CIR v ISABELA CULTURAL CORPORATION

FACTS:
ICC was assessed for decency ncome tax | BIR dsaowed expense
deductons for professona and securty servces by 1) audtng servces by
SGV & Co. 2) ega servces Bengzon aw omce 3) E Tgre Securty servces|
and decency expanded wthhodng tax, when t faed to wthhod 1%
expanded wthhodng tax. The CTA canceed and set asde the
assessment notces hodng that the camed deductons for professona
and securty servces were propery camed n 1986 snce t was ony n
that year when the bs demandng payment were sent to ICC. It aso
found that the ICC wthhed 1% expanded wthhodng tax for securty
servces. The CA amrmed hence the case at bar.
ISSUE: W/N the aforementoned may be deducted
HELD: for the audtng and ega servces NO but for the securty servces
YES
The requstes for deductbty of ordnary and necessary trade, busness or
professona expenses, ke expenses pad for ega and audtng servces
are: a) the expense must be ordnary and necessary; b) t must have been
pad or ncurred durng the taxabe year; c) t must have been pad or
ncurred n carryng on the trade or busness of the taxpayer and d) t must
be supported by recepts, records and other pertnent papers.
The requste that t must have been pad or ncurred durng the taxabe
year s quaed by Sec. 45 of NIRC whch states that "the deducton
provde for n ths tte sha be taken for the taxabe year n whch pad or
ncurred dependent upon the method of accountng upon the bass of
whch the net ncome s computed x x x".
ICC uses the accrua method. RAM No. 1-2000 provdes that under the
accrua method, expenses not camed as deductons n the current year
when they are ncurred CANNOT be camed as deducton from ncome for
the succeedng year. The accrua method rees upon the taxpayers rght
to receve amount or ts obgaton to pay them NOT the actua recept or
payment. Amounts of ncome accrue where the rght to receve them
become xed, where there s created an enforceabe abty. Labtes are
accrued when xed and determnabe n amount.
The accrua of ncome and expense s permtted when the ALL-EVENTS
TEST has been met. The test requres that: 1) xng of a rght to ncome or
abty to pay and 2) the avaabty of the reasonabe accurate
determnaton of such ncome or abty. It does not requre that the
amount be absoutey known ony that the taxpayer has nformaton
necessary to compute the amount wth reasonabe accuracy. The test s
satsed where computaton remans uncertan f ts bass s unchangeabe.
The amount of abty does not have to be determned exacty, t must be
determned wth reasonabe accuracy.
In the case at bar, the expenses for ega servces pertan to the years
1984 and 1985. The rm has been retaned snce 1960. From the nature of
the camed deducton and the span of tme durng whch the rm was
retaned, ICC can be expected to have reasonaby known the retaner fees
charged by the rm as we as compensaton for ts servces. Exercsng
due dgence, they coud have nqured nto the amount of ther obgaton.
It coud have reasonaby determned the amount of ega and retaner fees
owng to ther famarty wth the rates charged.
The professona fees of SGV cannot be vady camed as deductons n
1986. ICC faed to present evdence showng that even wth ony
reasonabe accuracy, t cannot determne the professona fees whch the
company woud charge.
CIR v GENERAL FOODS
FACTS
Respondent corporaton Genera Foods (Phs), whch s engaged n the
manufacture of "Tang", "Caumet" and "Koo-Ad", ed ts ncome tax
return for the sca year endng February 1985 and camed as deducton,
among other busness expenses, P9,461,246 for meda advertsng for
"Tang".
The Commssoner dsaowed 50% of the deducton camed and assessed
decency ncome taxes of P2,635,141.42 aganst Genera Foods,
promptng the atter to e an MR whch was dened.
Genera Foods ater on ed a petton for revew at CA, whch reversed and
set asde an earer decson by CTA dsmssng the companys appea.
ISSUE
W/N the sub|ect meda advertsng expense for "Tang" was ordnary and
necessary expense fuy deductbe under the NIRC
RULING
No. Tax exemptons must be construed n strcssm |urs aganst the
taxpayer and beray n favor of the taxng authorty, and he who cams
an exempton must be abe to |ustfy hs cam by the cearest grant of
organc or statute aw. Deductons for ncome taxes partake of the nature
of tax exemptons; hence, f tax exemptons are strcty construed, then
deductons must aso be strcty construed.
1
To be deductbe from gross ncome, the sub|ect advertsng expense must
compy wth the foowng requstes: (a) the expense must be ordnary and
necessary; (b) t must have been pad or ncurred durng the taxabe year;
(c) t must have been pad or ncurred n carryng on the trade or busness
of the taxpayer; and (d) t must be supported by recepts, records or other
pertnent papers.
Whe the sub|ect advertsng expense was pad or ncurred wthn the
correspondng taxabe year and was ncurred n carryng on a trade or
busness, hence necessary, the partes vews conct as to whether or not
t was ordnary. To be deductbe, an advertsng expense shoud not ony
be necessary but aso ordnary.
The Commssoner mantans that the sub|ect advertsng expense was not
ordnary on the ground that t faed the two condtons set by U.S.
|ursprudence: rst, "reasonabeness" of the amount ncurred and second,
the amount ncurred must not be a capta outay to create "goodw" for
the product and/or prvate respondents busness. Otherwse, the expense
must be consdered a capta expendture to be spread out over a
reasonabe tme.
There s yet to be a cear-cut crtera or xed test for determnng the
reasonabeness of an advertsng expense. There beng no hard and fast
rue on the matter, the rght to a deducton depends on a number of
factors such as but not mted to: the type and sze of busness n whch
the taxpayer s engaged; the voume and amount of ts net earnngs; the
nature of the expendture tsef; the ntenton of the taxpayer and the
genera economc condtons. It s the nterpay of these, among other
factors and propery weghed, that w yed a proper evauaton.
The Court nds the sub|ect expense for the advertsement of a snge
product to be nordnatey arge. Therefore, even f t s necessary, t cannot
be consdered an ordnary expense deductbe under then Secton 29 (a)
(1) (A) of the NIRC.
Advertsng s generay of two knds: (1) advertsng to stmuate the
current sae of merchandse or use of servces and (2) advertsng desgned
to stmuate the future sae of merchandse or use of servces. The second
type nvoves expendtures ncurred, n whoe or n part, to create or
mantan some form of goodw for the taxpayers trade or busness or for
the ndustry or professon of whch the taxpayer s a member. If the
expendtures are for the advertsng of the rst knd, then, except as to the
queston of the reasonabeness of amount, there s no doubt such
expendtures are deductbe as busness expenses. If, however, the
expendtures are for advertsng of the second knd, then normay they
shoud be spread out over a reasonabe perod of tme.
The companys meda advertsng expense for the promoton of a snge
product s doubtessy unreasonabe consderng t comprses amost one-
haf of the companys entre cam for marketng expenses for that year
under revew. Petton granted, |udgment reversed and set asde.
AGUINALDO INDUSTRIES v CIR
FACTS:
Agunado Industres Corporaton (AIC) s a domestc corporaton engaged
n the manufacture of shng nets, a tax-exempt ndustry and the
manufacture of furnture. For accountng purposes, each dvson s
provded wth separate books of accounts. Prevousy, AIC acqured a parce
of and n Muntnupa, Rza, as ste of the shng net factory. Later, t sod
the Muntnupa property. AIC derved prot from ths sae whch was
entered n the books of the Fsh Nets Dvson as msceaneous ncome to
dstngush t from ts tax-exempt ncome.
For the year 1957, AIC ed two separate ncome tax returns for each
dvson. After nvestgaton, the examners of the BIR found that the Fsh
Nets Dvson deducted from ts gross ncome for that year the amount of
P61,187.48 as addtona remuneraton pad to the omcers of AIC. Ths
amount was taken from the net prot of an soated transacton (sae of
Muntnupa and) not n the course of or carryng on of AIC's trade or
busness, and was reported as part of the seng expenses of the
Muntnupa and. Upon recommendaton of the examner that the sad sum
of P61,187.48 be dsaowed as deducton from gross ncome, pettoner
asserted n ts etter of February 19, 1958, that sad amount shoud be
aowed as deducton because t was pad to ts omcers as aowance or
bonus pursuant to ts by-aws.
ISSUE/HELD: W/N the bonus gven to the omcers of the pettoner upon
the sae of ts Muntnupa and s an ordnary and necessary busness
expense deductbe for ncome tax purposes - NO
RATIO: Sec. 30 (a) (1) of the Tax Code provdes that n computng net
ncome, there sha be aowed as deductons Expenses, ncudng a the
ordnary and necessary expenses pad or ncurred durng the taxabe year
n carryng on any trade or busness, ncudng a reasonable allowance for
persona servces actually rendered.
The bonus gven to the omcers of the pettoner as ther share of the prot
reazed from the sae of pettoner's Muntngupa and cannot be deemed a
deductbe expense for tax purposes, even f the aforesad sae coud be
consdered as a transacton for carryng on the trade or busness of the
pettoner and the grant of the bonus to the corporate omcers pursuant to
pettoner's by-aws coud, as an ntra-corporate matter, be sustaned. The
records show that the sae was ehected through a broker who was pad by
2
pettoner a commsson of P51,723.72 for hs servces. On the other hand,
there s absoutey no evdence of any servce actuay rendered by
pettoner's omcers whch coud be the bass of a grant to them of a bonus
out of the prot derved from the sae. Ths beng so, the payment of a
bonus to them out of the gan reazed from the sae cannot be consdered
as a seng expense; nor can t be deemed reasonabe and necessary so as
to make t deductbe for tax purposes. The extraordnary and unusua
amounts pad by pettoner to these drectors n the guse and form of
compensaton for ther supposed servces as such, without any relation to
the measure of their actual services, cannot be regarded as ordinary and
necessary expenses wthn the meanng of the aw. Ths s n ne wth the
doctrne n the aw of taxaton that the taxpayer must show that ts
camed deductons ceary come wthn the anguage of the aw snce
aowances, ke exemptons, are matters of egsatve grace.
ATLAS CONSOLIDATED MINING v CIR
FACTS:
Atas s a corporaton engaged n the mnng ndustry regstered. On August
1962, CIR assessed aganst Atas for decency ncome taxes for the years
1957 and 1958. For the year 1957, t was the opnon of the CIR that Atas
s not entted to exempton from the ncome tax under RA 909 because
same covers ony god mnes. For the year 1958, the decency ncome tax
covers the dsaowance of tems camed by Atas as deductbe from gross
ncome. Atas protested for reconsderaton and canceaton, thus the CIR
conducted a renvestgaton of the case. On October 1962, the Secretary
of Fnance rued that the exempton provded n RA 909 embraces a new
mnes and od mnes whether god or other mneras. Accordngy, the CIR
recomputed Atas decency ncome tax abtes n the ght of sad rung.
On |une 1964, the CIR ssued a revsed assessment entrey emnatng the
assessment for the year 1957. The assessment for 1958 was reduced from
whch Atas appeaed to the CTA, assang the dsaowance of the foowng
tems camed as deductbe from ts gross ncome for 1958: Transfer
agent's fee, Stockhoders reaton servce fee, U.S. stock stng expenses,
Sut expenses, and Provson for contngences. The CTA aowed sad tems
as deducton except those denomnated by Atas as stockhoders reaton
servce fee and sut expenses.
Both partes appeaed the CTA decson to the SC by way of two (2)
separate pettons for revew. Atas appeaed ony the dsaowance of the
deducton from gross ncome of the so-caed stockhoders reaton servce
fee.
ISSUE/HELD: W/N the annua pubc reatons expense (aka stockhoders
reaton servce fee) pad to a pubc reatons consutant s a deductbe
expense from gross ncome
RATIO: Secton 30 (a) (1) of the Tax Code aows a deducton of "a the
ordnary and necessary expenses pad or ncurred durng the taxabe year
n carryng on any trade or busness." An tem of expendture, n order to
be deductbe under ths secton of the statute, must fa squarey wthn ts
anguage. To be deductbe as a busness expense, three condtons are
mposed, namey: (1) the expense must be ordnary and necessary, (2) t
must be pad or ncurred wthn the taxabe year, and (3) t must be pad or
ncurred n carryng n a trade or busness. In addton, not ony must the
taxpayer meet the busness test, he must substantay prove by evdence
or records the deductons camed under the aw, otherwse, the same w
be dsaowed. The mere aegaton of the taxpayer that an tem of expense
s ordnary and necessary does not |ustfy ts deducton.
The SC has never attempted to dene wth precson the terms "ordnary
and necessary." As a gudng prncpe, ordnary, an expense w be
consdered "necessary" where the expendture s approprate and hepfu n
the deveopment of the taxpayer's busness. It s "ordnary" when t
connotes a payment whch s norma n reaton to the busness of the
taxpayer and the surroundng crcumstances. The term "ordnary" does not
requre that the payments be habtua or norma n the sense that the
same taxpayer w have to make them often; the payment may be unque
or non-recurrng to the partcuar taxpayer ahected.
There s thus no hard and fast rue on the matter. The rght to a deducton
depends n each case on the partcuar facts and the reaton of the
payment to the type of busness n whch the taxpayer s engaged. The
ntenton of the taxpayer often may be the controng fact n makng the
determnaton. Assumng that the expendture s ordnary and necessary n
the operaton of the taxpayer's busness, the answer to the queston as to
whether the expendture s an aowabe deducton as a busness expense
must be determned from the nature of the expendture tsef, whch n turn
depends on the extent and permanency of the work accompshed by the
expendture.
It appears that on December 1957, Atas ncreased ts capta stock. It
camed that ts shares of stock were sod n the Unted States because of
the servces rendered by the pubc reatons rm. The nformaton about
Atas gven out and payed up n the mass communcaton meda resuted
n fu subscrpton of the addtona shares ssued by Atas; consequenty,
the stockhoders reaton servce fee, the compensaton for servces
carryng on the seng campagn, was n ehect spent for the acquston of
addtona capta, ergo, a capta expendture, and not an ordnary
expense. It s not deductbe from Atas gross ncome n 1958 because
expenses reatng to recaptazaton and reorganzaton of the corporaton,
the cost of obtanng stock subscrpton, promoton expenses, and
commsson or fees pad for the sae of stock reorganzaton are capta
expendtures. That the expense n queston was ncurred to create a
favorabe mage of the corporaton n order to gan or mantan the pubc's
and ts stockhoders' patronage, does not make t deductbe as busness
3
expense. As hed n a US case, ehorts to estabsh reputaton are akn to
acquston of capta assets and, therefore, expenses reated thereto are
not busness expense but capta expendtures.
Note: The burden of proof that the expenses ncurred are ordnary and
necessary s on the taxpayer and does not rest upon the Government. To
ava of the camed deducton, t s ncumbent upon the taxpayer to
adduce substanta evdence to estabsh a reasonaby proxmate reaton
petton between the expenses to the ordnary conduct of the busness of
the taxpayer. A ogca nk or nexus between the expense and the
taxpayer's busness must be estabshed by the taxpayer.
ZAMORA v CIR
FACTS:
Marano Zamora, owner of the Bay Vew Hote and Farmaca Zamora, ed
hs ncome tax returns. The CIR found that he faed to e hs return of the
capta gans derved from the sae of certan rea propertes and camed
deductons whch were not aowabe. The coector requred hm to pay
decency ncome tax. On appea by Zamora, the CTA reduced the amount
of decency ncome tax.
Zamora appeaed, aegng that the CTA erred n dssaowng P10,478.50,
as promoton expenses ncurred by hs wfe for the promoton of the Bay
Vew Hote and Farmaca Zamora (whch s of P20,957.00, supposed
busness expenses).
Zamora aeged that the CTA erred n dsaowng P10,478.50 as promoton
expenses ncurred by hs wfe for the promoton of the Bay Vew Hote and
Farmaca Zamora. He contends that the whoe amount of P20,957.00 as
promoton expenses, shoud be aowed and not merey one-haf of t, on
the ground that, whe not a the temzed expenses are supported by
recepts, the absence of some supportng recepts has been sumcenty and
satsfactory estabshed.
ISSUE: w/n CTA erred n aowng ony one haf of the promoton expenses.
NO
HELD:
Secton 30, of the Tax Code, provdes that n computng net ncome, there
sha be aowed as deductons a the ordnary and necessary expenses
pad or ncurred durng the taxabe year, n carryng on any trade or
busness. Snce promoton expenses consttute one of the deductons n
conductng a busness, same must satsfy these requrements. Cam for
the deducton of promoton expenses or entertanment expenses must aso
be substantated or supported by record showng n deta the amount and
nature of the expenses ncurred.
Consderng, as heretofore stated, that the appcaton of Mrs. Zamora for
doar aocaton shows that she went abroad on a combned medca and
busness trp, not a of her expenses came under the category of ordnary
and necessary expenses; part thereof consttuted her persona expenses.
There havng been no means by whch to ascertan whch expense was
ncurred by her n connecton wth the busness of Marano Zamora and
whch was ncurred for her persona benet, the Coector and the CTA n
ther decsons, consdered 50% of the sad amount of P20,957.00 as
busness expenses and the other 50%, as her persona expenses. We hod
that sad aocaton s very far to Marano Zamora, there havng been no
recept whatsoever, submtted to expan the aeged busness expenses, or
proof of the connecton whch sad expenses had to the busness or the
reasonabeness of the sad amount of P20,957.00.
In the case of Vsayan Cebu Termna Co., Inc. v. CIR., t was decared that
representatin e!penses "a## $n%er t&e 'ate(r) " *$siness
e!penses +&i'& are a##+a*#e %e%$'tins "r, (rss in',e- i"
t&e) ,eet t&e 'n%itins pres'ri*e% *) #a+- parti'$#ar#) se'tin ./
0a1 234- " t&e Ta! C%e5 t&at t *e %e%$'ti*#e- sai% *$siness
e!penses ,$st *e r%inar) an% ne'essar) e!penses pai% r
in'$rre% in 'arr)in( n an) tra%e r *$siness5 t&at t&se e!penses
,$st a#s ,eet t&e "$rt&er test " reasna*#eness in a,$nt6 T&e)
s&$#% a#s *e 'vere% *) s$pprtin( papers5 in t&e a*sen'e
t&ere" t&e a,$nt prper#) %e%$'ti*#e as representatin
e!penses s&$#% *e %eter,ine% "r, avai#a*#e %ata6
C6M6 HOS7INS8CO- INC6 v CIR
Fa'ts:
Pettoner, a domestc corporaton engaged n the rea estate busness as
brokers, managng agents and admnstrators, ed ts ncome tax return
for ts sca year endng September 30, 1957 showng a net ncome of
P92,540.25 and a tax abty due thereon of P18,508.00, whch t pad n
due course. Upon vercaton of ts return, CIR, dsaowed four tems of
deducton n pettoner's tax returns and assessed aganst t an ncome tax
decency n the amount of P28,054.00 pus nterests. The Court of Tax
Appeas upon revewng the assessment at the taxpayer's petton, uphed
respondent's dsaowance of the prncpa tem of pettoner's havng pad
to Mr. C. M. Hoskns, ts founder and controng stockhoder the amount of
P99,977.91 representng 50% of supervson fees earned by t and set
asde respondent's dsaowance of three other mnor tems.
Pettoner questons n ths appea the Tax Court's ndngs that the
dsaowed payment to Hoskns was an nordnatey arge one, whch bore a
cose reatonshp to the recpent's domnant stockhodngs and therefore
amounted n aw to a dstrbuton of ts earnngs and prots.
4
Iss$e: Whether the 50% supervson fee pad to Hoskn may be deductbe
for ncome tax purposes.
R$#in(: NO6
Rati:
Hoskn owns 99.6% of the CM Hoskns & Co. He was aso the Presdent and
Charman of the Board. That as charman of the Board of Drectors, he
receved a saary of P3,750.00 a month, pus a saary bonus of about
P40,000.00 a year and an amountng to an annua compensaton of
P45,000.00 and an annua saary bonus of P40,000.00, pus free use of the
company car and recept of other smar aowances and benets, the Tax
Court correcty rued that the payment by pettoner to Hoskns of the
addtona sum of P99,977.91 as hs equa or 50% share of the 8%
supervson fees receved by pettoner as managng agents of the rea
estate, subdvson pro|ects of Paradse Farms, Inc. and Reaty Investments,
Inc. +as inr%inate#) #ar(e an% '$#% nt *e a''r%e% t&e
treat,ent " r%inar) an% ne'essar) e!penses a##+e% as
%e%$'ti*#e ite,s +it&in t&e p$rvie+ " t&e Ta! C%e.
The fact that such payment was authorzed by a standng resouton of
pettoner's board of drectors, snce "Hoskns had personay conceved
and panned the pro|ect" cannot change the pcture. There coud be no
queston that as Charman of the board and practcay an absoutey
controng stockhoder of pettoner, Hoskns weded tremendous power
and nuence n the formuaton and makng of the company's poces and
decsons. Even |ust as board charman, gong by pettoner's own
enumeraton of the powers of the omce, Hoskns, coud exercse great
power and nuence wthn the corporaton, such as drectng the pocy of
the corporaton, deegatng powers to the presdent and advsng the
corporaton n determnng executve saares, bonus pans and pensons,
dvdend poces, etc.
It s a genera rue that 'Bonuses to empoyees made n good fath and as
addtona compensaton for the servces actuay rendered by the
empoyees are deductbe, provded such payments, when added to the
stpuated saares, do not exceed a reasonabe compensaton for the
servces rendered. The condtons precedent to the deducton of bonuses to
empoyees are: (1) the payment of the bonuses s n fact compensaton; (2)
t must be for persona servces actuay rendered; and (3) the bonuses,
when added to the saares, are 'reasonabe when measured by the
amount and quaty of the servces performed wth reaton to the busness
of the partcuar taxpayer.
There s no xed test for determnng the reasonabeness of a gven bonus
as compensaton. Ths depends upon many factors, one of them beng the
amount and quaty of the servces performed wth reaton to the
busness.' Other tests suggested are: payment must be 'made n good
fath'; 'the character of the taxpayer's busness, the voume and amount of
ts net earnngs, ts ocaty, the type and extent of the servces rendered,
the saary pocy of the corporaton'; 'the sze of the partcuar busness';
'the empoyees' quacatons and contrbutons to the busness venture';
and 'genera economc condtons. However, 'n determnng whether the
partcuar saary or compensaton payment s reasonabe, the stuaton
must be consdered as whoe. Ordnary, no snge factor s decsve. . . . t
s mportant to keep n mnd that t sedom happens that the appcaton of
one test can gve satsfactory answer, and that ordnary t s the nterpay
of severa factors, propery weghted for the partcuar case, whch must
furnsh the na answer."
Pettoner's case fas to pass the test. On the rght of the empoyer as
aganst respondent Commssoner to x the compensaton of ts omcers
and empoyees, we there hed further that whe the empoyer's rght may
be conceded, the queston of the aowance or dsaowance thereof as
deductbe expenses for ncome tax purposes s sub|ect to determnaton
by CIR. As far as pettoner's contenton that as empoyer t has the rght to
x the compensaton of ts omcers and empoyees and that t was n the
exercse of such rght that t deemed proper to pay the bonuses n
queston, a that We need say s ths: that rght may be conceded, but for
ncome tax purposes the empoyer cannot egay cam such bonuses as
deductbe expenses uness they are shown to be reasonabe. To hod
otherwse woud open the gate of rampant tax evason.
Lasty, We must not ose sght of the fact that the queston of aowng or
dsaowng as deductbe expenses the amounts pad to corporate omcers
by way of bonus s determned by respondent excusvey for ncome tax
purposes. Concededy, he has no authorty to x the amounts to be pad to
corporate omcers by way of basc saary, bonus or addtona remuneraton
- a matter that es more or ess excusvey wthn the sound dscreton of
the corporaton tsef. But ths rght of the corporaton s, of course, not
absoute. It cannot exercse t for the purpose of evadng payment of taxes
egtmatey due to the State."
CALANOC v CIR
FACTS:
By authorty of a soctaton permt ssued by the Soca Wefare
Commsson (SWC) whereby the pettoner was authorzed to soct and
receve contrbutons for the orphans and desttute chdren of the Chd
Wefare Workers Cub of the Commsson, the pettoner on December 3,
1949 nanced and promoted a boxng and wrestng exhbton at the Rza
Memora Stadum for the sad chartabe purpose. Before the exhbton
took pace, the pettoner apped wth the respondent Coector of Interna
Revenue for exempton from payment of the amusement tax, reyng on
the provsons of Secton 260 of the Natona Interna Revenue Code, to
whch the respondent answered that the exempton depended upon
pettoner's compance wth the requrements of aw.
5
After the sad exhbton, the respondent, through hs agent,
nvestgated the tax case of the pettoner, and from the statement of
recepts whch was furnshed the agent, the atter found that the gross
saes amounted to P26,553.00; the expendtures ncurred was P25,157.62;
and the net prot was ony P1,375,30. Upon examnaton of the sad
recepts, the agent aso found the foowng tems of expendtures: (a)
P461.65 for poce protecton; (b) P460.00 for gfts; (c) P1,880.05 for
partes; and (d) severa tems for representaton.
Out of the proceeds of the exhbton, ony P1,375.38 was remtted
to the Soca Wefare Commsson for the sad chartabe purpose for whch
the permt was ssued.
The Coector of Interna Revenue demanded from the pettoner
payment of the amount of 533.00; the expendtures ncurred was
P25,157.62; and the net prot was ony P1,375,38. Upon examnaton of
the Secretary of Fnance dated |une 15, 1948, authorzng dena of
appcaton for exempton from payment of amusement tax n cases where
the net proceeds are not substanta or where the expenses are exorbtant.
Not satsed wth the assessment mposed upon hm, the pettoner
brought ths case to the Court of Tax Appeas for revew.
The Court of Tax Appeas amrmng an assessment of P7,378.57, by
the Coector of Interna Revenue as amusement tax and surcharge due on
a boxng and wrestng exhbton hed by pettoner Caanoc on December
3, 1949 at the Rza Memora Stadum. Hence, ths petton questonng the
vadty of the assessment mposed upon hm by the respondent, as
amrmed by the tax court denyng havng receved the stadum fee P1,000,
whch s not ncuded n the recepts, and cams that f he dd, he cannot
be made to pay amost seven tmes the amount as amusement tax.
ISSUE:
Whether or not the assessment s vad.
RULING:
Evdence was submtted that whe he dd not receve sad stadum
fee of P1,000, sad amount was pad by the O-SO Beverages drecty to the
stadum for advertsement prveges n the evenng of the entertanments.
As the fee was pad by sad concessonare, pettoner had no rght to
ncude the P1,000 stadum fee among the tems of hs expenses. It resuts,
therefore, that P1,000 went nto pettoner's pocket whch s not accounted
for.
Furthermore pettoner admtted that he coud not |ustfy the other
expenses, such as those for poce protecton and gfts. He cams further
that the accountant who prepared the statement of recepts s aready
dead and coud no onger be questoned on the tems contaned n sad
statement.
We have examned the records of the case and we agree wth the
ower court that most of the tems of expendtures contaned n the
statement submtted to the agent are ether exorbtant or not supported by
recepts. We agree wth the tax court that the payment of P461.65 for
poce protecton s ega as t s a consderaton gven by the pettoner to
the poce for the performance by the atter of the functons requred of
them to be rendered by aw. The expendtures of P460.00 for gfts,
P1,880.05 for partes and other tems for representaton are rather
excessve, consderng that the purpose of the exhbton was for a
chartabe cause.
7UENZLE 8 STREIF- INC6 v CIR
FACTS: Pettoner s a domestc corporaton engaged n the mportaton of
textes, hardware, sundres, chemcas, pharmaceutcas, umbers,
groceres, wnes and quor; n nsurance and umber; and n some exports.
When Pettoner ed ts Income Tax Return, t deducted from ts gross
ncome the foowng tems:
1. saares, drectors' fees and bonuses of ts non-resdent presdent and
vce-presdent;
2. bonuses of ts resdent omcers and empoyees; and
3. nterests on earned but unpad saares and bonuses of ts omcers
and empoyees.
The CIR dsaowed the deductons and assessed Pettoner for decency
ncome taxes. Pettoner requested for re-examnaton of the assessment.
CIR moded the same by aowng as deductbe a tems comprsng
drectors' fees and saares of the non-resdent presdent and vce-
presdent, but dsaowng the bonuses nsofar as they exceed the saares
of the recpents, as we as the nterests on earned but unpad saares and
bonuses.
The CTA moded the assessment and rued that whe the bonuses gven
to the non-resdent omcers are reasonabe, bonuses gven to the resdent
omcers and empoyees are qute excessve.
ISSUES/RULING:
W/N the CTA erred n rung that the measure of the
reasonabeness of the bonuses pad to ts non-resdent presdent
and vce-presdent shoud be apped to the bonuses gven to
6
resdent omcers and empoyees n determnng ther deductbty?
NO.
It s a genera rue that "Bonuses to empoyees made n good fath and as
addtona compensaton for the servces actuay rendered by the
empoyees are deductbe, provded such payments, when added to the
stpuated saares, do not exceed a reasonabe compensaton for the
servces rendered." The condton precedents to the deducton of bonuses
to empoyees are:
1. the payment of the bonuses s n fact compensaton;
2. t must be for persona servces actuay rendered; and
3. the bonuses, when added to the saares, are reasonabe when
measured by the amount and quaty of the servces performed
wth reaton to the busness of the partcuar taxpayer
There s no xed test for determnng the reasonableness of a gven bonus
as compensaton. However, n determnng whether the partcuar saary or
compensaton payment s reasonabe, the stuaton must be consdered as
a whoe.
Pettoner contended that t s error to appy the same measure of
reasonabeness to both resdent and non-resdent omcers because the
nature, extent and quaty of the servces performed by each wth reaton
to the busness of the corporaton wdey dher. Sad non-resdent omcers
had rendered the same amount of emcent persona servce and
contrbuton to deserve equa treatment n compensaton and other
emouments. There s no speca reason for grantng greater bonuses to
such ower rankng omcers than those gven to the non-resdent presdent
and vce presdent.
W/N the CTA erred n aowng the deducton of the bonuses n
excess of the yeary saares of the empoyees? NO.
The deductbe amount of sad bonuses cannot be only equal to ther
respectve yeary saares consderng the post-war pocy of the
corporaton n gvng saares at ow eves because of the unsetted
condtons resutng from war and the mposton of government contros on
mports and exports and on the use of foregn exchange whch resuted n
the dmnuton of the amount of busness and the consequent oss of
prots on the part of the corporaton. The payment of bonuses n amounts
a tte more than the yeary saares receved consderng the prevang
crcumstances s n our opnon reasonabe.
W/N the CTA erred n dsaowng the deducton of nterests on
earned but unpad saares and bonuses? NO.
Under the aw, n order that nterest may be deductbe, t must be pad "on
ndebtedness." It s therefore mperatve to show that there s an existing
indebtedness whch may be sub|ected to the payment of nterest. Here the
tems nvoved are uncamed saares and bonus partcpaton whch
cannot consttute ndebtedness wthn the meanng of the aw because
whe they consttute an obgaton on the part of the corporaton, t s not
the atter's faut f they remaned uncamed. Whatever an empoyee may
fa to coect cannot be consdered an ndebtedness for t s the concern of
the empoyee to coect t n due tme. The wngness of the corporaton to
pay nterest thereon cannot be consdered a |ustcaton to warrant
deducton.
PAPER INDUSTRIES v CA 0 De'6 3- 399:1
Facts:
On varous years (1969, 1972 and 1977), Pcop obtaned oans from
foregn credtors n order to nance the purchase of machnery and
equpment needed for ts operatons. In ts 1977 Income Tax Return, Pcop
camed nterest payments made n 1977, amountng to P42,840,131.00,
on these oans as a deducton from ts 1977 gross ncome.
The CIR dsaowed ths deducton upon the ground that, because
the oans had been ncurred for the purchase of machnery and equpment,
the nterest payments on those oans shoud have been captazed nstead
and camed as a deprecaton deducton takng nto account the ad|usted
bass of the machnery and equpment (orgna acquston cost pus
nterest charges) over the usefu fe of such assets.
Both the CTA and the Court of Appeas sustaned the poston of
Pcop and hed that the nterest deducton camed by Pcop was proper and
aowabe. In the nstant Petton, the CIR nssts on ts orgna poston.
ISSUE:
Whether Pcop s entted to deductons aganst ncome of nterest
payments on oans for the purchase of machnery and equpment.
HELD:
YES. Interest payments on oans ncurred by a taxpayer (whether
BOI-regstered or not) are aowed by the NIRC as deductons aganst the
taxpayer's gross ncome. The bass s 1977 Tax Code Sec. 30 (b). Thus, the
genera rue s that nterest expenses are deductbe aganst gross ncome
and ths certany ncudes nterest pad under oans ncurred n connecton
wth the carryng on of the busness of the taxpayer. In the nstant case,
the CIR does not dspute that the nterest payments were made by Pcop
on oans incurred in connection with the carrying on of the registered
operations of Picop, i.e., the nancng of the purchase of machnery and
equpment actuay used n the regstered operatons of Pcop. Nether does
7
the CIR deny that such nterest payments were legally due and
demandable under the terms of such oans, and n fact pad by Pcop
durng the tax year 1977.
The contenton of CIR does not sprng of the 1977 Tax Code but from
Revenue Reguatons 2 Sec. 79. However, the Court sad that the term
"nterest" here shoud be construed as the so-caed ;t&ereti'a#
interest-; that s to say, nterest "calculated" or computed 0an%
nt incurred r paid1 "r t&e p$rpse " %eter,inin( t&e
;pprt$nit) 'st; " investin( "$n%s in a (iven *$siness6 S$'&
;t&ereti'a#; r i,p$te% interest %es not arise "r, a #e(a##)
%e,an%a*#e interest<*earin( *#i(atin in'$rre% *) t&e ta!pa)er
who however wshes to nd out, e.g., whether he woud have been better
oh by endng out hs funds and earnng nterest rather than nvestng such
funds n hs busness. One thng that Secton 79 quoted above makes cear
s that nterest whch does consttute a charge arsng under an nterest-
bearng obgaton is an aowabe deducton from gross ncome.
On#) i" sir as=s: 0Fr "$rt&er %is'$ssin " CIR>s 'ntentin1
It s camed by the CIR that Secton 79 of Revenue Reguatons No. 2
was "patterned after" paragraph 1.266-1 (b), entted "Taxes and Carryng
Charges Chargeabe to Capta Account and Treated as Capta Items" of the
U.S. Income Tax Reguatons, whch paragraph reads as foows:
(B) Taxes and Carrying Charges. - The tems thus
chargeabe to capta accounts are -
(11) In the case of rea property, whether mproved or
unmproved and whether productve or nonproductve.
(a) Interest on a oan (but not theoretca nterest of a
taxpayer usng hs own funds).
The truncated excerpt of the U.S. Income Tax Reguatons quoted by the
CIR needs to be reated to the reevant provsons of the U.S. Interna
Revenue Code, whch provsons dea wth the genera topc of ad|usted
bass for determnng aowabe gan or oss on saes or exchanges of
property and aowabe deprecaton and depeton of capta assets of the
taxpayer:
Present Rule. The Interna Revenue Code, and the
Reguatons promugated thereunder provde that "No
deduction shall be allowed for amounts paid or
accrued for such taxes and carrying charges as, under
reguatons prescrbed by the Secretary or hs deegate, are
chargeabe to capta account wth respect to property, if
the taxpayer elects, n accordance wth such
reguatons, to treat such taxes orcharges as so
chargeable."
At the same tme, under the ad|ustment of bass provsons
whch have |ust been dscussed, t s provded that
ad|ustment sha be made for a "expendtures, recepts,
osses, or other tems" propery chargeabe to a capta
account, thus ncudng taxes and carryng charges;
however, an exception exists, in which event such
adjustment to the capital account is not made, with
respect to taxes and carrying charges which the taxpayer
has not elected to capitalie but for which a deduction
instead has been ta!en.
??
(Emphass supped)
The "carryng charges" whch may be captazed under the above
quoted provsons of the U.S. Interna Revenue Code ncude, as the
CIR has ponted out, nterest on a oan "(but not theoretca nterest
of a taxpayer usng hs own funds)." What the CIR faed to pont
out s that such "carrying charges" may, at the eecton of the
taxpayer, either be "a# capitalied n whch case the cost bass of
the capta assets, e.g., machnery and equpment, w be ad|usted
by addng the amount of such nterest payments or aternatvey,
be "b# deducted from gross income of the taxpayer. Shoud the
taxpayer eect to deduct the nterest payments aganst ts gross
ncome, the taxpayer cannot at the same time captaze the
nterest payments. In other words, the taxpayer s not entted
to both the deduction from gross income and the adjusted
"increased# basis for determnng gan or oss and the aowabe
deprecaton charge. The U.S. Interna Revenue Code does not
prohibit the deduction of interest on a loan obtaned for purchasng
machnery and equpment aganst gross ncome, unless the
taxpayer has also or previously capitalied the same interest
payments and thereby ad|usted the cost bass of such assets.
CIR v @DA DE PRIETO
FACTS:
On December 4, 1945, the respondent conveyed by way of gfts to her four
chdren, namey, Antono, Bento, Carmen and Mauro, a surnamed Preto,
rea property wth a tota assessed vaue of P892,497.50. After the ng of
the gft tax returns on or about February 1, 1954, the pettoner
Commssoner of Interna Revenue apprased the rea property donated for
gft tax purposes at P1,231,268.00, and assessed the tota sum of
P117,706.50 as donor's gft tax, nterest and compromses due thereon. Of
the tota sum of P117,706.50 pad by respondent on Apr 29, 1954, the
sum of P55,978.65 represents the tota nterest on account of dequency.
Ths sum of P55,978.65 was camed as deducton, among others, by
respondent n her 1954 ncome tax return. Pettoner, however, dsaowed
8
the cam and as a consequence of such dsaowance assessed respondent
for 1954 the tota sum of P21,410.38 as decency ncome tax due on the
aforesad P55,978.65, ncudng nterest up to March 31, 1957, surcharge
and compromse for the ate payment.
Under the aw, for nterest to be deductbe, t must be shown that there be
an ndebtedness, that there shoud be nterest upon t, and that what s
camed as an nterest deducton shoud have been pad or accrued wthn
the year. It s here conceded that the nterest pad by respondent was n
consequence of the ate payment of her donor's tax, and the same was
pad wthn the year t s sought to be decared.
To sustan the proposton that the nterest payment n queston s not
deductbe for the purpose of computng respondent's net ncome,
pettoner rees heavy on secton 80 of Revenue Reguaton No. 2 (known
as Income Tax Reguaton) promugated by the Department of Fnance,
whch provdes that "the word `taxes' means taxes proper and no
deductons shoud be aowed for amounts representng nterest,
surcharge, or penates ncdent to denquency." The court beow, however,
hed secton 80 as nappcabe to the nstant case because whe t
mpements sectons 30(c) of the Tax Code governng deducton of taxes,
the respondent taxpayer seeks to come under secton 30(b) of the same
Code provdng for deducton of nterest on ndebtedness.
ISSUE:
Whether or not such nterest was pad upon an ndebtedness wthn the
contempaton of secton 30 (b) (1) of the Tax Code?
RULING:
Yes. Accordng to the Supreme Court, athough nterest payment for
denquent taxes s not deductbe as tax under Secton 30(c) of the Tax
Code and secton 80 of the Income Tax Reguatons, the taxpayer s not
precuded thereby from camng sad nterest payment as deducton under
secton 30(b) of the same Code.
SEC. 30 $eductions from gross income. - In computng net ncome there
sha be aowed as deductons -
(b) Interest:
(1) %n general. - The amount of nterest pad wthn the taxabe
year on ndebtedness, except on ndebtedness ncurred or
contnued to purchase or carry obgatons the nterest upon whch
s exempt from taxaton as ncome under ths Tte.
The term "ndebtedness" as used n the Tax Code of the Unted States
contanng smar provsons as n the above-quoted secton has been
dened as an uncondtona and egay enforceabe obgaton for the
payment of money.
To gve to the quoted porton of secton 80 of our Income Tax Reguatons
the meanng that the pettoner gves t woud run counter to the provson
of secton 30(b) of the Tax Code and the constructon gven to t by courts
n the Unted States. Such ehect woud thus make the reguaton nvad for
a "reguaton whch operates to create a rue out of harmony wth the
statute, s a mere nuty." As aready stated, secton 80 mpements ony
secton 30(c) of the Tax Code, or the provson aowng deducton of taxes,
whe heren respondent seeks to be aowed deducton under secton
30(b), whch provdes for deducton of nterest on ndebtedness.
CIR v LEDNIC7A
Fa'ts: The respondents, V. E. Ledncky and Mara Vaero Ledncky, are
husband and wfe, respectvey, both Amercan ctzens resdng n the
Phppnes, and have derived all their income from Philippine sources for
the taxabe years n queston.
In compance wth oca aw, the aforesad respondents, on 27 March 1957,
ed ther ncome tax return for 1956, reportng theren a gross ncome of
P1,017,287. 65 and a net ncome of P733,809.44 on whch the amount of
P317,395.4 was assessed after deductng P4,805.59 as wthhodng tax.
Pursuant to the pettoner's assessment notce, the respondents pad the
tota amount of P326,247.41, ncusve of the wthhed taxes, on 15 Apr
1957.
On 17 March 1959, the respondents Lednckys ed an amended ncome
tax return for 1956. The amendment conssts n a camed deducton of
P205,939.24 pad n 1956 to the Unted States government as federa
ncome tax for 1956. Smutaneousy wth the ng of the amended return,
the respondents requested the refund of P112,437.90.
When the pettoner Commssoner of Interna Revenue faed to answer the
cam for refund, the respondents ed ther petton wth the Tax Court on
11 Apr 1959.
The Tax Court hed that they may be deducted because of the undened
fact that the respondent spouses dd not "sgnfy" n ther ncome tax
return a desre to ava themseves of the benets of paragraph 3 (B) of the
subsecton, whch reads:
SEC. 30. $eduction from gross income. - In computng net ncome there
sha be aowed as deductons -
(c) Taxes:
9
(1) %n general. - Taxes pad or accrued wthn the taxabe
year, except -
(A) The ncome tax provded for under ths Tte;
(B) Income, war-prots, and excess prots taxes
mposed by the authorty of any foregn
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 bene&ts
of paragraph "'# of this subsection "relating to
credit for foreign countries#;
Par. (c) (3) Credits against tax for taxes of foreign countries. - If the
taxpayer sgnes n hs return hs desre to have the benets of ths
paragraph, the tax mposed by ths Tte sha be credted wth -
(A) ...;
0B1 (lien resident of the Philippines. - In the case of an
aen resdent of the Phppnes, the amount of any such
taxes pad or accrued durng the taxabe year to any
foregn country, f the foregn country of whch such aen
resdent s a ctzen or sub|ect, n mposng such taxes,
aows a smar credt to ctzens of the Phppnes resdng
n such country
ISSUE: WON a ctzen of the US resdng n Ph who derves ncome whoy
from sources wthn the Ph may deduct from hs gross ncome the ncome
taxes he has pad to US govt for the taxabe year?
RULING: No. The Constructon and wordng of Secton 30 (c) (1) (B) of the
Interna Revenue Act shows the aw's ntent that the rght to deduct ncome
taxes pad to foregn government from the taxpayer's gross ncome s
gven ony as an aternatve or substtute to hs rght to cam a tax credt
for such foregn ncome taxes under secton 30 (c) (3) and (4); so that
unless the alien resident has a right to claim such tax credit f he so
chooses, he s precuded from deductng the foregn ncome taxes from hs
gross ncome. For t s obvous that n prescrbng that such deducton sha
be aowed n the case of a taxpayer who does not signify n hs return hs
desre to have to any extent the benets of paragraph (3) (reatng to
credts for taxes pad to foregn countres), the statute assumes that the
taxpayer n queston aso may signify hs desre to cam a tax credt and
wave the deducton; otherwse, the foregn taxes woud aways be
deductbe, and ther menton n the st of non-deductbe tems n Secton
30(c) mght as we have been omtted, or at east expressy mted to
taxes on ncome from sources outsde the Phppne Isands.
Pettoners admt n ther bref that the purpose of the aw s to prevent the
taxpayer from camng twce the benets of hs payment of foregn taxes,
by deducton from gross ncome (subs. c-1) and by tax credt (subs. c-3).
Ths danger of doube credt certany can not exst f the taxpayer can not
cam benet under ether of these headngs at hs opton, so that he must
be entted to a tax credt "respondent taxpayers admittedly are not so
entitled because all their income is derived from Philippine sources#, or the
opton to deduct from gross ncome dsappears atogether.
PAPER INDUSTRIES v CA 0 De'6 3- 399:1
The Paper Industres Corporaton of the Phppnes ("Pcop"), s a
Phppne corporaton regstered wth the Board of Investments
("BOI") as a preferred pioneer enterprse wth respect to ts
ntegrated pup and paper m, and as a preferred non)pioneer
enterprse wth respect to ts ntegrated pywood and veneer ms.
In 1969, 1972 and 1977, Pcop obtaned oans from foregn credtors
n order to nance the purchase of machnery and equpment
needed for ts operatons.
Pcop aso ssued promssory notes of about P230M, on w/c t pad
P45M n nterest.
In ts 1977 Income Tax Return, Pcop camed the nterest payments
on the oans as DEDUCTIONS from ts 1977 gross ncome.
The CIR dsaowed ths deducton upon the ground that, because the
oans had been ncurred for the purchase of machnery and
equpment, the nterest payments on those oans shoud have been
captazed nstead and camed as a depreciation deduction
takng nto account the ad|usted bass of the machnery and
equpment (orgna acquston cost pus nterest charges) over the
usefu fe of such assets.
I: W/n the nterest payments can be deducted from gross ncome -
YES transacton tax
R:
The 1977 NIRC does not prohbt the deducton of nterest on a oan
ncurred for acqurng machnery and equpment. Nether does our
1977 NIRC compe the captazaton of nterest payments on such
a oan.
The 1977 Tax Code s smpy sent on a taxpayer's rght to eect one
or the other tax treatment of such nterest payments. Accordngy,
the genera rue that nterest payments on a egay demandabe
oan are deductbe from gross ncome must be apped.
In ths case, the CIR does not dspute that the nterest payments
were made by Pcop on oans incurred in connection with the
carrying on of the registered operations of Picop, i.e., the nancng
of the purchase of machnery and equpment actuay used n the
regstered operatons of Pcop. Nether does the CIR deny that such
nterest payments were legally due and demandable under the
10
terms of such oans, and n fact pad by Pcop durng the tax year
1977.
The CIR has been unabe to pont to any provson of the 1977 Tax
Code or any other Statute that requres the dsaowance of the
nterest payments made by Pcop.
THIS PART DI KO SUPER MAGETS:
The CIR nvokes Secton 79 of Revenue Reguatons No. 2 w/c
provdes that %nterest cacuated for cost-keepng or other purposes
on account of capta or surpus nvested n the busness, which
does not represent a charge arising under an interest)bearing
obligation, s not aowabe deducton from gross ncome.
It s camed by the CIR that Secton 79 of Revenue Reguatons No. 2
was "patterned after" paragraph 1.266-1 (b), entted "Taxes and
Carryng Charges Chargeabe to Capta Account and Treated as
Capta Items" of the U.S. Income Tax Reguatons, whch paragraph
reads as foows:
(B) Taxes and Carrying Charges. - The tems thus
chargeabe to capta accounts are -
(11) In the case of rea property, whether mproved or
unmproved and whether productve or nonproductve.
(a) Interest on a oan (but not theoretca nterest of a
taxpayer usng hs own funds).
?3
The truncated excerpt of the U.S. Income Tax Reguatons quoted by the
CIR needs to be reated to the reevant provsons of the U.S. Interna
Revenue Code, whch provsons dea wth the genera topc of ad|usted
bass for determnng aowabe gan or oss on saes or exchanges of
property and aowabe deprecaton and depeton of capta assets of the
taxpayer:
Present Rule. The Interna Revenue Code, and the
Reguatons promugated thereunder provde that "No
deduction shall be allowed for amounts paid or accrued for
such taxes and carrying charges as, under reguatons
prescrbed by the Secretary or hs deegate, are chargeabe
to capta account wth respect to property, if the taxpayer
elects, n accordance wth such reguatons, to treat such
taxes or charges as so chargeable."
At the same tme, under the ad|ustment of bass provsons
whch have |ust been dscussed, t s provded that
ad|ustment sha be made for a "expendtures, recepts,
osses, or other tems" propery chargeabe to a capta
account, thus ncudng taxes and carryng charges;
however, an exception exists, in which event such
adjustment to the capital account is not made, with
respect to taxes and carrying charges which the taxpayer
has not elected to capitalie but for which a deduction
instead has been ta!en.
The "carryng charges" whch may be captazed under the above
quoted provsons of the U.S. Interna Revenue Code ncude, as the
CIR has ponted out, nterest on a oan "(but not theoretca nterest
of a taxpayer usng hs own funds)." What the CIR faed to pont
out s that such "carrying charges" may, at the eecton of the
taxpayer, either be "a# capitalied n whch case the cost bass of
the capta assets, e.g., machnery and equpment, w be ad|usted
by addng the amount of such nterest payments or aternatvey,
be "b# deducted from gross income of the taxpayer. Shoud the
taxpayer eect to deduct the nterest payments aganst ts gross
ncome, the taxpayer cannot at the same time captaze the
nterest payments. In other words, the taxpayer s not entted to
both the deduction from gross income and the adjusted
"increased# basis for determnng gan or oss and the aowabe
deprecaton charge. The U.S. Interna Revenue Code does not
prohibit the deduction of interest on a loan obtaned for purchasng
machnery and equpment aganst gross ncome, unless the
taxpayer has also or previously capitalied the same interest
payments and thereby ad|usted the cost bass of such assets.
BIR RULING ./<//
Di(est " BIR R$#in( N6 /./<?/// %ate% A$($st 3/- ?///
INCOME TAB5 Ta!<"ree ,er(er $n%er 'ertain 'n%itin - Pursuant to
Secton 40(c)(2)of the Tax Code, no gan or oss sha be recognzed by Bue
Crce Phppnes, Inc. (BCPI), Round Roya, Inc. (RRI), SM Investment
Corporaton (SMIC), Sysmart Corporaton and CG&E Hodngs on the
transfer of ther Fortune, Zeus and Igan shares to Repubc, n exchange
for ne Repubc shares, because they together hod more than 51% of the
tota votng stock of Repubc after the transfer. The transfer through the
factes of the PSE by the 6th to the ast transferor of ther Fortune and
Zeus shares to Repubc n exchange for new Repubc shares w be
sub|ect to the of 1% stock transacton tax based on the gross seng
prce or gross vaue n money of the shares transferred, whe the 6th to
the ast transferor of the Igan shares w be sub|ect to capta gans tax
(CGT) at the rate of 5%, of the par vaue of the shares transferred. The new
Repubc shares to be ssued, beng orgna ssuances, are sub|ect to the
DST mposed under Secton 175 of the Tax Code at the rate of P2 on each
P200, or fractona part thereof, of the par vaue of
the new Repubc shares ssued. The net operatng osses of each of
Repubc, Fortune, MPCC and Igan are preserved after the proposed share
swap and may be carred over and camed as a deducton from ther
respectve gross ncome, pursuant to Secton 34(D)(3) of the Tax Code,
11
because there s no substanta change n the ether Repubc or Fortune or
MPCC or Igan."
BIR RULING ?/C<9/
Ths s etter requestng n behaf of Porceana Marwasa, Inc. (PMI), a rung
conrmng an opnon that the foregn exchange oss ncurred by PMI s a
deductbe oss n 1990.
It s represented that PMI s a corporaton estabshed and organzed under
Phppne aws; that t has exstng US doar oans from Nortake Company,
Lmted (Nortake) and Toyota Tsusho Corporaton (Toyota) n the aggregate
amounts of US $7,636,679.17 and US $3,054,671.27, respectvey, that n
1989, the partes agreed to convert the sad doar denomnated oans nto
pesos at the exchange rate prevang on |une 30, 1989; that n December
1989, both agreements were approved by the Centra Bank sub|ect to the
submsson of a copy each of the sgned agreements ncorporatng the
converson; thereafter, drafts of the amended agreements were submtted
to the Centra Bank for pre-approva; that on |anuary 29, 1990, the Centra
Bank advsed PMI's counse on ther ndngs and comments on the sad
drafts whch were consdered and ncorporated n the na amended
agreements; that n |une 1990, the partes submtted to the Centra Bank
the sgned agreements; that counse of PMI s of the opnon that n the
case of PMI, the resutant oss on converson of US doar denomnated
oans to peso s more than a shrnkage n vaue of money; that the
approva by the Centra Bank and the sgnng by the partes of the
agreements coverng the sad converson estabshed the oss, after whch,
the oss became na and rrevocabe, so that recoupment s reasonaby
mpossbe; and that havng been xed and determnabe, the oss s no
onger susceptbe to change, hence, t coud fary be stated that such has
been sustaned n a cosed and competed transacton.
In repy the commssoner nformed PMI that the annua ncrease n vaue
of an asset s not taxabe ncome because such ncrease has not yet been
reazed. The ncrease n vaue .e., the gan, coud ony be taxed when a
dsposton of the property occurred whch was of such a nature as to
consttute a reazaton of such gan, that s, a severance of the gan from
the orgna capta nvested n the property. The same concuson obtans
as to osses. The annua decne n the vaue of property s not normay
aowabe as a deducton. Hence, to be aowabe the oss must be reazed.
When foregn currency acqured n connecton wth a transacton n the
reguar course of busness s dsposed ordnary gan or oss resuts from the
uctuaton. The oss s deductbe ony for the year t s actuay sustaned.
It s sustaned durng the year n whch the oss occurs as evdenced by the
competed transacton and as xed by dentabe occurrng n that year.
No taxaton event has as yet been consummated pror to the remttance of
the schedued amortzaton. Accordngy, PMI's request for conrmaton of
opnon was dened consderng that foregn exchange osses sustaned as
a resut of converson or devauaton of the peso vs-a-vs the foregn
currency or US doar and vce versa but whch remttance of schedued
amortzaton consstng of prncpa and nterests payment on a foregn
oan had not actuay been made are not deductbe from gross ncome for
ncome tax purposes.
BIR RULING 3DD<E:
(Techncay, ths rung has no stated facts. It |ust sad that a request for
rung dated |uy 1, 1985 was sent to the BIR for the purpose of carfyng
the ssue, as heren stated.)
FACTS:
Request to carfy the deductbty of foregn exchange osses ncurred by
reason of the devauaton of the peso. The osses arose from matured but
unremtted prncpa repayments on oans ahected by the debt-
restructurng program n the Phppnes.
ISSUE:
Whether or not foregn exchange osses are deductbe for ncome tax
purposes.
HELD: NO.
The annua ncrease n vaue of an asset s NOT TAXABLE INCOME because
such ncrease has not yet been reazed. The ncrease n vaue, .e., the
gan, coud ony be taxed when a dsposton of the property occurred
whch was of such a nature as to consttute a reazaton of such gan, that
s, a severance of the gan from the orgna capta nvested n the
property. The aforementoned rue aso appes to osses. The annua
decrease n the vaue of property s not normay aowabe as a oss.
Hence, to be aowabe the oss must be reazed.
When foregn currency acqured n connecton wth a transacton n the
reguar course of busness s dsposed of, ordnary gan or oss resuts from
the foregn exchange uctuatons. THE LOSS IS DEDUCTIBLE ONLY FOR THE
YEAR IT IS ACTUALLY SUSTAINED. Thus, there s no taxabe event pror to
the remttance of the schedued amortzaton.
Accordngy, foregn exchange osses sustaned as a resut of devauaton of
the peso vs-a-vs the foregn currency e.g., US doar, but whch remttance
of schedued amortzaton consstng of prncpa and nterests payments
on a foregn oan has not actuay been made are NOT DEDUCTIBLE from
gross ncome for ncome tax purposes.
NOTE:
12
To sustan a oss means that the oss has occurred as evdenced by a
cosed and competed transacton and as xed by dentabe events
occurrng n that year.
A cosed transacton s a taxabe event whch has been consummated.
PHILEB MINING v CIR
Fa'ts: Phex Mnng entered nto a management agreement wth Baguo
God. The partes' agreement was denomnated as "Power of Attorney"
whch provded among others:
a. Funds avaabe for Phex Mnng durng the management
agreement; and
b. Compensaton to Phex Mnng whch sha be fty per cent
(50%) of the net prot;
In the course of managng and operatng the pro|ect, Phex Mnng
made advances of cash and property n accordance wth the agreement.
However, the mne suhered contnung osses over the years whch
resuted to pettoner's wthdrawa as manager and cessaton of mne
operatons.
The partes executed a "Compromse wth Daton n Payment"
wheren Baguo God admtted an ndebtedness to Phex Mnng, whch was
subsequenty amended to ncude addtona obgatons.
Subsequenty, Phex Mnng wrote oh n ts 1982 books of account
the remanng outstandng ndebtedness of Baguo God by chargng
P112,136,000.00 to aowances and reserves that were set up n 1981 and
P2,860,768.00 to the 1982 operatons.
In ts 1982 annua ncome tax return, Phex Mnng deducted from
ts gross ncome the amount of P112,136,000.00 as "oss on settement of
recevabes from Baguo God aganst reserves and aowances." However,
BIR dsaowed the amount as deducton for bad debt and assessed
pettoner a decency ncome tax of P62,811,161.39.
Iss$e: Whether the deducton for bad debts was vad?
He#%: No. For a deducton for bad debts to be aowed, a requstes must
be satsed, to wt: (a) there was a vad and exstng debt; (b) the debt
was ascertaned to be worthess; and (c) t was charged oh wthn the
taxabe year when t was determned to be worthess.
There was no vad and exstng debt. The nature of agreement
between Phex Mnng and Baguo God s that of a partnershp or |ont
venture. Under a contract of partnershp, two or more persons bnd
themseves to contrbute money, property, or ndustry to a common fund,
wth the ntenton of dvdng the prots among themseves.
Perusa of the agreement denomnated as the "Power of Attorney"
ndcates that the partes had ntended to create a partnershp and
estabsh a common fund for the purpose. They aso had a |ont nterest n
the prots of the busness as shown by a 50-50 sharng n the ncome of
the mne.
Vewed from ths ght, the advances can be characterzed as
pettoners nvestment n a partnershp wth Baguo God for the
deveopment and expotaton of the Sto. Nno mne. Snce the advanced
amount partook of the nature of an nvestment, t coud not be deducted
as a bad debt from pettoner's gross ncome.
PHILIPPINE REFINING CO v CA
FACTS:
Phppne Renng Corp (PRC) was assessed decency tax payments for
the year 1985 n the amount of around 1.8M. Ths gure was computed
based on the dsaowance of the cam of bad debts by PRC. PRC duy
protested the assessment camng that under the aw, bad debts and
nterest expense are aowabe deductons.
When the BIR subsequenty garnshed some of PRCs propertes, the atter
consdered the protest as beng dened and ed an appea to the CTA
whch set asde the dsaowance of the nterest expense and moded the
dsaowance of the bad debts by aowng 3 accounts to be camed as
deductons. However, 13 supposed "bad debts" were dsaowed as the CTA
camed that these were not substantated and dd not satsfy the
|ursprudenta requrement of "worthessness of a debt" The CA dened the
petton for revew.
ISSUE: Whether or not the CA was correct n dsaowng the 13 accounts
as bad debts.
RULING:YES.
Both the CTA and CA reed on the case of Coector vs. Goodrch
Internatona, whch ad down the requstes for "worthessness of a debt"
to wt:
In sad case, we hed that for debts to be consdered as "worthess," and
thereby quafy as "bad debts" makng them deductbe, the taxpayer
shoud show that 031 t&ere is a va#i% an% s$*sistin( %e*t6 0?1 t&e
%e*t ,$st *e a't$a##) as'ertaine% t *e +rt&#ess an%
$n'##e'ti*#e %$rin( t&e ta!a*#e )ear5 0.1 t&e %e*t ,$st *e
'&ar(e% F %$rin( t&e ta!a*#e )ear5 an% 0D1 t&e %e*t ,$st arise
"r, t&e *$siness r tra%e " t&e ta!pa)er6 A%%itina##)- *e"re a
%e*t 'an *e 'nsi%ere% +rt&#ess- t&e ta!pa)er ,$st a#s s&+
t&at it is in%ee% $n'##e'ti*#e even in t&e "$t$re6
13
Furthermore, there are steps outned to be undertaken by the taxpayer to
prove that he exerted dgent ehorts to coect the debts, vi.: 031 sen%in(
" state,ent " a''$nts5 0?1 sen%in( " '##e'tin #etters5 0.1
(ivin( t&e a''$nt t a #a+)er "r '##e'tin5 an% 0D1 G#in( a
'##e'tin 'ase in '$rt6
PRC ony used the testmony of ts accountant Ms. Masagana n order to
prove that these accounts were bad debts. Ths was consdered by a 3
courts to be sef-servng. The SC sad that PRC faed to exercse due
dgence n order to ascertan that these debts were uncoectbe. In fact,
PRC dd not even show the demand etters they aegedy gave to some of
ther debtors.
FERNANDEZ HERMANOS v CIR
Facts:
Fernandez Hermanos s an nvestment company. The CIR assessed t for
aeged decency ncome taxes. It camed as deducton, among others,
osses n or bad debts of Paawan Manganese Mnes Inc. whch the CIR
dsaowed and was sustaned by the CTA.
Issue: W/N dsaowance s correct
Hed: YES
It was shown that Paawan Manganese Mnes sought nanca hep from
Fernandez to resume ts mnng operatons hence a Memorandum of
Agreement (MOA) was executed where Fernandez woud gve yeary
advances to Paawan. But t st contnued to suher oses and Fernandez
reazed t coud no onger recover the advances hence camed t as
worthess. Lookng at the MOA, Fernandez dd not expect to be repad. The
consderaton for the advances was 15% of the net prots. If there were no
earnngs or prots there was no obgaton to repay. Vountary advances
wthout expectaton of repayment do not resut n deductbe osses.
Fernandez cannot even sue for recovery as the obgaton to repay w ony
arse f there was net prots. No bad debt coud arse where there s no
vad and subsstng debt.
Even assumng that there was vad or subsstng debt, the debt was not
deductbe n 1951 as a worthess debt as Paawan was st n operaton n
1951 and 1952 as Fernandez contnued to gve advances n those years. It
has been hed that f the debtor corporaton athough osng money or
nsovent was st operatng at the end of the taxabe year, the debt s not
consdered worthess and therefore not deductbe.
BASILAN ESTATES v CIR
Basan vs. CIR
A Phppne corporaton engaged n the coconut ndustry, Basan Estates,
Inc., wth prncpa omces n Basan Cty, ed on March 24, 1954 ts
ncome tax returns for 1953 and pad an ncome tax of P8,028. On
February 26, 1959, the Commssoner of Interna Revenue, per examners'
report of February 19, 1959, assessed Basan Estates, Inc., a decency
ncome tax of P3,912 for 1953 and P86,876.85 as 25% surtax on
unreasonaby accumuated prots as of 1953 pursuant to Secton 25 of the
Tax Code. On non-payment of the assessed amount, a warrant of dstrant
and evy was ssued but the same was not executed because Basan
Estates, Inc. succeeded n gettng the Deputy Commssoner of Interna
Revenue to order the Drector of the dstrct n Zamboanga Cty to hod
executon and mantan constructve embargo nstead. Because of ts
refusa to wave the perod of prescrpton, the corporaton's request for
renvestgaton was not gven due course, and on December 2, 1960,
notce was served the corporaton that the warrant of dstrant and evy
woud be executed.
On December 20, 1960, Basan Estates, Inc. ed before the Court of Tax
Appeas a petton for revew of the Commssoner's assessment, aegng
prescrpton of the perod for assessment and coecton; error n
dsaowng camed deprecatons, traveng and msceaneous expenses;
and error n ndng the exstence of unreasonaby accumuated prots and
the mposton of 25% surtax thereon. On October 31, 1963, the Court of
Tax Appeas found that there was no prescrpton and amrmed the
decency assessment n toto.
Issues:
1. Has the Commssoner's rght to coect decency ncome tax
prescrbed
2. Was the dsaowance of tems camed as deductbe proper?
Rung
PRESCRIPTION
There s no dspute that the assessment of the decency tax was made on
February 26, 1959; but the pettoner cams that t never receved notce of
such assessment or f t dd, t receved the notce beyond the ve-year
prescrptve perod. To show prescrpton, the annotaton on the notce
(Exhbt 10, No. 52, ACR, p. 54-A of the BIR records) "No accompanyng
etter 11/25/" s advanced as ndcatve of the fact that recept of the notce
was after March 24, 1959, the ast date of the ve-year perod wthn whch
to assess decency tax, snce the orgna returns were ed on March 24,
1954.
Athough the evdence s not cear on ths pont, We cannot accept ths
nterpretaton of the pettoner, consderng the presence of crcumstances
that ead Us to presume reguarty n the performance of omca functons.
14
The notce of assessment shows the assessment to have been made on
February 26, 1959, we wthn the ve-year perod. On the rght sde of the
notce s aso stamped "Feb. 26, 1959" - denotng the date of reease,
accordng to Bureau of Interna Revenue practce. The Commssoner
hmsef n hs etter (Exh. H, p. 84 of BIR records) answerng pettoner's
request to ft, the warrant of dstrant and evy, asserts that notce had
been sent to pettoner. In the etter of the Regona Drector forwardng the
case to the Chef of the Investgaton Dvson whch the atter receved on
March 10, 1959 (p. 71 of the BIR records), notce of assessment was sad to
have been sent to pettoner. Subsequenty, the Chef of the Investgaton
Dvson ndorsed on March 18, 1959 (p. 24 of the BIR records) the case to
the Chef of the Law Dvson. There t was aeged that notce was aready
sent to pettoner on February 26, 1959. These crcumstances pontng to
omca performance of duty must necessary preva over pettoner's
contrary nterpretaton. Besdes, even grantng that notce had been
receved by the pettoner ate, as aeged, under Secton 331 of the Tax
Code requrng ve years wthn whch to assess decency taxes, the
assessment s deemed made when notce to ths ehect s reeased, maed
or sent by the Coector to the taxpayer and t s not requred that the
notce be receved by the taxpayer wthn the aforementoned ve-year
perod.1
DEDUCTIONS
A. Deprecaton. - Basan Estates, Inc. camed deductons for the
deprecaton of ts assets up to 1949 on the bass of ther acquston cost.
As of |anuary 1, 1950 t changed the deprecabe vaue of sad assets by
ncreasng t to conform wth the ncrease n cost for ther repacement.
Accordngy, from 1950 to 1953 t deducted from gross ncome the vaue of
deprecaton computed on the reapprased vaue.
In 1953, the year nvoved n ths case, taxpayer camed the foowng
deprecaton deducton:
Reapprased assets P47,342.53
New assets consstng of hospta budng and equpment 3,910.45
Tota deprecaton
P51,252.98
Upon nvestgaton and examnaton of taxpayer's books and papers, the
Commssoner of Interna Revenue found that the reapprased assets
deprecated n 1953 were the same ones upon whch deprecaton was
camed n 1952. And for the year 1952, the Commssoner had aready
determned, wth taxpayer's concurrence, the deprecaton aowabe on
sad assets to be P36,842.04, computed on ther acquston cost at rates
xed by the taxpayer. Hence, the Commssoner pegged the deductbe
deprecaton for 1953 on the same od assets at P36,842.04 and dsaowed
the excess thereof n the amount of P10,500.49.
The queston for resouton therefore s whether deprecaton sha be
determned on the acquston cost or on the reapprased vaue of the
assets.
Deprecaton s the gradua dmnuton n the usefu vaue of tangbe
property resutng from wear and tear and norma obsoescense. The term
s aso apped to amortzaton of the vaue of ntangbe assets, the use of
whch n the trade or busness s dentey mted n duraton.2
Deprecaton commences wth the acquston of the property and ts owner
s not bound to see hs property graduay waste, wthout makng provson
out of earnngs for ts repacement. It s entted to see that from earnngs
the vaue of the property nvested s kept unmpared, so that at the end of
any gven term of years, the orgna nvestment remans as t was n the
begnnng. It s not ony the rght of a company to make such a provson,
but t s ts duty to ts bond and stockhoders, and, n the case of a pubc
servce corporaton, at east, ts pan duty to the pubc.3 Accordngy, the
aw permts the taxpayer to recover graduay hs capta nvestment n
wastng assets free from ncome tax.4 Precsey, Secton 30 (f) (1) whch
states:
(1)In genera. - A reasonabe aowance for deteroraton of property
arsng out of ts use or empoyment n the busness or trade, or out of ts
not beng used: Provded, That when the aowance authorzed under ths
subsecton sha equa the capta nvested by the taxpayer . . . no further
aowance sha be made. . . .
aows a deducton from gross ncome for deprecaton but mts the
recovery to the capta nvested n the asset beng deprecated.
The ncome tax aw does not authorze the deprecaton of an asset beyond
ts acquston cost. Hence, a deducton over and above such cost cannot
be camed and aowed. The reason s that deductons from gross ncome
are prveges,5 not matters of rght.6 They are not created by mpcaton
but upon cear expresson n the aw.7
Moreover, the recovery, free of ncome tax, of an amount more than the
nvested capta n an asset w transgress the underyng purpose of a
deprecaton aowance. For then what the taxpayer woud recover w be,
not ony the acquston cost, but aso some prot. Recovery n due tme
thru deprecaton of nvestment made s the phosophy behnd
deprecaton aowance; the dea of prot on the nvestment made has
never been the underyng reason for the aowance of a deducton for
deprecaton.
Accordngy, the cam for deprecaton beyond P36,842.04 or n the
amount of P10,500.49 has no |ustcaton n the aw. The determnaton,
15
therefore, of the Commssoner of Interna Revenue dsaowng sad
amount, amrmed by the Court of Tax Appeas, s sustaned.
B. Expenses. - The next tem nvoves dsaowed expenses ncurred n
1953, broken as foows:
Msceaneous expenses P6,759.17
Omcer's traveng expenses 2,300.40
Tota
P9,059.57
These were dsaowed on the ground that the nature of these expenses
coud not be satsfactory expaned nor coud the same be supported by
approprate papers.
Fex Gun, pettoner's accountant, expaned the P6,759.17 was actua
expenses credted to the account of the presdent of the corporaton
ncurred n the nterest of the corporaton durng the presdent's trp to
Mana (pp. 33-34 of TSN of Dec. 5, 1962); he stated that the P2,300.40
was the presdent's traveng expenses to and from Mana as to the
vouchers and recepts of these, he sad the same were made but got
burned durng the Basan re on March 30, 1962 (p. 40 of same TSN).
Pettoner further argues that when t sent ts records to Mana n February,
1959, the papers n support of these msceaneous and traveng
expenses were not ncuded for the reason that by February 9, 1959, when
the Bureau of Interna Revenue decded to nvestgate, pettoner had no
more obgaton to keep the same snce ve years had apsed from the
tme these expenses were ncurred (p. 41 of same TSN). On ths ground,
the pettoner may be sustaned, for under Secton 337 of the Tax Code,
recepts and papers supportng such expenses need be kept by the
taxpayer for a perod of ve years from the ast entry. At the tme of the
nvestgaton, sad ve years had apsed. Taxpayer's stand on ths ssue s
therefore sustaned.
LIMPAN IN@ESTMENT v CIR
FACTS:
BIR assessed decency taxes on Lmpan Corp, a companythat eases rea
property, for underdecarng ts renta ncomefor years 1956-57 by around
P20K and P81K respectvey.Pettoner appeas on the ground that portons
of theseunderdecared rents are yet to be coected by the prevousowners
and turned over or receved by the corporaton.Pettoner cted that some
rents were deposted wth the court,such that the corporaton does not
have actua nor constructvecontro over them.The soe wtness for the
pettoner, Sos (Corporate Secretary-Treasurer) admtted to some
undecared rents n 1956 and1957, and that some baances were not
coected by thecorporaton n 1956 because the essees refused to
recognzeand pay rent to the new owners and that the corps
presdentIsabeo Lm coected some rent and reported t n hs
personancome statement, but dd not turn over the rent to
thecorporaton. He aso ctes ack of actua or constructve controover
rents deposted wth the court.
ISSUE: WON the BIR was correct n assessng decency taxes
aganst Lmpan Corp. for undecared renta ncome
HELD:
Yes. Pettoner admtted that t ndeed had undecaredncome (athough
ony a part and not the fu amount assessedby BIR). Thus, t has become
ncumbent upon them to provether excuses by cear and convncng
evdence, whch t hasfaed to do.Issue: When s there constructve recept
of rent?Wth regard to 1957 rents deposted wth the court, andwthdrawn
ony n 1958, the court vewed the corporaton ashavng constructvey
receved sad rents. The non-coectonwas the pettoners faut snce t
refused to refused to acceptthe rent, and not due to non-payment of
essees. Hence,athough the corporaton dd not actuay receve the rent, t
sdeemed to have constructvey receved them.
BIR RULING 39</3
FACTS:
On October 3, 2000, the Phppne Counc for NGO Certcaton (PCNC)
sent a request for rung to the BIR, many to seek an opnon f
Conservaton Internatona (CI), an nternatona organzaton, can be
granted a donee nsttuton status. Note that CIs home omce and board
members are based abroad, hence, PCNCs evauaton process on
governance cannot be fuy executed.
ISSUE:
Whether or not nternatona organzatons wth home omces abroad are
quaed to be granted donee nsttuton status.
HELD: NO.
Sec. 34(H)() of the NIRC speccay mentons "accredted domestc
corporaton or assocatons" and "non-government organzatons". On the
other hand, subparagraph (2)(c) of the same Secton of the Tax Code
denes a "non-government organzaton" to mean a non-prot domestc
corporaton.
In mpementng Sec. 34(H) of the NIRC, RR 13-98 was ssued and n
reaton to the type of enttes that may be accredted, whch speccay
16
refers to organzatons or assocatons created or organzed under
Phppne aws.
Thus, the BIR opned that a non-stock, non-prot corporaton or
organzaton must be created or organzed under Phppne Laws and that
an NGO must be a non-prot domestc corporaton, ths Omce s of the
opnon that a foregn corporaton, ke Conservaton Internatona, whether
resdent or non-resdent, cannot be accredted as donee nsttuton.
Cns#i%ate% Mines- In'6 vs CIR
FACTS
The company, a domestc corporaton engaged n mnng, had ed ts
ncome tax returns for 1951, 1952, 1953, and 1956. In 1957 examners of
BIR nvestgated the ncome tax return ed by the company because ts
audtor, Fepe Oada, camed the refund of tye sum of P107,472.00
representng aeged overpayments of ncome taces for the year 1951.
After the nvestgaton the examners reported that (A) for the years 1951
to 1954, (1) the company had not accrued as an expense the share n the
company prots of Benguet Consodated Mnes as operator of the
Company's mnes, athough for ncome tax purposes for the Company had
reported ncome and expenses on the accrua bass; (2) depeton and
deprecaton expenses had been overcharged; and (3) the cams for audt
and ega fees and msceaneous expenses for 1953 and 1954 had not
been propery substantated; and that (B) for the year 1956 (1) the
Company had overstated ts cam for depeton, and (2) certan cams for
msceaneous expenses were not duy supported by evdence.
In vew of sad reports the CIR sent the Company a etter of demand
requrng t to pay certan decency ncome taxes for the years 1951 -
1954, ncusve, and for the year 1956. Decency ncome tax assessment
notces for sad years were aso sent to the Company. The Company
requested a reconsderaton of the assessment but the Commssoner
refused to reconsder, hence the Company appeaed to the CTA.
On May 6, 1961 the Tax Court rendered |udgement orderng the Company
to pay the amounts of P107,846.56, P134,033.01, and P71,392.82 as
decency ncome taxes for the years 1953, 1954, and 1956, respectvey.
However on Aug 7, 1961, upon moton of the Company, the tax Court
reconsdered ts decson and further reduced the decency ncome tax
abtes of the Company to P79,812.93, P51,528.24, and P71,382.82 for
the years 1953, 1954, and 1956, respectvey.
Both the Company and the Commssoner appeaed to ths Court. The
Company questons the rate of mne depeton adapted by the Court of Tax
Appeas and the dsaowance of deprecaton charges and certan
msceaneous.
ISSUE
Whether the CTA erred wth respect to the rate of mne depeton
RULING
The Tax Code provdes that n computng net ncome, there sha be
aowed as deducton, n the case of mnes, a reasonabe aowance for
depeton thereof not to exceed the market vaue n the mne of the
product thereof whch has been mned and sod durng the year for whch
the return s made.
The formua for computng the rate of depeton s:
Cost of Mne Property
---------------------- = Rate of Depeton Per Unt Estmated ore Depost of
Product Mned and sod
The Commssoner and the Company do not agree as to the gures
correspondng to ether factor that ahects the rate of depeton per unt.
The gures accordng to the Commssoner are:
P2,646,878.44 (mne cost) P0.59189 (rate of
------------------------- = depeton per ton)
4,471,892 tons (estmated ore depost)
17
whe the Company nssts they are:
P4,238,974.57 (mne cost) P1.0197 (rate of
------------------------- - = depeton per ton)
4,156,888 tons (estmated
ore depost)
They agree, however, that the "cost of mne property" consst of (1) mne
cost, and (2) expenses of deveopment before producton.
As an ncome tax concept, depeton s whoy a creaton of the statute --
"soey a matter of egsatve grace." Hence, the taxpayer has the burden
of |ustfyng the aowance f anu deducton camed. As n the connecton
wth a other controverses, the burden of proof to show that a
dsaowance of depeton by the Commssoner s ncorrect or that an
aowance made s nadequate s upon the taxpayer, and ths s true wth
resoect to the vaue of the property consttutng the bass of the deducton.
Ths burden of proof rue has been frequenty apped and a vaue camed
has been dsaowed for ack of evdence .
The Company's baance sheet for Dec 31, 1947 sts the "mne cost" of
P2,500,00.00 as "deveopment cost" and the amount of P1,738,974.37 as
suspense account (meanng propertes sub|ect to war osses). "The
Company cams that ts accountant, Mr. Capo, made these errors because
he was then new at the |ob. Grantng that was what had happened, t does
not ahect the fact that the, evdence on hand s nsumcent to prove the
cost of deveopment aeged by the Company. Nor, can we rey on the
statements of Ego Garca, who was the Company's treasurer and
assstant secretary at the tme he tested on Aug 14, 1959. He admtted
that he dd not know how the gure P4,238,974.57 was arrved at,
expanng "I ony know that t s the gure appearng on the baance sheet
as of Dec 31, 1946 as certed by the Company's audtors; and ths we
made as the bass of tyhe vauaton of the depetabe vaue of the mne."
We therefore, have to rey on the Commssoner's asserton that the
"deveopment cost" was P131,871.44, broken down as foows:
assessment, P34,092.12; deveopment, P61,484.63; exporaton
P13,966.62; and damond drng, P22,355.07.
The queston as to whch gure shoud propery correspond to "mne cost"
s one of the fact. The ndngs of the fact of the Tax Court, where
reasonaby supported by evdence, are concusve upon the Supreme
Court.
.M PHILIPPINES v CIR
Fa'ts:
3M Phppnes, Inc. s a subsdary of the Mnnesota Mnng and
Manufacturng Company (or "3M-St. Pau") a non-resdent foregn
corporaton wth prncpa omce n St. Pau, Mnnesota, U.S.A. It s the
excusve mporter, manufacturer, whoesaer, and dstrbutor n the
Phppnes of a products of 3M-St. Pau. To enabe t to manufacture,
package, promote, market, se and nsta the hghy specazed products
of ts parent company, and render the necessary post-saes servce and
mantenance to ts customers, 3M Phs. entered nto a "Servce Informaton
and Technca Assstance Agreement" and a "Patent and Trademark Lcense
Agreement" wth the atter under whch the 3m Phs. agreed to pay to 3M-
St. Pau a technca servce fee of 3% and a royaty of 2% of ts net saes.
Both agreements were submtted to, and approved by, the Centra Bank of
the Phppnes. the pettoner camed the foowng deductons as busness
expenses:
(a) royates and technca servce fees of P 3,050,646.00; and
(b) pre-operatona cost of tape coater of P97,485.08.
As to (a), the Commssoner of Interna Revenue aowed a deducton of
P797,046.09 ony as technca servce fee and royaty for ocay
manufactured products, but dsaowed the sum of P2,323,599.02 aeged
to have been pad by the pettoner to 3M-St. Pau as technca servce fee
and royaty on P46,471,998.00 worth of nshed products mported by the
pettoner from the parent company, on the ground that the fee and royaty
shoud be based ony on ocay manufactured goods. Whe as to (b), the
CIR ony aowed P19,544.77 or one-fth (1/5) of 3M Phs.capta
expendture of P97,046.09 for ts tape coater whch was nstaed n 1973
because such expendture shoud be amortzed for a perod of ve (5)
years, hence, payment of the dsaowed baance of P77,740.38 shoud be
spread over the next four (4) years. The CIR ordered 3M Ph. to pay
P840,540 as decency ncome tax on ts 1974 return, pus P353,026.80 as
14% nterest per annum from February 15, 1975 to February 15, 1976, or a
tota of P1,193,566.80.
18
3M Phs. protested the CIRs assessment but t dd not answer the protest,
nstead ssung a warrant of evy. The CTA amrmed the assessment on
appea.
Issue:
Whether or not 3M Phs s entted to the deductons due to royates?
Rung:
No. CB Crcuar No. 393 (Reguatons Governng Royates/Rentas) dated
December 7, 1973 was promugated by the Centra Bank as an exchange
contro reguaton to conserve foregn exchange and avod unnecessary
dran on the country's nternatona reserves (69 O.G. No. 51, pp. 11737-
38). Secton 3-C of the crcuar provdes that royates sha be pad ony on
commodtes manufactured by the censee under the royaty agreement:
Secton 3. Requrements for Approva and Regstraton. - The
requrements for approva and regstraton as provded for n Secton 2
above ncude, but are not mted to the foowng:
a. xxx xxx xxx
b. xxx xxx xxx
c. The royaty/renta contracts nvovng manufacturng' royaty, e.g., actua
transfers of technoogca servces such as secret formua/processes,
technca know how and the ke sha not exceed ve (5) per cent of the
whoesae prce of the commodty/tes manufactured under the royaty
agreement. For contracts nvovng 'marketng' servces such as the use of
foregn brands or trade names or trademarks, the royaty/renta rate sha
not exceed two (2) per cent of the whoesae prce of the commodty/tes
manufactured under the royaty agreement. The producer's or foregn
censor's share n the proceeds from the dstrbuton/exhbton of the ms
sha not exceed sxty (60) per cent of the net proceeds (gross proceeds
ess oca expenses) from the exhbton/dstrbuton of the ms. ...
(Emphass supped.) (p. 27, Roo.)
Ceary, no royaty s payabe on the whoesae prce of nshed products
mported by the censee from the censor. However, pettoner argues that
the aw appcabe to ts case s ony Secton 29(a)(1) of the Tax Code whch
provdes:
(a) Expenses. - (1) Busness expenses. - (A) In genera. - A ordnary
and necessary expenses pad or ncurred durng the taxabe year n
carryng on any trade or busness, ncudng a reasonabe aowance for
saares or other compensaton for persona servces actuay rendered;
traveng expenses whe away from home n the pursut of a trade,
professon or busness, rentas or other payments requred to be made as a
condton to the contnued use or possesson, for the purpose of the trade,
professon or busness, for property to whch the taxpayer has not taken or
s not takng tte or n whch he has no equty.
Pettoner ponts out that the Centra bank "has no say n the assessment
and coecton of nterna revenue taxes as such power s odged n the
Bureau of Interna Revenue," that the Tax Code "never mentons Crcuar
393 and there s no aw or reguaton governng deducton of busness
expenses that refers to sad crcuar." (p. 9, Petton.)
The argument s specous, for, athough the Tax Code aows payments of
royaty to be deducted from gross ncome as busness expenses, t s CB
Crcuar No. 393 that denes what royaty payments are proper. Hence,
mproper payments of royaty are not deductbe as egtmate busness
expenses.
ESSO STANDARD v CIR
FACTS:
ESSO deducted from ts gross ncome, as part of ts ordnary and necessary
busness expenses, the amount t had spent for drng and exporaton of
ts petroeum concessons. Ths cam was dsaowed by the CIR on the
ground that the expenses shoud be captazed and mght be wrtten oh as
a oss ony when a "dry hoe" shoud resut.
ESSO then ed an amended return and camed as ordnary and necessary
expenses ,ar(in "ees t had pad to the Centra Bank on ts prot
remttances to ts New York head omce. The CIR dsaowed the camed
deducton for the margn fees pad. CIR assessed ESSO a decency ncome
tax whch arose from the dsaowance of the margn fees.
ESSO pad under protest and camed for a refund. CIR dened the cams
for refund, hodng that the margn fees pad to the Centra Bank coud not
be consdered taxes or aowed as deductbe busness expenses.
ISSUES:
1. w/n margn fee s a tax and shoud be deductbe from ESSOs gross
ncome. NO
2. If margn fees are not taxes, w/n they shoud nevertheess be
consdered necessary and ordnary busness expenses and
therefore st deductbe from ts gross ncome. NO.
HELD:
1. NO. A margn s not a tax but an exacton desgned to curb the
excessve demands upon our nternatona reserves. The margn fee
was mposed by the State n the exercse of ts poce power and not
the power of taxaton.
2. NO.
19
To be deductbe as a busness expense, three condtons are mposed,
namey:
(1) the expense must be ordnary and necessary,
(2) t must be pad or ncurred wthn the taxabe year, and
(3) t must be pad or ncurred n carryng on a trade or busness.
In addton, not ony must the taxpayer meet the busness test, he
must substantay prove by evdence or records the deductons
camed under the aw, otherwse, the same w be dsaowed. The
mere aegaton of the taxpayer that an tem of expense s ordnary and
necessary does not |ustfy ts deducton.
Ordnary, an expense w be consdered 'necessary' where the
expendture s approprate and hepfu n the deveopment of the
taxpayer's busness. It s 'ordnary' when t connotes a payment whch
s norma n reaton to the busness of the taxpayer and the
surroundng crcumstances. The term 'ordnary' does not requre that
the payments be habtua or norma n the sense that the same
taxpayer w have to make them often; the payment may be unque or
non-recurrng to the partcuar taxpayer ahected. There s thus no hard
and fast rue on the matter. The rght to a deducton depends n each
case on the partcuar facts and the reaton of the payment to the type
of busness n whch the taxpayer s engaged. The ntenton of the
taxpayer often may be the controng fact n makng the
determnaton. Assumng that the expendture s ordnary and
necessary n the operaton of the taxpayer's busness, the answer to
the queston as to whether the expendture s an aowabe deducton
as a busness expense must be determned from the nature of the
expendture tsef, whch n turn depends on the extent and
permanency of the work accompshed by the expendture.

Snce the margn fees n queston were ncurred for the remttance of
funds to pettoner's Head Omce n New York, whch s a separate and
dstnct ncome taxpayer from the branch n the Phppnes, for ts
dsposa abroad, t can never be sad therefore that the margn fees
were approprate and hepfu n the deveopment of pettoner's
busness n the Phppnes excusvey. ESSO has not shown that the
remttance to the head omce of part of ts prots was made n
furtherance of ts own trade or busness and therefore cannot be
camed as an ordnary and necessary expense pad or ncurred n
carryng on ts own trade or busness.
20
SEC6 .D6 Deductions from Gross Income. - Except for taxpayers
earnng compensaton ncome arsng from persona servces rendered
under an empoyer-empoyee reatonshp where no deductons sha be
aowed under ths Secton other than under subsecton (M) hereof, n
computng taxabe ncome sub|ect to ncome tax under Sectons 24 (A); 25
(A); 26; 27 (A), (B) and (C); and 28 (A) (1), there sha be aowed the
foowng deductons from gross ncome;
0A1 Expenses* )
031 Ordinary and Necessary Trade, Business or Professional
Expenses* ) (a) %n +eneral. - There sha be aowed as deducton from
gross ncome a the ordnary and necessary expenses pad or ncurred
durng the taxabe year n carryng on or whch are drecty attrbutabe to,
the deveopment, management, operaton and/or conduct of the trade,
busness or exercse of a professon, ncudng: () A reasonabe aowance
for saares, wages, and other forms of compensaton for persona servces
actuay rendered, ncudng the grossed-up monetary vaue of frnge
benet furnshed or granted by the empoyer to the
empoyee: Provided,That the na tax mposed under Secton 33 hereof has
been pad; () A reasonabe aowance for trave expenses, here and
abroad, whe away from home n the pursut of trade, busness or
professon; () A reasonabe aowance for rentas and/or other payments
whch are requred as a condton for the contnued use or possesson, for
purposes of the trade, busness or professon, of property to whch the
taxpayer has not taken or s not takng tte or n whch he has no equty
other than that of a essee, user or possessor; (v) A reasonabe aowance
for entertanment, amusement and recreaton expenses durng the taxabe
year, that are drecty connected to the deveopment, management and
operaton of the trade, busness or professon of the taxpayer, or that are
drecty reated to or n furtherance of the conduct of hs or ts trade,
busness or exercse of a professon not to exceed such cengs as the
Secretary of Fnance may, by rues and reguatons prescrbe, upon
recommendaton of the Commssoner, takng nto account the needs as
we as the speca crcumstances, nature and character of the ndustry,
trade, busness, or professon of the taxpayer: Provided, That any expense
ncurred for entertanment, amusement or recreaton that s contrary to
aw, moras pubc pocy or pubc order sha n no case be aowed as a
deducton.
(b) ,ubstantiation Requirements. - No deducton from gross ncome sha
be aowed under Subsecton (A) hereof uness the taxpayer sha
substantate wth sumcent evdence, such as omca recepts or other
adequate records: () the amount of the expense beng deducted, and ()
the drect connecton or reaton of the expense beng deducted to the
deveopment, management, operaton and/or conduct of the trade,
busness or professon of the taxpayer.
(c) -ribes, .ic!bac!s and /ther ,imilar Payments* - No deducton from
gross ncome sha be aowed under Subsecton (A) hereof for any
payment made, drecty or ndrecty, to an omca or empoyee of the
natona government, or to an omca or empoyee of any oca government
unt, or to an omca or empoyee of a government-owned or -controed
corporaton, or to an omca or empoyee or representatve of a foregn
government, or to a prvate corporaton, genera professona partnershp,
or a smar entty, f the payment consttutes a brbe or kckback.
0?1 Expenses Allowale to Pri!ate Educational Institutions. - In
addton to the expenses aowabe as deductons under ths Chapter, a
prvate educatona nsttuton, referred to under Secton 27 (B) of ths
Code, may at ts opton eect ether: (a) to deduct expendtures otherwse
consdered as capta outays of deprecabe assets ncurred durng the
taxabe year for the expanson of schoo factes or (b) to deduct
aowance for deprecaton thereof under Subsecton (F) hereof.
0B1 Interest6< 031 In General. - The amount of nterest pad or ncurred
wthn a taxabe year on ndebtedness n connecton wth the taxpayer's
professon, trade or busness sha be aowed as deducton from gross
ncome: Provided, however, That the taxpayer's otherwse aowabe
deducton for nterest expense sha be reduced by an amount equa to the
foowng percentages of the nterest ncome sub|ected to na tax: Forty-
one percent (41%) begnnng |anuary 1, 1998; Thrty-nne percent (39%)
begnnng |anuary 1, 1999; and Thrty-eght percent (38%) begnnng
|anuary 1, 2000;
21
0?1 Exceptions* - No deducton sha be aowed n respect of nterest
under the succeedng subparagraphs: (a) If wthn the taxabe year an
ndvdua taxpayer reportng ncome on the cash bass ncurs an
ndebtedness on whch an nterest s pad n advance through dscount or
otherwse: Provded, That such nterest sha be aowed a a deducton n
the year the ndebtedness s pad: Provided, further, That f the
ndebtedness s payabe n perodc amortzatons, the amount of nterest
whch corresponds to the amount of the prncpa amortzed or pad durng
the year sha be aowed as deducton n such taxabe year; (b) If both the
taxpayer and the person to whom the payment has been made or s to be
made are persons speced under Secton 36 (B); or (c)If the ndebtedness
s ncurred to nance petroeum exporaton.
0.1 Optional Treatment of Interest Expense. - At the opton of the
taxpayer, nterest ncurred to acqure property used n trade busness or
exercse of a professon may be aowed as a deducton or treated as a
capta expendture.
0C1 Taxes. " 031 In General* - Taxes pad or ncurred wthn the taxabe
year n connecton wth the taxpayer's professon, trade or busness, sha
be aowed as deducton, except
(a) The ncome tax provded for under ths Tte; (b) Income taxes mposed
by authorty of any foregn country; but ths deducton sha be aowed n
the case of a taxpayer who does not sgnfy n hs return hs desre to have
to any extent the benets of paragraph (3) of ths subsecton (reatng to
credts for taxes of foregn countres); (c) Estate and donor's taxes; and (d)
Taxes assessed aganst oca benets of a knd tendng to ncrease the
vaue of the property assessed. Provided, That taxes aowed under ths
Subsecton, when refunded or credted, sha be ncuded as part of gross
ncome n the year of recept to the extent of the ncome tax benet of sad
deducton.
0?1 #imitations on Deductions. - In the case of a nonresdent aen
ndvdua engaged n trade or busness n the Phppnes and a resdent
foregn corporaton, the deductons for taxes provded n paragraph (1) of
ths Subsecton (C) sha be aowed ony f and to the extent that they are
connected wth ncome from sources wthn the Phppnes.
0.1 $redit A%ainst Tax for Taxes of &orei%n $ountries. - If the
taxpayer sgnes n hs return hs desre to have the benets of ths
paragraph, the tax mposed by ths Tte sha be credted wth: (a) Citien
and $omestic Corporation* - In the case of a ctzen of the Phppnes and
of a domestc corporaton, the amount of ncome taxes pad or ncurred
durng the taxabe year to any foregn country; and (b) Partnerships and
0states. - In the case of any such ndvdua who s a member of a genera
professona partnershp or a benecary of an estate or trust, hs
proportonate share of such taxes of the genera professona partnershp
or the estate or trust pad or ncurred durng the taxabe year to a foregn
country, f hs dstrbutve share of the ncome of such partnershp or trust
s reported for taxaton under ths Tte.
An aen ndvdua and a foregn corporaton sha not be aowed the
credts aganst the tax for the taxes of foregn countres aowed under ths
paragraph.
0D1 #imitations on $redit* - The amount of the credt taken under ths
Secton sha be sub|ect to each of the foowng mtatons: (a) The amount
of the credt n respect to the tax pad or ncurred to any country sha not
exceed the same proporton of the tax aganst whch such credt s taken,
whch the taxpayer's taxabe ncome from sources wthn such country
under ths Tte bears to hs entre taxabe ncome for the same taxabe
year; and (b) The tota amount of the credt sha not exceed the same
proporton of the tax aganst whch such credt s taken, whch the
taxpayer's taxabe ncome from sources wthout the Phppnes taxabe
under ths Tte bears to hs entre taxabe ncome for the same taxabe
year.
0:1 Ad'ustments on Payment of Incurred Taxes. - If accrued taxes
when pad dher from the amounts camed as credts by the taxpayer, or f
any tax pad s refunded n whoe or n part, the taxpayer sha notfy the
Commssoner; who sha redetermne the amount of the tax for the year or
years ahected, and the amount of tax due upon such redetermnaton, f
any, sha be pad by the taxpayer upon notce and demand by the
Commssoner, or the amount of tax overpad, f any, sha be credted or
refunded to the taxpayer.
22
In the case of such a tax ncurred but not pad, the Commssoner as a
condton precedent to the aowance of ths credt may requre the
taxpayer to gve a bond wth suretes satsfactory to and to be approved by
the Commssoner n such sum as he may requre, condtoned upon the
payment by the taxpayer of any amount of tax found due upon any such
redetermnaton.
The bond heren prescrbed sha contan such further condtons as the
Commssoner may requre.
0C1 (ear in )*ic* $redit Ta+en* - The credts provded for n Subsecton
(C)(3) of ths Secton may, at the opton of the taxpayer and rrespectve of
the method of accountng empoyed n keepng hs books, be taken n the
year whch the taxes of the foregn country were ncurred, sub|ect,
however, to the condtons prescrbed n Subsecton (C)(5) of ths Secton.
If the taxpayer eects to take such credts n the year n whch the taxes of
the foregn country accrued, the credts for a subsequent years sha be
taken upon the same bass and no porton of any such taxes sha be
aowed as a deducton n the same or any succeedng year.
0H1 Proof of $redits. - The credts provded n Subsecton (C)(3) hereof
sha be aowed ony f the taxpayer estabshes to the satsfacton of the
Commssoner the foowng: (a) The tota amount of ncome derved from
sources wthout the Phppnes; (b) The amount of ncome derved from
each country, the tax pad or ncurred to whch s camed as a credt under
sad paragraph, such amount to be determned under rues and reguatons
prescrbed by the Secretary of Fnance; and (c) A other nformaton
necessary for the vercaton and computaton of such credts.
0D1 #osses. " 031 In General. - Losses actuay sustaned durng the
taxabe year and not compensated for by nsurance or other forms of
ndemnty sha be aowed as deductons: (a) If ncurred n trade,
professon or busness; (b) Of property connected wth the trade, busness
or professon, f the oss arses from res, storms, shpwreck, or other
casuates, or from robbery, theft or embezzement.
The Secretary of Fnance, upon recommendaton of the Commssoner, s
hereby authorzed to promugate rues and reguatons prescrbng, among
other thngs, the tme and manner by whch the taxpayer sha submt a
decaraton of oss sustaned from casuaty or from robbery, theft or
embezzement durng the taxabe year: Provided, however, That the tme
mt to be so prescrbed n the rues and reguatons sha not be ess than
thrty (30) days nor more than nnety (90) days from the date of dscovery
of the casuaty or robbery, theft or embezzement gvng rse to the oss.
(c) No oss sha be aowed as a deducton under ths Subsecton f at the
tme of the ng of the return, such oss has been camed as a deducton
for estate tax purposes n the estate tax return.
0?1 Proof of #oss* - In the case of a nonresdent aen ndvdua or foregn
corporaton, the osses deductbe sha be those actuay sustaned durng
the year ncurred n busness, trade or exercse of a professon conducted
wthn the Phppnes, when such osses are not compensated for by
nsurance or other forms of ndemnty.
The Secretary of Fnance, upon recommendaton of the Commssoner, s
hereby authorzed to promugate rues and reguatons prescrbng, among
other thngs, the tme and manner by whch the taxpayer sha submt a
decaraton of oss sustaned from casuaty or from robbery, theft or
embezzement durng the taxabe year: Provided, That the tme to be so
prescrbed n the rues and reguatons sha not be ess than thrty (30)
days nor more than nnety (90) days from the date of dscovery of the
casuaty or robbery, theft or embezzement gvng rse to the oss; and
0.1 Net Operatin% #oss $arry"O!er. - The net operatng oss of the
busness or enterprse for any taxabe year mmedatey precedng the
current taxabe year, whch had not been prevousy ohset as deducton
from gross ncome sha be carred over as a deducton from gross ncome
for the next three (3) consecutve taxabe years mmedatey foowng the
year of such oss: Provided, however, That any net oss ncurred n a
taxabe year durng whch the taxpayer was exempt from ncome tax sha
not be aowed as a deducton under ths Subsecton: Provided, further,That
a net operatng oss carry-over sha be aowed ony f there has been no
substanta change n the ownershp of the busness or enterprse n that -
() Not ess than seventy-ve percent (75%) n nomna vaue of
outstandng ssued shares, f the busness s n the name of a corporaton,
s hed by or on behaf of the same persons; or () Not ess than seventy-
ve percent (75%) of the pad up capta of the corporaton, f the busness
23
s n the name of a corporaton, s hed by or on behaf of the same
persons.
For purposes of ths subsecton, the term 1not operating loss1 sha mean
the excess of aowabe deducton over gross ncome of the busness n a
taxabe year. Provided, That for mnes other than o and gas wes, a net
operatng oss wthout the benet of ncentves provded for under
Executve Order No. 226, as amended, otherwse known as the Omnbus
Investments Code of 1987, ncurred n any of the rst ten (10) years of
operaton may be carred over as a deducton from taxabe ncome for the
next ve (5) years mmedatey foowng the year of such oss.
The entre amount of the oss sha be carred over to the rst of the ve
(5) taxabe years foowng the oss, and any porton of such oss whch
exceeds, the taxabe ncome of such rst year sha be deducted n ke
manner form the taxabe ncome of the next remanng four (4) years.
0D1 $apital #osses. "
(a) 2imitation. - Loss from saes or Exchanges of capta assets sha be
aowed ony to the extent provded n Secton 39.
(b) ,ecurities -ecoming 3orthless. - If securtes as dened n Secton 22
(T) become worthess durng the taxabe year and are capta assets, the
oss resutng therefrom sha, for purposes of ths Tte, be consdered as a
oss from the sae or exchange, on the ast day of such taxabe year, of
capta assets.
0:1 #osses &rom )as* ,ales of ,toc+ or ,ecurities* - Losses
from1wash sales1 of stock or securtes as provded n Secton 38.
0C1 )a%erin% #osses. - Losses from wagerng transactons sha b aowed
ony to the extent of the gans from such transactons.
0H1 Aandonment #osses* ) (a) In the event a contract area where
petroeum operatons are undertaken s partay or whoy abandoned, a
accumuated exporaton and deveopment expendtures pertanng thereto
sha be aowed as a deducton4 Provided, That accumuated expendtures
ncurred n that area pror to |anuary 1, 1979 sha be aowed as a
deducton ony from any ncome derved from the same contract area.
In a cases, notces of abandonment sha be ed wth the Commssoner.
(b) In case a producng we s subsequenty abandoned, the unamortzed
costs thereof, as we as the undeprecated costs of equpment drecty
used theren, sha be aowed as a deducton n the year such we,
equpment or facty s abandoned by the contractor: Provided, That f such
abandoned we s reentered and producton s resumed, or f such
equpment or facty s restored nto servce, the sad costs sha be
ncuded as part of gross ncome n the year of resumpton or restoraton
and sha be amortzed or deprecated, as the case may be.
0E1 Bad Dets. " 031 In General. - Debts due to the taxpayer actuay
ascertaned to be worthess and charged oh wthn the taxabe year except
those not connected wth professon, trade or busness and those sustaned
n a transacton entered nto between partes mentoned under Secton 36
(B) of ths Code: Provded, That recovery of bad debts prevousy aowed
as deducton n the precedng years sha be ncuded as part of the gross
ncome n the year of recovery to the extent of the ncome tax benet of
sad deducton.
0?1 ,ecurities Becomin% )ort*less. - If securtes, as dened n Secton
22 (T), are ascertaned to be worthess and charged oh wthn the taxabe
year and are capta assets, the oss resutng therefrom sha, n the case
of a taxpayer other than a bank or trust company ncorporated under the
aws of the Phppnes a substanta part of whose busness s the recept of
deposts, for the purpose of ths Tte, be consdered as a oss from the sae
or exchange, on the ast day of such taxabe year, of capta assets.
0F1 Depreciation. " 031 General -ule. - There sha be aowed as a
deprecaton deducton a reasonabe aowance for the exhauston, wear
and tear (ncudng reasonabe aowance for obsoescence) of property
used n the trade or busness.
In the case of property hed by one person for fe wth remander to
another person, the deducton sha be computed as f the fe tenant were
the absoute owner of the property and sha be aowed to the fe tenant.
In the case of property hed n trust, the aowabe deducton sha be
apportoned between the ncome benecares and the trustees n
accordance wth the pertnent provsons of the nstrument creatng the
trust, or n the absence of such provsons, on the bass of the trust ncome
aowabe to each.
0?1 .se of $ertain /et*ods and -ates. - The term 1reasonable
allowance1 as used n the precedng paragraph sha ncude, but not
24
mted to, an aowance computed n accordance wth rues and reguatons
prescrbed by the Secretary of Fnance, upon recommendaton of the
Commssoner, under any of the foowng methods:
(a) The straght-ne method;
(b) Decnng-baance method, usng a rate not exceedng twce the rate
whch woud have been used had the annua aowance been computed
under the method descrbed n Subsecton (F) (1);
(c) The sum-of-the-years-dgt method; and
(d) any other method whch may be prescrbed by the Secretary of Fnance
upon recommendaton of the Commssoner.
0.1 A%reement as to .seful #ife on )*ic* Depreciation -ate is
Based* ) Where under rues and reguatons prescrbed by the Secretary of
Fnance upon recommendaton of the Commssoner, the taxpayer and the
Commssoner have entered nto an agreement n wrtng speccay
deang wth the usefu fe and rate of deprecaton of any property, the
rate so agreed upon sha be bndng on both the taxpayer and the natona
Government n the absence of facts and crcumstances not taken nto
consderaton durng the adopton of such agreement.
The responsbty of estabshng the exstence of such facts and
crcumstances sha rest wth the party ntatng the modcaton.
Any change n the agreed rate and usefu fe of the deprecabe property
as speced n the agreement sha not be ehectve for taxabe years pror
to the taxabe year n whch notce n wrtng by certed ma or regstered
ma s served by the party ntatng such change to the other party to the
agreement: Provided, however, that where the taxpayer has adopted such
usefu fe and deprecaton rate for any deprecabe and camed the
deprecaton expenses as deducton from hs gross ncome, wthout any
wrtten ob|ecton on the part of the Commssoner or hs duy authorzed
representatves, the aforesad usefu fe and deprecaton rate so adopted
by the taxpayer for the aforesad deprecabe asset sha be consdered
bndng for purposes of ths Subsecton.
0D1 Depreciation of Properties .sed in Petroleum Operations. - An
aowance for deprecaton n respect of a propertes drecty reated to
producton of petroeum ntay paced n servce n a taxabe year sha be
aowed under the straght-ne or decnng-baance method of deprecaton
at the opton of the servce contractor.
However, f the servce contractor ntay eects the decnng-baance
method, t may at any subsequent date, shft to the straght-ne method.
The usefu fe of propertes used n or reated to producton of petroeum
sha be ten (10) years of such shorter fe as may be permtted by the
Commssoner.
Propertes not used drecty n the producton of petroeum sha be
deprecated under the straght-ne method on the bass of an estmated
usefu fe of ve (5) years.
0:1 Depreciation of Properties .sed in /inin% Operations. - an
aowance for deprecaton n respect of a propertes used n mnng
operatons other than petroeum operatons, sha be computed as foows:
(a) At the norma rate of deprecaton f the expected fe s ten (10) years
or ess; or (b) Deprecated over any number of years between ve (5) years
and the expected fe f the atter s more than ten (10) years, and the
deprecaton thereon aowed as deducton from taxabe
ncome:Provided, That the contractor notes the Commssoner at the
begnnng of the deprecaton perod whch deprecaton rate aowed by
ths Secton w be used.
0C1 Depreciation Deductile y Nonresident Aliens En%a%ed in
Trade or Business or -esident &orei%n $orporations. - In the case of
a nonresdent aen ndvdua engaged n trade or busness or resdent
foregn corporaton, a reasonabe aowance for the deteroraton of
Property arsng out of ts use or empoyment or ts non-use n the busness
trade or professon sha be permtted ony when such property s ocated
n the Phppnes.
0G1 Depletion of Oil and Gas )ells and /ines. < 031 In General* - In
the case of o and gas wes or mnes, a reasonabe aowance for depeton
or amortzaton computed n accordance wth the cost-depeton method
sha be granted under rues and reguatons to be prescrbed by the
Secretary of nance, upon recommendaton of the
Commssoner.Provided, That when the aowance for depeton sha equa
the capta nvested no further aowance sha be granted: Provided,
further, That after producton n commerca quanttes has commenced,
25
certan ntangbe exporaton and deveopment drng costs: (a) sha be
deductbe n the year ncurred f such expendtures are ncurred for non-
producng wes and/or mnes, or (b) sha be deductbe n fu n the year
pad or ncurred or at the eecton of the taxpayer, may be captazed and
amortzed f such expendtures ncurred are for producng wes and/or
mnes n the same contract area. 1%ntangible costs in petroleum
operations1 refers to any cost ncurred n petroeum operatons whch n
tsef has no savage vaue and whch s ncdenta to and necessary for the
drng of wes and preparaton of wes for the producton of petroeum4
Provided, That sad costs sha not pertan to the acquston or
mprovement of property of a character sub|ect to the aowance for
deprecaton except that the aowances for deprecaton on such property
sha be deductbe under ths Subsecton.
Any ntangbe exporaton, drng and deveopment expenses aowed as a
deducton n computng taxabe ncome durng the year sha not be taken
nto consderaton n computng the ad|usted cost bass for the purpose of
computng aowabe cost depeton.
0?1 Election to Deduct Exploration and De!elopment Expenditures*
) In computng taxabe ncome from mnng operatons, the taxpayer may
at hs opton, deduct exporaton and deveopment expendtures
accumuated as cost or ad|usted bass for cost depeton as of date of
prospectng, as we as exporaton and deveopment expendtures pad or
ncurred durng the taxabe year: Provided, That the amount deductbe for
exporaton and deveopment expendtures sha not exceed twenty-ve
percent (25%) of the net ncome from mnng operatons computed wthout
the benet of any tax ncentves under exstng aws.
The actua exporaton and deveopment expendtures mnus twenty-ve
percent (25%) of the net ncome from mnng sha be carred forward to
the succeedng years unt fuy deducted.
The eecton by the taxpayer to deduct the exporaton and deveopment
expendtures s rrevocabe and sha be bndng n succeedng taxabe
years. 1Net income from mining operations1, as used n ths Subsecton,
sha mean gross ncome from operatons ess 1allowable
deductions1 whch are necessary or reated to mnng
operatons. 1(llowable deductions1 sha ncude mnng, mng and
marketng expenses, and deprecaton of propertes drecty used n the
mnng operatons.
Ths paragraph sha not appy to expendtures for the acquston or
mprovement of property of a character whch s sub|ect to the aowance
for deprecaton.
In no case sha ths paragraph appy wth respect to amounts pad or
ncurred for the exporaton and deveopment of o and gas.
The term 1exploration expenditures1 means expendtures pad or ncurred
for the purpose of ascertanng the exstence, ocaton, extent or quaty of
any depost of ore or other mnera, and pad or ncurred before the
begnnng of the deveopment stage of the mne or depost.
The term 1development expenditures1 means expendtures pad or
ncurred durng the deveopment stage of the mne or other natura
deposts.
The deveopment stage of a mne or other natura depost sha begn at
the tme when deposts of ore or other mneras are shown to exst n
sumcent commerca quantty and quaty and sha end upon
commencement of actua commerca extracton.
0.1 Depletion of Oil and Gas )ells and /ines Deductile y a
Nonresident Alien indi!idual or &orei%n $orporation* - In the case of
a nonresdent aen ndvdua engaged n trade or busness n the
Phppnes or a resdent foregn corporaton, aowance for depeton of o
and gas wes or mnes under paragraph (1) of ths Subsecton sha be
authorzed ony n respect to o and gas wes or mnes ocated wthn the
Phppnes.
0H1 $*aritale and Ot*er $ontriutions. " 031 In General* -
Contrbutons or gfts actuay pad or made wthn the taxabe year to, or
for the use of the Government of the Phppnes or any of ts agences or
any potca subdvson thereof excusvey for pubc purposes, or to
accredted domestc corporaton or assocatons organzed and operated
excusvey for regous, chartabe, scentc, youth and sports
deveopment, cutura or educatona purposes or for the rehabtaton of
veterans, or to soca wefare nsttutons, or to non-government
organzatons, n accordance wth rues and reguatons promugated by the
Secretary of nance, upon recommendaton of the Commssoner, no part
26
of the net ncome of whch nures to the benet of any prvate stockhoder
or ndvdua n an amount not n excess of ten percent (10%) n the case of
an ndvdua, and ve percent (%) n the case of a corporaton, of the
taxpayer's taxabe ncome derved from trade, busness or professon as
computed wthout the benet of ths and the foowng subparagraphs.
0?1 $ontriutions Deductile in &ull. - Notwthstandng the provsons
of the precedng subparagraph, donatons to the foowng nsttutons or
enttes sha be deductbe n fu;
(a) $onations to the +overnment. - Donatons to the Government of the
Phppnes or to any of ts agences or potca subdvsons, ncudng fuy-
owned government corporatons, excusvey to nance, to provde for, or
to be used n undertakng prorty actvtes n educaton, heath, youth and
sports deveopment, human settements, scence and cuture, and n
economc deveopment accordng to a Natona Prorty Pan determned by
the Natona Economc and Deveopment Authorty (NEDA), In consutaton
wth approprate government agences, ncudng ts regona deveopment
councs and prvate phantrophc persons and nsttutons4 Provided, That
any donaton whch s made to the Government or to any of ts agences or
potca subdvsons not n accordance wth the sad annua prorty pan
sha be sub|ect to the mtatons prescrbed n paragraph (1) of ths
Subsecton;
(b) $onations to Certain 5oreign %nstitutions or %nternational
/rganiations*- Donatons to foregn nsttutons or nternatona
organzatons whch are fuy deductbe n pursuance of or n compance
wth agreements, treates, or commtments entered nto by the
Government of the Phppnes and the foregn nsttutons or nternatona
organzatons or n pursuance of speca aws;
(c) $onations to (ccredited Nongovernment /rganiations. - The
term1nongovernment organiation1 means a non prot domestc
corporaton:
(1) Organzed and operated excusvey for scentc, research, educatona,
character-budng and youth and sports deveopment, heath, soca
wefare, cutura or chartabe purposes, or a combnaton thereof, no part
of the net ncome of whch nures to the benet of any prvate ndvdua;
(2) Whch, not ater than the 15
th
day of the thrd month after the cose of
the accredted nongovernment organzatons taxabe year n whch
contrbutons are receved, makes utzaton drecty for the actve conduct
of the actvtes consttutng the purpose or functon for whch t s
organzed and operated, uness an extended perod s granted by the
Secretary of Fnance n accordance wth the rues and reguatons to be
promugated, upon recommendaton of the Commssoner;
(3) The eve of admnstratve expense of whch sha, on an annua bass,
conform wth the rues and reguatons to be prescrbed by the Secretary of
Fnance, upon recommendaton of the Commssoner, but n no case to
exceed thrty percent (30%) of the tota expenses; and
(4) The assets of whch, n the even of dssouton, woud be dstrbuted to
another nonprot domestc corporaton organzed for smar purpose or
purposes, or to the state for pubc purpose, or woud be dstrbuted by a
court to another organzaton to be used n such manner as n the
|udgment of sad court sha best accompsh the genera purpose for whch
the dssoved organzaton was organzed.
Sub|ect to such terms and condtons as may be prescrbed by the
Secretary of Fnance, the term 1utiliation1 means:
() Any amount n cash or n knd (ncudng admnstratve expenses) pad
or utzed to accompsh one or more purposes for whch the accredted
nongovernment organzaton was created or organzed.
() Any amount pad to acqure an asset used (or hed for use) drecty n
carryng out one or more purposes for whch the accredted
nongovernment organzaton was created or organzed.
An amount set asde for a specc pro|ect whch comes wthn one or more
purposes of the accredted nongovernment organzaton may be treated as
a utzaton, but ony f at the tme such amount s set asde, the
accredted nongovernment organzaton has estabshed to the satsfacton
of the Commssoner that the amount w be pad for the specc pro|ect
wthn a perod to be prescrbed n rues and reguatons to be promugated
by the Secretary of Fnance, upon recommendaton of the Commssoner,
but not to exceed ve (5) years, and the pro|ect s one whch can be better
accompshed by settng asde such amount than by mmedate payment of
funds.
27
0.1 0aluation6'&anr*#es virt$a# #a+ #i*rar) - The amount of any
chartabe contrbuton of property other than money sha be based on the
acquston cost of sad property.
0D1 Proof of Deductions6'&anr*#es virt$a# #a+ #i*rar) - Contrbutons
or gfts sha be aowabe as deductons ony f vered under the rues and
reguatons prescrbed by the Secretary of Fnance, upon recommendaton
of the Commssoner.
0I1 -esearc* and De!elopment. " 031 In General. - a taxpayer may
treat research or deveopment expendtures whch are pad or ncurred by
hm durng the taxabe year n connecton wth hs trade, busness or
professon as ordnary and necessary expenses whch are not chargeabe
to capta account.
The expendtures so treated sha be aowed as deducton durng the
taxabe year when pad or ncurred.
0?1 Amorti1ation of $ertain -esearc* and De!elopment
Expenditures* - At the eecton of the taxpayer and n accordance wth the
rues and reguatons to be prescrbed by the Secretary of Fnance, upon
recommendaton of the Commssoner, the foowng research and
deveopment expendtures may be treated as deferred expenses: (a) Pad
or ncurred by the taxpayer n connecton wth hs trade, busness or
professon;
(b) Not treated as expenses under paragraph 91) hereof; and
(c) Chargeabe to capta account but not chargeabe to property of a
character whch s sub|ect to deprecaton or depeton.
In computng taxabe ncome, such deferred expenses sha be aowed as
deducton rataby dstrbuted over a perod of not ess than sxty (60)
months as may be eected by the taxpayer (begnnng wth the month n
whch the taxpayer rst reazes benets from such expendtures).
The eecton provded by paragraph (2) hereof may be made for any
taxabe year begnnng after the ehectvty of ths Code, but ony f made
not ater than the tme prescrbed by aw for ng the return for such
taxabe year.
The method so eected, and the perod seected by the taxpayer, sha be
adhered to n computng taxabe ncome for the taxabe year for whch the
eecton s made and for a subsequent taxabe years uness wth the
approva of the Commssoner, a change to a dherent method s
authorzed wth respect to a part or a of such expendtures.
The eecton sha not appy to any expendture pad or ncurred durng any
taxabe year for whch the taxpayer makes the eecton.
0.1 #imitations on Deduction6'&anr*#es virt$a# #a+ #i*rar) - Ths
Subsecton sha not appy to: (a) Any expendture for the acquston or
mprovement of and, or for the mprovement of property to be used n
connecton wth research and deveopment of a character whch s sub|ect
to deprecaton and depeton; and (b) Any expendture pad or ncurred for
the purpose of ascertanng the exstence, ocaton, extent, or quaty of
any depost of ore or other mnera, ncudng o or gas.
0I1 Pension Trusts6'&anr*#es virt$a# #a+ #i*rar) - An empoyer
estabshng or mantanng a penson trust to provde for the payment of
reasonabe pensons to hs empoyees sha be aowed as a deducton (n
addton to the contrbutons to such trust durng the taxabe year to cover
the penson abty accrung durng the year, aowed as a deducton under
Subsecton (A) (1) of ths Secton ) a reasonabe amount transferred or pad
nto such trust durng the taxabe year n excess of such contrbutons, but
ony f such amount (1) has not theretofore been aowed as a deducton,
and (2) s apportoned n equa parts over a perod of ten (10) consecutve
years begnnng wth the year n whch the transfer or payment s made.
071 Additional -e2uirements for Deductiility of $ertain Payments*-
Any amount pad or payabe whch s otherwse deductbe from, or taken
nto account n computng gross ncome or for whch deprecaton or
amortzaton may be aowed under ths Secton, sha be aowed as a
deducton ony f t s shown that the tax requred to be deducted and
wthhed therefrom has been pad to the Bureau of Interna Revenue n
accordance wth ths Secton 58 and 81 of ths Code.
0L1 Optional ,tandard Deduction. - In eu of the deductons aowed
under the precedng Subsectons, an ndvdua sub|ect to tax under
Secton 24, other than a nonresdent aen, may eect a standard deducton
n an amount not exceedng ten percent (10%) of hs gross ncome.
Uness the taxpayer sgnes n hs return hs ntenton to eect the optona
standard deducton, he sha be consdered as havng avaed hmsef of the
deductons aowed n the precedng Subsectons.
28
Such eecton when made n the return sha be rrevocabe for the taxabe
year for whch the return s made: Provided, That an ndvdua who s
entted to and camed for the optona standard deducton sha not be
requred to submt wth hs tax return such nanca statements otherwse
requred under ths Code: Provided, further, That except when the
Commssoner otherwse permts, the sad ndvdua sha keep such
records pertanng to hs gross ncome durng the taxabe year, as may be
requred by the rues and reguatons promugated by the Secretary of
Fnance, upon recommendaton of the Commssoner.
0M1 Premium Payments on 3ealt* and4or 3ospitali1ation Insurance
of an Indi!idual Taxpayer* ) The amount of premums not to exceed Two
thousand four hundred pesos (P2,400) per famy or Two hundred pesos
(P200) a month pad durng the taxabe year for heath and/or
hosptazaton nsurance taken by the taxpayer for hmsef, ncudng hs
famy, sha be aowed as a deducton from hs gross
ncome:Provided, That sad famy has a gross ncome of not more than Two
hundred fty thousand pesos (P250,000) for the taxabe year: Provided,
&nally, That n the case of marred taxpayers, ony the spouse camng the
addtona exempton for dependents sha be entted to ths deducton.
Notwthstandng the provson of the precedng Subsectons, The Secretary
of Fnance, upon recommendaton of the Commssoner, after a pubc
hearng sha have been hed for ths purpose, may prescrbe by rues and
reguatons, mtatons or cengs for any of the temzed deductons under
Subsectons (A) to (|) of ths Secton: Provided, That for purposes of
determnng such cengs or mtatons, the Secretary of Fnance sha
consder the foowng factors: (1) adequacy of the prescrbed mts on the
actua expendture requrements of each partcuar ndustry; and (2) ehects
of naton on expendture eves: Provided, further, That no cengs sha
further be mposed on tems of expense aready sub|ect to cengs under
present aw.
SEC6 .:6 Allowance of Personal Exemption for Indi!idual Taxpayer.
"
0A1 In General6'&anr*#es virt$a# #a+ #i*rar) - For purposes of
determnng the tax provded n Secton 24 (A) of ths Tte, there sha be
aowed a basc persona exempton as foows:
For snge ndvdua or marred ndvdua |udcay decreed as egay
separated wth no quaed dependents P20,000
For Head of Famy P25,000
For each marred ndvdua P32,000 In the case of marred ndvduas
where ony one of the spouses s dervng gross ncome, ony such spouse
sha be aowed the persona exempton.
For purposes of ths paragraph, the term 1head of family1 means an
unmarred or egay separated man or woman wth one or both parents, or
wth one or more brothers or ssters, or wth one or more egtmate,
recognzed natura or egay adopted chdren vng wth and dependent
upon hm for ther chef support, where such brothers or ssters or chdren
are not more than twenty-one (21) years of age, unmarred and not
ganfuy empoyed or where such chdren, brothers or ssters, regardess
of age are ncapabe of sef-support because of menta or physca defect.
0B1 Additional Exemption for Dependents6'&anr*#es virt$a# #a+
#i*rar) - There sha be aowed an addtona exempton of Eght thousand
pesos (P8,000) for each dependent not exceedng four (4).
The addtona exempton for dependent sha be camed by ony one of
the spouses n the case of marred ndvduas.
In the case of egay separated spouses, addtona exemptons may be
camed ony by the spouse who has custody of the chd or
chdren:Provided, That the tota amount of addtona exemptons that may
be camed by both sha not exceed the maxmum addtona exemptons
heren aowed. craaw
For purposes of ths Subsecton, a 1dependent1 means a egtmate,
egtmate or egay adopted chd chey dependent upon and vng wth
the taxpayer f such dependent s not more than twenty-one (21) years of
age, unmarred and not ganfuy empoyed or f such dependent,
regardess of age, s ncapabe of sef-support because of menta or
physca defect.
0C1 $*an%e of ,tatus6'&anr*#es virt$a# #a+ #i*rar) - If the taxpayer
marres or shoud have addtona dependent(s) as dened above durng
the taxabe year, the taxpayer may cam the correspondng addtona
exempton, as the case may be, n fu for such year. craaw
29
If the taxpayer des durng the taxabe year, hs estate may st cam the
persona and addtona exemptons for hmsef and hs dependent(s) as f
he ded at the cose of such year.
If the spouse or any of the dependents des or f any of such dependents
marres, becomes twenty-one (21) years od or becomes ganfuy
empoyed durng the taxabe year, the taxpayer may st cam the same
exemptons as f the spouse or any of the dependents ded, or as f such
dependents marred, became twenty-one (21) years od or became
ganfuy empoyed at the cose of such year.
0D1 Personal Exemption Allowale to Nonresident Alien Indi!idual.-
A nonresdent aen ndvdua engaged n trade, busness or n the exercse
of a professon n the Phppnes sha be entted to a persona exempton
n the amount equa to the exemptons aowed n the ncome tax aw n
the country of whch he s a sub|ect - or ctzen, to ctzens of the
Phppnes not resdng n such country, not to exceed the amount xed n
ths Secton as exempton for ctzens or resdent of the
Phppnes:Provided, That sad nonresdent aen shoud e a true and
accurate return of the tota ncome receved by hm from a sources n the
Phppnes, as requred by ths Tte.
SEC6 .C6 Items Not Deductile. "
0A1 General -ule. - In computng net ncome, no deducton sha n any
case be aowed n respect to -
(1) Persona, vng or famy expenses; (2) Any amount pad out for new
budngs or for permanent mprovements, or betterments made to
ncrease the vaue of any property or estate; Ths Subsecton sha not
appy to ntangbe drng and deveopment costs ncurred n petroeum
operatons whch are deductbe under Subsecton (G) (1) of Secton 34 of
ths Code.
(3) Any amount expended n restorng property or n makng good the
exhauston thereof for whch an aowance s or has been made; or (4)
Premums pad on any fe nsurance pocy coverng the fe of any omcer
or empoyee, or of any person nancay nterested n any trade or
busness carred on by the taxpayer, ndvdua or corporate, when the
taxpayer s drecty or ndrecty a benecary under such pocy.
0B1 #osses from ,ales or Exc*an%es of Property6'&anr*#es virt$a#
#a+ #i*rar) - In computng net ncome, no deductons sha n any case be
aowed n respect of osses from saes or exchanges of property drecty or
ndrecty - (1) Between members of a famy.
For purposes of ths paragraph, the famy of an ndvdua sha ncude
ony hs brothers and ssters (whether by the whoe or haf-bood), spouse,
ancestors, and nea descendants; or (2) Except n the case of dstrbutons
n qudaton, between an ndvdua and corporaton more than fty
percent (50%) n vaue of the outstandng stock of whch s owned, drecty
or ndrecty, by or for such ndvdua; or (3) Except n the case of
dstrbutons n qudaton, between two corporatons more than fty
percent (50%) n vaue of the outstandng stock of whch s owned, drecty
or ndrecty, by or for the same ndvdua f ether one of such
corporatons, wth respect to the taxabe year of the corporaton precedng
the date of the sae of exchange was under the aw appcabe to such
taxabe year, a persona hodng company or a foregn persona hodng
company; (4) Between the grantor and a ducary of any trust; or (5)
Between the ducary of and the ducary of a trust and the ducary of
another trust f the same person s a grantor wth respect to each trust; or
(6) Between a ducary of a trust and benecary of such trust.
30
R6 CAPITAL GAINS an% LOSSES
Capital assets
CALASANZ v CIR
Fa'ts: Pettoner Ursua Caasanz nherted from her father de Torres an
agrcutura and ocated n Rza wth an area of 1.6M sqm. In order to
qudate her nhertance, Ursua Caasanz had the and surveyed and
subdvded nto ots. Improvements, such as good roads, concrete gutters,
dranage and ghtng system, were ntroduced to make the ots saeabe.
Soon after, the ots were sod to the pubc at a prot.
In ther |ont ncome tax return for the year 1957 ed wth the Bureau of
Interna Revenue on March 31, 1958, pettoners dscosed a prot of
P31,060.06 reazed from the sae of the subdvded ots, and reported fty
per centum thereof or P15,530.03 as taxabe capta gans.
Upon an audt and revew of the return thus ed, the Revenue Examner
ad|udged pettoners engaged n busness as rea estate deaers, as dened
n the NIRC, and requred them to pay the rea estate deaer's tax and
assessed a decency ncome tax on prots derved from the sae of the
ots based on the rates for ordnary ncome.
Tax court uphed the ndng of the CIR, hence, the present appea.
Iss$es:
a. Whether or not pettoners are rea estate deaers abe for rea estate
deaer's xed tax. YES
b. Whether the gans reazed from the sae of the ots are taxabe n fu as
ordnary ncome or capta gans taxabe at capta gan rates. ORDINARY
INCOME
Rati:
The assets of a taxpayer are cassed for ncome tax purposes nto
ordnary assets and capta assets. Secton 34|a| |1| of the Natona
Interna Revenue Code broady denes capta assets as foows:
|1| Capta assets.-The term 'capta assets' means property
hed by the taxpayer |whether or not connected wth hs
trade or busness|, but does not ncude, stock n trade of
the taxpayer or other property of a knd whch woud
propery be ncuded, n the nventory of the taxpayer f on
hand at the cose of the taxabe year, or property hed by
the taxpayer prmary for sae to customers n the ordnary
course of hs trade or busness, or property used n the
trade or busness of a character whch s sub|ect to the
aowance for deprecaton provded n subsecton |f| of
secton thrty; or rea property used n the trade or
busness of the taxpayer.
The statutory denton of capta assets s negatve n nature. If the asset
s not among the exceptons, t s a capta asset; conversey, assets fang
wthn the exceptons are ordnary assets. And necessary, any gan
resutng from the sae or exchange of an asset s a capta gan or an
ordnary gan dependng on the knd of asset nvoved n the transacton.
However, there s no rgd rue or xed formua by whch t can be
determned wth naty whether property sod by a taxpayer was hed
prmary for sae to customers n the ordnary course of hs trade or
busness or whether t was sod as a capta asset. Athough severa factors
or ndces have been recognzed as hepfu gudes n makng a
determnaton, none of these s decsve; nether s the presence nor the
absence of these factors concusve. Each case must n the ast anayss
rest upon ts own pecuar facts and crcumstances.
Aso a property ntay cassed as a capta asset may thereafter be
treated as an ordnary asset f a combnaton of the factors ndubtaby
tend to show that the actvty was n furtherance of or n the course of the
taxpayer's trade or busness. Thus, a sae of nherted rea property usuay
gves capta gan or oss even though the property has to be subdvded or
mproved or both to make t saabe. However, f the nherted property s
substantay mproved or very actvey sod or both t may be treated as
hed prmary for sae to customers n the ordnary course of the her's
busness.
In ths case, the sub|ect and s consdered as an ordnary asset.
Pettoners dd not se the and n the condton n whch they acqured t.
Whe the and was orgnay devoted to rce and frut trees, t was
subdvded nto sma ots and n the process converted nto a resdenta
subdvson and gven the name Don Marano Subdvson. Extensve
mprovements ke the ayng out of streets, constructon of concrete
gutters and nstaaton of ghtng system and dranage factes, among
others, were undertaken to enhance the vaue of the ots and make them
more attractve to prospectve buyers. The audted nanca
statements submtted together wth the tax return n queston dscosed
that a consderabe amount was expended to cover the cost of
mprovements. There s authorty that a property ceases to be a capta
asset f the amount expended to mprove t s doube ts orgna cost, for
the extensve mprovement ndcates that the seer hed the property
prmary for sae to customers n the ordnary course of hs busness.

Another dstnctve feature of the rea estate busness dscernbe from the
records s the exstence of contracts recevabes, whch stood at
P395,693.35. The szabe amount of recevabes n comparson wth the
saes voume of P446,407.00 durng the same perod sgnes that the ots
were sod on nstament bass and suggests the number, contnuty and
frequency of the saes. Aso of sgncance s the crcumstance that the ots
31
were advertsed for sae to the pubc and that saes and coecton
commssons were pad out durng the perod n queston.
Pettoners argument that they are merey qudatng the and must aso
fa. In 0hrman vs* Commissioner,

the Amercan court n cear and
categorca terms re|ected the qudaton test n determnng whether or
not a taxpayer s carryng on a trade or busness The court observed that
the fact that property s sod for purposes of qudaton does not forecose
a determnaton that a "trade or busness" s beng conducted by the seer.
One may, of course, qudate a capta asset. To do so, t s necessary to
se. The sae may be conducted n the most advantageous manner to the
seer and he w not ose the benets of the capta gan provson of the
statute uness he enters the rea estate busness and carres on the sae n
the manner n whch such a busness s ordnary conducted. In that event,
the qudaton consttutes a busness and a sae n the ordnary course of
such a busness and the preferred tax status s ost.
BIR RULING ?H</?
Regstraton wth HLURB or HUDCC sha be sumcent for a seer/transferor
to be consdered as habtuay engaged n rea estate busness. If the
seer/transferor s not regstered wth the HLURB or HUDCC, he/t may
prove that he/t s engaged n the rea estate busness by oherng other
satsfactory evdence (e.g. consummaton durng the precedng year at
east 6 taxabe rea estate transactons regardess of amount). (BIR Rung
No. 027-2002 dated |uy 3, 2002)
Capital assets
CHINA BAN7ING CORP v CA
S6 DETERMINATION OF GAIN OR LOSS FROM SALE OR TRANSFER OF
PROPERTA
0xchange of property
CIR v RUFINO
FACTS:
The prvate respondents were the ma|orty stockhoders of the defunct
Eastern Theatrca Co., Inc., (Od Corporaton). Ernesto Runo was the
presdent. The prvate respondents were aso the ma|orty and controng
stockhoders of another corporaton, the Eastern Theatrca Co Inc., (New
Corporaton). Ths corporaton was engaged n the same knd of busness
as the Od Corporaton, .e. operatng theaters, opera houses, paces of
amusement and other reated busness enterprses. Vcente Runo was the
Genera Manager.
The Od Corporaton hed a speca meetng of stockhoders where a
resouton was passed authorzng the Od Corporaton to merge wth the
New Corporaton. Pursuant to the sad resouton, the Od Corporaton,
represented by Ernesto Runo as Presdent, and the New Corporaton,
represented by Vcente Runo as Genera Manager, sgned a Deed of
Assgnment provdng for the conveyance and transfer of a the busness,
property assets, goodw, and abtes of the Od Corporaton to the New
Corporaton n exchange for the atter's shares of stock to be dstrbuted
among the sharehoders on the bass of one stock for each stock hed n
the Od Corporaton. Ths agreement was made retroactve. The aforesad
transfer was eventuay made. The resouton and the Deed of Assgnment
were approved n a resouton by the stockhoders of the New Corporaton
n ther speca meetng. The ncreased captazaton of the New
Corporaton was regstered and approved by the SEC.
The BIR, after examnaton, decared that the merger was not undertaken
for a bona &de busness purpose but merey to avod abty for the capta
gans tax on the exchange of the od for the new shares of stock.
Accordngy, decency assessments were mposed aganst the prvate
respondents. MR dened. CTA reversed and hed that there was a vad
merger. It decared that no taxabe gan was derved by pettoners from
the exchange of ther od stocks soey for stocks of the New Corporaton
because t was pursuant to a pan of reorganzaton. Thus, such exchange
s exempt from CGT.
ISSUE/RULING:
W/N the CTA erred n ndng that no taxabe gan was derved by the
prvate respondents from the questoned transacton? NO
There was a vad merger athough the actua transfer of the propertes
sub|ect of the Deed of Assgnment was not made on the date of the
merger. In the nature of thngs, ths was not possbe. Obvousy, t was
necessary for the Od Corporaton to surrender ts net assets rst to the
New Corporaton before the atter coud ssue ts own stock to the
sharehoders of the Od Corporaton because the New Corporaton had to
ncrease ts captazaton for ths purpose. Ths requred the adopton of
the resouton for the regstraton of such ssuance wth the SEC and ts
approva. A these took pace after the date of the merger but they were
deemed part and parce of, and ndspensabe to the vadty and
enforceabty of, the Deed of Assgnment.
There s no mpedment to the exchange of property for stock between the
two corporatons beng consdered to have been ehected on the date of
the merger. That, n fact, was the ntenton, and the reason why the Deed
32
of Assgnment was made retroactve whch provded n ehect that a
transactons set forth n the merger agreement sha be deemed to be
takng pace smutaneousy when the Deed of Assgnment became
operatve.
The basc consderaton, of course, s the purpose of the merger, as ths
woud determne whether the exchange of propertes nvoved theren sha
be sub|ect or not to the capta gans tax. The crteron ad down by the
aw s that the merger" must be undertaken for a bona &de busness
purpose and not soey for the purpose of escapng the burden of taxaton."
Here, the purpose of the merger was to contnue the busness of the Od
Corporaton, whose corporate fe was about to expre, through the New
Corporaton to whch a the assets and obgatons of the former had been
transferred. What argues strongy, ndeed, for the New Corporaton s that
t was not dssoved after the merger agreement. On the contrary, t
contnued to operate the paces of amusement orgnay owned by the Od
Corporaton and contnues to do so today after takng over the busness of
the Od Corporaton 27 years ago.
What s aso worth notng s that, as n the case of the Od Corporaton
when t was dssoved, there has been no dstrbuton of the assets of the
New Corporaton snce then and up to now, as far as the record dscoses.
To date, the prvate respondents have not derved any benet from the
merger of the Od Corporaton and the New Corporaton amost 3 decades
earer that w make them sub|ect to the capta gans tax under Secton
35. They are no more abe now than they were when the merger took
ehect, as the merger, beng genune, exempted them under the aw from
such tax.
By ths decson, the government s, of course, not eft entrey wthout
recourse, at east n the future. The fact s that the merger had merey
deferred the cam for taxes, whch may be asserted by the government
ater, when gans are reazed and benets are dstrbuted among the
stockhoders as a resut of the merger. In other words, the correspondng
taxes are not forever forecosed or forfeted but may at the proper tme
and wthout pre|udce to the government st be mposed.
BIR RULING ?HD<EH
GREGORA v HEL@ERING
Facts:
Pettoner was the owner of a the stock of Unted Mortgage
Corporaton(UMC). That corporaton hed among ts assets 1,000 shares of
the Montor Securtes Corporaton(MSC). Pettoner wanted these shares
transferred to her at a prot and wth the mnmum ncome tax abty. In
order to acheve ths purpose, Pettoner made t appear that she was
makng a "reorganzaton" (n conforme wth Revenue Act of 1928). Under
ths aw, a "reorganzaton" woud ehect a drect transfer of a corporatons
share by way of dvdend at a ower taxabe transacton.
In order to have an appearance of a "reorganzaton",
she(Pettoner) organzed Aver Corporaton (AC). Three (3) days ater,
UMC transferred the 1,000 shares of MSC to AC. Then these shares were a
transferred to Pettoner. Subsequenty, AC was dssoved wth no other
transacton beng made other the transfer of the shares. Pettoner then
sod the shares and decared a ower taxabe abty. The Board contended
that the so-caed "reorganzaton" shoud be consdered nehectve snce t
was |ust a scheme to have a ower tax abty.
ISSUE:
Whether the "reorganzaton" s vad whch woud resut to a ower
tax abty.
HELD:
NO. It s contended that snce every eement requred by the
foregong subdvson (B) (refer to footnote) s to be found n what was
done, a statutory reorganzaton was ehected, and that the motve of the
taxpayer thereby to escape payment of a tax w not ater the resut or
make unawfu what the statute aows.
The Court sad, athough the ega rght of a taxpayer to decrease
the amount of what otherwse woud be hs taxes, or atogether avod
them, by means whch the aw permts, cannot be doubted, t&e J$estin
"r %eter,inatin is +&et&er +&at +as %ne- apart "r, t&e ta!
,tive- +as t&e t&in( +&i'& t&e stat$te inten%e%6
When subdvson (B) speaks of a transfer of assets by one
corporaton to another, t means a transfer made "n pursuance of a pan of
reorganzaton of corporate busness, and not a transfer of assets by one
corporaton to another n pursuance of a pan havng no reaton to the
busness of ether, as pany s the case here.
Smpy an operaton havng no busness or corporate purpose -- a
mere devce whch put on the form of a corporate reorganzaton as a
dsguse for conceang ts rea character, and the soe ob|ect and
accompshment of whch was the consummaton of a preconceved pan,
not to reorganze a busness or any part of a busness, but to transfer a
parce of corporate shares to the pettoner. The rue whch excudes from
consderaton the motve of tax avodance s not pertnent to the stuaton,
because the transacton, upon ts face, es outsde the pan ntent of the
33
statute. (kas waa nga taagang busness purpose but to crcumvent the
aw).
34