HOSPITAL DE SAN JUAN DE DIOS, INC.

VS. CIR
FACTS:
Petitioner Hospital de San Juan, Inc is engaged in the operation of a hospital and nursing
school. The income derived therefrom is exempt from income tax, while the rest of
petitioners income is subject thereto. Its taxable or non-operating income consists of
rentals, interest and dividends received from its properties and investments. In the
computation of its taxable income from years 1952 to 1955, petitioner allowed all its
taxable income to share in the allocation of administrative expenses. Respondent
however, disallowed the interest and dividends from sharing in the allocation of
administrative expense on the ground that such expenses incurred in the administration or
management of petitioners investments are not allowable business expenses inasmuch as
they wer not incurred in carrying on any trade or business within the contemplation of
section 30(a)(1) of the Revenue code. Consequently, petitioner was assessed deficiency
income taxes for the years in question. Thus, this petition for review.
ISSUE:
Whether or not petitioner can consider those expenses incurred in the realization of
interest and dividends as deductions from its Gross Income.
Held:
No, interest and dividends cannot be considered deductions from its Gross Income as
these are not ordinary and necessary expenses.
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 are allowed as deductions
from Gross Income.
However, under the case at bar, petitioner failed to establish by competent proof that its
receipt of interest and dividends constituted the carrying of a trade or business so as to
warrant the deductibility of the expenses incurred in their realization. Such interest and
dividends received were merely incidental income to its main activity, which is the
operation of its hospital and nursing schools, hence the conclusion is inevitable that
petitioners activities never went beyond that of a passive investor, which under existing
jurisprudence do not come within the purview of carrying on any trade or business.