Esso Standard Eastern v.

CIR (1989)

FACTS:
1. The petitioner, ESSO, deducted expenses for drilling and exploration of petroleum concessions in 1959,
but the deduction was disallowed by the Commissioner of Internal Revenue.
2. ESSO filed an amended return claiming a refund for the abandonment of oil wells and margin fees paid
to the Central Bank.
3. The Commissioner granted a tax credit for the margin fees, but disallowed the claimed deduction for
the abandoned oil wells.
4. In 1960, ESSO was assessed a deficiency income tax for margin fees paid to the Central Bank.
5. ESSO settled the deficiency assessment by applying a tax credit and paying the remaining amount
under protest.
6. ESSO claimed a refund for overpayment of interest on the deficiency income tax.
7. The claims for refund were denied by the Commissioner, and ESSO appealed to the Court of Tax
Appeals.
8 . The Court of Tax Appeals denied the claims for refund of both the margin fees and the overpaid
income taxes, but sustained the claim for excess interest.
ISSUE:
whether the margin fees are deductible as ordinary and necessary business expenses or as taxes.

RULING:
The court held that the margin fees were not deductible as ordinary and necessary business expenses because
they were incurred for the remittance of funds to the taxpayer's head office in New York, which is a separate and
distinct income taxpayer.
In this case ESSO has not shown that the remittance to the head office of part of its profits was made in
furtherance of its own trade or business. The petitioner merely presumed that all corporate expenses are
necessary and appropriate in the absence of a showing that they are illegal or ultra vires. The court ruled that
claims for deductions are a matter of legislative grace and that the burden is on the taxpayer to justify the
allowance of any deduction claimed. The court also emphasized the need for the taxpayer to substantiate their
deductions with evidence or records, and that mere allegations or assertions are not sufficient to justify the
allowance of deductions.

The court also held that the taxpayer must meet the statutory test of deductibility, which includes the conditions
that the expense must be ordinary and necessary, paid or incurred within the taxable year, and paid or incurred
in carrying on a trade or business. In this case, the court found that the margin fees did not meet these
conditions and THEREFORE WERE NOT DEDUCTIBLE.