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ESSO STANDARD v. CIR [G.R. Nos. 28508-9. July 7, 1989.

FACTS: Petitioner ESSO claimed as ordinary and necessary expenses in the same return the
margin fees it paid to the Central Bank on its profit remittances to its New York head office.

ISSUE: WON the margin fees were deductible from gross income either as a tax or as an
ordinary and necessary business expense

HELD: Neither. The margin fees were imposed by the State in the exercise of its police
power and not the power of taxation. Neither are they necessary and ordinary business
expenses. To be deductible as a business expense, the expense must be paid or incurred in
carrying on a trade or business. The fees were paid for the remittance by ESSO as part of the
profits to the head office in the United States, which is already another distinct and separate
income taxpayer. Such remittance was an expenditure necessary and proper for the conduct
of its corporate affairs.

ZAMORA v. COLLECTOR [G.R. No. L-15290. May 31, 1963.]

FACTS: Mariano Zamora, owner of the Bay View Hotel and Farmacia Zamora, Manila, filed
his income tax returns. The Collector of Internal Revenue found that the promotion expenses
incurred by his wife for the promotion of the Bay View Hotel and Farmacia Zamora were not
allowable deductions. Mariano Zamora contends that the whole amount of the promotion
expenses in his income tax returns, should be allowed and not merely one-half of it, on the
ground that, while not all the itemized expenses are supported by receipts, the absence of

supporting receipts has been sufficiently and satisfactorily established.

ISSUE: In the absence of receipts, WON to allow as deduction all or merely one-half of the
promotion expenses of Mrs. Zamora claimed in Mariano Zamora's income tax returns

HELD: One-half only. Claims for the deduction of promotion expenses r entertainment
expenses must also be substantiated or supported by record showing in detail the amount
and nature of the expense incurred. Considering 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 as business expense and the other 50%, as her personal expenses. While in
situations like the present, absolute certainty is usually not possible, the CTA should make as
close an approximate as it can, bearing heavily, if it chooses, upon the taxpayer whose
inexactness is of his own making.

C.M. HOSKINS v. CIR G.R. No. L-28383. June 22, 1976.]

FACTS: Petitioner-appellant, a domestic corporation engaged in the development and

management of subdivisions, sale of subdivision lots and collection of installments due for a
fee which the real estate owners pay as compensation for each of the services rendered,
failed to pay the real estate broker's tax on its income derived from the supervision and
collection fees. Consequently, the Commissioner of Internal Revenue demanded the
payment of the percentage tax plus surcharge, contending that said income is subject to the
real estate broker's percentage tax. On the other hand, petitioner-appellant claimed that the
supervision and collection fees do not form part of its taxable gross compensation.

ISSUE: WON the supervision and collection fees received by a real estate broker are
deductible from its gross compensation

HELD: No. With respect to the collection fees, the services rendered by Hoskins in collecting
the amounts due on the sales of lots on the installment plan are incidental to its brokerage
service in selling the lots. If the broker's commissions on the cash sales of lots are subject to
the brokerage percentage tax, its commissions on installment sales should likewise be
taxable. As to the supervision fees for the development and management of the
subdivisions, which fees were paid out of the proceeds of the sales of the subdivision lots,
they, too, are subject to the

real estate broker's percentage tax. The development, management and supervision
services were necessary to bring about the sales of the lots and were inseparably linked
thereto. Hence, there is basis for holding that the operation of subdivisions is really
incidental to the main business of the broker, which is the sale of the lots on commission.

GANCAYCO v. COLLECTOR [G.R. No. L-13325. April 20, 1961.]

FACTS: Petitioner Santiago Gancayco seeks the review of a decision of the Court of Tax
Appeals, requiring him to pay deficiency income tax. The question whether the sum is due
from Gancayco as deficiency income tax hinges on the validity of his claim for deduction of
two (2)

items, namely: (a) for farming expenses; and (b) for representation expenses.

ISSUE: WON the two claimed deductions are allowable

HELD: No. In computing net income, no deduction shall be allowed in respect of any amount
paid out for new buildings or for permanent improvements, or betterments made to increase
the value of any property or estate. The cost of farm machinery, equipment and farm
building represents a capital investment and is not an allowable deduction as an item of
expense. Hence, the farming expenses allegedly incurred for clearing and developing the
farm which were necessary to place it in a productive state, were not an ordinary expense
but a capital

expenditure. Accordingly, they are not deductible. As for Gancayco's claim for representation
expenses, a fraction was disallowed. Such disallowance is justified by the record, for, apart
from the absence of receipts, invoices or vouchers of the expenditures, petitioner could not
specify the items constituting the same, or when or on whom or on what they were incurred.


FACTS: Don Carlos Palanca, Sr. donated in favor of his son, the petitioner, herein shares of
stock in La Tondea, Inc. amounting to 12,500 shares. For failure to file a return on the
donation within the statutory period, the petitioner was 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. The petitioner filed with the BIR his income tax return for the
calendar year 1955, claiming, among others, a deduction for interest amounting to
P9,706.45 and reporting a taxable income of P65,982.12. On the basis of this return, he was
assessed the sum of P21,052.91, as income tax, which he paid, as follows: Petitioner filed an
amended return for the calendar year 1955, claiming therein an additional deduction in the
amount of P47,868.70 representing interest paid on the donee's gift tax, thereby reporting a
taxable net income of P18,113.42 and a tax due thereon in the sum of P3,167.00. 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. BIR denied the claim. On August 12, 1958, the petitioner once more filed
an amended income tax return for the calendar 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. Again this was denied. CTA reversed.

ISSUE/S: 1) Whether the amount paid by respondent 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; 2) Whether the claim for refund has prescribed.

HELD: 1) 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. We
do not see any element in this case which can justify a departure from or abandonment of
the doctrine in the Prieto case. 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. 2) No. The 30-day period under Section 11 of Republic Act
1125 did not even commence to run in this incident. It should be recalled that while the
herein petitioner originally assessed the respondent-claimant for alleged gift tax liabilities,
the said assessment was subsequently abandoned and in its lieu, a new one was prepared
and served on the respondent-taxpayer. In this new assessment, the petitioner charged the
said respondent with an entirely new liability and for a substantially different amount from
the first. While initially the petitioner assessed the respondent for donee's gift tax in the
amount of P170,002.74, in the

subsequent assessment the latter was asked to pay P191,591.62 for delinquent estate and
inheritance tax. Considering that it is the interest paid on this latter-assessed estate and
inheritance tax that respondent Palanca is claiming refund for, then the thirty-day period
under the abovementioned section of Republic Act 1125 should be computed from the
receipt of the final denial by the Bureau of Internal Revenue of the said claim. In the second
place, the claim at bar refers to the alleged overpayment by respondent Palanca of his 1955
income tax. Inasmuch as the said account was paid by him by installment, then the
computation of the two year prescriptive period, under Section 306 of the National Internal
Revenue Code, should be from the date of the last installment.
DOCTRINE: 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.


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

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. 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

ISSUE/S: 1) Whether Picop is liable for the thirty-five percent (35%) transaction tax; 2)
Whether Picop is liable for interest and surcharge on unpaid transaction tax; 3) Whether
Picop is entitled to deduct against current income interest payments on loans for the
purchase of machinery and equipment; 4) Whether Picop is entitled to deduct against
current income net operating losses incurred by Rustan Pulp and Paper Mills, Inc; 5) Whether
Picop is entitled to deduct against current income certain claimed financial guarantee
expenses; 6) Whether Picop had understated its sales and overstated its cost of sales for
1977; 7) Whether Picop is liable for the corporate development tax of five percent (5%) of its
income for 1977.

HELD: 1) We agree with the CTA and the Court of Appeals that Picop's tax exemption under
R.A. No. 5186, as amended, does not include exemption from the thirty-five percent (35%)
transaction tax. In the first place, the thirty-five percent (35%) transaction tax is an income
tax, that is, it is a tax on the interest income of the lenders or creditors. It is thus clear that
the transaction tax is an income tax and as such, in any event, falls outside the scope of the
tax exemption granted to registered pioneer enterprises by Section 8 of R.A. No. 5186, as
amended. 2) Section 51 (c) and (e) of the 1977 Tax Code did not authorize the imposition of
a surcharge and penalty interest for failure to pay the thirtyfive percent (35%) transaction
tax imposed under Section 210 (b) of the same Code. The corresponding provision in the
current Tax Code very

clearly embraces failure to pay all taxes imposed in the Tax Code, without any regard to the
Title of the Code where provisions imposing particular taxes are textually located. Tax
exemptions are, to be sure, to be "strictly construed," that is, they are not to be extended
beyond the ordinary and reasonable intendment of the language actually used by the
legislative authority in granting the exemption. The issuance of debenture bonds is certainly
conceptually distinct from pulping and paper manufacturing operations. But no one
contends that issuance of bonds was a principal or regular business activity of Picop; only
banks or other financial institutions are in the

regular business of raising money by issuing bonds or other instruments to the general

3) We have already noted that our 1977 NIRC does not prohibit the deduction of interest on
a loan incurred for acquiring machinery and equipment. Neither does our 1977 NIRC compel
the capitalization of interest payments on such a loan. The 1977 Tax Code is simply silent on

a taxpayer's right to elect one or the other tax treatment of such interest payments.
Accordingly, the general rule that interest payments on a legally demandable loan are
deductible from gross income must be applied. We conclude that the CTA and the Court of
Appeals did not err in allowing the deductions of Picop's 1977 interest payments on its loans
for capital equipment against its gross income for 1977. 4) 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 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

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

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. 5) We must support the
CTA and the Court of Appeals in their foregoing rulings. A taxpayer has the burden of proving
entitlement to a claimed

deduction. Even Picop's own vouchers were not submitted in evidence and the BIR
Examiners denied that such vouchers and other documents had been exhibited to them.
Moreover, cash vouchers can only confirm the fact of disbursement but not necessarily the
purpose thereof.

6) The CIR has made out at least a prima facie case that Picop had understated its sales and
overstated its cost of sales as set out in its Income Tax Return. For the CIR has a right to
assume that Picop's Books of Accounts speak the truth in this case since, as already noted,

they embody what must appear to be admissions against Picop's own interest.

7) The adjusted net income of Picop for 1977, as will be seen below, is P48,687,355.00. Its
net worth figure or total stockholders' equity as reflected in its Audited Financial Statements
for 1977 is P464,749,528.00. Since its adjusted net income for 1977 thus exceeded ten
percent (10%) of its net worth, Picop must be held liable for the five percent (5%) corporate
development tax in the amount of P2,434,367.75.

DOCTRINE: It is thus clear that the transaction tax is an income tax and

as such, in any event, falls outside the scope of the tax exemption

granted to registered pioneer enterprises by Section 8 of R.A. No. 5186,

as amended.


FACTS: Respondent conveyed by way of gifts to her four children, namely, Antonio, Benito,
Carmen and Mauro, all surnamed Prieto, real property with a total assessed value of
P892,497.50. After the filing of the gift tax returns on or about February 1, 1954, the
petitioner CIR appraised the real property donated for gift tax purposes at P1,231,268.00,
and assessed the total sum of P117,706.50 as donor's gift tax, interest and compromises
due thereon. Of the total sum of P117,706.50 paid by respondent on April 29, 1954, the sum
of P55,978.65 represents the total interest on account of deliquency. This sum of P55,978.65
was claimed as deduction, among others, by respondent in her 1954 income tax return.
Petitioner, however,

disallowed the claim and as a consequence of such disallowance assessed respondent for
1954 the total sum of P21,410.38 as deficiency income tax due on the aforesaid P55,978.65,
including interest up to March 31, 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 respondent was in consequence of the late payment of her donor's tax, and the same
was paid within the year it is sought to be declared.

ISSUE/S: Whether or not such interest was paid upon an indebtedness within the
contemplation of section 30 (b) (1) of the Tax Code.

HELD: Yes. The term "indebtedness" as used in the Tax Code of the United States containing
similar provisions as in the above-quoted section has been defined as an unconditional and
legally enforceable obligation for the payment of money. Although taxes already due have
not, strictly speaking, the same concept as debts, they are, however, obligations that may
be considered as such. 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 requirement of the law. It follows that the interest paid by
herein respondent for the late payment of her donor's tax is deductible from her gross
income under section 30(b) of the Tax Code above quoted. This conclusion finds support in
the established jurisprudence in the United States after whose laws our Income Tax Law has
been patterned. Thus, under sec. 23(b) of the Internal Revenue Code of 1939, as amended ,
which contains similarly

worded provisions as sec. 30(b) of our Tax Code, the uniform ruling is that interest on taxes
is interest on indebtedness and is deductible.

DOCTRINE: The term "indebtedness" as used in the Tax Code of the United States
containing similar provisions as in the abovequoted section has been defined as
an unconditional and legally enforceable obligation for the payment of money.


Facts: V. E. Lednicky and Maria Valero Lednicky, are husband and wife, both American
citizens residing in the Philippines, and have derived all their income from Philippine sources
for the taxable years under question. [GR L-18286] In compliance with local law, the
spouses, on 27

March 1957, filed their income tax return for 1956, reporting therein a gross income of
P1,017,287.65 and a net income of P733,809.44 on which the amount of P317,395.41 was
assessed after deducting P4,805.59 as withholding tax. Pursuant to the Commissioner of
Internal Revenues assessment notice, the spouses paid the total amount of P326,247.41,
inclusive of the withheld taxes, on 15 April 1957. On 17 March 1959, the spouses filed an
amended income tax return for 1956. The amendment consists in a claimed deduction of
P205,939.24 paid in 1956 to the US government as federal income tax for 1956.
Simultaneously with the filing of the amended return, the spouses requested the refund of
P112,437.90. When the Commissioner of Internal Revenue failed to answer the claim for
refund, the spouses filed

their petition with the tax court on 11 April 1959 as CTA Case 646. [GR L-18165] On 28
February 1956, the spouses filed their domestic income tax return for 1955, reporting a
gross income of P1,771,124.63 and a net income of P1,052,550.67. On 19 April 1956, they
filed an amended income tax return, the amendment upon the original being a lesser net
income of P1,012,554.51, and, on the basis of this amended return, they paid P570,252.00,
inclusive of withholding taxes. After audit, the Commissioner determined a deficiency of
P16,116.00, which amount the spouses paid on 5 December 1956. Back in 1955, however,
the spouses filed with the US Internal Revenue Agent in Manila their Federal income tax
return for the years 1947, 1951, 1952, 1953 and 1954 on income from Philippine sources on
a cash basis. Payment of these federal income taxes, including penalties and delinquency
interest in the amount of $264,588.82, were made in 1955 to the US Director of Internal
Revenue, Baltimore, Maryland, through the National City Bank of New York, Manila Branch.
Exchange and bank charges in remitting payment totaled P4,143.91. On 11 August 1958 the
said respondents amended their Philippines income tax return for 1955 to including US
Federal income taxes, interest accruing up to 15 May 1955, and exchange and bank charges,
totaling P516,345.15 and therewith filed a claim for refund of the sum of P166,384.00, which
was later reduced to P150,269.00. The spouses brought suit in the Tax Court, which was
docketed therein as CTA Case 570. [GR 21434] The facts are similar to above cases but refer
to the spouses income tax returns for 1957, filed on 28 February 1958, and for which the
spouses paid a total sum of P196,799.65. In 1959, they filed an amended return for 1957,
claiming deduction of P190,755.80, representing taxes paid to the US Government on
income derived wholly from Philippine sources. On the strength thereof, spouses seek refund
of P90,520.75 as overpayment (CTA Case 783). The Tax Court decided for the spouses.

Issue: WON there should be a refund for the spouses

Held: NO. The Supreme Court reversed the decisions of the Court of Tax Appeals, and
affirmed the disallowance of the refunds claimed by the spouses, with costs against said

1. Section 30 (c-1) of the Philippine Internal Revenue Code Section 30 (c) (1)
(Deduction from gross income) provides that in computing net income there shall be
allowed as deductions: (c) Taxes: (1) In general. Taxes paid or accrued within the taxable
year, except (A) The income tax provided for under this Title; (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 to
any extent the benefits of

paragraph (3) of this subsection (relating to credit for taxes of foreign countries); (C) Estate,
inheritance and gift taxes; and (D) Taxes assessed against local benefits of a kind tending to
increase the value of the property assessed.

2. Paragraph (c) (3) (b) of the Tax Code; Credits against tax for taxes of foreign

Paragraph 3 (B) of the subsection (Credits against tax for taxes of foreign countries), reads:
If the taxpayer signifies in his return his desire to have the benefits of this paragraph, the
tax imposed by this Title shall be credited with (B) Alien resident of the Philippines. In the
case of an alien resident of the Philippines, the amount of any such taxes paid or accrued
during the taxable year to any foreign country, if the foreign country of which such alien
resident is a citizen or subject, in imposing such taxes, allows a similar credit to citizens of
the Philippines residing in

such country;

3. Paragraph (c) (4) of the Tax Code; Limitation on credit The tax credit so authorized
is limited under paragraph 4 (A and B) of the same subsection, in the following terms: Par.
(c) (4) Limitation on credit. The amount of the credit taken under this section shall be
subject to each of the following limitations: (A) The amount of the credit in respect to the tax
paid or accrued to any country shall not exceed the same proportion of the tax against
which such credit is taken, which the taxpayers net income from sources within such
country taxable under this Title bears to his entire net income for the same taxable year;
and (B) The total amount of the credit shall not exceed the same proportion of the tax
against which such credit is taken, which the taxpayers net income from sources without
the Philippines taxable under this Title bears to his entire net income for the same taxable

4. Laws intent that right to deduct income taxes paid to foreign government
taken as an alternative or substitute to claim of tax credit for such foreign income
tax Construction and wording of Section 30 (c) (1) (B) of the Internal Revenue Act shows the
laws intent that the right to deduct income taxes paid to foreign government from the
taxpayers gross income is given

only as an alternative or substitute to his right to claim a tax credit for such foreign income
taxes under section 30 (c) (3) and (4); 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. 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 to any
extent the benefits of paragraph (3) (relating to credits for taxes paid to foreign countries),
the statute assumes that the taxpayer in question also 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 of nondeductible items in Section 30 (c) 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

taxpayers right to claim a tax credit, it is the latter right that should be conditioned upon
the taxpayers waiving the deduction; in which case the right to reduction under subsection
(c-1-B) would have been made absolute or unconditional (by omitting foreign taxes from the
enumeration of non- deductions), while the right to a tax credit under subsection (c-3) would
have been expressly conditioned upon the taxpayers not claiming any deduction under
subsection (c-1).

5. Danger of double credit does not exist if taxpayer cannot claim benefit from
either headings at his option The purpose of the law is to prevent the taxpayer from
claiming twice the benefits of his payment of foreign taxes, by deduction from gross income
(subs. c-1) and by tax credit (subs. c-3). This danger of double credit certainly can not exist
if the taxpayer can not claim benefit under either of these headings at his option, so that he
must be entitled to a tax credit (the spouses admittedly are not so entitled because all their
income is derived from Philippine sources), or the option to deduct from gross income
disappears altogether.

6. When double taxation; Tax income should accrue to benefit of the Philippines

Double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of
the same governmental entity (cf. Manila vs. Interisland Gas Service, 52 Off. Gaz. 6579,
Manuf. Life Ins. Co. vs. Meer, 89 Phil. 357). In the present case, while the taxpayers would
have to pay two taxes on the same income, the Philippine government only receives the
proceeds of one tax. As between the Philippines, where the income was earned and where
the taxpayer is domiciled, and the United States, where that income was not earned and
where the taxpayer did not reside, it is indisputable that justice and equity demand that the
tax on the income should accrue to the benefit of the Philippines. Any relief from the alleged
double taxation should come from the United States, and not from the Philippines, since the
formers right to burden the taxpayer is solely predicated on his citizenship, without
contributing to the production of the 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 latterpower to reduce the tax income of the Philippine government simply
by increasing the tax rates on the alien resident. Everytime the rate of taxation imposed
upon an alien resident is increased by his own government, his deduction from Philippine
taxes would correspondingly increase, and the proceeds for the Philippines diminished,
thereby subordinating our own taxes to those levied by a foreign government. Such a result
is incompatible with the status of the Philippines as an independent and sovereign state.


Facts: Maria Morales was the registered owner of an agricultural land designated as Lot No.
724-C of the cadastral survey of Mabalacat, Pampanga. The Republic of the Philippines, at
the request of the U.S.Government and pursuant to the terms of the Military Bases
Agreement of March 14, 1947, instituted condemnation proceedings in the Court of the First
Instance of Pampanga, docketed, as Civil Case No. 148, for the purpose of expropriating the
lands owned by Maria Morales and others needed for the expansion of the Clark Field Air
Base. t the commencement of the action, the Republic of the Philippines, therein plaintiff
deposited with the Clerk of the Court of First Instance of Pampanga the sum of P156,960,
which was provisionally fixed as the value of the lands sought to be expropriated, in order
that it could take immediate possession of the same. On January 27, 1949, upon order of the
Court, the sum of P34,580 (PNB Check 721520-Exh. R) was paid by the Provincial treasurer
of Pampanga to Maria Morales out of the original deposit of P156,960 made by therein
plaintiff. After due hearing, the Court of First Instance of Pampanga rendered decision dated
November 29, 1949, wherein it fixed as just compensation P2,500 per hectare for some of
the lots and P3,000 per hectare for the others, which values were based on the reports of
the Commission on Appraisal whose members were chosen by both parties and by the
Court, which took into consideration the different conditions affecting, the value of the
condemned properties in making their findings.

In virtue of said decision, defendant Maria Morales was to receive the amount of P94,305.75
as compensation for Lot No. 724-C which was one of the expropriated lands. Sometime in
1950, the spouses Blas Gutierrez and Maria Morales received the sum of P59.785.75
presenting the balance remaining in their favor after deducting the amount of P34,580
already withdrawn from the compensation to them. In a notice of assessment dated January
28, 1953, the Collector of

Internal Revenue demanded of the petitioners the payment of P8,481 as alleged deficiency
income tax for the year 1950, inclusive of surcharges and penalties. The CIR contended that
petitioners-appellants failed to include from their gross income, in filing their income tax
return for 1950, the amount of P94,305.75 which they had received as compensation for
their land taken by the Government by expropriation proceedings. It is the contention of
respondent Collector of Internal Revenue that such transfer of property, for taxation
purposes, is "sale" and that the income derived therefrom is taxable. The lower court
exonerated petitioners from the 50 per cent surcharge

imposed on the latter, on the ground that the taxpayers' income tax return for 1950 is false
and/or fraudulent.

Issue: WON petitioners should pay surcharge Held: NO. It should be noted that the Court of
Tax Appeals found that the evidence did not warrant the imposition of said surcharge

the petitioners therein acted in good faith and without intent to defraud the Government.

The question of fraud is a question of fact which frequently requires a nicely balanced
judgement to answer. All the facts and circumstances surrounding the conduct of the tax
payer's business and all the facts incident to the preparation of the alleged fraudulent return
should be considered. (Mertens, Federal Income Taxation, Chapter 55). The question of fraud
being a question of fact and the lower court having made the finding that "the evidence of
this case does not warrant the imposition of the 50 per cent surcharge", We are constrained
to refrain from giving any consideration to the question raised by the Solicitor General, for it
is already settled in this jurisdiction that in passing upon petitions to review decisions of the
Court of Tax Appeals, We have to confine ourselves to questions of law.


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
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 contractual
obligation to produce and supply logs to the latter. 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 favor1 while Ramon Cuervo executed a real estate mortgage.2 San
Jose later failed to deliver the logs to Galang Machinery3 and the latter sued on the
performance bond. On October 1, 1952, the Court of First Instance adjudged San Jose and
petitioner liable; it also directed San Jose and Cuervo to reimburse petitioner for whatever
amount it would pay Galang Machinery. The Court of Appeals, on June 17, 1955, affirmed the
judgment of the lower court. The same judgment was

likewise affirmed by this Court4 on January 11, 1957 except for a slight modification apropos
the award of attorney's fees. In its income tax return for the year 1957, petitioner claimed
the said

amount of P44,490.00 as deductible loss from its gross income and, accordingly, paid the
amount of P136.00 as its income tax for 1957. The Commissioner of Internal Revenue
disallowed the claimed deduction of P44,490.00 and assessed against petitioner the sum of
P8,898.00, plus interest, as deficiency income tax for the year 1957. Petitioner filed its
protest which was denied. Whereupon, appeal was taken to the Tax Court, petitioner
insisting that the P44,490.00 which it paid to Galang Machinery was a deductible loss.

Issue: WON the amount Plaridel paid to Galang Machinery is a deductible loss

Held: NO. 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

payments it would make to Galang Machinery. Clearly, petitioner's loss is compensable

otherwise (than by insurance). It should follow, then, that the loss deduction can not be
claimed in 1957. Now, petitioner's submission is that its case is an exception. Citing Cu
Unjieng Sons, Inc. v. Board of Tax Appeals,6 and American cases also, petitioner argues that
even if there is a right to compensation by insurance or otherwise, the deduction can be
taken in the year of actual loss where the possibility of recovery is remote. The
pronouncement, however to this effect in the Cu Unjieng case is not as authoritative as
petitioner would have it since it was there found that the taxpayer had no legal right to
compensation either by insurance or otherwise.7 And the American cases cited8 are not in
point. None of them involved a taxpayer who had, as in the present case, obtained a final
judgment against third persons for reimbursement of payments made. In those cases, there
was either no legally enforceable right at all or such claimed right was still to be, or being,
litigated. On the other hand, 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.9 In other words, as the Tax Court put it, the taxpayer (petitioner) must
exhaust his remedies first to recover or reduce his loss. But assuming that there was no
reasonable expectation of recovery, still no loss deduction can be had. Sec. 30 (d) (2) of the
Tax Code requires a charge-off as one of the conditions for loss deduction: In the case of a
corporation, all losses actually sustained and charged-off within the taxable year and not
compensated for by

insurance or otherwise. Mertens12 states only four (4) requisites because the United States

Internal Revenue Code of 193913 has no charge-off requirement. Sec. 23(f) thereof provides
merely: In the case of a corporation, losses sustained during the taxable year and not
compensated for by insurance or otherwise. Petitioner, who had the burden of proof14 failed
to adduce evidence that there was a charge-off in connection with the P44,490.00or
P30,600.00 which it paid to Galang Machinery.


Facts: These four appeals involve two decisions of the Court of Tax Appeals determining the
taxpayer's income tax liability for the years 1950 to 1954 and for the year 1957. Both the
taxpayer and the Commissioner of Internal Revenue, as petitioner and respondent in the
cases a quo respectively, appealed from the Tax Court's decisions, insofar as their respective
contentions on particular tax items were therein resolved against them.

Issue: Proper/Improper Allowances/Disallowances of Losses

Held: Re allowances/disallowances of losses.

(a) Allowance of losses in Mati Lumber Co. (1950). The Commissioner of Internal Revenue
questions the Tax Court's allowance of the taxpayer's writing off as worthless securities in its
1950 return the sum of P8,050.00 representing the cost of shares of stock of Mati Lumber
Co. acquired by the taxpayer on January 1, 1948, on the ground that the worthlessness of
said stock in the year 1950 had not been clearly established. The Commissioner contends
that although the said Company was no longer in operation in 1950, it still had its sawmill
and equipment which must be of considerable value. There was adequate basis for the
writing off of the stock as worthless securities. Assuming that the Company would later
somehow realize some proceeds from its sawmill and equipment, which were still existing as
claimed by the Commissioner, and that such proceeds would later be distributed to its
stockholders such as the taxpayer, the amount so received by the taxpayer would then
properly be reportable as income of the taxpayer in the year it is received.

(b) Disallowance of losses in or bad debts of Palawan Manganese Mines, Inc. (1951). The
taxpayer appeals from the Tax Court's disallowance of its writing off in 1951 as a loss or bad
debt the sum of P353,134.25, which it had advanced or loaned to Palawan Manganese
Mines, Inc. Pursuant to the agreement mentioned above, petitioner gave to Palawan
Manganese Mines, Inc. yearly advances starting from 1945, which advances amounted to
P587,308.07 by the end of 1951. Despite these advances and the resumption of operations
by Palawan Manganese

Mines, Inc., it continued to suffer losses. By 1951, petitioner became convinced that those
advances could no longer be recovered. While it continued to give advances, it decided to
write off as worthless the sum of P353,134.25. Under the circumstances, was the sum of

properly claimed by petitioner as deduction in its income tax return for 1951, either as
losses or bad debts? It will be noted that in giving advances to Palawan Manganese Mine
Inc., petitioner did not expect to be repaid. It is true that some testimonial evidence was
presented to show that there was some agreement that the advances would be repaid, but
no documentary evidence was presented to this effect. The memorandum agreement signed
by the parties appears to be very clear that the consideration for the advances made by
petitioner was 15% of the net profits of Palawan Manganese Mines, Inc. In other words, if
there were no earnings or profits, there was no obligation to repay those advances. It has
been held that the voluntary advances made without expectation of repayment do not result
in deductible losses. The Tax Court's is allowance of the write-off was proper. The Solicitor
General has rightly pointed out that the taxpayer has taken an "ambiguous position " and
"has not definitely taken a stand on whether
the amount involved is claimed as losses or as bad debts but insists that it is either a loss or
a bad debt." 4 We sustain the government's position that the advances made by the
taxpayer to its 100% subsidiary, Palawan Manganese Mines, Inc. amounting to P587,308,07
as of 1951 were

investments and not loans. 5 (c) Disallowance of losses in Balamban Coal Mines (1950 and

1951). The Court sustains the Tax Court's disallowance of the sums of P8,989.76 and
P27,732.66 spent by the taxpayer for the operation of its Balamban coal mines in Cebu in
1950 and 1951, respectively, and claimed as losses in the taxpayer's returns for said years.
The Tax Court correctly held that the losses "are deductible in 1952, when the mines were
abandoned, and not in 1950 and 1951, when they were still in operation." 9 The taxpayer's
claim that these expeditions should be allowed as losses for the corresponding years that
they were incurred,

because it made no sales of coal during said years, since the promised road or outlet
through which the coal could be transported from the mines to the provincial road was not
constructed, cannot be sustained. Some definite event must fix the time when the loss is
sustained, and here it was the event of actual abandonment of the mines in 1952. (d) and
(e) Allowance of losses in Hacienda Dalupiri (1950 to 1954) and Hacienda Samal (1951-
1952). The Tax Court overruled the Commissioner's disallowance of these items of losses
thus: Petitioner deducted losses in the operation of its Hacienda Dalupiri the sums of
P17,418.95 in 1950, P29,125.82 in 1951, P26,744.81 in 1952, P21,932.62 in 1953, and
P42,938.56 in 1954. These deductions were disallowed by respondent on the ground that
the farm was operated solely for pleasure or as a

hobby and not for profit. This conclusion is based on the fact that the farm was operated
continuously at a loss. From the evidence, we are convinced that the Hacienda Dalupiri was
operated by petitioner for business and not pleasure. It was mainly a cattle farm, although a
few race horses were also raised. It does not appear that the farm was used by petitioner for
entertainment, social activities, or other nonbusiness purposes. Therefore, it is entitled to
deduct expenses and losses in connection with the operation of said farm. (See 1955 PH Fed.
Taxes, Par. 13, 63, citing G.C.M. 21103, CB 1939- 1, p.164) Section 100 of Revenue
Regulations No. 2, otherwise known as the Income Tax Regulations, authorizes farmers to
determine their gross income on the basis of inventories. Said regulations provide: "If gross
income is ascertained by inventories, no deduction can be made for livestock or products
lost during the year, whether purchased for resale, produced on the farm, as such losses will
be reflected in the inventory by reducing the amount of livestock or products on hand at the
close of the year." Evidently, petitioner determined its income or losses in the operation of
said farm on the basis of inventories. We quote from the memorandum of counsel for
petitioner: "The Taxpayer deducted from its income tax returns for the years from 1950 to
1954 inclusive, the corresponding yearly losses sustained in the operation of Hacienda
Dalupiri, which losses represent the excess of its yearly expenditures over the receipts; that
is, the losses represent the difference between the sales of livestock and the actual cash
disbursements or expenses." (Pages 21-22, Memorandum for Petitioner.) As the Hacienda
Dalupiri was operated by petitioner for business and since it sustained losses in its
operation, which losses were determined by means of inventories authorized under Section
100 of Revenue Regulations No. 2, it was error for respondent to have disallowed the
deduction of said losses. The same is true with respect to loss sustained in the operation of
the Hacienda Samal for the years 1951 and 1952. 10 The Commissioner questions that the
losses sustained by the taxpayer were properly based on the inventory method of
accounting. He concedes, however, "that the regulations referred to does not specify how
the inventories are to be made. The Tax Court, however, felt satisfied with the evidence
presented by the taxpayer ... which merely consisted of an alleged physical count of the
number of the livestock in Hacienda Dalupiri for the years involved." 11 The Tax Court was
satisfied with the method adopted by the taxpayer as a farmer breeding livestock, reporting
on the basis of receipts and disbursements. We find no Compelling reason to disturb its


Facts: Petitioners mad a 53% equity investment in First CBC Capital (Asia) Limited to the
amount of P16,227,851.80 consisting of 106,000 shares with par value of P100 per share.

Subsequently, First CBC was found to be insolvent. Petitioners, with the approval of the BSP,
wrote off as worthless its investment in the company and treated it as a bad debt or ordinary
loss deductible from its gross income. The Commissioner of Internal Revenue disallowed the
deduction saying that the investment could not be considered "worthless" since First CBC
could still exercise its financing and investment activities even if it was no longer licensed as
a depository. Even assuming that the securities had become worthless, it still cannot be
considered as a "bad debt" or expense since there is no indebtedness between petitioner
and First CBC. It should be classified as a "capital loss."

Held: The SC found in favor of respondents.

1. Not and indebtedness. An equity investment in shares of stock cannot be considered as

an indebtedness of First CBC Capital to China Bank. The former has no obligation to repay
the latter the amount invested. The amount China Bank invested in First CBC is, in fact, an


2. Capital asset, not ordinary. Capital assets are defined in the negative by Sec 33(1) of the
NIRC as property held by the TP exclusive of items primarily for the sale to customers in the
ordinary course of business, or property used in trade or business. Hence, securities, such as
equity holdings, are ordinary assets only in the hands of a dealer, or a person actively
engaged in trading in the same for his own account.

3. Section 29(d)(4)(B) of the NIRC treats the worthlessness of the securities held as
capital assets as a loss resulting from the sale or exchange of capital assets. Strictly
speaking, no sale occurs when securities held as capital assets become worthless.
Nonetheless, the law treats it as a loss from a sale just the same.

4. Section 33 of the NIRC provides that the capital loss sustained can only be deducted from
any capital gain derived within the taxable year. The same provision enumerates assets
which are not subject to the said limitation but equity holdings are not one of them.

O'Donnabhain v. Commissioner 134 T.C. No. 4 is a case decided by the United States Tax Court.
The issue for the court was whether a taxpayer who has been diagnosed with gender identity
disorder can deduct sex reassignment surgery costs as necessary medical expenses under 26
U.S.C. 213. The IRS argued that such surgery is cosmetic and not medically necessary.[1] On Feb
2, 2010 the court ruled that O'Donnabhain should be allowed to deduct the costs of her treatment for
gender-identity disorder, including sex-reassignment surgery and hormone treatments. [2] In its
decision, the court found the IRS position was "at best a superficial characterization of the
circumstances" that is "thoroughly rebutted by the medical evidence".

SOLIMAN: On his 1983 federal income tax return, Soliman claimed deductions for the portion of
condominium fees, utilities, and depreciation attributable to the home office. Upon audit, the
Commissioner disallowed those deductions based upon his determination that the home office was
not Soliman's principal place of business. Soliman filed a petition in the Tax Court seeking review
of the resulting tax deficiency.

After noting that in its earlier decisions it identified the place where services are performed and
income is generated in order to determine the principal place of business, the so called "focal
point test," the Tax Court abandoned that test, citing criticism by two Courts of Appeals.

`home office' is his `principal place of business:' (1) the office in the home is essential to the
taxpayer's business; (2) he spends a substantial amount of time there; and (3) there is no other
location available for performance of the office functions of the business.

There are, however, two primary considerations in deciding whether a home office is a taxpayer's
principal place of business: the relative importance of the activities performed at each business
location and the time spent at each place.

Under the principles we have discussed, the taxpayer was not entitled to a deduction for home
office expenses. The practice of anesthesiology requires the medical doctor to treat patients
under conditions demanding immediate, personal observation. So exacting were these
requirements that all of respondent's patients were treated at hospitals, facilities with special
characteristics designed to accommodate the demands of the profession. The actual treatment
was the essence of the professional service.

PEVSNER: Taxpayer's business (YSL) expense deduction for clothing expenditures. Necessary
or ordinary business expense. NO.

The generally accepted rule governing the deductibility of clothing expenses is that the cost of
clothing is deductible as a business expense only if: (1) the clothing is of a type specifically
required as a condition of employment, (2) it is not adaptable to general usage as ordinary
clothing, and (3) it is not so worn.

DRUCKER: Since a musician must practice, he must have a place in which he can practice. This
appeal concerns the tax treatment of portions of residential areas which are set aside and used solely for
such purpose. Appellants deducted from gross income the rent, electricity, and maintenance costs
allocable to the practice areas. DENIED

Section 280A(a) of the Internal Revenue Code of 1954, as amended, 26 U.S.C. 280A(a) (1976 & Supp.
V 1981), generally disallows any deduction for individuals "with respect to the use of a dwelling unit which
is used by the taxpayer during the taxable year as a residence." Section 280A(c)(1)(A), however, permits
the deduction of the expenses "allocable to a portion of the dwelling unit which is exclusively used on a
regular basis" as the "principal place of business for any trade or business of the taxpayer."

Applying its rule that the "focal point" of a taxpayer's activities determines his "principal place of business,"

We believe that appellant musicians' "principal place[s] of business" were their home practice studios. In
so holding, we see no need to disturb the Tax Court's ruling that the taxpayers are in the business of
being employees of the Met. Rather, we find this the rare situation in which an employee's principal place
of business is not that of his employer. Both in time and in importance, home practice was the "focal point"
of the appellant musicians' employment-related activities.
Because the Met provided appellants with no space for the essential task of private practice, the
maintenance of residential space exclusively for such purpose was an expense almost entirely additional
to nondeductible personal living expenses. The appellant musicians' use of home studios "was not 'purely
a matter of personal convenience, comfort, or economy.' REMANDED

CIR v. CTA: SKFOC ask a refund for an overpayment of home office

From the foregoing, it is manifest that where an expense is clearly related to the production of
Philippine-derived income or to Philippine operations (e.g. salaries of Philippine personnel, rental of
office building in the Philippines), that expense can be deducted from the gross income acquired in
the Philippines without resorting to apportionment.

In his petition for review, the Commissioner does not dispute the right of Smith Kline to avail itself of
section 37(b) of the Tax Code and section 160 of the regulations. But the Commissioner maintains
that such right is not absolute and that as there exists a contract (in this case a service agreement)
which Smith Kline 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, that contract is binding.

On the other hand, Smith Kline submits that the contract between itself and its home office cannot
amend tax laws and regulations. The matter of allocated expenses which are deductible under the
law cannot be the subject of an agreement between private parties nor can the Commissioner
acquiesce in such an agreement. Presented evidence AFFIRMED!

OLD COLONY: HELD: When an employer pays an employee's income tax on the
employee's behalf, the payment is taxable as income to the employee.

American Woolen Company adopted a resolution which provided that the company would
pay all taxes due on the salaries of the company's officers.

Old Colony Trust Co., as theexecutors of Wood's estate, filed suit in the District Court for a
refund, then appealed to the Board of Tax Appeals (the predecessor to the United States Tax
Court). The petitioners then appealed the Board's decision to the United States Court of
Appeals for the First Circuit, which certified the following question to be decided by the U.S.
Supreme Court: "Did the payment by the employer of the income taxes assessable against
the employee constitute additional taxable income to such employee?"

Merits. Taft held that payment of Mr. Wood's taxes by his employer constituted additional
taxable income to him for the years in question. The fact that a person induced or permitted
a third party to pay income taxes on his behalf does not excuse him from filing a tax return.
Furthermore, Taft added, "The discharge by a third person of an obligation to him is
equivalent to receipt by the person taxed." 279 U.S. 716 at 729.

Thus, the company's payment of Wood's tax bill was the same as giving him extra income,
regardless of the mode of payment. Further, the payment of taxes of Wood's behalf did not
constitute a gift in the legal sense, because it was made inconsideration of his services to the
company, thus making the payment part of his compensation package. (This case did not
change the general rule that gifts are not includable in gross income for the purposes of U.S.
Federal income taxation, while some gifts but not all gifts from an employer to an employee
are taxable to the employee.