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TAXATIONI

SECTION2B FRANCISCOB.GONZALEZ
I. DeductionsandCredits
A. WhatisNetIncomecomparedtoIncome

SECTION 36. Meaning of net income. The tax imposed by law is upon
income. In the computation of the tax, various classes of income must be
considered: (a) Income, in the broad sense, meaning all wealth which flows
into the tax-payer other than as a mere return of capital. It includes the forms
of income specifically described as gains and profits, including gains derived
from the sale or other disposition of capital assets. Income cannot be
determined merely by reckoning cash receipts, for the statute recognizes as
income determining factor other items, among which are inventories,
accounts receivable, property exhaustion, and accounts payable for expenses
incurred. (b) Gross income, meaning income (in the broad sense) less income
which is by statutory provision or otherwise exempt from the tax imposed by
law. (c) Net income, meaning gross income less statutory deductions. The
statutory deductions are, in general, though not exclusively, expenditures
other than capital expenditures, connected with production of income. (d) In
the case of a taxpayer other than a corporation as defined in Section 84 (b) of
the Code, net income means gross income less exemptions. Ordinarily the
net income is to be computed in accordance with the method of accounting
regularly employed in keeping the books of the taxpayer. (Sec. 36 RR 2-40)

B. Introduction

1. economicvalueofdeductions:multiplyamountofdeductionby
marginaltaxrate
a. willfindthatded'nsdonothaveapesoperpesovalue
b. exclusionsfromincome,basicpersonalexemptions,onthe
otherhand,do
2. forCORPORATIONS
a. allowable ded'ns serve to reduce gross income to get
taxableincome
3. forINDIVIDUALS(morecomplicated)
a. Purecompensationincomeearner
1. startwithtotalcompensationincomeearned
2. subtracttheabovethelinepersonalexemptionprovidedunder
Sec.35oftheNIRC
Single,headoffamily,married P50,000
Exemptionfordependentchild,4max P 25,000 each

3. subtractallowabledeductionunderSec.34M,ifapplicable
4. Computefornettaxableincome

NationalInternalRevenueCodeDeductionsoutline
5. Computeforincometaxdue
6. Deduct taxes withheld below the line items from
compensationincomebyemployeragainsttotalincometaxdue
togetincometaxpayable
7. Ifproperlycomputedoroneemployeronlyinthetaxableyear,
usuallyzeropayment.
b. Purebusinessincomeearner
1. startwithgrossincome
2. subtract above the line deductions under Sec. 34 or use
optionalstandarddeductionunderSec.34(L)
3. computefornetbusinessincome(Item1lessItem2)
4. subtractthepersonalexemptionprovidedunderSec.35ofthe
NIRC
Single,headoffamily,married P50,000
Exemptionfordependentchild,4max P25,000each

Computefortotaltaxableincome
5. Computeforincometaxdue
6. Deductcreditablewithholdingtaxesrelatedtobusinessincome
toobtainnetincometaxpayable
c. Combinedbusinessandcompensationincomeearner
a. same as Item a and b above but compensation income and
business income are computed separately. Basic personal
exemptionisalsofirstappliedtocompensationincome,iftherebe
anyexcessthesamecanbechargedtobusinessincome.Notethat
thebasicpersonalexemptionischargedonlyonce.
d. TreatmentofSeniorCitizens
a. Rev.Reg.12007andR.A.9257
b. Rev.Reg.42006andR.A.9257
c. RepealingRev.Reg.294andR.A.7432
d. ResidentcitizensofthePhilippineswhoisatleast60yearsof
age, including those who have retired from government or
privateserviceanddoesnothaveincomeofmorethanpoverty
level
e. Shallbeexemptfromincometaxpaymentprovidedthattheir
annualtaxableincomedoesnotexceedthepovertylevelsuch
incomedeterminationexcludesthefollowing:
a. interestincomeformPhilippinecurrencybankdep.
b. Capitalgainsfromsalesofsharesofstock
c. Capitalgainsfromsalesofrealproperty.
f. Seniorcitizensqualifytheirbenefactorsasheadofthefamily
buttheycannotclaimadditionalexemptionofachildforthe
seniorcitizen

NationalInternalRevenueCodeDeductionsoutline
C. BusinessExpenses(DeductibleDed'ble)
**requirementofpropertaxestobewithheldtomakesuchdeduction
allowableSec.34(K)

1. Section34A1(tradeorbusinessexpenses)
a. abovethelineded'ns
b. allowsded'nofallordinary&necessaryexpensespaidor
incurredduringtaxableyearincarryingonatradeorbusiness
c. e.g. employee wages, annual insurance premiums on
businessassets,officerent,utilities
d. recognition of travel expenses, rentals, representation
expenses
e. disallows bribes, kickbacks and other similar payments
(Sec34A1c)asameanstocurbgraftandcorruption
f. justification:iftaxpolicyistotaxincome
(1) then inappropriate to tax costs in producing the
income
2. distinctionsrequireinquiryinto"tradeorbusinessactivity"
a. HospitaldeSanJuandeDiosvsComG.R.No.31305
May10,1990
(1) definestradeorbusiness
(2) an independent investor could not treat the
managementofhisowninvestmentsasatradeorbusiness
(a) evenwithanoffice
(b) evenwithasecretary
b. Comm'rv.Groetzinger(S.Ct.1987)
(1) a professional gambler engages in a trade if
involvedintheactivitywithcontinuityandregularity
(2) Test
(a) activitymustbecontinuousandregular
(b) primarypurposeofearningincomeorprofit
i) evenifnosaleofgoodsorservices
c. AtlasConsolidatedMiningvsCom.L2692427Jan.1981
d. Essovs.StandardEasternvsComG.R.2850809,July7,
1989
e. Zamoravs.Collector(8SCRA163)
3. Reasonableness
a. C.M.Hoskins&Co,Incvs.Com(30SCRA343)
b. AguinaldoIndustriesCorpvs.com,L29790Feb25,1982
4. Welchv.Helvering(S.Ct.1933)
a. Tp, employee of company which becomes bankrupt.
Welchpayssomeofco'sdebtsinordertosolidifyhisreputation

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andgoodwill.Welchclaimsthesewerecapitalexpenditure;IRS
saysordinary
b. H:Itisnot"ordinary"tocoversomeoneelse'sdebts.Also,
necessarymeans"merelyappropriateandhelpful"
c. Welchisbenefittinghisreputation
(1) hasbenefitsbeyondthiscurrentyear
d. hisexpensesareNOTded'ble
5. Gilliamv.Comm'r(TaxCt.1986)
a. artistflewtoanexhibition,andonwaythere,hadnervous
breakdown, injuring another passenger. Claimed legal fees as
businessdeduction
b. H:Where,ashere,expensesarenotordinaryexpensesof
tp'stradeorbusiness,theyarenotdeductible
c. R:Travelnotitselftheconductofartist'stradeorbusiness
d. Neitherthealtercationnortheexpenseswereundertaken
tofurtherGilliam'scareer
6. U.S.v.Gilmore(S.Ct.1963)
a. Test=originoftheclaim
b. eg.,iforiginofclaimispersonal,thensoarelegalfees
(1) and,thus,nondeductible
c. iforiginofclaimisbusiness,perhapsdeductible
7. ExpensesContrarytoPublicPolicy
a. Comm'rv.Tellier(S.Ct.1966)

(1) Tellierconvictedoffraud,andattemptedtoclaim
legalfeesconnectedwithhisdefenseasded'blebusiness
expenses.
(2) H: Can be ded'ble. Tax Code is not concerned
abouttheoriginoftp'sincome,onlythattaxispaiduponit.
Todisallow aded'nwouldbetopotentially increasethe
punishmentusingthetaxcode
(3) ded'nheremetplainlanguageofthestatute,but
IRSclaimedthatallowingitasaded'nwouldviolatepublic
policy
(4) HIGHSTDADOPTED:
(a) allowing ded'n must frustrate sharply
nationalorstatepolicies
(b) policies frustrated must be declared by
government
(c) frustrationmustbesevereANDimmediate
b. disallowsbribes,kickbacksandothersimilarpayments(Sec34
A1c)asameanstocurbgraftandcorruption
8. EmployeeBusinessExpenses

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a. determiningtheamountoftheallowableded'n
(1) ded'bleemployeeexpenses

(a) ordinary & necessary in carrying on


trade/business
(b) issue often is whether they are actually
personalexps.
(c) professionalexpensesded'ble
i) eg. supplies, dues to professional
societies,etc.
(d) requirementofpropertaxestobewithheldto
makesuchdeductionallowableSec.34(K)
i) ingbanknvvs.CIRGR167678July22,2015
(wheniswithholdingtaxdueonbonuses)
ii) CIRvs.IsabelaCulturalcorp.GR172231Feb.
12,2007(alleventstest)

D. Interest
1. GeneralStructureoftheInterestDed'n
a. ded'bilityofinterest turnsgen'llyonthepurposeofthe
indebtedness
(1) question often unanswerable since tps generally
borrowtoacquirenewassetsandtokeepeverythingthey
have
b. shouldberegardedasacostoftpholdingassets.
c. BusinessInterest
(1) costofdoingbusinessSec.34B
(a) interestonindebtednessusedtooperatea
tradeorbusiness
(2) b/c all businesses borrow, it's thus ordinary/
necessary
(3) ded'blelikeanyotherbusinessexpense
(4) deductionsubjecttothelimitationofapercentage
ofinterestincome(38%now42%underRA9337Sec.3)
subjecttofinaltax.Thisistodoawaywiththebackto
backloansystembeingused.
(5) Kuenzle&Seriffvs.CIR106Phil355
Interestmustbelegallyduetobedeductible

(6) EXCEPTION
(a) whenanindividualobtainsaloanwithinterest
isdiscountedorcomputedinadvance,thesaid

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interestexpenseshallberecordedontheyearof
thepayment.
(b) PartieswhoserelationshipiscoveredbySec.
36(B)
(c) indebtednesstofinancepetroleumprojects
(7) Alternativetreatment.Interestexpensesincurred
toacquirepropertyusedintradeorbusinessorexerciseof
aprofessionmaybeallowedasadeductionorasacapital
expenditure.
d. PersonalInterest
(1) underSec.36A personal,nonbusinessinterest
generallyisnotdeductible
2. WhatisInterest
a. Westv.Comm'r(TaxCt.1991)
(B/360)
(1) penaltyondelinquentmortgagepaymentsclaimed
as163(a)interestded'n.IRSdisallowed
(2) H: Not ded'ble b/c bank assessed late charge to
recoupitscostsrelatedtocollectionofdelinquencyfees
b.Palancavs.Comm.(18SCRA496)
(1) Interestondelinquenttaxesisdeductiblebutnotthe
penalty
c.defininginterest
(3) general reluctance of court to characterize
payments as "interest" when not specifically labelled
"interest"

E. Taxestaxespaidinconnectionwithtaxpayersbusinessortrade
1.Taxesnotdeductible
a. incometaxprovidedunderthiscode
b. incometaxpaidtoforeigncountryiftaxpayerisnotusing
thebenefitofthecredit.(seediscussioninbookofReyes)
c.Estatetaxes
d. Donorstax
e.Taxesagainstlocalbenefitswhichwouldincreasethevalueof
propertyassessed.
2.VATCommissionervs.AmericanRubber(18SCRA842),Cebu
PortlandCementCo.vs.Collector,25SCRA789

F. Losses
1. InGeneral

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a. Section 34 (D) permits ded'ns for certain losses not
compensatedbyinsurance
b. specificlimitationsonded'nsforlosses:
(1) mustbeactualandrelatedtothecompany(Marcelo
SteelvsCollector,L12401,Oct.31,1960)
(2) sustainedinaclosedandcompletedtransaction
(3) mustnotbecompensatedbyinsurance
(4) mustnotbechargedagainstothertaxes
(5) limitationsforgamblinglossesSec34(D)6
(6) abandonmentlossesofpetroleumoperationsSeeSec.
34(D)7
(7) Capitallosses
A. chargeabletocapitalgainsonlyandlimitedto
theextentofcapitalgains,exceptbanks,seeSec
34(D)4andSec39
B. Securities becoming worthless shall not be
deductible unless they have actually been
sustained(Paperlossesnotallowed).Exception:
when companies have ceased operations
(FernandezHermanosvsCom.29SCRA552)
(8) NetOperatingLossCarryOver
A.operatinglossofthebusinessintheimmediate
preceedingyear
B.Notcompensatedbyinsurance
C. Maybecarriedoverasadeductionofthecurrentyearprovidedthatthesamehas
notbeenoffsetalreadyasadeductionforthenext3consecutivetaxableyears.
D. Providedthattherehasbeennosubstantialchangeinownershipintheenterprise.
Nosubstantialchangeispresentwhen:
a. notlessthan75%ofissuedsharesinthe
ownershipofthecorporation,isheldby
thesameperson.
b. Notlessthat75%ofthepaidupcapital
ofthecorporation,isheldbythesame
person
c. ProofofLoss
Declarationoflossmustbesubmittedwithin30to90days
fromthedateofthediscoveryofthecasualtyorrobbery,
theftorembezzlement.
d.Whendolossesoccur
(1) notwhen/astheyaccrue
(2) realizationisrequired
e.statuteuses"loss"twoverydifferentways
(1) lossonatransaction

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(a) buypropertyatP1000,sellitatP750,suffer
(P250)loss(b/cactuallylostmoney)
(b) canbecarriedforward
i) as a net operating loss (assuming
youcanmeetthedefinition)
(2) "activity"
(a) overallsetoftransactions
(b) whereactivityresultedinaloss,orexcess
ofded'nsoverincomeforthatactivity
d. personallossesareNOTded'ble
(1) Sec.36disallowingded'nsforpersonalexpenses)
(2) garagesale
(3) sellcarataloss(=personalconsumption)
(4) gamblingSec.34(D)6
(a) lossesonlyded'bletotheextentofincome
(b) problemofproof
G. BadDebts
1. InGeneral
a. It must be related to the taxpayers trade or business.
Uncollected income is not a bad debt unless it has been
includedasanincome.
b. There must be ascertained that the debt is worthless. Mere
difficultyincollectingisnotbasis
c. Thedebtmustbewrittenoffasworthlessandmustbewritten
ofinfull(FernandezHermanos,Inc.vsCom.29SCRA552)
d. Taxbenefitruleisapplied,whereinarecoveryistreatedasan
incomeforthecurrentyearwhenthetaxpayerhasbenefited
fromthewriteoffofthepreviousyear.Itshouldbenotedthat
thiswillbesubjectmodificationbecauseofthenetoperating
losscarryoverprovisionbecausewriteoffmaybenefit the
taxpayerinsubsequentperiodsotherthantheyearofthewrite
off.

2. EffectofCondonationofdebts
SeeBIRRulingno.07689datedapril17,1989

H. RecoveryofCapitalExpenses
1. Depreciation
a. Sec.34Fpermitsasadepreciationded'n:
(1) reasonableallowanceforexhaustion,wear&tear
(including obsolescence) of assets used in a trade or
businessorheldfortheproductionofincome
(2) DOESNOTsaythepropertymustdeclineinvalue

NationalInternalRevenueCodeDeductionsoutline
(3) BASILANESTATEINC.VS.COMM21SCRA
17
(4) RR122012depreciationofmotorvehicles
b. depr'nded'ndesignedtoallowtpstotreatasanexpensein
determining taxable income am allocable part of the cost of
businessorinvestmentassetsthathavealimitedlife
c. EconomicDepr'n
(1) incometaxhasneverbeenattemptedtomeasure
thisdirectly
(a) although, would properly measure net
incomefortheperiod
d. RecoveryofCapital
(1) methodstodeterminedepreciationallowance
(a) straightlinemethod
i) costofanassetisallocatedinequal
amountsoveritsusefullife
ii) reciprocalofusefullife
a) THUS, if useful life = 10
years, then rate of depreciation is
1/10
(b) decliningbalance method ("accelerated
depreciation")
i) allocatesalargerportionofcostto
earlieryearsandlesserportiontolateryears
ii) constant percentage isused,butis
appliedeachyeartoamountremainingafter
depreciation of previous years has been
subtracted
iii) doublethestraightlinerate
(c) sumofyearsdigitmethod
i) same as declining as it allocates larger
depreciation during the early life of the
machine.
ii)percentageiscomputedontherationof
thecurrentyearslifeovertotalyearslife.
i.e.1styear5yr.Depreciation
5
(5+4+3+2+1)xdepreciableasset=dep.
(d) anyothermethodthatmaybeprescribedby
thedepartmentoffinance.

(2) rules

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(a) Sec.ofFinancewillpromulgaterulesand
regulationsondepreciation.
(b) Taxpayermayseekanadjustmentofuseful
life withagreement fromthecommisisonerbutit
willbeincumbentonthetaxpayertoproveuseful
life.
(c) Ifthetaxpayeradoptsacertainusefullife
withoutobjectionfromtheBIR,thesameisdeemed
bindingontheparties.
(d) SeparaterulesforPetroleumoperations
(e) Separeterulesinminingoperation.
(f) Depreciationbynonresidentaliensengaged
in trade or business shall be allowed only for
propertiesusedinbusinessinthePhilippines.
(g) Apportionment rules are applicable under
sec34F
(3) Amortization (almost exclusively refers to
intangibles)
(a) defin: the allocation (and charge to
expenses)ofthecostorotherbasisofanintangible
assetoveritsestimatedusefullife
(b) Seesection107,RevReg2
(c) sacrificesaccuracyforsimplicity
(d) goodwill, trademarks, tradenames not
subjecttodepreciationoramortization.
(4) Dispositionandcostrecovery.
(a) Ifdepreciatedassetsarelatersoldathigher
thanthebookvalueoftheasset,thegainistobe
recognized as a taxable gain on disposition of
property.
(5) Land
(a) notdepreciable
(b) buildings,however,are
(c) justifications for disallowing depreciation
ofland
i) does not wear out or become
obsolete
ii) land has no "ascertainable useful
life"
(6) Antiques
(a) antiquesaregenerallynotdepreciableb/c
theydonothaveadeterminableusefullifedefined
bythephysicalconditionoftheartwork

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(b) BUT,ifyouuseanantiqueinconnection
withtradeorbusiness(eg.violinplayer)youhavea
strongerargumentfordepreciation
e. recoveringcapital
(1) oncedeterminedthatitemmustbecapitalizedasa
separateasset,MUSTbeaddedtobasisofyouroriginal
item
(2) methodofallowingyoutorecoveryourcost
2.Depletionofoilandgaswellsandmines
Depletion is similar to depreciation except that what is being
allowed asadepletion expensepertains tothevalueofthemineral or
substancewhichinitselfisbeingextractedfromtheearth.Thevalueof
researchanddevelopmentaswellasthevalueofthelanditselfisallowed
tobetakenasadeductionbecausethepropertywillhavelittleornovalue
attheendoftheextraction.
SeeRev.Reg.779
I. Charitableandothercontributions
1. Sec.34Hprovidestheded'n
(1) ded'ngenerallypermittedforatransferofcashor
(insomecases)theacquisitioncostofpropertytransferred
2. limitations
(1) ded'n can be no more than 10% of individual
taxpayers income computed without the benefit of the
contribution
(2) dedn can be no more than 5% of the corporate
taxpayers income computed without the benefit of the
contribution.
(3) neitherindividual'snorcorpscandeductcharitable
contributioninexcessofpercentagelimits
(4) However some deductions are allowed in full
withouttheimpositionoftheabovelimit,ifmadeinfavor
of:
(a) Donation to the government of the
Philippinesanditsagencies
(b) Donationstocertainforeigninstitutionsor
internationalorganizations
(c) Donations to Accredited Nongovernment
OrganizationsunderRevReg.1398
i) Organizedandoperatedexclusively
for scientific, research, educational,
character building and youth and sports
development,etc.

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ii) Utilizessaiddonationsnotlaterthan
the15 dayofthe3rdmonthfromtheclose
th

ofthetaxableperiod.
iii) Administrative expenses do not
exceed30%
iv) In case of dissolution of the
organization,assetswouldbetransferredto
anothersimilarorganizationorthestate.
(5) Sec.34H4substantiationrequirement
(a) hugeburdenoncharities
b. whenisatransfertoacharityacontribution
(1) Roxasvs.CTA(23SCRA276)

c. giftsofappreciatedproperty
(1) tp who gives appreciated property to a charity
DOESNOTrealizeagain
(2) BECAUSETaxcoderequiresthetransferofthe
propertytobebasedonacquisitioncost.
(a) Gain is also transferred but not taxed
becausetheacquisitioncostwillbethebasis.
(3) tpwillalsonotrealizealoss
(a) unlesssellsitfirsttorealizealossfortaxes
(b) contributestheproceeds

J. ResearchandDevelopmentcosts
1. Requirements:
a. Paidorincurredduringthetaxableyear
b. Connectedwithtradeorbusiness
c. Notchargeabletocapitalaccount
2.Amortizationtreatment
a.Paidorincurredandconnectedwithtradeorbusiness
b.nottreatedasanexpensefortheyear
c.Chargeabletocapitalaccountbutnotconnectedtoan
assetsubjecttodepreciationordepletion
d. allowedasadeferreddeductionforaperiodnotless
than60months.
3.Prohibition
a.acquisitionorimprovementofland,orimprovementof
thepropertytobeusedinconnectionwithresearchand
developmentofacharactersubjecttodepreciation
b.any expenditure paid or incurred for the purpose of
ascertainingtheexistence,location,extentorqualityof
anydepositoforeorothermineral,includingoilorgas.

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K. PensionTrusts
1. General
a.Pensiontrustisforthebenefitoftheemployeesofthe
company
b. yearly pension expenses are treated as expenses
undersec.34A1
c.Amortization ofpastservicecostsareallowedunder
thisprovision,provided:
1.thattheamounthadnotbeenpreviouslyallowed
asadeduction
2.isapportionedinequalpartsoveraten(10)year
period.

L. OptionalStandarddeduction
1. General
(1) applicabletoindividualsandcorporations
(2) individual taxpayer is allowed to deduct 40% of his
grosssalesorgrossreceipts,costofgoodssoldandcost
ofsalesareincludedinthe40%asanoptionalstandard
deductioninlieuofitemizeddeductionlistedabove.
(3) Corporatetaxpayerisallowedtodeduct40%fromthe
grossincomewhichisgrosssaleslesscostofgoods
soldorcostofservices.
(4) Presumptionistheitemizeddeductionunlessthereisa
manifest intention to elect optional deduction, which
willbeirrevocablefortheyearsuchelectionwasmade.
(5) Taxpayeroptingforoptionalstandarddeductionneed
notfilefinancialstatementswithhisincometaxreturn.
(6) Taxpayerisstillrequiredtokeeprecordsofhisgross
incomeasmayberequiredbyrulesandregulations.

M. Premium Payments on Health or Hospitalization Insurance of an


IndividualTaxpayer.
1. General
(1) insurance must not exceed P 2,400.00 per family or
P200.00permonth
(2) forhealthand/orhospitalization
(3) takenbytaxpayerhimself,includinghisfamily
(4) provided that family income does not exceed
P250,000.00annually.
2.Thisisanindividualexpenseanddoesnotrelatetocorporate
paymentsforthesaidbenefitofitsemployees.Suchcorporate

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paymentscanbeconsideredasdeductionsunderSec.341A.
Seealsorulesunderfringebenefits.

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NonDed'blePersonalLivingorFamilyExpensesSec.36
1.Introduction
a.Congresshaslimitedmixedmotiveexpenses(ded'ns)inorderto
raiserevenue
Sec.36AandB
2. Ingeneral
a. Personal,Livingorfamilyexpenses
a. Trebilcockv.Comm'r(TaxCt.1977)

(1) Tphiredministertoconductprayermeetingsand
heightenspiritualawarenessonthejob
(2) H: Tp failed to prove that minister's method of
providingbusinessadvice(praying)wasordinary.
(3) R:Servicesprovidedbyministersareinherently
personalinnature,anddisallowedasaded'n
b. Pevsnerv.Comm'r(5thCir.1980)

(1) ManagerofYvesSt.LaurentBoutiqueded'dcost
ofclothesasabusinessexpense
(2) H:Althoughtheseexpendituresmaybehelpfulor
essential, they are considered inherently personal and
disallowedunder
(3) Clothingonlyded'bleif
(a) ofatypespecificallyreq'dasaconditionof
employment
(b) not adaptable to gen'l usage as ordinary
clothing
(c) itisnotwornoffthejob
(4) Adaptabilityforpersonal/generalusedependsupon
whatisgenerallyacceptedforordinarystreetwear
(a) OBJECTIVETEST
(5) Evenifgetthisclothingded'nwouldbesubject
to2%floor
c. DomesticServicesandChildcare

3. TravelAwayfromHome

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a. TransportationExpenses

(1) cabfarefromTp'slawfirmtocourthousewouldbe
ded'ble
(2) contrastwithRulethatcostofcommutingtoand
fromworkarenonded'blepersonalexpenses
(a) locationofofficeisfixed
(b) decisiontolivebeyondwalkingdistanceis
apersonalone
(3) McCabev.Comm'r(2ndCir.1982)

(a) NYCCopreq'dtocarrygunoffduty.Lived
inNYS.QuickestwaytoworkwasthroughNJ,but
NJ req'd gun permit. Cop tried to deduct
commutingexpenses
(b) H:Tp'sincreasedcostsarearesultofhis
personalreasonstoliveawayfromwork
(c) Exception: Additional expenses may at
timesbeincurredfortransportingjobrequiredtools
andmaterialstoandfromwork
(4) General Rule: A transportation expense between
the tp's residence and regular place of work is a non
deductiblecommutingexpense
(a) BUT, transportation expenses incurred
between tp's residence and a temporary place of
businessAREded'ble

(5) Luxuryexpenses
(a) evenwhentptravelsonbusiness,thestyle
oftransportationmaybesoluxuriousastoproduce
clearpersonalbenefits
b. FoodandLodging
(1) U.S.v.Correll(S.Ct.1967)

(a) H:Congressspeaksof"mealsandlodging"
asasingleunit,thuscontemplatesadeductionfor
mealsonlywheretravelinvolvedlodgingaswell
(b) Thus,IRS's"sleeporrestrequired"ruleis
valid

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(2) Hantzisv.Comm'r(1stCir.1981)

(a) Boston law student got summer job in


NYC. Ded'dcostofapartment, meals andtravel
expensesbetweenBoston&NYCasbusinesstrip
(b) R:Whethertripisbusinessornotdepends
onwhereyourhomeis
(c) H:ded'ndeniedonbasisthatexpenseswere
notincurred"whileawayfromhome"
(3) Flowerstest:travellingexpensesareded'bleonlyif
theyare
(a) reasonable&necessary
(b) incurredwhileawayfromhome
(c) necessitatedbyexigenciesofbusiness
(4) Housenotnecessarilyahome
(a) IRSsayshomeiswhereyouwork
i) longdefendedthis
(b) "Home"forpurposesof162(a)(2)isthe
tp'sregularorprincipalplaceofbusiness
(c) ifnoprincipalplaceofbusiness,thenhis
"taxhome"isregularplaceofabode
(d) ifnoregularplaceofabodenonded'n
4. EntertainmentandBusinessMeals
a. Mossv.Comm'r(TaxCt.1983)

(1) partneratlawfirmreq'dtohaveeachlunchwith
otherlawyers(everyday),andclaimedded'n
(2) H: Ded'n disallowed. Mere fact that this time
(duringlunch)isgivenoverdoesnotconvertthecostof
daily meals into abusiness expensetobe shared bythe
government
b. (notrequiredtoknowdetails)
(1) only50%ofcostswillbeded'ble
(2) compromise
(3) problemsw/enforcement
(a) tpshavetokeeptrackofthis
(b) IRSnotreallycapableofenforcingthis
i) Revenueagentsnotlawyers
ii) overworked,underpaid
(4) haspracticaleffectofmakingcaseslikeMossless
likely
5. HomeOfficeExpenses

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a. Comm'rv.Soliman(S.Ct.1992)

(1) construing"principalplaceofbusiness"
(2) Anesthesiologist with no office provided by
hospitalwantedtodeductcostofmaintainingaspareroom
inhishouseasanoffice
(3) H:Principalbusinessofanesthesiologistrequiresa
hospital
(4) rejectedfocalpointtest
(5) 2primaryconsiderations
(a) relative importance of the activities
performedateachbusinesslocation
(b) timespentateachplace
(6) R:Wherethereisnoprincipalplaceofbusiness,
courtshouldnotstraintofindone
(a) homeofficedoesNOTqualifybydefault

N. NonDed'bleCapitalExpendituresSec36(A)(2)NIRC
1. Capitalization
a. onlyreferstoquestionofwhetheryoucancurrentlydeduct
thecostofsomething
b. has NOTHING to do with whether or not something
capitalinnatureisa"capitalasset"(thattermisdefinedinSec.39)
(1) simplydisallowsded'nofcapitalexpenditures
c. primaryreasoncategorizedas"capitalexpenditure"
(1) lengthoftimeoverwhichitwillbenefityou
(2) costofasset=expenditure
(3) willlastyoumorethanoneyear
d. whenamountmustbecapitalized,itisaddedtotp'sbasis
intheassetwithrespecttowhichtheexpenditureisincurred
(1) amountwilleitherbe
(a) recoveredwhenassetissold;OR
(b) recoveredoversomeperiodoftimeduring
whichtheassetisheld
i) through a series of depreciation
ded'nsspreadingthecostoutovertime
2. AcquisitionandDispositionofAssets
a. costsofasset,aswellascostsofacquiringasset(suchas
broker'sfees)mustbecapitalized
b. Woodwardv.Comm'r(S.Ct.1970)

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(1) Majority shareholders had to sue to determine
purchasepriceofminorityshs'stock.Claimedlegalfeesas
expenses
(2) H:Costsofnegotiatingpurchasepricearecostsof
acquiringacapitalasset.Court'ssubstitutionofitsfinding
ofpriceislikewisecostofacquisition
(3) STDisbasedonoriginofclaimlitigated
(4) notabutfortest,butthisanalogyhelps
(a) wouldn'tspendthismoneyifnottryingto
acquiretheasset
c. costsofconstructingproperty
(1) costs of constructing capital asset must be
capitalized
(a) inordertoprovideparitywithpurchaserof
property
(2) THUScoststhatwouldnormallybeded'ble(eg.,
wagespaidtoworkers)mustbecapitalized
(3) forsomeexpenses,thisresultflowsdirectlyfrom
263(a)(1)
3. NonRecurringExpandExpthatProvideBenefitsbeyondcurrent
year
a. INDOPCOv.Comm'r(S.Ct.1992)
(1) I:Whethercertainprofessionalexpensesincurred
byatargetcorpincourseoffriendlytakeover(merger)are
ded'bleasordinaryandnecessarybusinessexpenses
(2) H:No.Targetcofailedtomeetitsburdenofproof
thatthisdealwouldnotprovidebenefitsbeyondthecurrent
yearfortargetco.
(3) R:TPsrealizationofbenefitsbeyondyearincurred
isundeniablyimportantindeterminingwhetherappropriate
taxtreatmentisimmediateded'norcapitalization
b. EnvironmentalRemediationExpenses
(1) ifyouownland,contaminateit,andthenfixland
(a) candeductrepaircosts
(2) ifyoubuycontaminatedland,andfixit
(a) CANNOTdeductrepaircosts
(b) youare creating something different than
whatyoupurchased
(c) extendinglifeofassetisnotdeductible
O. PersonalDed'nsSec35(seepage1ofthisoutline)
1. StandardDed'ns
Sec.35oftheNIRC
Single,headoffamily,married P50,000

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Exemptionfordependentchild,4maxP25,000each

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