax Code allows payments of royalty to be deducted from gross income as business expenses it is CB Circular No 393 that defines what royalty payments are proper Improper payments of royalty are not deductible as legitimate business expenses Section 3-c of CB Circular No 393 provides for payment of royalties only on commodities manufactured by the licensee under the royalty agreement not on the wholesale price of finished products imported by the licensee from the licensor entral Bank Circulars like CB Circular No 393 (dated December 7 1973 published in the Official Gazette issue of December 17 1973 [69 OG No 51 p 11737] issued by the Central Bank in the exercise of fits authority under the Central Bank Act duly published in the Official Gazette have the force and effect of law (Cases cited) andbinding on everybody

DEDUCTIONS AND EXEMPTIONS PERSONAL EXEMPTIONSCOLLECTOR OF INTERNAL REVENUE petitioner vs ORLANDO VCALSADO and COURT OF TAX APPEALS respondents [GR 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 supportIssue WON the respondent is classified as head of the familyHeld 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 Php50000

In the matter of the adoption of the minor MARCIAL ELEUTERIO RESABA LUIS SANTOS-YNtildeIGO and LIGIA MIGUEL DE SANTOSYNtildeIGO petitioners-appellees vs REPUBLIC OF THE PHILIPPINES oppositor-appellantTAX ON CORPORATIONS BASES AND RATESRESIDENT FOREIGN CORPORATIONS TAXABLE INCOME [GRNo 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 minorIssue WON the adoption is validHeld 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 suchagreement 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 bymarriage 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 childrenwith 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 or main support Partial support not amounting to chief support will not entitle the taxpayer to claim exemption as a head of a family Regulation No section 11

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 Php50000

In the matter of the adoption of the minor MARCIAL ELEUTERIO RESABA LUIS SANTOS-YNtildeIGO and LIGIA MIGUEL DE SANTOSYNtildeIGO petitioners-appellees vs REPUBLIC OF THE PHILIPPINES oppositor-appellantTAX ON CORPORATIONS BASES AND RATESRESIDENT FOREIGN CORPORATIONS TAXABLE INCOME [GRNo 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 minorIssue WON the adoption is validHeld 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 suchagreement 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 bymarriage 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 childrenwith 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 or main support Partial support not amounting to chief support will not entitle the taxpayer to claim exemption as a head of a family Regulation No section 11