ZAMORA v. COLLECTOR [G.R. No. L-15290. ESSO STANDARD v. CIR [G.R. Nos. 28508-9.

May 31, 1963.] July 7, 1989.]

FACTS: Mariano Zamora, owner of the Bay View FACTS: Petitioner ESSO claimed as ordinary and
Hotel and Farmacia Zamora, Manila, filed his necessary expenses in the same return the margin
income tax returns. The Collector of Internal fees it paid to the Central Bank on its profit
Revenue found that the promotion expenses remittances to its New York head office.
incurred by his wife for the promotion of the Bay
View Hotel and Farmacia Zamora were not ISSUE: WON the margin fees were deductible
allowable deductions. Mariano Zamora contends from gross income either as a tax or as an ordinary
that the whole amount of the promotion expenses in and necessary business expense
his income tax returns, should be allowed and not HELD: Neither. The margin fees were imposed by
merely one-half of it, on the ground that, while not the State in the exercise of its police power and not
all the itemized expenses are supported by receipts, the power of taxation. Neither are they necessary
the absence of some supporting receipts has been and ordinary business expenses. To be deductible as
sufficiently and satisfactorily established. a business expense, the expense must be paid or
ISSUE: In the absence of receipts, WON to allow incurred in carrying on a trade or business. The fees
as deduction all or merely one-half of the promotion were paid for the remittance by ESSO as part of the
expenses of Mrs. Zamora claimed in Mariano profits to the head office in the United States, which
Zamora's income tax returns is already another distinct and separate income
taxpayer. Such remittance was an expenditure
HELD: One-half only. Claims for the deduction of necessary and proper for the conduct of its
promotion expenses or entertainment expenses corporate affairs.
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.
CIR v. GENERAL FOODS [G.R. No. 143672.
April 24, 2003.]
FACTS: In its income tax return, respondent
corporation claimed as deduction, among other
business expenses, the amount for media
advertising for ‘Tang,’ one of its products.
ISSUE: WON the subject media advertising
expense for ‘Tang’ incurred by respondent was an
ordinary and necessary expense fully deductible
under the NIRC
HELD: Not deductible. Deductions for income tax
purposes partake of the nature of tax exemptions;
hence, must be strictly construed. To be deductible
from gross income, the subject advertising expense
must be ordinary and necessary. There being no
hard and fast rule on the reasonableness of an
advertising expense, the right to a deduction
depends on a number of factors such as but not
limited to: 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. The amount claimed as media
advertising expense for ‘Tang’ alone was almost
one-half of its total claim for marketing expenses.
Furthermore, it was almost double the amount of
respondent corporation's general and administrative
expenses. The subject expense for the advertisement
of a single product is inordinately large. Said
venture of respondent to protect its brand franchise
was tantamount to efforts to establish a reputation,
and should not, therefore, be considered as business
expense but as capital expenditure, which normally
should be spread out over a reasonable period of
time.
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
Facts:
Gancayco filed his Income tax Return (ITR) for
1949. CIR notified him that his liability is Php
9.793.62, which he paid 1950. CIR, after a year
wrote to Gancayco saying that there was tax due
from him for a total of Php 29,554.05. Gancayco
asked for reconsideration and the tax assessed was
reduced. CIR issued a warrant of distraint for the
deficient liability. Gancayco filed petition with
CTA.
CTA Required Gancayco to pay Php 16, 860.31 for
tax deficiency in1949
Gancayco: the right to collect the deficiency income
tax is barred by thestatute of limitations.
: the 5 yr period for judicial action should be
counted from May 12 50, the date of original
assessment SC: Section 316 provides: The civil
remedies for the collection of internal revenue
taxes, fees, or charges, and any increment thereto
resulting from delinquency shall be (a) by distraint
of goods, chattels, or effects, and other personal
property of whatever character, including stocks
and other securities, debts, credits, bank accounts,
and interest in and rights to personal property, and
by levy upon real property; and (b) by judicial
action. Either of these remedies or both
simultaneously may be pursued in the discretion of
the authorities charged with the collection of such
taxes. No exemption shall be allowed against the
internal revenue taxes in any case.
: Deduction for expenses may be allowed, however
in this case, Gancayco was not able to prove any
expense as there were no receipts or other proofs.
CTA AFFIRMED
WESTERN MINOLCO v. CIR [G.R. No. L-61632.
August 16, 1983.]
FACTS: Petitioner is a domestic corporation
engaged in mining, particularly copper concentrates
for export mined from mineral lands. It was granted
by the Securities and Exchange Commission, under
Certificate of Renewal No. R-1056, authority to
borrow money and issue
commercial papers. Pursuant to this authority, the
petitioner borrowed funds from several financial
institutions and paid the corresponding 35%
transaction tax due thereon. Petitioner applied for a
refund alleging that it was not liable to pay the 35%
transaction tax.
ISSUE: WON the 35% transaction tax is a business
tax that constitutes an allowable deduction from
gross income
HELD: No. The 35% transaction tax is imposed on
interest income from commercial papers issued in
the primary money market. Being a tax on interest,
it is a tax on income. The petitioner who borrowed
funds from several financial institutions by issuing
commercial papers merely
withheld the 35% transaction tax before paying to
the financial institutions the interests earned by
them and later remitted the same to the respondent
Commissioner of Internal Revenue. Whatever
collecting procedure is adopted does not change the
nature of the tax. Furthermore, whether or not
certain taxes are on income is not necessarily
determined by their deductibility or non-
deductibility from ross income. Income in the form
of dividends, capital gains on real property, shares
of stock, and interests on savings in bank accounts
are incomes, yet they are not included in the gross
income when income taxes are paid because these
are subject to final withholding taxes.
YUTIVO SONS HARDWARE CO. VS COURT
OF TAX APPEALS
Facts: Yutivo Sons Hardware Co. is a domestic
corporation engaged in the importation and sale of
hardware supplies and equipment. It bought a
number of cars and trucks from General Motors
Overseas Corporation, an American corporation
licensed to do business in the Philippines. As
importer, GM paid sales tax prescribed by sections
184, 185 and 186 of the Tax Code on the basis of its
selling price to Yutivo. Said tax being collected
only once on original sales, Yutivo paid no further
sales tax on its sales to the public. Southern Motors,
Inc. was organized to engage in the business of
selling cars, trucks and spare parts. Its shares were
subscribed in five equal proportions by the
descendants of the founders of Yutivo. When GM
withdrew from the Philippines, the cars and trucks
purchased by Yutivo from GM were sold by Yutivo
to SM which, in turn, sold them to the public in the
Visayas and Mindanao. GM appointed Yutivo as
importer for the Visayas and Mindanao, and Yutivo
continued its previous arrangement of selling
exclusively to SM. In the same way that GM used
to pay sales taxes based on its sales to Yutivo, the
latter, as importer, paid sales tax on the basis of its
selling price to SM, and since such sales tax, as
already stated, is collected only once on original
sales, SM paid no sales tax on its sales to the public.
Yutivo was investigated by the CIR and was
assessed deficiency sales tax plus surcharge. The
CIR claimed that the taxable sales were the retail
sales by SM to the public and not the sales at
wholesale made by Yutivo to the latter inasmuch as
SM and Yutivo were one and the same corporation,
the former being the subsidiary of the latter. Yutivo
alleged the following before the Court of Tax
Appeals: (1) that there is no valid ground to
disregard the corporate personality of SM and to
hold that it is an adjunct of petitioner Yutivo; (2)
that assuming that the separate personality of SM
may be disregarded, the sales tax already paid by
Yutivo should first be deducted from the selling
price of SM in computing the sales tax due on each
vehicle; and (3) that the surcharge has been
erroneously imposed by the CIR. The CTA ruled in
favor of CIR and ruled that the creation of SM is for
Yutivo to evade taxes, as it is owned and controlled
by Yutivo and is a mere subsidiary, branch, adjunct
conduit, instrumentality or alter ego of the latter.
Issue: Whether or not SM has a personality separate
and distinct from Yutivo.
Held: It is an elementary and fundamental principle
of corporation law that a corporation is an entity
separate and distinct from its stockholders and from
other corporations to which it may be connected.
However, "when the notion of legal entity is used to
defeat public convenience, justify wrong, protect
fraud, or defend crime," the law will regard the
corporation as an association of persons, or in the
case of two corporations merge them into one.
When the corporation is the "mere alter ego or
business conduit of a person, it may be
disregarded." However, SM was not organized
purposely as a tax evasion device. Moreover, it runs
counter to the fact that there was no tax to evade.
The intention to minimize taxes, when used in the
context of fraud, must be proved to exist by clear
and convincing evidence amounting to more than
mere preponderance, and cannot be justified by a
mere speculation. This is because fraud is never
lightly to be presumed. The SC however agreed that
SM was actually owned and controlled by petitioner
as to make it a mere subsidiary or branch of the
latter created for the purpose of selling the vehicles
at retail and maintaining stores for spare parts as
well as service repair shops. Consideration of
various other circumstances, especially when taken
together, indicates that Yutivo treated SM merely as
its department or adjunct. For one thing, the
accounting system maintained by Yutivo shows that
it maintained a high degree of control over SM
accounts. All transactions between Yutivo and SM
are recorded and effected by mere debit or credit
entries against the reciprocal account maintained in
their respective books of accounts and indicate the
dependency of SM as branch upon Yutivo.
Atlas Consolidated Mining v. CIR
Facts: CIR assessed Atlas deficiency income tax
for 1957 to 1958 which amounted to morethan
P700K. CIR asserted that in 1957, Atlas was still
not entitled to exemption fromthe income tax under
RA 909 because the same covers only gold mines
and Atlas isnot engaged in that. Atlas
protested before the Sec of Finance and Sec ruled
that exemption provided in RA 909 embraces all
new mines and old mines, whether gold or other
minerals. Hence, Sec recomputed and eliminated
P500K+ in 1957 and reduced P215K to P39K in
1958. Atlas appealed to this assessments assailing
the disallowance of the following items: transfer
agent􀀀s fees, stockholders relation service fee, US
stock listing expenses, suit expenses, provision for
contingency. CTA disallowed the items except the
stockholders relation service fee and suit expenses.
Also CTA ruled that the exemption from payment
of the corporate income tax of Atlas was good only
up to the first quarter of 1958, hence it computed
for its net taxable income for the remaining ¾ of the
year. Atlas appealed asserting that the annual public
relations expense is a deductible expense from gross
income because it is an ordinary and necessary
business expense.
Issue: WON this fee paid for the services rendered
by a public relations firm in the US labeled as
stockholders relation service fee is an allowable
deduction.
Held: No. it is a capital expenditure and not an
ordinary expense. The principle is recognized that
when a taxpayer claims a deduction, he must point
to some specific provision of the statute in which
that deduction is authorized and must be able to
prove that he is entitled to the deduction which the
law allows. As previously adverted to, the law
allowing expenses as deduction from gross income
for purposes of the income tax is Section 30 (a) (1)
of the National Internal Revenue which allows a
deduction of "all the ordinary and necessary
expenses paid or incurred during the taxable year in
carrying on any trade or business." An item of
expenditure, in order to be deductible under this
section of the statute, must fall squarely within its
language. We come, then, to the statutory test of
deductibility where it is axiomatic that to be
deductible as a business expense, three conditions
are imposed, namely: (1) the expense must be
ordinary and necessary, (2) it must be paid or
incurred within the taxable year, and (3) it must be
paid or incurred in carrying in a trade or business.
In addition, not only must the taxpayer meet the
business test, he must substantially prove by
evidence or records the deductions claimed under
the law, otherwise, the same will be disallowed. The
mere allegation of the taxpayer that an item of
expense is ordinary and necessary does not justify
its deduction. Assuming that the expenditure is
ordinary and necessary in the operation of the
taxpayer's business, the answer to the question as to
whether the expenditure is an allowable deduction
as a business expense must be determined from the
nature of the expenditure itself, which in turn
depends on the extent and permanency of the work
accomplished by the expenditure. The expenditure
of P25,523.14 paid to P.K. Macker & Co. as
compensation for services carrying on the selling
campaign in an effort to sell Atlas' additional capital
stock of P3,325,000 is not an ordinary expense in
line with the decision of U.S. Board of Tax Appeals
in the case of Harrisburg Hospital Inc. vs.
Commissioner of Internal Revenue. 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 1)
recapitalization and reorganization of the
corporation, 2) the cost of obtaining stock
subscription 3)promotion expenses and 4)
commission or fees paid for the sale of stock
reorganization are capital expenditures. The burden
of proof that the expenses incurred are ordinary and
necessary is onthe taxpayer. The claimed business
expense must also be supported by appropriate
documents such as invoices, official receipts, and
contracts, to be made available in case of a tax audit
by the Bureau of Internal Revenue.
VISAYAN CEBU TERMINAL CO. INC. VS
COLLECTOR OF INTERNAL REVENUE
Facts: Visayan Cebu Terminal Co. Inc. is a
corporation organized for the purpose of handling
arrastre operations in the port of Cebu. Visayan
filed its income tax return for 1951 claiming the
following items as deductions from the company’s
gross income: (1) salaries, (2) representation
expenses (PhP 75,855.88), and (3) miscellaneous
expenses. The Collector of Internal Revenue
disallowed the entire amount of representation
expenses. The Court of Tax Appeals allowed
representation expenses but set the limit at PhP
10,000.00.
Issue: Whether or not the full amount of
representation expenses should be allowed as a
deduction from Visayan’s gross income.
Held: The Court sustained the Tax Court in holding
that representation expenses fall under the category
of business expenses which are allowable
deductions from gross income if they meet the
following requisites laid down in the Tax Code—
they must be ordinary and necessary expense paid
or incurred in carrying on any trade or business and
they must meet the test of reasonableness in
amount. The Court further agreed with the
computation made by the CTA. Because of the
company’s failure to provide evidence for all such
expenses (the corporation claims that the supporting
papers were destroyed when the house of the
company treasurer, where the records were kept was
burned), the Court should determine from all
available data the amount properly deductible as
representation expenses. The Court sustained the
finding of the CTA that PhP 10,000.00 may be
considered reasonably necessary as the company’s
representation expenses based on figures presented
during the proceedings.
KUENZLE & STREIFF, INC. vs. THE
COLLECTOR OF INTERNALREVENUE
Facts: Petitioner claimed as a deduction for income
tax purposes for the years 1950, 1951 and 1952
salaries, directors' fees and bonuses of its non-
resident president and vice-president; bonuses of
some of its resident officers and employees; and
interests on earned but unpaid
salaries and bonuses of its officers and employees.
Petitioner gave to its non-resident president and
vice president for the years 1950 and 1951 bonuses
equal to 133-1/2% of their annual salaries and
bonuses equal to 125 2/3% for the year 1952.
Petitioner however gave its resident officers and
employees higher bonuses on the alleged reason
because of their valuable contribution to the
business of the corporation which has made it
possible for it to realize huge profits during the
aforesaid years. The respondent disallowed the said
deductions hence they were assessed for deficiency
income taxes. Upon re-examination by the
respondents, they allowed as deductions all items
comprising directors' fees and salaries of the non-
resident president and vice president, but
disallowing the bonuses insofar as they exceed the
salaries of the recipients, as well as the interests on
earned but unpaid salaries and bonuses.
Issue: WON the excessive bonuses and interest
should be allowed as a deduction for income tax
purposes.
Held: No. 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" Requisites for deductibility of employee
bonuses: (1) the payment of the bonuses is in fact
compensation; (2) it must be for personal services
actually rendered; and (3) the 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". There is no fixed test for determining the
reasonableness of a given bonus as compensation.
Deductible amount of bonuses is not limited to the
amount of salary of its recipient. The prevailing
circumstances
should be considered. However In this case, the
bonuses given to resident employees were higher
than its non-resident officers on the reason that the
resident officers and employees had performed their
duty well and rendered efficient service. It does not
necessarily follow that they should be given greater
amount of additional compensation in the form of
bonuses than what was given to the non-resident
officers. The non-resident officers had rendered the
same amount of efficient personal service and
contribution to deserve equal treatment in
compensation and
other emoluments with the particularity that their
liberation yearly salaries had been much smaller.
Interest should also be disallowed. . Under the law,
in order that interest may be deductible, it must be
paid "on indebtedness" (Section 30, (b) (1) of the
National Internal Revenue Code). It is therefore
imperative to show that there is an existing
indebtedness which may be subjected to the
payment of interest. Here the items involved are
unclaimed salaries and
bonus participation which in our opinion cannot
constitute indebtedness within the meaning of the
law because while they constitute an obligation on
the part of the corporation, it is not the latter's fault
if they remained unclaimed. The willingness of the
corporation to pay interest thereon cannot be
considered a justification to warrant deduction.
AGUINALDO INDUSTRIES CORPORATION
(FISHING NETS DIVISION) vs.
COMMISSIONER OF INTERNAL REVENUE
and THE COURT OF TAX APPEALS
Facts: Upon investigation of petitioner's 1957
income tax returns of its Fish Nets Division, the
Bureau of Internal Revenue examiner found that the
amount of P61,187.48 was deducted from the gross
income as additional remuneration paid to the
officers of petitioner and that such amount was
taken from the net profit which petitioner derived
from an isolated transaction (sale of a parcel of its
land) which is not in the course of or carrying on of
petitioner's trade or business. The examiner
recommended disallowance of the deduction, but
petitioner insisted otherwise, claiming that the
payment of the allowance or bonus was pursuant to
its by-laws. The Court of Tax Appeals held the
petitioner liable for deficiency income tax plus
surcharge and interest
Issue: WON the profit derived from the sale of its
land is tax-exempt income under Republic Act No.
901
Held: No. Petitioner may not raise the question of
tax exemption for the first time on review where
such question was not raised at the administrative
forum
Issue: WON the bonus given to the officers of
petitioner as share in the profit realized from the
sale of the land is deductible expense for tax
purposes
Held: No. The bonus given should be considered as
deductible for income tax purposes only if payment
was made for service actually rendered and it is
reasonable and necessary. The records show that the
sale was effected through a broker who was paid by
petitioner a commission for his services. On the
other hand, there is absolutely no evidence of any
service actually rendered by petitioner's officers
which could be the basis of a grant to them of a
bonus out of the profit derived from the sale. Thus,
the payment of a bonus to them out of the gain
realized from the sale cannot be considered as a
selling expense; nor can it be deemed reasonable
and necessary so as to make it deductible for tax
purposes.
CIR v JAMIR
Facts: For the year 1954, Alberto M. K. Jamir
declared a gross income of P75,858.65 and claimed
deductions aggregating P58,134.50, thereby
showing a net income of P17,774.15, upon which
he paid P1,634 as income tax. The Collector of
Internal Revenue, however, assessed, as deficiency
income tax due from him, the sum of P16,395.
Jamir appealed to the Court of Tax Appeals, which
reduced the amount due as deficiency income tax to
P552.00
Issue: Whether Jamir had an undeclared income for
the year 1954 aggregating P31,274.91.
Held: No. It appears that, by using the so-called
"expenditures method", the Government considered
as an undeclared income Jamir's expenditures for
February and May were in excess of his reported
income for the same months. Although the Court of
Tax Appeals, in effect, sanctioned the adoption of
the "expenditures method", it held that the same
should be applied by deducting the aggregate yearly
expenditures from the declared yearly income, not
the expenditures incurred each month from the
declared income therefor. In the case at bar, Jamir's
total income for the year 1954 (P75,858.65)
exceeded (Pl7,774.15) the total deductions
(P58,134.50) claimed by him. Jamir introduced
evidence that the said sums of P1,281.24 and
P29,993.67 represented advances made to him by
customers in the months of February and may,
1954, and that the income derived from the
corresponding transactions were entered in his
books of account in subsequent months, and this
explanation was found by the Court of Tax Appeals
to have been proven satisfactorily. The next
question raised by appellant refers to Jamir's claim
for car depreciation and salary of his driver.
Although petitioner had disallowed one-half (1/2) of
these claims, it appearing that the car was used by
Jamir for personal and business purposes, the lower
court allowed, as deductions, three-fourths (3/4) of
said amounts, the car having been used by Jamir
"more for business than for personal purpose".
Petitioner assails this as an error, but, considering
the circumstances, we agree with the deduction of ¾
by the lower court. It is next urged that Jamir
committed fraud and the 50% surcharge should not
have been eliminated. But since Jamir did not have
the undeclared income of P31,274.91, upon which
the contested assessment is mainly based, it follows
necessarily that he was not guilty of the fraud and
that the 50% surcharge has been properly liminated.
Disposition: the decision appealed from is hereby
affirmed.
HOSPITAL DE SAN JUAN DE DIOS, INC. vs.
COMMISSIONER OF INTERNAL REVENUE
Facts: Petitioner is engaged in both taxable and
non-taxable operations. For the years 1952 to 1955,
the petitioner allocated its administrative expenses.
The respondent disallowed, however, the interests
and dividends from sharing in the allocation of
administrative expenses on the ground that the
expenses incurred in the administration or
management of petitioner's investments are not
allowable business expenses inasmuch as they were
not incurred in 'carrying on any trade or business'
within the contemplation of Section 30 (a)(1) of the
Revenue
Code. Hence, were assessed for deficiency income
taxes.
Issue: WON administrative expenses should be
considered as a deduction/allocated to its interest
and dividend income for income tax purposes.
Held: No. the principle of allocating expenses is
grounded on the premise that the taxable income
was derived from carrying on a trade or business, as
distinguished from mere receipt of interests and
dividends from one's investments, the Court of Tax
Appeals correctly ruled that
said income should not share in the allocation of
administrative expenses. Hospital de San Juan De
Dios, Inc., according to its Articles of
Incorporation, was established for purposes "which
are benevolent, charitable and religious, and not for
financial gain". It is not carrying on a trade or
business for the word "business" in its ordinary and
common use means "human efforts which have for
their end living or reward; it is not commonly used
as descriptive of charitable, religious, educational or
social agencies" or "any particular occupation or
employment habitually engaged in especially for
livelihood or gain" or "activities where profit is the
purpose or livelihood is the motive."
FELIX MONTENEGRO, INC., petitioner, vs. sale as the dates of their efficacy have expired
COMMISSIONER OF should be disallowed.

INTERNAL REVENUE, respondent. Issue: WON campaign contribution should be

allowed as a deduction.
[C.T.A. CASE NO. 695. April 30, 1969.]
Held: No. Amount expended for political campaign
Facts: The CIR disallowed salaries of some of its purposes or payments to campaign funds are not
officers, value of medicines, campaign contribution deductible either as business expenses or as
and miscellaneous expense as deduction for income contribution
tax purposes hence the petitioner was assessed for
deficiency income taxes. The deduction of salaires
was disallowed because the said officers are also
stockholders of the corporation and that their
salaries are excessive compared to those of officers
of other corporation holding similar positions and
doing the same volume of business.

Issue: WON the salaries and expenses should be

allowed as a deduction.

Held: Yes. The general rule is that the employer is

given a wide latitude of discretion in the amount of
salaries paid to the employees. A corporation has
the right to fix the compensation of its employees
.There is no comparative study of the profits of the
two enterprises in relation to other concerns
similarly situated. Neither is there any comparative
study of the peculiar situation of the two enterprises
in relation to other concerns, nor is there a
comparison of the nature and volume of the work
performed by the officers involved. Since no two
business enterprises are exactly in the same
situation, negligible differences in salaries cannot
reasonably show that the salary is excessive or that
profits are channeled to the stockholders thru
salaries.

Issue: WON the value of medicines is a deductible

loss

Held: No. Aside from self serving testimonial

evidence, no other evidence was presented to
substantiate this claim of petitioner. There is not
even a list of the medicines, their value, and their
expiry dates. The deductible as loss on the ground
that the aforesaid medicines were no longer fit for
COLLECTOR V. PHILIPPINE EDUCATION
CO.
FACTS: Respondent lost all its pre-war books of
accounts and records, with the exception of a copy
of the trial balance sheet. It employed an accounting
firm and paid it the sum of P 13, 045.48. to prepare
and prove it’s war damage claim. In filing its
income tax return respondent claimed said sum as
deduction under section 30 of the NIRC. Petitioner
disallowed the same and instead assessed additional
P2,405.14 as deficiency income tax. CTA reversed
upon appeal and declared respondent exempt from
the deficiency income tax in question.
ISSUE: Whether or not the expense in question was
ordinary and necessary and whether or not it was
paid or incurred in carrying on respondent’s
business.
HELD: Yes. The law does not say that the expense
must be for or on account of transactions in one’s
trade or business. Ordinarily an expense will be
considered necessary where the expenditure is
appropriate and helpful in the development of the
taxpayer’s business. It is sufficient that the expense
were incurred for purposes proper to the conduct of
the corporate affairs or for the purpose of realizing a
profit or of minimizing a loss. The fee in question
was paid by the respondent to recover its lost assets
occasioned by the war and thereby to be so
rehabilitated as to be able to carry on its business.
Also, it should be noted that even if there is no law
exempting the proceeds of war damage claims from
taxes, the war damage compensation would still not
be subject to tax, not being an income.
Compensation for injury to capital is never income.
DOCTRINE: To carry on its business the taxpayer
not only must have sufficient assets but must
preserve the same and recover any that should be
lost. The fee or expense paid to recover its lost
assets occasioned by the war and thereby to be so
rehabilitated as to be able to carry on its business is
not required that it must be for or on account of
transactions in one’s trade or business.
CIR v Palanca, Jr.
GR No L-16626, October 29, 1966
FACTS:
The late Don Carlos Palanca, Sr. donated in favor of
his son, Carlos Palanca, Jr. shares of stock in La
Tondeña Inc.
amounting to 12,500 shares. Later, the BIR
considered the donation as transfer in contemplation
of death; consequently, the BIR assessed against the
respondent, Palanca Jr., the sum of P191,591.62 as
estate and inheritance taxes on the transfer of said
12,500 shares of stock, including therein interest for
delinquency of P60,581.80. The respondent then
filed an amended income tax return, claiming an
additional deduction in the amount P60,581.80;
hence, his new income tax due is only P428. He
attached a letter requesting the refund of
P20,624.01. However, the said request for refund
was denied by the BIR. Court of tax appeals ordered
the refund. Hence, this petition.
ISSUES:
1. Whether the interest on the delinquent estate
and inheritance tax is deductible from the
gross income
2. Whether the respondent’s claim for refund
has prescribed
RULING:
1. Yes, the interest is deductible. The rule is
settled that although taxes already due have
not, strictly speaking, the same
concept as debts, they are, however,
obligations that may be considered as such.
In CIR v Prieto, the Court explicitly
announced that while the distinction
between “taxes” and “debts” was recognized
in this jurisdiction, the variance in their legal
conception does not extend to the interests
paid on them.
No, respondent’s claim has not yet prescribed.
Considering that it is the interest paid on this latter-
assessed estate and inheritance tax that respondent
is claiming for refund, then the 30-day period for
prescription under RA 1125 should be computed
from the receipt of the final denial by the BIR of the
said claim.
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.
Respondent Palanca paid the last installment on his
1955 income tax account on August 14, 1956. His
claim for refund was filed on August 13, 1958. It
was, therefore, still timely instituted.
CIR V VIUDA DE PRIETO
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.
1.
2.
3.
1.
PAPER INDUSTRIES CORPORATION
OF THE PHILIPPINES (PICOP) v. CA,
CIR and CTA, G.R. Nos. 106949-50 (1995)
Facts:
Paper Industries Corporation of the Philippines
(PICOP) is a Philippine corporation registered with
the Board of Investments (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. Petitioner received from the
Commissioner of Internal Revenue (CIR) two (2)
letters of assessment 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
PhP88,763,255.00.
PICOP protested the assessment of deficiency
transaction tax , the documentary and science stamp
taxes, and the deficiency income tax assessment.
CIR did not formally act upon these protests, but
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, thereby denying PICOP's protests.
Thereupon, PICOP went before (CTA) appealing
the assessments.
On 15 August 1989, CTA rendered a decision,
modifying the CIR’s findings and holding PICOP
liable for the reduced aggregate amount of
P20,133,762.33. Both parties went to the Supreme
Court, which referred the case to the Court of
Appeals (CA).
CA denied the appeal of the CIR and modified the
judgment against PICOP holding it liable for
transaction tax and absolved it from payment of
documentary and science stamp tax and
compromise penalty. It also held PICOP liable for
deficiency of income tax.
Issues:
Whether PICOP is liable for transaction tax
Whether PICOP is liable for documentary and
science stamp tax
Whether PICOP is liable for deficiency income tax
Held:
YES. PICOP reiterates that it is exempt from the
payment of the transaction tax by virtue of its tax
exemption under R.A. No. 5186, as amended,
known as the Investment Incentives Act, which in
the form it existed in 1977-1978, read in relevant
 part as follows: "SECTION 8. Incentives to a
Pioneer Enterprise. — In addition to the incentives
provided in the preceding section, pioneer
enterprises shall be granted the following incentive
benefits: (a) Tax Exemption. Exemption from all
taxes under the National Internal Revenue Code,
except income tax, from the date of investment is
included in the Investment Priorities Plan x x x”.
The Supreme Court holds that 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,
a tax on the interest income of the lenders or
creditors as held by the Supreme Court in the case
of Western Minolco Corporation v. Commissioner
of Internal Revenue. The 35% transaction tax is an
income tax on interest earnings to the lenders or
placers. The latter are actually the taxpayers.
Therefore, the tax cannot be a tax imposed upon the
petitioner. In other words, the petitioner who
borrowed funds from several financial institutions
by issuing commercial papers merely withheld the
35% transaction tax before paying to the financial
institutions the interest earned by them and later
remitted the same to the respondent CIR. The tax
could have been collected by a different procedure
but the statute chose this method. Whatever
collecting procedure is adopted does not change the
nature of the tax. 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. PICOP was the withholding
agent, obliged to withhold thirty-five percent (35%)
of the interest payable to its lenders and to remit the
amounts so withheld to the Bureau of Internal
Revenue ("BIR"). As a withholding, agent, PICOP
is made personally liable for the thirty-five percent
(35%) transaction tax 10 and if it did not actually
withhold thirty-five percent (35%) of the interest
monies it had paid to its lenders, PICOP had only
itself to blame.
2. NO. The CIR assessed documentary and science
stamp taxes, amounting to PhP300,000.00, on the
issuance of PICOP's debenture bonds. 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 public. The
actual dedication of the proceeds of the bonds to the
carrying out of PICOP's registered operations
constituted a sufficient nexus with such registered
operations so as to exempt PICOP from taxes
ordinarily imposed upon or in connection with
issuance of such bonds. The Supreme Court agrees
with the Court of Appeals on this matter that the
CTA and the CIR had erred in rejecting PICOP's
claim for exemption from stamp taxes.
3. YES. PICOP did not deny the existence of
discrepancy in their Income Tax Return and Books
of Account owing to their procedure of recording its
export sales (reckoned in U.S. dollars) on the basis
of a fixed rate, day to day and month to month,
regardless of the actual exchange rate and without
waiting when the actual proceeds are received. In
other words, PICOP recorded its export sales at a
pre-determined fixed exchange rate. That pre-
determined rate was decided upon at the beginning
of the year and continued to be used throughout the
year. Because of this, 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.
Commissioner vs. Itogon-Suyoc Mines
GR L-25299, 29 July 1969En Banc,
Fernando (J): 9 concur, 1 took no part
Facts: Itogon-Suyoc Mines filed its income tax
return for the fiscal year 1959 to 1960. Four months
later, itfiled an amended income tax return,
reporting a loss. It thus sought a refund from the
Commissioner. When itfiled its income tax return
on the next year, it deducted an amount representing
alleged tax credit foroverpayment for the preceding
fiscal year. The Commissioner imposed an amount
P1,512.83 as 1% monthlyinterest on the amount of
P13,155.20 from January to December 1962. The
basis for such assessment wasallegedly the absence
of a legal right to deduct said amount before the tax
credit or refund is approved by theCommissioner.
Issue: Whether the assessment on interest was
justified.
Held: The Tax Code provides that interest upon the
amount determined as a deficiency shall be assessed
andshall be paid upon notice and demand from the
Commissioner at the rate therein specified. It made
clear,however, in an earlier provision found in the
same section that if in any preceding year, the
taxpayer wasentitled to a refund of any amount due
as tax, such amount, if not refunded, may be
deducted from the tax to be paid. Although the
imposition of monthly interest does not constitute
penalty but a just compensation to theState for the
delay in paying the tax and for the concomitant use
by the taxpayer of funds that rightfullyshould be in
government’s hands; in light of the overpayment for
1959 and 1960, it cannot be said that thetaxpayer
was guilty of delay enabling it to utilize the money.
The company is entitled to refund.
CASTRO v. COLLECTOR
Facts: This is an appeal from a decision of the
Court of Tax Appeals (in its C.T.A. Case 141)
holding petitioner Maria B. Castro liable under the
War Profits Tax Law, Republic Act No. 55, and
ordering her to pay a deficiency war profits tax
(including surcharges and interest) in the amount of
P1,360,514.66, and costs. Castro was previously
acquitted in the criminal case instituted against her
for violation of the War Profits Tax Law.
Issue: WON the acquittal is a bar to the collection
of the taxes assessed, and specially of the 50%
surcharge
Held: NO. With regard to the tax proper, the state
correctly points out in its brief that the acquittal in
the criminal case could not operate to discharge
petitioner from the duty to pay the tax, since that
duty is imposed by statute prior to and
independently of any attempts on the part of the
taxpayer to evade payment. The obligation to pay
the tax is not a mere consequence of the felonious
acts charged in the information, nor is it a mere civil
liability derived from crime that would be wiped out
by the judicial declaration that the criminal acts
charged did not exist. As to the 50% surcharge, the
very United States Supreme Court that rendered the
Coffey decision has subsequently pointed out that
additions of this kind to the main tax are not
penalties but civil administrative sanctions,
provided primarily as a safeguard for the protection
of the state revenue and to reimburse the
government for the heavy expense of investigation
and the loss resulting from the taxpayer's fraud
(Helvering vs. Mitchell, 303 U.S. 390, 82 L. Ed.
917; Spies vs. U.S. 317 U.S. 492). This is made
plain by the fact that such surcharges are
enforceable, like the primary tax itself, by distraint
or civil suit, and that they are provided in a section
of R.A. No. 55 (section 5) that is separate and
distinct from that providing for criminal prosecution
(section 7). We conclude that the defense of
jeopardy and estoppel by reason of the petitioner's
acquittal is untenable and without merit. Whether or
not there was fraud committed by the taxpayer
justifying the imposition of the surcharge is an issue
of fact to be inferred from the evidence and
surrounding circumstances; and the finding of its
existence by the Tax Court is conclusive upon us. Collector of Internal Revenue vs. Fisher
(Gutierrez v. Collector, G.R. No. L-9771, May 31,
1951 ; Perez vs. Collector, supra). GR. No. L-11622 January 28, 1961

DOCTRINE: “Reciprocity must be total. If any of

the two states collects or imposes or does not
exempt any transfer, death, legacy or succession tax
of any character, the reciprocity does not work.”

FACTS:
Walter G. Stevenson was born in the Philippines of
British parents, married in Manila to another British
subject, Beatrice. He died in 1951 in California
where he and his wife moved to.
In his will, he instituted Beatrice as his sole heiress
to certain real and personal properties, among which
are 210,000 shares of stocks in Mindanao Mother
Lode Mines (Mines).
Ian Murray Statt (Statt), the appointed ancillary
administrator of his estate filed an estate and
inheritance tax return. He made a preliminary return
to secure the waiver of the CIR on the inheritance of
the Mines shares of stock.
In 1952, Beatrice assigned all her rights and
interests in the estate to the spouses Fisher.
Statt filed an amended estate and inheritance tax
return claiming ADDITIOANL EXEMPTIONS,
one of which is the estate and inheritance tax on the
Mines’ shares of stock pursuant to a reciprocity
proviso in the NIRC, hence, warranting a refund
from what he initially paid. The collector denied the
claim. He then filed in the CFI of Manila for the
said amount.
CFI ruled that (a) the ½ share of Beatrice should be
deducted from the net estate of Walter, (b) the
intangible personal property belonging to the estate
of Walter is exempt from inheritance tax pursuant to
the reciprocity proviso in NIRC.
ISSUE/S: Whether or not the estate can avail itself
of the reciprocity proviso in the NIRC granting
exemption from the payment of taxes for the Mines
shares of stock.
RULING: NO. Reciprocity must be total. If any of
the two states collects or imposes or does not
exempt any transfer, death, legacy or succession tax the nonresident resided allowed a similar exemption
of any character, the reciprocity does not work. in respect to intangible personal property of
residents of the Territory or State of the United
In the Philippines, upon the death of any citizen or States or foreign state or country of residence of the
resident, or non-resident with properties, there are decedent."
imposed upon his estate, both an estate and an
inheritance tax.
But, under the laws of California, only
inheritance tax is imposed. Also, although the
Federal Internal Revenue Code imposes an estate
tax, it does not grant exemption on the basis of
reciprocity. Thus, a Filipino citizen shall always be
at a disadvantage. This is not what the legislators
intended.
SPECIFICALLY:
Section122 of the NIRC provides that “No tax shall
be collected under this Title in respect of intangible
personal property
(a) if the decedent at the time of his death was a
resident of a foreign country which at the time of
his death did not impose a transfer of tax or death
tax of any character in respect of intangible
personal property of citizens of the Philippines not
residing in that foreign country, or
(b) if the laws of the foreign country of which the
decedent was a resident at the time of his death
allow a similar exemption from transfer taxes or
death taxes of every character in respect of
intangible personal property owned by citizens of
the Philippines not residing in that foreign country."
On the other hand, Section 13851 of the California
Inheritance Tax Law provides that intangible
personal property is exempt from tax if the decedent
at the time of his death was a resident of a territory
or another State of the United States or of a foreign
state or country which then imposed a legacy,
succession, or death tax in respect to intangible
personal property of its own residents, but either:.
Did not impose a legacy, succession, or death tax of
any character in respect to intangible personal
property of residents of this State, or
Had in its laws a reciprocal provision under which
intangible personal property of a non-resident was
exempt from legacy, succession, or death taxes of
every character if the Territory or other State of the
United States or foreign state or country in which