tax digest pp.4-6 (until basilan estates).doc

8/12/2019 Tax Digest pp.4-6 (until Basilan Estates).doc

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TAXATION 1 | B2015CASE DIGESTS

NATIONAL DEVELOPMENT COMPANYvs.

COMMISSIONER OF INTERNAL

REVENUE June 30, 1987 CRUZ, J.

Mica Maurinne M. AdaoTopic: Passive nco!e" n#eres# nco!e

SUMMARY: NDC entered into contracts in Tokyo with several Japaneseshipbuilding companies for the construction of 12 ocean-going vessels Thebalance payment was embodied in a promissory note which earns !" perannum interest NDC remitted to the shipbuilding companies the interest onthe balance payment without withholding the necessary ta# so $%& served awarrant of distraint and levy to enforce collection CT' sustained $%&ruling (C affirmed Clearly) the interest remitted to the Japaneseshipbuilders on the unpaid balance of the purchase price of the vesselsac*uired by NDC is interest derived from sources within the +hilippinessub,ect to income ta# under the then (ection 2 .b/.1/ of the N%&C

DOCTRINE: 0nder the terms of the law) that the overnment s right tolevy and collect income ta# on interest received by foreign corporations notengaged in trade or business within the +hilippines is not planted upon thecondition that the activity or labor 3 and the sale from which the .interest/income flowed had its situs in the +hilippines The law specifies4 %nterestderived from sources within the +hilippines) and interest on bonds) notes) orother interest-bearing obligations of residents) corporate or otherwiseNothing there speaks of the act or activity of non-resident corporations inthe +hilippines) or place where the contract is signed

The residence of obligor who pays the interest rather than the physical

location of the securities) bonds or notes or the place of payment) is thedetermining factor of the source of interest income 'ccordingly) if theobligor is a resident of the +hilippines the interest payment paid by him canhave no other source than within the +hilippines The interest is paid not bythe bond) note or other interest-bearing obligations) but by the obligor

FACTS:The National Development Company .NDC/ entered into contracts inTokyo with several Japanese shipbuilding companies for the construction of12 ocean-going vessels The purchase price was to come from the proceedsof bonds issued by the Central $ank %nitial payments were made in cashand through irrevocable letters of credit 1 promissory notes were signedfor the balance by the NDC and) as re*uired by the shipbuilders) guaranteedby the &epublic of the +hilippines +ursuant thereto) the remainingpayments and the interests thereon were remitted in due time by the NDC toTokyo The vessels were eventually completed and delivered to the NDC inTokyo

The NDC remitted to the shipbuilders in Tokyo the total amount of0(5 )677)!86 96 as interest .rate4 !" per annum/ on the balance of thepurchase price No ta# was withheld The Commissioner then held the NDCliable on such ta# in the total sum of +!)11!)2: 9 Negotiations followedbut failed The $%& thereupon served on the NDC a warrant of distraint andlevy to enforce collection of the claimed amount

The NDC went to the CT' which sustained $%& ruling e#cept for a slightreduction of the ta# deficiency in the sum of +;66 66) representing thecompromise penalty Thus) this petition for certiorari.

ISSUE: Whether or not the interest on the b ! n"e #ri"e is s$b%e"t to&ithho!'in( t )*RULIN+: YES

RATIO:The Japanese shipbuilders were liable to ta# on the interest remitted to themunder (ection :9 of the Ta# Code) thus4

1


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(anila

??(ee Doctrine

The law is clear The residence of the obligor .NDC/ which paid the interestunder consideration) petitioner herein) is Calle +ure@a) (ta >esa) >anila)+hilippinesA and as a corporation duly organi@ed and e#isting under the lawsof the +hilippines) it is a domestic corporation) resident of the +hilippines.(ec 8 .c/) N%&C / The interest paid by NDC) which is admittedly aresident of the +hilippines) is on the promissory notes issued by it C!e r!,-there ore- the interest re/itte' to the 0 # nese shi#b$i!'ers in 0 # n in1234- 1231 n' 1235 on the $n# i' b ! n"e o the #$r"h se #ri"e o thevesse!s "6$ire' b, NDC is interest 'erive' ro/ so$r"es &ithin the

Phi!i##ines s$b%e"t to in"o/e t ) $n'er the then Se"tion 578b9819 o theNIRC.

There is no basis for saying that the interest payments were obligations ofthe &epublic of the +hilippines and that the promissory notes of the NDCwere government securities e#empt from ta#ation under (ection 2;.b/B ofthe Ta# Code) reading as follows4

(


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Japanese shipbuilders (uch liability is imposed by (ection !:.c/ of the Ta#Code

Philippine Guarant% $o. ". 'he $ommissioner of Internal e"enue)%n case of doubt) a withholding agent may always protect himself by

withholding the ta# due) and promptly causing a *uery to be addressed tothe C%& for the determination whether or not the income paid to anindividual is not sub,ect to withholding %n case the C%& decides that theincome paid to an individual is not sub,ect to withholding) the withholdingagent may thereupon remit the amount of a ta# withheld

(trict observance of said steps is re*uired of a withholding agent before hecould be released from liability enerally) the law frowns upon e#emptionfrom ta#ationA hence) an e#empting provision should be construedstrictissimi *uris

The petitioner was remiss in the discharge of its obligation as the

withholding agent of the government and so should be held liable for itsomission

EF


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payment Gn the other hand) a cursory reading of the various ta# treatieswill show that there is no similarity in the provisions on relief from oravoidance of double ta#ation as this is a matter of negotiation between thecontracting parties This dissimilarity is true particularly in the treatiesbetween the +hilippines and the 0nited (tates and between the +hilippines

and Eest ermany

The &+-0( Ta# Treaty is ,ust one of a number of bilateral treaties whichthe +hilippines has entered into for the avoidance of double ta#ation Thepurpose of these international agreements is to reconcile the national fiscallegislations of the contracting parties in order to help the ta#payer avoidsimultaneous ta#ation in two different ,urisdictions >ore precisely) the ta#conventions are drafted with a view towards the elimination of international

,uridical double ta#ation) which is defined as the imposition of comparableta#es in two or more states on the same ta#payer in respect of the samesub,ect matter and for identical periods The apparent rationale for doingaway with double ta#ation is to encourage the free flow of goods and

services and the movement of capital) technology and persons betweencountries) conditions deemed vital in creating robust and dynamiceconomies

%n negotiating ta# treaties) the underlying rationale for reducing the ta# rateis that the +hilippines will give up a part of the ta# in the e#pectation thatthe ta# given up for this particular investment is not ta#ed by the othercountry Thus the petitioner correctly opined that the phrase Hroyalties paidunder similar circumstancesI in the most favored nation clause of the 0(-&+ Ta# Treaty necessarily contemplated Hcircumstances that are ta#-relatedI

iven the purpose underlying ta# treaties and the rationale for the mostfavored nation clause) the concessional ta# rate of 16 percent provided forin the &+- ermany Ta# Treaty should apply only if the ta#es imposed uponroyalties in the &+-0( Ta# Treaty and in the &+- ermany Ta# Treaty arepaid under similar circumstances This would mean that respondent mustprove that the &+-0( Ta# Treaty grants similar ta# reliefs to residents of the0nited (tates in respect of the ta#es imposable upon royalties earned fromsources within the +hilippines as those allowed to their ermancounterparts under the &+- ermany Ta# Treaty %f the state of residencedoes not grant some form of ta# relief to the investor) no benefit wouldredound to the +hilippines) i e ) increased investment resulting from a

favorable ta# regime) should it impose a lower ta# rate on the royaltyearnings of the investor) and it would be better to impose the regular raterather than lose much-needed revenues to another country

The &+-0( and the &+-Eest ermany Ta# Treaties do not contain similar

provisions on ta# crediting 'rticle 2 of the &+- ermany Ta# Treatye#pressly allows crediting against erman income and corporation ta# of26" of the gross amount of royalties paid under the law of the+hilippines Gn the other hand) 'rticle 2: of the &+-0( Ta# Treaty) whichis the counterpart provision with respect to relief for double ta#ation) doesnot provide for similar crediting of 26" of the gross amount of royaltiespaid Thus) the concessional ta# rate of 16 percent provided for in the &+-

ermany Ta# Treaty cannot be applied to the most favored nation clauseunder the &+-0( Ta# Treaty

DISPOSITIVE: C' reversed +etition for refund by respondentdisallowed

CIR v. CANov. 20, 1944Mahoney, J.

Dave Anastacio

SUMMARY: Don Andres Soriano formed ANSCOR, of which heowned shares of stock. Don Andres died, and ANSCOR redeemedshares of stock from the estate of Don Andres. The CIR he dANSCOR ia! e for ta"es. The CTA re#ersed, and CA affirmed there#ersa . The SC he d that the$ were ia! e.

DOCTRINE: The general rule states that: A stock d v dendre!resent ng the trans"er o" sur!lus to ca! tal account shallnot #e su#$ect to ta%. Stock di#idends, strict $ s%eakin&, re%resentca%ita and do not constit'te income to its reci%ient. So that themere iss'ance thereof is not $et s'!(ect to income ta" as the$ arenothin& !'t an )enrichment thro'&h increase in #a 'e of ca%itain#estment.) The e%ce!t on !rov des that the rede&!t on orcancellat on o" stock d v dends' de!end ng on the (t &e( and(&anner( t )as &ade' s essent all* e+u valent to a

*


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d str #ut on o" ta%a#le d v dends'( &ak ng the !roceedsthereo" (ta%a#le nco&e( (to the e%tent t re!resents !ro" ts(. The e"ce%tion was desi&ned to %re#ent the iss'ance andcance ation or redem%tion of stock di#idends, which isf'ndamenta $ not ta"a! e, from !ein& made 'se of as a de#ice for

the act'a distri!'tion of cash di#idends, which is ta"a! e. +or thee"em%tin& c a'se of Section, 3-! to a%% $, it is indis%ensa! e that/-a there is redem%tion or cance ation0 -! the transaction in#o #esstock di#idends and -c the )time and manner) of the transactionmakes it )essentia $ e 'i#a ent to a distri!'tion of ta"a! edi#idends.)

,ACTS: -I don t think the n'm!ers other facts are im%ortant at a .+oc's on the redem%tion Don Andres Soriano, a citi en andresident of the 5nited States, formed the cor%oration 6A. Soriano 7Cia8, %redecessor of ANSCOR with a 91,:::,:::.:: ca%ita i ation

di#ided into 1:,::: common shares at a %ar #a 'e of 91:: share.ANSCOR is who $ owned and contro ed !$ the fami $ of DonAndres, who are a non;resident a iens. In 1*< shares as stock di#idend dec arations. Corres%ondin& $,one;ha f of that shareho din&s or , stock di#idends worth 4>,2,2 =

shares were res%ecti#e $ recei#ed !$ the Don Andres estate andDo a Carmen from ANSCOR. ence, increasin& their acc'm' atedshareho din&s to 13 , >= and 13 , >4 common shares each.

On Decem!er 2 , 1=, Do a Carmen re 'ested a r' in&from the 5nited States Interna Re#en'e Ser#ice -IRS , in 'irin& if ane"chan&e of common with %referred shares ma$ !e considered as ata" a#oidance scheme. @$ ?an'ar$ 2, 1 , ANSCOR rec assified itse"istin& 3::,::: common shares into 1*:,::: common and 1*:,:::%referred shares.

In a etter;re% $ dated +e!r'ar$ 1 , the IRS o%ined that

the e"chan&e is on $ a reca%ita i ation scheme and not ta"a#oidance. Conse 'ent $, on Barch 31, 1 Do a Carmene"chan&ed her who e 13 , >4 common shares for 13 , >: of the%referred shares. The estate of Don Andres in t'rn e"chan&ed11,14: of its common shares for the remainin& 11,14: %referredshares.

On -une /' 0123' !ursuant to a 4oard Resolut on'ANSCOR redee&ed 53'/// co&&on shares "ro& the DonAndres6 estate. @$ No#em!er 1 , the @oard f'rther increasedANSCOR s ca%ita stock to 9=*B di#ided into 1*:,::: %referredshares and >::,::: common shares. A#out a *ear later' ANSCORaga n redee&ed 3/'/// co&&on shares "ro& the Don Andres6estate' "urther reduc ng the latter6s co&&on sharehold ngs to01'757. As stated in the @oard Reso 'tions, ANSCOR6s #us ness!ur!ose "or #oth rede&!t ons o" stocks s to !art all* ret re sa dstocks as treasur* shares n order to reduce the co&!an*6s"ore gn e%change re& ttances n case cash d v dends aredeclared.

In 1


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1 and the 2nd 'arter of 1< !ased on the transaction ofe"chan&e and redem%tion of stocks. @IR made the corres%ondin&assessments. ANSCOR s s'!se 'ent %rotest on the assessments

was denied in 1< 3 !$ %etitioner. ANSCOR fi ed a %etition for re#iew with the CTA, the Ta" Co'rt re#ersed the r' in&. CA affirmed the

r' in& of the CTA. ence this %osition.ISSUES / 8ON ANSCOR6s rede&!t on o" stocks "ro& tsstockholder can #e cons dered as (essent all* e+u valent to thed str #ut on o" ta%a#le d v dend( &ak ng the !roceeds ta%a#le9YES

RU IN;: It s ta%a#le

RATIO: The !one of contention is the inter%retation and a%% icationof Section 3-! of the 1


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were on $ 2*,24=.*


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which deductions were allowed upon a showing that such premiums werelegitimate e#penses of its business 0pon the death of ' Melhagen)


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beneficiaries) speaks of the proceeds of life insurance policies as income)but this is a very slight indication of legislative intention %n reality) whatthe plaintiff received was in the nature of an indemnity for the loss which itactually suffered because of the death of its manager

DISPOSITIVE: The foregoing pronouncement will result in the ,udgmentbeing &/ and +NGC .+;:>/ 'fter recommendation to >inisterof %ncance) he was given informerLs reward e*uivalent to 1!" .+2> forNC'/ and .1 > for +NGC/ CG' rendered a decision disallowing auditin payment on ground that under section 281 of N%&C such is conditionedupon actual recovery or collection of revenues

DOCTRINE: CG' s disallowance of the informer s reward on the groundthat there was actually no revenue reali@ed or recovered as 2 governmentagencies were involved overlooks the fact that NC' and +NGC) possesslegal personalities separate and distinct from the +hilippine government'lthough both are GCCs) they perform proprietary functions Theirrevenues do not automatically devolve to the general coffers of thegovernment 0nless transferred to the +hilippine government through thevehicle of ta#ation) no part of their revenues is available for appropriationby the egislature for e#penditure in government pro,ectsA such revenuesremain said agencies in their entirety) to be applied to and e#pended fortheir own e#clusive purpose Ehen revenues are sub,ected to ta#) theportion thereof corresponding to such ta# becomes) in its own) revenue orthe government accruing to the eneral und

FACTS: Tirso $ (avellano furnished the $%& with a confidential

affidavit of information denouncing the National Coal 'uthority .NC'/and the +hilippine National Gil Company .+NGC/ for non- payment ofta#es totalling +2: >illion on interest earnings of their respective moneyplacements with +N$ since Gctober 1!) 1;8 %nvestigation by the $%&confirmed the reported ta# liabilities) and upon demands thereafter made)

NC' and +NGC paid to the $%& the +1!);87)17! and +;:);!!) 9; 12 $%&Commissioner $ienvenido Tan) Jr recommended to the >inister of inancepayment to (avellano of an informer s reward e*uivalent to 1!" of theamount of +1!);87)17! 66 paid by NC') or +2):;9);2 9! (avellano waspaid the said amount (avellano was paid his informer s reward in the+NGC case in the total amount of +1 )6;:):21 8; in installments

CG' rendered CG' Decision No 9 6 disallowing in audit the payment ofinformer s reward to (avellano in the NC' case on the ground that paymentof an informer s reward under (ection 281of N%&C is conditioned upon theactual recovery or collection of revenues) and no such revenue or incomewas actually reali@ed or recovered on any benefit accrued to the

government) since 2 government agencies were involved CG' alsoimpugned the propriety of the claim for informer s reward based on inter-governmental violations 'llowance of claims of the kind would not onlyplace a premium upon violations committed by government agencies butalso induce collusion among government offices in order to obtain theinformer s reward

Commissioner of %nternal &evenue sought reconsideration of CG'Decision Fe was followed by Tirso (avellano and >rs


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+hilippinesA there were actual cash collections of +16;); 1)7 19 fromNC' and +NGC for non-payment of withholding ta#es on interest earnings)which amount had accrued to the eneral undA (ection :17 .now 281/ ofthe N%&C entitling an informer to a reward for information leading to thecollection of internal revenue ta#es is clear and needs no interpretationA

NC' and +NGC have separate personalities from the $ureau of %nternal&evenue and overnment

Tirso S ve!! no 4


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subdivisions) agencies) or instrumentalities That authority e#tends to theaccounts of all persons respecting funds or properties received or held bythem in an accountable capacity .(ection 27) + D No 1 !/ %n) thee#ercise of its ,urisdiction) it determines whether or not the fiscalresponsibility that rests directly with the head of the government agency has

been properly and effectively discharged and whether or not there has beenloss or wastage of government resources %t is also empowered to reviewand evaluate contracts 'nd) after an audit has been made) its auditors issuea certificate of settlement to each officer whose account has been auditedand settled in whole or in part) stating the balances found due thereon andcertified) and the charges or differences arising from the settlement byreason of disallowances) charges or suspensions

This is not to say) however) that the disallowance in audit by respondentCG' is in itself final The same may be set aside and nullified by the Cout)if done with grave abuse of discretion

The informer s reward granted to petitioner (avellano is based on (ection:17 .now 281/ of the National %nternal &evenue Code %t reads )

#ec. 09+. Informers reward to persons instrumental in the disco"er% of "iolation of the 3ational Internal e"enue $ode and in the disco"er% and sei&ure of smuggled goods. (+! or"iolation of the 3ational Internal e"enue $ode. n% person except an internal re"enueofficial or emplo%ee, or other public official, or his relati"e w ithin the sixth grade ofconsanguinit%, who "oluntaril% gi"es definite and sworn information, not %et in the possessionof the ui"alent to fifteen per centum of the re"enues,surcharges or fees reco"ered and=or fine or penalt% imposed and collected. 'he same amountof reward shall also be gi"en to an informer where the offender has offered to compromise the"iolation of law committed b% him and his offer has been accepted b% the $ommissioner and insuch a case, the fifteen per centum reward fixed herein shall be based on the amount agreedupon in the compromise and collected from the offender; Pro"ided, 'hat should no re"enues,surcharges or fees be actuall% reco"ered or collected, such person shall not be entitled to areward) Pro"ided, further, 'hat the information mentioned herein shall not refer to a casealread% pending or pre"iousl% in"estigated or examined b% the $ ommissioner or an% of hisdeputies, agents or examiners, or the #ecretar% of inance or an% of his deputies or agents)

Pro"ided, finall%, 'hat the reward pro"ided herein shall be paid under the regulations issuedb% the $ommissioner of Internal e"enue with the appro"al of the #ecretar% of inance.

CG' s disallowance of the informer s reward on the ground that there wasactually no revenue reali@ed or recovered as 2 government agencies wereinvolved overlooks the fact that NC' and +NGC) possess legal

personalities separate and distinct from the +hilippine government'lthough both are GCCs) they perform proprietary functions Theirrevenues do not automatically devolve to the general coffers of thegovernment 0nless transferred to the +hilippine government through thevehicle of ta#ation) no part of their revenues is available for appropriation

by the egislature for e#penditure in government pro,ectsA such revenuesremain said agencies in their entirety) to be applied to and e#pended fortheir own e#clusive purpose Ehen revenues are sub,ected to ta#) theportion thereof corresponding to such ta# becomes) in its own) revenue forthe government accruing to the eneral und

That the informer s reward was sought and given in relation to ta#delin*uencies of government agencies provides no reason for disallowanceThe law on the matter makes no distinction whatsoever between delin*uentta#payers in this regard) whether private persons or corporations) or publicor *uasi-public agencies) it being sufficient for its operation that the personor entity concerned is sub,ect to) and violated) revenue laws) and the

informer s report thereof resulted in the recovery of revenues %t iselementary that where the law does not distinguish) none must be made?bi lex non distinguit nec nos distinguere debemos.

'lso) mere possibility of collusion to obtain the informer s reward is notsufficient ground for disallowance Collusion cannot be presumed Fere)there is no showing of collusion between (avellano and any official oremployee of the $%& or the Department of inance Neither is there anyevidence to overcome the presumption of regularity en,oyed by the officialacts of the $%& and the Department of inance in approving the claim ofpetitioner (avellano for informer s reward

The delin*uencies of these agencies are not condoned) much less rewarded%t is the person whose information led to the discovery of theirtransgressions who is being rewarded 'lthough this results in a reductionin the amount of revenues actually received) the net effect is that thegovernment still gains from the remaining amount paid) which otherwisewould have been lost to it

DISPOSITIVE: consolidated petitions are &'NT


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R /n ni v. Co//issioner oIntern ! Reven$e

#eptember +1, + @ Ernesto 5. costa Paolo A. oti C &amnani) Nirmla M &amnani and Grtigas and Co td+artnership

Thereafter) both the (pouses and the losing parties entered into anagreement which set the money value of the ,udgment provisionally at+7! million

The Commissioner of %nternal &evenue thereafter issued a $%& ruling (heinformed the losing parties) that as payors of the +7! >illion) they areconstituted as the withholding agents of the :6" final income ta# on thewhole +7! million

The (pouses &amnani then filed a petition for review with the CT' to setaside the *uestioned $%& ruling

DOCTRINE: estated 4 +ayment of a money ,udgment regarding a case as peragreement of the parties constitutes ta#able passive income

Berbatim, from the case 4 The rest of the income earned by way of money ,udgment per agreement of the parties constitutes ta#able income Bpassiveincome to the (pouses &amnani sub,ect to the income ta# under (ection21.f/ of the N%&C) in the same manner as citi@ens of the +hilippines

FACTS:(pouses %shwar Jethmal &amnani and (onya Jethmal &amnani .(pouses&amnani/ were parties in a case decided by the (upreme Court .(C/ on>ay 9) 1;;1) The (C in this case decided in favor of the spouses andagainst Choithram C &amnani) >oti C &amnani) Nirmla M &amnani andGrtigas and Co td +artnership .losing parties/

The >otion for &econsideration of the afore*uoted decision filed by thelosing parties was subse*uently denied by the (C

The &egional Trial Court of +asay was afterwards designated by the (C to

e#ecute the ,udgment %t issued an Grder of partial writ of e#ecution49 the rent ! in"o/e o the #ro#erties n' i/#rove/ents ro/123 $# to M , =1- 1225 in the /o$nt o P57-B 2-=3 .44 andb/ the 1;8! appraised value of the properties in the amount of+22):7 )666 66A +!66)666 66 moral damagesA +266)666 66e#emplary damages and 16" of said amounts as attorney s fees)plus 7" legal interest on the totality of the amounts from the timethe ,udgment became final until fully paid

Gn July 1;) 1;;:) the # rties- pursuant to the (C case aforecited) entere'into tri# rtite (ree/ent setting forth the following terms4

=2 To e#peditiously terminate said proceedings) the parties.e#cluding >oti and Nirmla &amnani/ hereb, set the /one,v !$e o the s i' 0$'(/ent- in"!$'in( the other /onet r,

& r's '$e S#s. Ish& r #rovision !!, t P3 Mi!!ion The finaland total monetary awards to (ps %shwar could be more than +7!>illion %t could also be less than said amount

Conse*uently) without waiting for the Court s determinationaforesaid) parties agree to suspend hearings on valuation andproceedings in e#ecution of the ,udgment in & No 8! ; and

& No 8! ;7

Thereafter) Commissioner of %nternal &evenue) iwayway Min@ons-Chato)issued a $%& ruling (he informed the losing parties that as payors of the+7! >illion) they are constituted as the withholding agents of the :6" finalincome ta# provided in (ection 22.b/) in relation to (ections !6.a/ and !1.a/of the Ta# Code

The amount to be withheld is Twenty >illion Gne Fundred iftyThousand .+26)1!6)666 66/ +esos) broken down as follows4:6" final income ta# on+7!)666)666 66 3 +1;)!66)666 661" documentary stamp ta# on+7!)666)666 66 3 7!6)666 66

333333

13


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Total 3 +26)1!6)666 66QQQQQQQQQQQ

or the Commissioner) (ection 22.b/ of the Ta# Code is the applicableprovision of ta#ing the receipt of the income by non-resident 'mericanciti@en) such as rents) casual gains) profits) and income %nasmuch as the

compromise settlement arose from a money ,udgment involving ownershipover real property) the income is ta#able in the +hilippines notwithstandingthe fact that the recipients thereof) (pouses &amnani) are 'merican citi@ens)as provided in 'rticle 9.1/ of the &+-0( Ts# Treaty where the location ofthe real property is the situs of income ta#ation and not the residence of thealienator

The (pouses &amnani did not agree with $%& &uling so in a letter theyre*uested the Commissioner to reconsider the opinions) arguing that4

They are resident aliens contrary to the ruling s declaration thatthey are non-resident aliens not doing business in the +hilippinesAThe money ,udgment rendered in their favor is the nature of a merereturn of capitalPinvestment and hence must not be sub,ect to theincome ta#

%n an effort to put more teeth to this afore*uoted $%& ruling) theCommissioner served a Earrant of arnishment to the


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f There is no doubt that %shwar &amnani is an 'merican citi@enwho fre*uently comes to the +hilippines for the most part ofthe year to oversee his various investments as shown by hispassport entries

g The then Commissioner of %mmigration even approved thechange of his status of admission from temporary visitor to

immigrantPresident alien under (ection 1:.e/ of the +hilippine %mmigration'ct

2 %t is clear from the Grder of Erit of


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QQQQQQQQQQQ%ncome Ta# Due +16)2 9)266 66

ess4 %ncome Ta# paid on P1!1; :)82:)621 22!" Eithholding ta# onrentals 1)2 :);7: 2!

333333 %ncome Ta# +ayable +!)186)21! !:QQQQQQQQQQQ

DISPOSITIVE:The IR R$!in(s re SET ASIDE. S#o$ses R /n nire "onsi'ere' resi'ent !ien t ) b!e In the s /e / nner s

resi'ent "iti en $n'er Se"tion 51 8 9 o the NIRC. The !osin( # rtiesre hereb, ORDERED TO WIT OLD the /o$nt o P1-57=-23B.5

re#resentin( the G &ithho!'in( t ) on the rent ! o P57-B 2-=3 .44.S#o$ses R /n ni re !so hereb, ORDERED to # , ''ition ! in"o/et ) s in the /o$nt o P -1B4-51 . = #!$s interest "o/#$te' ro/#ro/$!( tion o 'e"ision$nti! $!!, # i'.

DISSENTIN+ OPINION 4

CONCURRIN+ OPINION 4

HAMORA vs. CIR n' CTA 2a% 1+, + @1

Paredes, . on

SUMMARY:1 Samora is contesting the deficiency income ta# assessed by the C%&2 The C%& disallowed half of the promotion e#penses which he

deducted in computing his net income: (C held that the disallowance was proper being the promotion

e#penses being claimed was not used e#clusively for businesspurposes but also for personal purposes and the promotion e#pensewas not supported by receipts

DOCTRINE:1 %n computing net income) there shall be allowed as deductions all the

ordinary and necessary e#penses paid or incurred during the ta#ableyear) in carrying on any trade or business .Mol ) >ertens) aw of

ederal %ncome Ta#ation) sec 2! 6:) p :69/.1/ (ince promotion e#penses constitute one of the deductions in

conducting a business) same must testify these re*uirements Claim

for the deduction of promotion e#penses or entertainment e#pensesmust also be substantiated or supported by record showing in detailthe amount and nature of the e#penses incurred .N F Man (ocklan)Jr v Comm of %nt &ev A :: $T' ! /

.2/ &epresentation e#penses fall under the category of business e#penseswhich are allowable deductions from gross income) if they meet thefollowing conditions4i that to be deductible) said business e#penses must be ordinary

and necessary e#penses paid or incurred in carrying on any tradeor businessA

ii that those e#penses must also meet the further test ofreasonableness in amountA

iii that when some of the representation e#penses claimed by theta#payer were evidenced by vouchers or chits) but others werewithout vouchers or chits) documents or supporting papersA

iv that there is no more than oral proof to the effect that paymentshave been made for representation e#penses allegedly made bythe ta#payer and about the general nature of such allegede#pensesA

v that accordingly) it is not possible to determine the actual amountcovered by supporting papers and the amount without supportingpapers) the court should determine from all available data) theamount properly deductible as representation e#penses

FACTS:1 >ariano Samora) owner of the $ay Miew Fotel and armacia Samora)

>anila) filed his income ta# returns the years 1;!1 and 1;!22 The C%& found that he failed to file his return of the capital gains

derived from the sale of certain real properties and claimed deductionswhich were not allowable

: The collector re*uired him to pay the sums of + :)9!8 !6 and+9)72! 66) as deficiency income ta# for the years 1;!1 and 1;!2Samora filed case in CT' *uestioning the deficiency income ta#

1>


17/45


! CT' modified the decision appealed from and ordered Samora to paythe reduced total sum of +:6)2!8 66 .+22);86 66 and +9)298 66) asdeficiency income ta# for the years 1;!1 and 1;!2) respectively/

Samora contention41 CT' erred in disallowing +16) 98 !6 as promotion e#penses incurred

by his wife for the promotion of the $ay Miew Fotel and armaciaSamoraa Samora is claiming that his wife incurred +26);!9 66 as promotion

e#penses and the whole amount should be allowed as deductionsand not only half of it or +16) 98 !6

b The +26);!9 66 was allegedly spent by >rs


18/45


$ut inasmuch as the useful life of the building for business purposesdepends to a large e#tent on the4i suitability of the structure to its use and location)ii its architectural *uality)iii the rate of change in population)

iv the shifting of land values)v as well as the e#tent and maintenance and rehabilitationvi %t is allowed a depreciation rate of 2- " corresponding to a

normal useful life of only 6 years .1;!! +F ederal Ta#es) +ar 1176-V/

Conse*uently) the stand of Samora cannot be sustained

DISPOSITIVE: %N M%


19/45


C%&4 denied


20/45


.1/ In general C 'll ordinary and necessary e#penses paid orincurred during the ta#able year in carrying on any trade orbusinessY ###.2/ Expenses allowable to non-resident alien indi"iduals andforeign corporations C %n the case of non-resident alienindividual or a foreign corporation) the e#penses deductible are

the necessary e#penses paid or incurred in carrying on anybusiness or trade conducted &ithin the Phi!i##inese)"!$sive!,.

- %n tlas $onsolidated 2ining ". $I , the (C laid down the rules onthe deductibility of business e#penses

o Ehen a ta#payer claims a deduction) he must point tosome specific provision of the statute in which thatdeduction is authori@ed and must be able to prove that heis entitled to the deduction which the law allows

o 'n item of e#penditure) in order to be deductible under(ection :6.a/.1/ of N%&C must fall s*uarely within itslanguage

o

(T'T0TG&R T


21/45


CB OSKINS #. CIR -DG LGON

+ n" ,"o vs. C.I.R. pril 04, + @+$oncepcion, .

rancis

SUMMARY: ancayco was arguing that his farm e#penses should bededucted from the computation of the net income as an ordinary andnecessary e#pense (C held that No evidence has been presented as to thenature of the said =farming e#penses= other than the bare statement of

ancayco that they were spent for the =development and cultivation of hisproperty= No specification has been made as to the actual amount spentfor purchase of tools) e*uipment or materials) or the amount spent forimprovement C%& claims that the entire amount was spent e#clusively forclearing and developing the farm which were necessary to place it in aproductive state %t is not) therefore) an ordinary e#pense but a capitole#penditure

DOCTRINE: 'n item of e#penditure) in order to be deductible under theTa# Code as ordinary and necessary business e#penses) mustfall s*uarely within the language of the statutory provision (uch section isintended primarily) although not always necessarily) to cover e#pendituresof a recurring nature where the benefit derived from the paymentis reali@ed and e#hausted within the ta#able year 'ccordingly) if theresult of the e#penditure is the ac*uisition of an asset which has aneconomically useful life beyond the ta#able year) no deduction of suchpayment may be obtained under the provisions of the statute %n suchcases) deduction must be obtained under the provisions of the statutewhich permit deductions for amorti@ation) depreciation) depletion or loss

FACTS: (antiago ancayco filed his income ta# return for 1; ; 2 dayslater) C%&) Collector of %nternal &evenue.C%&/ issued a notice advising himthat his income ta# liability for 1; ; is +;)9;: 72) which he paid on >ay1!) 1;!6 C%& wrote ancayco stating that upon investigation) there wasstill due a deficiency income ta# for 1; ; of +2;)!! 6! ancayco sought

a reconsideration) which was partly granted by reducing it to +17)876 :1ancayco urged another reconsideration but no action was taken on this

re*uestC%& issued a warrant of distraint and levy against the properties of

ancayco for the satisfaction of his deficiency income ta# liability Themunicipal treasurer of issued a notice of sale of said property at publicauction ancayco filed a petition to the CT' but the latter held he is liablefor ordered +17)876 :1

There are two 2 civil remedies for the collection of internal revenue ta#es4.a/ by distraint of personal property and levy upon real propertyA and .b/ by

,udicial action The first may not be availed of e#cept within : years afterthe =return is due or has been made = ancayco s income ta# return for1; ; was filed on >ay 16) 1;!6 so the warrant of distraint and levy issuedon >ay 1!) 1;!7) was illegal and void The ,udicial action in the Ta# Codemay be resorted to within ! years from the date the return has been filed) ifthere has been no assessment) or within ! years from the date of theassessment made within the statutory period The C%& made three :assessments4 .a/ the original assessment of +;)9;: 72) on >ay 12) 1;!6A .b/the first deficiency income ta# assessment of >ay 1 ) 1;!1) for +2;)!! 6!Aand .c/ the amended deficiency income ta# assessment of 'pril 8) 1;!:) for+17)876 :1

ISSUES: Ehether or not the arming e#penses are deductible from the netincome RATIO: No) they are capital e#penditures) not ordinary and necessarye#penses

RULIN+:+ n" ,"o r($es that the five-year period for the ,udicial action should becounted from >ay 12) 1;!6) the date of the original assessment) because theincome ta# for 1; ;) he says) could have been collected from him sincethen

SC: (aid assessment was) however) not for the deficiency income ta#involved in this proceedings) but for +;)9;: 72) which he paid Fence) therenever had been any cause for a ,udicial action against him) and) per force)no statute of limitations to speak of) in connection with said sum of+;)9;: 72 The 2 nd assessment cannot apply since it was reconsidered on

21


22/45


ancayco s re*uest The last assessment is what ancayco contested in theamended petition filed by him with the CT' Thus) the five-year periodshould be counted from 'pril 8) 1;!:) so that the statute of limitations doesnot bar the present proceedings) instituted on 'pril 12) 1;!7) if it is a

,udicial action

+ n" ,"o "! i/s a deduction of 2 items) namely4 .a/ for farming e#penses)+29) !; 66A and .b/ for representation e#penses) +8);:: !

SC: (ection :6 of the Ta# Code partly reads4.a/


23/45


FACTS: +hilippine 'cetylene Company .the company/ is engaged in themanufacture of o#ygen) acetylene and nitrogen) and the packaging of +in cylinders and tanks (ometime in 1;!9) the company imported from the0nited (tates a custom-built + tank %t was then assessed by theCommissioner of Customs .the commissioner/ + :)78: as special importta# The company paid in protest

'ccording to the manager of the company) the gas tank is simply a largecylinder which is used as a container for + obtained from the Calte#refinery in $atangas and transported to the companyLs plant in >anila The

+ does not undergo any chemical change and is sold to consumers in thesame state) e#cept that the gas is pumped into smaller containers to be sold

0pon appeal to the CT') the CT' held that the company is entitled to arefund Thus) the commissioner appealed to the (C

ISSUES:EGN +hilippine 'cetylene is an industry e#empt from special import ta#under (ection 7 of &' 1:; 2 -Z NGEGN the ambiguity of (ection 7 should be construed in favor of +hilippine'cetyleneLs e#emption -Z NG .relevant/ RULIN+: +hilippine 'cetylene is not e#empt from the special import ta#

RATIO:1 The (C upheld the contention of the commissioner) which it *uotedverbatim %t goes as follows4 %n the e#empting provisions of &' 1:; ) thee#empted items are divided into separate and distinct enumerations Thefirst group of e#empted industries refers e#clusively to those falling underthe new and necessary industries as defined in &epublic 'ct No ;61 %n thesecond) the term =industries= is classed together with the terms miners)mining enterprises) planters and farmers %f Congress really intended to

2 The ta# provided for in section one of this 'ct shall not beimposed against the importation into the +hilippines of machineryandPor raw materials to be used by new and necessary industries asdetermined in accordance with &epublic 'ct numbered Nine Fundredand GneA A machinery) e*uipment) accessories and spare parts) forthe use of industries ) miners) mining enterprises planters andfarmersA

give the term =industries= its ordinary and general meaning and thus grantta# e#emption to all ventures and trades falling under the said ordinary andgeneral definition) it should have eliminated the words =new and necessaryindustries and mining enterprises= since these two ventures are alreadycovered by the term =industries= in its ordinary and general meaning Gn theother hand) the fact that the language of the law specifically segregates newand necessary industries under &epublic 'ct No ;61 among those entitledto the ta# e#emption) in effect) restricts the meaning and scope of the word=industries I

2 (ection 7 of &' 1:; is ambiguous This being the case) the statutoryconstruction principle that ta# e#emptions are held strictly against theta#payer) and if not e#pressly mentioned in the law must be within itspurview by clear legislative intent is applicable 's such) +hilippine'cetylene has to pay the special import ta#

DISPOSITIVE: CT' reversed Costs against +hilippine 'cetylene

+OODRIC INTERNATIONALRU ER CO. v. COLLECTOR

OF INTERNAL REVENUE$' $ase 3o. @9

uciano, 3oel $hristian D. I am not sure of this is the correct $' case.

SUMMARY: oodrich has this policy of re*uiring its staff to bemembers of athletic and social clubs for the purpose of establishingcontracts with prospective customers and to entertain customers or itsta#able year 1;!2) oodrich declared as deductibles Hrepresentatione#penses I These e#penses are comprised of athletic and social clubs duesand entertainment e#penses C%& disallowed the deduction and assessed

oodrich with deficiency income ta# oodrich appealed

DOCTRINE: Eith respect to club dues) it has been held that where acorporation re*uires its officers to be members of social or athletic clubsto promote its business) and the club dues are paid by corporation) suchdues are D


24/45


's regards the portion of the representation e#penses pertaining toentertainment e#penses) it has been sufficiently proven that said e#penseswere incurred to entertain oodrichLs customers

3D'E) 'his is an 2E35E5 5E$I#ID3; I can t find the original decisionas of the time of this writing

FACTS: I reconstituted the facts based from this 1-page amended decisionsince I ha"e not read the original decision.

%t appears that oodrich re*uired the members of its staff to bemembers of athletic and social clubs for the purpose of establishingcontracts with prospective customers and to entertain customers

oodrich claims that the e#penses incurred from these activities as&


25/45


SUMMARY: +alanca Jr received shares of stocks from his deceasedfather and was assessed for estate ta#es Fe paid his ta# due but incurredinterests thereon for delin*uent payment Fe paid the delin*uencyinterests The following year) he applied as deductions to his gross incomethe delin*uency interests he has paid

or the second time he was assessed estate and inheritance ta#es on thesame shares of stocks +alanca again paid interests for delin*uency'gain) he applied the delin*uency interests as deductions on his grossincome (ince at that time he has already paid his income ta#es) he wasasking for a refund of the e#cess ta#es he has paid The issue here iswhether interests on ta#es for delin*uent payment may be considered asinterests on indebtedness as to be allowed as deduction under (ection:6.b/ .1/ of the Ta# Code The (C ruled) in this case) that although ta#esand indebtedness are the two different things) interests paid ondelin*uency payments may be considered as interests paid onindebtedness DOCTRINE 4 Ehile the distinction between =ta#es= and =debts= wasrecogni@ed in this ,urisdiction) the variance in their legal conception doesnot e#tend to the interests paid on them) at least insofar as (ection :6 .b/.1/ of the National %nternal &evenue Code is concerned

FACTS:-(ometime in July) 1;!64 the late Don Carlos +alanca) (r donated in favorof his son) +alanca Jr ) 12)!66 shares of stock in a Tonde[a) %nc orfailure to file a return on the donation +alanca Jr was assessed the sums of+;9)7;1 2:) +2 ) 2 81 and P7 -B3B. 4 as gift ta#) 2!"surcharge and interest) respectively) which he paid on June 22) 1;!!

->arch 1) 1;!74 the +alanca Jr filed with the $ureau of %nternal&evenue his income ta# return for the calendar year 1;!!) claiming)a deduction for interest amounting to +;)967 ! and reporting a ta#ableincome of +7!);82 12 Gn the basis of this) he was assessed the sum ofP51-4 5.21 as income ta# which he paid

-November 16) 1;!74 the +alanca Jr filed an amended return for thecalendar year 1;!!) claiming additional deduction in the amount ofP7 -B3B. 4 representing interest paid on the donee s gift ta#) thereby

reporting a ta#able net income of +18)11: 2 and a ta# due thereon in thesum of P=-13 .44

-The claim for deduction was based on the provisions of (ection :6.b/.1/ of the Ta# Code) which authori@es the deduction from gross income ofinterest # i' &ithin the t ) b!e ,e r on in'ebte'ness ' claim for therefund of alleged overpaid income ta#es for the year 1;!! amounting toP1 -BB .41) which is the difference between the amount of P51-4 5.41 andof P=-13 .44 ) was filed together with this amended return $%& denied theclaim for refund

->eanwhile) the $ureau of %nternal &evenue considered the transfer of12)!66 shares of stock of a Tonde[a %nc to be a transfer in contemplationof death pursuant to (ection 88.b/ of the National%nternal &evenue Code Conse*uently) the C%& assessed against the +alancathe sum of +1;1)!;1 72 as estate and inheritance ta#es on the transfer ofsaid 12)!66 shares of stock The amount of +19)662 9 paid by the +alancaJr as gift ta#) including interest and surcharge was applied to his estate andinheritance ta# liability Gn the ta# liability of +1;1)!;1 72) the petitionerpaid the amount of P34- B1.B4 s interest or 'e!in6$en",.

-'ugust 12) 1;!84 the +alanca Jr filed an amended income ta# return forthe calendar year 1;!!) claiming) in addition to the interest deduction of+;)697 ! appearing in his original return) a deduction in the amount ofP34- B1.B4) representing interest on the estate and inheritance ta#es on the12)!66 shares of stock) thereby reporting a net ta#able income for 1;!! inthe amount of +!) 66 :2 and an income ta# due thereon in the sum of+ 28 66 'ttached to this amended return was a letter wherein +alanca Jrre*uested the refund of +26)72 61 which is the difference between theamounts of +21)6!2 61 he paid as income ta# under his original return andof + 28 66-C%& now seeks the reversal of the CT' s ruling (pecifically) the issue withCT' s determination that the amount paid by +alanca for interest on hisdelin*uent estate and inheritance ta# is deductible from the gross income forthat year under (ection :6 .b/ .1/ of the &evenue Code) and) that said+alanca s claim for refund has not prescribed

CIR?s Ar($/ent: ' ta# is not an indebtedness Debts are due to thegovernment in its corporate capacity) while ta#es are due to the governmentin its sovereign capacity ' debt is a sum of money due upon contract

2*


26/45


e#press or implied or one which is evidenced by a ,udgment Ta#es areimposts levied by government for its support or some special purpose whichthe government has recogni@ed %n view of this distinction) C%& submits thatthe deductibility of =interest on indebtedness= from a person s income ta#under (ection :6.b/ .1/ cannot e#tend to =interest on ta#es I

ISUES:1. WON n interest # i' 'e!in6$ent # ,/ent o est te n'

inherit n"e t ) " n be "onsi'ere' s n interest onin'ebte'ness s to be !!o&e' s 'e'$"tion on P ! n" ?s(ross in"o/e* YES.

Ehile =ta#es= and =debts= are distinguishable legal concepts) in certaincases as in the case at bar) on account of their nature) the distinctionbecomes inconse*uential

The term =debt= is properly used in a comprehensive sense asembracing not merely money due by contract) but whatever one isbound to render to another) either for contract or the re*uirements ofthe law Ehere statutes impose a personal liability for a ta#) the ta#becomes at least in a broad sense) a debt (ome 'merican authorities holdthat ederal ta#es are debts

%n our ,urisdiction) the rule is settled that although ta#es already due havenot) strictly speaking) the same concept as debts) they are obligations thatmay be considered as such %n $ommissioner of Internal e"enue "s. Prieto ) the (C e#plicitlyannounced that while the distinction between =ta#es= and =debts= wasrecogni@ed in this ,urisdiction) the variance in their legal conception doesnot e#tend to the interests paid on them) at least insofar as (ection :6 .b/ .1/of the National %nternal &evenue Code is concerned Thus) under the law)for interest to be deductible) it must be shown that there be an indebtedness)that there should be interest upon it) and that what is claimed as an interestdeduction should have been paid or accrued within the year %t is hereconceded that the interest paid by +alanca was in conse*uence of the latepayment of her donor s ta#) and the same was paid within the year it issought to be deducted

(ection :6.b/ .1/ of the Ta# Code reads4

(ec :6 Deductions from gross income 3 %n computing net income there shall beallowed as deductions 3

### ### ###=%nterest4.1/ %n general 3 The amount of interest paid within the ta#able year on indebtedness)e#cept on indebtedness incurred or continued to purchase or carry obligations theinterest upon which is e#empt from ta#ation as income under this Title

The term =indebtedness= as used in the Ta# Code of the 0( containingsimilar provisions as in the above-*uoted section has been defined as theunconditional and legally enforceable obligation for the payment of money7ithin the meaning of that definition, it is apparent that a tax ma% beconsidered an indebtedness

%t follows that the interest paid by +alanca Jr for the late payment of hisdonor s ta# is deductible from his income under section :6 .b/ of the Ta#Code

Gf course) what was involved in the Prieto case was the donor s ta# while

the present suit pertains to interest paid on the estate and inheritance ta#This difference submits no appreciable conse*uence to the rationale of thisCourt s previous determination that interests on ta#es should be consideredas interests on indebtedness within the meaning of (ection :6.b/ .1/ of theTa# Code This interpretation upon the said section was predicated on thecongressional intent) not on the nature of the ta# for which the interest waspaid

5. WON the "! i/ or re $n' h s !re ', #res"ribe'* NO- CIRJs"ontention on #res"ri#tion is $nten b!e.

DISPOSITIVE: (C affirmed the CT' and ruled in favor of +alanca Jr

CIR v. V' . 'e Prieto#eptember 14, + @4

. Gutierre& 5a"iderome 2arcelo

SUMMARY: Consuelo donated real property to her children (he wasdelin*uent in paying her corresponding donorLs ta#) hence she had to payan additional +!!);98 7! Thus she claimed this amount as a deduction for

2>


27/45


her %T& for the same year The C%& did not allow the deduction CT'4C%& decision reversed (C4 CT' affirmed

DOCTRINE: or interest to be deductible from gross income) it must beshown that there is an indebtedness) that there should be interest upon it)and that what is claimed as an interest deduction should have been paid oraccrued within the yearThe term =debt= for the purposes of ta# deductions) is properly used in acomprehensive sense as embracing not merely money due by contract butwhatever one is bound to render to another) either by contract) or by lawsuch as ta#es

FACTS: December ) 1; !- the respondent Consuelo Mda de +rietoconveyed by way of gifts to her children real property with a totalassessed value of +8;2) ;9 !6 'fter the filing of the gift ta# returns) theCommissioner of %nternal &evenue appraised the real property donated forgift ta# purposes at +1)2:1)278 66) and assessed the total sum of+119)967 !6 as donor s gift ta#) interest and compromises due Gf the totalsum of +119)967 !6 paid by Consuelo on 'pril 2;) 1;! ) the sum of+!!);98 7! represents the total interest on account of delin*uency in payingon time This sum of +!!);98 7! was claimed as deduction by Consuelo inher income ta# return for 1;!+etitioner C%&) however) disallowed the claim and as a conse*uence of suchdisallowance assessed Consuelo +21) 16 :8 as deficiency income ta# dueon the aforesaid +!!);98 7!) including interest up to >arch :1) 1;!9)surcharge and compromise for the late payment Consuelo challenged theC%& ruling with the CT'

CTA: C%& decision reversed Deduction of +!!);98 7! is valid

Note4 or interest to be deductible) it must be shown that there is anindebtedness) that there should be interest upon it) and that what is claimedas an interest deduction should have been paid or accrued within the year %tis here conceded that the interest paid by Consuelo was in conse*uence ofthe late payment of her donor s ta#) and the same was paid within the year itis sought to be declared The only *uestion to be determined) as stated bythe parties) is whether or not such interest was paid upon an indebtednesswithin the contemplation of the Ta# Code part on deductions to grossincome

ISSUE n' RULIN+: WON the +!!);98 7!) which is the interest onaccount of delin*uency in paying the donorLs ta#) can be claimed asdeduction in the income ta# return YES RATIO: The relevant law provides4

(


28/45


section :6.b/ of the same Code providing for deduction of interest onindebtedness Ee find the lower court s ruling to be correct Contrary topetitioner s belief) the portion of section 86 of &evenue &egulation 2 underconsideration has been part and parcel of the development to the law ondeduction of ta#es in the 0( Thus) >ertens in his treatise says4 =+enaltiesare to be distinguished from ta#es and they are not deductible under theheading of ta#s = %nterest on state ta#es is not deductible as ta#es Thisnotwithstanding) courts in that ,urisdiction) however) have invariably heldthat interest on deficiency ta#es are deductible) not as ta#es) but as interest(ection 86 of &evenue &egulation 2) merely incorporated the establishedapplication of the ta# deduction statute in the 0() where deduction of=ta#es= has always been limited to ta#es proper and has never includedinterest on delin*uent ta#es) penalties and surcharges To give to the *uoted portion of section 86 of our %ncome Ta#&egulations the meaning that the petitioner gives it would run counter to theprovision of section :6.b/ of the Ta# Code and the construction given to itby 0( courts 's already stated) section 86 implements only section :6.c/of the Ta# Code) or the provision allowing deduction of ta#es) while hereinConsuelo seeks to be allowed deduction under section :6.b/) whichprovides for deduction of interest on indebtedness %n conclusion) we are of the opinion and so hold that although interestpayment for delin*uent ta#es is not deductible as ta# under (ection :6.c/ ofthe Ta# Code and section 86 of the %ncome Ta# &egulations) the ta#payer isnot precluded thereby from claiming said interest payment as deductionunder section :6.b/ of the same Code

DISPOSITIVE: The decision sought to be reviewed is affirmed) withoutpronouncement as to costs

PAPER INDUSTRIES vs. CA 5ecember +, + 6 eliciano, .

uisa

SUMMARY: +aper %ndustries Corporation of the +hilippines .+%CG+/received from C%& two letters of assessment and demand for deficiencytransaction ta# and documentary and science stamp ta# and eficiencyincome ta# for 1;99

+%CG+ protested the assessment of deficiency transaction ta# and

documentary and science stamp ta#es and also the deficiency income ta#assessment for 1;99 These werenLt formally acted upon but instead CIRissued a warrant of distraint on personal property and a warrant of levy onreal property against +%CG+ in effect denying +%CG+Ls protests

CTA modified C%& holding +%CG+ liable for the reduced aggregateamount which represented :!" transaction ta#) documentary and sciencestamp ta# and deficiency income ta#

CA reduced +%CG+Ls liability but still held them liableSC held them liable but held that +%CG+ is entitled to deductions for

interest payments on loansDOCTRINE:

(ection :6 of the 1;99 Ta# Code provides that interest paymentson loans incurred by a ta#payer are allowed by the N%&C as deductionsagainst the ta#payerLs gross income Thus) the general rule is that intereste#penses are deductible against gross income and this certainly includesinterest paid under loans incurred in connection with the carrying on of thebusiness of the ta#payer

FACTS:+aper %ndustries Corporation of the +hilippines .+%CG+/ is a

+hilippine corporation registered with the $oard of %nvestments .$G%/ as apreferred pioneer enterprise with respect to its integrated pulp and papermill and as a preferred non-pioneer enterprise with respect to its integratedplywood and veneer mills

+%CG+ received from C%& two letters of assessment and demandfor the following4

- Deficiency transaction ta# and documentary and science stamp ta#- Deficiency income ta# for 1;99The two amounted to +88)97:)2!! 66+%CG+ protested the assessment of deficiency transaction ta# and

documentary and science stamp ta#es and also the deficiency income ta#assessment for 1;99 These werenLt formally acted upon but instead CIRissued a warrant of distraint on personal property and a warrant of levy onreal property against +%CG+ in effect denying +%CG+Ls protests

+%CG+ appealed to CT' CTA modified C%& holding +%CG+ liable forthe reduced aggregate amount of +26)1::)972 :: which represented :!"transaction ta#) documentary and science stamp ta# and deficiency incometa#

$oth parties appealed CA reduced +%CG+Ls liability to +7)::8):! 96which represented :!" transaction ta# in a reduced rate) 26" interest per

2


29/45


annum on the deficiency income ta# for a period of : years and a surchargeof 16" C' e#empted +%CG+ from payment of documentary and sciencestamp ta# and compromise penalty

ISSUES:1 EGN +%CG+ is liable for4

a :!" transaction ta#b %nterest and surcharge on unpaid transaction ta#c Documentary and science stamp ta#

2 EGN +%CG+ is entitled to deductions against income of4a .&<


30/45


Ee conclude that +icop was properly held liable for the thirty-fivepercent .:!"/ transaction ta# due in respect of interest payments onitsmoney market borrowingsWON PICOP is !i b!e or interest n' s$r"h r(e on $n# i' tr ns "tiont ) NO

C%& prays that +icop be held liable for a twenty-five percent .2!"/surcharge and for interest at the rate of fourteen percent .1 "/ per annumfrom the date prescribed for its payment %n so praying) the C%& relies upon(ection 16 of &evenue &egulation 9-99 which provided for these penalitiesC%& points to section !1 .e/ of the 1;99 Ta# code as its source of authorityfor assessing a surcharge and penalty interest of :!" transaction ta# duefrom +icop

%t will be seen that (ection !1 .c/ .1/ and .e/ .1/ and .:/) of the1;99 Ta# Code) authori@e the imposition of surcharge and interest only inrespect of a = tax imposed b% this 'itle )= that is to say) 'itle II on = Income'ax = %t will also be seen that (ection 92 of the 1;99 Ta# Code imposes asurcharge only in case of failure to file a return or list = re>uired b% this'itle )= that is) 'itle II on = Income 'ax = The thirty-five percent .:!"/transaction ta# is) however) imposed in the 1;99 Ta# Code by #ection 0+4(b! thereof which #ection is embraced in 'itle B on ='axes on artial

aw in our country Nevertheless) we are compelled to adopt thisconclusion Ee consider that the authority to impose what the present Ta#Code calls .in (ection 2 8/ ci"il penalties consisting of additions to the ta#due) must be e#pressly given in the enabling statute) in language too clear tobe mistaken The grant of that authority is not lightly to be assumed to havebeen made to administrative officials) even to one as highly placed as the(ecretary of inance

The state of the present law tends to reinforce our conclusion that(ection !1 .c/ and .e/ of the 1;99 Ta# Code did not authori@e theimposition of a surcharge and penalty interest for failure to pay the thirty-

five percent .:!"/ transaction ta# imposed under (ection 216 .b/ of thesame Code

%n other words) (ection 2 9 .a/ of the current N%&C supplies whatdid not e#ist back in 1;99 when +icop s liability for the thirty-five percent.:!"/ transaction ta# became fi#ed Ee do not believe we can fill thatlegislative lacuna by ,udicial fiat There is nothing to suggest that (ection2 9 .a/ of the present Ta# Code) which was inserted in 1;8!) was intendedto be given retroactive application by the legislative authorityWON PICOP is !i b!e or 'o"$/ent r, n' s"ien"e st /# t ) YES

+icop issued sometime in 1;99 long-term subordinated convertibledebenture bonds with an aggregate face value of +166)666)666 66 Theproceeds of the debenture bonds were in fact utili@ed to finance the $G%-registered operations of +icop The C%& assessed documentary and sciencestamp ta#es) amounting to +:66)666 66) on the issuance of +icop sdebenture bonds %t is claimed by +icop that its ta# e#emption includese#emption from the documentary and science stamp ta#es imposed underthe N%&C

C%& stresses that the ta# e#emption under the %nvestment%ncentives 'ct may be granted or recogni@ed only to the e#tent that theclaimant +icop was engaged in registered operations The borrowing offunds from the public) in the submission of the C%&) was not an activityincluded in +icop s registered operations CT' adopted the view of the C%&

Court of 'ppeals took a less rigid view of the ambit of the ta#e#emption granted to registered pioneer enterprises %t reasoned out that#ince the mone% raised thereb% was to be used in its registered operation,

PI$DP should en*o% the incenti"es granted to it by & ' !187) one of whichis the e#emption from payment of all ta#es under the National %nternal&evenue Code) e#cept income ta#es) otherwise the purpose of theincenti"es would be defeated. 5ocumentar% and science stamp taxes ondebenture bonds are certainl% not income taxes

(C agrees with C' Ta# e#emptions are) to be sure) to be =strictlyconstrued)= that is) they are not to be e#tended beyond the ordinary andreasonable intendment of the language actually used by the legislativeauthority in granting the e#emption Ee consider that the actual dedicationof the proceeds of the bonds to the carrying out of +icop s registeredoperations constituted a sufficient ne#us with such registered operations soas to e#empt +icop from stamp ta#es ordinarily imposed upon or inconnection with issuance of such bonds

'lso) after commencement of the present litigation before theCT') the $%& took the position that the ta# e#emption granted by & ' No

3:


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!187) as amended) does include e#emption from documentary stamp ta#eson transactions entered into by $G%-registered enterprises

(imilarly) in $%& &uling No 61:) dated 7 ebruary 1;8;) theCommissioner held that a registered pioneer enterprise producing polyesterfilament yarn was entitled to e#emption =from the documentary stamp ta#on Bits sale of real property in >akati up to December :1) 1;8; =WON PICOP is entit!e' to 'e'$"t ( inst "$rrent in"o/e interest# ,/ents on !o ns or the #$r"h se o / "hiner, n' e6$i#/ent YES

%n 1;7;) 1;92 and 1;99) +icop obtained loans from foreign creditorsin order to finance the purchase of machinery and e*uipment needed for itsoperations %n its 1;99 %ncome Ta# &eturn) +icop claimed interest paymentsmade in 1;99) amounting to + 2)8 6)1:1 66) on these loans as a deductionfrom its 1;99 gross income

The C%& disallowed this deduction upon the ground that) becausethe loans had been incurred for the purchase of machinery and e*uipment)the interest payments on those loans should have been capitali@ed insteadand claimed as a depreciation deduction taking into account the ad,ustedbasis of the machinery and e*uipment .original ac*uisition cost plus interestcharges/ over the useful life of such assets

$oth the CT' and the Court of 'ppeals sustained the position of+icop and held that the interest deduction claimed by +icop was proper andallowable

Mia (ection :6 of the 1;99 Ta# Code) interest payments on loansincurred by a ta#payer are allowed by the N%&C as deductions against theta#payerLs gross income

Thus) the general rule is that interest e#penses are deductibleagainst gross income and this certainly includes interest paid under loansincurred in connection with the carrying on of the business of the ta#payer%n the instant case) the C%& does not dispute that the interest payments weremade by +icop on loans incurred in connection with the carr%ing on of theregistered operations of Picop Neither does the C%& deny that such interestpayments were legall% due and demandable under the terms of such loans)and in fact paid by +icop during the ta# year 1;99

The C%& has been unable to point to any provision of the 1;99 Ta#Code or any other (tatute that re*uires the disallowance of the interestpayments made by +icop The C%& invokes (ection 9; of &evenue&egulations No 2 Ee read the above provision of &evenue &egulationsNo 2 as referring to so called =theoretical interest= (uch =theoretical= orimputed interest does not arise from a legally demandable interest-bearing

obligation incurred by the ta#payer who however wishes to find out Gnething that (ection 9; *uoted above makes clear is that interest which doesconstitute a charge arising under an interest-bearing obligation is anallowable deduction from gross income

C%& argues finally that to allow +icop to deduct itsinterestpayments against its gross income would be to encourage fraudulentclaims to double deductions from gross income

+icop has not claimed to be entitled to double deduction of its 1;99interest payments The C%& has neither alleged nor proved that +icop hadpreviously ad,usted its cost basis for the machinery and e*uipmentpurchased with the loan proceeds by capitali@ing the interest payments hereinvolved

Ee conclude that the CT' and the Court of 'ppeals did not err inallowing the deductions of +icop s 1;99 interest payments on its loans forcapital e*uipment against its gross income for 1;99WON PICOP is entit!e' to 'e'$"t ( inst "$rrent in"o/e net o#er tin(!osses in"$rre' b, R$st n P$!# n' P #er Mi!!s NO

+icop entered into a merger agreement with the &ustan +ulp and+aper >ills) %nc .=&++>=/ and &ustan >anufacturing Corporation.=&>C=/ 0nder this agreement) the rights) properties) privileges) powersand franchises of &++> and &>C were to be transferred) assigned andconveyed to +icop as the surviving corporation &++> and &>C were) like+icop) $G%-registered companies %mmediately before merger effectivedate) &++> had over preceding years accumulated losses in the totalamount of +81)1!;);6 66 %n its 1;99 %ncome Ta# &eturn) +icop claimed+ )1;7)167 66 of &++> s accumulated losses as a deduction against+icop s 1;99 gross income

0nder our law) and outside the special realm of $G%-registeredenterprises) there is no such thing as a carry-over of net operating loss Tothe contrary) losses must be deducted against current income in the taxable

%ear when such losses were incurred >oreover) such losses may becharged off onl% against income earned in the same taxable %ear when thelosses were incurred

& ' No !187 introduced the carry-over of net operating losses asa "er% special incenti"e to be granted only to registered pioneer enterprisesand only with respect to their registered operations The statutory purposehere may be seen to be the encouragement of the establishment andcontinued operation of pioneer industries by allowing the registeredenterprise to accumulate its operating losses which may be e#pected duringthe early years of the enterprise and to permit the enterprise to offset such

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losses against income earned by it in later years after successfulestablishment and regular operations To promote its economicdevelopmentgoals) the &epublic foregoes or defers ta#ing the income of the pioneerenterprise until after that enterprise has recovered or offset its earlier lossesEe consider that the statutory purpose can be served only if theaccumulated operating losses are carried over and charged off againstincome subse*uently earned and accumulated b% the same enterpriseengaged in the same registered operations

%n the instant case) to allow the deduction claimed by +icop wouldbe to permit one corporation or enterprise) +icop) to benefit from theoperating losses accumulated by another corporation or enterprise) &++>&++> far from benefiting from the ta# incentive granted by the $G%statute) in fact gave up the struggle and went out of e#istence and its formerstockholders ,oined the much larger group of +icop s stockholders

WON PICOP IS ENTITLED TO DEDUCT A+AINST CURRENTINCOME CERTAIN CLAIMED FINANCIAL +UARANTEEEKPENSES NO

%n its %ncome Ta# &eturn for 1;99) +icop also claimed a deduction inthe amount of +1)2:9) 21 66 as financial guarantee e#penses Thisdeduction is said to relate to chattel and real estate mortgages re*uired from+icop by the +hilippine National $ank .=+N$=/ and D$+ as guarantors ofloans incurred by +icop from foreign creditors

C%& disallowed this claimed deduction upon the ground ofinsufficiency of evidence This disallowance was sustained by the CT' andthe Court of 'ppeals

Ee consider that entitlement to +icop s claimed deduction of+1)2:9) 21 66 was not ade*uately shown and that such deduction must bedisallowedDISPOSITIVE: >GD% %


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for the ta#able year on the strength of se" =4 8">19= o the Phi!i##ineIntern ! Reven$e Co'e.

The Ta# Court held that they may be deducted because s#o$ses 'i' not;si(ni ,< in their in"o/e t ) ret$rn 'esire to v i! the/se!ves o thebene its o # r = 8 97 o s$bse"tion. The ta# credit is limited under par .' and $/ ! of the same subsection RULIN+: No) he cannot

RATIO:The wording of section :6 .c/ .1/ .$/ of the %nternal &evenue 'ct shows thelawLs intent that the right to deduct income ta#es paid to foreign3 SGC. 3:. Ded'ction from &ross income. F In com%'tin& net income there sha !ea owed as ded'ctions F-a ...-! ...-c Ta"es/

-1 In &enera . F Ta"es %aid or accr'ed within the ta"a! e $ear, e"ce%t F-A The income ta" %ro#ided for 'nder this Tit e0-@ Income, war;%rofits, and e"cess %rofits ta"es im%osed !$ the a'thorit$ of an$forei&n co'ntr$0 !'t this ded'ction sha !e a owed in the case of a ta"%a$er who doesnot si&nif$ in his ret'rn his desire to ha#e to an$ e"tent the !enefits of %ara&ra%h -3 ofthis s'!section -re atin& to credit for forei&n co'ntries 0-C Gstate, inheritance and &ift ta"es0 and-D Ta"es assessed a&ainst oca !enefits of a kind tendin& to increase the #a 'e ofthe %ro%ert$ assessed.4 9ar. -c -3 Credits a&ainst ta" for ta"es of forei&n co'ntries. F If the ta"%a$ersi&nifies in his ret'rn his desire to ha#e the !enefits of this %ara&ra%h, the ta" im%osed!$ this Tit e sha !e credited with F-A ...0-@ A ien resident of the 9hi i%%ines. F In the case of an a ien resident of the9hi i%%ines, the amo'nt of an$ s'ch ta"es %aid or accr'ed d'rin& the ta"a! e $ear toan$ forei&n co'ntr$, if the forei&n co'ntr$ of which s'ch a ien resident is a citi en ors'!(ect, in im%osin& s'ch ta"es, a ows a simi ar credit to citi ens of the 9hi i%%inesresidin& in s'ch co'ntr$0* 9ar. -c -4 Limitation on credit. F The amo'nt of the credit taken 'nder this sectionsha !e s'!(ect to each of the fo owin& imitations/-A The amo'nt of the credit in res%ect to the ta" %aid or accr'ed to an$ co'ntr$ shanot e"ceed the same %ro%ortion of the ta" a&ainst which s'ch credit is taken, whichthe ta"%a$er s net income from so'rces within s'ch co'ntr$ ta"a! e 'nder this Tit e!ears to his entire net income for the same ta"a! e $ear0 and-@ The tota amo'nt of the cr edit sha not e"ceed the same %ro%ortion of the ta"a&ainst which s'ch credit is taken, which the ta"%a$er s net income from so'rces

witho't the 9hi i%%ines ta"a! e 'nder this Tit e !ears to his entire net income for thesame ta"a! e $ear.

government form the ta#payerLs gross income is given only as an alternativeor substitute to his right to claim a ta# credit for such foreign income ta#esunder sec :6.c/ .:/ and . /) so that unless the alien resident has a right toclaim such ta# credit if he so chooses) he is precluded from deductingforeign income ta#es from his gross income The wording that suchdeduction shall be allowed in case of a ta#payer who does not signify hisdesire to have the benefits of par :) assumes that the ta#payer may alsosignify his desire to claim a ta# credit and waive the deduction

Fad the law intended that foreign income ta#es be deducted from grossincome in any event) regardless of the ta#payerLs right to claim credit) it isthe right to credit that should be conditioned upon the waiving of thededuction) and the right to reduction under subsection .c-1-$/ would havebeen made absolute The purpose of the law is to prevent the ta#payer fromclaiming twice the benefits of his payment of foreign ta#es) by deductionfrom gross income and by ta# credit

Gn the argument that the spouses would be sub,ect to double ta#ation) the(C said that double ta#ation is obno#ious only when the ta#payer is ta#edtwice for the benefit of the same governmental entity) but in this case the+hilippine government would only receive the proceeds of one ta# Thecourt said that between the 0() where income was not earned and theta#payer does not reside) and the +hilippines) where the income was earnedand the ta#payer resides) ,ustice and e*uity demand that the ta# on theincome should accrue to the benefit of the +hilippines 'ny relief fromdouble ta#ation should come from the 0() since the 0( did not contributeto the production of wealth that is being ta#ed

The court also said that the interpretation of the spouses would also place aresident alien with only domestic sources of income in an e*ual or betterposition than one who has both domestic and foreign sources of income) asituation which is unfair and short of logic 'lso) to allow suchinterpretation would confer on the other government the power to reducethe income ta# to the +hilippines by increasing the ta# rates on the alienresident %t would be tantamount to subordinating our ta#es to a foreigngovernment) which is incompatible with the status of the +hilippines as anindependent and sovereign state

DISPOSITIVE: Decisions of CT' reversed) disallowance of refundsaffirmed

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M5TIGRRG . COLLGCTOR -RA+ANAN

FERNANDEH ERMANOS V.

CIR #EP'E2anganese >ine%nc ) petitioner did not e#pect to be repaid

1 The memorandum agreement signed bythe parties appears to be very clear thatthe consideration for the advances madeby petitioner was 1!" of the net profitsof +alawan >anganese >ines) %nc %nother words) if there were no earningsor profits) there was no obligation torepay those advances

2 %t has been held that the voluntaryadvances made without e#pectation ofrepayment do not result in deductiblelosses

: No bad debt could arise where there isno valid and subsisting debt

ii The funds given were not loans but investments1 This fact e#plains the liberality with

which the ta#payer made such largeadvances to the subsidiary) despite thelatter s admittedly poor financialcondition

iii The Ta# Court correctly held that the subsidiarycompany was still in operation in 1;!1 and 1;!2

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and the ta#payer continued to give it advances inthose years) and) therefore) the alleged debt orinvestment could not properly be consideredworthless and deductible in 1;!1) as claimed bythe ta#payer urthermore) neither under (ection

:6 .d/ .2/ of our Ta# Code providing fordeduction by corporations of losses actuallysustained and charged off during the ta#able yearnor under (ection :6 .e/ .1/ thereof providing fordeduction of bad debts actually ascertained to beworthless and charged off within the ta#ableyear) can there be a partial writing off of a loss orbad debt) as was sought to be done here by theta#payer or such losses or bad debts must beascertained to be so and written off during theta#able year) are therefore deductible in full ornot at all) in the absence of any e#press provisionin the Ta# Code authori@ing partial deductions

c 5isallowance of losses in


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c The law in point is (ection :6.g/ .1/ .$/ of the &evenueCode) before its amendment by &epublic 'ct No 27;8)which provided in part4

=.g/ 5epletion of oil and gas wells and mines 4 =.1/ In general 3 .$/ in the case of mines) a reasonableallowance for depletion thereof not to e#ceed the market value inthe mine of the product thereof) which has been mined and soldduring the year for which the return and computation are madeThe allowances shall be made under rules and regulations to beprescribed by the (ecretary of inance4 Pro"ided ) That when theallowances shall e*ual the capital invested) no further allowanceshall be made =

DISPOSITIVE: 'CCG&D%N R) the ,udgment of the Court of Ta#'ppeals) sub,ect of the appeals in Cases Nos -21!!1 and -21!!9) asmodified by the crediting of the losses of +:7)922 2 disallowed in 1;!1and 1;!2 to the ta#payer for the year 1;!: as directed in paragraph 1 .c/ ofthis decision) is hereby affirmed The ,udgment of the Court of Ta# 'ppealsappealed from in Cases Nos -2 ;92 and -2 ;98 is affirmed in toto Nocosts (o ordered

PLARIDEL vs. CIR 5ec ++, + @: ustice achinery 's additional security)+laridel also re*uired (an Jose and one Cuervo to e#ecute an indemnityagreement in favor or +laridel (urety (an Jose failed to perform hisobligation %n the suit filed by + alang) +laridel was ad,udged solidarilyliable with (an Jose in favor of + alang or that year) +larideldeducted the amount it paid from its gross income The C%& ad,udged it anincome deficiency ta# The Court held that the amount paid to +l alangwas not a deductible loss since the amount was recoverable from (an Jose

and Cuervo

DOCTRINE: Deductible ossThe rule is that loss deduction will be denied if there is a measurable rightto compensation for the loss) with ultimate collection reasonably clear (owhere there is reasonable ground for reimbursement) the ta#payer mustseek his redress and may not secure a loss deduction until he establishesthat no recovery may be had %n other words) as the Ta# Court put it) theta#payer .+laridel/ must e#haust his remedies first to recover or reduce hisloss

FACTS:1 +etitioner +laridel (urety ] %nsurance Co is a domestic corp engaged

in the bonding business +laridel) as surety) and Constancio (an Jose)as principal) e#ecuted a bond in favor of + alang >achinery Co tosecure (an JoseLs contractual obligation to produce and supply logsto + alang

2 's additional security) +laridel re*uired (an Jose and one &amonCuervo to e#ecute an indemnity agreement 'ccordingly) (an Joseconstituted a chattel mortgage on its logging machineries and othermovables in +laridel s favor while &amon Cuervo e#ecuted a realestate mortgage

: (an Jose was not able to deliver the logs to + alang %n 1;!:) theC % ad,udged (an Jose and +alridel liable %t also directed Cuervo toreimburse +laridel for whatever amount it would pay + alang TheC' affirmed the C %Ls decision +laridel paid + ) ;6 to + alangin 1;!9

or its income ta# return for the year 1;!9) +laridel claimed theamount of + k from its gross income

! The C%& disallowed the claimed deduction and assessed +laridel anincome deficiency ta#

ISSUE:1 EGN the amount paid to + alang is a deductible loss -NG

RATIO:1 $reakdown4 Gf the sum of + ) ;6 66) the amount of +:6)766 66

3 which is the principal sum stipulated in the performance bond 3 is being claimed as loss deduction under (ec :6 .d/ .2/ of theTa# Code and +16)666 66 3 which is the interest that had accrued

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on the principal sum 3 is now being claimed as interest deductionunder (ec :6 .b/ .1/

2 oss is deductible only in the ta#able year it actually happens or issustained Fowever) if it is compensable by insurance or otherwise)deduction for the loss suffered is postponed to a subse*uent year)which) to be precise) is that year in which it appears that nocompensation at all can be had) or that there is a remaining or netloss) i e ) no full compensation

: +laridel effected payment to alang >achinery pursuant to a finaldecision in 1;!9 Fowever) under the same court decision) (anJose and Cuervo were obligated to reimburse +laridel for whateverpayments it would make to alang >achinery Clearly) +laridel sloss is compensable otherwise .than by insurance/ %t shouldfollow) then) that the loss deduction can not be claimed in 1;!9

7. The r$!e is th t !oss 'e'$"tion &i!! be 'enie' i there is /e s$r b!e ri(ht to "o/#ens tion or the !oss- &ith $!ti/ te"o!!e"tion re son b!, "!e r. So &here there is re son b!e(ro$n' or rei/b$rse/ent- the t )# ,er /$st see his re'ress

n' / , not se"$re !oss 'e'$"tion $nti! he est b!ishes th t nore"over, / , be h '. In other &or's- s the T ) Co$rt #$t it-the t )# ,er 8P! ri'e!9 /$st e)h $st his re/e'ies irst tore"over or re'$"e his !oss.

! %n the case at bar) +laridel did not e#haust its remedies Fowever)even assuming that there was no reasonable e#pectation ofrecovery) still no loss deduction can be had (ec :6 .d/ .2/ of theTa# Code re*uires a charge-off as one of the conditions for lossdeduction4%n the case of a corporation) all losses actually sustained andcharged-off within the ta#able year and not compensated for byinsurance or otherwise

7 ' re*uisite of a charge-off is found under (ection 2:.f/ of the 0(%nternal &evenue Code of 1;:; which states4 H%n the case of acorporation) losses sustained during the ta#able year and notcompensated for by insurance or otherwise I +laridel) who had theburden of proof failed to adduce evidence that there was a charge-off in connection with the + ) ;6 663or +:6)766 66 3 which itpaid to alang >achinery

9 %n connection with the claimed interest deduction of +16)666 66)the (olicitor eneral correctly points out that this *uestion wasnever raised before the Ta# Court The alleged interest deduction

not having been properly litigated as an issue before the Ta# Court)it is now too late to raise and assert it before this Court

RULIN+: The amount paid to +l alang is not a deductible lossDISPOSITIVE: 'ppealed decision is affirmed

C INA AN IN+ VS. CAul% + , 0444

. Bitug 2abel frica

SUMMARY: +etitioner wished to e#clude from its ta# return theinvestment it made to the irst C$C Capital who has become bankruptChina $anking argued that the investment became bad debt TheCommissioner) CT' and the (C disallowed such e#clusion on the groundthat is not an ordinary loss and not sub,ect to repayment

DOCTRINE:1 The e*uity investment in shares of stock held by the China

$anking is not an indebtedness) and it is a capital) not anordinary) asset

2 'ssuming that the investment indeed became worthless) the losssustained is a capital) not an ordinary) loss

: The capital loss sustained by China $anking can only bededucted from capital gains if any derived by it during the sameta#able year that the securities have become worthless

FACTS:

1 China $anking Corporation made a !:" e*uity investment in theirst C$C Capital .'sia/ td

a %nvestment made in the year 1;86b irst C$C Capital is a Fongkong subsidiary engaged in

financing and investment with Hdeposit-takingI functionc China $ankingLs investment amounted to +hp 17) 229)

8!1 86 .consisting of 167)666 shares with a par value of+hp 166Pshare/

3=


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2 ' regular e#amination of the financial books ] investmentportfolios of China $anking was conducted by $ankgo (entral in1;87

a %t was shown that irst C$C Capi

tax digest pp.4-6 (until basilan estates).doc

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