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Commissioner of Internal Revenue vs. Vda.

De Prieto (1960)
FACTS:
On December 4, 1945, Consuelo L. Vda. De Prieto conveyed by way of gifts to her
four children (Antonio, Benito, Carmen and Mauro), real property with total
assessed value of 892,497.50.
CIR appraised the real property donated for gift tax purposes at 1,231.268.00, and
assessed the total sum of 117,706.50 as donors gift tax, interests and compromises
due thereon.
Of the total sum of 117,706.50 paid by Consuelo, the sum of 55,978.65 represents
the total interest on account of delinquency. Said sum of the total interest was
claimed as deduction by Consuelo in her 1954 income tax return.
CIR disallowed the claim and as a consequence, assessed Consuelo the total sum of
21,410.38 as deficiency income tax due on the aforesaid 55,978.65, including
interest up to March 1957, surcharge and compromise for the late payment.
Under the law, for interest to be deductible, it must be shown that there be an
indebtedness, that there should be interest upon it, and that what is claimed as an
interest deduction should have been paid or accrued within the year. It is here
conceded that the interest paid by Consuelo was in consequence of the late
payment of her donors tax, and the same was paid within the year it is sought to
be deducted.
To sustain the proposition that the interest payment is not deductible, CIR relies
heavily on section 80 of the Revenue Regulation No. 2( Income Tax Regulation)
promulgated by the Department of Finance, which provides that the word taxes
means taxes proper and no deductions should be allowed for amounts representing
interest, surcharge, or penalties incident to delinquency.
CTA reversed the decision of CIR.
ISSUES:
1. WON such interest was paid upon indebtedness within the contemplation of section
30(b) (1) of the Tax Code.
2. WON the interest paid for the late payment of the donors tax is deductible from the
gross income under section 30(b) of the Tax Code.
3. WON section 80 of the Revenue Regulation No. 2 is applicable in this case, thus the
deduction should not be allowed.
HELD:
1. Yes, the donors tax may be considered as indebtedness within the contemplation of
the Tax Code.
2. Yes, given that the donors tax may be considered as indebtedness, the interest paid
for the late payment of the donors tax is deductible from the gross income under
section 30(b) of the Tax Code.
3. No, section 80 of RR2 is not applicable in this case because the said section of RR2
pertains to or implements section 30(c) of the Tax Code, governing deduction of

taxes, and not section 30 (b) on deduction of interest on indebtedness, which is the
provision invoked by Consuelo.
RATIO:
1. The term indebtedness as used in the US Tax Code containing similar provisions
as in the Phil Tax Code has been defined as an unconditional and legally
enforceable obligation for the payment of money. Within the meaning of that
definition, it is apparent that a tax may be considered an indebtedness. As stated by
the SC in the case of Santiago Sambrano vs. CTA and CIR: Although taxes
already due have not, strictly speaking, the same concept as debts, they are,
however, obligations that may be considered as such.
2. This conclusion finds support in the established jurisprudence in the US. Under
section 23(b) of the Internal Revenue Code of 1939, as amended, which contains
similarly worded provisions as section 30(b) of Phil Tax Code, the uniform ruling
in the US jurisprudence is that interest on taxes is interest on indebtedness and is
deductible. This rule applies even though the tax is nondeductible, like the donors
tax.
3. Section 80 is inapplicable to the instant case because while it implements section
30(c) of the Tax Code governing deduction of taxes, Consuelo seeks to come under
section 30(b) providing for deduction of interest on indebtedness.
In conclusion, the SC is of the opinion that although interest payment for delinquent
taxes is not deductible as tax under section 30(c) of the Tax Code and Section 80 of
RR2, the taxpayer is not precluded thereby from claiming said interest payment as
deduction under section (b) of the same code.
Dispositive: CTAs decision AFFIRMED.

Collector of Internal Revenue vs. Goodrich International Rubber Co.


(1967)
FACTS:
CIR assessed Goodrich the sums of 14,128 and 8,439.00 as deficiency income taxes
for the years 1951 and 1952, respectively.
The assessments were based on disallowed deductions, claimed by Goodrich,
consisting of 18 bad debts, in the aggregate sum of 50,455.41 for 1951 and the
sum of 30,138.88 as representation expenses allegedly incurred in 1952.
Initially, the CTA only set aside the assessments on the bad debts, but upon the
Motion for Reconsideration and New Trial, the CTA likewise set aside the
assessments on the deduction for the representation expenses.
CIR appealed the decision of the CTA.
ISSUES:
1. WON the CTA erred in allowing the deduction claimed by Goodrich for the
representation expenses.
2. WON the CTA erred in allowing the deduction claimed by Goodrich for the 18
bad debts.
HELD/RATIO:
1. Yes, the CTA erred in allowing the deduction for the representation expenses. The
claim for this deduction was based upon receipts issued not by the entities (Elks
Club, Manila Polo Club, Army and Navy Club, Manila Golf Club, Wack Wack
Golf Club, and Casino Espaflol) in which the alleged expenses had been incurred,
but by the officers of Goodrich who allegedly paid them. The receipts issued by the
officers of Goodrich merely attest to their claim that they incurred and paid said
expenses, but do not establish payment of said alleged expenses to the entities in
which the same are said to have been incurred.
2. CTA erred in allowing the deduction for 10 of the 18 debts, while it properly
allowed the deductions for the remaining 8 bad debts.
The claim for deduction for 10 of the bad debts (debts of Portillos Auto Seat
Cover, Visayan Rapid Transit, Bataan Auto Seat Cover, Tres Amigos Auto
Supply, P.C. Teodoro, Ordinance Service, P.A., Ordinance Service, P.C.,
National Land Settlement Administration, National Coconut Corporation and
Interior Caltex Service Station) should be rejected. Goodrich has not
established either that the debts are actually worthless or that it had
reasonable grounds to believe them to be so in 1951.
The requirement of ascertainment of worthlessness requires proof of two
facts:
(1) that the taxpayer did in fact ascertain the debt to be worthless, in the year for
which the deduction is sought;
(2) that, in so doing, he acted in good faith.

SC held that good faith is not enough. Taxpayer must also show 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 accounts had been characterized as bad debts,
merely stresses the undue haste with which the same had been written off. At any
rate, Goodrich has not proven that the 10 debts were worthless. There is no
evidence that the debtors cannot pay. It should also be noted that in violation of
RR2, Section 102, Goodrich had not attached to its income tax returns a statement
showing the propriety of the deductions therein made for the 10 bad debts.
The claim for deduction for the remaining 8 bad debts (San Juan Auto Supply,
PACSA, Phil Naval Patrol, Surplus Property Commision, Alvarez Auto Supply,
Lion Shoe Store, Ruiz Highway Transit and Esquire Auto Seat Cover) was
proper because:
1. It was proved that Goodrich had filed a case against San Juan Auto
Supply for the collection of the sum and judgment was rendered in
favor of Goodrich in 1951. The corresponding writ of execution was
returned unsatisfied, for no properties could be attached or levied upon.
2. The PACSA, Phil Naval Patrol, Surplus Property Commission and
Alvarez Auto Supply accounts were 2 or 3 years old in 1951.
Considering the small amounts involved in these accounts
(45.36,14.18, 277.68 and 258.62 respectively), the taxpayer was
justified in feeling that the unsuccessful efforts exerted to collect the
same (letters of demands sent by their counsel) sufficed to warrant their
being written off.
3. The Lion Shoe Store, Ruiz Highway Transit and Esquire Auto Seat
Cover accounts have been referred to their counsel for collection. Up to
1951, when they were written off, counsel sent 17 letters of demand to
Lion, 16 demand letters to Ruiz and 6 to Esquire. Counsel interviewed
the debtors, investigated their ability to pay and threatened with law
suits. Counsel found that debtors were in strained financial condition
and had no attachable property. Moreover, Lion was burned twice,
thereafter continued to do business on limited scale, and later, went out
of business. Ruiz, on the other hand, had more debts than assets.
Thus, deduction for these 8 accounts, aggregating 22,627.38 as bad debts should
be allowed.
Dispositive: Decision Modified. Representation expenses are totally disallowed.
Claim for Bad debts allowed only up to the sum of 22,627.35

3.

Zamora vs. Collector of Internal Revenue (1963)


*Joint decision on 4cases that practically involved the same issues. Issue
relevant to our topic is the issue on the rate of depreciation of the Bay
View Hotel Building.
FACTS:
In Cases Nos. L-15290 and L-15280, Mariano Zamora, owner of Bay View Hotel
and Framacia Zamora filed his income tax returns for 1951 and 1952. 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. CIR required him
to pay 43,758.50 and 7,625.00 as deficiency income tax for 1951 and 1952,
respectively. CTA modified the assessment, reducing the sums to 22,980.00 and
7,278.00. Zamora appealed alleging that CTA erred in:
1. Disallowing 10,478.50 as promotion expenses incurred by his wife for
the promotion of Bay View Hotel and Farmacia Zamora
2. Disallowing 3.5% per annum as the rate of depreciation of the Bay
View Hotel Building
3. Disregarding the price stated in the deed of sale, as the costs of a
Manila property, for the purpose of determining capital gains
4. In applying the Ballantyne scale of values in determining the cost of
said property.
In cases No. L-15289 and L-15281, Mariano and his deceased sister Felicidad
bought a piece of land in Manila on May 16, 1944, for 132,000 and sold it for
75,000 on March 5, 1951. They also purchased a lot in QC for 68,959 on January
19,1944, which they sold for 94,000 on Feb 9, 1951. The CTA ordered the estate of
Felicidad to pay 235, representing alleged deficiency income tax and surcharge.
Estate of Felicidad appealed alleging that CTA erred:
1. In disregarding the price stated in the deed of sale as the cost of the
Manila Property for the purposes of determining alleged capital gains
2. In applying the Ballantyne Scale of values in determining the cost
thereof.
In all the cases, the CIR also appealed alleging mainly that the CTA erred in giving
credence to the uncorroborated testimony of Mariano that he bought the real
properties involved during the Japanese occupation, partly in genuine Phil currency
and partly in Japanese war notes.

ISSUES:
1. WON the CTA erred in disallowing 10,478.50 as promotion expenses
incurred by Marianos wife in promoting Bay View and Farmacia Zamora
in USA and Japan.
2. WON the CTA erred in disallowing 3.5% per annum as the rate of
depreciation of the Bay View Hotel Building and allowing only 2.5%
per annum as the rate of depreciation.

WON CTA erred in giving credence to the uncorroborated testimony of


Mariano that he bought the real properties involved (Manila and QC
properties) during the Japanese occupation, partly in genuine Phil currency
and partly in Japanese war notes.

HELD/RATIO:
1.

2.

CTA did not err in disallowing the 10,478.50 claim for deduction as
promotion expenses and allowing only a deduction of 5,000 or 50% of the
claimed promotion expenses. Mariano was not able to prove through
receipts that said expenses were indeed incurred for the promotion of the
pharmacy and the hotel. The CTA also found that for the said trip, Mrs.
Zamora obtained only 5,000 from Central Bank and in her application for
dollar allocation, she stated that she was going abroad on a combined
medical and business trip. There having been no means by which to
ascertain which expense was incurred by her in connection with the
business and which was incurred for her personal benefit (due to the
absence of receipts), the Collector and CTA correctly considered only 50%
of the whole amount as pertaining to the promotion expenses.
No, the CTA did not err in holding that the rate of depreciation of the
Bay View Building is 2.5% per annum and not 3.5% per annum.
In justifying depreciation deduction of 3.5%, Mariano contended that (1)
Ermita District, where Bay View 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. Mariano also contended that his basis for
applying the 3.5% 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.
All the three factors mentioned by Mariano above were taken into account
by the CTA in estimating the reasonable rate of depreciation allowance for
hotels made of concrete and steel, like the Bay View Hotel, at 2.5%. Unlike
Mariano who based his estimated rate on a book, the CTA based its findings
on Bulletin F, a publication of the US Federal Internal Revenue Service,
which was made after a study of the lives of the properties. It is true that
Bulletin F has no binding force, but it has strong persuasive effect
considering that the same has been the result of scientific studies and
observation for a long period in the US 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.

3.

CTA did not err in giving credence to the uncorroborated testimony of


Mariano that he bought the real properties involved during the Japanese

occupation, partly in genuine Phil currency and partly in Japanese war


notes. The SC examined the facts thoroughly and is inclined to give
credence to the allegation of Mariano. In the first place, the Farmacia
Zamora owned by Mariano continued to engage in business during the war
years and a considerable portion of its sales was paid in genuine Phil
currency. In the second place, 132,000 in Japanese war notes in May 1944
is equivalent to only 11,000. The Manila property in question had at the
time an assessed value of 27,031.00 (Phil currency). Considering the well
known fact that the assessed value of real property is very much below the
fair market value, it is incredible that the property will be sold by the owner
for less than one-half of its assessed value. These facts convinced the court
of the veracity of the allegation that of the purchase price of 132,000 the

sum of 66,000 was paid in Phil currency, so that only the sum of 66,000 was
paid in Japanese War notes.