1. Western Minolco Corporation vs Commisioner been repealed by P.D. No.
1739, which now imposes a tax of
Facts: Western Minolco is a domestic corporation engaged in
mining. It borrowed funds from several financial institutions
from June to October 1977 and paid the corresponding 35%
transactions tax due thereon in the amount of P 1, 317, 801.03.
The tax was paid pursuant to Section 210 (b) of the National
Internal Revenue Code of 1977. On Febraaury 16, 1978, the
petitioner applied for the refund of the P 1, 317, 801. 03 alleging
that it was not liable to pay the 35% tansaction tax under its
Certificate of Qualifications for Tax Exemption No. 34 issued by
the Secretary of Agriculture and Natural Resources, and
pursuant to The Mining Act(CA 137) and the Mineral Resources
Development Decree of 1974 (PD 463), as implemented by
consolidated Mines Administrative Order of the Secretary of
Natural Resources dated May 17, 1974.
Issue: Whether or not Minolco is exempt from transaction tax
Held: No. The statutory provisions on tax exemptions clearly
exclude the 35%tarnsaction tax. Presidential Decree No. 237 on
the Compensating tax. Section I of P.D. No. 238 on Conditionally
Free Importations, and Section 53 of P.D. No. 463 all refer to
tax exemptions for importations of machineries, tools for
production, plants to convert mineral ores into saleable form,
spare parts, supplies, materials, accessories, explosives
chemicals and transportation and communication facilities, to be
used in mining operations. Section 53 of P.D. No 463 likewise
refers to tax exemptions for mining claims and improvement
thereon, and mineral products, except income tax. The
petitioner’s of Qualifications for Tax Exemption No. 34 exempts
“... from payment of all taxes except income tax, payable by him
in the court of his business ad in the importation of machineries,
spare parts and or equipment listed in the stamped “Annex I”
which are considered to be indispensable in the operation and
will be used by said operator lessee exclusively in the mineral
land mentioned above. Petitioner’s submit that in as much as
taxes in general constitute allowable deductions from gross
income in the determination of taxable net income. The 35%
transaction tax is a business tax and not income tax because the
Revenue Code itself classifies it as “Business Tax” under Title V,
and that P.D. No. 1154 expressly states that the transaction tax
shall be allowed as a deductictible item for purposes of
determining the borrower’s taxable income. The petitioner’s
contentions deserve scant consideration. The 35% tax imposed
on interest income from commercial papers issued primary
money market. Being a tax on interest, it is a tax on income.
The 35% transaction tax is an income tax on interest earnings
to the lenders or placers. The latter are actually the tax payers.
Therefore, the tax cannot be a tax imposed upon petitioner. In
other words, the petitioner who borrowed funds from several
financial institutions by issuing a commercial papers merely
withheld the 35% transaction tax before paying to the financial
institutions the interests earned by them and later remitted the
same to respondent Commissioner of Internal Revenue. The tax
could have been collected by a different procedure but the
statue chose this method. Whatever collecting procedure is
adopted does not change the nature of the tax. The petitioner
also submits that the 35% transaction tax is a business tax
imposed under Title V, entitled -, Taxes on Business” and
classified specially under Chapter II, entitled “Tax on Business.”
The location of the 35%, tax in the Tax Code does not
necessarily determine its nature, Again, we agree with the
Solicitor General that the legislative body must have realized
later that the subject tax was inappropriately included among
taxes on business because Section 210 of the Tax Code has
20% on interests from deposits and yields from deposit
substitute such as commercial papers issued in the primary
market as principal instrument and provides for them in Section
24(cc) under Chapter III, Tax on Corporations, Title II – Income
Tax.
2. COMMISSIONER OF INTERNAL REVENUE vs.
ARNOLDUS CARPENTRY SHOP, INC. and COURT
OF TAX APPEALS
Facts:
In March 1979, the examiners of the petitioner Commissioner of
Internal Revenue conducted an investigation of the business tax
liabilities of private respondent pursuant to Letter of Authority
No. 08307 NA dated November 23, 1978. As a result thereof,
the examiners assessed private respondent for deficiency tax.
This tax deficiency was a consequence of the 3% tax imposed
on private respondent's gross export sales which, in turn,
resulted from the examiners' finding that categorized private
respondent as a contractor. Against this assessment, private
respondent protested that the carpentry shop is a manufacturer
and therefor entitled to tax exemption on its gross export sales
under Section 202 (e) of the National Internal Revenue Code.
He explained that it was the 7% tax exemption on export sales
which prompted private respondent to exploit the foreign
market which resulted in the increase of its foreign sales to at
least 52% of its total gross sales in 1977.
Issue: Whether or not the Court of Tax Appeals erred in holding
that private respondent is a manufacturer and not a contractor
and therefore not liable for the amount of P108,720.92, as
deficiency contractor's tax, inclusive of surcharge and interest,
for the year 1977.
Held:
Private respondent is a "manufacturer" as defined in the Tax
Code and not a "contractor", under Section 205(e) of the Tax
Code as petitioner would have this Court decide. A contract for
the delivery at a certain price of an article Which the vendor in
the ordinary course of his business manufactures or procures for
the - general market, whether the same is on hand at the time
or not, is a contract of sale, but if the goods are to be
manufactured specially for the customer and upon his special
order, and not for the general market, it is a contract for a piece
of work. As the Court of Tax Appeals did not err in holding that
private respondent is a "manufacturer," then private respondent
is entitled to the tax exemption of the Tax Code. Disposition:
WHEREFORE, the Court hereby DENIES the Petition for lack of
merit and AFFIRMS the Court of Tax Appeals decision.
3. BPI V. Trinidad, Collector of Internal Revenue
FACTS:
1. The property in question formerly belonged to the Taba Saw
Mill Co., a copartnership formed by Pujalte and Co. and one
Ramon Murga. In April, 1914, Ramon Murga sold all his rights,
title, and interest in and to the said copartnership to Pujalte and B. Whether or not BPI should have proceeded under section 141
Co., which thereby became the sole owner of the concern. of Act No. 2339 (now sec. 1580 of Act No. 2711), and not under
2. That on the 26th day of September, 1912, the said Taba Saw section 140 of the said Act
Mill Co. conveyed to the plaintiff bank (BPI), by way of chattel
mortgage, the property here in question together with other RULING:
personalities, as security for the payment to said bank of two A. There is absolutely no basis for the finding of the trial court
certain promissory notes for the sum of P180,000. Said chattel that "the plaintiff bank had voluntarily and spontaneously paid
mortgage was duly registered in the office of the register of the debt of a third party, that is, that of the firm of Pujalte and
deeds of Zamboanga on the 26th day of December, 1912. Co.” Paragraph 7 of the plaintiff's complaint alleges: "That
thereupon, involuntarily and under due protest in writing, the
3. On that date the property in question was free from all tax
plaintiff bank made payment of the required sum of P2,159.79
liens; at least, the plaintiff mortgagee had no notice thereof. On
in order to secure the release of its seized property." These
the 13th day of July, 1916, when the amount here in question
allegations were specially admitted by the defendant.
was found to be due to the Government from Pujalte and Co. as
forestry charges, and when the property in question was seized
B. Section 140 of the Internal Revenue Law (Act No. 2339
by the defendant, the said chattel mortgage was still subsisting.
provides as follows:
4. On the 13th day of July, 1916, the defendant Collector of
SEC. 140. Recovery of tax paid under protest. — When the
Internal Revenue (Trinidad) hrough his duly authorized agent at
validity of any tax in questioned, or amount disputed, or
Zamboanga, seized and distrained certain personal property,
other question raised as to liability therefor, the person
consisting of machinery for sawing lumber which is particularly
against whom or against whose property the same is
enumerated and described in paragraph 3 of the complaint, and
sought to be enforced shall pay the tax under instant
advertised the same for sale, to realize the sum of P2,159.79,
protest, or upon protest within ten days, and shall thereupon
alleged to be due to the Government of the Philippine Islands
request the decision of the Collector of Internal Revenue. If the
from Pujalte and Co., as forestry charges.
decision of the Collector of Internal Revenue is adverse, or if no
5. The defendant (Trinidad) claimed that said personality that
decision is made by him within six months from the date when
belonged to the said company (Pujalte and Company) was used
his decision was requested, the taxpayer may proceed, at any
in the business on which the taxes were due, and was liable to
time within two years after the payment of the tax, to bring an
seizure to cover said taxes. On the other hand, the plaintiff (BPI)
action against the Collector of Internal Revenue for the recovery
claimed to be the owner of said property, and demanded its
of the sum alleged to have been illegally collected, the process
release. The demand being denied, the plaintiff (BPI) paid to the
to be served upon him, upon the provincial treasurer, or upon
defendant (Trinidad) the said sum of P2,159.79 under protest
the officer collecting the tax.
to prevent the sale of said property, and immediately brought
Section 141 of the same Act provides:
the present action in the Court of First Instance of Zamboanga
SEC. 141. Action to contest forfeiture of chattels. — In case of
to recover the said sum of P2,159.78 together with interest and
the seizure of personal property under claim of
costs. The lower court, after due trial, dismissed the plaintiff's
forfeiture, the owner, desiring to contest the validity of
complaint and absolved the defendant from all liability
the forfeiture, may at any time before sale or destruction
thereunder. From that judgment the plaintiff appealed to this
of the property bring an action against the person
court
seizing the property or having possession thereof to
recover the same, and upon giving proper bond may enjoin
ISSUES:
the sale; or after the sale and within six months he may bring
A. Whether or not BPI voluntary and spontaneously paid the
an action to recover the net proceeds realized at the sale.
debt of Pujalte Comapny
It can be said that the personal property in question was seized
not because of forfeiture but a seizure to enforce a tax lien.
Forfeiture is "the divestiture of property without compensation,
in consequence of an offense. The effect of such forfeiture is to amount of P333,196.86, and Assessment Notice No. FAS-1-86-
transfer the title to the specific thing from the owner to the 90-000681 for deficiency expanded withholding tax in the
sovereign power." (12 R. C. L., 124.) There is a great amount of P4,897.79, inclusive of surcharges and interest, both
difference between a seizure under forfeiture and a for the taxable year 1986.
seizure to enforce a tax lien. In the former all the proceeds
derived from the sale of the thing forfeited are turned over to The deficiency income tax of P333,196.86, arose from:
the Collector of Internal Revenue (sec. 148, Act No. 2339) in the (1) BIR disallowance of ICC’s claimed expense deductions for
latter the residue of such proceeds over and above what is professional and security services billed to and paid by ICC in
required to pay the tax sought to be realized, including 1986, to wit:
expenses, is returned to the owner of the property (second (a) Expenses for auditing services of SGV & Co., for the year
aragraph, sec. 152, Act No. 2339). Clearly, the remedy ending Dec 31, 1985
applicable to the present case is that provided for in section 140, (b) Expenses for legal services [incl of retainer fees] of law
above quoted, and which the plaintiff invoked. firm Bengzon for 1984 and 1985
(c) Expense for security services of El Tigre Security for
months of April and May 1986
4. CIR v Isabela Cultural Corporation (ICC)
(2) Understatement of ICC interest income on 3 promissory
notes due from Realty Investment
DOCTRINE: The requisites for the deductibility of ordinary and
necessary trade, business, or professional expenses, like
The deficiency expanded withholding tax of P4,897.79 (inclusive
expenses paid for legal and auditing services, are: (a) the
of interest and surcharge) was allegedly due to the failure of
expense must be ordinary and necessary; (b) it must have been
ICC to withhold 1% expanded withholding tax on its claimed
paid or incurred during the taxable year; (c) it must have been
P244,890.00 deduction for security services.
paid or incurred in carrying on the trade or business of the
taxpayer; and (d) it must be supported by receipts, records or
2. On March 23, 1990, ICC sought for a reconsideration, but on
other pertinent papers. The requisite that it must have been paid
Feb 9, 1995, it received a final notice before seizure demanding
or incurred during the taxable year is further qualified by Section
payment of amounts stated in the said notices.
45 of the NIRC which states that: "[t]he deduction provided for
in this Title shall be taken for the taxable year in which ‘paid or
3. CTA held that petition is premature because final notice of
accrued’ or ‘paid or incurred’, dependent upon the method of
assessment cannot be considered as a final decision appealable
accounting upon the basis of which the net income is computed
to the tax court. CA reversed the holding that a demand letter
x x x".
of the BIR reiterating the payment of deficiency tax, amounts to
a final decision on the protested assessment and may therefore
QUICK FACTS: BIR disallowed the following ICC
be questioned before the CTA. This conclusion was sustained by
expenses for years 1984-1986 to be included in ICC’s
this Court on July 1, 2001, G.R. No. 135210. Case was remanded
1986 tax expense deductions: (1) Expenses for auditing
to CTA for further proceedings.
services for year ending 31 December 1985; (2)
Expenses for legal services for years 1984 and 1985; and
4. CTA rendered a decision canceling and setting aside the
(3) Expense for security services for months of April and
assessment notices issued against ICC. It held that the claimed
May 1986. BIR thus charged ICC for deficiency income
deductions for professional and security services were properly
taxes. ICC contested the assessment.
claimed by ICC in 1986 because it was only in the said year
when the bills demanding payment were sent to ICC. Hence,
FACTS:
even if some of these professional services were rendered to
1. On Feb 23, 1990, ICC received from BIR Assessment Notice
ICC in 1984 or 1985, it could not declare the same as deduction
No. FAS-1-86-90-000680 for deficiency income tax in the
for the said years as the amount could not be determined at that
time. ICC did not understate its interest income on the subject
promissory notes. 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. CTA also found that ICC in fact withheld 1% expanded
withholding tax on its claimed deduction for security services as
shown by the various confirmation receipts it presented as
evidence.
5. CA affirmed CTA decision, holding that although the
professional services (legal and auditing) were rendered to ICC
in 1984 and 1985, the cost of the services was not yet
determinable at that time, hence, it could be considered as
deductible expenses only in 1986 when ICC received the billing
statements for said services. It further ruled that ICC did not
understate its interest income from the promissory notes of
Realty Investment, Inc., and that ICC properly withheld and
remitted taxes on the payments for security services for the
taxable year 1986.
6. BIR contention: Since ICC is using the accrual method of
accounting, the expenses for the professional services that
accrued in 1984 and 1985, should have been declared as
deductions from income during the said years and the failure of
ICC to do so bars it from claiming said expenses as deduction
for the taxable year 1986.
ISSUE: Whether the deduction of the expenses for professional
and security services of 1984-1986 are valid deductions from
ICC’s gross income for 1986
DECISION: NO for audit services from SGV and legal services
from Bengzon; YES for security services.
HELD:
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 Sec 45 of the 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".
Accounting methods for tax purposes comprise a set of rules for
determining when and how to report income and deductions.
The accounting method used by ICC is the accrual method.
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 taxpayer’s 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.
For a taxpayer using the accrual method, the determinative
question is, when do facts present themselves in such a manner
that the taxpayer must recognize an income or expense? The
accrual of income and expense is permitted when the all-events
test has been met. It requires: (1) the fixing of a right to income
or liability to pay; and (2) the availability of the reasonable
accurate determination of such income or liability.
The all-events test requires the right to income or liability be
fixed, and the amount of such income or liability be determined
with reasonable accuracy. However, the test does not demand
that the amount of income or liability be known absolutely, only
that a taxpayer has at his disposal the information necessary to
compute the amount with reasonable accuracy. The all-events
test is satisfied where computation remains uncertain, if its basis
is unchangeable; the test is satisfied where a computation may
be unknown, but is not as much as unknowable, within the
taxable year. 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.
The expenses for professional fees for legal and auditing
services pertain to 1984 and 1985 legal and retainer fees of the
law firm Bengzon. As testified by the ICC Treasurer, the firm has
been its counsel since the 1960’s. From the nature of the
claimed deductions and the span of time during which the firm
was retained, ICC can be expected to have reasonably known
the retainer fees charged by the firm as well as the
compensation for its legal services. The failure to determine the
exact amount of the expense cannot be attributed solely to the
delayed billing of these liabilities by the firm. ICC could have
inquired into the amount of their obligation to the firm,
especially since it is using the accrual method of accounting. It
could also have reasonably determined the amount of legal and
retainer fees owing to its familiarity with the rates charged by
their long time legal consultant.
SGV & Co. professional fees for auditing financial statements of
ICC for 1985 cannot be validly claimed as expense deductions
in 1986. ICC failed to present evidence showing that even with
only "reasonable accuracy" as the standard to ascertain its
liability to SGV & Co. in year 1985, it cannot determine the
professional fees which said company would charge for its
services.
ICC thus failed to discharge the burden of proving that the
claimed expense deductions for the professional services were
allowable deductions for the taxable year 1986. Hence, per
Revenue Audit Memorandum Order No. 1-2000, they cannot be
validly deducted from its gross income for the said year and
were therefore properly disallowed by the BIR.
As to the expenses for security services, the records show that
these expenses were incurred by ICC in 1986 and could
therefore be properly claimed as deductions for 1986.
5. KUENZLE & STREIFF, INC. VS. CIR
G.R. No. 143672
It is a general rule that `Bonuses to employees made in good
faith and as additional compensation for the services actually
rendered by the employees are deductible, provided such
payments, when added to the stipulated salaries, do not exceed
a reasonable compensation for the services rendered.
The condition precedents to the deduction of bonuses to
employees are: (1) the payment of the bonuses is in fact
compensation; (2) it must be for personal services actually
rendered; and (3) bonuses, when added to the salaries, are
`reasonable ... when measured by the amount and quality of
the services performed with relation to the business of the
particular taxpayer. Here it is admitted that the bonuses are in
fact compensation and were paid for services actually rendered.
FACTS:
Kuenzle & Streiff for the years 1953, 1954 and 1955 filed its
income tax return, declaring losses. CIR filed for deficiency of
income taxes against Kuenzle & Streiff Inc. for the said years in
the amounts of P40,455.00, P11,248.00 and P16,228.00,
respectively, arising from the disallowance, as deductible
expenses, of the bonuses paid by the corporation to its officers,
upon the ground that they were not ordinary, nor necessary,
nor reasonable expenses within the purview of Section 30(a) (1)
of the National Internal Revenue Code.The corporation filed with
the Court of Tax Appeals a petition for review contesting the
assessments. CTA favored the CIR, however lowered the tax
due on 1954. The corporation moved for reconsideration, but
still lost. The Corporation contends that the tax court, in arriving
at its conclusion, acted "in a purely arbitrary manner", and erred
in not considering individually the total compensation paid to
each of petitioner's officers and staff members in determining
the reasonableness of the bonuses in question, and that it erred
likewise in holding that there was nothing in the record
indicating that the actuation of the respondent was
unreasonable or unjust.
ISSUE: Whether or not the bonuses in question was reasonable
and just to be allowed as a deduction?
HELD: No.
RATIO: It is a general rule that `Bonuses to employees made in
good faith and as additional compensation for the services
actually rendered by the employees are deductible, provided
such payments, when added to the stipulated salaries, do not
exceed a reasonable compensation for the services rendered.
The condition precedents to the deduction of bonuses to
employees are: (1) the payment of the bonuses is in fact
compensation; (2) it must be for personal services actually
rendered; and (3) bonuses, when added to the salaries, are
`reasonable ... when measured by the amount and quality of
the services performed with relation to the business of the
particular taxpayer. Here it is admitted that the bonuses are in
fact compensation and were paid for services actually rendered.
The only question is whether the payment of said bonuses is
reasonable.
There is no fixed test for determining the reasonableness of a
given bonus as compensation. This depends upon many factors,
one of them being the amount and quality of the services
performed with relation to the business. Other tests suggested
are: payment must be 'made in good faith'; the character of the
taxpayer's business, the volume and amount of its net earnings,
its locality, the type and extent of the services rendered, the
salary policy of the corporation'; 'the size of the particular
business'; 'the employees' qualifications and contributions to the
business venture'; and 'general economic conditions. However,
'in determining whether the particular salary or compensation
payment is reasonable, the situation must be considered as a
whole.
It seems clear from the record that, in arriving at its
main conclusion, the tax court considered, inter alia, the
following factors:
1) The paid officers, in the absence of evidence to the contrary,
that they were competent, on the other the record discloses no
evidence nor has petitioner ever made the claim that all or some
of them were gifted with some special talent, or had undergone
some extraordinary training, or had accomplished any particular
task, that contributed materially to the success of petitioner's
business during the taxable years in question.
2) All the other employees received no pay increase in the said
years.
3) The bonuses were paid despite the fact that it had suffered
net losses for 3 years. Furthermore the corporation cannot use
the excuse that it is 'salary paid' to an employee because the
CIR does not question the basic salaries paid by petitioner to the
officers and employees, but disallowed only the bonuses paid to
petitioner's top officers at the end of the taxable years in
question.
6. CIR V.S. GENERAL FOODS (PHILS), INC.
GR No. 143672
Facts:
Respondent corporation :led its income tax return for the :scal
year ending February 28, 1985. In said tax return, respondent
claimed as deduction, among other business expenses, the
amount of P9,461,246 for media advertising for "Tang" one of
its products. The Commissioner disallowed 50% or P4,730,623
of the deduction claimed by respondent. The latter :led a motion
for reconsideration, but the same was denied. Respondent
appealed to the Court of Tax Appeals, but the appeal was
dismissed. Aggrieved, respondent :led a petition for review at
the Court of Appeals which rendered a decision reversing and
setting aside the decision of the Court of Tax Appeals. Hence,
the present petition for review. The Commissioner of Internal
Revenue presented to the Court the lone issue of whether or not
the subject media advertising expense for "Tang" incurred by
respondent was an ordinary and necessary expense fully
deductible under the National Internal Revenue Code (NIRC).
The Supreme Court reversed and set aside the decision of the
Court of Appeals and ordered private respondent General Foods
(Phils); Inc., to pay its de:ciency income tax in the amount of
P2,635,141.42, plus 25% surcharge for late payment and 20%
annual interest computed from August 25, 1989, the date of the
denial of its protest, until the same is fully paid. The Court found
the subject expense for the advertisement of a single product to
be inordinately large, and even if indeed it is necessary, it cannot
be considered an ordinary expense deductible under Section 29
(a) (1) (A) of the NIRC. According to the Court, the subject
advertisement is one designed to stimulate the future sale of
merchandise or use of services. Said venture of respondent to
protect its brand franchise was tantamount to efforts to
establish a reputation and is akin to the acquisition of capital
assets, and should not, therefore, be considered as business
expenses but as capital expenditures which normally should be
spread out over a reasonable period of time.
Issue:
W/N the subject media advertising expense for “Tang” was
ordinary and necessary expense fully deductible under the NIRC
Held:
No. Tax exemptions must be construed in stricissimi 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.
Deductions for income taxes partake of the nature of tax
exemptions; hence, if tax exemptions are strictly construed,
then deductions must also be strictly construed.
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.
While the subject advertising expense was paid or incurred
within the corresponding taxable year and was incurred in
carrying on a trade or business, hence necessary, the
parties’ views conflict as to whether or not it was ordinary. To
be deductible, an advertising expense should not only be
necessary but also ordinary.
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 respondent’s business. Otherwise, the expense must be
considered a capital expenditure to be spread out over a
reasonable time.
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.
The Court finds 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 taxpayer’s 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.
The company’s media advertising expense for the promotion of
a single product is doubtlessly unreasonable considering it
comprises almost one-half of the company’s entire claim for
marketing expenses for that year under review. Petition
granted, judgment reversed and set aside.
7. MARIANO ZAMORA, petitioner,
vs.
COLLECTOR OF INTERNAL REVENUE and COURT OF TAX
APPEALS, respondents.
*consolidated cases
PAREDES, J.:
FACTS:
Cases Nos. L-15290 and L-15280
Mariano Zamora, owner of the Bay View Hotel and Farmacia
Zamora, Manila, filed his income tax returns the years 1951 and
1952. The CIR 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. He was assessed
to pay the sums of P43,758.50 and P7,625.00, as deficiency
income tax for the years 1951 and 1952.
On appeal by Zamora, the CTA, modified the decision appealed
from and ordered him to pay a reduced amount instead.
Zamora alleged that the CTA erred in:
(1) In dissallowing P10,478.50, as promotion expenses
incurred by his wife for the promotion of the Bay View
Hotel and Farmacia Zamora (which is ½ of P20,957.00,
supposed business expenses):
(2) In disallowing 3-½% per annum as the rate of
depreciation of the Bay View Hotel Building;
(3) In disregarding the price stated in the deed of sale,
as the costs of a Manila property, for the purpose of
determining alleged capital gains; and
(4) In applying the Ballantyne scale of values in
determining the cost of said property.
.ñët
Cases Nos. L-15289 and L-15281
Mariano Zamora and his deceased sister Felicidad Zamora,
bought a piece of land located in Manila on May 16, 1944, for
P132,000.00 and sold it for P75,000.00 on March 5, 1951. They
also purchased a lot located in Quezon City for P68,959.00 on
January 19, 1944, which they sold for P94,000 on February 9,
1951. The CTA ordered the payment of deficiency income tax
and surcharge due from the estate of Felicidad.
ISSUES-RULING
a) WON the CTA erred in allowing as promotion expenses of
Mrs. Zamora claimed in Mariano Zamora's 1951 income tax
returns, merely one-half or P10,478.50
ZAMORA: He contends that the whole amount of P20,957.00 as
promotion expenses in his 1951 income tax returns, should be
allowed and not merely one-half 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 P20,957.00 was spent by Mrs. Esperanza A.
Zamora (wife of Mariano), during her travel to Japan and the
United States to purchase machinery for a new Tiki-Tiki plant,
and to observe hotel management in modern hotels.
SC: CTA did not commit any reversible error.
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, claim
for the deduction of promotion expenses or entertainment
expenses must be substantiated or supported by record showing
in detail the amount and nature of the expenses incurred.
In the case, 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 Zamora and which was incurred
for her personal benefit, the Collector and the CTA in their
decisions, considered 50% of the said amount of P20,957.00 as
business expenses and the other 50%, as her personal
expenses. Said allocation is very fair to Mariano Zamora, 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 P20,957.00.
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.
of land values, as well as the extent and maintenance
and rehabilitation. It is allowed a depreciation rate of
2-½% corresponding to a normal useful life of only 40
years (1955 PH Federal Taxes, Par 14 160-K).
Although Bulletin F has no binding force, it has a strong
persuasive effect considering that the same has been the result
of scientific studies and observation for a long period in the
United States after whose Income Tax Law ours is patterned.
c) WON Zamora is liable for the undeclared capital gains derived
from the sales in 1951 of certain real properties in Malate, Manila
and in Quezon City, acquired during the Japanese occupation?
COURT: Yes. The cost basis of property acquired in Japanese
war notes is the equivalent of the war notes in genuine
Philippine currency in accordance with the Ballantyne Scale of
values, and that the determination of the gain derived or loss
sustained in the sale of such property is not affected by the
decline at the time of sale, in the purchasing power of the
Philippine currency.
Simply put: the court is not convinced with the contention of
Zamora because if the amounts in the deeds of sale will be
followed, it will appear that a particular real property
(P132,000.00) was sold to an amount that is very much below
than its fair market value (P68,959.00). Hence, the court is
inclined to believe, based on admissions and careful study of the
evidences, that in the subject sales, the basis for the capital
gains computation should not the costs appearing in the deed
of sale.
IN VIEW HEREOF, the petition in each of the above-entitled
cases is dismissed, and the decision appealed from is affirmed,
without special pronouncement as to costs.

b) WON the CTA erred in disallowing 3-½% per annum as the (read the full text for a detailed explanation on issue #3)
rate of depreciation of the Bay View Hotel Building and instead
used only 2-½%?

ZAMORA: He contends that (1) the Ermita District, where the

Bay View Hotel is located, is now becoming a commercial
district; (2) the hotel has no room for improvement; and (3) the
changing modes in architecture, styles of furniture and
decorative designs, "must meet the taste of a fickle public,"
hence, the depreciation rate should be 3-½% per annum. His
basis is the testimony of its witness Mariano Katipunan, who
cited a book entitled "Hotel Management — Principles and
Practice" by Lucius Boomer, President, Hotel Waldorf Astoria
Corporation

COURT: The 2-½% rate of depreciation of the Bay View Hotel

building, is approximately correct, based on Bulletin F which
8. 3M PHILIPPINES, INC., petitioner,
states that:
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
Normally, an average hotel building is estimated to
have a useful life of 50 years, but inasmuch as the
useful life of the building for business purposes
depends to a large extent on the suitability of the GRIÑO-AQUINO, J.:
structure to its use and location, its architectural
quality, the rate of change in population, the shifting
Section 29(a)(1) of the Tax Code which provides:

(a) Expenses. — (1) Business expenses. —


CB Circular No. 393
Section 3. Requirements for Approval and Registration. —
The requirements for approval and registration as provided
for in Section 2 above include, but are not limited to the
following:
a. xxx xxx xxx
b. xxx xxx xxx
c. The royalty/rental contracts involving manufacturing'
royalty, e.g., actual transfers of technological services such
as secret formula/processes, technical knowhow and the
like shall not exceed five (5) per cent of the wholesale price
of the commodity/ties manufactured under the royalty
agreement. For contracts involving 'marketing' services
such as the use of foreign brands or trade names or
trademarks, the royalty/rental rate shall not exceed two
(2) per cent of the wholesale price of the commodity/ties
manufactured under the royalty agreement. The producer's
or foreign licensor's share in the proceeds from the
distribution/exhibition of the films shall not exceed sixty
(60) per cent of the net proceeds (gross proceeds less local
expenses) from the exhibition/distribution of the films. ...
(Emphasis supplied.) (p. 27, Rollo.)
FACTS:
3M Philippines, Inc. (3M) is a subsidiary of the Minnesota Mining
and Manufacturing Company (or "3M-St. Paul") a non-resident
foreign corporation with principal office in St. Paul, Minnesota,
U.S.A. It is the exclusive importer, manufacturer, wholesaler,
and distributor in the Philippines of all products of 3M-St. Paul.
3M entered into a "Service Information and Technical Assistance
Agreement" and a "Patent and Trademark License Agreement"
with 3M-St. Paul under which 3M agreed to pay 3M-St. Paul a
technical service fee of 3% and a royalty of 2% of its net sales.
Both agreements were submitted to, and approved by, the
Central Bank of the Philippines.
In 3M’s income tax return for the fiscal year 1974, it claimed the
following deductions as business expenses: (a) royalties and
technical service fees of P 3,050,646.00; and (b) pre-operational
cost of tape coater of P97,485.08.
On the first item, CIR allowed a deduction but
only on the technical service fee and royalty for locally
manufactured products, and disallowed those which
have been paid by 3M to 3M-St. Paul as technical
service fee and royalty on the P46,471,998.00 worth of
finished products imported by 3M from the 3M-St. Paul
(parent company), on the ground that the fee and
royalty should be based only on locally manufactured
goods. (the basis of the CIR was the Central Bank
Circular No. 393)
On the second item, CIR allowed only one-
fifth (1/5) of 3M's capital expenditure on its tape coater
which was installed in 1973 because such expenditure
should be amortized for a period of five (5) years. The
disallowed balance should be spread over for the next
four (4) years.
In sum, CIR ordered 3M to pay P840,540.00 as deficiency
income tax on its 1974 return, plus P353,026.80 as 14% interest
per annum from February 15, 1975 to February 15, 1976, or a
total of P1,193,566.80.
3M protested the assessment and argues that the Central bank
has no say in the assessment and collection of internal revenue
taxes as such power is lodged in the Bureau of Internal
Revenue, that the Tax Code never mentions Circular 393 and
there is no law or regulation governing deduction of business
expenses that refers to said circular.
ISSUE:
WON 3M’s contention is tenable?
RULING:
No.
The court ruled that although the Tax Code allows payments of
royalty to be deducted from gross income as business expenses,
it is CB Circular No. 393 that defines what royalty payments are
proper. Hence, improper payments of royalty are not deductible
as legitimate business expenses.
CB Circular No. 393 dated December 7,1983 was published in
the Official Gazette issue of December 17,1973 (69 O.G. No. 51,
p. 11737). Circulars issued by the Central Bank in the exercise
of its authority under the Central Bank Act, and which have been
duly published in the Official Gazette, have the force and effect
of law. They are binding on everybody, the petitioner, as much
as the public respondent.
Because remittances to foreign licensors of technical service
fees and royalties are made in foreign exchange, CB Circular No.
393 (Regulations Governing Royalties/Rentals) dated December
7, 1973 was promulgated by the Central Bank as an exchange
control regulation to conserve foreign exchange and avoid
unnecessary drain on the country's international reserves (69
O.G. No. 51, pp. 11737-38).
Section 3-C of the circular provides that royalties shall be paid
only on commodities manufactured by the licensee under the
royalty agreement. CIR is correct in its assessment.
WHEREFORE, finding no reversible error in the decision of the
Court of Tax Appeals, the petition for review is denied. Costs
against the petitioner.
SO ORDERED.
9. ANTONIO ROXAS, EDUARDO ROXAS and ROXAS Y
CIA., in their own respective behalf and as judicial co-
guardians of JOSE ROXAS, petitioners,
vs.
COURT OF TAX APPEALS and COMMISSIONER OF
INTERNAL REVENUE, respondents.
BENGZON, J.P., J.:
FACTS:
Antonio Roxas, Eduardo Roxas and Jose Roxas, formed
a partnership called Roxas y Compania to properly administer
the properties they inherited from their grandparents.
Subject transactions:
a) on the agricultural lands
The Government, by virtue of its constitutional mandate
subjected the Nasugbu lands of the petitioners to the
coverage of agrarian reform. But since the Government did
not have funds to cover the purchase price, a special
arrangement was made for the Rehabilitation Finance
Corporation to advance to Roxas y Cia. the amount of
P1,500,000.00 as loan. Collateral for such loan were the
lands proposed to be sold to the farmers. Under the
arrangement, Roxas y Cia. allowed the farmers to buy the
lands for the same price but by installment, and contracted
with the Rehabilitation Finance Corporation to pay its loan
from the proceeds of the yearly amortizations paid by the
farmers.
In 1953 and 1955 Roxas y Cia. derived from said installment
payments a net gain of P42,480.83 and P29,500.71. Fifty
percent of said net gain was reported for income tax
purposes as gain on the sale of capital asset held for more
than one year pursuant to Section 34 of the Tax Code.
b) on the residential house
During their bachelor days the Roxas brothers lived in the
residential house at Wright St., Malate, Manila, which they
inherited from their grandparents. After Antonio and
Eduardo got married, they resided somewhere else leaving
only Jose in the old house. Jose paid to Roxas y Cia. rentals
for the house in the sum of P8,000.00 a year.
c) donations made by the partnership
On June 17, 1958, the CIR demanded from Roxas y Cia
the following:
a) deficiency income taxes against the Roxas Brothers for the
years 1953 and 1955. 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.
b) payment of real estate dealer's tax based on the fact that
Roxas y Cia. received house rentals from Jose Roxas in the
amount of P8,000.00. It contends that pursuant to Sec. 194
of the Tax Code, an owner of a real estate who derives a
yearly rental income therefrom in the amount of P3,000.00
or more is considered a real estate dealer and is liable to pay
the corresponding fixed tax. It justified its demand by
arguing that said partnership made profits from the purchase
and sale of securities.
c) disallowed deductions (entities are specified in the ruling)
CTA: sustained the assessment of CIR 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.
Hence, this petition.
ISSUES:
1. Is the gain derived from the sale of the Nasugbu farm
lands an ordinary gain, hence 100% taxable?
2. Are the deductions for business expenses and
contributions deductible?
3. Is Roxas y Cia liable for the payment of the fixed tax
on real estate dealers?
RULING:
1. The court ruled that it was only an isolated transaction .
(based on the agricultural land transaction)
The sale of the Nasugbu farm lands to the very farmers
who tilled them for generations was not only in consonance
with, but more in obedience to the request and pursuant to
the policy of our Government to allocate lands to the
landless. It was the bounden duty of the Government to pay
the agreed compensation after it had persuaded Roxas y Cia
to sell its haciendas, and to subsequently subdivide them
among the farmers at very reasonable terms and prices.
However, the Government could not comply with its duty for
lack of funds. Obligingly, Roxas y Cia. shouldered the
Government's burden, went out of its way and sold lands
directly to the farmers in the same way and under the same
terms as would have been the case had the Government
done it itself.
 In fine, Roxas y Cia. cannot be considered a real estate
dealer for the sale in question. Hence, pursuant to Section
34 of the Tax Code the lands sold to the farmers are
capital assets, and the gain derived from the sale thereof is
capital gain, taxable only to the extent of 50%.
2. It depends.
Under Section 39(h), a contribution to a government
entity is deductible when used exclusively for public
purposes. Hence,
Allowed deductions:
a. the contribution to the Manila Police trust fund
because said trust fund belongs to the Manila Police,
a government entity, intended to be used exclusively
for its public functions.
Disallowed deductions:
a. the contributions to the Christmas funds of the
Pasay City Police, Pasay City Firemen and Baguio
City Police because the Christmas funds were not
spent for public purposes but as Christmas gifts to
the families of the members of said entities.
b. the contributions to the Philippines Herald's fund for
Manila's neediest families because 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.)
c. the contribution to Our Lady of Fatima chapel at the
Far Eastern University because 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. Also, 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 inures to the
benefit of its stockholders.
3. Yes. (based on the house rentals received from Jose,
pursuant to Art. 194 of the Tax Code stating that an owner of a
real estate who derives a yearly rental income therefrom in the
amount of P3,000.00 or more is considered a real estate dealer
and is liable to pay the corresponding fixed tax)
Because Section 194 of the Tax Code, in considering as real
estate dealers owners of real estate receiving rentals of at least
P3,000.00 a year, does not provide any qualification as to the
persons paying the rentals.
Section 194 of the Tax Code
. . . "Real estate dealer" includes any person
engaged in the business of buying, selling, exchanging,
leasing or renting property on his own account as
principal and holding himself out as a full or part-time
dealer in real estate or as an owner of rental property
or properties rented or offered to rent for an aggregate
amount of three thousand pesos or more a year: . . .
WHEREFORE, the decision appealed from is modified. Roxas y
Cia. is hereby ordered to pay the sum of P150.00 as real estate
dealer's fixed tax for 1952, and Antonio Roxas, Eduardo Roxas
and Jose Roxas are ordered to pay the respective sums of
P109.00, P91.00 and P49.00 as their individual deficiency
income tax all corresponding for the year 1955. No costs. So
ordered.
 The power of taxation is sometimes called also the
power to destroy. Therefore it should be exercised with
caution to minimize injury to the proprietary rights of a
taxpayer. It must be exercised fairly, equally and
uniformly, lest the tax collector kill the "hen that lays
the golden egg". And, in order to maintain the general
public's trust and confidence in the Government this
power must be used justly and not treacherously. It
does not conform with Our sense of justice in the
instant case for the Government to persuade the
taxpayer to lend it a helping hand and later on to
penalize him for duly answering the urgent call.
 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.
10. Gancayco v. CIR
FACTS:
Petitioner Santiago Gancayco seeks the review of a decision of
the Court of Tax Appeals, requiring him to pay P16,860.31, plus
surcharge and interest, by way of deficiency income tax for the
year 1949.
On May 10, 1950, Gancayco filed his income tax return for the
year 1949. Two (2) days later, respondent Collector of Internal
Revenue issued the corresponding notice advising him that his
income tax liability for that year amounted P9,793.62, which he
paid on May 15, 1950. A year later, on May 14, 1951, respondent
wrote the communication Exhibit C, notifying Gancayco, inter
alia , that, upon investigation, there was still due from him, a
efficiency income tax for the year 1949, the sum of P29,554.05.
Gancayco sought a reconsideration, which was part granted by
respondent, who in a letter dated April 8, 1953 (Exhibit D),
informed petitioner that his income tax defendant efficiency for
1949 amounted to P16,860.31. Gancayco urged another
reconsideration (Exhibit O), but no action taken on this request,
although he had sent several communications calling
respondent's attention thereto.
On April 15, 1956, respondent issued a warrant of distraint and
levy against the properties of Gancayco for the satisfaction of
his deficiency income tax liability.
ISSUE: The question whether the sum of P16,860.31 is due from
Gancayco as deficiency income tax for 1949 hinges on the
validity of his claim for deduction of two (2) items, namely: (a)
for farming expenses, P27,459.00; and (b) for representation
expenses, P8,933.45.
Held:
Section 30 of the Tax Code partly reads:
(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 salaries
or other compensation for personal services actually
rendered; traveling expenses while away from home in
the pursuit of a trade or business; and rentals or other
payments required to be made as a condition to the
continued use or possession, for the purposes of the
trade or business, of property to which the taxpayer
has not taken or is not taking title or in which he has
no equity. (Emphasis supplied.)
Referring to the item of P27,459, for farming expenses allegedly
incurred by Gancayco, the decision appealed from has the
following to say:
No evidence has been presented as to the nature of
the said "farming expenses" other than the bare
statement of petitioner that they were spent for the
"development and cultivation of (his) property". No
specification has been made as to the actual amount
spent for purchase of tools, equipment or materials, or
the amount spent for improvement. Respondent claims
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 capitol
expenditure. Accordingly, it is not deductible but it may
be amortized, in accordance with section 75 of
Revenue Regulations No. 2, cited above. See also,
section 31 of the Revenue Code which provides that in
computing net income, no deduction shall in any case
be allowed in respect of any amount paid out for new
buildings or for permanent improvements,
or betterments made to increase the value of any
property or estate. (Emphasis supplied.)
We concur in this view, which is a necessary consequence of
section 31 of the Tax Code, pursuant to which:
(a) General Rule — In computing net income no
deduction shall in any case be allowed in respect of —
(1) Personal, living, or family expenses;
(2) Any amount paid out for new buildings or
for permanent improvements, or betterments made
to increase the value of any property or estate;
(3) Any amount expended in restoring property or
in making good the exhaustion thereof for which an
allowance is or has been made; or
(4) Premiums paid on any life insurance policy covering
the life of any officer or employee, or any person
financially interested in any trade or business carried
on by the taxpayer, individual or corporate, when the
taxpayer is directly or indirectly a beneficiary under
such policy. (Emphasis supplied.)
Said view is, likewise, in accord with the consensus of the
authorities on the subject.
Expenses incident to the acquisition of property follow
the same rule as applied to payments made as direct
consideration for the property. For example,
commission paid in acquiring property are considered
as representing part of the cost of the property
acquired. The same treatment is to be accorded to
amounts expended for maps, abstracts, legal opinions
on titles, recording fees and surveys. Other non-
deductible expenses include amounts paid in
connection with geological
explorations, development and subdividing of real
estate; clearing and grading; restoration of soil, drilling
wells, architects's fees and similar types of
expenditures. (4 Merten's Law of Federal Income
Taxation, Sec. 25.20, pp. 348-349; see also sec. 75 of
the income Regulation of the B.I.R.; Emphasis
supplied.)
The cost of farm machinery, equipment and farm
building represents a capital investment and is not an
allowable deduction as an item of expense. Amounts
expended in the development of farms, orchards, and
ranches prior to the time when the productive state is
reached may be regarded as investments of capital.
(Merten's Law of Federal Income Taxation, supra, sec.
25.108, p. 525.)
Expenses for clearing off and grading lots acquired is
a capital expenditure, representing part of the cost of
the land and was not deductible as an expense.
(Liberty Banking Co. v. Heiner 37 F [2d] 703 [8AFTR
100111] [CCA 3rd]; The B.L. Marble Chair Company v.
U.S., 15 AFTR 746).
 An item of expenditure, in order to be deductible under
this section of the statute providing for the deduction
of ordinary and necessary business expenses, must
fall squarely within the language of the statutory
provision. This section is intended primarily, although
not always necessarily, to cover expenditures of
a recurring nature where the benefit derived from the
payment is realized and exhausted within the taxable
year. Accordingly, if the result of the expenditure is
the acquisition of an asset which has an economically
useful life beyond the taxable year, no deduction of
such payment may be obtained under the provisions of
the statute. In such cases, to the extent that a
deduction is allowable, it must be obtained under the
provisions of the statute which permit deductions for
amortization, depreciation, depletion or loss. (W.B.
Harbeson Co. 24 BTA, 542; Clark Thread Co., 28 BTA
1128 aff'd 100 F [2d] 257 [CCA 3rd, 1938]; 4 Merten's
Law of Federal Income Taxation, Sec. 25.17, pp. 337-
338.)
Gancayco's claim for representation expenses aggregated
P31,753.97, of which P22,820.52 was allowed, and P8,933.45
disallowed. Such disallowance is justified by the record, for,
apart from the absence of receipts, invoices or vouchers of the
expenditures in question, petitioner could not specify the items
constituting the same, or when or on whom or on what they
were incurred. The case of Cohan v. Commissioner, 39 F (2d)
540, cited by petitioner is not in point, because in that case there
was evidence on the amounts spent and the persons entertained
and the necessity of entertaining them, although there were no
receipts an vouchers of the expenditures involved therein. Such
is not the case of petitioner herein.
Being in accordance with the facts and law, the decision of the
Court of Tax Appeals is hereby affirmed therefore, with costs
against petitioner Santiago Cancayco. It is so ordered.
11. CIR V. AMERICAN RUBBER
The factual background is the same in all four cases, and is not
in controversy, having been stipulated between the parties.
Petitioner, American Rubber Company, a domestic corporation,
from January 1, 1955 to December 1, 1958, was engaged in
producing rubber from its approximately 900 hectare rubber
tree plantation, which it owned and operated in Latuan, Isabela,
City of Basilan. Its products, known in the market as Preserved
Latex, Pale Crepe No. 1, Pale Crepe No. 2, Ribbed Smoked
Sheets Nos. 1 and 2, Flat Bark Rubber, 2X Brown Crepe and 3X
Brown Crepe.
The following sales taxes on the aforementioned rubber
products were paid under protest —
From Jan. 1, 1955 to Dec. 31, P83,193.48
1956
From Jan. 1, 1957 to June P20,504.99
30, 1957
From July 1, 1957 to Dec. 31, P52,378.90
1958
It is further stipulated that the sales tax collected from petitioner
American Rubber Company on the local sales of its rubber
products, following Internal Revenue General Circulars Nos. 431
and 440, had been separately itemized and billed by petitioner
Company in the invoices issued to the customers, that paid both
the value of the rubber articles and the separately itemized sales
tax, from January 1, 1955 to August 2, 1957.
After paying under protest, the petitioner claimed refund of the
sales taxes paid by it on the ground that under section 188,
paragraph b, of the Internal Revenue Code, as amended,1 its
rubber products were agricultural products exempt from sales
tax, and upon refusal of the Commissioner of Internal Revenue,
brought the case on appeal to the Court of Tax Appeals (C.T.A.
Nos. 356, 440,, 632). The respondent Commissioner interposed
defenses, denying that petitioner's products were agricultural
ones within the exemption; claiming that there had been no
exhaustion of administrative remedies; and argued that the
sales tax having been passed to the buyers during the period
that elapsed from January 1, 1955 to August 2, 1957, the
petitioner did not have personality to demand, sue for and
recover the aforesaid sales taxes, plus interest.
In its decision, now under appeal, the Tax Court held Preserved
Latex, Flat Bark Rubber, and 3X Brown Crepe to be agricultural
products, "because the labor employed in the processing thereof
is agricultural labor", and hence, the sales of such products were
exempt from sales tax, but declared Pale Crepe No. 1, Ribbed
Smoked Sheets Nos. 1 and 3, as well as 2X Brown Crepe (which
is obtained from rolling excess pieces of Smoked Sheets) to be
manufactured products, sales of which were subject to the tax.
It overruled the defense of non-exhaustion of administrative
remedies and upheld the Revenue Commissioner's stand that
petitioner Company was not entitled to recover the sales tax that
had been separately billed to its customers, and paid by the
latter. Hence, it dismissed the appeal in C.T.A. Nos. 356 and 440
and ordered respondent Commissioner to refund only P3,916.49
without interest, or costs.
ISSUES:
(1) Whether the plaintiff's rubber products above described
should be considered agricultural or manufactured for purposes
of their subjection to the sales tax;
(2) Whether plaintiff is or is not entitled to recover the sales tax
paid by it, but passed on to and paid by the buyers of its
products; and
(3) Whether plaintiff is or is not entitled to interest on the sales
tax paid by it under protest, in case recovery thereof is allowed.
HELD:
The first issue, in our opinion, is governed by the principles laid
down by this Court in Philippine Packing Corporation vs.
Collector of Internal Revenue, 100 Phil. 545 et seq. We there
ruled that the exemption from sales tax established in section
188 (b) of the Internal Revenue Tax Code in favor of sales of
agricultural products, whether in their original form or not, made
by the producer or owner of the land where produced is not
taken away merely because the produce undergoes processing
at the hand of said producer or owner for the purpose of working
his product into a more convenient and valuable form suited to
meet the demand of an expanded market; that the exemption
was not designed in favor of the small agricultural producer,
already exempted by the subsequent paragraphs of the same
section 188, but that said exemption is not incompatible with
large scale agricultural production that incidentally required
resort to preservative processes designed to increase or prolong
marketability of the product.
In the case before us, the parties have stipulated that fresh latex
directly obtained from the rubber tree, which is clearly an
agricultural product, becomes spoiled after only two hours. It
has, therefore, a severely limited marketability. The addition of
ammonia prevents its deterioration for about a month, and we
see no reason why this preservative process should wrest away
from the preserved latex the protective mantle of the tax
exemption.
Taking also into account the great distance that separates the
plaintiff's plantation from the main rubber processing centers in
Japan, the United States and Europe, and the difficulty in
handling products in liquid form, it can be discerned without
difficulty that preserved, latex, with its 30-day spoilage limit, is
still severely handicapped for export and dollar earning
purposes.
To overcome these shortcomings, and extend its useful life
almost indefinitely, it becomes necessary to separate and
solidify the rubber granules diffused in the latex, and hence,
according to the stipulation of facts and the evidence, acetic acid
is added to hasten coagulation. There is nothing on record to
show that the acetic acid in way produces anything that was not
originally in the source, the liquid latex. The coagulum is then
rolled and compacted and afterwards air dried to make Pale
Crepe(1 and 2), or else cured and smoked to produce rubber
sheets. Once again we see nothing in this processing to alter
the agricultural nature of the result; what takes place is merely
an accelerated coagulation and dessication that would naturally
occur anyway, only within a longer period of time, coupled with
greater spoilage of the product.
Thus the operations carried out by plaintiff appear to be purely
preservative in nature, made necessary, by its production of
fresh rubber latex in a large scale. they are purely incidental to
the latter, just as the canning of skinned and cored pineapples
in syrup was held to be incidental to the large-scale cultivation
of the fruit in the Philippine Packing Corporation case (ante).
Being necessary to suit the product to the demands of the
market, the operations in both cases should lead to the same
result, non-taxability of the sales of the respective agricultural
products. In not so holding, the Tax Court was in error.
Even less justifiable is the position taken by the Revenue
Commissioner in his appeal against the finding of the Tax Court
that Flat Bark 3X Brown Crepe rubber are agricultural products.
According to the record, these sheets result from the drippings
and waste rubber that have dried naturally, that are rolled and
compacted into the desired thickness, without any other
processing.
As to 2X Brown Crepe which is compacted out of the trimmings
and waste left over from the production of ribbed smoked
sheets, no reason is seen why it should be treated differently
from the ribbed smoked sheets themselves.
In his appeal, the Revenue Commissioner contends that all of
plaintiff's products should be deemed manufactured articles, on
the strength of section 194 (n) of the Revenue Code defining a
"manufacturer" as
every person who by physical or chemical process
alters the exterior texture or form or inner substances
of any raw material or manufactured or partially
manufactured product in such manner as to prepare it
for a special use or uses to which it could not have
been put to in its original condition, or who . . . alters
the quality of any such raw material . . . as to reduce
it to marketable shape . . . .
But, as pointed out in the Philippine Packing Corporation case,
this definition is not applicable to the exemption of agricultural
products, "whether in their original form or not". The use of this
last phrase in the statute clearly indicates that the agricultural
product may be altered in texture or form without being divested
of the exemption (cas cit. 100 Phil., p. 548). The exception
would be sales of agricultural products while Republic Act No.
1612 was in effect because under this Act the freedom from
sales tax became restricted to agricultural products "in their
original form" only. So that plaintiff's sales from August 24, 1956
(approval of Republic Act 1612) to June 22, 1957 (when
Republic Act 1856 became effective and restored the exemption
to agricultural products "whether in their original form or not")
became properly taxable. Under paragraphs (A)2 and B(4) of
the additional stipulation of facts (CTA Rec. pp. 261-262, G.R.
L-19801), the sales tax properly collected during this period of
plaintiff's transactions amounted to P18,187.19 from August 24
to December 31, 1956; and P18,888.28 from January 1 to June
21, 1957, or a total of P37,075.47. This last amount is, therefore
non-recoverable.2
The second issue in this appeal concerns the holding of the
Court of Tax Appeals that the plaintiff Company is not entitled
to recover the sales tax paid by it from January, 1955 to August
2, 1957, because during that period the plaintiff had separately
invoiced and billed the corresponding sales tax to the buyers of
its products. In so holding, the Tax Court relied on our decisions
in Medina vs. City of Baguio, 91 Phil. 854; Mendoza, Santos &
Co. vs. Municipality of Meycawayan, L-6069-6070, April 30, 1954
(94 Phil. 1047); and Zosimo Rojas & Bros. vs. City of Cavite, L-
10730, May 27, 1958.
The basic ruling is that of Medina vs. City of Baguio, supra,
where this Court affirmed the ruling of the court of First Instance
to the effect that —
"The amount collected from the theatergoers as
additional price of admission tickets is not the property
of plaintiffs or any of them. It is paid by the public. If
anybody has the right to claim it, it is those who paid
it. Only owners of property has the right to claim said
property. The cine owner acted as mere agents of the
city in collecting additional price charged in the sale of
admission tickets." (Medina vs. City of Baguio, 91 Phil.
854) (Emphasis supplied)
We agree with the plaintiff-appellant that the Medina ruling is
not applicable to the present case, since the municipal taxes
therein imposed were taxes on the admission tickets sold, so
that, in effect, they were levies upon the theatergoers who
bought them; so much so that (as the decision expressly ruled)
the tax was collected by the theater owners as agents of the
respective municipal treasurers. This does not obtain in the case
at bar. The Medina ruling was merely followed in Rojas & Bros.
vs. Cavite, supra; and in Mendoza, Santos & Co. vs. Municipality
of Meycawayan, 94 Phil. 1047.
By contrast with the municipal taxes involved in the preceding
cases, the sales tax is by law imposed directly, not on the thing
sold, but on the act (sale) of the manufacturer, producer or
importer (Op. of the Secretary of Justice, June 15, 1946; 47
C.J.S., p. 1141), who is exclusively made liable for its timely
payment. There is no proof that the tax paid by plaintiff is the
very money paid by its customers. Where the tax money paid
by the plaintiff came from is really no concern of the
Government, but solely a matter between the plaintiff and its
customers. Anyway, once recovered, the plaintiff must hold the
refund taxes in trust for the individual purchasers who advanced
payment thereof, and whose names must appear in plaintiff's
records.
Moreover, the separate billing of the sales tax in appellant's
invoices was a direct result of the respondent Commissioner's
General Circular No. 440, providing that —
if a manufacturer, producer, or importer, in fixing the
gross selling price of an article sold by him, has
included an amount intended to cover the sales tax in
the gross selling price of the article, the sales tax shall
be based on the gross selling price less the amount
intended to cover the tax, if the same is billed to the
purchaser as a separate item in the invoice. . . .
(Emphasis supplied)
In other words, the separate itemization of the sales tax in the
invoices was permitted to avoid the taxpayer being compelled
to pay a sales tax on the tax itself. It does not seem either just
or proper that a step suggested by the Internal Revenue
authorities themselves to protect the taxpayer from paying a
double tax should now be used to block his action to recover
taxes collected without legal sanction.
Finally, a more important reason that militates against extensive
and indiscriminate application of the Medina vs. City of Baguio
ruling is that it would tend to perpetuate illegal taxation; for the
individual customers to whom the tax is ultimately shifted will
ordinarily not care to sue for its recovery, in view of the small
amount paid by each and the high cost of litigation for the
reclaiming of an illegal tax. In so far, therefore, as it favors the
imposition, collection and retention of illegal taxes, and
encourages a multiplicity of suits, the Tax Court's ruling under
appeal violates morals and public policy.
The plaintiff Company also urges that the refund of the taxes
should include interest thereon. While this Court has allowed
recovery of interest in some cases, it has done so only in cases
of patent arbitrariness on the part of the Revenue authorities;
and in this instance we agree with the Tax Court that no such
patent arbitrariness has been shown.
IN VIEW OF THE FOREGOING, the decision of the Court of Tax
Appeals is affirmed
12. No. L-20563. October 29, 1968.
CEBU PORTLAND CEMENT COMPANY,
petitioner, vs.COLLECTOR (NOW COMMISSIONER) OF
INTERNAL REVENUE, respondent.
Facts: This case involves petitioner's claim for refund of
P458,241.45 sales tax paid from November 1, 1954 to March,
1955, and P427,552.95 ad valorem tax paid from April, 1955 to
September 30, 1956 from the sale of APO
Portland cement produced by the petitioner.
Prior to the effectivity of Republic Act No. 1299 on June 16,
1955,1 the petitioner had been paying the sales tax (known also
as percentage tax) of APO portland cement produced by
it,2 computed at 7% of the gross selling price inclusive of the
cost of the bag containers of cement and the gypsum3 used in
the manufacture of said product. Af ter the approval of the
amendment of the law petitioner stopped paying sales tax on its
gross sales and instead paid the ad valorem tax4 on the selling
price of the product after deducting therefrom the
corresponding cost of the containers thereof.
It appears, however, that since 1952, petitioner had been
protesting the imposition of the sales tax on its APO portland
cement, and on January 16, 1953, it also protested the payment
of ad valorem taxes. A written claim for refund of sales and ad
valorem taxes paid by petitioner was filed two years later
(September 1955) which was reiterated on July 26, 1956.
Without awaiting respondent's ruling on said claims for refund,
petitioner, on January 24, 1957, filed with the Court of Tax
Appeals a petition for review "of the action of the Collector of
Internal Revenue in refusing to entertain petitioner's claim for
refund of the percentage tax on sales of its APO cement." It was
alleged in the petition that the percentage taxes collected by
respondent are refundable since under Republic Act 1299,
producers of cement are exempt from the payment of said tax.
The petition was amended on October 24, 1959, and again
amended on June 23, 1961, to include a claim for refund of ad
valorem taxes alleged to have been overpaid through double
payments.
Issue: Whether of not Cebu Portland entitled to the refund
of sales and ad valorem taxes?
Held: NO, due to prescription, and the taxable character of
cement. However, deductions may be had from the gross selling
price representing Gypsum and the Bag Containers of cement.

The gypsum and bag containers used in the production

and sale of cement are deductible from the gross selling price in
computing the 7% compensating tax levied on the sale of
cement before Republic Act 1299. In the absence of any
showing that the petitioner itself manufactured the bag
containers, the inference is that these bags were bought from
others from whom taxes had been levied for the original sale
thereof. The same holds true with the gypsum used in the
process of the manufacture of cement.

Pursuant to section 186 of the Tax Code and in

consonance with the case of Philippine Acetylene Co.,
Inc. vs. Commissioner of Internal Revenue & Court of Tax
Appeals, it is the petitioner, and not its customers that may ask
for a refund of whatever amounts it is entitled for the
percentage or sales tax it paid before the amendment of section
246 of the Tax Code.

** Constitutional law; Statutory construction; Statute

operates prospectively unless the contrary is made manifest;
Tax laws operate prospectively unless retrospective effect is
expressly declared or clearly implied.— It is a settled rule in
statutory construction that a statute operates prospectively only
and never retroactively, unless the legislative intent to the
contrary is made manifest either by the express terms of the
statute or by necessary implication. In every case of doubt, the
doubt must be resolved against the retrospective effect. There
is nothing in the context of the provision in question that would
manifest the Legislature's intention to have the provision apply
to taxes due in the past. On the other hand, the use of the word
"shall" gives the unmistakable impression that the lawmakers
intended this enactment to be effective only in future.
Furthermore, careful perusal of the explanatory note to House
Bill No. 3251, later approved as Republic Act 1299, and the
portions of the record of the discussions in Congress, reveals
nothing that would suggest that the amendment was enacted
to operate retrospectively. Indeed, like other statutes, tax laws
operate prospectively, whether they enact, amend or repeal,
unless as aforesaid, the purpose of the Legislature to give
retrospective effect is expressly declared or may clearly be
implied from the language used.
13. No. L-21520. December 11, 1967.
PLARIDEL SURETY & INSURANCE COMPANY,
petitioner, vs. COMMISSIONER OF INTERNAL REVENUE,
respondent.
Facts: Petitioner Plaridel Surety & Insurance Co., is a domestic
corporation engaged in the bonding business. On November 9,
1950, petitioner, as surety, and Constancio San Jose, as
principal, solidarity executed a performance bond in the penal
sum of P30,600.00 in favor of the P. L. Galang Machinery Co.,
Inc., to secure the performance of San Jose’s contractual
obligation to produce and supply logs to the latter.
To afford itself adequate protection against loss or damage
on the performance bond, petitioner required San Jose and one
Ramon Cuervo to execute an indemnity agreement obligating
themselves, solidarity, to indemnify petitioner for whatever
liability it may incur by reason of said performance bond.
Accordingly, San Jose constituted a chattel mortgage on logging
machineries and other movables in petitioner’s favor1 while
Ramon Cuervo executed a real estate mortgage.2
San Jose later failed to deliver the logs to Galang
Machinery3 and the latter sued on the performance bond. On
October 1, 1952, the Court of First Instance adjudged San Jose
and petitioner liable; it also directed San Jose and Cuervo to
reimburse petitioner for whatever amount it would pay Galang
Machinery.
In its income tax return for the year 1957, petitioner
claimed the said amount of P44,490.00 as deductible loss from
its gross income and, accordingly, paid the amount of P136.00
as its income tax for 1957.
The Commissioner of Internal Revenue disallowed the
claimed deduction of P44,490.00 and assessed against
petitioner the sum of P8,898.00, plus interest, as deficiency
income tax for the year 1957.
Issue: Whether or not petitioner can claim P44,490 as a
deductible loss from its gross income.
Held: No. Petitioner was duly compensated for otherwise than
by insurance- thru the mortgage in its favor executed by San
Jose and Cuervo and it had not yet exhausted all its available
remedies, especially as against Cuervo to minimize its loss.
Loss is deductible only in the taxable year it actually
happens or is sustained. However, if the loss is compensable
otherwise than by insurance—thru the mortgages in petitioner’s
favor executed by San Jose and Cuervo—though it had not
exhausted all its available remedies, especially as against
Cuervo, to minimize its loss, then deduction for the loss suffered
is postponed to a subsequent year, which, to be precise, is that
year in which it appears that no compensation at all can be had,
or that there is a remaining or net loss, i.e., no full
compensation.
Assuming that there was no reasonable expectation of
recovery of the loss sustained by petitioner, still no loss
deduction can be had. Sec. 30(d) (2) of the Tax Code requires
a charge-off as one of the conditions for loss deduction.
However, petitioner, who had the burden of proof, failed to
adduce evidence that there was a charge-off in connection with
the P44,490.00—or P30,600.00—which it paid to Galang
Machinery.
14. Collector vs. Goodrich International Rubber Co.
No. L-22265; dated 22 December 1967; 21 SCRA 1336
FACTS: Assessments was made by the Commissioner of
Internal Revenue, in the sums of P14,128.00 and P8,439.00, as
deficiency income taxes allegedly due from respondent
Goodrich—for the years 1951 and 1952. These assessments
were based on disallowed deductions, claimed by Goodrich,
consisting of several alleged bad debts, in the aggregate sum of
P50,455.41, for the year 1951, and the sum of P30,138.88, as
representation expenses allegedly incurred in the year 1952.
Goodrich had appealed from said assessments to the CA. A
decision allowing the deduction for bad debts, but disallowing
the alleged representation expenses was made. On motion for
reconsideration and new trial, filed by Goodrich, on November
19, 1963, the Court of Tax Appeals amended its aforementioned
decision and allowed said deductions for representation
expenses.
A reading of the case shows that Portillo Auto Seat Cover,
Visayan Rapid Transit, Bataan Auto Seat Cover, Tres Amigos
Supply and 6 more debtors were given a demand letter and after
a while was written off as bad debt.
ISSUE: Should deductions to the respondent’s tax be allowed
for the bad debts incurred by the debtors?
HELD: The claim for deduction of the said ten (10) debts should
be rejected. Goodrich has not established either that the debts
are actually worthless or that it had reasonable grounds to
believe them to be so in 1951. Our statute permits the deduction
of debts “actually ascertained to be worthless within the taxable
year,” obviously to prevent arbitrary action by the taxpayer, to
unduly avoid tax liability.
The requirement of ascertainment of worthlessness
requires proof of two facts: (1) that the taxpayer did in fact
ascertain the debt to be worthless, in the year for which the
deduction is sought; and (2) that, in so doing, he acted in good
faith.

Good faith on the part of the taxpayer is not enough. He must

show, also, that he had reasonably investigated the relevant
facts and had drawn a reasonable inference from the
information thus obtained by him. Respondent herein has not
adequately made such showing. The payments made, some in
full, after some of the foregoing accounts had been
characterized as bad debts, merely stresses the undue haste
with which the same had been written off. At any rate,
respondent has not proven that said debts were worthless.
There is no evidence that the debtors can not pay them. It
should be noted also that, in violation of Revenue Regulations
No. 2, Section 102, respondent had not attached to its income
tax returns a statement showing the propriety of the deductions
therein made for alleged bad debts.
 accounts; (2) sending of collection letters; (3) giving the account
to a lawyer for collection; and (4) filing a collection case in court.
15. Phil. Refining Co. vs. CA et al

G.R. No. 118794; dated 8 May 1996; 256 SCRA 667 On the foregoing considerations, respondent Court of Appeals
held that petitioner did not satisfy the requirements of
“worthlessness of a debt” as to the thirteen (13) accounts
disallowed as deductions.
FACTS: Petitioner Philippine Refining Company (PRC) was
assessed by respondent (Commissioner) to pay a deficiency tax
for the year 1985 in the amount of P1,892,584.00. The
assessment was timely protested by petitioner on April 26, 1989,
on the ground that it was based on the erroneous disallowances
of “bad debts” and “interest expense” although the same are
both allowable and legal deductions. Respondent Commissioner,
however, issued a warrant of garnishment against the deposits
of petitioner (implied action of denial of protest).

Out of the sixteen (16) accounts alleged as bad debts, the CA

found out that only three (3) accounts have met the
requirements of the worthlessness of the accounts, hence were
properly written off as bad debts. Further, that said accounts
have not satisfied the requirements of the ‘worthlessness of a
debt.’ Mere testimony of the Financial Accountant of the
Petitioner explaining the worthlessness of said debts is seen by
this Court as nothing more than a self-serving exercise which
lacks probative value. There was no iota of documentary
evidence.

ISSUE: Is nobody in a better position to determine when an

obligation becomes a bad debt than the creditor itself, and that
its judgment should not be substituted by that of respondent
court as it is PRC which has the facilities in ascertaining the
collectability or uncollectibility of the debts?

HELD: No. Court of Appeals relied on the ruling of this Court in

Collector vs. Goodrich International Rubber Co., which
established the rule in determining the “worthlessness of a
debt.” In said case, we held that for debts to be considered as
“worthless,” and thereby qualify as “bad debts” making them
deductible, the taxpayer should show that: (1) there is a valid
and subsisting debt; (2) the debt must be actually ascertained
to be worthless and uncollectible during the taxable year; (3)
the debt must be charged off during the taxable year; and (4)
the debt must arise from the business or trade of the taxpayer.

Additionally, before a debt can be considered worthless, the

taxpayer must also show that it is indeed uncollectible even in
the future. Furthermore, there are steps outlined to be
undertaken by the taxpayer to prove that he exerted diligent
efforts to collect the debts, viz.: (1) sending of statement of

16. Atlas Consolidated Mining vs. Commissioner
L-26911; dated 27January 1981; 102 SCRA 246
FACTS: This tax case (CTA No. 1312) arose from the 1957 and
1958 deficiency income tax assessments made by to Atlas. It is
a corporation engaged in the mining industry registered under
the laws of the Philippines.
For the year 1957, it was the opinion of the Commissioner that
Atlas is not entitled to exemption from the income tax under
Section 4 of Republic Act 909 because same covers only gold
mines.
For the year 1958, the assessment of deficiency income tax of
P761,789.12 covers the disallowance of items claimed by Atlas
as deductible from gross income. On October 9, 1962, Atlas
protested the assessment asking for its reconsideration.
The Secretary of Finance ruled that the exemption provided in
Republic Act 909 embraces all new mines and old mines whether
gold or other minerals. Accordingly, the Commissioner
recomputed Atlas deficiency income tax liabilities. Thus,
eliminating the assessment of P546,295.16 for the year 1957.
The Commissioner’s assessment for 1958 was reduced from
P215,493.96 to P39,646.82 from which Atlas appealed to the
Court of Tax Appeals, assailing the disallowance of the following
items claimed as deductible from its gross income: Transfer
agent’s fee, Stockholders relation service fee, U.S. stock listing
expenses, Suit expenses, Provision for contingencies.
Atlas appealed only that portion of the Court of Tax Appeals’
decision disallowing the deduction from gross income of the so--
called stockholders relation service fee. Atlas claimed that it was
paid for services of a public relations firm, P.K. Macker & Co., a
reputable public relations consultant in New York City, U.S.A.,
hence, an ordinary and necessary business expense in order “to
compete with other corporations also interested in the
investment market in the United States.”
ISSUE: Are expenses paid for the services rendered by a public
relations firm P.K. Macker & Co. labelled as stockholders relation
service fee an allowable deduction as business expense under
Section 30 (a) (1) of the National Internal Revenue Code?
HELD: The statutory test of deductibility where it is axiomatic
that 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, not only must the taxpayer meet the
business test, he must substantially prove by evidence or
records the deductions claimed under the law, 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. The Court
has never attempted to define with precision the terms “ordinary
and necessary.” There are however, certain guiding principles
worthy of serious consideration in the proper adjudication of
conflicting claims. 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 term “ordinary” does not require that the
payments be habitual or normal in the sense that the same
taxpayer will have to make them often; the payment may be
unique or nonrecurring to the particular taxpayer affected.
There is thus no hard and fast rule on the matter. The right to
a deduction depends in each case on the particular facts and the
relation of the payment to the type of business in which the
taxpayer is engaged. The intention of the taxpayer often may
be the controlling fact in making the determination.
Assuming that the expenditure is ordinary and necessary in the
operation of the taxpayer’s business, the answer to the question
as to whether the expenditure is an allowable deduction as a
business expense must be determined from the nature of the
expenditure itself, which in turn depends on the extent and
permanency of the work accomplished by the expenditure.
It appears that on December 27, 1957, Atlas increased its capital
stock from P15,000,000 to P18,325,000. It was claimed by Atlas
that its shares of stock worth P3,325,000 were sold in the United
States because of the services rendered by the public relations
firm, P. K. Macker & Company. The Court of Tax Appeals ruled
that the information about Atlas given out and played up in the
mass communication media resulted in full subscription of the
additional shares issued by Atlas; consequently, the
questioned item, stockholders relation service fee, was
in effect spent for the acquisition of additional capital,
ergo, a capital expenditure. We sustain the ruling of the tax
court that the expenditure of P25,523.14 paid to P.K. Macker &
Co. as compensation for services carrying on the selling
campaign in an effort to sell Atlas’ additional capital stock of
P3,325,000 is not an ordinary expense.

That the expense in question 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.