Cases Parts 4-5 PDF

Block 2A 2021 | TAXATION 1 | Montero
WEEK 2 COMPILATION a) the structure of the Philippine branch or liaison office, the Home Office, other
IV. Source of Income Rules (cont.) branches or more than 50% owned or controlled subsidiaries located outside the
Philippines dealing with the local branch;
Gross income from sources within the Philippines b) the ownership, relationship, extent of control, directors
43. RAMO 1-95 (Billy) and officers of the Philippine branch or liaison office and the Home Office;
March 21 1995 | Income - SOURCE OF INCOME RULES c) The affectivity of the MNE and how it relates to the activity of the local
branch or liaison office and other branches or more than 50% owned or
controlled subsidiaries dealing with the local company
March 21, 1995 2. Ascertain the mathematical accuracy and completeness of the income tax
Summary: This Revenue Audit Memorandum Order was to Address the issue return, financial statements and supporting schedules filed by the taxpayer.
on the proper determination of the income tax liability of Philippine branches 3. Require the submission of financial statements exclusive for
and liaison offices of MNEs pursuant to Section 43 of the National Internal transactions dealing with construction and all other activities and have a CPA
Revenue Code (NIRC) wherein the (CIR) is authorized to distribute, apportion render an opinion to its fairness and conformity with accepted accounting
or allocate gross income or deduction among organizations in order to clearly standards.
reflect the income of any such organization
For solicitation/trading activities
This Order shall pay only to Philippine branches and liaison of Japanese trading 4. Obtain a copy of the Worldwide Financial Statement duly certified by an
firms which are members of the Sogo Shoshas and registered with the Japanese independent public accountant of the country which issues the financial
Chamber of Commerce and Industry (JCCI), and also all other foreign trading statements and authenticated by the Philippine Embassy or Consulate situated
companies similarly situated as determined by the CIR within the country where the Home Office of the MNE is located.
5. Verify correctness of Worldwide Operating Income and the
Furthermore, the content of this Order will apply only to income tax liabilities of Worldwide Sales figures against the financial statements obtained in 4 above.
Philippine branches and liaison offices of MNEs and will not affect the 6. Request for a summary of Sales to the Philippines duly certified by an
withholding, including branch profit remittance, and business tax obligations of independent public accountant and authenticated by the Philippine Embassy or
the same Philippine branches and liaison offices of MNEs which shall be subject Consulate situated within the country where the Home Office of the MNE is
to the provisions of the (NIRC). located. The Sales to the Philippine shall include the offshore portion of the local
construction projects which includes the supply of machinery and equipment.
The Philippine income tax due from soliciting orders, purchaser, service 7. Request for presentation of copies of pertinent sales invoices, bills of lading,
contracts, trading, construction and other activities of the Philippine branches freight and insurance coverages and other documents to verify Sales to the
and liaison offices of MNEs will be ascertained using the following formula. Philippines, on a test sampling basis.
(Worldwide Operating Income) X( Sales to the Philippines/ Worldwide Sales) x For construction activities
Attribution Rate (75%) x Tax Rate (35%) 8. Review all Contracts and analyze the nature of the Contracts, the parties
involved, the terms and conditions, the total contract price, the payment and
For construction other pertinent information.
Net Income from Construction and other activities x Tax Rate (35%) 9. Determine method of accounting, whether completed contract or the
percentage of completion, and check the correctness of take up in the books of
In the application of the formula, no offsetting of losses from one line of accounts.
business to the detriment of the other line of business shall be allowed. This 10. Segregate the income from exempt transactions from that of taxable
would mean that the tax due from each line of business shall be computed transactions, if applicable.
independently from the other line of business. 11. Determine the total contract price and composition of the project. The total
PROCEDURES contract price includes:
1. Request documents containing information on the nature of business a. Supply of Machinery and Equipment
transactions of the taxpayer as follows: (Sometimes referred to as the
"offshore portion") xx
1
b. Supply of Labor/Civil Works a) This Order shall pay only to Philippine branches and liaison of Japanese trading
(Sometimes referred to as the firms which are members of the Sogo Shoshas and registered with the Japanese
"onshore portion") xx Chamber of Commerce and Industry (JCCI), and also all other foreign trading
—— companies similarly situated determined by the CIR
Total Contract Price xx b) Tthe content of this Order will apply only to income tax liabilities of Philippine
==== branches and liaison offices of MNEs and will not affect the withholding, including
12. Verify that only the supply of local/civil works (onshore branch profit remittance, and business tax obligations of the same Philippine
portion) is included in computation of profit/loss on local branches and liaison offices of MNEs which shall be
construction project. subject to the provisions of the (NIRC).
13. Determine if costs and expenses corresponded only to the
service portion of the project referred to in 11 above. IV. GUIDELINES
14. Be aware of charging of income and expenses by mere book entries using the 1. The Philippine income tax due from soliciting orders, purchaser, service contracts,
branch/home office account. trading, construction and other activities of the Philippine branches and liaison
offices of MNEs will be ascertained using the following formula.
For all other activities For solicitation and trading activities
15. Verify that all income from other activities are included as part of the gross {(Worldwide Operating Sales to the Philippines attribution tax){( Income X
income Worldwide Sales X rate X rate )}
16. Ensure that only expenses related to the activities above are For construction and other activities
included in the determination of the net income.This Revenue Audit plus {(Net Income from construction and other activities X tax rate )}
Memorandum Order was to Address the issue on the proper determination of the 2. In implementing the above formula, the following terms shall be construed to
income tax liability of Philippine branches and liaison offices of MNEs pursuant mean as follows:
to Section 43 of the National Internal Revenue Code (NIRC) wherein the (CIR) (a) Worldwide (W/W) shall include head office accounts and those of branches
is authorized to distribute, apportion or allocate gross income or deduction located in difference countries but shall exclude subsidiary accounts.
among organizations in order to clearly reflect the income of any such (b) W/W Operating Income shall include the Gross Income minus Selling General &
organization Administrative expenses. Operating Income does not include non-operating and
extraordinary items like interest expense, exchange profit/loss capital gains/losses or
other income/loss not related not related to operation.
(c) Sales to the Philippines shall be defined as the aggregated amount of exports and
offshore transactions to the Philippines by the Head Office, all branches and liaison
FACTS: offices and shall include the amount of indent transactions from which commissions
II. OBJECTIVES are generated. These shall also include imported materials and equipment of
This Order is issued to: construction projects undertaken in the Philippines, but shall exclude local service
a) Amend and supersede RAMO No. 1-86 dated April 25, 1986 which provides for income from construction projects or onshore income from local construction.
the procedures for tax audit of Philippine branches or foreign corporation. (d) W/W Sales shall consist of domestic, export, import and offshore transactions
b) Address the issue on the proper determination of the income tax liability of which include nor only principal transactions but also indent transactions from which
Philippine branches and liaison offices of MNEs pursuant to Section 43 of the commissions are generated.
(NIRC) wherein the (CIR) is authorized to distribute, apportion or allocate gross (e) Attribution rate shall mean a rate of 75% to be applied against formula.
income or deduction among organizations in order to clearly reflect the income of (f) The tax rate to be applied shall be in accordance with Section 25(a) of the NIRC
any such organization. which is 35%.
c) Provide guidelines on implementation of policies on the properdetermination of (g) Net income on construction shall consist of local service
the income tax liability of Philippine branches and liaison offices of MNEs. income from construction projects income from construction projects less the costs
d) Prescribed the minimum procedure required in the audit of theincome tax liability associated with local construction projects including the cost of locally purchased
of Philippine branches and liaison offices of MNEs. materials equipment.
(h) Net income on all other activities shall consist of income
III. COVERAGE
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such as branches and liaison offices of MNEs are engaged in, net of costs and 9. Determine method of accounting, whether completed contract or the percentage of
expenses associated with such income. completion, and check the correctness of take up in the books of accounts.
3. In the application of the formula, no offsetting of losses from one line of business 10. Segregate the income from exempt transactions from that of taxable transactions,
to the detriment of the other line of business shall be allowed. This would mean that if applicable.
the tax due from each line of business shall be computed independently from the 11. Determine the total contract price and composition of the project. The total
other line of business. contract price includes:
a. Supply of Machinery and Equipment
V. PROCEDURES (Sometimes referred to as the
1. Request documents containing information on the nature of business transactions "offshore portion") xx
of the taxpayer as follows: b. Supply of Labor/Civil Works
a) the structure of the Philippine branch or liaison office, the Home Office, other (Sometimes referred to as the
branches or more than 50% owned or controlled subsidiaries located outside the "onshore portion") xx
Philippines dealing with the local branch; ——
b) the ownership, relationship, extent of control, directors and officers of the Total Contract Price xx
Philippine branch or liaison office and the Home Office; ====
c) The affectivity of the MNE and how it relates to the activity of the local branch or 12. Verify that only the supply of local/civil works (onshore
liaison office and other branches or more than 50% owned or controlled subsidiaries portion) is included in computation of profit/loss on local
dealing with the local company construction project.
2. Ascertain the mathematical accuracy and completeness of the income tax return, 13. Determine if costs and expenses corresponded only to the
financial statements and supporting schedules filed by the taxpayer. service portion of the project referred to in 11 above.
3. Require the submission of financial statements exclusive for transactions dealing 14. Be aware of charging of income and expenses by mere book entries using the
with construction and all other activities and have a CPA render an opinion to its branch/home office account.
fairness and conformity with accepted accounting standards.
For all other activities
For solicitation/trading activities 15. Verify that all income from other activities are included as part of the gross
4. Obtain a copy of the Worldwide Financial Statement duly certified by an income
independent public accountant of the country which issues the financial statements 16. Ensure that only expenses related to the activities above are
and authenticated by the Philippine Embassy or Consulate situated within the included in the determination of the net income.
country where the Home Office of the MNE is located.
5. Verify correctness of Worldwide Operating Income and the Worldwide Sales
figures against the financial statements obtained in 4 above.
6. Request for a summary of Sales to the Philippines duly certified by an independent
44. RAMO 4-86 (Marie)
public accountant and authenticated by the Philippine Embassy or Consulate situated
within the country where the Home Office of the MNE is located. The Sales to the April 5, 1986 | Commissioner Bienvenido A. Tan, Jr. | Income - SOURCE OF
Philippine shall include the offshore portion of the local construction projects which INCOME RULES
includes the supply of machinery and equipment.
7. Request for presentation of copies of pertinent sales invoices, bills of lading,
freight and insurance coverages and other documents to verify Sales to the
Philippines, on a test sampling basis.
For construction activities

8. Review all Contracts and analyze the nature of the Contracts, the parties involved,
the terms and conditions, the total contract price, the payment and other pertinent
information.
3
ISSUED BY: Commissioner Bienvenido A. Tan, Jr. Office and the Local Branch. For this purpose, an organization and
functional chart of the home office and local branch should be secured.
SUBJECT: Audit Guidelines in the Allocation of Home Office
Overhead Expenses Under Section 37(b) of the National Internal 2.11 The functions should be determined and then listed. Who does
Revenue Code. what? What is required to do it? Who needs whom for what?
TO: All Internal Revenue Officers and Others Concerned 2.12 After having listed the functions performed by each entity, the
In order to avoid delay and conflict in the determination of functions themselves must be analyzed. Could anyone else perform
Philippine sources taxable net income of foreign taxpayers for these functions? How difficult are they? What skill, equipment and
purposes of Philippine income tax, this Revenue Audit processes are needed?
Memorandum is issued.
2.2 On the basis of the functional analysis, the claimed deduction
1. Background properly allocable can now be determined by applying the tests of (a)
1.1 In computing net income from sources within the Philippines, relevance (necessary) to the local branch and (b) reasonable (ordinary)
Section 37(b) provides that from the gross income from sources within charges keeping always in mind the arm's length principle in
the Philippines ". . . there shall be deducted the expenses, losses and transactions between related parties.
other deductions properly allocated thereto and a ratable part of any
expenses, interests and losses and other deductions effectively 2.3 As to the deductions which cannot be definitely allocated, the
connected with the business or trade conducted exclusively within the following are required:
Philippines which cannot be definitely allocated to some items or class
of gross income . . . " 2.3 Breakdown or Schedule of Home or Foreign Office expenses being
pro-rated, together with an explanation of the nature of each expense.
1.2 These deductions are difficult to verify because substantial amounts Take note of deductions which are directly allocable to income earned
thereof are incurred in the head office or elsewhere and the outside the Philippines.
corresponding supporting documents and books of accounts are not
accessible to local taxing authorities. 2.3 Basis of pro-ration — (a) Determine if the basis and method of pro-
ration are being applied consistently from year to year. (b) Is the same
1.3 Heretofore only an audit certificate is presented to substantiate the amount of Home Office expenses being allocated world-wide?
deductions incurred abroad which are allocated and pro-rated to
Philippine source gross income 3. In all instances, be on the lookout for:
a. Charges applicable to newly opened foreign branches but are being
1.4 In implementing the above provision of the National Internal claimed as deductions by the Philippine branch;
Revenue Code, there is a need for adequate and satisfactory proof and b. Functions are being performed for some branches but not for others,
explanations in order that the claimed deductions of the foreign and yet no adjustments are made on the allocation;
taxpayer may be allowed for income tax purposes. c. or any other scheme of over-allocating costs to the Philippine branch.
2. Audit Procedure 4. All pertinent provisions of these Audit Guidelines applicable in the
2.1 Functional analysis — At the start of investigation there should be investigations of subsidiaries by multi-national companies should be
a detailed examination of the functions performed both by the Home observed by all internal revenue officers
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concerned.
SEPARATE OPINIONS: N/A

CONCURRING: N/A
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under this method, an expense is recognized when it is incurred. Under a Revenue

Audit Memorandum, when the method of accounting is accrual, expenses not
being claimed as deductions by a taxpayer in the current year when they are
incurred cannot be claimed in the succeeding 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.
The term "reasonable accuracy" implies something less than an exact or
V. Deductions completely accurate amount.
Business Expenses
From the nature of the claimed deductions and the span of time during which the
45. CIR v. Isabela Cultural Corporation (BENICA) firm was retained, ICC can be expected to have reasonably known the retainer fees
12 February 2007 | Ynares-Santiago, J. | Deductions- Business expenses charged by the firm. They cannot give as an excuse the delayed billing, since it
could have inquired into the amount of their obligation and reasonably determine
PETITIONER: Commissioner of Internal Revenue the amount.
RESPONDENTS: Isabela Cultural Corporation (ICC)
DOCTRINE: One of the requisites for the deductibility of ordinary and necessary
SUMMARY: ICC a domestic corporation received an assessment notice for trade, business, or professional expenses is it must have been paid or incurred
deficiency income tax and expanded withholding tax from BIR. It arose from the during the taxable year. This requisite is dependent on the method of accounting
disallowance of ICC’s claimed expense for professional and security services paid of the taxpayer.
by ICC; as well as the alleged understatement of interest income on the three
promissory notes due from Realty Investment Inc. 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)
ICC sought a reconsideration of the assessments. Having received a final notice the availability of the reasonable accurate determination of such income or
of assessment, it brought the case to CTA, which held that it is unappealable, since liability. The all-events test requires the right to income or liability be fixed, and
the final notice is not a decision. CTA’s ruling was reversed by CA, which was the amount of such income or liability be determined with reasonable accuracy.
sustained by SC, and case was remanded to CTA. CTA rendered a decision in The term "reasonable accuracy" implies something less than an exact or
favor of ICC. CA affirmed CTA. Hence, this Petition. completely accurate amount.
Whether or not the expenses for professional and security services are deductible FACTS:
-- NO 1. ICC, a domestic corporation, received from the BIR two Assessment Notices:
(a) for deficiency income tax of P333k-ish and (b) deficiency expanded
One of the requisites for the deductibility of ordinary and necessary trade, withholding tax in the amount of P4k-ish, inclusive of surcharges and
business, or professional expenses is it must have been paid or incurred during the interest, both for the taxable year 1986.
taxable year. This requisite is dependent on the method of accounting of the a. The deficiency income tax of P333k-ish arose from BIR’s
taxpayer. In the case at bar, ICC is using the accrual method of accounting. Hence, disallowance of ICC’s claimed expense deductions for professional
6
and security services billed to and paid by ICC in the year 1986 and 2. Accounting methods for tax purposes comprise a set of rules for determining
the alleged understatement of ICC’s interest income on the three when and how to report income and deductions.
promissory notes due from Realty Investment. a. In the instant case, the accounting method used by ICC is the accrual
b. The deficiency expanded withholding tax of P4k-ish was allegedly method.
due to the failure of ICC to withhold 1% expanded withholding tax 3. Revenue Audit Memorandum Order No. 1-2000, provides that under the
on its claimed P244k-ish deduction for security services. accrual method of accounting, expenses not being claimed as deductions by
2. ICC sought a reconsideration of the subject assessments. It brought the case a taxpayer in the current year when they are incurred cannot be claimed as
to CTA which held that the petition is premature because the final notice of deduction from income for the succeeding year.
assessment cannot be considered as a final decision appealable to the tax a. Thus, a taxpayer who is authorized to deduct certain expenses and
court. other allowable deductions for the current year but failed to do so
a. CA reserved CTA holding that a demand letter of the BIR reiterating cannot deduct the same for the next year.
the payment of deficiency tax, amounts to a final decision on the 4. For a taxpayer using the accrual method, the determinative question is, when
protested assessment and may therefore be questioned before the do the facts present themselves in such a manner that the taxpayer must
CTA. recognize income or expense?
b. Such conclusion was sustained by the SC and the case was a. The accrual of income and expense is permitted when the all-events
remanded back to CTA for further proceedings. test has been met. This test requires: (1) fixing of a right to income
3. CTA then rendered a decision cancelling and setting aside the assessment or liability to pay; and (2) the availability of the reasonable accurate
notices issued against ICC. determination of such income or liability.
4. CA affirmed CTA. 5. The all-events test requires the right to income or liability be fixed, and the
5. Hence, this Petition. amount of such income or liability be determined with reasonable accuracy.
a. The amount of liability does not have to be determined exactly; it
ISSUES: must be determined with "reasonable accuracy." Accordingly, the
1. Whether or not the expenses for professional and security services are term "reasonable accuracy" implies something less than an exact or
deductible -- NO completely accurate amount.
6. The propriety of an accrual must be judged by the facts that a taxpayer knew,
RATIO: or could reasonably be expected to have known, at the closing of its books
1. The requisites for the deductibility of ordinary and necessary trade, business, for the taxable year. Accrual method of accounting presents largely a question
or professional expenses, like expenses paid for legal and auditing services, of fact; such that the taxpayer bears the burden of proof of establishing the
are: (a) the expense must be ordinary and necessary; (b) it must have been accrual of an item of income or deduction.
paid or incurred during the taxable year; (c) it must have been paid or 7. In the instant case, the expenses for professional fees consist of expenses for
incurred in carrying on the trade or business of the taxpayer; and (d) it must legal and auditing services.
be supported by receipts, records or other pertinent papers. a. The expenses for legal services pertain to the 1984 and 1985 legal
a. The requisite that it must have been paid or incurred during the and retainer fees of a law firm and for reimbursement of the
taxable year is further qualified by Section 45 of the National expenses of said firm in connection with ICC's tax problems for the
Internal Revenue Code (NIRC) which states that: "[t]he deduction year 1984. As testified by the Treasurer of ICC, the firm has been
provided for in this Title shall be taken for the taxable year in which its counsel since the 1960's. From the nature of the claimed
'paid or accrued' or 'paid or incurred', dependent upon the method of deductions and the span of time during which the firm was retained,
accounting upon the basis of which the net income is computed . . ." ICC can be expected to have reasonably known the retainer fees
7
charged by the firm as well as the compensation for its legal

services.
b. 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.
8. ICC thus failed to discharge the burden of proving that the claimed expense
deductions for the professional services were allowable deductions for the
taxable year 1986. Hence, per Revenue Audit Memorandum Order No. 1-
2000, they cannot be validly deducted from its gross income for the said year
and were therefore properly disallowed by the BIR.
9. As to the expenses for security services, the records show that these expenses
were incurred by ICC in 1986 20 and could therefore be properly claimed as
deductions for the said year.
10. Anent the purported understatement of interest income from the promissory
notes of Realty Investment, Inc., we sustain the findings of the CTA and the
Court of Appeals that no such understatement exists and that only simple
interest computation and not a compounded one should have been applied by
the BIR.
SEPARATE OPINIONS: NONE

CONCURRING: NONE
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DOCTRINE: The NIRC expressly requires, as a condition for deductibility of an

expense, that the tax required to be withheld on the amount paid or payable is
shown to have been remitted to the BIR by the taxpayer constituted as a
46. ING Bank v. CIR (Pat) withholding agent of the government.
22 July 2015| Leonen, J. | Deductions - Business Expenses [Author’s note (chz): Important stuff are in boldface; I just made lists para mas madali
PETITIONER: ING BANK N.V. MANILA BRANCH maalala yung taxes involved and I used tables for easier comparison. Yung legal basis
RESPONDENTS: Commissioner of Internal Revenue is also copy-pasted here verbatim (which is why the digest looks long)]
SUMMARY: FACTS:
ING Bank, a Philippine branch of a foreign banking corporation in Netherlands 1. ING Bank is the Philippine branch of Internationale Nederlanden Bank
received a final assessment notice for deficiency tax assessments. It paid some and N.V. → a foreign banking corporation incorporated in the Netherlands.
protested the others which amounted to Php 673M (approx). It filed a case with 2. ING Bank is duly authorized by the Bangko Sentral ng Pilipinas to operate
the CTA seeking to cancel and withdraw the deficiency assessments but only the as a branch with full banking authority in the Philippines.
deficiency income tax, DST, and branch profit remittance taxes were withdrawn. 3. On 3 January 2000, ING Bank received a Final Assessment Notice (dated 3
Both parties appealed but the CTA en banc dismissed the case. Subject of the December 1999), which contained the Details of Assessment and Assessment
petition for review before the SC are the upheld deficiencies of ING Bank. Note Notices issued by the BIR for deficiency tax assessments for taxable years
that in 2007, ING Bank availed of tax amnesty. 1996 and 1997 on:
a. Income tax
The main issue is W/N ING Bank is liable for deficiency withholding tax on b. Withholding tax on compensation
accrued bonuses for the taxable years 1996 and 1997. c. Onshore tax
d. Branch profit remittance tax
A - Yes, ING Bank is liable for deficiency withholding tax on accrued bonuses e. DST
for the taxable years 1996 and 1997. f. Compromise penalty
L - NIRC provision on deductions from gross income and RR 8-85, as amended g. Final tax
both require that an expense, whether the same is paid or payable, shall be 4. On 2 February 2000, ING Bank paid the deficiency assessments for
allowed as a deduction only if it is shown that the tax required to be deducted a. 1996 compromise penalty
and withheld therefrom was paid to the BIR. The obligation of the b. 1997 deficiency documentary stamp tax
payor/employer to deduct and withhold the related withholding tax arises at c. 1997 deficiency final tax
the time the income was paid or accrued or recorded as an expense in the 5. ING Bank protested the other ten (10) deficiency tax assessments in the
payor's/employer's books, whichever comes first. total amount of P672,576,939.18.
A - ING Bank accrued or recorded the bonuses as deductible expense in its books. 6. ING Bank then filed a Petition for Review before the CTA seeking the
Therefore, its obligation to withhold the related withholding tax due from the cancellation and withdrawal of the deficiency tax assessments for the
deductions for accrued bonuses arose at the time of accrual and not at the time years 1996 and 1997, including the alleged deficiency documentary stamp
of actual payment. tax on special savings accounts, deficiency onshore tax, and deficiency
C - Thus, ING Bank must pay for its liabilities in the total amount of P564,542.67 withholding tax on compensation.
inclusive of interest. 7. CTA decision:
Cancelled & Withdrawn Upheld
9
● 1996 and 1997 deficiency ● 1996 and 1997 deficiency same should be disallowed
income tax withholding tax on
● 1996 & 1997 deficiency branch compensation
profit remittance tax ● 1996 deficiency onshore tax ISSUES:
● 1997 deficiency DST on IBCLs ● 1996 and 1997 deficiency 1. W/N ING Bank may avail of the tax amnesty - Yes
(wala yung full name nito sa DST on special savings 2. [MAIN] W/N ING Bank is liable for deficiency withholding tax on
case o.o) exceeding 5 days accounts accrued bonuses for the taxable years 1996 and 1997 - Yes
8. Both the CIR and ING Bank filed their respective MRs → both denied
RULING: WHEREFORE, the Petition is PARTLY GRANTED. The assessments
9. ING Bank filed its appeal w/ the CTA en banc → dismissed
with respect to petitioner ING Bank's liabilities for deficiency documentary stamp
10. Hence this petition for review before the SC.
taxes on its special savings accounts for the taxable years 1996 and 1997 and
11. In 2007, ING Bank availed itself of the tax amnesty under RA 9480, with
deficiency tax on onshore interest income under the foreign currency deposit system
respect to its liabilities for deficiency documentary stamp taxes on its
for taxable year 1996 are hereby SET ASIDE solely in view of petitioner ING Bank's
special savings accounts for the taxable years 1996 and 1997 and deficiency
availment of the tax amnesty program under Republic Act No. 9480. The April 5,
tax on onshore interest income under the foreign currency deposit system
2005 Decision of the Court of Tax Appeals En Banc, which affirmed the August 9,
for taxable year 1996.
2004 Decision and November 12, 2004 Resolution of the Court of Tax Appeals Second
12. Arguments of the parties
Division holding petitioner ING Bank liable for deficiency withholding tax on
ING Bank CIR compensation for the taxable years 1996 and 1997 in the total amount of
P564,542.67 inclusive of interest, is AFFIRMED.
ING is qualified to avail ING Bank is not qualified to avail itself of the tax
of the tax amnesty. The amnesty granted under RA 9480 because both the
RATIO:
law only excludes from CTA En Banc and Second Division confirmed
tax amnesty "tax cases ING’s liability for deficiency DST, onshore taxes, First Issue: W/N ING Bank may avail of the tax amnesty - Yes
subject of final and and withholding taxes. This is based on a BIR 1. Taxpayers with pending tax cases may avail themselves of the tax amnesty
[executory] judgment memorandum which excludes "cases which were program under RA 9480
by the courts. ruled by any court (even without finality) in favor 2. BIR's inclusion of "issues and cases which were ruled by any court (even
of the BIR prior to amnesty availment of the without finality) in favor of the BIR prior to amnesty availment of the
taxpayer" from the coverage of the tax amnesty taxpayer" as one of the exceptions in RMC 19-2008 is misplaced.
under RA 9480.
3. RA 9480 is specifically clear that the exceptions to the tax amnesty program
ING is not liable for Claim[ing] [the] subject bonuses as deductible include "tax cases subject of final and executory judgment by the courts."
withholding taxes on expenses in its taxable income although it has not 4. ING Bank is not disqualified from availing itself of the tax amnesty under the
bonuses accruing to its yet withheld and remitted the [corresponding law during the pendency of its appeal before this court
officers and employees withholding] tax" to the BIR contravened Section 5. Considering ING Bank's tax amnesty availment, there is no more issue
during taxable years 29 (j) of the NIRC. regarding its liability for deficiency DST on its special savings accounts for
1996 & 1997 because
CTA Second Division also already found that ING 1996 and 1997 and deficiency tax on onshore interest income for 1996,
the liability of the
employer to withhold bonuses were determined during the year but were including surcharge and interest.
the tax does not arise distributed in the succeeding year. No withholding
until such bonus is of income tax was effected but the bonuses were Second Issue: [MAIN] W/N ING Bank is liable for deficiency withholding tax on
actually distributed claimed as an expense for the year. Since the accrued bonuses for the taxable years 1996 and 1997 - Yes
based on NIRC Sec. 72. bonuses were not subjected to withholding tax 1. CTA En Banc affirmed the factual finding of the Second Division that
during the year they were claimed as an expense, the
accrued bonuses were recorded in petitioner ING Bank's books as
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expenses for taxable years 1996 and 1997, although no withholding of tax 4. The term "compensation" means all remunerations paid for services
was effected. performed by an employee for his or her employer, whether paid in cash or
2. An expense, whether the same is paid or payable, "shall be allowed as a in kind, unless specifically excluded
deduction only if it is shown that the tax required to be deducted and 5. The name designated to the remuneration for services is immaterial. Thus,
withheld therefrom [was] paid to the BIR” "salaries, wages, emoluments and honoraria, bonuses, allowances (such as
transportation, representation, entertainment, and the like), [taxable] fringe
[LEGAL BASIS #1] benefits[,] pensions and retirement pay, and other income of a similar
Section 29 (j) of the 1977 NIRC (now Section 34 (K) of the 1997 National nature constitute compensation income" that is taxable
Internal Revenue Code) provides: 6. Thus, ING Bank is liable for the withholding tax on the bonuses since it
claimed the same as expenses in the year they were accrued
“Section 29. Deductions from gross income. — In computing taxable income subject 7. The tax on compensation income is withheld at source under the creditable
to tax under Secs. 21(a); 24(a), (b) and (c); and 25(a) (1), there shall be allowed as withholding tax system wherein the tax withheld is intended to equal or
deductions the items specified in paragraphs (a) to (i) of this section: at least approximate the tax due of the payee on the said income. It was
xxx xxx xxx
designed to enable (a) the individual taxpayer to meet his or her income tax
(a) Expenses. — (1) Business expenses. — (A) In general. — All ordinary and
liability on compensation earned; and (b) the government to collect at source
necessary expenses paid or incurred during the taxable year in carrying on any trade
or business, including a reasonable allowance for salaries or other compensation for
the appropriate taxes on compensation.
personal services actually rendered; travelling expenses while away from home in the 8. Taxes withheld are creditable in nature. Thus, the employee is still required
pursuit of a trade, profession or business, rentals or other payments required to be to file an income tax return to report the income and/or pay the difference
made as a condition to the continued use or possession, for the purpose of the trade, between the tax withheld and the tax due on the income.
profession or business, of property to which the taxpayer has not taken or is not taking 9. For over withholding, the employee is refunded. Therefore, absolute or exact
title or in which he has no equity. accuracy in the determination of the amount of the compensation income is
xxx xxx xxx not a prerequisite for the employer's withholding obligation to arise.
(j) Additional requirement for deductibility of certain payments. — Any amount paid
10. If the taxpayer is on cash basis, the expense is deductible in the year it was
or payable which is otherwise deductible from, or taken into account in computing
gross income for which depreciation or amortization may be allowed under this paid, regardless of the year it was incurred. If he is on the accrual method,
section, shall be allowed as a deduction only if it is shown that the tax required to he can deduct the expense upon accrual thereof. An item that is reasonably
be deducted and withheld therefrom has been paid to the Bureau of Internal ascertained as to amount and acknowledged to be due has "accrued";
Revenue in accordance with this section, Sections 51 and 74 of this Code.”
actual payment is not essential to constitute "expense." → MEANING an
[LEGAL BASIS #2] expense is accrued and deducted for tax purposes when
Sec. 9 of the Revenue Regulation No. 6-85, as amended also states that: a. The obligation to pay is already fixed;
b. The amount can be determined with reasonable accuracy; and
Section 9. (a) Requirement for deductibility. — Any income payment, which is c. It is already knowable or the taxpayer can reasonably be expected to
otherwise deductible under Sections 29 and 54 of the Tax Code, as amended, shall be
have known at the closing of its books for the taxable year.
allowed as a deduction from the payor's gross income only if it is shown that the
11. The NIRC expressly requires, as a condition for deductibility of an
tax required to be withheld has been paid to the Bureau of Internal Revenue in
accordance with Sections 50, 51, 72, and 74 also of the Tax Code. expense, that the tax required to be withheld on the amount paid or
payable is shown to have been remitted to the BIR by the taxpayer
3. Under the NIRC, every form of compensation for personal services is constituted as a withholding agent of the government.
subject to income tax and, consequently, to withholding tax. 12. If we go by the theory of ING Bank (na dapat paid or distributed muna), then
the condition imposed by Section 29 (j) would have been rendered nugatory,
11
or we would in effect have created an exception to this mandatory

requirement when there was none in the law.
13. Thus, the obligation of the payor/employer to deduct and withhold the
related withholding tax arises at the time the income was paid or accrued
or recorded as an expense in the payor's/employer's books, whichever
comes first.
14. 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.
15. Here, 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.
SEPARATE OPINIONS: None
12
47. CIR v. General Foods (Syl) a. There was also an assessed deficiency income taxes in the amount
April 24, 2003| Corona | Deductions – Business Expenditure of P2.6m
PETITIONER: Commissioner of Internal Revenue 4. General Foods appealed to CTA but was denied saying that the expense
RESPONDENTS: General Foods (Phils.), Inc 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
SUMMARY: General Foods filed for its income tax return for the fiscal year member."
ending in Feb 28, 1985. They claimed as deduction an amount of P9.4m for media a. The term "good will" can hardly be said to have any precise
advertising for Tang. Commissioner disallowed 50% (approx. P4.7M) of the signification; it is generally used to denote the benefit arising from
deduction. General Foods appealed to the CTA but was dismissed. CA reversed connection and reputation
the decision. The issue in this case is whether the subject media advertising b. efforts to establish reputation are akin to acquisition of capital assets
expense by General Foods was an ordinary and necessary expense fully deductible and, therefore, expenses related thereto are not business expenses
under the National Internal Revenue Code (NIRC). The Court held in the but capital expenditures.
negative. c. For sure such expenditure was meant not only to generate present
sales but more for future and prospective benefits. Hence,
DOCTRINE: 2 kinds of Advertising: a. advertising to stimulate the current sale of "abnormally large expenditures for advertising are usually to be
merchandise or use of services, b. advertising designed to stimulate the future sale spread over the period of years during which the benefits of the
of merchandise or use of services. The second type involves expenditures expenditures are received
incurred, in whole or in part, to create or maintain some form of goodwill for the 5. CA reversed the decision of the CTA: it has not been suffciently established
taxpayer's trade or business or for the industry or profession of which the taxpayer that the item it claimed as a deduction is excessive, the same should be
is a member. If the expenditures are for the advertising of the first kind, then, allowed.
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 ISSUES:
over a reasonable period of time. General Foods venture to protect its brand 1. Whether the subject media advertising expense by General Foods was
franchise was tantamount to efforts to establish a reputation. This was akin to the an ordinary and necessary expense fully deductible under the National
acquisition of capital assets and therefore expenses related thereto were not to be Internal Revenue Code (NIRC). NO
considered as business expenses but as capital expenditures. (So it was considered
a capital outlay). General Foods media advertising expense was unreasonable. RATIO:
1. Governing principle: tax exemptions must be construed in strictissimi juris

against the taxpayer and liberally in favor of the taxing authority
a. 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.
b. Deductions for income tax purposes partake of the nature of tax
FACTS: exemptions; hence, if tax exemptions are strictly construed, then
deductions must also be strictly construed
1. General Foods is engaged in the manufacture of beverages (such as Tang,
2. Sec 34(A)(1) , formerly Section 29(a)(1)(A), of the professional expenses
Calumet and Kool Aid.
2. General Food filed its income tax return for the fiscal year ending in Feb 28,
1985 (A) Expenses. —
a. General Food also claimed as deduction an amount of P9,461,246 (1) Ordinary and necessary trade, business or professional expenses. —
for media advertising for Tang (a) In general. — There shall be allowed as deduction from gross income all ordinary
3. Commissioner disallowed 50% (approx. P4.7M) of the deduction and necessary expenses paid or incurred during the taxable year in carrying on, or
13
which are directly attributable to, the development, management, operation and/or
conduct of the trade, business or exercise of a profession.
a. To be deductible from gross income, the following requisites
must comply: (a) the expense must be ordinary and necessary;
(b) it must have been paid or incurred during the taxable year;
(c) it must have been paid or incurred in carrying on the trade
or business of the taxpayer; and (d) it must be supported by
receipts, records or other pertinent papers.
b. Commissioner maintains that the subject advertising was not
ordinary on the ground that it failed 2 conditions set by US
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. (Court agrees)
c. 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.
2. The Court finds that the subject expense for advertisement product to be
inordinately large.
a. Even if it is necessary, it cannot be considered an ordinary expense
deductible under then Section 29 (a) (1) (A) of the NIRC.
3. 2 kinds of Advertising: (i) advertising to simulate the current sale of
merchandise or use of services and (ii) advertising designed to simulate
the future sale of merchandise or use of services
a. 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 48. CIR v. Lancaster (Maye)
time. July 12, 2017 | Martires, J. | Deductions – Business Expenses
b. General Foods venture to protect its brand franchise was
tantamount to efforts to establish a reputation. This was akin to
the acquisition of capital assets and therefore expenses related
thereto were not to be considered as business expenses but as
capital expenditures. (So it was considered a capital outlay.)
c. General Foods media advertising expense was unreason
14
PETITIONERS: Commissioner of Internal Revenue

RESPONDENTS: Lancaster Philippines, Inc. DOCTRINE: Crop year basis is a method applicable only to farmers engaged in
the production of crops, which take more than a year from the time of planting to
SUMMARY: Lancaster is a domestic corporation engaged in the production of the process of gathering and disposal. This method enjoins the recognition of the
tobacco. BIR issued a Letter of Authority (LOA) authorizing its revenue officers expense (or the deduction of the cost) of crop production in the year that the crops
to examine Lancaster’s books of accounts and other accounting records for all are sold (when income is realized).
internal revenue taxes due from taxable year 1998 to an unspecified date. After
the examination, the BIR issued a Preliminary Assessment Notice which states
that Lancaster did an overstatement of its purchases for the fiscal year April 1998
to March 1999; and cited the disallowance of purchases of tobacco from farmers FACTS:
for the months of February and March 1998 as deductions against income for the 1. Lancaster Philippines, Inc. is a domestic corporation engaged in the
FY April 1998 to March 1999. Lancaster replied contending that it had used an production, processing and marketing of tobacco.
entire “tobacco cropping season” to determine its total purchases covering a one- 2. 1999 - BIR issued a Letter of Authority (LOA) authorizing its revenue
year period from October 1 to September 30 of the following year; that it has been officers to examine Lancaster’s books of accounts for all internal revenue
adopting the 6-month timing difference to conform to the matching concept. It taxes due from taxable year 1998 to an unspecified date.
also argued that the February and March 1998 purchases should not have been a. LOA states: “The bearers are authorize to examine your books of
disallowed. It concluded that they correctly posted the subject purchases in the accounts…from taxable year 1998 to ____, 19__.”
fiscal year ending March 1999 as it was the only in this year that the gross income 3. After the conduct of an examination, the BIR issued a Preliminary
from the crop was realized. Lancaster received from the BIR a final assessment Assessment Notice (PAN) which cited Lancaster for:
notice, which assessed it a deficiency income tax of P11,496,770.18, as a a. overstatement of its purchases for the fiscal year (FY) April 1998 to
consequence of the disallowance of purchases claimed for the FY March 31, 1999. March 1999;
Lancaster filed a petition for review before CTA Division. CTA Division granted b. noncompliance with the generally accepted accounting principle
the petition filed by Lancaster. CTA En Banc affirmed. The issue is the propriety (GAAP) of proper matching of cost and revenue; and
of the cancellation and withdrawal of the deficiency tax assessment. c. disallowance of purchases of tobacco from farmers for the
months of February and March 1998 as deductions against
SC ruled that the cancellation and withdrawal of the deficiency tax assessment income for the FY April 1998 to March 1999.
was proper. The general rule is that taxable income shall be computed upon the 4. According to BIR, Lancaster’s tax deficiency amounts to P6,466,065.50
basis of taxpayer’s annual accounting period (fiscal year or calendar year). The a. Income tax assessment → an overstatement of purchases for the
deductions provided in NIRC shall be taken for the taxable year in which ‘paid or year April 1998-March 1999. Purchase Invoice Vouchers (PIVs)
accrued’ or ‘paid or incurred’ dependent upon the method of accounting upon the for Feb and March 1998, P11.5 million, were included as part of
basis of which the net income is computed. NIRC enumerated methods of
accounting the law expressly recognizes. Any of these methods may be employed purchases for taxable year 1998 violating NIRC.
by any taxpayer so long as it reflects its income properly and method is used 5. Lancaster replied to the PAN contending that:
regularly. As such, other methods are approved by CIR even when not expressly a. it had used an entire “tobacco cropping season” to determine its
mentioned in NIRC as long as it would correctly reflect the taxpayer’s income. total purchases covering a one-year period from October 1 to
One such method is the “crop method of accounting”. Lancaster, as a business September 30 of the following year;
engaged in the production and marketing of tobacco, is justified in adopting the b. it has been adopting the 6-month timing difference to conform to the
crop method. Considering that the crop year of Lancaster starts from October up matching concept; and this has been a part of the company’s system
to September of the following year, it follows that ALL of its expenses in the crop and consistently applied in its accounting books.
production made within the crop year Oct-Sep 1998, including the Feb and March c. It also argued that the February and March 1998 purchases should
1998 purchases, are rightfully deductible for income tax purposes in the year when not have been disallowed
the gross income from the crops are realized. The matching concept, one of the d. !!! It argued that the situation of farmers engaged in producing
GAAP, directs that the expenses are to be reported in the same period that related tobacco, like Lancaster, is unique in that the costs are taken as
revenues are earned. It attempts to match revenue with expenses that helped of a different period and posted in the year in which the gross
earned it. income from the crop is realized.
15
e. It concluded that they correctly posted the subject purchases in the 6. Look at Fact 2A. The LOA shows that the period of examination is the
fiscal year ending March 1999 as it was the only in this year that the taxable year 1998. This means that the examination of Lancaster must cover
gross income from the crop was realized. the FY period from 1 April 1997 to 31 March 1998.
6. Lancaster received from the BIR a final assessment notice which assessed a 7. LOA in this case is valid. It could not have contemplated a longer period.
deficiency income tax of P11,496,770.18, as a consequence of the This is in accordance with a Memorandum Order which states that the LOA
disallowance of purchases claimed for the FY ending March 31, 1999. shall cover a taxable period not exceeding one taxable year.
7. Lancaster duly protested but BIR did not act upon it. So, Lancaster filed a 8. Nonetheless, a valid LOA does not necessarily clothe validity to an
petition for review before CTA Division. assessment issued on it, esp. when the officers act in excess of the
8. CTA Division granted the petition filed by Lancaster. BIR is ORDERED to authority granted.
cancel and withdraw the deficiency income tax assessment issued. 9. The taxable year covered by the assessment was outside the period specified
9. CTA En Banc affirmed. Hence, this petition in the LOA. Hence, the assessment against Lancaster is VOID.
a. LOA covers examination of FY period from 1 April 1997 to 31
ISSUE: CIR assigns the following errors: March 1998 ONLY. What the CIR assessed was FY April 1998 to
1. Whether CTA en banc erred in holding that BIR’s officers exceeded their March 1999.
authority to investigate the period not covered by LOA – NO
2. [Topic] WoN CTA erred in ordering BIR to cancel and withdraw the The cancellation and withdrawal of the deficiency tax assessment was proper.
deficiency assessment issued against Lancaster? – NO ● To recall, the assessment against Lancaster for deficiency income tax came
from the disallowance of its Feb and March 1998 purchases which they only
RATIO: posted in its FY 1999 instead of FY 1998.
BIR revenue officers had exceeded their authority
● CIR argues that its officers did not exceed their authority as they verified that BIR Arguments Lancaster Arguments
Lancaster made purchases for Feb and March 1998 which were not declared BIR insists that the purchases should Lancaster justifies the inclusion of the
in the latter’s FY from April 1997 to March 1998. Also argued that Lancaster have been reported in FY 1998, to Feb and March 1998 purchases in its FY
did not raise the issue on the scope of authority before the CTA. conform to the GAAP of proper 1999 considering that they coincided
matching of cost and revenue. with its crop year covering the period
1. The jurisdiction of the CTA is not limited only to cases which involve October 1997 to Sept. 1998 (daming
decisions or inactions of the CIR on matters relating to assessments or refunds When Lancaster reported such dates???!!?). Hence, it argued that it was
but also includes other matters arising from the NIRC or related laws purchases in its FY 1999, it resulted in properly posted in FY 1999 as it was the
administered by the BIR. overstatement of expenses warranting year in which the gross income from the
2. The assessment of internal revenue taxes is one of the duties of the BIR. The disallowance, resulting in deficiency in crop was realized.
CIR may authorize the examination and assessment of any taxpayer. the payment of its income tax.
3. The issue on whether the revenue officers who had conducted the
examination on Lancaster exceeded their authority pursuant to LOA may be From this, the issue boils down to the proper timing when Lancaster should
considered as covered by the terms “other matters”; hence, it is well within recognize its purchases in computing its taxable income. This is an issue because
the exclusive and appellate jurisdiction of the CTA. Lancaster’s “crop year” does not coincide with its “fiscal year” for tax purposes.
4. The CTA is not bound by the issues specifically raised by the parties but may
also rule upon related issues necessary to achieve an orderly disposition of 10. There is a difference between tax accounting and business accounting. In our
the case. jurisdiction, the concepts in business accounting, including GAAP,
5. The audit process normally commences with the issuance by the CIR of embedded in the NIRC comprise the rules on tax accounting.
a LOA. LOA gives notice to the taxpayer that it is under investigation. It also a. Accounting attempts to match cost against revenue while tax law is
authorizes a designated revenue officer to examine and scrutinize a aimed at collecting revenue.
taxpayer’s books and records, in relation to internal revenue tax liabilities for b. NIRC recognizes the important facility provided by GAAP and
a particular period. methods to the primary aim of tax laws to collect the correct amount
of taxes.
16
11. General rule: Taxable income shall be computed upon the basis of 1998), Revenue Memorandum Circular 22-04 mandates that where there is
taxpayer’s annual accounting period (fiscal year or calendar year). conflict between NIRC, its rules and regulations, and GAAP, the former
a. If no such method of accounting is employed, or if the method does (NIRC and rules) shall prevail.
not clearly reflect the income, computation will be based in 22. As such, no reason to overturn the CTA decision. The assessed amount of
accordance with the method as in the opinion of the CIR. P6,566,065.50 for deficiency income tax should be cancelled and set aside
12. The deductions provided in NIRC shall be taken for the taxable year in for being issued without valid authority. No legal justification for the
which ‘paid or accrued’ or ‘paid or incurred’ dependent upon the disallowance of Lancaster’s expenses for the purchase of tobacco in Feb and
method of accounting upon the basis of which the net income is computed. March 1998.
13. NIRC enumerated methods of accounting the law expressly recognizes
→ cash basis method, accrual method, installment method, percentage of WHEREFORE, petition is DENIED.
completion method, and other accounting methods.
14. Any of these methods may be employed by any taxpayer so long as it reflects
its income properly and method is used regularly. The NIRC does not
prescribe a uniform or specific method of accounting.
15. As such, other methods are allowed by CIR even when not expressly
mentioned in NIRC as long as it would correctly reflect the taxpayer’s
income. One such method is the “crop method of accounting”
16. Crop year basis is a method applicable only to farmers engaged in the
production of crops, which take more than a year from the time of
planting to the process of gathering and disposal. Expenses paid or
incurred are deductible in the year the gross income from the sale of the crops
are realized.
a. It recognizes that the harvesting and selling of crops do not fall
within the same year that they are planted or grown.
b. This method enjoins the recognition of the expense (or the
deduction of the cost) of crop production in the year that the
crops are sold (when income is realized).
17. Lancaster, as a business engaged in the production tobacco, is justified in
adopting the crop method.
18. Considering that the crop year of Lancaster starts from Oct-Sept. of the
following year, it follows that ALL of its expenses in the crop production
made within the crop year Oct-Sep 1998, including the Feb and March
1998 purchases, are rightfully deductible for income tax purposes in the
year when the gross income from the crops are realized.
19. Records show that the Feb and March 1998 purchases were recorded by
Lancaster as advances and later taken up as purchases by the close of the
crop year in Sep 1998 or within the FY 1999.
20. The matching concept, one of the GAAP, directs that the expenses are to
be reported in the same period that related revenues are earned. It
attempts to match revenue with expenses that helped earned it.
a. Nothing In the law is it required that for the expense to be
deductible, the income to which such expense is related to be
realized in the same year that it is paid or incurred.
21. In addition, even if we were to accept BIR’s argument of GAAP of marching
cost against revenue (meaning 1998 purchases should be deducted in FY
17
1. Aguinaldo Industries Corp (AIC) is a domestic corporation engaged in the

49. Aguinaldo Industries Corp. v. Commissioner of Internal Revenue (Pau) manufacture of fish nets (handled by FISH NETS DIVISION), which is a tax
August 7 1918| Malcom, J. | Deductions – Business Expenses exempt industry, and manufacture of furniture (handled by FURNITURE
DIVISION)
PETITIONER: Aguinaldo Industries Corp. AIC held a parcel of land in Muntinlupa as a site for its Fish Nets factory. It
RESPONDENTS: Commissioner of Internal Revenue subsequently found a land in Marikina Heights, which was found to be more
suitable for a factory site.
SUMMARY
Aguinaldo Industries Corp (AIC) is engaged in the manufacture of Fish AIC sold the Muntinlupa land. Profits derived from the sale were entered
Nets (handled by the Fish Nets Division). AIC held a parcel of land located into the books of Fish Nets Division as Miscellaneous Income, as
in Muntinlupa City, as a site for the manufacture of its fish nets. It distinguished from Tax Exempt Income.
subsequently sold the Muntinlupa land after locating a more suitable
location in Marikina, for which it made profit. AIC filed its income tax returns for 1957. BIR examiner found that Fish Nets
AIC distributed some of the profits earned in the form of Bonuses to its Division deducted from its gross income, bonuses paid to corporate
Corporate Officers. AIC claimed that these bonuses should be considered officers which were reported as selling expenses.
as deductible expenses under “business expenses” provided for in the Tax (So Fishnets distributed some of the profits from the sale of the Muntinlupa
Code, for services actually rendered. The BIR, and subsequently the CTA Land in the form of “bonuses” to its corporate officers, and considered it as
denied the deduction. a selling expense)
ISSUES: W/N the bonuses given to the corporate officers from the sale
of the Muntinlupa property should be an allowable deduction as a 2. BIR disallowed the bonuses as an allowable deduction.
business expense - NO AIC Asserts that it should be allowed because it was paid to the corporate
The records show that the actual sale was actually effected through a broker officers as allowance or bonus, pursuant to the by-laws of the corporation
who was duly paid a commission. which provides: 20% of the net profits from business go to the President, VP,
On the other hand, there is absolutely no evidence of any service actually Board members, Sec. Gen Manager, and Asst. Gen Manager (Corporate
rendered by the Corporate Officers which could be made basis of a grant to officers)
them of a bonus classified as a business expense.
DOCTRINE: CTA disallowed the deduction.
Whenever a controversy arises on the deductibility, for purposes of income
tax of certain items for alleged compensation of officers of the taxpayer, 2 ISSUES: W/N the bonuses given to the corporate officers from the sale of the
questions have become material: Muntinlupa property should be an allowable deduction as a business expense -
1.Have personal services been actually rendered by said officers? NO
2.IF in the affirmative, what is the “reasonable allowance” therefor?
… The amounts paid… without any relation to the measure of their RATIO:
actual services, cannot be regarded as ordinary and necessary expenses
within the meaning of the law. 1. The bonuses cannot be considered as reasonable allowance for personal
services actually rendered, under deductible business expenses under Sec.
30 of the Tax Code
FACTS:
Sec. 30 of the Tax Code:
18
In computing net Income, there shall be allowed as deductions:

(a)Expenses:
(1)In General: All ordinary and necessary expenses paid or incurred…
including a reasonable allowance for personal services actually rendered
The records show that the actual sale was actually effected through a
broker who was duly paid a commission.
On the other hand, there is absolutely no evidence of any service actually
rendered by the Corporate Officers which could be made basis of a grant
to them of a bonus classified as a business expense.
Alhambra Sugar v. CIR: “Whenever a controversy arises on the deductibility,

for purposes of income tax of certain items for alleged compensation of
officers of the taxpayer, 2 questions have become material:
1.Have personal services been actually rendered by said officers?
2.IF in the affirmative, what is the “reasonable allowance” therefor?
… The amounts paid… without any relation to the measure of their actual
services, cannot be regarded as ordinary and necessary expenses within
the meaning of the law.”
This doctrine is in line with the law of taxation that the taxpayer must show
that its claimed deductions clearly come within the language of the law
since allowances, like exemptions, are matters of legislative grace.
Petition DENIED.
19
50. Atlas Consolidated Mining & Development Corporation vs. Commissioner is appropriate and helpful in the development of the taxpayer's business. It is
of Internal Revenue (Mina) "ordinary" when it connotes a payment which is normal in relation to the
January 27, 1981 | De Castro, J. | Deductions - Business expenses business of the taxpayer and the surrounding circumstances. The term
"ordinary" does not require that the payments be habitual or normal in the sense
PETITIONER: Atlas Consolidated Mining & Development Corporation that the same taxpayer will have to make them often; the payment may be unique
RESPONDENTS: Commissioner of Internal Revenue or non-recurring to the particular taxpayer affected.
CTA ruled that the information about Atlas given out and played up in the mass
SUMMARY: Atlas is a corporation engaged in the mining industry registered communication media resulted in full subscription of the additional shares issued
under the laws of the Philippines. On 1962, the Commissioner of Internal Revenue by Atlas; consequently, the questioned item, stockholders relation service fee,
assessed against Atlas the sum of P546,295.16 and P215,493.96 or a total of was in effect spent for the acquisition of additional capital, ergo, a capital
P761,789.12 as de􏰀ciency income taxes for the years 1957 and 1958. For the year expenditure. And a capital expenditure is not an ordinary and necessary expense
1957, it was the opinion of the Commissioner that Atlas is not entitled to encompassed by the law.
exemption from the income tax under Section 4 of Republic Act 909 because same
covers only gold mines and for the year 1958, the assessment of de􏰀ciency DOCTRINE: Statutory test of deductibility – states that it is axiomatic that to be
income tax covers the disallowance of items claimed by Atlas as deductible from deductible as a business expenses, three conditions are imposed: (1) The expense
gross income. Atlas protested the assessment. The Secretary of Finance ruled that must be ordinary and necessary; (2) It must be paid or incurred within the taxable
the exemption provided by R.A. 909 can be applied to Atlas. The Commissioner year; (3) It must be paid or incurred in carrying in a trade or business. Not only
issued a new assessment, however Atlas appealed to CTA for the disallowance of must the taxpayer meet the business test, he must substantially prove by evidence
some items claimed as deductible from its gross income. CTA rendered a decision or record the deductions claimed under the law, otherwise, the same will be
on allowing some of the disallowed items, except the items denominated by Atlas disallowed. Interpretation of “ordinary and necessary”: (a) An expense will be
as stockholders relation service fee and suit expenses. Both parties appealed. Atlas considered “necessary” where the expenditure is appropriate and helpful in the
appealed only that portion of the Court of Tax Appeals' decision disallowing the development of the taxpayer’s business. (b) It is “ordinary” when it connotes a
deduction from gross income of the so-called stockholders relation service fee. payment, which is normal in relation to the business of the taxpayer and the
Atlas contends that the expense was an annual public relations expenses is a surrounding circumstances.
deductible expense from gross income under Section 30(a) (1) of the National
Internal Revenue Code as it was paid for services of a public relations firm, P.K.
Macker & Co., a reputable public relations consultant in New York.
Issue: WON the expenses paid for the services rendered by a public relations firm
P.K. Macker & Co. labelled as stockholders relation service fee is an allowable FACTS:
deduction as business expense under Section 30(a) (1) of the National Internal 1. The case arose from the 1957 and 1958 deficiency income tax assessments
Revenue Code? — NO made by the Commissioner of Internal Revenue (Commissioner) where Atlas
Ratio: The principle is recognized that when a taxpayer claims a deduction, he Consolidated Mining and Development Corporation (Atlas) was assessed a
must point to some specific provision of the statute in which that deduction is deficiencies of Php546,295.16 for 1957 and Php215,493.96 for 1958
authorized and must be able to prove that he is entitled to the deduction which the 2. Atlas is a corporation engaged in the mining industry registered under the
law allows. An item of expenditure, in order to be deductible under this section of laws of the Philippines.
the statute must fall squarely within its language. 3. For the year 1957, it was the opinion of the Commissioner that Atlas is not
We come, then, to the statutory test of deductibility where it is axiomatic that to entitled to exemption from the income tax under Section 4 of Republic Act
be deductible as a business expense, three conditions are imposed, namely: (1) 909 because same covers only gold mines
the expense must be ordinary and necessary, (2) it must be paid or incurred within 4. For the year 1958, the assessment of deficiency income tax covers the
the taxable year, and (3) it must be paid or incurred in carrying in a trade or disallowance of items claimed by Atlas as deductible from gross income.
business. In addition, not only must the taxpayer meet the business test, he 5. Atlas protested the assessment asking for its reconsideration and cancellation.
must substantially prove by evidence or records the deductions claimed Acting on the protest, the Commissioner conducted a reinvestigation of the
under the law, otherwise, the same will be disallowed. The mere allegation of case.
the taxpayer that an item of expense is ordinary and necessary does not justify its 6. The Secretary of Finance ruled that the exemption provided in Republic Act
deduction. An expense will be considered "necessary" where the expenditure 909 embraces all new mines and old mines whether gold or other minerals.
20
Accordingly, the Commissioner recomputed Atlas deficiency income tax 4. In addition, not only must the taxpayer meet the business test, he must
liabilities' in the light of the ruling of the Secretary of Finance. substantially prove by evidence or records the deductions claimed under
7. The Commissioner issued a revised assessment however, Atlas appealed to the law, otherwise, the same will be disallowed. The mere allegation of the
CTA for the disallowance of some items claimed as deductible from its gross taxpayer that an item of expense is ordinary and necessary does not justify its
income deduction.
8. After hearing, the Court of Tax Appeals rendered a decision on allowing the 5. This Court has never attempted to define with precision the terms "ordinary
disallowed items, except the items denominated by Atlas as stockholders and necessary." There are however, certain guiding principles worthy of
relation service fee and suit expenses. serious consideration in the proper adjudication of conflicting claims.
9. Both parties appealed. Atlas appealed only that portion of the Court of Tax Ordinarily, an expense will be considered "necessary" where the
Appeals' decision disallowing the deduction from gross income of the so- expenditure is appropriate and helpful in the development of the
called stockholders relation service fee taxpayer's business. It is "ordinary" when it connotes a payment which
a. It is the contention of Atlas that the amount of P25,523.14 paid in is normal in relation to the business of the taxpayer and the surrounding
1958 as annual public relations expenses is a deductible expense circumstances. The term "ordinary" does not require that the payments be
from gross income under Section 30(a) (1) of the National Internal habitual or normal in the sense that the same taxpayer will have to make them
Revenue Code. Atlas claimed that it was paid for services of a public often; the payment may be unique or non-recurring to the particular taxpayer
relations firm, P.K. Macker & Co., a reputable public relations affected.
consultant in New York City, U.S.A., hence, an ordinary and 6. There is thus no hard and fast rule on the matter. The right to a deduction
necessary business expense in order "to compete with other depends in each case on the particular facts and the relation of the payment
corporations also interested in the investment market in the United to the type of business in which the taxpayer is engaged. The intention of the
States. taxpayer often may be the controlling fact in making the determination.
7. Atlas increased its capital stock from P15,000,000 to P18,325,000 and claims
ISSUE: that its shares of stock worth P3,325,000 were sold in the United States
1. Whether or not the expenses paid for the services rendered by a public because of the services rendered by the public relations firm, P.K. Macker &
relations firm P.K. Macker & Co. labelled as stockholders relation service fee Company.
is an allowable deduction as business expense under Section 30(a) (1) of the 8. The CTA ruled that the information about Atlas given out and played up in
National Internal Revenue Code — NO, the expenditure is not an ordinary the mass communication media resulted in full subscription of the additional
expense shares issued by Atlas; consequently, the questioned item, stockholders
relation service fee, was in effect spent for the acquisition of additional
RATIO: capital, ergo, a capital expenditure.
1. The principle is recognized that when a taxpayer claims a deduction, he must 9. We sustain the ruling of CTA that the expenditure paid to P. K. Macker &
point to some specific provision of the statute in which that deduction is Co. as compensation for services carrying on the selling campaign in an effort
authorized and must be able to prove that he is entitled to the deduction which to sell Atlas' additional capital stock is not an ordinary expense
the law allows. As previously adverted to, the law allowing expenses as 10. Based on US Jurisprudence, the said expense is not deductible from Atlas'
deduction from gross income for purposes of the income tax is Section 30 (a) gross income in 1958 because expenses relating to recapitalization and
(1) of the National Internal Revenue which allows a deduction of "all the reorganization of the corporation, the cost of obtaining stock subscription,
ordinary and necessary expenses paid or incurred during the taxable year in promotion expenses, and commission or fees paid for the sale of stock
carrying on any trade or business." organization are capital expenditures.
2. An item of expenditure, in order to be deductible under this section of the 11. That the expense in question was incurred to create a favorable image of the
statute must fall squarely within its language. corporation in order to gain or maintain the public's and its stockholders'
3. We come, then, to the statutory test of deductibility where it is axiomatic patronage, does not make it deductible as business expense. As held in the
that to be deductible as a business expense, three conditions are imposed, case of Welch vs. Helvering, efforts to establish reputation are akin to
namely: (1) the expense must be ordinary and necessary, (2) it must be paid acquisition of capital assets and, therefore, expenses related thereto are not
or incurred within the taxable year, and (3) it must be paid or incurred in business expense but capital expenditures.
carrying in a trade or business. 12. We do not agree with the contention of Atlas that the conclusion of the Court
of Tax Appeals in holding that the expense of P25,523.14 was incurred for
21
acquisition of additional capital is not supported by the evidence. The burden

of proof that the expenses incurred are ordinary and necessary is on the
taxpayer and does not rest upon the Government.
13. To avail of the claimed deduction under Section 30(a)(1) of the National
Internal Revenue Code, it is incumbent upon the taxpayer to adduce
substantial evidence to establish a reasonably proximate relation between the
expenses to the ordinary conduct of the business of the taxpayer. A logical
link or nexus between the expense and the taxpayer's business must be
established by the taxpayer
22
51. ZAMORA v. CIR (tin) DOCTRINE: Representation expenses fall under the category of business expenses
1963 | Paredes, J. | Deduction - Business Expenses which are allowable deductions from gross income, if they meet the conditions prescribed
by law. To be deductible:
PETITIONER: MARIONA ZAMORA 1. Said business expenses must be ordinary and necessary expenses paid or
RESPONDENTS: CIR & CTA incurred in carrying on any trade or business;
2. That those expenses must also meet the further test of reasonableness in amount;
SUMMARY: Petitioner Zamora is an owner of a hotel and a pharmacy. He was assessed 3. That when some of the representation expenses claimed by the taxpayer were
by the CIR of tax deficiency for taxable years 1951 and 1952. He claimed tax deductions evidenced by vouchers or chits, but others were without vouchers or chits,
for business expenses amounting to PhP 20, 597, which he said was used by his wife documents or supporting papers (???)
when the latter went to Japan and the US to purchase machinery for a new Tiki-tiki plant 4. That there is no more than oral proof to the effect that payments have been made
and to observe hotel management in modern hotels. The CTA however only allowed him for representation expenses allegedly made by the taxpayer;
half of the said amount or PhP 10, 478 because when the wife applied for dollar 5. That because it is not possible to determine the actual amount covered by
allocation, it was only for PhP 5,000 and she stated that she was going abroad on a supporting papers and the amount without supporting papers, the court should
combined medical and business trip. Moreover, the CTA held that no evidence was determine from all available data the amount properly deductible as
submitted as to how Zamora obtained the excess of 5k to finance his wife’s trip. The representation expenses.
alleged expenses were also not presented with receipts.
The question before the Court is: How much shall be considered deductible as business
expense? The whole amount of PhP20, 957, as claimed by Zamora? Or just the PhP10,
478, as held by the CTA? JUST THE PhP 10, 478 as held by the CTA.
Section 30 of the Tax Code provides that in computing net income, there shall be allowed
as deductions all the ordinary and necessary expenses paid or incurred during the taxable
year, in carrying on any trade or business. Claims for the deduction of promotion
expenses or entertainment expenses must be substantiated or supported by record
showing in detail the amount and nature of the expense incurred. FACTS:
1. Mariano Zamora, owner of the Bay View Hotel and Farmacia Zamora,
Considering that the application of Mrs. Zamora for dollar allocation shows that she went Manila, filed his income tax returns for the years 1951 and 1952.
abroad on a combined medical and business trip, not all of her expenses came under the 2. The CIR found that he failed to file his return of the capital gains derived
category of ordinary and necessary expenses, i.e. part thereof constituted her personal from the sale of certain real properties and claimed deductions which were
expenses. Because no receipts were presented, there was no means by which to ascertain not allowable. The Collector thus required him to pay the deficiency of
which expense was incurred by her in connection with the business of Mariano Zamora P43,758.50 and P7,625.00 for the mentioned taxable years.
and which was incurred for her personal benefit. Hence, the Collector and the CTA in 3. On appeal by Zamora, the CTA ordered him to pay the reduced total sum of
their decisions, considered 50% of the said amount of P20,957.00 as business expense P30,258.00 within thirty (30) days from the date the decision becomes final,
and the other 50%, as her personal expenses. We hold that said allocation is very fair to plus the corresponding surcharges and interest.
Mariano Zamora, there having been no receipt whatsoever, submitted to explain the 4. Zamora appealed alleging that the Court of Tax Appeals erred in
alleged business expenses. disallowing P10,478.50, as promotion expenses incurred by his wife for
the promotion of the Bay View Hotel and Farmacia Zamora (which is
1/2 of P20,957.00, supposed business expenses).
23
5. According to Mariano Zamora : 7. Claims for the deduction of promotion expenses or entertainment expenses
a. The CTA erred in disallowing P10,478.50 as promotion expenses must be substantiated or supported by record showing in detail the amount
incurred by his wife for the promotion of the Bay View Hotel and and nature of the expense incurred.
Farmacia Zamora; 8. Considering that the application of Mrs. Zamora for dollar allocation shows
b. The whole amount of P20,957.00 as promotion expenses in his 1951 that she went abroad on a combined medical and business trip, not all of her
income tax returns, should be allowed and not merely one-half of it expenses came under the category of ordinary and necessary expenses, i.e.
or P10,478.50, on the ground that, while not all the itemized part thereof constituted her personal expenses.
expenses are supported by receipts, the absence of some supporting 9. There having been no means by which to ascertain which expense was
receipts has been sufficiently and satisfactorily established incurred by her in connection with the business of Mariano Zamora and
c. The said amount of P20,957.00 was spent by Mrs. Esperanza A. which was incurred for her personal benefit, the Collector and the CTA in
Zamora (wife of Mariano), during her travel to Japan and the United their decisions, considered 50% of the said amount of P20,957.00 as business
States to purchase machinery for a new Tiki-Tiki plant, and to expense and the other 50%, as her personal expenses.
observe hotel management in modern hotels. 10. We hold that said allocation is very fair to Mariano Zamora, there having
6. The CTA, however, found that: been no receipt whatsoever, submitted to explain the alleged business
a. For said trip, Mrs. Zamora obtained only the sum of P5,000.00 from expenses, or proof of the connection which said expenses had to the business
the Central Bank and that in her application for dollar allocation, she or the reasonableness of the said amount of P20,957.00.
stated that she was going abroad on a combined medical and 11. While in situations like the present, absolute certainty is usually not possible,
business trip, which facts were not denied by Mariano Zamora. the CTA should make as close an approximate as it can, bearing heavily, if it
b. No evidence had been submitted as to where Mariano had obtained chooses, upon the taxpayer whose inexactness is of his own making.
the amount in excess of P5,000.00 given to his wife which she spent 12. Representation expenses fall under the category of business expenses which
abroad. are allowable deductions from gross income, if they meet the conditions
c. No explanation had been made either that the statement contained prescribed by law.
in Mrs. Zamora's application for dollar allocation that she was going 13. To be deductible:
abroad on a combined medical and business trip, was not correct. a. Said business expenses must be ordinary and necessary expenses
d. The alleged expenses were not supported by receipts. Mrs. Zamora paid or incurred in carrying on any trade or business;
could not even remember how much money she had when she left b. That those expenses must also meet the further test of
abroad in 1951, and how the alleged amount of P20,957.00 was reasonableness in amount;
spent. c. That when some of the representation expenses claimed by the
taxpayer were evidenced by vouchers or chits, but others were
ISSUE: How much of the said approx. 20k shall be considered deductible as business without vouchers or chits, documents or supporting papers (???)
expense? The whole 20k, as claimed by Zamora? Or just the 10k, as held by the CTA? d. That there is no more than oral proof to the effect that payments have
JUST THE 10K as held by the CTA! been made for representation expenses allegedly made by the
taxpayer;
RULING: IN VIEW HEREOF, the petition is dismissed. e. That because it is not possible to determine the actual amount
covered by supporting papers and the amount without supporting
RATIO: papers, the court should determine from all available data, the
6. Section 30, of the Tax Code, provides that in computing net income, there amount properly deductible as representation expenses.
shall be allowed as deductions all the ordinary and necessary expenses paid
or incurred during the taxable year, in carrying on any trade or business.
24
14. We are of the opinion that the CTA, did not commit error in allowing as
promotion expenses of Mrs. Zamora claimed in Mariano Zamora's 1951
income tax returns, merely one-half or P10,478.50.
25
52. C.M. Hoskins & Co., Inc. vs. Commissioner of Internal Revenue (Patrick) (3) When added to the salaries, are reasonable when measured to the amount
November 28, 1969 | TEEHANKEE, J.:| Payment of supervision fees; what are and quality of the services performed with relation to the business of the
deductible ordinary and necessary expenses; test for determining reasonableness of a particular taxpayer
given bonus as compensation
FACTS:
PETITIONER: C. M. HOSKINS & CO., INC.
1. C.M. Hoskins & Co., Inc. (CMH&C) is a domestic corporation engaged in
RESPONDENTS: COMMISSIONER OF INTERNAL REVENUE
real estate as brokers, managing agents, and administrators.
SUMMARY: C.M. Hoskins & Co., Inc. (CMH&C) is a domestic corporation
2. C.M. Hoskins & Co., Inc. was founded by Mr. C. M. Hoskins in 1937, with
engaged in real estate as brokers, managing agents, and administrators. C.M. Hoskins
a capital stock of 1,000 shares at a par value of P1.00 each share; that of these
& Co., Inc. was founded by Mr. C. M. Hoskins in 1937, with a capital stock of 1,000
1,000 shares, Mr. C. M. Hoskins owns 996 shares (the other 4 shares being
shares at a par value of P1.00 each share; that of these 1,000 shares, Mr. C. M.
held by the other four officers of the corporation), which constitute exactly
Hoskins owns 996 shares. He was also a stockholder and officer of the Paradise 99.6% of the total authorized capital stock.
Farms, Inc. and Realty Investments, Inc., from which C.M. Hoskins & Co., Inc.
derived a large portion of its income in the form of supervision fees and commissions
3. During the first four years of its existence, Mr. C. M. Hoskins was the
earned on sales of lots. They filed their income tax return for 1957 showing a net
President, but during the taxable period in question, that is, from October 1,
income of P92, 540.25, and a tax liability of P18, 508. Hoskins & Co. claimed as
1956 to September 30, 1957, he was the chairman of the Board of Directors
deductions the payment to Hoskins of the additional sum of P99, 977.91 as his equal
and salesman-broker for the company. As chairman of the Board of Directors,
or 50% share of the 8% supervision fees received by C.M. Hoskins & Co., Inc. as
he received a salary of P3,750.00 a month, plus a salary bonus of about
managing agents of the real estate, subdivision projects of Paradise Farms, Inc. and
P40,000.00 a year
Realty Investments, Inc. Commissioner of Internal Revenue (CIR), disallowed the
deduction of the supervision fees which was upheld by the Court of Tax Appeals.
4. He was also a stockholder and officer of the Paradise Farms, Inc. and Realty
Investments, Inc., from which C.M. Hoskins & Co., Inc. derived a large
Whether or not the payment of supervision fees are deductible ordinary and
portion of its income in the form of supervision fees and commissions earned
necessary expenses?
on sales of lots.
SC held that such was not deductible for failing to pass the reasonableness test. There
5. He familiar with the contract entered into by the C.M. Hoskins & Co., Inc.
is no fixed test for determining the reasonableness of a given bonus as compensation.
with the Paradise Farms, Inc. and the Realty Investments, Inc. by the terms
This depends upon many factors, one of them being 'the amount and quality of the
of which C.M. Hoskins & Co., Inc was 'to program the development, arrange
services performed with relation to the business.' However, 'in determining whether
financing, plan the proposed subdivision as outlined in the prospectus of
the particular salary or compensation payment is reasonable, the situation must be
Paradise Farms, Inc., arrange contract for road constructions, with the
considered as whole.
provision of water supply to all of the lots and in general to serve as managing
agents for the Paradise Farms, Inc. and subsequently for the Realty
The amounts received by Hoskins was inordinately large and could not be accorded
Investment, Inc.
the treatment of ordinary and necessary expenses. If allowed, Hoskin would be
receiving on his salary, bonus, and supervision fees a total of P185,000 which is 6. They filed their income tax return for 1957 showing a net income of P92,
double the company’s reported net income. The SC stated that if it was a one-time
540.25, and a tax liability of P18, 508.
payment, it could have been deducted since Hoskin was an experienced realtor.
However, the P100, 000 supervision fee was being paid every year (for three (3)
7. Commissioner of Internal Revenue (CIR), disallowed four items of deduction
years) for the entire duration of the company’s project with Paradise Farms and
in petitioner's tax returns and assessed against it an income tax deficiency in
Realty Investment.
the amount of P28,054.00 plus interests.
DOCTRINE: Conditions precedent to the deduction of bonuses to employees:
8. Court of Tax Appeals upheld the disallowance of the principal item of CM
(1) Payments of the bonuses is in fact compensation Hoskin's having paid to 7 its founder and controlling stockholder the amount
(2) Must be for personal services actually rendered
26
of P99,977.91 representing 50% of supervision fees earned by it and set aside 6. The conditions precedent to the deduction of bonuses to employees are:
CIR's disallowance of three other minor items. (1) the payment of the bonuses is in fact compensation; (2) it must be for
personal services actually rendered; and (3) the bonuses, when added to
ISSUES: the salaries, are 'reasonable . . . when measured by the amount and
1. Whether or not the payment of supervision fees are deductible quality of the services performed with relation to the business of the
ordinary and necessary expenses? - NO particular taxpayer'
Ruling: We uphold in this taxpayer's appeal the Tax Court's ruling that payment by 7. "There is no fixed test for determining the reasonableness of a given
the taxpayer to its controlling stockholder of 50% of its supervision fees or the bonus as compensation. This depends upon many factors, one of them
amount of P99, 977.91 is not a deductible ordinary and necessary expense and being 'the amount and quality of the services performed with relation to
should be treated as a distribution of earnings and profits of the taxpayer. the business.'
RATIO:
1. The Tax Court correctly ruled that the payment by petitioner to Hoskins 8. Other tests suggested are: payment must be 'made in good faith'; 'the
of the additional sum of P99, 977.91 as his equal or 50% share of the 8% character of the taxpayer's business, the volume and amount of its net
supervision fees received by petitioner as managing agents of the real earnings, its locality, the type and extent of the services rendered, the
estate, subdivision projects of Paradise Farms, Inc. and Realty salary policy of the corporation'; 'the size of the particular business'; 'the
Investments, Inc. was inordinately large and could not be accorded the employees' qualifications and contributions to the business venture'; and
treatment of ordinary and necessary expenses allowed as deductible 'general economic conditions'
items within the purview of Section 30 (a) (i) of the Tax Code.
9. However, 'in determining whether the particular salary or compensation
2. If such payment of P99, 977.91 were to be allowed as a deductible item, then payment is reasonable, the situation must be considered as whole.
Hoskins would receive on these three items alone (salary, bonus and Ordinarily, no single factor is decisive. . . . it is important to keep in mind that
supervision fee) a total of P184, 977.91, which would be double the it seldom happens that the application of one test can give satisfactory
petitioner's reported net income for the year of P92, 540.25. answer, and that ordinarily it is the interplay of several factors, properly
weighted for the particular case, which must furnish the final answer."
3. The fact that such payment was authorized by a standing resolution of
petitioner's board of directors, since "Hoskins had personally conceived and 10. On the right of the employer as against respondent Commissioner to fix
planned the project" cannot change the picture. There could be no question the compensation of its officers and employees, we there held further that
that as Chairman of the board and practically an absolutely controlling while the employer's right may be conceded, the question of the
stockholder of petitioner, holding 99.6% of its stock, Hoskins wielded allowance or disallowance thereof as deductible expenses for income tax
tremendous power and influence in the formulation and making of the purposes is subject to determination by respondent Commissioner of
company's policies and decisions. Internal Revenue. For income tax purposes the employer cannot legally
claim such bonuses as deductible expenses unless they are shown to be
4. Invoking of its policy since its incorporation of sharing equally sales reasonable. To hold otherwise would open the gate of rampant tax
commissions with its salesmen, in accordance with its board resolution of evasion.
June 18, 1946, is equally untenable.
11. CIR has no authority to fix the amounts to be paid to corporate officers by
5. In Kuenzle & Streiff, Inc. vs. Commissioner of Internal Revenue, we way of basic salary, bonus or additional remuneration — a matter that lies
reaffirmed the test of reasonableness, enunciated in the earlier 1967 case more or less exclusively within the sound discretion of the corporation itself.
involving the same parties, that: "It is a general rule that 'Bonuses to But this right of the corporation is, of course, not absolute. It cannot exercise
employees made in good faith and as additional compensation for the it for the purpose of evading payment of taxes legitimately due to the State.
services actually rendered by the employees are deductible, provided
such payments, when added to the stipulated salaries, do not exceed a 12. A case practically of a sole proprietorship of C. M. Hoskins, who however
reasonable compensation for the services rendered' chose to incorporate his business with himself holding virtually absolute
control thereof with 99.6% of its stock with four other nominal shareholders
27
holding one share each. Specifically, it is bound to pay the income tax
imposed by law on corporations and may not legally be permitted, by way of
corporate resolutions authorizing payment of inordinately large commissions
and fees to its controlling stockholder, to dilute and diminish its
corresponding corporate tax liability.
28
53. Calanoc v. Commissioner of Internal Revenue (Lei) 1. By authority of a solicitation permit issued by the Social Welfare
November 29, 1961 | Labrador, J. .:| Deductions Commission on November 24, 1949, Calanoc was authorized to solicit and
PETITIONER: C. F Calanoc receive contributions for the orphans and the destitute children of the Child
RESPONDENTS: COMMISSIONER OF INTERNAL REVENUE Welfare Workers Club of the Commission.
2. On December 3, 1949, Calanoc financed and promoted a boxing and
SUMMARY: To solicit and receive contributions for orphans and destitute wrestling exhibition at the Rizal Memorial Stadium for the said charitable
children from the Child Welfare Workers Club of the Social Welfare Commission, purpose.
Calanoc financed and promoted a boxing exhibition. After the exhibition, the CIR 3. Before the exhibition took place, Calanoc applied with the CIR for exemption
investigated the tax case of Calanoc and from the statements of receipts which was from payment of amusement tax, relying on the provisions of Sec. 260 of the
furnished to the CIR, the CIR found that the gross sales amounted to P26, 553.00. NIRC.
The expenditures incurred as P25, 157 and the net profit was only P1,375,38. 4. After the exhibition, the CIR investigated the tax case of Calanoc and from
Upon examination of said receipts, the agent also found the following items of the statements of receipts which was furnished to the CIR, the CIR found that
expenditures: (a) P461.65 for police protection, (b) P460.00 for gifts, © P1,880.05 the gross sales amounted to P26, 553.00. The expenditures incurred as P25,
for parties and (d) several items for representation. On November 24, 1951, the 157 and the net profit was only P1,375,38. Upon examination of said receipts,
CIR demanded from Calanoc payment of the amount of P7,378.57 as the the agent also found the following items of expenditures: (a) P461.65 for
amusement tax for the exhibition. This was based on an opinion of the Secretary police protection, (b) P460.00 for gifts, © P1,880.05 for parties and (d)
of Finance which stated that no exemption from payment of amusement tax will several items for representation.
be granted in cases where the net proceeds are not substantial or where the 5. Out of the proceeds of the exhibition, only P1,375.38 was remitted to the
expenses are exorbitant. . Social Welfare Commission for said charitable purpose for which the permit
was issued.
Issue is WON expenses are exorbitant and therefore not deductible? YES. 6. On November 24, 1951, the CIR demanded from Calanoc payment of the
amount of P7,378.57 as the amusement tax for the exhibition. This was based
We have examined the records of the case and we agree with the lower court that on an opinion of the Secretary of Finance which stated that no exemption
most of the items of expenditures contained in the statement submitted to the agent from payment of amusement tax will be granted in cases where the net
are either exorbitant or not supported by receipts. We agree with the tax court that proceeds are not substantial or where the expenses are exorbitant. .
the payment of P461.65 for police protection is illegal as it is a consideration given
by the petitioner to the police for the performance by the latter of the functions
required of them to be rendered by law. The expenditures of P460.00 for gifts, ISSUES:
P1,880.05 for parties and other items for representation are rather excessive, 1. Whether or not Calanoc’s expenses are exorbitant and therefore, not
considering that the purpose of the exhibition was for a charitable cause. deductible? - YES
DOCTRINE: No exemption from payment of amusement tax will be granted in RATIO:

cases where the net proceeds are not substantial or where the expenses are 1. Calanoc was questioning the validity of the assessment of P7,378.57. He
exorbitant. . denies having received the stadium fee of P1,000 which is not included in the
receipts and claims that if he did, he can not be made to pay almost seven
times the amount as amusement tax.
2. Evidence however shows that while he did not receive the stadium fee, said
FACTS:
amount was paid by O-SO Beverages directly to the stadium directly for
29
advertisement privileges in the evening of the entertainments. As the fee was

paid by said concessionaire, Calanoc had no right to include the P1,000
stadium fee among the items of expenses. Instead, it went directly to his
pockets.
3. Furthermore petitioner admitted that he could not justify the other expenses,
such as those for police protection and gifts. He claims further that the
accountant who prepared the statement of receipts is already dead and could
no longer be questioned on the items contained in said statement.
We have examined the records of the case and we agree with the lower court that
most of the items of expenditures contained in the statement submitted to the agent
are either exorbitant or not supported by receipts. We agree with the tax court that
the payment of P461.65 for police protection is illegal as it is a consideration given
by the petitioner to the police for the performance by the latter of the functions
required of them to be rendered by law. The expenditures of P460.00 for gifts,
P1,880.05 for parties and other items for representation are rather excessive,
considering that the purpose of the exhibition was for a charitable cause.
54. Kuenzle & Streiff (John)

May 29, 2019 | J.Dizon | Deductions
30
PETITIONER: Kuenzle & Streiff extraordinary training, or had accomplished any particular task, that
RESPONDENTS: CIR contributed materially to the success of petitioner's business during the
taxable years in question.
SUMMARY: second, working under the above-named officials and constituting what we
might call the staff of petitioner's working personnel, were a good number
Keunzle was assessed a deficiency for the years 1953, 1954, and 1955. of other employees — mostly Filipinos— all of whom, according to the
Petitioner concluded that it was deductible under section 30(a) (1) of the record , received no pay increase at all during the same years.
revenue code under “reasonable allowance for salaries and other third, the above salaries and bonuses were paid to petitioner's top officials
compensation. Thus, it questioned CIR. Appealed to CTA then SC. mentioned heretofore, in spite of the fact that according to its income tax
returns for the relevant years, it had suffered net losses as follows:
Issue: W/N Whether the salaries were deductible P2,085.84, P4,953.91, P9,246.07 for the years 1953, 1954 and 1955,
respectively. In fact, petitioner's financial statements further show that its
General rule that `Bonuses to employees made in good faith and as gross assets suffered a gradual decrease for the same years and that a similar
additional compensation for the services actually rendered by the downward trend took place in its surplus and capital position during the
employees are deductible, provided such payments, when added to the same period of time.
stipulated salaries, do not exceed a reasonable compensation for the services
rendered' (4 Mertens Law of Federal Income Taxation, Sec. 25.50, p. 410). Petitioner justifies payment of these bonuses to its top officials by saying
The condition precedents to the deduction of bonuses to employees are: (1) that its general salary policy was to give a low salary but to grant substantial
the payment of the bonuses is in fact compensation; (2) it must be for bonuses at the end of each year, so that its officers may receive considerable
personal services actually rendered; and (3) bonuses, when added to the lump sums with which to purchase whatever expensive objects or items they
salaries, are `reasonable ... when measured by the amount and quality of the might need. While We are not prepared to hold that such policy is
services performed with relation to the business of the particular taxpayer). unreasonable, still We believe that its application should not result in
Here it is admitted that the bonuses are in fact compensation and were paid producing a net loss for the employer at the end of the year, for if that were
for services actually rendered. The only question is whether the payment of to be the case, the scheme may be utilized to freely achieve some other
said bonuses is reasonable. No fixed test for determining the reasonableness purpose — evade payment of taxes.
of a given bonus as compensation.
It seems clear from the record that, in arriving at its main conclusion, the
tax court considered the following factors:
In the first place, for the years 1953, 1954 and 1955 the petitioner paid to DOCTRINE:`Bonuses to employees made in good faith and as additional
its following top officers: A. P. Kuenzle, H. A. Streiff, A. Jung, G. Gattaneo, compensation for the services actually rendered by the employees are
A. Schatzmann, F. E. Rein, M. Klinger, A. Huber, S. Meili, M. Triaca, J. deductible, provided such payments, when added to the stipulated salaries,
Ortiz, H. Vogt, W. Ramp, W. Strehler, H. R. Jung, K. Schedler, P. C. Curtis, do not exceed a reasonable compensation for the services rendered' . The
R. Oefeli, substantial amounts as salaries and bonuses ranging from condition precedents to the deduction of bonuses to employees are: (1) the
P9,000.00 yearly as a minimum (except in the case) and P50,000.00 as payment of the bonuses is in fact compensation; (2) it must be for personal
maximum. All these officials headed various departments of petitioner's services actually rendered; and (3) bonuses, when added to the salaries, are
business. While it must be assumed, on the one hand, in the absence of `reasonable ... when measured by the amount and quality of the services
evidence to the contrary, that they were competent, on the other the record performed with relation to the business of the particular taxpayer)
discloses no evidence nor has petitioner ever made the claim that all or some
of them were gifted with some special talent, or had undergone some
31
construed Section 30(a) (1) of the Revenue Code as allowing the deduction
FACTS: from gross income of all the ordinary and necessary expenses incurred during
1. Petition filed by Kuenzle & Streiff Inc. for the review of the decision of the the taxable year in carrying on the trade or business of the taxpayer, including
Court of Tax Appeals in C.T.A. Case No. 551 sustaining the assessments of a reasonable allowance for salaries or other compensation for personal
the respondent issued against it, for deficiency income taxes for the years services actually rendered. We agree with the view thus expressed, as well as
1953, 1954 and 1955 in the amounts of P40,455.00, P11,248.00 and with court's conclusion that the bonuses in question were not reasonable
P16,228.00, respectively, arising from the disallowance, as deductible considering all material and relevant factors.
expenses, of the bonuses paid by petitioner to its officers, upon the ground 2. General rule that `Bonuses to employees made in good faith and as additional
that they were not ordinary, nor necessary, nor reasonable expenses within compensation for the services actually rendered by the employees are
the purview of Section 30(a) (1) of the National Internal Revenue Code. deductible, provided such payments, when added to the stipulated salaries,
do not exceed a reasonable compensation for the services rendered' (4
2. For the year 1953, by disallowing as deductions all amounts paid that year by Mertens Law of Federal Income Taxation, Sec. 25.50, p. 410). The condition
the petitioner as bonus to its officers and staff-members in the aggregate sum precedents to the deduction of bonuses to employees are: (1) the payment of
of P175,140.00, this resulting in a net taxable income of petitioner amounting the bonuses is in fact compensation; (2) it must be for personal services
to P173,054.16; for the taxable years 1954 and 1955, the similar disallowance actually rendered; and (3) bonuses, when added to the salaries, are
as deductions of a portion of the bonuses paid by petitioner in said years to `reasonable ... when measured by the amount and quality of the services
its officers and staff-members in the aggregate sums of P88,193.33 for 1954 performed with relation to the business of the particular taxpayer' (Idem., Sec.
and P90,385.00 for 1955, resulted likewise in a net taxable income for 25.44, p. 395). Here it is admitted that the bonuses are in fact compensation
petitioner in the sum of P83,239.42 for 1954 and P81,138.93 for 1955 and were paid for services actually rendered. The only question is whether
3. Having found that the bonuses in question were paid for services actually the payment of said bonuses is reasonable.
rendered by the recipients thereof, the tax court proceeded to consider the 3. no fixed test for determining the reasonableness of a given bonus as
question of "whether or not they are reasonable". In this connection it compensation. This depends upon many factors, one of them being 'the
construed Section 30(a) (1) of the Revenue Code as allowing the deduction amount and quality of the services performed with relation to the business'.
from gross income of all the ordinary and necessary expenses incurred during Other tests suggested are: payment must be 'made in good faith'; 'the character
the taxable year in carrying on the trade or business of the taxpayer, including of the taxpayer's business, the volume and amount of its net earnings, its
a reasonable allowance for salaries or other compensation for personal locality, the type and extent of the services rendered, the salary policy of the
services actually rendered. We agree with the view thus expressed, as well as corporation'; 'the size of the particular business'; 'the employees'
with court's conclusion that the bonuses in question were not reasonable qualifications and contributions to the business venture'; and 'general
considering all material and relevant factors. economic conditions (4 Mertens Law of Federal Income Taxation, Secs.
25.44, 25.49, 25.50, 25.51, pp. 407-412). However, 'in determining whether
the particular salary or compensation payment is reasonable, the situation
must be considered as a whole.lawphi1.ñet Ordinarily, no single factor is
ISSUES: decisive. ... it is important to keep in mind that it seldom happens that the
W/N Whether the salaries were deductible application of one test can give a satisfactory answer, and that ordinarily it is
RATIO: the interplay of several factors, properly weighted for the particular case,
which must furnish the final answer
1. Having found that the bonuses in question were paid for services actually 4. It seems clear from the record that, in arriving at its main conclusion, the tax
rendered by the recipients thereof, the tax court proceeded to consider the court considered, inter alia, the following factors:
question of "whether or not they are reasonable". In this connection it
32
a. In the first place, for the years 1953, 1954 and 1955 the petitioner 6. As far as petitioner's contention that as employer it has the right to fix the
paid to its following top officers: A. P. Kuenzle, H. A. Streiff, A. compensation of its officers and employees and that it was in the exercise of such right
Jung, G. Gattaneo, A. Schatzmann, F. E. Rein, M. Klinger, A. that it deemed proper to pay the bonus in question, all that We need say is this: that
Huber, S. Meili, M. Triaca, J. Ortiz, H. Vogt, W. Ramp, W. Strehler, right maybe conceded, but for income tax purposes the employer cannot legally claim
H. R. Jung, K. Schedler, P. C. Curtis, R. Oefeli, substantial amounts such bonuses as deductible expenses unless they are shown to be reasonable. To hold
as salaries and bonuses ranging from P9,000.00 yearly as a otherwise would open the gate to rampant tax evasion. Lastly, We must not lose sight
minimum (except in the case) and P50,000.00 as maximum. All of the fact that the question of allowing or disallowing as deductible expenses the
these officials headed various departments of petitioner's business. amounts paid to corporate officers by way of bonus is determined by respondent
While it must be assumed, on the one hand, in the absence of exclusively for income tax purposes. Concededly, he has no authority to fix the
evidence to the contrary, that they were competent, on the other the amounts to be paid to corporate officers by way of basic salary, bonus or additional
record discloses no evidence nor has petitioner ever made the claim remuneration — a matter that lies more or less exclusively within the sound discretion
that all or some of them were gifted with some special talent, or had of the corporation itself. But this right of the corporation is, of course, not absolute. It
undergone some extraordinary training, or had accomplished any cannot exercise it for the purpose of evading payment of taxes legitimately due to the
particular task, that contributed materially to the success of State.
petitioner's business during the taxable years in question.
b. In the second place, working under the above-named officials and
constituting what we might call the staff of petitioner's working
personnel, were a good number of other employees — mostly SEPARATE OPINIONS:
Filipinos— all of whom, according to the record , received no pay CONCURRING:
increase at all during the same years.
c. n the third place, the above salaries and bonuses were paid to
petitioner's top officials mentioned heretofore, in spite of the fact
that according to its income tax returns for the relevant years, it had
suffered net losses as follows: P2,085.84, P4,953.91, P9,246.07 for
the years 1953, 1954 and 1955, respectively. In fact, petitioner's
financial statements further show that its gross assets suffered a
gradual decrease for the same years and that a similar downward
trend took place in its surplus and capital position during the same
period of time.
d.
5. Petitioner justifies payment of these bonuses to its top officials by saying that its
general salary policy was to give a low salary but to grant substantial bonuses at the
end of each year, so that its officers may receive considerable lump sums with which
to purchase whatever expensive objects or items they might need. While We are not
prepared to hold that such policy is unreasonable, still We believe that its application
should not result in producing a net loss for the employer at the end of the year, for if
that were to be the case, the scheme may be utilized to freely achieve some other
purpose — evade payment of taxes.
33
55. RR 10-2002 (Gp)1 2. Any similar item of real or personal property used by the taxpayer primarily for
July 10, 2002 | BIR | Deductions – Business Expenses entertainment, amusement or recreation
------------------------------------------------------------------------------------------------------ To be considered as such, such facilities must be owned or form a part of the taxpayer’s
Pursuant to Sec. 244 of the Tax Code of 1997, in relation to Sec. 34(A)(1)(a)(iv) of trade, business or profession, or rented by such taxpayer
the same code, these regulations are promulgated to provide a ceiling on the amount
“Guests” shall mean persons or entities with which the taxpayer has direct business
of entertainment, amusement and recreation expense claimed by individual
relations
taxpayers engaged in business or in the practice of their profession. Also, for domestic
or resident foreign corporations, to arrive at the taxable income subject to income tax EXCLUSIONS:
under Secs. 24(A); 25(A)(1); 26; 27(A), (B), and (C); 28(A)(1); 28(A)(6)(b); and 61,
all of the Tax Code of 1997 The following expenses are not considered entertainment, amusement or recreation
expenses:
COVERAGE: 1. Expenses which are treated as compensations or fringe benefits for services
rendered under am employer-employee relationship
These Regulations shall cover entertainment, amusement and recreation expenses
2. Expenses for charitable or fund-raising events
of the following taxpayers:
3. Expenses for bonafide business meeting of stockholders, partners, or directors
1. Individuals engaged in business, including taxable estates and trusts 4. Expenses for attending or sponsoring an employee to a business league or
professional organization meeting
2. Individuals engaged in the practice of profession 5. Expenses for events organized for promotion, marketing and advertising including
3. Domestic Corporations concerts, conferences, seminars, workshops, conventions, and other similar events
6. Other expenses of a similar nature
4. Resident Foreign Corporations Such items of exclusions may qualify as items of deduction under Sec. 34 of the Tax
Code of 1997
5. General Professional Partnerships (GPP), including its members
REQUISITES:
DEFINITON OF TERMS:
Requisites for deductibility:
The term “Entertainment, Amusement and Recreation Expenses” includes
1. It must be paid or incurred during the taxable year
representation expenses and/or depreciation or rental expense relating to
2. It must be: (i) directly connected to the development, management and operation
entertainment facilities
of the trade, business or profession of the taxpayers; (ii) directly related to or in
“Representation Expenses” shall refer to expenses incurred by a taxpayers in furtherance of the conduct of his or its trade, business or exercise of a profession
connection with the conduct of his trade, business or exercise of profession in 3. It must not be contrary to law, morals, good customs, public policy, or public
entertaining, providing amusement and recreation to, or meeting with, a guest or order
guests. It shall not refer to fixed representation allowances that are subject to 4. It must not have been paid directly or indirectly, to an official or employee of the
withholding tax national government, or any local government unit, or any GOCC, or any foreign
government, or to a private individual or corporation, or GPP, or similar entity, if it
“Entertainment Facilities” shall refer to:
constitutes a bribe, kickback, or other similar payment
1. A yacht, vacation home or condominium
1
NOT A CASE
34
5. It must be duly substantiated by adequate proof. The official receipts, invoices, The taxpayer is hereby required to use in its financial statements and income tax return
bills, or statements of account should be in the name of the taxpayer claiming the the account title “entertainment, amusement and recreation expense”, of in the
deduction alternative, to disclose in the notes to financial statements the amount corresponding
6. The appropriated amount of withholding tax, if applicable, should have been thereto when recording expenses paid or incurred of the nature of entertainment,
withheld and paid to the BIR amusement and recreation expense. However, such expense should be reported in the
taxpayer’s income tax return as a separate expense item
CEILING ON ENTERTAINMENT, AMUSEMENT, AND RECREATION
EXPENSES The ceiling provided on the Regulations shall apply only to entertainment,
amusement and recreation expenses paid or incurred beginning Sept. 1, 2002,
There shall be allowed a deduction from gross income for entertainment, amusement
regardless of the taxpayer’s accounting period
and recreation expense in an amount equivalent to the actual entertainment,
amusement and recreation expense paid or incurred within the taxable year by the
taxpayer, but in no case shall such deduction exceed:
a. 0.50% of net sales for taxpayers engaged in sale of goods or properties
b. 1% of net revenue for taxpayers engaged in sale of services, including exercise
of profession and use or lease of properties
However, if the taxpayer is deriving income from bot sale of goods/properties and
services, the allowable entertainment, amusement and recreation expense shall be
determined based on an appointment formula
Illustration:
REPORTING:
35
56. REVENUE REGULATIONS NO. 01-09 (JM) 5. Medical and dental privileges in private facilities, such as but not limited to
December 9, 2008 diagnostic and laboratory fees (e.g., x-rays, computerized tomography scans
SUBJECT: Rules and Regulations Implementing Republic Act No. 9 442, entitled and blood tests), including professional fees of attending doctors, subject to
"An Act Amending Republic Act 7277, Otherwise Known as the Magna Carta for guidelines to be issued by the DOH, in coordination with Philhealth; and
Persons with Disability", Relative to the Tax Privileges of Persons with Disability and 6. Domestic air and sea transportation based on the actual fare except
Tax Incentives for Establishments Granting Sales Discount promotional fare. If the promotional fare discount is higher than the 20%
discount privilege, the person with disability may choose the promotional
SECTION 2. Definition of Terms. — For purposes of these Regulations, the fare and should no longer be entitled to the 20% discount privilege; and
following terms and phrases shall be defined as follows:   7. Land transportation privileges in bus fares such as ordinary, aircon fares and
on public railways such as LRT, MRT, PNR, and such other similar
a. Person with disability — shall refer to an individual suffering from restriction
infrastructure that will be constructed, established and operated by public or
or different abilities, as a result of mental, physical or sensory impairment to
private entity. Toll fees of skyways and expressways are likewise subject to
perform an activity in a manner or within the range considered normal for
at least 20% discount, however, this privilege can be availed only by a person
human being.
with disability owning the vehicle.
b. Disability — shall mean a physical or mental impairment that substantially
8.
limits one or more psychological, physiological or anatomical function of an
SECTION 4. Availment by Establishments of Sales Discounts as Deduction from
individual or activities of such individuals; a record of such an impairment;
Gross Income. — Establishments granting sales discounts to persons with disability
or being regarded as having such an impairment.   on their sale of goods and/or services specified under Section 3 above shall be entitled
c. Benefactor — shall refer to any person, whether related or not to the person to deduct the said sales discount from their gross income subject to the following
with disability, who takes care of him/her as a dependent. ISDCHA   conditions:
1. The sales discounts shall be deducted from gross income after deducting the
d. Dependent — shall refer to a person with disability, whether minor or of legal
cost of goods sold or the cost of service;
age, and who is a Filipino citizen, who may or may not be related to his
2. The cost of the sales discount shall be allowed as deduction from gross
benefactor and who is living with and dependent upon such benefactor for
his/her chief support. income for the same taxable year that the discount is granted;  
e. Sales discount — shall refer to the actual discount, or that discount which in 3. Only that portion of the gross sales exclusively used, consumed or enjoyed
no case shall exceed 20% of the gross selling price of goods sold or services by the person with disability shall be eligible for the deductible sales
rendered to persons with disability by certain business establishments discount;  
enumerated under the Act and these Regulations.
4. The gross selling price and the sales discount must be separately indicated in
f. Establishment — shall refer to any entity, public or private, duly licensed
the sales invoice or official receipt issued by the establishment for the sale of
and/or authorized by the national government agencies or by the local
government units to operate. goods or services to the person with disability;  
5. Only the actual amount of the sales discount granted or a sales discount not
SECTION 3. Sales Discounts Which May Be Claimed by Persons with Disability. exceeding 20% of the gross selling price or gross receipt can be deducted
— Persons with disability shall be entitled to claim at least twenty percent (20%) from the gross income, net of value added tax, if applicable, for income tax
discount from the following establishments relative to the sale of goods or services for purposes, and from gross sales or gross receipts of the business enterprise
their exclusive use or enjoyment, viz.: concerned, for VAT or other percentage tax purposes; and shall be subject to
1. Hotels and similar lodging establishments and restaurants; Sports and proper documentation under pertinent provisions of the Tax Code of 1997, as
recreation centers; amended;  
2. Theaters, cinema houses, concert halls, circuses, carnivals and other similar
6. The business establishment giving sales discount to qualified person with
places of culture, leisure and amusement;
disability is required to keep separate and accurate records of sales, which
3. All drugstores regarding purchase of medicine;
shall include the name of the person with disability, ID Number, gross
4. Medical and dental privileges in government facilities, such as but not limited
sales/receipts, sales discount granted, date of transactions and invoice number
to diagnostic and laboratory fees (e.g., x-rays, computerized tomography
scans and blood tests) subject to guidelines to be issued by the DOH, in for every sale transaction to person with disability; and  
coordination with the Philippine Health Insurance Corporation (Philhealth);
36
7. All establishments mentioned in Section 3 above which granted sales 1. For the first violation of any provision of the Act and these Regulations, a
discount to persons with disability on their sale of goods and/or services may fine of not less than Fifty thousand pesos (P50,000) but not exceeding One
claim the said discount as deduction from gross income.   hundred thousand pesos (P100,000) or imprisonment of not less than six
months but not more than two years, or both at the discretion of the court;
and
SECTION 5. Prohibition on Availment of Double Discounts. — The foregoing 2. For any subsequent violation thereto, a fine of not less than One hundred
privileges granted to person with disability shall not be claimed if the said person with thousand pesos (P100,000) but not exceeding Two hundred thousand pesos
disability claims a higher discount as may be granted by the commercial establishment (P200,000) or imprisonment for not less than two years but not more than six
and/or under other existing laws or in combination with other discount program/s. years, or both at the discretion of the court.
Thus, a person with disability who is at the same a senior citizen can only claim one 3. Any person who abuses the privileges granted herein shall be punished with
20% discount on a particular sales transaction. imprisonment of not less than six months or a fine of not less than Five
thousand pesos (P5,000), but not more than Fifty thousand pesos (P50,000),
SECTION 6. Basis of Computation of Value-Added Tax on Sale of Goods or or both, at the discretion of the court.
Services to Persons with Disability. — VAT on sale of goods or services with sales 4. If the violator is a corporation, organization or any similar entity, the officials
discounts granted by business establishments enumerated under Section 3 hereof shall thereof directly involved shall be liable therefor.
be computed in accordance with the following illustration: 5. If the violator is an alien or a foreigner, he shall be deported immediately
after service of sentence without further deportation proceedings.
6. Upon filing of an appropriate complaint, and after due notice and hearing, the
Amount of sale (without the VAT): P100 proper authorities may also cause the cancellation or revocation of the
Less: 20% sales discount: P20 business permit, permit to operate, franchise and other similar privileges
granted to any business entity that fails to abide by the provisions of the Act
Vatable sale  P80 and these Regulations.
Plus: 12% VAT (based on P80) P9.60
Total amount to be paid by the person with disability: P89.60
SECTION 7. Non-Availment of the "Head of Family" Status by Benefactors of

Persons with Disability. — Although the Act provides that a benefactor of persons
with disability whose civil status is "single" shall be considered as "head of family"
and therefore shall be entitled to the personal exemption of P25,000 under Section 35
(A) of the Tax Code, said single benefactor can no longer avail the "head of family"
status in view of the elimination of the terms "head of family" and "his/her dependents"
for purposes of availing the personal exemption of P25,000
SECTION 8. Proofs of Entitlement to the Privileges by Person with Disability. —

The privileges under the Act and in these Regulations available to persons with
disability who are Filipino citizens may only be granted upon presentation of any of
the following proof of his/her entitlement thereto:
1. An identification card issued by the city or municipal mayor or the barangay
captain of the place where the person with disability resides; or  
2.The passport of the person with disability concerned; or  
3.Transportation discount fare Identification Card (ID) issued by the National 57. RR No. 7-2010 (Dolatre)
Council for the Welfare of Disabled Persons (NCWDP).   July 20, 2010 | Deductions – Business Expenses
SECTION 9. Penalties. —
37
SUMMARY: shipping vessels and the like, based on the actual fare and advanced booking.
RR No.7-2010 provides that establishments granting discounts to Senior Citizens g. On the utilization of services in hotels and similar lodging establishments,
can deduct such discounts from their gross income for the same taxable year. The restaurants and recreation centers.
discounts granted by the seller of qualified goods and services. shall be treated as h. On admission fees charged by theaters, cinema houses and concert halls,
an ordinary and necessary expenses deductible from the gross income of the seller circuses, carnivals and other similar places of culture, leisure and amusement.
falling under the category of itemized deductions, and can only be claimed if the i. On funeral and burial services for the death of Senior Citizens.
seller does not opt for the Optional Standard Deduction during the taxable
quarter/year. (See #5 for conditions for the deduction) 4. SEC. 5. Special Discount granted to Senior Citizens and Senior Citizens Centers
The monthly utilization of water and electricity by the Senior Citizen supplied by
It also provides that private establishments employing Senior Citizens shall be public utilities will be subject to a 5% discount upon concurrence of the following:
entitled to additional deduction from their gross income equivalent to 15% of the 1. The individual meters for the said utilities are registered in the name of the
total amount paid as salaries and wages to Senior Citizen. Senior Citizen residing therein;
2. The monthly consumption does not exceed 100kwh of electricity and 30 m3
of water; and
1. Revenue Regulations No. 7-2010 implements the tax privileges provisions of RA
3. The privilege is granted per household regardless of the number of Senior
9994 or the "Expanded Senior Citizens Act of 2010", and prescribes the guidelines Citizens residing therein.
for the availment thereof.
For the consumption of water, electricity and telephone, there shall be granted by
public utilities a discount of at least 50% on the consumption by a Senior Citizens
2. Relevant Definitions: Center and residential care/group homes that are run by the Government or by a non-
Senior Citizen or Elderly — refers to any Filipino citizen who is a resident of stock, non-profit domestic corporation organized and operated primarily for the
the Philippines, and who is 60 years old or above. It may apply to senior citizens purpose of promoting the well-being of abandoned, neglected, unattached, or homeless
with “dual citizenship” status provided they prove their Filipino citizenship and Senior Citizens, subject to the guidelines formulated by the DSWD.
have at least 6 months residency in the Philippines.
Sales discount — the actual discount, or that discount, which in no case shall be
5. !!! SEC. 7. Tax Treatment of the Discount Granted to Senior Citizens.
lower than 20% of the gross selling price of the goods sold or services rendered
All establishments supplying any of the said goods and services may claim the
to Senior Citizens by certain establishments enumerated under the Act and in
discounts granted as a tax deduction based on the cost of the goods sold or
these Regulations, Provided, that, for purchase of water and electricity from
services rendered to Senior Citizens.
public utilities, the sales discount shall be a minimum of five (5%) per cent.
Example of how to compute discount:
Establishment — any entity, public or private, duly licensed and/or franchised If a VAT-registered drug store sells 10 pieces of Allopurinol to a Senior Citizen at an
by the national government agencies or the local government units. undiscounted selling price of P5.00 per piece
Selling Price (VAT-exempt) of 10 pcs. P50.00
3. SEC. 4. Grant of Discounts to Senior Citizens.
at P5.00/pc
All establishments, supplying any of the following goods and services to Senior
Less: 20% Discount 10.00
Citizen for their exclusive use and enjoyment or availment, shall give a discount of
Amount Payable by the Senior Citizen P40.00
20%:
a. Medicines and such other essential medical supplies, accessories and
equipment. The selling price to be charged by the seller must be net of VAT because the sale to
b. On the professional fees of attending physician/s in all private hospitals, Senior Citizens is exempt from VAT. The cost of the discount in the above
medical facilities, outpatient clinics and home health care services. illustration is P10.00 and shall be allowed as a deduction from gross income for
c. On professional fees of licensed professional health workers providing home the same taxable year that the discount is granted, provided that, the total amount
health care services. of the claimed tax deduction net of VAT, if applicable, shall be included in their gross
d. On medical and dental services, diagnostic and laboratory fees. sales receipts for tax purposes and shall be subject to proper documentation in
e. In actual fare for land transportation travel in Public Utility Buses, Public accordance with the provisions of the Tax Code. This means that for the
Utility Jeepneys, taxis, Asian Utility Vehicles, shuttle services and public establishment to be allowed to claim the discount as a deduction, the amount of
railways, including LRT, MRT and PNR. sales that must be reported for tax purposes is the undiscounted selling price and
f. On actual transportation fare for domestic air transport services and sea not the amount of sales net of the discount. The income statement of the seller must
38
reflect the discount, not as a reduction of sales to arrive at net sales, but as a deduction 6. SEC. 12. Additional Deduction from Gross Income of Private Establishments
from its gross income (sales less cost of sales). It should appear in the books like this: for Compensation Paid to Senior Citizens.
Private establishments employing Senior Citizens shall be entitled to additional
deduction from their gross income equivalent to 15% of the total amount paid as
salaries and wages to Senior Citizens, subject to the provision of Section 34 of the
Tax Code and its implementing rules and regulations, provided the following
The discounts granted by the seller of qualified goods and services, i.e. the
promotional discount, the 20% discount, the 5% discount on water and electric conditions are met:
consumption by Senior Citizens, or the 50% discount on electricity, water and 1. The employment shall have to continue for a period of at least 6 months;
telephone consumption by the Senior Citizens Center, shall be treated as an ordinary 2. The annual taxable income of the Senior Citizen does not exceed the poverty
and necessary expenses deductible from the gross income of the seller falling level as may be determined by the NEDA thru the NSCB. For this purpose,
under the category of itemized deductions, and can only be claimed if the seller the Senior Citizen shall submit to his employer a sworn certification that his
does not opt for the Optional Standard Deduction during the taxable annual taxable income does not exceed the poverty level.
quarter/year. The claim of the discount granted under the Act as an additional item
of deduction from the gross income of the seller is subject to the following
conditions:
1. Only that portion of the gross sales exclusively used, consumed or enjoyed
by the Senior Citizen shall be eligible for the deductible sales discount.
2. The gross selling price and the sales discount must be separately indicated in
the official receipt or sales invoice issued by the establishment for the sale of
goods or services to the Senior Citizen.
3. Only the actual amount of the discount granted or a sales discount not less
than the statutory rate (20%, 5% or 50% when applicable), whichever is
higher, based on the gross selling price can be deducted from the gross
income, net of VAT, if applicable, for Income Tax purposes, and from gross
sales or gross receipts of the business enterprise concerned, for VAT or other
Percentage Tax (PT) purposes.
4. The seller must record its sales inclusive of the discount granted.
5. The discount can only be allowed as a deduction from gross income for the
same taxable year that the discount is granted.
6. The business establishment giving sales discounts to qualified Senior
Citizens is required to keep a separate and accurate record of sales, which
shall include the name of the Senior Citizen, OSCA ID, gross sales/receipts,
sales discount granted, dates of transactions and invoice numbers for every
sale transaction to Senior Citizen.
7. Only business establishments selling any of the qualified goods and services
to Senior Citizens where an actual discount was granted may claim the
deduction.
8. The seller must not claim the Optional Standard Deduction during the taxable
year.
39
Interest (as amended by Republic Act 9337)

from the very beginning) which had not been earned by the registered
enterprise which had suffered the accumulated losses. In effect, to grant Picop
58. Paper Industries Corporation of the Philippines vs. Court of Appeals ‘s claimed deduction would be to permit Picop to purchase a tax deduction and
(Ebron) RPPM to peddle its accumulated operating losses. Under the CTA and Court
December 1, 1995 | Feliciano, J. | Deduction-Interest of Appeals decisions, Picop would benefit by immunizing P44,196,106.00 of
its income from taxation although Picop had not run the risks and incurred the
PETITIONER: Paper Industries Corporation of the Philippines losses which had been encountered and suffered by RPPM. Conversely, the
RESPONDENTS: Court of Appeals income that would be shielded from taxation is not income that was eventually
SUMMARY: Picop received from the Commissioner of Internal Revenue generated by the same registered operations which earlier had sustained losses.
("CIR") two (2) letters of assessment and demand: (a) one for deficiency We consider and so hold that there is nothing in Section 7 (c) of R. A. No. 5186
transaction tax and for documentary and science stamp tax; and (b) the other which either requires or permits such a result. Indeed, that result makes non-
for deficiency income tax for 1977, for an aggregate amount of P88,763,255. sense of the legislative purpose which may be seen clearly to be projected by
Picop protested the assessment. These protests were not formally acted upon Section 7 (c), R.A. No. 5186.
by respondent CIR and so CIR issued a warrant of distraint on personal
property and a warrant of levy on real property against Picop, to enforce a. Certain claimed financial guarantee expenses:
collection of the contested assessments. Picop appealed. CTA rendered a A taxpayer has the burden of proving entitlement to a claimed deduction. In the
decision modifying the findings of the CIR and held Picop liable for the instant case, even Picop ‘s own vouchers were not submitted in evidence and
reduced aggregate amount of P20,133,762.33. Picop and CIR appealed to SC, the BIR Examiners denied that such vouchers and other documents had been
which referred the case to the CA. CA further reduced reduced the liability of exhibited to them. Moreover, cash vouchers can only confirm the fact of
Picop to P6,338,354.70. Once again, Picop and CIR appealed to the SC. disbursement but not necessarily the purpose thereof. 37 The best evidence that
Picop should have presented to support its claimed deduction were the invoices
ISSUES and DECISIONS: and official receipts issued by the Register of Deeds. Picop not only failed to
Whether Picop is entitled to deductions against income of: present such documents; it also failed to explain the loss thereof, assuming they
a. Interest payments of loans for the purchase of machinery and had existed before. Under the best evidence rule, therefore, the testimony of
equipment: Picop ‘s employee was inadmissible and was in any case entitled to very little,
The provision invoked by the CIR refers to "theoretical interest," that is to say, if any, credence.
interest "calculated" or computed (and not incurred or paid) for the purpose of We consider that entitlement to Picop’s claimed deduction of P1,237,421.00
determining the "opportunity cost" of investing funds in a given business. Such was not adequately shown and that such deduction must be disallowed.
"theoretical" or imputed interest does not arise from a legally demandable DOCTRINE:
interest-bearing obligation incurred by the taxpayer who however wishes to Interest payments of loans for the purchase of machinery and equipment –
find out, e.g., whether he would have been better off by lending out his funds deductible
and earning interest rather than investing such funds in his business. What Net operating losses incurred by the Rustan Pulp and Paper Mills, Inc – not
section 79 makes clear is that interest which does constitute a charge arising deductible
under an interest bearing obligation is an allowable deduction from gross Certain claimed financial guarantee expenses – not deductible
income.
Net operating losses incurred by the Rustan Pulp and Paper Mills, Inc: FACTS:
To allow the deduction claimed by Picop would be to permit one corporation 1. The Paper Industries Corporation of the Philippines ("Picop"), s a
or enterprise, Picop, to benefit from the operating losses accumulated by Philippine corporation registered with the Board of Investments (BOI)
another corporation or enterprise, RPPM. RPPM far from benefitting from the
as a preferred pioneer enterprise with respect to its integrated pulp and
tax incentive granted by the BOI statute, in fact gave up the struggle and went
out of existence and its former stockholders joined the much larger group of paper mill, and as a preferred non-pioneer enterprise with respect to its
Picop’s stockholders. To grant Picop’s claimed deduction would be to permit integrated plywood and veneer mills.
Picop to shelter its otherwise taxable income (an objective which Picop had 2. Picop received from the Commissioner of Internal Revenue ("CIR") two (2)
letters of assessment and demand: (a) one for deficiency transaction tax and for
40
documentary and science stamp tax; and (b) the other for deficiency income tax 1a. Whether Picop is entitled to deduct against current income interest payments on
for 1977, for an aggregate amount of P88,763,255. loans for the purchase of machinery and equipment.
3. Picop protested the assessment. These protests were not formally acted upon
by respondent CIR and so CIR issued a warrant of distraint on personal property 1. Interest payments on loans incurred by a taxpayer (whether BOI-registered or
and a warrant of levy on real property against Picop, to enforce collection of the not) are allowed by the NIRC as deductions against the taxpayer's gross income
contested assessments (Sec. 301977 Tax Code). Thus, the general rule is that interest expenses are
4. Picop appealed. CTA rendered a decision modifying the findings of the CIR deductible against gross income and this certainly includes interest paid under
and held Picop liable for the reduced aggregate amount of P20,133,762.33 loans incurred in connection with the carrying on of the business of the taxpayer.
5. Picop and the CIR both went to the Supreme Court on separate Petitions for 2. In requiring the disallowance of the interest payments made by Picop, CIR
Review of the above decision of the CTA. In 2 Resolutions, the Court referred the invoked Section 79,
2 Petitions to the Court of Appeals. The Court of Appeals consolidated the 2 cases
and rendered a decision which further reduced the liability of Picop to "SECTION 79. Interest on Capital. — Interest calculated for cost-keeping or other
P6,338,354.70. Picop and CIR once again appealed. purposes on account of capital or surplus invested in the business, which does not represent
6. Picopassails the propriety of the 35% deficiency transaction tax which the a charge arising under an interest- bearing obligation, is not allowable deduction from gross
income."
Court of Appeals held due from it in the amount of P3,578,543.51. Picop also
questions the imposition of the deficiency income tax of P1,481,579.15, resulting
3. SC: The general rule is that interest expenses are deductible against the gross
from disallowance of certain claimed financial guarantee expenses and claimed
income and this includes interest paid under loans incurred in connection with
year-end adjustments of sales and cost of sale figures by Picop's external auditors.
carrying on of the business of the taxpayer. The above provision refers to
7. CIR insists that the Court of Appeals erred in finding Picop not liable for
"theoretical interest," that is to say, interest "calculated" or computed (and not
surcharge and interest on unpaid transaction tax and for documentary and science
incurred or paid) for the purpose of determining the "opportunity cost" of
stamp taxes and in allowing Picop to claim as deductible expenses:
investing funds in a given business. Such "theoretical" or imputed interest does
1. the net operating losses of another corporation (i.e., Rustan Pulp
not arise from a legally demandable interest-bearing obligation incurred by the
and Mills, Inc.); and
taxpayer who however wishes to find out, e.g., whether he would have been better
2. interest payments on loans for the of machinery and equipment.
off by lending out his funds and earning interest rather than investing such funds
8. CIR also asserts that Picop should be held liable for interest at 14% per annum
in his business. What Section 79 makes clear is that interest which does constitute
3 years, and interest at 20% per annum for a max of 3 years; and a surcharge of
a charge arising under an interest bearing obligation is an allowable deduction
10% on Picop's deficiency income tax. Finally, CIR contends that Picop is liable
from gross income.
for the corporate development tax equivalent to 5% of its correct 1977 net income.
1b. Whether Picop is entitled to deduct against current income net operating losses
ISSUES:
incurred by Rustan Pulp and Paper Mills, Inc.
1. Whether Picop is entitled to deductions against income of:
1. interest payments of loans for the purchase of machinery and
1. Picop entered into a merger agreement with the Rustan Pulp and Rustan
equipment
Manufacturing Corporation. Under this agreement, the rights, properties,
2. net operating losses incurred by the Rustan Pulp and Paper Mills,
privileges, powers and franchises of RPPM and RMC were to be transferred,
Inc
assigned and conveyed to Picop. The entire subscribed and outstanding capital
3. certain claimed financial guarantee expenses
stock of RPPM and RMC would be exchanged for 2,891,476 fully paid up Class
"A" common stock of Picop (with a par value of P10.00) and 149,848 shares of
RATIO:
preferred stock of Picop (with a par value of P10.00), to be issued by Picop , the
result being that Picop would wholly own both RPPM and RMC while the
41
stockholders of RPPM and RMC would join the ranks of Picop ‘s shareholders. registered enterprise which had suffered the accumulated losses. In effect, to grant
In addition, Picop paid off the obligations of RPPM to the Development Bank of Picop ‘s claimed deduction would be to permit Picop to purchase a tax deduction
the Philippines in the amount of P68,240,340.00, by issuing 6,824,034 shares of and RPPM to peddle its accumulated operating losses. Under the CTA and Court
preferred stock (with a par value of P10.00) to the DBP. The merger agreement of Appeals decisions, Picop would benefit by immunizing P44,196,106.00 of its
was approved in 1977 by the creditors and stockholders of Picop , RPPM and income from taxation although Picop had not run the risks and incurred the losses
RMC and by the Securities and Exchange Commission. The Board of Investments which had been encountered and suffered by RPPM. Conversely, the income that
approved the merger agreement on 12 January 1978. would be shielded from taxation is not income that was eventually generated by
2. In claiming such deduction, Picop relies on Section 7 (c) of R.A. No. the same registered operations which earlier had sustained losses. We consider
5186which provides:chanrobles.com.ph and so hold that there is nothing in Section 7 (c) of R. A. No. 5186 which either
requires or permits such a result. Indeed, that result makes non-sense of the
"SECTION 7. Incentives to Registered Enterprise. — A registered enterprise, to the extent legislative purpose which may be seen clearly to be projected by Section 7 (c),
engaged in a preferred area of investment, shall be granted the following incentive R.A. No. 5186.
benefits:chanrob1es virtual 1aw library
(c) Net Operating Loss Carry-over. — A net operating loss incurred in any of the first ten
years of operations may be carried over as a deduction from taxable income for the six 1c. Whether Picop is entitled to deduct against current income certain claimed
years immediately following the year of such loss. The entire amount of the loss shall be financial guarantee expenses.
carried over to the first of the six taxable years following the loss, and any portion of such 1. In its Income Tax Return for 1977, Picop also claimed a deduction in the
loss which exceeds the taxable income of such first year shall be deducted in like manner amount of P1,237,421.00 as financial guarantee expenses. This deduction is said
from the taxable income of the next remaining five years. The net operating loss shall be to relate to chattel and real estate mortgages required from Picop by the PNB and
computed in accordance with the provisions of the National Internal Revenue Code, any DBP as guarantors of loans incurred by Picop from foreign creditors. According
provision of this Act to the contrary notwithstanding, except that income not taxable either to Picop, the claimed deduction represents registration fees and other expenses
in whole or in part under this or other laws shall be included in gross income."
incidental to registration of mortgages in favor of DBP and PNB. Picop allegedly
showed its own vouchers to BIR Examiners to prove disbursements to the
3. On the other hand, CIR disallowed all the deductions claimed on the basis of
Register of Deeds of Tandag, Surigao del Sur, of particular amounts. In the
RPPM’s losses because: (1) the previous losses were incurred by "another
proceedings before the CTA, however, Picop did not submit in evidence such
taxpayer," RPPM, and not by Picop in connection with Picop’s own registered
vouchers and instead presented one of its employees to testify that the amount
operations. CIR took the view that Picop , RPPM and RMC were merged into 1
claimed had been disbursed for the registration for chattel and real estate
corporate personality only on 1978, upon approval of the merger agreement by
mortgages.
the BOI. Thus, during the taxable year 1977, Picop, RPPM, and RMC still had
2. CIR and CTA disallowed this claim mainly because there is no evidence of
their separate juridical personalities. (2) CIR alleged that these losses had been
such and that mere testimony is not enough to justify the claim for deduction.
incurred by RPPM "from the borrowing of funds" and not from carrying out of
3. We must support the CTA and the Court of Appeals in their foregoing rulings.
RPPM’s registered operations.
A taxpayer has the burden of proving entitlement to a claimed deduction. In the
4. SC: The deduction claimed by Picop in the amount of P44,196,106.00 in its
instant case, even Picop ‘s own vouchers were not submitted in evidence and the
1977 Income Tax Return must be disallowed. To allow the deduction claimed by
BIR Examiners denied that such vouchers and other documents had been
Picop would be to permit one corporation or enterprise, Picop, to benefit from the
exhibited to them. Moreover, cash vouchers can only confirm the fact of
operating losses accumulated by another corporation or enterprise, RPPM. RPPM
disbursement but not necessarily the purpose thereof. 37 The best evidence that
far from benefitting from the tax incentive granted by the BOI statute, in fact gave
Picop should have presented to support its claimed deduction were the invoices
up the struggle and went out of existence and its former stockholders joined the
and official receipts issued by the Register of Deeds. Picop not only failed to
much larger group of Picop’s stockholders. To grant Picop’s claimed deduction
present such documents; it also failed to explain the loss thereof, assuming they
would be to permit Picop to shelter its otherwise taxable income (an objective
had existed before. Under the best evidence rule, therefore, the testimony of Picop
which Picop had from the very beginning) which had not been earned by the
42
‘s employee was inadmissible and was in any case entitled to very little, if any,
credence.
We consider that entitlement to Picop’s claimed deduction of P1,237,421.00 was

not adequately shown and that such deduction must be disallowed.
SEPARATE OPINIONS:
CONCURRING:
43
59. CIR v. Consuelo Vda. De Prieto (Vi) 3. Of the total sum of P117,706.50 paid by Consuelo on April 29, 1954,
September 30, 1960| Gutierrez David, J. | Deductions - Interest P55,978.65 represents the total interest on account of delinquency (the P55k
was already included in the computation of P117k). The P55,978.65 was
PETITIONER: THE COMMISSIONER OF INTERNAL REVENUE claimed as a deduction in her 1954 income tax return. CIR disallowed the
RESPONDENTS: CONSUELO L. VDA. DE PRIETO deduction and as a consequence, assessed Consuelo for P21,410.38
SUMMARY: Consuelo Vda. de Prieto gave real property to her 4 children. The deficiency income tax due on the P55,978.65, including interest up to March
Commissioner of Internal Revenue appraised the property donated at 31, 1957, surcharge and compromise for the late payment.
P1,231,268.00, and assessed the total sum of P117,706.50 as donor's gift tax, ISSUES:
interest and compromises due thereon. Of the total sum of P117,706.50 paid by
1. Whether the interest paid by Consuelo for late payment of tax is
Consuelo, the sum of P55,978.65 represents the total interest on account of
deductible from gross income – YES
delinquency. This sum of P55,978.65 was claimed as a deduction on her 1954
RATIO:
income tax return. CIR disallowed the claim and as a consequence, assessed
Consuelo for 1954 the total sum of P21,410.38 as deficiency income tax due on the
1. For interest to be deductible, it must be shown that: (1) there be an
aforesaid P55,978.65, including interest up to March 31, 1957, surcharge and indebtedness, (2) that there should be interest upon it, and (3) that what
compromise for the late payment. Issue: Whether the interest for late payment is is claimed as an interest deduction should have been paid or accrued
within the year.
deductible from gross income – YES. For interest to be deductible, it must be shown
that: (1) there be an indebtedness, (2) that there should be interest upon it, and 2. The interest paid by Consuelo was because of the late payment of her donor's
(3) that what is claimed as an interest deduction should have been paid or tax, and the same was paid within the year it is sought to be deducted. The
accrued within the year. The interest paid by Consuelo was because of the late question is whether the interest was paid upon an indebtedness under
payment of her donor's tax, and the same was paid within the year it is sought to be Section 30(b)(1) of the tax code which says:
Sec. 30 Deductions from gross income. — In computing net income there shall be allowed
deducted. US defines indebtedness as an unconditional and legally enforceable as deductions
obligation for the payment of money. Under this definition, a tax can be (b) Interest
considered an indebtedness. It follows that interest paid by Consuelo for the late (1) In general. — The amount of interest paid within the taxable year on
payment of her donor's tax is deductible from her gross income (interest on taxes is indebtedness, except on indebtedness incurred or continued to purchase or carry
obligations the interest upon which is exempt from taxation as income under this Title."
interest on indebtedness so it should be deductible).
DOCTRINE: Although interest payment for delinquent taxes is not deductible as 3. The tax code of the US defines indebtedness as an unconditional and
tax under Section 30 (c) of the Tax Code and section 80 of the Income Tax legally enforceable obligation for the payment of money. Under this
Regulations, the taxpayer is not precluded thereby from claiming said interest definition, a tax can be considered an indebtedness.
payment as deduction under section 30 (b). 4. In Sambrano v. CTA, the court said that "Although taxes already due have
(interest payment for delinquent taxes is not deductible as tax but the not, strictly speaking, the same concept as debts, they are, however,
taxpayer is not precluded thereby from claiming said payment as deduction obligations that may be considered as such.”
on account of interest on indebtedness.) 5. Thus, the uniform ruling is that interest on taxes is interest on indebtedness
and is deductible. Therefore, the interest paid by Consuelo for the late
FACTS:
payment of her donor's tax is deductible from her gross income under
1. This is an appeal from a decision of the Court of Tax Appeals reversing the section 30 (b) of the Tax Code.
decision of the Commissioner of Internal Revenue which held Consuelo L.
Vda. de Prieto liable for the payment of the sum of P21,410.38 as deficiency
6. CIR claims that it should not be deductible under Section 80 of Revenue
Regulation No. 2 (Income Tax Regulation) which provides that "the word
income tax, plus penalties and monthly interest.
'taxes' means taxes proper and no deductions should be allowed for amounts
2. On December 4, 1945, Consuelo gave her four children, Antonio, Benito, representing interest, surcharge, or penalties incident to delinquency." The
Carmen, and Mauro, real property with a total assessed value of P892,497.50. CTA said Section 80 is inapplicable because while it implements Section
After the filing of the gift tax returns on or about February 1, 1954, the 30(c) of the Tax Code governing deduction of taxes, Consuelo argues based
Commissioner of Internal Revenue appraised the real property donated for on Section 30(b) providing for deduction of interest on indebtedness.
gift tax purposes at P1,231,268.00 and assessed the total sum of P117,706.50
as donor's gift tax, interests and compromises due thereon.
7. In conclusion, although interest payment for delinquent taxes is not
deductible as tax under Section 30(c) of the Tax Code and Section 80 of the
44
Income Tax Regulations, the taxpayer is not precluded from claiming the
interest payment as deduction under section 30(b) of the same Code.
45
60. BIR RR 13-2000 (Corinne) withholding tax depending on the year when the interest income was earned,
viz:
SUMMARY: This Revenue Regulation states the requisites and rules in order to
deduct interest expense to arrive at your taxable income. · Forty-one percent (41%) beginning January 1, 1998;
· Thirty-nine percent (39%) beginning January 1, 1999; and
· Thirty-eight percent (38%) beginning January 1, 2000 and
The following are the relevant provisions: thereafter.
(b) Taxpayer – shall refer to a person, whether natural or juridical, engaged in trade, The limitations shall apply regardless of whether or not a tax arbitrage scheme was
business or in the exercise of profession, except one earning compensation income entered into by the taxpayer or regardless of the date when the interest bearing loan
arising from personal services rendered under an employer-employee relationship. and the date when the investment was made for as long as, during the taxable year,
there is an interest expense incurred on one side and an interest income earned on the
SECTION 3. Requisites for Deductibility of Interest Expense. – In general, other side, which interest income had been subjected to final withholding tax. This
subject to certain limitations, the following are the requisites for the deductibility of rule shall be observed irrespective of the currency the loan was contracted and/or in
interest expense from gross income, viz: whatever currency the investments or deposits were made.
(a) There must be an indebtedness;
(b) There should be an interest expense paid or incurred upon such Illustration: Supposing on January 15, 1998, Company A, who has a deposit account
indebtedness; with BCD Bank, obtained a load from XYZ Financing Corporation in connection
(c) The indebtedness must be that of the taxpayer; with the operation of its business. Assume that Company A’s net income for the year
(d) The indebtedness must be connected with the taxpayer’s trade, business or 1998 before the deduction of the interest expense amounted to P1,000,000. For the
exercise of profession; year 1998, the interest income it derived from the said deposit with BCD Bank
(e) The interest expense must have been paid or incurred during the taxable amounted to P180,000 on which final tax of P36,000 had been withheld. Its interest
year; expense on the loan obtained from XYZ Financing Corporation during the same year
(f) The interest must have been stipulated in writing; amounted to P150,000.
(g) The interest must be legally due;
(h) The interest payment arrangement must not be between to Sec. 36(B), both
of the Tax Code of 1997;
(i) The interest must not be incurred to finance petroleum operations; and
(j) In case of interest incurred to acquire property used in trade, business or
exercise of profession, the same was not treated as a capital expenditure.
SECTION 4. Rules on the Deductibility of Interest Expense. –

(a) General Rule. – In general, the amount of interest expense paid or incurred
within a taxable year on indebtedness in connection with the taxpayer’s trade,
business or exercise of profession shall be allowed as a deduction from the
taxpayer’s gross income.
(b) Limitations. – The amount of interest expense paid or incurred by a
taxpayer in connection with his trade, business or exercise of a profession from
an existing indebtedness shall be reduced by an amount equal to the following
percentages of the interest income earned which had been subjected to final
46
Interest Arbitrage 2. Sec. 34(B) was introduced to mitigate the effects of the tax arbitrage scheme
61. BIR Ruling 006-00 (Meryl) (practice of profiting from differences that arise from the ways transactions are treated
January 5, 2000 | Beethoven L. Rualo | Deduction – Interest Arbitrage for tax purposes) where taxpayers:
▪ save approximately 14% on taxes by placing their excess funds in
TO: Atty. Julian B. Soriano, PNB government securities and
FROM: Beethoven L. Rualo, Commissioner of Internal Revenue ▪ pay only a 20% tax on the interest derived therefrom instead of the
34% corporate tax that will be imposed had such excess been used
SUMMARY: for other income-generating activities not subject to final tax.
Section 34(B) of the Tax Reform Act of 1997 disallows as a deduction a portion 3. As a result of Sec. 34(B)
of bank's interest expense representing 41% of interest income subjected to final
▪ taxpayers will no longer enjoy the tax benefit/savings that otherwise
tax. Sec. 34(B) was introduced to mitigate the effects of the tax arbitrage scheme
(practice of profiting from differences that arise from the ways transactions are may be derived from the tax arbitrage.
treated for tax purposes). As a result of Sec. 34(B), taxpayers will no longer enjoy 4. PNB through Atty. Soriano claims that the 12-year treasury bonds were given
the tax benefit/savings that otherwise may be derived from the tax arbitrage. by the government as payment for its liabilities to PNB not as a way to
engage in a tax arbitrage scheme.
PNB through Atty. Soriano claims that the 12-year treasury bonds were given by
the government as payment for its liabilities to PNB not as a way to engage in ISSUE:
a tax arbitrage scheme. BIR said that the amount of interest expense paid or
W/N the amount of interest expense paid or incurred derived by PNB from the treasury
incurred derived by PNB from the treasury bonds shall not be allowed as a
deduction from bank’s gross income. (See doctrine) bonds shall be allowed as a deduction from bank’s gross income – NO
DOCTRINE: RATIO:
General Rule: The amount of interest expense paid or incurred by a taxpayer 1. General Rule: The amount of interest expense paid or incurred by a taxpayer
within a taxable year on indebtedness in connection with his trade, business or within a taxable year on indebtedness in connection with his trade, business
exercise of profession shall be allowed as a deduction from his gross income. or exercise of profession shall be allowed as a deduction from his gross
income.
Exception: Said interest expense shall be reduced if the taxpayer has derived
certain interest income which had been subjected to final withholding tax. ▪ However, said interest expense shall be reduced if the taxpayer has
derived certain interest income which had been subjected to final
This limitation shall apply withholding tax.
▪ regardless of whether a tax arbitrage scheme was entered into by the a) 41% beginning Jan. 1, 1998
taxpayer or b) 39% beginning Jan.1, 1999
▪ regardless of the date of the interest-bearing loan and the date when the c) 38% beginning Jan. 1, 2000 and thereafter
investment was made, 2. This limitation shall apply
for as long as, during the taxable year, there is an interest expense incurred ▪ regardless of whether a tax arbitrage scheme was entered into by the
on one side and an interest income earned on the other side, which interest taxpayer or
income had been subjected to final withholding tax. ▪ regardless of the date of the interest-bearing loan and the date when
the investment was made,
FACTS: for as long as, during the taxable year, there is an interest expense
1. This ruling refers to the letter by PNB & Atty. Julian B. Soriano with incurred on one side and an interest income earned on the other side,
reference to Section 34(B) of the Tax Reform Act of 1997 which interest income had been subjected to final withholding tax.
▪ disallowing as a deduction a portion of bank's interest expense
representing 41% of interest income subjected to final tax.
47
Taxes
62. CIR vs Lednicky (Myling)

31 July 1964 | Reyes, J.B.L., J | Deductions - Taxes paid to Foreign Govts
48
PETITIONER: Commissioner of Internal Revenue deduction. When the CIR failed to answer the claim for refund, the
RESPONDENTS: V. E Lednicky and Maria Valero Lednicky Lednickys filed a petition with the CTA for the same.
4. The Lednickys filed their local ITRs for 1957 in February 1958. In 1959,
SUMMARY: V. E. Lednicky and Maria Valero Lednicky are husband and they filed an amended return for 1957 claiming deductions representing
wife both American citizens residing in the Philippines and have derived all taxes paid to the U.S. Government on income derived wholly from
their income from Philippine sources for the taxable years under question. Philippine sources. Again, the couple sought a refund for the overpayment.
They filed their income tax returns (ITR) in the Philippines for the years 1955, 5. The CTA decided for the Lednickys which the CIR appealed with the
1956 and 1957 on the next succeeding years as required by law. However, they Court.
also subsequently amended their ITRs for said years for deductions from the
payment of federal income taxes to the US government on the same incomes. ISSUES:
Refunds were claimed for the amendments with the CTA which the CTA granted 1. Can a citizen of the United States residing in the Philippines, who derives
but which the CIR is appealing with the Court. income wholly from sources within the Republic of the Philippines, may
The Court reversed the CTA and disallowed the refunds claimed by the deduct from his gross income the income taxes he has paid to the United
Lednickys. The Court disagreed with the Lednicky and the CTA’s interpretation States government for the taxable year on the strength of section 30 (c-1)
of Section 30 (c-1-b). According to the Lednickys and the CTA, said provision of the Philippine Internal Revenue Code? NO
is to be read as allowing the deduction of taxes paid to a foreign government at
all times either as a deduction or as a tax credit at the option of the taxpayer. The RATIO:
Court however read said provision to mean that deductions of taxes paid to 1. The Lednickys premised their claim for refund under section 30 (c-1) of
foreign governments may only be allowed only if the taxpayer qualifies for a tax the Philippine Internal Revenue Code copied below:
credit under Section 30 (c-3) and (c-4). In this case, the Lednickys do not qualify "SEC. 30. Deduction from gross income. — In computing net income there
for a tax credit as their income is derived wholly from sources within the shall be allowed as deductions —
Philippines. xxx
(c) Taxes:
DOCTRINE: An alien resident's right to deduct from gross income the income "(1) In general. — Taxes paid or accrued within the taxable year, except —
taxes he paid to a foreign government is given only as an alternative to his right "(A) The income tax provided for under this Title;
to claim a tax credit for such foreign income taxes; so that unless he has a right "(B) Income, war-profits, and excess profits taxes imposed by the authority
to claim such tax credit if he chooses, he is precluded from said deduction. of any foreign country; but this deduction shall be allowed in the case of a
taxpayer who does not signify in his return his desire to have to any extent
the benefits of paragraph (3) of this subsection (relating to credit for taxes of
foreign countries);
FACTS:
2. In ruling for the Lednickys, the CTA upheld the deductions from the taxes
1. V. E. Lednicky and Maria Valero Lednicky are husband and wife both
paid to the US government because of the undenied fact that the Lednickys
American citizens residing in the Philippines and have derived all their
did not signify in their ITRs a desire to avail of the said tax credits.
income from Philippine sources for the taxable years under question.
3. However, the Court agrees with the CIR that Section 30 (c)(1)(B) of the
2. In February 1956, the Lednickys filed their domestic ITR for 1955. In that
Internal Revenue Act shows the law’s intent that the right to deduct income
year of 1955, the Lednickys filed with the US Internal Revenue Agent in
taxes paid to foreign government from the taxpayer’s gross income is given
Manila their Federal ITR for 1947, 1951, 1952, 1953 and 1954 on income
only as an alternative or substitute to his right to claim a tax credit for such
from Philippine sources on a cash basis. In August 1958, the couple
foreign income taxes under section (c-3) and (c-4) copied as follows:
amended their Philippine ITR for 1955 to include deductions from US
"Par. (c) (3) Credits against tax for taxes of foreign countries. —If the
Federal income taxes, interest accrued, and exchange and bank charges.
taxpayer signifies in his return his desire to have the benefits of this
They filed a refund for the amendment which they brought with the CTA.
paragraph, the tax imposed by this Title shall be credited with —
3. The couple filed their income tax returns (ITR) in the Philippines for the
(A) . . .
years 1956 in March 1957. In March 1959, they amended their ITR for
(B) Alien resident of the Philippines. — In the case of an alien resident of
1956 to reflect a claimed deduction paid in 1956 to the US government as
the Philippines, the amount of any such taxes paid or accrued during the
federal income tax for 1956. They subsequently requested a refund for the
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taxable year to any foreign country, if the foreign country of which such b. As between the Philippines, where the income was earned and
alien resident is a citizen or subject, in imposing such taxes, allows a where the taxpayer is domiciled, and the United States, where that
similar credit to citizens of the Philippines residing in such country;" income was not earned and where the taxpayer did not reside, it is
indisputable that justice and equity demand that the tax on the
"Par. (c) (4) Limitation on credit. — The amount of the credit taken under income should accrue to the benefit of the Philippines. Any relief
this section shall be subject to each of the following limitations: from the alleged double taxation should come from the United
(A) The amount of the credit in respect to the tax paid or accrued to any States, and not from the Philippines, since the former's right to
country shall not exceed the same proportion of the tax against which such burden the taxpayer is solely predicated on his citizenship,
credit is taken, which the taxpayer's net income from sources within such without contributing to the production of the wealth that is being
country taxable under this Title bears to his entire net income for the same taxed.
taxable year; and c. This conforms with the fundamental doctrine of income taxation
(B) The total amount of the credit shall not exceed the same proportion of that the right of a government to tax income emanates from its
the tax against which such credit is taken, which the taxpayer's net income partnership in the production of income, by providing the
from sources without the Philippines taxable under this Title bears to his protection, resources, incentives, and proper climate for such
entire net income for the same taxable year." production
d. The Lednickys interpretation likewise places a resident alien with
4. Therefor, unless the alien resident has a right to claim such tax credit under only domestic sources of income in an equal, if not in a better,
30 (c-3) and (c-4), he is precluded from deducting the foreign income taxes position than one who has both domestic and foreign sources of
from his gross income. income, a situation which is manifestly unfair and short of logic.
5. If Section 30 (c-1-B) was read following the Lednickys and the CTA’s e. Finally, to allow an alien resident to deduct from his gross income
interpretation, it would mean that foreign taxes would always be whatever taxes he pays to his own government amounts to
deductible. conferring on the latter power to reduce the tax income of the
a. Instead, said section should be read as - If the taxpayer does not Philippine government simply by increasing the tax rates on the
signify his desire to avail of the tax credit, the alternative is that alien resident. Such a result is incompatible with the status of the
the taxpayer may signify his desire to avail of the tax credit. Philippines as an independent and sovereign state.
Otherwise, the foreign taxes will always be deductible and should
have not been included in the list of non-deductibles or have been RULING: IN VIEW OF THE FOREGOING, the decisions of the Court of Tax
limited to taxes on income from sources outside the Philippines. Appeals are reversed, and the disallowance of the refunds claimed by the
b. If the intent of the law was the deduction of foreign income taxes respondents Lednicky is affirmed, with costs against said respondents-appellees.
regardless of the right to a tax credit, it is the right to a tax credit
which should be conditioned on the taxpayer’s waiving the SEPARATE OPINIONS: None
deduction. The right to reduction should have been absolute, and
the right to a credit conditioned upon the taxpayer’s claiming any
deduction.
c. The Lednickys are not entitled to tax credit because all their
income is derived from Philippine sources.
6. The Lednickys allege double taxation if they are not allowed to deduct the
income taxes they are required to pay to the US government in their
Philippine ITRs.
a. However, the Court held that double taxation only becomes
obnoxious when the taxpayer is taxed twice for the benefit of the
same government entity. In this case, although the Lednickys are
paying two taxes on the same income, the Philippine government
only receives the proceed of one tax.
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63. BIR Ruling 123-13 (Kua) processing of any and all mineral resources as well as of operating mines and of
25 March 2013 | CIR Kim Jacinto Henares | Deductions - Taxes prospecting, milling, concentrating, converting, melting, treating, refining, preparing for
market manufacturing, buying, selling, exchanging and otherwise producing and dealing
in all kinds of ores, metals and minerals, hydrocarbons, acids and chemicals, and in the
PETITIONER: Commissioner of Internal Revenue products and by-products and by-products of every kind and description; that
RESPONDENTS: Cekas Development Corporation considering the nature of its business, Cekas often enters into V A T zero-rated
transactions in the ordinary course of its business.
SUMMARY:
3. Cekas obtained passed-on input V A T from its purchases that can be used to offset
Cekas Development Corporation (Cekas), a VAT registered corporation, enters into against its output VAT liabilities; that Cekas is a VAT- registered taxpayer and because
VAT zero-rated transactions in the ordinary course of its business. Since its transactions its transactions do not result to any output VAT liability, it’s input VAT from its
do not result in any output VAT liability, Cekas is not able to apply or utilize its input purchases has remained unapplied on its books and has accumulated over the years; that
VAT on purchases from various suppliers. Cekas intended to file a claim for refund or as of 31 December 2011, the unapplied input tax (asset account) has already amounted
tax credit of its unutilized input VAT but was not able to do so due to the expiration of to P1,961,767.00; that Cekas intended to vail of the refund for the said amount but was
the two-year period to file the claim. The issue is WON Cekas can expense outright the not able to do so due to the prescription of the period to file the same.
unutilized input VAT after the expiration of the two-year period to file a claim for refund.
Held: NO. Under Section 112 (A) of the Tax Code, unutilized creditable input taxes ISSUES:
attributable to VAT zero-rated sales can only be recovered through the application for 1. WON Cekas can expense outright the unutilized input VAT after the
refund or tax credit. Nowhere in the Tax Code can a specific provision be found expiration of the two-year period to file a claim for refund—NO
expressly providing for another mode of recovery of unutilized input VAT, such as
through outright deduction or expense for income tax purposes.
RATIO:
DOCTRINE:
1. NO. Under Section 112 (A) of the Tax Code, unutilized creditable input
Unutilized input VAT attributable to VAT zero-rated sales cannot be expensed taxes attributable to VAT zero-rated sales can only be recovered through
outright (for income tax purposes) after the expiration of the two- year period to file the application for refund or tax credit. Nowhere in the Tax Code can a
a claim for refund. specific provision be found expressly providing for another mode of
recovery of unutilized input VAT, such as through outright deduction or
expense for income tax purposes.
2. Section 110(B)8, in relation to Section 112(A)9 of the 1997 Tax Code
provides for the remedy of a taxpayer to recover the unapplied accumulated
input VAT arising from zero-rated transactions.
3. As regards the request that, in the purchase of goods and services the
amount to be used as basis for expanded withholding tax shall be the
FACTS: purchase amount net of VAT, the same is hereby granted. Revenue
Memorandum Circular No. 72-04 clarifies that the basis of CWT to a VAT
registered supplier of goods and services shall be the gross amount paid
1. This was an answer to a letter of Rafael R. Magsaysay, Chief Executive Officer, dated exclusive of net of VAT.
October 15, 2012, requesting on behalf on Cekas Development Corporation (“Cekas”)
confirmation of the opinion that the accumulates and unapplied input value-added tax SEPARATE OPINIONS: None
(VAT) arising from its purchase of goods and services after the expiration of the two (2)
year prescriptive period may be expensed outright, and that the basis of computing the
expanded withholding tax (EWT) on such purchase of goods and services is the total
amount appearing in the invoice/official receipt net of VAT.
2. Cekas is registered with the SEC on September 10, 2007. Its primary purpose is to carry
on the business of exploration, development, utilization, exploration, quarrying and
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Losses substantiated them by sufficient evidence. CTA En Banc likewise denied the
64. Tambunting Pawnshop, Inc. vs. CIR (Pamie) petition for review.
July 29, 2013 | Bersamin, J. | Deductions - Losses 6. Tambunting argues that CTA should have allowed its deductions because:
a. it had been able to point out the provisions of law authorizing the
PETITIONER: Tambunting Pawnshop, Inc. deductions;
RESPONDENTS: Commissioner of Internal Revenue b. that it proved its entitlement to the deductions through all the
documentary and testimonial evidence presented in court;
SUMMARY: Tambunting Pawnshop was assessed for deficiency tax. It protested c. that the provisions NIRC 1997, governing the types of evidence to
saying that it was entitled to tax deductions on losses incurred on auction sales, prove a claim for deduction of expenses, were applicable because
necessary and ordinary business expenses, and due to a fire and theft. Issue: Was the law took effect during the pendency of the case in the CTA;
Tambunting able to prove that it is entitled to tax deductions? - NO. The SC held d. that CTA had allowed deductions for ordinary and necessary
that failure to submit proper proof and to substantiate claims was fatal to the expenses on the basis of cash vouchers issued by the taxpayer or
claim. Tambunting submitted its “Subasata” and “Rematado” books to prove certifications issued by the payees evidencing receipt of interest on
losses on auction sales. These documents were not the evidence required by law loans as well as agreements relating to the imposition of interest;
because they did not reflect the true amounts of proceeds and capital respectively. e. that it had thus shown beyond doubt that it had incurred the losses
Also, to prove losses on ordinary and necessary business expenses, Tambunting in its auction sales; and
relied on withholding tax returns, cash vouchers, lessor’s certifications, and the f. that it substantially complied with the requirements of Revenue
contracts of lease but the law requires official receipts or invoices to substantiate Regulations No. 12-77 on the deductibility of its losses
such claims. Finally, to prove Tambunting's claim for deductions due to losses
from fire and theft it submitted certifications from the police and fire stations, an ISSUES:
accounting of its losses, and a list of property lost but, in this case, what was 1. Which NIRC is applicable in this case? - 1977
required was a sworn statement required by RR 12-77. 2. Did Tambunting prove that it is entitled to tax deductions? - NO,
evidence submitted not enough to prove claim
DOCTRINE: The rule that tax deductions, being in the nature of tax exemptions,
are to be construed in strictissimi juris against the taxpayer is well settled. RATIO:
Corollary to this rule is the principle that when a taxpayer claims a deduction, he Issue #1: Because this case involved assessments relating to transactions incurred by
must point to some specific provision of the statute in which that deduction is Tambunting prior to the effectivity of National Internal Revenue Code of 1997, the
authorized and must be able to prove that he is entitled to the deduction which provisions governing the propriety of the deductions was NIRC of 1977.
the law allows.
Issue #2
Tambunting claims tax deductions because of alleged losses in its auction sales,
FACTS: business expenses, fire and theft.
1. BIR issued assessment notices and demand letters assessing Tambunting Loss in auction sales
Pawnshop Inc. for deficiency percentage tax, income tax and compromise 1. To prove the loss on auction sale, Tambunting submitted in evidence its
penalties for taxable year 1997. "Rematado" and "Subasta" books and the "Schedule of Losses on Auction
2. Tambunting instituted an administrative protest against the assessment Sale".
notices with the Commissioner of Internal Revenue, seeking tax deductions a. The "Rematado" book contained a record of items foreclosed by the
because of alleged losses incurred in auction sales, necessary and ordinary pawnshop
business expenses, fire and theft. b. The "Subasta" book contained a record of the auction sale of pawned
3. Tambunting then brought a petition for review in the CTA, citing the inaction items foreclosed.
of the CIR on its protest within the 180-day period prescribed by law. 2. However, the amounts appearing in the "Rematado" book do not reflect the
4. CTA rendered a decision, where it still held Tambunting liable for deficiency total capital of Tambuning as it merely reflected the amounts loaned to the
income tax for 1997. pawnee. Likewise, the amounts appearing in the "Subasta" book, are not
5. Tambunting filed a petition for review in the CTA En Banc, arguing that the representative of the amount of sale made during the auctions since not all
First Division erred in disallowing its deductions on the ground that it had not articles are eventually sold.
52
3. In this case, the "Subasta" book is not sufficient to substantiate the claimed interpretation of the law. In order that the cash vouchers may be given
deduction of loss on auction sale. The contents in the "Rematado" and probative value, these must be validated with official receipts.
"Subasta" books do not reflect the true amounts of the total capital and the 2. The law now requires that a person who is subject to an internal revenue tax
auction sale. shall issue receipts or invoices, prepared at least in duplicate. It imposed a
4. The evidence is neither conclusive to sustain its claim of loss on auction sale. responsibility on the purchaser to keep the original copy of the receipt for
Also, Tambunting should not rely on the weakness of CIR’s evidence but on three years from the close of the taxable year in which the receipt was issued.
the strength of its own documents. The facts essential for the proper b. The rationale behind this is the duty of the taxpayer to keep adequate
disposition of the said controversy were available to Tambunting. It failed to records of each transaction entered into in the conduct of its
dispute the same with clear and convincing proof. business. So that when their books of accounts are subjected to a tax
5. The rule that tax deductions, being in the nature of tax exemptions, are to be audit examination, all entries therein could be shown as adequately
construed in strictissimi juris against the taxpayer is well settled. Corollary to supported and proven as legitimate business transactions.
this rule is the principle that when a taxpayer claims a deduction, he must c. Hence, Tambunting’s claim that the NIRC of 1977 did not require
point to some specific provision of the statute in which that deduction is substantiation requirements is erroneous.
authorized and must be able to prove that he is entitled to the deduction 4. Tambunting’s management and professional fees were disallowed as these
which the law allows. were supported merely by cash vouchers, which the Court’s Division
a. An item of expenditure must fall squarely within the language of the correctly found to have little probative value.
law in order to be deductible. A mere averment that the taxpayer has 5. Tambunting did not discharge its burden of substantiating its claim for
incurred a loss does not automatically warrant a deduction from its deductions due to the inadequacy of its documentary support of its claim.
gross income a. Its reliance on withholding tax returns, cash vouchers, lessor’s
6. Tambunting did not properly prove that it had incurred losses. certifications, and the contracts of lease was futile because such
documents had scant probative value.
Business expenses b. The law required Tambunting to support its claim for deductions
1. The requisites for the deductibility of ordinary and necessary trade or with the corresponding official receipts issued by the service
business expenses, like those paid for security and janitorial services, providers concerned.
management and professional fees, and rental expenses, are that:
a. the expenses must be ordinary and necessary; Loss due to fire and theft
b. must have been paid or incurred during the taxable year; 1. What were required were for Tambunting to submit the sworn declaration of
c. must have been paid or incurred in carrying on the trade or business loss mandated by Revenue Regulations 12-77.
of the taxpayer; and 2. The sworn declaration of loss was necessary to forewarn the BIR that it had
d. must be supported by receipts, records or other pertinent papers suffered a loss whose extent it would be claiming as a deduction of its tax
2. In denying Tambunting’s claim for deduction, CTA explained that the liability, and thus enable the BIR to conduct its own investigation of the
security/janitorial expenses paid to Pathfinder Investigation were not duly incident leading to the loss.
substantiated by Tambunting. 3. Indeed, the documents Tambunting submitted to the BIR could not serve the
a. The certification issued by Mr. Balisado was not the proper purpose of their submission without the sworn declaration of loss.
document required by law to substantiate its expenses. 4. The documents submitted were:
b. The official receipts or invoices should have been presented to prove a. the certification from the Bureau of Fire Protection in Malolos;
its claim as provided for under the NIRC of 1977 b. the certification from the Police Station in Malolos;
3. While the rental payments were subjected to the applicable expanded c. the accounting entry for the losses; and
withholding taxes, such returns are not the documents required by law to d. the list of properties lost
substantiate the rental expense.
a. They should have submitted official receipts to support its claim. ____________________
Provisions of the law showing what documents needed to prove loss:
Probative value of Cash Vouchers 1. NIRC 1977: Section 29(d) (3)
1. The trend before was to allow deductions based on cash vouchers which are a. (3) Proof of loss. — In the case of a non-resident alien individual or
signed by the payees. However, latest jurisprudence has deviated from such foreign corporation, the losses deductible are those actually
53
sustained during the year incurred in business or trade conducted

within the Philippines, and losses actually sustained during the year
in transactions entered into for profit in the Philippines although not
connected with their business or trade, when such losses are not
compensated for by insurance or otherwise. The Secretary of
Finance, upon recommendation of the Commissioner of Internal
Revenue, is hereby authorized to promulgate rules and regulations
prescribing, among other things, the time and manner by which the
taxpayer shall submit a declaration of loss sustained from casualty
or from robbery, theft, or embezzlement during the taxable year:
2. The IRR for deductible losses are found in Revenue Regulations No. 12-77,
as follows:
a. SECTION 1. Nature of deductible losses.— Any loss arising from
fires, storms or other casualty, and from robbery, theft or
embezzlement, is allowable as a deduction under Section 30 (d) for
the taxable year in which the loss is sustained.
b. SECTION 2. Requirements of substantiation. — The taxpayer
bears the burden of proving and substantiating his claim for
deduction for losses allowed under Section 30(d) and should comply
with the following substantiation requirements:
i. A [sworn] 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.
ii. Proof of the elements of the loss claimed, such as the actual
nature and occurrence of the event and amount of the loss.
c. SECTION 4. Proof of loss.— In general. The declaration of loss,
being one of the essential requirements of substantiation of a claim
for a loss deduction, is subject to verification and does not constitute
sufficient proof of the loss that will justify its deductibility for
income tax purposes. [...] The failure to submit the said declaration
of loss within the period prescribed in these regulations will result
in the disallowance of the casualty loss claimed in the taxpayer's
income tax return.
d. To support the deduction for losses arising from robbery, theft or
embezzlement, the taxpayer must prove by credible evidence all the
elements of the loss, the amount of the loss, and the proper year of
the deduction. The taxpayer bears the burden of proof, and no
deduction will be allowed unless he shows the property was stolen,
rather than misplaced or lost.
54
65. RR 12-77 (Anne) a. Declaration of loss filed with the CIR or his deputies within a
October 6, 1977 | BIR | Deductions - Losses certain period after occurrence.
b. Proof of the elements of loss claimed, the actual nature and
SUMMARY: occurrence of the event and the amount of the loss.
This Revenue Regulation provides for the substantiation requirements for losses 3. Sec.3. Within 45 days from occurrence, taxpayer who intends to claim
arising from casualty, robbery, theft, or embezzlement. Loss from fires, storms deduction shall file a sworn declaration of loss with the nearest Revenue
or other casualty, robbery, theft, and embezzlement is allowed as deduction District Office (RDO) which shall contain:
for the taxable year in which the loss is sustained. There are 2 requirements for a. Nature of the event giving rise to the loss and time of its occurrence;
substantiation: (1) declaration of loss filed with the CIR or his deputies; (2) b. Description of the damaged property and its location;
proof of the elements of loss claimed, the actual nature and occurrence of the c. Items needed to compute the loss such as cost or other basis;
event and the amount of the loss. Taxpayer claiming deduction shall file a sworn depreciation allowed if any; value of property before and after the
declaration of loss with the nearest RDO within 45 days from occurrence. event; cost of repair;
Declaration of loss is subject to verification and is not sufficient proof of loss. It d. Amount of insurance or other compensation received or receivable;
must be accompanied with evidence gathered immediately after the event 4. Evidence to support may be purchase contracts, deeds, pictures, etc.
causing the loss. The amount is limited to the difference of the value of the 5. Sec.4. Declaration of loss is subject to verification and is not sufficient proof
property immediately before the casualty and its value immediately after. of loss. It must be accompanied with evidence gathered immediately after
This shall not exceed the cost or other adjusted basis of the property or depreciated the event causing the loss. For pre-audit purposes, a taxpayer claiming the
cost in case it is used in business, reduced by any insurance or compensation deduction shall attach to his return a copy of his declaration of loss showing
received. the imprint of receipt by the revenue receiving office. Failure to do will result
in the disallowance of the loss in the pre-audit of his income, without
Formula for computation: prejudice to the loss being taken up upon the investigation of the return.
Value before - Value after - Insurance received= Deductible Loss 6. For casualty loss, photographs before the damage and after will be
helpful to establish the condition and value of the property. Photos after
repair, restoration, or replacement will also be helpful. Taxpayer should be
1. Sec. 1. Loss from fires, storms or other casualty, robbery, theft, and prepared to submit documentary proofs, such as cancelled checks, vouchers,
embezzlement is allowed as deduction for the taxable year in which the loss receipts to prove cost.
is sustained. 7. For Robbery, Theft, or Embezzlement, taxpayer must prove by credible
a. Casualty – complete or partial destruction of property resulting evidence all the elements of the loss, the amount of loss, and the year of
from an identifiable event of a sudden, unexpected, or unusual deduction. No deduction shall be allowed unless it is shown that the property
nature. It denotes accident, some sudden invasion by hostile agency was stolen, not misplaced or lost. Mere disappearance or mere error or
and excludes progressive deterioration through a steadily operating shortage in accounts is not enough. Although police report is not enough,
cause. failure to make report can be taken against the taxpayer.
b. Theft – criminal appropriation of another’s property for the use of 8. Sec. 5. The amount is limited to the difference of the value of the property
the taker. immediately before the casualty and its value immediately after. [Value
c. Embezzlement – fraudulent appropriation of another’s property by before casualty – Value after = Deductible loss]
a person to whom it had been entrusted or into whose hands it has 9. This shall not exceed the cost or other adjusted basis of the property or
lawfully come. depreciated cost in case it is used in business, reduced by any insurance or
2. Sec. 2. Requirement of substantiation: compensation received.
55
10. Method of valuation: The Fair Market Value of the property before and after b. This does not apply to losses reflected in the inventories of taxpayer.
the casualty shall be ascertained by an impartial and competent appraisal. It [Value before theft – Value after theft (always 0) – insurance
shall recognize the effects of any general market decline affecting undamaged received = deductible loss]
as well as damaged property, which may have occurred simultaneously with 16. Sec. 7: If a casualty may result in a loss and happened in the year where there
the casualty, in order to limit the deduction only to actual loss. is a claim for reimbursement and there is a reasonable prospect of recovery,
[Value Before - Value After - Insurance received= Deductible Loss] no portion of loss for reimbursement may be sustained, until it can be
11. Cost of repairs is acceptable as evidence of loss if it is shown that: ascertained whether reimbursement will be received. This is a question of
a. Repairs are necessary to restore the property to its condition before fact. Taxpayer may have settled, adjudicated or abandoned the claim. He
casualty; must produce objective evidence to prove entitlement.
b. Amount spent is not excessive 17. Sec.8. This is applicable to losses on or after approval of regulation. For those
c. Value or property after repairs does not exceed value before before the approval, declaration of loss must be filed within 45 days from
casualty. approval.
12. For property used in business, which was totally destroyed, the net book
value immediately preceding the casualty shall be the basis of loss, also
reduced by an insurance or compensation received.
[Cost – Accumulated Depreciation –Insurance recovered = Deductible loss]
13. In case of partial destruction of property used in business, replacement
cost to restore property should be used to compute loss, but it cannot be
more than the net book value before the casualty. Any excess over the
NBV should be capitalized subject to depreciation. STEPS:
a. Cost – Accumulated Depreciation = Net Book Value (NBV)
b. NBV – Replacement Cost = Excess of replacement cost to be
capitalized
c. NBV before casualty + excess = New cost basis.
d. Yearly depreciation = Replacement cost/estimated remaining useful
life.
14. Farm losses (Sustained by farmers)
a. Loss of livestock – allowed to the extent of cost only if no
inventories are taken into account in determining the income from
the business of farming.
b. Other farm losses – when ground is prepared and planted or stocked
and its value is completely destroyed by natural causes, the cost of
preparation, planting, and stocking up to the time of disaster shall be
deductible as loss in the year when it occurred.
15. Sec. 6. The determination of deductible loss for robbery, theft, and
embezzlement is determined consistently in the manner prescribed in SEC 5.
a. The FMV of the property immediately after theft shall be considered
0.
56
66. RMO 31-2009 (October 16, 2009) (Marcelo) and should be kept by the taxpayer as part of his tax records,
Commissioner Sixto E. Esquivas IV and be made available to the duly-authorized Revenue
Officer(s), upon audit of his Income Tax return and the
SENDER: Commissioner Sixto E. Esquivas IV declaration of loss.
A taxpayer engaged in trade or business may be entitled to claim, as
SUMMARY: (From the BIR website) business deductions, casualty losses incurred for properties actually used in
REVENUE MEMORANDUM ORDER NO. 31-2009 issued on October the business enterprise that were damaged and reported as losses in the
23, 2009 prescribes the policies and guidelines for the declaration and appropriate declaration filed with the BIR. Said properties must have been
reporting of casualty losses incurred by taxpayers as a result of the properly reported as part of the taxpayer’s assets in the taxpayer’s
destruction brought about by Typhoons “Ondoy” and “Pepeng”. accounting records and financial statements in the year immediately
preceding the occurrence of the loss, with the costs of acquisition clearly
The requirements for the filing of claims of casualty loss are the following: established and recorded. Otherwise, the claim for deduction shall not be
a. Sworn Declaration of Loss to be filed within forty-five (45) days allowed.
after the date of the event, stating the following:
i. Nature of the event that gave rise to such loss(es), and the time The recovery of casualty losses through insurance claims shall be governed
of its occurrence; by the guidelines set forth in Revenue Regulations No. 12-77. Moreover,
ii. Description and location of the damaged property(ies); the amount of loss that shall be compensated by insurance coverage should
iii. Items needed to compute the loss(es), such as: i) cost or other not be claimed as a deductible loss. If the insurance proceeds exceed the net
basis of the property(ies); ii) depreciation allowed, if any; iii) book value of the damages assets, such excess shall be subject to the regular
value of the property(ies) before and after the event; iv) cost of Income Tax, but not to the Value-Added Tax, since the indemnification is
repair. not an actual sale of goods by the insured company to the insurance
iv. Amount of insurance or other compensation received or company.
receivable.
v. The Sworn Declaration of loss must be supported by the The deduction of assets as capital losses must be properly recorded in
following documents: accounting reports, with the adjustment of the applicable accounts. In the
1. Financial Statement for the year immediately event of a total loss / destruction of property(ies) used in the business
preceding the event; and, enterprise, the net book value (costs less accumulated depreciation)
2. Copies of the Insurance Policy(ies), if any, for the immediately preceding the natural disaster should be used as the basis in
concerned property(ies). claiming casualty losses, and shall be reduced by the amount of insurance
b. Proof of the elements of the loss(es) claimed, such as, but not proceeds received.
limited to, the following:
i. Photographs of the property(ies) taken before the typhoon and The restoration of the damaged property, or the acquisition of new property
after the typhoon, showing the extent of the damage sustained
ii. Documentary evidence for determining the cost or valuation of to replace it, must be properly recorded and recognized as either: a) a repairs
the damaged property(ies), such as, but not limited to: expense; or, b) a capitalized asset. The appropriate treatment of this property
cancelled checks, vouchers, receipts, and other evidence of shall be governed by the financial accounting and tax accounting rules, and
costs must take into account the nature of the transaction, the value of the amounts
iii. Insurance policy, in the event that there is an insurance involved, and other factors
coverage for the property(ies)
iv. Police report, in cases of robbery/theft during the typhoon Source: https://www.bir.gov.ph/images/bir_files/old_files/pdf/47679rmo09_31.pdf
and/or as a consequence of looting
Failure to report a theft or robbery to the police can be held
against the taxpayer. However, a mere report of an alleged theft OTHER MATTERS:
or robbery to the police authorities is not considered as Requisites for Deductibility
conclusive proof of the loss arising therefrom. 1. A taxpayer engaged in trade or business may be entitled to claim, as
All documents and other evidence submitted to prove such loss(es) business deductions, casualty losses incurred for properties actually used in
shall be subject to verification by the concerned BIR office, the business enterprise that were damaged and reported as losses in the
57
appropriate declaration filed with the BIR. The loss of assets not used in the The appropriate treatment of this property shall be governed by the financial
course of business and / or are personal in nature shall therefore not be accounting and tax accounting rules, and must take into account the nature of the
allowed. transaction, the value of the amounts involved, and other factors.
2. Properties that shall be reported as casualty losses must have been properly
reported as part of the taxpayer’s assets in the taxpayer’s accounting records Monitoring and Reporting of Claims for Casualty Losses
and financial statements in the year immediately preceding the occurrence 1. All revenue personnel are enjoined to exert every effort to assist taxpayers
of the loss, with the costs of acquisition clearly established and recorded. who wish to file claims for casualty losses.
Otherwise, the claim for deduction shall not be allowed. 2. All RDOs should ensure that samples of the format to be used in the
3. The recovery of casualty losses through insurance claims shall be governed preparation of the Sworn Declaration of Loss are readily available upon
by the guidelines set forth in Revenue Regulations (RR) No. 12-77. request of the taxpayer. The RDOs must initiate a campaign to inform the
Moreover, the amount of loss that shall be compensated by insurance taxpaying public within their respective jurisdictions of the policies and
coverage should not be claimed as a deductible loss. guidelines for the filing of claims for casualty losses.
a. If the insurance proceeds exceed the net book value of the damages 3. All RDOs shall submit to the Deputy Commissioner (Operations Group),
assets, such excess shall be subject to the regular Income Tax, but through the concerned Regional Director, copy furnished the Office of the
not to the Value-Added Tax, since the indemnification is not an Senior Deputy Commissioner, a Report on Casualty Losses for the month of
actual sale of goods by the insured company to the insurance October 2009, using the format prescribed in Annex B of this Order, not
company. later than November 10, 2009.
4. In addition to the policies prescribed in RR No. 12-77 relative to the 4. A Final Report on Casualty Losses must be submitted, following the
substantiation of casualty losses arising from typhoons and other natural aforesaid channels, not later than December 10, 2009. A Consolidated
disasters, the following guidelines shall be observed: Report shall then be submitted by the Deputy Commissioner (Operations
a. The deduction of assets as capital losses must be properly recorded Group) to the Commissioner, not later than December 31, 2009.
in accounting reports, with the adjustment of the applicable
accounts. The accounting entry to record this action is illustrated as
follows:
Debit: Casualty Loss P XXX,XXX

Accumulated Depreciation XXX,XXX
Credit: Property / Asset Account P XXX, XXX
In the event of a total loss / destruction of property(ies) used in the business

enterprise, the net book value (costs less accumulated depreciation) immediately
preceding the natural disaster should be used as the basis in claiming casualty losses,
and shall be reduced by the amount of insurance proceeds received.
b. The restoration of the damaged property, or the acquisition of new

property to replace it, must be properly recorded and recognized as
either: a) a repairs expense; or, b) a capitalized asset.
58
Forex losses
FACTS:
67. BIR Ruling 206-90 (October 30, 1990) (Marian) 1. This refers to the letter by petitioner in behalf of Porcelana Mariwasa (PMI)
Oct. 30, 1990 | Jose Ong, Commissioner | Deductions - Losses → Severance Test asking to confirming their opinion that the foreign exchange loss incurred
Theory by PMI is a deductible loss in year 1990
2. PMI is a corporation under PH laws which had existing US Dollar loans from:
a. Noritake Company → USD 7,640,000
PETITIONER: Representative of PMI (Porcelana Mariwasa)
b. Toyota Corporation → USD 3,054,000
AUTHOR OF RULING: Commissioner Ong
3. In June 1989, parties agreed to convert the said dollar denominated loans into
SUMMARY: Representative of PMI (Porcelana Mariwasa Inc.) claims that the pesos at the exchange rate prevailing on June 30, 1989;
losses from conversion from USD to PHP of their loans from Noritake Company & 4. In December 1989, both agreements were approved by the Central Bank (CB)
Toyota Corp. can be gleaned as deductions on gross income for the year 1990. Their subject to the submission of a copy each of the signed agreements
basis for this claim is the fact that the Central Bank has approved their agreement incorporating the conversion
with Noritake and Toyota to denominate the loan in Pesos. PMI Rep now seeks the a. Drafts were sent to the CB
confirmation of their opinion that the losses from forex conversion is deductible. 5. In June 1990, petitioner sent to the CB the signed agreements and petitioner
Commissioner Ong denied the confirmation of PMI Rep’s opinion because: contends that:
1. Severance Test Theory → Gains (income) could only be taxed when a a. in the case of your client, the resultant loss on conversion of US
dollar denominated loans to peso is more than a shrinkage in value
disposition of the property occurred and severance of the gain from the of money;
original capital invested in the property is done. [aka iba na yung income b. that the approval by the Central Bank and the signing by the parties
sa capital]. This rule on income applies to losses. of the agreements covering the said conversion established the loss,
2. In forex, gains and losses are usual consequences of fluctuations, the after which, the loss became final and irrevocable, so that
reckoning point to deem gain/loss from forex is actual remittance of recoupment is reasonably impossible;
scheduled amortization consisting of principal and interests payment on a c. that having been fixed and determinable, the loss is no longer
foreign loan. [aka dapat nagbayad ka na ng utang & nag incur ka na ng loss susceptible to change, hence, it could fairly be stated that such has
for it to be deductible from your gross income] been sustained in a closed and completed transaction
d. *in other words, petitioner contends that conversion of USD to PHP
DOCTRINE: Foreign exchange loss is deductible only if the same had been realized. led to losses which, after CB’s signing, has been deemed realized
Without realization, there can be no loss. There is realization of loss in the year it is and deductible from gross income
actually sustained.
59
ISSUES:
1. WON the loss from foreign exchange conversion is deemed realized and
deductible from gross income for income tax purposes → No.
RATIO:
1. The annual increase in value of an asset is not taxable income because such
increase has not yet been realized. The increase in value i.e., the gain, could
only be taxed when a disposition of the property occurred which was of such
a nature as to constitute a realization of such gain, that is, a severance of the
gain from the original capital invested in the property. The same conclusion
obtains as to losses. The annual decline in the value of property is not
normally allowable as a deduction. Hence, to be allowable the loss must be
realized.
2. When foreign currency acquired in connection with a transaction in the
regular course of business is disposed, ordinary gain or loss results from the
fluctuations.
a. The loss is deductible only for the year it is actually sustained.
b. No taxation event has as yet been consummated prior to the
remittance of the scheduled amortization.
c. Accordingly, petitioner’s request for confirmation of aforesaid
opinion is hereby denied considering that foreign exchange losses
sustained as a result of conversion or devaluation of the peso vis-a-
vis the foreign currency or US dollar and vice versa but which
remittance of scheduled amortization consisting of principal and
interests payment on a foreign loan has not actually been made are
not deductible from gross income for income tax purposes
SEPARATE OPINIONS:
CONCURRING:
60
68. BIR Ruling No. 144-85 (Sel) 4. The annual decrease in the value of property is not normally allowable as a
August 26, 1985 | Ruben Ancheta | Deductions - Losses loss. Hence, to be allowable, the loss must be realized first.
PETITIONER: 5. When foreign currency acquired in connection with a transaction in the
RESPONDENTS: Ruben Ancheta (Acting Commissioner) regular course of business is disposed of ordinary gain or loss results from
the fluctuations.
SUMMARY: In this case, there was a devaluation of the peso vis-a-vis the foreign 6. The loss is deductible only for the year it is actually sustained. It is
currency (US dollar). Because of that, the foreign exchange losses arose from sustained during the year in which the loss occurs as evidenced by closed
matured BUT UNREMITTED principal repayments on loans affected by the debt and completed transaction and as fixed by identifiable events occurring
restructuring. in that year.
a. A CLOSED TRANSACTION is a taxable event which has been
The issue is: Whether foreign exchange losses which have accrued by reason of consummated.
devaluation are deductible for income tax purposes -- NO. 7. In this case, no taxable event has yet been consummated prior to the
remittance of the scheduled amortization.
The BIR held that losses must be realized to be deductible just like how an annual 8. Accordingly, foreign exchange losses sustained as a result of devaluation of
increase in value of an asset is not taxable income because such increase has not yet the peso vis-a-vis the foreign currency (e.g. US dollar, but which remittance
been realized. The loss is deductible only for the year it is actually sustained and
this is evidenced by closed and completed transaction and as fixed by identifiable of scheduled amortization consisting of principal and interests payments on
events occurring in that year. In this case, no taxable event has yet been a foreign loan has not actually been made are not deductible from gross
consummated prior to the remittance of the scheduled amortization.
income for income tax purposes.
DOCTRINE: Losses must be realized first before it can be deductible. The loss is
deductible only for the year it is actually sustained. It is sustained during the year in
which the loss occurs as evidenced by closed and completed transaction and as fixed
by identifiable events occurring in that year.
FACTS:
1. The foreign exchange losses arose from matured but unremitted principal
repayments on loans affected by the debt restructuring program in the PH.
ISSUES:
1. Whether foreign exchange losses which have accrued by reason of
devaluation are deductible for income tax purposes -- NO
RATIO:
1. Annual increase in value of an asset is NOT TAXABLE INCOME because
such increase has not yet been realized.
2. The increase in value (i.e. the gain) could only be taxed when a disposition
of the property occurred which was of such a nature as to constitute a
realization of such gain, that is, a severance of the gain from the original
capital invested in the property.
3. And the same conclusion is applied to LOSSES.
61
Bad debts
69. Philex Mining Corp. v. CIR (Mika) FACTS:
April 16, 2008 | Ynares-Santiago, J.| Deductions – Bad Debts 1. Philex Mining Corporation (Philex), entered into an agreement with Baguio
PETITIONER: PHILEX MINING CORPORATION, Gold Mining Company (Baguio Gold) for the former to manage and operate
RESPONDENTS: COMMISSIONER OF INTERNAL REVENUE the latter's mining claim, known as the Sto. Niño mine, located Benguet
Province.
SUMMARY: Philex entered into an agreement with Baguio Gold for the former to 2. Philex made advances of cash and property in accordance with par. 5 of their
manage and operate the latter’s mining claim, Sto Niño. Pursuant to their agreement, agreement. However, the mine suffered continuing losses over the years
Philex made advances of cash and property. The mine suffered losses which resulted which resulted to Philex’s withdrawal as manager of the mine on and in the
to Philex’s withdrawal as manager and eventually, the cessation of the operations. eventual cessation of mine operations.
Thereafter, they executed a “Compromise with Dation in Payment” where they
3. Thereafter, they executed a "Compromise with Dation in Payment" wherein
determined the indebtedness of Baguio Gold to Philex in the amount of
P259,137,245.00. Such sum included liabilities of Baguio Gold that Philex assumed Baguio Gold admitted an indebtedness to Philex in the amount of
as guarantor. Baguio Gold was not able to fully pay Philex and it still owed the latter P179,394,000.00.
P114, 996, 768.00. Philex wrote off in it 1982 books of account the remaining 4. They amended such agreement and determined that Baguio Gold’s
outstanding indebtedness of Baguio gold by charging it to allowances and reserves. indebtedness to Philex actually amounted to P259,137,245.00, which sum
In Philex’s annual income tax return, Philex deducted from its gross income the included liabilities of Baguio Gold to other creditors that Philex had assumed
amount of P112,136,000 as “loss on settlement of receivables from Baguio Gold as guarantor. These liabilities pertained to long-term loans.
against reserves and allowances.” However, the BIR disallowed the amount as
deduction for bad debt. Philex protested and argues that the deduction must be a. Baguio Gold undertook to pay Philex in 2 segments by a) assigning
allowed since all the requisites for a bad debt deduction were satisfied. They further its tangible assets for P127,838,051.00 and b) transferring its
argued that the bad debt deduction represented the advances made by Philex and the equitable title in its Philodrill assets for P16,302,426.00. Baguio
payments made by Philex as guarantor of Baguio Gold. Due to Baguio Gold’s Gold had a remaining outstanding indebtedness to Philex in the
irreversible losses, it became evident that it would not be able to recover the advances amount of P114,996,768.00.
and payments it made in behalf of Baguio Gold. CTA denied the appeal of Philex and 5. Subsequently, Philex wrote off in its 1982 books of account the remaining
held that the advances made by Philex were in the form of investments in a
outstanding indebtedness of Baguio Gold by charging P112,136,000.00 to
partnership thus it cannot be deducted as a bad debt from Philex’s gross income.
The issue is won the advances made by Philex were debts of Baguio Gold to Philex allowances and reserves that were set up in 1981 and P2,860,768.00 to the
and won Philex can claim as the advances as bad debt deduction from its gross 1982 operations.
income. 6. In its 1982 annual income tax return, Philex deducted from its gross income
SC held that NO the advances were not debts and it cannot be claimed as a bad debt the amount of P112,136,000.00 as "loss on settlement of receivables from
deduction from its gross income. SC held that there was a partnership formed. It Baguio Gold against reserves and allowances." However, the BIR
found no reason for Baguio Gold to be liable to Philex since the advances made were disallowed the amount as deduction for bad debt and assessed Philex a
deficiency income tax of P62,811,161.39.
in the form of investments to the Sto. Niño Mining claim and not in the form of debts.
7. Philex protested before the BIR arguing that the deduction must be allowed
Philex failed to substantiate its assertion that the advances were subsisting debts of
since all requisites for a bad debt deduction were satisfied: a) there was a
Baguio Gold that could be deducted from its gross income. Consequently, it could
valid and existing debt; b) the debt was ascertained to be worthless; and c) it
not claim the advances as a valid bad debt deduction. As to the amounts Philex, paid
was charged off within the taxable year when it was determined to be
as guarantor, SC held that the debts were not yet due and demandable.
worthless.
8. Philex also said that the bad debt arose out of a valid management contract it
DOCTRINE: Deductions for income tax purposes partake of the nature of tax
exemptions and are strictly construed against the taxpayer, who must prove by entered into with Baguio Gold. The bad debt deduction represented the:
convincing evidence that he is entitled to the deduction claimed.
62
a. advances made by Philex which formed part of Baguio Gold’s partnership, two or more persons bind themselves to contribute money,
“pecuniary obligations” to Philex. property, or industry to a common fund, with the intention of dividing the
b. also included payments made by Philex as guarantor of Baguio profits among themselves.
Gold's long-term loans which legally entitled Philex to be 2. Under the "Power of Attorney", Philex and Baguio Gold undertook to
subrogated to the rights of the original creditor. contribute money, property and industry to the common fund known as the
9. Philex asserted that due to Baguio Gold’s irreversible losses, it became Sto. Niño mine. Pursuant to the agreement, Philex and Baguio Gold were to
evident that it would not be able to recover the advances and payments it had contribute equally to the joint venture assets under their respective accounts.
made in behalf of Baguio Gold. Baguio Gold would contribute P11M under its owner's account plus any of
10. BIR denied the protest for: its income that is left in the project, in addition to its actual mining claim.
a. lack of legal and factual basis. Meanwhile, Philex's contribution would consist of its expertise in the
b. It held that the alleged debt was not ascertained to be worthless since management and operation of mines, as well as the manager's account which
Baguio Gold remained existing and had not filed a petition for is comprised of P11M in funds and property.
bankruptcy; and 3. The strongest indication that Philex was a partner in the Sto Niño mine is the
c. that the deduction did not consist of a valid and subsisting debt since fact that it would receive 50% of the net profits as "compensation" under the
under the management contract, Philex would be paid 50% of the agreement. The entirety of the parties' contractual stipulations simply leads
project’s net profit. to no other conclusion than that Philex’s "compensation" is actually its share
11. CTA denied the appeal of Philex. CTA held that the in the income of the joint venture.
a. advances made by Philex were not in the nature of a loan but were Issue on Bad debts
in the form of investment in a partnership with Baguio Gold. Since 1. SC held that there was no contractual basis for the execution of the two
it was in the nature of an investment, it could not be deducted as compromise agreements in which Baguio Gold recognized a debt in favor
a bad debt from Philex’s gross income. of Philex, which supposedly arose from the termination of their business
b. Also, CTA held that the amount paid by Philex for the long-term relations over the Sto. Niño mine.
obligations of Baguio Gold could not be considered as a bad debt 2. The "Power of Attorney" clearly provides that Philex would only be entitled
deduction since, at the time payments were made, Baguio Gold to the return of a proportionate share of the mine assets to be computed at a
was not in default as the loans were not yet due and demandable. ratio that the manager's account had to the owner's account. Except to
Philex just pre-paid the loans. provide a basis for claiming the advances as a bad debt deduction, there
12. CA affirmed the decision of CTA. Hence this petition under Rule 45. is no reason for Baguio Gold to hold itself liable to Philex under the
compromise agreements, for any amount over and above the proportion
ISSUES: agreed upon in the "Power of Attorney".
1. WON there was a partnership between Baguio Gold and Philex. – YES. 3. SC held that the lower courts did not err in treating Philex’s advances as
2. WON the advances made by Philex were “debts” of Baguio gold to investments in a partnership known as the Sto. Niño mine.
Philex. – NO. Not debts. 4. The advances were not "debts" of Baguio Gold to Philex inasmuch as the
3. WON Philex can claim the advances as bad debt deduction from its gross latter was under no unconditional obligation to return the same to the former
income. – NO. under the "Power of Attorney".
5. As for the amounts that Philex paid as guarantor to Baguio Gold's
RATIO: creditors, SC found no reason to depart from the tax court's factual
Issue on Partnership/Joint Venture: (we discussed this case in Partnership) finding that Baguio Gold's debts were not yet due and demandable at the
1. An examination of the parties’ "Power of Attorney" reveals that a partnership time that petitioner paid the same. Verily, Philex pre-paid Baguio Gold's
or joint venture was indeed intended by the parties. Under a contract of
63
outstanding loans to its bank creditors and this conclusion is supported by the
evidence on record.
6. In sum, Philex cannot claim the advances as a bad debt deduction from
its gross income. Deductions for income tax purposes partake of the
nature of tax exemptions and are strictly construed against the taxpayer,
who must prove by convincing evidence that he is entitled to the
deduction claimed.
7. In this case, Philex failed to substantiate its assertion that the advances were
subsisting debts of Baguio Gold that could be deducted from its gross income.
Consequently, it could not claim the advances as a valid bad debt deduction.
SEPARATE OPINIONS:
CONCURRING:
64
70. Philippine Refining Company v CA (Isa) (1) sending of statement of accounts;

May 8,1996 | J. Regelado| Deductions – Bad Debts (2) sending of collection letters;
(3) giving the account to a lawyer for collection; and
PETITIONER: Philippine Refining Company
(4) filing a collection case in court.
RESPONDENTS: Court of Appeals, Court of Tax Appeals, and Commissioner
of Internal Revenue FACTS:
1. Petitioner Philippine Refining Company (PRC) was assessed by respondent
SUMMARY: PRC was assessed by CIR to pay a deficiency tax for the year Commissioner of Internal Revenue (CIR) to pay a deficiency tax for the year
1985 in the amount of P1,892,584.00. The assessment was timely protested by 1985 in the amount of P1,892,584.00.
PRC on April 26, 1989, on the ground that it was based on the erroneous 2. It is computed as follows:
disallowances of "bad debts" and "interest expense" although the same are both
allowable and legal deductions. The CTA found basis in some of the deductions Deficiency Income Tax
while the others were without basis which is why it had reduced the amount to
Net Income per investigation P197,502,568.00
395, 324.27 from the 713,070.93 and it had allowed the deductions of the Add: Disallowances
interest expenses. The issue is WON all bad debts should be treated as Bad Debts P 713,070.93
deductions. SC held that based on the evidentiary support given by PRC for its Interest Expense P 2,666,545.49
aforesaid claimed deductions was the explanation or justification posited by its —————— ——————
financial adviser or accountant, Guia D. Masagana. Her allegations were not P3,379,616.00
supported by any documentary evidence, hence both the Court of Appeals and
the CTA ruled that said contentions per se cannot prove that the debts were Net Taxable Income 200,882,184.00
indeed uncollectible and can be considered as bad debts as to make them
deductible. PRC here failed to prove the worthlessness of the amounts Tax Due Thereon 70,298,764.00
receivable. Less: Tax Paid 69,115,899.00
Deficiency Income Tax 1,182,865.00
DOCTRINE: Before a debt can be considered worthless, the taxpayer must Add: 20% Interest (60% max.) 709,719.00
also show that it is indeed uncollectible even in the future. ——————
For debts to be considered as worthless, and thereby qualify as bad debts making Total Amount Due and Collectible P1,892,584.00
them deductible, the taxpayer should show that
(1) there is a valid and subsisting debt; 3. The assessment was timely protested by PRC on April 26, 1989, on the
(2) the debt must be actually ascertained to be worthless and uncollectible during ground that it was based on the erroneous disallowances of "bad debts" and
the taxable year; "interest expense" although the same are both allowable and legal deductions.
(3) the debt must be charged off during the taxable year; and CIR, however, issued a warrant of garnishment against the deposits of
(4) the debt must arise from the business or trade of the taxpayer. petitioner at a branch of City Trust Bank, in Makati, Metro Manila, which
action the latter considered as a denial of its protest.  
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 4. PRC accordingly filed a petition for review with the Court of Tax Appeals
outlined to be undertaken by the taxpayer to prove that he exerted diligent efforts (CTA) on the same assignment of error, that is, that the "bad debts" and
"interest expense" are legal and allowable deductions. In its decision on
to collect the debts, viz:
February 3, 1993, the CTA modified the findings of the Commissioner by
65
reducing the deficiency income tax assessment to P237,381.26, with 3. Based on the evidentiary support given by PRC for its aforesaid claimed
surcharge and interest incident to delinquency. In said decision, the Tax Court deductions was the explanation or justification posited by its financial adviser
reversed and set aside the CIR's disallowance of the interest expense of or accountant, Guia D. Masagana. Her allegations were not supported by any
P2,666,545.19 but maintained the disallowance of the supposed bad debts of documentary evidence, hence both the Court of Appeals and the CTA ruled
thirteen (13) debtors in the total sum of P395,324.27.   that said contentions per se cannot prove that the debts were indeed
a. The CTA found basis in some of the deductions while the others uncollectible and can be considered as bad debts as to make them deductible.
were without basis which is why it had reduced the amount to 395, Some of the examples:
324.27 from the 713,070.93 a. The account of Tomas Store in the amount of P16,842.79 is
uncollectible, claims petitioner PRC, since the owner thereof was
5. Petitioner then elevated the case to respondent Court of Appeals which, murdered and left no visible assets which could satisfy the debt.
affirmed the decision of the CTA Withal, just like the accounts of the two other stores just mentioned,
petitioner again failed to present proof of the efforts exerted to
ISSUE: collect the debt, other than the aforestated asseverations of its
1. WON all bad debts should be treated as deductions. –NO financial adviser.  
b. As to the account of P13,550.00 representing the balance collectible
RATIO: from Renato Alejandro, a former employee who failed to pay the
1. The SC affirmed the decision of the CA in which the latter cited CIR v. judgment against him, it is petitioners theory that the same can no
Goodrich International Rubber, Inc. as its basis to allow bad debt longer be collected since his whereabouts are unknown and he has
deductions.  no known property which can be garnished or levied upon. Once
a. In CIR v. Goodrich International Rubber, the SC established the rule again, petitioner failed to prove the existence of the said case against
in determining the worthlessness of a debt. To qualify as a bad debt that debtor or to submit any documentation to show that Alejandro
which would then be allowed as deductions, the tax payer should was indeed bound to pay any judgment obligation.  
show: c. The account of Enriched Food Corporation in the amount of
(1) There is a valid and subsisting debt;   P24,158.00 remains unpaid, although petitioner claims that it sent
(2) The debt must be actually ascertained to be worthless and several letters. This is not sufficient to sustain its position, even if
 uncollectible during the taxable year;   true, but even smacks of insouciance on its part. On top of that, it  
(3) The debt must be charged off during the taxable year; and   was unable to show a single copy of the alleged demand letters sent
(4) The debt must arise from the business or trade of the taxpayer.  to the said corporation or any of its corporate officers.
(5) Additionally, before a debt can be considered worthless, the d. The accounts of Remoblas Store in the amount of P11,961.00 and
taxpayer must also show that it is indeed uncollectible even in the CM Variety Store in the amount of P10,895.82 are uncollectible,
future.  according to petitioner, since the stores were burned and there are
no assets belonging to the debtors that can be garnished by
2. Furthermore, the SC outlined the steps which the taxpayer must have PRC. However, PRC failed to show any documentary evidence for
undertaken to prove that he exerted diligent efforts to collect the debts which said allegations. Not a single document was offered to show that the
are: stores were burned, even just a police report or an affidavit attesting
(1) Sending of statement of accounts;   to such loss by fire.
(2) Sending of collection letters;   e. The accounts of Aboitiz Shipping Corporation and J. Ruiz Trucking
(3) Giving the account to a lawyer for collection; and   in the amounts of P89,483.40 and P69,640.34, respectively, both of
(4) Filing a collection case in court.   which allegedly arose from the hijacking of their cargo and for
66
which they were given 30% rebates by PRC, are claimed to be

uncollectible. Again, petitioner failed to present an iota of proof, not
even a copy of the supposed policy regulation of PRC that it gives
rebates to clients in case of loss arising from fortuitous events
or force majeure, which rebates it now passes off as uncollectible
debts.
4. It was not an issue in the case but was resolved by the Court as part of its
obiter.
a. The PRC contends that it is in a better position to determine whe
nan obligation becomes a bad debt than the creditor itself, and that
its judgment should not be substituted by that of respondent court as
it is PRC which has the facilities in ascertaining the collectability or
uncollectability of these debts, are presumptuous and uncalled for.
 
b. The SC, however, stated the Court of Tax Appeals is a highly
specialized body specifically created for the purpose of reviewing
tax cases. Through its expertise, it is undeniably competent to
determine the issue of whether or not the debt is deductible through
the evidence presented before it.  
c. Because of this recognized expertise, the findings of the CTA will
not ordinarily be reviewed absent a showing of gross error or abuse
on its part. The findings of fact of the CTA are binding on this Court
and in the absence of strong reasons for this Court to delve into facts,
only questions of law are open for determination.  
SEPARATE OPINIONS:
CONCURRING:
71. Fernandez Hermanos, Inc. vs. Commissioner of Internal Revenue (JAYA)

September 30, 1969 | TEEHANKEE, J | Deductions - Bad Debts
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PETITIONER: FERNANDEZ HERMANOS, INC. deductible in full or not at all, in the absence of any express provision in the Tax
RESPONDENTS: COMMISSIONER OF INTERNAL REVENUE and COURT Code authorizing partial deductions.”
OF TAX APPEALS
Doctrine
SUMMARY: Neither under Section 30(d)(c) of our Tax Code providing for deduction by
corporations of losses actually sustained and charged off during the taxable year
Hermanos Inc. was assessed by CIR for the years 1950, 1951, 1952, 1953 and nor under Section 30 (e)(1) thereof providing for deduction of bad debts actually
1954. CIR found that there were discrepancies in the income tax returns submitted ascertained to be worthless and charged off within the taxable year, can there be a
by Hermanos. CIR’s deficiency assessment was questioned by Hermanos in CTA. partial writing-off of a loss or bad debt, as was sought to be done here by the
CTA issued a decision addressing each disputed item in CIR’s assessment. Among taxpayer. For such losses or bad debts must be ascertained to be so and written-
all the items, CTA only sustained the disallowances in Mati Lumber and the bad off during the taxable year, are therefore deductible in full or not at all, in the
debts of Palawan; all other disallowances were overruled by CTA. CTA decision absence of any express provision in the Tax Code authorizing partial deductions.
was appealed by both parties to SC, thus, the present case.
There are 7 disputed items which SC addressed in this case. Relevant to our topic
of bad debts is the one involving the disallowance of losses in or bad debts of
Palawan Manganese Mines, Inc. Palawan Inc is a subsidiary company of
Hermanos. Palawan was having financial problems so it requested support from
Hermanos. Hermanos agreed to extend financial help by giving advances to
Palawan. Both parties executed a MOA. It is stipulated in the MOA that Palawan
shall give 15% share of its net profits to Hermosa. The MOA was signed in 1945
and from 1945-1949, Palawan was operating. In 1951, Hermosa decided to write
off the total advances it had given to Palawan for the years 1945-1949, roughly
around 300K pesos, because Palawan did not recover and hardly had any profits
at all. SC held that it cannot be written off as bad debt since Palawan was still in
operation from 1945-1949 (the period when Palawan received the advances from
Hermanos). Furthermore, SC said that there can be no bad debts if there is no valid FACTS:
and subsisting debt to begin with. It appears from the facts that the advances made
1. Fernandez Hermanos, Inc., the taxpayer, is a domestic-corporation organized
by Hermanos was in the nature of an investment and not of debt since there was
for the principal purpose of engaging in business as an "investment company"
no obligation to repay Hermanos under their MOA. The court also noted that
with main office at Manila.
Hermanos has taken an ambiguous position and has not definitely taken a stand
2. The CIR assessed the Hermanos for the years 1950, 1951, 1952, 1953 and
on whether the amount involved is claimed as losses or as bad debts but insists
1954. The total assessed value was the result of alleged discrepancies found
that it is either a loss or a bad debt. “Neither under Section 30(d)(c) of our Tax
upon the examination and verification of the taxpayer’s income tax returns
Code providing for deduction by corporations of losses actually sustained and
for the said years.
charged off during the taxable year nor under Section 30 (e)(1) thereof providing
3. The CTA sustained the CIR’s disallowances of items
for deduction of bad debts actually ascertained to be worthless and charged off
a. Losses in Mati Lumber Co. (1950) P 8,050.00
within the taxable year, can there be a partial writing-off of a loss or bad debt, as
b. Losses in or bad debts of Palawan
was sought to be done here by the taxpayer. For such losses or bad debts must be
ascertained to be so and written-off during the taxable year, are therefore
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4. But CTA overruled the disallowances of all remaining items. Thus, the b. It started in 1945 when Palawan requested financial help from
deficiency assessment was modified by CTA from the Php166,063 (assessed Hermanos to enable it to resume its mining operations in Palawan.
by CIR) to Php123,436. c. Hermanos agreed and the parties then executed a memorandum of
5. Both Hermanos and CIR appealed the CTA’s decision. agreement (MOA) stipulating therein that Palawan will pay
Hermanos 15% of its net profits.
ISSUES: d. Pursuant to such MOA, Hermanos delivered yearly advances to
Palawan but despite such financial aid, Palawan failed to recover.
1. WON CTA was correct in its allowances and disallowances. - On some items. e. In 1951, Hermanos became convinced that those advances could no
2. WON the government’s right to collect the deficiency income taxes in longer be recovered. While it continued to give advances, Hermanos
question has already prescribed. - NO. decided to write off as worthless the sum of Php353,134.25 from
years 1945-1949.
RATIO: f. In Hermanos’ 1951 return, petitioner claimed the deduction of the
Issue #1 said amount as either loss or bad debts.
The following are the disputed items of allowances and disallowances based on CTA g. Court denied.
ruling: i. It will be noted that in giving advances to Palawan
Manganese Mines, Inc., Hermanos did not expect to be
1. Allowance of losses in Mati Lumber Co (1950) repaid. It is true that some testimonial evidence was
a. Hermanos wrote off as worthless securities in its 1950 return the
presented to show that there was some agreement that the
sum of Php8,050 representing the cost of shares of stock of Mati
advances would be repaid, but no documentary evidence
Lumber Co acquired by Hermanos in 1948.
was presented to this effect. The memorandum agreement
b. Mati Lumber ceased its operation in 1949. CIR now contends that it signed by the parties appears to be very clear that the
should be included in its return because Mati Lumber still had its consideration for the advances made by petitioner was 15%
sawmill and equipment which must be of considerable value. of the net profits of Palawan Manganese Mines, Inc. In
c. The disagreed. It said that when the company ceased to operate, it other words, if there were no earnings or profits, there was
had no assets, and is therefore completely insolvent. Such no obligation to repay those advances. It has been held that
information was the basis of Hermanos act of writing off of the stock the voluntary advances made without expectation of
as worthless securities repayment do not result in deductible losses.
d. The court added that if in the future Hermanos realize some proceeds ii. The amount cannot also be deducted as bad debt because
from its sawmill and equipment, which were still existing as claimed no bad debt could arise where there is no valid and
by the Commissioner, and that such proceeds would later be subsisting debt. The advances made by the taxpayer to its
distributed to its stockholders such as the taxpayer, the amount so 100% subsidiary, Palawan Manganese Mines, Inc.
received by the taxpayer would then properly be reportable as amounting to P587,308,07 as of 1951 were investments
income of the taxpayer in the year it is received. and not loans.
iii. The Tax Court correctly held that the subsidiary company
was still in operation in 1951 and 1952 and the taxpayer
2. Disallowance of losses in or bad debts of Palawan Manganese Mines, Inc. (1951)
continued to give it advances in those years, and, therefore,
a. Hermanos appeals from the Tax Court’s disallowance of its writing
the alleged debt or investment could not properly be
off in 1951 as a loss or bad debt the sum of Php353,134.25 which it
considered worthless and deductible in 1951, as claimed by
had advanced to Palawan Manganese Mines.
the taxpayer.
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iv. Furthermore, court noted that the Solicitor General has c. Thus, as the Hacienda Dalupiri was operated by petitioner for business and
rightly pointed out that the taxpayer has taken an since it sustained losses in its operation, which losses were determined by
"ambiguous position" and "has not definitely taken a stand means of inventories authorized under Section 100 of Revenue Regulations
on whether the amount involved is claimed as losses or as No. 2, it was error for respondent to have disallowed the deduction of said
bad debts but insists that it is either a loss or a bad debt.". losses. The same is true with respect to losses sustained in the operation of
Neither under Section 30 (d) (2) of our Tax Code providing the Hacienda Samal for the years 1951 and 1952.”
for deduction by corporations of losses actually sustained
and charged off during the taxable year nor under Section
30 (e) (1) thereof providing for deduction of bad debts 5. Disallowance of excessive depreciation of buildings (1950- 1954)
actually ascertained to be worthless and charged off within
the taxable year, can there be a partial writing off of a loss a. During the years 1950 to 1954, the taxpayer claimed a depreciation allowance
or bad debt, as was sought to be done here by the taxpayer. for its buildings at the annual rate of 10%. The Commissioner claimed that
For such losses or bad debts must be ascertained to be so the reasonable depreciation rate is only 3% per annum, and, hence,
and written off during the taxable year, are therefore disallowed as excessive the amount claimed as depreciation allowance in
deductible in full or not at all, in the absence of any express excess of 3% annually.
provision in the Tax Code authorizing partial deductions. b. Court held that 10% is indeed excessive. Hermanos failed to submit adequate
proof of the correctness of the taxpayer’s claim that the depreciable assets or
3. Disallowance of losses in Balamban Coal Mines (1950 and 1951) buildings in question had a useful life only of 10 years so as to justify its 10%
a. A coal mine was operating in Cebu from 1950-1951. It ceased its operation depreciation per annum claim
in 1952.
b. Hermanos was saying that the deductible loss should include the years 1950- 6. Taxable increase in net worth (1950-1951)
1951 even tho the mine was still in operation because it was not making
a. Hermanos had an account with the Manila Insurance Company, the records
profits anyway.
bearing on which were lost. When its records were reconstituted the amount
c. Court held in the negative. The Tax Court correctly held that the losses are
of P349,800.00 was set up as its liability to the Manila Insurance Company.
deductible in 1952 only, when the mines were abandoned, and not in 1950
It was discovered later that the correct liability was only P319,750.00, or a
and 1951, when they were still in operation.
difference of P30,050.00, so that the records were adjusted so as to show the
correct liability. The correction or adjustment was made in 1950. Respondent
4. Allowance of losses in Hacienda Dalupiri (1950 to 1954) and Hacienda Samal contends that the reduction of petitioners liability to Manila Insurance
(1951-1952)
Company resulted in the increase of petitioner’s net worth to the extent of
a. Court is convinced that the Hacienda Dalupiri was operated by petitioner for
P30,050.00 which is taxable.
business and not pleasure. It was mainly a cattle farm, although a few race
b. Court disagrees with CIR. The increase in the net worth of Hermanos for
horses were also raised. It does not appear that the farm was used by petitioner
1950 was not the result of the receipt by it of taxable income. It was merely
for entertainment, social activities, or other non-business purposes.
the outcome of the correction of an error in the entry in its books relating to
Therefore, it is entitled to deduct expenses and losses in connection with the
its indebtedness to the Manila Insurance Company. The Income Tax Law
operation of said farm.
imposes a tax on income; it does not tax any or every increase in net worth
b. If gross income is ascertained by inventories, no deduction can be made for
whether or not derived from income. Surely, the said sum of P30,050.00 was
livestock or products lost during the year, whether purchased for resale,
not income to petitioner; and it was error for respondent to assess a deficiency
produced on the farm, as such losses will be reflected in the inventory by
income tax on said amount.
reducing the amount of livestock or products on hand at the close of the year.’
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7. Gain realized from sale of real property mines. “The method employed by Hermanos in making an outright deduction of 1/5 of
the cost of the mines is not authorized under Section 30(g) (1) (B) of the Revenue Code.
a. A property was acquired in 1926 for P11,852.74, and was sold in 1950 for Thus, CIR’s disallowance of the alleged ‘contractual rights’ amounting to P48,481.62
P60,000.00, apparently, resulting in a gain of P48,147.26. 14 must therefore be sustained."
b. The taxpayer reported in its return a gain of P37,000.00, or a discrepancy of
P11,147.26. 15.
c. But it was sufficiently proved from the taxpayer’s books that after acquiring
the property, the taxpayer had made improvements totalling P11,147.26, SEPARATE OPINIONS:
accounting for the apparent discrepancy in the reported gain. Thus, this figure CONCURRING:
added to the original acquisition cost of P11,852.74 results in a total cost of
P23,000.00, and the gain derived from the sale of the property for P60,000.00
was correctly reported by the taxpayer at P37,000.00.
Issue #2
1. Hermanos contends that 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.
2. Court disagrees. It has consistently 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.
3. 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.
The parties filed an appeal again in SC.
Court only reiterated its findings and clarified that when it comes to the disallowance
of contractual rights, the disallowance shall be sustained since Hermanos failed to
72. RR 5-99 (Cla)2
show evidence that would justify their outright deduction of 1/5 of the cost of the
March 10, 1999 | BIR | Deductions - Bad Debts
2
Di siya case, copied from an ancient website na march 10, 1999, pero rr 5-99 sa BIR website
and lawphil march 16, 1999 bakit ganun pero sa outline march 10, summary from bir.gov.ph.
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c. The debt does not arise from a transaction made by the taxpayer with
SUMMARY: a related party as enumerated in the Tax Code.
Implements Section 34(E) of the Tax Code of 1997 relative to the requirements d. The debt must be actually charged off the books of accounts of the
for deductibility of bad debts from gross income of a corporation or an individual taxpayer as of the end of the taxable year.
engaged in trade or business or a professional engaged in the practice of his e. The debt must be actually ascertained to be worthless and
profession. uncollectible as of the end of the taxable year.
5. The rules discussed above will generally apply to all types of taxpayers,
The requisites for valid deduction of bad debts from gross income are: regardless of the nature of his business except in the following cases:
a) there must be an existing indebtedness due to the taxpayer which must be valid a. In the case of banks, the Bangko Sentral ng Pilipinas (BSP), thru its
and legally demandable; Monetary Board, will ascertain the worthlessness and
b) the same must be connected with the taxpayer's trade, business or practice of uncollectibility of the bad debts and it shall approve the writing-off
profession; of the said indebtedness from the bank's books of accounts at the
c) the same must not be sustained in a transaction entered into between related end of the taxable year.
parties enumerated under Section 36(B) of the Tax Code of 1997; b. For an insurance or surety company, a receivable may be written off
d) the same must be actually charged off the books of accounts of the taxpayer as from the taxpayer's books of accounts and claimed as bad debt
of the end of the taxable year; and deduction only if such company has been declared closed due to
e) the same must be actually ascertained to be worthless and uncollectible as of insolvency or for any such similar reason by the Insurance
the end of the taxable year. Commissioner.
6. In the case of securities, particularly those held as capital assets and thereafter
The recovery of bad debts previously allowed as deduction in the preceding year ascertained to be worthless and charged off within the taxable year, the
or years will be included as part of the taxpayer's gross income in the year of such resulting loss shall be considered as a loss from the sale or exchange of capital
recovery to the extent of the income tax benefit of said deduction. asset made on the last day of such taxable year. The taxpayer, however, has
to prove through clear and convincing evidence that the securities are in fact
worthless.
a. Securities refer to shares of stock in a corporation and rights to
subscribe for or to receive such shares. The term includes bonds,
debentures, notes or certificates, or other evidence of indebtedness,
issued by any corporation, including those issued by a government
These regulations provide for the requirements that must be satisfied in order that a or political subdivision thereof, with interest coupon or in registered
taxpayer can claim its receivables as bad debts. form.
7. "Actually charged off from the books of accounts" means that the amount of
1. As provided under Sec. 34 (E) of the 1997 Tax Code, a corporation, an money lent by the taxpayer, which had been recorded in his books as a
individual engaged in trade or business, or a professional engaged in the receivable, has actually become worthless and that the said receivable has
practice of his profession is allowed to claim bad debts as deduction from been cancelled and written off from the taxpayer's books.
gross income. a. The mere recording in the taxpayer's books of the receivables as
2. “Bad debts” refer to amounts borrowed from the taxpayer by another person, estimated uncollectible account will not be a valid basis for claiming
whether corporate or individual, which have become worthless or said receivable as a deduction from gross income.
uncollectible 8. Before a cancellation or write-off from the accounting records can be done,
3. These receivables may come from money actually extended as a loan or from there must first be a determination that the receivable has actually become
uncollectible payments for goods sold or services rendered by the taxpayer. worthless. There is no inflexible formula or rule that can be applied to
4. A bad debt may be claimed as a deduction only if the following requirements determine whether a receivable is worthless.
are satisfied: a. Thus, the determination of worthlessness in a given case depends
a. The debt due the taxpayer is valid and legally demandable upon the particular facts and the circumstances of the case.
b. It is connected with the taxpayer’s trade, business or practice of b. A receivable, the amount of which is insignificant such that the
profession filing of a legal case against the debtor may be more costly to the
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taxpayer, may be written off as a bad debt even without conclusive (1) There must be an existing indebtedness due to the taxpayer which must
evidence that the taxpayer's receivable from a debtor has definitely be valid and legally demandable;
become worthless. (2) The same must be connected with the taxpayer’s trade, business or
9. The BIR will consider all pertinent evidence like the value of the collateral practice of profession;
securing the debt and the financial condition of the debtor. The BIR may also (3) The same must not be sustained in a transaction entered into between
rely on a statement issued under oath by an independent collection lawyer related parties enumerated under Sec. 36(B) of the Tax Code of 1997;
who is not under the employ of the taxpayer showing the propriety of (4) The same must be actually charged off the books of accounts of the
claiming such alleged bad debts as deductions. Said statement must report on taxpayer as of the end of the taxable year; and
the legal obstacle and the virtual impossibility of collecting the same from (5) The same must be actually ascertained to be worthless and uncollectible
the debtor. as of the end of the taxable year.
10. A taxpayer may not postpone a bad debt deduction on the basis of a mere
hope of ultimate collection or because of continuous attempts to collect such 1. Before a taxpayer may charge off and deduct a debt, he must ascertain and be
receivable which has long become overdue. A mere hope will not justify able to demonstrate with reasonable degree of certainty the uncollectibility
postponement of the deduction. However, the bad debt deduction may be of the debt.
deferred under the following circumstances: 2. The Commissioner of Internal Revenue will consider all pertinent evidence,
a. The taxpayer can show that the surrounding circumstances for the including the value of the collateral, if any, securing the debt and the financial
receivables which he decided not to write off are different from condition of the debtor in determining whether a debt is worthless, or the
those relating to other debts which were charged off in a prior year; assigning of the case for collection to an independent collection lawyer who
b. A reasonable possibility of recovery exists; is not under the employ of the taxpayer and who shall report on the legal
c. The creditor offers evidence to show some expectation that the debt obstacle and the virtual impossibility of collecting the same from the debtor
would be paid in the intervening years. and who shall issue a statement under oath showing the propriety of the
deductions thereon made for alleged bad debts.
Recoveries 3. Thus, where the surrounding circumstances indicate that a debt is worthless
11. If a bad debt that was previously allowed as deduction in the preceding year and uncollectible and that legal action to enforce payment would in all
or years is collected, it shall be included as part of the taxpayer's gross income probability not result in the satisfaction of execution on a judgment, a
in the year of such recovery to the extent of the income tax benefit of said showing of those facts will be sufficient evidence of the worthlessness of the
deduction. Thus, if the taxpayer realized a reduction of the income tax due debt for the purpose of deduction.
him on account of a deduction for bad debts, his subsequent recovery of the 4. In the case of banks, the Commissioner of Internal Revenue shall determine
same from the debtor shall be treated as a receipt of taxable income. whether or not bad debts are worthless and uncollectible in the manner
12. However, if the taxpayer did not benefit from the deduction of the said bad provided in the immediately preceding paragraph.
debt written off because it did not result to any reduction of his income tax in a. Without prejudice to the Commissioner’s determination of the
the year of such deduction, i.e., his business operations was a net loss even worthlessness and uncollectibility of debts, the taxpayer shall
without such deduction of bad debt written off, then the subsequent recovery submit a Bangko Sentral ng Pilipinas/Monetary Board written
shall not be treated as receipt of realized taxable income. Instead, it shall be approval of the writing off of the indebtedness from the banks’
considered as a mere recovery or return of capital, thus, not taxable. books of accounts at the end of the taxable year.
5. In no case may a receivable from an insurance or surety company be written-
RR 25-2002 off from the taxpayer’s books and claimed as bad debts deduction unless such
- Amending RR 5-99, Further Implementing Section 34 (E) of the Tax Code of 1997 company has been declared closed due to insolvency or for any such similar
on the Requirements for Deductibility of Bad Debts from Gross Income. reason by the Insurance Commissioner.
Sec. 2. AMENDMENT - Section 3 of RR 5-99 on the requisites for valid deduction of

bad debts from gross income is hereby amended by deleting the penultimate paragraph
of the said Section and should now read as follows:
Sec. 3. Requisites for valid deduction of bad debts from gross income. – The
requisites for deductibility of bad debts are:
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Depreciation profit on the investment made has never been the underlying reason for the
allowance of a deduction for depreciation.
73. Basilan Estates, Inc. v. CIR (Charlie)
September 5, 1967 | Bengzon J.P.., J.| Deductions - Depreciation
PETITIONER: Basilan Estates, Inc.

RESPONDENTS: Commissioner of Internal Revenue and CTA
SUMMARY:
Basilan Estates, Inc., a Philippine corporation engaged in the coconut industry,
had 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. In 1953, it claimed a
depreciation deduction of P47,342.53 for its reappraised assets. CIR disallowed
the deductions claimed by Basilan Estates, Inc., saying that in 1952, the CIR had
already determined, with taxpayer’s concurrence, the depreciation allowable on
the same assets to be P36,842.04, computed on their acquisition cost. CIR
disallowed the excess deductible depreciation amounting to P10,500.49
consequently assessed Basilan of deficiency income taxes. The issue is whether
depreciation shall be determined on the acquisition cost or on the reappraised
value of the assets. SC held that depreciation should be determined on the
acquisition cost, and that the claim for depreciation beyond P36,842.04 has no
justification in the law. Section 30 (f) (1) of the Tax Code allows a deduction
from gross income for depreciation, but limits the recovery to the capital invested FACTS:
in the asset being depreciated. 1. Basilan Estates, Inc. is a Philippine corporation engaged in the coconut
industry. On March 24, 1954, it filed its income tax returns for 1953 and paid
DOCTRINE: an income tax of P8,028. Basilan Estates, Inc. claimed deductions for the
The income tax law does not authorize the depreciation of an asset beyond its depreciation of its assets up to 1949 on the basis of their acquisition cost.
acquisition cost. Hence, a deduction over and above such cost cannot be claimed 2. As of January 1, 1950 it changed the depreciable value of said assets by
and allowed. The reason is that deductions from gross income are privileges, not increasing it to conform with the increase in cost for their replacement.
matters of right. They are not created by implication but upon clear expression in A. Accordingly, from 1950 to 1953 it deducted from gross income the
the law. value of depreciation computed on the reappraised value.
Moreover, the recovery, free of income tax, of an amount more than the invested B. In 1953, the year involved in this case, Basilan Estates, Inc.
claimed a depreciation deduction of P47,342.53 for its
capital in an asset will transgress the underlying purpose of a depreciation
reappraised assets.
allowance. For then what the taxpayer would recover will be, not only the 3. The CIR found that the reappraised assets depreciated in 1953 were the same
acquisition cost, but also some profit. Recovery in due time through depreciation ones upon which depreciation was claimed in 1952. And for the year 1952,
of investment made is the philosophy behind depreciation allowance; the idea of the CIR had already determined, with taxpayer’s concurrence, the
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depreciation allowable on said assets to be P36,842.04, computed on their also applied to amortization of the value of intangible assets, the use of
acquisition cost at rates fixed by Basilan. which in the trade or business is definitely limited in duration.
A. CIR pegged the deductible depreciation for 1953 on the same old 3. Depreciation commences with the acquisition of the property and its owner
assets at P36,842.04 and disallowed the excess thereof in the is not bound to see his property gradually waste, without making provision
amount of P10,500.49. out of earnings for its replacement. It is entitled to see that from earnings
B. In 1959, CIR assessed Basilan Estates, Inc. a deficiency income tax the value of the property invested is kept unimpaired, so that at the end of
of P3,912 for 1953, and P86,876.85 as 25% surtax on unreasonably any given term of years, the original investment remains as it was in the
accumulated profits as of 1953 pursuant to Section 25 of the Tax beginning. It is not only the right of a company to make such a provision,
Code. but it is its duty to its bond and stockholders, and, in the case of a public
4. On non-payment of the assessed amount, a warrant of distraint and levy was service corporation, at least, its plain duty to the public.
issued. However, it was not executed because Basilan Estates, Inc. succeeded 4. Accordingly, the law permits the taxpayer to recover gradually his
in getting the Deputy CIR to order the Director of the district in Zamboanga capital investment in wasting assets free from income tax.
City to hold execution and maintain constructive embargo instead. Because 5. Section 30 (f) (1) of the Tax Code allows a deduction from gross income
of its refusal to waive the period of prescription, the corporation's request for for depreciation but limits the recovery to the capital invested in the
reinvestigation was not given due course. Notice was served the corporation asset being depreciated. It states:
that the warrant of distraint and levy would be executed. (1)In general. — A reasonable allowance for deterioration of
5. Basilan Estates, Inc. filed before the CTA a petition for review of the property arising out of its use or employment in the business or
Commissioner's assessment, alleging prescription of the period for trade, or out of its not being used: Provided, That when the
assessment and collection; error in disallowing claimed depreciations, allowance authorized under this subsection shall equal the capital
travelling and miscellaneous expenses; and error in finding the existence of invested by the taxpayer . . . no further allowance shall be made. . .
unreasonably accumulated profits and the imposition of 25% surtax. CTA .
found that there was no prescription and affirmed the deficiency assessment. 6. The income tax law does not authorize the depreciation of an asset
beyond its acquisition cost. Hence, a deduction over and above such
ISSUES: cost cannot be claimed and allowed. The reason is that deductions from
1. Whether depreciation shall be determined on the acquisition cost or on the gross income are privileges, not matters of right. They are not created by
reappraised value of the assets. - ACQUISITION COST. implication but upon clear expression in the law.
7. Moreover, the recovery, free of income tax, of an amount more than the
HELD: WHEREFORE, the judgment appealed from is modified to the extent that invested capital in an asset will transgress the underlying purpose of a
petitioner is allowed its deductions for travelling and miscellaneous expenses, but depreciation allowance. For then what the taxpayer would recover will
affirmed insofar as the petitioner is liable for P2,100.67 as deficiency income tax for be, not only the acquisition cost, but also some profit. Recovery in due
1953 and P86,876.75 as 25% surtax on the unreasonably accumulated profit of time through depreciation of investment made is the philosophy behind
P347,507.01. depreciation allowance; the idea of profit on the investment made has never
been the underlying reason for the allowance of a deduction for
RATIO: depreciation.
1. The claim for depreciation beyond P36,842.04 or in the amount of
P10,500.49 has no justification in the law.
2. Depreciation is the gradual diminution in the useful value of tangible
property resulting from wear and tear and normal obsolescense. The term is
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74. Limpan Investment Corp. v. CIR (Yen) FACTS:

July 26, 1966| Reyes, J.B.L., J.| Deductions - Depreciation 1. Limpan Corp is a domestic corporation duly registered since June 1955
and engaged in the business of leasing real properties. Its principal
PETITIONER: Limpan Investment Corporation stockholders are the spouses Isabelo and Purficacion Lim, who own and
RESPONDENTS: Commissioner of Internal Revenue, et al. control 99% of its total paid up capital. Its president n chairman of the
board is Isabelo.
SUMMARY: 2. Limpan’s real properties consist f several lots and buildings acquired
This is an appeal from the CTA’s judgment upholding the assessment of the from Isabelo an his mother.
CIR against Limpan Corporation for deficiency income taxes representing 3. Limpan duly filed its 1956 and 1957 income tax returns, reporting
rental incomes for the taxable years 1956 and 1957, as well as an excess in therein net incomes of about 3k, and P11k, respectively, for which it paid
the depreciation claimed in the same years. the corresponding taxes.
4. Sometime in 1958 and 1959, BIR conducted an investigation of
Limpan Corporation’s principal stockholders are the Lim spouses who own Limpan’s 1956 and 1957 ITRs and discovered that Limpan had
and control 99% of its total paid up capital. Limpan’s real properties undeclared its rental income by about P20k and P81k during the above
likewise consist of several lots and buildings acquired from Mr. Lim and his taxable years and had claimed excessive depreciation of its buildings in
mother. Hence, it is argued by the corporation that the undeclared income the sums of about P4k and P16k, covering the same period. On the basis
from the rents of the properties was due to the fact that some of the lessees of these, CIR issued a letter-assessment and demand for payment of
refused to acknowledge the change in ownership (i.e. from Lim to the deficiency income tax and surcharge against Limpan.
Corpo) and hence would still pay Lim himself. The corporation however 5. Limpan requested CIR to reconsider bu it was denied. Limpan then filed
admitted to a portion of the deficient amounts to have been collected by its its petition for review before the CTA.
President Mr. Lim but argued that such portion was undeclared because Mr. A. Liman disclaimed having received or collected the rental income in 1957,
Lim only turned over the amount to the Corporation in 1959. Another claiming that it was the previous owners who had collected such. For 1956,
portion was argued to have been deposited by a certain tenant (Go Tong) in it claimed that only about P31k was actually collected but not declared
court, hence the Corporation had no actual or constructive control over such. because Isabelo was the one who collected and received about P13k from
As regards to the rates of depreciation applied by the CIR (which were certain tenants and did not turn over the same to the Corporation until 1959,
argued to be unfair and inaccurate), the Corporation tried to justify its higher and that a certain tenant (Go Tong) deposited his rentals in court.
claim by establishing that some of its buildings are old and out of style, B. It was also alleged that the rates of depreciation applied by the CIR to its
hence they were entitled to higher rates of depreciation than those adopted buildings are unfair and inaccurate.
by the CIR. 6. The sole witness for the Corporation was its secretary-treasurer (Solis).
With regard to the depreciation, Solis tried to establish that some of its
ISSUE: W/N the rates of depreciation applied by the CIR are unfair and buildings are old and out of style, hence they are entitled to higher rates
inaccurate - No. The tax Court applied rates of depreciation in accordance of depreciation than those adopted by CIR in its assessment.
with Bulletin “F” of the US Federal Internal Revenue Service which has 7. Plaridel Mingoa, one of the BIR examiners who personally conducted
strong persuasive effect in this jurisdiction. Such was the result of scientific the investigation testified for CIR saying that he personally interviewed
studies and observation for a long period in the US, after whose Income Tax the tenants of CIR and found that the tenants had been regularly paying
Law ours is patterned. their rentals to the collectors of either Limpan or Isabelo himself, yet
these payments were not declared. Plaridel also testified that in applying
DOCTRINE: “Depreciation is a question of fact and is not measured rates of depreciation to Limpan’s buildings , he adopted Bulletin “F” of
by theoretical yardstick, but should be determined by a consideration US Federal Internal Revenue Service.
of actual facts", and the findings of the Tax Court in this respect 8. CTA upheld the CIR’s assessment. Hence this appeal.
should not be disturbed when not shown to be arbitrary or in abuse
of discretion. ISSUES:
1. W/N CTA erred in holding that Limpan had unreported rental
income - No.
76
2. W/N the rates of depreciation applied by the CIR are unfair and in this respect should not be disturbed when not shown to be
inaccurate - No. arbitrary or in abuse of discretion.
3. Limpan had not shown any arbitrariness or abuse of discretion on the
HELD: Judgment appealed from is AFFIRMED. part of the CTA in finding that it claimed excessive depreciation in its
returns.
RATIO: 4. It appearing that the CTA applied rates of depreciation in accordance
1. Limpan has actually admitted (Fact No. 5) it had undeclared more than with Bulletin “F” of the US Federal Internal Revenue Service which has
½ of the amount found by the BIR examiners as unreported rental income strong persuasive effect in this jurisdiction, for having been the result of
of 1956, and more than ⅓ of the amount for 1957. It was incumbent upon scientific studies and observation for a long period in the US, after whose
them to establish the remainder of its pretensions by clear and convincing Income Tax Law ours is patterned, the foregoing error is devoid of merit.
evidence which they failed to do.
2. “Depreciation is a question of fact and is not measured by SEPARATE OPINIONS: None
theoretical yardstick, but should be determined by a
consideration of actual facts", and the findings of the Tax Court
75. RR 12-2012 (Jen)

October 12, 2012 | Depreciation
SUBJECT: Deductibility of depreciation expenses as it relates to purchase vehicles
and other expenses related thereto, and input taxes allowed therefor.
SUMMARY (by BIR):

REVENUE REGULATIONS NO. 12-2012 issued on October 12, 2012 prescribes
the rules on the deductibility of depreciation expenses as it relates to purchase of
vehicles and other expenses related thereto, and input taxes allowed therefor, to wit:
77
incurred on said vehicle may be allowed, the rules prescribed under

1. No deduction from gross income for depreciation shall be allowed unless
the taxpayer substantiates the purchase with sufficient evidence, such as these Regulations must be complied with.
official receipts or other adequate records which contain the following, 3. Section 3. Rules on Deductibility of Depreciation on Vehicles, Other
among others: expenses, and input taxes on disallowed expenses
i. Specific Motor Vehicle Identification Number, Chassis Number a. Guidelines in determining whether depreciation expenses can be
or other registrable identification numbers of the vehicle; claimed or not on account of vehicles capitalized by taxpayer, or in
ii. total price of the specific vehicle subject to depreciation; and claiming other expenses and input taxes on account of said vehicle:
iii. direct connection or relation of the vehicle to the development,
i. No deduction from gross income for depreciation shall be
management, operation and/or conduct of the trade or business or
profession of the taxpayers. allowed unless the taxpayer substantiates the purchase with
2. Only one vehicle for land transport is allowed for the use of an official or sufficient evidence, such as official receipts or adequate
employee, the value of which should not exceed Two Million Four records which contain the following:
Hundred Thousand Pesos (Php 2,400,000.00); 1. Special Motor Vehicle Identification Number,
3. No depreciation shall be allowed for yachts, helicopters, airplanes and/or Chassis Number or other registrable identification
aircrafts and land vehicles which exceed the above threshold amount, numbers of the vehicle
unless the taxpayer’s main line of business is transport operations or lease
2. Total price of vehicle subject to depreciation
of transportation equipment and the vehicles purchased are used in said
operations; 3. Direct connection or relation of the vehicle to the
4. All maintenance expenses on account of non-depreciable vehicles for development, management operation and conduct
taxation purposes are disallowed in its entirety; of the business, trade or profession of the taxpayer
5. The input taxes on the purchase of non-depreciable vehicles and all input ii. Only one 1 vehicle for land transport is allowed for the use
taxes on maintenance expenses incurred thereon are likewise disallowed of an official or employee, the value should not exceed
for taxation purposes.
2.4M
iii. No depreciation shall be allowed for yachts, helicopters,
airplanes and/or aircrafts, and land vehicles which exceed
FACTS: the above threshold amount, unless the taxpayer’s main
1. Section 1. Scope: line of business is transport operations or lease of
a. Pursuant to provisions of Section 244, in relation to Sec. 245 of transportation equipment and the vehicles purchased are
NIRC of 1997, these Regulations are promulgated to implement used in said operations;
Sections 34(F) and 110 of the Tax Code, to define the depreciation iv. All maintenance expenses on account of non-depreciable
expenses relating to taxpayer’s purchase of vehicles of all type vehicles for taxation purposes are disallowed in its entirety
(whether by land, water or air) providing for limits on the v. Input taxes on the purchase of non-depreciable vehicles
deductibility and all expenses related and the disallowance of input and all input taxes on maintenance expenses incurred are
taxes for disallowed expenses. likewise disallowed for taxation purposes.
2. Section 2. General Principles
a. Under Chapter VII, Section 34(F) of Tax Code, in computing
taxable income, a reasonable allowance for the exhaustion, wear and
tear of property use in business is allowed to be deducted from gross
income. Generally, it cannot be presumed that the purchase of a
vehicle is a purchase of property used in business. In order for the
deduction for depreciation and all other expenses and input taxes
78
Depletion Regarding Estimated Ore Deposits. The Court agrees with Consolidated
Mines argues that, based on a report by a geologist, the estimated float of
76. Consolidated Mines v. Court of Tax Appeals (Feli) 200,000 tons and the recoverable ore from dump material of 115,004 tons
August 29, 1974 | C.J. Makalintal | Deduction - Depletion should have been deducted, since the estimated float consists of broken up
pieces that could not increase the ore potential of the mines, and there is no
PETITIONER: Consolidated Mines, Inc. data to affirm or deny the amount of 115,004 tons.
RESPONDENTS: Court of Tax Appeals and Commissioner of Internal
Revenue The SC finally decided that the rate of depletion should be P0.6196 (See
Ratio #6 for the SC’s final computation)
SUMMARY: Consolidated Mines filed its income tax returns for 1951,
1952, 1953 and 1956. In 1954, Felipe Ollada, the company’s auditor, DOCTRINE: Sec. 30 (g) (1) (B), Tax Code - In computing net income
claimed a refund of P107,472 representing alleged overpayments of income there shall be allowed as deduction, in case of mines, a reasonable
taxes for 1951. Upon examination by the BIR in 1957, they found that for allowance for depletion thereof not to exceed the market value in the mine
the years 1951 to 1954 and 1956, the company had overstated its claim for of the product thereof, which has been mined and sold during the year for
depletion. The Commissioner of Internal Revenue sent a letter of demand to which the return is made. The formula for this is cost of mine
Consolidated Mines requiring it to pay deficiency income taxes for the years property/estimated ore deposits = rate of depletion per unit of product
1951 to 1954 and 1956. The company requested a reconsideration of the mined and sold. The burden of proof to show that a disallowance of
assessment, but the Commissioner refused. Consolidated Mines appealed to depletion by the Commissioner is incorrect or that an allowance made is
the CTA, which ordered the company to pay the deficiency income taxes inadequate is upon the taxpayer.
for 1953, 1954 and 1956 (since the assessments for 1951 and 1952 were
issued beyond the 5 year period and therefore had prescribed). Consolidated
Mines now questions the rate of mine depletion adopted by the CTA.
The issue is WON the rate adopted by the CTA is correct. The SC held NO.
While the CTA’s computation of the cost of mine property should be
sustained, it agreed with Consolidated Mines’ computation of estimated ore FACTS:
deposit. 1. Consolidated Mines filed its income tax returns for 1951, 1952, 1953 and
1956. In 1954, Felipe Ollada, the company’s auditor, claimed a refund of
Regarding Cost of Mine Property. Consolidated Mines presented a P107,472 representing alleged overpayments of income taxes for 1951.
balance sheet to prove that the cost for developing the mine was 2. Upon examination by the BIR in 1957, they found that:
P1,738,974.56. But the company did not prove what the amount really a. For the years 1951 to 1954,
consisted of and whether it actually formed part of the cost of mine i. Consolidated Mines had not accrued as an expense the
development. Moreover, the BIR examiner found that the expenses made share in the company profits of Benguet Consolidated
by the operator are those which are depreciable and/or amortizable instead Mines as operator of the mines, although Consolidated
of depletable and of the total expenditure of P1, 570,277.58, P1,438,399.14 Mines had reported income and expenses on accrual basis
were spent on depreciable/amortizable expenses and P131,878.44 were ii. depletion and depreciation expenses had been
made for the direct improvement of the mine property (development cost). overcharged
iii. the claims for audit, legal fees and miscellaneous expenses
for 1953 and 1954 had not been properly substantiated.
79
b. For the year 1956, c. Argument of Consolidated mines = Cost of Mine property is
i. The company had overstated its claim for depletion P1,738,974.56
ii. Certain claims for miscellaneous expenses were not duly d. Argument of Commissioner = P 131,878.44
supported by evidence 2. Depletion is a creation of the statute. Hence,the taxpayer has the burden of
3. The Commissioner of Internal Revenue sent a letter of demand to justifying the allowance of any deduction claimed.
Consolidated Mines requiring it to pay deficiency income taxes for the years a. The burden of proof to show that a disallowance of depletion by the
1951 to 1954 and 1956. The company requested a reconsideration of the Commissioner is incorrect or that an allowance made is inadequate
assessment, but the Commissioner refused. is upon the taxpayer.
4. Consolidated Mines appealed to the CTA, which ordered the company to pay 3. To prove the amount spent for developing the mines was P1,738,974.56,
the deficiency income taxes for 1953, 1954 and 1956 (since the assessments Consolidated Mines presented the balance sheet, that showed the purchase
for 1951 and 1952 were issued beyond the 5 year period and therefore had price of the mine (P2,500,000) and the cost of developing it (P1,738,974.56).
prescribed). a. However, the company has not explained what the two amounts
5. Consolidated Mines now questions the rate of mine depletion adopted by consisted of.
the CTA and the disallowance of depreciation charges and certain b. A balance sheet may not be considered as entries made in the
miscellaneous expenses. ordinary course of business. It is only a paper which shows a
a. According to the Commissioner, the rate of depletion per ton should summation or general balance of all accounts, but not the particular
be P0.59189 items going to make up the several accounts.
b. According to Consolidated Mines, it should be P1.0197 c. The presentation of the balance sheet would only prove that the
P4,238,974.57 corresponds to mine cost. The company would still
need to prove the components of the amount of P1,738,974.56 (what
ISSUES: WON the rate of mine depletion used by the CTA is correct - NO (The were the particular expenses and the corresponding amounts), so it
CTA’s computation of Mine Cost is correct, but the SC sustained the company’s may be determined whether the expenses were actually made and
computation of estimated ore deposit. See Ratio for the SC’s computation) are part of the cost of mine development.
4. Memorandum of BIR Examiner Cesar Aguirre
RATIO: a. The expenses made by the operator are those which are depreciable
and/or amortizable instead of depletable.
1. Sec. 30 (g) (1) (B), Tax Code - In computing net income there shall be b. Of the total expenditure of P1, 570,277.58, P1,438,399.14 were
allowed as deduction, in case of mines, a reasonable allowance for depletion spent on depreciable/amortizable expenses and P131,878.44 were
thereof not to exceed the market value in the mine of the product thereof, made for the direct improvement of the mine property (development
which has been mined and sold during the year for which the return is made. cost)
a. Formula: 5. Regarding estimated ore deposit, Consolidated Mines argues that the figure
is 4,156,888 tons while the Commissioner claims it is 4,471,892.
a. Based on a report by geologist Paul Schaffer, Consolidated Mines
argues that the estimated float of 200,000 tons and the recoverable
ore from dump material of 115,004 tons should have been deducted.
b. The Court agrees with Consolidated Mines.
i. The estimated float of 200,000 tons (pieces of ore that had
b. Cost of mine property = Mine Cost and Expenses for development broken loose and become detached by erosion from their
before production original position) could hardly be viewed as part of the total
80
estimated ore deposit. Since it has been broken up into

small pieces, the same cannot increase the ore potentials of
the mines.
ii. As to the 115,004 tons, there is no sufficient data to affirm
or deny the accuracy of the amount.
iii. The court thinks that 4,271,892 tons would be a fair
estimate of the ore deposits.
6. THE SC’S FINAL COMPUTATION FOR RATE OF DEPLETION
Charitable and other contributions
77. BIR Ruling 19-01 (Lex)

May 10, 2001 | BIR | Deductions- Charitable and other contributions
81
PETITIONER: Conservation International addressed by your evaluation process. In reply, please be informed that Sec. 34 (H) of
RESPONDENTS: the Tax Code provides, viz.:
"(H) Charitable and Other Contributions. —
SUMMARY: Conservation International, an international organization with "(l) In General. — Contributions or gifts actually paid or made within the
home offices abroad, applied for certification with Philippine Council for NGO taxable year to, or for the use of the Government of the Philippines or any of
Certification (PCNC) to be granted status as a donee institution, but since its its agencies or any political subdivision thereof exclusively for public
members are based overseas, fundamental issues regarding governance cannot be purposes, or to accredited domestic corporations or associations organized
fully addressed by the BIR’s evaluation process. Issue: Whether or not and operated exclusively for religious, charitable, scientific, youth and sports
international organizations with home offices based abroad are qualified to be development, cultural or educational purposes or for the rehabilitation of
granted donee institution status. veterans, or to social welfare institutions or to non-government organizations,
in accordance with rules and regulations promulgated by the Secretary of
BIR Opinion: Sec. 34(H) of the Tax Code of 1997, which talks of Charitable and Finance, upon recommendation of the Commissioner, no part of the net
Other Contributions, specifically mentions “accredited domestic corporation or income of which inures to the benefit of any private stockholder or individual
associations” and “non-government organizations”. On the other hand, in an amount not in excess of ten percent (10%) in the case of an individual,
subparagraph (2)(c) of the same Section of the Tax Code defines a "non- and five percent (5%) in the case of a corporation of the taxpayer's taxable
government organization" to mean a non-profit domestic corporation. income derived from trade, business or profession as computed without the
benefit of this and the following subparagraphs".
Revenue Regulation No. 13-98 was issued to implement sec. 34(H), and it
provides that a non-stock, non-profit corporation or organization must be created ISSUES:
or organized under Philippine Laws and that an NGO must be a non-profit 1. Whether or not international organizations with home offices based abroad
domestic corporation. are qualified to be granted donee institution status.
The BIR opines that a foreign corporation, like Conservative International, RATIO:
whether resident or non-resident, cannot be accredited as donee institution.
Sec. 34(H)(l) of the Tax Code of 1997 specifically mentions "accredited domestic
corporation or associations" and "non-government organizations". On the other hand,
FACTS:
subparagraph (2)(c) of the same Section of the Tax Code defines a "non-government
organization" to mean a non-profit domestic corporation.
BIR RULING NO. 019-01
In implementing Sec. 34(H) of the Tax Code, Rev. Regs. No. 13-98 was issued and in
Philippine Council for NGO Certification 4/F 4718 Eduque St.
relation to the type of entities that may be accredited, provides as follows:
Makati City
Attention: Ms. Fely I. Soledad Executive Director
"SEC. 1. Definition of Terms. — For purposes of these Regulations, the terms herein
enumerated shall have the following meanings:
Gentlemen:
a) "Non-stock, non-profit corporation or organization" — shall refer to a corporation
or association/organization referred to under Section 30 (E) and (G) of the Tax Code
This refers to your letter dated October 3, 2000 requesting for opinion on whether or
created or organized under Philippine laws exclusively for one or more of the
not international organizations with home offices based abroad are qualified to be
following purposes: xxx xxx xxx
granted donee institution status. Specifically, you are referring to Conservation
International which was applied for certification with PCNC but its board members
are based overseas, hence fundamental issues regarding governance cannot be fully
82
b) "Non-government Organization (NGO)" — shall refer to a non-stock, non-profit

domestic corporation or organization as defined under Section 34(H)(2)(c) of the Tax
Code organized and operated exclusively . . ."
Considering the requirements of the Tax Code of 1997 and Rev. Regs. No. 13-98 that
a non-stock, non-profit corporation or organization must be created or organized under
Philippine Laws and that an NGO must be a non-profit domestic corporation, this
Office is of the opinion that a foreign corporation, like Conservation International,
whether resident or non-resident, cannot be accredited as donee institution.
Research and Development
78. 3M Philippines Inc. v. CIR (Sari)

September 26, 1988 | Grino-Aquino, J.| Deductions – Research and Development
83
PETITIONER: 3M PHILIPPINES, INC. 4. Petitioner protested the assessment in a letter but the Commissioner did not
RESPONDENTS: COMMISSIONER OF INTERNAL REVENUE answer and instead issued warrants of distraint and levy and petitioner had to
post a P1,850,000 bond with the Court of Tax Appeals during its petition for
SUMMARY: review for a writ of preliminary injunction to stop the enforcement of the
3M Philippines Inc. is a local subsidiary of a nonresident foreign company 3M – St. warrants.
Paul (Minnesota). It entered into a “Service Information and Technical Assistance 5. After hearing, the Tax Court rendered a decision upholding the
Agreement” and a “Patent and Trademark License Agreement” under which Commissioner’s ruling and the petitioner’s motion for reconsideration was
petitioner agreed to pay the foreign company a technical service fee of 3% and a
royalty fee of 2% of its net sales. 3M tried to claim the technical service fees and likewise dismissed.
royalties as business expense deductions on its income return but respondent CIR 6. Hence, the case before the SC where petitioner argued that only Sec. 29(a)(1)
disallowed the amount paid on finished products imported by the petitioner, on the of the Tax Code should have been applied to the case instead of the Central
ground that the fee and royalty should be based only on goods manufactured locally, Bank Circular, which the CIR and Tax Court had used in arriving at their
based on how royalties and service fees are defined under Central Bank Circular No. decisions.
393. Petitioner then argued before the SC that the CB Circular should not have been ● Tax Code:
applied, as the Tax Code never refers to the CB Circular. Issue: WON the application
Sec 29(a)(1) Business expenses. — (A) In general. — All ordinary
of the Central Bank Circular was invalid?
Held: NO. Although the Tax Code allows payments of royalty to be deducted from and necessary expenses paid or incurred during the taxable year in
gross income as business expenses, it is only CB Circular 393 that defines what carrying on any trade or business, including a reasonable allowance
proper royalty payments are. Improper payments of royalty cannot be deductible as for salaries or other compensation for personal services actually
legitimate business expenses rendered; travelling expenses while away from home in the pursuit
of a trade, profession or business, rentals or other payments required
DOCTRINE: Although the Tax Code allows payments of royalty to be deducted to be made as a condition to the continued use or possession, for the
from gross income as business expenses, it is CB Circular No. 393 that defines purpose of the trade, profession or business, for property to which
what royalty payments are proper. Hence, improper payments of royalty are not
the taxpayer has not taken or is not taking title or in which he has no
deductible as legitimate business expenses.
equity.
● CB Circular:
Sec 3-C. The royalty/rental contracts involving manufacturing
royalty, e.g., actual transfers of technological services such as secret
formula/processes, technical know how and the like shall not exceed
FACTS:
five (5) percent of the wholesale price of the commodity/ties
1. 3M Philippines, the local subsidiary of foreign corporation 3M –St. Paul (as
manufactured under the royalty agreement. For contracts involving
in St. Paul, Minnesota), entered into a “Service Information and Technical
'marketing' services such as the use of foreign brands or trade names
Assistance Agreement” and a “Patent and Trademark License Agreement”
or trademarks, the royalty/rental rate shall not exceed two (2)
with the latter, under which the petitioner agreed to pay to 3M – St. Paul a
percent of the wholesale price of the commodity/ties manufactured
technical service fee of 3% and a royalty of 2% of its net sales.
under the royalty agreement.
2. In its income tax return for the fiscal year 1974, petitioner claimed:
● Royalties and technical service fees (P3,050,646); and
ISSUE:
● Pre-operational costs as business expenses. (Not relevant)
1. WON the application of the Central Bank circular was invalid? - NO
3. The CIR, however, disallowed the amount alleged to have been paid as
technical service fees and royalties on the finished products imported by the
RATIO:
petitioner (P2,323,599 of the P3,050,646), on the ground that the fee and
royalty should be based only on locally manufactured goods.
84
1. Although the Tax Code allows payments of royalty to be deducted from gross
income as business expenses, it is only CB Circular 393 that defines what
proper royalty payments are. Improper payments of royalty cannot be
deductible as legitimate business expenses.
2. CB Circular 393 was promulgated as an exchange control regulation to
conserve foreign exchange and avoid unnecessary drain on the country’s
international reserves. This was necessary because remittances to foreign
licensors of technical services fees and royalties are made in foreign
exchange.
3. In this case, it was clear that no royalty was payable on the wholesale price
of finished products imported by the licensee from the licensor as CB
Circular 393 clearly provided that royalties were to be paid only on
commodities manufactured by the licensee under the royalty agreement.
SEPARATE OPINIONS:
CONCURRING:
Additional requirements for deductibility
79. RMO 38-83 (YvonneChon)

November 14, 1983 | BIR | Deductions - Additional requirements for deductibility
85
RMO = Revenue Memorandum Orders have been withheld, inclusive of surcharges, interest and penalties incident
***It’s a 1 page RMO, no digests or anything for it to such error.
(Lifted from Cabochan. In Cabochan, we trust.)
o Items of deductions disallowed due to non-compliance with this provision, the
RMO 38-83 provides for the guidelines for allowance of deductions for certain deficiency income tax assessment for which had been issued before the effectivity
income payments. of this RMO, may be allowed upon payment not later than May 15, 1984 of the
withholding tax required and supposed to have been withheld and/or surcharges,
Background interest and penalties.
o Amount paid or payable, which is deductible, shall be allowed as deduction only - No Refund or credit arising from such re-allowance of a previously
if it is shown that the tax required to be deducted and withheld therefrom has been disallowed deduction shall be granted.
paid to the BIR in accordance with SEC 53 and 93 of the NIRC.
o This guideline is issued to minimize audit controversies and to achieve uniformity
in implementation.
Rationale:
o The purpose of the provision is to compel compliance with the requirements of
SEC 53 and 93 of the NIRC.
o Considering that the existing surcharges, interests, fines, and imprisonment are
adequate to compel taxpayers/withholding agents to comply with the withholding
taxes, outright disallowance of deductions for mere failure to withhold and remit
will be tantamount to the imposition of additional surcharge.
o To minimize the onerous effect of literal application, allowance or disallowance
of such items shall be determined in accordance with the following guidelines:
Guidelines:
o Deduction on which a tax is supposed to have been withheld shall be allowed if
the examiner discovers that:
- No withholding of creditable or final tax was made, but the payee reported
the income and the withholding agent pays during the original audit and
investigation the surcharges, interest, penalties incident to the failure to
withhold the tax.
- No withholding of creditable or final tax was made and the payee failed to
report the income on due date, but the withholding agent pays during the
original audit and investigation the amount supposed to have been
withheld, inclusive of surcharges, interest and penalties incident to the
failure to withhold.
- Withholding agent erroneously under withheld the tax, but pays during the
original audit and investigation the difference in the amount supposed to
86
80. RR 12-2013 (BAM) REVENUE REGULATIONS NO. 6-20183 issued on January 19, 2018 revokes
July 12, 2013 | Sec. Purisima | Deductions - ADDITIONAL REQUIREMENTS Revenue Regulations (RR) No. 12-2013 relative to the requirements for deductibility
of certain expenses, thereby reinstating the provisions of Section 2.58.5 of RR No.
SUMMARY: 14-2002, as amended by RR No. 17-2003.
RR 12-2013 amended Section 2.58.5 of RR 2-98 which now reads:
Any income payment which is otherwise deductible under the Tax Code, shall be
Any income otherwise deductible under the NIRC shall be allowed as deduction allowed as a deduction from the payor’s gross income only if it is shown that the
only if it is shown that the income tax required to be withheld has been paid to income Tax required to be withheld has been paid to the BIR in accordance with
the BIR in accordance with Sec. 57 and 58. Sections 57 and 58 of this code.
A deduction will be allowed in the following cases where no withholding of tax was
No deduction will be allowed notwithstanding payments of withholding tax at the made:
time of audit investigation or reinvestigation/reconsideration in cases where no a. The payee reported the income and pays the tax due thereon and the
withholding of tax was made in accordance with Sec. 57 and 58 of this Code. withholding agent pays the tax, including the interest incident to the failure
to withhold the tax, and surcharges, if applicable, at the time of
audit/investigation or reinvestigation/reconsideration;
FACTS: b. The recipient/payee failed to report the income on the due date thereof, but
1. Enacted to amend provisions of RR 2-98 the withholding agent/taxpayer pays the tax, including the interest incident to
2. Amended Sec. 2.58.5 of RR 2-98 now reads: the failure to withhold the tax, and surcharges, if applicable, at the time of
Any income otherwise deductible under the NIRC shall be allowed as audit/investigation or reinvestigation/reconsideration; and
deduction only if it is shown that the income tax required to be withheld has c. The withholding agent erroneously underwithheld the tax but pays the
been paid to the BIR in accordance with Sec. 57 and 58. difference between the correct amount and the amount of tax withheld,
including the interest incident to such error and surcharges, if applicable, at
No deduction will be allowed notwithstanding payments of withholding tax the time of audit/investigation or reinvestigation/reconsideration.
at the time of audit investigation or reinvestigation/reconsideration in cases
where no withholding of tax was made in accordance with Sec. 57 and 58 Items of deduction representing return of capital, such as those pertaining to purchases
of this Code of raw materials forming part of finished product purchases of goods for resale, shall
be allowed as deduction upon withholding agent’s payment of the basic withholding
BUT!! This was subsequently revoked by RR No. 6-2018(not in the syllabus). tax and penalties incident to non-withholding or underwithholding.
3
Taken from the bir.gov.ph website; published in Manila Bulletin 23 January 2018
87
Optional Standard Deduction ■ The partners’ distributive share in the GPP is

treated as his gross income not his gross
81. RR 2-2010 (JackJack) sales/receipts and the 40% OSD allowed to
Feb 18, 2010 | Issued by BIR | V. Deductions- Optional Standard Deduction individuals is specifically mandated to be
deducted not from his gross income but from his
*It’s not a case. I copied this from the digest available in the BIR website :) gross sales/ receipts; and
■ The OSD being in lieu of the itemized deductions
OVERVIEW: allowed in computing taxable income as defined
This RR amends Sections 6 and 7 of RR No. 16-2008 with respect to the under Section 31 of the NIRC, it will answer for
determination of the Optional Standard Deduction (OSD) of General Professional both the items of deduction allowed to the GPP
Partnerships and the partners thereof, as well as the manner and period for making and its partners.
the election to claim OSD in the Income Tax Returns. c. Since one-layer of Income Tax is imposed on the income of the
GPP and the individual partners where the law had placed the
DOCTRINE: statutory incidence of the tax in the hands of the latter, the type of
The General Professional Partnerships (GPP) is not a taxable entity for deduction chosen by the GPP must be the same type of deduction
Income Tax purposes since it is only acting as a “pass-through” entity where that can be availed of by the partners. Accordingly, if the GPP
its income is ultimately taxed to the partners comprising it. claims itemized deductions, all items of deduction allowed under
Section 34 of the NIRC can be claimed both at the level of the GPP
and at the level of the partner in order to determine the taxable
1. In computing taxable income defined under Section 31 of the National income. On the other hand, should the GPP opt to claim the OSD,
Internal Revenue Code (NIRC), all expenses which are ordinary and the individual partners are deemed to have availed also of the OSD
necessary, incurred or paid for the practice of profession, are allowed as because the OSD is in lieu of the itemized deductions that can be
deductions. claimed in computing taxable income.
2. Since the taxable income is in the hands of the partner, as a rule apart from d. If the partner also derives other gross income from trade, business
the expenses claimed by the GPP in determining its net income, the individual or practice of profession apart and distinct from his share in the net
partner can still claim deductions incurred or paid by him that contributed to income of the GPP, the deduction that he can claim from his other
the earning of the income taxable to him. The following rules shall govern gross income would follow the same deduction availed of from his
the claim of the partners of deductions from their share in the net income of partnership income as explained in the foregoing rules.
the partnership: Provided, however, that if the GPP opts for the OSD, the individual
a. If the GPP availed of the itemized deduction in computing its net partner may still claim 40% of its gross income from trade,
income, the partners may still claim itemized deductions from said business or practice of profession but not to include his share from
share, provided, that, in claiming itemized deductions, the partner is the net income of the GPP.
precluded from claiming the same expenses already claimed by the ● A taxpayer who elected to avail of the OSD not exceeding 40% of gross sales
GPP. In fine, if the GPP claimed itemized deductions the partners or gross receipts, in case of an individual taxable under Sections 24(A) and
comprising it can only claim itemized deductions which are in the 25(A)(1) of the NIRC, or 40% of gross income, in case of a corporation
nature of ordinary and necessary expenses for the practice of subject to tax under Section 27(A) or 28(A)(1) of the NIRC shall signify in
profession which were not claimed by the GPP in computing its his/its return such intention, otherwise he/it shall be considered as having
net income or distributable net income during the year. availed himself of the itemized deductions allowed under Section 34 of the
Hence, if the GPP availed of itemized deductions, the partners are NIRC. Once the election to avail of the OSD or itemized deduction is
not allowed to claim the OSD from their share in the net income signified in the return, it shall be irrevocable for the taxable year for which
because the OSD is a proxy for all the items of deductions allowed the return is made.
in arriving at taxable income. ● The election to claim either the OSD or the itemized deduction for the taxable
b. If the GPP avails of OSD in computing its net income, the partners year must be signified by checking the appropriate box in the Income Tax
comprising it can no longer claim further deduction from their share Return filed for the first quarter of the taxable year adopted by the taxpayer.
in the said net income for the following reasons: Once the election is made, the same type of deduction must be consistently
88
applied for all the succeeding quarterly returns and in the final Income Tax
Return for the taxable year. Any taxpayer who is required but fails to file the
quarterly Income Tax Return for the first quarter shall be considered as
having availed of the itemized deductions option for the taxable year.
● An individual taxpayer who is entitled to and claimed the OSD shall not be
required to submit with his tax return such financial statements otherwise
required under the NIRC. Provided, that, except when the Commissioner
otherwise permits, the said individual shall keep such records pertaining to
his gross sales or gross receipts. In the case of a corporation, however, said
corporation is still required to submit its financial statements when it files its
annual Income Tax Return and to keep such records pertaining to its gross
income as herein defined.”
89
82. RR 16-2008 Sections 1 - 7 (KARA ℅ Cabochan) --- For trading and merchandising, COGS means the invoice cost of goods sold, plus
December 18, 2008 | BIR Revenue Regulation | Optional Standard Deduction import duties, freight in transporting the goods to the place where the goods are
actually sold, including insurance while the goods are in transit.
SECTION 1 – These Regulations are promulgated to implement the provisions on --- For manufacturing, COGS means all costs incurred in the production of the finished
OSD for individuals and corporations. goods such as raw materials used, direct labor and manufacturing overhead, freight
cost, insurance premiums and other costs incurred to bring the raw materials to the
SECTION 2 – The following may be allowed to claim OSD in lieu of itemized factory or warehouse. The Term COGMS can also be used interchangeably.
deductions: --- For services, GI means gross receipts less sales returns, allowances, discounts, and
1. Individuals: costs of services. Cost of Services means all direct costs and expenses necessarily
a. RC incurred to provide the services required by the customers and clients including:
b. NRC ● Salaries and employee benefits of personnel, consultants and specialists
c. RA directly rendering the service;
d. Taxable estates and Trusts. ● Cost of facilities directly utilized in providing the service such as depreciation
or rental of equipment used and cost of supplies.
1. Corporations: ● Cost of Services shall not include interest expense, except in the case of banks
a. DC and other financial institutions.
b. RFC ● Gross Receipts means amount actually or constructively received during the
taxable year.
SECTION 3 – OSD allowed to individuals shall be a maximum of 40% of gross sales ● For service taxpayers, under accrual basis, gross receipts shall mean amounts
or receipts during the taxable year. earned as gross revenue during the taxable year.
--- For accrual basis, OSD shall be based on the gross sales during the taxable year. --- Items of GI under SEC 32 of the NIRC, are part of the GI against which the OSD
--- For cash basis, OSD shall be based on gross receipts during the taxable year. may be deducted. Passive incomes subjected to final tax at source shall not form part
--- Cost of Sales or Cost of Services are not allowed to be deducted for purposes of of the GI for purposes of computing the 40% OSD.
determining the basis of the OSD. The Law is specific. It mentions gross sales or --- For different method of accounting, GI shall be determined in accordance with said
receipts, not GI. acceptable method of accounting.
--- For different method of accounting (percentage of completion basis, etc.), the gross
sales or receipts shall be determined in accordance with said acceptable method of SECTION 5 – Illustrative Example.
accounting.
SECTION 4 – OSD allowed to corporate taxpayers shall be an amount not exceeding

40% of their Gross Income.
--- GI shall mean gross sales less sales returns, discounts, and allowances and Cost Of
Goods Sold.
--- Gross sales shall include only sales contributory to taxable income.
--- COGS shall include purchase price or cost to produce the merchandise and all
expenses directly incurred in bringing them to their present location and use.
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● it can opt to avail of the OSD allowed to corporations in claiming the

deductions in an amount not exceeding forty percent (40 %) of its gross
income.
-- The net income determined after claiming deductions is the distributable net income
from which the share of each partner is to be determined
-- In computing taxable income defined under Section 31 of the Code, the individual
partner can still claim either itemized deductions or optional standard deduction from
his share in the net income of the GPP because said share is considered as gross income
in the hands of the partner
-- If the GPP availed of the itemized deduction in computing its net income, the
partners may still either claim itemized deduction or OSD from said share, provided,
that, in claiming itemized deductions, the partner is precluded from claiming expenses
already claimed by the GPP.
-- Four possibilities:
● GPP - itemized deductions | Partner - Itemized deductions
● GPP - OSD | Partner - Itemized Deductions
● GPP - itemized deductions | Partner - OSD
● GPP - OSD | Partner - OSD
SECTION 7 – OTHER IMPLICATIONS OF THE OPTIONAL STANDARD

DEDUCTION.
-- A taxpayer who elected to avail of the OSD shall signify in his/its return such
intention, otherwise he/it shall be considered as having availed himself of the itemized
deductions
-- Once the election to avail the OSD is signified in the return, it shall be irrevocable
for the taxable year for which the return is made. (precluded from amending the said
return to shift to itemized deductions)
SECTION 6 – DETERMINATION OF THE OPTIONAL STANDARD
-- An individual taxpayer who is entitled to and claimed the OSD shall not be required
DEDUCTION FOR GENERAL PROFESSIONAL PARTNERSHIPS (GPPs) AND
to submit with his tax return such financial statements. Provided, the said individual
PARTNERS OF GPPs.
shall keep such records pertaining to his gross sales or gross receipts.
-- a GPP is not subject to income tax.
-- Corporation is still required to submit its financial statements when it files its annual
-- However, the partners shall be liable to pay income tax on their separate and
income tax return and to keep such records pertaining to its gross income as herein
individual capacities for their respective distributive share in the net income of the
defined
GPP.
-- In the filing of the quarterly income tax returns, the taxpayer may opt to use either
-- Sec. 26 of the Code: For purposes of computing the distributive share of the partners,
the itemized deduction or OSD.
the net income of the GPP shall be computed in the same manner as a corporation.
-- In filing the final adjustment income tax return, the taxpayer must make a choice as
● a GPP may claim either the itemized deductions allowed under Section 34 of
to what method of deduction it or he shall employ for the purpose of determining its/his
the Code OR
taxable net income for the entire year.
91
-- The taxpayer is, thus, not allowed to use a hybrid method of claiming its/his
deduction for one taxable year.
92
NOLCO xxx xxx xxx

(2) By Corporations. — In a case of a corporation, all losses actually sustained
83. Paper Industries Corp. v CA (Billy c/o A2020) and charged off within the taxable year and not compensated for by insurance or
December 1 1995 | Feliciano | NOLCO otherwise.
(3) By Non-resident Aliens or Foreign Corporations. — In the case of a non-
resident alien individual or a foreign corporation, the losses deductible are
PETITIONER: Paper Industries Corporation of the Philippines (Picop)
those actually sustained during the year incurred in business or trade
RESPONDENTS: CTA CIR CA conducted within the Philippines
SUMMARY: Section 76 of the Philippine Income Tax Regulations (Revenue Regulation No. 2,
PICOP entered into merger agreement with Rustan which provided that the rights, as amended) is even more explicit and detailed:
properties, privileges, powers, and franchises of RPPM and RMC were to be Sec. 76. When charges are deductible. — Each year's return, so far as
transferred, assigned, and conveyed to PICOP as the surviving corporation. Before practicable, both as to gross income and deductions therefrom should be
the merger, Rustan had accumulated losses of P81M. In its 1977 income, PICOP complete in itself, and taxpayers are expected to make every reasonable effort to
claimed P44M of Rustan’s losses as deduction based on Section 7(c) of RA 5186 ascertain the facts necessary to make a correct return. The expenses, liabilities, or
which provides for a net operation loss carry-over. This was disallowed by the deficit of one year cannot be used to reduce the income of a subsequent year. A
CIR. CIR claims that they are different entities when the losses were incurred so taxpayer has the right to deduct all authorized allowances and it follows that if he
PICOP cannot deduct the losses incurred by Rustan from its gross income. PICOP does not within any year deduct certain of his expenses, losses, interests, taxes,
claims that they merged so they became one entity. or other charges,
he can not deduct them from the income of the next or any succeeding year. . . .
Issue/s: WON PICOP can deduct losses incurred by Rustan—NO xxx xxx xxx
. . . . If subsequent to its occurrence, however, a taxpayer first ascertains the
NO. The rule applicable in respect of corporations not registered with the BOI as amount of a loss sustained during a prior taxable year which has not been
a preferred pioneer enterprise is that net operating losses cannot be carried over. deducted from gross income, he may render an amended return for such
Under our Tax Code, losses may be deducted from gross income only if such preceding taxable year including such amount of loss in the deduction from
losses were actually sustained in the same year that they are deducted or charged gross income and may in proper cases file a claim for refund of the excess paid
off. It is thus clear that under our law, and outside the special realm of BOI- by reason of the failure to deduct such loss in the original return. A loss from
registered enterprises, there is no such thing as a carryover of net operating loss. theft or embezzlement occurring in one year and discovered in another is
To the contrary, losses must be deducted against current income in the taxable ordinarily deductible for the year in which sustained. (Emphases supplied)
year when such losses were incurred. Thus it is that R.A. No. 5186 introduced the
carry-over of net operating losses as a very special incentive to be granted only to
registered pioneer enterprises and only with respect to their registered operations.
To allow PICOP to deduct would be to permit one corporation or enterprise to
benefit from losses accumulated by another corporation FACTS:
BIG PICTURE (There are different facts per issue but these are the general facts for
the whole case)
DOCTRINE: 1. The Paper Industries Corporation of the Philippines (PICOP), is a Phil.
Sec. 30. Deductions from Gross Income. — In computing net income, there shall Corporation registered with the Board of Investments as a preferred pioneer
be allowed as deduction — enterprise with respect to its integrated pulp and paper mill, and as a
xxx xxx xxx preferred non-pioneer enterprise with respect to its integrated plywood and
(d) Losses: veneer mills.
(1) By Individuals. — In the case of an individual, losses actually sustained 2. CIR sent PICOP 2 letters of assessment for:
during the taxable year and not compensated for by an insurance or otherwise — 3. Deficiency transaction tax and documentary and science stamp tax
(P38,094,309.90) & Deficiency income tax for 1977 (P16,014745.90)
(A) If incurred in trade or business;
TOTAL: P59,668,946.90
93
4. PICOP protested these assessments but CIR did not act on it and instead, it Code, any provision of this Act to the contrary notwithstanding, except that
issued a warrant of levy on real property against PICOP. income not taxable either in whole or in part under this or other laws shall be
5. The CTA modified the decision of the CIR and held PICOP liable for the included in gross income.”
reduced amount of P20,133,762.33
6. CA – further reduced it to P6,338,354.70. 9. PICOP secured a letter-opinion from the BOI (after the agreement of merger but
7. Arguments of PICOP It is not liable at all to pay any of the assessments or before the merger became effective) which says that:
any part thereof o It assails the propriety of the 35% deficiency transaction 10. Prior to the dissolution of Rustan, PICOP will not be allowed to carry
tax which the CA held due from it. It also questions the imposition by the over the losses of Rustan prior to the legal dissolution of the latter
CA of the deficiency income tax of P1,481,579.15 resulting from because they are separate entities;
disallowance of certain claimed financial guarantee expenses and claimed a 11. After BOI approval of the merger, PICOP may carry over the losses of
year-end adjustments of sales and cost of sales Rustan because PICOP assumes all the rights and obligations of Rustan
8. Arguments of the CIR o CA erred in not finding PICOP liable for surcharge subject to the period prescribed for carrying over.
and interest on unpaid transaction tax and for documentary stamp tax and in 12. PICOP did not seek a ruling from the BIR and relied on the BOI opinion.
allowing PICOP to claim deductible expenses: Net operating losses of 13. The CIR disallowed all deductions because Rustan is another taxpayer and they
another corp (Rustan Pulp and Paper Mills, Inc.) and Interest payments were merged only in 1987. Thus, during the taxable year of 1977, they were still
on loans for the purchase of machinery and equipment separate. CIR also says that the losses had been incurred by RPPM from
FACTS RELATED TO OUR TOPIC borrowing funds and not from RPPM’s instructions
1. PICOP entered into a merger agreement with Rustan which provided that the 14. CTA – upheld deductions claimed and fell back on the BOI opinion
rights, properties, privileges, powers, and franchises of RPPM and RMC were to
be transferred, assigned, and conveyed to PICOP as the surviving corporation.
2. The entire subscribed and outstanding capital stock of RPPM and RMC would
be exchanged for stocks of PICOP, the result being that PICOP would wholly ISSUES:
own both RPPM and RMC and the stockholders of the latter would join the 1. WON PICOP is entitled to deductions against income of. Net operating
ranks of PICOP’s shareholders. losses incurred by Rustan Pulp and Paper Mills Inc. - NO
3. PICOP paid off the obligations of RPPM to DBP (P68M) by issuing preferred
shares to DBP.
4. The Board of Investments approved the merger agreement.
5. Before the merger, RPPM had accumulated losses in the total amount of P81M RATIO:
6. In its 1977 income, PICOP claimed the P44M of RPPM’s accumulated losses as 1. According to PICOP’s counsel, the net operating loss carry-over of RMC
a deduction against PICOP’s gross income. was among the attractions of the merger to PICOP as the NOLCO might
7. Before the date of the merger, PICOP sold all the outstanding shares of RMC relieve it from its income taxes
stock to SMC and reported a gain of P9M from the transaction. a. The size of RPPM’s accumulated losses (P81M) must have
8. In claiming its deduction, PICOP relies on Section 7(c) of RA 5186 which constituted a powerful attraction indeed for PICOP.
provides: “Section 7. Incentives to Registered Enterprise.—A registered b. The court is unable to agree with the CTA and CA on the
enterprise, to the extent engaged in a preferred area of investment, shall be deductibility of RPPM’s accumulated losses against PICOP’s gross
granted the following incentive benefits: income.
xxx xxx xxx 2. The rule applicable in respect of corporations not registered with the BOI as
(c) Net Operating Loss Carry-over.—A net operating loss incurred in any of the a preferred pioneer enterprise is that net operating losses cannot be carried
first ten years of operations may be carried over as a deduction from taxable over.
income for the six years immediately following the year of such loss. The entire a. Under our Tax Code, losses may be deducted from gross income
amount of the loss shall be carried over to the first of the six taxable years only if such losses were actually sustained in the same year that
following the loss, and any portion of such loss which exceeds the taxable they are deducted or charged off.
income of such first year shall be deducted in like manner from the taxable b. Section 30 of the 1977 Tax Code and Section 76 of the Philippine
income of the next remaining five years. The net operating loss shall be Income Tax Regulationsuy
computed in accordance with the provisions of the National Internal Revenue c. It is thus clear that under our law, and outside the special realm of
94
BOI-registered enterprises, there is no such thing as a carryover of commercial papers issued in the primary market under the 1977 Revenue Code,
net operating loss. Losses must be deducted against current income in relation to Republic Act ("R.A.") 5186, to be an income tax.
in the taxable year when such losses were incurred. 2. R.A. No. 5186, also known as the Investment Incentives Act, has provided for
d. Such losses may be charged off only against income earned in the incentives by, among other things, granting to registered pioneer enterprises an
same taxable year when the losses were incurred. exemption from all taxes, except income tax, under the National Internal Revenue
e. Thus it is that R.A. No. 5186 introduced the carry-over of net Code. The income tax, referred to, in my view, is that imposed in Title II, entitled
operating losses as a very special incentive to be granted only to "Income Tax," of the Revenue Code. Nowhere under that title is there a 35%
registered pioneer enterprises and only with respect to their transaction tax.
registered operations. 3. There was, to be sure, a 35% transaction tax still in effect in 1977 but it was a
f. This is to encourage pioneer industries by allowing the registered tax not on the investor-lender in whose favor the interest income on the
enterprise to accumulate its operating losses which may be commercial paper accrues. The tax was, instead, levied on the borrower-issuer of
expected during the early years of the enterprise and to permit the commercial papers transacted in the primary market. Being the principal taxpayer,
enterprise to offset such losses against income earned by it in later the borrower-issuer could not have been likewise contemplated to be a mere tax
years after successful establishment and regular operations. (Both withholding agent. The tax was conceived as a tax on business transaction, and so
companies are registered with the BOI. PICOP is a pioneer it was rightly incorporated in Title V, entitled "Privilege Taxes on Business and
enterprise. The case did not mention if Rustan was a pioneer Occupation" of the Tax Code.
enterprise. ) 4. The fact that a taxpayer on whom the tax is imposed can shift, characteristic of
3. We consider that the statutory purpose can be served only if the indirect taxes, the burden thereof to another does not make the latter the taxpayer
accumulated operating losses are carried over and charged off against and the former the withholding agent. Indeed, the facility of shifting the burden
income subsequently earned and accumulated by the same enterprise of the tax is opposed to the idea of a direct tax to which class the income tax
engaged in the same registered operations. actually belongs.
a. To allow PICOP to deduct would be to permit one corporation or 5. Accordingly, I vote to so reduce the tax liability of petitioners as adjudged by the
enterprise to benefit from losses accumulated by another corp. amount corresponding to the 35% transaction tax. In all other respects, I concur
b. To grant this would be to permit PICOP to shelter its taxable with the majority in the judgment.
income which had not been earned by the enterprise which had
suffered the accumulated losses.
c. In effect, to grant Picop’s claimed deduction would be to permit
Picop to purchase a tax deduction and RPPM to peddle its
accumulated operating losses
4. We do not believe that the technical factor (that the merger made them one
and the same corporation) is enough to justify the deduction claimed by
PICOP. Its claim is bereft of statutory basis and it does violence to the
legislative intent.
5. Save for RA 5186, Sec. 7 (c), no statute recognizes or permits loss
carryovers and loss carry-backs.24
6. The deduction claimed by PICOP must be disallowed.
OPINIONS:
VITUG, J., concurring and dissenting:
1. While I share, in most part, the conclusions expressed in the opinion, I regrettably
find it difficult, not to propose a re-examination of the Court's holding in Western
Minolco Corporation vs. Commissioner of Internal Revenue (124 SCRA 121),
reiterated in Marinduque Mining and Industrial Corporation vs. Commissioner of
Internal Revenue (137 SCRA 88), that has taken the 35% transaction tax on
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84. RR 14-01 (Marie) 2.1 For purposes of these Regulations, the allowance for deduction of NOLCO shall
August 27, 2001 be limited only to net operating losses accumulated beginning January 1, 1998.
SECTION 1. Scope. – Pursuant to the provisions of Section 244 of the National 2.2 In general, NOLCO shall be allowed as a deduction from the gross income of
Internal Revenue Code of 1997 (hereinafter referred to as the Code), these the same taxpayer who sustained and accumulated the net operating losses
Regulations are hereby promulgated to govern the deduction from gross income of regardless of the change in its ownership. This rule shall also apply in the case of a
the Net Operating Loss Carry-Over (NOLCO) pursuant to Section 34 (D) (3) of the merger where the taxpayer is the surviving entity.
Code, which provides:
2.3 Unless otherwise provided in these Regulations, NOLCO of the taxpayer shall
not be transferred or assigned to another person, whether directly or indirectly, such
“Net Operating Loss Carry-over.- The net operating loss of the business or enterprise
as, but not limited to, the transfer or assignment thereof through a merger,
for any taxable year immediately preceding the current taxable year, which had not
consolidation or any form of business combination of such taxpayer with another
been previously offset as deduction from gross income shall be carried over as a
person.
deduction from gross income for the next three (3) consecutive taxable years
immediately following the year of such loss: Provided, however, That any net loss
2.4 NOLCO shall also be allowed if there has been no substantial change in the
incurred in a taxable year during which the taxpayer was exempt from income tax
ownership of the business or enterprise in that not less than 75% in nominal value
shall not be allowed as a deduction under this Subsection: Provided, further, That a
of outstanding issued shares or not less than 75% of the paid up capital of the
net operating loss carry- over shall be allowed only if there has been no substantial
corporation, if the business is in the name of the corporation, is held by or on behalf
change in the ownership of the business or enterprise in that –
of the same persons.
“(i) Not less than seventy-five percent (75%) in nominal value of outstanding issued
The 75% equity, ownership or interest rule prescribed in these Regulations shall
shares, if the business is in the name of a corporation, is held by or on behalf of the
only apply to a transfer or assignment of the taxpayer’s net operating losses as a
same persons; or
result of or arising from the said taxpayer’s merger or consolidation or business
combination with another person. In case the transfer or assignment of the taxpayer’s
“(ii) Not less than seventy-five percent (75%) of the paid up capital of the net operating losses arises from the said taxpayer’s merger, consolidation or
corporation, if the business is in the name of a corporation, is held by or on behalf combination with another person, the transferee or assignee shall not be entitled to
of the same persons. claim the same as deduction from gross income unless, as a result of the said merger,
consolidation or combination, the shareholders of the transferor/assignor, or the
“For purposes of this Subsection, the term ‘net operating loss’ shall mean the excess transferor (in case of other business combinations) gains control of at least 75% or
of allowable deduction over gross income of the business in a taxable year: more in nominal value of the outstanding issued shares or paid up capital of the
transferee/assignee (in case the transferee/assignee is a corporation) or 75% or more
“Provided, That for mines other than oil and gas wells, a net operating loss without interest in the business of the transferee/assignee (in case the transferee/assignee is
the benefit of incentives provided for under Executive Order No. 226, as amended, other than a corporation).
otherwise known as the Omnibus Investments Code of 1987, incurred in any of the
first ten (10) years of operation may be carried over as a deduction from taxable 2.5 Unless otherwise provided in these Regulations, an individual (including estate
income for the next five (5) years immediately following the year of such loss. The or trust) engaged in trade or business or in the exercise of profession, or a domestic
entire amount of the loss shall be carried over to the first of the five (5) taxable years or resident foreign corporation may be allowed to claim deduction of his/its
following the loss, and any portion of such loss which exceeds the taxable income corresponding NOLCO: Provided, however, that an individual who claims the 10%
of such first year shall be deducted in like manner from the taxable income of the optional standard deduction shall not simultaneously claim deduction of the
next remaining four (4) years.” NOLCO: Provided, further, that the three-year reglementary period shall continue
to run notwithstanding the fact that the aforesaid individual availed of the 10%
SEC. 2. General Principles and Policies. - optional standard deduction during the said period.
96
2.6 The three-year reglementary period on the carry-over of NOLCO shall continue capital). For this purpose, the taxpayers shall maintain complete and accurate
to run notwithstanding the fact that the corporation paid its income tax under the records of the paid-up capital of the shareholders.
“Minimum Corporate Income Tax” computation.
3.6 Taxable Income – The term “Taxable Income” means the excess amount of the
2.7 NOLCO shall be availed of on a “first-in, first-out” basis. pertinent items of gross income over the allowable deductions and/or personal and
additional exemptions, if any, authorized under the Code or under any special law.
2.8 The net operating loss incurred by a taxpayer in the year in which a substantial
change in ownership in such taxpayer occurs shall not be affected by such change 3.7 Taxable Year - The term “Taxable Year” means the calendar year, or the fiscal
in ownership, notwithstanding subsections 2.3 and 2.4. year ending during such calendar year, upon the basis of which the net income is
computed under Title II of the Code. Taxable year includes, in the case of a return
SEC. 3. Definition of Terms. - For purposes of these Regulations, the words and made for a fractional part of a year, the period for which such return is made. The
phrases herein provided shall mean as follows: term “Fiscal Year” means an accounting period of twelve (12) months ending on the
last day of any month other than December.
3.1 Gross Income - Except as otherwise provided in these Regulations, the term
“Gross Income” means the pertinent items of income referred to in Section 32(A) of 3.8 Substantial Change in the Ownership of the Business or Enterprise - The term “
the Tax Code of 1997 which are required to be declared in the taxpayer’s Income Substantial Change in the Ownership of the Business or Enterprise” shall refer to a
Tax Return for purposes of computing his taxable income as defined in Section 31 change in the ownership of the business or enterprise as a result of or arising from
of the same Code. All exempt income and other items of income subject to final tax its merger or consolidation or combination with another person in the manner as
shall not form part of the gross income. provided in subsection 2.4 of these Regulations. Any change in ownership as a result
of or arising thereunder shall not be treated as a substantial change for as long as the
3.2 Allowable Deductions – The term “Allowable Deductions” means the items of stockholders of the party thereto, to whom the net operating loss is attributable, gains
deduction enumerated under Section 34(A) to (J) and Section 34(M), including the or retains 75% or more interest after such merger or consolidation or combination.
special deductions allowed to insurance companies under Section 37 of the Code,
but excluding NOLCO and any item of incentive deduction allowable under any 3.9 Merger - For purposes of these Regulations, the term “Merger” shall refer to the
special law that does not actually involve cash outlay: Provided, that, in the case of absorption of a corporation by another corporation, the latter retaining its own name
an individual entitled to claim the Optional Standard Deduction (OSD) under and identity and acquiring the assets, liabilities, franchises and powers of the former,
Section 34(L), in lieu of the deductions enumerated under Section 34(A) to (K), the and the absorbed corporation ceasing to exist as a separate juridical person.
term “allowable deductions” shall mean the aforesaid OSD plus deduction of
premium payments on health and/or hospitalization insurance as provided under 3.10 Consolidation - For purposes of these Regulations, the term “Consolidation”
Section 34(M) of the Code, if applicable. shall refer to a situation when two or more corporations are extinguished, and by the
same process a new one is created, taking over the assets and assuming the liabilities
3.3 Net Operating Loss - The term “Net Operating Loss” shall mean the excess of of the said extinguished corporations; or the unification of two or more corporations
allowable deduction over gross income of the business in a taxable year. into a single new corporation, having the combined capital, franchises and powers
of all its constituents.
3.4 Nominal Value of Outstanding Issued Shares - The term “Nominal Value of
Outstanding Issued Shares” shall refer to the par value (in case of par value shares 3.11 Combination - For purposes of these Regulations, the term “Combination” shall
of stock) or stated value (in case of no par value shares of stock) of shares of stock refer to a situation when an owner of a business, organized as a sole proprietorship,
issued to the stockholders of the corporation. admits a partner in his business for the purpose of forming a co-partnership, or any
such business combination which, in effect, is similar or synonymous thereto.
3.5 Paid Up Capital of the Corporation - The term “Paid Up Capital of the
Corporation” shall refer to the total amount paid by stockholders for their 3.12 By or on Behalf of the Same Persons - The term “By or on Behalf of the Same
subscriptions in the shares of stock of the corporation, including any amount paid Persons” shall refer to the maintenance of ownership despite change as when:
over and above the par value or stated value of the share of stock (e.g., premium on
97
the period of its PEZA registration shall not qualify for purposes of the NOLCO;
1. No actual change in ownership is involved in case the transfer involves
change from direct ownership to indirect ownership, or vice versa.
2. No actual change in ownership is involved as in the case of merger of the 4.4 An enterprise registered under R.A. No. 7227, otherwise known as the Bases
subsidiary into the parent company. Conversion and Development Act of 1992, e.g., SBMA-registered enterprises, with
respect to its registered business activity. Its accumulated net operating losses
Any reference in these Regulations to the “75% equity, ownership, or interest rule”, incurred or sustained during the period of its said registered operation shall not
“75% or more in nominal value”, “75% or more interest”, and other similar terms qualify for purposes of the NOLCO;
shall be construed within the context of this definition.
4.5 Foreign corporations engaged in international shipping or air carriage business
Notwithstanding the above, in determining whether there is actual change in in the Philippines; and
ownership in the above-mentioned and similar cases, each and every step of the
transaction shall be considered and the whole transaction or series of transactions 4.6 In general, any person, natural or juridical, enjoying exemption from income tax,
shall be treated as a single unit. pursuant to the provisions of the Code or any special law, with respect to its
operation during the period for which the aforesaid exemption is applicable. Its
SEC. 4. Taxpayers Entitled to Deduct NOLCO from Gross Income. – Any individual accumulated net operating losses incurred or sustained during the said period shall
(including estates and trusts) engaged in trade or business or in the exercise of his not qualify for purposes of the NOLCO.
profession, and domestic and resident foreign corporations subject to the normal
income tax (e.g., manufacturers and traders) or preferential tax rates under the Code SEC. 5. Determination of Substantial Change in the Ownership of the Business.
(e.g., private educational institutions, hospitals, and regional operating
headquarters) on their taxable income as defined in Section 3 of these Regulations 5.1 Time of Determination of Substantial Change in the Ownership of the Business;
shall be entitled to deduct from his/its gross income for the current year his/its Determined as of the End of the Taxable Year. - The substantial change in the
accumulated net operating losses for the immediately preceding three (3) ownership of the business or enterprise shall be determined as of the end of the
consecutive taxable years: Provided, however, that net operating losses incurred or taxable year when NOLCO is to be claimed as deduction. Whether or not substantial
sustained prior to January 1, 1998 shall not qualify for purposes of the NOLCO. change in ownership occurred shall be determined on the basis of any change in the
Provided, further, that any provision of these Regulations notwithstanding, the ownership of interest in the said business or enterprise arising from or incident to its
following shall not be entitled to claim deduction of NOLCO: merger, or consolidation, or combination with another person (e.g., in the case of
merger or consolidation of two or more corporations, such change shall be
4.1 Offshore Banking Unit (OBU) of a foreign banking corporation, and Foreign determined based on the ownership of the outstanding shares of stock issued or
Currency Deposit Unit (FCDU) of a domestic or foreign banking corporation, duly based on paid-up capital as of the end of the taxable year, and as a result of or arising
authorized as such by the Bangko Sentral ng Pilipinas (BSP); from the said merger or consolidation).
5.2 When Change Occurs. - A change in the ownership of the business occurs when
the person who sustained net operating losses enters into a merger, or consolidation
4.2 An enterprise registered with the Board of Investments (BOI) with respect to its or combination with another person, thereby resulting to the transfer or conveyance
BOI-registered activity enjoying the Income Tax Holiday incentive. Its accumulated of the said net operating losses, to another person, in the course of the said merger
net operating losses incurred or sustained during the period of such Income Tax or consolidation or combination.
Holiday shall not qualify for purposes of the NOLCO;
(a) When No Substantial Change Occurs. - No substantial change in
4.3 An enterprise registered with the Philippine Economic Zone Authority (PEZA), ownership of the business occurs if, as a result of the said merger or
pursuant to R.A. No. 7916, as amended, with respect to its PEZA- registered consolidation or combination, the stockholders of the transferor, or the
business activity. Its accumulated net operating losses incurred or sustained during transferor, in case of other business combinations, gains control of at least
75% or more in nominal value of the outstanding issued shares or paid-up
98
capital of the transferee-assignee (in case the transferee-assignee is a deduction (e.g., any BOI-registered enterprise enjoying income tax holiday pursuant
corporation) or 75% or more interest in the business of the transferee- to E.O. No. 226, as amended, otherwise known as the Omnibus Investments Code
assignee (in case the transferee- assignee is other than a corporation). of 1987; or any PEZA-registered enterprise enjoying preferential tax treatment or
income tax holiday pursuant to R.A. No. 7916, as amended; any person enjoying
(b) When Substantial Change Occurs. - A substantial change in ownership preferential tax treatment pursuant to R.A. No. 7227, otherwise known as the Bases
of the business occurs if, as a result of the transaction referred to in Conversion and Development Act of 1992. See Section 4 of these Regulations for
subsection 5.2 (a) hereof, the stockholders of the transferor or the further discussion).
transferor, in case of other business combinations, gains control of the
aforesaid transferee-assignee only to the extent of less than 75%. In case any of the aforementioned persons is engaged in both registered and
unregistered business activities under any of the aforesaid laws (e.g., a corporation
SEC. 6. Entitlement to Net Operating Loss Carry- Over. - with a BOI-registered activity enjoying income tax holiday; and other unregistered
business activities not enjoying any BOI incentive) the net operating loss or losses
6.1 In General. - In general, only net operating losses incurred by a qualified sustained or incurred by the said BOI-enterprise from its registered activities shall
taxpayer for the period beginning January 1, 1998 may be carried over to the next not be allowed as NOLCO deduction from its gross income derived from the
three (3) immediately succeeding taxable years following the year of such loss for unregistered business activities.
purposes of the NOLCO deduction. Provided, however, that for mines other than oil
and gas wells, a net operating loss without the benefit of incentives provided for 6.4 Quarterly and Annual Availment of NOLCO. - NOLCO shall be allowed as
under Executive Order No. 226, otherwise known as the Omnibus Investments Code deduction in computing the taxpayer’s income taxes per quarter and annual final
of 1987, as amended , incurred in any of the first ten (10) years of operation may be adjustment income tax returns: Provided, however, that if per the taxpayer’s final
carried over as a deduction from taxable income for the next five (5) years annual adjustment income tax return, the entire operations for the year resulted to a
immediately following the year of such loss. Provided, further, that the entire net operating loss, such net operating loss may be claimed as NOLCO deduction in
amount of the loss shall be carried over to the first of the five (5) taxable years the immediately succeeding taxable year: Provided, further, that NOLCO may be
following the loss, and any portion of such loss which exceeds the taxable income claimed as deduction only within a period of three (3) consecutive taxable years
of such first year shall be deducted in like manner from the taxable income of the immediately following the year the net operating loss was sustained or incurred. In
next remaining (4) four years. order that compliance with this three- year statutory requisite may be effectively
monitored, the taxpayer shall, at all times, show its NOLCO deduction, in its income
6.2 Transitory Apportionment of NOLCO, in Case of Corporation Using the Fiscal tax return, as a separate item of deduction. In no case may NOLCO be claimed, as a
Year Accounting Period. - In general, only net operating losses incurred beginning part of the taxpayer’s other itemized deductions, like under deduction of “losses,”
January 1, 1998 may be claimed as a NOLCO deduction. In the case of a corporation in general.
using a fiscal year accounting period as of the said date, whose result of operations
for the fiscal year 1997-1998 shows a net operating loss, the allowable NOLCO for 6.5 NOLCO in Relation to the Minimum Corporate Income Tax (MCIT). - In
the succeeding fiscal years shall be determined, as follows general, domestic and resident foreign corporations subject to the normal income
tax rate are liable to the 2% MCIT, if applicable, computed based on gross income,
whenever the amount of the MCIT is greater than the normal income tax due
[NOLCO for the entire fiscal year (1997-1998)] * [number of months in 1998 (computed with the benefit of NOLCO, if any), pursuant to Sections 27 or 28 of the
divided by 12 mos. covering FY 97-98] Code. Thus, such corporation cannot enjoy the benefit of NOLCO for as long as it
is subject to MCIT in any taxable year. Provided, however, that the running of the
NOLCO to be carried over to FYs 1998-1999, 1999-2000, and/or 2000-2001 three-year period for the expiry of NOLCO is not interrupted by the fact that such
corporation is subject to MCIT in any taxable year during such three-year period.
6.3 Where Taxpayer is Exempt, or Partly Exempt from Income Tax, or Enjoying
Preferential Tax Treatment Under Special Laws. - Net operating loss or losses SEC. 7. Presentation of NOLCO in the Tax Return and Unused NOLCO in the
incurred by any person who is exempt from income tax, or enjoying preferential tax Income Statement. –The NOLCO shall be separately shown in the taxpayer’s
treatment pursuant to the provisions of special laws, shall not be allowed a NOLCO income tax return (also shown in the Reconciliation Section of the Tax Return) while
99
the Unused NOLCO shall be presented in the Notes to the Financial Statements
showing, in detail, the taxable year in which the net operating loss was sustained or
incurred, and any amount thereof claimed as NOLCO deduction within three (3)
consecutive years immediately following the year of such loss. Failure to comply
with this requirement will disqualify the taxpayer from claiming the NOLCO.
SEC. 8. Repealing Clause. - Any revenue ruling or issuance inconsistent herewith

shall be considered repealed, amended or modified accordingly.
SEC. 9. Effectivity Clause. – These Regulations shall take effect beginning January
1, 1998.
100
85. BIR Ruling 30-00 (Pat) 1. This BIR Ruling is an answer to SGV’s request for confirmation of their
10 Aug 2000| Net Operating Loss Carry Over (NOLCO) opinion on the tax implications of he proposed integration plan of SGV
To SGV & Co clients:
From Commissioner of Internal Revenue - Dakila Fonacier a. Republic Cement Corp (“Republic)
b. Fortune Cement Corp (“Fortune”)
SUMMARY: c. Blue Circle Philippines Ince (“BCPI)
Corporations BCPI, Montinola Group, SM Group, CG&E, and Guoco 2. Republic and Fortune → domestic corp engaged in the manufacture,
Group invested in corporations Republic, Fortune, Zeus, and Iligan (aka development, exploitation, and sale of cement, marble and other kinds of
“Group Companies” which were in a net loss position). In 1999, the BODs of building materials.
the Group Companies approved the integration of their cement business 3. BCPI → domestic corp; wholly owned subsidiary of Blue Circle Home
operations undeer a single management structure, which will make them the Products
2nd largest cement group in the country. Essentially, there will be a share swap 4. BCPI partnered w/ the Montinola Group, SM Group. CG&E Holdings and
PICOP/Guoco Group [lahat ‘to may cement business] → they invested in the
→ investors transfer their shares in Fortune, Zeus, and Iligan to Republic in
form of equity and debt in the following companies (“Group Companies”):
exchange for Republic shares. SGV is the counsel of Republic, Fortune, and
a. Republic
BCPI, and they asked the CIR to confirm that the net operating losses of b. Fortune
Republic, Fortune, MPCC, and Iligan are preserved and may be claimed as a c. Zeus Holdings (“Zeus”) → owned 99.63 % of Mindanao Portland
deduction from gross income. Cement Corp (“MPCC”)
CIR Fonacier agreed. Since the corporations are not dissolved but are merely d. Iligan Cement Corp (“Iligan”)
integrated for a specific bona fide business purpose, the net operating losses of 5. All of the Group Companies are in a net loss position; Of these companies,
Republic, Fortune, MPCC, and Iligan are preserved after the proposed share swap Republic, Fortune, and Zeus are listed on the Phil. Stock Exchange
and may be carried over and claimed as a deduction from their respective gross 6. BCPI and SM Group extended loans to Fortune and MPCC → therefore
income (Basis: Sec. 34(d)(3), Tax Code) because there is no substantial change in
may receivables si BCPI and SM
the ownership. There is substantial change in ownership of business only if there
7. BCPI also extended a loan to Alsons Cement Corp (“Alsons”) which can be
has been change of ownership greater than 25% of either nominal value of
settled by paying the amount or by exchange into Iligan shares held by
outstanding issued shares or of the paid-up capital. After the swap, the investor
Ansons
companies continue to own more than 75% of paid-up capital stock.
8. On 08 Dec 1999, the BOD of Republic, Fortune, Zeus, and Iligan approved
a proposal to integrate their cement business operations and activities to
DOCTRINE:
consolidate the operations of the Group Companies under a single
The net operating losses of each of Republic, Fortune, MPCC and Iligan are
management structure that will make the Group the 2nd largest cement
preserved after he proposed share swap and may be carried over and claimed as a
group in the Philippines
deduction from their respective gross income, pursuant to Section 34(D)(3) of the
9. The proposed integration consists of
Tax Code, because there is no substantial change in the ownership of either
a. consolidation in Republic of investment in shares in Fortune, Zeus,
Republic or Fortune or MPCC or Iligan.
and Iligan (of shareholders BCPI, SWCV, RRI, Montinola, SM, and
CG&E Groups, and of Fortune CLN (did not say what CLN is) held
FACTS: by SM) by exchanging such investments with new shares of
Republic based on the Share Swap Ratios approved by the BODS
of Republic, Fortune, Zeus, and Iligan
101
b. Basically BCPI, RRI, SWCV, Montinola, SM, CG&E transfer 6. W/N gain or loss will be recognized by Voltes V on the transfer of their
their respective shares in the Fortune, Zeus, and Iligan to Fortune, Zeus, and Iligan shares → NO gain or loss because they hold
Republic and then Republic will issue them shares in Republic → together more than 51% of the total voting stock after transfer
SHARE SWAP
c. Share Swap resulted in the 5 transferors’ (BCPI, RRI, SM, RATIO:
Sysmart, & CG&E → let’s call them Voltes V para madali W/N transfer thru PSE facilities is subject to stock transaction tax - Yes
hahahuhu4) ownership of 63.618% the total subscribed common 1. Tax free treatment applies only to Voltes V.
voting stock of Republic 2. The 6th transferor onwards will be subject to the stock transaction tax
d. Other transferors not mentioned in Fact 9(c) will transfer their
Fortune and Zeus shares to Republic in exchange for new Republic W/N Voltes V transfer of shares to Republic in exchange for Republic shares (this is
shares thru the facilities of PSE. Iligan shares excluded because it is the share swap in Fact 9(b)) is subject to VAT - No
not a listed company 1. No explanation; just cited legal basis → Sec. 4.100-5(b)(1) of RR 7-95
e. If integration pushes through, Republic will own 100% of Fortune
and Zeus, and 30.367% of Iligan W/N transfer to Republic is subject to DST - No
f. Republic will be owned by Voltes V, Montinola, and the minorities 1. No explanation; legal basis → Sec. 176, Tax Code
involved
10. SGV asked the BIR re: tax implications of this integration W/N new Republic shares to be issued are subject to DST - Yes, because original
issuances
ISSUES: (#5 lang important) 1. No explanation; legal basis → Sec. 175, Tax Code
1. W/N transfer thru PSE facilities is subject to stock transaction tax - Yes
2. W/N Voltes V transfer of shares to Republic in exchange for Republic shares W/N net operating losses of Republic, Fortune, MPCC, and Iligan are preserved
(this is the share swap in Fact 9(b)) is subject to VAT - No after the share swap and may be carried over and claimed as a deduction from
3. W/N transfer to Republic is subject to DST - No their respective gross income - YES because there is no substantial change in the
4. W/N new Republic shares to be issued are subject to DST - Yes, because ownership of either Republic, Fortune, MPC, or Iligan
original issuances 1. Since the corporations are not dissolved but are merely integrated for a
5. W/N net operating losses of Republic, Fortune, MPCC, and Iligan are specific bona fide business purpose, the net operating losses of Republic,
preserved after the share swap and may be carried over and claimed as Fortune, MPCC, and Iligan are preserved after the proposed share swap and
a deduction from their respective gross income - YES because there is no may be carried over and claimed as a deduction from their respective
substantial change in the ownership of either Republic, Fortune, MPC, gross income (Basis: Sec. 34(d)(3)5, Tax Code) because there is no
or Iligan substantial change in the ownership
4
Don’t call them Voltes V for recit further, That a net operating loss carry-over shall be allowed only if there has been no substantial
5
Net Operating Loss Carry-Over — The net operating loss of the business or any enterprise for change in the ownership of the business or the enterprise in that —
(i) Not less than seventy-five percent (75%) in nominal value of outstanding issued shares, if
any taxable year immediately preceding the current taxable year, which had not been previously
the business is in the name of a corporation, is held by or on behalf of the same persons; or
offset as deduction from gross income shall be carried over as a deduction from gross income
for the next three (3) consecutive taxable years immediately following the year of such loss: (ii) Not less than seventy five percent (75%) of the paid up capital of the corporation, if the
business is in the name of a corporation, is held by or on behalf of the same persons.
Provided, however, That any net loss incurred in a taxable year during which the taxpayer was
exempt from income tax shall not be allowed as a deduction under this Subsection: Provided, For purposes of this subsection, the term 'net operating loss' shall mean the excess of allowable
deduction over gross income of the business in the taxable year: xxx xxx xxx
102
2. BCPI, SWCV, RRI, SM, and Montinola already owned 87.079% of 4. Side note: This is deferment of recognition of gain or loss lang. If transferor
Republic and they continued to own Republic (83.189%) after the later sells or exchanges shares, it is liable on income tax gains.
5. Parties were advised by CIR to avail of non-recognition of gain and comply
proposed integration plan → thus, issuance of new shares by Republic
w/ requirements of Tax Code.
from its unsubscribed portion in the authorized capital stock or from
increased capital stock will NOT RESULT in substantial or effective SEPARATE OPINIONS: None
change in ownership
3. Since more than 75% of paid up capital of Republic continues to be held by
the same stockholders, net operating losses are preserved
4. For MPCC, net operating losses are preserved because MPCC continues to
be owned 99.63% by Zeus
5. For Fortune, BCPI, SWCV, RRI, Montinola, SM, and CG&E already owned
94.141% before the share swap. After swap, they continued to own Fortune
thru Republic 88.642%
6. For Iligan, Republic ends up owning 30.367%. Net operating losses are
preserved even after share swap because BCPI was already a 25%
shareholder before swap. After swap, 28.538% ownership.
7. Sec. 34(d)(3) of Tax Code → There is substantial change in ownership of
business only if there has been change of ownership greater than 25% of
either nominal value of outstanding issued shares or of the paid-up capital.
→ even after integration, more than 75% of Iligan continues to be held by
BCPI
Other (not important) issues

W/N gain or loss will be recognized by Voltes V on the transfer of their Fortune,
Zeus, and Iligan shares → NO gain or loss because they hold together more than
51% of the total voting stock after transfer
1. Sec. 40(c)(2) of Tax Code → no gain or loss shall be recognized if
properties are transferred to a corp by a person in exchange for stocks,
which transfer results in transferor (alone or up to 4 persons) gaining
control of the corporation
2. Control means ownership of stocks possessing at least 51% of the total voting
power of all classes of stocks entitled to vote. This is determined by amount
of stocks received
3. Voltes V will recognize NO gain or loss on the share swap because together,
they hold more than 51% of the total voting stock of Republic (They now own
together 63%)
103
104
Non-deductible expenses (2) it must be paid or incurred within the taxable year, and
(3) it must be paid or incurred in carrying on a trade or business. In
addition, the taxpayer must substantially prove by evidence or records
86. ESSO Standard Eastern, Inc. v. CIR (Sylina ℅ Issa)
the deductions claimed.
(edited summary box)
July 7, 1989 | Cruz, J. | Classification and Distinctions The margin fees were incurred for purposes proper to the conduct of the
corporate affairs of Standard Vacuum Oil Company in New York, but
PETITIONER: ESSO Standard Eastern, Inc. certainly not in the Philippines
RESPONDENTS: CIR
SUMMARY: ESSO deducted from its gross income the amount it spent
for drilling and exploration of its petroleum concessions, as these were
ordinary and necessary business expenses. CIR disallowed this because
these expenses must be capitalized. They can only be written off as loss
when ‘dry holes’ result. So ESSO filed an amended return, asking for a
refund of Php323,279 by reason of its abandonment as several dry holes of
its oil wells. It also claimed that the margin fees it paid to Central Bank on
its profit remittances to its New York head office were ordinary and
necessary expenses (meaning deductible business expenses). CIR allowed
a refund of Php221,033 only and disallowed any deduction for the margin
fees.
CIR assessed a deficiency income tax for ESSO plus 18% interest for the
period 1961-1964 (totaling Php434,232.92). The deficiency was due to the
disallowance of the margin fees (paid by ESSO to CIR. So ESSO settled
the deficiency issue using the Php221,033 tax credit it then paid the rest of
the balance on protest. Its argument is that the 18% interest should have
been imposed not on the amount of the total deficiency, but on the amount
of deficiency after the tax credit had been deducted. This claim was denied
by CIR. CIR again said that the margin fees paid to Central Bank cannot
be considered deductible business expenses.
ESSO appealed to CTA contending that the margin fees are deductible
from gross income either as a tax or a business expense. But CTA denied FACTS:
the appeal. The issue in this case is WON margin fees are taxes would it be 1. ESSO deducted from its gross income the amount it spent for drilling
deductible from gross income. SC held that margin fees are not taxes and and exploration of its petroleum concessions, as these were ordinary and
are not deductible from gross income. CTA did not err in denying ESSO’s necessary business expenses.
claim for refund of the margin fees. Margin fees are a police power 2. CIR disallowed this because these expenses can only be written off as
measure and not an exercise of the state’s power to tax. loss when ‘dry holes’ result.
DOCTRINE: To be deductible as a business expense, three conditions 3. So ESSO filed an amended return, asking for a refund of Php323,279 by
are imposed, namely: reason of its abandonment as several dry holes of its oil wells. It also
(1) the expense must be ordinary and necessary, claimed that the margin fees it paid to Central Bank on its profit
105
remittances to its New York head office were ordinary and necessary i. According to Jurisprudence margin fees are NOT
expenses (meaning deductible business expenses). revenue measures, but “an exaction designed to curb the
4. CIR allowed a refund of Php221,033 only and disallowed any deduction excessive demands upon our international reserve.”
for the margin fees. - Caltex (Phil.) Inc. v. Acting Commissioner of Customs: “a tax is levied to
5. CIR assessed a deficiency income tax for ESSO plus 18% interest for provide revenue for government operations, while the proceeds of the margin fee
the period 1961-1964 (totaling Php434,232.92). The deficiency was due are applied to strengthen our country's international reserves.”
to the disallowance of the margin fees (mentioned in first case) paid by - Chamber of Agriculture and Natural Resources of the Philippines v. Central
ESSO to CIR. Bank: “A tax is a levy for the purpose of providing revenue for government
6. ESSO settled the deficiency issue using the Php221,033 tax credit it got operations, while the proceeds of the 20% retention, as we have seen, are applied
(mentioned in #4) and then paid the rest of the balance on protest. to strengthen the Central Bank's international reserve.”
7. ESSO argued that the 18% interest should have been imposed not on the ii. Resort to history and deliberations are only availing when
amount of the total deficiency, but on the amount of deficiency after the the language of the law is really doubtful, not when it is plain
tax credit had been deducted. and unambiguous
8. This claim was denied by CIR. CIR again said that the margin fees paid 4.. SC AGREED WITH ALL POINTS OF THE CTA; Thus,
to Central Bank cannot be considered deductible business expenses. margin fees are a police power measure and not an exercise
9. ESSO appealed to CTA contending that the margin fees are deductible of the state’s power to tax.
business expenses. And even if this were denied again, it was still entitled
to refund for the overpayment it made because of the wrong application 2. MARGIN FEES ARE NOT DEDUCTIBLE FROM THE GROSS INCOME
of the 18% interest mentioned above. (Applicable Law is Sec. 30 of the National Internal Revenue Code)
ISSUES:
1. WON margin fees are taxes – NO 1. ESSO now prays that if margin fees are not taxes, they should
2. WON margin fees are deductible from gross income - NO nevertheless be considered necessary and ordinary business
expenses and therefore still deductible from its gross income. The
RATIO: fees were paid for the remittance by ESSO as part of the profits to
1. MARGIN FEES ARE NOT TAXES the head office in the United States. Such remittance was an
1. Is RA 2009 (An Act to Authorize the Central Bank of the Philippines expenditure necessary and proper for the conduct of its corporate
to Establish a Margin Over Banks' Selling Rates of Foreign affairs.
Exchange), the law providing for margin fees, a police or revenue 2. Statutory Test of Deductibility: to be deductible as a business
measure? If it’s a revenue measure, then it’s a tax and according to expense, three conditions are imposed, namely: (1) the expense
the NIRC Sec. 30(c), ‘all taxes paid or accrued during or within the must be ordinary and necessary, (2) it must be paid or incurred
taxable year and which are related to the taxpayer's trade, business within the taxable year, and (3) it must be paid or incurred in
or profession are deductible from gross income.’ carrying on a trade or business. In addition, the taxpayer must
2. ESSO argues that margin fees are taxes and cites its legislative substantially prove by evidence or records the deductions
history of the Margin Fee Law showing that the margin fees were claimed
originally imposed as an excise tax and was one of the major sources 3. Expense is “NECESSARY” where the expenditure is appropriate
of revenue used to finance the Government’s ordinary expenditures. and helpful in the development of the taxpayer's business. It is
3. On the other hand, the CTA argued that margin fee is not tax ORDINARY when it connotes a payment which is normal in
because: relation to the business of the taxpayer and the surrounding
circumstances
4. SC AGREED WITH CTA
106
1. margin fees are not expenses in connection with the

production or earning of petitioner's incomes in the
Philippines. They were expenses incurred in the disposition
of said incomes; expenses for the remittance of funds after
they have already been earned by petitioner's branch in the
Philippines for the disposal of its Head Office in New York
which is already another distinct and separate income
taxpayer.
2. If at all, the margin fees were incurred for purposes proper
to the conduct of the corporate affairs of Standard Vacuum
Oil Company in New York, but certainly not in the
Philippines
3. The taxpayer in every instance has the burden of justifying
the allowance of any deduction claimed – this ESSO failed
to do
107

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Block 2A 2021 | TAXATION 1 | Montero

For construction activities

SEPARATE OPINIONS: N/A

under this method, an expense is recognized when it is incurred. Under a Revenue

charged by the firm as well as the compensation for its legal

SEPARATE OPINIONS: NONE

DOCTRINE: The NIRC expressly requires, as a condition for deductibility of an

or we would in effect have created an exception to this mandatory

SEPARATE OPINIONS: None

1. Governing principle: tax exemptions must be construed in strictissimi juris

PETITIONERS: Commissioner of Internal Revenue

1. Aguinaldo Industries Corp (AIC) is a domestic corporation engaged in the

In computing net Income, there shall be allowed as deductions:

Alhambra Sugar v. CIR: “Whenever a controversy arises on the deductibility,

acquisition of additional capital is not supported by the evidence. The burden

DOCTRINE: No exemption from payment of amusement tax will be granted in RATIO:

advertisement privileges in the evening of the entertainments. As the fee was

54. Kuenzle & Streiff (John)

SECTION 7. Non-Availment of the "Head of Family" Status by Benefactors of

SECTION 8. Proofs of Entitlement to the Privileges by Person with Disability. —

Interest (as amended by Republic Act 9337)

We consider that entitlement to Picop’s claimed deduction of P1,237,421.00 was

SECTION 4. Rules on the Deductibility of Interest Expense. –

62. CIR vs Lednicky (Myling)

sustained during the year incurred in business or trade conducted

Debit: Casualty Loss P XXX,XXX

In the event of a total loss / destruction of property(ies) used in the business

b. The restoration of the damaged property, or the acquisition of new

70. Philippine Refining Company v CA (Isa) (1) sending of statement of accounts;

which they were given 30% rebates by PRC, are claimed to be

71. Fernandez Hermanos, Inc. vs. Commissioner of Internal Revenue (JAYA)

The parties filed an appeal again in SC.

Sec. 2. AMENDMENT - Section 3 of RR 5-99 on the requisites for valid deduction of

PETITIONER: Basilan Estates, Inc.

74. Limpan Investment Corp. v. CIR (Yen) FACTS:

75. RR 12-2012 (Jen)

SUMMARY (by BIR):

incurred on said vehicle may be allowed, the rules prescribed under

estimated ore deposit. Since it has been broken up into

6. THE SC’S FINAL COMPUTATION FOR RATE OF DEPLETION

Charitable and other contributions

77. BIR Ruling 19-01 (Lex)

b) "Non-government Organization (NGO)" — shall refer to a non-stock, non-profit

Research and Development

78. 3M Philippines Inc. v. CIR (Sari)

Additional requirements for deductibility

79. RMO 38-83 (YvonneChon)

Optional Standard Deduction ■ The partners’ distributive share in the GPP is

SECTION 4 – OSD allowed to corporate taxpayers shall be an amount not exceeding

● it can opt to avail of the OSD allowed to corporations in claiming the

SECTION 7 – OTHER IMPLICATIONS OF THE OPTIONAL STANDARD

NOLCO xxx xxx xxx

SEC. 8. Repealing Clause. - Any revenue ruling or issuance inconsistent herewith

Other (not important) issues

1. margin fees are not expenses in connection with the

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