TIO V.

VIDEOGRAM REGULATORY BOARD (HIGHER TAX IMPOSED ON VIDEOTAPES)

- A tax does not cease to be valid merely because it regulates, discourages, or even definitely
deters the activities taxed. The power to impose taxes is one so unlimited in force and so
searching in extent, that the courts scarcely venture to declare that it is subject to any
restrictions whatever, except such as rest in the discretion of the authority which exercises
it. In imposing a tax, the legislature acts upon its constituents. This is, in general, a sufficient
security against erroneous and oppressive taxation.
- The taxed imposed is not only a regulatory but also a revenue measure prompted by the
realization that earnings of videogram establishments have not been subjected to tax,
thereby depriving the Government of an additional source of revenue.
- The levy of the 30% tax is for a public purpose. It was imposed primarily to answer the need
for regulating the video industry, particularly because of the rampant film piracy, the
flagrant violation of intellectual property rights, and the proliferation of pornographic video
tapes.
- The public purpose of a tax may legally exist even if the motive which impelled the
legislature to impose the tax was to favor one industry over another. It is inherent in the
power to tax that a state be free to select the subjects of taxation, and it has been
repeatedly held that "inequities which result from a singling out of one particular class for
taxation or exemption infringe no constitutional limitation". Taxation has been made the
implement of the state's police power.
-

The rate of tax is a matter better addressed to the taxing legislature.

LUTZ V. ARANETA (SUGAR INDUSTRY)

- The tax is levied with a regulatory purpose to provide means for the rehabilitation and
stabilization of the threatened sugar industry. In other words, the act is primarily an exercise
of the police power, and not a pure exercise of taxing power. Taxation may be made the
implement of the state's police power.
- The promotion, protection and advancement of the sugar industry redounds greatly to the
general welfare.
- It is inherent in the power to tax that a state be free to select the subjects of taxation, and it
has been repeatedly held that "inequalities which result from a singling out of one particular
class for taxation, or exemption infringe no constitutional limitation".
CIR V. 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.
MACTAN CEBU INTL AIRPORT AUTHORITY V. MARCOS
VAT RULING

NO.

7-2006

MANILA RAILROAD V. COLLECTOR

CIR V. FIREMENS
SEALAND

FUND INS.

SERVICES V.

OF CUSTOMS

CO.

CIR

MACEDA V. MACARAIG
CIR V. CA
CIR V. PILIPINAS

SHELL

PETROLEUM CORP.

CIR V. ESTATE

OF

TODA

DELPHER TRADES CORP.

IAC

FISHER V. TRINIDAD
EISNER V. MACOMBER
US V. KIRBY LUMBER
HELVERING V. BRUUN
CIR V.
a.
b.
c.

GLENSHAW GLASS CO.

Requisites:
Undeniable accessions to wealth
Clearly realized
Over which the taxpayers have complete dominion.

JAMES V. US
COTTAGE SAVINGS ASSN. V. CIR
HELVERING V. HORST (NEGOTIABLE COUPON GIVEN TO SON)
- The gift, during the donors taxable year, of interest coupons detached from the bonds,
delivered to the done and later in the year paid at maturity, is taxable income in the hands
of the donor.
- The power to dispose of income is the equivalent of ownership of it. The exercise of that
power to procure the payment of income to another is the enjoyment and hence the
realization of the income by him who exercises it.
- The realization rule, which is founded on administrative convenience, generally postpones
taxability until final enjoyment of the income, which is usually the receipt of it by the TP.
- However, the enjoyment of the income may occur when TP has made such use or disposition
of his power to receive or control the income as to procure in its place other satisfactions
which are of economic worth.
- As owner of the bonds, Horst had acquired the legal right to demand payment at maturity of
the interest specified by the coupons and the power to command its payment to others
which constituted an economic gain to him.
- Not all economic gain is taxable. Realization of income is the taxable event, and not
necessarily the acquisition of the right to receive it. And the realization is not deemed to
occur until the income is paid. Where the taxpayer does not receive payment of income in
money or property, realization may occur when the last step is taken by which he obtains
the fruition of the economic gain which has already accrued to him.
CIR V. MINZER (BROKER)
- Commissions derived by an insurance broker on life insurance policies procured on his own
life are taxable income.
CLARK V. CIR (TAX COUNSEL FAIL)
- Reimbursement (compensatory payment) by tax adviser to client for erroneous tax advice
resulting to payment of taxes client need not have paid Not taxable.
- The reimbursement was compensation for a loss which impaired the taxpayer-clients
capital.
- Compare with Glenshaw. TPs taxes were not paid by a third person.

Payments in settlement for breach of promise to marry; compromise payments in settlement

of an action for damages against a bank on account of conduct impairing the taxpayers
goodwill by injuring its reputation; payments in settlement for injuries caused by libel and
slander; and damages for personal injury are not taxable income. Reason: Recoupment on
account of such losses is not income since it is not derived from capital or labor or both.
So long as petitioner neither could nor did take a deduction in a prior year of this loss in such
a way as to offset income for the prior year, the amount received by him in the taxable year,
by way of recompense, is not then includable in his gross income.

CESARINI V. US (PIANO WITH DOLLARS; TREASURE TROVE)

- Windfalls, including found monies, are includable in gross income.
- Finder of treasure trove is in receipt of taxable income to the extent of its value for the
taxable year in which it is reduced to undisputed possession.
- Undisputed possession = actual discovery.
HORNUNG V CIR (BASEBALL PLAYER GETS CORVETTE, THUNDERBIRD FREE USE, AND FUR STOLE FOR BEING
MVP)
- The amount of any time of gross income is included in gross income for the taxable year in
which received by the taxpayer unless such amount is properly accounted as for a different
period.
- Doctrine of constructive receipt: Income although not actually reduced to a taxpayer's
possession is constructively received by him in the taxable year during which it is credited to
his account, set apart for him, or otherwise made available so that he may draw upon it at
any time, or so that he could have drawn upon it during the taxable year if notice of
intention to withdraw had been given. EXCEPTION: if the taxpayer's control of its receipt is
subject to substantial limitations or restrictions
- Under the cash receipts and disbursements method, all items which constitute gross income
are to be included for the taxable year in which actually or constructively received.
- Corvette and Thunderbirds: taxable. It was not a tax-exempt gift. An economic benefit
was realized which constituted gross income. Free use of the Thunderbirds satisfies
Glenshaw requisites (valuable benefit fully realized).
- Crucial factor: donors intention. Donors commercial motive precludes a determination that
the Corvette was a gift. There was no detached and disinterested generosity, nor was it
out of affect, admiration, charity or like impulses. The claimed gift does not proceed
primarily from the constraining force of any moral or legal duty or from the incentive of
anticipated benefit of an economic nature.
- A person may receive a taxable benefit even though it is not earned in the sense that
special duties in return for the benefit are required. Here, the essence of the transaction was
the endorsement element.
- The fact that Hornung could only realize the benefit by doing what was valued by Ford
Motors, using the Thunderbirds, is unusual but this factor should not determine the taxability
of the benefit.
- Statutory provision for the exclusion from gross income of any amount received
as a prize or award:
A. Such prize or award was made primarily in recognition of past achievements of the
recipient in religious, charitable, scientific, educational, artistic, literary, or civic fields.
O
SC: Only awards for genuinely meritorious achievements were to be freed from
taxation; Construction: ordinary meaning. Athletic field not included.
B. Recipient was selected without any action on his part to enter the contest or proceeding.
c. Recipient is not required to render to substantial future services as a condition to
receiving the prize and award.
OLD COLONY TRUST V. CIR (COMPANY PAID FOR THE EMPLOYEES INCOME TAXES)
- Discharge by a third person of an obligation to him is equivalent to receipt by the person
taxed.

A taxpayer, having induced a third person to pay his income tax or having acquiesced in
such payment as made in discharge of an obligation to him (payment of his labor), may not
avoid making a return thereof and the payment of a corresponding tax.
The taxes were imposed upon the employee but paid by the employer, and the employee
entered upon his duties under the express agreement that his income taxes would be paid
by his employer. The taxes were paid upon a valuable consideration, namely, the services
rendered by the employee. The payment of taxes constituted additional income to the
employee.
Such was not a gift. The payment for services, even though entirely voluntary, is
nevertheless compensation. TB: Gift = pure liberality, which does not obtain here.

US V. DRESCHER (ANNUITY CONTRACT PURCHASED BY EMPLOYER FOR EMPLOYEE)

- An annuity purchased by the employer for the employee is taxable income to the employee
in the year of the purchase by employer despite the fact that the policies were nonassignable and retained in the possession of the employer. REASON: he received economic
benefit which he did not previously have, i.e. the obligation of the insurance company to pay
money in the future.
- Non-assignability and retention by employee do not affect immediate taxability, although
they may affect the valuation of the includable income.
- Value to be taxed not really laid down (greater than zero but less than the value of the
annuity contract).
- OD: If unconditionally placed at employees disposal, taxable (assignable value of the policy;
at the time the policy was delivered to him). However, due to the cutting off of the
acceleration clause (d/t retention by employer), we cannot use the same valuation.
BENAGLIA V. CIR (HOTEL MANAGER IN A HOTEL SUITE EATING HOTEL FOOD)
- To a taxpayer who, solely for the convenience of his employer and as a necessary incident of
the proper performance of his duty, receives food and lodging from the employer, the value
thereof is not taxable income.
- Doctrine holds true even if it may relieve the employee of an expense which he would
otherwise bear. Advantage to him was merely an incident.
RUDOLPH V. US (HALF-DAY BUSINESS MEETING, REST OF THE WEEK FOR SIGHTSEEING)
- If a taxpayer who travels to a destination engages in both business and personal activities,
the travel expenses are deductible only if the trip is related primarily to the taxpayers
business; uf primarily personal. Such are not deductible even though the taxpayer
engages in some business there.
- The test to determine whether travel costs (paid out by employer in favor of employee for
reaching a quota) is income: dominant motive and purpose. Determine if it was primarily
for business or primarily for pleasure, which is really dependent on the facts and
circumstances of the case.
- If primarily for pleasure, costs were considered as personal and non-deductible.
WISE&CO. V MEER (LIQUIDATING CORPORATION SELLING WINE)
ORDINARY DIVIDENDS
LIQUIDATING DIVIDENDS
In the ordinary course of business and with Not in the ordinary course of business and
the intent to maintain the corporation as a within the context of a decision to pursue
going concern. This does not reduce their dissolution and liquidation of the business.
stockholdings and leaves them in a position Such distributions are treated as payments
to enjoy future returns upon the same stock.
in exchange for the stock or share. xxx The
gains realized by the stockholders from the
distribution of the assets in liquidation were
subject to the normal tax in like manner as
if they had sold their stock to third persons.

Recurring return on stock

Payments
for
the
surrender
and
relinquishment of the stockholders interest
in the corporation, after providing for return
of capital and necessary or various
expenses.
Non-taxable before, taxable now
Taxable, but only with respect to the gains
or losses
HTC: Value of liquidation dividend minus
acquisition cost of shares (or fair market
value) = taxable gain or deductible loss
Note: If counted as other gains or profits
taxable; if dividends* in the strict sense
non-taxable. SC said LD are not dividends
within the meaning of the statute.
Factual; depends on particular circumstances of the case and the intent of the parties.
*"Dividend" as "any distribution made by a corporation . . . to its shareholders . . . whether
in cash or in other property out of its accumulated earnings or profits.
As generally understood and used, a dividend is a return upon the stock of its
stockholders, paid to them by a going corporation without reducing their stockholdings,
leaving them in a position to enjoy future returns upon the same stock. In other words, it is
earnings paid to him by the corporation upon his invested capital therein, without wiping
out his capital. On the other hand, when a solvent corporation dissolves and liquidates, it
distributes to its stockholders not only any earnings it may have on hand, but it also pays
to them their invested capital, namely, the amount which they had paid in for their stocks,
thus wiping out their interest in the company.
CIR V. MANNING (The stockholders reverted the shares of Reese in the Treasury to the capital
account of the company as stock dividends to be distributed to the stockholders).
- The distribution of Reeses shares as stock dividends was in effect a distribution of the
assets or property of the corporation.
- Where by the use of a trust instrument, respondents (TPs) bestowed unto themselves the
full worth and value of a deceased stockholders corporate holding acquired with the very
earnings of the companies, such package device which obviously is not designed to carry
out the usual stock dividend purpose of corporate expansion reinvestment, e.g., the
acquisition of additional facilities and other capital budget items, but exclusively for
expanding the capital base of the surviving stockholders in the company, cannot be allowed
to deflect the latter's responsibilities toward our income tax laws. The conclusion is
ineluctable that whenever the company parted with a portion of its earnings "to
buy" the corporate holdings of the deceased stockholders, it was in ultimate
effect and result making a distribution of such earnings to the surviving
stockholders.
- Where the surviving stockholders partitioned among themselves, as treasury stock
dividends, the deceased stockholder's interest, and earnings of the corporation over a period
of years were used to gradually wipe out the holdings therein of said deceased stockholder,
the earnings (which in effect have been distributed to the surviving stockholders when they
appropriated among themselves the deceased stockholder's interest), should be taxed for
each of the corresponding years when payments were made to the deceased's
estate on account of his shares, and not the total acquisition cost of the alleged
treasury stock dividends in one lump sum.
- However, with regard to payment made with the corporation's earnings before the passage
of the resolution declaring as stock dividends the deceased stockholder's interest, the
surviving stockholders should be liable to the extent of the aggregate amount paid by

the corporation (prior to such resolution) to buy off the deceased stockholder's
shares.
TREASURY SHARES
Stocks fully issued and paid for and re-acquired by the corporation either by purchase,
donation, forfeiture, or other means.
Do not have the status of outstanding shares for being in the treasury. Stock dividends,
being one payable in capital stock, cannot be declared out of outstanding corporate stock, but
only from retained earnings. thus, the declaration of the newly acquired shares as treasury
stock dividends was a nullity, in view of the manifest intention of the stockholders to treat
them as outstanding shares.
CIR V. DUBERSTEIN (CADILLAC GIVEN AS GIFT FOR INFO ON POSSIBLE CUSTOMERS SC: NOT GIFT ||
MONEY GIVEN AS GRATUITY FOR PAST SERVICES SC: GIFT)
- A voluntarily executed transfer of his property by one to another, without any consideration
or compensation therefor, though a common law gift, is not necessarily a "gift" within the
meaning of the statute. The mere absence of a legal or moral obligation to make such a
payment does not establish that it is a gift. If the payment proceeds primarily from the
constraining force of any moral or legal duty," or from "the incentive of anticipated benefit"
of an economic nature, it is not a gift.
- Where the payment is in return for services rendered, it is irrelevant that the donor derives
no economic benefit from it.
- A gift proceeds from a detached and disinterested generosity, out of affection, respect,
admiration, charity or like impulses. Thus, the most critical consideration is the TRANSFERORS
INTENTION.
O
The donor's characterization of his action is not determinative -- that there must be
an objective inquiry as to whether what is called a gift amounts to it in reality.
O
Parties' expectations or hopes as to the tax treatment of their conduct, in
themselves, have nothing to do with the matter.
O
The proper criterion is one that inquires what the basic reason for his conduct
was in fact -- the dominant reason that explains his action in making the
transfer.
- The conclusion whether a transfer amounts to a gift is one that must be reached on
consideration of all the factors.
- The Tax Court, as trier of the facts, was warranted in concluding that, despite the
characterization of the transfer of the Cadillac by the parties, and the absence of any
obligation, even of a moral nature, to make it, it was, at bottom, a recompense for
Duberstein's past services, or an inducement for him to be of further service in the future.
OGILVIE

V US (WIFE DIES OF SHOCK D/T FAULTY PRODUCT, FAMILY RECEIVES PUNITIVE DAMAGES AND
ACTUAL DAMAGES AS COMPENSATION; PUNITIVE DAMAGES TAXABLE)

The amount of any damages received on account of personal injuries or sickness is excluded
from gross income. It covers pain and suffering damages, medical expenses, and lost
wages in an ordinary tort case because they are designed to compensate victims.
Compensatory damages excluded for it merely restores a victims lost, nontaxable
capital.
On account of damages that were awarded by reason of, or because of, the personal
injuries, and not to punitive damages that do not compensate injury, but are private fines
levied by civil juries to punish the reprehensible conduct and to deter its future occurrence.
Suggests a strong causal connection; i.e. TP was awarded damages because of his
physical injuries.
Punitive damages are not a substitute for any normally untaxed personal (or financial)
quality, good, or asset and do not compensate for any kind of loss.
In this case, the punitive damages were not received on account of personal injuries.
Hence, such are taxable.

The language [of the statute] excludes from taxation not only those damages that aim to
substitute for a victim's physical or personal well-being-personal assets that the Government
does not tax and would not have taxed had the victim not lost them. It also excludes from
taxation those damages that substitute, say, for lost wages, which would have been taxed
had the victim earned them. To that extent, the provision can make the compensated
taxpayer better off from a tax perspective than had the personal injury not taken place.

MURPHY

V. US (COMPENSATORY DAMAGES AWARDED FOR EMOTIONAL DISTRESS AND LOSS

REPUTATION FROM BEING UNDULY BLACKLISTED BY EMPLOYER NOT EXEMPT BUT ALSO NOT INCOME)

OF

Murphys compensation was not received on account of personal physical injuries excludable
from gross income under the law. She, no doubt, suffered from certain physical
manifestations of emotional distress, but evidence shows that the Board awarded her
compensation only for mental pain and anguish and for injury to professional reputation.
- However, subject provision is unconstitutional as applied to her award because
compensation for a non-physical personal injury is not income under the Sixteenth
Amendment if, as here, it is unrelated to lost wages or earnings.
o Congress is not authorized to tax as incomes every sort of revenue a taxpayer may
receive.
o The payment for the diminution of a personal attribute, such as reputation, is but a
restoration of the status quo ante, analogous to a restoration of capital, human
capital as it were; in neither context does the payment result in a gain or
accession to wealth.
In lieu of what were the damages awarded? If the value was received
in lieu of something normally untaxed, then her compensation is
not an income.
The damages were awarded to make Murphy emotionally and reputationally
whole and not to compensate her for lost wages or taxable earnings of any
kind. The emotional well-being and good reputation she enjoyed before they
were diminished by her former employer were not taxable as income.
o Citing Glenshaw,
The long history of holding personal injury recoveries nontaxable on the
theory that they roughly correspond to a return of capital cannot support
exemption of punitive damaged following injury to property. Damages for
personal injury are by definition compensatory only. Punitive damages, on the
other hand, cannot be considered restoration of capital for taxation purposes.
Compensatory damages designed to make a person whole are excluded from
the definition of income.
MURPHY V. US, ON REHEARING (SAME CASE, BUT MURPHY IS SCREWED; TAXABLE)
- Murphys compensation was not received on account of personal physical injuries excludable
from gross income. Even though she suffered from certain physical manifestations of
emotional distress, the record clearly indicates that the Board expressly awarded the
damages because of nonphysical injuries mental anguish and injury to reputation.
Therefore, the damages are not covered by the exclusion clause.
- Gross income includes compensatory damages for non-physical injuries. Tax upon such
damages is within the Congress power to tax.
- Section 104(a) (Compensation for injuries or sickness) provides that gross income does
not include the amount of any damages (other than punitive damages) received ... on
account of personal physical injuries or physical sickness. Since 1996 it has further
provided that, for purposes of this exclusion, emotional distress shall not be treated as a
physical injury or physical sickness. The version of 104(a)(2) in effect prior to 1996 had
excluded from gross income monies received in compensation for personal injuries or
sickness, which included both physical and nonphysical injuries such as emotional distress.
- Murphy undeniably had an economic gain because she was better off financially after
receiving the damages award than she was prior to receiving it.
-

Murphy has no tax basis in her human capital. The taxpayers gain upon the disposition of
property is the difference between the amount realized from the disposition and his basis
in the property, defined as the cost of such property, adjusted for expenditures, receipts,
losses, or other items, properly chargeable to a capital account. The Code does not allow
individuals to claim a basis in their human capital; the gain is the full value of the award.
Since there is no tax basis in a persons health and other personal interests, money received
as compensation for an injury to those interests might be considered a realized accession to
wealth.
For the amendment to make sense, gross income must include an award for nonphysical
damages, regardless whether the award is an accession to health.
A) Tax upon ones ownership of property OR B) upon a use of property, a privilege, an
activity, or transaction? B, Murphy was taxed only after receiving the award. Murphys
situation seems akin to an involuntary conversion of assets; she was forced to surrender
some part of her mental health and reputation in return for monetary damages. Property
involuntarily converted into money is taxed to extent of gain recognized.

CIR V CA (1992) [EMPLOYEES TRUSTS EXEMPT]

- Employees' trusts are exempt from income tax, by virtue of express provision of law. The tax
advantage was conceived in order to encourage the formation and establishment of private
loans for the benefit of laborers and employees outside of the Social Security Act.
- Employees' trusts or benefit plans normally provide economic assistance to employees upon
the occurrence of certain contingencies, particularly, old age retirement, death, sickness, or
disability. It provides security against certain hazards to which members of the Plan may be
exposed. It is an independent and additional source of protection for the working group.
What is more, it is established for their exclusive benefit and for no other purpose.
CIR V CA (1991) [TERMINAL LEAVE PAY EXEMPT]
- Terminal leave pay received by a government official or employee on the occasion of his
compulsory retirement from government service is exempt from income tax (and
consequently withholding tax on compensation).
- RATIONALE: commutation of leave credits, more commonly known as terminal leave, is
applied for by an officer or employee who retires, resigns or is separated from the service
through no fault of his own. In the exercise of sound personnel policy, the Government
encourages unused leaves to be accumulated. The Government recognizes that for most
public servants, retirement pay is always less than generous if not meager and scrimpy. A
modest nest egg which the senior citizen may look forward to is thus avoided. Terminal leave
payments are given not only at the same time but also for the same policy considerations
governing retirement benefits."
IN

RE:

ATTY. ZIALCITA [TERMINAL LEAVE PAY]

Exclusions Retirement benefits, pensions, gratuities, etc.:
(b) Any amount received by an official or employee or by his heirs from the employer as a
consequence of separation of such official or employee from the service of the employer due
to death, sickness or other physical disability or for any cause beyond the control of the said
official or employee."
The terminal leave pay (commutation of unused leave credits) is exempt from income tax.
Since terminal leave is applied for by an officer who has already severed his connection with
his employer and who is no longer working, then it follows that the terminal leave pay, which
is the value of his accumulated leave credits, is no longer compensation for services
rendered.
Compulsory retirement may be considered as a "cause beyond the control of the said official
or employee".
It may also be considered as a "retirement gratuity received by government officials and
employees" which is also another exclusion from gross income. A gratuity -- a bounty given

by the government in consideration and in recognition of meritorious services -- is that paid

to the beneficiary for past services rendered purely out of generosity of the grantor.
CIR V MITSUBISHI METAL CORP. [ATLAS NOT AN AGENT, NOT COVERED BY EXEMPTION]
- The provision of the National Internal Revenue Code relied upon is Section 29 (b) (7) (A),
6(6) which excludes from gross income: "(A) Income received from their investments in the
Philippines in loans, stocks, bonds or other domestic securities, or from interest on their
deposits in banks in the Philippines by (1) foreign governments, (2) financing institutions
owned, controlled, or enjoying refinancing from them, and (3) international or regional
financing institutions established by governments."
- Interest income from the loans extended to Atlas by Mitsubishi is NOT excludible from gross
income taxation and, therefore, is NOT exempt from withholding tax. Mitsubishi is not a
mere conduit of Eximbank, so Eximbank cannot be considered as the creditor whose
investments in the Philippines on loans are exempt from taxes.
- Scrupulous care must be taken to avoid opening the floodgates to the violation of our tax
laws. Otherwise, the mere expedient of having a Philippine corporation enter into a contract
for loans or other domestic securities with private foreign entities, which in turn will
negotiate independently with their governments, could be availed of to take advantage of
the tax exemption law under discussion.
NIPPON LIFE INS. CO.

V CIR [TAX ON INTEREST INCOME AND GAIN FROM SALE DERIVED FROM AN
INVESTMENT IN A TREASURY BOND]

NIRC: Gains from the sale or exchange of long-term bonds, debentures, and other
certificates of indebtedness with a maturity of more than 5 years shall not be included in
gross income and shall be exempt from taxation.
Statutory construction: letter of the law provides gains from the sale, not the term gains
in the general sense, which is synonymous to income.
In the NIRC, it is clear that there is a distinction between gains derived from dealings in
property and interests, which are separately classified as items of gross income.
INTEREST
GAIN FROM THE SALE OF BONDS
Periodic
income
derived
from
the
Income derived from the conversion of an
forbearance of money
asset
Derived from the continuance of the bond
Derived from the termination of the bond
investment
investment
Not exempt
Exempt

SMITH V. CIR
- Cost of hiring nursemaids to care for the infant child of a couple, both of whom are
employed, held not deductible as an ordinary and necessary business expense of the wife.
Child care is a personal concern. The wife's services as custodian of the home and protector
of its children are ordinarily rendered without monetary compensation. There results no
taxable income from the performance of this service and the correlative expenditure is
personal and not susceptible of deduction.
- But for test (but for such expense, there would be no income and no tax).
- Personal expenses those that are not necessary to the operation of business and to the
creation of income are non-deductible.
- Certain disbursements which are normally personal may become deductible by reason of
their intimate connection with an occupation carried on for profit. Example: entertainment,
travel expenses, cost of an actor's wardrobe. Qualifier: distinction between those activities
which, as a matter of common acceptance and universal experience, are ordinary or usual
as the direct accompaniment of business pursuits, on the one hand; and those which,
though they may in some indirect and tenuous degree relate to the circumstances of a
profitable occupation, are nevertheless personal in their nature, of a character applicable to
human beings generally, and which exist on that plane regardless of the occupation, though
not necessarily of the station in life, of the individuals concerned.

PEVSNER V. CIR [CLOTHING EXPENSES OF YSL MANAGER, IN THIS CASE, NOT DEDUCTIBLE BUSINESS
EXPENSE]
- Many expenses which are helpful or essential to one's business activities, such as
commuting expenses and the cost of meals while at work, are considered inherently
personal and thus are not deductible.
- Cost of clothing is deductible as a business expense only if the clothing is of a type
specifically required as a condition of employment, is not adaptable to general use as
ordinary clothing, and is not so worn.
- When a taxpayer is prohibited from wearing the clothing away from work, deduction as a
business expense is normally allowed for the cost of the clothing.
- Cost of expensive designer clothing which manager of boutique was required to wear was
not deductible, even though she did not wear the clothes during off-work hours because
they were too expensive for simple, everyday life-style where the employer did not preclude
her from wearing the clothing away from work.
- Under the objective test for determining deductibility of the cost of clothing, no reference is
made to the individual taxpayer's life-style or personal taste; adaptability for personal or
general use depends on what is generally accepted for ordinary streetwear. Ratio: 1)
Administrative necessity. As a practical matter, it is virtually impossible to determine at what
point either price or style makes clothing inconsistent with or inappropriate to a taxpayer's
lifestyle. 2) This test also tends to promote substantial fairness among the greatest number
of taxpayers.
Ordinary and necessary business expenses
Personal, living, or family expenses
incurred in the conduct of a trade or
business
- Deductible
- Not deductible
RUDOLPH V. US (business trip with pleasure, supra)
- Deductibility of a combined business-pleasure trip depends on a subjective standard:
whether the TPs primary purpose was business or personal.
SCHULTZ

V. CIR [ENTERTAINMENT EXPENSES FOR SUPPERS, THEATERS, NIGHTCLUBS, AND LUNCHEONS OF

CUSTOMERS; LUXURY WATCHES]

Entertainment expenses are deductible only if they are in fact ordinary and necessary
expenses for carrying on a trade or business and to the extent that they are primarily social
and personal in nature and bear no direct relation to the operation of a business, such
expenditures may not be deducted.
Whether contested expenditures are ordinary and necessary is primarily a question of fact.
Proof is required that the purpose of the expenditure was primarily business rather than
social or personal, and that the business in which taxpayer is engaged benefited or was
intended to be benefited thereby.
After taking into consideration the nature of the entertainment provided by the petitioner
[clients brought their wives; quite similar to usual gatherings among friends] and the fact
that it was undertaken at a time when he had more business than he could handle, we are
not convinced that all of the expenditures in issue were made for purely business reasons or
that the entire cost of such entertainment may be characterized as ordinary and necessary
expense incident to the carrying on of the petitioners business.
On the other hand, we are convinced that some part of the expenditures was prompted by
strictly business considerations and should be characterized as ordinary and necessary
expenses.

CIR V. FLOWERS [TRAVEL EXPENSES OF LAWYER FROM HOME IN MISSISSIPPI TO WORKPLACE IN ALABAMA
FOR RAILROAD BUSINESS]
- 'Traveling expenses (including the entire amount expended for meals and lodging)
while away from home in the pursuit of a trade or business deductible.

Conditions:
(1) The expense must be a reasonable and necessary traveling expense, as
that term is generally understood. This includes such items as transportation
fares and food and lodging expenses incurred while traveling.
(2) The expense must be incurred 'while away from home.'
(3) The expense must be incurred in pursuit of business. This means that
there must be a direct connection between the expenditure and the carrying
on of the trade or business of the taxpayer or of his employer. Moreover, such
expenditure must be necessary or appropriate to the development and pursuit
of the business or trade.
Construction of the word "home" - WON it was the place of business or actual residence - not
decided in the case
The expenses were incurred solely as the result of the TP's desire to maintain a home in
Jackson while working in Mobile, a factor irrelevant to the maintenance of the railroad's legal
business. Expenses were occasioned solely by his personal propensities.
Travel expenses in pursuit of business within the meaning of Code could arise only when the
railroad's business forced the taxpayer to travel and to live temporarily at some place other
than Mobile, thereby advancing the interests of the railroad. Business trips are to be
identified in relation to business demands and the traveler's business headquarters. The
exigencies of business rather than the personal conveniences and necessities of the traveler
must be the motivating factors.

HANTZIS

V. CIR [LAW STUDENTS SUMMER EMPLOYMENT EXPENSES WERE INCURRED AS EXPENSES IN

PURSUIT OF TRADE OR BUSINESS BUT AWAY FROM HOME REQUIREMENT WAS NOT MET]

Phrase in pursuit of a trade or business as used in section of Internal Revenue Code

authorizing deduction for business-related travel expenses does not require that a
deductible traveling expense be incurred under demands of a trade or business which
predates the expense.
A person's taxable income should not include the cost of producing that income.
The location of a person's home for taxation purposes becomes problematic only when the
person lives one place and works another. Where a taxpayer resides and works at a single
location, he is always home, however defined; and where a taxpayer is constantly on the
move due to his work, he is never away from home. (In the latter situation, it may be said
either that he has no residence to be away from, or else that his residence is always at his
place of employment.)
Whether it is held in a particular decision that a taxpayer's home is his residence or his
principal place of business, the ultimate allowance or disallowance of a deduction is a
function of the court's assessment of the reason for a taxpayer's maintenance of two homes.
If the reason is perceived to be personal, the taxpayer's home will generally be held to be
his place of employment rather than his residence and the deduction will be denied. If the
reason is felt to be business exigencies, the person's home will usually be held to be his
residence and the deduction will be allowed.
Temporary employment doctrine: Where a taxpayer reasonably expects to be employed
in a location for a substantial or indefinite period of time, the reasonable inference is that his
choice of a residence is a personal decision, unrelated to any business necessity. Thus, it is
irrelevant how far he travels to work. The normal expectation, however, is that the taxpayer
will choose to live near his place of employment. Consequently, when a taxpayer reasonable
(sic) expects to be employed in a location for only a short or temporary period of time and
travels a considerable distance to the location from his residence, it is unreasonable to
assume that his choice of a residence is dictated by personal convenience. The reasonable
inference is that he is temporarily making these travels because of a business necessity.
o For a taxpayer in Mrs. Hantzis' circumstances to be away from home in the pursuit
of a trade or business, she must establish the existence of some sort of business
relation both to the location she claims as home and to the location of her
temporary employment sufficient to support a finding that her duplicative expenses

are necessitated by business exigencies. This is the meaning of the statement in

Flowers that (b)usiness trips are to be identified in relation to business demands and
the traveler's business headquarters.
Taxpayer who pursues temporary employment away from location of his usual
residence but has no business connection with that location is not away from home
for purposes of travel expense deduction.

MT. MORRIS DRIVE-IN THEATRE CO.

V. CIR [DRAINING SYSTEM IN SLOPING LAND SUBSEQUENTLY

CONSTRUCTED AFTER LAWSUIT AGAINST THEATRE OWNER; Deductible Current Expenses v. Non-

Deductible Capital Expenditures]

- The cost of the drainage system was a capital expenditure and was not deductible either as
an ordinary and necessary business expense or as a loss.
- Theater owner was thoroughly familiar with the topography. If he had included in its original
construction plans an expenditure for a proper drainage system, such an expenditure would
have been capital in nature. There was no sudden catastrophic loss caused by a "physical
fault" undetected by the taxpayer. There is no unforeseeable external factor. Moreover, there
was no mere restoration or rearrangement of the original capital asset, but there was the
acquisition and construction of a capital asset which petitioner had not previously had,
namely, a new drainage system.
- That the drainage system was acquired and constructed and that payments therefor were
made in compromise of a lawsuit is not determinative. The decisive test is still the character
of the transaction which gives rise to the payment.

MIDLAND EMPIRE PACKING CO. V. CIR [CONCRETE LINER BUILT BY MEAT-PACKING PLANT IS REPAIR
DEDUCTIBLE O/N BUSINESS EXPENSE]
- The purpose of the expenditure for the concrete liner was not to prepare the plant for
operation on a changed or larger scale, nor to make it suitable for new or additional uses,
but only to permit petitioner to continue the use of the plant, and particularly the basement,
in normal operation. Held, the expenditure for lining the basement walls and floor was
essentially a repair and as such is deductible as an ordinary and necessary business
expense.
- In determining whether an expenditure is a capital one or is chargeable against operating
income, it is necessary to bear in mind that purpose for which the expenditure was made. To
repair is to restore to a sound state or to mend, while a replacement connotes a substitution.
A repair is an expenditure for the purpose of keeping the property in an ordinarily efficient
operating condition. It does not add to the value of the property nor does it appreciably
prolong its life. It merely keeps the property in an operating condition over its probable
useful life for the uses for which it was acquired. Expenditures for that purpose are
distinguishable from those for replacements, alterations, improvements, or additions which
prolong the life of the property, increase its value, or make it adaptable to a different use.
The one is a maintenance charge, while the others are additions to capital investment which
should not be applied against current earnings.
INDOPCO, INC. V. CIR [ACQUISITION-RELATED EXPENSES BY NATIONAL STARCH NON-DEDUCTIBLE; NOT
AN O/N BUSINESS EXPENSE]
- Deductions are exceptions to the norm of capitalization, and are allowed only if there is clear
provision for them in the Code and the taxpayer has met the burden of showing a right to
the deduction.
- The creation of a separate and distinct asset may be a sufficient condition for classification
as a capital expenditure, not that it is a prerequisite to such classification. A taxpayer's
expenditure that "serves to create or enhance . . . a separate and distinct" asset should be
capitalized. It by no means follows, however, that only expenditures that create or enhance
separate and distinct assets are to be capitalized.
- Reliance on future benefit as means of distinguishing an ordinary business expense from a
capital expenditure is not prohibited in jurisprudence. Although the presence of an incidental

CIR

future benefit may not warrant capitalization, a taxpayer's realization of benefits beyond the
year in which the expenditure is incurred is important in determining whether the
appropriate tax treatment is immediate deduction or capitalization. In this case, the
transaction produced significant benefits to petitioner extending beyond the tax year in
question.
Expenses "incurred for the purpose of changing the corporate structure for the benefit of
future operations are not ordinary and necessary business expenses."
Ordinary and necessary expenses in Capital expenditure ("amount paid out
pursuit of trade or business
for new buildings or for permanent
improvements or betterments made to
increase the value of any property or
estate.")
Deductible
Not deductible
Timing of the taxpayer's cost recovery: Usually is amortized and depreciated
Currently deductible
over the life of the relevant asset, or,
where no specific asset or useful life can
be ascertained, is deducted upon
dissolution of the enterprise.
To qualify for a deduction, item must
(1) Be "paid or incurred during the taxable year,"
(2) Be for "carrying on any trade or business,"
(3) Be an "expense,"
(4) Be a "necessary" expense, - The term "necessary" imposes "only the minimal
requirement that the expense be `appropriate and helpful' for `the development of the
taxpayer's business,'
(5) be an "ordinary" expense."- To qualify as "ordinary," the expense must relate to a
transaction "of common or frequent occurrence in the type of business involved".

V. GENERAL FOODS [9M MEDIA ADVERTISING EXPENSE FOR

CAPITAL EXPENDITURE SO NON-DEDUCTIBLE]

WELCH

TANG

NOT AN

O/N

EXPENSE; IT IS

Deductions for income tax purposes partake of the nature of tax exemptions; thus must be
strictly construed.
2 conditions to be considered as an ORDINARY expense:
1. "Reasonableness" of the amount incurred
-- No hard and fast rule to determine reasonableness -- 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.
2. Amount incurred must not be a capital outlay to create "goodwill" for the
product and/or TP's business.
-- The protection of brand franchise is analogous to the maintenance of goodwill or title to
one's property.
-- Advertising to stimulate future, rather than current, sales is considered as a means of
creating goodwill.
To be deductible from gross income, the 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.

V. HELVERING [AGENT PAYS DEBTS INCURRED BY FORMER COMPANY TO RE-ESTABLISH HIS

RELATIONS WITH CUSTOMERS AND SOLIDIFY HIS CREDIT AND STANDING]

'Ordinary' expense does not mean that the payments must be habitual or normal in the
sense that the same taxpayer will have to make them often. The expense is an ordinary one
because we know from experience that payments for such a purpose, whether the amount is
large or small, are the common and accepted means of defense against attack.
Men do at times pay the debts of others without legal obligation or the lighter obligation
imposed by the usages of trade or by neighborly amendities, but they do not do so
ordinarily, not even though the result might be to heighten their reputation for generosity
and opulence. Payment in such circumstances is in a high degree extraordinary.
Reputation and learning are akin to capital assets.

ATLAS CONSOLIDATED MINING

V. CIR [STOCKHOLDERS RELATIONS EXPENSES AND SUIT EXPENSES OF

MINING COMPANY NOT A DEDUCTIBLE EXPENSE; AIMED AT CREATING FAVORABLE GOODWILL IN THE
INVESTMENT MARKET // CAPITAL EXPENSE]

It is ordinary when it connotes a payment which is normal in relation to the business of the
TP and the surrounding circumstances. The payment may be unique or non-recurring. No
hard and fast rule. The intention of the TP often may be the controlling fact in making the
determination.
Expenses relating to recapitalization and reorganization of the corporation; cost of obtaining
stock subscription; promotion expenses; and fees paid for the sale of stock reorganization
are capital expenditures.
PR expenses are for the promotion of reputation and reputation is akin to capital assets.
Litigation expenses were incurred in defense of Atlas title to its mining properties. Such
expenses incurred in defense and protection of title are capital in nature; constitute a part of
the cost of the property; and are not deductible.
Stock listing expenses: If paid only once and the benefit acquired thereby continued
indefinitely -- non-deductible for being a capital expenditure; If paid annually -- ordinary and
necessary business expense. s

C.M. HOSKINS V. CIR [PAYMENT BY CORPORATE TP TO ITS CONTROLLING STOCKHOLDER OF SUPERVISION

FEES NOT DEDUCTIBLE AS O/N EXPENSE; DISTRIBUTION OF EARNINGS AND PROFITS OF THE TP;
REASONABLENESS TEST]
- The fees were inordinately large and were received whether the services were actually
rendered or not; thus, it could not be accorded the treatment of ordinary and necessary
expenses.
- REASONABLENESS TEST: 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 conditions precedent to the deduction of
bonuses to employees are:
o (1) The payment of the bonuses is in fact compensation;
o (2) It must be for personal services actually rendered; and
o (3) The 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.
- There is no fixed test for determining the reasonableness of a given bonus as compensation.
Factors:the amount and quality of the services performed with relation to the business;
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 whole.
KUENZLE & STREIFF V. COLLECTOR [CORPORATE TP DEDUCTED BONUSES AND SALARIES OF
OFFICERS AND NON-RESIDENT OFFICERS; BONUSES DISALLOWED INSOFAR AS THEY EXCEED THE

RESIDENT
SALARIES

OF RECIPIENTS; INTERESTS ON EARNED BUT UNPAID SALARIES AND BONUSES ALSO DISALLOWED AS
DEDUCTIONS.]

The bonuses were paid as additional compensation for personal services actually rendered
and as such can be considered as ordinary and necessary expenses incurred in the business.
The only question is how much of said bonuses may be considered reasonable in order that
it may be allowed as deduction.
Reasonableness test in Hoskins case was applied.
There was no special reason for granting greater bonuses to lower ranking resident officers.
Non-resident officers had rendered the same amount of efficient personal service and
contribution to deserve equal treatment in compensation and other emoluments with the
particularity that their liberation yearly salaries had been much smaller. Moreover, the
payment of bonuses in amounts a little more than the yearly salaries received considering
the prevailing circumstances [post-war policy was to give salaries at low levels] is
reasonable.

CIR

V. ISABELA CORP. [CORP CLAIMED FOR DEDUCTIONS FOR PROFESSIONAL

NOT ALLOWED AND SECURITY SERVICES-ALLOWED]

(AUDITING

AND LEGAL)

Requisites same as in CIR v. General Foods.

2nd requisite - (b) it must have been paid or incurred during the taxable year - is qualified by
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."
Accounting methods for tax purposes comprise a set of rules for determining when and how
to report income and deductions.
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of
accounting, expenses not being claimed as deductions [even when authorized to do so] by a
taxpayer in the current year when they are incurred cannot be claimed as deduction from
income for the succeeding year.
Accrual method of accounting
Cash method of accounting
Relies upon the taxpayer's right to receive Relies upon actual receipt or payment
amounts or its obligation to pay them
Amounts of income accrue where the right
to receive them become fixed, where there
is created an enforceable liability (fixed and
determinable in amount).
The accrual of income and expense is permitted when the all-events test has been met.
This test requires:
o (1) fixing of a right to income or liability to pay; and
o (2) availability of the reasonable accurate determination of such income or liability.
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 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.
Reason: strict construction for deductions

PAPER IND. CORP V. CA

CIR V. VDA.

DE

PRIETO

CIR V. LEDNICKY

PHIL. REFINING CO.

CA

FERNANDEZ HERMANOS, INC.

CIR

BASILAN ESTATES V. CIR

LIMPAN INVESTMENT CORP V. CIR
CONSOLIDATED MINES V. CTA
3M PHIL. INC.

CIR