3RD BATCH TAX DIGEST

3.) Jaime N. Soriano, et al. vs. Secretary of Finance and The Commissioner of
Internal Revenue

G.R. No. 184450, January 24, 2017

Sereno, C.J.

FACTS:

On 17 June 2008, R.A. 9504 entitled “An Act Amending Sections 22, 24, 34, 35,
51, and 79 of Republic Act No. 8424, as Amended, Otherwise Known as the
National Internal Revenue Code of 1997,” was approved and signed into law by
President Arroyo. On 24 September 2008, the Bureau of Internal Revenue (BIR)
issued RR 10-2008, dated 08 July 2008, implementing the provisions of R.A. 9504.

Petitioners assail the subject RR as an unauthorized departure from the legislative

intent of R.A. 9504. The regulation allegedly restricts the implementation of the
minimum wage earners’ (MWE) income tax exemption only to the period starting
from 6 July 2008, instead of applying the exemption to the entire year 2008. They
further challenge the BIR’s adoption of the prorated application of the new set of
personal and additional exemptions for taxable year 2008. They also contest the
validity of the RR’s alleged imposition of a condition for the availment by MWEs
of the exemption provided by R.A. 9504. Supposedly, in the event they receive
other benefits in excess of P30,000, they can no longer avail themselves of that
exemption. Petitioners contend that the law provides for the unconditional
exemption of MWEs from income tax and, thus, pray that the RR be nullified.

ISSUES:

1) Whether or not the increased personal and additional exemptions provided by

R.A. 9504 should be applied to the entire taxable year 2008

2)Whether or not  Sections 1 and 3 of RR 10-2008 are consistent with the law in
providing that an MWE who receives other benefits in excess of the statutory limit
of P30,000 is no longer entitled to the exemption provided by R.A. 9504
HELD:

1) Yes. R.A. 9504 as a piece of social legislation clearly intended to afford

immediate tax relief to individual taxpayers, particularly low-income compensation
earners. Indeed, if R.A. 9504 was to take effect beginning taxable year 2009 or half
of the year 2008 only, then the intent of Congress to address the increase in the
cost of living in 2008 would have been negated. In one case, the test is whether the
new set of personal and additional exemptions was available at the time of the
filing of the income tax return. In other words, while the status of the individual
taxpayers is determined at the close of the taxable year, their personal and
additional exemptions – and consequently the computation of their taxable income
– are reckoned when the tax becomes due, and not while the income is being
earned or received.

In the present case, the increased exemptions were already available much earlier
than the required time of filing of the return on 15 April 2009. R.A. 9504 came into
law on 6 July 2008, more than nine months before the deadline for the filing of the
income tax return for taxable year 2008. Hence, individual taxpayers were entitled
to claim the increased amounts for the entire year 2008. This was true despite the
fact that incomes were already earned or received prior to the law’s effectivity on 6
July 2008.

2) NO. To be exempt, one must be an MWE, a term that is clearly defined. Section
22(HH) of Republic Act No. 8424 says he/she must be one who is paid the
statutory minimum wage if he/she works in the private sector, or not more than the
statutory minimum wage in the non-agricultural sector where he/she is assigned, if
he/she is a government employee. R.A. 9504 is explicit as to the coverage of the
exemption: the wages that are not in excess of the minimum wage as determined
by the wage boards, including the corresponding holiday, overtime, night
differential and hazard pays. In other words, the law exempts from income taxation
the most basic compensation an employee receives – the amount afforded to the
lowest paid employees by the mandate of law. In a way, the legislature grants to
these lowest paid employees additional income by no longer demanding from them
a contribution for the operations of government.

An administrative agency may not enlarge, alter or restrict a provision of law. The
Court is not persuaded that RR 10-2008 merely clarifies the law. The treatment of
bonuses and other benefits that an employee receives from the employer in excess
of the P30,000 ceiling cannot but be the same as the prevailing treatment prior to
R.A. 9504 – anything in excess of P30,000 is taxable; no more, no less.

The treatment of this excess cannot operate to disenfranchise the MWE from
enjoying the exemption explicitly granted by R.A. 9504. Moreover, RR 10-2008
does not withdraw the MWE exemption from those who are earning other income
outside of their employer employee relationship. Section 2.78.1 (B) of RR 10-2008
provides that: MWEs receiving other income, such as income from the conduct of
trade, business, or practice of profession, except income subject to final tax, in
addition to compensation income are not exempted from income tax on their entire
income earned during the taxable year. This rule, notwithstanding, the SMW,
Holiday pay, overtime pay, night shift differential pay and hazard pay shall still be
exempt from withholding tax.

In sum, the proper interpretation of R.A. 9504 is that it imposes taxes only on the
taxable income received in excess of the minimum wage, but the MWEs will not
lose their exemption as such. Workers who receive the statutory minimum wage
their basic pay remain MWEs. The receipt of any other income during the year
does not disqualify them as MWEs. They remain MWEs, entitled to exemption as
such, but the taxable income they receive other than as MWEs may be subjected to
appropriate taxes.

4.) Tambunting vs. CIR

BERSAMIN, J.:

“SUBSTANTATION RULE”

To be entitled to claim a tax deduction, the taxpayer must competently establish

the factual and documentary bases of its claim.

FACTS:

H. Tambunting Pawnshop, Inc. (petitioner), a domestic corporation duly licensed

and authorized to engage in the pawnshop business, appeals the adverse decision
promulgated on April 24, 2006,1 whereby the Court of Tax Appeals En Banc (CTA
En Banc) affirmed the decision of the CTA First Division ordering it to pay
deficiency income taxes in the amount of ₱4,536,687.15 for taxable year 1997,
plus 20% delinquency interest computed from August 29, 2000 until full payment,
but cancelling the compromise penalties for lack of basis.

On June 26, 2000, the Bureau of Internal Revenue (BIR), through then Acting
Regional Director Lucien E. Sayuno of Revenue Region No. 6 in Manila, issued
assessment notices and demand letters, all numbered 32-1-97, assessing
Tambunting for deficiency percentage tax, income tax and compromise penalties
for taxable year 1997, On July 26, 2000, Tambunting instituted an administrative
protest against the assessment notices and demand letters with the Commissioner
of Internal Revenue.3

On February 21, 2001, Tambunting brought a petition for review in the CTA,
pursuant to Section 228 of the National Internal Revenue Code of 1997, 4 citing the
inaction of the Commissioner of Internal Revenue on its protest within the 180-day
period prescribed by law.

ISSUES:

W/N the CTA Enbanc must have allowed the deductions presented by
Tambunting.
Tambunting argues that the CTA should have allowed its deductions because it had
been able to point out the provisions of law authorizing the deductions; that it
proved its entitlement to the deductions through all the documentary and
testimonial evidence presented in court.

RULING
On the AUCTION LOSS: (₱4,915,967.50.)

To prove the loss on auction sale, petitioner submitted in evidence its "Rematado"
and "Subasta" books and the "Schedule of Losses on Auction Sale". The
"Rematado" book contained a record of items foreclosed by the pawnshop while
the "Subasta" book contained a record of the auction sale of pawned items
foreclosed.

In this case, petitioner's reliance on the entries made in the "Subasta" book were
not sufficient to substantiate the claimed deduction of loss on auction sale. As
admitted by the petitioner, the contents in the "Rematado" and "Subasta" books do
not reflect the true amounts of the total capital and the auction sale, respectively.
Be that as it may, petitioner still failed to adduce evidence to substantiate the other
expenses alleged to have been incurred in connection with the sale of pawned
items.

As correctly held by the Court's Division in the assailed decision, and We quote:

x x x The remaining evidence is neither conclusive to sustain its claim of loss on

auction sale in the aggregate amount of ₱4,915,967.50. While it appears that the
basis of respondent is not strong, petitioner, nevertheless, should not rely on the
weakness of such evidence but on the strength of its own documents. The facts
essential for the proper disposition of the said controversy were available to the
petitioner. Petitioner should have endeavored to make the facts clear to this court.
Sad to say, it failed to dispute the same with clear and convincing proof.

ON SECURITY/JANITORIAL EXPENSES:

Contrary to petitioner’s contention, the security/janitorial expenses paid to

Pathfinder Investigation were not duly substantiated. The certification issued by
Mr. Balisado was not the proper document required by law to substantiate its
expenses. Petitioner should have presented the official receipts or invoices to prove
its claim as provided for under Section 238 of the National Internal Revenue Code
of 1977, as amended,
the proper substantiation requirement for an expense to be allowed is the official
receipt or invoice
In order that the cash vouchers may be given probative value, these must be
validated with official receipts

ON CASUALTY LOSSES:

(a) A declaration of loss which must be filed with the Commissioner of

Internal Revenue or his deputies within a certain period prescribed in these
regulations after the occurrence of the casualty, robbery, theft or
embezzlement.

(b) Proof of the elements of the loss claimed, such as the actual nature and
occurrence of the event and amount of the loss.
(b) Casualty loss. — Photographs of the property as it existed before it was
damaged will be helpful in showing the condition and value of the property prior to
the casualty. Photographs taken after the casualty which show the extent of damage
will be helpful in establishing the condition and value of the property after it was
damaged. Photographs showing the condition and value of the property after it was
repaired, restored or replaced may also be helpful.

What were required were for Tambunting to submit the sworn declaration of loss
mandated by Revenue Regulations 12-77.
 5.) G.R. No. 143672            April 24, 2003

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
GENERAL FOODS (PHILS.), INC., respondent.

CORONA, J.:

“ADVERTISMENT”

Petitioner Commissioner of Internal Revenue (Commissioner) assails the

resolution1 of the Court of Appeals reversing the decision2 of the Court of Tax
Appeals which in turn denied the protest filed by respondent General Foods
(Phils.), Inc., regarding the assessment made against the latter for deficiency taxes.

FACTS:

The records reveal that, on June 14, 1985, respondent corporation, which is
engaged in the manufacture of beverages such as "Tang," "Calumet" and "Kool-
Aid," filed its income tax return for the fiscal year ending February 28, 1985. In
said tax return, respondent corporation claimed as deduction, among other business
expenses, the amount of P9, 461,246 for media advertising for "Tang."

On May 31, 1988, the Commissioner disallowed 50% or P4,730,623 of the

deduction claimed by respondent corporation. Consequently, respondent
corporation was assessed deficiency income taxes in the amount of P2,635, 141.42.
The latter filed a motion for reconsideration but the same was denied.

On September 29, 1989, respondent corporation appealed to the Court of Tax

Appeals but the appeal was dismissed:

The staggering expense led us to believe that such expenditure was incurred "to
create or maintain some form of good will for the taxpayer’s trade or business or
for the industry or profession of which the taxpayer is a member." The term "good
will" can hardly be said to have any precise signification; it is generally used to
denote the benefit arising from connection and reputation.

As held in the case of Welch vs. Helvering, efforts to establish reputation are akin
to acquisition of capital assets and, therefore, expenses related thereto are not
business expenses but capital expenditures.

DECISION OF CA:

Aggrieved, respondent corporation filed a petition for review at the Court of

Appeals which rendered a decision reversing and setting aside the decision of the
Court of Tax Appeals:

ISSUE/S:

whether or not the subject media advertising expense for "Tang" incurred by
respondent corporation was an ordinary and necessary expense fully deductible
under the National Internal Revenue Code (NIRC).

RULING:

It is a governing principle in taxation that tax exemptions must be construed in

strictissimi juris against the taxpayer and liberally in favor of the taxing
authority;5 and he who claims an exemption must be able to justify his claim by the
clearest grant of organic or statute law. An exemption from the common burden
cannot be permitted to exist upon vague implications.

The parties are in agreement that the subject advertising expense was paid or
incurred within the corresponding taxable year and was incurred in carrying on a
trade or business. Hence, it was necessary. However, their views conflict as to
whether or not it was ordinary. To be deductible, an advertising expense should not
only be necessary but also ordinary. These two requirements must be met.

The Commissioner maintains that the subject advertising expense was not ordinary
on the ground that it failed the two conditions set by U.S. jurisprudence: first,
"reasonableness" of the amount incurred and second, the amount incurred must not
be a capital outlay to create "goodwill" for the product and/or private respondent’s
business. Otherwise, the expense must be considered a capital expenditure to be
spread out over a reasonable time.

There being no hard and fast rule on the matter, the right to a deduction depends on
a number of factors such as but not limited to: the type and size of business in
which the taxpayer is engaged; the volume and amount of its net earnings; the
nature of the expenditure itself; the intention of the taxpayer and the general
economic conditions. It is the interplay of these, among other factors and properly
weighed, that will yield a proper evaluation.

Advertising is generally of two kinds: (1) advertising to stimulate the current sale

of merchandise or use of services and (2) advertising designed to stimulate
the future sale of merchandise or use of services. The second type involves
expenditures incurred, in whole or in part, to create or maintain some form of
goodwill for the taxpayer’s trade or business or for the industry or profession of
which the taxpayer is a member. If the expenditures are for the advertising of the
first kind, then, except as to the question of the reasonableness of amount, there is
no doubt such expenditures are deductible as business expenses. If, however, the
expenditures are for advertising of the second kind, then normally they should be
spread out over a reasonable period of time.

NOTE

The respondent corporation itself also admitted, in its letter protest 8 to the
Commissioner of Internal Revenue’s assessment, that the subject media expense
was incurred in order to protect respondent corporation’s brand franchise, a critical
point during the period under review.

The protection of brand franchise is analogous to the maintenance of goodwill or

title to one’s property. This is a capital expenditure which should be spread out
over a reasonable period of time.9

The burden of proof to establish the validity of claimed deductions is on the

taxpayer.14 In the present case, that burden was not discharged satisfactorily
 6.) G.R. No. 172231             February 12, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
ISABELA CULTURAL CORPORATION, Respondent.

FACTS:

Isabela Cultural Corporation (ICC) a domestic corporation, received from the BIR
Assessment... for deficiency income tax in the amount of P333,196.86... for
deficiency expanded withholding tax in... the amount of P4,897.79, inclusive of
surcharges and interest, both for the taxable year 1986 arose from P333,196.86
CTA’S DECISION

On February 26, 2003, the CTA rendered a decision canceling and setting aside the
assessment notices issued against ICC. It held that the claimed deductions for
professional and security services were properly claimed by ICC in 1986 because it
was only in the said year when the bills demanding payment were sent to ICC.
Hence, even if some of these professional services were rendered to ICC in 1984 or
1985, it could not declare the same as deduction for the said years as the amount
thereof could not be determined at that time.

Issues:
whether the Court of Appeals correctly:  (1) sustained the deduction of the
expenses for professional and security services from ICC's gross income; and (2)
held that ICC did not understate its interest income from the promissory notes of
Realty
Investment, Inc; and that ICC withheld the required 1% withholding tax from the
deductions for security services.
Ruling:

Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual
method of accounting, expenses not being claimed as deductions by a taxpayer in
the current year when they are incurred cannot be claimed as deduction from
income for the succeeding year. Thus, a taxpayer who is authorized to deduct
certain expenses and other allowable deductions for the current year but failed to
do so cannot deduct the same for the next year.

The accrual of income and expense is permitted when the all-events test has been
met. This test requires: (1) fixing of a right to income or liability to pay; and (2) the
availability of the reasonable accurate determination of such income or liability.

The all-events test requires the right to income or liability be fixed, and the amount
of such income or liability be determined with reasonable accuracy. However, the
test does not demand that the amount of income or liability be known absolutely,
only that a taxpayer has at his disposal the information necessary to compute the
amount with reasonable accuracy. The all-events test is satisfied where
computation remains uncertain, if its basis is unchangeable; the test is satisfied
where a computation may be unknown, but is not as much as unknowable, within
the taxable year. The amount of liability does not have to be determined
exactly; it must be determined with "reasonable accuracy." Accordingly, the
term "reasonable accuracy" implies something less than an exact or
completely accurate amount.

The propriety of an accrual must be judged by the facts that a taxpayer knew, or
could reasonably be expected to have known, at the closing of its books for the
taxable year.
19
 From the nature of the claimed deductions and the span of time during which the
firm was retained, ICC can be expected to have reasonably known the retainer fees
charged by the firm as well as the compensation for its legal services. The failure
to determine the exact amount of the expense during the taxable year when they
could have been claimed as deductions cannot thus be attributed solely to the
delayed billing of these liabilities by the firm. For one, ICC, in the exercise of due
diligence could have inquired into the amount of their obligation to the firm,
especially so that it is using the accrual method of accounting. For another, it could
have reasonably determined the amount of legal and retainer fees owing to its
familiarity with the rates charged by their long time legal consultant.

It simply relied on the defense of delayed billing by the firm and the company,
which under the circumstances, is not sufficient to exempt it from being charged
with knowledge of the reasonable amount of the expenses for legal and auditing
services.

WHEREFORE, the petition is PARTIALLY GRANTED. The September 30, 2005

Decision of the Court of Appeals in CA-G.R. SP No. 78426, is AFFIRMED with
the MODIFICATION that Assessment Notice No. FAS-1-86-90-000680, which
disallowed the expense deduction of Isabela Cultural Corporation for professional
and security services, is declared valid only insofar as the expenses for the
professional fees of SGV & Co. and of the law firm, Bengzon Zarraga Narciso
Cudala Pecson Azcuna & Bengson, are concerned. The decision is affirmed in all
other respects.

The case is remanded to the BIR for the computation of Isabela Cultural
Corporation’s liability under Assessment Notice No. FAS-1-86-90-000680.

Principles:
For a taxpayer using the accrual method, the determinative question is, when do
the facts present themselves in such a manner that the taxpayer must recognize
income or expense?  The accrual of income and expense is permitted when the all-
events test has been met. 
This test requires: (1) fixing of a right to income or liability to pay; and (2) the
availability of the reasonable accurate determination of such income or liability.
The all-events test requires the right to income or liability be fixed, and the amount
of such income or liability be determined with reasonable accuracy.  However, the
test does not demand that the amount of income or liability be known absolutely,
only that a taxpayer has... at his disposal the information necessary to compute the
amount with reasonable accuracy.  The all-events test is satisfied where
computation remains uncertain, if its basis is unchangeable; the test is satisfied
where a computation may be unknown, but is not as much as... unknowable, within
the taxable year.  The amount of liability does not have to be determined exactly; it
must be determined with "reasonable accuracy."  Accordingly, the term
"reasonable accuracy" implies something less than an exact or completely
accurate... amount.

7.) G.R. No. 167679               July 22, 2015

ING BANK N.V., engaged in banking operations in the Philippines as ING
BANK N.V. MANILA BRANCH, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent
“TAX AMNESTY”

FACTS:

ING Bank, "the Philippine branch of Internationale Nederlanden Bank N.V., a

foreign banking corporation incorporated in the Netherlands[,] is duly authorized
by the Bangko Sentral ng Pilipinas to operate as a branch with full banking
authority in the Philippines."10

This is a Petition for Review3 appealing the April 5, 2005 Decision4 of the Court of
Tax Appeals En Banc, which in turn affirmed the August 9, 2004 Decision 5 and
November 12, 2004 Resolution6 of the Court of Tax Appeals Second Division. The
August 9, 2004 Decision held petitioner ING Bank, N.V. Manila Branch (ING
Bank) liable for (a) deficiency documentary stamp tax for the taxable years 1996
and 1997 in the total amount of ₱238,545,052.38 inclusive of surcharges; (b)
deficiency onshore tax for the taxable year 1996 in the total amount of
₱997,333.89 inclusive of surcharges and interest; and (c) deficiency withholding
tax on compensation for the taxable years 1996 and 1997 in the total amount of
₱564,542.67 inclusive of interest. The Resolution denied ING Bank’s Motion for
Reconsideration.7

While this case was pending before this court, ING Bank filed a Manifestation and
Motion8 stating that it availed itself of the government’s tax amnesty program
under Republic Act No. 9480 with respect to its deficiency documentary stamp tax
and deficiency onshore tax liabilities.9 
CTA 2ND DIVISION:

Accordingly, petitioner is ORDERED to PAY the respondent the aggregate

amount of ₱240,106,928.94, plus 20% delinquency interest per annum from
February 3, 2000 until fully paid, pursuant to Section 249(C) of the National
Internal Revenue Code of 1997.

CTA EN BANC:

On December 8, 2004, ING Bank filed its appeal before the Court of Tax Appeals
En Banc.23 The Court of Tax Appeals En Banc denied due course to ING Bank’s
Petition for Review and dismissed the same for lack of merit in the Decision
promulgated on April 5, 2005.24

ISSUE/S:

W/N ING Bank is entitled to the immunities and privileges under Republic Act
No. 9480,and whether the assessment for deficiency withholding tax on
compensation is proper.

RULING:

YES. Thus, petitioner ING Bank is not disqualified from availing itself of the tax
amnesty under the law during the pendency of its appeal before this court.

Republic Act No. 9480 provides a general grant of tax amnesty subject only to the
cases specifically excepted by it. A tax amnesty "partakes of an absolute waiver by
the Government of its right to collect what otherwise would be due it. The effect of
a qualified taxpayer’s submission of the required documents and the payment of
the prescribed amnesty tax was immunity from payment of all national internal
revenue taxes as well as all administrative, civil, and criminal liabilities founded
upon or arising from non-payment of national internal revenue taxes for taxable
year 2005 and prior taxable years.76
Finally, the documentary stamp tax and onshore income tax are covered by the tax
amnesty program under Republic Act No. 9480 and its Implementing Rules and
Regulations.77 Moreover, as to the deficiency tax on onshore interest income, it is
worthy to state that petitioner ING Bank was assessed by respondent
Commissioner of Internal Revenue, not as a withholding agent, but as one that was
directly liable for the tax on onshore interest income and failed to pay the same.

Considering petitioner ING Bank’s tax amnesty availment, there is no more issue
regarding its liability for deficiency documentary stamp taxes on its special savings

accounts for 1996 and 1997 and deficiency tax on onshore interest income for
1996, including surcharge and interest. III.

An expense, whether the same is paid or payable, "shall be allowed as a deduction

only if it is shown that the tax required to be deducted and withheld therefrom
[was] paid to the Bureau of Internal Revenue[.]"79

WHEREFORE, the Petition is PARTLY GRANTED. The assessments with

respect to petitioner ING Bank's liabilities for deficiency documentary stamp taxes
on its special savings accounts for the taxable years 1996 and 1997 and deficiency
tax on onshore interest income under the foreign currency deposit system for
taxable year 1996 are hereby SET ASIDE solely in view of petitioner ING Bank's
availment of the tax amnesty program under Republic Act No. 9480. The April 5,
2005 Decision of the Court of Tax Appeals En Banc, which affirmed the August 9,
2004 Decision and November 12, 2004 Resolution of the Court of Tax Appeals
Second Division holding petitioner ING Bank liable for deficiency withholding tax
on compensation for the taxable years 1996 and 1997 in the total amount of
₱564,542.67 inclusive of interest, is AFFIRMED.

Petitioner ING Bank accrued or recorded the bonuses as deductible expense in its
books. Therefore, its obligation to withhold the related withholding tax due from
the deductions for accrued bonuses arose at the time of accrual and not at the time
of actual payment of the benefit provided in the law allowing for deductions from
gross income."

Here, petitioner ING Bank already recognized a definite liability on its part
considering that it had deducted as business expense from its gross income the
accrued bonuses due to its employees. Underlying its accrual of the bonus expense
was a reasonable expectation or probability that the bonus would be achieved. In
this sense, there was already a constructive payment for income tax purposes as
these accrued bonuses were already allotted or made available to its officers and
employees.

8.) G.R. No. 118794 May 8, 1996

PHILIPPINE REFINING COMPANY (now known as "UNILEVER

PHILIPPINES [PRC], INC."), petitioner,
vs.
COURT OF APPEALS, COURT OF TAX APPEALS, and THE
COMMISSIONER OF INTERNAL REVENUE, respondents.

“ BAD DEBTS”

FACTS:

Petitioner Philippine Refining Company (PRC) was assessed by respondent

Commissioner of Internal Revenue (Commissioner) to pay a deficiency tax for the
year 1985 in the amount of P1,892,584.00,

The assessment was timely protested by petitioner on April 26, 1989, on the
ground that it was based on the erroneous disallowances of "bad debts" and
"interest expense" although the same are both allowable and legal deductions.
Respondent Commissioner, however, issued a warrant of garnishment against the
deposits of petitioner at a branch of City Trust Bank, in Makati, Metro Manila,
which action the latter considered as a denial of its protest.

Petitioner accordingly filed a petition for review with the Court of Tax Appeals
(CTA) on the same assignment of error, that is, that the "bad debts" and "interest
expense" are legal and allowable deductions. In its decision3 of February 3, 1993 in
C.T.A. Case No. 4408, the CTA modified the findings of the Commissioner by
reducing the deficiency income tax assessment to P237,381.26, with surcharge and
interest incident to delinquency. In said decision, the Tax Court reversed and set
aside the Commissioner's disallowance of the interest expense of P2,666,545.19
but maintained the disallowance of the supposed bad debts of thirteen (13) debtors
in the total sum of P395,324.27.

Petitioner then elevated the case to respondent Court of Appeals which, as earlier
stated, denied due course to the petition for review and dismissed the same on
August

Out of the sixteen (16) accounts alleged as bad debts, We find that only three (3)
accounts have met the requirements of the worthlessness of the accounts, hence
were properly written off as: bad debts,

ISSUE/S:

W/N THE PETITIONER REPORT OF BAD DEBTS SHOULD BE ALLOWED.

RULINGS:

NO.We find that said accounts have not satisfied the requirements of
the "worthlessness of a debt". Mere testimony of the Financial
Accountant of the Petitioner explaining the worthlessness of said
debts is seen by this Court as nothing more than a self-serving
exercise which lacks probative value. There was no iota of
documentary evidence (e.g., collection letters sent, report from
investigating fieldmen, letter of referral to their legal department,
police report/affidavit that the owners were bankrupt due to fire that
engulfed their stores or that the owner has been murdered. etc.), to
give support to the testimony of an employee of the Petitioner. Mere
allegations cannot prove the worthlessness of such debts in 1985.
Hence, the claim for deduction of these thirteen (13) debts should be
rejected.5

1. This pronouncement of respondent Court of Appeals relied on the ruling of this

Court in Collector vs. Goodrich International Rubber Co.,6 which established the
rule in determining the "worthlessness of a debt." In said case, we held that for
debts to be considered as "worthless," and thereby qualify as "bad debts" making
them deductible, the taxpayer should show that (1) there is a valid and subsisting
debt. (2) the debt must be actually ascertained to be worthless and uncollectible
during the taxable year; (3) the debt must be charged off during the taxable year;
and (4) the debt must arise from the business or trade of the taxpayer. Additionally,
before a debt can be considered worthless, the taxpayer must also show that it is
indeed uncollectible even in the future.

Furthermore, there are steps outlined to be undertaken by the taxpayer to prove that
he exerted diligent efforts to collect the debts, viz.: (1) sending of statement of
accounts; (2) sending of collection letters; (3) giving the account to a lawyer for
collection; and (4) filing a collection case in court.

9.) CIR v. CA G.R. No. 123206; MARCH 22,2016

CIR v. CA
Doctrine:

Facts:

Pedro Pajonar, a member of the Philippine Scout, Bataan Contingent, during the
second World War, was a part of the infamous Death March by reason of which he
suffered shock and became insane.

His sister Josefina Pajonar became the guardian over his person, while his property
was placed under the guardianship of PNB.

He died on January 10, 1988. He was survived by his two brothers Isidro P.
Pajonar and Gregorio Pajonar, his sister Josefina Pajonar, nephews Concordio
Jandog and Mario Jandog and niece Conchita Jandog.

PNB filed an accounting of the decedent's property under guardianship valued at

P3,037,672.09. However, the PNB did not file an estate tax return, instead it
advised Pedro Pajonar's heirs to execute an extrajudicial settlement and to pay the
taxes on his estate.
Pursuant to the assessment by the BIR, the estate of Pedro Pajonar paid taxes in the
amount of P2,557.

The trial court appointed Josefina as the regular administratrix of Pedro Pajonar's
estate.

Pursuant to a second assessment by the BIR for deficiency estate tax, the estate of
Pedro Pajonar paid estate tax in the amount of P1,527,790.98.

Josefina, in her capacity as administratrix and heir of Pedro Pajonar's estate, filed a
protest with the BIR praying that the estate tax payment in the amount of
P1,527,790.98, or at least some portion of it, be returned to the heirs.

However, without waiting for her protest to be resolved by the BIR, Josefina filed
a petition for review with the Court of Tax Appeals praying for the refund of
P1,527,790.98, or in the alternative, P840,202.06, as erroneously paid estate tax.

CTA ordered the CIR to refund Josefina the amount of P252,585.59, representing
erroneously paid estate tax for the year 1988.

Among the deductions from the gross estate allowed by the CTA were the amounts
of P60,753 representing the notarial fee for the Extrajudicial Settlement and the
amount of P50,000 as the attorney's fees in Special Proceedings No. 1254 for
guardianship.

Commissioner of Internal Revenue filed a motion for reconsideration of the CTA's

decision asserting, among others, that the notarial fee for the Extrajudicial
Settlement and the attorney's fees in the guardianship proceedings are not
deductible expenses.

CTA issued the assailed Resolution ordering the Commissioner of Internal

Revenue to refund Josefina, as administratrix of the estate of Pedro Pajonar, the
amount of P76,502.42 representing erroneously paid estate tax for the year 1988.
Also, the CTA upheld the validity of the deduction of the notarial fee for the
Extrajudicial Settlement and the attorney's fees in the guardianship proceedings

Commissioner of Internal Revenue filed with the Court of Appeals a petition for
review questioning the validity of the abovementioned deductions.

Issue:
whether the notarial fee paid for the extrajudicial settlement in the amount of
P60,753 and the attorney's fees in the guardianship proceedings in the amount of
P50,000 may be allowed as deductions from the gross estate of decedent in order to
arrive at the value of the net estate.

Ruling:

YES. Respondent maintains that only judicial expenses of the testamentary or

intestate proceedings are allowed as a deduction to the gross estate. The amount of
P60,753.00 is quite extraordinary for a mere notarial fee.

This Court adopts the view under American jurisprudence that expenses incurred
in the extrajudicial settlement of the estate should be allowed as a deduction from
the gross estate. "There is no requirement of formal administration. It is sufficient
that the expense be a necessary contribution toward the settlement of the case."

Attorney's fees in order to be deductible from the gross estate must be essential to
the collection of assets, payment of debts or the distribution of the property to the
persons entitled to it. The services for which the fees are charged must relate to the
proper settlement of the estate. In this case, the guardianship proceeding was
necessary for the distribution of the property of the late Pedro Pajonar to his
rightful heirs.

PNB was appointed as guardian over the assets of the late Pedro Pajonar, who,
even at the time of his death, was incompetent by reason of insanity. The expenses
incurred in the guardianship proceeding was but a necessary expense in the
settlement of the decedent's estate. Therefore, the attorney's fee incurred in the
guardianship proceedings amounting to P50,000.00 is a reasonable and necessary
business expense deductible from the gross estate of the decedent.

Attorney's fees are allowable deductions if incurred for the settlement of the estate.
It is noteworthy to point that PNB was appointed the guardian over the assets of
the deceased. Necessarily the assets of the deceased formed part of his gross estate.
Accordingly, all expenses incurred in relation to the estate of the deceased will be
deductible for estate tax purposes provided these are necessary and ordinary
expenses for administration of the settlement of the estate.

Although the Tax Code specifies "judicial expenses of the testamentary or intestate
proceedings," there is no reason why expenses incurred in the administration and
settlement of an estate in extrajudicial proceedings should not be allowed.
However, deduction is limited to such administration expenses as are actually and
necessarily incurred in the collection of the assets of the estate, payment of the
debts, and distribution of the remainder among those entitled thereto

It is clear then that the extrajudicial settlement was for the purpose of payment of
taxes and the distribution of the estate to the heirs. The execution of the
extrajudicial settlement necessitated the notarization of the same. Hence the
Contract of Legal Services of March 28, 1988 entered into between respondent
Josefina Pajonar and counsel was presented in evidence for the purpose of showing
that the amount of P60,753.00 was for the notarization of the Extrajudicial
Settlement. It follows then that the notarial fee of P60,753.00 was incurred
primarily to settle the estate of the deceased Pedro Pajonar. Said amount should
then be considered an administration expenses actually and necessarily incurred in
the collection of the assets of the estate, payment of debts and distribution of the
remainder among those entitled thereto. Thus, the notarial fee of P60,753 incurred
for the Extrajudicial Settlement should be allowed as a deduction from the gross
estate.

Thus, in Lorenzo v. Posadas the Court construed the phrase "judicial expenses of
the testamentary or intestate proceedings" as not including the compensation paid
to a trustee of the decedent's estate when it appeared that such trustee was
appointed for the purpose of managing the decedent's real estate for the benefit of
the testamentary heir.

Coming to the case at bar, the notarial fee paid for the extrajudicial settlement is
clearly a deductible expense since such settlement effected a distribution of Pedro
Pajonar's estate to his lawful heirs. Similarly, the attorney's fees paid to PNB for
acting as the guardian of Pedro Pajonar's property during his lifetime should also
be considered as a deductible administration expense. PNB provided a detailed
accounting of decedent's property and gave advice as to the proper settlement of
the latter's estate, acts which contributed towards the collection of decedent's assets
and the subsequent settlement of the estate.
10.) CIR v. CA and Pajonar Tax Law; Deductions; Case No. 1 G.R. No.
123206 March 22, 2000 Francis Xavier Sinon Doctrine: [Judicial
Expenses] Expenses on extrajudicial settlement of the estate are allowed
as deductions. They come within the meaning of administration
expenses.

FACTS:

By reason of the Bataan Death March during World War II, Pedro
Pajonar became insane. Private respondent Josefina Pajonar, his sister,
became the guardian of the person of decedent Pedro Pajonar. The
property of the decedent was put by the RTC- Dumaguete, under the
guardianship of the Philippine National Bank via special proceeding,
wherein P50, 000 was spent therein for payment of attorney's fees. When
the decedent died, instead of filing an estate tax return, PNB advised
Josefina to extra-judicially settle the estate of his brother. The decedent's
estate was extra-judicially settled and the heirs paid an amount of P60,
753 for the notarization of the deed of extra-judicial settlement of estate.
However, BIR subsequently assessed deficiency taxes against the
decedent’s estate because the amount paid in the special proceeding P50,
000 for attorney’s fees and the notarization fee of P60, 753 cannot be
claimed as a deduction. Private respondent Pajonar paid the said taxes
under protest. While the case is under review by the BIR, she filed a
claim for refund in the CTA which was granted. The CTA ordered the
Commissioner of Internal Revenue to refund Josefina P252,585.59,
representing erroneously paid estate tax for the year 1988. Among the
deductions from the gross estate allowed by the CTA were P60,753
representing the notarial fee for the Extrajudicial Settlement and the
amount of P50,000 as the attorney's fees for guardianship proceedings.
CIR filed a MR which the CTA denied. It then filed with the CA a
petition for review which was also denied Hence, the present appeal.

ISSUE:

Whether the notarial fee paid for the extrajudicial settlement in the
amount of P60,753 and the attorney's fees in the guardianship
proceedings in the amount of P50,000 may be allowed as deductions
from the gross estate of decedent in order to arrive at the value of the net
estate.
 HELD:

YES. The notarial fee paid for the extrajudicial settlement is a deductible expense
since such settlement effected a distribution of Pedro’s estate to his lawful heirs.
Similarly, attorney's fees paid to PNB for acting as the guardian of Pedro’s
property during his lifetime should also be considered as a deductible
administration expense. This is because PNB provided a detailed accounting of
decedent's property and gave advice as to the proper settlement of the latter's
estate, acts which contributed towards the collection of decedent's assets and the
subsequent settlement of the estate. Administration expenses, as an allowable
deduction from the gross estate of the decedent for purposes of arriving at the
value of the net estate, have been construed by the federal and state courts of the
United States to include all expenses "essential to the collection of the assets,
payment of debts or the distribution of the property to the persons entitled to it." In
other words, the expenses must be essential to the proper settlement of the estate.
This Court adopts the view under American jurisprudence that expenses incurred
in the extrajudicial settlement of the estate should be allowed as a deduction from
the gross estate. There is no requirement of formal administration. It is sufficient
that the expense be a necessary contribution toward the settlement of the case.

 
11.) Esso Standard Eastern Inc. vs. CIR (G.R. Nos. L-28508-9, July 7,
1989) 
Facts:

In CTA Case No. 1251, Esso Standard Eastern Inc.(Esso) deducted from its gross
income for 1959, as part of its ordinary and necessary business expenses, the
amount it had spent for drilling and exploration of its petroleum concessions. This
claim was disallowed by the Commissioner of Internal Revenue (CIR) on the
ground that the expenses should be capitalized and might be written off as a loss
only when a "dryhole" should result. Esso then filed an amended return where it
asked for the refund of P323,279.00 by reason of its abandonment as dry holes of
several of its oil wells. Also claimed as ordinary and necessary expenses in the
same return was the amount of P340,822.04, representing margin fees it
had paid to the Central Bank on its profit remittances to its NewYork head
office.On August 5, 1964, the CIR granted a tax credit of P221,033.00only,
disallowing the claimed deduction for the margin fees paid on the ground that the
margin fees paid to the Central Bank could not be considered taxes or allowed as
deductible business expenses. Esso appealed to the Court of Tax Appeals (CTA)
for the refund of the margin fees it had earlier paid contending that the margin fees
were deductible from gross income either as a tax or as an ordinary and necessary
business expense. However, Esso’s appeal was denied.

Issues
:(1) Whether or not the margin fees are taxes.

 
(2) Whether or not the margin fees are necessary and ordinary business expenses.

Held

:(1) No. A tax is levied to provide revenue for government operations, while the
proceeds of the margin fee are applied to strengthen our country's international
reserves. The margin fee was imposed by the State in the exercise of its police
power and not the power of taxation.

2) No. Ordinarily, an expense will be considered the expenditure is appropriate

and helpful in the development of the taxpayer's business. It is 'ordinary' when it
connotes a payment which is normal in relation to the business of the taxpayer and
the surrounding circumstances. Since the margin fees in question were incurred for
the remittance of funds to Esso's Head Office in New York, which is a separate and
distinct income taxpayer from the branch in the Philippines, for its disposal abroad,
it can never be said therefore that the margin fees were appropriate and helpful in
the development of Esso's business in the Philippines exclusively or were incurred
for purposes proper to the conduct of the affairs of Esso's branch in the Philippines
exclusively or for the purpose of realizing a profit or of minimizing a loss in the
Philippines exclusively. If at all, the margin fees were incurred for purposes proper
to the conduct of the corporate affairs of Esso in New York, but certainly not in the
Philippines.

12.) CASE DIGEST: UNIVERSITY PHYSICIANS SERVICES INC.

- MANAGEMENT, INC., Petitioner vs. COMMISSIONER OF
INTERNAL REVENUE, Respondent. (G.R. No. 205955; March
7, 2018)

“IRREVOCABILITY RULE”
PRINCIPLE: When a corporation overpays its income tax liability as
adjusted at the close of the taxable year, it has two options: (1) to be
refunded or issued a tax credit certificate, or (2) to carry over such
overpayment to the succeeding taxable quarters to be applied as tax
credit against income tax due. Once the carry-over option is taken, it
becomes irrevocable such that the taxpayer cannot later on change its
mind in order to claim a cash refund or the issuance of a tax credit
certificate of the very same amount of overpayment or excess income
tax credit.

GENERAL ISSUE: Does the irrevocability rule apply

exclusively to the carry-over option?

FACTS:

 UPSI-MI had, as of 31 December 2005, an outstanding amount of

₱2,331, 102.00 in excess and unutilized creditable withholding taxes.

For the subsequent taxable year ending 31 December 2006, the total
sum of creditable taxes withheld on the management fees of UPSI-MI
was ₱2,927,834.00. Per its 2006 Annual Income Tax Return (ITR),
UPSI-MI's income tax due amounted to ₱99,105.00. UPSI-MI applied
its "Prior Year's Excess Credits" of ₱2,331, 102.00 as tax credit against
such 2006 Income Tax due, leaving a balance of ₱2,231,507.00 of still
unutilized excess creditable tax. Meanwhile, the creditable taxes
withheld for the year 2006 (₱2,927,834.00) remained intact and
unutilized. In said 2006 Annual ITR, UPSI-MI chose the option "To be
issued a tax credit certificate" with respect to the amount
₱2,927,834.00, representing unutilized excess creditable taxes for the
taxable year ending 31 December 2006.

In the following year, UPSI-MI changed its taxable period from

calendar year to fiscal year ending on the last day of March. Thus, it
 filed on 14 November 2007 an Annual ITR covering the short period
from January 1 to March 31 of 2007. In the original 2007 Annual ITR,
UPSI-MI opted to carry over as "Prior Year's Excess Credits" the total
amount of ₱5,159,341.00 which included the 2006 unutilized creditable
withholding tax of ₱2,927,834.00. UPSI-MI amended the return by
excluding the sum of ₱2,927,834.00 under the line "Prior Year's Excess
Credits" which amount is the subject of the refund claim.

ISSUE: 

May UPSI-MI still be entitled to the refund of its 2006 excess tax
credits in the amount of ₱2,927,834.00 when it thereafter filed its
income tax return (for the short period ending 31 March 2007)
indicating the option of carry-over.

HELD: 

NO. Under Philippine tax laws, there are two options available to a corporation
whenever it overpays its income tax for the taxable year: (1) to carry over and
apply the overpayment as tax credit against the estimated quarterly income tax
liabilities of the succeeding taxable years (also known as automatic tax credit)
until fully utilized (meaning, there is no prescriptive period); and (2) to apply
for a cash refund or issuance of a tax credit certificate within the
prescribed period. Such overpayment of income tax is usually occasioned by the
over-withholding of taxes on the income payments to the corporate taxpayer.

The law does not prevent a taxpayer who originally opted for a refund or tax
credit certificate from shifting to the carry-over of the excess creditable taxes to
the taxable quarters of the succeeding taxable years. However, in case the
taxpayer decides to shift its option to carryover, it may no longer revert to its
original choice due to the irrevocability rule. As Section 76 unequivocally
provides, once the option to carry over has been made, it shall be irrevocable.
Furthermore, the provision seems to suggest that there are no qualifications or
conditions attached to the rule on irrevocability.
Law and jurisprudence unequivocally support the view that only the option of
carry-over is irrevocable.

Applying the foregoing precepts to the given case, UPSI-MI is barred from
recovering its excess creditable tax through refund or TCC. It is undisputed that
despite its initial option to refund its 2006 excess creditable tax, UPSI-MI
subsequently indicated in its 2007 short-period FAR that it carried over the 2006
excess creditable tax and applied the same against its 2007 income tax due. The
CTA was correct in considering UPSI-MI to have constructively chosen the option
of carry-over, for which reason, the irrevocability rule forbade it to revert to its
initial choice. It does not matter that UPSI-Ml had not actually benefited from the
carry-over on the ground that it did not have a tax due in its 2007 short period.
Neither may it insist that the insertion of the carry-over in the 2007 FAR was by
mere mistake or inadvertence. As we previously laid down, the irrevocability rule
admits of no qualifications or conditions.

In sum, the UPSI-MI is clearly mistaken in its view that the irrevocability rule
also applies to the option of refund or tax credit certificate. In view of the court's
finding that it constructively chose the option of carry-over, it is already barred
from recovering its 2006 excess creditable tax through refund or TCC even if it
was its initial choice.

12.) CIR v. TEAM [PHILIPPINES] OPERATIONS CORPORATION

[FORMERLY MIRANT (PHILS) OPERATIONS CORPORATION]
G.R. No. 179260 April 02, 2014

FACTS:

Respondent Mirant is a corporation engaged in the business of constructing and

managing gas turbine and other power generating plants and related facilities for
the conversion into electricity of coal, distillate and other fuels.

Mirant filed its 2001 income tax return with the BIR reporting an income tax
overpayment in the amount of 69.5 million pesos arising from unutilized creditable
taxes withheld during the year. Relative to this, Mirant filed a letter request for the
refund or issuance of a tax credit certificate with the BIR.
Thereafter, Mirant filed a petition for review before the CTA in order to toll the
running of the two-year prescriptive period of the claim for refund.

The CTA in Division ordered that BIR should refund or issue a certificate of tax
credit for the tax overpayment of Mirant since it complied with the requirements
provided by law. The ruling was affirmed by the CTA En Banc. Hence, this
petition.

ISSUE:

Whether or not Mirant has established its entitlement for the refund or issuance of
a tax credit certificate in its favor the entire amount of P69.5 million representing
its unutilized tax credits for taxable year 2001.

RULING:

YES. In order to be entitled to a refund claim or issuance of a tax credit certificate

representing any excess or unutilized creditable withholding tax, it must be shown
that the claimant has complied with the essential basic conditions set forth under
pertinent provisions of law and existing jurisprudential declarations. The SC, in a
prior court decision, had articulated that there are three essential conditions for the
grant of a claim for refund of creditable withholding income tax, to wit: (1) the
claim is filed with the Commissioner of Internal Revenue within the two-year
period from the date of payment of the tax; (2) it is shown on the return of the
recipient that the income payment received was declared as part of the gross
income; and (3) the fact of withholding is established by a copy of a statement
duly issued by the payor to the payee showing the amount paid and the amount of
the tax withheld therefrom.

In this case, Mirant had indeed complied with the abovementioned requirements. it
is undisputed that the claim for refund was filed within the two-year prescriptive
period prescribed under Section 229 of the NIRC of 1997, as amended. Likewise,
Mirant was able to present various certificates of creditable tax withheld at source
from its payors for taxable year 2001. Lastly, in compliance with Section 76 of the
NIRC of 1997, as amended, Mirant opted to be refunded of its unutilized tax credit
and the same was not carried over in its 2002 income tax return; therefore, the
entire amount may be a proper subject of a claim for refund/tax credit certificate.

All told, Mirant complied with all the legal requirements and it is entitled, as it
opted, to a refund of its excess creditable withholding tax for the taxable year
2001.

13.) CHINA BANKING CORPORATION, petitioner,vs.COURT OF

APPEALS (CA), COMMISSIONER OF INTERNAL REVENUE
and COURT OF TAX APPEALS(CTA), respondents
---------------------------------------------------------------G.R. No. 125508July 19, 2000Ponente:
VITUG, J.:
Nature of Case:
Petition for review of the decision of the Court of Appeals

Brief:
 
This is a petition for review on the decision of the CA upholding the CTA’s decision that the
securities held by the petitioner as investments had not indeed become worthless and
ordered petitioner to pay its deficiency tax for 1987 amounting to P 8,533,328.04.

Facts:

Sometime in 1980, petitioner China Banking Corporation made a 53% equity investment in the
First CBC Capital (Asia) Ltd., a Hongkong subsidiary engaged in financing and
investment with "deposit-taking" function. The investment amounted to P16, 227,
851.80, consisting of 106,000 shares with a par value of P100 per share. In the course of the
regular examination of the financial books and investment portfolios of petitioner
conducted by Bangko Sentral in 1986, it was shown that First CBC Capital (Asia),
Ltd., has become insolvent .With the approval of BangkoSentral, petitioner wrote-
off as being worthless its investment in First CBC Capital(Asia), Ltd., in its 1987
Income Tax Return and treated it as a bad debt or as an ordinary loss deductible
fromi ts gross income. Respondent Commissioner of Internal Revenue disallowed the
deduction and assessed petitioner for income tax deficiency in the amount of P8,533,328.04 on
the ground that the investment should not be classified as being "worthless" and that, although
the Hongkong Banking Commissioner had revoked the license of FirstCBC Capital as a
"deposit-taping" company, the latter could still exercise, however, its financing and
investment activities. Assuming that the securities had indeed become worthless, respondent
Commissioner ofI internal Revenue held the view that they should then be classified
as "capital loss," and not as a bad debt expense there being no indebtedness
to speak of between petitioner and its subsidiary.

 Action of the Court/s:

CIR- disallowed the deduction and assessed petitioner for income tax deficiency
CTA-upheld CIR’s decision
 CA- affirmed the ruling of the CTA
SC- the judgment of the CA was affirmed.

Issue/s:

 Whether the petitioner can claim deduction from writing off the value of the securities
considered as being worthless.

Rationale:

NO. The Court did not go of length into issue of deductibility since, even to
assume the worthlessness of the shares, the deductibility thereof would still be nil
in this particular case. An equity investment is a capital, not ordinary, asset of the
investor the sale or exchange of which results in either a capital gain or a capital
loss. When the shares held by such investor become worthless, the loss is deemed
to be a loss from the sale or exchange of capital assets.
Section 29(d)(4)(B) of the NIRC states:
 "(B) Securities becoming worthless. - If securities as defined in Section 20
become worthless during the tax"year and are capital assets, the loss resulting therefrom
shall, for the purposes of his Title, be considered as a loss from the sale or exchange, on
the last day of such taxable year, of capital assets." A capital gain or a capital loss
normally requires the concurrence of two conditions for it to result: (1) There is a
sale or exchange; and (2) the thing sold or exchanged is a capital asset. When securities become
worthless, there is strictly no sale or exchange but the law deems the loss anyway to
be "a loss from the sale or exchange of capital assets." In these cases, the NIRC dispenses,
in effect, with the standard requirement of a sale or exchange for the application of the
capital gain and loss provisions of the code."
Section 33.Capital gains and losses. -"x xxxxxxxx"(c) Limitation on capital losses. -
Losses from sales or exchange of capital assets shall be allowed only to the extent of the gains
from such sales or exchanges. In the case, the petitioner cannot benefit from the
deduction because there were no capital gains from which to offset the capital loss
and the loss should be considered as capital loss and not as bad debt.

Supreme Court Ruling:

Wherefore, the petition is denied. The decision of the CA disallowing the claimed deduction of
P16,227,851.80 is affirmed

14.)FERNANDOS HERMANOS, INC. vs. COMMISSIONER

29 SCRA 552
GR No. No. L-21551, September 30, 1969
"The filing of an answer to taxpayer's petition for review is considered
as institution of judicial action."
 
FACTS:
 The Commissioner of Internal Revenue assessed the petitioner investment
corporation of deficiency income taxes for the years 1950 to 1954 and for 1957.
There were two conflicting dates of assessment, which are vital to the compliance
with the statute of limitations, based on each claim of the petitioner and the
respondent; the Commisioner's record of date of assesment is February 27, 1956
while the petitioner believes the demand was made on December 27, 1955 so that,
as the petitioner corporation claims, the Commissioner's action to recover its tax
liability should be deemed to have prescribed for failure on the part of the
Commissioner to file a complaint for collection against it in an appropriate civil
action.
 
ISSUE:
Has the action for collection prescribed?
 
HELD:
No. It has been held that "a judicial action for the collection of a tax is begun by
the filing of a complaint with the proper court of first instance, or where the
assessment is appealed to the Court of Tax Appeals, by filing an answer to the
taxpayer's petition for review wherein payment of the tax is prayed for." This is but
logical for where the taxpayer avails of the right to appeal the tax assessment to the
Court of Tax Appeals, the said Court is vested with the authority to pronounce
judgment as to the taxpayer's liability to the exclusion of any other court. In the
present case, regardless of whether the assessments were made on February 24 and
27, 1956, as claimed by the Commissioner, or on December 27, 1955 as claimed
by the taxpayer, the government's right to collect the taxes due has clearly not
prescribed, as the taxpayer's appeal or petition for review was filed with the Tax
Court on May 4, 1960, with the Commissioner filing on May 20, 1960 his Answer
with a prayer for payment of the taxes due, long before the expiration of the five-
year period to effect collection by judicial action counted from the date of
assessment.
 

15.)BASILAN ESTATES, INC. v. CIR

G.R. No. L-22492 September 5, 1967
Bengzon, J.P., J.

Doctrine:
The income tax law does not authorize the depreciation of an asset beyond its
acquisition cost. Hence, a deduction over and above such cost cannot be claimed
and allowed. The reason is that deductions from gross income are privileges, not
matters of right. They are not created by implication but upon clear expression in
the law.

Facts:
Basilan Estates, Inc. claimed deductions for the depreciation of its assets on the
basis of their acquisition cost. As of January 1, 1950 it changed the depreciable
value of said assets by increasing it to conform with the increase in cost for their
replacement. Accordingly, from 1950 to 1953 it deducted from gross income the
value of depreciation computed on the reappraised value.

CIR disallowed the deductions claimed by petitioner, consequently assessing the

latter of deficiency income taxes.

Issue:
Whether or not the depreciation shall be determined on the acquisition cost rather
than the reappraised value of the assets

Held:
Yes. The following tax law provision allows a deduction from gross income for
depreciation but limits the recovery to the capital invested in the asset being
depreciated:

(1)In general. — A reasonable allowance for deterioration of property arising out

of its use or employment in the business or trade, or out of its not being
used: Provided, That when the allowance authorized under this subsection shall
equal the capital invested by the taxpayer . . . no further allowance shall be
made. . . .

The income tax law does not authorize the depreciation of an asset beyond its
acquisition cost. Hence, a deduction over and above such cost cannot be claimed
and allowed. The reason is that deductions from gross income are privileges, not
matters of right. They are not created by implication but upon clear expression in
the law [Gutierrez v. Collector of Internal Revenue, L-19537, May 20, 1965].
Depreciation is the gradual diminution in the useful value of tangible property
resulting from wear and tear and normal obsolescense. It commences with the
acquisition of the property and its owner is not bound to see his property gradually
waste, without making provision out of earnings for its replacement.

The recovery, free of income tax, of an amount more than the invested capital in an
asset will transgress the underlying purpose of a depreciation allowance. For then
what the taxpayer would recover will be, not only the acquisition cost, but also
some profit. Recovery in due time thru depreciation of investment made is the
philosophy behind depreciation allowance; the idea of profit on the investment
made has never been the underlying reason for the allowance of a deduction for
depreciation.

16.) CIR v. PRISCILA ESTATE, INC.

G.R. No. L-18282 May 29, 1964

Since the demolished building was not compensated for by insurance or otherwise,
its loss should be charged off as deduction from gross income. (Sec. 30[2],
Internal Revenue Code.)

FACTS: The corporation duly filed its income tax returns for the years 1949, 1950
and 1951. On 13 June 1952, however, it amended its income tax returns for 1951
and paid the tax corresponding to the assessment made by the petitioner on the
basis of the returns, as amended; and on 13 September 1952, the company claimed
a refund of P4,941.00 as overpaid income tax for the year 1950 for having
deducted from gross income only the sum of P6,013.85 instead of P39,673.25 as
its loss in the sale of a lot and building. Thereupon, the Commissioner of Internal
Revenue conducted an investigation 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. The Priscila Estate, Inc., contested the deficiency
assessments and when the Commissioner of Internal Revenue refused to reconsider
them, the former brought suit to the tax court which after trial, rendered the
decision that, in 1961, the Commissioner elevated to this Supreme Court for
review.

ISSUE:
1. Whether or not value of the demolished building should not be deducted from
gross income but added to the cost of the building replacing it.
2. Whether or not the basis for commuting the depreciation of this building should
be limited to the capital invested, which is the assessed value.

RULING:
1. NO. The first assignment of error refers to the allowance of a deduction in
the 1949 income tax returns of the respondent corporation the amount of
P11,237.35 representing the cost of a "barong-barong" (a make-shift
building), situated at the corner of Azcarraga Street and Rizal Avenue,
Manila, which was demolished on 31 December 1949 and a new one built in
its place. The petitioner claims that the value of the demolished building
should not be deducted from gross income but added to the cost of the
building replacing it because its demolition or removal was to make way for
the erection of another in its place.

The foregoing argument is erroneous inasmuch as the tax court found that
the removal of the "barong-barong", instead of being voluntary, was forced
upon the corporation by the city engineer because the structure was a fire
hazard; that the rental income of the old building was about P3,730.00 per
month, and that the corporation had no funds but had to borrow, in order to
construct a new building. All these facts, taken together, belie any intention
on the part of the corporation to demolish the old building merely for the
purpose of erecting another in its place. Since the demolished building was
not compensated for by insurance or otherwise, its loss should be charged
off as deduction from gross income. (Sec. 30[2], Internal Revenue Code.)
2. NO. Particularly contested by the petitioner is the basis for depreciation of
Building Priscila No. 3. This building, with an assessed value of P70,343.00
but with a construction cost of P110,600.00, was acquired by the respondent
corporation from the spouses, Carlos Moran Sison and Priscila F. Sison, in
exchange for shares of stock. According to the petitioner, the basis for
commuting the depreciation of this building should be limited to the capital
invested, which is the assessed value. On the other hand, the respondent
based its computation on its construction cost, revaluing the property on this
basis by a board resolution in order to "give justice to the Sison spouse
Since this revaluation would import an obligation of the corporation to pay
the Sison spouses, as vendors, the difference between the assessed value and
the revalued construction cost, as provided in resolution Exhibit F-1
(otherwise the revaluation would make no sense), the corporate investment
would ultimately be the construction cost which is undisputed), and
depreciation logically had to be on that basis. That the revaluation may
import additional profit to the vendor spouses is a matter related to their own
income tax, and not to that of respondent corporation.
 18. G.R. Nos. L-18843 and L-18844 August 29, 1974

CONSOLIDATED MINES, INC., petitioner, 

vs.
COURT OF TAX APPEALS and COMMISSIONER OF
INTERNAL REVENUE, respondents.

Facts:
The Company, a domestic corporation engaged in mining, had filed its income tax
returns for 1951, 1952, 1953 and 1956. In 1957 examiners of the BIR investigated
the income tax returns filed by the Company because its auditor, Felipe Ollada,
claimed the refund of the sum ofP107,472.00 representing alleged overpayments of
income taxes for the year 1951. After the investigation the examiners reported that
(A) for the years 1951 to 1954 (1) the Company had not accrued as an expense the
share in the company profits of Benguet Consolidated Mines as operator of the
Company's mines, although for income tax purposes the Company had reported
income and expenses on the accrual basis; (2) depletion and depreciation expenses
had been overcharged; and (3) the claims for audit and legal fees and
miscellaneous expenses for 1953 and1954 had not been properly substantiated; and
that (B) for the year 1956 (1) the Company had overstated its claim for depletion;
and (2) certain claims for miscellaneous expenses were not duly supported by
evidence. In view of said reports the Commissioner of Internal Revenue sent the
Company a letter of demand requiring it to pay certain deficiency income taxes for
the years 1951 to 1954, inclusive , and for the year 1956. Deficiency income tax
assessment notices for said years were also sent tothe Company. The Company
requested a reconsideration of the assessment, but the Commissioner refused to
reconsider, hence the Company appealed to the Court of Tax Appeals. On May 6,
1961 the Tax Court rendered judgment ordering the Company to pay the amounts
ofP107,846.56, P134,033.01 and P71,392.82 as deficiency income taxes for the
years 1953, 1954and 1956, respectively. However, on August 7, 1961, upon
motion of the Company, the Tax Court reconsidered its decision and further
reduced the deficiency income tax liabilities of the Company to P79,812.93,
P51,528.24 and P71,382.82 for the years 1953, 1954 and 1956, respectively.