G.R. No.

L-25043 April 26, 1968

ANTONIO ROXAS, EDUARDO ROXAS and ROXAS Y CIA., in their own respective behalf and
as judicial co-guardians of JOSE ROXAS
vs.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE

FACTS:
N.B maraming issues pero deductions lang gnwa ko.

BENGZON, J.P., J.:

Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects, transmitted to their grandchildren by
hereditary succession the following properties:

(1) Agricultural lands with a total area of 19,000 hectares, situated in the municipality of Nasugbu,
Batangas province;

(2) A residential house and lot located at Wright St., Malate, Manila; and

(3) Shares of stocks in different corporations.

To manage the above-mentioned properties, said children, namely, Antonio Roxas, Eduardo Roxas and
Jose Roxas, formed a partnership called Roxas y Compania.

the Commissioner assessed deficiency income taxes against the Roxas Brothers for the years 1953 and
1955, as follows:
1953 1955
Antonio Roxas P7,010.00 P5,813.00
Eduardo Roxas 7,281.00 5,828.00
Jose Roxas 6,323.00 5,588.00

The deficiency income taxes resulted from the inclusion as income of Roxas y Cia. of the unreported
50% of the net profits for 1953 and 1955 derived from the sale of the Nasugbu farm lands to the tenants,
and the disallowance of deductions from gross income of various business expenses and contributions
claimed by Roxas y Cia. and the Roxas brothers. For the reason that Roxas y Cia. subdivided its Nasugbu
farm lands and sold them to the farmers on installment, the Commissioner considered the partnership as
engaged in the business of real estate, hence, 100% of the profits derived therefrom was taxed.

The following deductions were disallowed:

ROXAS Y CIA.:
1953
Tickets for Banquet in honor of
S. Osmea P 40.00
Gifts of San Miguel beer 28.00
Contributions to

Philippine Air Force Chapel

100.00

Manila Police Trust Fund

150.00

Philippines Herald's fund for Manila's neediest families

100.00
1955
Contributions to Contribution to
Our Lady of Fatima Chapel, FEU 50.00
 ANTONIO ROXAS:
1953
Contributions to

Pasay City Firemen Christmas Fund

25.00

Pasay City Police Dept. X'mas fund

50.00
1955
Contributions to

Baguio City Police Christmas fund

25.00

Pasay City Firemen Christmas fund

25.00

Pasay City Police Christmas fund

50.00
EDUARDO ROXAS:
1953
Contributions to

Hijas de Jesus' Retiro de Manresa

450.00

Philippines Herald's fund for Manila's neediest families

100.00
1955
Contributions to Philippines
Herald's fund for Manila's
neediest families 120.00
JOSE ROXAS:
1955
Contributions to Philippines
Herald's fund for Manila's
neediest families 120.00

The Roxas brothers protested the assessment but inasmuch as said protest was denied, they instituted an
appeal in the Court of Tax Appeals on January 9, 1961. The Tax Court heard the appeal and rendered
judgment on July 31, 1965 sustaining the assessment except the demand for the payment of the fixed tax
on dealer of securities and the disallowance of the deductions for contributions to the Philippine Air
Force Chapel and Hijas de Jesus' Retiro de Manresa. Not satisfied, Roxas y Cia. and the Roxas brothers
appealed to this Court. The Commissioner of Internal Revenue did not appeal.

ISSUE:
Are the deductions for business expenses and contributions deductible?

RULING:
Roxas y Cia. deducted from its gross income the amount of P40.00 for tickets to a banquet given in honor
of Sergio Osmena and P28.00 for San Miguel beer given as gifts to various persons. The deduction were
claimed as representation expenses. Representation expenses are deductible from gross income as
expenditures incurred in carrying on a trade or business under Section 30(a) of the Tax Code provided the
taxpayer proves that they are reasonable in amount, ordinary and necessary, and incurred in connection
with his business. In the case at bar, the evidence does not show such link between the expenses and the
business of Roxas y Cia. The findings of the Court of Tax Appeals must therefore be sustained.

The petitioners also claim deductions for contributions to the Pasay City Police, Pasay City Firemen, and
Baguio City Police Christmas funds, Manila Police Trust Fund, Philippines Herald's fund for Manila's
neediest families and Our Lady of Fatima chapel at Far Eastern University.

The contributions to the Christmas funds of the Pasay City Police, Pasay City Firemen and Baguio City
Police are not deductible for the reason that the Christmas funds were not spent for public purposes but as
Christmas gifts to the families of the members of said entities. Under Section 39(h), a contribution to a
government entity is deductible when used exclusively for public purposes. For this reason, the
disallowance must be sustained. On the other hand, the contribution to the Manila Police trust fund is an
allowable deduction for said trust fund belongs to the Manila Police, a government entity, intended to be
used exclusively for its public functions.

The contributions to the Philippines Herald's fund for Manila's neediest families were disallowed on the
ground that the Philippines Herald is not a corporation or an association contemplated in Section 30 (h)
of the Tax Code. It should be noted however that the contributions were not made to the Philippines
Herald but to a group of civic spirited citizens organized by the Philippines Herald solely for charitable
purposes. There is no question that the members of this group of citizens do not receive profits, for all the
funds they raised were for Manila's neediest families. Such a group of citizens may be classified as an
association organized exclusively for charitable purposes mentioned in Section 30(h) of the Tax Code.

Rightly, the Commissioner of Internal Revenue disallowed the contribution to Our Lady of Fatima
chapel at the Far Eastern University on the ground that the said university gives dividends to its
stockholders. Located within the premises of the university, the chapel in question has not been shown to
belong to the Catholic Church or any religious organization. On the other hand, the lower court found
that it belongs to the Far Eastern University, contributions to which are not deductible under Section
30(h) of the Tax Code for the reason that the net income of said university injures to the benefit of its
stockholders. The disallowance should be sustained.
G.R. No. L-24248 July 31, 1974

ANTONIO TUASON, JR.

vs.
JOSE B. LINGAD, as Commissioner of Internal Revenue

FACTS:
In 1948 the petitioner inherited from his mother several tracts of land, among which were two contiguous
parcels situated on Pureza and Sta. Mesa streets in Manila, with an area of 318 and 67,684 square meters,
respectively.

When the petitioner's mother was yet alive she had these two parcels subdivided into twenty-nine lots.
Twenty-eight were allocated to their then occupants who had lease contracts with the petitioner's
predecessor at various times from 1900 to 1903, which contracts expired on December 31, 1953. The
29th lot (hereinafter referred to as Lot 29), with an area of 48,000 square meters, more or less, was not
leased to any person. It needed filling because of its very low elevation, and was planted to kangkong and
other crops. here was no difficulty encountered in selling the 28 small lots as their respective occupants
bought them on a 10-year installment basis. Lot 29 could not however be sold immediately due to its low
elevation.

Sometime in 1952 the petitioner's attorney-in-fact had Lot 29 filled, then subdivided into small lots and
paved with macadam roads. The small lots were then sold over the years on a uniform 10-year annual
amortization basis.In 1953 and 1954 the petitioner reported his income from the sale of the small lots
(P102,050.79 and P103,468.56, respectively) as long-term capital gains. On May 17, 1957 the Collector
of Internal Revenue upheld the petitioner's treatment of his gains from the said sale of small lots, against
a contrary ruling of a revenue examiner.

In his 1957 tax return the petitioner as before treated his income from the sale of the small lots
(P119,072.18) as capital gains and included only thereof as taxable income. In this return, the
petitioner deducted the real estate dealer's tax he paid for 1957. It was explained, however, that the
payment of the dealer's tax was on account of rentals received from the mentioned 28 lots and other
properties of the petitioner. On the basis of the 1957 opinion of the Collector of Internal Revenue, the
revenue examiner approved the petitioner's treatment of his income from the sale of the lots in question.
In a memorandum dated July 16, 1962 to the Commissioner of Internal Revenue, the chief of the BIR
Assessment Department advanced the same opinion, which was concurred in by the Commissioner of
Internal Revenue.

On January 9, 1963, however, the Commissioner reversed himself and considered the petitioner's profits
from the sales of the mentioned lots as ordinary gains. On January 28, 1963 the petitioner received a
letter from the Bureau of Internal Revenue advising him to pay deficiency income tax for 1957.
(TOTAL AMOUNT DUE AND
COLLECTIBLE ......................................... P31,095.36)

The petitioner's motion for reconsideration of the foregoing deficiency assessment was denied, and so he
went up to the Court of Tax Appeals, which however rejected his posture in a decision dated January 16,
1965, and ordered him, in addition, to pay a 5% Surcharge and 1% monthly interest "pursuant to Sec.
51(e) of the Revenue Code."

Hence, the present petition.

The petitioner assails the correctness of the opinion below that as he was engaged in the business of
leasing the lots he inherited from his mother as well other real properties, his subsequent sales of the
mentioned lots cannot be recognized as sales of capital assets but of "real property used in trade or
business of the taxpayer." The petitioner argues that (1) he is not the one who leased the lots in question;
(2) the lots were residential, not commercial lots; and (3) the leases on the 28 small lots were to last until
1953, before which date he was powerless to eject the lessees therefrom.

ISSUE:
whether the properties in question which the petitioner had inherited and subsequently sold in small lots
to other persons should be regarded as capital assets.
RULING:

As thus defined by law, the term "capital assets" includes all the properties of a taxpayer whether or not
connected with his trade or business, except: (1) stock in trade or other property included in the
taxpayer's inventory; (2) property primarily for sale to customers in the ordinary course of his trade or
business; (3) property used in the trade or business of the taxpayer and subject to depreciation allowance;
and (4) real property used in trade or business. 1 If the taxpayer sells or exchanges any of the properties
above-enumerated, any gain or loss relative thereto is an ordinary gain or an ordinary loss; the gain or
loss from the sale or exchange of all other properties of the taxpayer is a capital gain or a capital loss. 2

Under section 34(b) (2) of the Tax Code, if a gain is realized by a taxpayer (other than a corporation)
from the sale or exchange of capital assets held for more than twelve months, only 50% of the net capital
gain shall be taken into account in computing the net income.
In the case at bar, after a thoroughgoing study of all the circumstances relevant to the resolution of the
issue raised, this Court is of the view, and so holds, that the petitioner's thesis is bereft of merit.

When the petitioner obtained by inheritance the parcels in question, transferred to him was not merely the
duty to respect the terms of any contract thereon, but as well the correlative right to receive and enjoy the
fruits of the business and property which the decedent had established and maintained. 7 Moreover, the
record discloses that the petitioner owned other real properties which he was putting out for rent, from
which he periodically derived a substantial income, and for which he had to pay the real estate dealer's
tax (which he used to deduct from his gross income). 8 In fact, as far back as 1957 the petitioner was
receiving rental payments from the mentioned 28 small lots, even if the leases executed by his deceased
mother thereon expired in 1953. Under the circumstances, the petitioner's sales of the several lots
forming part of his rental business cannot be characterized as other than sales of non-capital assets.

The sales concluded on installment basis of the subdivided lots comprising Lot 29 do not deserve a
different characterization for tax purposes. The following circumstances in combination show
unequivocally that the petitioner was, at the time material to this case, engaged in the real estate business:
(1) the parcels of land involved have in totality a substantially large area, nearly seven (7) hectares, big
enough to be transformed into a subdivision, and in the case at bar, the said properties are located in the
heart of Metropolitan Manila; (2) they were subdivided into small lots and then sold on installment basis
(this manner of selling residential lots is one of the basic earmarks of a real estate business); (3)
comparatively valuable improvements were introduced in the subdivided lots for the unmistakable
purpose of not simply liquidating the estate but of making the lots more saleable to the general public; (4)
the employment of J. Antonio Araneta, the petitioner's attorney-in-fact, for the purpose of developing,
managing, administering and selling the lots in question indicates the existence of owner-realty broker
relationship; (5) the sales were made with frequency and continuity, and from these the petitioner
consequently received substantial income periodically; (6) the annual sales volume of the petitioner from
the said lots was considerable, e.g., P102,050.79 in 1953; P103,468.56 in 1954; and P119,072.18 in
1957; and (7) the petitioner, by his own tax returns, was not a person who can be indubitably adjudged as
a stranger to the real estate business. Under the circumstances, this Court finds no error in the holding
below that the income of the petitioner from the sales of the lots in question should be considered as
ordinary income.
G.R. No. L-29790 February 25, 1982
AGUINALDO INDUSTRIES CORPORATION (FISHING NETS DIVISIONS), vs.
COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX APPEALS,
PLANA , J.:
FACTS: Aguinaldo Industries Corporation is a domestic corporation engaged in two lines of business,
namely: (a) the manufacture of fishing nets, a tax-exempt industry, and (b) the manufacture of furniture
Its business of manufacturing fishing nets is handled by its Fish Nets Division, while the manufacture of
Furniture is operated by its Furniture Division. For accounting purposes, each division is provided with
separate books of accounts as required by the Department of Finance. Under the company's accounting
method, the net income from its Fish Nets Division, miscellaneous income of the Fish Nets Division, and
the income of the Furniture Division are computed individually.
Previously, petitioner acquired a parcel of land in Muntinglupa, Rizal, as site of the fishing net factory.
This transaction was entered in the books of the Fish Nets Division of the Company. Later, when another
parcel of land in Marikina Heights was found supposedly more suitable for the needs of petitioner, it sold
the Muntinglupa property, Petitioner derived profit from this sale which was entered in the books of the
Fish Nets Division as miscellaneous income to distinguish it from its tax-exempt income.
For the year 1957, petitioner filed 2 separate income tax returns one for its Fish Nets Division and
another for its Furniture Division. After investigation of these returns, the examiners of the BIR found
that the Fish Nets Division deducted from its gross income for that year the amount of P61,187.48 as
additional remuneration paid to the officers of petitioner. The examiner further found that this amount
was taken from the net profit of an isolated transaction (sale of aforementioned land) not in the course of
or carrying on of petitioner's trade or business. (It was reported as part of the selling expenses of the land
in Muntinglupa, Rizal.) Upon recommendation of the examiner that the said sum of P61,187.48 be
disallowed as deduction from gross income, petitioner asserted that said amount should be allowed as
deduction because it was paid to its officers as allowance or bonus pursuant to its by-laws which
provides:
From the net profits of the business of the Company shall be deducted for allowance of the President
3% for the first Vice President 1 %, for the second Vice President for the members of the
Board of Directors 10% to he divided equally among themselves, for the Secretary of the Board
for the General Manager for two Assistant General Managers
In this connection, petitioner explains that to arrive at the aforesaid 20% it gets 20% of the profits from
the furniture business and adds (the same) to 20 of the profit of the fish net venture. The P61,187.48
which is the basis of the assessment of P17,133 does not even represent the entire 20%, allocated as
allowance in its by-laws but only 20% of the net profit of the non-exempt operation of the Fish Nets
Division, that is, 20,%, of P305,869.89, which is the sum total of P305,802.18 representing profit from
the sale of the Muntinglupa land, P45.21 representing interest on savings accounts, and P90 representing
dividends from investment of the Fish Nets Division.
Petitioner argues that the profit derived from the sale of its Muntinglupa land is not taxable for it is
tax-exempt income, considering that its Fish Nets Division enjoys tax exemption as a new and necessary
industry under RA 901.
It must be stressed however that at the administrative level, the petitioner implicitly admitted that the
profit it derived from the sale of its Muntinglupa land, a capital asset, was a taxable gain which was
precisely the reason why for tax purposes the petitioner deducted therefrom the questioned bonus to its
corporate officers as a supposed item of expense incurred for the sale of the said land, apart from the
P51,723.72 commission paid by the petitioner to the real estate agent who indeed effected the sale. The
BIR therefore had no occasion to pass upon the issue.
ISSUE: (1) whether or not the bonus given to the officers of the petitioner upon the sale of its
Muntinglupa land is an ordinary and necessary business expense deductible for income tax purposes
HELD: the applicable legal provision is Sec. 30 (a) (1) of the Tax Code which reads:
In computing net income there shall be allowed as deductions
(a) Expenses:
(1) In general. All the Ordinary and necessary expenses paid or incurred during the taxable year in
carrying on any trade or business, including a reasonable allowance for personal services actually
rendered. ...
On the basis of the foregoing standards, the bonus given to the officers of the petitioner as their share of
the profit realized from the sale of petitioner's Muntinglupa land cannot be deemed a deductible expense
for tax purposes, even if the aforesaid sale could be considered as a transaction for Carrying on the trade
or business of the petitioner and the grant of the bonus to the corporate officers pursuant to petitioner's
by-laws could, as an intra-corporate matter, be sustained. The records show that the sale was effected
through a broker who was paid by petitioner a commission of P51,723.72 for his services. On the other
hand, there is absolutely no evidence of any service actually rendered by petitioner's officers which could
be the basis of a grant to them of a bonus out of the profit derived from the sale. This being so, the
payment of a bonus to them out of the gain realized from the sale cannot be considered as a selling
expense; nor can it be deemed reasonable and necessary so as to make it deductible for tax purposes.
Further, (in a case) whenever a controversy arises on the deductibility, for purposes of income tax, of
certain items for alleged compensation of officers of the taxpayer, 2 questions become material, namely:
(a) Have personal services been actually rendered by said officers? (b) In the affirmative case, what is the
reasonable allowance' therefor
In this case, these extraordinary and unusual amounts paid by petitioner to these directors in the guise and
form of compensation for their supposed services as such, without any relation to the measure of their
actual services, cannot be regarded as ordinary and necessary expenses within the meaning of the law.
[G.R. No. 142299. June 22, 2006.]
BICOLANDIA DRUG CORPORATION (FORMERLY ELMAS DRUG CORPORATION) vs.
CIR.
AZCUNA, J p:

Facts: Petitioner Bicolandia Drug Corporation is a domestic corporation principally engaged in the retail
of pharmaceutical products. Petitioner has a drugstore located in Naga City under the name and business
style of "Mercury Drug."
Pursuant to the provisions of R.A. No. 7432, entitled "An Act to Maximize the Contribution of Senior
Citizens to Nation Building, Grant Benefits and Special Privileges and for Other Purposes," also known
as the "Senior Citizens Act," and Revenue Regulations No. 2-94, petitioner granted to qualified senior
citizens a 20% sales discount on their purchase of medicines covering the period from July 19, 1993 to
December 31, 1994. When petitioner filed its corresponding corporate annual income tax returns for
taxable years 1993 and 1994, it claimed as a deduction from its gross income the respective amounts of
P80,330 and P515,000 representing the 20% sales discount it granted to senior citizens.
On March 28, 1995, however, alleging error in the computation and claiming that the aforementioned
20% sales discount should have been treated as a tax credit pursuant to R.A. No. 7432 instead of a
deduction from gross income, petitioner filed a claim for refund or credit of overpaid income tax for 1993
and 1994, amounting to P52,215 and P334,750, respectively.
On December 29, 1995, petitioner filed a Petition for Review with the Court of Tax Appeals (CTA) in
order to toll the running of the two-year prescriptive period for claiming for a tax refund. It contended
that Section 4 of R.A. No. 7432 provides in clear and unequivocal language that discounts granted to
senior citizens may be claimed as a tax credit. The Commissioner of Internal Revenue,maintained that
the discount should be deductible from gross sales of value-added tax or other percentage tax purposes.
The Court ruled that it is a tax credit.

Issue: whether or not petitioner is entitled to the claim for refund of its overpaid income taxes for the
years 1993 and 1994 based on the evidence at hand.

Held: NO.
Petitioner's claim for refund must be denied. The law expressly provides that the discount given to senior
citizens may be claimed as a tax credit, and not a refund. Thus, where the words of a statute are clear,
plain and free from ambiguity, it must be given its literal meaning and applied without attempted
interpretation.
Otherwise stated, the matter to be determined is the amount of tax credit that may be claimed by a taxable
entity which grants a 20% sales discount to qualified senior citizens on their purchase of medicines
pursuant to Section 4(a) of R.A. No. 7432 which states:
Sec. 4.Privileges for the Senior citizens. The senior citizens shall be entitled to the following:
a) the grant of twenty percent (20%) discount from all establishments relative to utilization of
transportation services, hotels and similar lodging establishments, restaurants and recreation centers and
purchase of medicines anywhere in the country: Provided, That private establishments may claim the
cost 8 as tax credit. The term "cost" in the above provision refers to the amount of the 20% discount
extended by a private establishment to senior citizens in their purchase of medicines. This amount shall
be applied as a tax credit, and may be deducted from the tax liability of the entity concerned. If there is no
current tax due or the establishment reports a net loss for the period, the credit may be carried over to the
succeeding taxable year. This is in line with the interpretation of this Court in Commissioner of Internal
Revenue v. Central Luzon Drug Corporation 9 wherein it affirmed that R.A. No. 7432 allows private
establishments to claim as tax credit the amount of discounts they grant to senior citizens.
 Commissioner of Internal Revenue vs. General Foods (Phils.), Inc.
(G.R. No. 143672, April 24, 2003)

Corona, J.,

FACTS: General Foods (Phils.), Inc., a corporation engaged in the manufacture of beverages such as
Tang, Calumet and Kool-Aid, filed its income tax return for the fiscal year ending February 28,
1985. In the said tax return, General Foods claimed as deduction, among other business expenses, the
amount of P9,461,246 for media advertising for Tang. The Commissioner disallowed 50% or
P4,730,623 of the deduction claimed by General Foods. Consequently, General Foods was assessed
deficiency income taxes in the amount of P2,635,1414.42. General Foods filed a motion for
reconsideration but the same was denied. General Foods appealed to the CTA but it was dismissed on the
ground that such expenditure was incurred to create or maintain some form of good will for the
taxpayers trade or business or for the industry or profession of which the taxpayer is a member. The
CTA also ruled that the term good will generally used to denote the benefit arising from connection
and reputation efforts to establish reputations are akin to acquisition of capital assets and, therefore,
expenses related thereto are not business expenses but capital expenditures. Such expenditure was meant
not only to generate present sales but more for future and prospective benefits. Hence, abnormally large
expenditures for advertising are usually to be spread over the period of years during which the benefits of
the expenditures are received. Thereafter, General Foods filed a petition for review at the Court of
Appeals which rendered a decision reversing and setting aside the decision of the CTA.

ISSUES: Whether or not the subject media advertising expense for Tang incurred by respondent
corporation was an ordinary and necessary expense fully deductible under the National Internal Revenue
Code (NIRC).

HELD: NO. It is a governing principle in taxation that tax exemptions must be construed in strictissimi
juris against the taxpayer and liberally in favor of the taxing authority; and he who claims an exemption
must be able to justify his claim by the clearest grant of organic or statute law. An exemption from the
common burden cannot be permitted to exist upon vague implications. To be deductible from gross
income, the subject advertising expense must comply with the following requisites: (a) the expense must
be ordinary and necessary; (b) it must have been paid or incurred during the taxable year; (c) it must have
been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must be supported by
receipts, records or other pertinent papers.
The Commissioner maintains that the subject advertising expense was not ordinary on the ground
that it failed the two conditions set by U.S. jurisprudence: first, reasonableness of the amount incurred
and second, the amount incurred must not be a capital outlay to create goodwill for the product and/or
private respondents business. Otherwise, the expense must be considered a capital expenditure to be
spread out over a reasonable time. We agree. There is yet to be a clear-cut criteria or fixed test for
determining the reasonableness of an advertising expense. There being no hard and fast rule on the
matter, the right to a deduction depends on a number of factors such as but not limited to: the type and
size of business in which the taxpayer is engaged; the volume and amount of its net earnings; the nature
of the expenditure itself; the intention of the taxpayer and the general economic conditions. It is the
interplay of these, among other factors and properly weighed, that will yield a proper evaluation.
In the case at bar, the P9,461,246 claimed as media advertising expense for Tang alone was
almost one-half of its total claim for marketing expenses. Aside from that, respondent-corporation also
claimed P2,678,328 as other advertising and promotions expense and another P1,548,614, for
consumer promotion. Furthermore, the subject P9,461,246 media advertising expense for Tang was
almost double the amount of respondent corporations P4,640,636 general and administrative expenses.
We find the subject expense for the advertisement of a single product to be inordinately large. Therefore,
even if it is necessary, it cannot be considered an ordinary expense deductible under then Section 29 (a)
(1) (A) of the NIRC.
Advertising is generally of two kinds: (1) advertising to stimulate the current sale of
merchandise or use of services and (2) advertising designed to stimulate the future sale of merchandise or
use of services. The second type involves expenditures incurred, in whole or in part, to create or maintain
some form of goodwill for the taxpayers trade or business or for the industry or profession of which the
taxpayer is a member. If the expenditures are for the advertising of the first kind, then, except as to the
question of the reasonableness of amount, there is no doubt such expenditures are deductible as business
expenses. If, however, the expenditures are for advertising of the second kind, then normally they
should be spread out over a reasonable period of time. We agree with the Court of Tax Appeals that the
subject advertising expense was of the second kind. Not only was the amount staggering; the
respondent corporation itself also admitted, in its letter protest to the Commissioner of Internal
Revenues assessment, that the subject media expense was incurred in order to protect respondent
corporations brand franchise, a critical point during the period under review. The protection of brand
franchise is analogous to the maintenance of goodwill or title to ones property. This is a capital
expenditure which should be spread out over a reasonable period of time. Respondent corporations
venture to protect its brand franchise was tantamount to efforts to establish a reputation. This was akin to
the acquisition of capital assets and therefore expenses related thereto were not to be considered as
business expenses but as capital expenditures.
 Commissioner of Internal Revenue vs. Isabela Cultural Corporation
(G.R. No. 172231, February 12, 2007)

Ynares-Santiago, J.,

FACTS: On February 23, 1990, Isabela Cultural Corporation (ICC), a domestic corporation, received
from the BIR an assessment notices: (1) for deficiency income tax in the amount of P333,196.86, and (2)
for deficiency expanded withholding tax in the amount of P4,897.79, inclusive of surcharges and interest,
both for the taxable year 1986.
The deficiency income tax of P333,196.86, arose from:
(1) The BIRs disallowance of ICCs claimed expense deductions for professional and
security services billed to and paid by ICC in 1986, to wit:
(a) Expenses for the auditing services of SGV & Co., [3] for the year ending
December 31, 1985;
(b) Expenses for the legal services [inclusive of retainer fees] of the law firm
Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson for the years
1984 and 1985.
(c) Expense for security services of El Tigre Security & Investigation
Agency for the months of April and May 1986.
(2) The alleged understatement of ICCs interest income on the three promissory notes
due from Realty Investment, Inc.
The deficiency expanded withholding tax of P4,897.79 (inclusive of interest and surcharge) was
allegedly due to the failure of ICC to withhold 1% expanded withholding tax on its claimed P244,890.00
deduction for security services.
Thereafter, ICC sought a reconsideration of the subject assessments. However, ICC received a
final notice before seizure demanding the payment of the amounts stated in the notices. Hence, it brought
the case to the CTA which held that the petition is premature because the FAN cannot be considered as a
final decision appealable to the tax court. This was reversed This was reversed by the Court of Appeals
holding that a demand letter of the BIR reiterating the payment of deficiency tax, amounts to a final
decision on the protested assessment and may therefore be questioned before the CTA. This conclusion
was sustained by the Supreme Court. The case was thus remanded to the CTA for further proceedings.
The CTA rendered a decision cancelling and setting aside the assessment notices issued against
ICC. It held that the claimed deductions for professional and security services were properly claimed by
ICC in 1986 because it was only in the said year when the bills demanding payment were sent to ICC.
Hence, even if some of these professional services were rendered to ICC in 1984 or 1985, it could not
declare the same as deduction for the said years as the amount thereof could not be determined at that
time. The CTA also held that ICC did not understate its interest income on the subject promissory notes.
It found that it was the BIR which made an overstatement of said income when it compounded the
interest income receivable by ICC from the promissory notes of Realty Investment, Inc., despite the
absence of a stipulation in the contract providing for a compounded interest; nor of a circumstance, like
delay in payment or breach of contract, that would justify the application of compounded interest.
Petitioner filed a petition for review with the CA, which affirmed the decision of the CTA.

ISSUES: Whether or not the Court of Appeals correctly sustained the deduction of the expenses for
professional and security services from ICCs gross income.

HELD: YES. The requisites for the deductibility of ordinary and necessary trade, business, or
professional expenses, like expenses paid for legal and auditing services, are: (a) the expense must be
ordinary and necessary; (b) it must have been paid or incurred during the taxable year; (c) it must have
been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must be supported by
receipts, records or other pertinent papers. The requisite that it must have been paid or incurred during the
taxable year is further qualified by Section 45 of the National Internal Revenue Code (NIRC) which
states that: [t]he deduction provided for in this Title shall be taken for the taxable year in which paid or
accrued or paid or incurred, dependent upon the method of accounting upon the basis of which the net
income is computed x x x.
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of
accounting, expenses not being claimed as deductions by a taxpayer in the current year when they are
incurred cannot be claimed as deduction from income for the succeeding year. Thus, a taxpayer who is
authorized to deduct certain expenses and other allowable deductions for the current year but failed to do
so cannot deduct the same for the next year. The accrual method relies upon the taxpayers right to
receive amounts or its obligation to pay them, in opposition to actual receipt or payment, which
characterizes the cash method of accounting. Amounts of income accrue where the right to receive
them become fixed, where there is created an enforceable liability. Similarly, liabilities are accrued
when fixed and determinable in amount, without regard to indeterminacy merely of time of payment.
The amount of liability does not have to be determined exactly; it must be determined with
reasonable accuracy. Accordingly, the term reasonable accuracy implies something less than an
exact or completely accurate amount. The propriety of an accrual must be judged by the facts that a
taxpayer knew, or could reasonably be expected to have known, at the closing of its books for the taxable
year. Accrual method of accounting presents largely a question of fact; such that the taxpayer bears the
burden of proof of establishing the accrual of an item of income or deduction.
In the instant case, the expenses for professional fees consist of expenses for legal and auditing
services. The expenses for legal services pertain to the 1984 and 1985 legal and retainer fees of the law
firm Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson, and for reimbursement of the
expenses of said firm in connection with ICCs tax problems for the year 1984.
 Commissioner of Internal Revenue vs. V.E. Lednicky and Maria Valero Lenicky
(G.R. No. L-18169, L-18262 & L-21434, July 31, 1964)

Reyes, J.B.L., J.,

FACTS: The V. E. Lednicky and Maria Valero Lednicky are husband and wife, respectively, both
American citizens residing in the Philippines, and have derived all their income from Philippine sources
for the taxable years under question. In compliance with local law, the aforesaid respondents, filed their
income tax return for 1956, reporting therein a gross income of P1,017,287.65 and a net income of
P733,809.44 on which the amount of P317,395.41 was assessed after deducting P4,805.59 as
withholding tax. Pursuant to the petitioner's assessment notice, the respondents paid the total amount of
P326,247.41, inclusive of the withheld taxes. Thereafter, the respondents Lednickys filed an amended
income tax return for 1956. The amendment consists in a claimed deduction of P205,939.24 paid in 1956
to the United States government as federal income tax for 1956. Simultaneously with the filing of the
amended return, the respondents requested the refund of P112,437.90. When the petitioner
Commissioner of Internal Revenue failed to answer the claim for refund, the respondents filed their
petition with the tax court which is now G. R. No. L-18286 in the Supreme Court.
G.R. No. L-18169 (formerly CTA Case No. 570) is also a claim for refund in the amount of
P150,269.00, as alleged overpaid income tax for 1955. same respondents-spouses filed their domestic
income tax return for 1955, reporting a gross income of P1,771,124.63 and a net income of
P1,052,550.67. On 19 April 1956, they filed an amended income tax return, the amendment upon the
original being a lesser net income of P1,012,554.51, and, on the basis of this amended return, they paid
P570,252.00, inclusive of withholding taxes. After audit, the petitioner determined a deficiency of
P16,116.00, which amount the respondents paid on 5 December 1956. Back in 1955, however, the
Lednickys filed with the U.S. Internal Revenue Agent in Manila their Federal income tax return for the
years 1947, 1951, 1952, 1953 and 1954 on income from Philippine sources on a cash basis. Payment of
these federal income taxes, including penalties and delinquency interest in the amount of $264,588.82,
were made in 1955 to the U. S. Director of Internal Revenue, Baltimore, Maryland, through the National
City Bank of New York, Manila Branch. Exchange and bank charges in remitting payment totaled
P4,143.91. On 11 August 1958 the said respondents amended their Philippines income tax return for
1955 to include the following deductions:
U.S. Federal income taxes P471,867.32
Interest accrued up to May 15, 1955 40,333.92
Exchange and bank Charges 4,143.91
___________
Total P516,345.15
==========
and therewith filed a claim for refund of the sum of P166,384.00, which was later reduced to
P150,269.00. The respondents Lednicky brought suit in the Tax Court, which was docketed therein as
CTA Case No. 570.
In G.R. No. 21434 (CTA Case No. 783), the facts are similar but refer to respondents Lednickys
income tax returns for 1957, filed on February 28, 1958, and for which respondents paid a total sum of
P196,799.65. In 1959, they filed an amended return for 1957, claiming deduction of P190,755.80,
representing taxes paid to the U.S. Government on income derived wholly from Philippine sources. On
the strength thereof, respondents seek refund of P90,520.75 as overpayment. The tax Court again decided
for respondents.

ISSUES: Whether or not a citizen of the United States residing in the Philippines, who derives income
wholly from sources within the Republic of the Philippines, may deduct from his gross income the
income taxes he has paid to the United States government for the taxable year on the strength of section
30 (c-1) of the Philippine Internal Revenue Code1.

1 "SEC. 30. Deduction from gross income. In computing net income there shall be allowed as deductions
"(a) ...
(b) ...
(c) Taxes:
"(1) In general. Taxes paid or accrued within the taxable year, except
"(A) The income tax provided for under this Title;
"(B) Income, war-profits, and excess profits taxes imposed by the authority of any foreign country; but this deduction shall be allowed in the
case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) of this subsection (relating to
credit for taxes of foreign countries);
"(C) Estate, inheritance and gift taxes; and
"(D) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed."
HELD: NO. The Tax Court held that they may be deducted because of the undenied fact that the
respondent spouses did not "signify" in their income tax returns a desire to avail themselves of the
benefits of paragraph 3 (B)2 of the subsection.
We agree with appellant Commissioner that the construction and wording of Section 30 (c) (1) (B)
of the Internal Revenue Act shows the law's intent that the right to deduct income taxes paid to foreign
government from the taxpayer's gross income is given only as an alternative or substitute to his right to
claim a tax credit for such foreign income taxes under section 30 (c) (3) and (4); so that unless the alien
resident has a right to claim such tax credit if he so chooses, he is precluded from deducting the foreign
income taxes from his gross income. Had the law intended that foreign income taxes could be deducted
from gross income in any event, regardless of the taxpayer's right to claim a tax credit, it is the latter right
that should be conditioned upon the taxpayer's waiving the deduction; in which case the right to
reduction under subsection (c-1-B) would have been made absolute or unconditional (by omitting
foreign taxes from the enumeration of non- deductions), while the right to a tax credit under subsection
(c-3) would have been expressly conditioned upon the taxpayer's not claiming any deduction under
subsection (c-1).
Petitioners admit in their brief that the purpose of the law is to prevent the taxpayer from claiming
twice the benefits of his payment of foreign taxes, by deduction from gross income (subs. c-1) and by tax
credit (subs. c-3). This danger of double credit certainly can not exist if the taxpayer can not claim benefit
under either of these headings at his option, so that he must be entitled to a tax credit (respondent
taxpayers admittedly are not so entitled because all their income is derived from Philippine sources), or
the option to deduct from gross income disappears altogether.
Much stress is laid on the thesis that if the respondent taxpayers are not allowed to deduct the
income taxes they are required to pay to the government of the United States, in their return for
Philippine income tax, they would be subjected to double taxation. What respondents fail to observe is
that double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the
same governmental entity. In the present case, while the taxpayers would have to pay two taxes on the
same income, the Philippine government only receives the proceeds of one tax. As between the
Philippines, where the income was earned and where the taxpayer is domiciled, and the United States,
where that income was not earned and where the taxpayer did not reside, it is indisputable that justice and
equity demand that the tax on the income should accrue to the benefit of the Philippines. Any relief from
the alleged double taxation should come from the United States, and not from the Philippines, since the
former's right to burden the taxpayer is solely predicated on his citizenship, without contributing to the
production of the wealth that is being taxed.

2 "Par. (c) (3) Credits against tax for taxes of foreign countries. If the taxpayer signifies in his return his desire to have the benefits of this
paragraph, the tax imposed by this Title shall be credited with
(A) ...
(B) Alien resident of the Philippines. In the case of an alien resident of the Philippines, the amount of any such taxes paid or accrued during
the taxable year to any foreign country, if the foreign country of which such alien resident is a citizen or subject, in imposing such taxes, allows a
similar credit to citizens of the Philippines residing in such country;"
G.R. Nos. L-33665-68 February 27, 1987
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
VICENTE A. RUFINO and REMEDIOS S. RUFINO, ERNESTO D. RUFINO and ELVIRA B.
RUFINO, RAFAEL R. RUFINO and JULIETA A. RUFINO, MANUEL S. GALVEZ and ESTER
R. GALVEZ, and COURT OF TAX APPEALS, respondents.
CRUZ, J.:
The private respondents were the majority stockholders of the defunct Eastern Theatrical Co., Inc., a
corporation organized in 1934, for a period of 25 years. It had an original capital stock of P500,000,
which was increased in 1949 to P2,000,000, and was organized to engage in the business of operating
theaters, opera houses, places of amusement and other related business enterprises, more particularly the
Lyric and Capitol Theaters in Manila. The President of this corporation (the Old Corporation) was
Ernesto Rufino.
The private respondents are also the majority and controlling stockholders of another corporation, the
Eastern Theatrical Co Inc., which was organized on December 8, 1958, for a term of 50 years, with an
authorized capital stock of P200,000. This corporation is engaged in the same kind of business as the Old
Corporation. The General-Manager of this corporation (the New Corporation) at the time was Vicente
Rufino.
In a special meeting of stockholders of the Old Corporation, to provide for the continuation of its
business after the end of its corporate life, a resolution was passed authorizing the Old Corporation to
merge with the New Corporation by transferring its business, assets, goodwill, and liabilities to the latter,
which in exchange would issue and distribute to the shareholders of the Old Corporation one share for
each share held by them in the said Corporation. It was expressly declared that the merger of the Old with
the New Corporation was necessary to continue the exhibition of moving pictures at the Lyric and
Capitol Theaters even after the expiration of the corporate existence of the former, in view of its pending
booking contracts, not to mention its collective bargaining agreements with its employees. Pursuant to
the said resolution, the Old Corporation and the New Corporation signed a Deed of Assignment
providing for the conveyance and transfer of all the business, property, assets and goodwill of the Old
Corporation to the New Corporation in exchange for the latter's shares of stock to be distributed among
the shareholders on the basis of one stock for each stock held in the Old Corporation except that no new
and unissued shares would be issued to the shareholders of the Old Corporation; the delivery by the New
Corporation to the Old Corporation of 125,005-3/4 shares to be distributed to the shareholders of the Old
Corporation as their corresponding shares of stock in the New Corporation; the assumption by the New
Corporation of all obligations and liabilities of the Old Corporation under its bargaining agreement with
the Cinema Stage & Radio Entertainment Free Workers (FFW) which included the retention of all
personnel in the latter's employ; and the increase of the capitalization of the New Corporation in
compliance with their agreement. This agreement was made retroactive to January 1, 1959. The aforesaid
transfer was eventually made by the Old Corporation to the New Corporation, which continued the
operation of the Lyric and Capitol Theaters and assumed all the obligations and liabilities of the Old
Corporation.
The resolution of the Old Corporation and the Deed of Assignment were approved in a resolution by the
stockholders of the New Corporation in their special meeting. In the same meeting, the increased
capitalization of the New Corporation to P2,000,000 was also divided into 200,000 shares at P10 par
value each share, and the said increase was registered, with the SEC. As agreed, and in exchange for the
properties, and other assets of the Old Corporation, the New Corporation issued to the stockholders of the
former stocks in the New Corporation equal to the stocks each one held in the Old Corporation.
After an examination by the BIR, the petitioner declared that the merger of the aforesaid corporations
was not undertaken for a bona fide business purpose but merely to avoid liability for the capital gains tax
on the exchange of the old for the new shares of stock. Accordingly, he imposed the deficiency
assessments against the private respondents for the amounts already mentioned. The private respondents'
request for reconsideration having been denied, they elevated the matter to the CTA, which reversed the
petitioner.
ISSUE: WON the private respondents are liable for deficiency assessments?
HELD: No. there was a valid merger between the Old Corporation and the New Corporation.
Where stocks for stocks were exchanged, and distributed to the stockholders of the corporations, parties
to the merger or consolidation, pursuant to a plan of reorganization, such exchange is exempt from
capital gains tax. In view of the foregoing, no taxable gain was derived by the old corp from the exchange
of their old stocks solely for stocks of the New Corp pursuant to Section 35(c) (2), in relation to (c) (5), of
the NIRC which provides in material part as follows:
 Sec. 35. Determination of gain or loss from the sale or other disposition of property. The gain
derived or loss sustained from the sale or other disposition of property, real, personal or mixed, shall
be determined in accordance with the following schedule:
(c) Exchange of property-
(1) General Rule. Except as herein provided upon the sale or exchange of property, the entire
amount of the gain or loss, as the case may be, shall be recognized.
(2) Exceptions. No gain or loss shall be recognized if in pursuance of a plan of merger or
consolidation (a) a corporation which is a party to a merger or consolidation, exchanges property
solely for stock in a corporation which is a party to the merger or consolidation, (b) a shareholder
exchanges stock in a corporation which is a party to the merger or consolidation solely for the stock
of another corporation, also a party to the merger or consolidation, or (c) a security holder of a
corporation which is a party to the merger or consolidation exchanges his securities in such
corporation solely for stock or securities in another corporation, a party to the merger or
consolidation.
(5) Definitions.-(a) x x x (b) The term "merger" or "consolidation," when used in this section, shall
be understood to mean: (1) The ordinary merger or consolidation, or (2) the acquisition by one
corporation of all or substantially all the properties of another corporation solely for stock;
Provided, That for a transaction to be regarded as a merger or consolidation within the purview of
this section, it must be undertaken for a bona fide business purpose and not solely for the purpose of
escaping the burden of taxation; Provided further, That in determining whether a bona fide business
purpose exists, each and every step of the transaction shall be considered and the whole transaction
or series of transactions shall be treated as a single unit: ...
The basic consideration, of course, is the purpose of the merger, as this would determine whether the
exchange of properties involved therein shall be subject or not to the capital gains tax. The criterion laid
down by the law is that the merger" must be undertaken for a bona fide business purpose and not solely
for the purpose of escaping the burden of taxation." We must therefore seek and ascertain the intention of
the parties in the light of their conduct contemporaneously with, and especially after, the questioned
merger pursuant to the Deed of Assignment of January 9, 1959.
It has been suggested that one certain indication of a scheme to evade the capital gains tax is the
subsequent dissolution of the new corporation after the transfer to it of the properties of the old
corporation and the liquidation of the former soon thereafter. This highly suspect development is likely to
be a mere subterfuge aimed at circumventing the requirements of Section 35 of the Tax Code while
seeming to be a valid corporate combination.
We see no such furtive intention in the instant case. It is clear, in fact, that the purpose of the merger was
to continue the business of the Old Corporation, whose corporate life was about to expire, through the
New Corporation to which all the assets and obligations of the former had been transferred. What argues
strongly, indeed, for the New Corporation is that it was not dissolved after the merger agreement.On the
contrary, it continued to operate the places of amusement originally owned by the Old Corporation and
transfered to the New Corporation, particularly the Capitol and Lyric Theaters, in accordance with the
Deed of Assignment. The New Corporation, in fact, continues to do so today after taking over the
business of the Old Corporation 27 years ago.
What is also worth noting is that, as in the case of the Old Corporation when it was dissolved on
December 31, 1958, there has been no distribution of the assets of the New Corporation since then and up
to now, as far as the record discloses. To date, the private respondents have not derived any benefit from
the merger of the Old Corporation and the New Corporation almost three decades earlier that will make
them subject to the capital gains tax under Section 35. They are no more liable now than they were when
the merger took effect in 1959, as the merger, being genuine, exempted them under the law from such
tax.
[G.R. No.L-19865. July 31, 1965.]
MARIA CARLA PIROVANO, ETC., ET AL., vs. CIR

Facts: Enrico Pirovano was the father of the herein petitioners- appellants. Sometime in the early part of
1941, De la Rama Steamship Co. insured the life of said Enrico Pirovano, who was then its President and
General Manager until the time of his death, with various Philippine and American insurance companies
for a total sum of one million pesos, designating itself as the beneficiary of the policies obtained by it.
Due to the Japanese occupation of the Philippines during the second World War, the Company was
unable to pay its premiums on the policies issued by its Philippine insurers and these policies lapsed,
while the policies issued by its American insurers were kept effective and subsisting, the New York
office of the Company having continued paying its premiums from year to year.
In the latter part of 1944, said Enrico Pirovano died.
the Board of Directors of De la Rama Steamship Co. adopted a resolution granting and setting aside, out
of the proceeds receivable the sum of P400,000.00 for equal division among the four (4) minor children
of the deceased, said sum of money to be convertible into 4,000 shares of stock of the Company.
The Board later modified the resolution by renouncing all its rights, title, and interest to the said amount
of P643,000.00 in favor of the minor children of the deceased, subject to the express condition that said
amount should be retained by the Company in the nature of a loan to it. It was further modified providing
therein that the Company shall pay the proceeds of said life insurance policies to the heirs of the said
Enrico Pirovano after the Company shall have settled in full the balance of its present remaining bonded
indebtedness. Mrs. Estefania R. Pirovano, in behalf of her children, executed a public document formally
accepting the donation. However, the majority stockholders of the Company voted to revoke the
resolution approving the donation in favor of the Pirovano children.
As a consequence, the herein petitioners-appellants, represented by their natural guardian, Mrs. Estefania
R. Pirovano, brought an action for the recovery of said amount. The Court held that the donation was
valid and remunerative in nature. (This case is a sequel to the case of Pirovano, vs. De la Rama Steamship
Co., 96 Phil. 335.)
On March 6, 1955, respondent Commissioner of Internal Revenue assessed the amount of P60,869.67 as
donee's gift taxagainst each of the petitioners-appellants.

Issues:
1. Whether a donation made by a corporation to the heirs of a deceased officer out of gratitude for
his past service is subject to the donees' gift tax.
2. Whether a donation made out of gratitude for past services is not subject to deduction.

Held:
1. There is nothing on record to show that when the late Enrico Pirovano rendered services as
President and General Manager of the De la Rama Steamship Co. he was not fully compensated
for such services, or that, because they were "largely responsible for the rapid and very
successful development of the activities of the company" (Resol. of July 10, 1946), Pirovano
expected or was promised further compensation over and in addition to his regular emoluments
as President and General Manager. The fact that his services contributed in a large measure to
the success of the company did not give rise to a recoverable debt, and the conveyances made by
the company to his heirs remain a gift or donation. This is emphasized by the director's
Resolution of January 6, 1947, that "out of gratitude" the company decided to renounce in favor
of Pirovano's heirs the proceeds of the life insurance policies in question. The true consideration
for the donation was, therefore, the company's gratitude for his services, and not the services
themselves.
2. A donation made out of gratitude for past services is not subject to deduction for the value of
said services which do not constitute a recoverable debt.
G.R. No. L-15290 May 31, 1963
MARIANO ZAMORA vs.COLLECTOR OF INTERNAL REVENUE and COURT OF TAX
APPEALS
PAREDES, J.:
Mariano Zamora, owner of the Bay View Hotel and Farmacia Zamora, Manila, filed his income tax
returns the years 1951 and 1952. The Collector of Internal Revenue found that he failed to file his return
of the capital gains derived from the sale of certain real properties and claimed deductions which were
not allowable. The collector required him to pay the sums of P43,758.50 and P7,625.00, as deficiency
income tax for the years 1951 and 1952, respectively. The CTA modified the decision and ordered him to
pay the reduced total sum of P30,258.00 (P22,980 and P7,278, as deficiency income tax for 1951 and
1952, respectively).
Mariano alleged that the CTA erred in disallowing P10,478.50 as promotion expenses incurred by his
wife for the promotion of the Bay View Hotel and Farmacia Zamora. He contends that the whole amount
of P20,957 as promotion expenses in his 1951 income tax returns, should be allowed and not merely of
it or P10,478.50, on the ground that, while not all the itemized expenses are supported by receipts, the
absence of some supporting receipts has been sufficiently and satisfactorily established. For, as alleged,
the said amount of P20,957 was spent by Mrs. Esperanza (wife of Mariano), during her travel to Japan
and the US to purchase machinery for a new Tiki-Tiki plant, and to observe hotel management in modern
hotels. The CTA, however, found that for said trip Mrs. Zamora obtained only the sum of P5,000 from
the Central Bank and that in her application for dollar allocation, she stated that she was going abroad on
a combined medical and business trip, which facts were not denied by Mariano. No evidence had been
submitted as to where Mariano had obtained the amount in excess of P5,000 given to his wife which she
spent abroad. No explanation had been made either that the statement contained in Mrs. Zamora's
application for dollar allocation that she was going abroad on a combined medical and business trip, was
not correct. The alleged expenses were not supported by receipts. Mrs. Zamora could not even remember
how much money she had when she left abroad in 1951, and how the alleged P20,957 was spent.
ISSUE: WON the CTA was correct in allowing only P10,478.50, as promotion expenses incurred by his
wife for the promotion of the Bay View Hotel and Farmacia Zamora (which is of P20,957, supposed
business expenses)
HELD: Yes.
Section 30, of the Tax Code, provides that in computing net income, there shall be allowed as deductions
all the ordinary and necessary expenses paid or incurred during the taxable year, in carrying on any trade
or business. Since promotion expenses constitute one of the deductions in conducting a business, same
must testify these requirements. Claim for the deduction of promotion expenses or entertainment
expenses must also be substantiated or supported by record showing in detail the amount and nature of
the expenses incurred. Considering, as heretofore stated, that the application of Mrs. Zamora for dollar
allocation shows that she went abroad on a combined medical and business trip, not all of her expenses
came under the category of ordinary and necessary expenses; part thereof constituted her personal
expenses. There having been no means by which to ascertain which expense was incurred by her in
connection with the business of Mariano and which was incurred for her personal benefit, the CIR and
the CTA in their decisions, considered 50% of the said amount of P20,957 as business expenses and the
other 50%, as her personal expenses. We hold that said allocation is very fair to Mariano, there having
been no receipt whatsoever, submitted to explain the alleged business expenses, or proof of the
connection which said expenses had to the business or the reasonableness of the said amount of P20,957.
While in situations like the present, absolute certainty is usually no possible, the CTA should make as
close an approximation as it can, bearing heavily, if it chooses, upon the taxpayer whose inexactness is of
his own making.
Representation expenses fall under the category of business expenses which are allowable deductions
from gross income, if they meet the conditions prescribed by law, particularly section 30 (a) [1], of the
Tax Code; that to be deductible, said business expenses must be ordinary and necessary expenses paid or
incurred in carrying on any trade or business; that those expenses must also meet the further test of
reasonableness in amount; that when some of the representation expenses claimed by the taxpayer were
evidenced by vouchers or chits, but others were without vouchers or chits, documents or supporting
papers; that there is no more than oral proof to the effect that payments have been made for
representation expenses allegedly made by the taxpayer and about the general nature of such alleged
expenses; that accordingly, it is not possible to determine the actual amount covered by supporting
papers and the amount without supporting papers, the court should determine from all available data, the
amount properly deductible as representation expenses.
In view hereof, the CTA, did not commit error in allowing as promotion expenses of Mrs. Zamora
claimed in Marianos 1951 income tax returns, merely or P10,478.50.