Deductions 1
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TAX LAW REVIEW DIGESTS – MonteroAlcisso, Arriola, Cajucom, Calalang, Claudio, Escueta, Delos Santos, Dialino, Fajardo, Imperial, Juaquino, Martin, Martinez, Mendoza, Noel, Pangcog, Plazo Raso,Rosales, Sia, Uy, Venzuela
Q. DEDUCTION
In general
[C.T.A. CASE NO. 128. June 29, 1957.]VISAYAN CEBUTERMINAL CO., INC., appellant, vs. COLLECTOR OF
INTERNALREVENUE, appellee.
D E C I S I O N
The appellant, Visayan Cebu Terminal Co., Inc., is a corporation
organized for the purpose of handling arrastre operations in the
port of Cebu. It was awarded the contract for the said arrastre
operations by the Bureau of Customs, pursuant to Act No. 3002, as
amended. On March 1, 1952, appellant filed its income tax return
for 1951 reporting a gross in come of P420,633.40 and claimeddeductions amounting to P379,036.95,leaving a net income of
P41,596.45 on which it paid income tax in the sum of P8,319.29.
The sum of P379,036.95 claimed as deductions consisted of various
items, among which were the following:
1.Salaries —
(a)Salary and bonus of Juan Eugenio LoP1,875.00
(b)Salary of Felix Go Chan250.00
(c)Salary of Teotimo Tiu Tian250,00P2,375.00————
2.Representation expenses75,855.883.Miscellaneous expenses —
(a)Christmas bonus given to variouspersonsP1,500.00
(b)Tips to ships'officers4,800.006,300.00—————————
TotalP84,530.88=========
The said sums of P2,375.00, P75,855.88 and P6,300.00,
representing salaries,representation expenses and miscellaneous
expenses, respectively, or a total of P84,530.88, were disallowed bythe Collector of Internal Revenue, thus giving rise to a deficiency
assessment of P18,991.00. The disallowances were explained by
the Collector in his letter of February 4, 1954, as follows:P2,375.00
— Salaries. This item represents bonus allegedly paid to Messrs.
Felix G. Chan, T.R. Tiam and Juan Eugenio Co in the amounts of
P250.00, P250.00 andP1,875.00, respectively. The first two
amounts were disallowed because they were paid to persons who
were not (appellant's) bonafide employees and,therefore, not
entitled to any compensation. The amount of P1,875.00 given to
Mr. Juan Eugenio Co who is (appellant's) employee and a
stockholder at the same time was likewise disallowed because the
payment is considered distribution of dividend.P75,855.88 —
Representation expenses. This amount consists of 15% of the net
profit given to your (appellant's) general manager, 8% of the net
profit given to(appellant's) vice-president, both of whom are
members of the Board of Directors, and 5% of the net profit to each
of the rest of the five members of the Board of Directors and to a
legal counsel. The amount of P75,855.88 represents distributions to
(appellant's) aforesaid officers based on the percent of the net
profit. It has been observed that the recipients of the aforesaid
amount are(appellant's) substantial stockholders. The allegedpayments, therefore, partake more of the nature of dividend
distribution than representation expense.P6,300.00 —
Miscellaneous expenses. This discrepancy is constituted by the
amount of P1,500.00 which (appellant) gave as Christmas bonus to
various persons who are not (appellant's) bonafide employees and
the sum of P4,800.00given as tips to unknown persons. The whole
amount cannot be allowed as deduction because they were not
ordinary and necessary expenses.Upon request for reconsideration,
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the Collector modified the deficiency income tax assessment by
allowing the deduction from appellant's gross income of the salary
of Juan Eugenio Lo in the sum of P1,875.00 and miscellaneous
expenses amounting to P532.00, at the same time maintaining the
disallowance of the full amount of P75,855.88 as representationexpenses. The revised deficiency assessment is itemized in the
letter of the Collector dated March 26, 1955, and is reproduced
below:
Net income as per returnP41,596.45
Disallowances:per investigation:salaries of
officersP2,375.00allowed per reaudit1,875.00500.00per
investigation
and re audit, representationexpenses75,855.88perinvestigation,miscellaneousexpensesP6,300.00
allowed per reaudit532.005,768.00—————————
Net income subject to tax per reauditP123,720.33—————
Tax due on P123,720.33:P100,000.00 at 20%P20,000.00P23,720.00
at 28%6,642.00P26,642.00—————
Less tax previously assessed and paidP8,325.00—————
Deficiency taxP18,317.00Add:5% surcharge915.851% monthly
interest from5/31/53 to 4/30/554,212.91Compromise for late
payment40.00—————
Total amount due on April 30, 1955P23,485.76
=========
Appellant has agreed to the disallowance of the sum of P500.00,
representing the salaries of Felix Go Chan and Teotimo Tiu Tian at
P250.00 each, and the sum of P5,768.00, representing
miscellaneous expenses. The only issue raised in this appeal
relates to the deductibility of the sum of P75,855.88 as
representation expenses.
In computing net income, the law allows the deduction from gross
income of —"All the ordinary and necessary expenses paid or
incurred during the taxables year in carrying on any trade or
business, including a reasonable allowance for salaries or other
compensation for personal services actually rendered . . ." (Sec.30
(a)(1), National Internal Revenue Code.)Representation or
entertainment expenses fall under the category of business
expenses and are allowable deductions from gross income if they
meet the conditions prescribed by law.In order that expenses may
be deductible, they must be —(1)Ordinary and necessary,
and(2)Paid or incurred during the taxable year under one of the
following conditions —(a)In carrying on any trade or business;(b)For
the production or collection of income;(c)For the management,
conservation, or maintenance of property held forthe production of
income;(d)In connection with the determination, refund or
collection of any tax. (Par.11,000 P-H Fed. 1955.)Even if expenses
were paid or incurred in carrying on a trade or business within the
taxable year; or for the production or collection of income; or for
the management, conservation, or maintenance of property held
for the production of income; or in connection with thedetermination, refund or collection of any tax, such expenses would
not be deductible unless they were both ordinary and necessary.
An expense is generally considered necessary where the
expenditure is appropriate or helpful in the development of the
taxpayer's business or that the same is proper for the purpose of
realizing a profit or minimizing a loss. An expense is ordinary when
it connotes a payment which is normal in relation to the business of
the taxpayer and the surrounding circumstances. As to the
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meaning of the word "ordinary", the Supreme Court of the United
States stated:"Now, what is ordinary, though there must always be
a strain of constancy within it, is none the less a variable affected
by time and place and circumstance.Ordinary in this context does
not mean that the payments must be habitual or normal in thesense that the same taxpayer will have to make them often. A
lawsuit affecting the safety of a business may happen once in a
lifetime. The counsel fees may be so heavy that repetition is
unlikely. Nonetheless, the expense is an ordinary one because we
know from experience that payments for such a purpose, whether
the amount is large or small, are the common and accepted means
of defense against attack. Cf. Kornhauser v. United States, 276U.S.
145, 48 S. Ct. 219 72 L. Ed. 505 (6 AFTR 7358). The situation is
unique in the life of the individual affected, but not in the life of the
group, the community, of
which he is a part. At such times there are norms of conduct that
help to stabilize our judgment, and make it certain and objective.
The instance is not erratic, but is brought within a known type."
(Welch v. Helvering, 290 U.S. 111, cited in Par.11,008 P-H Fed.
1955.)Business expenses, in order to be deductible, must not only
be ordinary and necessary but must also meet the further test of
reasonableness in amount. The element of reasonableness in
amount is inherent in the phrase ordinary and necessary". It was
not the intention of Congress to automatically allow as deductions
operating expenses incurred or paid by the taxpayer in anunlimited amount. (Commissioner vs. Lincoln Elec. Co., 176 Fed. 2d
815, 38 AFTR 411.)Have the requirements for deductibility of the
sum of P75,855.88 been satisfied?Counsel for the Government
admit that "the expense of P75,855.88 was paid and incurred
within the taxable year 1951." It is, however, contended that " it is
not ordinary and necessary expense nor was it incurred in carrying
on the trade or business of the appellant in 1951." It was, according
to the Collector, in the nature of a dividend distribution. (Page 5,
Memorandum for the Appellee.) On the other hand, appellant
sought to prove that the said amount was actually spent by its
officers and members of the Board of Directors for the promotion
and enhancement of the business of the corporation. Let us
examine the facts.It appears that by a resolution of the Board of Directors of appellant corporation dated July 22, 1949, a dividend of
50% of the net profit was authorized to be declared to the
stockholders annually and the other 50% was to be used to
reimburse the representation expenses of the General Manager,
members of the Board of Directors and the legal consultant at the
following rates: General Manager, 12%; Assistant General Manager,
8%; members of the Board of Directors and the legal consultant,
5% each of the net profit. During the period of four years from 1949
to 1952, appellant had gross incomes, net profits and claimed
representation expenses, as follows:
LL pr Representation Year Gross Income
Net
ProfitExpenses1949P722,135.42P61,257.53P83,703.541950451,30
3.2133,023.7810,424.391951420,479.3941,596.4575,855.8819524
25,326.8654,207.3163,618.64lIt also appears from the testimony of
Dioscoro B. Casco, Accountant-Bookkeeper of appellant, that
reimbursement of representation expenses incurred by the officers
and members of the Board of Directors were made upon
presentation of the corresponding vouchers and chits, but therewere instances when reimbursements were made without
presentation of supporting papers. Casco justified reimbursement
of a claim for representation expenses without
presentation of supporting papers by stating that he did not have
the courage to ask the officers and members of the Board to
comply with the requirement because of the "unquestioned
integrity of these people and the high esteem of the community
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TAX LAW REVIEW DIGESTS – MonteroAlcisso, Arriola, Cajucom, Calalang, Claudio, Escueta, Delos Santos, Dialino, Fajardo, Imperial, Juaquino, Martin, Martinez, Mendoza, Noel, Pangcog, Plazo Raso,Rosales, Sia, Uy, Venzuela
toward them." Besides, "it was the policy of the office to give them
free way to spend such amount without, of course, complete
supporting papers."As to how the amounts claimed by the officers
and members of the Board were spent, Casco testified that, with
respect to the manager, they were spent for"hotel andaccommodation charges and entertainment expenses while in
Manila;entertainment of the agents of the ship and other officers
and also importers when he comes to Manila on official business for
the Company." As regards the members of the Board, he testified
that "they used to present chits covering their expenses for the
entertainments of friends who came from other places to see Cebu
to get indentions of their imports. The members of the Board of
Directors or the liaison officers entertained them, in which case
these liaison officers submitted hotel and accommodation expenses
and also transportation expenses." (Pp. 61-62, t.s.n.; p. 20,Memorandum for Appellant.)From the evidence adduced by
appellant, there were two sets of representation expenses. One
covers expenses supported by appropriate vouchers and chits;the
other covers expenses without supporting papers. Unfortunately, it
is not possible to determine the actual amount covered by
supporting papers and the amount without supporting papers. It is
alleged that the records were destroyed when the house of
Buenaventura M. Veloso, treasurer of Appellant, where the records
were kept was burned. We may, therefore, accept as correct the
fact that at least a portion of the amount of P75,855.88 was spent
for representation expenses of appellant corporation, while the
portion thereof not covered by supporting papers was spent for
purposes not clearly established. The first qualifies for the
deduction, the other does not. It is up to us to determine from all
available data the amount properly deductible as representation
expenses. It would seem unjust to disallow the deduction of the
entire amount for lack of documentary evidence to establish the
precise amount beyond a reasonable doubt. The practice under the
Federal Income Tax Law of the United States is —". . . that while a
taxpayer is not relieved from the burden of substantiating his
claimed deductions, the examining agent should exercise careful
judgment which will permit reasonable determinations for
entertainment expense,provided he is satisfied that there is a
proper basis for some allowance.Disallowing amounts claimed fordeduction merely because there is available no documentary
evidence which will establish the precise amount beyond a
reasonable doubt ignores commonly recognized business practices
as well as the fact proof may be established by credible oral
testimony. On the other hand, it is not the policy to allow an
arbitrary percentage of the claimed deduction merely for purpose
of settlement. Ir-Min. No. 54-92, Par. 76,750 P-H Fed. 1954."
(Par.11,300 P-H Fed. 1955.
In this case, it is impossible to determine the precise amount spent
for representation. But it is our duty to make a determination, even
if the result be merely an approximation."In the production of his
plays Cohan was obliged to be free-handed in entertaining actors,
employees, and, as he naively adds, dramatic critics. He had also
to travel much, at times with his attorney. These expenses
amounted to substantial sums, but he kept no account and
probably could not have done so.At the trial before the Board he
estimated that he had spent eleven thousand dollars in this fashion
during the first six months of 1921, twenty-two thousand dollars,
between July first, 1921, and June thirtieth, 1922, and as much for
his following fiscal year, fifty-five thousand dollars in all. The Boardrefused to allow him any part of this, on the ground that it was
impossible to tell how much he had in fact spent, in the absence of
any items or details. The question is how far this refusal is justified,
in view of the finding that he had spent much and that the sums
were allowable expenses. Absolute certainty in such matters is
usually impossible and is not necessary; the Board should make as
close an approximation as it can, bearing heavily if it chooses upon
the taxpayer whose inexactitude is of his own making. But to allow
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nothing at all appears to us inconsistent with saying that something
was spent. True, we do not know how many trips Cohan made, nor
how large his entertainments were; yet there was obviously some
basis for computations, if necessary by drawing upon the Board's
personal estimates of the minimum of such expenses. The amountmay be trivial and unsatisfactory, but there was basis for some
allowance, and it was wrong to refuse any, even though it were the
traveling expenses of a single trip. It is not fatal that the result will
inevitably be speculative; many important decisions must be such.
We think that the Board was in error as to this and must reconsider
the evidence." (Pp. 543-544, Vol. 39 Fed. Rep.)We shall, therefore,
endeavor to ascertain the amount actually spent by appellant for
representation or entertainment which we deem reasonably
necessary in carrying on its business. As already adverted to
above, appellant claimed representation expenses from 1949 to1952 in the following
amounts:1949P83,703.54195010,424.39195175,855.88195263,61
8.64We presume that, as in 1951, the expenses incurred by the
officers and members of the Board of Directors were not all covered
by supporting papers showing that said expenses were all for
entertainment purposes as testified by appellant's accountant-
bookkeeper. From the above figures, we may infer that the sum of
P10,000.00 may be considered reasonably necessary for
entertainment expenses of appellant in 1951, it having claimed a
little over that amount in 1950, when its gross income was more
than its gross incomes in 1951
and 1952. Moreover, it allegedly spent for entertainment purposes
in 1948 the sum of P500.00 only.It is argued, however, that the
whole amount claimed by the appellant should be disallowed
because there is no necessity for appellant to incur expenses for
entertainment, the business in which it is engaged being a
monopoly. To accept this preposition is to ignore the commonly
recognized business practices. A business concern, whether a
monopoly or one which operates in a highly competitive market,
has need to provide for entertainment or representation expenses
to preserve and maintain the goodwill and patronage of its
customers and to win more customers if possible. Moreover, in the
case of appellant, while it is true that it has the exclusive contractto undertake arrastre operations in the port of Cebu, the contract is
for a limited period after which it has to compete again with others
before it may win a renewal of the contract. There is,
therefore,necessity for it to provide for a reasonable amount for
representation or entertainment expenses.It is also contended that
the sum of P75,855.88 being claimed as representation expenses
was an indirect distribution of dividend, the officers and members
of the Board of Directors of appellant being the holders of the
majority stock of the corporation, together with their relatives. The
records show that the officers and members of the Board of Directors of appellant corporation had never been the holders of
the majority stock of the corporation. It is true that some of their
relatives were and are stockholders of said corporation, but it has
not been shown that the stocks in the names of such relatives were
owned or controlled,directly or indirectly, by the officers and
members of the Board of Directors.Accordingly, there is no basis for
holding that the officers and members of the Board of Directors of
appellant own or control the majority stock to justify the inference
that representation expenses being claimed are an indirect
distribution of dividend.Finally, it is argued that while the officers
and members of the Board of Directors of appellant corporation
reported in their income tax returns the amounts received by them
as reimbursements for alleged representation expenses, they did
not claim deduction of the amounts actually spent by them. From
this the conclusion is drawn that the amounts received by them
were not in reality reimbursements for representation expenses but
a distribution of part of the net profit of the corporation. We can not
accept the soundness of this proposition. The failure of a person to
claim deduction in connection with income derived from a
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corporation cannot affect the legality of the deduction claimed by
the corporation in respect of the amount paid by it to such person.
Of the same nature is the argument of appellant that because the
Collector of Internal Revenue has not questioned the legality of the
deduction for representation expenses claimed in other years inamounts nearly the same as the claim in1951, there is no
justification for questioning the deduction for representation
expenses in that year. The legality of a deficiency assessment
cannot be affected by the failure to assess in cases of similar
nature. The rule is well established that the Government is not
estopped by error or mistake on the part of its agents. (Pineda v.
Court of First Instance of Tayabas, 52 Phil. 803.)FOR THE
FOREGOING CONSIDERATIONS, the decision appealed from is
hereby modified, and appellant is hereby ordered to pay to the
Collector of Internal Revenue, within a reasonable period to befixed by the latter, the sum of P15,517.00, computed below:
Net income per returnP41,596.45
Disallowances:
(1)Salaries500.00
(2)Representation Expenses:As claimed by appellantP75,855.88
Allowed10,000.0065,855.88
(3)Miscellaneousexpenses5,768.00—————
Net income subject to taxP113,720.33—————
Tax due on P113,720.33:P100,000.00 at 20%P20,000.00P13,720.00
at 28%3,842.00P23,842.00
Less tax previously assessed and paid8,325.00—————
Deficiency taxP15,517.00
=========
With costs against appellant. cdasiaSO ORDERED.ROMAN M.
UMALIAssociate JudgeWE CONCUR:
G.R. No. L-12798 May 30, 1960
VISAYAN CEBU TERMINAL CO., INC., petitioner-appellant,
vs.
COLLECTOR OF INTERNAL REVENUE, respondent-
appellee.
Duterte and Rodriguez for petitioner.
Assistant Solicitor General Jose P. Alejandro and Atty. Sixto J.
Javier for respondent.
CONCEPCION, J.:
Petitioner Visayan Cebu Terminal Co., Inc., seeks a review of
the decision of the Court of Tax Appeals in the above entitled
case. The dispositive part of said decision reads as follows:
FOR THE FOREGOING CONSIDERATIONS, the decision
appealed from is hereby modified, and appellant is hereby
ordered to pay the Collector of Internal Revenue, within a
reasonable period to be fixed by the latter, the sum of
P15,517.00, computed below:
Net income per return P41,596.45
Disallowances:
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(1) Salaries 500.00
(2) Representation Expenses:
As claimed by appellant 75,855.88
Allowed 10,000.00 65,855.88
(3) Miscellaneous expenses 5,768.00
————
Net income subject to tax P113,720.33
Tax due on P113,720.33:
P100,000.00 at 20% P20,000.00
P13,720.00 at 28% 3,842.00 P23,842.00
Less tax previously assessed and paid 8,325.00
————
Deficiency tax P15,517.00
With costs against appellant.
The facts, which are not disputed, are set forth in the
aforementioned decision, from which we quote:
"The appellant, Visayan Terminal Co. Inc., is a corporation
organized for the purpose of handling arrastre operations in
the port of Cebu. It was awarded the contract for the said
arrastre operations by the Bureau of Customs, pursuant to
Act No. 3002, as amended.
"On March 1, 1952, appellant filed its income tax return for
1951 reporting a gross income of P420,633.40 and claimed
deductions amounting to P379,036.95, leaving a net income
of P41,596.45 on which it paid income tax in the sum of
P8,319.20. The sum of P379,036.95 claimed as deductions
consisted of various items, among which were the following:
1. Salaries —
(a) Salary and bonus of Juan
Eugenio Lo P1,875.00
(b) Salary of Felix Go Chan 250.00
(c) Salary of Teomino Tiu
Tiam 250.00 P 2,375.00
2. Representation expenses 75,855.88
3. Miscellaneous expenses
(a) Christmas bonus given to
various persons P1,500.00
(b) Tips to ships' officers 4,800.00 6,300.00
TOTAL P84,530.88
The said sums of P2,375.00, P75,855.88 and P6,300.00,representing salaries, representation expenses and
miscellaneous expenses, respectively, or a total of
P84,530.88, were disallowed by the Collector of Internal
Revenue, thus giving rise to a deficiency assessment of
P18,991.00.
x x x x x x x x x
Upon request for reconsideration, the Collector modified the
deficiency income tax assessment by allowing the deductionfrom appellant's gross income of the salary of Juan Eugenio
Lo in the sum of P1,875.00 and miscellaneous expenses
amounting to P532.00, at the same time maintaining the
disallowance of the full amount of P75,855.88 as
representation expenses. The revised deficiency assessment
is itemized in the letter of the Collector dated March 26,
1955, and is reproduced below:
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TAX LAW REVIEW DIGESTS – MonteroAlcisso, Arriola, Cajucom, Calalang, Claudio, Escueta, Delos Santos, Dialino, Fajardo, Imperial, Juaquino, Martin, Martinez, Mendoza, Noel, Pangcog, Plazo Raso,Rosales, Sia, Uy, Venzuela
Net income as per return P41.596.45
Disallowances:
per investigation:
salaries of officers P 2,375.00
allowed per reaudit 1,875.00 500.00
per investigation and reaudit,
representation expenses 75,855.88
per investigation, miscellaneous
expenses 6,300.00
allowed per reaudit 532.00 5,768.00
——— ————
Net income subject to tax per
reaudit P123,720.33
Tax due on P123,720.33:P100,000.00 at 20% P20,000.00
P23,720.00 at 28% 6,642.00 P26,642.00
————
Less tax previously assessed and paid 8,325.00
—————
Deficiency tax P18,317.00
Add: 5% surcharge 915.85
1% monthly interest from
5/31/53 to 4/30/55 4,212.91Compromise for late payment 40.00
—————
Total amount due on April 30,1955 P23,485.76
Appellant has agreed to the disallowance of the sum P500.00
representing the salaries of Felix Go Chan and Teotimo Tiu
Tiam at P250.00 each, and the sum of P5,768.00,
representing miscellaneous expenses. The only issue raised
in this appeal relates to the deductibility of the sum of
P75,855.88 as representation expenses.
Passing upon said issue, which is, also, the only one raised in
this appeal, the lower court held that "representation ...expenses fall under the category of business expenses
which" are allowable deductions from gross income if they
meet the conditions prescribed by law", particularly section
30(a) (1) of the National Internal Revenue Code; that, to be
deductible, said business expenses must "ordinary and
necessary expenses paid or incurred in carrying on any trade
or business"; that those expenses "must also, meet the
further test of reasonableness in amount", this test being
"inherent in the phase `ordinary and necessary'"; that someof the representation expenses claimed by appellant had
been evidenced by vouchers or chits, but others were
reimbursed "without presentation of supporting papers; that
the aforementioned vouchers or chits were allegedly
"destroyed when the house of Buenaventura M. Veloso,
treasurer of appellant, where the records were kept was
burned"; that, accordingly, "it is not possible to determine
the actual amount covered by supporting papers and the
amount without supporting papers"; that the court should,
therefore, "determine from all available data the amountproperly deductible as representation expenses"; that
"during the period of four (4) years from 1949 to 1952,
appellant had gross income, net income, net profits and
claimed representation expenses as follows:
Year Gross Income Net Profit Representation
Expenses
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1949 P722,135.42 P61,257.53 P83,703.54
1950 451,303.21 33,023.78 10,424.39
1951 420,479.39 41,596.45 75,855.88
1952 425,326.86 34,207.31 63,618.64
and that "from the above figures, we may infer that the sum
of P10,000 may be considered reasonably necessary for
entertainment expenses of appellant in 1951, it having
claimed a little over the amount in 1950, when its gross
income was more than its gross income in 1951 and 1952",
and because "it allegedly spent for entertainment purposes
in 1948 the sum of P500.00 only." Hence, the lower court
modified the assessment of the taxes due from appellant
herein the manner set forth in the beginning of this decision.
In its brief, appellant does not assail any of the premises
upon which the aforementioned conclusion of the lower court
was predicated. What is more, it relied upon, and, even,
quoted some of the views expressed in the decision appealed
from. Appellant, however, maintains that said court had
acted arbitrarily in considering the representation expenses
in 1950, not those incurred in 1949 and 1952, in fixing the
amount deductible in 1951. This pretense is clearly
untenable. It appears: (a) that part of the allegedrepresentation expenses had never had any supporting
paper; (b) that the vouchers and chits covering other
representation expenses had been allegedly destroyed; (c)
that there is no documentary evidence on record of any of
the representation expenses in question; (d) that no
testimonial evidence has been introduced on any specific
item of said alleged expenses; (e) that there is no more than
oral proof to the effect that payments had been made to
appellant's officers for representation expenses allegedly
made by the latter and about the general nature of such
alleged expenses; (f) that the gross income in 1950
exceeded the gross income in 1951 and 1952, and (g) that
the representation expenses in 1948 amounted to P500 only.
Under these circumstances, the lower court was fully justified
in concluding that the representation expenses in 1951
should be slightly less than those incurred in 1950.
Upon the other hand, appellant has not even tried to show
why its representation expenses in 1951 should be deemed
bigger than the amount allowed by the lower court. In fact,
the latter had been patently fair and reasonable, if not ratherliberal, in allowing appellant to deduct P10,000.00 as
representation expenses for 1951, there being absolutely no
concrete evidence of the sums then actually spent for
purposes of representation. It may not be amiss to note that
the explanation to the effect that the supporting paper of
some of those expenses had been destroyed when the house
of the treasurer was burned, can hardly be regarded as
satisfactory, for appellant's records are supposed to be kept
in its offices, not in the residence of one of its officers.
Being in accordance with the facts and the law, the decision
appealed from is hereby affirmed, with costs against
petitioner-appellant, Visayan Cebu Terminal Co., Inc. It is so
ordered.
G.R. No. L-23226 November 28, 1967
ALHAMBRA CIGAR and CIGARETTE MANUFACTURING
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COMPANY, petitioner-appellant,
vs.
THE COMMISSIONER OF INTERNAL REVENUE,
respondent-appellee.
Gamboa and Gamboa for petitioner-appellant.
Office of the Solicitor General for respondent-appellee.
FERNANDO, J.:
This Court, in this petition for the review of a decision of the
Court of Tax Appeals is not faced with a problem of undue
complexity. The law governing the matter has been
authoritatively expounded in an opinion by the then Justice,
now Chief Justice, Concepcion in Alhambra Cigar v. Collector of Internal Revenue,1 a case involving the same parties over
a similar question but covering an earlier period of time. The
limits of a power of respondent Commissioner of Internal
Revenue to allow deductions from the gross income "the
ordinary and necessary expenses paid or increased during
the taxable year in carrying on any trade or business,
including a reasonable allowance for salaries and other
compensation for personal services actually rendered . . ." 2
had thus been authoritatively expounded. What remains tobe decided in this litigation is whether the decision of the
Court of Tax Appeals sought to be reviewed reflected with
fidelity the doctrine thus announced or deviated therefrom.
According to the petition for review, Alhambra Cigar &
Cigarette Manufacturing Company, petitioner-appellant, "is a
corporation duly organized and existing under the laws of the
Philippines, with principal office at 31 Tayuman street, Tondo,
Manila; and the respondent-appellee is the duly appointed
and qualified Commissioner of Internal Revenue, vested with
authority to act as such for the Government of the Republic
of the Philippines, . . . .3
In the petition for review it was contended that the Court of
Tax Appeals, in affirming the action taken by respondent-
appellee Commissioner of Internal Revenue, erred "(a) In
holding that A. P. Kuenzle and H.A. Streiff who were the
President and Vice-President, respectively, of the petitioner-
appellant, were entitled to a salary of only P6,000.00 each
year, for 1954, 1955, 1956 and 1957, and a bonus equal to
the reduced bonus of W. Eggmann for each of said years; and
disallowing as deductions the portions of their salary andbonus in excess of said amounts; (b) In disallowing, as
deductions, all the directors' fees and commissions paid by
the petitioner-appellant to A.P. Kuenzle and H.A. Streiff; (c) In
holding that the petitioner-appellant is liable for the alleged
deficiency income taxes in question."4
It is indisputable as noted in the brief for petitioner-appellant
that the deductions disallowed by respondent-appellee,
Commissioner of Internal Revenue, for the year 1954 to 1957
designated as salaries, officers; bonus, officers; commissionsto managers and directors' fees "relate exclusively to the
compensations paid by the petitioner-appellant in 1954,
1955, 1956 and 1957, to A. P. Kuenzle and H.A. Streiff who
were, during the said years, as they had been in prior years
and still are, directors and the president and vice-president,
respectively, of the petitioner-appellant. . . ."5
Under the category of salaries, officers of the fixed annual10
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compensation of A. P. Kuenzle and H. A. Streiff in the amount
of P15,000.00 each "the respondent-appellee allowed for
each of them a salary of only P6,000.00 and disallow the
balance of P9,000.00, or a total disallowance of P18,00.0,0
for both of them, for each of the years in question."6 Under
that of the bonus, officers of the amount under such category
paid to the above gentlemen for the year 1954 of P14,750.00
each, "the respondent-appellee allowed each of them a
bonus of only P5,850.00, and disallowed the balance of
P8,900.00 or a total disallowance of P17,800.00 for both of
them."7 For the year 1955, the bonus being paid, once again,
amounting to P14,750.00 to each of them, "the respondent-
appellee allowed for each of them, a bonus of only
P7,000.00, and disallowed the balance of P7,750.00 each, ora total disallowance of P15,500.00 for both of them."8 For the
year 1956, again the amount, not suffering any change for
each, "the respondent-appellee allowed for each of them a
bonus of only P5,500.00 and disallowed the balance of
P9,250.00 each, or a total disallowance of P18,500.00 for
both of them."9 Lastly, for the year 1957, of a similar amount
payable to each in the concept of bonus, "the respondent-
appellee allowed for each of them a bonus of only P6,500.00,
and disallowed the balance of P8,250.00 each, or a total
disallowance of P16,500.00 for both of them."10
As to the deduction in the concept of commissions to
managers, the brief for the petitioner appellant states: "The
commissions paid by the petitioner-appellant to A. P. Kuenzle
and H. A. Streiff in the amount of P13,607.61 each in 1954,
or a total of P27,215.22 for both of them; P14,097.62 each in
1955, or a total of P28,195.24 for both of them; P13,180.87
each in 1956, or a total of P26,361.74 for both of them; and
P13,144.29 each in 1957, or a total of P26,288.48 for both of
them, were entirely disallowed by the respondent-
appellee."11
Concerning the directors' fees paid to both officials by
petitioner-appellant, it is noted in the brief that "in the
amount of P11,504.71 each in 1954, or a total of P23,009.42
for both of them; P10,693.02 each in 1955, or a total of
P21,386.04 for both of them; P10,360.23 each in 1956, or a
total of P20,720.46 for both of them; and P9,716.63 each in
1957, or a total of P19,433.26 for both of them were also
entirely disallowed by the respondent-appellee."12
In the decision of the respondent Court of Tax Appeals
sought to be reviewed, there was an appraisal of the
evidence on which respondent-appellee Commissioner of
Internal Revenue based the above deduction on salaries and
bonuses: "The evidence shows that prior to 1954, Messrs. A.
P. Kuenzle and H. A. Streiff President and Vice-President,
respectively, of petitioner corporation, were each paid an
annual salary P6,000.00 and a bonus of about four times as
much as the annual salary. In Alhambra Cigar and Cigarette
Manufacturing Company v. Coll. of Int. Rev. C.T.A. No. 142 January 31, 1957 (affd. in G.R. Nos. L-12026 & L-12131, May
29, 1959), this Court held that considering the nature of the
services performed by Messrs. Kuenzle and Streiff the salary
of P6,000.00 paid to each of them was reasonable and,
therefore, deductions is ordinary and necessary business
expense. The bonus paid to each of said officers was
however reduced to the amount equivalent to that paid to
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Mr. W. Eggmann, the resident Treasurer and Manager of
petitioner. Following the decision of the Supreme Court in G.
R. Nos. L-12026 & L- 12131, . . ., respondent allowed as
deduction P6,000.00 as salary to Messrs. Kuenzle and Streiff
and a bonus equivalent to that paid annually to Mr. Eggmann
from 1954 to 1957, as indicated above."13
Then the decision of respondent Court of Tax Appeals in
affirming what respondent-appellee did explained why:
"Upon the evidence of record, we find no justification to
reverse or modify the decision of respondent with respect to
the disallowance of a portion of the salaries and bonuses
paid to Messrs. Kuenzle and Streiff. Petitioner seeks to justify
the increase in the salaries of Messrs. Kuenzle and Streiff onthe ground of increased costs of living. The said officers of
petitioner are, however, non-residents of the Philippines."14
It may be stated in this connection that the brief for
petitioner-appellant did not actually dispute the fact of non-
residence of the aforesaid officials. Thus: "A. P. Kuenzle or H.
A. Streiff usually came to the Philippines every two years,
and generally stayed from five to eight weeks (t.s.n., pp. 203-
204). During the years in question, H. A. Streiff was in the
Philippines from January 27 to March 20, 1954. He waspersonally present at the special meeting of the board of
directors of the petitioner-appellant on February 19, 1954
and at the regular meeting on February 27, 1954, the
minutes of all of which he signed as Vice-President (Exhibits
Q, Q-1 and Q-2). He was also personally present at the semi-
annual meeting of stockholders of the petitioner-appellant on
February 19, 1954, the minutes of which he also signed as
vice-president (Exh. R). A. P. Kuenzle was in the Philippines
from February 3 to March 8, 1956 (t.s.n., pp. 204-205). He
was personally present at the special meeting of the board of
directors on February 22, and on February 23, 1956, and at
the semi-annual general meeting of stockholders on February
23, 1956, the minutes of all of which he signed as President
(Exhs. Q-8, Q-9. and R-4). H. A. Streiff came again to the
Philippines in 1958, and he personally attended the special
meeting of the board of directors on March 7, 1968, the
minutes of which he also, signed as Vice-President (Exh. Q-
16)."15
There was in the brief of petitioner-appellant stress laid on
those work performed by them, both in and outside thePhilippines. "During their stay in the Philippines, A. P. Kuenzle
or H. A. Streiff inspected the install petitions of the petitioner-
appellant, and discussed with the local management,
personnel and management matters, long-range planning
and policies of the company (t.s.n., pp. 205-206). Aside from
these visits of A. P. Kuenzle and H. A. Streiff to the
Philippines, there were other personal consultations between
them and the local management. There were about seven
staff members in the local management, and each of them
went on home leave every four years and for consultations inSwitzerland with the general managers, AP Kuenzle and H. A.
Streiff. These home leaves each lasted for six months. In this
way, at least one staff member went on home leave every
year and for consultations with the general
manager. . . ."16
As to commissions and directors' fees, it is the finding of the
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Court of Tax Appeals: "In connection with the commissions
paid to Messrs. Kuenzle and Streiff there is no evidence of
any particular service rendered by them to petitioner to
warrant payment of commissions. Counsel for petitioner
sought to prove the various types of services performed by
said officers, but the services mentioned are those for which
they have been more than adequately compensated in the
form of salaries and bonuses. As regards the directors' fees,
it is admitted that Messrs. Kuenzle and Streiff "usually came
to the Philippines every two years, and generally stayed from
five to eight weeks." (Page 17, Memorandum for Petitioner.)
We cannot see any justification for the payment of director's
fees of about P10,000.00 to each of said officers for coming
to the Philippines to visit their corporation once in two years.Being non-resident President and Vice-President of Petitioner
corporation of which they are the controlling stockholders,
we are more inclined to believe that said commissions and
directors' fees, payment of which was based on a certain
percentage of the annual profits of petitioner, are in the
nature of dividend distributions,"17
Considering how carefully the Court of Tax Appeals
considered the matter of the disallowances in the light of
Section 30 of the National Internal Revenue Code, the taskfor petitioner-appellant in proving that it erred in holding that
A. P. Kuenzle and H. A. Streiff were entitled only to the salary
of P6,000.00 each a year, for 1954, 1955, 1956 and 1957,
and a bonus equal to the reduced bonus of one of its officials
a certain W. Eggmann, for each of said years, and in
disallowing as deductions the directors' fees and
commissions paid by it to them, was far from easy. Nor could
it be said that petitioner-appellant did succeed in such effort
As mentioned earlier, the previous case of Alhambra Cigar &
Cigarette Manufacturing Company v. The Collector of Internal
Revenue,18 has laid down the applicable principle of law.
In the language of then Justice, now Chief Justice,
Concepcion: "In the light of the tenor of the foregoing
provision, whenever a controversy arises on the deductibility,
for purposes of income tax, of certain items for alleged
compensation of officers of the taxpayer, two (2) questions
become material, namely: (a) Have "personal services" been
"actually rendered" by said officers? (b) In the affirmative
case, what is the "reasonable allowance" therefore? When
the Collector of Internal Revenue disallowed the fees,bonuses and commissions aforementioned, and the company
appealed therefrom, it became necessary for the [Court of
Tax Appeals] to determine whether said officer had correctly
applied section 30 of the Tax Code, and this, in turn, required
the consideration of the two (2) questions already adverted
to. In the circumstances surrounding the case, we are of the
opinion that the [Court of Tax Appeals] has correctly
construed and applied said provision." So it is now. This
appeal too cannot prosper.
Even if there were no such previous decision, it would still
follow, in the light of the controlling doctrines, that the Court
of Tax Appeals must be sustained. The well written brief for
petitioner-appellant citing Botany Worsted Bills v. United
States,19 states: "Whether the amounts disallowed by the
respondent-appellee in the respective years were reasonable
compensation for personal services, is a question of fact to
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be determined from all the evidence."20 That the question
thus involved is inherently factual, appears to be undeniable.
This Court is bound by the finding of facts of the Court of Tax
Appeals, especially so, where as here, the evidence in
support thereof is more than substantial, only questions of
law thus being left open to it for determination.21 Without
ignoring this various factors which petitioner-appellant would
have this Court consider in passing upon the determination
made by the Court of Tax Appeals but with full recognition of
the fact that the two officials were non-residents, it cannot be
said that it committed the alleged errors, calling for the
interposition of the corrective authority of this Court. Nor as a
matter of principle is it advisable for this Court to set aside
the conclusion reached by an agency such as the Court of Tax Appeals which is, by the very nature of its function,
dedicated exclusively to the study and consideration of tax
problems and has necessarily developed an expertise on the
subject unless, as did not happen here, there has been an
abuse or improvident exercise of its authority.
WHEREFORE, the decision of the Court of Tax Appeals is
affirmed, with costs against petitioner-appellant.
Expenses for police protection is illegal!
G.R. No. L-15922 November 29, 1961
C. F. CALANOC, petitioner,
vs.
THE COLLECTOR OF INTERNAL REVENUE, respondent.
Francisco M. Gonzales for petitioner.
Office of the Solicitor General and Special Attorney Librada
del Rosario-Natividad for respondent.
LABRADOR, J.:
This is a petition to review the decision of the Court of Tax
Appeals affirming an assessment of P7,378.57, by the
Collector of Internal Revenue as amusement tax and
surcharge due on a boxing and wrestling exhibition held by
petitioner Calanoc on December 3, 1949 at the Rizal
Memorial Stadium.
By authority of a solicitation permit issued by the Social
Welfare Commission on November 24, 1949, whereby the
petitioner was authorized to solicit and receive contributionsfor the orphans and destitute children of the Child Welfare
Workers Club of the Commission, the petitioner on December
3, 1949 financed and promoted a boxing and wrestling
exhibition at the Rizal Memorial Stadium for the said
charitable purpose. Before the exhibition took place, the
petitioner applied with the respondent Collector of Internal
Revenue for exemption from payment of the amusement tax,
relying on the provisions of Section 260 of the National
Internal Revenue Code, to which the respondent answered
that the exemption depended upon petitioner's compliance
with the requirements of law.
After the said exhibition, the respondent, through his agent,
investigated the tax case of the petitioner, and from the
statement of receipts which was furnished the agent, the
latter found that the gross sales amounted to P26,553.00;
the expenditures incurred was P25,157.62; and the net profit
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was only P1,375,30. Upon examination of the said receipts,
the agent also found the following items of expenditures: (a)
P461.65 for police protection; (b) P460.00 for gifts; (c)
P1,880.05 for parties; and (d) several items for
representation.
Out of the proceeds of the exhibition, only P1,375.38 was
remitted to the Social Welfare Commission for the said
charitable purpose for which the permit was issued.
On November 24, 1951, the Collector of Internal Revenue
demanded from the petitioner payment of the amount of
533.00; the expenditures incurred was P25,157.62; and the
net profit was only P1,375,38. Upon examination of the
Secretary of Finance dated June 15, 1948, authorizing denial
of application for exemption from payment of amusement
tax in cases where the net proceeds are not substantial or
where the expenses are exorbitant. Not satisfied with the
assessment imposed upon him, the petitioner brought this
case to the Court of Tax Appeals for review.
After hearing, the tax court rendered the decision sought
herein to be reviewed. Hence, this petition.
Before this Court, the petitioner questions the validity of theassessment of P7,378.57 imposed upon him by the
respondent, as affirmed by the tax court. He denies having
received the stadium fee 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. But
evidence was submitted that while he did not receive said
stadium fee of P1,000, said amount was paid by the O-SO
Beverages directly to the stadium for advertisement
privileges in the evening of the entertainments. As the fee
was paid by said concessionaire, petitioner had no right to
include the P1,000 stadium fee among the items of his
expenses. It results, therefore, that P1,000 went into
petitioner's pocket which is not accounted for.
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.
WHEREFORE, the decision sought herein to be reviewed is
hereby affirmed, with costs against the petitioner.
CIR v ISABELA CULTURAL CORPORATION
FACTS:
ICC was assessed for deficiency income tax [ BIR disallowed
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expense deductions for professional and security services by 1)
auditing services by SGV & Co. 2) legal services Bengzon law office
3) El Tigre Security services] and deficiency expanded withholding
tax, when it failed to withhold 1% expanded withholding tax. The
CTA cancelled and set aside the assessment notices holding thatthe claimed deductions for professional and security services were
properly claimed in 1986 since it was only in that year when the
bills demanding payment were sent to ICC. It also found that the
ICC withheld 1% expanded withholding tax for security services.
The CA affirmed hence the case at bar.
ISSUE: W/N the aforementioned may be deducted
HELD: For the auditing and legal services NO but for the security
services YES
The requisites for deductibility of ordinary and necessary trade,
business or professional expenses, like expenses paid for legal and
auditing services are: 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 and other pertinent papers.
The requisite that it must have been paid or incurred during the
taxable year is qualified by Sec. 45 of NIRC which states that “the
deduction provide for in this title shall be taken for the taxable yearin which ‘paid or incurred’ dependent upon the method of
accounting upon the basis of which the net income is computed x x
x”.
ICC uses the accrual method. RAM No. 1-2000 provides that under
the accrual method, expenses not claimed as deductions in the
current year when they are incurred CANNOT be claimed as
deduction from income for the succeeding year. The accrual
method relies upon the taxpayer’s right to receive amount or its
obligation to pay them NOT the actual receipt or payment.
Amounts of income accrue where the right to receive them becomefixed, where there is created an enforceable liability. Liabilities are
accrued when fixed and determinable in amount.
The accrual of income and expense is permitted when the ALL-
EVENTS TEST has been met. The test requires that: 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. It
does not require that the amount be absolutely known only that the
taxpayer has information necessary to compute the amount with
reasonable accuracy. The test is satisfied where computation
remains uncertain if its basis is unchangeable. The amount of
liability does not have to be determined exactly, it must be
determined with reasonable accuracy.
In the case at bar, the expenses for legal services pertain to the
years 1984 and 1985. The firm has been retained since 1960. From
the nature of the claimed deduction and the span of time during
which the firm was retained, ICC can be expected to have
reasonably known the retainer fees charged by the firm as well as
compensation for its services. Exercising due diligence, they could
have inquired into the amount of their obligation. It could havereasonably determined the amount of legal and retainer fees owing
to their familiarity with the rates charged.
The professional fees of SGV cannot be validly claimed as
deductions in 1986. ICC failed to present evidence showing that
even with only reasonable accuracy, it cannot determine the
professional fees which the company would charge.
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CIR v GENERAL FOODSAGUINALDO INDUSTRIES v CIR
FACTS:
Aguinaldo Industries Corporation (AIC) is a domestic corporationengaged in the manufacture of fishing nets, a tax-exempt industryand the manufacture of furniture. For accounting purposes, eachdivision is provided with separate books of accounts. Previously,AIC acquired a parcel of land in Muntinlupa, Rizal, as site of thefishing net factory. Later, it sold the Muntinlupa property. AICderived profit from this sale which was entered in the books of theFish Nets Division as miscellaneous income to distinguish it from itstax-exempt income.
For the year 1957, AIC filed two separate income tax returns foreach division. After investigation, the examiners of the BIR foundthat the Fish Nets Division deducted from its gross income for thatyear the amount of P61,187.48 as additional remuneration paid tothe officers of AIC. This amount was taken from the net profit of anisolated transaction (sale of Muntinlupa land) not in the course of orcarrying on of AIC's trade or business, and was reported as part of the selling expenses of the Muntinlupa land. Upon recommendationof the examiner that the said sum of P61,187.48 be disallowed asdeduction from gross income, petitioner asserted in its letter of February 19, 1958, that said amount should be allowed asdeduction because it was paid to its officers as allowance or bonus
pursuant to its by-laws.
ISSUE/HELD: W/N the bonus given to the officers of the petitionerupon the sale of its Muntinlupa land is an ordinary and necessarybusiness expense deductible for income tax purposes - NO
RATIO: Sec. 30 (a) (1) of the Tax Code provides that in computingnet income, there shall be allowed as deductions ‘Expenses,including all the ordinary and necessary expenses paid or incurredduring the taxable year in carrying on any trade or business,
including a reasonable allowance for personal services actually rendered.
The bonus given to the officers of the petitioner as their share of
the profit realized from the sale of petitioner's Muntinglupa landcannot be deemed a deductible expense for tax purposes, even if the aforesaid sale could be considered as a transaction for carryingon the trade or business of the petitioner and the grant of thebonus to the corporate officers pursuant to petitioner's by-lawscould, as an intra-corporate matter, be sustained. The records showthat the sale was effected through a broker who was paid bypetitioner a commission of P51,723.72 for his services. On theother hand, there is absolutely no evidence of any service actuallyrendered by petitioner's officers which could be the basis of a grantto them of a bonus out of the profit derived from the sale. Thisbeing so, the payment of a bonus to them out of the gain realized
from the sale cannot be considered as a selling expense; nor can itbe deemed reasonable and necessary so as to make it deductiblefor tax purposes. The extraordinary and unusual amounts paid bypetitioner to these directors in the guise and form of compensationfor their supposed services as such, without any relation to themeasure of their actual services, cannot be regarded as ordinary and necessary expenses within the meaning of the law. This is inline with the doctrine in the law of taxation that the taxpayer mustshow that its claimed deductions clearly come within the languageof the law since allowances, like exemptions, are matters of legislative grace.
ATLAS CONSOLIDATED MINING v CIR
FACTS:
Atlas is a corporation engaged in the mining industryregistered. On August 1962, CIR assessed against Atlas fordeficiency income taxes for the years 1957 and 1958. For theyear 1957, it was the opinion of the CIR that Atlas is notentitled to exemption from the income tax under RA 909
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because same covers only gold mines. For the year 1958, thedeficiency income tax covers the disallowance of itemsclaimed by Atlas as deductible from gross income. Atlasprotested for reconsideration and cancellation, thus the CIR
conducted a reinvestigation of the case.
On October 1962, the Secretary of Finance ruled that theexemption provided in RA 909 embraces all new mines andold mines whether gold or other minerals. Accordingly, theCIR recomputed Atlas deficiency income tax liabilities in thelight of said ruling. On June 1964, the CIR issued a revisedassessment entirely eliminating the assessment for the year1957. The assessment for 1958 was reduced from whichAtlas appealed to the CTA, assailing the disallowance of thefollowing items claimed as deductible from its gross income
for 1958: Transfer agent's fee, Stockholders relation servicefee, U.S. stock listing expenses, Suit expenses, and Provisionfor contingencies. The CTA allowed said items as deductionexcept those denominated by Atlas as stockholders relationservice fee and suit expenses.
Both parties appealed the CTA decision to the SC by way of two (2) separate petitions for review. Atlas appealed only thedisallowance of the deduction from gross income of the so-called stockholders relation service fee.
ISSUE/HELD: W/N the ‘annual public relations expense’ (akastockholders relation service fee) paid to a public relationsconsultant is a deductible expense from gross income
RATIO: Section 30 (a) (1) of the Tax Code allows a deductionof "all the ordinary and necessary expenses paid or incurredduring the taxable year in carrying on any trade or business."An item of expenditure, in order to be deductible under thissection of the statute, must fall squarely within its language.
To be deductible as a business expense, three conditions areimposed, namely: (1) the expense must be ordinary andnecessary, (2) it must be paid or incurred within the taxableyear, and (3) it must be paid or incurred in carrying in a trade
or business. In addition, not only must the taxpayer meet thebusiness test, he must substantially prove by evidence orrecords the deductions claimed under the law, otherwise, thesame will be disallowed. The mere allegation of the taxpayerthat an item of expense is ordinary and necessary does not justify its deduction.
The SC has never attempted to define with precision theterms "ordinary and necessary." As a guiding principle,ordinarily, an expense will be considered "necessary" wherethe expenditure is appropriate and helpful in the
development of the taxpayer's business. It is "ordinary" whenit connotes a payment which is normal in relation to thebusiness of the taxpayer and the surrounding circumstances. The term "ordinary" does not require that the payments behabitual or normal in the sense that the same taxpayer willhave to make them often; the payment may be unique ornon-recurring to the particular taxpayer affected.
There is thus no hard and fast rule on the matter. The right toa deduction depends in each case on the particular facts andthe relation of the payment to the type of business in whichthe taxpayer is engaged. The intention of the taxpayer oftenmay be the controlling fact in making the determination.Assuming that the expenditure is ordinary and necessary inthe operation of the taxpayer's business, the answer to thequestion as to whether the expenditure is an allowablededuction as a business expense must be determined fromthe nature of the expenditure itself, which in turn depends onthe extent and permanency of the work accomplished by theexpenditure.
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It appears that on December 1957, Atlas increased its capitalstock. It claimed that its shares of stock were sold in theUnited States because of the services rendered by the publicrelations firm. The information about Atlas given out and
played up in the mass communication media resulted in fullsubscription of the additional shares issued by Atlas;consequently, the ‘stockholders relation service fee’, thecompensation for services carrying on the selling campaign,was in effect spent for the acquisition of additional capital,ergo, a capital expenditure, and not an ordinary expense. Itis not deductible from Atlas gross income in 1958 becauseexpenses relating to recapitalization and reorganization of the corporation, the cost of obtaining stock subscription,promotion expenses, and commission or fees paid for thesale of stock reorganization are capital expenditures. That
the expense in question was incurred to create a favorableimage of the corporation in order to gain or maintain thepublic's and its stockholders' patronage, does not make itdeductible as business expense. As held in a US case, effortsto establish reputation are akin to acquisition of capitalassets and, therefore, expenses related thereto are notbusiness expense but capital expenditures.
Note: The burden of proof that the expenses incurred areordinary and necessary is on the taxpayer and does not restupon the Government. To avail of the claimed deduction, it is
incumbent upon the taxpayer to adduce substantial evidenceto establish a reasonably proximate relation petition betweenthe expenses to the ordinary conduct of the business of thetaxpayer. A logical link or nexus between the expense andthe taxpayer's business must be established by the taxpayer.
ROXAS v CTA
FACTS:
Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects,transmitted to their grandchildren by hereditary succession
agricultural lands in Batangas, a residential house and lot in Manila,and shares of stocks in different corporations. To manage theproperties, said children, namely, Antonio, Eduardo and Jose Roxasformed a partnership called Roxas y Compania.
On June 1958, the CIR assessed deficiency income taxes againstthe Roxas Brothers for the years 1953 and 1955. Part of thedeficiency income taxes resulted from the disallowance of deductions from gross income of various business expenses andcontributions claimed by Roxas. (see expense items below)
The Roxas brothers protested the assessment but inasmuch as said
protest was denied, they instituted an appeal in the CTA, whichsustained the assessment except the demand for the payment of the fixed tax on dealer of securities and the disallowance of thedeductions for contributions to the Philippine Air Force Chapel andHijas de Jesus' Retiro de Manresa. Not satisfied, Roxas brothersappealed to the SC. The CIR did not appeal.
ISSUES/HELD: W/N the deductions for business expenses andcontributions deductible
RATIO: With regard to the disallowed deductions (expenses for
tickets to a banquet given in honor of Sergio Osmena and beergiven as gifts to various persons, labelled as representationexpenses), representation expenses are deductible from grossincome as expenditures incurred in carrying on a trade or businessunder Section 30(a) of the Tax Code provided the taxpayer provesthat they are reasonable in amount, ordinary and necessary, andincurred in connection with his business. In the case at bar, theevidence does not show such link between the expenses and thebusiness of Roxas.
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The petitioners also claim deductions for contributions to the PasayCity Police, Pasay City Firemen, and Baguio City Police Christmasfunds, Manila Police Trust Fund, Philippines Herald's fund forManila's neediest families and Our Lady of Fatima chapel at FarEastern University. The contributions to the Christmas funds of thePasay City Police, Pasay City Firemen and Baguio City Police are notdeductible for the reason that the Christmas funds were not spent for public purposes but as Christmas gifts to the families of themembers of said entities. Under Section 39(h), a contribution to agovernment entity is deductible when used exclusively for public purposes. For this reason, the disallowance must be sustained. Onthe other hand, the contribution to the Manila Police trust fund is anallowable deduction for said trust fund belongs to the Manila Police,a government entity, intended to be used exclusively for its publicfunctions. The contributions to the Philippines Herald's fund forManila's neediest families were disallowed on the ground that thePhilippines Herald is not a corporation or an associationcontemplated in Section 30 (h) of the Tax Code. It should be notedhowever that the contributions were not made to the PhilippinesHerald but to a group of civic spirited citizens organized by thePhilippines Herald solely for charitable purposes. There is noquestion that the members of this group of citizens do not receiveprofits, for all the funds they raised were for Manila's neediestfamilies. Such a group of citizens may be classified as anassociation organized exclusively for charitable purposesmentioned in Section 30(h) of the Tax Code.
The contribution to Our Lady of Fatima chapel at the Far Eastern
University should also be disallowed on the ground that the saiduniversity gives dividends to its stockholders. Located within thepremises of the university, the chapel in question has not beenshown to belong to the Catholic Church or any religiousorganization. It belongs to the Far Eastern University, contributionsto which are not deductible under Section 30(h) of the Tax Code forthe reason that the net income of said university injures to the
benefit of its stockholders.
ZAMORA v CIR
FACTS:
Mariano Zamora, owner of the Bay View Hotel and FarmaciaZamora, filed his income tax returns. The CIR found that he failedto file his return of the capital gains derived from the sale of certainreal properties and claimed deductions which were not allowable. The collector required him to pay deficiency income tax. On appealby Zamora, the CTA reduced the amount of deficiency income tax.
Zamora appealed, alleging that the CTA erred in dissallowingP10,478.50, as promotion expenses incurred by his wife for thepromotion of the Bay View Hotel and Farmacia Zamora (which is ½of P20,957.00, supposed business expenses).
Zamora alleged that the CTA erred in disallowing P10,478.50 aspromotion expenses incurred by his wife for the promotion of theBay View Hotel and Farmacia Zamora. He contends that the wholeamount of P20,957.00 as promotion expenses, should be allowedand not merely one-half of it, on the ground that, while not all theitemized expenses are supported by receipts, the absence of somesupporting receipts has been sufficiently and satisfactorilyestablished.
ISSUE: w/n CTA erred in allowing only one half of the promotionexpenses. NO
HELD:Section 30, of the Tax Code, provides that in computing netincome, there shall be allowed as deductions all the ordinary andnecessary expenses paid or incurred during the taxable year, incarrying on any trade or business. Since promotion expensesconstitute one of the deductions in conducting a business, samemust satisfy these requirements. Claim for the deduction of promotion expenses or entertainment expenses must also besubstantiated or supported by record showing in detail the amountand nature of the expenses incurred.
Considering, as heretofore stated, that the application of Mrs.
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Zamora for dollar allocation shows that she went abroad on acombined medical and business trip, not all of her expenses cameunder the category of ordinary and necessary expenses; partthereof constituted her personal expenses. There having been nomeans by which to ascertain which expense was incurred by her inconnection with the business of Mariano Zamora and which wasincurred for her personal benefit, the Collector and the CTA in theirdecisions, considered 50% of the said amount of P20,957.00 asbusiness expenses and the other 50%, as her personal expenses.We hold that said allocation is very fair to Mariano Zamora, therehaving been no receipt whatsoever, submitted to explain thealleged business expenses, or proof of the connection which saidexpenses had to the business or the reasonableness of the saidamount of P20,957.00.
In the case of Visayan Cebu Terminal Co., Inc. v. CIR., it wasdeclared that representation expenses fall under thecategory of business expenses which are allowabledeductions from gross income, if they meet the conditionsprescribed by law, particularly section 30 (a) [1], of the TaxCode; that to be deductible, said business expenses mustbe ordinary and necessary expenses paid or incurred incarrying on any trade or business; that those expensesmust also meet the further test of reasonableness inamount. They should also be covered by supporting papers;in the absence thereof the amount properly deductible asrepresentation expenses should be determined fromavailable data.
Expenses
C.M. HOSKINS&CO, INC. v CIR
Facts:
Petitioner, a domestic corporation engaged in the real estatebusiness as brokers, managing agents and administrators,
filed its income tax return for its fiscal year endingSeptember 30, 1957 showing a net income of P92,540.25and a tax liability due thereon of P18,508.00, which it paid indue course. Upon verification of its return, CIR, disallowed
four items of deduction in petitioner's tax returns andassessed against it an income tax deficiency in the amount of P28,054.00 plus interests. The Court of Tax Appeals uponreviewing the assessment at the taxpayer's petition, upheldrespondent's disallowance of the principal item of petitioner'shaving paid to Mr. C. M. Hoskins, its founder and controllingstockholder the amount of P99,977.91 representing 50% of supervision fees earned by it and set aside respondent'sdisallowance of three other minor items.
Petitioner questions in this appeal the Tax Court's findings
that the disallowed payment to Hoskins was an inordinatelylarge one, which bore a close relationship to the recipient'sdominant stockholdings and therefore amounted in law to adistribution of its earnings and profits.
Issue: Whether the 50% supervision fee paid to Hoskin maybe deductible for income tax purposes.
Ruling: NO.
Ratio:
Hoskin owns 99.6% of the CM Hoskins & Co. He was also thePresident and Chairman of the Board. That as chairman of the Board of Directors, he received a salary of P3,750.00 amonth, plus a salary bonus of about P40,000.00 a year andan amounting to an annual compensation of P45,000.00 andan annual salary bonus of P40,000.00, plus free use of thecompany car and receipt of other similar allowances andbenefits, the Tax Court correctly ruled that the payment by
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petitioner to Hoskins of the additional sum of P99,977.91 ashis equal or 50% share of the 8% supervision fees receivedby petitioner as managing agents of the real estate,subdivision projects of Paradise Farms, Inc. and Realty
Investments, Inc. was inordinately large and could not beaccorded the treatment of ordinary and necessary expensesallowed as deductible items within the purview of the TaxCode.
The fact that such payment was authorized by a standingresolution of petitioner's board of directors, since "Hoskinshad personally conceived and planned the project" cannotchange the picture. There could be no question that asChairman of the board and practically an absolutelycontrolling stockholder of petitioner, Hoskins wielded
tremendous power and influence in the formulation andmaking of the company's policies and decisions. Even just asboard chairman, going by petitioner's own enumeration of the powers of the office, Hoskins, could exercise great powerand influence within the corporation, such as directing thepolicy of the corporation, delegating powers to the presidentand advising the corporation in determining executivesalaries, bonus plans and pensions, dividend policies, etc.
It is a general rule that 'Bonuses to employees made in goodfaith and as additional compensation for the services actually
rendered by the employees are deductible, provided suchpayments, when added to the stipulated salaries, do notexceed a reasonable compensation for the servicesrendered. The conditions precedent to the deduction of bonuses to employees are: (1) the payment of the bonuses isin fact compensation; (2) it must be for personal servicesactually rendered; and (3) the bonuses, when added to thesalaries, are 'reasonable when measured by the amount andquality of the services performed with relation to the
business of the particular taxpayer.
There is no fixed test for determining the reasonableness of agiven bonus as compensation. This depends upon many
factors, one of them being the amount and quality of theservices performed with relation to the business.' Other testssuggested are: payment must be 'made in good faith'; 'thecharacter of the taxpayer's business, the volume and amountof its net earnings, its locality, the type and extent of theservices rendered, the salary policy of the corporation'; 'thesize of the particular business'; 'the employees' qualificationsand contributions to the business venture'; and 'generaleconomic conditions. However, 'in determining whether theparticular salary or compensation payment is reasonable, thesituation must be considered as whole. Ordinarily, no single
factor is decisive. . . . it is important to keep in mind that itseldom happens that the application of one test can givesatisfactory answer, and that ordinarily it is the interplay of several factors, properly weighted for the particular case,which must furnish the final answer."
Petitioner's case fails to pass the test. On the right of theemployer as against respondent Commissioner to fix thecompensation of its officers and employees, we there heldfurther that while the employer's right may be conceded, thequestion of the allowance or disallowance thereof as
deductible expenses for income tax purposes is subject todetermination by CIR. As far as petitioner's contention that asemployer it has the right to fix the compensation of itsofficers and employees and that it was in the exercise of such right that it deemed proper to pay the bonuses inquestion, all that We need say is this: that right may beconceded, but for income tax purposes the employer cannotlegally claim such bonuses as deductible expenses unlessthey are shown to be reasonable. To hold otherwise would
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open the gate of rampant tax evasion.
Lastly, We must not lose sight of the fact that the question of allowing or disallowing as deductible expenses the amounts
paid to corporate officers by way of bonus is determined byrespondent exclusively for income tax purposes. Concededly,he has no authority to fix the amounts to be paid tocorporate officers by way of basic salary, bonus or additionalremuneration — a matter that lies more or less exclusivelywithin the sound discretion of the corporation itself. But thisright of the corporation is, of course, not absolute. It cannotexercise it for the purpose of evading payment of taxeslegitimately due to the State."
CALANOC v CIR
KUENZLE & STREIF, INC. v CIR
FACTS:
Petitioner is a domestic corporation engaged in theimportation of textiles, hardware, sundries, chemicals,pharmaceuticals, lumbers, groceries, wines and liquor; ininsurance and lumber; and in some exports. When Petitionerfiled its Income Tax Return, it deducted from its gross income
the following items:
1. salaries, directors' fees and bonuses of its non-residentpresident and vice-president;
2. bonuses of its resident officers and employees; and
3. interests on earned but unpaid salaries and bonuses of its officers and employees.
The CIR disallowed the deductions and assessed Petitionerfor deficiency income taxes. Petitioner requested for re-examination of the assessment. CIR modified the same byallowing as deductible all items comprising directors' fees
and salaries of the non-resident president and vice-president,but disallowing the bonuses insofar as they exceed thesalaries of the recipients, as well as the interests on earnedbut unpaid salaries and bonuses.
The CTA modified the assessment and ruled that while thebonuses given to the non-resident officers are reasonable,bonuses given to the resident officers and employees arequite excessive.
ISSUES/RULING:
W/N the CTA erred in ruling that the measure of thereasonableness of the bonuses paid to its non-residentpresident and vice-president should be applied to thebonuses given to resident officers and employees indetermining their deductibility? NO.
It is a general rule that "Bonuses to employees made in goodfaith and as additional compensation for the services actuallyrendered by the employees are deductible, provided suchpayments, when added to the stipulated salaries, do notexceed a reasonable compensation for the servicesrendered.” The condition precedents to the deduction of bonuses to employees are:
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 the salaries, are
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reasonable when measured by the amount and qualityof the services performed with relation to the businessof the particular taxpayer
There is no fixed test for determining the reasonableness of agiven bonus as compensation. However, in determiningwhether the particular salary or compensation payment isreasonable, the situation must be considered as a whole.
Petitioner contended that it is error to apply the samemeasure of reasonableness to both resident and non-residentofficers because the nature, extent and quality of theservices performed by each with relation to the business of the corporation widely differ. Said non-resident officers hadrendered the same amount of efficient personal service and
contribution to deserve equal treatment in compensation andother emoluments. There is no special reason for grantinggreater bonuses to such lower ranking officers than thosegiven to the non-resident president and vice president.
W/N the CTA erred in allowing the deduction of thebonuses in excess of the yearly salaries of theemployees? NO.
The deductible amount of said bonuses cannot be onlyequal to their respective yearly salaries considering the post-war policy of the corporation in giving salaries at low levelsbecause of the unsettled conditions resulting from war andthe imposition of government controls on imports andexports and on the use of foreign exchange which resulted inthe diminution of the amount of business and the consequentloss of profits on the part of the corporation. The payment of bonuses in amounts a little more than the yearly salariesreceived considering the prevailing circumstances is in ouropinion reasonable.
W/N the CTA erred in disallowing the deduction of interests on earned but unpaid salaries and bonuses?NO.
Under the law, in order that interest may be deductible, itmust be paid "on indebtedness." It is therefore imperative toshow that there is an existing indebtedness which may besubjected to the payment of interest. Here the items involvedare unclaimed salaries and bonus participation which cannotconstitute indebtedness within the meaning of the lawbecause while they constitute an obligation on the part of thecorporation, it is not the latter's fault if they remainedunclaimed. Whatever an employee may fail to collect cannotbe considered an indebtedness for it is the concern of theemployee to collect it in due time. The willingness of the
corporation to pay interest thereon cannot be considered a justification to warrant deduction.
Interest
PAPER INDUSTRIES v CA ( Dec. 1, 1995)
Facts:
On various years (1969, 1972 and 1977), Picop obtained
loans from foreign creditors in order to finance the purchase of
machinery and equipment needed for its operations. In its 1977Income Tax Return, Picop claimed interest payments made in 1977,
amounting to P42,840,131.00, on these loans as a deduction from
its 1977 gross income.
The CIR disallowed this deduction upon the ground that,
because the loans had been incurred for the purchase of machinery
and equipment, the interest payments on those loans should have
been capitalized instead and claimed as a depreciation deduction
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taking into account the adjusted basis of the machinery and
equipment (original acquisition cost plus interest charges) over the
useful life of such assets.
Both the CTA and the Court of Appeals sustained theposition of Picop and held that the interest deduction claimed by
Picop was proper and allowable. In the instant Petition, the CIR
insists on its original position.
ISSUE:
Whether Picop is entitled to deductions against income of
interest payments on loans for the purchase of machinery and
equipment.
HELD:
YES. Interest payments on loans incurred by a taxpayer
(whether BOI-registered or not) are allowed by the NIRC as
deductions against the taxpayer's gross income. The basis is 1977
Tax Code Sec. 30 (b).1 Thus, the general rule is that interest
expenses are deductible against gross income and this certainly
includes interest paid under loans incurred in connection with the
carrying on of the business of the taxpayer. In the instant case, the
CIR does not dispute that the interest payments were made by
1
Sec. 30. Deduction from Gross Income. — The followingmay be deducted from gross income:xxx xxx xxx
(b) Interest :(1) In general. — The amount of interest paid within
the taxable year on indebtedness, except on indebtednessincurred or continued to purchase or carry obligations theinterest upon which is exempt from taxation as income underthis Title: . . . (Emphasis supplied)
Picop on loans incurred in connection with the carrying on of the
registered operations of Picop, i.e., the financing of the purchase of
machinery and equipment actually used in the registered
operations of Picop. Neither does the CIR deny that such interest
payments were legally due and demandable under the terms of such loans, and in fact paid by Picop during the tax year 1977.
The contention of CIR does not spring of the 1977 Tax Code
but from Revenue Regulations 2 Sec. 79.2 However, the Court said
that the term “interest” here should be construed as the so-called
"theoretical interest," that is to say, interest "calculated" or
computed (and not incurred or paid ) for the purpose of
determining the "opportunity cost" of investing funds in a
given business. Such "theoretical" or imputed interest
does not arise from a legally demandable interest-bearing
obligation incurred by the taxpayer who however wishes tofind out, e.g., whether he would have been better off by lending out
his funds and earning interest rather than investing such funds in
his business. One thing that Section 79 quoted above makes clear
is that interest which does constitute a charge arising under an
interest-bearing obligation is an allowable deduction from gross
income.
Only if sir asks: (For further discussion of CIR’s contention)
It is claimed by the CIR that Section 79 of Revenue
Regulations No. 2 was "patterned after" paragraph 1.266-1 (b),
entitled "Taxes and Carrying Charges Chargeable to Capital
Account and Treated as Capital Items" of the U.S. Income Tax
2 Sec. 79. Interest on Capital. — Interest calculated for cost-keeping
or other purposes on account of capital or surplus invested in the
business, which does not represent a charge arising under an
interest-bearing obligation, is not allowable deduction from gross
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Regulations, which paragraph reads as follows:
(B) Taxes and Carrying Charges. — The itemsthus chargeable to capital accounts are —
(11) In the case of real property, whetherimproved or unimproved and whetherproductive or nonproductive.
(a) Interest on a loan (but not theoreticalinterest of a taxpayer using his own funds).
The truncated excerpt of the U.S. Income Tax Regulationsquoted by the CIR needs to be related to the relevantprovisions of the U.S. Internal Revenue Code, whichprovisions deal with the general topic of adjusted basis fordetermining allowable gain or loss on sales or exchanges of property and allowable depreciation and depletion of capitalassets of the taxpayer:
Present Rule. The Internal Revenue Code, andthe Regulations promulgated thereunderprovide that "No deduction shall be allowed foramounts paid or accrued for such taxesand carrying charges as, under regulations
prescribed by the Secretary or his delegate, arechargeable to capital account with respect toproperty, if the taxpayer elects, in accordancewith such regulations, to treat such taxesorcharges as so chargeable."
At the same time, under the adjustment of basisprovisions which have just been discussed, it isprovided that adjustment shall be made for all
"expenditures, receipts, losses, or other items"properly chargeable to a capital account, thusincluding taxes and carrying charges;however, an exception exists, in which event
such adjustment to the capital account is notmade, with respect to taxes and carryingcharges which the taxpayer has not elected tocapitalize but for which a deduction instead hasbeen taken. 22 (Emphasis supplied)
The "carrying charges" which may be capitalized underthe above quoted provisions of the U.S. InternalRevenue Code include, as the CIR has pointed out,interest on a loan "(but not theoretical interest of ataxpayer using his own funds)." What the CIR failed to
point out is that such "carrying charges" may, at theelection of the taxpayer, either be (a) capitalized inwhich case the cost basis of the capital assets, e.g.,machinery and equipment, will be adjusted by addingthe amount of such interest payments or alternatively,be (b) deducted from gross income of the taxpayer.Should the taxpayer elect to deduct the interestpayments against its gross income, the taxpayercannot at the same time capitalize the interestpayments. In other words, the taxpayer is not entitledto both the deduction from gross income and the
adjusted (increased) basis for determining gain or lossand the allowable depreciation charge. The U.S.Internal Revenue Code does not prohibit the deductionof interest on a loan obtained for purchasingmachinery and equipment against grossincome, unless the taxpayer has also or previouslycapitalized the same interest payments and therebyadjusted the cost basis of such assets.
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TAX LAW REVIEW DIGESTS – MonteroAlcisso, Arriola, Cajucom, Calalang, Claudio, Escueta, Delos Santos, Dialino, Fajardo, Imperial, Juaquino, Martin, Martinez, Mendoza, Noel, Pangcog, Plazo Raso,Rosales, Sia, Uy, Venzuela
CIR v VDA DE PRIETO
FACTS:
On December 4, 1945, the respondent conveyed by way of gifts toher four children, namely, Antonio, Benito, Carmen and Mauro, allsurnamed Prieto, real property with a total assessed value of P892,497.50. After the filing of the gift tax returns on or aboutFebruary 1, 1954, the petitioner Commissioner of Internal Revenueappraised the real property donated for gift tax purposes atP1,231,268.00, and assessed the total sum of P117,706.50 asdonor's gift tax, interest and compromises due thereon. Of the totalsum of P117,706.50 paid by respondent on April 29, 1954, the sumof P55,978.65 represents the total interest on account of deliquency. This sum of P55,978.65 was claimed as deduction,among others, by respondent in her 1954 income tax return.Petitioner, however, disallowed the claim and as a consequence of such disallowance assessed respondent for 1954 the total sum of P21,410.38 as deficiency income tax due on the aforesaidP55,978.65, including interest up to March 31, 1957, surcharge andcompromise for the late payment.
Under the law, for interest to be deductible, it must be shown thatthere be an indebtedness, that there should be interest upon it,and that what is claimed as an interest deduction should have beenpaid or accrued within the year. It is here conceded that theinterest paid by respondent was in consequence of the latepayment of her donor's tax, and the same was paid within the yearit is sought to be declared.
To sustain the proposition that the interest payment in question isnot deductible for the purpose of computing respondent's netincome, petitioner relies heavily on section 80 of RevenueRegulation No. 2 (known as Income Tax Regulation) promulgatedby the Department of Finance, which provides that "the word`taxes' means taxes proper and no deductions should be allowedfor amounts representing interest, surcharge, or penalties incidentto delinquency." The court below, however, held section 80 as
inapplicable to the instant case because while it implementssections 30(c) of the Tax Code governing deduction of taxes, therespondent taxpayer seeks to come under section 30(b) of thesame Code providing for deduction of interest on indebtedness.
ISSUE:
Whether or not such interest was paid upon an indebtedness withinthe contemplation of section 30 (b) (1) of the Tax Code?
RULING:
Yes. According to the Supreme Court, although interest paymentfor delinquent taxes is not deductible as tax under Section 30(c) of the Tax Code and section 80 of the Income Tax Regulations, thetaxpayer is not precluded thereby from claiming said interestpayment as deduction under section 30(b) of the same Code.
SEC. 30 Deductions from gross income. — In computing netincome there shall be allowed as deductions —
(b) Interest:
(1) In general. — The amount of interest paid withinthe taxable year on indebtedness, except onindebtedness incurred or continued to purchase orcarry obligations the interest upon which is exempt
from taxation as income under this Title.
The term "indebtedness" as used in the Tax Code of theUnited States containing similar provisions as in the above-quoted section has been defined as an unconditional andlegally enforceable obligation for the payment of money.
To give to the quoted portion of section 80 of our Income Tax Regulations the meaning that the petitioner gives it
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would run counter to the provision of section 30(b) of the TaxCode and the construction given to it by courts in the UnitedStates. Such effect would thus make the regulation invalid fora "regulation which operates to create a rule out of harmony
with the statute, is a mere nullity." As already stated, section80 implements only section 30(c) of the Tax Code, or theprovision allowing deduction of taxes, while hereinrespondent seeks to be allowed deduction under section30(b), which provides for deduction of interest onindebtedness.
BIR RULING NO 006-00
Taxes
CIR v LEDNICKY
Losses
PAPER INDUSTRIES v CA ( Dec. 1, 1995)
• The Paper Industries Corporation of the Philippines ("Picop"), is a Philippine
corporation registered with the Board of Investments ("BOI") asa preferred pioneer enterprise with respect to its integratedpulp and paper mill, and as a preferred non-pioneer enterprise with respect to its integrated plywood and veneermills.
• In 1969, 1972 and 1977, Picop obtained loans from foreigncreditors in order to finance the purchase of machinery andequipment needed for its operations.
• Picop also issued promissory notes of about P230M, on w/c itpaid P45M in interest.
• In its 1977 Income Tax Return, Picop claimed the interest
payments on the loans as DEDUCTIONS from its 1977 grossincome.
• The CIR disallowed this deduction upon the ground that,because the loans had been incurred for the purchase of machinery and equipment, the interest payments on thoseloans should have been capitalized instead and claimed as adepreciation deduction taking into account the adjustedbasis of the machinery and equipment (original acquisitioncost plus interest charges) over the useful life of suchassets.
• I: W/n the interest payments can be deducted from grossincome – YES transaction tax
• R:
• The 1977 NIRC does not prohibit the deduction of intereston a loan incurred for acquiring machinery and equipment.Neither does our 1977 NIRC compel the capitalization of
interest payments on such a loan.• The 1977 Tax Code is simply silent on a taxpayer's right to
elect one or the other tax treatment of such interestpayments. Accordingly, the general rule that interestpayments on a legally demandable loan are deductible fromgross income must be applied.
• In this case, the CIR does not dispute that the interestpayments were made by Picop on loans incurred inconnection with the carrying on of the registered operationsof Picop, i.e., the financing of the purchase of machinery andequipment actually used in the registered operations of Picop. Neither does the CIR deny that such interest
payments were legally due and demandable under theterms of such loans, and in fact paid by Picop during the taxyear 1977.
• The CIR has been unable to point to any provision of the1977 Tax Code or any other Statute that requires thedisallowance of the interest payments made by Picop.
• THIS PART DI KO SUPER MAGETS:
• The CIR invokes Section 79 of Revenue Regulations No. 2w/c provides that Interest calculated for cost-keeping or
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other purposes on account of capital or surplus invested inthe business, which does not represent a charge arisingunder an interest-bearing obligation, is not allowablededuction from gross income.
• It is claimed by the CIR that Section 79 of RevenueRegulations No. 2 was "patterned after" paragraph 1.266-1(b), entitled "Taxes and Carrying Charges Chargeable toCapital Account and Treated as Capital Items" of the U.S.Income Tax Regulations, which paragraph reads as follows:
(B) Taxes and Carrying Charges. — The items thus
chargeable to capital accounts are —
(11) In the case of real property, whether improved
or unimproved and whether productive or
nonproductive.
(a) Interest on a loan (but not theoretical interest of ataxpayer using his own funds). 21
The truncated excerpt of the U.S. Income Tax Regulations quoted
by the CIR needs to be related to the relevant provisions of the U.S.
Internal Revenue Code, which provisions deal with the general topic
of adjusted basis for determining allowable gain or loss on sales or
exchanges of property and allowable depreciation and depletion of
capital assets of the taxpayer:
Present Rule. The Internal Revenue Code, and the
Regulations promulgated thereunder provide that"No deduction shall be allowed for amounts paid or
accrued for such taxes and carrying charges as,
under regulations prescribed by the Secretary or his
delegate, are chargeable to capital account with
respect to property, if the taxpayer elects, in
accordance with such regulations, to treat such taxes
or charges as so chargeable."
At the same time, under the adjustment of basis
provisions which have just been discussed, it is
provided that adjustment shall be made for all
"expenditures, receipts, losses, or other items"
properly chargeable to a capital account, thusincluding taxes and carrying charges; however, an
exception exists, in which event such adjustment to
the capital account is not made, with respect to
taxes and carrying charges which the taxpayer has
not elected to capitalize but for which a deduction
instead has been taken.
The "carrying charges" which may be capitalized under the
above quoted provisions of the U.S. Internal Revenue Code
include, as the CIR has pointed out, interest on a loan "(but
not theoretical interest of a taxpayer using his own funds)."What the CIR failed to point out is that such "carrying
charges" may , at the election of the taxpayer, either be (a)
capitalized in which case the cost basis of the capital assets,
e.g., machinery and equipment, will be adjusted by adding
the amount of such interest payments or alternatively, be
(b) deducted from gross income of the taxpayer. Should the
taxpayer elect to deduct the interest payments against its
gross income, the taxpayer cannot at the same time
capitalize the interest payments. In other words, the
taxpayer is not entitled to both the deduction from grossincome and the adjusted (increased) basis for determining
gain or loss and the allowable depreciation charge. The U.S.
Internal Revenue Code does not prohibit the deduction of
interest on a loan obtained for purchasing machinery and
equipment against gross income, unless the taxpayer has
also or previously capitalized the same interest payments
and thereby adjusted the cost basis of such assets.
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BIR RULING 30-00
Digest of BIR Ruling No. 030-2000 dated August 10,
2000
INCOME TAX; Tax-free merger under certain condition
- Pursuant to Section 40(c)(2)
of the Tax Code, no gain or loss shall be recognized by Blue
Circle Philippines, Inc. (BCPI), Round Royal, Inc. (RRI), SM
Investment Corporation (SMIC), Sysmart Corporation and
CG&E Holdings on the transfer of their Fortune, Zeus and
Iligan shares to Republic, in exchange for ne Republic shares,
because they together hold more than 51% of the total
voting stock of Republic after the transfer. The transfer
through the facilities of the PSE by the 6th to the last
transferor of their Fortune and Zeus shares to Republic in
exchange for new Republic shares will be subject to the ½ of
1% stock transaction tax based on the gross selling price or
gross value in money of the shares transferred, while the 6th
to the last transferor of the Iligan shares will be subject to
capital gains tax (CGT) at the rate of 5%, of the par value of
the shares transferred. The new Republic shares to be
issued, being original issuances, are subject to the DSTimposed under Section 175 of the Tax Code at the rate of P2
on each P200, or fractional part thereof, of the par value of
the new Republic shares issued. The net operating losses of
each of Republic, Fortune, MPCC and Iligan are preserved
after the proposed share swap and may be carried over and
claimed as a deduction from their respective gross income,
pursuant to Section 34(D)(3) of the Tax Code, because there
is no substantial change in the either Republic or Fortune or
MPCC or Iligan."
BIR RULING 206-90
This is letter requesting in behalf of Porcelana Mariwasa, Inc. (PMI),
a ruling confirming an opinion that the foreign exchange loss
incurred by PMI is a deductible loss in 1990.
It is represented that PMI is a corporation established and
organized under Philippine laws; that it has existing US dollar loans
from Noritake Company, Limited (Noritake) and Toyota Tsusho
Corporation (Toyota) in the aggregate amounts of US
$7,636,679.17 and US $3,054,671.27, respectively, that in 1989,
the parties agreed to convert the said dollar denominated loansinto pesos at the exchange rate prevailing on June 30, 1989; that in
December 1989, both agreements were approved by the Central
Bank subject to the submission of a copy each of the signed
agreements incorporating the conversion; thereafter, drafts of the
amended agreements were submitted to the Central Bank for pre-
approval; that on January 29, 1990, the Central Bank advised PMI's
counsel on their findings and comments on the said drafts which
were considered and incorporated in the final amended
agreements; that in June 1990, the parties submitted to the Central
Bank the signed agreements; that counsel of PMI is of the opinion
that in the case of PMI, the resultant loss on conversion of US dollar
denominated loans to peso is more than a shrinkage in value of
money; that the approval by the Central Bank and the signing by
the parties of the agreements covering the said conversion
established the loss, after which, the loss became final and
irrevocable, so that recoupment is reasonably impossible; and that
having been fixed and determinable, the loss is no longer
susceptible to change, hence, it could fairly be stated that such has
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been sustained in a closed and completed transaction.
In reply the commissioner informed PMI that 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, couldonly 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.
When foreign currency acquired in connection with a transaction in
the regular course of business is disposed ordinary gain or loss
results from the fluctuation. The loss is deductible only for the year
it is actually sustained. It is sustained during the year in which theloss occurs as evidenced by the completed transaction and as fixed
by identifiable occurring in that year. No taxation event has as yet
been consummated prior to the remittance of the scheduled
amortization. Accordingly, PMI's request for confirmation of opinion
was 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 had not actually been made are not
deductible from gross income for income tax purposes.
BIR RULING 144-85
(Technically, this ruling has no stated facts. It just said that a
request for ruling dated July 1, 1985 was sent to the BIR for the
purpose of clarifying the issue, as herein stated.)
FACTS:
Request to clarify the deductibility of foreign exchange losses
incurred by reason of the devaluation of the peso. The losses arose
from matured but unremitted principal repayments on loansaffected by the debt-restructuring program in the Philippines.
ISSUE:
Whether or not foreign exchange losses are deductible for income
tax purposes.
HELD: NO.
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 theproperty 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 aforementioned rule
also applies to losses. The annual decrease in the value of property
is not normally allowable as a loss. Hence, to be allowable the loss
must be realized.
When foreign currency acquired in connection with a transaction in
the regular course of business is disposed of, ordinary gain or loss
results from the foreign exchange fluctuations. THE LOSS IS
DEDUCTIBLE ONLY FOR THE YEAR IT IS ACTUALLY SUSTAINED.
Thus, there is no taxable event prior to the remittance of the
scheduled amortization.
Accordingly, foreign exchange losses sustained as a result of
devaluation of the peso vis-a-vis the foreign currency e.g., US
dollar, but which remittance of scheduled amortization consisting of
principal and interests payments on a foreign loan has not actually
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been made are NOT DEDUCTIBLE from gross income for income tax
purposes.
NOTE:
• To sustain a loss means that the loss has occurred as evidencedby a closed and completed transaction and as fixed byidentifiable events occurring in that year.
• A closed transaction is a taxable event which has beenconsummated.
Bad debts
PHILEX MINING v CIR
Facts: Philex Mining entered into a management agreement withBaguio Gold. The parties' agreement was denominated as "Power
of Attorney" which provided among others:
a. Funds available for Philex Mining during the
management agreement; and
b. Compensation to Philex Mining which shall be fifty per
cent (50%) of the net profit;
In the course of managing and operating the project, Philex
Mining made advances of cash and property in accordance with theagreement. However, the mine suffered continuing losses over the
years which resulted to petitioner's withdrawal as manager and
cessation of mine operations.
The parties executed a "Compromise with Dation in
Payment" wherein Baguio Gold admitted an indebtedness to Philex
Mining, which was subsequently amended to include additional
obligations.
Subsequently, Philex Mining wrote off in its 1982 books of
account the remaining outstanding indebtedness of Baguio Gold by
charging P112,136,000.00 to allowances and reserves that were
set up in 1981 and P2,860,768.00 to the 1982 operations.
In its 1982 annual income tax return, Philex Mining
deducted from its gross income the amount of P112,136,000.00 as
"loss on settlement of receivables from Baguio Gold against
reserves and allowances." However, BIR disallowed the amount as
deduction for bad debt and assessed petitioner a deficiency income
tax of P62,811,161.39.
Issue: Whether the deduction for bad debts was valid?
Held: No. For a deduction for bad debts to be allowed, all
requisites must be satisfied, to wit: (a) there was a valid andexisting debt; (b) the debt was ascertained to be worthless; and (c)
it was charged off within the taxable year when it was determined
to be worthless.
There was no valid and existing debt. The nature of
agreement between Philex Mining and Baguio Gold is that of a
partnership or joint venture. Under a contract of partnership, two or
more persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the profits
among themselves.
Perusal of the agreement denominated as the "Power of
Attorney" indicates that the parties had intended to create a
partnership and establish a common fund for the purpose. They
also had a joint interest in the profits of the business as shown by a
50-50 sharing in the income of the mine.
Viewed from this light, the advances can be characterized
as petitioner’s investment in a partnership with Baguio Gold for the
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development and exploitation of the Sto. Nino mine. Since the
advanced amount partook of the nature of an investment, it could
not be deducted as a bad debt from petitioner's gross income.
PHILIPPINE REFINING CO v CA
FACTS:
Philippine Refining Corp (PRC) was assessed deficiency tax
payments for the year 1985 in the amount of around 1.8M. This
figure was computed based on the disallowance of the claim of bad
debts by PRC. PRC duly protested the assessment claiming that
under the law, bad debts and interest expense are allowable
deductions.
When the BIR subsequently garnished some of PRC’s properties,the latter considered the protest as being denied and filed an
appeal to the CTA which set aside the disallowance of the interest
expense and modified the disallowance of the bad debts by
allowing 3 accounts to be claimed as deductions. However, 13
supposed “bad debts” were disallowed as the CTA claimed that
these were not substantiated and did not satisfy the jurisprudential
requirement of “worthlessness of a debt” The CA denied the
petition for review.
ISSUE:Whether or not the CA was correct in disallowing the 13
accounts as bad debts.
RULING: YES.
Both the CTA and CA relied on the case of Collector vs. Goodrich
International, which laid down the requisites for “worthlessness of a
debt” to wit:
In said case, we held that for debts to be considered as
"worthless," and thereby qualify as "bad debts" making themdeductible, the taxpayer should show that (1) there is a validand subsisting debt. (2) the debt must be actuallyascertained to be worthless and uncollectible during the
taxable year; (3) the debt must be charged off during thetaxable year; and (4) the debt must arise from the businessor trade of the taxpayer. Additionally, before a debt can beconsidered worthless, the taxpayer must also show that it isindeed uncollectible even in the future.Furthermore, there are steps outlined to be undertaken bythe taxpayer to prove that he exerted diligent efforts tocollect the debts, viz.: (1) sending of statement of accounts;(2) sending of collection letters; (3) giving the account to alawyer for collection; and (4) filing a collection case in court.PRC only used the testimony of its accountant Ms. Masagana
in order to prove that these accounts were bad debts. Thiswas considered by all 3 courts to be self-serving. The SC saidthat PRC failed to exercise due diligence in order to ascertainthat these debts were uncollectible. In fact, PRC did not evenshow the demand letters they allegedly gave to some of theirdebtors.FERNANDEZ HERMANOS v CIRFacts:
Fernandez Hermanos is an investment company. The CIR assessed
it for alleged deficiency income taxes. It claimed as deduction,
among others, losses in or bad debts of Palawan Manganese MinesInc. which the CIR disallowed and was sustained by the CTA.
Issue: W/N disallowance is correct
Held: YES
It was shown that Palawan Manganese Mines sought financial help
from Fernandez to resume its mining operations hence a
Memorandum of Agreement (MOA) was executed where Fernandez
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would give yearly advances to Palawan. But it still continued to
suffer loses and Fernandez realized it could no longer recover the
advances hence claimed it as worthless. Looking at the MOA,
Fernandez did not expect to be repaid. The consideration for the
advances was 15% of the net profits. If there were no earnings orprofits there was no obligation to repay. Voluntary advances
without expectation of repayment do not result in deductible
losses. Fernandez cannot even sue for recovery as the obligation to
repay will only arise if there was net profits. No bad debt could
arise where there is no valid and subsisting debt.
Even assuming that there was valid or subsisting debt, the debt
was not deductible in 1951 as a worthless debt as Palawan was still
in operation in 1951 and 1952 as Fernandez continued to give
advances in those years. It has been held that if the debtor
corporation although losing money or insolvent was still operatingat the end of the taxable year, the debt is not considered worthless
and therefore not deductible.
Depreciation
BASILAN ESTATES v CIRLIMPAN INVESTMENT v CIR
FACTS:
BIR assessed deficiency taxes on Limpan Corp, acompanythat leases real property, for underdeclaring itsrental incomefor years 1956-57 by around P20K and P81K respectively.Petitioner appeals on the ground that portions of theseunderdeclared rents are yet to be collected by thepreviousowners and turned over or received by thecorporation.Petitioner cited that some rents were depositedwith the court,such that the corporation does not have actualnor constructivecontrol over them.The sole witness for the
petitioner, Solis (Corporate Secretary-Treasurer) admitted tosome undeclared rents in 1956 and1957, and that somebalances were not collected by thecorporation in 1956because the lessees refused to recognizeand pay rent to the
new owners and that the corp’s presidentIsabelo Limcollected some rent and reported it in his personalincomestatement, but did not turn over the rent to thecorporation.He also cites lack of actual or constructive controlover rentsdeposited with the court.
ISSUE: WON the BIR was correct in assessing deficiencytaxesagainst Limpan Corp. for undeclared rental income
HELD:
Yes. Petitioner admitted that it indeed had undeclaredincome(although only a part and not the full amount assessedbyBIR). Thus, it has become incumbent upon them to provetheirexcuses by clear and convincing evidence, which it hasfailedto do.Issue: When is there constructive receipt of rent?Withregard to 1957 rents deposited with the court, andwithdrawnonly in 1958, the court viewed the corporation ashavingconstructively received said rents. The non-collectionwas thepetitioner’s fault since it refused to refused to acceptthe rent,and not due to non-payment of lessees. Hence,although thecorporation did not actually receive the rent, it isdeemed to
have constructively received them.
Depletion
CONSOLIDATED MINES v CTABIR RULING 19-01FACTS:
On October 3, 2000, the Philippine Council for NGO Certification
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opinion if Conservation International (CI), an international
organization, can be granted a donee institution status. Note that
CI’s home office and board members are based abroad, hence,
PCNC’s evaluation process on governance cannot be fully executed.
ISSUE:
Whether or not international organizations with home offices
abroad are qualified to be granted donee institution status.
HELD: NO.Sec. 34(H)(l) of the NIRC3 specifically mentions
"accredited domestic corporation or associations" and "non-
government organizations". On the other hand, subparagraph (2)(c)
of the same Section of the Tax Code defines a "non-government
organization" to mean a non-profit domestic corporation.
In implementing Sec. 34(H) of the NIRC, RR 13-984 was issued and
3(H) Charitable and Other Contributions. —
(l) In General. — Contributions or gifts actually paid or made within the taxable year
to, or for the use of the Government of the Philippines or any of its agencies or any
political subdivision thereof exclusively for public purposes, or to accredited
domestic corporations or associations organized and operated exclusively for
religious, charitable, scientific, youth and sports development, cultural or
educational purposes or for the rehabilitation of veterans, or to social welfare
institutions or to non-government organizations, in accordance with rules and
regulations promulgated by the Secretary of Finance, upon recommendation of the
Commissioner, no part of the net income of which inures to the benefit of anyprivate stockholder or individual in an amount not in excess of ten percent (10%) in
the case of an individual, and five percent (5%) in the case of a corporation of the
taxpayer's taxable income derived from trade, business or profession as computed
without the benefit of this and the following subparagraphs".
4SEC. 1.Definition of Terms. — For purposes of these Regulations, the terms herein
enumerated shall have the following meanings:
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
in relation to the type of entities that may be accredited, which
specifically refers to organizations or associations created or
organized under Philippine laws.
Thus, the BIR opined 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.
3M PHILIPPINES v CIR
Facts:
3M Philippines, Inc. is a subsidiary of the Minnesota Mining and
Manufacturing Company (or "3M-St. Paul") a non-resident foreign
corporation with principal office in St. Paul, Minnesota, U.S.A. It is
the exclusive importer, manufacturer, wholesaler, and distributor in
the Philippines of all products of 3M-St. Paul. To enable it to
manufacture, package, promote, market, sell and install the highly
specialized products of its parent company, and render the
necessary post-sales service and maintenance to its customers, 3M
Phils. entered into a "Service Information and Technical Assistance
Agreement" and a "Patent and Trademark License Agreement" with
the latter under which the 3m Phils. agreed to pay to 3M-St. Paul a
technical service fee of 3% and a royalty of 2% of its net sales.created or organized under Philippine laws exclusively for one or more of the
following purposes:
xxx xxx xxx
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 . . ."
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Both agreements were submitted to, and approved by, the Central
Bank of the Philippines. the petitioner claimed the following
deductions as business expenses:
(a) royalties and technical service fees of P 3,050,646.00; and
(b) pre-operational cost of tape coater of P97,485.08.
As to (a), the Commissioner of Internal Revenue allowed a
deduction of P797,046.09 only as technical service fee and royalty
for locally manufactured products, but disallowed the sum of
P2,323,599.02 alleged to have been paid by the petitioner to 3M-St.
Paul as technical service fee and royalty on P46,471,998.00 worth
of finished products imported by the petitioner from the parent
company, on the ground that the fee and royalty should be based
only on locally manufactured goods. While as to (b), the CIR onlyallowed P19,544.77 or one-fifth (1/5) of 3M Phils.capital
expenditure of P97,046.09 for its tape coater which was installed in
1973 because such expenditure should be amortized for a period of
five (5) years, hence, payment of the disallowed balance of
P77,740.38 should be spread over the next four (4) years. The CIR
ordered 3M Phil. to pay P840,540 as deficiency income tax on its
1974 return, plus P353,026.80 as 14% interest per annum from
February 15, 1975 to February 15, 1976, or a total of
P1,193,566.80.
3M Phils. protested the CIR’s assessment but it did not answer theprotest, instead issuing a warrant of levy. The CTA affirmed the
assessment on appeal.
Issue:
Whether or not 3M Phils is entitled to the deductions due to
royalties?
Ruling:
No. CB Circular No. 393 (Regulations Governing Royalties/Rentals)
dated December 7, 1973 was promulgated by the Central Bank as
an exchange control regulation to conserve foreign exchange and
avoid unnecessary drain on the country's international reserves (69
O.G. No. 51, pp. 11737-38). Section 3-C of the circular provides that
royalties shall be paid only on commodities manufactured by the
licensee under the royalty agreement:
Section 3. Requirements for Approval and Registration. — The
requirements for approval and registration as provided for in
Section 2 above include, but are not limited to the following:
a. xxx xxx xxx
b. xxx xxx xxx
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 five (5) per cent of the wholesale price of the
commodity/ties manufactured under the royalty agreement. For
contracts involving 'marketing' services such as the use of foreign
brands or trade names or trademarks, the royalty/rental rate shall
not exceed two (2) per cent of the wholesale price of the
commodity/ties manufactured under the royalty agreement. The
producer's or foreign licensor's share in the proceeds from the
distribution/exhibition of the films shall not exceed sixty (60) per
cent of the net proceeds (gross proceeds less local expenses) from
the exhibition/distribution of the films. ... (Emphasis supplied.) (p.
27, Rollo.)
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Clearly, no royalty is payable on the wholesale price of finished
products imported by the licensee from the licensor. However,
petitioner argues that the law applicable to its case is only Section
29(a)(1) of the Tax Code which provides:
(a) Expenses. — (1) Business expenses. — (A) In general. — All
ordinary and 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
personal services actually rendered; travelling expenses while
away from home in the pursuit of a trade, profession or business,
rentals or other payments required to be made as a condition to
the continued use or possession, for the purpose of the trade,
profession or business, for property to which the taxpayer has not
taken or is not taking title or in which he has no equity.
Petitioner points out that the Central bank "has no say in the
assessment and collection of internal revenue taxes as such power
is lodged in the Bureau of Internal Revenue," that the Tax Code
"never mentions Circular 393 and there is no law or regulation
governing deduction of business expenses that refers to said
circular." (p. 9, Petition.)
The argument is specious, for, although the Tax Code allows
payments of royalty to be deducted from gross income as business
expenses, it is CB Circular No. 393 that defines what royalty
payments are proper. Hence, improper payments of royalty are notdeductible as legitimate business expenses.
ESSO STANDARD v CIR
FACTS:
ESSO deducted from its gross income, as part of its ordinary andnecessary business expenses, the amount it had spent for drilling
and exploration of its petroleum concessions. This claim wasdisallowed by the CIR on the ground that the expenses should becapitalized and might be written off as a loss only when a "dryhole" should result.
ESSO then filed an amended return and claimed as ordinary andnecessary expenses margin fees it had paid to the Central Bankon its profit remittances to its New York head office. The CIRdisallowed the claimed deduction for the margin fees paid. CIRassessed ESSO a deficiency income tax which arose from thedisallowance of the margin fees.
ESSO paid under protest and claimed for a refund. CIR denied theclaims for refund, holding that the margin fees paid to the CentralBank could not be considered taxes or allowed as deductiblebusiness expenses.
ISSUES:1. w/n margin fee is a tax and should be deductible from
ESSO’s gross income. NO2. If margin fees are not taxes, w/n they should nevertheless
be considered necessary and ordinary business expensesand therefore still deductible from its gross income. NO.
HELD:1. NO. A margin is not a tax but an exaction designed to curb the
excessive demands upon our international reserves. The marginfee was imposed by the State in the exercise of its police powerand not the power of taxation.
2. NO. To be deductible as a business expense, three conditions areimposed, namely:
(1) the expense must be ordinary and necessary,(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, not only must the taxpayer meet the business test,he must substantially prove by evidence or records the
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deductions claimed under the law, otherwise, the same will bedisallowed. The mere allegation of the taxpayer that an item of expense is ordinary and necessary does not justify itsdeduction.
Ordinarily, an expense will be considered 'necessary' where theexpenditure is appropriate and helpful in the development of the taxpayer's business. It is 'ordinary' when it connotes apayment which is normal in relation to the business of thetaxpayer and the surrounding circumstances. The term'ordinary' does not require that the payments be habitual ornormal in the sense that the same taxpayer will have to makethem often; the payment may be unique or non-recurring to theparticular taxpayer affected. There is thus no hard and fast ruleon the matter. The right to a deduction depends in each case onthe particular facts and the relation of the payment to the typeof business in which the taxpayer is engaged. The intention of
the taxpayer often may be the controlling fact in making thedetermination. Assuming that the expenditure is ordinary andnecessary in the operation of the taxpayer's business, theanswer to the question as to whether the expenditure is anallowable deduction as a business expense must be determinedfrom the nature of the expenditure itself, which in turn dependson the extent and permanency of the work accomplished by theexpenditure.
Since the margin fees in question were incurred for theremittance of funds to petitioner's Head Office in New York,which is a separate and distinct income taxpayer from the
branch in the Philippines, for its disposal abroad, it can never besaid therefore that the margin fees were appropriate andhelpful in the development of petitioner's business in thePhilippines exclusively. ESSO has not shown that the remittanceto the head office of part of its profits was made in furtheranceof its own trade or business and therefore cannot be claimed asan ordinary and necessary expense paid or incurred in carryingon its own trade or business.
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R. CAPITAL GAINS and LOSSES
Capital assets
CALASANZ v CIR
Facts: Petitioner Ursula Calasanz inherited from her father de Torres an agricultural land located in Rizal with an area of 1.6M sqm. In order to liquidate her inheritance, UrsulaCalasanz had the land surveyed and subdivided into lots.Improvements, such as good roads, concrete gutters,drainage and lighting system, were introduced to make thelots saleable. Soon after, the lots were sold to the public at aprofit.
In their joint income tax return for the year 1957 filed withthe Bureau of Internal Revenue on March 31, 1958,petitioners disclosed a profit of P31,060.06 realized from thesale of the subdivided lots, and reported fifty per centumthereof or P15,530.03 as taxable capital gains.
Upon an audit and review of the return thus filed, theRevenue Examiner adjudged petitioners engaged in businessas real estate dealers, as defined in the NIRC, and requiredthem to pay the real estate dealer's tax and assessed adeficiency income tax on profits derived from the sale of the
lots based on the rates for ordinary income.
Tax court upheld the finding of the CIR, hence, the presentappeal.
Issues:
a. Whether or not petitioners are real estate dealers liable forreal estate dealer's fixed tax. YES
b. Whether the gains realized from the sale of the lots aretaxable in full as ordinary income or capital gains taxable atcapital gain rates. ORDINARY INCOME
Ratio:
The assets of a taxpayer are classified for income taxpurposes into ordinary assets and capital assets. Section34[a] [1] of the National Internal Revenue Code broadlydefines capital assets as follows:
[1] Capital assets.-The term 'capital assets'means property held by the taxpayer [whetheror not connected with his trade or business], butdoes not include, stock in trade of the taxpayer
or other property of a kind which would properlybe included, in the inventory of the taxpayer if on hand at the close of the taxable year, orproperty held by the taxpayer primarily for saleto customers in the ordinary course of his tradeor business, or property used in the trade orbusiness of a character which is subject to theallowance for depreciation provided insubsection [f] of section thirty; or real propertyused in the trade or business of the taxpayer.
The statutory definition of capital assets is negative innature. If the asset is not among the exceptions, it is acapital asset; conversely, assets falling within the exceptionsare ordinary assets. And necessarily, any gain resulting fromthe sale or exchange of an asset is a capital gain or anordinary gain depending on the kind of asset involved in thetransaction.
However, there is no rigid rule or fixed formula by which it
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can be determined with finality whether property sold by ataxpayer was held primarily for sale to customers in theordinary course of his trade or business or whether it wassold as a capital asset. Although several factors or
indices have been recognized as helpful guides in making adetermination, none of these is decisive; neither is thepresence nor the absence of these factors conclusive. Eachcase must in the last analysis rest upon its own peculiar factsand circumstances.
Also a property initially classified as a capital asset maythereafter be treated as an ordinary asset if a combination of the factors indubitably tend to show that the activity was infurtherance of or in the course of the taxpayer's trade orbusiness. Thus, a sale of inherited real property usually gives
capital gain or loss even though the property has to besubdivided or improved or both to make it salable. However,if the inherited property is substantially improved or veryactively sold or both it may be treated as held primarily forsale to customers in the ordinary course of the heir'sbusiness.
In this case, the subject land is considered as an ordinaryasset. Petitioners did not sell the land in the condition inwhich they acquired it. While the land was originally devotedto rice and fruit trees, it was subdivided into small lots and in
the process converted into a residential subdivision andgiven the name Don Mariano Subdivision. Extensiveimprovements like the laying out of streets, construction of concrete gutters and installation of lighting system anddrainage facilities, among others, were undertaken toenhance the value of the lots and make them more attractiveto prospective buyers. The audited financialstatements submitted together with the tax return inquestion disclosed that a considerable amount was expended
to cover the cost of improvements. There is authority that aproperty ceases to be a capital asset if the amount expendedto improve it is double its original cost, for the extensiveimprovement indicates that the seller held the property
primarily for sale to customers in the ordinary course of hisbusiness. Another distinctive feature of the real estate businessdiscernible from the records is the existence of contractsreceivables, which stood at P395,693.35. The sizable amountof receivables in comparison with the sales volume of P446,407.00 during the same period signifies that the lotswere sold on installment basis and suggests the number,continuity and frequency of the sales. Also of significance isthe circumstance that the lots were advertised for sale to
the public and that sales and collection commissions werepaid out during the period in question.
Petitioners argument that they are merely liquidating theland must also fail. In Ehrman vs. Commissioner, theAmerican court in clear and categorical terms rejected theliquidation test in determining whether or not a taxpayer iscarrying on a trade or business The court observed that thefact that property is sold for purposes of liquidation does notforeclose a determination that a "trade or business" is beingconducted by the seller.
One may, of course, liquidate a capital asset. To do so, it isnecessary to sell. The sale may be conducted in the mostadvantageous manner to the seller and he will not lose thebenefits of the capital gain provision of the statute unless heenters the real estate business and carries on the sale in themanner in which such a business is ordinarily conducted. Inthat event, the liquidation constitutes a business and a salein the ordinary course of such a business and the preferred
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tax status is lost.
BIR RULING 27-02
Registration with HLURB or HUDCC shall be sufficient for aseller/transferor to be considered as habitually engaged inreal estate business. If the seller/transferor is not registeredwith the HLURB or HUDCC, he/it may prove that he/it isengaged in the real estate business by offering othersatisfactory evidence (e.g. consummation during thepreceding year at least 6 taxable real estate transactionsregardless of amount). (BIR Ruling No. 027-2002 dated July 3,2002)
Capital assets
CHINA BANKING CORP v CA
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S. DETERMINATION OF GAIN OR LOSS FROM SALE
OR TRANSFER OF PROPERTY
Exchange of property
CIR v RUFINO
FACTS:
The private respondents were the majority stockholders of the defunct Eastern Theatrical Co., Inc., (Old Corporation).Ernesto Rufino was the president. The private respondentswere also the majority and controlling stockholders of another corporation, the Eastern Theatrical Co Inc., (NewCorporation). This corporation was engaged in the same kind
of business as the Old Corporation, i.e. operating theaters,opera houses, places of amusement and other relatedbusiness enterprises. Vicente Rufino was the GeneralManager.
The Old Corporation held a special meeting of stockholderswhere a resolution was passed authorizing the OldCorporation to merge with the New Corporation. Pursuant tothe said resolution, the Old Corporation, represented byErnesto Rufino as President, and the New Corporation,represented by Vicente Rufino as General Manager, signed aDeed of Assignment providing for the conveyance andtransfer of all the business, property assets, goodwill, andliabilities of the Old Corporation to the New Corporation inexchange for the latter's shares of stock to be distributedamong the shareholders on the basis of one stock for eachstock held in the Old Corporation. This agreement was maderetroactive. The aforesaid transfer was eventually made. Theresolution and the Deed of Assignment were approved in aresolution by the stockholders of the New Corporation in their
special meeting. The increased capitalization of the NewCorporation was registered and approved by the SEC.
The BIR, after examination, declared that the merger was not
undertaken for a bona fide business purpose but merely toavoid liability for the capital gains tax on the exchange of theold for the new shares of stock. Accordingly, deficiencyassessments were imposed against the private respondents.MR denied. CTA reversed and held that there was a validmerger. It declared that no taxable gain was derived bypetitioners from the exchange of their old stocks solely forstocks of the New Corporation because it was pursuant to aplan of reorganization. Thus, such exchange is exempt fromCGT.
ISSUE/RULING:
W/N the CTA erred in finding that no taxable gain wasderived by the private respondents from the questionedtransaction? NO
There was a valid merger although the actual transfer of theproperties subject of the Deed of Assignment was not madeon the date of the merger. In the nature of things, this wasnot possible. Obviously, it was necessary for the OldCorporation to surrender its net assets first to the New
Corporation before the latter could issue its own stock to theshareholders of the Old Corporation because the NewCorporation had to increase its capitalization for this purpose. This required the adoption of the resolution for theregistration of such issuance with the SEC and its approval.All these took place after the date of the merger but theywere deemed part and parcel of, and indispensable to thevalidity and enforceability of, the Deed of Assignment.
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There is no impediment to the exchange of property for stockbetween the two corporations being considered to have beeneffected on the date of the merger. That, in fact, was theintention, and the reason why the Deed of Assignment was
made retroactive which provided in effect that alltransactions set forth in the merger agreement shall bedeemed to be taking place simultaneously when the Deed of Assignment became operative.
The basic consideration, of course, is the purpose of themerger, as this would determine whether the exchange of properties involved therein shall be subject or not to thecapital gains tax. The criterion laid down by the law is thatthe merger" must be undertaken for a bona fide businesspurpose and not solely for the purpose of escaping the
burden of taxation."
Here, the purpose of the merger was to continue thebusiness of the Old Corporation, whose corporate life wasabout to expire, through the New Corporation to which all theassets and obligations of the former had been transferred.What argues strongly, indeed, for the New Corporation is thatit was not dissolved after the merger agreement. On thecontrary, it continued to operate the places of amusementoriginally owned by the Old Corporation and continues to doso today after taking over the business of the Old
Corporation 27 years ago.
What is also worth noting is that, as in the case of the OldCorporation when it was dissolved, there has been nodistribution of the assets of the New Corporation since thenand up to now, as far as the record discloses. To date, theprivate respondents have not derived any benefit from themerger of the Old Corporation and the New Corporationalmost 3 decades earlier that will make them subject to the
capital gains tax under Section 35. They are no more liablenow than they were when the merger took effect, as themerger, being genuine, exempted them under the law fromsuch tax.
By this decision, the government is, of course, not leftentirely without recourse, at least in the future. The fact isthat the merger had merely deferred the claim for taxes,which may be asserted by the government later, when gainsare realized and benefits are distributed among thestockholders as a result of the merger. In other words, thecorresponding taxes are not forever foreclosed or forfeitedbut may at the proper time and without prejudice to thegovernment still be imposed.
BIR RULING 274-87
GREGORY v HELVERING
Facts:
Petitioner was the owner of all the stock of United Mortgage
Corporation(UMC). That corporation held among its assets 1,000
shares of the Monitor Securities Corporation(MSC). Petitioner
wanted these shares transferred to her at a profit and with the
minimum income tax liability. In order to achieve this purpose,
Petitioner made it appear that she was making a “reorganization”(in conforme with Revenue Act of 19285). Under this law, a
5"Sec. 112. (g) Distribution of Stock on Reorganization. If there is
distributed, in pursuance of a plan of reorganization, to a shareholder in acorporation a party to the reorganization, stock or securities in such corporation orin another corporation a party to the reorganization, without the surrender by suchshareholder of stock or securities in such a corporation, no gain to the distributeefrom the receipt of such stock of securities shall be recognized. . . ."
"(i) Definition of Reorganization. -- As used in this section . . .""(1) The term 'reorganization' means . . . (B) a transfer by a corporation of allor a part of its assets to another corporation if immediately after the
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“reorganization” would effect a direct transfer of a corporation’s
share by way of dividend at a lower taxable transaction.
In order to have an appearance of a “reorganization”,
she(Petitioner) organized Averill Corporation (AC). Three (3) days
later, UMC transferred the 1,000 shares of MSC to AC. Then these
shares were all transferred to Petitioner. Subsequently, AC was
dissolved with no other transaction being made other the transfer
of the shares. Petitioner then sold the shares and declared a lower
taxable liability. The Board contended that the so-called
“reorganization” should be considered ineffective since it was just a
scheme to have a lower tax liability.
ISSUE:
Whether the “reorganization” is valid which would result to
a lower tax liability.
HELD:
NO. It is contended that since every element required by the
foregoing subdivision (B) (refer to footnote) is to be found in what
was done, a statutory reorganization was effected, and that the
motive of the taxpayer thereby to escape payment of a tax will not
alter the result or make unlawful what the statute allows.
The Court said, although the legal right of a taxpayer to
decrease the amount of what otherwise would be his taxes, or
altogether avoid them, by means which the law permits, cannot be
doubted, the question for determination is whether what
was done, apart from the tax motive, was the thing which
the statute intended.
transfer the transferor or its stockholders or both are in control of thecorporation to which the assets are transferred. . . ."
When subdivision (B) speaks of a transfer of assets by one
corporation to another, it means a transfer made "in pursuance of a
plan of reorganization of corporate business, and not a transfer of
assets by one corporation to another in pursuance of a plan having
no relation to the business of either, as plainly is the case here.
Simply an operation having no business or corporate
purpose -- a mere device which put on the form of a corporate
reorganization as a disguise for concealing its real character, and
the sole object and accomplishment of which was the
consummation of a preconceived plan, not to reorganize a business
or any part of a business, but to transfer a parcel of corporate
shares to the petitioner. The rule which excludes from
consideration the motive of tax avoidance is not pertinent to the
situation, because the transaction, upon its face, lies outside the
plain intent of the statute. (kasi wala nga talagang businesspurpose but to circumvent the law).
T. SITUS OF TAXATION
Gross income from sources within the Phils
CIR v MARUBENI CORPORATIONCIR v BOACCIR v CTA AND SMITH&FRENCH OVERSEAS
Facts:
Smith Kline & French Overseas Company is a multinational
firm domiciled in Philadelphia, licensed to do business in the
Philippines. It is engaged in the importation, manufacture,
and sale of pharmaceutical drugs and chemicals.
In 1971, it declared a net taxable income of P1.4 M and paid
P511k as tax due. It claimed its share of the head office
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overhead expenses (P501k) as deduction from gross income.
In its amended return, it claimed that there was an
overpayment of tax (P324k) arising from under-deduction of
the overhead expense. This was certified by international
independent auditors, the allocation of the overhead expensemade on the basis of the percentage of gross income in the
Philippines to gross income of the corporation as a whole.
In 1974, without waiting for the action of the CIR, Smith filed
a petition for review with the CTA. CTA ordered CIR to refund
the overpayment or grant Smith a tax credit. CIR appealed
to the SC.
Issue: Whether Smith is entitled to a refund – YES
Ratio:
The governing law is found in Sec. 37 (b).6 Revenue
Regulation No. 2 of the DOF contains a similar provision, with
the additional line that “the ratable part is based upon the
ratio of gross income from sources within the Philippines to
the total gross income” (Sec. 160). Hence, where an
expense is clearly related to the production of Philippine-
derived income or to Philippine operations, that expense can
6 Net income from sources in the Philippines. – From the items of
gross income specified in subsection (a) of this section there shall
be deducted expenses, losses, and other deductions properly
apportioned or allocated thereto and a ratable part of any
expenses, losses, or other deductions which cannot definitely be
allocated to some item or class of gross income. The remainder, if
any, shall be included in full as net income from sources within the
Philippines.
be deducted from the gross income acquired in the
Philippines without resorting to apportionment.
However, the overhead expenses incurred by the parent
company in connection with finance, administration, andresearch & development, all of which directly benefit its
branches all over the world, fall under a different category.
These are items which cannot be definitely allocated or
identified with the operations of the Philippine branch. Smith
can claim as its deductible share a ratable part of such
expenses based upon the ration of the local branch’s gross
income to the total gross income of the corporation
worldwide.
CIR’s Contention
The CIR does not dispute the right of Smith to avail of Sec. 37
(b) of the Tax Code and Sec. 160 of the RR. But he maintains
that such right is not absolute and that there exists a
contract (service agreement) which Smith has entered into
with its home office, prescribing the amount that a branch
can deduct as its share of the main office’s overhead
expenses. Since the share of the Philippine branch has been
fixed, Smith cannot claim more than the said amount.
Smith’s Contention
Smith, on the other hand, submits that the contract between
itself and its home office cannot amend tax laws and
regulations. The matter of allocated expenses deductible
under the law cannot be the subject of an agreement
between private parties nor can the CIR acquiesce in such an
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agreement.
SC ruled for Smith Kline and said that its amended return
conforms with the law and regulations.
PHIL GUARANTY CO v CIR
Facts: The Philippine Guaranty Co., Inc., a domestic
insurance company, entered into reinsurance contracts, on
various dates, with foreign insurance companies not doing
business in the Philippines.
The reinsurance contracts made the commencement of the
reinsurers' liability simultaneous with that of Philippine
Guaranty Co., Inc. under the original insurance. PhilippineGuaranty Co., Inc. was required to keep a register in Manila
where the risks ceded to the foreign reinsurers where
entered, and entry therein was binding upon the reinsurers.
A proportionate amount of taxes on insurance premiums not
recovered from the original assured were to be paid for by
the foreign reinsurers. The foreign reinsurers further agreed,
in consideration for managing or administering their affairs in
the Philippines, to compensate the Philippine Guaranty Co.,
Inc., in an amount equal to 5% of the reinsurance premiums.
Conflicts and/or differences between the parties under the
reinsurance contracts were to be arbitrated in Manila.
Philippine Guaranty Co., Inc. and Swiss Reinsurance
Company stipulated that their contract shall be construed by
the laws of the Philippines.
Pursuant to the aforesaid reinsurance contracts, Philippine
Guaranty Co., Inc. ceded premiuns to the foreign reinsurers.
Said premiums were excluded by Philippine Guaranty Co.,
Inc. from its gross income when it file its income tax returns
for 1953 and 1954. Furthermore, it did not withhold or pay
tax on them. Consequently, the Commissioner of InternalRevenue assessed against Philippine Guaranty Co., Inc.
withholding tax on the ceded reinsurance premiums.
Issue: Whether the reinsurance premiums ceded to foreign
reinsurers not doing business in the Philippines are subject to
withholding tax?
Held: The reinsurance premiums are subject to withholding
tax. The reinsurance contracts, however, show that the
transactions or activities that constituted the undertaking toreinsure Philippine Guaranty Co., Inc. against loses arising
from the original insurances in the Philippines were
performed in the Philippines. The liability of the foreign
reinsurers commenced simultaneously with the liability of
Philippine Guaranty Co., Inc. under the original insurances.
Philippine Guaranty Co., Inc. kept in Manila a register of the
risks ceded to the foreign reinsurers. Entries made in such
register bound the foreign resinsurers, localizing in the
Philippines the actual cession of the risks and premiums and
assumption of the reinsurance undertaking by the foreign
reinsurers. Taxes on premiums imposed by Section 259 of
the Tax Code for the privilege of doing insurance business in
the Philippines were payable by the foreign reinsurers when
the same were not recoverable from the original assured.
The foreign reinsurers paid Philippine Guaranty Co., Inc. an
amount equivalent to 5% of the ceded premiums, in
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consideration for administration and management by the
latter of the affairs of the former in the Philippines in regard
to their reinsurance activities here. Disputes and differences
between the parties were subject to arbitration in the City of
Manila. All the reinsurance contracts, except that with SwissReinsurance Company, were signed by Philippine Guaranty
Co., Inc. in the Philippines and later signed by the foreign
reinsurers abroad. Although the contract between Philippine
Guaranty Co., Inc. and Swiss Reinsurance Company was
signed by both parties in Switzerland, the same specifically
provided that its provision shall be construed according to
the laws of the Philippines, thereby manifesting a clear
intention of the parties to subject themselves to Philippine
law.
Section 24 of the Tax Code subjects foreign corporations totax on their income from sources within the Philippines. Theword "sources" has been interpreted as the activity, propertyor service giving rise to the income. 1 The reinsurancepremiums were income created from the undertaking of theforeign reinsurance companies to reinsure PhilippineGuaranty Co., Inc., against liability for loss under originalinsurances. Such undertaking, as explained above, took placein the Philippines. These insurance premiums, therefore,
came from sources within the Philippines and, hence, aresubject to corporate income tax.
The foreign insurers' place of business should not beconfused with their place of activity. Business should not becontinuity and progression of transactions while activity mayconsist of only a single transaction. An activity may occuroutside the place of business. Section 24 of the Tax Codedoes not require a foreign corporation to engage in business
in the Philippines in subjecting its income to tax. It sufficesthat the activity creating the income is performed or done inthe Philippines. What is controlling, therefore, is not the placeof business but the place of activity that created an income.
HOWDEN & CO v CIRPHILIPPINE AMERICAN LIFE INSURANCE CO v CTA
Howden Vs CIR
(taxation from Sources in the Philippines)
FACTS:
Commonwealth Insurance Co. (CIC), a domestic corporation,entered into reinsurance contracts with 32 British companiesnot engaged in business in thePhilippines represented byherein Plaintiff. CIC remitted to Plaintiff reinsurancepremiums and, on behalf of Plaintiff, paid income tax on thepremiums. Plaintiff filed a claim for a refund of the paid tax,stating that it was exempted from withholding taxreinsurance premiums received from domestic insurancecompanies by foreign insurance companies not authorized todo business in the Philippines. Plaintiffs stated that since Sec.53 and 54 were substantially re-enacted” by RA 1065, 1291and 2343,said rulings should be given the force of law under theprinciple of legislative approval by re-enactment.
ISSUE:W/N the tax should be withheld.
HELD:
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No. The principle of legislative enactment states that where astatute is susceptible of the meaning placed upon it by aruling of the government agency charged with itsenforcement and the legislature thereafter re-enacts theprovisions without substantial changes, such action isconfirmatory to an extent that the ruling carries out thelegislative purpose. This principle is not applicable forheaforementioned sections were never re-enacted. Only thetax rate was amended. The administrative rulings invoked bythe CIR were only contained in unpublished letters. It cannotbe assumed that the legislature knew of these rulings.Finally, the premiums remitted were to indemnify CIC againstliability. This took place within thePhilippines, thus subject to income tax
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