Commissioner vs Manning

FACTS:
Manila Trading and Supply Co. (MANTRASCO) had an authorized capital stock of P2.5 million
divided into 25,000 common shares: 24,700 were owned by Reese and the rest at 100 shares
each by the Respondents. Reese entered into a trust agreement whereby it is stated that upon
Reese’s death, the company would purchase back all of its shares. Reese died. MANTRASCO
repurchased the 24,700 shares. Thereafter, a resolution was passed authorizing that the 24,700
shares be declared as stock dividends to be distributed to the stockholders. The BIR ordered an
examination of MANTRASCO’s books and discovered that the 24,700 shares declared as
dividends were not disclosed by respondents as part of their taxable income for the year 1958.
Hence, the CIR issued notices of assessment for deficiency income taxes to respondents.
Respondents protested but the CIR denied. Respondents appealed to the CTA. The CTA ruled in
their favor. Hence, this petition by the CIR

ISSUE:
Whether the respondents are liable for deficiency income taxes on the stock dividends?

HELD: Dividends means any distribution made by a corporation to its shareholders out of its
earnings or profits. Stock dividends which represent transfer of surplus to capital account is not
subject to income tax. But if a corporation redeems stock issued so as to make a distribution,
this is essentially equivalent to the distribution of a taxable dividend the amount so distributed
in the redemption considered as taxable income.
The distinctions between a stock dividend which does not and one which does constitute
taxable income to the shareholders is that a stock dividend constitutes income if its gives the
shareholder an interest different from that which his former stockholdings represented. On the
other hand, it does constitute income if the new shares confer no different rights or interests
than did the old shares. Therefore, whenever the companies involved parted with a portion of
their earnings to bnuy the corporate holdings of Reese, they were making a distribution of such
earnings to respondents. These amounts are thus subject to income tax as a flow of cash
benefits to respondents. Hence, respondents are liable for deficiency income taxes.
Fisher vs. Trinidad [G.R. No. L-17518 October 30, 1922]

Facts: Philippine American Drug Company was a corporation duly organized and existing under
the laws of the Philippine Islands, doing business in the City of Manila. Fisher was a stockholder
in said corporation. Said corporation, as result of the business for that year, declared a "stock
dividend" and that the proportionate share of said stock divided of Fisher was P24,800. Said the
stock dividend for that amount was issued to Fisher. For this reason, Trinidad demanded
payment of income tax for the stock dividend received by Fisher. Fisher paid under protest the
sum of P889.91 as income tax on said stock dividend. Fisher filed an action for the recovery of
P889.91. Trinidad demurred to the petition upon the ground that it did not state facts sufficient
to constitute cause of action. The demurrer was sustained and Fisher appealed.

Issue: Whether or not the stock dividend was an income and therefore taxable.

Held: No. Generally speaking, stock dividends represent undistributed increase in the capital of
corporations or firms, joint stock companies, etc., etc., for a particular period. The inventory of
the property of the corporation for particular period shows an increase in its capital, so that the
stock theretofore issued does not show the real value of the stockholder's interest, and
additional stock is issued showing the increase in the actual capital, or property, or assets of the
corporation.

In the case of Gray vs. Darlington (82 U.S., 653), the US Supreme Court held that mere advance
in value does not constitute the "income" specified in the revenue law as "income" of the
owner for the year in which the sale of the property was made. Such advance constitutes and
can be treated merely as an increase of capital.

In the case of Towne vs. Eisner, income was defined in an income tax law to mean cash or its
equivalent, unless it is otherwise specified. It does not mean unrealized increments in the value
of the property. A stock dividend really takes nothing from the property of the corporation, and
adds nothing to the interests of the shareholders. Its property is not diminished and their
interest are not increased. The proportional interest of each shareholder remains the same. In
short, the corporation is no poorer and the stockholder is no richer then they were before.

When a corporation or company issues "stock dividends" it shows that the company's
accumulated profits have been capitalized, instead of distributed to the stockholders or retained
as surplus available for distribution, in money or in kind, should opportunity offer. The essential
and controlling fact is that the stockholder has received nothing out of the company's assets for
his separate use and benefit; on the contrary, every dollar of his original investment, together
with whatever accretions and accumulations resulting from employment of his money and that
of the other stockholders in the business of the company, still remains the property of the
company, and subject to business risks which may result in wiping out of the entire investment.
The stockholder by virtue of the stock dividend has in fact received nothing that answers the
definition of an "income."
The stockholder who receives a stock dividend has received nothing but a representation of his
increased interest in the capital of the corporation. There has been no separation or segregation
of his interest. All the property or capital of the corporation still belongs to the corporation.
There has been no separation of the interest of the stockholder from the general capital of the
corporation. The stockholder, by virtue of the stock dividend, has no separate or individual
control over the interest represented thereby, further than he had before the stock dividend
was issued. He cannot use it for the reason that it is still the property of the corporation and not
the property of the individual holder of stock dividend. A certificate of stock represented by the
stock dividend is simply a statement of his proportional interest or participation in the capital of
the corporation. The receipt of a stock dividend in no way increases the money received of a
stockholder nor his cash account at the close of the year. It simply shows that there has been an
increase in the amount of the capital of the corporation during the particular period, which may
be due to an increased business or to a natural increase of the value of the capital due to
business, economic, or other reasons. We believe that the Legislature, when it provided for an
"income tax," intended to tax only the "income" of corporations, firms or individuals, as that
term is generally used in its common acceptation; that is that the income means money
received, coming to a person or corporation for services, interest, or profit from investments.
We do not believe that the Legislature intended that a mere increase in the value of the capital
or assets of a corporation, firm, or individual, should be taxed as "income."

A stock dividend, still being the property of the corporation and not the stockholder, may be
reached by an execution against the corporation, and sold as a part of the property of the
corporation. In such a case, if all the property of the corporation is sold, then the stockholder
certainly could not be charged with having received an income by virtue of the issuance of the
stock dividend. Until the dividend is declared and paid, the corporate profits still belong to the
corporation, not to the stockholders, and are liable for corporate indebtedness. The rule is well
established that cash dividend, whether large or small, are regarded as "income" and all stock
dividends, as capital or assets

If the ownership of the property represented by a stock dividend is still in the corporation and
not in the holder of such stock, then it is difficult to understand how it can be regarded as
income to the stockholder and not as a part of the capital or assets of the corporation. If the
holder of the stock dividend is required to pay an income tax on the same, the result would be
that he has paid a tax upon an income which he never received. Such a conclusion is absolutely
contradictory to the idea of an income.

As stock dividends are not "income," the same cannot be considered taxes under that provision
of Act No. 2833. For all of the foregoing reasons, SC held that the judgment of the lower court
should be REVOKED.

WISE AND CO., INC. VS MEER

Facts: On June 1, 1937, Manila Wine Merchants, Ltd., a Hongkong company, was liquidated and
its capital stock was distributed to its stockholders, one of which is the petitioner. As part of its
liquidation, the corporation was sold to Manila Wine Merchants., Inc. for Php400,000. The said
earnings, declared as dividends, were distributed to its stockholders. The Hongkong company
then paid the income tax for the entire earnings. As a result of the sale of its business and
assets, a surplus was realized by the Hongkong company after deducting the dividends. This
surplus was also distributed to its stockholders. The Hongkong company also paid the income
tax for the said surplus. The petitioners then filed their respective income tax returns. The
respondent Commissioner, then, made a deficiency assessment charging the individual
stockholders for taxes on the shares distributed to them despite the fact that income tax was
already paid by the Hongkong company. The petitioners paid the assessed amount in protest.
The lower courts ruled in favor of the Commissioner of Internal Revenue, hence, this action.

Issue(s):
1. Whether the amount received by the petitioners were ordinary dividends or liquidating
dividends.
2. Whether such dividends were taxable or not.
3. Whether or not the profits realized by the non-resident alien individual appellants constitute
“income from the Philippines” considering that the sale took place outside the Philippines.

Held:
1. The dividends are liquidating dividends or payments for surrendered or relinquished stock in
a corporation in complete liquidation. It was stipulated in the deed of sale that the sale and
transfer of the corporation shall take effect on June 1, 1937 while distribution took place on
June 8. They could not consistently deem all the business and assets of the corporation sold as
of June 1, 1937, and still say that said corporation, as a going concern, distributed ordinary
dividends to them thereafter.
2. Yes. Petitioners received the said distributions in exchange for the surrender and
relinquishment by them of their stock in the liquidated corporation. That money in the hands of
the corporation formed a part of its income and was properly taxable to it under the Income Tax
Law. When the corporation was dissolved in the process of complete liquidation and its
shareholders surrendered their stock to it and it paid the sums in question to them in exchange,
a transaction took place. The shareholder who received the consideration for the stock earned
received that money as income of his own, which again was properly taxable to him under the
Income Tax Law.
3. The contention of the petitioners that the earnings cannot be considered as income from the
Philippines because the sale was made outside the Philippines and is not subject to Philippine
tax law is untenable. At the time of the sale, the Hongkong company was engage in its business
in the Philippines. Its successor was a domestic corporation and doing business also in the
Philippines. It must be taken into consideration that the Hongkong company was incorporated
for the purpose of carrying business in the Philippine Islands. Hence, its earnings, profits and
assets, including those from whose proceeds the distribution was made, had been earned and
acquired in the Philippines. It is clear that the distributions in questions were income “from
Philippine sources”, hence, taxable under Philippine law.
CIR vs. Goodyear Philippines (GR 216130, August 3, 2016)

Facts: Respondent is a domestic corporation duly organized and existing under the laws of the
Philippines, and registered with the Bureau of Internal Revenue (BIR) as a large taxpayer with
Taxpayer Identification Number 000-409-561-000.6 On August 19, 2003, the authorized capital
stock of respondent was increased from P400,000,000.00 divided into 4,000,000 shares with a
par value of P100.00 each, to P1,731,863,000.00 divided into 4,000,000 common shares and
13,318,630 preferred shares with a par value of P100.00 each. Consequently, all the preferred
shares were solely and exclusively subscribed by Goodyear Tire and Rubber Company (GTRC),
which was a foreign company organized and existing under the laws of the State of Ohio, United
States of America (US) and is unregistered in the Philippines.7chanrobleslaw

On May 30, 2008, the Board of Directors of respondent authorized the redemption of GTRC's
3,729,216 preferred shares on October 15, 2008 at the redemption price of P470,653,914.00,
broken down as follows: P372,921,600.00 representing the aggregate par value and
P97,732,314.00, representing accrued and unpaid dividends.8chanrobleslaw

On October 15, 2008, respondent filed an application for relief from double taxation before the
International Tax Affairs Division of the BIR to confirm that the redemption was not subject to
Philippine income tax, pursuant to the Republic of the Philippines (RP) - US Tax Treaty.9 This
notwithstanding, respondent still took the conservative approach, and thus, withheld and
remitted the sum of P14,659,847.10 to the BIR on November 3, 2008, representing fifteen
percent (15%) FWT, computed based on the difference of the redemption price and aggregate
par value of the shares.10chanrobleslaw

On October 21, 2010, respondent filed an administrative claim for refund or issuance of TCC,
representing 15% FWT in the sum of P14,659,847.10 before the BIR. Thereafter, or on
November 3, 2010, it filed a judicial claim, by way of petition for review, before the CTA,
docketed as C.T.A. Case No. 8188.11chanrobleslaw

For her part, petitioner maintained that respondent's claim must be denied, considering that:
(a) it failed to exhaust administrative remedies by prematurely filing its petition before the CTA;
and (b) it failed to submit complete supporting documents before the BIR.

Issue/s: WON the judicial claim of respondent should be dismissed for non-exhaustion of
administrative remedies.

Ruling: NO.

Section 229 of the Tax Code states that judicial claims for refund must be filed within two (2)
years from the date of payment of the tax or penalty, providing further that the same may not
be maintained until a claim for refund or credit has been duly filed with the Commissioner of
Internal Revenue (CIR), viz.:
SEC. 229. Recovery of Tax Erroneously or Illegally Collected. – No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter alleged
to have been erroneously or illegally assessed or collected, or of any penalty claimed to have
been collected without authority, or of any sum alleged to have been excessively or in any
manner wrongfully collected, until a claim for refund or credit has been duly filed with the
Commissioner; but such suit or proceeding may be maintained, whether or not such tax,
penalty, or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from
the date of payment of the tax or penalty regardless of any supervening cause that may arise
after payment x x x. (Emphases and underscoring supplied)
Verily, the primary purpose of filing an administrative claim was to serve as a notice of warning
to the CIR that court action would follow unless the tax or penalty alleged to have been
collected erroneously or illegally is refunded. To clarify, Section 229 of the Tax Code – [then
Section 306 of the old Tax Code] – however does not mean that the taxpayer must await the
final resolution of its administrative claim for refund, since doing so would be tantamount to the
taxpayer's forfeiture of its right to seek judicial recourse should the two (2)-year prescriptive
period expire without the appropriate judicial claim being filed. In CBK Power Company, Ltd. v.
CIR,36 the Court enunciated:
In the foregoing instances, attention must be drawn to the Court's ruling in P.J. Kiener Co., Ltd. v.
David (Kiener), wherein it was held that in no wise does the law, i.e., Section 306 of the old Tax
Code (now, Section 229 of the NIRC), imply that the Collector of Internal Revenue first act upon
the taxpayer's claim, and that the taxpayer shall not go to court before he is notified of the
Collector's action. In Kiener, the Court went on to say that the claim with the Collector of
Internal Revenue was intended primarily as a notice of warning that unless the tax or penalty
alleged to have been collected erroneously or illegally is refunded, court action will follow x x
x.37 (Emphases and underscoring supplied)
In the case at bar, records show that both the administrative and judicial claims for refund of
respondent for its erroneous withholding and remittance of FWT were indubitably filed within
the two-year prescriptive period.38 Notably, Section 229 of the Tax Code, as worded, only
required that an administrative claim should first be filed. It bears stressing that respondent
could not be faulted for resorting to court action, considering that the prescriptive period stated
therein was about to expire. Had respondent awaited the action of petitioner knowing fully well
that the prescriptive period was about to lapse, it would have resultantly forfeited its right to
seek a judicial review of its claim, thereby suffering irreparable damage.

Thus, in view of the aforesaid circumstances, respondent correctly and timely sought judicial
redress, notwithstanding that its administrative and judicial claims were filed only 13 days apart.

Visayan Cebu Terminal vs CIR

The Visayan Cebu Terminal Co. Inc., is a corporation organized for the purpose of handling
arrastre operations in the port of Cebu. It was awarded the contract for the said arrastre
operations by the Bureau of Customs, pursuant to Act No. 3002, as amended.
On March 1, 1952, appellant filed its income tax return for 1951 reporting a gross income of
P420,633.40 and claimed deductions amounting to P379,036.95, leaving a net income of
P41,596.45 on which it paid income tax in the sum of P8,319.29.
The sum of P379,036.95 claimed as deductions consisted of various items including salaries,
representation and miscellaneous expenses. However, the said expenses were disallowed by the
Collector of Internal Revenue, thus giving rise to a deficiency assessment.
Upon reconsideration, the Collector modified the deficiency income tax assessment by allowing
the deduction from appellant's gross income of the salary and miscellaneous expenses.
The Vusayan Cebu Terminal Co. Inc., maintains that said court had acted arbitrarily in
considering the representation expenses in 1950, not those incurred
in 1949 and 1952, in fixing the amount deductible in 1951

ISSUE: The only issue raised in this appeal relates to the deductibility of the sum of P75,855.88
as representation expenses.

HELD:
The Court of Tax Appeals, in the instant case, had been patently fair and reasonable, if not
liberal, in allowing appellant to deduct a certain amount as representation expenses on the
basis of its gross income, net income and representation expenses during the prior years,
although there was absolutely no concrete evidence of the sums actually spent for purposes of
representation. The explanation to the effect that the supporting papers of some of the
expenses had been destroyed when the house of appellant's treasurer was burned, it not
satisfactory, for appellant's records were supposed to be kept in its offices, not in the
residence of one of its officers.

It appears: (a) that part of the alleged representation expenses had never had any supporting
paper; (b) that the vouchers and chits covering other representation expenses had been
allegedly destroyed; (c) that there is no documentary evidence on record of any of the
representation expenses in question; (d) that no testimonial evidence has been introduced on
any specific item of said alleged expenses; (e) that there is no more than oral proof to the effect
that payments had been made to appellant's officers for representation expenses allegedly
made by the latter and about the general nature of such alleged expenses; (f) that the gross
income in 1950 exceeded the gross income in 1951 and 1952, and (g) that the representation
expenses in 1948 amounted to P500 only. Under these circumstances, the lower court was fully
justified in concluding that the representation expenses in 1951 should be slightly less than
those incurred in 1950.

CIR vs General Foods

Facts:
 Respondent corporation General Foods (Phils), which is engaged in the manufacture of
“Tang”, “Calumet” and “Kool-Aid”, filed its income tax return for the fiscal year ending
February 1985 and claimed as deduction, among other business expenses, P9,461,246
for media advertising for “Tang”.
 The Commissioner disallowed 50% of the deduction claimed and assessed deficiency
income taxes of P2,635,141.42 against General Foods, prompting the latter to file an MR
which was denied.
 General Foods later on filed a petition for review at CA, which reversed and set aside an
earlier decision by CTA dismissing the company’s appeal.
Issue:
W/N the subject media advertising expense for “Tang” was ordinary and necessary expense
fully deductible under the NIRC

Held: No.
 Tax exemptions must be construed in stricissimi juris against the taxpayer and liberally in
favor of the taxing authority, and he who claims an exemption mus t be able to justify his
claim by the clearest grant of organic or statute law.
 Deductions for income taxes partake of the nature of tax exemptions; hence, if tax
exemptions are strictly construed, then deductions must also be strictly construed.
 To be deductible from gross income, the subject advertising expense must comply with
the following requisites:
o (a) the expense must be ordinary and necessary;
o (b) it must have been paid or incurred during the taxable year;
o (c) it must have been paid or incurred in carrying on the trade or business of the
taxpayer; and
o (d) it must be supported by receipts, records or other pertinent papers.
 While the subject advertising expense was paid or incurred within the corresponding
taxable year and was incurred in carrying on a trade or business, hence necessary, the
parties’ views conflict as to whether or not it was ordinary.
o To be deductible, an advertising expense should not only be necessary but also
ordinary.
 The Commissioner maintains that the subject advertising expense was not ordinary on
the ground that it failed the two conditions set by U.S. jurisprudence:
o first, “reasonableness” of the amount incurred and
o second, the amount incurred must not be a capital outlay to create “goodwill” for
the product and/or private respondent’s business.
 Otherwise, the expense must be considered a capital expenditure to be
spread out over a reasonable time.
 There is yet to be a clear-cut criteria or fixed test for determining the reasonableness of
an advertising expense.
 There being no hard and fast rule on the matter, the right to a deduction depends on a
number of factors such as but not limited to:
o the type and size of business in which the taxpayer is engaged; the volume and
amount of its net earnings; the nature of the expenditure itself; the intention of
the taxpayer and the general economic conditions. It is the interplay of these,
among other factors and properly weighed, that will yield a proper evaluation.
 The Court finds the subject expense for the advertisement of a single product to be
inordinately large.
 Therefore, even if it is necessary, it cannot be considered an ordinary expense deductible
under then Section 29 (a) (1) (A) of the NIRC.
 Advertising is generally of two kinds:
o (1) advertising to stimulate the current sale of merchandise or use of services
and
o (2) advertising designed to stimulate the future sale of merchandise or use of
services. The second type involves expenditures incurred, in whole or in part, to
create or maintain some form of goodwill for the taxpayer’s trade or business or
for the industry or profession of which the taxpayer is a member.
 If the expenditures are for the advertising of the first kind, then, except as to the
question of the reasonableness of amount, there is no doubt such expenditures are
deductible as business expenses.
 If, however, the expenditures are for advertising of the second kind, then normally they
should be spread out over a reasonable period of time.
 The company’s media advertising expense for the promotion of a single product is
doubtlessly unreasonable considering it comprises almost one-half of the company’s
entire claim for marketing expenses for that year under review.
KUENZLE & STREIFF, INC vs. THE COLLECTOR OF INTERNAL REVENUE

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.
o 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.
 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:
o (1) the payment of the bonuses is in fact compensation;
o (2) it must be for personal services actually rendered; and
o (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:
 o 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:
o The paid officers, in the absence of evidence to the contrary, that they were
competent, on the other the record discloses no evidence nor has petitioner ever
made the claim that all or some of them were gifted with some special talent, or
had undergone some extraordinary training, or had accomplished any particular
task, that contributed materially to the success of petitioner's business during
the taxable years in question.
o All the other employees received no pay increase in the said years.
o 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.
ALHAMBRA CIGAR and CIGARETTE MANUFACTURING COMPANY vs CIR (1967)

Facts:
 The petitioner Alhambra Cigar have been paying A. P. Kuenzle and H.A. Streiff, non –
resident aliens, who were its President and Vice-President respectively, their salaries,
officers; bonus, officers; commissions to managers and directors' fees.
 Such were always claimed by the petitioner as ordinary expenses to be deducted from
its gross receipts for the purposes of Income Taxation.
 However, time has come that the CIR reduced the amount thereof base on the sums
paid to Mr. W. Eggmann, the resident Treasurer and Manager Alhambra.
 Under the category of salaries, officers of the fixed annual compensation of A. P. Kuenzle
and H. A. Streiff in the amount of P15,000.00 each the CIR allowed for each of them a
salary of only P6,000.00 and disallowed the balance of P9,000.00, or a total disallowance
of P18,00.0,0 for both of them, for each of the years in question.
 Under that of the bonus, officers of the amount under such category paid to the above
gentlemen is P14,750.00 each, the CIR allowed each of them a bonus of only P5,850.00,
and disallowed the balance of P8,900.00 for both of them for each year in question.
 As to the deduction in the concept of commissions to managers, the commissions paid
by the petitioner-appellant to A. P. Kuenzle and H. A. Streiff for both of them, were
entirely disallowed by the CIR.
 Concerning the directors' fees paid to both officials by Alhambra, were also entirely
disallowed by the CIR.

ISSUE: Whether or not such reduction and disallowances are just and reasonable.

Held: NO
 Considering the nature of the services performed by Messrs. Kuenzle and Streiff the
salary of P6,000.00 paid to each of them was reasonable and, therefore, deductions is
ordinary and necessary business expense.
o The bonus paid to each of said officers which were reduced to the amount
equivalent to that paid to Mr. W. Eggmann, the resident Treasurer and Manager
of Alhambra is also sound according to the factual milieu of this case.
 We agree with the Tax Court that “Upon the evidence of record, we find no justification
to reverse or modify the decision of CIR with respect to the disallowance of a portion of
the salaries and bonuses paid to Messrs. Kuenzle and Streiff.
o Alhambra seeks to justify the increase in the salaries of Messrs. Kuenzle and
Streiff on the ground of increased costs of living. The said officers of Alhambra
are, however, non-residents of the Philippines."
Calanoc vs CIR

Facts:
 the petitioner on December 3, 1949 financed and promoted a boxing and wrestling
exhibition at the Rizal Memorial Stadium for the said charitable purpose. Before the
exhibition took place, the petitioner applied with the respondent Collector of Internal
Revenue for exemption from payment of the amusement tax, relying on the provisions
of Section 260 of the National Internal Revenue Code, to which the respondent
answered that the exemption depended upon petitioner’s compliance with the
requirements of law
 demanded from the petitioner payment of the amount of P7,378.57 as the amusement
tax for the exhibition.
 petitioner admitted that he could not justify the other expenses, such as those for police
protection and gifts.
o He claims further that the accountant who prepared the statement of receipts is
already dead and could no longer be questioned on the items contained in said
statement.
Issue: Whether or not the expenses are exempted

Held: NO
 We have examined the records of the case and we agree with the lower court that most
of the items of expenditures contained in the statement submitted to the agent are
either exorbitant or not supported by receipts.
 We agree with the tax court that the payment of P461.65 for police protection is illegal
as it is a consideration given by the petitioner to the police for the performance by the
latter of the functions required of them to be rendered by law.
 The expenditures of P460.00 for gifts, P1,880.05 for parties and other items for
representation are rather excessive, considering that the purpose of the exhibition was
for a charitable cause.
CIR vs De Prieto

Facts:

 Respondent Vda. de Prieto conveyed by way of gifts a real property to her children. The
Commissioner of Internal Revenue appraised the property donated at P1,231,268.00,
and assessed the total sum of P117,706.50 as donor's gift tax, interest and compromises
due thereon. Of the total sum of P117,706.50 paid by respondent on April 29, 1954, the
sum of P55,978.65 represents the total interest on account of deliquency.
 Said sum was claimed as deduction, among others, by respondent in her 1954 income
tax return.
 Petitioner disallowed the claim and as a consequence of such disallowance assessed
respondent for 1954 deficiency income tax due on the aforesaid P55,978.65, including
interest 1957, surcharge and compromise for the late payment.

ISSUE:
Whether or not interest paid for the late payment of tax is deductible from gross income.

HELD: YES

 For interest to be deductible, it must be shown that:

o (1) there be an indebtedness,
o (2) there should be interest upon it, and
o (3) what is claimed as an interest deduction should have been paid or accrued
within the year. In this case, the last two requirements are undisputed.
 The only question is if interest on account of late payments of taxes be considered as
indebtedness.
 Indebtedness has been defined as an unconditional and legally enforceable obligation
for the payment of money.
 Within the meaning of that definition, it is apparent that a tax may be considered
indebtedness.
 Although taxes already due have not, strictly speaking, the same concept as debts, they
are, however, obligations that may be considered as such.
 Where statute imposes a personal liability for a tax, the tax becomes, at least in a board
sense, a debt.
 It follows that the interest paid by herein respondent for the late payment of her donor's
tax is deductible from her gross income.
 In conclusion, interest payment for delinquent taxes is not deductible as tax but the
taxpayer is not precluded thereby from claiming said payment as deduction on account
of interest.
CIR vs Lednicky

Facts:
 Spouses are both American citizens residing in the Philippines and have derived all their
income from Philippine sources for taxable years in question.
 On March, 1957, filed their ITR for 1956, reporting gross income of P1,017,287.65 and a
net income of P 733,809.44. On March 1959, file an amended claimed deduction of P
205,939.24 paid in 1956 to the United States government as federal income tax of 1956.
ISSUE: Whether a citizen of the United States residing in the Philippines, who derives wholly
from sources within the Philippines, may deduct his gross income from the income taxes he has
paid to the United States government for the said taxable year?
HELD: NO
 An alien resident who derives income wholly from sources within the Philippines may
not deduct from gross income the income taxes he paid to his home country for the
taxable year.
o The right to deduct foreign income taxes paid given only where alternative right
to tax credit exists.
 Section 30 of the NIRC, Gross Income “Par. C (3): Credits against tax per taxes of foreign
countries.
 If the taxpayer s ignifies in his return his desire to have the benefits of this
paragraph, the tax imposed by this shall be credited with: Paragraph (B), Alien resident
of the Philippines; and, Paragraph C (4), Limitation on credit.”
 An alien resident not entitled to tax credit for foreign income taxes paid when his
income is derived wholly from sources within the Philippines.
 Double taxation becomes obnoxious only where the taxpayer is taxed twice for the
benefit of the same governmental entity.
o In the present case, although the taxpayer would have to pay two taxes on the
same income but the Philippine government only receives the proceeds of one
tax, there is no obnoxious double taxation.
CIR vs Bicolanda

Facts:
 Bicolandia Drug Corporation, a corporation engaged in the business of retailing
pharmaceutical products under the business style of "Mercury Drug," granted the 20%
sales discount to qualified senior citizens purchasing their medicines in compliance with
R.A. No. 7432
 It then alleged error that they should have tax credit so it claimed for refund.
 CTA: Rev. Reg. No. 2-94 is null and void for being inconsistent with Sec. 4 of RA 7432 that
states the discount is claimed as credit
 But, it computed the tax credit as cost of sales / gross income x 20%
 It also excluded those sales without pre-marked cash slips.
 Both CIR and petitioner appealed.
 CTA modified its decision to issue a certificate of tax credit to petitioner.
ISSUE: 1. W/N the discount granted is based on the acquisition cost rather than actual
discount granted
2. W/N petitioner can claim its refund
HELD: Petition is hereby DENIED
 Yes. Cost refers to the amount extended to senior citizens. It shall be applied as tax
credit and may be deducted from tax liability.
o If no current tax due or nnet loss for the period, the credit may be carried over to
the succeeding taxable year.
 No. The words of statute are clear and free from ambiguity. It must be given literal
meaning. Thus, can only claim as tax credit.
Mercury Drug v CIR
Facts:
 Petitioner Mercury Drug corporation grants a 20% sales discount to qualified senior
citizens in the purchase of medicines pursuant to RA 7432.
 With this, petitioner claims an amount representing the 20% sales discount as
deductions from its gross income.
 Realizing that RA 7432 allows tax credit for the sales granted to senior citizens, petitioner
filed with CIR claims for refund for the years 1993 and 1994.
 Computation of its overpayment of income tax was presented by petitioner.
 When CIR failed to act on petitioner’s claims, the latter filed petitioner for review with
the CTA.
 CTA ruled in favor of petitioner and treated the 20% sales discount as tax credit rather
than a deduction from the gross income.
o However, the CTA did not grant the full amount of claims because if found some
discrepancies and irregularities in the cash slips submitted by petitioner.
o The CTA stated that the tax credit must be based on the actual cost of the
medicine and not the whole amount of the 20% senior citizens discount, thus the
formula applied is: cost of sales/gross sales x amount of 20% sales discount.
 Petitioner moved for partial reconsideration which CTA modified its ruling by increasing
the taxable creditable tax amount.
 Petitioner contended that the actual discount granted to the senior citizens, rather than
the acquisition cost of the item availed by senior citizens, should be the basis for
computation of tax credit.
 The CA affirms the CTA decision. It interpreted the term "cost" as used in Section 4(a) of
Republic Act No. 7432 to mean the acquisition cost of the medicines sold to senior
citizens. Hence, comes this petition for review before the SC.
Issue:
Whether the claim for tax credit should be based on the full amount of the 20% senior citizens’
discount or the acquisition cost of the merchandise sold.

Ruling: The court ruled that the cost of discount should be computed on the actual amount of
the discount extended to senior citizens.
 RA 7432, which grants, among others, sales discounts to senior citizens on the purchase
of medicines, imposes burden to private establishments amounting to taking of private
property for public use with just compensation in the form of tax credit.
 However, said law does not provide how the cost of the discount as tax credit be
computed.
 Thus, the court construed the cost as referring to the amount of the 20% sales discount
extended by establishments to senior citizens in the purchase of medicines.
 However, the Court gave full accord to the factual findings of the Court of Tax Appeals
with respect to the actual amount of the 20% sales discount.
 Thus the court held that petitioner is entitled to a tax credit equivalent to the actual
amounts of the 20% sales discount as determined by the Court of Tax Appeals.
Guiterrez vs Collector

Facts:

1. Maria Morales, married to Gutierrez(spouses), was the owner of an agricultural land. The U.S.
Gov(pursuant to Military Bases Agreement) wanted to expropriate the land of Morales to
expand the Clark Field Air Base.

2. The Republic was the plaintiff, and deposited a sum of Php 152k to be able to take immediate
possession. The spouses wanted consequential damages but instead settled with a compromise
agreement. In the compromise agreement, the parties agreed to keep the value of Php 2,500
per hectare, except to some particular lot which would be at Php 3,000 per hectare.

3. In an assessment notice, CIR demanded payment of Php 8k for deficiency of income tax for
the year 1950.

4. The spouses contend that the expropriation was not taxable because it is not "income
derived from sale, dealing or disposition of property" as defined in Sec. 29 of the Tax Code. The
spouses further contend that they did not realize any profit in the said transaction. CIR did not
agree.

5. The spouses appealed to the CTA. The Solicitor General, in representation of the respondent
Collector of Internal Revenue, filed an answer that the profit realized by petitioners from the
sale of the land in question was subject to income tax, that the full compensation received by
petitioners should be included in the income received in 1950, same having been paid in 1950
by the Government. CTA favored SolGen but disregarded the penalty charged.

6. Both parties appealed to the SC.

Issue: Whether or not fines and peanlites may be deducted from gross income
Held: NO

 Gutierrez also claimed for deduction the fines and penalties which he paid for late
payment of taxes.
 While Section 30 allows taxes to be deducted from gross income,
 it does not specifically allow fines and penalties to be so deducted.
o Deductions from gross income are matters of legislative grace; what is not
expressly granted by Congress is withheld.
o 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
Hermanos vs CIR

Facts:
 Four cases involve two decisions of the Court of Tax Appeal s determining the taxpayer '
s income tax liability for the years 1950 to 1954 and for the year 1957.
 Both the taxpayer and the Commissioner of Internal Revenue, as petitioner and
respondent in the cases a quo respectively , appealed from the Tax Court's decisions ,
insofar as their respective contentions on particular tax items were therein resolved
against them.
 The taxpayer , Fernandez Hermanos, Inc. , is a domestic corporation organized for the
principal purpose of engaging in business as an " investment company " wi th main office
at Manila.
 Upon verification of the taxpayer's income tax returns for the period in quest ion, the
Commissioner of Internal Revenue assessed against the taxpayer the sums of
P13,414.00, P119,613.00, P11,698.00, P6,887.00 and P14,451.00 as alleged deficiency
income taxes for the year s 1950, 1951, 1952, 1953 and 1954, respectively.
 Said assessments were the result of alleged discrepancies found upon the examination
and verification of the taxpayer's income tax returns for the said years,

ISSUE: The correctness of the Tax Court's rulings with respect to the disputed items of
disallowances enumerated in the Tax Court's summary reproduced

HELD:
That the circumstances are such that the method does not reflect the taxpayer’s income with
reasonable accuracy and certainty and proper and just additions of personal expenses and other
non-deductible expenditures were made and correct , fair and equitable credit adjustments
were given by way of eliminating non-taxable items.

 Proper adjustments to conform to the income tax laws. Proper adjustments for non-
deductible items must be made. The following non-deductibles , as the case may be,
must be added to the increase of decrease in the net worth
o Personal living or family expenses
o Premiums paid on any life insurance policy
o Losses from sales or exchanges of property between members of the family
o Income taxes paid
o Other non-deductible taxes
o Election expenses and other expense against public policy
o Non-deductible contributions
o Gifts to others
o Estate inheritance and gift taxes
o Net Capital Loss
 On the other hand, non- taxable items should be deducted therefrom.
 These items are necessary adjustments to avoid the inclusion of what otherwise are
non-taxable receipts.
 They are:
o inheritance gifts and bequests received
o non- taxable gains
o compensation for injuries or sickness
o proceeds of life insurance policies
o sweepstakes
o winnings
o interest on government securities and increase in net worth are not taxable if
they are shown not to be the result of unreported income but to be the result of
the correction of errors in the taxpayer’s entries in the books relating to
indebtedness
Collector vs Goodrich

Facts:
 Goodrich claimed for deductions based upon receipts issued, not by entities in which the
alleged expenses had been incurred, but by the officers of Goodrich who allegedly paid
for them
 The Commissioner disallowed deductions in the amount of P50,455.41 (for the year
1951) for bad debts and P30,188.88 (for year 1952) for representation expenses
 Goodrich appealed from the said assessment to the Court of Tax Appeals (CTA) which
allowed the deduction for bad debts but disallowing the alleged representation
expenses. CTA amended its decision allowing the deduction of representation expenses.
 The Government appealed to the SC. The alleged bad debts are the following:
1. Portillo's Auto Seat Cover 630.31
2. Visayan Rapid Transit 17,810.26
3. Bataan Auto Seat Cover 373.13
4. Tres Amigos Auto Supply 1,370.31
5. P. C. Teodorolawphil 650.00
6. Ordnance Service, P.A. 386.42
7. Ordnance Service, P.C. 796.26
8. National land Settlement Administration 3,020.76
9. National Coconut Corporation 644.74
10. Interior Caltex Service Station 1,505.87
11. San Juan Auto Supply 4,530.64
12. P A C S A 45.36
13. Philippine Naval Patrol 14.18
14. Surplus Property Commission 277.68
15. Alverez Auto Supply 285.62
16. Lion Shoe Store 1,686.93
17. Ruiz Highway Transit 2,350.00
18. Esquire Auto Seat Cover 3,536.94
TOTAL P50,455.41*

Issue:
Whether or not these bad debts are properly deducted.

Held: NO for 1-10

 The claim for deduction for debt numbers 1-10 is REJECTED.

 Goodrich has not established either that the debts are actually worthless or that it had
reasonable grounds to believe them to be so.
 NIRC permits the deduction of debts “actually ascertained to be worthless within the
taxable year” obviously to prevent arbitrary action by the taxpayer, to unduly avoid tax
liability.
 The requirement of ascertainment of worthlessness require proof of 2 facts:
o That the taxpayer did in fact ascertain the debt to be worthless
o That he did so, in good faith.
 Good faith on the part of the taxpayer is not enough.
 He must also how that he had reasonably investigated the relevant facts and had drawn
a reasonable inference from the information obtained by him.
o In the case, Goodrich has not adequately made such showing.
 The payments made, after being characterized as bad debts, merely stresses the undue
haste with which the same had been written off.
o Goodrich has not proven that said debts were worthless. There was no evidence
that the debtors can not pay them.
 SC held that the claim for bad debts are allowed but only up to
P22,627.35. (those from Debts 11-18)
Philex Mining vs CIR ( Focusing on Debt)

Facts:

 On August 5, 1992, the BIR sent a letter to Philex asking it to settle its excise tax liabilities
amounting to P123,821,982.52.
 Philex protested the demand for payment of the tax liabilities stating that it has pending
claims for VAT input credit/refund for the taxes it paid for the years 1989 to 1991 in the
amount of P119,977,037.02 plus interest. Therefore, these claims for tax credit/refund
should be applied against the tax liabilities.
 In reply, the BIR held that since these pending claims have not yet been established or
determined with certainty, it follows that no legal compensation can take place. Hence,
the BIR reiterated its demand that Philex settle the amount plus interest within 30 days
from the receipt of the letter.
 Philex raised the issue to the Court of Tax Appeals and in the course of the proceedings,
the BIR issued a Tax Credit Certificate SN 001795 in the amount of P13,144,313.88
which, applied to the total tax liabilities of Philex of P123,821,982.52; effectively lowered
the latter’s tax obligation of P110,677,688.52.
 Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay the
remaining balance of P110,677,688.52 plus interest, elucidating its reason that “taxes
cannot be subject to setoff on compensation since claim for taxes is not a debt or
contract.
 Philex appealed the case before the Court of Appeals. Nonetheless, the Court of Appeals
affirmed the Court of Tax Appeals observation. Philex filed a motion for reconsideration
which was again denied. However, a few days after the denial of its motion for
reconsideration, Philex was able to obtain its VAT input credit/refund not only for the
taxable year 1989 to 1991 but also for 1992 and 1994, computed amounting to
205,595,289.20.
 In view of the grant of its VAT input credit/refund, Philex now contends that the same
should, ipso jure, off-set its excise tax liabilities since both had already become “due and
demandable, as well as fully liquidated;” hence, legal compensation can properly take
place

Issue: Whether or not the advances can be considered debt

Held: NO

 In this connection, we find no contractual basis for the execution of the two compromise
agreements in which Baguio Gold recognized a debt in favor of petitioner, which
 supposedly arose from the termination of their business relations over the Sto. Nino
mine. T
 he "Power of Attorney" clearly provides that petitioner would only be entitled to the
return of a proportionate share of the mine assets to be computed at a ratio that the
manager’s account had to the owner’s account.
 Except to provide a basis for claiming the advances as a bad debt deduction, there is no
reason for Baguio Gold to hold itself liable to petitioner under the compromise
agreements, for any amount over and above the proportion agreed upon in the "Power
of Attorney".
 All told, the lower courts did not err in treating petitioner’s advances as investments in a
partnership known as the Sto. Nino mine.
o The advances were not "debts" of Baguio Gold to petitioner inasmuch as the
latter was under no unconditional obligation to return the same to the former
under the "Power of Attorney".
 As for the amounts that petitioner paid as guarantor to Baguio Gold’s creditors, we find
no reason to depart from the tax court’s factual finding that Baguio Gold’s debts were
not yet due and demandable at the time that petitioner paid the same.
o Verily, petitioner pre-paid Baguio Gold’s outstanding loans to its bank creditors
and this conclusion is supported by the evidence on record
 In sum, petitioner cannot claim the advances as a bad debt deduction from its gross
income.
 Deductions for income tax purposes partake of the nature of tax exemptions and are
strictly construed against the taxpayer, who must prove by convincing evidence that he
is entitled to the deduction claimed.
 In this case, petitioner failed to substantiate its assertion that the advances were
subsisting debts of Baguio Gold that could be deducted from its gross income.
o Consequently, it could not claim the advances as a valid bad debt deduction.
Zamora vs Collector

Facts:

 These are 4 cases regarding deficiency income taxes allegedly incurred by the Zamoras.
Cases Nos. L-15290 and L-15280: 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 CTA reduced the sum due Zamora and on appeal, petitioner alleged that the CTA
erred in disallowing the promotion expenses incurred by his wife for promotion of the
above businesses, depreciation of the Bayview Hotel Bldg, and in applying the
Ballantyne scale of values for determining the cost of his Manila property.
o The CIR, on the other hand, claimed that the CTA erred in reducing the amounts
and giving credence to the uncorroborated testimony of Mariano Zamora that he
bought the said real property in question during the Japanese occupation, partly
in Philippine currency and partly in Japanese war notes.
 Cases Nos. L-15289 and L-15281 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.
o 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.

First issue – disallowance of the entire promotion expenses incurred by Mrs. Zamora

Petitioner: The CTA erred in disallowing P10,478.50 as promotion expenses incurred by his wife
for the promotion of the Bay View Hotel and Farmacia Zamora. He contends that the whole
amount of P20,957.00 as promotion expenses 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 some supporting receipts has been sufficiently and satisfactorily established - to purchase
machinery for a new Tiki-Tiki plant, and to observe hotel management in modern hotels.

Respondents: 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. 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. 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 respondents considered 50% of the said amount of P20,957.00 as business
expenses and the other 50%, as her personal expenses.

Held: The 50% allocation is very fair to Zamora, there being no receipt to explain the alleged
business expenses as well as the personal expenses that might have been incurred.

 While in situations like the present, absolute certainty is usually no 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. 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
 In the case of Visayan Cebu Terminal Co., Inc. v. Collector of Int. Rev., G.R. No. L-12798,
May 30, 1960, 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;
o that to be deductible, said business expenses must be ordinary and necessary
expenses paid or incurred in carrying on any trade or business;
o that those expenses must also meet the further test of reasonableness in
amount; that accordingly, it is not possible to determine the actual amount
covered by supporting papers and the amount without supporting papers, the
court should determine from all available data, the amount properly deductible
as representation expenses.

Second issue – disallowance/reduction of the rate of depreciation of Bayview Hotel (from 3.5%
to 2.5%)

Petitioner: Contends that 1) the Ermita district is 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". Also, the reference to Bulletin F,
a publication by the IRS, should have been first proved as law to be subject of judicial notice.

Held: The CTA was approximately correct in holding that the rate of depreciation must be 2.5%.
 An average hotel building’s estimated useful life is 5 years, but inasmuch as it also
depends on the use and location, change in population and other, it is allowed a
deprecation rate of 2.5% which corresponds to a useful life of 40 years.
 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 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.
Atlas vs CIR

Facts:

Held:

 Accordingly, as found by the Court of Tax Appeals, the said expense is not deductible
from Atlas gross income in 1958 because expenses relating to recapitalization and
reorganization of the corporation, promotion expenses and commission or fees paid for
the sale of stock reorganization are capital expenditures
 That the expense in question was incurred to create a favorable image of the
corporation in order to gain or maintain the public's and its stockholders' patronage,
does not make it deductible as business expense.
o As held in the case of Welch vs. Helvering, 15 efforts to establish reputation are
akin to acquisition of capital assets and, therefore, expenses related thereto are
not business expense but capital expenditures.
 the litigation expenses under consideration were incurred in defense of Atlas title to its
mining properties. In line with the decision of the U.S. Tax Court in the case of Safety
Tube Corp. vs. Commissioner of Internal Revenue,
o it is well settled that litigation expenses incurred in defense or protection of title
are capital in nature and not deductible.
o Likewise, it was ruled by the U.S. Tax Court that expenditures in defense of title
of property constitute a part of the cost of the property, and are not deductible
as expense.