ISSUE (2): WON CA correctly held that ICC did not
DEDUCTIONS understate its interest income from the promissory
TAXATION 1 Case Digest
Jong P. Batayo
CIR vs. Isabela Cultural Corporation
Isabela Cultural Corp.(ICC for brevity) , a domestic
corporation received from BIR assessment notice no.
FAS-1-86-90000680 (680 for brevity) for deficiency
income tax in the amount of PhP 333,196.86 and
assessment notice no. FAS-1-86-90-000681 (681 for
brevity) for deficiency expanded withholding tax in the
amount of PhP 4,897.79, inclusive of surcharge and
interest both for the taxable year 1986. The deficiency
income tax of PhP 333,196 arose from BIR
disallowance of ICC claimed expenses deductions for
professional and security services billed to and paid by
ICC in 1986.
The deficiency expanded withholding tax of
PhP4,897.79 was allegedly due to the failure of ICC to
withhold 1% expanded withholding tax on its claimed
PhP244,890 deduction for security services.
Court of Tax Appeal and Court of Appeal affirmed that
the professional services were rendered to ICC in 1984
and 1985, the cost of the service was not yet
determinable at that time, hence, it could be
considered as deductible expenses only in 1986 when
ICC received the billing statement for said service. It
further ruled that ICC did not state its interest income
from the promissory notes of Realty Investment and
that ICC properly withheld the remitted taxes on the
payment for security services for the taxable year
1986.
Petitioner contend that since ICC is using the accrual
method of accounting, the expenses for the
professional services that accrued in 1984 and 9185
should have been declared as deductions from income
during the said years and the failure of ICC to do so
bars it from claiming said expenses as deduction for
the taxable year 1986.
ISSUE (1): WON CA is correct in sustaining the
deduction of the expenses for professionals and
security services form ICC gross income?
HELD: NO
Revenue Audit Memorandum Order No.1-2000
provides that under the accrual method of accounting,
expenses not being claimed as deductions by a tax
payer in the current year when they are incurred cannot
be claimed as deductions from the income for the
succeeding year.
TAXATION ! NOTES [Type here]
notes of Realty Investment, Inc; that ICC withheld the
required 1% withholding tax from the deduction for
security services.
HELD:
Sustaining the finding of the CTA and CA that no such
understatement exist and that only simple interest
computation and not a compounded one should have
been applied by the BIR. There is no indeed no
stipulation between the latter and ICC on the
application of compound interest.
Under Article 1959 of the Civil Code, unless there is a
stipulation to the contrary, interest due should not
further earn interest.
ING BANK N.V. vs.
COMMISSIONER OF INTERNAL REVENUE
On January 3, 2000, ING received a FAN dated
December 3, 1999. The FAN also contained the Details
of Assessment and 13 Assessment Notices. The FAN
covered the deficiency tax assessments for years 1996
and 1997.
ING Bank paid the deficiency assessments for the year
1996 and 1997 deficiency final tax. ING Bank,
however, protested the remaining 10 deficiency tax
assessments.
ING Bank filed a Petition for Review before the CTA to
seek cancellation and withdrawal of the deficiency tax
assessments for the years 1996 and 1997,
CTA partially granted the petition, ING Bank appealed
to the CTA En Banc. CTA denied for lack of merit.
ING Bank filed a Motion to the SC that it had availed
itself of the tax amnesty under RA 9480 covering all
national internal revenue taxes for the taxable year
2005 and prior years.
ING Bank prayed that the SC issue a resolution of its
availment of the tax amnesty, and confirming its
entitlement to all the immunities and privileges under
Section 6 of RA 9480.
However, ING Bank availed itself of the tax amnesty
under RA 9480, with respect to its liabilities for
deficiency documentary stamp taxes on its special
savings accounts for the taxable years 1996 and 1997
and deficiency tax on onshore interest income under
the foreign currency deposit system for taxable year
1996.
ISSUES:
1. Whether ING Bank may validly avail itself of the tax
amnesty granted by Republic Act No. 9480; and
2. Whether petitioner ING Bank is liable for deficiency
withholding tax on accrued bonuses for the taxable
years 1996 and 1997.
[Type here]
RULING:
1. YES. Taxpayers with pending tax cases may avail
themselves of the tax amnesty program under RA
9480.
Both R.A. 9480 and DOF Order No. 29-07 are quite
precise in declaring that "tax cases subject of final and
executory judgment by the courts" are the ones
excepted from the benefits of the law.
Petitioner ING Bank showed that it complied with the
requirements under RA 9480. The CIR never
questioned that petitioner ING Bank fully complied with
the requirements for tax amnesty under the law.
RA 9480 confers no discretion on the CIR, its authority
under RA 9480 is limited to determining whether (a) the
taxpayer is qualified to avail oneself of the tax amnesty;
(b) all the requirements for availment under the law
were complied with; and (c) the correct amount of
amnesty tax was paid within the period prescribed by
law.
2. YES. An expense, whether the same is paid or
payable, shall be allowed as a deduction only if it is
shown that the tax required to be deducted and
withheld therefrom was paid to the BIR.
Under the NIRC, every form of compensation for
personal services is subject to income tax and,
consequently, to withholding tax. Petitioner ING Bank
insists that the bonus accruals in 1996 and 1997 were
not yet subject to withholding tax because these
bonuses were actually distributed only in the
succeeding years of their accrual when the amounts
were finally determined.
The tax on compensation income is withheld at source
under the creditable withholding tax system wherein
the tax withheld is intended to equal or at least
approximate the tax due of the payee on the said
income.
It is true that the law and implementing regulations
require the employer to deduct and pay the income tax
on compensation paid to its employees, either actually
or constructively.
When the employer or other person required to deduct
and withhold the tax under this Chapter XI, Title II of
the Tax Code has withheld and paid such tax to the
Commissioner of Internal Revenue or to any
authorized collecting officer, then such employer or
person shall be relieved of any liability to any person.
(Emphasis supplied)
On the other hand, it is also true that under Section 45
of the 1997 National Internal Revenue Code (then
Section 39 of the 1977 National Internal Revenue
Code, as amended), deductions from gross income are
taken for the taxable year in which "paid or accrued" or
"paid or incurred" is dependent upon the method of
accounting income and expenses adopted by the
taxpayer.
TAXATION ! NOTES [Type here]
Here, petitioner ING Bank already recognized a
definite liability on its part considering that it had
deducted as business expense from its gross income
the accrued bonuses due to its employees. Underlying
its accrual of the bonus expense was a reasonable
expectation or probability that the bonus would be
achieved. In this sense, there was already a
constructive payment for income tax purposes as these
accrued bonuses were already allotted or made
available to its officers and employees.
CIR VS GENERAL FOODS
Facts:
Respondent corporation General Foods (Phils), which
is engaged in the manufacture of “Tang”, “Calumet”
and “Kool-Aid”, filed its income tax return for the fiscal
year ending February 1985 and claimed as deduction,
among other business expenses, P9,461,246 for
media advertising for “Tang”.
The Commissioner disallowed 50% of the deduction
claimed and assessed deficiency income taxes of
P2,635,141.42 against General Foods, prompting the
latter to file an MR which was denied.
General Foods later on filed a petition for review at CA,
which reversed and set aside an earlier decision by
CTA dismissing the company’s appeal.
Issue:
W/N the subject media advertising expense for “Tang”
was ordinary and necessary expense fully deductible
under the NIRC
Held:
No. Tax exemptions must be construed in stricissimi
juris against the taxpayer and liberally in favor of the
taxing authority, and he who claims an exemption must
be able to justify his claim by the clearest grant of
organic or statute law. Deductions for income taxes
partake of the nature of tax exemptions; hence, if tax
exemptions are strictly construed, then deductions
must also be strictly construed.
To be deductible from gross income, the subject
advertising expense must comply with the following
requisites: (a) the expense must be ordinary and
necessary; (b) it must have been paid or incurred
during the taxable year; (c) it must have been paid or
incurred in carrying on the trade or business of the
taxpayer; and (d) it must be supported by receipts,
records or other pertinent papers.
While the subject advertising expense was paid or
incurred within the corresponding taxable year and was
[Type here]
incurred in carrying on a trade or business, hence
necessary, the parties’ views conflict as to whether or
not it was ordinary. To be deductible, an advertising
expense should not only be necessary but also
ordinary.
The Commissioner maintains that the subject
advertising expense was not ordinary on the ground
that it failed the two conditions set by U.S.
jurisprudence: first, “reasonableness” of the amount
incurred and second, the amount incurred must not be
a capital outlay to create “goodwill” for the product
and/or private respondent’s business. Otherwise, the
expense must be considered a capital expenditure to
be spread out over a reasonable time.
There is yet to be a clear-cut criteria or fixed test for
determining the reasonableness of an advertising
expense. There being no hard and fast rule on the
matter, the right to a deduction depends on a number
of factors such as but not limited to: the type and size
of business in which the taxpayer is engaged; the
volume and amount of its net earnings; the nature of
the expenditure itself; the intention of the taxpayer and
the general economic conditions. It is the interplay of
these, among other factors and properly weighed, that
will yield a proper evaluation.
The Court finds the subject expense for the
advertisement of a single product to be inordinately
large. Therefore, even if it is necessary, it cannot be
considered an ordinary expense deductible under then
Section 29 (a) (1) (A) of the NIRC.
Advertising is generally of two kinds: (1) advertising to
stimulate the current sale of merchandise or use of
services and (2) advertising designed to stimulate the
future sale of merchandise or use of services. The
second type involves expenditures incurred, in whole
or in part, to create or maintain some form of goodwill
for the taxpayer’s trade or business or for the industry
or profession of which the taxpayer is a member. If the
expenditures are for the advertising of the first kind,
then, except as to the question of the reasonableness
of amount, there is no doubt such expenditures are
deductible as business expenses. If, however, the
expenditures are for advertising of the second kind,
then normally they should be spread out over a
reasonable period of time.
The company’s media advertising expense for the
promotion of a single product is doubtlessly
unreasonable considering it comprises almost one-half
of the company’s entire claim for marketing expenses
TAXATION ! NOTES [Type here]
for that year under review. Petition granted, judgment
reversed and set aside.
COMMISSIONER OF INTERNAL REVENUE v.
LANCASTER PHILIPPINES, INC.
G.R. No. 183408, July 12, 2017
Facts:
Lancaster Philippines, Inc. is a domestic corporation
engaged in the production, processing and marketing
of tobacco. BIR issued a Letter of Authority (LOA)
authorizing its revenue officers to examine Lancaster’s
books of accounts and other accounting records for all
internal revenue taxes due from taxable year 1998 to
an unspecified date.
After the conduct of an examination pursuant to the
LOA, the BIR issued a Preliminary Assessment Notice
(PAN) which cited Lancaster for: (1) overstatement of
its purchases for the fiscal year April 1998 to March
1999; (2) noncompliance with the generally accepted
accounting principle of proper matching of cost and
revenue; and (3) disallowance of purchases of tobacco
from farmers for the months of February and March
1998 as deductions against income for the fiscal year
April 1998 to March 1999.
Lancaster replied to the PAN contending that it had
used an entire “tobacco cropping season” to determine
its total purchases covering a one-year period from
October 1 to September 30 of the following year; that it
has been adopting the 6-month timing difference to
conform to the matching concept; It concluded that
they correctly posted the subject purchases in the fiscal
year ending March 1999 as it was the only in this year
that the gross income from the crop was realized.
Subsequently, Lancaster received from the BIR a final
assessment notice (FAN) which assessed Lancaster’s
deficiency income tax as a consequence of the
disallowance of purchases claimed for the taxable year
ending March 31, 1999
Lancaster filed a petition for review before CTA
Division.
CTA Division granted the petition filed by Lancaster.
CTA En Banc affirmed the cancellation of assessment
against Lancaster.
Issues:
Whether BIR revenue officers exceeded their authority.
– YES
[Type here]
Whether CTA can resolve an issue (scope of authority
of the revenue examiners) which was not raised by the
parties. – YES
Held:
SC denied the petition for review on certiorari filed by
Commissioner of Internal Revenue.
Jurisdiction of CTA
The jurisdiction of the CTA is not limited only to cases
which involve decisions or inactions of the CIR on
matters relating to assessments or refunds but also
includes other cases arising from the NIRC or related
laws administered by the BIR. This court has once held
that the question of whether or not to impose a
deficiency tax assessment comes within the purview of
the words “other matters arising under the NIRC.” It
must be stressed that the assessment of internal
revenue taxes is one of the duties of the BIR. Thus,
CIR may authorize the examination of any taxpayer
and correspondingly make an assessment whenever
necessary.
Authority of CTA to rule on issues not raised by the
parties
Under Section 1 of the Revised Rules of the Court of
Tax Appeals, the Court (CTA) may not limit itself to the
issues stipulated by the parties but may also rule upon
related issues necessary to achieve an orderly
disposition of the case. The CTA, therefore, was well
within the authority to consider in its decision the
question on the scope of authority of the revenue
officers who were named in the LOA even though the
parties had not raised the same in their pleadings or
memoranda.
BIR Revenue Officers exceeds the authority granted by
LOA
SC agreed with the trial court when it ruled the LOA
authorizing BIR Revenue Officers to examine the
books of account of Lancaster for the taxable year
1998 only or since Lancaster adopted a fiscal year for
the period April 1, 1997 to March 31, 1998. However,
the deficiency income tax assessment which the BIR
eventually issue against Lancaster was based on the
disallowance of expenses reported in FY 1999, or for
the period April 1, 1998 to March 31, 1999. The CTA
concluded that the revenue examiners had exceeded
their authority when they issued the assessment
against Lancaster and, consequently, declared such
assessment to be without force and effect.
The LOA gives notice to the taxpayer that it is under
investigation for possible deficiency tax assessment; at
the same time it authorizes or empowers a designated
revenue officer to examine, verify, and scrutinize a
TAXATION ! NOTES [Type here]
taxpayer’s books and records, in relation to internal
revenue tax liabilities for a particular period.
The taxable year covered by the assessment being
outside of the period specified in the LOA in this case,
the assessment issued against Lancaster is, therefore,
void.
AGUINALDO INDUSTRIES (FISHING NETS) vs.
COMMISSIONER OF INTERNAL REVENUE G.R.
No. L-29790 February 25, 1982 Income Tax, Tax
Exemption, Necessary Expense
OCTOBER 23, 2017
FACTS:
Aguinaldo Industries Corp. is engaged in the
manufacture of fishing nets, a tax-exempt industry, and
the manufacture of furniture. For accounting purposes,
each division is provided with separate books of
accounts. Previously, Aguinaldo Industries acquired a
parcel of land in Muntinglupa,Rizal, as site of the
fishing net factory. This transaction was entered in the
books of the Fish Nets Division of the Company.
Later, Aguinaldo Industries, it sold the said property,
the profit from this sale which was entered in the books
of the Fish Nets Division as miscellaneous income to
distinguish it from its tax-exempt income. Petitioner
filed two separate income tax returns and after
investigation of these returns, the examiners of the BIR
found that the Fish Nets Division deducted from its
gross income P61,187.48 as additional remuneration
paid to the officers of Aguinaldo Industries. The
examiner recommended the disallowance of the
deduction. It appears from the books that such
deduction was claimed as part of the selling expenses
of the land in Muntinglupa. Aguinaldo Industries insists
that said amount should be allowed as deduction
because it was paid to its officers as allowance or
bonus pursuant to Section 3 of its by-laws.
ISSUE:
Whether the bonus given to the officers of Aguinaldo
upon the sale of its Muntinglupa land is an ordinary and
necessary business expense deductible for income tax
purposes?
RULING:
No. In general, only those ordinary and necessary
expenses paid or incurred during the taxable year in
carrying on any trade or business, including a
reasonable allowance for personal services actually
rendered can be claimed as a deductible. The bonus
given to the officers of the Aguinaldo Industries as their
share of the profit realized from the sale of the land
cannot be deemed a deductible expense for tax
purposes, even if the aforesaid sale could be
considered as a transact ion for Carrying on the trade
[Type here]
or business of the Aguinaldo Industries and the grant
of the bonus to the corporate officers pursuant to
Aguinaldo Industries’ by -laws could, as an intra-
corporate matter, be sustained.
Evidence show that the sale was effected through a
broker who was paid by Aguinaldo Industries a
commission for his services. On the other hand, there
is absolutely no evidence of any service actually
rendered by Aguinaldo Industries’ officers which could
be the basis of a grant to them of a bonus out of the
profit derived from the sale. This being so, the payment
of a bonus to them out of the gain realized from the sale
cannot be considered as a selling expense; nor can it
be deemed reasonable and necessary so as to make
it deductible for tax purposes. Thus, the extraordinary
and unusual amounts paid by Aguinaldo to these
directors in the guise and form of compensation for
their supposed services as such, without any relation
to the measure of their actual services, cannot be
regarded as ordinary and necessary expenses within
the meaning of the law.
Whenever a controversy arises on the deductibility, for
purposes of income tax, of certain items for alleged
compensation of officers of the taxpayer, two (2)
questions become material, namely: (a)Have personal
services been actually rendered by said officers? (b) In
the affirmative case, what is the reasonable allowance
therefor.
ATLAS CONSOLIDATED MINING DEVT CORP vs.
CIR
"The taxpayer must justify his claim for tax exemption
or refund by the clearest grant of organic or statute law
and should not be permitted to stand on vague
implications."
"Export processing zones (EPZA) are effectively
considered as foreign territory for tax purposes."
FACTS: Petitioner corporation, a VAT-registered
taxpayer engaged in mining, production, and sale of
various mineral products, filed claims with the BIR for
refund/credit of input VAT on its purchases of capital
goods and on its zero-rated sales in the taxable
quarters of the years 1990 and 1992. BIR did not
immediately act on the matter prompting the petitioner
to file a petition for review before the CTA. The latter
denied the claims on the grounds that for zero-rating to
apply, 70% of the company's sales must consists of
exports, that the same were not filed within the 2-year
prescriptive period (the claim for 1992 quarterly returns
were judicially filed only on April 20, 1994), and that
petitioner failed to submit substantial evidence to
support its claim for refund/credit.
The petitioner, on the other hand, contends that CTA
failed to consider the following: sales to PASAR and
PHILPOS within the EPZA as zero-rated export sales;
the 2-year prescriptive period should be counted from
the date of filing of the last adjustment return which was
TAXATION ! NOTES [Type here]
April 15, 1993, and not on every end of the applicable
quarters; and that the certification of the independent
CPA attesting to the correctness of the contents of the
summary of suppliers’ invoices or receipts examined,
evaluated and audited by said CPA should
substantiate its claims.
ISSUE: Did the petitioner corporation sufficiently
establish the factual bases for its applications for
refund/credit of input VAT?
HELD: No. Although the Court agreed with the
petitioner corporation that the two-year prescriptive
period for the filing of claims for refund/credit of input
VAT must be counted from the date of filing of the
quarterly VAT return, and that sales to PASAR and
PHILPOS inside the EPZA are taxed as exports
because these export processing zones are to be
managed as a separate customs territory from the rest
of the Philippines, and thus, for tax purposes, are
effectively considered as foreign territory, it still denies
the claims of petitioner corporation for refund of its
input VAT on its purchases of capital goods and
effectively zero-rated sales during the period claimed
for not being established and substantiated by
appropriate and sufficient evidence.
Tax refunds are in the nature of tax exemptions. It is
regarded as in derogation of the sovereign authority,
and should be construed in strictissimi juris against the
person or entity claiming the exemption. The taxpayer
who claims for exemption must justify his claim by the
clearest grant of organic or statute law and should not
be permitted to stand on vague implications.
ZAMORA VS. COLLECTOR (1963)- ALLOWED TAX
DEDUCTIONS
FACTS:
• Mariano Zamora, owner of the Bay View Hotel and
Farmacia Zamora, Manila, filed his income tax returns
the years 1951 and 1952. The Collector of Internal
Revenue found that he failed to file his return of the
capital gains derived from the sale of certain real
properties and claimed deductions which were not
allowable. The collector required him to pay the sums
of P43,758.50 and P7,625.00, as deficiency income tax
for the years 1951 and 1952.
• On appeal by Zamora, the Court of Tax Appeals
modified the decision appealed from and ordered him
to pay the reduced total sum of P30,258.00
(P22,980.00 and P7,278.00, as deficiency income tax
for the years 1951 and 1952.
• Having failed to obtain a reconsideration of the
decision, Mariano Zamora appealed alleging that the
[Type here]
Court of Tax Appeals erred (amongst other things, this
being the only relevant to the topic) in disallowing
P10,478.50, as promotion expenses incurred by his
wife for the promotion of the Bay View Hotel and
Farmacia Zamora (which is ½ of P20,957.00,
supposed business expenses).
• Note: He contends that the whole amount of
P20,957.00 as promotion expenses in his 1951 income
tax returns, should be allowed and not merely one-half
of it or P10,478.50, on the ground that, while not all the
itemized expenses are supported by receipts, the
absence of some supporting receipts has been
sufficiently and satisfactorily established. For, as
alleged, the said amount of P20,957.00 was spent by
Mrs. Esperanza A. Zamora (wife of Mariano), during
her travel to Japan and the United States to purchase
machinery for a new Tiki-Tiki plant, and to observe
hotel management in modern hotels. The CTA,
however, found that for said trip Mrs. Zamora obtained
only the sum of P5,000.00 from the Central Bank and
that in her application for dollar allocation, she stated
that she was going abroad on a combined medical and
business trip, which facts were not denied by Mariano
Zamora. No evidence had been submitted as to where
Mariano had obtained the amount in excess of
P5,000.00 given to his wife which she spent abroad.
No explanation had been made either that the
statement contained in Mrs. Zamora's application for
dollar allocation that she was going abroad on a
combined medical and business trip, was not correct.
The alleged expenses were not supported by receipts.
Mrs. Zamora could not even remember how much
money she had when she left abroad in 1951, and how
the alleged amount of P20,957.00 was spent.
ISSUE:
Whether or not the CTA erred in disallowing
P10,478.50 as promotion expenses incurred by his
wife for the promotion of the Bay View Hotel and
Farmacia Zamora in the absence of receipts proving
the same.
HELD: NO
• Section 30, of the Tax Code, provides that in
computing net income, there shall be allowed as
deductions all the ordinary and necessary expenses
paid or incurred during the taxable year, in carrying on
any trade or business. Since promotion expenses
constitute one of the deductions in conducting a
business, same must testify these requirements. Claim
for the deduction of promotion expenses or
entertainment expenses must also be substantiated or
supported by record showing in detail the amount and
nature of the expenses incurred (N.H. Van Socklan, Jr.
v. Comm. of Int. Rev.; 33 BTA 544). Considering, as
heretofore stated, that the application of Mrs. Zamora
for dollar allocation shows that she went abroad on a
combined medical and business trip, not all of her
expenses came under the category of ordinary and
necessary expenses; part thereof constituted her
personal expenses. There having been no means by
TAXATION ! NOTES [Type here]
which to ascertain which expense was incurred by her
in connection with the business of Mariano Zamora and
which was incurred for her personal benefit, the
Collector and the CTA in their decisions, considered
50% of the said amount of P20,957.00 as business
expenses and the other 50%, as her personal
expenses. We hold that said allocation is very fair to
Mariano Zamora, there having been no receipt
whatsoever, submitted to explain the alleged business
expenses, or proof of the connection which said
expenses had to the business or the reasonableness
of the said amount of P20,957.00. While in situations
like the present, absolute certainty is usually not
possible, the CTA should make as close an
approximation as it can, bearing heavily, if it chooses,
upon the taxpayer whose inexactness is of his own
making.
• In the case of Visayan Cebu Terminal Co., Inc. v.
Collector of Int. Rev, it was declared that
representation expenses fall under the category of
business expenses which are allowable deductions
from gross income, if they meet the conditions
prescribed by law, particularly section 30 (a) [1], of the
Tax Code; that to be deductible, said business
expenses must be ordinary and necessary expenses
paid or incurred in carrying on any trade or business;
that those expenses must also meet the further test of
reasonableness in amount; that when some of the
representation expenses claimed by the taxpayer were
evidenced by vouchers or chits, but others were
without vouchers or chits, documents or supporting
papers; that there is no more than oral proof to the
effect that payments have been made for
representation expenses allegedly made by the
taxpayer and about the general nature of such alleged
expenses; that accordingly, it is not possible to
determine the actual amount covered by supporting
papers and the amount without supporting papers, the
court should determine from all available data, the
amount properly deductible as representation
expenses.
C. M. Hoskins & Co. Inc. v Commissioner of Internal
Revenue
Facts:
Hoskins, a domestic corporation engaged in the real
estate business as broker, managing agents and
administrators, filed its income tax return (ITR) showing
a net income of P92,540.25 and a tax liability of
P18,508 which it paid.
CIR disallowed 4 items of deductions in the ITR. Court
of Tax Appeals upheld the disallowance of an item
which was paid to Mr. C. Hoskins representing 50% of
supervision fees earned and set aside the
disallowance of the other 3 items.
[Type here]
Issue:
Whether or not the disallowance of the 4 items were
proper.
Held:
NOT deductible. It did not pass the test of
reasonableness which is:
General rule, bonuses to employees made in good
faith and as additional compensation for services
actually rendered by the employees are deductible,
provided such payments, when added to the salaries
do not exceed the compensation for services rendered.
The conditions precedent to the deduction of bonuses
to employees are:
· Payment of bonuses is in fact compensation
· Must be for personal services actually rendered
· Bonuses when added to salaries are reasonable
when measured by the amount and quality of 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.
This depends upon many factors.
In the case, Hoskins fails to pass the test. CTA was
correct in holding that the payment of the company to
Mr. Hoskins of the sum P99,977.91 as 50% share of
supervision fees received by the company was
inordinately large and could not be treated as an
ordinary and necessary expenses allowed for
deduction.
CF CALANOC vs CIR
(29 Nov 1961)
Kind of tax involved: AMUSEMENT TAX – Sec 125 of
the Tax Code provides that amusement tax is collected
from the proprietor, lessee or operator of cockpits,
cabarets, night or day clubs, boxing exhibitions,
professional basketball games, Jai-Alai, and
racetracks.
DOCTRINE: Payment for police protection given by
Calanoc to the police is ILLEGAL since it is a
consideration given by the petitioner to the police for
the performance by the latter of functions required of
them to be rendered by law.
TAXATION ! NOTES [Type here]
The expenditures were rather EXCESSIVE,
considering that the purpose of the law was for a
charitable cause.
FACTS:
• This case is a petition to review CTA decision
which affirmed the assessment of CIR of amusement
tax and surcharge against a boxing and wrestling
exhibition held by petitioner Calanoc on 03 Dec 1949
at the Rizal Memorial Stadium.
• 24 Nov 1949 – Social Welfare Commission
(SCW) issued a solicitation permit, authorizing Calanoc
(petitioner) to solicit and receive contributions for the
orphans and destitute children of the Child Welfare
Workers Club of the SCW.
• Such solicitation will be done through a
boxing and wrestling exhibition at the Rizal Memorial
Stadium. Calanoc financed and promoted the
exhibition.
• BEFORE the exhibition took place, Calanoc
applied with the Collector of Internal Revenue (CIR) for
exemption from the payment of the amusement tax,
based on Sec 260 of the NIRC. CIR says that such
exemption will only be granted if Calanoc complies with
the requirements of the law.
• AFTER the exhibition, CIR investigated the
tax case of Calanoc. It was shown that the gross sales
amounted to ~26K, expenditures was ~25K, net profit
was only ~1K. Other items of expenditure included:
o Police protection
o Gifts
o Parties
o Items for representation
• Only the said net profit was remitted to the
SCW for the said charitable purpose for which the
permit was issued.
• CIR assessed amount against Calanoc.
(around~7K)
• Sec of Finance authorized the denial of the
application for exemption from payment of amusement
tax where a) the net proceeds are not substantial OR
b) where the expenses are exorbitant.
ISSUE/S: Petitioner Calanoc questions the VALIDITY
of the assessment of AMUSEMENT tax against him
(as financer of the exhibition)
Petitioner’s argument:
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• Denied having received 1K as stadium fee.
Such amount was not included in the receipts; says he
cannot be made to pay almost 7 times the amount as
amusement tax
HELD +RATIO:
AMUSEMENT TAX IS VALID. You cannot pay for
services that are required by law to be performed by
government officers. Also, the expenditures are
excessive!
• Evidence showed that while Calanoc did not
pay for the stadium fee, said amount was paid by the
O-SO Beverages directly to the stadium for
advertisement privileges during the exhibition.
• Since the stadium fee was paid by the
concessionaire, Calanoc had no right to include the
stadium fee among the items of his expenses. Such
amount was unaccounted, and it went into the
petitioner’s pocket.
• Also, Calanoc cannot justify the other
expenses, such as police protection and gifts.
• SC says that most of the items of
expenditures are either EXORBITANT or were NOT
SUPPORTED by receipts.
• Payment for police protection given by
Calanoc to the police is ILLEGAL since it is a
consideration given by the petitioner to the police for
the performance by the latter of functions required of
them to be rendered by law.
• The expenditures were rather EXCESSIVE,
considering that the purpose of the law was for a
charitable cause.
Dispositive: We have examined the records of the case
and we agree with the lower court that most of the
items of expenditures contained in the statement
submitted to the agent are either exorbitant or not
supported by receipts. We agree with the tax court that
the payment of P461.65 for police protection is illegal
as it is a consideration given by the petitioner to the
police for the performance by the latter of the functions
required of them to be rendered by law. The
expenditures of P460.00 for gifts, P1,880.05 for parties
and other items for representation are rather
excessive, considering that the purpose of the
exhibition was for a charitable cause.
WHEREFORE, the decision sought herein to be
reviewed is hereby affirmed, with costs against the
petitioner.
TAXATION ! NOTES [Type here]
Vote: En banc. Bengzon, C.J., Padilla, Bautista
Angelo, Labrador, Concepcion, Reyes, J.B.L., Barrera,
Paredes, Dizon and De Leon, JJ., concur.
It is a general rule that `Bonuses to employees made
in good faith and as additional compensation for the
services actually rendered by the employees are
deductible, provided such payments, when added to
the stipulated salaries, do not exceed a reasonable
compensation for the services rendered.
The condition precedents to the deduction of bonuses
to employees are: (1) the payment of the bonuses is in
fact compensation; (2) it must be for personal services
actually rendered; and (3) bonuses, when added to the
salaries, are `reasonable ... when measured by the
amount and quality of the services performed with
relation to the business of the particular taxpayer. Here
it is admitted that the bonuses are in fact compensation
and were paid for services actually rendered.
KUENZLE AND STREIFF VS CIR
FACTS:
1. Kuenzle & Streiff for the years 1953, 1954 and 1955
filed its income tax return, declaring losses.
2. CIR filed for deficiency of income taxes against
Kuenzle & Streiff Inc. for the said years in the amounts
of P40,455.00, P11,248.00 and P16,228.00,
respectively, arising from the disallowance, as
deductible expenses, of the bonuses paid by the
corporation to its officers, upon the ground that they
were not ordinary, nor necessary, nor reasonable
expenses within the purview of Section 30(a) (1) of the
National Internal Revenue Code.
3. The corporation filed with the Court of Tax Appeals
a petition for review contesting the assessments. CTA
favored the CIR, however lowered the tax due on 1954.
The corporation moved for reconsideration, but still
lost.
4. The Corporation contends that the tax court, in
arriving at its conclusion, acted "in a purely arbitrary
manner", and erred in not considering individually the
total compensation paid to each of petitioner's officers
and staff members in determining the reasonableness
of the bonuses in question, and that it erred likewise in
holding that there was nothing in the record indicating
that the actuation of the respondent was unreasonable
or unjust.
[Type here]
ISSUE: Whether or not the bonuses in question was
reasonable and just to be allowed as a deduction?
HELD: No.
RATIO: It is a general rule that `Bonuses to employees
made in good faith and as additional compensation for
the services actually rendered by the employees are
deductible, provided such payments, when added to
the stipulated salaries, do not exceed a reasonable
compensation for the services rendered. The condition
precedents to the deduction of bonuses to employees
are: (1) the payment of the bonuses is in fact
compensation; (2) it must be for personal services
actually rendered; and (3) bonuses, when added to the
salaries, are `reasonable ... when measured by the
amount and quality of the services performed with
relation to the business of the particular taxpayer. Here
it is admitted that the bonuses are in fact compensation
and were paid for services actually rendered. The only
question is whether the payment of said bonuses is
reasonable.
There is no fixed test for determining the
reasonableness of a given bonus as compensation.
This depends upon many factors, one of them being
the amount and quality of the services performed with
relation to the business. Other tests suggested are:
payment must be 'made in good faith'; the character of
the taxpayer's business, the volume and amount of its
net earnings, its locality, the type and extent of the
services rendered, the salary policy of the corporation';
'the size of the particular business'; 'the employees'
qualifications and contributions to the business
venture'; and 'general economic conditions. However,
'in determining whether the particular salary or
compensation payment is reasonable, the situation
must be considered as a whole.
It seems clear from the record that, in arriving at its
main conclusion, the tax court considered, inter alia,
the following factors:
1) The paid officers, in the absence of evidence to the
contrary, that they were competent, on the other the
record discloses no evidence nor has petitioner ever
made the claim that all or some of them were gifted
with some special talent, or had undergone some
extraordinary training, or had accomplished any
particular task, that contributed materially to the
success of petitioner's business during the taxable
years in question.
2) All the other employees received no pay increase in
the said years.
3) The bonuses were paid despite the fact that it had
suffered net losses for 3 years. Furthermore the
corporation cannot use the excuse that it is 'salary paid'
to an employee because the CIR does not question the
basic salaries paid by petitioner to the officers and
employees, but disallowed only the bonuses paid to
petitioner's top officers at the end of the taxable years
in question.
TAXATION ! NOTES [Type here]
INTEREST
PAPER INDUSTRIES CORPORATION OF THE
PHILIPPINES (PICOP) v. CA, CIR and CTA, G.R.
Nos. 106949-50 (1995)
Facts:
Paper Industries Corporation of the Philippines
(PICOP) is a Philippine corporation registered with the
Board of Investments (BOI) as a preferred pioneer
enterprise with respect to its integrated pulp and paper
mill, and as a preferred non-pioneer enterprise with
respect to its integrated plywood and veneer mills.
Petitioner received from the Commissioner of Internal
Revenue (CIR) two (2) letters of assessment and
demand (a) one for deficiency transaction tax and for
documentary and science stamp tax; and (b) the other
for deficiency income tax for 1977, for an aggregate
amount of PhP88,763,255.00.
PICOP protested the assessment of deficiency
transaction tax , the documentary and science stamp
taxes, and the deficiency income tax assessment. CIR
did not formally act upon these protests, but issued a
warrant of distraint on personal property and a warrant
of levy on real property against PICOP, to enforce
collection of the contested assessments, thereby
denying PICOP's protests. Thereupon, PICOP went
before (CTA) appealing the assessments.
On 15 August 1989, CTA rendered a decision,
modifying the CIR’s findings and holding PICOP liable
for the reduced aggregate amount of P20,133,762.33.
Both parties went to the Supreme Court, which referred
the case to the Court of Appeals (CA).
CA denied the appeal of the CIR and modified the
judgment against PICOP holding it liable for
transaction tax and absolved it from payment of
documentary and science stamp tax and compromise
penalty. It also held PICOP liable for deficiency of
income tax.
Issues:
1. Whether PICOP is liable for transaction tax
2. Whether PICOP is liable for documentary and
science stamp tax
3. Whether PICOP is liable for deficiency income tax
Held:
1. YES. PICOP reiterates that it is exempt from the
payment of the transaction tax by virtue of its tax
exemption under R.A. No. 5186, as amended, known
as the Investment Incentives Act, which in the form it
existed in 1977-1978, read in relevant part as follows:
"SECTION 8. Incentives to a Pioneer Enterprise. — In
addition to the incentives provided in the preceding
section, pioneer enterprises shall be granted the
following incentive benefits: (a) Tax Exemption.
Exemption from all taxes under the National Internal
Revenue Code, except income tax, from the date of
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investment is included in the Investment Priorities Plan
x x x”. The Supreme Court holds that that PICOP's tax
exemption under R.A. No. 5186, as amended, does not
include exemption from the thirty-five percent (35%)
transaction tax. In the first place, the thirty-five percent
(35%) transaction tax is an income tax, a tax on the
interest income of the lenders or creditors as held by
the Supreme Court in the case of Western Minolco
Corporation v. Commissioner of Internal Revenue. The
35% transaction tax is an income tax on interest
earnings to the lenders or placers. The latter are
actually the taxpayers. Therefore, the tax cannot be a
tax imposed upon the petitioner. In other words, the
petitioner who borrowed funds from several financial
institutions by issuing commercial papers merely
withheld the 35% transaction tax before paying to the
financial institutions the interest earned by them and
later remitted the same to the respondent CIR. The tax
could have been collected by a different procedure but
the statute chose this method. Whatever collecting
procedure is adopted does not change the nature of
the tax. It is thus clear that the transaction tax is an
income tax and as such, in any event, falls outside the
scope of the tax exemption granted to registered
pioneer enterprises by Section 8 of R.A. No. 5186, as
amended. PICOP was the withholding agent, obliged
to withhold thirty-five percent (35%) of the interest
payable to its lenders and to remit the amounts so
withheld to the Bureau of Internal Revenue ("BIR"). As
a withholding, agent, PICOP is made personally liable
for the thirty-five percent (35%) transaction tax 10 and
if it did not actually withhold thirty-five percent (35%) of
the interest monies it had paid to its lenders, PICOP
had only itself to blame.
2. NO. The CIR assessed documentary and science
stamp taxes, amounting to PhP300,000.00, on the
issuance of PICOP's debenture bonds. Tax
exemptions are, to be sure, to be "strictly construed,"
that is, they are not to be extended beyond the ordinary
and reasonable intendment of the language actually
used by the legislative authority in granting the
exemption. The issuance of debenture bonds is
certainly conceptually distinct from pulping and paper
manufacturing operations. But no one contends that
issuance of bonds was a principal or regular business
activity of PICOP; only banks or other financial
institutions are in the regular business of raising money
by issuing bonds or other instruments to the general
public. The actual dedication of the proceeds of the
bonds to the carrying out of PICOP's registered
operations constituted a sufficient nexus with such
registered operations so as to exempt PICOP from
taxes ordinarily imposed upon or in connection with
issuance of such bonds. The Supreme Court agrees
with the Court of Appeals on this matter that the CTA
and the CIR had erred in rejecting PICOP's claim for
exemption from stamp taxes
TAXATION ! NOTES [Type here]
3. YES. PICOP did not deny the existence of
discrepancy in their Income Tax Return and Books of
Account owing to their procedure of recording its export
sales (reckoned in U.S. dollars) on the basis of a fixed
rate, day to day and month to month, regardless of the
actual exchange rate and without waiting when the
actual proceeds are received. In other words, PICOP
recorded its export sales at a pre-determined fixed
exchange rate. That pre-determined rate was decided
upon at the beginning of the year and continued to be
used throughout the year. Because of this, the CIR has
made out at least a prima facie case that PICOP had
understated its sales and overstated its cost of sales
as set out in its Income Tax Return. For the CIR has a
right to assume that PICOP's Books of Accounts speak
the truth in this case since, as already noted, they
embody what must appear to be admissions against
PICOP's own interest.
CASE: THE COMMISSIONER OF INTERNAL
REVENUE, petitioner, vs. CONSUELO L. VDA. DE
PRIETO, respondent. G.R. No. L-13912 September
30, 1960
FACTS:
Respondent Vda. de Prieto conveyed by way of
gifts a real property to her children. The Commissioner
of Internal Revenue appraised the property donated at
P1,231,268.00, and assessed the total sum of
P117,706.50 as donor's gift tax, interest and
compromises due thereon. Of the total sum of
P117,706.50 paid by respondent on April 29, 1954, the
sum of P55,978.65 represents the total interest on
account of deliquency. Said sum was claimed as
deduction, among others, by respondent in her 1954
income tax return. Petitioner disallowed the claim and
as a consequence of such disallowance assessed
respondent for 1954 deficiency income tax due on the
aforesaid P55,978.65, including interest 1957,
surcharge and compromise for the late payment.
ISSUE:
Whether or not interest paid for the late
payment of tax is deductible from gross income.
HELD:
YES. For interest to be deductible, it must be
shown that: (1) there be an indebtedness, (2) there
should be interest upon it, and (3) what is claimed as
an interest deduction should have been paid or
accrued within the year. In this case, the last two
requirements are undisputed. The only question is if
interest on account of late payments of taxes be
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considered as indebtedness. Indebtedness has been
defined as an unconditional and legally enforceable
obligation for the payment of money. Within the
meaning of that definition, it is apparent that a tax may
be considered indebtedness. Although taxes already
due have not, strictly speaking, the same concept as
debts, they are, however, obligations that may be
considered as such. Where statute imposes a personal
liability for a tax, the tax becomes, at least in a board
sense, a debt. It follows that the interest paid by herein
respondent for the late payment of her donor's tax is
deductible from her gross income.
In conclusion, interest payment for delinquent taxes is
not deductible as tax but the taxpayer is not precluded
thereby from claiming said payment as deduction on
account of interest.
TAXES
Commissioner of Internal Revenue vs W.E.
Lednicky and Maria Lednicky
FACTS:
Spouses are both American citizens residing in the
Philippines and have derived all their income from
Philippine sources for taxable years in question.
On March, 1957, filed their ITR for 1956, reporting
gross income of P1,017,287.65 and a net income of P
733,809.44. On March 1959, file an amended claimed
deduction of P 205,939.24 paid in 1956 to the United
States government as federal income tax of 1956.
ISSUE:
Whether a citizen of the United States residing in the
Philippines, who derives wholly from sources within the
Philippines, may deduct his gross income from the
income taxes he has paid to the United States
government for the said taxable year?
HELD:
An alien resident who derives income wholly from
sources within the Philippines may not deduct from
gross income the income taxes he paid to his home
country for the taxable year. The right to deduct foreign
income taxes paid given only where alternative right to
tax credit exists.
TAXATION ! NOTES [Type here]
Section 30 of the NIRC, Gross Income “Par. C (3):
Credits against tax per taxes of foreign countries.
If the taxpayer signifies in his return his desire to have
the benefits of this paragraph, the tax imposed by this
shall be credited with: Paragraph (B), Alien resident of
the Philippines; and, Paragraph C (4), Limitation on
credit.”
An alien resident not entitled to tax credit for foreign
income taxes paid when his income is derived wholly
from sources within the Philippines.
Double taxation becomes obnoxious only where the
taxpayer is taxed twice for the benefit of the same
governmental entity. In the present case, although the
taxpayer would have to pay two taxes on the same
income but the Philippine government only receives
the proceeds of one tax, there is no obnoxious double
taxation.
TAMBUNTING PAWNSHOP, INC. v.
COMMISSIONER OF INTERNAL REVENUE. G.R.
No. 179085. January 21, 2010
FACTS:
Petitioner was issued an assessment for deficiency
VAT for the taxable year of 1999. Petitioner, after his
protest with the CIR merited no response, it filed a
Petition for Review with the CTA raising that
pawnshops are not subject to VAT under the NIRC and
that pawn tickers are not subject to documentary stamp
tax.
The CTA ruled that petitioner is liable for the deficiency
VAT and the documentary stamp tax.
The petitioner argues that a pawnshop is not
enumerated as one of those engaged in sale or
exchange of services in Section 108 of the National
Internal Revenue Code and citing the case of
Commissioner of Internal Revenue v. Michel J. Lhuillier
Pawnshops, Inc. as basis.
ISSUE: Whether petitioner is liable for the deficiency
VAT.
Whether the petitioner is liable for the documentary
stamp tax.
RULING:
YES. The Court cited the case of First Planters
Pawnshop, Inc. v. Commissioner of Internal Revenue.
In the foregoing case, since the imposition of VAT on
pawnshops, which are non-bank financial
intermediaries, was deferred for the tax years 1996 to
[Type here]
2002, petitioner is not liable for VAT for the tax year
1999.
NO. Sections 195 of the NIRC provides that on the
pledge of personal property, there shall be collected a
documentary stamp tax. The Court held in Michel J.
Lhuillier Pawnshop, Inc. v. Commissioner of Internal
Revenue that the documentary stamp tax is an excise
tax on the exercise of a right or privilege and that
pledge is among the privileges, the exercise of which
is subject to documentary stamp taxes. For purposes
of taxation, pawn tickets are proof of an exercise of a
taxable privilege of concluding a contract of pledge.
BAD DEBTS
Philex Mining Corporation v CIR GR No 125704,
August 28, 1998
FACTS:
BIR sent a letter to Philex asking it to settle its tax
liabilities amounting to P124 million. Philex protested
the demand for payment stating that it has pending
claims for VAT input credit/refund amounting to P120
million. Therefore, these claims for tax credit/refund
should be applied against the tax liabilities.
In reply the BIR found no merit in Philex’s position. On
appeal, the CTA reduced the tax liability of Philex.
ISSUES:
Whether legal compensation can properly take place
between the VAT input credit/refund and the excise tax
liabilities of
Philex Mining Corp;
Whether the BIR has violated the NIRC which requires
the refund of input taxes within 60 days
Whether the violation by BIR is sufficient to justify non-
payment by Philex
RULING:
No, legal compensation cannot take place. The
government and the taxpayer are not creditors and
debtors of each other.
Yes, the BIR has violated the NIRC. It took five years
for the BIR to grant its claim for VAT input credit.
Obviously, had the
BIR been more diligent and judicious with their duty, it
could have granted the refund
No, despite the lethargic manner by which the BIR
handled Philex’s tax claim, it is a settled rule that in the
performance of
TAXATION ! NOTES
government function, the State is not bound by the
neglect of its agents and officers. It must be stressed
that the same is not a valid reason for the non-payment
of its tax liabilities.
Refining Company v. CA
G.R. No. 118794 May 8, 1996
REGALADO, J.
Lessons Applicable: deductibility of bad debts,
penalties of 25% surcharge, interest of 20, civil
penalties are compensatory (not penal), civil penalties
and interest are automatic
Laws Applicable:
FACTS:
Petitioner Philippine Refining Company (PRC) was
assessed by respondent Commissioner of Internal
Revenue (Commissioner) to pay a deficiency tax for
the year 1985 in the amount of P1,892,584
PRC protested that the amounts are bad debts and
interest expense which are allowable and legl
deductions. But, CIR ignored it and issued a warrant
of garnishment against PRC's deposits at City Trust
Bank.
PRC filed a Petition for Review with the CTA who
reversed the interest expense disallowance but
maintained the 13 bad debts disallowance.
PRC elevated the case to CA who dismissed the case
for failing to satisfy the requirements of worthlessness
of a debt:
(1) there is a valid and subsisting debt
(2) debt must be actually ascertained to be worthless
and uncollectible during the taxable year
(3) debt must be charged off during the taxable year
(4) debt must arise from the business or trade of the
taxpayer
(5) uncollectible even in the future
(6) exerted diligent effort to collect
ISSUES:
1. W/N bad debts requirements are met to be
deductible as assessed by the CA
2. W/N PRC should be liable for penalties and interests
HELD: petition at bar is DENIED
[Type here] [Type here]
1. NO.
Furthermore, there are steps outlined to be undertaken
by the taxpayer to prove that he exerted diligent efforts
to collect the debts, viz: (1) sending of statement of
accounts; (2) sending of collection letters; (3) giving the
account to a lawyer for collection; and (4) filing a
collection case in court.
The only evidentiary support given by PRC for its
aforesaid claimed deductions was the explanation or
justification posited by its financial adviser or
accountant. Not a single document was offered to
show that the Remoblas Store and CM Variety Store
were burned, even just a police report or an affidavit
attesting to such loss by fire. The account of Tomas
Store in the amount of P16,842.79 is uncollectible,
claims petitioner PRC, since the owner thereof was
murdered and left no visible assets which could satisfy
the debt. Withal, just like the accounts of the two other
stores just mentioned, petitioner again failed to present
proof of the efforts exerted to collect the debt, other
than the aforestated asseverations of its financial
adviser. The accounts of Aboitiz Shipping Corporation
and J. Ruiz Trucking in the amounts of P89,483.40 and
P69,640.34, respectively, both of which allegedly arose
from the hijacking of their cargo and for which they
were given 30% rebates by PRC, are claimed to be
uncollectible. Again, petitioner failed to present an iota
of proof, not even a copy of the supposed policy
regulation of PRC that it gives rebates to clients in case
of loss arising from fortuitous events or force majeure,
which rebates it now passes off as uncollectible debts.
Findings of the CTA having recognized expertise will
not ordinarily be reviewed absent a showing of gross
error or abuse on its part.
2. YES.
Sec. 248 and 249 of the tax code clearly provides that
civil penalty is imposed in case of failure to pay the tax
within the prescribed time for its payment and
deficiency tax or any surcharge or interest on the due
date appearing in the notice and demand of the
commissioner. Thus, penalties of 25% surcharge and
interest of 20% shall accrue from April 11, 1989.
Tax laws imposing penalties for delinquencies, so we
have long held, are intended to hasten tax payments
by punishing evasions or neglect of duty in respect
thereof. If penalties could be condoned for flimsy
reasons, the law imposing penalties for delinquencies
would be rendered nugatory, and the maintenance of
the Government and its multifarious activities will be
adversely affected.
TAXATION ! NOTES [Type here]
That the circumstances are such that the method does
not reflect the taxpayer ’ s income with reasonable
accuracy and certainty and proper and just additions of
personal expenses and other non-deductible
expenditures were made and correct , fair and
equitable credit adjustments were given by way of
eliminating non- taxable items.
FERNANDEZ HERMANOS INC VS. CIR
FACTS:
• Four cases involve two decisions of the Court of Tax
Appeal s determining the taxpayer ' s income tax
liability for the years 1950 to 1954 and for the year
1957. Both the taxpayer and the Commissioner of
Internal Revenue, as petitioner and respondent in the
cases a quo respectively , appealed from the Tax
Court's decisions , insofar as their respective
contentions on particular tax items were therein
resolved against them. Since the issues raised are
inter related, the Court resolves the four appeals in this
joint decision.
• The taxpayer , Fernandez Hermanos, Inc. , is a
domestic corporation organized for the principal
purpose of engaging in business as an " investment
company " wi th main office at Manila. Upon verification
of the taxpayer's income tax returns for the period in
quest ion, the Commissioner of Internal Revenue
assessed against the taxpayer the sums of
P13,414.00, P119,613.00, P11,698.00, P6,887.00 and
P14,451.00 as alleged deficiency income taxes for the
year s 1950, 1951, 1952, 1953 and 1954, respectively.
Said assessments were the result of alleged
discrepancies found upon the examination and
verification of the taxpayer's income tax returns for the
said years, summarized by the Tax Court in its decision
of June 10, 1963 in CTA Case No. 787, as follows:
ISSUE: The correctness of the Tax Court's rulings with
respect to the disputed items of disallowances
enumerated in the Tax Court's summary reproduced
HELD:
That the circumstances are such that the method does
not reflect the taxpayer’s income with reasonable
accuracy and certainty and proper and just additions of
personal expenses and other non-deductible
expenditures were made and correct , fair and
equitable credit adjustments were given by way of
eliminating non-taxable items.
[Type here]
Proper adjustments to conform to the income tax laws.
Proper adjustments for non-deductible items must be
made. The following non-deductibles , as the case may
be, must be
added to the increase of decrease in the net worth:
1. Personal living or family expenses
2. Premiums paid on any life insurance policy
3. Losses from sales or exchanges of property
between members of the family
4. Income taxes paid
5. Other non-deductible taxes
6. Election expenses and other expense against public
policy
7. Non-deductible contributions
8. Gifts to others
9. Estate inheritance and gift taxes
10. Net Capital Loss
On the other hand, non- taxable items should be
deducted therefrom. These items are necessary
adjustments to avoid the inclusion of what otherwise
are non-taxable receipts. They are:
1. inheritance gifts and bequests received
2. non- taxable gains
3. compensation for injuries or sickness
4. proceeds of life insurance policies
5. sweepstakes
6. winnings
7. interest on government securities and increase in
net worth are not taxable if they are shown not to be
the result of unreported income but to be the result of
the correction of errors in the taxpayer’s entries in the
books relating to indebtedness
BASILAN ESTATES, INC. v. CIR
G.R. No. L-22492 September 5, 1967
Bengzon, J.P., J.
Doctrine:
The income tax law does not authorize the depreciation
of an asset beyond its acquisition cost. Hence, a
TAXATION ! NOTES [Type here]
deduction over and above such cost cannot be claimed
and allowed. The reason is that deductions from gross
income are privileges, not matters of right. They are not
created by implication but upon clear expression in the
law.
Facts:
Basilan Estates, Inc. claimed deductions for the
depreciation of its assets on the basis of their
acquisition cost. As of January 1, 1950 it changed the
depreciable value of said assets by increasing it to
conform with the increase in cost for their replacement.
Accordingly, from 1950 to 1953 it deducted from gross
income the value of depreciation computed on the
reappraised value.
CIR disallowed the deductions claimed by petitioner,
consequently assessing the latter of deficiency income
taxes.
Issue:
Whether or not the depreciation shall be determined on
the acquisition cost rather than the reappraised value
of the assets
Held:
Yes. The following tax law provision allows a deduction
from gross income for depreciation but limits the
recovery to the capital invested in the asset being
depreciated:
(1)In general. — A reasonable allowance for
deterioration of property arising out of its use or
employment in the business or trade, or out of its not
being used: Provided, That when the allowance
authorized under this subsection shall equal the capital
invested by the taxpayer . . . no further allowance shall
be made. . . .
The income tax law does not authorize the depreciation
of an asset beyond its acquisition cost. Hence, a
deduction over and above such cost cannot be claimed
and allowed. The reason is that deductions from gross
income are privileges, not matters of right. They are not
created by implication but upon clear expression in the
law [Gutierrez v. Collector of Internal Revenue, L-
19537, May 20, 1965].
Depreciation is the gradual diminution in the useful
value of tangible property resulting from wear and tear
and normal obsolescense. It commences with the
acquisition of the property and its owner is not bound
to see his property gradually waste, without making
provision out of earnings for its replacement.
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The recovery, free of income tax, of an amount more
than the invested capital in an asset will transgress the
underlying purpose of a depreciation allowance. For
then what the taxpayer would recover will be, not only
the acquisition cost, but also some profit. Recovery in
due time thru depreciation of investment made is the
philosophy behind depreciation allowance; the idea of
profit on the investment made has never been the
underlying reason for the allowance of a deduction for
depreciation
LIMPAN INVESTMENT VS. CIR- ACTUAL VS
CONSTRUCTIVE RECEIPT
FACTS:
• BIR assessed deficiency taxes on Limpan Corp, a
company that leases real property, for under-declaring
its rental income for years 1956-57 by around P20K
and P81K respectively.
• Petitioner appeals on the ground that portions of
these underdeclared rents are yet to be collected by
the previous owners and turned over or received by the
corporation.
• Petitioner cited that some rents were deposited with
the court, such that the corporation does not have
actual nor constructive control over them.
• The sole witness for the petitioner, Solis (Corporate
Secretary- Treasurer) admitted to some undeclared
rents in 1956 and1957, and that some balances were
not collected by the corporation in 1956 because the
lessees refused to recognize and pay rent to the new
owners and that the corp’s president Isabelo Lim
collected some rent and reported it in his personal
income statement, but did not turn over the rent to the
corporation.
• He also cites lack of actual or constructive control
over rents deposited with the court.
ISSUE:
Whether or not the BIR was correct in assessing
deficiency taxes against Limpan Corp. for undeclared
rental income
HELD:
Yes. Petitioner admitted that it indeed had undeclared
income (although only a part and not the full amount
assessed by BIR). Thus, it has become incumbent
upon them to prove their excuses by clear and
convincing evidence, which it has failed to do. When is
there constructive receipt of rent? With regard to 1957
rents deposited with the court, and withdrawn only in
1958, the court viewed the corporation as having
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constructively received said rents. The non-collection
was the petitioner’s fault since it refused to refused to
accept the rent, and not due to nonpayment of lessees.
Hence, although the corporation did not actually
receive the rent, it is deemed to have constructively
received them.
DEPLETION
Consolidated Mines, Inc. v. CTA (Aug. 29, 1974)
FACTS:
• The Company, a domestic corporation
engaged in mining, had filed its income tax returns for
1951, 1952, 1953 and 1956. In 1957 examiners of the
BIR investigated the income tax returns filed by the
Company because its auditor, Felipe Ollada, claimed
the refund of the sum of P107,472.00 representing
alleged overpayments of income taxes for the year
1951.
• After the investigation the examiners reported
that:
(A) For the years 1951 to 1954:
• The Company had not accrued as an
expense the share in the company profits of Benguet
Consolidated Mines as operator of the Company's
mines, although for income tax purposes the Company
had reported income and expenses on the accrual
basis;
• Depletion and depreciation expenses had
been overcharged; and
• The claims for audit and legal fees and
miscellaneous expenses for 1953 and 1954 had not
been properly substantiated
(B) For the year 1956:
• The Company had overstated its claim for
depletion; and
• Certain claims for miscellaneous expenses
were not duly supported by evidence.
• In view of said reports the CIR sent the
Company a letter of demand requiring it to pay certain
deficiency income taxes for the years 1951 to 1954,
inclusive, and for the year 1956. Deficiency income tax
assessment notices for said years were also sent to the
Company. The Company requested a reconsideration
of the assessment, but the Commissioner refused to
reconsider, hence the Company appealed to the CTA
• On May 6, 1961 the Tax Court rendered
judgment ordering the Company to pay the amounts of
P107,846.56, P134,033.01 and P71,392.82 as
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deficiency income taxes for the years 1953, 1954 and
1956, respectively.
• However, on August 7, 1961, upon motion of
the Company, the Tax Court reconsidered its decision
and further reduced the deficiency income tax liabilities
of the Company to P79,812.93, P51,528.24 and
P71,382.82 for the years 1953, 1954 and 1956,
respectively.
• Both the Company and the Commissioner
appealed to this Court. The Company questions the
rate of mine depletion adopted by the Court of Tax
Appeals and the disallowance of depreciation charges
and certain miscellaneous.
ISSUE:
• Whether the CTA erred with respect to the
rate of mine depletion
RULING:
• The Tax Code provides that in computing net
income there shall be allowed as deduction, in the case
of mines, a reasonable allowance for depletion thereof
not to exceed the market value in the mine of the
product thereof which has been mined and sold during
the year for which the return is made. (Sec. 30(g) (1)
(B).
• As an income tax concept, depletion is wholly
a creation of the statue – solely a matter of legislative
grace. Hence, the taxpayer has the burden of justifying
the allowance of any deduction claimed. As in
connection with all other tax controversies, the burden
of proof to show that a disallowance of depletion by the
Commissioner is incorrect or that an allowance made
is inadequate is upon the taxpayer, and this is true with
respect to the value of the property constituting the
basis of the deduction. This burden-of-proof rule has
been frequently applied and a value claimed has been
disallowed for lack of evidence.
• Here, SC considered the evidence presented
(testimony of Eligio Garcia) and the Report to
Stockholders which includes the Balance Sheet as of
1946), geological report on the estimated amount of
ore in the claims, etc.) it set forth a very detailed
computation of the depletion rate, determining the
value of each component of the formula of depletion,
viz: Rate of Depletion Per Unit=Cost of Mine
Property/Estimated Ore Deposit of product Mined and
sold – depletion is different from depreciation.
• In determining the amount of cost depletion
allowable the following three facts are essential:
1. The basis of the property;
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2. The estimated total recoverable units in the
property; and
3. The no. of units recovered during the taxable
year in question.
RESEARCH AND DEVELOPMENT
3M Philippines, Inc. vs. Commissioner of Internal
Revenue (26 September 1988)
Facts:
• 3M Philippines, Inc., a subsidiary of 3M-St.
Paul, is a non-resident foreign corporation with
principal office in St. Paul, Minnesota, USA.
• It is the exclusive importer, manufacturer,
wholesaler, and distributor in the Philippines of all
products of the latter.
• To enable it to manufacture, package,
promote, market, sell and install the highly specialized
products of its parent company, and render the
necessary post-sales service and maintenance to its
customers, petitioner entered into a "Service
Information and Technical Assistance Agreement" and
a "Patent and Trademark License Agreement" with the
latter under which the petitioner agreed to pay to 3M-
St. Paul a technical service fee of 3% and a royalty of
2% of its net sales.
• Both agreements were submitted to, and
approved by, the Central Bank of the Philippines.
• In its income tax return for the fiscal year
ended October 31, 1974, the petitioner claimed the
following deductions as business expenses:
(a) royalties and technical service fees of P
3,050,646.00; and
(b) Pre-operational cost of tape coater of P97,
485.08.
• On the first item, the respondent
Commissioner of Internal Revenue allowed a
deduction of ₱797,046.09 only as technical service fee
and royalty for locally manufactured products, but
disallowed the sum of ₱2,323,599.02 alleged to have
been paid by the petitioner to 3M-St. Paul as technical
service fee and royalty on ₱46,471,998.00 worth of
finished products imported by the petitioner from the
parent company, on the ground that the fee and royalty
should be based only on locally manufactured goods.
The improper deduction was treated by respondent as
a disguised dividend or income.
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• On the second item, respondent allowed
₱19,544.77 or one-fifth (1/5) of petitioner's capital
expenditure of ₱97,046.09 for its tape coater which
was installed in 1973 because such expenditure should
be amortized for a period of five (5) years, hence,
payment of the disallowed balance of ₱77,740.38
should be spread over the next four (4) years.
Respondent ordered petitioner to pay ₱840,540 as
deficiency income tax on its 1974 return, plus
₱353,026.80 as 14% interest per annum from February
15, 1975 to February 15, 1976, or a total of
₱1,193,566.80.
• Petitioner protested the assessment in a letter
dated March 7, 1980. The respondent Commissioner
did not answer the protest. Instead, he issued warrants
of distraint and levy on October 1, 1984. On October
23, 1984, petitioner appealed to the Court of Tax
Appeals by petition for review with a prayer for the
issuance of a writ of preliminary injunction to stop the
enforcement of the warrants of distraint and levy. The
writ was issued upon petitioner posting a ₱1,850,000
bond. The Tax Court rendered a decision on August
14, 1987 upholding the Commissioner's ruling.
Petitioner's motion for reconsideration of the decision
was denied by the Tax Court on April 6, 1988. Hence,
this petition.
Issue: Whether or not the ruling of CIR is proper?
Held: Finding no reversible error in the decision of the
Court of Tax Appeals, the petition for review is denied.
Because remittances to foreign licensors of
technical service fees and royalties are made in foreign
exchange, CB Circular No. 393 (Regulations
Governing Royalties/Rentals) dated December 7, 1973
was promulgated by the Central Bank as an exchange
control regulation to conserve foreign exchange and
avoid unnecessary drain on the country's international
reserves Section. 3-C of the circular provides that
royalties shall be paid only on commodities
manufactured by the licensee under the royalty
agreement. Clearly, no royalty is payable on the
wholesale price of finished products imported by the
licensee from the licensor. However, petitioner argues
that the law applicable to its case is only Section
29(a)(1) of the Tax Code which provides:
(a) Expenses. — (1) Business expenses. — (A)
In general. — All ordinary and necessary expenses
paid or incurred during the taxable year in carrying on
any trade or business, including a reasonable
allowance for salaries or other compensation for
personal services actually rendered; travelling
expenses while away from home in the pursuit of a
trade, profession or business, rentals or other
TAXATION ! NOTES [Type here]
payments required to be made as a condition to the
continued use or possession, for the purpose of the
trade, profession or business, for property to which the
taxpayer has not taken or is not taking title or in which
he has no equity.
Petitioner points out that the Central bank
"has no say in the assessment and collection of internal
revenue taxes as such power is lodged in the Bureau
of Internal Revenue," that the Tax Code "never
mentions Circular 393 and there is no law or regulation
governing deduction of business expenses that refers
to said circular." The argument is specious, for,
although the Tax Code allows payments of royalty to
be deducted from gross income as business expenses,
it is CB Circular No. 393 that defines what royalty
payments are proper. Hence, improper payments of
royalty are not deductible as legitimate business
expenses.
NO DEDUCTIBLE EXPENSES
ESSO STANDARD EASTERN, INC. VS.
COMMISSIONER OF INTERNAL REVENUE (7
JULY 1989(
Facts:
 ESSO deducted from its gross income for
1959, as part of its ordinary and necessary
business expenses, the amount it had spent
for drilling and exploration of its petroleum
conscessions.
 The Commissioner disallowed the claim on
the ground that the expenses should be
capitalized and might be written off as a loss
only when a “dry hole” should result.
 Hence, ESSO filed an amended return where
it asked for the refund of P323,270 by reason
of its abandonment, as dry holes, of several
of its oil wells.
 It also claimed as ordinary and necessary
expenses in the same return amount
representing margin fees it had paid to the
Central Bank on its profit remittances to its
New York Office.
Issue: Whether the margin fees may be considered
ordinary and necessary expenses when paid.
 HELD: For an item to be deductible as a
business expense, the expense must be
ordinary and necessary;
 it must be paid or incurred within
the taxable year;
 it must be paid or incurred in
carrying on a trade or business.
 the taxpayer must substantially
prove by evidence or records
the deductions claimed under
law, otherwise, the same will be
disallowed.
 There has been no attempt to define
“ordinary and necessary” with precision.
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  However, as guiding principle in the
proper adjudication of conflicting claims,
an expenses is considered necessary -
where the expenditure is appropriate and
helpful in the development of the
taxpayer’s business.
 It is ordinary - when it connotes a
payment which is normal in relation to the
business of the taxpayer and the
surrounding circumstances.

 Assuming that the expenditure is

ordinary and necessary in the operation
of the taxpayer’s business; the
expenditure, to be an allowable
deduction as a business expense, must
be determined from the nature of the
expenditure itself, and on the extent and
permanency of the work accomplished
by the expenditure.
 Herein, ESSO has not shown that the
remittance to the head office of part of its
profits was made in furtherance of its own
trade or business.
 The petitioner merely presumed that all
corporate expenses are necessary and
appropriate in the absence of a showing
that they are illegal or ultra vires; which is
erroneous.
 Claims for deductions are a matter of
legislative grace and do not turn on mere
equitable

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