NON-DEDUCTIBLE EXPENSES

CIR vs JAMIR

FACTS
In his income tax return for 1954, Alberto M. K. Jamir declared a gross income of
P75,858.65 and claimed deductions with an aggregate amount of P58,134.50, thereby
showing a net income of P17,774.15, upon which he paid P1,634 as income tax.

Upon examination of his aforementioned return, as well as of his books of account and
other records, the CIR assessed Jamir as deficiency income tax the sum of P16,395.

The CIR claimed that Jamir had an undeclared income of P31,274.91, representing the
amounts by which his expenses for February and May 1954 exceeded his income.

DECISION: Deductions allowed.

The Court of Tax Appeals correctly held that the "expenditures method" should be
applied by deducting the aggregate yearly expenditures from the declared yearly income,
not the expenditures incurred each month from the declared income.

In the case at bar, Jamir's total income for 1954 (P75,858.65) exceeded the total
deductions (P58,134.50) claimed by him. Jamir explained and introduced evidence to the
effect that the excess represented advances made to him by customers in the months of
February and May, 1954, and that the income derived from the corresponding
transactions were entered in his books of account in subsequent months.

With regard to Jamir's claim for car depreciation and salary of his driver, the CIR
disallowed 1/2 of these claims on the ground that the car was used by Jamir for personal
and business purposes. The CTA, meanwhile, allowed as deductions 3/4 of said amounts,
the car having been used by Jamir "more for business than for personal purpose". The
Court affirmed the CTA.

ATLAS CONSOLIDATED vs CIR.

FACTS
For the year 1958, the CIR assessed against Atlas Consolidated Mining a deficiency
income tax of P39,646.82. Atlas appealed to the CTA, assailing the disallowance of the
following items which it claimed as deductible from its gross income: transfer agent's fee,
stockholders relation service fee, US stock listing expenses, suit expenses, and provision
for contingencies.
The CTA allowed the aforementioned items, except stockholders relation service fee and
suit expenses.

Atlas argued that the public relations expenses were paid for the services of P.K Macker
& Co. to help Atlas compete with other corporations also interested in the investment
market in the US. Atlas pointed out that the information given out to the public in general
and to the stockholder in particular concerning the company’s operation was aimed at
creating a favorable image and goodwill to gain or maintain their patronage—hence, an
ordinary and necessary business expense.

DECISION: Public relations and suit expenses are not ordinary and necessary expense,
not deductible

Based on the statutory test of deductibility, to be deductible as a business expense, three

conditions are imposed, namely: (1) the expense must be ordinary and necessary, (2) it
must be paid or incurred within the taxable year, and (3) it must be paid or incurred in
carrying in a trade or business. In addition, the taxpayer must also substantially prove by
evidence or records the deductions claimed, otherwise the same will be disallowed. The
mere allegation of the taxpayer that an item of expense is ordinary and necessary does not
justify its deduction.

Ordinarily, an expense will be considered "necessary" where the expenditure is

appropriate and helpful in the development of the taxpayer's business. It is "ordinary"
when it connotes a payment which is normal in relation to the business of the taxpayer
and the surrounding circumstances.

The compensation paid to P.K. Macker & Co. for its services to sell Atlas' additional
capital stock is not an ordinary expense. That it was incurred to create a favorable image
of the corporation in order to gain or maintain the public's and its stockholders' patronage
does not make it deductible as business expense. As held in the case of Welch vs.
Helvering, efforts to establish reputation are akin to acquisition of capital assets and,
therefore, expenses related thereto are not business expense but capital expenditures.

As for the suit expenses, Atlas deducted from its 1958 gross income the attorney's fees
and litigation expenses in the defense of title to the Toledo Mining properties purchased
by Atlas from Mindanao Lode Mines Inc. on the ground that said expenses were a capital
expenditure.

It is well settled that litigation expenses incurred in defense or protection of title are
capital in nature and not deductible. Likewise, it was ruled by the U.S. Tax Court that
expenditures in defense of title of property constitute a part of the cost of the property,
and are not deductible as expense.
SANTIAGO GANCAYCO vs CIR

FACTS
The CIR claims that Santiago Gancayco has deficiency income tax for 1949 amounting to
P16,860.31.

Gancayco argues that the CIR failed to deduct two items from his return, namely: (a) for
farming expenses, P27,459.00; and (b) for representation expenses, P8,933.45.

DECISION: No evidence for farming and representation expenses, not deductible

No evidence was presented as to the nature of the said "farming expenses" other
than the bare statement of Gancayco that they were spent for the "development and
cultivation of (his) property". No specification was made either as to the actual amount
spent for purchase of tools, equipment or materials, or the amount spent for improvement.
The CIR found that the entire amount was spent exclusively for clearing and developing
the farm which were necessary to place it in a productive state. It is not, therefore, an
ordinary expense but a capital expenditure. Accordingly, it is not deductible but it may be
amortized, in accordance with section 75 of Revenue Regulations No. 2.

2. As for representation expenses, they were properly disallowed by the CIR because,
apart from the absence of receipts, invoices, or vouchers of the expenditures in question,
Gancayco could not specify the items constituting the same, or when or on whom or on
what they were incurred.

C. F. CALANOC vs CIR

FACTS
To solicit and receive contributions for the orphans and destitute children of the Child
Welfare Workers Club of the Social Welfare Commission, CF Calanoc financed and
promoted a boxing and wrestling exhibition.

The CIR found that the gross sales generated by the exhibition amounted to P26,553.00;
the expenditures incurred was P25,157.62; and the net profit was only P1,375.30. Upon
examination of the receipts, the CIR also found the following items of expenditures: (a)
P461.65 for police protection; (b) P460.00 for gifts; (c) P1,880.05 for parties; and (d)
several items for representation. Calanoc remitted to SWC P1,375.30 only.

Based on its findings, the CIR assessed Calanoc an amusement tax of P7,378.57.

DECISION: Expenses were excessive and not justified, not deductible

Calanoc denied having received the stadium fee P1,000, which was not included in the
receipts. And that even if he did, he could not be made to pay almost seven times the
amount as amusement tax. Evidence was submitted, however, that the said stadium fee of
P1,000, was paid by the O-SO Beverages directly to the stadium management for
advertisement privileges on the day of the exhibition. Since the fee was paid by the
concessionaire, Calanoc had no right to include the P1,000 stadium fee among the items
of his expenses. It results, therefore, that P1,000 went into Calanoc’s pocket unaccounted.

Furthermore petitioner admitted that he could not justify the other expenses, such as those
for police protection and gifts. He claims further that the accountant who prepared the
statement of receipts was already dead and could no longer be questioned on the items
contained in said statement.

Most of the items of expenditures contained in the statement submitted to the CIR were
either exorbitant or not supported by receipts. The payment of P461.65 for police
protection was illegal as it was a consideration given by Calanoc to the police for the
performance by the latter of the functions required of them to be rendered by law. The
expenditures of P460 for gifts, P1,880.05 for parties, and other items for representation
were rather excessive, considering that the purpose of the exhibition was for a charitable
cause.