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PDF Tax Deductions
PDF Tax Deductions
promotion expenses in his 1951 income tax returns, should be the Bay View Hotel and Farmacia Zamora in the absence of
allowed and not merely one-half of it or P10,478.50, on the receipts proving the same.
ground that, while not all the itemized expenses are
supported by receipts, the absence of some supporting HELD: NO
receipts has been sufficiently and satisfactorily established.
For, as alleged, the said amount of P20,957.00 was spent by Section 30, of the Tax Code, provides that in computing net
Mrs. Esperanza A. Zamora (wife of Mariano), during her travel income, there shall be allowed as deductions all the ordinary
to Japan and the United States to purchase machinery for a and necessary expenses paid or incurred during the taxable
new Tiki-Tiki plant, and to observe hotel management in year, in carrying on any trade or business. Since promotion
modern hotels. The CTA, however, found that for said trip expenses constitute one of the deductions in conducting a
Mrs. Zamora obtained only the sum of P5,000.00 from the business, same must testify these requirements. Claim for
Central Bank and that in her application for dollar allocation, the deduction of promotion expenses or entertainment
she stated that she was going abroad on a combined medical expenses must also be substantiated or supported by record
and business trip, which facts were not denied by Mariano showing in detail the amount and nature of the expenses
Zamora. No evidence had been submitted as to where incurred (N.H. Van Socklan, Jr. v. Comm. of Int. Rev.; 33 BTA
Mariano had obtained the amount in excess of P5,000.00 544). Considering, as heretofore stated, that the application
given to his wife which she spent abroad. No explanation had of Mrs. Zamora for dollar allocation shows that she went
been made either that the statement contained in Mrs. abroad on a combined medical and business trip, not all of
Zamora's application for dollar allocation that she was going her expenses came under the category of ordinary and
abroad on a combined medical and business trip, was not necessary expenses; part thereof constituted her personal
correct. The alleged expenses were not supported by expenses. There having been no means by which to ascertain
receipts. Mrs. Zamora could not even remember how much which expense was incurred by her in connection with the
money she had when she left abroad in 1951, and how the business of Mariano Zamora and which was incurred for her
alleged amount of P20,957.00 was spent. personal benefit, the Collector and the CTA in their
decisions, considered 50% of the said amount of P20,957.00
ISSUE: as business expenses and the other 50%, as her personal
Whether or not the CTA erred in disallowing P10,478.50 as expenses. We hold that said allocation is very fair to Mariano
promotion expenses incurred by his wife for the promotion of Zamora, there having been no receipt whatsoever, submitted
to explain the alleged business expenses, or proof of the
good faith and as additional compensation for the services that contributed materially to the success of petitioner's business
actually rendered by the employees are deductible, provided during the taxable years in question.
such payments, when added to the stipulated salaries, do not 2) All the other employees received no pay increase in the said
exceed a reasonable compensation for the services rendered. years.
The condition precedents to the deduction of bonuses to employees 3) The bonuses were paid despite the fact that it had suffered net
are: (1) the payment of the bonuses is in fact compensation; (2) it losses for 3 years. Furthermore the corporation cannot use the
must be for personal services actually rendered; and (3) bonuses, excuse that it is 'salary paid' to an employee because the CIR does
when added to the salaries, are `reasonable ... when measured by not question the basic salaries paid by petitioner to the officers
the amount and quality of the services performed with relation to and employees, but disallowed only the bonuses paid to petitioner's
the business of the particular taxpayer. Here it is admitted that the top officers at the end of the taxable years in question.
bonuses are in fact compensation and were paid for services
actually rendered. The only question is whether the payment of ALTERNATIVE DIGEST FOR
said bonuses is reasonable.
G.R. No. L-18840 May 29, 1969
There is no fixed test for determining the reasonableness of a given KUENZLE & STREIFF, INC., petitioner,
bonus as compensation. This depends upon many factors, one of vs.
them being the amount and quality of the services performed with THE COMMISSIONER OF INTERNAL
relation to the business. Other tests suggested are: payment must REVENUE, respondent.
be 'made in good faith'; the character of the taxpayer's business,
the volume and amount of its net earnings, its locality, the type Topic: Deductions
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 FACTS:
'general economic conditions. However, 'in determining whether the
particular salary or compensation payment is reasonable, the Kuenzle & Streiff for the years 1953, 1954 and 1955 filed its
situation must be considered as a whole. income tax return, declaring losses.
It seems clear from the record that, in arriving at its main
conclusion, the tax court considered, inter alia, the following CIR filed for deficiency of income taxes against Kuenzle &
factors:
1) The paid officers, in the absence of evidence to the contrary,
Streiff Inc. for the said years in the amounts of P40,455.00,
that they were competent, on the other the record discloses no P11,248.00 and P16,228.00, respectively, arising from the
evidence nor has petitioner ever made the claim that all or some of disallowance, as deductible expenses, of the bonuses paid by
them were gifted with some special talent, or had undergone some the corporation to its officers, upon the ground that they
extraordinary training, or had accomplished any particular task, were not ordinary, nor necessary, nor reasonable expenses
The Corporation contends that the tax court, in arriving at its There is no fixed test for determining the reasonableness of a
conclusion, acted "in a purely arbitrary manner", and erred in given bonus as compensation. This depends upon many
not considering individually the total compensation paid to factors, one of them being the amount and quality of the
each of petitioner's officers and staff members in services performed with relation to the business. Other tests
determining the reasonableness of the bonuses in question, suggested are: payment must be 'made in good faith'; the
and that it erred likewise in holding that there was nothing in character of the taxpayer's business, the volume and amount
the record indicating that the actuation of the respondent of its net earnings, its locality, the type and extent of the
was unreasonable or unjust. services rendered, the salary policy of the corporation'; 'the
size of the particular business'; 'the employees' qualifications
ISSUE: Whether or not the bonuses in question was
reasonable and just to be allowed as a deduction? and contributions to the business venture'; and 'general
economic conditions. However, 'in determining whether the
HELD: No. particular salary or compensation payment is reasonable, the
situation must be considered as a whole.
It is a general rule that `Bonuses to employees made in good
faith and as additional compensation for the services actually It seems clear from the record that, in arriving at its main
rendered by the employees are deductible, provided such conclusion, the tax court considered, inter alia, the
payments, when added to the stipulated salaries, do not following factors:
exceed a reasonable compensation for the services rendered. 1) The paid officers, in the absence of evidence to the
The6condition
CHAPTER V: DEDUCTIONS
precedents to the deduction of bonuses to contrary, that they were competent, on the other the record
employees are: (1) the payment of the bonuses is in fact discloses no evidence nor has petitioner ever made the
compensation; (2) it must be for personal services actually claim that all or some of them were gifted with some special
[CHAPTER V: DEDUCTIONS] 7
talent, or had undergone some extraordinary training, or had considered as ordinary or necessary — and was therefore
accomplished any particular task, that contributed materially beyond the purview of the provisions of Section 30(a) (1) of
to the success of petitioner's business during the taxable the National Internal Revenue Code. This being so, We cannot
years in question. see our way clear to holding that the respondent acted
arbitrarily in disallowing as deductible expenses the amounts
2) All the other employees received no pay increase in thus paid as bonus or "additional remuneration".
the said years.
3) The above salaries and bonuses were paid to petitioner's C. M. Hoskins & Co. Inc. v Commissioner of Internal Revenue
top officials mentioned heretofore, in spite of the fact that Facts: Petitioner, a domestic corporation engaged in the real
according to its income tax returns for the relevant years, it estate business as brokers, managing agents and
had suffered net losses. In fact, petitioner's financial administrators, filed its income tax return for its fiscal year
statements further show that its gross assets suffered a ending September 30, 1957 showing a net income of
gradual decrease for the same years.), and that a similar P92,540.25 and a tax liability due thereon of P18,508.00,
downward trend took place in its surplus and capital position which it paid in due course. Upon verification of its return,
during the same period of time. respondent Commissioner of Internal Revenue, disallowed
four items of deduction in petitioner's tax returns and
Petitioner admits that the amounts it paid to its top officers assessed against it an income tax deficiency in the amount of
in 1953 as bonus or "additional remuneration" were taken P28,054.00 plus interests. The Court of Tax Appeals upon
either from operating funds, that is, funds from the year's reviewing the assessment at the taxpayer's petition, upheld
respondent's disallowance of the principal item of petitioner's
business operations, or from its general reserve. Normally,
having paid to Mr. C. M. Hoskins, its founder and controlling
the amounts taken from the first source should have
stockholder the amount of P99,977.91 representing 50% of
constituted profits of the corporation distributable as
supervision fees earned by it and set aside respondent's
dividends amongst its shareholders. Instead it would appear disallowance of three other minor items. The Tax Court
that they were diverted from this purpose and used to pay therefore determined petitioner's tax deficiency to be in the
the bonuses for the year 1953. In the case of the amounts amount of P27,145.00 and on November 8, 1964 rendered
taken from the general reserve it seems clear that the judgment against it, as follows:
company had to resort to the use of such reserve funds
because the item of expense to be met could not be
NOT deductible. It did not pass the test of reasonableness It is a general rule that `Bonuses to employees made in good
which is: faith and as additional compensation for the services actually
rendered by the employees are deductible, provided such
General rule, bonuses to employees made in good faith and
payments, when added to the stipulated salaries, do not exceed a
as additional compensation for services actually rendered by
the employees are deductible, provided such payments, reasonable compensation for the services rendered.
when added to the salaries do not exceed the compensation The condition precedents to the deduction of bonuses to
for services rendered. employees are: (1) the payment of the bonuses is in fact
compensation; (2) it must be for personal services actually
The conditions precedent to the deduction of bonuses to rendered; and (3) bonuses, when added to the salaries, are
emp loy e e s a re : `reasonable ... when measured by the amount and quality of the
8 C H A P T E R V: DEDUCTIONS
services performed with relation to the business of the particular
· Payment of bonuses is in fact compensation
taxpayer. Here it is admitted that the
[CHAPTER V: DEDUCTIONS] 9
bonuses are in fact compensation and were paid for CA however, set aside the ruling of the CTA: “Since it has
services actually rendered. not been sufficiently established that the item it claimed as
a deduction is excessive, the same should be allowed.”
National Internal Revenue Code (NIRC) which states that: Philippines. It is engaged in the importation, manufacture,
[t]he deduction provided for in this Title shall be taken for and sale of pharmaceutical drugs and chemicals.
the taxable year in which paid or accrued or paid or
incurred, dependent upon the method of accounting upon In 1971, it declared a net taxable income of P1.4 M and paid
the basis of which the net income is computed P511k as tax due. It claimed its share of the head office
overhead expenses (P501k) as deduction from gross income.
From the nature of the claimed deductions and the span of In its amended return, it claimed that there was an
time during which the firm was retained, ICC can be overpayment of tax (P324k) arising from under-deduction of
expected to have reasonably known the retainer fees charged the overhead expense. This was certified by international
by the firm as well as the compensation for its legal independent auditors, the allocation of the overhead expense
services. The failure to determine the exact amount of the made on the basis of the percentage of gross income in the
expense during the taxable year when they could have been Philippines to gross income of the corporation as a whole.
claimed as deductions cannot thus be attributed solely to the
delayed billing of these liabilities by the firm. For one, ICC, In 1974, without waiting for the action of the CIR, Smith filed
in the exercise of due diligence could have inquired into the a petition for review with the CTA. CTA ordered CIR to
amount of their obligation to the firm, especially so that it is refund the overpayment or grant Smith a tax credit. CIR
using the accrual method of accounting. For another, it could appealed to the SC.
have reasonably determined the amount of legal and retainer
fees owing to its familiarity with the rates charged by their Issue: Whether Smith is entitled to a refund – YES
long time legal consultant.
Ratio:
1
Net income from sources in the Philippines. – From the items of gross income specified in subsection (a) of this section there shall be
deducted expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expenses, losses, or other
deductions which cannot definitely be allocated to some item or class of gross income. The remainder, if any, shall be included in full as net
income from sources within the Philippines.
P191,591.62 as estate and inheritance taxes on the transfer ISSUE: WON the amount paid by Palanca for interest on his
of said 12,500 shares of stock. The amount of P17,002.74 delinquent estate and inheritance tax is deductible from the
paid on June 22, 1955 by the petitioner as gift tax, including gross income for that year under Section 30 (b) (1) of the
interest and surcharge, was applied to his estate and Revenue Code.
inheritance tax liability. On the tax liability of P191,591.62,
the petitioner paid the amount of P60,581.80 as interest for
delinquency.
HELD: Yes.
TtiIoOnNrSegistered with the Board of Investments ("BOI") as a preferred pioneer enterprise with respect to its integrated pulp and paper mill, and as a
CA: further reduced the liability of Picop.
[CHAPTER V: DEDUCTIONS] 19
• For it is obvious that in prescribing that such contributing to the production of wealth that
deduction shall be allowed in the case of a taxpayer is being taxed
who does not signify in his return his desire to have o To allow an alien resident to deduct from his
any extent benefits of paragraph 3, the statute gross income whatever taxes he pays to his
assumes that the taxpayer in question may signify his own government amounts to conferring on the
desire to claim a tax credit and waive the deduction; latter the power to reduce the tax income of
otherwise, the foreign taxes would always be the Philippine government simply by
deductible and their mention in the list on non- increasing the tax rates on the alien resident.
deductible items in Sec. 30c might as well have been
omitted or at least expressly limited to taxes on
income from sources outside the Philippine Islands MARCELO STEEL CORPORATION
• Had the law intended that foreign income taxes could vs. COLLECTOR OF INTERNAL REVENUE
be deducted from gross income in any event,
regardless of the taxpayer’s right to claim a tax Facts: The petitioner is a corporation duly organized and
credit, it is the latter right that should be conditioned existing under and by virtue of the laws of the Philippines,
upon the taxpayer’s waiving the deduction with offices at Malabon, Rizal. It is engaged in three (3)
• No danger of double credit/taxation. industrial activities, namely, (1) manufacture of wire fence,
o Double taxation becomes obnoxious only (2) manufacture of nails, and (3) manufacture of steel bars,
where the taxpayer is taxed twice for the rods and other allied steel products. enjoined the benefits of
benefit of the same governmental entity the tax exemption under Republic Act No. 35.
o The Philippine government only receives the
proceeds of one tax On May 21, 1953, the petitioner filed an income tax return
o Justice and equity demand that the tax on the for the year 1952, reflecting a net income of P34,386.58
income should accrue to the benefit of the realized solely from its business of manufacturing wire fence,
Philippines an activity which is not tax exempt, and on March 31, 1954,
o Any relief from the alleged double taxation it filed its income tax return for the year 1953, showing a net
should come from the US since the former’s income of P58,329.00 realized from the same sources, i.e.,
right to burden the taxpayer is solely the manufacture of wire fence.
predicated in is citizenship, without
Issue:
[CHAPTER V: DEDUCTIONS] 23
As already stated, the law intended to treat to treat taxable Our National Internal Revenue Code does not contain a
or non-excempt industry as separate and distinct from new similar prohibition. When in 1939 Commonwealth Act No.
and necessary industry, which is tax exempt, and did not 466, the National Internal Revenue Code, was enacted into
mean to grant an entrepreneur, engaged at the same time in law, the idea of granting tax exemption to new and necessary
a taxable or non-exempt industry and a new and necessary industries in the Philippines had not yet been thought of
industry, the benefit or privilege of deducting his gains or because there were no new and necessary industries being
profit derived from the operation of the first from the losses established or exploited. It was only in 1946, after the last
incurred in the operation of the second. Moreover, aside from World War, and after the Philippines became sovereign
PLARIDEL SURETY and INSURANCE COMPANY, petitioner, CFI: San Jose and petitioner = liable.
In its income tax return for the year 1957, petitioner claimed
the amount of P44,490.00 (paid to Galang machinery) as
FACTS: deductible loss from its gross income and, accordingly, paid
the amount of P136.00 as its income tax for 1957. CIR
Petitioner Plaridel Surety & Insurance Co., is a domestic
disallowed deduction. Petitioner filed protest but was
corporation engaged in the bonding business. On November
denied.
9, 1950, petitioner, as surety, and Constancio San Jose, as
pr2in4cipCaHl,APsoTliEdRarVil:y DeExDeUcuCtTedIONa
Sperformance bond in the penal sum of P30,600.00 in favor
of the P. L. Galang Machinery Co., Inc., to secure the
performance of San Jose's
[CHAPTER V: DEDUCTIONS] 25
ISSUE: WON the amount of interest bond is an interest The alleged interest deduction not having been properly
deduction. litigated as an issue before the Tax Court, it is now too late
to raise and assert it before this Court.
HELD: NO.
Loss is deductible only in the taxable year it actually happens *Losses (Requisites for Deductibility)
or is sustained. However, if it is compensable by insurance or
G.R. No. L-18282 May 29, 1964
otherwise, deduction for the loss suffered is postponed to a
subsequent year, which, to be precise, is that year in which it COMMISSIONER OF INTERNAL REVENUE, petitioner,
appears that no compensation at all can be had, or that
there is a remaining or net loss, i.e., no full compensation. vs.
There is no question that the year in which the petitioner PRISCILA ESTATE, INC., and THE COURT OF APPEALS,
Insurance Co. effected payment to Galang Machinery respondents.
pursuant to a final decision occurred in 1957. However, under
the same court decision, San Jose and Cuervo were obligated FACTS:
to reimburse petitioner for whatever payments it would
The corporation duly filed its income tax returns for the
make to Galang Machinery. Clearly, petitioner's loss is
years 1949, 1950 and 1951. On 13 June 1952, however, it
compensable otherwise (than by insurance).itc-al It should
amended its income tax returns for 1951 and paid the tax
follow, then, that the loss deduction can not be claimed in
corresponding to the assessment made by the petitioner on
1957.
the basis of the returns, as amended; and on 13 September
The rule is that loss deduction will be denied if there is a 1952, the company claimed a refund of P4,941.00 as overpaid
measurable right to compensation for the loss, with ultimate income tax for the year 1950 for having deducted from gross
collection reasonably clear. So where there is reasonable income only the sum of P6,013.85 instead of P39,673.25 as
ground for reimbursement, the taxpayer must seek his its loss in the sale of a lot and building. Thereupon, the
redress and may not secure a loss deduction until he Commissioner of Internal Revenue conducted an investigation
establishes that no recovery may be had. of the company's income tax returns for 1949 through 1951
and, thereafter, granted a tax credit of P1,443.00 for 1950
but assessed on 3 November 1953 deficiency income taxes of
P3,575.49 for 1949 and P22,166.10 for 1951.
HELD:
After prolonged consideration and analysis of this matter, the Court BAD DEBTS
is unable to agree with the CTA and Court of Appeals on the
G.R. No. L-22265 December 22, 1967
de d uct ib ili ty o f R PP M 's a cc u m u la t ed
2 8 against
l osses C H Picop's
A P 1977
T E gross
R Vincome.
: D EIt isDimportant
U C T to IO
noteN COLLECTOR OF INTERNAL REVENUE, petitioner,
S
at the outset that in our vs.
jurisdiction, the ordinary rule — that is, the rule applicable in GOODRICH INTERNATIONAL RUBBER CO., respondent.
respect of corporations not
[CHAPTER V: DEDUCTIONS] 29
TOPIC: Bad Debts respondent had not attached to its income tax returns a
statement showing the propriety of the deductions therein
FACTS: made for alleged bad debts.
Respondent was assessed by the CIR for Taxable Years Below are the accounts claimed by Goodrich as Bad Debts:
1951-1952. These assessments were based on disallowed
Disallowed by SC:
deductions, claimed by Goodrich, consisting of several
alleged bad debts, in the aggregate sum of P50,455.41, for Portillo's Auto Seat Cover (P730.00):
the year 1951, and the sum of P30,138.88, as representation
This debt was incurred in 1950. In 1951, the debtor paid
expenses allegedly incurred in the year 1952. Goodrich had P70.00, leaving a balance of P630.31. That same year, the
appealed from said assessments to the Court of Tax Appeals, account was written off as bad debt (Exhibit 3-C-4). Counsel
which, after appropriate proceedings, rendered, on June 8, for Goodrich had merely sent two (2) letters of demand in
1963, a decision allowing the deduction for bad debts, but 1951 (Exh. B-14). In 1952, the debtor paid the full balance
disallowing the alleged representation expenses, hence, this (Exhibit A).
appeal. Visayan Rapid Transit (P17,810.26):
This debt was, also, incurred in 1950. In 1951, it was charged
ISSUE: Whether or not the bad debts had been properly
off as bad debt, after the debtor had paid P275.21. No other
deducted for the year 1951. payment had been made.lawphil Taxpayer's Accountant
testified that, according to its branch manager in Cebu, he
RULING: Some but not all. The requirement of ascertainment had been unable to collect the balance. The debtor had
of worthlessness requires proof of two facts: (1) that the merely promised and kept on promising to pay. Taxpayer's
taxpayer did in fact ascertain the debt to be worthlessness, counsel stated that the debtor had gone out of business and
in the year for which the deduction is sought; and (2) that, in became insolvent, but no proof to this effect. was
so doing, he acted in good faith. Good faith on the part of introduced.
the taxpayer is not enough. He must show, also, that he had
reasonably investigated the relevant facts and had drawn a Bataan Auto Seat Cover (P373.13):
reasonable inference from the information thus obtained by This is the balance of a debt of P474.13 contracted in 1949.
him. The payments made, some in full, after some of the In 1951, the debtor paid P100.00. That same year, the
foregoing accounts had been characterized as bad debts, balance of P373.13 was charged off as bad debt. The next
merely stresses the undue haste with which the same had year, the debtor paid the additional sum of P50.00.
been written off. At any rate, respondent has not proven
that said debts were worthless. There is no evidence that the Tres Amigos Auto Supply (P1,370.31):
debtors can not pay them.lawphil.net It should be noted also
that, in violation of Revenue Regulations No. 2, Section 102,
in these accounts, the taxpayer was justified in feeling that debts by PRC. PRC duly protested the assessment claiming that
the unsuccessful efforts therefore exerted to collect the
under the law, bad debts and interest expense are allowable
same sufficed to warrant their being written off.3
deductions.
Lion Shoe Store (P11,686.93),
When the BIR subsequently garnished some of PRC’s properties, the
Ruiz Highway Transit (P2,350.00), latter considered the protest as being denied and filed an appeal to
and the CTA which set aside the disallowance of the interest expense
and modified the disallowance of the bad debts by allowing 3
Esquire Auto Seat Cover (P3,536.94): accounts to be claimed as deductions. However, 13 supposed “bad
These three (3) accounts were among those referred to debts” were disallowed as the CTA claimed that these were not
counsel for Goodrich for collection. Up to 1951, when they substantiated and did not satisfy the jurisprudential requirement of
were written off, counsel had sent 17 Letters of demand to “worthlessness of a debt” The CA denied the petition for review.
Lion Shoe Store (Exh. B); 16 demand letters to Ruiz Highway
Transit (Exh. B-1); and 6 letters of demand to Esquire Auto ISSUE: Whether or not the CA was correct in disallowing the 13
Seat Cover (Exit. B-5) In 1951, Lion Shoe Store, Ruiz Highway accounts as bad debts.
Transit, and Esquire Auto Seat Cover had made partial
payments in the sums of P1,050.00, P400.00, and P300.00 RULING:YES.
respectively. Subsequent to the write-off, additional small
Both the CTA and CA relied on the case of Collector vs. Goodrich
payments were made and accounted for as income of
International, which laid down the requisites for “worthlessness of
Goodrich. Counsel interviewed the debtors, investigated
their ability to pay and threatened law suits. He found that a debt” to wit:
the debtors were in strained financial condition and had no
In said case, we held that for debts to be considered as "worthless," and
attachable or leviable property. Moreover, Lion Shoe Store thereby qualify as "bad debts" making them deductible, the taxpayer should
was burned twice, in 1948 and 1949. Thereafter, it continued show that (1) there is a valid and subsisting debt. (2) the debt must be
to do business on limited scale. Later; it went out of actually ascertained to be worthless and uncollectible during the
business. Ruiz Highway Transit, had more debts than assets. taxable year; (3) the debt must be charged off during the taxable year;
Counsel, therefore, advised respondent to write off these and (4) the debt must arise from the business or trade of the taxpayer.
accounts as bad debts without going to court, for it would be Additionally, before a debt can be considered worthless, the taxpayer
"foolish to spend good money after bad." must also show that it is indeed uncollectible even in the future.
Furthermore, there are steps outlined to be undertaken by the taxpayer to
PHILIPPINE REFINING CO ( UNILEVER COMPANY) v CA
prove that he exerted diligent efforts to collect the debts, viz.: (1) sending of
FACTS:Philippine Refining Corp (PRC) was assessed deficiency tax statement of accounts; (2) sending of collection letters; (3) giving the
payments for the year 1985 in the amount of around 1.8M. This account to a lawyer for collection; and (4) filing a collection case in
court.
figure was computed based on the disallowance of the claim of bad
Moreover, the recovery, free of income tax, of an amount Mariano Zamora and his deceased sister Felicidad Zamora, bought a
more than the invested capital in an asset will transgress the piece of land located in Manila on May 16, 1944, for P132,000.00
underlying purpose of a depreciation allowance. For then and sold it for P75,000.00 on March 5, 1951. They also purchased a
what the taxpayer would recover will be, not only the lot located in Quezon City for P68,959.00 on January 19, 1944,
acquisition cost, but also some profit. Recovery in due time which they sold for P94,000 on February 9, 1951. The CTA ordered
thru depreciation of investment made is the philosophy the estate of the late Felicidad Zamora (represented by Esperanza
behind depreciation allowance; the idea of profit on the A. Zamora, as special administratrix of her estate), to pay the sum
investment made has never been the underlying reason for of P235.50, representing alleged deficiency income tax and
surcharge due from said estate.
the allowance of a deduction for depreciation.
FACTS:
ISSUE: w/n the depreciation rate 2-1/2% is correct? YES
Ludey disposed, in the form of oil, of part of his capital assets; that, in the
extraction of the oil, he consumed so much of the equipment as was was the gain or the loss depends primarily upon whether
represented by the depreciation, and disposed of so much of the oil deductions for depletion and depreciation are to be made
reserves as was represented by the depletion; that the sale of the from the original cost in determining gain or loss on sale of
properties made by him in 1917 was not a sale of all of the property oil mining properties. The question is one of statutory
represented by the original cost of $95,977.33, since physical equipment
to the amount of the depreciation and oil reserves to the amount of the construction or application. The Court of Claims entered
depletion had been taken from it during the preceding years, and that, for judgment for the plaintiff.
this reason, the cost to plaintiff of the net property sold in 1917 was not
$95,977.33, but $53,258.36.
▪ COURT OF CLAIMS: No deduction should be made – It held that no
deduction from original cost should be made here, because of the nature ISSUE: Whether or not depreciation of the mining e-uipment
of oil mining properties. It held that the depreciation was not deductible, should be deducted on the cost of the same to determine
because wear and tear of equipment was an expense or incident of the whether there was a gain or loss on the sale of the said
business.
equipment.
US vs. LUDLEY
RULING: YES
DOCTRINE
Until 1924, none of the revenue Acts provided in terms that
Depreciation should be taken into account in determining
in computing the gain from a sale of any property' a
whether there is a loss or gain in sale of properties for
deduction shall be made from the original cost on account of
purposes of income taxation.
depreciation and depletion during the period of operation.
FACTS But ever since March 1,1913, the revenue acts have required
that gains from sales made within the tax year shall be
Ludey brought this suit in the Court of Claims to recover an included in the taxable income of the year' and that losses on
amount exacted as additional taxes for 1917. The tax was sales may be deducted from gross income. We are of opinion
assessed on the alleged gain from a sale in 1917 of oil mining that the revenue acts should be construed as requiring
properties which had been owned and operated by him for deductions for both depreciation and depletion when
several years. The Commissioner of Internal Revenue determining the original cost of oil properties sold. The
determined that there was a gain on the sale of $26, 904.15. depreciation charge permitted as a deduction from the gross
Ludey insists that there was a loss of $14,777.33. The amount income in determining the taxable income of a business for
sued for is the tax assessed on the difference. ,hether there any year represents the reduction during the year' of the
To manage the properties, Antonio Roxas, Eduardo Roxas and Jose Real estate dealer: any person engaged in the business of buying,
Roxas, the children, formed a partnership called Roxas y Compania selling, exchanging, leasing or renting property on his own account
On 1958, CIR demanded from Roxas y Cia the payment of real as principal and holding himself out as a full or part-time dealer in
estate dealer's tax for 1952 amtg to P150.00 plus P10.00 compromise real estate or as an owner of rental property or properties rented or
penalty for late payment, and P150.00 tax for dealers of securities offered to rent for an aggregate amount of three thousand pesos or
plus P10.00 compromise penalty for late payment. more a year:
Basis: house rentals received from Jose, pursuant to Art. 194 of the Section 194 of the Tax Code, in considering as real estate dealers
Tax Code stating that an owner of a real estate who derives a yearly owners of real estate receiving rentals of at least P3,000.00 a year,
rental income therefrom in the amount of P3,000.00 or more is does not provide any qualification as to the persons paying the
considered a real estate dealer and is liable to pay the corresponding rentals
fixed tax The fact that there were hundreds of vendees and them being paid for
The Commissioner further assessed deficiency income taxes against their respective holdings in installment for a period of ten years, it
the brothers for 1953 and 1955, resulting from the inclusion as would nevertheless not make the vendor Roxas y Cia. a real estate
income of Roxas y Cia of the unreported 50% of the net profits dealer during the 10-year amortization period
derived from the sale of the Nasugbu farm lands to the tenants, and The sale of the Nasugbu farm lands to the very farmers who tilled
the disallowance of deductions from gross income of various them for generations was not only in consonance with, but more in
business expenses and contributions claimed by Roxas y Cia and the obedience to the request and pursuant to the policy of our
Roxas brothers Government to allocate lands to the landless
The brothers protested the assessment but was denied, thus appealing It was the duty of the Government to pay the agreed compensation
to the CTA after it had persuaded Roxas y Cia. to sell its haciendas, and to
· CTA decision: sustained the assessment except the demand subsequently subdivide them among the farmers at very reasonable
for the payment of the fixed tax on dealer of securities and the terms and prices. But due to the lack of funds, Roxas y Cia.
disallowance of the deductions for contributions to the Philippine shouldered the Government's burden, went out of its way and sold
Air Force Chapel and Hijas de Jesus' Retiro de Manresa lands directly to the farmers in the same way and under the same
terms as would have been the case had the Government done it itself.
Issue: Should Roxas y Cia be considered a real estate dealer because The power of taxation is sometimes called also the power to destroy.
it engaged in the business of selling real estate Therefore it should be exercised with caution to minimize injury to
the proprietary rights of a taxpayer. It must be exercised fairly,
Ruling: NO, being an isolated transaction equally and uniformly
G.R. No. L-26924 January 27, 1981 For the year 1958, the assessment of deficiency income tax
COMMISSIONER OF INTERNAL REVENUE, petitioner, of P761,789.12 covers the disallowance of items claimed by
Atlas as deductible from gross income.
vs.
On October 25, 1962, the Secretary of Finance ruled that the
ATLAS CONSOLIDATED MINING & DEVELOPMENT exemption provided in Republic Act 909 embraces all new
CORPORATION and COURT OF TAX APPEALS, respondents. mines and old mines whether gold or other minerals.
Commissioner recomputed Atlas deficiency income tax
liabilities in the light of the ruling of the Secretary of
Finance. On June 9, 1964, the Commissioner issued a revised
assessment entirely eliminating the assessment of
FACTS: P546,295.16 for the year 1957. The assessment for 1958 was
reduced from P215,493.96 to P39,646.82 from which Atlas
This tax case (CTA No. 1312) arose from the 1957 and 1958 appealed to the Court of Tax Appeals, assailing the
deficiency income tax assessments made by the disallowance of the following items claimed as deductible
Commissioner of Internal Revenue, where the Atlas from its gross income for 1958.
Consolidated Mining and Development Corporation, was
assessed P546,295.16 for 1957 and P215,493.96 for 1958
deficiency income taxes.
CTA: allowed the ff as deductions: Transfer agent's fee, U.S.
Atlas is a corporation engaged in the mining industry stock listing expenses, Provision for contingencies EXCEPT
registered under the laws of the Philippines. On August 20, Stockholders relation service fee and suit expenses.
1962, the Commissioner assessed against Atlas the sum of
P546,295.16 and P215,493.96 or a total of P761,789.12 as
deficiency income taxes for the years 1957 and 1958. For the ISSUE: WON the expenses paid for the services rendered by a
year 1957, it was the opinion of the Commissioner that Atlas public relations firm P.K MacKer & Co. labelled as
is not entitled to exemption from the income tax under stockholders relation service fee is an allowable deduction as
Section 4 of Republic Act 909 because same covers only gold business expense under Section 30 (a) (1) of the National
mines. Internal Revenue Code.
Gancayco filed his Income tax Return (ITR) for 1949. Deduction for expenses may be allowed, however in this case,
Gancayco was not able to prove any expense as there were no
Ø CIR notified him that his liability is Php 9.793.62, which he paid
receipts or other proofs. CTA AFFIRMED
1950
Ø CIR after a year wrote to Gancayco saying that there was tax due
from him for a total of Php 29,554.05
CTA: Required Gancayco to pay Php 16, 860.31 for tax deficiency
in1949