MEDICARD vs.

COMMISSIONER OF INTERNAL REVENUE

It is clear that unless authorized by the CIR himself or by his duly authorized
representative, through an LOA, an examination of the taxpayer cannot ordinarily be
undertaken. The circumstances contemplated under Section 6 where the taxpayer may
be assessed through best-evidence obtainable, inventory-taking, or surveillance
among others has nothing to do with the LOA. These are simply methods of examining
the taxpayer in order to arrive at the correct amount of taxes. Hence, unless
undertaken by the CIR himself or his duly authorized representatives, other tax
agents may not validly conduct any of these kinds of examinations without prior
authority.
In the present case, the VAT is a tax on the value added by the performance of the
service by the taxpayer. It is, thus, this service and the value charged thereof by
the taxpayer that is taxable under the NIRC.
The CTA En Banc overlooked that the definition of gross receipts under RR No. 16-
2005 merely presumed that the amount received by an HMO as membership fee is the
HMO’s compensation for their services. As a mere presumption, an HMO is, thus,
allowed to establish that a portion of the amount it received as membership fee
does NOT actually compensate it but some other person, which in this case are the
medical service providers themselves.
The CIR’s interpretation of gross receipts in the present case is patently
erroneous for lack of both textual and non-textual support.
Commissioner of Internal Revenue vs. Baier-Nickel
“Source of income” relates to the property, activity or service that produced the
income.—The Court reiterates the rule that “source of income” relates to the
property, activity or service that produced the income. With respect to rendition
of labor or personal service, as in the instant case, it is the place where the
labor or service was performed that determines the source of the income. There is
therefore no merit in petitioner’s interpretation which equates source of income in
labor or personal service with the residence of the payor or the place of payment
of the income.
Tan vs. Del Rosario, Jr.,
Schedular approach is a system employed where the income tax treatment varies and
made to depend on the kind or category of taxable income of the taxpayer.
Global treatment is a system where the tax treatment views indifferently the tax
base and generally treats in common all categories of taxable income of the
taxpayer.
Here, the partners themselves, not the partnership (although it is still obligated
to file an income tax return [mainly for administration and data]), are liable for
the payment of income tax in their individual capacity computed on their respective
and distributive shares of profits. In the determination of the tax liability, a
partner does so as an individual, and there is no choice on the matter. In fine,
under the Tax Code on income taxation, the general professional partnership is
deemed to be no more than a mere mechanism or a flow-through entity in the
generation of income by, and the ultimate distribution of such income to,
respectively, each of the individual partners.
Madrigal and Paterno vs. Rafferty and Concepcion.
INCOME CONTRASTED WITH CAPITAL AND PROPERTY.—Income as contrasted with capital or
property is to be the test. The essential difference between capital and income is
that capital is a fund; income is a flow. Capital is wealth, while income is the
service of wealth. "The fact is that property is a tree, income is the fruit; labor
is a tree, income the fruit; capital is a tree, income the fruit."
The higher schedules of the additional tax provided by the Income Tax Law directed
at the incomes of the wealthy may not be partially defeated by reliance on
provisions in our Civil Code dealing with the conjugal partnership. The aims and
purposes of the Income Tax Law must be given effect.
The Income Tax Law does not look on the spouses as individual partners in an
ordinary partnership.
Obillos, Jr. vs. Commissioner of Internal Revenue
To regard the petitioners as having formed a taxable unregistered partnership would
result in oppressive taxation and confirm the dictum that the power to tax involves
the power to destroy. That eventuality should be obviated.
''The sharing of gross returns does not of itself establish a partnership, whether
or not the persons sharing them have a j oint or common right or interest in any
property from which the returns are derived". There must be an unmistakable
intention to form a partnership or joint venture.
Oña vs. Commissioner of Internal Revenue
For tax purposes, the co-ownership of inherited properties is automatically
converted into an unregistered partnership the moment the said common properties
and/or the incomes derived therefrom are used as a common fund with intent to
produce profits for the heirs in proportion to their respective shares in the
inheritance as determined in a project partition either duly executed in an extra-
judicial settlement or approved by the court in the corresponding testate or
intestate proceeding. The reason is simple. From the moment of such partition, the
heirs are entitled already to their respective definite shares of the estate and
the incomes thereof, for each of them to manage and dispose of as exclusively his
own without the intervention of the other heirs, and, accordingly, he becomes
liable individually for all taxes in connection therewith. If after such partition,
he allows his share to be held in common with his co-heirs under a single
management to be used with the intent of making profit thereby in proportion to his
share, there can be no doubt that, even if no document or instrument were executed
for the purpose, for tax purposes, at least, an unregistered partnership is formed.
The income derived from inherited properties may be considered as individual income
of the respective heirs only so long as the inheritance or estate is not
distributed or, at least, partitioned, but the moment their respective known shares
are used as part of the common assets of the heirs to be used in making profits, it
is but proper that the income of such shares should be considered as part of the
taxable income of an unregistered partnership.
Calasanz vs. Commissioner of Internal Revenue
A property initially classified as a capital asset may thereafter be treated as an
ordinary asset if a combination of the factors indubitably tend to show that the
activity was in furtherance of or in the course of the taxpayer’s trade or
business. Thus, a sale of inherited real property usually gives capital gain or
loss even though the property has to be subdivided or improved or both to make it
salable. However, if the inherited property is substantially improved or very
actively sold or both it may be treated as held primarily for sale to customers in
the ordinary course of the heir’s business.
Supreme Transliner, Inc. vs. BPI Family Savings Bank, Inc
Considering that herein petitioners-mortgagors exercised their right of redemption
before the expiration of the statutory one-year period, petitioner bank is not
liable to pay the capital gains tax due on the extrajudicial foreclosure sale.
There was no actual transfer of title from the owners-mortgagors to the foreclosing
bank. Hence, the inclusion of the said charge in the total redemption price was
unwarranted and the corresponding amount paid by the petitioners-mortgagors should
be returned to them.
Manila Banking Corporation vs. Commissioner of Internal Revenue
Revenue Regulations No. 9-98, implementing R.A. No. 8424 imposing the minimum
corporate income tax on corporations, provides that for purposes of this tax, the
date when business operations commence is the year in which the domestic
corporation registered with the BIR. However, under Revenue Regulations No. 4-95,
the date of commencement of operations of thrift banks, such as herein petitioner,
is the date the particular thrift bank was registered with the SEC or the date when
the Certificate of Authority to Operate was issued to it by the Monetary Board of
the BSP, whichever comes later. Clearly then, Revenue Regulations No. 4-95, not
Revenue Regulations No. 9-98, applies to petitioner, being a thrift bank. It is,
therefore, entitled to a grace period of four (4) years counted from June 23, 1999
when it was authorized by the BSP to operate as a thrift bank. Consequently, it
should only pay its minimum corporate income tax after four (4) years from 1999.
Commissioner of Internal Revenue vs. Philippine Airlines, Inc. (PAL)
A domestic corporation must pay whichever is the higher of: (1) the income tax
under Section 27(A) of the NIRC of 1997, as amended, computed by applying the tax
rate therein to the taxable income of the corporation; or (2) the MCIT under
Section 27(E), also of the same Code, equivalent to 2% of the gross income of the
corporation. The Court would like to underscore that although this may be the
general rule in determining the income tax due from a domestic corporation under
the provisions of the NIRC of 1997, as amended, such rule can only be applied to
respondent only as to the extent allowed by the provisions of its franchise.
During the lifetime of the franchise of respondent, its taxation shall be strictly
governed by two fundamental rules, to wit: (1) respondent shall pay the Government
either the basic corporate income tax or franchise tax, whichever is lower; and (2)
the tax paid by respondent, under either of these alternatives, shall be in lieu of
all other taxes, duties, royalties, registration, license, and other fees and
charges, except only real property tax. Parenthetically, the basic corporate income
tax of respondent shall be based on its annual net taxable income, computed in
accordance with the NIRC of 1997, as amended. PD 1590 also explicitly authorizes
respondent, in the computation of its basic corporate income tax, to: (1)
depreciate its assets twice as fast the normal rate of depreciation; and (2) carry
over as a deduction from taxable income any net loss incurred in any year up to
five years following the year of such loss. The franchise tax, on the other hand,
shall be 2% of the gross revenues derived by respondent from all sources, whether
transport or nontransport operations. However, with respect to international air-
transport service, the franchise tax shall only be imposed on the gross passenger,
mail, and freight revenues of respondent from its outgoing flights.
Rizal Commercial Banking Corporation vs. Commissioner of Internal Revenue
Based on the foregoing, the liability of the withholding agent is independent from
that of the taxpayer. The former cannot be made liable for the tax due because it
is the latter who earned the income subject to withholding tax. The withholding
agent is liable only insofar as he failed to perform his duty to withhold the tax
and remit the same to the government. The liability for the tax, however, remains
with the taxpayer because the gain was realized and received by him. While the
payor-borrower can be held accountable for its negligence in performing its duty to
withhold the amount of tax due on the transaction, RCBC, as the taxpayer and the
one which earned income on the transaction, remains liable for the payment of tax
as the taxpayer shares the responsibility of making certain that the tax is
properly withheld by the withholding agent, so as to avoid any penalty that may
arise from the non-payment of the withholding tax due. RCBC cannot evade its
liability
Commercial Banking Corporation vs. Commissioner of Internal Revenue for FCDU
Onshore Tax by shifting the blame on the payor-borrower as the withholding agent.
Comm’r. of Internal Revenue vs. Wander Philippines, Inc.
Closely intertwined with the first assignment of error is the issue of whether or
not Switzerland, the foreign country where Glaro is domiciled, grants to Glaro a
tax credit against the tax due it, equivalent to 20%, or the difference between the
regular 35% rate and the preferential 15% rate. The dispute in this issue lies on
the fact that Switzerland does not impose any income tax on dividends received by
Swiss corporation from corporations domiciled in foreign countries.
While it may be true that claims for refund are construed strictly against the
claimant, nevertheless, the fact that Switzerland did not impose any tax or the
dividends received by Glaro from the Philippines should be considered as a full
satisfaction of the given condition. For, as aptly stated by respondent Court, to
deny private respondent the privilege to withhold only 15% tax provided for under
Presidential Decree No. 369, amending Section 24 (b) (1) of the Tax Code, would run
counter to the very spirit and intent of said law and definitely will adversely
affect foreign corporations’ interest here and discourage them from investing
capital in our country.
Commissioner of Internal Revenue vs. Goodyear Philippines, Inc
Section 229 of the Tax Code states that judicial claims for refund must be filed
within two (2) years from the date of payment of the tax or penalty, providing
further that the same may not be maintained until a claim for refund or credit has
been duly filed with the Commissioner of Internal Revenue (CIR).
The primary purpose of filing an administrative claim was to serve as a notice of
warning to the CIR that court action would follow unless the tax or penalty alleged
to have been collected erroneously or illegally is refunded. To clarify, Section
229 of the Tax Code — [then Section 306 of the old Tax Code] — however does not
mean that the taxpayer must await the final resolution of its administrative claim
for refund, since doing so would be tantamount to the taxpayer’s forfeiture of its
right to seek judicial recourse should the two (2)-year prescriptive period expire
without the appropriate judicial claim being filed.
Commissioner of Internal Revenue vs. British Overseas Airways Corporation
"In order that a foreign corporation may be regarded as doing business within a
State, there must be continuity of conduct and intention to establish a continuous
business, such as the appointment of a local agent, and not one of a temporary
character.'
BOAC, during the periods covered by the subject assessments, maintained a general
sales agent in the Philippines. That general sales agent, from 1959 to 1971, "was
engaged in (1) selling and issuing tickets; (2) breaking down the whole trip into
series of trips—each trip in the series corresponding to a different airline
company; (3) receiving the fare from the whole trip; and (4) consequently
allocating to the various airline companies on the basis of their participation in
the services rendered through the mode of interline settlement as prescribed by
Article VI of the Resolution No. 850 of the IATA Agreement." Those activities were
in exercise of the functions which are normally incident to, and are in progressive
pursuit of the purpose and object of its organization as an international air
carrier. In fact, the regular sale of tickets, its main activity, is the very
lifeblood of the airline business, the generation of sales being the paramount
objective. There should be no doubt then that BOAC was "engaged in" business in the
Philippines through a local agent during the period covered by the assessments.
Accordingly, it is a resident foreign corporation subject to tax upon its total net
income received in the preceding taxable year from all sources within the
Philippines.
Air Canada vs. Commissioner of Internal Revenue
At the outset, we affirm the Court of Tax Appeals’ ruling that petitioner, as an
offline international carrier with no landing rights in the Philippines, is not
liable to tax on Gross Philippine Billings under Section 28(A)(3) of the 1997
National Internal Revenue Code. ‘Gross Philippine Billings’ refers to the amount of
gross revenue derived from carriage of persons, excess baggage, cargo and mail
originating from the Philippines in a continuous and uninterrupted flight,
irrespective of the place of sale or issue and the place of payment of the ticket
or passage document: Provided, That tickets revalidated, exchanged and/or indorsed
to another international airline form part of the Gross Philippine Billings if the
passenger boards a plane in a port or point in the Philippines: Provided, further,
That for a flight which originates from the Philippines, but transshipment of
passenger takes place at any port outside the Philippines on another airline, only
the aliquot portion of the cost of the ticket corresponding to the leg flown from
the Philippines to the point of transshipment shall form part of Gross Philippine
Billings. (Emphasis supplied) Under the foregoing provision, the tax attaches only
when the carriage of persons, excess baggage, cargo, and mail originated from the
Philippines in a continuous and uninterrupted flight, regardless of where the
passage documents were sold. Not having flights to and from the Philippines,
petitioner is clearly not liable for the Gross Philippine Billings tax.
Petitioner, an offline carrier, is a resident foreign corporation for income tax
purposes. Petitioner falls within the definition of resident foreign corporation
under Section 28(A)(1) of the 1997 National Internal Revenue Code, thus, it may be
subject to 32% tax on its taxable income. Resident corporations.—A corporation
organized, authorized, or existing under the laws of any foreign country, except a
foreign life insurance company, engaged in trade or business within the
Philippines, shall be taxable as provided in subsection (a) of this section upon
the total net income received in the preceding taxable year from all sources within
the Philippines.
Petitioner is a resident foreign corporation that is taxable on its income derived
from sources within the Philippines. Petitioner’s income from sale of airline
tickets, through Aerotel, is income realized from the pursuit of its business
activities in the Philippines.
Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc.
Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1)
proprietary non-profit educational institutions and (2) proprietary non-profit
hospitals. The only qualifications for hospitals are that they must be proprietary
and non-profit. “Proprietary” means private, following the definition of a
“proprietary educational institution” as “any private school maintained and
administered by private individuals or groups” with a government permit. “Non-
profit” means no net income or asset accrues to or benefits any member or specific
person, with all the net income or asset devoted to the institution’s purposes and
all its activities conducted not for profit.
“Non-profit” does not necessarily mean “charitable.” To be a charitable
institution, however, an organization must meet the substantive test of charity.
Charity is essentially a gift to an indefinite number of persons which lessens the
burden of government. In other words, charitable institutions provide for free
goods and services to the public which would otherwise fall on the shoulders of
government. Thus, as a matter of efficiency, the government forgoes taxes which
should have been spent to address public needs, because certain private entities
already assume a part of the burden. This is the rationale for the tax exemption of
charitable institutions. Charitable institutions, however, are not ipso facto
entitled to a tax exemption. The requirements for a tax exemption are specified by
the law granting it. The power of Congress to tax implies the power to exempt from
tax. Congress can create tax exemptions, subject to the constitutional provision
that “[n]o law granting any tax exemption shall be passed without the concurrence
of a majority of all the Members of Congress.” The requirements for a tax exemption
are strictly construed against the taxpayer because an exemption restricts the
collection of taxes necessary for the existence of the government.
The Court finds that St. Luke’s is a corporation that is not “operated exclusively”
for charitable or social welfare purposes insofar as its revenues from paying
patients are concerned. This ruling is based not only on a strict interpretation of
a provision granting tax exemption, but also on the clear and plain text of Section
30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution be
“operated exclusively” for charitable or social welfare purposes to be completely
exempt from income tax. An institution under Section 30(E) or (G) does not lose its
tax exemption if it earns income from its for-profit activities. Such income from
for-profit activities, under the last paragraph of Section 30, is merely subject to
income tax, previously at the ordinary corporate rate but now at the preferential
10% rate pursuant to Section 27(B).
Dumaguete Cathedral Credit Cooperative (DCCCO) vs. Commissioner of Internal Revenue
Cooperatives are not required to withhold taxes on interest from savings and time
deposits of their members.—On November 16, 1988, the BIR declared in BIR Ruling No.
551-888 that cooperatives are not required to withhold taxes on interest from
savings and time deposits of their members. To encourage the formation of
cooperatives and to create an atmosphere conducive to their growth and development,
the State extends all forms of assistance to them, one of which is providing
cooperatives a preferential tax treatment.
Although the tax exemption only mentions cooperatives, this should be construed to
include the members pursuant to Article 126 of Republic Act No. 6938.
Manila Wine Merchants, Inc. vs. Commissioner of Internal Revenue
A prerequisite to the imposition of the tax has been that the corporation be formed
or availed of for the purpose of avoiding the income tax (or surtax) on its
shareholders, or on the shareholders of any other corporation by permitting the
earnings and profits of the corporation to accumulate instead of dividing them
among or distributing them to the shareholders. If the earnings and profits were
distributed, the shareholders would be required to pay an income tax thereon
whereas, if the distribution were not made to them, they would incur no tax in
respect to the undistributed earnings and profits of the corporation. The
touchstone of liability is the purpose behind the accumulation of the income and
not the consequences of the accumulation. Thus, if the failure to pay dividends is
due to some other cause, such as the use of undistributed earnings and profits for
the reasonable needs of the business, such purpose does not fall within the
interdiction of the statute.
To avoid the twenty-five percent (25%) surtax, petitioner has to prove that the
purchase of the U.S.A. Treasury Bonds in 1951 with a face value of $175,000.00 was
an investment within the reasonable needs of the Corporation.
To determine the “reasonable needs” of the business in order to justify an
accumulation of earnings, the Courts of the United States have invented the so-
called “Immediacy Test” which construed the words “reasonable needs of the
business” to mean the immediate needs of the business, and it was generally held
that if the corporation did not prove an immediate need for the accumulation of the
earnings and profits, the accumulation was not for the reasonable needs of the
business, and the penalty tax would apply. American cases likewise hold that
investment of the earnings and profits of the corporation in stock or securities of
an unrelated business usually indicates an accumulation beyond the reasonable needs
of the business.
In order to determine whether profits are accumulated for the reasonable needs of
the business as to avoid the surtax upon shareholders, the controlling intention of
the taxpayer is that which is manifested at the time of accumulation not
subsequently declared intentions which are merely the product of afterthought. A
speculative and indefinite purpose will not suffice. The mere recognition of a
future problem and the discussion of possible and alternative solutions is not
sufficient. Definiteness of plan coupled with action taken towards its consummation
are essential.
Cyanamid Philippines, Inc. vs. Court of Appeals
The provision discouraged tax avoidance through corporate surplus accumulation.
When corporations do not declare dividends, income taxes are not paid on the
undeclared dividends received by the shareholders. The tax on improper accumulation
of surplus is essentially a penalty tax designed to compel corporations to
distribute earnings so that the said earnings by shareholders could, in turn, be
taxed. The amendatory provision of Section 25 of the 1977 NIRC, which was PD 1739,
enumerated the corporations exempt from the imposition of improperly accumulated
tax: (a) banks; (b) non-bank financial intermediaries; (c) insurance companies; and
(d) corporations organized primarily and authorized by the Central Bank of the
Philippines to hold shares of stocks of banks. Petitioner does not fall among those
exempt classes. Besides, the rule on enumeration is that the express mention of one
person, thing, act, or consequence is construed to exclude all others. Laws
granting exemption from tax are construed strictissimi juris against the taxpayer
and liberally in favor of the taxing power.
“Bardahl” Formula and “Operating Cycle,” Explained.—Another point raised by the
petitioner in objecting to the assessment, is that increase of working capital by a
corporation justifies accumulating income. Petitioner Cyanamid Philippines, Inc.
vs. Court of Appeals asserts that respondent court erred in concluding that
Cyanamid need not infuse additional working capital reserve because it had
considerable liquid funds based on the 2.21:1 ratio of current assets to current
liabilities. Petitioner relies on the so-called “Bardahl” formula, which allowed
retention, as working capital reserve, sufficient amounts of liquid assets to carry
the company through one operating cycle. The “Bardahl” formula was developed to
measure corporate liquidity. The formula requires an examination of whether the
taxpayer has sufficient liquid assets to pay all of its current liabilities and any
extraordinary expenses reasonably anticipated, plus enough to operate the business
during one operating cycle. Operating cycle is the period of time it takes to
convert cash into raw materials, raw materials into inventory, and inventory into
sales, including the time it takes to collect payment for the sales.
Commissioner of lnternal Revenue vs. Algue
Taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance. On the other hand, such collection should be made in
accordance with law as any arbitrariness will negate the very reason for government
itself. It is therefore necessary to reconcile the apparently conflicting interests
of the authorities and the taxpayers so that the real purpose of taxation, which is
the promotion of the common good, may be achieved.
The total commission paid by the Philippine Sugar Estate Development Co. to the
private respondent was P1 25,000.00. After deducting the said fees, Algue still had
a balance of P50,000.00 as clear profit from the transaction. The amount of
P75,000.00 was 60% of the total commission. This was a reasonable proportion,
considering that it was the payees who did practically everything, from the
formation of the Vegetable Oil Investment Corporation to the actual purchase by it
of the Sugar Estate properties. The private respondent has proved that the payment
of the fees was necessary and reasonable in the light of the efforts exerted by the
payees in inducing investors and prominent businessmen to venture in an
experimental enterprise and involve themselves in a new business requiring millions
of pesos. This was no mean feat and should be, as it was, sufficiently recompensed.

China Banking Corporation vs. Court of Appeals

As commonly understood, the term “gross receipts” means the entire receipts without
any deduction. Deducting any amount from the gross receipts changes the result, and
the meaning, to net receipts. Any deduction from gross receipts is inconsistent
with a law that mandates a tax on gross receipts, unless the law itself makes an
exception.
When Section 121 of the Tax Code includes “interest” as part of gross receipts, it
refers to the entire interest earned and owned by the bank without any deduction.
“Interest” means the gross amount paid by the borrower to the lender as
consideration for the use of the lender’s money. Section 2(h) of Revenue
Regulations No. 12-80, now Section 2(i) of Revenue Regulations No. 17-84, defines
the term “interest” as “the amount which a depository bank (borrower) may pay on
savings and time deposit in accordance with rates authorized by the Central Bank of
the Philippines.” This definition does not allow any deduction. The entire interest
paid by the depository bank, without any deduction, is what forms part of the
lending bank’s gross receipts.
Thus, interest earned by banks, even if subject to the final tax and excluded from
taxable gross income, forms part of its gross receipts for gross receipts tax
purposes. The interest earned refers to the gross interest without deduction since
the regulations do not provide for any deduction. The gross interest, without
deduction, is the amount the borrower pays, and the income the lender earns, for
the use by the borrower of the lender’s money. The amount of the final tax plainly
comes from the interest earned and is consequently part of the bank’s taxable gross
receipts.
CBC’s contention that it can deduct the final withholding tax from its interest
income amounts to a claim of tax exemption. The cardinal rule in taxation is
exemptions are highly disfavored and whoever claims an exemption must justify his
right by the clearest grant of organic or statute law. CBC must point to a specific
provision of law granting the tax exemption. The tax exemption cannot arise by mere
implication and any doubt about whether the exemption exists is strictly construed
against the taxpayer and in favor of the taxing authority.

Commissioner of Internal Revenue vs. General Foods (Phils.), Inc.,

Requisites for Deductions from Gross Income for Advertising Expense.—Simply put, 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.
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 protection of brand franchise is analogous to the maintenance of goodwill or
title to one’s property. This is a capital expenditure which should be spread out
over a reasonable period of time. Respondent corporation’s venture to protect its
brand franchise was tantamount to efforts to establish a reputation. This was akin
to the acquisition of capital assets and therefore expenses related thereto were
not to be considered as business expenses but as capital expenditures.
Commissioner of Internal Revenue vs. Isabela Cultural Corporation
The requisites for the deductibility of ordinary and necessary trade, business, or
professional expenses, like expenses paid for legal and auditing services, are: (a)
the expense must be ordinary and necessary; (b) it must have been paid or incurred
during the taxable year; (c) it must have been paid or incurred in carrying on the
trade or business of the taxpayer; and (d) it must be supported by receipts,
records or other pertinent papers. The requisite that it must have been paid or
incurred during the taxable year is further qualified by Section 45 of the National
Internal Revenue Code (NIRC) which states that: “[t]he deduction provided for in
this Title shall be taken for the taxable year in which ‘paid or accrued’ or ‘paid
or incurred,’ dependent upon the method of accounting upon the basis of which the
net income is computed..
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.
The propriety of an accrual must be judged by the fact that a taxpayer knew, or
could reasonably be expected to have known, at the closing of its books for the
taxable year.—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 fact 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.
ICC 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.
H. Tambunting Pawnshop, Inc. vs. Commissioner of Internal Revenue
Requisites for the Deductibility of Ordinary and Necessary Trade or Business
Expenses, Like Those Paid for Security and Janitorial Services, Management and
Professional Fees, and Rental Expenses.―The requisites for the deductibility of
ordinary and necessary trade or business expenses, like those paid for security and
janitorial services, management and professional fees, and rental expenses, are
that: (a) the expenses must be ordinary and necessary; (b) they must have been paid
or incurred during the taxable year; (c) they must have been paid or incurred in
carrying on the trade or business of the taxpayer; and (d) they must be supported
by receipts, records or other pertinent papers.
Deductions for income tax purposes partake of the nature of tax exemptions and are
strictly construed against the taxpayer, who must prove by convincing evidence that
he is entitled to the deduction claimed. Tambunting did not discharge its burden of
substantiating its claim for deductions due to the inadequacy of its documentary
support of its claim. Its reliance on withholding tax returns, cash vouchers,
lessor’s certifications, and the contracts of lease was futile because such
documents had scant probative value.
Philippine Refining Company vs. Court of Appeals
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.
Soriano vs. Secretary of Finance
The proper interpretation of R.A. 9504 is that it imposes taxes only on the taxable
income received in excess of the minimum wage, but the MWEs (Minimum Wage Earners)
will not lose their exemption as such. Workers who receive the statutory minimum
wage their basic pay remain MWEs. The receipt of any other income during the year
does not disqualify them as MWEs. They remain MWEs, entitled to exemption as such,
but the taxable income they receive other than as MWEs may be subjected to
appropriate taxes.
Bracket Creep; Words and Phrases; “Bracket creep,” “the process by which inflation
pushes individuals into higher tax brackets.”—When tax tables do not get adjusted,
inflation has a profound impact in terms of tax burden. “Bracket creep,” “the
process by which inflation pushes individuals into higher tax brackets,” occurs,
and its deleterious results may be explained as follows: [A]n individual whose
dollar income increases from one year to the next might be obliged to pay tax at a
higher marginal rate (say 25% instead of 15%) on the increase, this being a natural
consequence of rate progression. If, however, due to inflation the benefit of the
increase is wiped out by a corresponding increase in the cost of living, the effect
would be a heavier tax burden with no real improvement in the taxpayer’s economic
position. Wage and salary-earners are especially vulnerable. Even if a worker gets
a raise in wages this year, the raise will be illusory if the prices of consumer
goods rise in the same proportion. If her marginal tax rate also increased, the
result would actually be a decrease in the taxpayer’s real disposable income.
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Prepared by:
Jessa V. Corre