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    Esso Standard Eastern Inc. deducted drilling and exploration expenses from its 1959 gross income, which was disallowed by the Commissioner of Internal Revenue who said the expenses should be capitalized. Esso also deducted margin fees paid to remit profits to its New York office, which the CIR also disallowed. The Court of Tax Appeals denied Esso's appeal. The Supreme Court held that the margin fees were not taxes, as their purpose was to regulate imports and protect domestic industry through the state's police power rather than generate revenue. The fees also did not qualify as ordinary and necessary business expenses.

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    Esso Standard Eastern Inc. deducted drilling and exploration expenses from its 1959 gross income, which was disallowed by the Commissioner of Internal Revenue who said the expenses should be capitalized. Esso also deducted margin fees paid to remit profits to its New York office, which the CIR also disallowed. The Court of Tax Appeals denied Esso's appeal. The Supreme Court held that the margin fees were not taxes, as their purpose was to regulate imports and protect domestic industry through the state's police power rather than generate revenue. The fees also did not qualify as ordinary and necessary business expenses.

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    8 views2 pages

    ESSO V CIR Print Out

    Uploaded by

    Gezelle Ramos
    Esso Standard Eastern Inc. deducted drilling and exploration expenses from its 1959 gross income, which was disallowed by the Commissioner of Internal Revenue who said the expenses should be capitalized. Esso also deducted margin fees paid to remit profits to its New York office, which the CIR also disallowed. The Court of Tax Appeals denied Esso's appeal. The Supreme Court held that the margin fees were not taxes, as their purpose was to regulate imports and protect domestic industry through the state's police power rather than generate revenue. The fees also did not qualify as ordinary and necessary business expenses.

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    Esso Standard Eastern Inc. vs. CIR (G.R. Nos.

    L-28508-9, July 7, 1989) Regulatory Purpose of Taxation

    Facts: 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 "dry hole" 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 New York head office. On August 5, 1964, the CIR granted a tax credit of P221,033.00 only, 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, Essos 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. Its purpose also is to limit non-essential imports, protecting domestic industry. (note: implementing the police power of the state is a regulatory purpose)

    (2) No. Ordinarily, an expense will be considered 'necessary' where 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. Sarandi, Abigail Moffait P. III-C

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