Tax Deductions

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[CHAPTER V: DEDUCTIONS] 1

G.R. Nos. L-28508-9 July 7, 1989
ESSO STANDARD EASTERN, INC., (formerly, StandardVacuum Oil Company), petitioner, 

vs.

THE
COMMISSIONER
OF
INTERNAL
REVENUE, respondent.



TOPIC: Deductions

The applicable provision is Section 30(a) of the National
Internal Revenue Code reading as follows:

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
concessions. 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 Head Office. It
contends that the margin fees are considered taxes and
hence deductible. Alternatively, ESSO prays that if margin
fees are not taxes, they should nevertheless be considered
necessary and ordinary business expenses and therefore still
deductible from its gross income.


ISSUE: Whether the margin fees may be considered ordinary
and necessary expenses when paid.

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HELD: No.
Margin fee was imposed by the State in the exercise of its
police power and not the power of taxation. Hence, it is not
considered as tax.

SEC. 30. Deductions from gross income in
computing net income there shall be allowed
as deductions
(a) Expenses:
(1) In general. — All the ordinary and necessary
expenses paid or incurred during the taxable
year in carrying on any trade or business,
including a reasonable allowance for salaries
or other compensation for personal services
actually rendered; traveling expenses while
away from home in the pursuit of a trade or
business; and rentals or other payments
required to be made as a condition to the
continued use or possession, for the purpose of
the trade or business, of property to which the
taxpayer has not taken or is not taking title or
in which he has no equity.
(2)  Expenses allowable to non-resident alien
individuals and foreign corporations. — In the
case of a non-resident alien individual or a
foreign corporation, the expenses deductible
are the necessary expenses paid or incurred in
carrying on any business or trade conducted
within the Philippines exclusively.

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[CHAPTER V: DEDUCTIONS]

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; and it must be paid or
incurred in carrying on a trade or business. In addition, 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. 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 considerations.

G.R. No. L-15290
May 31, 1963
MARIANO ZAMORA, petitioner, 

vs.

COLLECTOR OF INTERNAL REVENUE and COURT OF
TAX APPEALS, respondents.
TOPIC: 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.


2 CHAPTER V: DEDUCTIONS

Having failed to obtain a reconsideration of the decision,
Mariano Zamora appealed alleging that the Court of Tax
Appeals erred 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). – eto lang related sa topic

Note: He contends that the whole amount of P20,957.00 as

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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

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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 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

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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
4 CHAPTER V: DEDUCTIONS
properly deductible as representation expenses.

KUENZLE & STREIFF INC. V CIR

Facts: 

Kuenzle & Streiff for the years 1953, 1954 and 1955 filed its
income tax return, declaring losses.

CIR filed for deficiency of income taxes against Kuenzle & Streiff
Inc. for the said years in the amounts of P40, 455.00, P11, 248.00
and P16, 228.00, respectively, arising from the disallowance, as
deductible expenses, of the bonuses paid by the corporation to its
officers, upon the ground that they were not ordinary, nor
necessary, nor reasonable expenses within the purview of Section
30(a) (1) of the National Internal Revenue Code.
The corporation filed with the Court of Tax Appeals a petition for
review contesting the assessments. CTA favored the CIR, however
lowered the tax due on 1954. The corporation moved for
reconsideration, but still lost.
The Corporation contends that the tax court, in arriving at its
conclusion, acted "in a purely arbitrary manner", and erred in not
considering individually the total compensation paid to each of
petitioner's officers and staff members in determining the
reasonableness of the bonuses in question, and that it erred
likewise in holding that there was nothing in the record indicating
that the actuation of the respondent was unreasonable or unjust.

ISSUE: Whether or not the bonuses in question was reasonable
and just to be allowed as a deduction?

HELD: No.

RATIO: It is a general rule that `Bonuses to employees made in

[CHAPTER V: DEDUCTIONS] 5

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,

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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.
ALTERNATIVE DIGEST FOR

G.R. No. L-18840
May 29, 1969
KUENZLE & STREIFF, INC., petitioner, 

vs.

THE COMMISSIONER OF INTERNAL
REVENUE, respondent.
Topic: Deductions
FACTS:


Kuenzle & Streiff for the years 1953, 1954 and 1955 filed its
income tax return, declaring losses.

CIR filed for deficiency of income taxes against Kuenzle &
Streiff Inc. for the said years in the amounts of P40,455.00,
P11,248.00 and P16,228.00, respectively, arising from the
disallowance, as deductible expenses, of the bonuses paid by
the corporation to its officers, upon the ground that they
were not ordinary, nor necessary, nor reasonable expenses

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within the purview of Section 30(a) (1) of the National
Internal Revenue Code.
 
The corporation filed with the Court of Tax Appeals a petition
for review contesting the assessments. CTA favored the CIR,
however lowered the tax due on 1954. The corporation
moved for reconsideration, but still lost.
 
The Corporation contends that the tax court, in arriving at its
conclusion, acted "in a purely arbitrary manner", and erred in
not considering individually the total compensation paid to
each of petitioner's officers and staff members in
determining the reasonableness of the bonuses in question,
and that it erred likewise in holding that there was nothing in
the record indicating that the actuation of the respondent
was unreasonable or unjust.

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.

ISSUE: Whether or not the bonuses in question was
reasonable and just to be allowed as a deduction?


HELD: No.


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.
6 CHAPTER V: DEDUCTIONS
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


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

[CHAPTER V: DEDUCTIONS] 7

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 above salaries and bonuses were paid to petitioner's
top officials mentioned heretofore, in spite of the fact that
according to its income tax returns for the relevant years, it
had suffered net losses. In fact, petitioner's financial
statements further show that its gross assets suffered a
gradual decrease for the same years.), and that a similar
downward trend took place in its surplus and capital position
during the same period of time.
Petitioner admits that the amounts it paid to its top officers
in 1953 as bonus or "additional remuneration" were taken
either from operating funds, that is, funds from the year's
business operations, or from its general reserve. Normally,
the amounts taken from the first source should have
constituted profits of the corporation distributable as
dividends amongst its shareholders. Instead it would appear
that they were diverted from this purpose and used to pay
the bonuses for the year 1953. In the case of the amounts
taken from the general reserve it seems clear that the
company had to resort to the use of such reserve funds
because the item of expense to be met could not be

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considered as ordinary or necessary — and was therefore
beyond the purview of the provisions of Section 30(a) (1) of
the National Internal Revenue Code. This being so, We cannot
see our way clear to holding that the respondent acted
arbitrarily in disallowing as deductible expenses the amounts
thus paid as bonus or "additional remuneration".
C. M. Hoskins & Co. Inc. v Commissioner of Internal Revenue

Facts: Petitioner, a domestic corporation engaged in the real
estate business as brokers, managing agents and
administrators, filed its income tax return for its fiscal year
ending September 30, 1957 showing a net income of
P92,540.25 and a tax liability due thereon of P18,508.00,
which it paid in due course. Upon verification of its return,
respondent Commissioner of Internal Revenue, disallowed
four items of deduction in petitioner's tax returns and
assessed against it an income tax deficiency in the amount of
P28,054.00 plus interests. The Court of Tax Appeals upon
reviewing the assessment at the taxpayer's petition, upheld
respondent's disallowance of the principal item of petitioner's
having paid to Mr. C. M. Hoskins, its founder and controlling
stockholder the amount of P99,977.91 representing 50% of
supervision fees earned by it and set aside respondent's
disallowance of three other minor items. The Tax Court
therefore determined petitioner's tax deficiency to be in the
amount of P27,145.00 and on November 8, 1964 rendered
judgment against it, as follows:

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WHEREFORE, premises considered, the decision of the
respondent is hereby modified. Petitioner is ordered to pay
to the latter or his representative the sum of P27,145.00,
representing deficiency income tax for the year 1957, plus
interest at 1/2% per month from June 20, 1959 to be
computed in accordance with the provisions of Section 51(d)
of the National Internal Revenue Code. If the deficiency tax
is not paid within thirty (30) days from the date this decision
becomes final, petitioner is also ordered to pay surcharge
and interest as provided for in Section 51 (e) of the Tax Code,
without costs.
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:

8 CHAPTER V: DEDUCTIONS

·         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.
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

[CHAPTER V: DEDUCTIONS] 9

bonuses are in fact compensation and were paid for services
actually rendered.

CIR vs. GENERAL FOODS PHILS. INC. (test of reasonableness)
FACTS: In June 1985, GF, engaged in the manufacture of
beverages filed its income tax return for the fiscal year
ending February 28, 1985. In said tax return, respondent
corporation claimed as deduction, among other business
expenses, the amount of P9,461,246 for media advertising for
Tang.
CIR disallowed 50% or P4,730,623 of the deduction claimed
by respondent corporation. Consequently, GR was assessed
deficiency income taxes in the amount of P2,635,
141.42. The latter filed a motion for reconsideration but the
same was denied.
GR appealed to the Court of Tax Appeals but the appeal was
dismissed: “With such a gargantuan expense for the
advertisement of a singular product, which even excludes
other advertising and promotions expenses, we are not
prepared to accept that such amount is reasonable to
stimulate the current sale of merchandise regardless of
Petitioners explanation that such expense does not connote
unreasonableness considering the grave economic situation
taking place after the Aquino assassination characterized by
capital fight, strong deterioration of the purchasing power
of the Philippine peso and the slacking demand for consumer
products”.

Taxation 1- SY 2015-2016 (Zarate)

CA however, set aside the ruling of the CTA: “Since it has not
been sufficiently established that the item it claimed as a
deduction is excessive, the same should be allowed.”
Thus, this petition by CIR.
ISSUE: W/N the media advertising expense for Tang incurred
by respondent corporation was an ordinary and necessary
expense fully deductible under the
HELD: NO. We find the subject expense for the
advertisement of a single product to be inordinately large.
Therefore, even if it is necessary, it cannot be considered an
ordinary expense deductible under the NIRC.
Advertising is generally of two kinds: (1) advertising to
stimulate the current sale of merchandise or use of services
and (2) advertising designed to stimulate the future sale of
merchandise or use of services. The second type involves
expenditures incurred, in whole or in part, to create or
maintain some form of goodwill for the taxpayers trade or
business or for the industry or profession of which the
taxpayer is a member. If the expenditures are for the
advertising of the first kind, then, except as to the question
of the reasonableness of amount, there is no doubt such
expenditures are deductible as business expenses. If,
however, the expenditures are for advertising of the second
kind, then normally they should be spread out over a
reasonable period of time.
We agree with the CTA that the subject advertising expense
was of the second kind. Not only was the amount staggering;

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the respondent corporation itself also admitted, in its letter
protest to the Commissioner of Internal Revenues assessment,
that the subject media expense was incurred in order to
protect GR’s brand franchise, a critical point during the
period under review.
The protection of brand franchise is analogous to the
maintenance of goodwill or title to one’s property. This is a
capital expenditure which should be spread out over a
reasonable period of time.
Respondent corporations venture to protect its brand
franchise was tantamount to efforts to establish a
reputation. This was akin to the acquisition of capital assets
and therefore expenses related thereto were not to be
considered as business expenses but as capital expenditures.

CIR vs. ISABELA CULTURAL CORPORATION (it must be paid
or incurred during the taxable year)
FACTS: In February 1990, ICC, a domestic corporation,
received from the BIR an Assessment Notice for deficiency
income tax in the amount of P333,196.86, and an Assessment
Notice for deficiency expanded withholding tax in the
amount of P4,897.79, inclusive of surcharges and interest,
both for the taxable year 1986.
The deficiency expanded withholding tax was allegedly due
10 CHAPTER V: DEDUCTIONS
to the failure of ICC to withhold 1% expanded withholding tax
on its claimed P244,890.00 deduction for security services.
The CTA held however that the claimed deductions for

professional and security services were properly claimed by
ICC in 1986 because it was only in the said year when the
bills demanding payment were sent to ICC. Hence, even if
some of these professional services were rendered to ICC in
1984 or 1985, it could not declare the same as deduction for
the said years as the amount thereof could not be
determined at that time.
CIR appealed to the CA which upheld CTA holding that
although the professional services (legal and auditing
services) were rendered to ICC in 1984 and 1985, the cost of
the services was not yet determinable at that time, hence, it
could be considered as deductible expenses only in 1986
when ICC received the billing statements for said services.
Hence, this case before the SC.
ISSUE: W/N the deduction of the expenses for professional
and security services from ICCs gross income was correct.
HELD: NO.
The requisites for the deductibility of ordinary and necessary
trade, business, or professional expenses, like expenses paid
for legal and auditing services, are: (a) the expense must be
ordinary and necessary; (b) it must have been paid or
incurred during the taxable year; (c) it must have been paid
or incurred in carrying on the trade or business of the
taxpayer; and (d) it must be supported by receipts, records
or other pertinent papers.
The requisite that it must have been paid or incurred during
the taxable year is further qualified by Section 45 of the

[CHAPTER V: DEDUCTIONS] 11

National Internal Revenue Code (NIRC) which states that:
[t]he deduction provided for in this Title shall be taken for
the taxable year in which paid or accrued or paid or
incurred, dependent upon the method of accounting upon
the basis of which the net income is computed
From the nature of the claimed deductions and the span of
time during which the firm was retained, ICC can be
expected to have reasonably known the retainer fees charged
by the firm as well as the compensation for its legal
services. The failure to determine the exact amount of the
expense during the taxable year when they could have been
claimed as deductions cannot thus be attributed solely to the
delayed billing of these liabilities by the firm. For one, ICC,
in the exercise of due diligence could have inquired into the
amount of their obligation to the firm, especially so that it is
using the accrual method of accounting. For another, it could
have reasonably determined the amount of legal and retainer
fees owing to its familiarity with the rates charged by their
long time legal consultant.
CIR v CTA AND SMITH&FRENCH OVERSEAS

Facts:
Smith Kline & French Overseas Company is a multinational
firm domiciled in Philadelphia, licensed to do business in the

Philippines. It is engaged in the importation, manufacture,
and sale of pharmaceutical drugs and chemicals.
In 1971, it declared a net taxable income of P1.4 M and paid
P511k as tax due. It claimed its share of the head office
overhead expenses (P501k) as deduction from gross income.
In its amended return, it claimed that there was an
overpayment of tax (P324k) arising from under-deduction of
the overhead expense. This was certified by international
independent auditors, the allocation of the overhead expense
made on the basis of the percentage of gross income in the
Philippines to gross income of the corporation as a whole.
In 1974, without waiting for the action of the CIR, Smith filed
a petition for review with the CTA. CTA ordered CIR to
refund the overpayment or grant Smith a tax credit. CIR
appealed to the SC.
Issue: Whether Smith is entitled to a refund – YES
Ratio:
The governing law is found in Sec. 37 (b).1
Revenue
Regulation No. 2 of the DOF contains a similar provision, with
the additional line that “the ratable part is based upon the
ratio of gross income from sources within the Philippines to
the total gross income” (Sec. 160).
Hence, where an
expense is clearly related to the production of Philippine-

Net income from sources in the Philippines. – From the items of gross income specified in subsection (a) of this section there shall be
deducted expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expenses, losses, or other
deductions which cannot definitely be allocated to some item or class of gross income. The remainder, if any, shall be included in full as net
income from sources within the Philippines.
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derived income or to Philippine operations, that expense can
be deducted from the gross income acquired in the
Philippines without resorting to apportionment.
However, the overhead expenses incurred by the parent
company in connection with finance, administration, and
research & development, all of which directly benefit its
branches all over the world, fall under a different category.
These are items which cannot be definitely allocated or
identified with the operations of the Philippine branch.
Smith can claim as its deductible share a ratable part of such
expenses based upon the ration of the local branch’s gross
income to the total gross income of the corporation
worldwide.
CIR’s Contention
The CIR does not dispute the right of Smith to avail of Sec. 37
(b) of the Tax Code and Sec. 160 of the RR. But he maintains
that such right is not absolute and that there exists a
contract (service agreement) which Smith has entered into
with its home office, prescribing the amount that a branch
can deduct as its share of the main office’s overhead
expenses. Since the share of the Philippine branch has been
fixed, Smith cannot claim more than the said amount.
Smith’s Contention
Smith, on the other hand, submits that the contract between
itself
and its home
office cannot amend tax laws and
12 CHAPTER
V: DEDUCTIONS
regulations. The matter of allocated expenses deductible
under the law cannot be the subject of an agreement

between private parties nor can the CIR acquiesce in such an
agreement.
SC ruled for Smith Kline and said that its amended return
conforms with the law and regulations.
GUTIERREZ v COLLECTOR

Facts:
Lino Gutierrez was primarily engaged in the business of
leasing real property for which he paid real estate broker’s
privilege tax. The Collector assessed against Gutierrez
deficiency income tax amounting to P11,841.
The deficiency tax came about by the disallowance of
deductions from gross income representing depreciation
expenses Gutierrez allegedly incurred in carrying on his
business. The expenses consisted of:
1.       Transportation expenses incurred to attend the funeral
of his friends,
2.       Procurement and installation of an iron door,
3.       Cost of furniture given by the taxpayer in furtherance
of a business transaction,
4.       Membership fees in organizations established by those
engaged in the real estate trade,
5.       Car expenses, salary of his driver and car depreciation,
6.       Repairing taxpayer’s rental apartments,
7.       Litigation expenses,
8.       Depreciation of Gutierrez’ residence,
9.       Fines and penalties for late payment of taxes,
10.   Alms given to in indigent family and a donation
consisting of officer’s jewels and aprons to Biak-na-Bato
Lodge No. 7.

[CHAPTER V: DEDUCTIONS] 13

Issue:
Whether or not claims for deduction are proper and
allowable.
Held:
To be deductible, an expense must be:
·         Ordinary and necessary
·         Paid or incurred within the taxable year
·         Paid or incurred in carrying on a trade or business.
1. Transportation expenses which petitioner incurred to
attend the funeral of his friends and the cost of admission
tickets to operas - expenses relative to his personal and
social activities rather than to his business of leasing real
estate.
2. Procurement and installation of an iron door to - purely a
personal expense. Personal, living, or family expenses are not
deductible.
3. Cost of furniture given by the taxpayer as commission in
furtherance of a business transaction - the expenses incurred
in attending the National Convention of Filipino Businessmen,
luncheon meeting and cruise to Corregidor of the
Homeowners' Association were shown to have been made in
the pursuit of his business. Commissions given in
consideration for bringing about a profitable transaction are
part of the cost of the business transaction and are
deductible.
4. Membership and activities in connection therewith were
solely to enhance his business -Gutierrez was an officer of
the Junior Chamber of Commerce which sponsored the
National Convention of Filipino Businessmen. He was also the
president of the Homeowners' Association, an organization

Taxation 1- SY 2015-2016 (Zarate)

established by those engaged in the real estate trade. Having
proved that his, the expenses incurred are deductible as
ordinary and necessary business expenses.
5. Car expenses, salary of his driver and car depreciation –
1/3 of the same was disallowed by the Commissioner on the
ground that the taxpayer used his car and driver both for
personal and business purposes. There is no clear showing,
however, that the car was devoted more for the taxpayer's
business than for his personal and business needs. According
to the evidence, the taxpayer's car was utilized both for
personal and business needs. It is reasonable to allow as
deduction 1/2 of the driver's salary, car expenses and
depreciation.
6. Those used to repair the taxpayer's rental apartments - did
not increase the value of such apartments, or prolong their
life. They merely kept the apartments in an ordinary
operating condition. Hence, the expenses incurred are
deductible as necessary expenditures for the maintenance of
the taxpayer's business.
7. Litigation expenses - defrayed by Gutierrez to collect
apartment rentals and to eject delinquent tenants are
ordinary and necessary expenses in pursuing his business. It is
routinary and necessary for one in the leasing business to
collect rentals and to eject tenants who refuse to pay their
accounts.
8. Depreciation of Gutierrez' residence - not deductible. A
taxpayer may deduct from gross income a reasonable
allowance for deterioration of property arising out of its use
or employment in business or trade. Gutierrez' residence was
not used in his trade or business.
9. Deduction the fines and penalties which he paid for late
payment of taxes - while Section 30 allows taxes to be

14

[CHAPTER V: DEDUCTIONS]

deducted from gross income, it does not specifically allow
fines and penalties to be so deducted.
Deductions from gross income are matters of legislative
grace; what is not expressly granted by Congress is withheld.
Moreover, when acts are condemned, by law and their
commission is made punishable by fines or forfeitures, to
allow them to be deducted from the wrongdoer's gross
income, reduces, and so in part defeats, the prescribed
punishment.
10. Alms to an indigent family and various individuals,
contributions to Lydia Yamson and G. Trinidad and a donation
consisting of officers' jewels and aprons to Biak-na-Bato
Lodge No. 7 - not deductible from gross income inasmuch as
their recipients have not been shown to be among those
specified by law. Contributions are deductible when given to
the Government of the Philippines, or any of its political
subdivisions for exclusively public purposes, to domestic
corporations or associations organized and operated
exclusively for religious, charitable, scientific, athletic,
cultural or educational purposes, or for the rehabilitation of
veterans, or to societies for the prevention of cruelty to
children or animals, no part of the net income of which
inures to the benefit of any private stockholder or individual.

GANGAYCO vs COLLECTOR
FACTS:
▪ Respondent CIR issued a communication informing the
petitioner
that V:
there
was still due from him, a efficiency
14
CHAPTER
DEDUCTIONS
income tax for the year 1949, the sum of P29,554.05.
Gancayco sought a reconsideration, which was part granted
by respondent, who in a letter dated April 8, 1953,

informed petitioner that his income tax defendant
efficiency for 1949 amounted to P16,860.31. 
▪ On April 15, 1956, respondent issued a warrant of distraint
and levy against the properties of Gancayco for the
satisfaction of his deficiency income tax liability, and
accordingly, the municipal treasurer of Catanauan, Quezon
issued on May 29, 1956, a notice of sale of said property at
public auction on June 19, 1956.
▪ The question whether the sum of P16,860.31 is due from
Gancayco as deficiency income tax for 1949 hinges on the
validity of his claim for deduction of two (2) items, namely:
(a) for farming expenses, P27,459.00; and (b) for
representation expenses, P8,933.45.
ISSUE:
Whether or not the 2 claimed deductions are allowable.
HELD:
No.
Section 30 of the Tax Code partly reads: (a) Expenses: (1) In
General — All the  ordinary  and  necessary  expenses paid or
incurred during the taxable year incarrying on any trade or
business, including a reasonable allowance for salaries or
other compensation for personal services actually rendered;
traveling expenses while away from home in the pursuit of a
trade or business; and rentals or other payments required to
be made as a condition to the continued use or possession,
for the purposes of the trade or business, of property  to
which the taxpayer has not taken or is not taking title or in
which he has no equity.

[CHAPTER V: DEDUCTIONS] 15

In computing net income no deduction shall in  any  case be
allowed in respect of —(1) Personal, living, or family
expenses;(2) Any amount paid out for new buildings or
for  permanent improvements, or  betterments  made to
increase the value of any property or estate;(3) Any amount
expended in  restoring  property or in  making good the
exhaustion thereof  for which an allowance is or has been
made; or (4) Premiums paid on any life insurance policy
covering the life of any officer or employee, or any person
financially interested in any trade or business carried on by
the taxpayer, individual or corporate, when the taxpayer is
directly or indirectly a beneficiary under such policy.
The cost of farm machinery, equipment and farm building
represents a capital investment and is  not  an allowable
deduction as an item of expense. Amounts expended in
the  development  of farms, orchards, and ranches  prior to
the time when the productive state is reached  may be
regarded as investments of capital. Accordingly, they are not
deductible. As for Gangayco’s claim for representation
expenses amounting to P31,753.97, of which P22,820.52 was
allowed, and P8,933.45 disallowed. Such disallowance is
justified by the record, for, apart from the absence of
receipts, invoices or vouchers of the expenditures in
question, petitioner could not specify the items constituting
the same, or when or on whom or on what they were
incurred.

3M Philippines vs. CIR
FACTS:
▪ 3M Philippines, Inc. is a subsidiary of the Minnesota Mining
and Manufacturing Company (or "3M-St. Paul") a nonresident foreign corporation with principal office in St.
Paul, Minnesota, U.S.A. It is the exclusive importer,

Taxation 1- SY 2015-2016 (Zarate)








manufacturer, wholesaler, and distributor in the Philippines
of all products of 3M-St. Paul. 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. 
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.
The Commissioner did not allow the entire amount as
deduction. Instead, respondent ordered petitioner to pay
P840,540 as deficiency income tax on its 1974 return, plus
P353,026.80 as 14% interest per annum from February 15,
1975 to February 15, 1976, or a total ofP1,193,566.80.
Petitioner protested and argued that the law applicable to
its case is only Section 29(a)(1) and not circular 393 of the
central bank.
CA upheld the commissioner’s ruling.

ISSUE:
Whether or not the royalty payments are valid deductible
payments.
HELD:
No.

16

[CHAPTER V: DEDUCTIONS]

Although 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. Section 3c of the
circular provides that no royalty is payable on the wholesale
price of finished products imported by the licensee from the
licensor. Further, Circulars issued by the Central Bank in the
exercise of its authority under the Central Bank Act, and
which have been duly published in the Official Gazette, have
the force and effect of law (People vs. Que Po Lay, 94 Phil.
640; Lim Hoa Ting vs. Central Bank, 104 Phil. 573). They are
binding on everybody, the petitioner, as much as the public
respondent.

OPTIONAL TREATMENT OF INTEREST EXPENSE
COMMISSIONER OF INTERNAL REVENUE vs. CARLOS
PALANCA, JR. (1966)

In 1950, Don Palanca Sr. donated in favor of his son
(Respondent) shares of stock in La Tondeña, Inc. amounting
to 12,500 shares. Respondent failed to file a return on the
donation within the statutory period so BIR assessed the sums
of P97,691.23, P24,442.81 and P47,868.70 as gift tax, 25%
surcharge and interest, respectively, which he paid on June
22, 1955.

16 CHAPTER V: DEDUCTIONS

In 1956, respondent filed with BIR his income tax return for
the calendar year 1955, claiming, among others, a deduction
for interest. On the basis of this return, he was assessed the
sum of P21,052.91, as income tax, which he paid.
Subsequently, the respondent filed an amended return for
the year 1955, claiming an additional deduction representing
interest paid on the donee's gift tax. The claim for deduction
was based on the provisions of Section 30(b) (1) of the Tax
Code, which authorizes the deduction from gross income of
interest paid within the taxable year on indebtedness. A
claim for the refund of alleged overpaid income taxes for the
year 1955 amounting to P17,885.01, which is the difference
between the amount of P21,052.01 he paid as income taxes
under his original return and of P3,167.00, was filed together
with this amended return. The claim for refund was denied
by the BIR.

In 1957, the respondent reiterated his claim for refund but
was again denied. Then, he requested the case to be referred
to the conference staff of the BIR. Later, he requested the
respondent to hold his action on the case in abeyance until
after the CTA renders its division on a similar case, and on
November 7, 1957, BIR denied the claim for the refund.

Meanwhile, the BIR considered the transfer of 12,500 shares
of stock of La Tondeña Inc. to be a transfer in contemplation
of death pursuant to Section 88(b) of the NIRC. Consequently,
the respondent assessed against the petitioner the sum of

[CHAPTER V: DEDUCTIONS] 17

P191,591.62 as estate and inheritance taxes on the transfer
of said 12,500 shares of stock. The amount of P17,002.74
paid on June 22, 1955 by the petitioner as gift tax, including
interest and surcharge, was applied to his estate and
inheritance tax liability. On the tax liability of P191,591.62,
the petitioner paid the amount of P60,581.80 as interest for
delinquency.

In 1958, the respondent once more filed an amended income
tax return for the year 1955, claiming, in addition to the
interest deduction of P9,076.45 appearing in his original
return, a deduction in the amount of P60,581.80,
representing interest on the estate and inheritance taxes on
the 12,500 shares of stock, thereby reporting a net taxable
income for 1955 in the amount of P5,400.32 and an income
tax due thereon in the sum of P428.00. He attached a letter
requesting the refund of P20,624.01 which is the difference
between the amounts of P21,052.01 he paid as income tax
under his original return and of P428.00. Without waiting for
the CIR's decision on this claim for refund, he filed his
petition for review before the CTA. CIR then denied the
request for refund.
CTA ordered CIR to refund to the respondent the amount
representing alleged over-payment of income taxes for the
calendar year 1955.

Taxation 1- SY 2015-2016 (Zarate)

ISSUE: WON the amount paid by Palanca for interest on his
delinquent estate and inheritance tax is deductible from the
gross income for that year under Section 30 (b) (1) of the
Revenue Code.

HELD: Yes.
While "taxes" and "debts" are distinguishable legal concepts,
in certain cases as in the suit at bar, on account of their
nature, the distinction becomes inconsequential. This
qualification is recognized even in the United States. Thus,
The term "debt" is properly used in a comprehensive sense as
embracing not merely money due by contract, but whatever
one is bound to render to another, either for contract or the
requirements of the law. (Camden vs. Fink Coule and Coke
Co., 61 ALR 584).
Where statutes impose a personal liability for a tax, the tax
becomes at least in a broad sense, a debt. (Idem.) Some
American authorities hold that, especially for remedial
purposes, Federal taxes are debts. (Tax Commission vs.
National Malleable Castings Co., 35 ALR 1448)

In our jurisdiction, the rule is settled that although taxes
already due have not, strictly speaking, the same concept as
debts, they are, however obligations that may be considered
as such. (Sambrano vs. Court of Tax Appeals, G.R. no. L-8652,
March 30, 1957). In a more recent case Commissioner of
Internal Revenue vs. Prieto, G.R. No. L-13912, September 30,

18

[CHAPTER V: DEDUCTIONS]

1960, we explicitly announced that while the distinction
between "taxes" and "debts" was recognized in this
jurisdiction, the variance in their legal conception does not
extend to the interests paid on them, at least insofar as
Section 30 (b) (1) of the National Internal Revenue Code is
concerned.

We do not see any element in this case which can justify a
departure from or abandonment of the doctrine in the Prieto
case above. In both this and the said case, the taxpayer
sought the allowance as deductible items from the gross
income of the amounts paid by them as interests on
delinquent tax liabilities. Of course, what was involved in the
cited case was the donor's tax while the present suit pertains
to interest paid on the estate and inheritance tax. This
difference, however, submits no appreciable consequence to
the rationale of this Court's previous determination that
interests on taxes should be considered as interests on
indebtedness within the meaning of Section 30(b) (1) of the
Tax Code. The interpretation we have placed upon the said
section was predicated on the congressional intent, not on
the nature of the tax for which the interest was paid.
PAPER INDUSTRIES CORPORATION OF THE PHILIPPINES
(PICOP) vs. CA, CIR, and CTA (1995)

18 is
CHAPTER
V: DEDUCTIONS
Picop
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.
In 1983, Picop received from the CIR 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
P88,763,255.00. Picop protested the assessment of deficiency
transaction tax and documentary and science stamp taxes. It
also protested the deficiency income tax assessment for
1977. These protests were not formally acted upon by CIR. In
1984, the CIR 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; in
effect, the CIR denied Picop's protests.

PICOP appealed the assessments to CTA, which modified the
CIR’s findings and held PICOP liable for the reduced
aggregate amount of P20,133,762.33.

Picop and the CIR both went to the Supreme Court on
separate Petitions for Review of the above decision of the
CTA. Both petitions were referred by SC to the CA. Cases
were consolidated.

CA: further reduced the liability of Picop.

[CHAPTER V: DEDUCTIONS] 19

Elevated the case again to SC, alleged:
Picop: not liable at all to pay any of the assessments
or any part thereof.
CIR: Court of Appeals erred in finding Picop not liable
for surcharge and interest on unpaid transaction tax
and for documentary and science stamp taxes and in
allowing Picop to claim as deductible expenses and
that Picop should be held liable for interest at 14%
per annum for 3 years, and interest at 20% per annum
for a maximum of 3 years; and for a surcharge of 10%,
on Picop's deficiency income tax. Finally, the CIR
contends that Picop is liable for the corporate
development tax equivalent to five percent (5%) of its
correct 1977 net income.

ISSUE: Whether Picop is entitled to deductions against
income of interest payments on loans for the purchase of
machinery and equipment.
HELD:
YES. Interest payments on loans incurred by a
taxpayer (whether BOI-registered or not) are allowed by the
NIRC as deductions against the taxpayer's gross income. The
basis is 1977 Tax Code Sec. 30 (b). Thus, the general rule is
that interest expenses are deductible against gross income
and this certainly includes interest paid under loans incurred

Taxation 1- SY 2015-2016 (Zarate)

in connection with the carrying on of the business of the
taxpayer. In the instant case, the CIR does not dispute that
the interest payments were made by Picop on loans incurred
in connection with the carrying on of the registered
operations of Picop, i.e., the financing of the purchase of
machinery and equipment actually used in the registered
operations of Picop. Neither does the CIR deny that such
interest payments were legally due and demandable under
the terms of such loans, and in fact paid by Picop during the
tax year 1977.
The contention of CIR does not spring of the 1977 Tax
Code but from Revenue Regulations 2 Sec. 79. However, the
Court said that the term “interest” here should be construed
as the so-called "theoretical interest," that is to say, interest
"calculated" or computed (and not incurred or paid) for the
purpose of determining the "opportunity cost" of investing
funds in a given business. Such "theoretical" or imputed
interest does not arise from a legally demandable interestbearing obligation incurred by the taxpayer who however
wishes to find out, e.g., whether he would have been better
off by lending out his funds and earning interest rather than
investing such funds in his business. One thing that Section 79
quoted above makes clear is that interest which does
constitute a charge arising under an interest-bearing
obligation is an allowable deduction from gross income.
CIR V LEDNICKY
FACTS:

20

[CHAPTER V: DEDUCTIONS]

Resp spouses V.E. Lednicky and Maria Valero Lednicky are
American Citizens residing in the Philippines and derived
their income from Philippine sources for the taxable years in
question.
1957 – Sps filed their ITR for 1956 reporting a gross income
P1,017,287.65 and a net income of P733,809.44 on which
P317,395.40 was assessed after deducting P4,805.59 as
withholding tax.
Sps paid 326,247.41 on April 1957
March 1959 – Sps filed an amended ITR for 1956. They
claimed a deduction of P205,939.24 paid in 1956 to US gov’t.
Respondents requested refund of 112,437.90
CIR failed to answer the claim for refund, resps filed their
petition with the Tax Court
G.R. No. L-18169 formerly CTA case 570[different case/year]
is also a claim for refund in the amount of P150,269.00 as
alleged overpaid income tax for 1955
Facts:
In Feb 1956 Sps filed ITR for 1955 = gross income of
P1,7771,124.63 and net income of P1,052,550.67
1956 – sps filed an amended ITR. Back in 1955, sps filed with
the US Internal Revenue Agent in Manila their federal ITR for
the years 1947,1951-54 on income from Phil sources on a cash
basis. 1958 – Sps amended their Phil ITR for 1955 to include
the deductions of US Federal income taxes, interest accrued
up to May 15, 1955, and exchange and bank charges. CTA
case 570 was filed.
20 No.
CHAPTER
V: DEDUCTIONS
G.R.
21434 formerly
CTA Case No. 783, facts are similar
but refer to Lednickys’ OTR for 1957 filed in Feb 1958. In

1959 sps filed amended return for 1957 claiming deductions
representing taxes paid to US Gov’t.
* Tax court held that the taxes may be deducted because the
Sps did not signify in their ITR a desire to avail themselves
of the benefits of paragraph 3(B) of Sec. 30
COMMON ISSUE: WON a citizen of the US residing in Phils
who derives income wholly from sources within the Phils may
deduct from his gross income the income taxes he has paid to
US gov’t for the taxable year?
HELD/RATIO:




SC: CIR correct that the construction and wording of
Sec. 30c(1)B of the Internal Revenue Act shows the
law’s intent that the right to deduct income taxes
paid to foreign government from the taxpayer’s gross
income is given only as an alternative or substitute to
his right to claim a tax credit for such foreign income
taxes
o (B) – Income, war-profits, and excess profits
taxes imposed by the authority of any foreign
country; but this deduction shall be allowed in
the case of a taxpayer who does not signify in
his return his desire to have any extent the
benefits of paragraph (3) of this subsection
(relating to credit for foreign countries)
So that unless the alien resident has a right to claim
such tax credit if he so chooses, he is precluded from
deducting the foreign income taxes from his gross
income.

[CHAPTER V: DEDUCTIONS] 21







For it is obvious that in prescribing that such
deduction shall be allowed in the case of a taxpayer
who does not signify in his return his desire to have
any extent benefits of paragraph 3, the statute
assumes that the taxpayer in question may signify his
desire to claim a tax credit and waive the deduction;
otherwise, the foreign taxes would always be
deductible and their mention in the list on nondeductible items in Sec. 30c might as well have been
omitted or at least expressly limited to taxes on
income from sources outside the Philippine Islands
Had the law intended that foreign income taxes could
be deducted from gross income in any event,
regardless of the taxpayer’s right to claim a tax
credit, it is the latter right that should be conditioned
upon the taxpayer’s waiving the deduction
No danger of double credit/taxation.
o Double taxation becomes obnoxious only
where the taxpayer is taxed twice for the
benefit of the same governmental entity
o The Philippine government only receives the
proceeds of one tax
o Justice and equity demand that the tax on the
income should accrue to the benefit of the
Philippines
o Any relief from the alleged double taxation
should come from the US since the former’s
right to burden the taxpayer is solely
predicated in is citizenship, without

Taxation 1- SY 2015-2016 (Zarate)

o

contributing to the production of wealth that
is being taxed
To allow an alien resident to deduct from his
gross income whatever taxes he pays to his
own government amounts to conferring on the
latter the power to reduce the tax income of
t h e Ph i li p p i n e gove rn m e n t si m p ly b y
increasing the tax rates on the alien resident.

MARCELO STEEL CORPORATION
vs. COLLECTOR OF INTERNAL REVENUE
Facts: The petitioner is a corporation duly organized and
existing under and by virtue of the laws of the Philippines,
with offices at Malabon, Rizal. It is engaged in three (3)
industrial activities, namely, (1) manufacture of wire fence,
(2) manufacture of nails, and (3) manufacture of steel bars,
rods and other allied steel products. enjoined the benefits of
the tax exemption under Republic Act No. 35.
On May 21, 1953, the petitioner filed an income tax return
for the year 1952, reflecting a net income of P34,386.58
realized solely from its business of manufacturing wire fence,
an activity which is not tax exempt, and on March 31, 1954,
it filed its income tax return for the year 1953, showing a net
income of P58,329.00 realized from the same sources, i.e.,
the manufacture of wire fence.

22

[CHAPTER V: DEDUCTIONS]

On basis of the said income tax return filed by the petitioner
for the year 1952 and 1953 which did not reflect the financial
of its tax exempt business activities, the respondent assessed
the total sum of P12,750.
On October 1, 1954, the petitioner filed amended income tax
returns for taxable years 1952 and 1953, showing that bit
suffered a net loss of P871,407.37 in 1952, and P10,956.29 in
1953. The said losses were arrived at by consolidating the
gross income and expenses and/or deductions of the
petitioner in all its business activities.
On October 1, 1954, the petitioner, claiming that instead of
earning the net income shown in its original income tax
returns for 1952 and 1953, it sustained the losses shown in its
amended income tax returns for refund of the income taxes
for the said years amounting to P12,750.00 which it allegedly
paid to the respondent.
After more than ten months of waiting without any action
being taken by the respondent on the claim for refund, and
in order to protect its right under Section 306 of the National
Internal Revenue Code, the petitioner, on August 13, 1955,
filed with this Court the instant petition for review.
The Court of Tax Appeals held that "petitioner cannot deduct
from the profits realized from its taxable industries, the
22 CHAPTER
V:its
DEDUCTIONS
losses
sustained by
tax exempt business activities, . . ."
Issue:

1) whether or not the petitioner may be allowed to deduct
from the profits realized from its taxable business
activities, the losses sustained by its tax except
industries, an
2) whether or not the action for refund, with regard to the
sum of P3,458.50 which was of the Tax Code.
Held: No.
The fact that the petitioner is a corporate organized with a
single capital that answer for all its financial obligations
including those incurred in the tax exempt industries is of no
moment. The intent of the law is to treat taxable or nonexempt industries as separate and distinct from new and
necessary industries which are tax-exempt for purposes of
taxation. Section 7, Executive Order No. 341, series of 1950,
issued by the President of the Philippines pursuant to section
2, Republic Act No. 35, provides:
Any industry granted tax exemption under the provisions of
Republic Act No. 35 shall report to the Secretary of Finance
at the end of every fiscal rear a complete list and a correct
valuation of all real and personal property of its industrial
plant of factory: shall file a separate income tax return; shall
keep separetely the accounting records relative to the
industry declared exempt; shall keep such records and
submit such sworn statements as may be prescribed from
time to time by the Secretary of Finance;1 (Emphasis
supplied.)

[CHAPTER V: DEDUCTIONS] 23

And when Congress revised the provision of Republic Act No.
35 by enacting onto law Republic Act No. 901 it incorporate
similar provisions and provided that "Any industry granted tax
exemption under of Republic Act No. 35" shall "file a separate
income tax return."2
The petitioner states that it is not liable to pay income tax
on its industries of manufacturing nails and steel bars, ros
and other allied steel product for the reason that it had
incurred loss in their operation and not because it is exempt
under the provision of Republic Act No. 35. It argues that by
being allowed to deduct its gains derived from the operation
of its taxable or non-exempt industry of manufacturing wire
fence, from the losses incurred in the operation of its taxexempt industries of manufacturing nails and steels bars, rod
and other allied steel products, it would not receive the
benefit of double exemption under Republic Act No. 35 is to
lighten the onerous financial burden and reduce the losses of
the entrepeneur, yet it is not designed to assure him of a
return on his capital invested.
As already stated, the law intended to treat to treat taxable
or non-excempt industry as separate and distinct from new
and necessary industry, which is tax exempt, and did not
mean to grant an entrepreneur, engaged at the same time in
a taxable or non-exempt industry and a new and necessary
industry, the benefit or privilege of deducting his gains or
profit derived from the operation of the first from the losses
incurred in the operation of the second. Moreover, aside from

Taxation 1- SY 2015-2016 (Zarate)

its exemption from the payment of income tax on its profits
derived from the operation of new and necessary industries,
the petitioner is exempt from the payment of other internal
revenue taxes directly payable by it, such as the fixed and
privilege tax on business, the percentage tax on the fixed
and privilege tax on business, the percentage tax on the sales
of manufactured products, in respect to which exemption is
granted, the compensating tax on the articles, goods or
material exclusively used in the new and necessary industry,
and the documentary stamp tax (Exhibits 6 and 7). These
exemption alone are enough to lighten its onerous financial
burden and reduce losses.
The petitioner claims that unlike the United States Internal
Revenue Code which expressly forbids the deduction of —
Any amount otherwise allowable as a deduction which is
allocable to one or more classes of income other than
interest (whether or not only any amount of income of that
class or classes is received or accrued) wholly exempt from
the taxes imposed by this chapter [(Section 24 (a) (5)].
Our National Internal Revenue Code does not contain a
similar prohibition. When in 1939 Commonwealth Act No.
466, the National Internal Revenue Code, was enacted into
law, the idea of granting tax exemption to new and necessary
industries in the Philippines had not yet been thought of
because there were no new and necessary industries being
established or exploited. It was only in 1946, after the last
World War, and after the Philippines became sovereign

24

[CHAPTER V: DEDUCTIONS]

nation, that the establishment or exploitation of new and
necessary industries was stimulated. Hence the absence of a
similar provision in out National Internal Revenue Code. This
absence, however, cannot be capitalized upon by the
petitioner in support of its theory. For, as already stated,
when Congress enacted Republic Act No. 35 into law, it
intended to segregate income derived from the operation of
new and necessary industries from that derived from the
operation of taxable or non-exempt industries.

contractual obligation to produce and supply logs to the
latter.

*Losses (Requisites for Deductibility)

San Jose later failed to deliver the logs to Galang Machinery
and the latter sued on the performance bond.

To afford itself adequate protection against loss or damage
on the performance bond, petitioner required San Jose and
one Ramon Cuervo to execute an indemnity agreement
obligating themselves, solidarily, to indemnify petitioner for
whatever liability it may incur by reason of said performance
bond. Accordingly, San Jose constituted a chattel mortgage
on logging machineries and other movables in petitioner's
favor while Ramon Cuervo executed a real estate mortgage.

G.R. No. L-21520      December 11, 1967
PLARIDEL SURETY and INSURANCE COMPANY, petitioner,

CFI: San Jose and petitioner = liable.

vs.

CA and SC affirmed.

COMMISSIONER OF INTERNAL REVENUE, respondent.

FACTS:
Petitioner Plaridel Surety & Insurance Co., is a domestic
corporation engaged in the bonding business. On November
9, 1950, petitioner, as surety, and Constancio San Jose, as
24 CHAPTER
V: DEDUCTIONS
principal,
solidarily
executed a performance bond in the
penal sum of P30,600.00 in favor of the P. L. Galang
Machinery Co., Inc., to secure the performance of San Jose's

In its income tax return for the year 1957, petitioner claimed
the amount of P44,490.00 (paid to Galang machinery) as
deductible loss from its gross income and, accordingly, paid
the amount of P136.00 as its income tax for 1957. CIR
disallowed deduction. Petitioner filed protest but was
denied.

[CHAPTER V: DEDUCTIONS] 25

ISSUE: WON the amount of interest bond is an interest
deduction.

The alleged interest deduction not having been properly
litigated as an issue before the Tax Court, it is now too late
to raise and assert it before this Court.

HELD: NO.
Loss is deductible only in the taxable year it actually happens
or is sustained. However, if it is compensable by insurance or
otherwise, deduction for the loss suffered is postponed to a
subsequent year, which, to be precise, is that year in which it
appears that no compensation at all can be had, or that
there is a remaining or net loss, i.e., no full compensation.
There is no question that the year in which the petitioner
Insurance Co. effected payment to Galang Machinery
pursuant to a final decision occurred in 1957. However, under
the same court decision, San Jose and Cuervo were obligated
to reimburse petitioner for whatever payments it would
make to Galang Machinery. Clearly, petitioner's loss is
compensable otherwise (than by insurance).itc-al It should
follow, then, that the loss deduction can not be claimed in
1957.
The rule is that loss deduction will be denied if there is a
measurable right to compensation for the loss, with ultimate
collection reasonably clear. So where there is reasonable
ground for reimbursement, the taxpayer must seek his
redress and may not secure a loss deduction until he
establishes that no recovery may be had.

Taxation 1- SY 2015-2016 (Zarate)

*Losses (Requisites for Deductibility)
G.R. No. L-18282             May 29, 1964
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
PRISCILA ESTATE, INC., and THE COURT OF APPEALS,
respondents.
FACTS:
The corporation duly filed its income tax returns for the
years 1949, 1950 and 1951. On 13 June 1952, however, it
amended its income tax returns for 1951 and paid the tax
corresponding to the assessment made by the petitioner on
the basis of the returns, as amended; and on 13 September
1952, the company claimed a refund of P4,941.00 as overpaid
income tax for the year 1950 for having deducted from gross
income only the sum of P6,013.85 instead of P39,673.25 as
its loss in the sale of a lot and building. Thereupon, the
Commissioner of Internal Revenue conducted an investigation
of the company's income tax returns for 1949 through 1951
and, thereafter, granted a tax credit of P1,443.00 for 1950
but assessed on 3 November 1953 deficiency income taxes of
P3,575.49 for 1949 and P22,166.10 for 1951.

26

[CHAPTER V: DEDUCTIONS]

The Priscila Estate, Inc., contested the deficiency
assessments and when the Commissioner of Internal Revenue
refused to reconsider them, the former brought suit to the
tax court which after trial, rendered the decision that, in
1961, the Commissioner elevated to this Supreme Court for
review.

G.R. No. 125508               July 19, 2000
CHINA BANKING CORPORATION, petitioner, 

vs.

COURT OF APPEALS, COMMISSIONER OF INTERNAL
REVENUE and COURT OF TAX APPEALS, respondents.
Topic: Ordinary Losses v Capital Losses
Decisions:

ISSUE: WON the cost of the barong-barong is an allowable
deduction. (The petitioner claims that the value of the
demolished building should not be deducted from gross
income but added to the cost of the building replacing it
because its demolition or removal was to make way for the
erection of another in its place.) 1äwphï1.ñët)
HELD: NO.
Tax court found that the removal of the "barong-barong",
instead of being voluntary, was forced upon the corporation
by the city engineer because the structure was a fire hazard;
that the rental income of the old building was about
P3,730.00 per month, and that the corporation had no funds
but had to borrow, in order to construct a new building. All
these facts, taken together, belie any intention on the part of
the corporation to demolish the old building merely for the
purpose of erecting another in its place. Since the
demolished building was not compensated for by insurance
or otherwise, its loss should be charged off as deduction
26 gross
CHAPTER
V: DEDUCTIONS
from
income.

CTA:

Denied in the inclusion for deductions valued
worthless securities.

CA:

Affirmed CTA decision..

SC:

Petition denied. Affirmed CTA decision.

Facts:
1.

Sometime in 1980, petitioner China Banking Corporation
made a 53% equity investment in the First CBC Capital
(Asia) Ltd., a Hongkong subsidiary engaged in financing and
investment with "deposit-taking" function. The investment
amounted to P16,227,851.80, consisting of 106,000 shares
with a par Value of P100 per share.

2.

In 1986, it was shown that First CBC Capital (Asia), Ltd.,
has become insolvent. With the approval of Bangko
Sentral, petitioner wrote-off as being worthless its
investment in First CBC Capital (Asia), Ltd., in its 1987
Income Tax Return and treated it as a bad debt or as an
ordinary loss deductible from its gross income. This was
denied by the BIR stating among other things that they
should then be classified as "capital loss," and not as a bad

[CHAPTER V: DEDUCTIONS] 27

debt expense there being no indebtedness to speak of
between petitioner and its subsidiary.
Issue:
WoN CA is correct in affirming CTA and BIR’s
decision that such worthless securities should be treated as
capital loss and not as bad debts?
Basis of SC Decision:
1.

No error on the CA ruling > In the case at bar, First CBC
Capital (Asia), Ltd., the investee corporation, is a
subsidiary corporation of petitioner bank whose shares in
said investee corporation are not intended for purchase or
sale but as an investment. Unquestionably then, any loss
therefrom would be a capital loss, not an ordinary loss, to
the investor. Therefore, following Section 29(d)(4)(B) of
the NIRC which states "(B) Securities becoming worthless.
- If securities as defined in Section 20 become worthless
during the tax" year and are capital assets, the loss
resulting therefrom shall, for the purposes of his Title, be
considered as a loss from the sale or exchange, on the last
day of such taxable year, of capital assets

Note: In sum
(a) The equity investment in shares of stock held by CBC of
approximately 53% in its Hongkong subsidiary, the First CBC
Capital (Asia), Ltd., is not an indebtedness, and it is a
capital, not an ordinary, asset.91âwphi1
(b) Assuming that the equity investment of CBC has indeed
become "worthless," the loss sustained is a capital, not an
ordinary, loss.10
(c) The capital loss sustained by CBC can only be deducted
from capital gains if any derived by it during the same
taxable year that the securities have become "worthless."

Taxation 1- SY 2015-2016 (Zarate)

G.R. Nos. 106949-50 December 1, 1995
PAPER INDUSTRIES CORPORATION OF THE PHILIPPINES
(PICOP), petitioner, 

vs.

COURT OF APPEALS, COMMISSIONER OF INTERNAL
REVENUE and COURT OF TAX APPEALS, respondents.
G.R. Nos. 106984-85 December 1, 1995
COMMISSIONER INTERNAL REVENUE, petitioner, 

vs.

PAPER INDUSTRIES CORPORATION OF THE PHILIPPINES,
THE COURT OF APPEALS and THE COURT OF TAX
APPEALS, respondents..
Facts:
Petitioner is registered with the 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. It received from the 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
P88,763,255.00. Picop protested the assessment of deficiency
transaction tax and documentary and science stamp taxes. These
protests were not formally acted upon by respondent CIR. On 26
September 1984, the CIR 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; in effect, the CIR
denied Picop's protests. Thereupon, Picop went before the CTA.

28

[CHAPTER V: DEDUCTIONS]

Picop and the CIR both went to the Supreme Court on separate
Petitions for Review of the above decision of the CTA. In two (2)
Resolutions dated 7 February 1990 and 19 February 1990,
respectively, the Court referred the two (2) Petitions to the Court
of Appeals. The Court of Appeals consolidated the two (2) cases and
rendered a decision, dated 31 August 1992, which further reduced
the liability of Picop to P6,338,354.70. Picop now maintains that it
is not liable at all to pay any of the
assessments or any part thereof. It assails the propriety of the
thirty-five percent (35%) deficiency transaction tax which the Court
of Appeals held due from it in the amount of P3,578,543.51. Picop
also questions the imposition by the Court of Appeals of the
deficiency income tax of P1,481,579.15, resulting from
disallowance of certain claimed financial guarantee expenses and
claimed year-end adjustments of sales and cost of sales figures by
Picop's external auditors. 3 The CIR, upon the other hand, insists
that the Court of Appeals erred in
finding Picop not liable for surcharge and interest on unpaid
transaction tax and for documentary and science stamp taxes and
in allowing Picop to claim as deductible expenses.
ISSUE: Whether Picop is entitled to deduct against current
income net operating losses incurred by Rustan Pulp and Paper
Mills, Inc;.

registered with the BOI as a preferred pioneer enterprise — is that
net operating losses cannot be carried over. Under our Tax Code,
both in 1977 and at present, losses may be deducted from gross
income only if such losses were actually sustained in the same year
that they are deducted or charged off. Thus it is that R.A. No. 5186
introduced the carry-over of net operating
losses as a very special incentive to be granted only to registered
pioneer enterprises and only with respect to their registered
operations. In the instant case, to allow the deduction claimed by
Picop would be to permit one corporation or enterprise, Picop, to
benefit from the operating
losses accumulated by another corporation or enterprise, RPPM. In
effect, to grant Picop's claimed deduction would be to permit Picop
to purchase a tax deduction and RPPM to peddle its accumulated
operating losses. We consider and so hold that there is nothing in
Section 7 (c) of
R.A. No. 5186 which either requires or permits such a result.
Indeed, that result makes non-sense of the legislative purpose
which may be seen clearly to be projected by Section 7 (c), R.A.
No. 5186. We conclude that the deduction claimed by Picop in the
amount of P44,196,106.00 in its 1977 Income Tax Return must be
disallowed.

HELD:
After prolonged consideration and analysis of this matter, the Court
is unable to agree with the CTA and Court of Appeals on the
deductibility of RPPM's accumulated losses against Picop's 1977
28 CHAPTER V: DEDUCTIONS
gross income. It is important to note at the outset that in our
jurisdiction, the ordinary rule — that is, the rule applicable in
respect of corporations not

BAD DEBTS
G.R. No. L-22265

December 22, 1967

COLLECTOR OF INTERNAL REVENUE, petitioner, 

vs.

GOODRICH INTERNATIONAL RUBBER CO., respondent.

[CHAPTER V: DEDUCTIONS] 29

TOPIC: Bad Debts
FACTS:
Respondent was assessed by the CIR for Taxable Years
1951-1952. These assessments were based on disallowed
deductions, claimed by Goodrich, consisting of several
alleged bad debts, in the aggregate sum of P50,455.41, for
the year 1951, and the sum of P30,138.88, as representation
expenses allegedly incurred in the year 1952. Goodrich had
appealed from said assessments to the Court of Tax Appeals,
which, after appropriate proceedings, rendered, on June 8,
1963, a decision allowing the deduction for bad debts, but
disallowing the alleged representation expenses, hence, this
appeal.
ISSUE: Whether or not the bad debts had been properly
deducted for the year 1951.
RULING: Some but not all. The requirement of ascertainment
of worthlessness requires proof of two facts: (1) that the
taxpayer did in fact ascertain the debt to be worthlessness,
in the year for which the deduction is sought; and (2) that, in
so doing, he acted in good faith. Good faith on the part of
the taxpayer is not enough. He must show, also, that he had
reasonably investigated the relevant facts and had drawn a
reasonable inference from the information thus obtained by
him. The payments made, some in full, after some of the
foregoing accounts had been characterized as bad debts,
merely stresses the undue haste with which the same had
been written off. At any rate, respondent has not proven that
said debts were worthless. There is no evidence that the
debtors can not pay them.lawphil.net It should be noted also
that, in violation of Revenue Regulations No. 2, Section 102,

Taxation 1- SY 2015-2016 (Zarate)

respondent had not attached to its income tax returns a
statement showing the propriety of the deductions therein
made for alleged bad debts.
Below are the accounts claimed by Goodrich as Bad Debts:
Disallowed by SC:
Portillo's Auto Seat Cover (P730.00):
This debt was incurred in 1950. In 1951, the debtor paid
P70.00, leaving a balance of P630.31. That same year, the
account was written off as bad debt (Exhibit 3-C-4). Counsel
for Goodrich had merely sent two (2) letters of demand in
1951 (Exh. B-14). In 1952, the debtor paid the full balance
(Exhibit A).
Visayan Rapid Transit (P17,810.26):
This debt was, also, incurred in 1950. In 1951, it was charged
off as bad debt, after the debtor had paid P275.21. No other
payment had been made.lawphil Taxpayer's Accountant
testified that, according to its branch manager in Cebu, he
had been unable to collect the balance. The debtor had
merely promised and kept on promising to pay. Taxpayer's
counsel stated that the debtor had gone out of business and
became insolvent, but no proof to this effect. was
introduced.
Bataan Auto Seat Cover (P373.13):
This is the balance of a debt of P474.13 contracted in 1949.
In 1951, the debtor paid P100.00. That same year, the
balance of P373.13 was charged off as bad debt. The next
year, the debtor paid the additional sum of P50.00.
Tres Amigos Auto Supply (P1,370.31):

30

[CHAPTER V: DEDUCTIONS]

This account had been outstanding since 1949. Counsel for
the taxpayer had merely sent demand letters (Exh. B-13)
without success.
P. C. Teodoro (P650.00):
In 1949, the account was P751.91. In 1951, the debtor paid
P101.91, thus leaving a balance of P650.00, which the
taxpayer charged off as bad debt in the same year. In 1952,
the debtor made another payment of P150.00.

The original account was P2,705.87, when, in 1950, it was
turned over for collection to counsel for Goodrich (p. 156,
CTA Records). Counsel began sending letters of collection in
April 1950. Interior Caltex made partial payments, so that as
of December, 1951, the balance outstanding was
P1,505.87.lawphil.net The debtor paid P200, in 1952;
P113.20, in 1954; P750.00, in 1961; and P300.00.00 in 1962.
The account had been written off as bad debt in 1951.

Ordinance Service, P.A. (P386.42):
In 1949, the outstanding account of this government agency
was P817.55. Goodrich's counsel sent demand letters (Exh.
B-8). In 1951, it paid Goodrich P431.13. The balance of
P386.42 was written off as bad debt that same year.
Ordinance Service, P.C. (P796.26):
In 1950, the account was P796.26.lawphil It was referred to
counsel for collection. In 1951, the account was written off
as a debt. In 1952, the debtor paid it in full.
National Land Settlement Administration (P3,020.76):
The outstanding account in 1949 was P7,041.51. Collection
letters were sent (Exh. B-7). In 1951, the debtor paid
P4,020.75, leaving a balance of P3,020.76, which was written
off, that same year, as a bad debt. This office was under
liquidation, and its Board of Liquidators promised to pay
when funds shall become available.
National Coconut Corporation (P644.74):
This account had been outstanding since 1949. Collection
letters were sent (Exh. B-12) without success. It was written
off as bad debt in 1951, while the corporation was under a
30 CHAPTER
V: DEDUCTIONS
Board
of Liquidators,
which promised to pay upon availability
of funds. In 1961, the debt was fully paid.
Interior Caltex Service Station (P1,505.87):

Allowed by SC:
San Juan Auto Supply (P4,530.64):
This account was contracted in 1950. Referred, for
collection, to respondent's counsel, the latter secured no
payment. In November, 1950, the corresponding suit for
collection was filed (Exh. C). The debtor's counsel was
allowed to withdraw, as such, the debtor having failed to
meet him. In fact, the debtor did not appear at the hearing
of the case.lawphil.net Judgment was rendered in 1951 for
the creditor (Exh. C-2). The corresponding writ of execution
(Exh. C-3) was returned unsatisfied, for no properties could
be attached or levied upon.
PACSA

(P45.36),

Philippine Naval Patrol

(P14.18),

Surplus Property Commission (P277.68),
Alvarez Auto Supply

(P285.62):

These four (4) accounts were 2 or 3 years old in 1951. After
the collectors of the creditor had failed to collect the same,
its counsel wrote letters of demand (Exhs. B-10, B-11, B-6
and B-2) to no avail. Considering the small amounts involved

[CHAPTER V: DEDUCTIONS] 31

in these accounts, the taxpayer was justified in feeling that
the unsuccessful efforts therefore exerted to collect the
same sufficed to warrant their being written off.3
Lion Shoe Store

(P11,686.93),

Ruiz Highway Transit

(P2,350.00),
and

Esquire Auto Seat Cover

(P3,536.94):

These three (3) accounts were among those referred to
counsel for Goodrich for collection. Up to 1951, when they
were written off, counsel had sent 17 Letters of demand to
Lion Shoe Store (Exh. B); 16 demand letters to Ruiz Highway
Transit (Exh. B-1); and 6 letters of demand to Esquire Auto
Seat Cover (Exit. B-5) In 1951, Lion Shoe Store, Ruiz Highway
Transit, and Esquire Auto Seat Cover had made partial
payments in the sums of P1,050.00, P400.00, and P300.00
respectively. Subsequent to the write-off, additional small
payments were made and accounted for as income of
Goodrich. Counsel interviewed the debtors, investigated
their ability to pay and threatened law suits. He found that
the debtors were in strained financial condition and had no
attachable or leviable property. Moreover, Lion Shoe Store
was burned twice, in 1948 and 1949. Thereafter, it continued
to do business on limited scale. Later; it went out of
business. Ruiz Highway Transit, had more debts than assets.
Counsel, therefore, advised respondent to write off these
accounts as bad debts without going to court, for it would be
"foolish to spend good money after bad."
PHILIPPINE REFINING CO ( UNILEVER COMPANY) v CA
FACTS:Philippine Refining Corp (PRC) was assessed deficiency tax
payments for the year 1985 in the amount of around 1.8M. This
figure was computed based on the disallowance of the claim of bad

Taxation 1- SY 2015-2016 (Zarate)

debts by PRC. PRC duly protested the assessment claiming that
under the law, bad debts and interest expense are allowable
deductions.
When the BIR subsequently garnished some of PRC’s properties, the
latter considered the protest as being denied and filed an appeal to
the CTA which set aside the disallowance of the interest expense
and modified the disallowance of the bad debts by allowing 3
accounts to be claimed as deductions. However, 13 supposed “bad
debts” were disallowed as the CTA claimed that these were not
substantiated and did not satisfy the jurisprudential requirement of
“worthlessness of a debt” The CA denied the petition for review.
ISSUE: Whether or not the CA was correct in disallowing the 13
accounts as bad debts.
RULING:YES.
Both the CTA and CA relied on the case of Collector vs. Goodrich
International, which laid down the requisites for “worthlessness of
a debt” to wit:
In said case, we held that for debts to be considered as "worthless," and
thereby qualify as "bad debts" making them deductible, the taxpayer should
show that (1) there is a valid and subsisting debt. (2) the debt must be
actually ascertained to be worthless and uncollectible during the
taxable year; (3) the debt must be charged off during the taxable year;
and (4) the debt must arise from the business or trade of the taxpayer.
Additionally, before a debt can be considered worthless, the taxpayer
must also show that it is indeed uncollectible even in the future.
Furthermore, there are steps outlined to be undertaken by the taxpayer to
prove that he exerted diligent efforts to collect the debts, viz.: (1) sending of
statement of accounts; (2) sending of collection letters; (3) giving the
account to a lawyer for collection; and (4) filing a collection case in
court.

32

[CHAPTER V: DEDUCTIONS]

PRC only used the testimony of its accountant Ms. Masagana in order to
prove that these accounts were bad debts. This was considered by all 3
courts to be self-serving. The SC said that PRC failed to exercise due
diligence in order to ascertain that these debts were uncollectible. In fact,
PRC did not even show the demand letters they allegedly gave to some of
their debtors.

BASILAN ESTATES INC. vs. CIR and CTA (depreciation)
FACTS:
CIR, per examiners' report of February 19, 1959, assessed
Basilan Estates, Inc., a deficiency income tax of P3,912 for
1953 and P86,876.85 as 25% surtax on unreasonably
accumulated profits as of 1953 pursuant to Section 25 of the
Tax Code. Basilan Estates, Inc. filed before the CTA a petition
for review of the Commissioner's assessment, alleging
prescription of the period for assessment and collection;
error in disallowing claimed depreciations, travelling and
miscellaneous expenses; and error in finding the existence of
unreasonably accumulated profits and the imposition of 25%
surtax thereon.
BEI claimed deductions for the depreciation of its assets up
to 1949 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.
32 CHAPTER
V: DEDUCTIONS

Upon investigation and examination of taxpayer's books and
papers, the CIR found that the reappraised assets
depreciated in 1953 were the same ones upon which
depreciation was claimed in 1952. And for the year 1952, the
Commissioner had already determined, with taxpayer's
concurrence, the depreciation allowable on said assets to be
P36,842.04, computed on their acquisition cost at rates fixed
by the taxpayer. Hence, the Commissioner pegged the
deductible depreciation for 1953 on the same old assets at
P36,842.04 and disallowed the excess thereof in the amount
of P10,500.49.
ISSUE: W/N depreciation shall be determined on the
acquisition cost or on the reappraised value of the assets.
HELD: It shall be determined on the acquisition cost.
Depreciation is the gradual diminution in the useful value of
tangible property resulting from wear and tear and normal
obsolescense. The term is also applied to amortization of the
value of intangible assets, the use of which in the trade or
business is definitely limited in duration. Depreciation
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.
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.

[CHAPTER V: DEDUCTIONS] 33

Moreover, 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.
Accordingly, the claim for depreciation beyond P36,842.04 or
in the amount of P10,500.49 has no justification in the law.
The determination, therefore, of the Commissioner of
Internal Revenue disallowing said amount, affirmed by the
Court of Tax Appeals, is sustained.
ZAMORA v CIR

Mariano Zamora and his deceased sister Felicidad Zamora, bought a
piece of land located in Manila on May 16, 1944, for P132,000.00
and sold it for P75,000.00 on March 5, 1951. They also purchased a
lot located in Quezon City for P68,959.00 on January 19, 1944,
which they sold for P94,000 on February 9, 1951. The CTA ordered
the estate of the late Felicidad Zamora (represented by Esperanza
A. Zamora, as special administratrix of her estate), to pay the sum
of P235.50, representing alleged deficiency income tax and
surcharge due from said estate.

Petitioner Mariano Zamora alleges that the CTA erred in disallowing
3-½% per annum as the rate of depreciation of the Bay View Hotel
Building but only 2-½%. In justifying depreciation deduction of 3-½
%, Mariano Zamora contends that (1) the Ermita District, where the
Bay View Hotel is located, is now becoming a commercial district;
(2) the hotel has no room for improvement; and (3) the changing
modes in architecture, styles of furniture and decorative designs,
"must meet the taste of a fickle public".

FACTS:
ISSUE: w/n the depreciation rate 2-1/2% is correct? YES
Mariano Zamora, owner of the Bay View Hotel and Farmacia
Zamora, filed his income tax returns. The CIR found that he failed
to file his return of the capital gains derived from the sale of
certain real properties and claimed deductions which were not
allowable. The collector required him to pay deficiency income
tax. On appeal by Zamora, the CTA reduced the amount of
deficiency income tax.

Cases Nos. L-15289 and L-15281

Taxation 1- SY 2015-2016 (Zarate)

HELD:
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 satisfy these requirements. Claim for the deduction of
promotion expenses or entertainment expenses must also be

34

[CHAPTER V: DEDUCTIONS]

substantiated or supported by record showing in detail the amount
and nature of the expenses incurred.

It is a fact, however, that the CTA, in estimating the reasonable
rate of depreciation allowance for hotels made of concrete and
steel at 2-½%, the three factors just mentioned had been taken
into account already. Said the CTA—
Normally, an average hotel building is estimated to have a useful
life of 50 years, but inasmuch as the useful life of the building for
business purposes depends to a large extent on the suitability of
the structure to its use and location, its architectural quality, the
rate of change in population, the shifting of land values, as well as
the extent and maintenance and rehabilitation. It is allowed a
depreciation rate of 2-½% corresponding to a normal useful life of
only 40 years (1955 PH Federal Taxes, Par 14 160-K). Consequently,
the stand of the petitioners can not be sustained.
As the lower court based its findings on Bulletin F, petitioner
Zamora, argues that the same should have been first proved as a
law, to be subject to judicial notice. Bulletin F, is a publication of
the US Federal Internal Revenue Service, which was made after a
study of the lives of the properties. In the words of the lower
court: "It contains the list of depreciable assets, the estimated
average useful lives thereof and the rates of depreciation allowable
for each kind of property. (See 1955 PH Federal Taxes, Par. 14, 160
to Par. 14, 163-0)

It is true that Bulletin F has no binding force, but it has a strong
persuasive
effect considering
that the same has been the result of
34 CHAPTER
V: DEDUCTIONS
scientific studies and observation for a long period in the United
States after whose Income Tax Law ours is patterned." Verily, courts
are permitted to look into and investigate the antecedents or the

legislative history of the statutes involved (Director of Lands v.
Abaya, et al., 63 Phil. 559). Zamora also contends that his basis for
applying the 3-½% rate is the testimony of its witness Mariano
Katipunan, who cited a book entitled "Hotel Management —
Principles and Practice" by Lucius Boomer, President, Hotel Waldorf
Astoria Corporation. As well commented by the Solicitor General,
"while the petitioner would deny us the right to use Bulletin F, he
would insist on using as authority, a book in Hotel management
written by a man who knew more about hotels than about taxation.
All that the witness did (Katipunan) . . . is to read excerpts from
the said book (t.s.n. pp. 99-101), which admittedly were based on
the decision of the U.S. Tax Courts, made in 1928 (t.s.n. p. 106)".
The 2-½% rate of depreciation of the Bay View Hotel building, is
approximately correct.

US vs LUDLEY
FACTS:
▪ Ludey brought this suit in the Court of Claims to recover an amount
exacted as additional taxes for 1917. The tax was assessed on the alleged
gain from a sale in 1917 of oil mining properties which had been owned
and operated by him for several years. The Commissioner of Internal
Revenue determined that there was a gain on the sale of $26,904.15.
Ludey insists that there was a loss of $14,777.33. The amount sued for is
the tax assessed on the difference.
▪ The aggregate original cost of the properties was $95,977.33. Of this
amount, $30,977.33 was the cost of th equipment used in the business;
$65,000 the cost of the oil reserves. The 1917 sale price was $81,200.
▪ CIR: Gain/Loss computed after deduction the depreciation/depletion
expenses.– the Commissioner deducted from the original cost $10,465.16
on account of depreciation of the equipment through wear and tear, and
$32,258.81 on account of depletion of the reserves through the taking out
of oil by the plaintiff, after March 1, 1913. In operating the properties,

[CHAPTER V: DEDUCTIONS] 35

Ludey disposed, in the form of oil, of part of his capital assets; that, in the
extraction of the oil, he consumed so much of the equipment as was
represented by the depreciation, and disposed of so much of the oil
reserves as was represented by the depletion; that the sale of the
properties made by him in 1917 was not a sale of all of the property
represented by the original cost of $95,977.33, since physical equipment
to the amount of the depreciation and oil reserves to the amount of the
depletion had been taken from it during the preceding years, and that, for
this reason, the cost to plaintiff of the net property sold in 1917 was not
$95,977.33, but $53,258.36.

was the gain or the loss depends primarily upon whether
deductions for depletion and depreciation are to be made
from the original cost in determining gain or loss on sale of
oil mining properties. The question is one of statutory
construction or application. The Court of Claims entered
judgment for the plaintiff.

▪ COURT OF CLAIMS: No deduction should be made – It held that no
deduction from original cost should be made here, because of the nature
of oil mining properties. It held that the depreciation was not deductible,
because wear and tear of equipment was an expense or incident of the
business.

ISSUE: Whether or not depreciation of the mining e-uipment
should be deducted on the cost of the same to determine
whether there was a gain or loss on the sale of the said
equipment.

US vs. LUDLEY
DOCTRINE
Depreciation should be taken into account in determining
whether there is a loss or gain in sale of properties for
purposes of income taxation.
FACTS
Ludey brought this suit in the Court of Claims to recover an
amount exacted as additional taxes for 1917. The tax was
assessed on the alleged gain from a sale in 1917 of oil mining
properties which had been owned and operated by him for
several years. The Commissioner of Internal Revenue
determined that there was a gain on the sale of $26, 904.15.
Ludey insists that there was a loss of $14,777.33. The amount
sued for is the tax assessed on the difference. ,hether there

Taxation 1- SY 2015-2016 (Zarate)

RULING: YES
Until 1924, none of the revenue Acts provided in terms that
in computing the gain from a sale of  any property' a
deduction shall be made from the original cost on account of
depreciation and depletion during the period of operation.
But ever since March 1,1913, the revenue acts have required
that gains from sales made within the tax year shall be
included in the taxable income of the year' and that losses on
sales may be deducted from gross income. We are of opinion
that the revenue acts should be construed as requiring
deductions for both depreciation and depletion when
determining the original cost of oil properties sold. The
depreciation charge permitted as a deduction from the gross
income in determining the taxable income of a business for
any year represents the reduction during the year' of the

36

[CHAPTER V: DEDUCTIONS]

capital assets through wear and tear of the plant used. The
amount of the allowance for depreciation is the sum which
should be set aside for the taxable year' in order that at the
end of the useful life of the plant in the business the
aggregate of the sums set aside will (with the salvage value)
suffice to provide an amount equal to the original cost. The
theory underlying this allowance for depreciation is that by
using up the plant a gradual sale is made of it. The
depreciation charged is the measure of the cost of the part
which has been sold. When the plant is disposed of after
years of use' the thing then sold is not the whole thing
originally acquired. The amount of the depreciation must be
deducted from the original cost of the whole in order to
determine the cost of that disposed of in the final sale of
properties. Any other construction would permit a double
deduction for the loss of the same capital assets.
DISPOSITIVE
The decision of the Court of Claims is reversed and the case
is remanded for further proceeding to determine the right
amount of depreciation.

Roxas vs. CTA
GR No. L-25043 | April 26, 1968
Facts:
· 36 CHAPTER
Don Pedro
and Dona Carmen Ayala, both Spanish,
V:Roxas
DEDUCTIONS
transmitted to their grandchildren by hereditary succession the
following properties:

a.
Agricultural lands with a total area of 19,000 hectares in
Nasugbu, Batangas
Tenants who have been tilling the lands expressed their desire to
purchase from Roxas y Cia, the parcels which they actually occupied
The govt, in line with the constitutional mandate to acquire big
landed estates and apportion them among landless tenants-farmers,
persuaded the Roxas brothers to part with their landholdings
The brothers agreed to sell 13,500 hec to the govt for P2.079Mn,
plus 300K survey and subdivision expenses
Unfortunately, the govt did not have funds
A special arrangement was made with the Rehabilitation Finance
Corporation to advance to Roxas y Cia the amount of P1.5Mn as
loan
Under the arrangement, Roxas y Cia. allowed the farmers to buy the
lands for the same price but by installment, and contracted with the
RFC to pay its loan from the proceeds of the yearly amortizations
paid by the farmers
In 1953 and 1955, Roxas y Cia. derived from said installment
payments a net gain of P42,480.83 and P29,500.71. 50% of said net
gain was reported for income tax purposes as gain on the sale of
capital asset held for more than one year pursuant to Sec. 34 of the
Tax Code

b.
Residential house and lot at Wright St., Malate, Manila
After the marriage of Antonio and Eduardo, Jose lived in the house
where he paid rentals of 8K/year to Roxas y Cia
c.

Shares of stocks in different corporations

[CHAPTER V: DEDUCTIONS] 37

To manage the properties, Antonio Roxas, Eduardo Roxas and Jose
Roxas, the children, formed a partnership called Roxas y Compania
On 1958, CIR demanded from Roxas y Cia the payment of real
estate dealer's tax for 1952 amtg to P150.00 plus P10.00 compromise
penalty for late payment, and P150.00 tax for dealers of securities
plus P10.00 compromise penalty for late payment.
Basis: house rentals received from Jose, pursuant to Art. 194 of the
Tax Code stating that an owner of a real estate who derives a yearly
rental income therefrom in the amount of P3,000.00 or more is
considered a real estate dealer and is liable to pay the corresponding
fixed tax
The Commissioner further assessed deficiency income taxes against
the brothers for 1953 and 1955, resulting from the inclusion as
income of Roxas y Cia of the unreported 50% of the net profits
derived from the sale of the Nasugbu farm lands to the tenants, and
the disallowance of deductions from gross income of various
business expenses and contributions claimed by Roxas y Cia and the
Roxas brothers
The brothers protested the assessment but was denied, thus appealing
to the CTA
·
CTA decision: sustained the assessment except the demand for
the payment of the fixed tax on dealer of securities and the
disallowance of the deductions for contributions to the Philippine Air
Force Chapel and Hijas de Jesus' Retiro de Manresa
Issue: Should Roxas y Cia be considered a real estate dealer because
it engaged in the business of selling real estate
Ruling: NO, being an isolated transaction

Taxation 1- SY 2015-2016 (Zarate)

Real estate dealer: any person engaged in the business of buying,
selling, exchanging, leasing or renting property on his own account
as principal and holding himself out as a full or part-time dealer in
real estate or as an owner of rental property or properties rented or
offered to rent for an aggregate amount of three thousand pesos or
more a year:
Section 194 of the Tax Code, in considering as real estate dealers
owners of real estate receiving rentals of at least P3,000.00 a year,
does not provide any qualification as to the persons paying the
rentals
The fact that there were hundreds of vendees and them being paid for
their respective holdings in installment for a period of ten years, it
would nevertheless not make the vendor Roxas y Cia. a real estate
dealer during the 10-year amortization period
The sale of the Nasugbu farm lands to the very farmers who tilled
them for generations was not only in consonance with, but more in
obedience to the request and pursuant to the policy of our
Government to allocate lands to the landless
It was the duty of the Government to pay the agreed compensation
after it had persuaded Roxas y Cia. to sell its haciendas, and to
subsequently subdivide them among the farmers at very reasonable
terms and prices. But due to the lack of funds, Roxas y Cia.
shouldered the Government's burden, went out of its way and sold
lands directly to the farmers in the same way and under the same
terms as would have been the case had the Government done it itself.
The power of taxation is sometimes called also the power to destroy.
Therefore it should be exercised with caution to minimize injury to
the proprietary rights of a taxpayer. It must be exercised fairly,
equally and uniformly

38

[CHAPTER V: DEDUCTIONS]

Therefore, Roxas y Cia. cannot be considered a real estate dealer for
the sale in question. Hence, pursuant to Section 34 of the Tax Code
the lands sold to the farmers are capital assets, and the gain derived
from the sale thereof is capital gain, taxable only to the extent of
50%
As to the deductions
a.
P40 tickets to a banquet given in honor of Sergio Osmena and
P28 San Miguel beer given as gifts to various persons –
representation expenses
·
Representation expenses: deductible from gross income as
expenditures incurred in carrying on a trade or business
·
In this case, the evidence does not show such link between the
expenses and the business of Roxas y Cia
b.
Contributions to the Pasay police and fire department and
other police departments as Christmas funds
·
Contributions to the Christmas funds are not deductible for the
reason that the Christmas funds were not spent for public purposes
but as Christmas gifts to the families of the members of said entities
·
Under Section 39(h), a contribution to a government entity is
deductible when used exclusively for public purposes
·
As to the contribution to the Manila Police trust fund, such is
an allowable deduction for said trust fund belongs to the Manila
Police, a government entity, intended to be used exclusively for its
public functions.
c.
Contributions to the Philippines Herald's fund for Manila's
neediest families
CHAPTER
V: DEDUCTIONS
· 38 The
contributions
were not made to the Philippines Herald but
to a group of civic spirited citizens organized by the Philippines
Herald solely for charitable purposes

·
There is no question that the members of this group of citizens
do not receive profits, for all the funds they raised were for Manila's
neediest families. Such a group of citizens may be classified as an
association organized exclusively for charitable purposes mentioned
in Section 30(h) of the Tax Code
d.
Contribution to Our Lady of Fatima chapel at the FEU
·
University gives dividends to its stockholders
·
Located within the premises of the university, the chapel in
question has not been shown to belong to the Catholic Church or any
religious organization
·
The contributions belongs to the Far Eastern University,
contributions to which are not deductible under Section 30(h) of the
Tax Code for the reason that the net income of said university injures
to the benefit of its stockholders
No deficiency income tax is due for 1953 from Antonio Roxas,
Eduardo Roxas and Jose Roxas. For 1955 they are liable to pay
deficiency income tax in the sum of P109.00, P91.00 and P49.00,
respectively

*Items not Deductible
G.R. No. L-26911 January 27, 1981
AT L A S C O N S O L I D AT E D M I N I N G & D E V E L O P M E N T
CORPORATION, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

[CHAPTER V: DEDUCTIONS] 39

G.R. No. L-26924 January 27, 1981
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
AT L A S C O N S O L I D AT E D M I N I N G & D E V E L O P M E N T
CORPORATION and COURT OF TAX APPEALS, respondents.

FACTS:
This tax case (CTA No. 1312) arose from the 1957 and 1958
deficiency income tax assessments made by the
Commissioner of Internal Revenue, where the Atlas
Consolidated Mining and Development Corporation, was
assessed P546,295.16 for 1957 and P215,493.96 for 1958
deficiency income taxes.
Atlas is a corporation engaged in the mining industry
registered under the laws of the Philippines. On August 20,
1962, the Commissioner assessed against Atlas the sum of
P546,295.16 and P215,493.96 or a total of P761,789.12 as
deficiency income taxes for the years 1957 and 1958. For the
year 1957, it was the opinion of the Commissioner that Atlas
is not entitled to exemption from the income tax under
Section 4 of Republic Act 909 because same covers only gold
mines.

Taxation 1- SY 2015-2016 (Zarate)

For the year 1958, the assessment of deficiency income tax
of P761,789.12 covers the disallowance of items claimed by
Atlas as deductible from gross income.
On October 25, 1962, the Secretary of Finance ruled that the
exemption provided in Republic Act 909 embraces all new
mines and old mines whether gold or other minerals.
Commissioner recomputed Atlas deficiency income tax
liabilities in the light of the ruling of the Secretary of
Finance. On June 9, 1964, the Commissioner issued a revised
assessment entirely eliminating the assessment of
P546,295.16 for the year 1957. The assessment for 1958 was
reduced from P215,493.96 to P39,646.82 from which Atlas
appealed to the Court of Tax Appeals, assailing the
disallowance of the following items claimed as deductible
from its gross income for 1958.

CTA: allowed the ff as deductions: Transfer agent's fee, U.S.
stock listing expenses, Provision for contingencies EXCEPT
Stockholders relation service fee and suit expenses.

ISSUE: WON the expenses paid for the services rendered by a
public relations firm P.K MacKer & Co. labelled as
stockholders relation service fee is an allowable deduction as
business expense under Section 30 (a) (1) of the National
Internal Revenue Code.

40

[CHAPTER V: DEDUCTIONS]

HELD: NO.
The principle is recognized that when a taxpayer claims a
deduction, he must point to some specific provision of the
statute in which that deduction is authorized and must be
able to prove that he is entitled to the deduction which the
law allows. As previously adverted to, the law allowing
expenses as deduction from gross income for purposes of the
income tax is Section 30 (a) (1) of the National Internal
Revenue which allows a deduction of "all the ordinary and
necessary expenses paid or incurred during the taxable year
in carrying on any trade or business." An item of expenditure,
in order to be deductible under this section of the statute,
must fall squarely within its language.

To be deductible as a business expense, three conditions
are imposed, namely: (1) the expense must be ordinary
and necessary, (2) it must be paid or incurred within the
taxable year, and (3) it must be paid or incurred in
carrying in a trade or business. In addition, not only must
the taxpayer meet the business test, he must substantially
prove by evidence or records the deductions claimed
under the law, otherwise, the same will be disallowed. The
mere allegation of the taxpayer that an item of expense is
ordinary and necessary does not justify its deduction.

40 CHAPTER V: DEDUCTIONS

SC sustained the ruling of the tax court that the expenditure
of P25,523.14 paid to P.K. Macker & Co. as compensation for

services carrying on the selling campaign in an effort to sell
Atlas' additional capital stock of P3,325,000 is not an ordinary
expense in line with the decision of U.S. Board of Tax Appeals
in the case of Harrisburg Hospital Inc. vs. Commissioner of
Internal Revenue.

As held in the case of Vera vs. Fernandez, 30 this Court
emphatically said that taxes are the lifeblood of the
Government and their prompt and certain availability are
imperious need. Upon taxation depends the Government's
ability to serve the people for whose benefit taxes are
collected. To safeguard such interest, neglect or omission of
government officials entrusted with the collection of taxes
should not be allowed to bring harm or detriment to the
people, in the same manner as private persons may be made
to suffer individually on account of his own negligence, the
presumption being that they take good care of their personal
affair. This should not hold true to government officials with
respect to matters not of their own personal concern. This is
the philosophy behind the government's exception, as a
general rule, from the operation of the principle of estoppel.

G.R. No. L-13325             April 20, 1961
SANTIAGO GANCAYCO, petitioner, 

vs.

THE COLLECTOR OF INTERNAL REVENUE, respondent..
Facts:

[CHAPTER V: DEDUCTIONS] 41

Gancayco filed his Income tax Return (ITR) for 1949.
Ø CIR notified him that his liability is Php 9.793.62, which he paid
1950
Ø CIR after a year wrote to Gancayco saying that there was tax due
from him for a total of Php 29,554.05
Ø Gancayco asked for reconsideration and the tax assessed
wasreduced
Ø CIR issued a warrant of distraint for the deficient liability
Ø Gancayco filed petition with CTA
CTA: Required Gancayco to pay Php 16, 860.31 for tax deficiency
in1949
Gancayco: the right to collect the deficiency income tax is barred
by the statute of limitations.
The 5 yr period for judicial action should be counted from May 12
50, the date of original assessment SC: Section 316 provides: The
civil remedies for the collection of internal revenue taxes, fees, or
charges, and any increment thereto resulting from delinquency
shall be (a) by distraint of goods, chattels, or effects, and other
personal property of whatever character, including stocks and other
securities, debts, credits, bank accounts, and interest in and rights
to personal property, and by levy upon real property; and (b) by
judicial action. Either of these remedies or both simultaneously
may be pursued in the discretion of the authorities charged with
the collection of such taxes. No exemption shall be allowed against
the internal revenue taxes in any case.

Taxation 1- SY 2015-2016 (Zarate)

Deduction for expenses may be allowed, however in this case,
Gancayco was not able to prove any expense as there were no
receipts or other proofs. CTA AFFIRMED

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