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PHILIPPINE REFINING CO v CA

- Documents G.R. No. 118794. May 8, 1996

FACTS:

Philippine Refining Corp (PRC) was assessed deficiency tax payments for the year 1985 in the
8 Sheet Music
amount of around 1.8@. !his figure was computed "ased on the disallowance of the claim of "ad de"ts "y
PRC. PRC duly protested the assessment claiming that under the law# "ad de"ts and interest expense are
allowa"le deductions.

$hen the %&R su"se'uently garnished some of PRCHs properties# the latter considered the protest
as "eing denied and filed an appeal to the C!I which set aside the disallowance of the interest expense
and modified the disallowance of the "ad de"ts "y allowing * accounts to "e claimed as deductions.
+owe,er# 1* supposed -"ad de"tsN were disallowed as the C!I claimed that these were not su"stantiated
and did not satisfy the /urisprudential re'uirement of -worthlessness of a de"tN !he CI denied the
petition for re,iew.

Issu@: $hether or not all the "ad de"ts should "e treated as deductions.

H@!": No. !he 0upreme Court stated laid down the re'uirements a taxpayer must show for a de"t to "e
considered as a Q"ad de"tQ which will in turn ma2e it deducta"le. !he re'uirements are as follows3 that #1)
there is a ,alid and su"sisting de"t. #$) the de"t must "e actually ascertained to "e worthless and
uncollecti"le during the taxa"le year4 #%& the de"t must "e charged off during the taxa"le year4 and #4& the
de"t must arise from the "usiness or trade of the taxpayer. Idditionally# "efore a de"t can "e considered
worthless# the taxpayer must also show that it is indeed uncollecti"le e,en in the future.

&n addition to that# there are steps that can "e done "y the taxpayer to show that he ga,e a diligent
effort in collecting the de"t. !hese steps are3 #1) sending of statement of accounts ' #$) sending of
collection letters ' #%& gi,ing the account to a lawyer for collection4 and #4& filing a collection case in
court.

&n the case at "ar# PRC failed to esta"lish the re'uirements to ma2e the su"/ect de"t a Q"ad de"tQ.
!hey only used the testimony of its accountant @s. @asagana in order to pro,e that these accounts were
"ad de"ts. !his was considered "y all * courts to "e selfUser,ing. !he 0C said that PRC failed to exercise
due diligence in order to ascertain that these de"ts were uncollecti"le. &n fact# PRC did not e,en show the
demand letters they allegedly ga,e to some of their de"tors.

P@()()o* +@*)@"

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F@L*a*"@" H@L-a*os INC vs CIR

FaN(s: !he taxpayer# 6ernande7 +ermanos# &nc.# is a domestic corporation organi7ed for the principal
purpose of engaging in "usiness as an Qin,estment companyQ with main office at @anila. Xpon
,erification of the taxpayerYs income tax returns for the period in 'uestion# the Commissioner of &nternal
Re,enue assessed against the taxpayer the sums of P1*#:1:.;;# P119#<1*.;;# P11#<98.;;# P<#88=.;; and
P1:#:51.;; as alleged deficiency income taxes for the years 195;# 1951# 195># 195* and 195:#
respecti,ely. !he assessments were the result of alleged discrepancies found upon the examination and
,erification of the taxpayerYs income tax returns for the said years. !he !ax court sustained the C&RYs
disallowance of the "ad de"ts of Palawan @ines. %oth sides appealed until it reached the 0upreme Court.

Issu@: $hether or not the rulings of the !ax Court regarding the disallowances of the de"ts to the
F@L*a*"@" H@L-a*os INC vs CIR
Palawan @anganese @ines are correct.
You're Reading a Preview
FaN(s: !he taxpayer# 6ernande7 +ermanos# &nc.# is a domestic corporation organi7ed for the principal
H@!": /@s.
purpose of engaging in "usiness as an Qin,estment companyQ with main office at @anila. Xpon
!he court noted
,erification of thethatUpload your documents to download.
there was
taxpayerYs a memorandum
income tax returns signed
for the "y the in
period parties in,ol,ed.
'uestion# &n this memorandum#
the Commissioner it
of &nternal
was statedassessed
Re,enue that if there were
against thenotaxpayer
earningsthe
or sums
profits#
of there was no o"ligation
P1*#:1:.;;# to repay
P119#<1*.;;# those ad,ances.
P11#<98.;;# P<#88=.;;&t and
has
"een#:5
P1: held
1.;;that
asthe
all,oluntary ad,ances
eged defici ency incom OR
madee without
taxes foexpectation
r the yearsof 195
repayment
;# 1951#do195
not>#result
195* in and
deducti"le
195:#
losses. Petitioner
respecti,ely. !he could not suewere
assessments for reco,ery under
the result the memorandum
of alleged agreement
discrepancies found upon "ecause the o"ligationand
the examination of
Palawan @anganese @ines# &nc. was totax
pay petitioner 15? of its net profits# notcourt
the ad,ances.
sustained !herefore
,erification
no
Become a Scribd member for full access. Your
of the taxpayerYs
"ad de"t could
income returns for the said years. !he !ax the C&RYs
disallowance of thearise "ecause
"ad de"ts one re'uirement
of Palawan is missing
@ines. %oth which is until
sides appealed that there "e a the
it reached ,alid and su"sisting
0upreme Court.
de"t. first 30 days are free.
Issu@: $hether or not the rulings of the !ax Court regarding the disallowances of the de"ts to the
Ta0 CouL(
Palawan Ru!)*Q A22)L-@"
@anganese @ines are)*correct.
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H@!": /@s. Continue for Free

!he court noted that there was a memorandum signed "y the parties in,ol,ed. &n this memorandum# it
was stated that if there were no earnings or profits# there was no o"ligation to repay those ad,ances. &t has
"een held that the ,oluntary ad,ances made without expectation of repayment do not result in deducti"le
losses. Petitioner could not sue for reco,ery under the memorandum agreement "ecause the o"ligation of
Palawan @anganese @ines# &nc. was to pay petitioner 15? of its net profits# not the ad,ances. !herefore
no "ad de"t could arise "ecause one re'uirement is missing which is that there "e a ,alid and su"sisting
de"t.

Ta0 CouL( Ru!)*Q A22)L-@" )* (o(o

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