DEDUCTIONS

TAX LAW REVIEW DIGESTS Montero
Alcisso, Arriola, Cajucom, Calalang, Claudio, Escueta, Delos Santos, Dialino, Fajardo, Imperial, Juaquino, Martin, Martinez, Mendoza, Noel, Pangcog, Plazo osales, Sia, !", #enzuela aso,
Q. DEDUCTION
In general
CIR v ISABELA CULTURAL CORPORATION FACTS: ICC $as assessed %or de%icienc" income ta& ' (I disallo$ed e&pense deductions %or pro%essional and securit" ser)ices *" +, auditing ser)ices *" S-# . Co/ 0, legal ser)ices (engzon la$ o%%ice 1, El 2igre Securit" ser)ices3 and de%icienc" e&panded $it44olding ta&, $4en it %ailed to $it44old +5 e&panded $it44olding ta&/ 24e C2A cancelled and set aside t4e assessment notices 4olding t4at t4e claimed deductions %or pro%essional and securit" ser)ices $ere properl" claimed in +678 since it $as onl" in t4at "ear $4en t4e *ills demanding pa"ment $ere sent to ICC/ It also %ound t4at t4e ICC $it44eld +5 e&panded $it44olding ta& %or securit" ser)ices/ 24e CA a%%irmed 4ence t4e case at *ar/ ISSUE: 9:N t4e a%orementioned ma" *e deducted ELD: %or t4e auditing and legal ser)ices N; *ut %or t4e securit" ser)ices <ES 24e requisites %or deducti*ilit" o% ordinar" and necessar" trade, *usiness or pro%essional e&penses, li=e e&penses paid %or legal and auditing ser)ices are> a, t4e e&pense must *e ordinar" and necessar"? *, it must 4a)e *een paid or incurred during t4e ta&a*le "ear? c, it must 4a)e *een paid or incurred in carr"ing on t4e trade or *usiness o% t4e ta&pa"er and d, it must *e supported *" receipts, records and ot4er pertinent papers/
24e requisite t4at it must 4a)e *een paid or incurred during t4e ta&a*le "ear is quali%ied *" Sec/ @A o% NI C $4ic4 states t4at Bt4e deduction pro)ide %or in t4is title s4all *e ta=en %or t4e ta&a*le "ear in $4ic4 Cpaid or incurredD dependent upon t4e met4od o% accounting upon t4e *asis o% $4ic4 t4e net income is computed & & &E/
ICC uses t4e accrual met4od/ AM No/ +F0GGG pro)ides t4at under t4e accrual met4od, e&penses not claimed as deductions in t4e current "ear $4en t4e" are incurred CANN;2 *e claimed as deduction %rom income %or t4e succeeding "ear/ 24e accrual met4od relies upon t4e ta&pa"erDs rig4t to recei)e amount or its o*ligation to pa" t4em N;2 t4e actual receipt or pa"ment/ Amounts o% income accrue $4ere t4e rig4t to recei)e t4em *ecome %i&ed, $4ere t4ere is created an en%orcea*le lia*ilit"/ Hia*ilities are accrued $4en %i&ed and determina*le in amount/ 24e accrual o% income and e&pense is permitted $4en t4e AHHF E#EN2S 2ES2 4as *een met/ 24e test requires t4at> +, %i&ing o% a rig4t to income or lia*ilit" to pa" and 0, t4e a)aila*ilit" o% t4e reasona*le accurate determination o% suc4 income or lia*ilit"/ It does not require t4at t4e amount *e a*solutel" =no$n onl" t4at t4e ta&pa"er 4as in%ormation necessar" to compute t4e amount $it4 reasona*le accurac"/ 24e test is satis%ied $4ere computation remains uncertain i% its *asis is unc4angea*le/ 24e amount o% lia*ilit" does not 4a)e to *e determined e&actl", it must *e determined $it4 reasona*le accurac"/ In t4e case at *ar, t4e e&penses %or legal ser)ices pertain to t4e "ears +67@ and +67A/ 24e %irm 4as *een retained since +68G/ From t4e nature o% t4e claimed deduction and t4e span o% time during $4ic4 t4e %irm $as retained, ICC can *e e&pected to 4a)e reasona*l" =no$n t4e retainer %ees c4arged *" t4e %irm as $ell as compensation %or its ser)ices/ E&ercising due diligence, t4e" could

4a)e inquired into t4e amount o% t4eir o*ligation/ It could 4a)e reasona*l" determined t4e amount o% legal and retainer %ees o$ing to t4eir %amiliarit" $it4 t4e rates c4arged/ 24e pro%essional %ees o% S-# cannot *e )alidl" claimed as deductions in +678/ ICC %ailed to present e)idence s4o$ing t4at e)en $it4 onl" reasona*le accurac", it cannot determine t4e pro%essional %ees $4ic4 t4e compan" $ould c4arge/
Fe*ruar" +6, +6A7, t4at said amount s4ould *e allo$ed as deduction *ecause it $as paid to its o%%icers as allo$ance or *onus pursuant to its *"Fla$s/ ISSUE! ELD> 9:N t4e *onus gi)en to t4e o%%icers o% t4e petitioner upon t4e sale o% its Muntinlupa land is an ordinar" and necessar" *usiness e&pense deducti*le %or income ta& purposes F N; RATIO> Sec/ 1G Ia, I+, o% t4e 2a& Code pro)ides t4at in computing net income, t4ere s4all *e allo$ed as deductions CE&penses, including all t4e ordinar" and necessary e&penses paid or incurred during t4e ta&a*le "ear in carr"ing on an" trade or *usiness, including a reasonable allowance %or personal ser)ices actually rendered/ 24e *onus gi)en to t4e o%%icers o% t4e petitioner as t4eir s4are o% t4e pro%it realized %rom t4e sale o% petitionerKs Muntinglupa land cannot *e deemed a deducti*le e&pense %or ta& purposes, e)en i% t4e a%oresaid sale could *e considered as a transaction %or carr"ing on t4e trade or *usiness o% t4e petitioner and t4e grant o% t4e *onus to t4e corporate o%%icers pursuant to petitionerKs *"Fla$s could, as an intraFcorporate matter, *e sustained/ 24e records s4o$ t4at t4e sale $as e%%ected t4roug4 a *ro=er $4o $as paid *" petitioner a commission o% PA+,J01/J0 %or 4is ser)ices/ ;n t4e ot4er 4and, t4ere is a*solutel" no e)idence o% an" ser)ice actuall" rendered *" petitionerKs o%%icers $4ic4 could *e t4e *asis o% a grant to t4em o% a *onus out o% t4e pro%it deri)ed %rom t4e sale/ 24is *eing so, t4e pa"ment o% a *onus to t4em out o% t4e gain realized %rom t4e sale cannot *e considered as a selling e&pense? nor can it *e deemed reasona*le and necessar" so as to ma=e it deducti*le %or ta& purposes/ 24e e&traordinar" and unusual amounts paid *" petitioner to t4ese directors in t4e guise and %orm o% compensation %or t4eir supposed ser)ices as suc4, without any relation to the measure of their actual services, cannot be regarded as ordinary and necessary expenses $it4in t4e meaning o% t4e la$/ 24is is in line $it4 t4e doctrine in t4e la$ o% ta&ation t4at t4e ta&pa"er must s4o$ t4at its claimed deductions clearl" come $it4in t4e language o% t4e la$ since allo$ances, li=e e&emptions, are matters o% legislati)e grace/
CIR v GENERAL FOODS AGUINALDO INDUSTRIES v CIR
FACTS: Aguinaldo Industries Corporation IAIC, is a domestic corporation engaged in t4e manu%acture o% %is4ing nets, a ta&Fe&empt industr" and t4e manu%acture o% %urniture/ For accounting purposes, eac4 di)ision is pro)ided $it4 separate *oo=s o% accounts/ Pre)iousl", AIC acquired a parcel o% land in Muntinlupa, izal, as site o% t4e %is4ing net %actor"/ Hater, it sold t4e Muntinlupa propert"/ AIC deri)ed pro%it %rom t4is sale $4ic4 $as entered in t4e *oo=s o% t4e Fis4 Nets Di)ision as miscellaneous income to distinguis4 it %rom its ta&Fe&empt income/ For t4e "ear +6AJ, AIC %iled t$o separate income ta& returns %or eac4 di)ision/ A%ter in)estigation, t4e e&aminers o% t4e (I %ound t4at t4e Fis4 Nets Di)ision deducted %rom its gross income %or t4at "ear t4e amount o% P8+,+7J/@7 as additional remuneration paid to t4e o%%icers o% AIC/ 24is amount $as ta=en %rom t4e net pro%it o% an isolated transaction Isale o% Muntinlupa land, not in t4e course o% or carr"ing on o% AICKs trade or *usiness, and $as reported as part o% t4e selling e&penses o% t4e Muntinlupa land/ !pon recommendation o% t4e e&aminer t4at t4e said sum o% P8+,+7J/@7 *e disallo$ed as deduction %rom gross income, petitioner asserted in its letter o%

ATLAS CONSOLIDATED MINING v CIR
FACTS: Atlas is a corporation engaged in t4e mining industr" registered/ ;n August +680, CI assessed against Atlas %or de%icienc" income ta&es %or t4e "ears +6AJ and +6A7/ For t4e "ear +6AJ, it $as t4e opinion o% t4e CI t4at Atlas is not entitled to e&emption %rom t4e income ta& under A 6G6 *ecause same co)ers onl" gold mines/ For t4e "ear +6A7, t4e de%icienc" income ta& co)ers t4e disallo$ance o% items claimed *" Atlas as deducti*le %rom gross income/ Atlas protested %or reconsideration and cancellation, t4us t4e CI conducted a rein)estigation o% t4e case/ ;n ;cto*er +680, t4e Secretar" o% Finance ruled t4at t4e e&emption pro)ided in A 6G6 em*races all ne$ mines and old mines $4et4er gold or ot4er minerals/ Accordingl", t4e CI recomputed Atlas de%icienc" income ta& lia*ilities in t4e lig4t o% said ruling/ ;n June +68@, t4e CI issued a re)ised assessment entirel" eliminating t4e assessment %or t4e "ear +6AJ/ 24e assessment %or +6A7 $as reduced %rom $4ic4 Atlas appealed to t4e C2A, assailing t4e disallo$ance o% t4e %ollo$ing items claimed as deducti*le %rom its gross income %or +6A7> 2rans%er agentKs %ee, Stoc=4olders relation ser)ice %ee, !/S/ stoc= listing e&penses, Suit e&penses, and Pro)ision %or contingencies/ 24e C2A allo$ed said items as deduction e&cept t4ose denominated *" Atlas as stoc=4olders relation ser)ice %ee and suit e&penses/ (ot4 parties appealed t4e C2A decision to t4e SC *" $a" o% t$o I0, separate petitions %or re)ie$/ Atlas appealed onl" t4e disallo$ance o% t4e deduction %rom gross income o% t4e soFcalled stoc=4olders relation ser)ice %ee/ ISSUE! ELD> 9:N t4e Cannual pu*lic relations e&penseD Ia=a stoc=4olders relation ser)ice %ee, paid to a pu*lic relations consultant is a deducti*le e&pense %rom gross income
RATIO> Section 1G Ia, I+, o% t4e 2a& Code allo$s a deduction o% Lall t4e ordinar" and necessar" e&penses paid or incurred during t4e ta&a*le "ear in carr"ing on an" trade or *usiness/L An item o% e&penditure, in order to *e deducti*le under t4is section o% t4e statute, must %all squarel" $it4in its language/ 2o *e deducti*le as a *usiness e&pense, t4ree conditions are imposed, namel"> I+, t4e e&pense must *e ordinar" and necessar", I0, it must *e paid or incurred $it4in t4e ta&a*le "ear, and I1, it must *e paid or incurred in carr"ing in a trade or *usiness/ In addition, not onl" must t4e ta&pa"er meet t4e *usiness test, 4e must su*stantiall" pro)e *" e)idence or records t4e deductions claimed under t4e la$, ot4er$ise, t4e same $ill *e disallo$ed/ 24e mere allegation o% t4e ta&pa"er t4at an item o% e&pense is ordinar" and necessar" does not justi%" its deduction/ 24e SC 4as ne)er attempted to de%ine $it4 precision t4e terms Lordinar" and necessar"/L As a guiding principle, ordinaril", an e&pense $ill *e considered Lnecessar"L $4ere t4e e&penditure is appropriate and 4elp%ul in t4e de)elopment o% t4e ta&pa"erKs *usiness/ It is Lordinar"L $4en it connotes a pa"ment $4ic4 is normal in relation to t4e *usiness o% t4e ta&pa"er and t4e surrounding circumstances/ 24e term Lordinar"L does not require t4at t4e pa"ments *e 4a*itual or normal in t4e sense t4at t4e same ta&pa"er $ill 4a)e to ma=e t4em o%ten? t4e pa"ment ma" *e unique or nonFrecurring to t4e particular ta&pa"er a%%ected/ 24ere is t4us no 4ard and %ast rule on t4e matter/ 24e rig4t to a deduction depends in eac4 case on t4e particular %acts and t4e relation o% t4e pa"ment to t4e t"pe o% *usiness in $4ic4 t4e ta&pa"er is engaged/ 24e intention o% t4e ta&pa"er o%ten ma" *e t4e controlling %act in ma=ing t4e determination/ Assuming t4at t4e e&penditure is ordinar" and necessar" in t4e operation o% t4e ta&pa"erKs *usiness, t4e ans$er to t4e question as to $4et4er t4e e&penditure is an allo$a*le deduction as a *usiness e&pense must *e determined %rom t4e nature o% t4e e&penditure itsel%, $4ic4 in turn depends on t4e e&tent and permanenc" o% t4e $or= accomplis4ed *" t4e e&penditure/

It appears t4at on Decem*er +6AJ, Atlas increased its capital stoc=/ It claimed t4at its s4ares o% stoc= $ere sold in t4e !nited States *ecause o% t4e ser)ices rendered *" t4e pu*lic relations %irm/ 24e in%ormation a*out Atlas gi)en out and pla"ed up in t4e mass communication media resulted in %ull su*scription o% t4e additional s4ares issued *" Atlas? consequentl", t4e Cstoc=4olders relation ser)ice %eeD, t4e compensation %or ser)ices carr"ing on t4e selling campaign, $as in e%%ect spent %or t4e acquisition o% additional capital, ergo, a capital e&penditure, and not an ordinar" e&pense/ It is not deducti*le %rom Atlas gross income in +6A7 *ecause e&penses relating to recapitalization and reorganization o% t4e corporation, t4e cost o% o*taining stoc= su*scription, promotion e&penses, and commission or %ees paid %or t4e sale o% stoc= reorganization are capital e&penditures/ 24at t4e e&pense in question $as incurred to create a %a)ora*le image o% t4e corporation in order to gain or maintain t4e pu*licKs and its stoc=4oldersK patronage, does not ma=e it deducti*le as *usiness e&pense/ As 4eld in a !S case , e%%orts to esta*lis4 reputation are a=in to acquisition o% capital assets and, t4ere%ore, e&penses related t4ereto are not *usiness e&pense *ut capital e&penditures/ Note> 24e *urden o% proo% t4at t4e e&penses incurred are ordinar" and necessar" is on t4e ta&pa"er and does not rest upon t4e -o)ernment/ 2o a)ail o% t4e claimed deduction, it is incum*ent upon t4e ta&pa"er to adduce su*stantial e)idence to esta*lis4 a reasona*l" pro&imate relation petition *et$een t4e e&penses to t4e ordinar" conduct o% t4e *usiness o% t4e ta&pa"er/ A logical lin= or ne&us *et$een t4e e&pense and t4e ta&pa"erKs *usiness must *e esta*lis4ed *" t4e ta&pa"er/
and s4ares o% stoc=s in di%%erent corporations/ 2o manage t4e properties, said c4ildren, namel", Antonio, Eduardo and Jose o&as %ormed a partners4ip called o&as " Compania/ ;n June +6A7, t4e CI assessed de%icienc" income ta&es against t4e o&as (rot4ers %or t4e "ears +6A1 and +6AA/ Part o% t4e de%icienc" income ta&es resulted %rom t4e disallo$ance o% deductions %rom gross income o% )arious *usiness e&penses and contri*utions claimed *" o&as/ (see expense items below) 24e o&as *rot4ers protested t4e assessment *ut inasmuc4 as said protest $as denied, t4e" instituted an appeal in t4e C2A, $4ic4 sustained t4e assessment e&cept t4e demand %or t4e pa"ment o% t4e %i&ed ta& on dealer o% securities and t4e disallo$ance o% t4e deductions %or contri*utions to t4e P4ilippine Air Force C4apel and Mijas de JesusK etiro de Manresa/ Not satis%ied, o&as *rot4ers appealed to t4e SC/ 24e CI did not appeal/ ISSUES! ELD: 9:N t4e deductions %or *usiness e&penses and contri*utions deducti*le RATIO: 9it4 regard to t4e disallo$ed deductions Ie&penses %or tic=ets to a *anquet gi)en in 4onor o% Sergio ;smena and *eer gi)en as gi%ts to )arious persons, la*elled as representation e&penses,, representation e&penses are deducti*le %rom gross income as e&penditures incurred in carr"ing on a trade or *usiness under Section 1GIa, o% t4e 2a& Code pro)ided t4e ta&pa"er pro)es t4at t4e" are reasona*le in amount, ordinar" and necessar", and incurred in connection $it4 4is *usiness/ In t4e case at *ar, t4e e)idence does not s4o$ suc4 lin= *et$een t4e e&penses and t4e *usiness o% o&as/ 24e petitioners also claim deductions %or contri*utions to t4e Pasa" Cit" Police, Pasa" Cit" Firemen, and (aguio Cit" Police C4ristmas %unds, Manila Police 2rust Fund, P4ilippines MeraldKs %und %or ManilaKs neediest %amilies and ;ur Had" o% Fatima c4apel at Far Eastern !ni)ersit"/ 24e contri*utions to t4e C4ristmas %unds o% t4e Pasa" Cit" Police, Pasa" Cit" Firemen and (aguio Cit" Police are not deducti*le %or t4e reason t4at t4e C4ristmas %unds $ere not spent
ROXAS v CTA
FACTS: Don Pedro o&as and Dona Carmen A"ala, Spanis4 su*jects, transmitted to t4eir grandc4ildren *" 4ereditar" succession agricultural lands in (atangas, a residential 4ouse and lot in Manila,

for public purposes *ut as C4ristmas gi%ts to t4e %amilies o% t4e mem*ers o% said entities/ !nder Section 16I4,, a contribution to a government entity is deductible when used exclusively for public purposes/ For t4is reason, t4e disallo$ance must *e sustained/ ;n t4e ot4er 4and, t4e contri*ution to t4e Manila Police trust %und is an allo$a*le deduction %or said trust %und *elongs to t4e Manila Police, a go)ernment entit", intended to *e used e&clusi)el" %or its pu*lic %unctions/ 24e contri*utions to t4e P4ilippines MeraldKs %und %or ManilaKs neediest %amilies $ere disallo$ed on t4e ground t4at t4e P4ilippines Merald is not a corporation or an association contemplated in Section 1G I4, o% t4e 2a& Code/ It s4ould *e noted 4o$e)er t4at t4e contri*utions $ere not made to t4e P4ilippines Merald *ut to a group o% ci)ic spirited citizens organized *" t4e P4ilippines Merald solel" %or c4arita*le purposes/ 24ere is no question t4at t4e mem*ers o% t4is group o% citizens do not recei)e pro%its, %or all t4e %unds t4e" raised $ere %or ManilaKs neediest %amilies/ Suc4 a group o% citizens ma" *e classi%ied as an association organized e&clusi)el" %or c4arita*le purposes mentioned in Section 1GI4, o% t4e 2a& Code/ 24e contri*ution to ;ur Had" o% Fatima c4apel at t4e Far Eastern !ni)ersit" s4ould also *e disallo$ed on t4e ground t4at t4e said uni)ersit" gi)es di)idends to its stoc=4olders/ Hocated $it4in t4e premises o% t4e uni)ersit", t4e c4apel in question 4as not *een s4o$n to *elong to t4e Cat4olic C4urc4 or an" religious organization/ It *elongs to t4e Far Eastern !ni)ersit", contri*utions to $4ic4 are not deducti*le under Section 1GI4, o% t4e 2a& Code %or t4e reason t4at t4e net income o% said uni)ersit" injures to t4e *ene%it o% its stoc=4olders.
real properties and claimed deductions $4ic4 $ere not allo$a*le/ 24e collector required 4im to pa" de%icienc" income ta&/ ;n appeal *" Namora, t4e C2A reduced t4e amount o% de%icienc" income ta&/ Namora appealed, alleging t4at t4e C2A erred in dissallo$ing P+G,@J7/AG, as promotion e&penses incurred *" 4is $i%e %or t4e promotion o% t4e (a" #ie$ Motel and Farmacia Namora I$4ic4 is O o% P0G,6AJ/GG, supposed *usiness e&penses,/ Namora alleged t4at t4e C2A erred in disallo$ing P+G,@J7/AG as promotion e&penses incurred *" 4is $i%e %or t4e promotion o% t4e (a" #ie$ Motel and Farmacia Namora/ Me contends t4at t4e $4ole amount o% P0G,6AJ/GG as promotion e&penses, s4ould *e allo$ed and not merel" oneF4al% o% it, on t4e ground t4at, $4ile not all t4e itemized e&penses are supported *" receipts, t4e a*sence o% some supporting receipts 4as *een su%%icientl" and satis%actoril" esta*lis4ed/ ISSUE: $:n C2A erred in allo$ing onl" one 4al% o% t4e promotion e&penses/ N; ELD: Section 1G, o% t4e 2a& Code, pro)ides t4at in computing net income, t4ere s4all *e allo$ed as deductions all t4e ordinar" and necessar" e&penses paid or incurred during t4e ta&a*le "ear, in carr"ing on an" trade or *usiness/ Since promotion e&penses constitute one o% t4e deductions in conducting a *usiness, same must satis%" t4ese requirements/ Claim %or t4e deduction o% promotion e&penses or entertainment e&penses must also *e su*stantiated or supported *" record s4o$ing in detail t4e amount and nature o% t4e e&penses incurred/ Considering, as 4ereto%ore stated, t4at t4e application o% Mrs/ Namora %or dollar allocation s4o$s t4at s4e $ent a*road on a com*ined medical and *usiness trip, not all o% 4er e&penses came under t4e categor" o% ordinar" and necessar" e&penses? part t4ereo% constituted 4er personal e&penses/ 24ere 4a)ing *een no means *" $4ic4 to ascertain $4ic4 e&pense $as incurred *" 4er in connection $it4 t4e *usiness o% Mariano Namora and $4ic4 $as incurred %or 4er personal *ene%it, t4e Collector and t4e C2A in t4eir
"AMORA v CIR FACTS: Mariano Namora, o$ner o% t4e (a" #ie$ Motel and Farmacia Namora, %iled 4is income ta& returns/ 24e CI %ound t4at 4e %ailed to %ile 4is return o% t4e capital gains deri)ed %rom t4e sale o% certain

decisions, considered AG5 o% t4e said amount o% P0G,6AJ/GG as *usiness e&penses and t4e ot4er AG5, as 4er personal e&penses/ 9e 4old t4at said allocation is )er" %air to Mariano Namora, t4ere 4a)ing *een no receipt $4atsoe)er, su*mitted to e&plain t4e alleged *usiness e&penses, or proo% o% t4e connection $4ic4 said e&penses 4ad to t4e *usiness or t4e reasona*leness o% t4e said amount o% P0G,6AJ/GG/ In t4e case o% #isa"an Ce*u 2erminal Co/, Inc/ )/ CI /, it $as declared t4at re#re$ent%t&on e'#en$e$ (%)) *n+er t,e -%te.or/ o( 0*$&ne$$ e'#en$e$ 1,&-, %re %))o1%0)e +e+*-t&on$ (ro2 .ro$$ &n-o2e3 &( t,e/ 2eet t,e -on+&t&on$ #re$-r&0e+ 0/ )%13 #%rt&-*)%r)/ $e-t&on 45 6%7 89:3 o( t,e T%' Co+e; t,%t to 0e +e+*-t&0)e3 $%&+ 0*$&ne$$ e'#en$e$ 2*$t 0e or+&n%r/ %n+ ne-e$$%r/ e'#en$e$ #%&+ or &n-*rre+ &n -%rr/&n. on %n/ tr%+e or 0*$&ne$$; t,%t t,o$e e'#en$e$ 2*$t %)$o 2eet t,e (*rt,er te$t o( re%$on%0)ene$$ &n %2o*nt. T,e/ $,o*)+ %)$o 0e -overe+ 0/ $*##ort&n. #%#er$; &n t,e %0$en-e t,ereo( t,e %2o*nt #ro#er)/ +e+*-t&0)e %$ re#re$ent%t&on e'#en$e$ $,o*)+ 0e +eter2&ne+ (ro2 %v%&)%0)e +%t%.
amount o% P07,GA@/GG plus interests/ 24e Court o% 2a& Appeals upon re)ie$ing t4e assessment at t4e ta&pa"erKs petition, up4eld respondentKs disallo$ance o% t4e principal item o% petitionerKs 4a)ing paid to Mr/ C/ M/ Mos=ins, its %ounder and controlling stoc=4older t4e amount o% P66,6JJ/6+ representing AG5 o% super)ision %ees earned *" it and set aside respondentKs disallo$ance o% t4ree ot4er minor items/ Petitioner questions in t4is appeal t4e 2a& CourtKs %indings t4at t4e disallo$ed pa"ment to Mos=ins $as an inordinatel" large one, $4ic4 *ore a close relations4ip to t4e recipientKs dominant stoc=4oldings and t4ere%ore amounted in la$ to a distri*ution o% its earnings and pro%its/ I$$*e: 94et4er t4e AG5 super)ision %ee paid to Mos=in ma" *e deducti*le %or income ta& purposes/ R*)&n.: NO. R%t&o: Mos=in o$ns 66/85 o% t4e CM Mos=ins . Co/ Me $as also t4e President and C4airman o% t4e (oard/ 24at as c4airman o% t4e (oard o% Directors, 4e recei)ed a salar" o% P1,JAG/GG a mont4, plus a salar" *onus o% a*out P@G,GGG/GG a "ear and an amounting to an annual compensation o% P@A,GGG/GG and an annual salar" *onus o% P@G,GGG/GG, plus %ree use o% t4e compan" car and receipt o% ot4er similar allo$ances and *ene%its, t4e 2a& Court correctl" ruled t4at t4e pa"ment *" petitioner to Mos=ins o% t4e additional sum o% P66,6JJ/6+ as 4is equal or AG5 s4are o% t4e 75 super)ision %ees recei)ed *" petitioner as managing agents o% t4e real estate, su*di)ision projects o% Paradise Farms, Inc/ and ealt" In)estments, Inc/ 1%$ &nor+&n%te)/ )%r.e %n+ -o*)+ not 0e %--or+e+ t,e tre%t2ent o( or+&n%r/ %n+ ne-e$$%r/ e'#en$e$ %))o1e+ %$ +e+*-t&0)e &te2$ 1&t,&n t,e #*rv&e1 o( t,e T%' Co+e/ 24e %act t4at suc4 pa"ment $as aut4orized *" a standing resolution o% petitionerKs *oard o% directors, since LMos=ins 4ad personall" concei)ed and planned t4e projectL cannot c4ange t4e picture/ 24ere could *e no question t4at as C4airman o% t4e *oard
Expenses
C.M. F%-t$: Petitioner, a domestic corporation engaged in t4e real estate *usiness as *ro=ers, managing agents and administrators, %iled its income ta& return %or its %iscal "ear ending Septem*er 1G, +6AJ s4o$ing a net income o% P60,A@G/0A and a ta& lia*ilit" due t4ereon o% P+7,AG7/GG, $4ic4 it paid in due course/ !pon )eri%ication o% its return, CI , disallo$ed %our items o% deduction in petitionerKs ta& returns and assessed against it an income ta& de%icienc" in t4e OS<INS=CO3 INC. v CIR

and practicall" an a*solutel" controlling stoc=4older o% petitioner, Mos=ins $ielded tremendous po$er and in%luence in t4e %ormulation and ma=ing o% t4e compan"Ks policies and decisions/ E)en just as *oard c4airman, going *" petitionerKs o$n enumeration o% t4e po$ers o% t4e o%%ice, Mos=ins, could e&ercise great po$er and in%luence $it4in t4e corporation, suc4 as directing t4e polic" o% t4e corporation, delegating po$ers to t4e president and ad)ising t4e corporation in determining e&ecuti)e salaries, *onus plans and pensions, di)idend policies, etc/ It is a general rule t4at K(onuses to emplo"ees made in good %ait4 and as additional compensation %or t4e ser)ices actuall" rendered *" t4e emplo"ees are deducti*le, pro)ided suc4 pa"ments, $4en added to t4e stipulated salaries, do not e&ceed a reasona*le compensation %or t4e ser)ices rendered/ 24e conditions precedent to t4e deduction o% *onuses to emplo"ees are> I+, t4e pa"ment o% t4e *onuses is in %act compensation? I0, it must *e %or personal ser)ices actuall" rendered? and I1, t4e *onuses, $4en added to t4e salaries, are Kreasona*le $4en measured *" t4e amount and qualit" o% t4e ser)ices per%ormed $it4 relation to t4e *usiness o% t4e particular ta&pa"er/ 24ere is no %i&ed test %or determining t4e reasona*leness o% a gi)en *onus as compensation/ 24is depends upon man" %actors, one o% t4em *eing t4e amount and qualit" o% t4e ser)ices per%ormed $it4 relation to t4e *usiness/K ;t4er tests suggested are> pa"ment must *e Kmade in good %ait4K? Kt4e c4aracter o% t4e ta&pa"erKs *usiness, t4e )olume and amount o% its net earnings, its localit", t4e t"pe and e&tent o% t4e ser)ices rendered, t4e salar" polic" o% t4e corporationK? Kt4e size o% t4e particular *usinessK? Kt4e emplo"eesK quali%ications and contri*utions to t4e *usiness )entureK? and Kgeneral economic conditions/ Mo$e)er, Kin determining $4et4er t4e particular salar" or compensation pa"ment is reasona*le, t4e situation must *e considered as $4ole/ ;rdinaril", no single %actor is decisi)e/ / / / it is important to =eep in mind t4at it seldom 4appens t4at t4e application o% one test can gi)e satis%actor" ans$er, and t4at ordinaril" it is t4e interpla" o% se)eral %actors, properl" $eig4ted %or t4e particular case, $4ic4 must %urnis4 t4e %inal ans$er/L
PetitionerKs case %ails to pass t4e test/ ;n t4e rig4t o% t4e emplo"er as against respondent Commissioner to %i& t4e compensation o% its o%%icers and emplo"ees, $e t4ere 4eld %urt4er t4at $4ile t4e emplo"erKs rig4t ma" *e conceded, t4e question o% t4e allo$ance or disallo$ance t4ereo% as deducti*le e&penses %or income ta& purposes is su*ject to determination *" CI / As %ar as petitionerKs contention t4at as emplo"er it 4as t4e rig4t to %i& t4e compensation o% its o%%icers and emplo"ees and t4at it $as in t4e e&ercise o% suc4 rig4t t4at it deemed proper to pa" t4e *onuses in question, all t4at 9e need sa" is t4is> t4at rig4t ma" *e conceded, *ut %or income ta& purposes t4e emplo"er cannot legall" claim suc4 *onuses as deducti*le e&penses unless t4e" are s4o$n to *e reasona*le/ 2o 4old ot4er$ise $ould open t4e gate o% rampant ta& e)asion/ Hastl", 9e must not lose sig4t o% t4e %act t4at t4e question o% allo$ing or disallo$ing as deducti*le e&penses t4e amounts paid to corporate o%%icers *" $a" o% *onus is determined *" respondent e&clusi)el" %or income ta& purposes/ Concededl", 4e 4as no aut4orit" to %i& t4e amounts to *e paid to corporate o%%icers *" $a" o% *asic salar", *onus or additional remuneration P a matter t4at lies more or less e&clusi)el" $it4in t4e sound discretion o% t4e corporation itsel%/ (ut t4is rig4t o% t4e corporation is, o% course, not a*solute/ It cannot e&ercise it %or t4e purpose o% e)ading pa"ment o% ta&es legitimatel" due to t4e State/L CALANOC v CIR <UEN"LE = STREIF3 INC. v CIR FACTS: Petitioner is a domestic corporation engaged in t4e importation o% te&tiles, 4ard$are, sundries, c4emicals, p4armaceuticals, lum*ers, groceries, $ines and liquor? in insurance and lum*er? and in some e&ports/ 94en Petitioner %iled its Income 2a& eturn, it deducted %rom its gross income t4e %ollo$ing items>

+/ salaries, directorsK %ees and *onuses o% its nonFresident president and )iceFpresident? 0/ *onuses o% its resident o%%icers and emplo"ees? and 1/ interests on earned *ut unpaid salaries and *onuses o% its o%%icers and emplo"ees/ 24e CI disallo$ed t4e deductions and assessed Petitioner %or de%icienc" income ta&es/ Petitioner requested %or reFe&amination o% t4e assessment/ CI modi%ied t4e same *" allo$ing as deducti*le all items comprising directorsK %ees and salaries o% t4e nonFresident president and )iceFpresident, *ut disallo$ing t4e *onuses inso%ar as t4e" e&ceed t4e salaries o% t4e recipients, as $ell as t4e interests on earned *ut unpaid salaries and *onuses/ 24e C2A modi%ied t4e assessment and ruled t4at $4ile t4e *onuses gi)en to t4e nonFresident o%%icers are reasona*le, *onuses gi)en to t4e resident o%%icers and emplo"ees are quite e&cessi)e/ ISSUES!RULING: 9:N t4e C2A erred in ruling t4at t4e measure o% t4e reasona*leness o% t4e *onuses paid to its nonFresident president and )iceFpresident s4ould *e applied to t4e *onuses gi)en to resident o%%icers and emplo"ees in determining t4eir deducti*ilit"Q N;/ It is a general rule t4at L(onuses to emplo"ees made in good %ait4 and as additional compensation %or t4e ser)ices actuall" rendered *" t4e emplo"ees are deducti*le, pro)ided suc4 pa"ments, $4en added to t4e stipulated salaries, do not e&ceed a reasona*le compensation %or t4e ser)ices rendered/E 24e condition precedents to t4e deduction o% *onuses to emplo"ees are> +/ t4e pa"ment o% t4e *onuses is in %act compensation? 0/ it must *e %or personal ser)ices actuall" rendered? and
1/ t4e *onuses, $4en added to t4e salaries, are reasona*le $4en measured *" t4e amount and qualit" o% t4e ser)ices per%ormed $it4 relation to t4e *usiness o% t4e particular ta&pa"er 24ere is no %i&ed test %or determining t4e reasonableness o% a gi)en *onus as compensation/ Mo$e)er, in determining $4et4er t4e particular salar" or compensation pa"ment is reasona*le, t4e situation must *e considered as a $4ole/ Petitioner contended t4at it is error to appl" t4e same measure o% reasona*leness to *ot4 resident and nonFresident o%%icers *ecause t4e nature, e&tent and qualit" o% t4e ser)ices per%ormed *" eac4 $it4 relation to t4e *usiness o% t4e corporation $idel" di%%er/ Said nonFresident o%%icers 4ad rendered t4e same amount o% e%%icient personal ser)ice and contri*ution to deser)e equal treatment in compensation and ot4er emoluments/ 24ere is no special reason %or granting greater *onuses to suc4 lo$er ran=ing o%%icers t4an t4ose gi)en to t4e nonFresident president and )ice president/ 9:N t4e C2A erred in allo$ing t4e deduction o% t4e *onuses in e&cess o% t4e "earl" salaries o% t4e emplo"eesQ N;/ 24e deducti*le amount o% said *onuses cannot *e only equal to t4eir respecti)e "earl" salaries considering t4e postF$ar polic" o% t4e corporation in gi)ing salaries at lo$ le)els *ecause o% t4e unsettled conditions resulting %rom $ar and t4e imposition o% go)ernment controls on imports and e&ports and on t4e use o% %oreign e&c4ange $4ic4 resulted in t4e diminution o% t4e amount o% *usiness and t4e consequent loss o% pro%its on t4e part o% t4e corporation/ 24e pa"ment o% *onuses in amounts a little more t4an t4e "earl" salaries recei)ed considering t4e pre)ailing circumstances is in our opinion reasona*le/ 9:N t4e C2A erred in disallo$ing t4e deduction o% interests on earned *ut unpaid salaries and *onusesQ N;/

!nder t4e la$, in order t4at interest ma" *e deducti*le, it must *e paid Lon inde*tedness/L It is t4ere%ore imperati)e to s4o$ t4at t4ere is an existing indebtedness $4ic4 ma" *e su*jected to t4e pa"ment o% interest/ Mere t4e items in)ol)ed are unclaimed salaries and *onus participation $4ic4 cannot constitute inde*tedness $it4in t4e meaning o% t4e la$ *ecause $4ile t4e" constitute an o*ligation on t4e part o% t4e corporation, it is not t4e latterKs %ault i% t4e" remained unclaimed/ 94ate)er an emplo"ee ma" %ail to collect cannot *e considered an inde*tedness %or it is t4e concern o% t4e emplo"ee to collect it in due time/ 24e $illingness o% t4e corporation to pa" interest t4ereon cannot *e considered a justi%ication to $arrant deduction/
Picop $as proper and allo$a*le/ In t4e instant Petition, t4e CI insists on its original position/ ISS!E> 94et4er Picop is entitled to deductions against income o% interest pa"ments on loans %or t4e purc4ase o% mac4iner" and equipment/ MEHD> <ES/ Interest pa"ments on loans incurred *" a ta&pa"er I$4et4er (;IFregistered or not, are allo$ed *" t4e NI C as deductions against t4e ta&pa"erKs gross income/ 24e *asis is +6JJ 2a& Code Sec/ 1G I*,/+ 24us, t4e general rule is t4at interest e&penses are deducti*le against gross income and t4is certainl" includes interest paid under loans incurred in connection $it4 t4e carr"ing on o% t4e *usiness o% t4e ta&pa"er/ In t4e instant case, t4e CI does not dispute t4at t4e interest pa"ments $ere made *" Picop on loans incurred in connection with the carrying on of the registered operations of Picop , i/e/, t4e %inancing o% t4e purc4ase o% mac4iner" and equipment actuall" used in t4e registered operations o% Picop/ Neit4er does t4e CI den" t4at suc4 interest pa"ments $ere legally due and demandable under t4e terms o% suc4 loans, and in %act paid *" Picop during t4e ta& "ear +6JJ/
+
Interest
PAPER INDUSTRIES v CA 6 De-. 93 9>>?7 Facts> ;n )arious "ears I+686, +6J0 and +6JJ,, Picop o*tained loans %rom %oreign creditors in order to %inance t4e purc4ase o% mac4iner" and equipment needed %or its operations/ In its +6JJ Income 2a& eturn, Picop claimed interest pa"ments made in +6JJ, amounting to P@0,7@G,+1+/GG, on t4ese loans as a deduction %rom its +6JJ gross income/ 24e CI disallo$ed t4is deduction upon t4e ground t4at, *ecause t4e loans 4ad *een incurred %or t4e purc4ase o% mac4iner" and equipment, t4e interest pa"ments on t4ose loans s4ould 4a)e *een capitalized instead and claimed as a depreciation deduction ta=ing into account t4e adjusted *asis o% t4e mac4iner" and equipment Ioriginal acquisition cost plus interest c4arges, o)er t4e use%ul li%e o% suc4 assets/ (ot4 t4e C2A and t4e Court o% Appeals sustained t4e position o% Picop and 4eld t4at t4e interest deduction claimed *"
Sec/ 1G/ Deduction from ross Income/ P 24e %ollo$ing ma" *e deducted %rom gross income> &&& &&& &&& I*, Interest> I+, In general/ P 24e amount o% interest paid $it4in t4e ta&a*le "ear on indebtedness, e&cept on inde*tedness incurred or continued to purc4ase or carr" o*ligations t4e interest upon $4ic4 is e&empt %rom ta&ation as income under t4is 2itle> / / / IEmp4asis supplied, 6

24e contention o% CI does not spring o% t4e +6JJ 2a& Code *ut %rom e)enue egulations 0 Sec/ J6/ 0 Mo$e)er, t4e Court said t4at t4e term BinterestE 4ere s4ould *e construed as t4e soFcalled @t,eoret&-%) &ntere$t3@ t4at is to sa", interest LcalculatedL or computed 6%n+ not incurred or paid7 (or t,e #*r#o$e o( +eter2&n&n. t,e @o##ort*n&t/ -o$t@ o( &nve$t&n. (*n+$ &n % .&ven 0*$&ne$$. S*-, @t,eoret&-%)@ or &2#*te+ &ntere$t +oe$ not %r&$e (ro2 % )e.%))/ +e2%n+%0)e &ntere$tA0e%r&n. o0)&.%t&on &n-*rre+ 0/ t,e t%'#%/er $4o 4o$e)er $is4es to %ind out, e/g/, $4et4er 4e $ould 4a)e *een *etter o%% *" lending out 4is %unds and earning interest rat4er t4an in)esting suc4 %unds in 4is *usiness/ ;ne t4ing t4at Section J6 quoted a*o)e ma=es clear is t4at interest $4ic4 does constitute a c4arge arising under an interestF*earing o*ligation is an allo$a*le deduction %rom gross income/ On)/ &( $&r %$B$: 6For (*rt,er +&$-*$$&on o( CIRC$ -ontent&on7 It is claimed *" t4e CI t4at Section J6 o% e)enue egulations No/ 0 $as Lpatterned a%terL paragrap4 +/088F+ I*,, entitled L2a&es and Carr"ing C4arges C4argea*le to Capital Account and 2reated as Capital ItemsL o% t4e !/S/ Income 2a& egulations, $4ic4 paragrap4 reads as %ollo$s> I(, !axes and "arrying "harges / P 24e items t4us c4argea*le to capital accounts are P I++, In t4e case o% real propert", $4et4er impro)ed or unimpro)ed and $4et4er producti)e or nonproducti)e/
Ia, Interest on a loan I*ut not t4eoretical interest o% a ta&pa"er using 4is o$n %unds,/ 24e truncated e&cerpt o% t4e !/S/ Income 2a& egulations quoted *" t4e CI needs to *e related to t4e rele)ant pro)isions o% t4e !/S/ Internal e)enue Code, $4ic4 pro)isions deal $it4 t4e general topic o% adjusted *asis %or determining allo$a*le gain or loss on sales or e&c4anges o% propert" and allo$a*le depreciation and depletion o% capital assets o% t4e ta&pa"er> Present #ule/ 24e Internal e)enue Code, and t4e egulations promulgated t4ereunder pro)ide t4at L$o deduction shall be allowed for amounts paid or accrued for suc4 ta&es and carrying charges as, under regulations prescri*ed *" t4e Secretar" or 4is delegate, are c4argea*le to capital account $it4 respect to propert", if the taxpayer elects, in accordance $it4 suc4 regulations, to treat such ta&es orcharges as so chargeable/L At t4e same time, under t4e adjustment o% *asis pro)isions $4ic4 4a)e just *een discussed, it is pro)ided t4at adjustment s4all *e made %or all Le&penditures, receipts, losses, or ot4er itemsL properl" c4argea*le to a capital account, t4us including ta&es and carr"ing c4arges? 4o$e)er, an exception exists, in which event such ad%ustment to the capital account is not made, with respect to taxes and carrying charges which the taxpayer has not elected to capitali&e but for which a deduction instead has been ta'en/ DD IEmp4asis supplied, 24e Lcarr"ing c4argesL $4ic4 ma" *e capitalized under t4e a*o)e quoted pro)isions o% t4e !/S/ Internal e)enue Code include, as t4e CI 4as pointed out, interest on a loan LI*ut not t4eoretical interest o% a ta&pa"er using 4is o$n %unds,/L 94at t4e CI %ailed to point out is t4at such Lcarrying chargesL may, at t4e election o% t4e ta&pa"er, either be (a) capitali&ed in $4ic4 case t4e cost *asis o% t4e capital assets,
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 income. (Emphases supplied)
+G

e/g/, mac4iner" and equipment, $ill *e adjusted *" adding t4e amount o% suc4 interest pa"ments or alternati)el", *e (b) deducted from gross income o% t4e ta&pa"er/ S4ould t4e ta&pa"er elect to deduct t4e interest pa"ments against its gross income, t4e ta&pa"er cannot at the same time capitalize t4e interest pa"ments/ In ot4er $ords, t4e ta&pa"er is not entitled to both the deduction from gross income and the ad%usted (increased) basis %or determining gain or loss and t4e allo$a*le depreciation c4arge/ 24e !/S/ Internal e)enue Code does not prohibit the deduction of interest on a loan o*tained %or purc4asing mac4iner" and equipment against gross income, unless t4e ta&pa"er 4as also or previously capitali&ed the same interest payments and t4ere*" adjusted t4e cost *asis o% suc4 assets/
!nder t4e la$, %or interest to *e deducti*le, it must *e s4o$n t4at t4ere *e an inde*tedness, t4at t4ere s4ould *e interest upon it, and t4at $4at is claimed as an interest deduction s4ould 4a)e *een paid or accrued $it4in t4e "ear/ It is 4ere conceded t4at t4e interest paid *" respondent $as in consequence o% t4e late pa"ment o% 4er donorKs ta&, and t4e same $as paid $it4in t4e "ear it is soug4t to *e declared/ 2o sustain t4e proposition t4at t4e interest pa"ment in question is not deducti*le %or t4e purpose o% computing respondentKs net income, petitioner relies 4ea)il" on section 7G o% e)enue egulation No/ 0 I=no$n as Income 2a& egulation, promulgated *" t4e Department o% Finance, $4ic4 pro)ides t4at Lt4e $ord Rta&esK means ta&es proper and no deductions s4ould *e allo$ed %or amounts representing interest, surc4arge, or penalties incident to delinquenc"/L 24e court *elo$, 4o$e)er, 4eld section 7G as inapplica*le to t4e instant case *ecause $4ile it implements sections 1GIc, o% t4e 2a& Code go)erning deduction o% ta&es, t4e respondent ta&pa"er see=s to come under section 1GI*, o% t4e same Code pro)iding %or deduction o% interest on inde*tedness/ ISSUE: 94et4er or not suc4 interest $as paid upon an inde*tedness $it4in t4e contemplation o% section 1G I*, I+, o% t4e 2a& CodeQ RULING: <es/ According to t4e Supreme Court, alt4oug4 interest pa"ment %or delinquent ta&es is not deducti*le as ta& under Section 1GIc, o% t4e 2a& Code and section 7G o% t4e Income 2a& egulations, t4e ta&pa"er is not precluded t4ere*" %rom claiming said interest pa"ment as deduction under section 1GI*, o% t4e same Code/ SEC/ 1G Deductions from gross income/ P In computing net income t4ere s4all *e allo$ed as deductions P I*, Interest>
CIR v VDA DE PRIETO FACTS: ;n Decem*er @, +6@A, t4e respondent con)e"ed *" $a" o% gi%ts to 4er %our c4ildren, namel", Antonio, (enito, Carmen and Mauro, all surnamed Prieto, real propert" $it4 a total assessed )alue o% P760,@6J/AG/ A%ter t4e %iling o% t4e gi%t ta& returns on or a*out Fe*ruar" +, +6A@, t4e petitioner Commissioner o% Internal e)enue appraised t4e real propert" donated %or gi%t ta& purposes at P+,01+,087/GG, and assessed t4e total sum o% P++J,JG8/AG as donorKs gi%t ta&, interest and compromises due t4ereon/ ;% t4e total sum o% P++J,JG8/AG paid *" respondent on April 06, +6A@, t4e sum o% PAA,6J7/8A represents t4e total interest on account o% deliquenc"/ 24is sum o% PAA,6J7/8A $as claimed as deduction, among ot4ers, *" respondent in 4er +6A@ income ta& return/ Petitioner, 4o$e)er, disallo$ed t4e claim and as a consequence o% suc4 disallo$ance assessed respondent %or +6A@ t4e total sum o% P0+,@+G/17 as de%icienc" income ta& due on t4e a%oresaid PAA,6J7/8A, including interest up to Marc4 1+, +6AJ, surc4arge and compromise %or t4e late pa"ment/
++

I+, In general/ P 24e amount o% interest paid $it4in t4e ta&a*le "ear on inde*tedness, e&cept on inde*tedness incurred or continued to purc4ase or carr" o*ligations t4e interest upon $4ic4 is e&empt %rom ta&ation as income under t4is 2itle/ 24e term Linde*tednessL as used in t4e 2a& Code o% t4e !nited States containing similar pro)isions as in t4e a*o)eFquoted section 4as *een de%ined as an unconditional and legall" en%orcea*le o*ligation %or t4e pa"ment o% mone"/ 2o gi)e to t4e quoted portion o% section 7G o% our Income 2a& egulations t4e meaning t4at t4e petitioner gi)es it $ould run counter to t4e pro)ision o% section 1GI*, o% t4e 2a& Code and t4e construction gi)en to it *" courts in t4e !nited States/ Suc4 e%%ect $ould t4us ma=e t4e regulation in)alid %or a Lregulation $4ic4 operates to create a rule out o% 4armon" $it4 t4e statute, is a mere nullit"/L As alread" stated, section 7G implements onl" section 1GIc, o% t4e 2a& Code, or t4e pro)ision allo$ing deduction o% ta&es, $4ile 4erein respondent see=s to *e allo$ed deduction under section 1GI*,, $4ic4 pro)ides %or deduction o% interest on inde*tedness/
BIR RULING NO 55EA55
!axes
CIR v LEDNIC<F
(osses
PAPER INDUSTRIES v CA 6 De-. 93 9>>?7
24e Paper Industries Corporation o% t4e P4ilippines ILPicopL,, is a P4ilippine corporation
registered $it4 t4e (oard o% In)estments IL(;IL, as
a pre%erred pioneer enterprise $it4 respect to its integrated pulp and paper mill, and as a pre%erred non)pioneer enterprise $it4 respect to its integrated pl"$ood and )eneer mills/ In +686, +6J0 and +6JJ, Picop o*tained loans %rom %oreign creditors in order to %inance t4e purc4ase o% mac4iner" and equipment needed %or its operations/ Picop also issued promissor" notes o% a*out P01GM, on $:c it paid P@AM in interest/ In its +6JJ Income 2a& eturn, Picop claimed t4e interest pa"ments on t4e loans as DED!C2I;NS %rom its +6JJ gross income/ 24e CI disallo$ed t4is deduction upon t4e ground t4at, *ecause t4e loans 4ad *een incurred %or t4e purc4ase o% mac4iner" and equipment, t4e interest pa"ments on t4ose loans s4ould 4a)e *een capitalized instead and claimed as a depreciation deduction ta=ing into account t4e adjusted *asis o% t4e mac4iner" and equipment Ioriginal acquisition cost plus interest c4arges, o)er t4e use%ul li%e o% suc4 assets/ I> 9:n t4e interest pa"ments can *e deducted %rom gross income S <ES transaction ta& > 24e +6JJ NI C does not pro4i*it t4e deduction o% interest on a loan incurred %or acquiring mac4iner" and equipment/ Neit4er does our +6JJ NI C compel t4e capitalization o% interest pa"ments on suc4 a loan/ 24e +6JJ 2a& Code is simpl" silent on a ta&pa"erKs rig4t to elect one or t4e ot4er ta& treatment o% suc4 interest pa"ments/ Accordingl", t4e general rule t4at interest pa"ments on a legall" demanda*le loan are deducti*le %rom gross income must *e applied/ In t4is case, t4e CI does not dispute t4at t4e interest pa"ments $ere made *" Picop on loans incurred in connection with the carrying on of the registered operations of Picop, i/e/, t4e %inancing o% t4e purc4ase o% mac4iner" and equipment actuall" used in t4e registered operations o% Picop/ Neit4er does t4e CI den" t4at suc4 interest pa"ments $ere legally due and demandable under t4e
+0

terms o% suc4 loans, and in %act paid *" Picop during t4e ta& "ear +6JJ/ 24e CI 4as *een una*le to point to an" pro)ision o% t4e +6JJ 2a& Code or an" ot4er Statute t4at requires t4e disallo$ance o% t4e interest pa"ments made *" Picop/ 2MIS PA 2 DI T; S!PE MA-E2S> 24e CI in)o=es Section J6 o% e)enue egulations No/ 0 $:c pro)ides t4at Interest calculated %or costF=eeping or ot4er purposes on account o% capital or surplus in)ested in t4e *usiness, which does not represent a charge arising under an interest)bearing obligation , is not allo$a*le deduction %rom gross income/ It is claimed *" t4e CI t4at Section J6 o% e)enue egulations No/ 0 $as Lpatterned a%terL paragrap4 +/088F+ I*,, entitled L2a&es and Carr"ing C4arges C4argea*le to Capital Account and 2reated as Capital ItemsL o% t4e !/S/ Income 2a& egulations, $4ic4 paragrap4 reads as %ollo$s> I(, !axes and "arrying "harges/ P 24e items t4us c4argea*le to capital accounts are P I++, In t4e case o% real propert", $4et4er impro)ed or unimpro)ed and $4et4er producti)e or nonproducti)e/ Ia, Interest on a loan I*ut not t4eoretical interest o% a ta&pa"er using 4is o$n %unds,/ D9
accrued for suc4 ta&es and carrying charges as, under regulations prescri*ed *" t4e Secretar" or 4is delegate, are c4argea*le to capital account $it4 respect to propert", if the taxpayer elects, in accordance $it4 suc4 regulations, to treat such ta&es or charges as so chargeable/L At t4e same time, under t4e adjustment o% *asis pro)isions $4ic4 4a)e just *een discussed, it is pro)ided t4at adjustment s4all *e made %or all Le&penditures, receipts, losses, or ot4er itemsL properl" c4argea*le to a capital account, t4us including ta&es and carr"ing c4arges? 4o$e)er, an exception exists, in which event such ad%ustment to the capital account is not made, with respect to taxes and carrying charges which the taxpayer has not elected to capitali&e but for which a deduction instead has been ta'en/ 24e Lcarr"ing c4argesL $4ic4 ma" *e capitalized under t4e a*o)e quoted pro)isions o% t4e !/S/ Internal e)enue Code include, as t4e CI 4as pointed out, interest on a loan LI*ut not t4eoretical interest o% a ta&pa"er using 4is o$n %unds,/L 94at t4e CI %ailed to point out is t4at such Lcarrying chargesL may, at t4e election o% t4e ta&pa"er, either be (a) capitali&ed in $4ic4 case t4e cost *asis o% t4e capital assets, e/g/, mac4iner" and equipment, $ill *e adjusted *" adding t4e amount o% suc4 interest pa"ments or alternati)el", *e (b) deducted from gross income o% t4e ta&pa"er/ S4ould t4e ta&pa"er elect to deduct t4e interest pa"ments against its gross income, t4e ta&pa"er cannot at the same time capitalize t4e interest pa"ments/ In ot4er $ords, t4e ta&pa"er is not entitled to both the deduction from gross income and the ad%usted (increased) basis %or determining gain or loss and t4e allo$a*le depreciation c4arge/ 24e !/S/
24e truncated e&cerpt o% t4e !/S/ Income 2a& egulations quoted *" t4e CI needs to *e related to t4e rele)ant pro)isions o% t4e !/S/ Internal e)enue Code, $4ic4 pro)isions deal $it4 t4e general topic o% adjusted *asis %or determining allo$a*le gain or loss on sales or e&c4anges o% propert" and allo$a*le depreciation and depletion o% capital assets o% t4e ta&pa"er> Present #ule/ 24e Internal e)enue Code, and t4e egulations promulgated t4ereunder pro)ide t4at L$o deduction shall be allowed for amounts paid or
+1

Internal e)enue Code does not prohibit the deduction of interest on a loan o*tained %or purc4asing mac4iner" and equipment against gross income, unless t4e ta&pa"er 4as also or previously capitali&ed the same interest payments and t4ere*" adjusted t4e cost *asis o% suc4 assets/ BIR RULING 45A55
issued, *eing original issuances, are su*ject to t4e DS2 imposed under Section +JA o% t4e 2a& Code at t4e rate o% P0 on eac4 P0GG, or %ractional part t4ereo%, o% t4e par )alue o% t4e ne$ epu*lic s4ares issued/ 24e net operating losses o% eac4 o% epu*lic, Fortune, MPCC and Iligan are preser)ed a%ter t4e proposed s4are s$ap and ma" *e carried o)er and claimed as a deduction %rom t4eir respecti)e gross income, pursuant to Section 1@ID,I1, o% t4e 2a& Code, *ecause t4ere is no su*stantial c4ange in t4e eit4er epu*lic or Fortune or MPCC or Iligan/L
D&.e$t o( BIR R*)&n. No. 545AD555 +%te+ A*.*$t 953 D555
INCOME TAX; T%'A(ree 2er.er *n+er -ert%&n -on+&t&on F Pursuant to Section @GIc,I0, o% t4e 2a& Code, no gain or loss s4all *e recognized *" (lue Circle P4ilippines, Inc/ I(CPI,, ound o"al, Inc/ I I,, SM In)estment Corporation ISMIC,, S"smart Corporation and C-.E Moldings on t4e trans%er o% t4eir Fortune, Neus and Iligan s4ares to epu*lic, in e&c4ange %or ne epu*lic s4ares, *ecause t4e" toget4er 4old more t4an A+5 o% t4e total )oting stoc= o% epu*lic a%ter t4e trans%er/ 24e trans%er t4roug4 t4e %acilities o% t4e PSE *" t4e 8t4 to t4e last trans%eror o% t4eir Fortune and Neus s4ares to epu*lic in e&c4ange %or ne$ epu*lic s4ares $ill *e su*ject to t4e O o% +5 stoc= transaction ta& *ased on t4e gross selling price or gross )alue in mone" o% t4e s4ares trans%erred, $4ile t4e 8t4 to t4e last trans%eror o% t4e Iligan s4ares $ill *e su*ject to capital gains ta& IC-2, at t4e rate o% A5, o% t4e par )alue o% t4e s4ares trans%erred/ 24e ne$ epu*lic s4ares to *e +@
BIR RULING D5EA>5 24is is letter requesting in *e4al% o% Porcelana Mari$asa, Inc/ IPMI,, a ruling con%irming an opinion t4at t4e %oreign e&c4ange loss incurred *" PMI is a deducti*le loss in +66G/ It is represented t4at PMI is a corporation esta*lis4ed and organized under P4ilippine la$s? t4at it 4as e&isting !S dollar loans %rom Norita=e Compan", Himited INorita=e, and 2o"ota 2sus4o Corporation I2o"ota, in t4e aggregate amounts o% !S UJ,818,8J6/+J and !S U1,GA@,8J+/0J, respecti)el", t4at in +676, t4e parties agreed to con)ert t4e said dollar denominated loans into pesos at t4e e&c4ange rate pre)ailing on June 1G, +676? t4at in Decem*er +676, *ot4 agreements $ere appro)ed *" t4e Central (an= su*ject to t4e su*mission o% a cop" eac4 o% t4e signed agreements incorporating t4e con)ersion? t4erea%ter, dra%ts o% t4e amended agreements $ere su*mitted to t4e Central (an= %or preF appro)al? t4at on Januar" 06, +66G, t4e Central (an= ad)ised PMIKs counsel on t4eir %indings and comments on t4e said dra%ts $4ic4 $ere considered and incorporated in t4e %inal amended agreements? t4at in June +66G, t4e parties su*mitted to t4e Central

(an= t4e signed agreements? t4at counsel o% PMI is o% t4e opinion t4at in t4e case o% PMI, t4e resultant loss on con)ersion o% !S dollar denominated loans to peso is more t4an a s4rin=age in )alue o% mone"? t4at t4e appro)al *" t4e Central (an= and t4e signing *" t4e parties o% t4e agreements co)ering t4e said con)ersion esta*lis4ed t4e loss, a%ter $4ic4, t4e loss *ecame %inal and irre)oca*le, so t4at recoupment is reasona*l" impossi*le? and t4at 4a)ing *een %i&ed and determina*le, t4e loss is no longer suscepti*le to c4ange, 4ence, it could %airl" *e stated t4at suc4 4as *een sustained in a closed and completed transaction/ In repl" t4e commissioner in%ormed PMI t4at t4e annual increase in )alue o% an asset is not ta&a*le income *ecause suc4 increase 4as not "et *een realized/ 24e increase in )alue i/e/, t4e gain, could onl" *e ta&ed $4en a disposition o% t4e propert" occurred $4ic4 $as o% suc4 a nature as to constitute a realization o% suc4 gain, t4at is, a se)erance o% t4e gain %rom t4e original capital in)ested in t4e propert"/ 24e same conclusion o*tains as to losses/ 24e annual decline in t4e )alue o% propert" is not normall" allo$a*le as a deduction/ Mence, to *e allo$a*le t4e loss must *e realized/ 94en %oreign currenc" acquired in connection $it4 a transaction in t4e regular course o% *usiness is disposed ordinar" gain or loss results %rom t4e %luctuation/ 24e loss is deducti*le onl" %or t4e "ear it is actuall" sustained/ It is sustained during t4e "ear in $4ic4 t4e loss occurs as e)idenced *" t4e completed transaction and as %i&ed *" identi%ia*le occurring in t4at "ear/ No ta&ation e)ent 4as as "et *een consummated prior to t4e remittance o% t4e sc4eduled amortization/ Accordingl", PMIKs request %or con%irmation o% opinion $as denied considering t4at %oreign e&c4ange losses sustained as a result o% con)ersion or de)aluation o% t4e peso )isFaF)is t4e %oreign currenc" or !S dollar and )ice )ersa *ut $4ic4 remittance o% sc4eduled amortization consisting o% principal and interests pa"ment on a %oreign loan 4ad not actuall" *een made are not deducti*le %rom gross income %or income ta& purposes/
BIR RULING 9GGAH? I2ec4nicall", t4is ruling 4as no stated %acts/ It just said t4at a request %or ruling dated Jul" +, +67A $as sent to t4e (I %or t4e purpose o% clari%"ing t4e issue, as 4erein stated/,
FACTS: equest to clari%" t4e deducti*ilit" o% %oreign e&c4ange losses incurred *" reason o% t4e de)aluation o% t4e peso/ 24e losses arose %rom matured *ut unremitted principal repa"ments on loans a%%ected *" t4e de*tFrestructuring program in t4e P4ilippines/
ISSUE: 94et4er or not %oreign e&c4ange losses are deducti*le %or income ta& purposes/
ELD: N;/ 24e annual increase in )alue o% an asset is N;2 2AVA(HE INC;ME *ecause suc4 increase 4as not "et *een realized/ 24e increase in )alue, i/e/, t4e gain, could onl" *e ta&ed $4en a disposition o% t4e propert" occurred $4ic4 $as o% suc4 a nature as to constitute a realization o% suc4 gain, t4at is, a se)erance o% t4e gain %rom t4e original capital in)ested in t4e propert"/ 24e a%orementioned rule also applies to losses/ 24e annual decrease in t4e )alue o% propert" is not normall" allo$a*le as a loss/ Mence, to *e allo$a*le t4e loss must *e realized/
+A

94en %oreign currenc" acquired in connection $it4 a transaction in t4e regular course o% *usiness is disposed o%, ordinar" gain or loss results %rom t4e %oreign e&c4ange %luctuations/ 2ME H;SS IS DED!C2I(HE ;NH< F; 2ME <EA I2 IS AC2!AHH< S!S2AINED/ 24us, t4ere is no ta&a*le e)ent prior to t4e remittance o% t4e sc4eduled amortization/
a/ Funds a)aila*le %or P4ile& management agreement? and */
Mining
during
t4e
Compensation to P4ile& Mining $4ic4 s4all *e %i%t" per cent IAG5, o% t4e net pro%it?
Accordingl", %oreign e&c4ange losses sustained as a result o% de)aluation o% t4e peso )isFaF)is t4e %oreign currenc" e/g/, !S dollar, *ut $4ic4 remittance o% sc4eduled amortization consisting o% principal and interests pa"ments on a %oreign loan 4as not actuall" *een made are N;2 DED!C2I(HE %rom gross income %or income ta& purposes/
In t4e course o% managing and operating t4e project, P4ile& Mining made ad)ances o% cas4 and propert" in accordance $it4 t4e agreement/ Mo$e)er, t4e mine su%%ered continuing losses o)er t4e "ears $4ic4 resulted to petitionerKs $it4dra$al as manager and cessation o% mine operations/ 24e parties e&ecuted a LCompromise $it4 Dation in Pa"mentL $4erein (aguio -old admitted an inde*tedness to P4ile& Mining, $4ic4 $as su*sequentl" amended to include additional o*ligations/ Su*sequentl", P4ile& Mining $rote o%% in its +670 *oo=s o% account t4e remaining outstanding inde*tedness o% (aguio -old *" c4arging P++0,+18,GGG/GG to allo$ances and reser)es t4at $ere set up in +67+ and P0,78G,J87/GG to t4e +670 operations/ In its +670 annual income ta& return, P4ile& Mining deducted %rom its gross income t4e amount o% P++0,+18,GGG/GG as Lloss on settlement o% recei)a*les %rom (aguio -old against reser)es and allo$ances/L Mo$e)er, (I disallo$ed t4e amount as deduction %or *ad de*t and assessed petitioner a de%icienc" income ta& o% P80,7++,+8+/16/ I$$*e> 94et4er t4e deduction %or *ad de*ts $as )alidQ e)+> No/ For a deduction %or *ad de*ts to *e allo$ed, all requisites must *e satis%ied, to $it> Ia, t4ere $as a )alid and e&isting de*t? I*, t4e de*t $as ascertained to *e $ort4less? and Ic, it $as c4arged o%% $it4in t4e ta&a*le "ear $4en it $as determined to *e $ort4less/
NOTE: 2o sustain a loss means t4at t4e loss 4as occurred as e)idenced *" a closed and completed transaction and as %i&ed *" identi%ia*le e)ents occurring in t4at "ear/ A closed transaction is a ta&a*le e)ent $4ic4 4as *een consummated/
*ad debts
P ILEX MINING v CIR F%-t$> P4ile& Mining entered into a management agreement $it4 (aguio -old/ 24e partiesK agreement $as denominated as LPo$er o% Attorne"L $4ic4 pro)ided among ot4ers>
+8

24ere $as no )alid and e&isting de*t/ 24e nature o% agreement *et$een P4ile& Mining and (aguio -old is t4at o% a partners4ip or joint )enture/ !nder a contract o% partners4ip, t$o or more persons *ind t4emsel)es to contri*ute mone", propert", or industr" to a common %und, $it4 t4e intention o% di)iding t4e pro%its among t4emsel)es/ Perusal o% t4e agreement denominated as t4e LPo$er o% Attorne"L indicates t4at t4e parties 4ad intended to create a partners4ip and esta*lis4 a common %und %or t4e purpose/ 24e" also 4ad a joint interest in t4e pro%its o% t4e *usiness as s4o$n *" a AGFAG s4aring in t4e income o% t4e mine/ #ie$ed %rom t4is lig4t, t4e ad)ances can *e c4aracterized as petitionerDs in)estment in a partners4ip $it4 (aguio -old %or t4e de)elopment and e&ploitation o% t4e Sto/ Nino mine/ Since t4e ad)anced amount partoo= o% t4e nature o% an in)estment, it could not *e deducted as a *ad de*t %rom petitionerKs gross income/
allo$ing 1 accounts to *e claimed as deductions/ Mo$e)er, +1 supposed B*ad de*tsE $ere disallo$ed as t4e C2A claimed t4at t4ese $ere not su*stantiated and did not satis%" t4e jurisprudential requirement o% B$ort4lessness o% a de*tE 24e CA denied t4e petition %or re)ie$/
ISSUE: 94et4er or not t4e CA $as correct in disallo$ing t4e +1 accounts as *ad de*ts/
RULING:<ES/ (ot4 t4e C2A and CA relied on t4e case o% Collector )s/ -oodric4 International, $4ic4 laid do$n t4e requisites %or B$ort4lessness o% a de*tE to $it> In said case, $e 4eld t4at %or de*ts to *e considered as L$ort4less,L and t4ere*" quali%" as L*ad de*tsL ma=ing t4em deducti*le, t4e ta&pa"er s4ould s4o$ t4at 697 t,ere &$ % v%)&+ %n+ $*0$&$t&n. +e0t. 6D7 t,e +e0t 2*$t 0e %-t*%))/ %$-ert%&ne+ to 0e 1ort,)e$$ %n+ *n-o))e-t&0)e +*r&n. t,e t%'%0)e /e%r; 647 t,e +e0t 2*$t 0e -,%r.e+ o(( +*r&n. t,e t%'%0)e /e%r; %n+ 6G7 t,e +e0t 2*$t %r&$e (ro2 t,e 0*$&ne$$ or tr%+e o( t,e t%'#%/er. A++&t&on%))/3 0e(ore % +e0t -%n 0e -on$&+ere+ 1ort,)e$$3 t,e t%'#%/er 2*$t %)$o $,o1 t,%t &t &$ &n+ee+ *n-o))e-t&0)e even &n t,e (*t*re. Furt4ermore, t4ere are steps outlined to *e underta=en *" t4e ta&pa"er to pro)e t4at 4e e&erted diligent e%%orts to collect t4e de*ts, vi&/> 697 $en+&n. o( $t%te2ent o( %--o*nt$; 6D7 $en+&n. o( -o))e-t&on )etter$; 647 .&v&n. t,e %--o*nt to % )%1/er (or -o))e-t&on; %n+ 6G7 (&)&n. % -o))e-t&on -%$e &n -o*rt. P C onl" used t4e testimon" o% its accountant Ms/ Masagana in order to pro)e t4at t4ese accounts $ere *ad de*ts/ 24is $as considered *" all 1 courts to *e sel%Fser)ing/ 24e SC said t4at P C %ailed to e&ercise due diligence in order to ascertain t4at t4ese
P ILIPPINE REFINING CO v CA FACTS: P4ilippine e%ining Corp IP C, $as assessed de%icienc" ta& pa"ments %or t4e "ear +67A in t4e amount o% around +/7M/ 24is %igure $as computed *ased on t4e disallo$ance o% t4e claim o% *ad de*ts *" P C/ P C dul" protested t4e assessment claiming t4at under t4e la$, *ad de*ts and interest e&pense are allo$a*le deductions/ 94en t4e (I su*sequentl" garnis4ed some o% P CDs properties, t4e latter considered t4e protest as *eing denied and %iled an appeal to t4e C2A $4ic4 set aside t4e disallo$ance o% t4e interest e&pense and modi%ied t4e disallo$ance o% t4e *ad de*ts *"
+J

de*ts $ere uncollecti*le/ In %act, P C did not e)en s4o$ t4e demand letters t4e" allegedl" ga)e to some o% t4eir de*tors/ FERNANDE" Facts> Fernandez Mermanos is an in)estment compan"/ 24e CI assessed it %or alleged de%icienc" income ta&es/ It claimed as deduction, among ot4ers, losses in or *ad de*ts o% Pala$an Manganese Mines Inc/ $4ic4 t4e CI disallo$ed and $as sustained *" t4e C2A/ ERMANOS v CIR
E)en assuming t4at t4ere $as )alid or su*sisting de*t, t4e de*t $as not deducti*le in +6A+ as a $ort4less de*t as Pala$an $as still in operation in +6A+ and +6A0 as Fernandez continued to gi)e ad)ances in t4ose "ears/ It 4as *een 4eld t4at i% t4e de*tor corporation alt4oug4 losing mone" or insol)ent $as still operating at t4e end o% t4e ta&a*le "ear, t4e de*t is not considered $ort4less and t4ere%ore not deducti*le/
Depreciation
BASILAN ESTATES v CIR
Issue> 9:N disallo$ance is correct
LIMPAN INVESTMENT v CIR FAC2S>
Meld> <ES It $as s4o$n t4at Pala$an Manganese Mines soug4t %inancial 4elp %rom Fernandez to resume its mining operations 4ence a Memorandum o% Agreement IM;A, $as e&ecuted $4ere Fernandez $ould gi)e "earl" ad)ances to Pala$an/ (ut it still continued to su%%er loses and Fernandez realized it could no longer reco)er t4e ad)ances 4ence claimed it as $ort4less/ Hoo=ing at t4e M;A, Fernandez did not e&pect to *e repaid/ 24e consideration %or t4e ad)ances $as +A5 o% t4e net pro%its/ I% t4ere $ere no earnings or pro%its t4ere $as no o*ligation to repa"/ #oluntar" ad)ances $it4out e&pectation o% repa"ment do not result in deducti*le losses/ Fernandez cannot e)en sue %or reco)er" as t4e o*ligation to repa" $ill onl" arise i% t4ere $as net pro%its/ No *ad de*t could arise $4ere t4ere is no )alid and su*sisting de*t/
(I assessed de%icienc" ta&es on Himpan Corp, a compan"t4at leases real propert", %or underdeclaring its rental income%or "ears +6A8FAJ *" around P0GT and P7+T respecti)el"/Petitioner appeals on t4e ground t4at portions o% t4eseunderdeclared rents are "et to *e collected *" t4e pre)iouso$ners and turned o)er or recei)ed *" t4e corporation/Petitioner cited t4at some rents $ere deposited $it4 t4e court,suc4 t4at t4e corporation does not 4a)e actual nor constructi)econtrol o)er t4em/24e sole $itness %or t4e petitioner, Solis ICorporate Secretar"F2reasurer, admitted to some undeclared rents in +6A8 and+6AJ, and t4at some *alances $ere not collected *" t4ecorporation in +6A8 *ecause t4e lessees re%used to recognizeand pa" rent to t4e ne$ o$ners and t4at t4e corpDs presidentIsa*elo Him collected some rent and reported it in 4is personalincome statement, *ut did not turn o)er t4e rent to t4ecorporation/ Me also cites lac= o% actual or constructi)e controlo)er rents deposited $it4 t4e court/ ISS!E> 9;N t4e (I $as correct in assessing de%icienc" ta&esagainst Himpan Corp/ %or undeclared rental income
+7

MEHD> <es/ Petitioner admitted t4at it indeed 4ad undeclaredincome Ialt4oug4 onl" a part and not t4e %ull amount assessed*" (I ,/ 24us, it 4as *ecome incum*ent upon t4em to pro)et4eir e&cuses *" clear and con)incing e)idence, $4ic4 it 4as%ailed to do/Issue> 94en is t4ere constructi)e receipt o% rentQ9it4 regard to +6AJ rents deposited $it4 t4e court, and$it4dra$n onl" in +6A7, t4e court )ie$ed t4e corporation as4a)ing constructi)el" recei)ed said rents/ 24e nonFcollection$as t4e petitionerDs %ault since it re%used to re%used to acceptt4e rent, and not due to nonFpa"ment o% lessees/ Mence,alt4oug4 t4e corporation did not actuall" recei)e t4e rent, it isdeemed to 4a)e constructi)el" recei)ed t4em/
Sec/ 1@IM,Il, o% t4e NI C1 speci%icall" mentions Laccredited domestic corporation or associationsL and LnonFgo)ernment organizationsL/ ;n t4e ot4er 4and, su*paragrap4 I0,Ic, o% t4e same Section o% t4e 2a& Code de%ines a LnonFgo)ernment organizationL to mean a nonFpro%it domestic corporation/ In implementing Sec/ 1@IM, o% t4e NI C, +1F67@ $as issued and in relation to t4e t"pe o% entities t4at ma" *e accredited, $4ic4 speci%icall" re%ers to organizations or associations created or organized under P4ilippine la$s/
1
IM, C4arita*le and ;t4er Contri*utions/ P
Depletion
CONSOLIDATED MINES v CTA BIR RULING 9>A59 FACTS: ;n ;cto*er 1, 0GGG, t4e P4ilippine Council %or N-; Certi%ication IPCNC, sent a request %or ruling to t4e (I , mainl" to see= an opinion i% Conser)ation International ICI,, an international organization, can *e granted a donee institution status/ Note t4at CIDs 4ome o%%ice and *oard mem*ers are *ased a*road, 4ence, PCNCDs e)aluation process on go)ernance cannot *e %ull" e&ecuted/ ISSUE: 94et4er or not international organizations $it4 4ome o%%ices a*road are quali%ied to *e granted donee institution status/ ELD: N;/
Il, In -eneral/ P Contri*utions or gi%ts actuall" paid or made $it4in t4e ta&a*le "ear to, or %or t4e use o% t4e -o)ernment o% t4e P4ilippines or an" o% its agencies or an" political su*di)ision t4ereo% e&clusi)el" %or pu*lic purposes, or to accredited domestic corporations or associations organized and operated e&clusi)el" %or religious, c4arita*le, scienti%ic, "out4 and sports de)elopment, cultural or educational purposes or %or t4e re4a*ilitation o% )eterans, or to social $el%are institutions or to nonFgo)ernment organizations, in accordance $it4 rules and regulations promulgated *" t4e Secretar" o% Finance, upon recommendation o% t4e Commissioner, no part o% t4e net income o% $4ic4 inures to t4e *ene%it o% an" pri)ate stoc=4older or indi)idual in an amount not in e&cess o% ten percent I+G5, in t4e case o% an indi)idual, and %i)e percent IA5, in t4e case o% a corporation o% t4e ta&pa"erKs ta&a*le income deri)ed %rom trade, *usiness or pro%ession as computed $it4out t4e *ene%it o% t4is and t4e %ollo$ing su*paragrap4sL/
@
SEC/ +/ De%inition o% 2erms/ P For purposes o% t4ese enumerated s4all 4a)e t4e %ollo$ing meanings>
egulations, t4e terms 4erein
a, LNonFstoc=, nonFpro%it corporation or organizationL P s4all re%er to a corporation or association: organization re%erred to under Section 1G IE, and I-, o% t4e 2a& Code created or organized under P4ilippine la$s e&clusi)el" %or one or more o% t4e %ollo$ing purposes> &&& &&& &&&
*, LNonFgo)ernment ;rganization IN-;,L P s4all re%er to a nonFstoc=, nonFpro%it domestic corporation or organization as de%ined under Section 1@IM,I0,Ic, o% t4e 2a& Code organized and operated e&clusi)el" / / /L
+6

24us, t4e (I opined t4at a nonFstoc=, nonFpro%it corporation or organization must *e created or organized under P4ilippine Ha$s and t4at an N-; must *e a nonFpro%it domestic corporation, t4is ;%%ice is o% t4e opinion t4at a %oreign corporation, li=e Conser)ation International, $4et4er resident or nonFresident, cannot *e accredited as donee institution/
4M P ILIPPINES v CIR F%-t$> 1M P4ilippines, Inc/ is a su*sidiar" o% t4e Minnesota Mining and Manu%acturing Compan" Ior L1MFSt/ PaulL, a nonFresident %oreign corporation $it4 principal o%%ice in St/ Paul, Minnesota, !/S/A/ It is t4e e&clusi)e importer, manu%acturer, $4olesaler, and distri*utor in t4e P4ilippines o% all products o% 1MFSt/ Paul/ 2o ena*le it to manu%acture, pac=age, promote, mar=et, sell and install t4e 4ig4l" specialized products o% its parent compan", and render t4e necessar" postFsales ser)ice and maintenance to its customers, 1M P4ils/ entered into a LSer)ice In%ormation and 2ec4nical Assistance AgreementL and a LPatent and 2rademar= Hicense AgreementL $it4 t4e latter under $4ic4 t4e 1m P4ils/ agreed to pa" to 1MFSt/ Paul a tec4nical ser)ice %ee o% 15 and a ro"alt" o% 05 o% its net sales/ (ot4 agreements $ere su*mitted to, and appro)ed *", t4e Central (an= o% t4e P4ilippines/ t4e petitioner claimed t4e %ollo$ing deductions as *usiness e&penses> Ia, ro"alties and tec4nical ser)ice %ees o% P 1,GAG,8@8/GG? and I*, preFoperational cost o% tape coater o% P6J,@7A/G7/ As to Ia,, t4e Commissioner o% Internal e)enue allo$ed a deduction o% PJ6J,G@8/G6 onl" as tec4nical ser)ice %ee and ro"alt"
%or locall" manu%actured products, *ut disallo$ed t4e sum o% P0,101,A66/G0 alleged to 4a)e *een paid *" t4e petitioner to 1MFSt/ Paul as tec4nical ser)ice %ee and ro"alt" on P@8,@J+,667/GG $ort4 o% %inis4ed products imported *" t4e petitioner %rom t4e parent compan", on t4e ground t4at t4e %ee and ro"alt" s4ould *e *ased onl" on locall" manu%actured goods/ 94ile as to I*,, t4e CI onl" allo$ed P+6,A@@/JJ or oneF%i%t4 I+:A, o% 1M P4ils/capital e&penditure o% P6J,G@8/G6 %or its tape coater $4ic4 $as installed in +6J1 *ecause suc4 e&penditure s4ould *e amortized %or a period o% %i)e IA, "ears, 4ence, pa"ment o% t4e disallo$ed *alance o% PJJ,J@G/17 s4ould *e spread o)er t4e ne&t %our I@, "ears/ 24e CI ordered 1M P4il/ to pa" P7@G,A@G as de%icienc" income ta& on its +6J@ return, plus P1A1,G08/7G as +@5 interest per annum %rom Fe*ruar" +A, +6JA to Fe*ruar" +A, +6J8, or a total o% P+,+61,A88/7G/ 1M P4ils/ protested t4e CI Ds assessment *ut it did not ans$er t4e protest, instead issuing a $arrant o% le)"/ 24e C2A a%%irmed t4e assessment on appeal/ Issue> 94et4er or not 1M P4ils is entitled to t4e deductions due to ro"altiesQ uling> No/ C( Circular No/ 161 I egulations -o)erning o"alties: entals, dated Decem*er J, +6J1 $as promulgated *" t4e Central (an= as an e&c4ange control regulation to conser)e %oreign e&c4ange and a)oid unnecessar" drain on t4e countr"Ks international reser)es I86 ;/-/ No/ A+, pp/ ++J1JF17,/ Section 1FC o% t4e circular pro)ides t4at ro"alties s4all *e paid onl" on commodities manu%actured *" t4e licensee under t4e ro"alt" agreement>
0G

Section 1/ equirements %or Appro)al and egistration/ P 24e requirements %or appro)al and registration as pro)ided %or in Section 0 a*o)e include, *ut are not limited to t4e %ollo$ing> a/ &&& &&& &&&
rentals or ot4er pa"ments required to *e made as a condition to t4e continued use or possession, %or t4e purpose o% t4e trade, pro%ession or *usiness, %or propert" to $4ic4 t4e ta&pa"er 4as not ta=en or is not ta=ing title or in $4ic4 4e 4as no equit"/ Petitioner points out t4at t4e Central *an= L4as no sa" in t4e assessment and collection o% internal re)enue ta&es as suc4 po$er is lodged in t4e (ureau o% Internal e)enue,L t4at t4e 2a& Code Lne)er mentions Circular 161 and t4ere is no la$ or regulation go)erning deduction o% *usiness e&penses t4at re%ers to said circular/L Ip/ 6, Petition/, 24e argument is specious, %or, alt4oug4 t4e 2a& Code allo$s pa"ments o% ro"alt" to *e deducted %rom gross income as *usiness e&penses, it is C( Circular No/ 161 t4at de%ines $4at ro"alt" pa"ments are proper/ Mence, improper pa"ments o% ro"alt" are not deducti*le as legitimate *usiness e&penses/ ESSO STANDARD v CIR FACTS: ESS; deducted %rom its gross income, as part o% its ordinar" and necessar" *usiness e&penses, t4e amount it 4ad spent %or drilling and e&ploration o% its petroleum concessions/ 24is claim $as disallo$ed *" t4e CI on t4e ground t4at t4e e&penses s4ould *e capitalized and mig4t *e $ritten o%% as a loss onl" $4en a Ldr" 4oleL s4ould result/ ESS; t4en %iled an amended return and claimed as ordinar" and necessar" e&penses 2%r.&n (ee$ it 4ad paid to t4e Central (an= on its pro%it remittances to its Ne$ <or= 4ead o%%ice/ 24e CI disallo$ed t4e claimed deduction %or t4e margin %ees paid/ CI assessed ESS; a de%icienc" income ta& $4ic4 arose %rom t4e disallo$ance o% t4e margin %ees/
*/ &&& &&& &&& c/ 24e ro"alt":rental contracts in)ol)ing manu%acturingK ro"alt", e/g/, actual trans%ers o% tec4nological ser)ices suc4 as secret %ormula:processes, tec4nical =no$ 4o$ and t4e li=e s4all not e&ceed %i)e IA, per cent o% t4e $4olesale price o% t4e commodit":ties manu%actured under t4e ro"alt" agreement/ For contracts in)ol)ing Kmar=etingK ser)ices suc4 as t4e use o% %oreign *rands or trade names or trademar=s, t4e ro"alt":rental rate s4all not e&ceed t$o I0, per cent o% t4e $4olesale price o% t4e commodit":ties manu%actured under t4e ro"alt" agreement/ 24e producerKs or %oreign licensorKs s4are in t4e proceeds %rom t4e distri*ution:e&4i*ition o% t4e %ilms s4all not e&ceed si&t" I8G, per cent o% t4e net proceeds Igross proceeds less local e&penses, %rom t4e e&4i*ition:distri*ution o% t4e %ilms/ /// IEmp4asis supplied/, Ip/ 0J, ollo/, Clearl", no ro"alt" is pa"a*le on t4e $4olesale price o% %inis4ed products imported *" t4e licensee %rom t4e licensor/ Mo$e)er, petitioner argues t4at t4e la$ applica*le to its case is onl" Section 06Ia,I+, o% t4e 2a& Code $4ic4 pro)ides> Ia, E&penses/ P I+, (usiness e&penses/ P IA, In general/ P All ordinar" and necessar" e&penses paid or incurred during t4e ta&a*le "ear in carr"ing on an" trade or *usiness, including a reasona*le allo$ance %or salaries or ot4er compensation %or personal ser)ices actuall" rendered? tra)elling e&penses $4ile a$a" %rom 4ome in t4e pursuit o% a trade, pro%ession or *usiness,
0+

ESS; paid under protest and claimed %or a re%und/ CI denied t4e claims %or re%und, 4olding t4at t4e margin %ees paid to t4e Central (an= could not *e considered ta&es or allo$ed as deducti*le *usiness e&penses/ ISSUES: +/ $:n margin %ee is a ta& and s4ould *e deducti*le %rom ESS;Ds gross income/ N; 0/ I% margin %ees are not ta&es, $:n t4e" s4ould ne)ert4eless *e considered necessar" and ordinar" *usiness e&penses and t4ere%ore still deducti*le %rom its gross income/ N;/ ELD: +/ N;/ A margin is not a ta& *ut an e&action designed to cur* t4e e&cessi)e demands upon our international reser)es/ 24e margin %ee $as imposed *" t4e State in t4e e&ercise o% its police po$er and not t4e po$er o% ta&ation/ 0/ N;/ 2o *e deducti*le as a *usiness e&pense, t4ree conditions are imposed, namel"> I+, t4e e&pense must *e ordinar" and necessar", I0, it must *e paid or incurred $it4in t4e ta&a*le "ear, and I1, it must *e paid or incurred in carr"ing on a trade or *usiness/ In addition, not onl" must t4e ta&pa"er meet t4e *usiness test, 4e must su*stantiall" pro)e *" e)idence or records t4e deductions claimed under t4e la$, ot4er$ise, t4e same $ill *e disallo$ed/ 24e mere allegation o% t4e ta&pa"er t4at an item o% e&pense is ordinar" and necessar" does not justi%" its deduction/ ;rdinaril", an e&pense $ill *e considered Knecessar"K $4ere t4e e&penditure is appropriate and 4elp%ul in t4e de)elopment o% t4e ta&pa"erKs *usiness/ It is Kordinar"K $4en it connotes a pa"ment $4ic4 is normal in relation to t4e *usiness o% t4e ta&pa"er and t4e surrounding circumstances/ 24e term Kordinar"K does not require t4at t4e pa"ments *e 4a*itual or normal in t4e sense t4at t4e same ta&pa"er $ill 4a)e to ma=e t4em o%ten? t4e pa"ment ma" *e unique or nonFrecurring to t4e
particular ta&pa"er a%%ected/ 24ere is t4us no 4ard and %ast rule on t4e matter/ 24e rig4t to a deduction depends in eac4 case on t4e particular %acts and t4e relation o% t4e pa"ment to t4e t"pe o% *usiness in $4ic4 t4e ta&pa"er is engaged/ 24e intention o% t4e ta&pa"er o%ten ma" *e t4e controlling %act in ma=ing t4e determination/ Assuming t4at t4e e&penditure is ordinar" and necessar" in t4e operation o% t4e ta&pa"erKs *usiness, t4e ans$er to t4e question as to $4et4er t4e e&penditure is an allo$a*le deduction as a *usiness e&pense must *e determined %rom t4e nature o% t4e e&penditure itsel%, $4ic4 in turn depends on t4e e&tent and permanenc" o% t4e $or= accomplis4ed *" t4e e&penditure/ Since t4e margin %ees in question $ere incurred %or t4e remittance o% %unds to petitionerKs Mead ;%%ice in Ne$ <or=, $4ic4 is a separate and distinct income ta&pa"er %rom t4e *ranc4 in t4e P4ilippines, %or its disposal a*road, it can ne)er *e said t4ere%ore t4at t4e margin %ees $ere appropriate and 4elp%ul in t4e de)elopment o% petitionerKs *usiness in t4e P4ilippines e&clusi)el"/ ESS; 4as not s4o$n t4at t4e remittance to t4e 4ead o%%ice o% part o% its pro%its $as made in %urt4erance o% its o$n trade or *usiness and t4ere%ore cannot *e claimed as an ordinar" and necessar" e&pense paid or incurred in carr"ing on its o$n trade or *usiness/
00

R. CAPITAL GAINS %n+ LOSSES "apital assets

CALASAN" v CIR F%-t$: Petitioner !rsula Calasanz in4erited %rom 4er %at4er de 2orres an agricultural land located in izal $it4 an area o% +/8M sqm/ In order to liquidate 4er in4eritance, !rsula Calasanz 4ad t4e land sur)e"ed and su*di)ided into lots/ Impro)ements, suc4 as good roads, concrete gutters, drainage and lig4ting s"stem, $ere introduced to ma=e t4e lots salea*le/ Soon a%ter, t4e lots $ere sold to t4e pu*lic at a pro%it/ In t4eir joint income ta& return %or t4e "ear +6AJ %iled $it4 t4e (ureau o% Internal e)enue on Marc4 1+, +6A7, petitioners disclosed a pro%it o% P1+,G8G/G8 realized %rom t4e sale o% t4e su*di)ided lots, and reported %i%t" per centum t4ereo% or P+A,A1G/G1 as ta&a*le capital gains/ !pon an audit and re)ie$ o% t4e return t4us %iled, t4e e)enue E&aminer adjudged petitioners engaged in *usiness as real estate dealers, as de%ined in t4e NI C, and required t4em to pa" t4e real estate dealerKs ta& and assessed a de%icienc" income ta& on pro%its deri)ed %rom t4e sale o% t4e lots *ased on t4e rates %or ordinar" income/ 2a& court up4eld t4e %inding o% t4e CI , 4ence, t4e present appeal/ I$$*e$: a/ 94et4er or not petitioners are real estate dealers lia*le %or real estate dealerKs %i&ed ta&/ <ES */ 94et4er t4e gains realized %rom t4e sale o% t4e lots are ta&a*le in %ull as ordinar" income or capital gains ta&a*le at capital gain rates/ ; DINA < INC;ME R%t&o:
24e assets o% a ta&pa"er are classi%ied %or income ta& purposes into ordinar" assets and capital assets/ Section 1@'a3 '+3 o% t4e National Internal e)enue Code *roadl" de%ines capital assets as %ollo$s> '+3 Capital assets/F24e term Kcapital assetsK means propert" 4eld *" t4e ta&pa"er '$4et4er or not connected $it4 4is trade or *usiness3, *ut does not include, stoc= in trade o% t4e ta&pa"er or ot4er propert" o% a =ind $4ic4 $ould properl" *e included, in t4e in)entor" o% t4e ta&pa"er i% on 4and at t4e close o% t4e ta&a*le "ear, or propert" 4eld *" t4e ta&pa"er primaril" %or sale to customers in t4e ordinar" course o% 4is trade or *usiness, or propert" used in t4e trade or *usiness o% a c4aracter $4ic4 is su*ject to t4e allo$ance %or depreciation pro)ided in su*section '%3 o% section t4irt"? or real propert" used in t4e trade or *usiness o% t4e ta&pa"er/ 24e statutor" de%inition o% capital assets is negati)e in nature/ I% t4e asset is not among t4e e&ceptions, it is a capital asset? con)ersel", assets %alling $it4in t4e e&ceptions are ordinar" assets/ And necessaril", an" gain resulting %rom t4e sale or e&c4ange o% an asset is a capital gain or an ordinar" gain depending on t4e =ind o% asset in)ol)ed in t4e transaction/ Mo$e)er, t4ere is no rigid rule or %i&ed %ormula *" $4ic4 it can *e determined $it4 %inalit" $4et4er propert" sold *" a ta&pa"er $as 4eld primaril" %or sale to customers in t4e ordinar" course o% 4is trade or *usiness or $4et4er it $as sold as a capital asset/ Alt4oug4 se)eral %actors or indices 4a)e *een recognized as 4elp%ul guides in ma=ing a determination, none o% t4ese is decisi)e? neit4er is t4e presence nor t4e a*sence o% t4ese %actors conclusi)e/ Eac4 case must in t4e last anal"sis rest upon its o$n peculiar %acts and circumstances/ Also a propert" initiall" classi%ied as a capital asset ma" t4erea%ter *e treated as an ordinar" asset i% a com*ination o% t4e %actors indu*ita*l" tend to s4o$ t4at t4e acti)it" $as in %urt4erance o% or in t4e course o% t4e ta&pa"erKs trade or *usiness/ 24us, a sale o% in4erited real propert" usuall" gi)es capital gain or loss e)en
01

t4oug4 t4e propert" 4as to *e su*di)ided or impro)ed or *ot4 to ma=e it sala*le/ Mo$e)er, i% t4e in4erited propert" is su*stantiall" impro)ed or )er" acti)el" sold or *ot4 it ma" *e treated as 4eld primaril" %or sale to customers in t4e ordinar" course o% t4e 4eirKs *usiness/ In t4is case, t4e su*ject land is considered as an ordinar" asset/ Petitioners did not sell t4e land in t4e condition in $4ic4 t4e" acquired it/ 94ile t4e land $as originall" de)oted to rice and %ruit trees, it $as su*di)ided into small lots and in t4e process con)erted into a residential su*di)ision and gi)en t4e name Don Mariano Su*di)ision/ E&tensi)e impro)ements li=e t4e la"ing out o% streets, construction o% concrete gutters and installation o% lig4ting s"stem and drainage %acilities, among ot4ers, $ere underta=en to en4ance t4e )alue o% t4e lots and ma=e t4em more attracti)e to prospecti)e *u"ers/ 24e audited %inancial statements su*mitted toget4er $it4 t4e ta& return in question disclosed t4at a considera*le amount $as e&pended to co)er t4e cost o% impro)ements/ 24ere is aut4orit" t4at a propert" ceases to *e a capital asset i% t4e amount e&pended to impro)e it is dou*le its original cost, %or t4e e&tensi)e impro)ement indicates t4at t4e seller 4eld t4e propert" primaril" %or sale to customers in t4e ordinar" course o% 4is *usiness/ Anot4er distincti)e %eature o% t4e real estate *usiness discerni*le %rom t4e records is t4e e&istence o% contracts recei)a*les, $4ic4 stood at P16A,861/1A/ 24e siza*le amount o% recei)a*les in comparison $it4 t4e sales )olume o% P@@8,@GJ/GG during t4e same period signi%ies t4at t4e lots $ere sold on installment *asis and suggests t4e num*er, continuit" and %requenc" o% t4e sales/ Also o% signi%icance is t4e circumstance t4at t4e lots $ere ad)ertised %or sale to t4e pu*lic and t4at sales and collection commissions $ere paid out during t4e period in question/ Petitioners argument t4at t4e" are merel" liquidating t4e land must also %ail/ In Ehrman vs+ "ommissioner, t4e American court in clear and categorical terms rejected t4e liquidation test in determining $4et4er or not a ta&pa"er is carr"ing on a trade or *usiness 24e court o*ser)ed t4at t4e %act t4at propert" is sold %or purposes o%
liquidation does not %oreclose a determination t4at a Ltrade or *usinessL is *eing conducted *" t4e seller/ ;ne ma", o% course, liquidate a capital asset/ 2o do so, it is necessar" to sell/ 24e sale ma" *e conducted in t4e most ad)antageous manner to t4e seller and 4e $ill not lose t4e *ene%its o% t4e capital gain pro)ision o% t4e statute unless 4e enters t4e real estate *usiness and carries on t4e sale in t4e manner in $4ic4 suc4 a *usiness is ordinaril" conducted/ In t4at e)ent, t4e liquidation constitutes a *usiness and a sale in t4e ordinar" course o% suc4 a *usiness and t4e pre%erred ta& status is lost/ BIR RULING DIA5D egistration $it4 MH! ( or M!DCC s4all *e su%%icient %or a seller:trans%eror to *e considered as 4a*ituall" engaged in real estate *usiness/ I% t4e seller:trans%eror is not registered $it4 t4e MH! ( or M!DCC, 4e:it ma" pro)e t4at 4e:it is engaged in t4e real estate *usiness *" o%%ering ot4er satis%actor" e)idence Ie/g/ consummation during t4e preceding "ear at least 8 ta&a*le real estate transactions regardless o% amount,/ I(I uling No/ G0JF 0GG0 dated Jul" 1, 0GG0,
"apital assets
C INA BAN<ING CORP v CA
0@

S. DETERMINATION OF GAIN OR LOSS FROM SALE OR TRANSFER OF PROPERTF Exchange of property

CIR v RUFINO FACTS:
lia*ilit" %or t4e capital gains ta& on t4e e&c4ange o% t4e old %or t4e ne$ s4ares o% stoc=/ Accordingl", de%icienc" assessments $ere imposed against t4e pri)ate respondents/ M denied/ C2A re)ersed and 4eld t4at t4ere $as a )alid merger/ It declared t4at no ta&a*le gain $as deri)ed *" petitioners %rom t4e e&c4ange o% t4eir old stoc=s solel" %or stoc=s o% t4e Ne$ Corporation *ecause it $as pursuant to a plan o% reorganization/ 24us, suc4 e&c4ange is e&empt %rom C-2/ ISSUE!RULING:
24e pri)ate respondents $ere t4e majorit" stoc=4olders o% t4e de%unct Eastern 24eatrical Co/, Inc/, I;ld Corporation,/ Ernesto u%ino $as t4e president/ 24e pri)ate respondents $ere also t4e majorit" and controlling stoc=4olders o% anot4er corporation, t4e Eastern 24eatrical Co Inc/, INe$ Corporation,/ 24is corporation $as engaged in t4e same =ind o% *usiness as t4e ;ld Corporation, i/e/ operating t4eaters, opera 4ouses, places o% amusement and ot4er related *usiness enterprises/ #icente u%ino $as t4e -eneral Manager/ 24e ;ld Corporation 4eld a special meeting o% stoc=4olders $4ere a resolution $as passed aut4orizing t4e ;ld Corporation to merge $it4 t4e Ne$ Corporation/ Pursuant to t4e said resolution, t4e ;ld Corporation, represented *" Ernesto u%ino as President, and t4e Ne$ Corporation, represented *" #icente u%ino as -eneral Manager, signed a Deed o% Assignment pro)iding %or t4e con)e"ance and trans%er o% all t4e *usiness, propert" assets, good$ill, and lia*ilities o% t4e ;ld Corporation to t4e Ne$ Corporation in e&c4ange %or t4e latterKs s4ares o% stoc= to *e distri*uted among t4e s4are4olders on t4e *asis o% one stoc= %or eac4 stoc= 4eld in t4e ;ld Corporation/ 24is agreement $as made retroacti)e/ 24e a%oresaid trans%er $as e)entuall" made/ 24e resolution and t4e Deed o% Assignment $ere appro)ed in a resolution *" t4e stoc=4olders o% t4e Ne$ Corporation in t4eir special meeting/ 24e increased capitalization o% t4e Ne$ Corporation $as registered and appro)ed *" t4e SEC/ 24e (I , a%ter e&amination, declared t4at t4e merger $as not underta=en %or a bona fide *usiness purpose *ut merel" to a)oid
9:N t4e C2A erred in %inding t4at no ta&a*le gain $as deri)ed *" t4e pri)ate respondents %rom t4e questioned transactionQ N; 24ere $as a )alid merger alt4oug4 t4e actual trans%er o% t4e properties su*ject o% t4e Deed o% Assignment $as not made on t4e date o% t4e merger/ In t4e nature o% t4ings, t4is $as not possi*le/ ;*)iousl", it $as necessar" %or t4e ;ld Corporation to surrender its net assets %irst to t4e Ne$ Corporation *e%ore t4e latter could issue its o$n stoc= to t4e s4are4olders o% t4e ;ld Corporation *ecause t4e Ne$ Corporation 4ad to increase its capitalization %or t4is purpose/ 24is required t4e adoption o% t4e resolution %or t4e registration o% suc4 issuance $it4 t4e SEC and its appro)al/ All t4ese too= place a%ter t4e date o% t4e merger *ut t4e" $ere deemed part and parcel o%, and indispensa*le to t4e )alidit" and en%orcea*ilit" o%, t4e Deed o% Assignment/ 24ere is no impediment to t4e e&c4ange o% propert" %or stoc= *et$een t4e t$o corporations *eing considered to 4a)e *een e%%ected on t4e date o% t4e merger/ 24at, in %act, $as t4e intention, and t4e reason $4" t4e Deed o% Assignment $as made retroacti)e $4ic4 pro)ided in e%%ect t4at all transactions set %ort4 in t4e merger agreement s4all *e deemed to *e ta=ing place simultaneousl" $4en t4e Deed o% Assignment *ecame operati)e/ 24e *asic consideration, o% course, is t4e purpose o% t4e merger, as t4is $ould determine $4et4er t4e e&c4ange o% properties in)ol)ed t4erein s4all *e su*ject or not to t4e capital gains ta&/ 24e criterion laid do$n *" t4e la$ is t4at t4e mergerL must *e underta=en %or
0A

a bona fide *usiness purpose and not solel" %or t4e purpose o% escaping t4e *urden o% ta&ation/L Mere, t4e purpose o% t4e merger $as to continue t4e *usiness o% t4e ;ld Corporation, $4ose corporate li%e $as a*out to e&pire, t4roug4 t4e Ne$ Corporation to $4ic4 all t4e assets and o*ligations o% t4e %ormer 4ad *een trans%erred/ 94at argues strongl", indeed, %or t4e Ne$ Corporation is t4at it $as not dissol)ed a%ter t4e merger agreement/ ;n t4e contrar", it continued to operate t4e places o% amusement originall" o$ned *" t4e ;ld Corporation and continues to do so toda" a%ter ta=ing o)er t4e *usiness o% t4e ;ld Corporation 0J "ears ago/ 94at is also $ort4 noting is t4at, as in t4e case o% t4e ;ld Corporation $4en it $as dissol)ed, t4ere 4as *een no distri*ution o% t4e assets o% t4e Ne$ Corporation since t4en and up to no$, as %ar as t4e record discloses/ 2o date, t4e pri)ate respondents 4a)e not deri)ed an" *ene%it %rom t4e merger o% t4e ;ld Corporation and t4e Ne$ Corporation almost 1 decades earlier t4at $ill ma=e t4em su*ject to t4e capital gains ta& under Section 1A/ 24e" are no more lia*le no$ t4an t4e" $ere $4en t4e merger too= e%%ect, as t4e merger, *eing genuine, e&empted t4em under t4e la$ %rom suc4 ta&/ (" t4is decision, t4e go)ernment is, o% course, not le%t entirel" $it4out recourse, at least in t4e %uture/ 24e %act is t4at t4e merger 4ad merel" de%erred t4e claim %or ta&es, $4ic4 ma" *e asserted *" t4e go)ernment later, $4en gains are realized and *ene%its are distri*uted among t4e stoc=4olders as a result o% t4e merger/ In ot4er $ords, t4e corresponding ta&es are not %ore)er %oreclosed or %or%eited *ut ma" at t4e proper time and $it4out prejudice to t4e go)ernment still *e imposed/
Facts> Petitioner $as t4e o$ner o% all t4e stoc= o% !nited Mortgage CorporationI!MC,/ 24at corporation 4eld among its assets +,GGG s4ares o% t4e Monitor Securities CorporationIMSC,/ Petitioner $anted t4ese s4ares trans%erred to 4er at a pro%it and $it4 t4e minimum income ta& lia*ilit"/ In order to ac4ie)e t4is purpose, Petitioner made it appear t4at s4e $as ma=ing a BreorganizationE Iin con%orme $it4 e)enue Act o% +607A,/ !nder t4is la$, a BreorganizationE $ould e%%ect a direct trans%er o% a corporationDs s4are *" $a" o% di)idend at a lo$er ta&a*le transaction/ In order to 4a)e an appearance o% a BreorganizationE, s4eIPetitioner, organized A)erill Corporation IAC,/ 24ree I1, da"s later, !MC trans%erred t4e +,GGG s4ares o% MSC to AC/ 24en t4ese s4ares $ere all trans%erred to Petitioner/ Su*sequentl", AC $as dissol)ed $it4 no ot4er transaction *eing made ot4er t4e trans%er o% t4e s4ares/ Petitioner t4en sold t4e s4ares and declared a lo$er ta&a*le lia*ilit"/ 24e (oard contended t4at t4e soFcalled BreorganizationE s4ould *e considered ine%%ecti)e since it $as just a sc4eme to 4a)e a lo$er ta& lia*ilit"/ ISS!E> 94et4er t4e BreorganizationE is )alid $4ic4 $ould result to a lo$er ta& lia*ilit"/
A
BIR RULING DIGAHI GREGORF v ELVERING
LSec/ ++0/ Ig, Distribution of Stock on Reorganization. I% t4ere is distri*uted, in pursuance o% a plan o% reorganization, to a s4are4older in a corporation a part" to t4e reorganization, stoc= or securities in suc4 corporation or in anot4er corporation a part" to t4e reorganization, $it4out t4e surrender *" suc4 s4are4older o% stoc= or securities in suc4 a corporation, no gain to t4e distri*utee %rom t4e receipt o% suc4 stoc= o% securities s4all *e recognized/ / / /L LIi, Definition of Reorganization. FF As used in t4is section / / /L LI+, 24e term KreorganizationK means / / / 6B7 % tr%n$(er 0/ % -or#or%t&on o( %)) or % #%rt o( &t$ %$$et$ to %not,er -or#or%t&on &( &22e+&%te)/ %(ter t,e tr%n$(er t,e tr%n$(eror or &t$ $to-B,o)+er$ or 0ot, %re &n -ontro) o( t,e -or#or%t&on to 1,&-, t,e %$$et$ %re tr%n$(erre+. . . .@
08

MEHD> N;/ It is contended t4at since e)er" element required *" t4e %oregoing su*di)ision I(, Ire%er to %ootnote, is to *e %ound in $4at $as done, a statutor" reorganization $as e%%ected, and t4at t4e moti)e o% t4e ta&pa"er t4ere*" to escape pa"ment o% a ta& $ill not alter t4e result or ma=e unla$%ul $4at t4e statute allo$s/ 24e Court said, alt4oug4 t4e legal rig4t o% a ta&pa"er to decrease t4e amount o% $4at ot4er$ise $ould *e 4is ta&es, or altoget4er a)oid t4em, *" means $4ic4 t4e la$ permits, cannot *e dou*ted, t,e J*e$t&on (or +eter2&n%t&on &$ 1,et,er 1,%t 1%$ +one3 %#%rt (ro2 t,e t%' 2ot&ve3 1%$ t,e t,&n. 1,&-, t,e $t%t*te &nten+e+. 94en su*di)ision I(, spea=s o% a trans%er o% assets *" one corporation to anot4er, it means a trans%er made Lin pursuance o% a plan o% reorganization o% corporate *usiness, and not a trans%er o% assets *" one corporation to anot4er in pursuance o% a plan 4a)ing no relation to t4e *usiness o% eit4er, as plainl" is t4e case 4ere/ Simpl" an operation 4a)ing no *usiness or corporate purpose FF a mere de)ice $4ic4 put on t4e %orm o% a corporate reorganization as a disguise %or concealing its real c4aracter, and t4e sole o*ject and accomplis4ment o% $4ic4 $as t4e consummation o% a preconcei)ed plan, not to reorganize a *usiness or an" part o% a *usiness, *ut to trans%er a parcel o% corporate s4ares to t4e petitioner/ 24e rule $4ic4 e&cludes %rom consideration t4e moti)e o% ta& a)oidance is not pertinent to t4e situation, *ecause t4e transaction, upon its %ace, lies outside t4e plain intent o% t4e statute/ I=asi $ala nga talagang *usiness purpose *ut to circum)ent t4e la$,/
0J

T. SITUS OF TAXATION ross income from sources within the Phils

CIR v MARUBENI CORPORATION CIR v BOAC CIR v CTA AND SMIT =FRENC OVERSEAS
,actsSmit4 Tline . Frenc4 ;)erseas Compan" is a multinational %irm domiciled in P4iladelp4ia, licensed to do *usiness in t4e P4ilippines/ It is engaged in t4e importation, manu%acture, and sale o% p4armaceutical drugs and c4emicals/ In +6J+, it declared a net ta&a*le income o% P+/@ M and paid PA++= as ta& due/ It claimed its s4are o% t4e 4ead o%%ice o)er4ead e&penses IPAG+=, as deduction %rom gross income/ In its amended return, it claimed t4at t4ere $as an o)erpa"ment o% ta& IP10@=, arising %rom underFdeduction o% t4e o)er4ead e&pense/ 24is $as certi%ied *" international independent auditors, t4e allocation o% t4e o)er4ead e&pense made on t4e *asis o% t4e percentage o% gross income in t4e P4ilippines to gross income o% t4e corporation as a $4ole/ In +6J@, $it4out $aiting %or t4e action o% t4e CI , Smit4 %iled a petition %or re)ie$ $it4 t4e C2A/ C2A ordered CI to re%und t4e o)erpa"ment or grant Smit4 a ta& credit/ CI appealed to t4e SC/ Issue- 94et4er Smit4 is entitled to a re%und S <ES #atio> 07
24e go)erning la$ is %ound in Sec/ 1J I*,/ 8 e)enue egulation No/ 0 o% t4e D;F contains a similar pro)ision, $it4 t4e additional line t4at Bt4e rata*le part is *ased upon t4e ratio o% gross income %rom sources $it4in t4e P4ilippines to t4e total gross incomeE ISec/ +8G,/ Mence, $4ere an e&pense is clearl" related to t4e production o% P4ilippineF deri)ed income or to P4ilippine operations, t4at e&pense can *e deducted %rom t4e gross income acquired in t4e P4ilippines $it4out resorting to apportionment/ Mo$e)er, t4e o)er4ead e&penses incurred *" t4e parent compan" in connection $it4 %inance, administration, and researc4 . de)elopment, all o% $4ic4 directl" *ene%it its *ranc4es all o)er t4e $orld, %all under a di%%erent categor"/ 24ese are items $4ic4 cannot *e de%initel" allocated or identi%ied $it4 t4e operations o% t4e P4ilippine *ranc4/ Smit4 can claim as its deducti*le s4are a rata*le part o% suc4 e&penses *ased upon t4e ration o% t4e local *ranc4Ds gross income to t4e total gross income o% t4e corporation $orld$ide/ "I#.s "ontention 24e CI does not dispute t4e rig4t o% Smit4 to a)ail o% Sec/ 1J I*, o% t4e 2a& Code and Sec/ +8G o% t4e / (ut 4e maintains
8
Net income %rom sources in t4e P4ilippines/ S From t4e items o% gross income speci%ied in su*section Ia, o% t4is section t4ere s4all *e deducted e&penses, losses, and ot4er deductions properl" apportioned or allocated t4ereto and a rata*le part o% an" e&penses, losses, or ot4er deductions $4ic4 cannot de%initel" *e allocated to some item or class o% gross income/ 24e remainder, i% an", s4all *e included in %ull as net income %rom sources $it4in t4e P4ilippines/

t4at suc4 rig4t is not a*solute and t4at t4ere e&ists a contract Iser)ice agreement, $4ic4 Smit4 4as entered into $it4 its 4ome o%%ice, prescri*ing t4e amount t4at a *ranc4 can deduct as its s4are o% t4e main o%%iceDs o)er4ead e&penses/ Since t4e s4are o% t4e P4ilippine *ranc4 4as *een %i&ed, Smit4 cannot claim more t4an t4e said amount/ /mith.s "ontention Smit4, on t4e ot4er 4and, su*mits t4at t4e contract *et$een itsel% and its 4ome o%%ice cannot amend ta& la$s and regulations/ 24e matter o% allocated e&penses deducti*le under t4e la$ cannot *e t4e su*ject o% an agreement *et$een pri)ate parties nor can t4e CI acquiesce in suc4 an agreement/ SC ruled %or Smit4 Tline and said t4at its amended return con%orms $it4 t4e la$ and regulations/
P IL GUARANTF CO v CIR
reco)ered %rom t4e original assured $ere to *e paid %or *" t4e %oreign reinsurers/ 24e %oreign reinsurers %urt4er agreed, in consideration %or managing or administering t4eir a%%airs in t4e P4ilippines, to compensate t4e P4ilippine -uarant" Co/, Inc/, in an amount equal to A5 o% t4e reinsurance premiums/ Con%licts and:or di%%erences *et$een t4e parties under t4e reinsurance contracts $ere to *e ar*itrated in Manila/ P4ilippine -uarant" Co/, Inc/ and S$iss einsurance Compan" stipulated t4at t4eir contract s4all *e construed *" t4e la$s o% t4e P4ilippines/ Pursuant to t4e a%oresaid reinsurance contracts, P4ilippine -uarant" Co/, Inc/ ceded premiuns to t4e %oreign reinsurers/ Said premiums $ere e&cluded *" P4ilippine -uarant" Co/, Inc/ %rom its gross income $4en it %ile its income ta& returns %or +6A1 and +6A@/ Furt4ermore, it did not $it44old or pa" ta& on t4em/ Consequentl", t4e Commissioner o% Internal e)enue assessed against P4ilippine -uarant" Co/, Inc/ $it44olding ta& on t4e ceded reinsurance premiums/ I$$*e> 94et4er t4e reinsurance premiums ceded to %oreign reinsurers not doing *usiness in t4e P4ilippines are su*ject to $it44olding ta&Q e)+> 24e reinsurance premiums are su*ject to $it44olding ta&/ 24e reinsurance contracts, 4o$e)er, s4o$ t4at t4e transactions or acti)ities t4at constituted t4e underta=ing to reinsure P4ilippine -uarant" Co/, Inc/ against loses arising %rom t4e original insurances in t4e P4ilippines $ere per%ormed in t4e P4ilippines/ 24e lia*ilit" o% t4e %oreign reinsurers commenced simultaneousl" $it4 t4e lia*ilit" o% P4ilippine -uarant" Co/, Inc/ under t4e original insurances/ 06
F%-t$> 24e P4ilippine -uarant" Co/, Inc/, a domestic insurance compan", entered into reinsurance contracts, on )arious dates, $it4 %oreign insurance companies not doing *usiness in t4e P4ilippines/ 24e reinsurance contracts made t4e commencement o% t4e reinsurersK lia*ilit" simultaneous $it4 t4at o% P4ilippine -uarant" Co/, Inc/ under t4e original insurance/ P4ilippine -uarant" Co/, Inc/ $as required to =eep a register in Manila $4ere t4e ris=s ceded to t4e %oreign reinsurers $4ere entered, and entr" t4erein $as *inding upon t4e reinsurers/ A proportionate amount o% ta&es on insurance premiums not

P4ilippine -uarant" Co/, Inc/ =ept in Manila a register o% t4e ris=s ceded to t4e %oreign reinsurers/ Entries made in suc4 register *ound t4e %oreign resinsurers, localizing in t4e P4ilippines t4e actual cession o% t4e ris=s and premiums and assumption o% t4e reinsurance underta=ing *" t4e %oreign reinsurers/ 2a&es on premiums imposed *" Section 0A6 o% t4e 2a& Code %or t4e pri)ilege o% doing insurance *usiness in t4e P4ilippines $ere pa"a*le *" t4e %oreign reinsurers $4en t4e same $ere not reco)era*le %rom t4e original assured/ 24e %oreign reinsurers paid P4ilippine -uarant" Co/, Inc/ an amount equi)alent to A5 o% t4e ceded premiums, in consideration %or administration and management *" t4e latter o% t4e a%%airs o% t4e %ormer in t4e P4ilippines in regard to t4eir reinsurance acti)ities 4ere/ Disputes and di%%erences *et$een t4e parties $ere su*ject to ar*itration in t4e Cit" o% Manila/ All t4e reinsurance contracts, e&cept t4at $it4 S$iss einsurance Compan", $ere signed *" P4ilippine -uarant" Co/, Inc/ in t4e P4ilippines and later signed *" t4e %oreign reinsurers a*road/ Alt4oug4 t4e contract *et$een P4ilippine -uarant" Co/, Inc/ and S$iss einsurance Compan" $as signed *" *ot4 parties in S$itzerland, t4e same speci%icall" pro)ided t4at its pro)ision s4all *e construed according to t4e la$s o% t4e P4ilippines, t4ere*" mani%esting a clear intention o% t4e parties to su*ject t4emsel)es to P4ilippine la$/
Section 0@ o% t4e 2a& Code su*jects %oreign corporations to ta& on t4eir income %rom sources $it4in t4e P4ilippines/ 24e $ord LsourcesL 4as *een interpreted as t4e acti)it", propert" or ser)ice gi)ing rise to t4e income/ + 24e reinsurance premiums $ere income created %rom t4e underta=ing o% t4e %oreign reinsurance companies to reinsure P4ilippine -uarant" Co/, Inc/, against lia*ilit" %or loss under original insurances/ Suc4
underta=ing, as e&plained a*o)e, too= place in t4e P4ilippines/ 24ese insurance premiums, t4ere%ore, came %rom sources $it4in t4e P4ilippines and, 4ence, are su*ject to corporate income ta&/ 24e %oreign insurersK place o% business s4ould not *e con%used $it4 t4eir place o% acti)it"/ *usiness s4ould not *e continuit" and progression o% transactions $4ile acti)it" ma" consist o% onl" a single transaction/ An acti)it" ma" occur outside t4e place o% *usiness/ Section 0@ o% t4e 2a& Code does not require a %oreign corporation to engage in *usiness in t4e P4ilippines in su*jecting its income to ta&/ It su%%ices t4at t4e acti)it" creating t4e income is per%ormed or done in t4e P4ilippines/ 94at is controlling, t4ere%ore, is not t4e place o% business *ut t4e place o% activity t4at created an income/
OWDEN = CO v CIR P ILIPPINE AMERICAN LIFE INSURANCE CO v CTA
o1+en V$ CIR
(taxation from Sources in the Philippines) FACTS: Common$ealt4 Insurance Co/ ICIC,, a domestic corporation, entered into reinsurance contracts $it4 10 (ritis4 companies not engaged in *usiness in t4eP4ilippines represented *" 4erein Plainti%%/ CIC remitted to Plainti%% reinsurance premiums and, on *e4al% o% Plainti%%, paid income ta& on t4e premiums/ Plainti%% %iled a claim %or a re%und o% t4e paid ta&, stating t4at it $as e&empted %rom $it44olding ta& reinsurance premiums recei)ed %rom domestic insurance companies *" %oreign insurance companies not aut4orized to do *usiness in t4e P4ilippines/ Plainti%%s stated t4at since Sec/ 1G

A1 and A@ $ere su*stantiall" reFenactedE *" A +G8A, +06+ and 01@1, said rulings s4ould *e gi)en t4e %orce o% la$ under t4e principle o% legislati)e appro)al *" reFenactment/ ISSUE: 9:N t4e ta& s4ould *e $it44eld/ ELD: No/ 24e principle o% legislati)e enactment states t4at $4ere a statute is suscepti*le o% t4e meaning placed upon it *" a ruling o% t4e go)ernment agenc" c4arged $it4 its en%orcement and t4e legislature t4erea%ter reFenacts t4e pro)isions $it4out su*stantial c4anges, suc4 action is con%irmator" to an e&tent t4at t4e ruling carries out t4e legislati)e purpose/ 24is principle is not applica*le %or 4ea%orementioned sections $ere ne)er reFenacted/ ;nl" t4e ta& rate $as amended/ 24e administrati)e rulings in)o=ed *" t4e CI $ere onl" contained in unpu*lis4ed letters/ It cannot *e assumed t4at t4e legislature =ne$ o% t4ese rulings/ Finall", t4e premiums remitted $ere to indemni%" CIC against lia*ilit"/ T,&$ tooB #)%-e 1&t,&n t,e P,&)&##&ne$3 t,*$ $*0Ke-t to &n-o2e t%'
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TAX LAW REVIEW DIGESTS Montero

TAX LAW REVIEW DIGESTS Montero

CIR v GENERAL FOODS AGUINALDO INDUSTRIES v CIR

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TAX LAW REVIEW DIGESTS Montero

TAX LAW REVIEW DIGESTS Montero

TAX LAW REVIEW DIGESTS Montero

TAX LAW REVIEW DIGESTS Montero

TAX LAW REVIEW DIGESTS Montero

TAX LAW REVIEW DIGESTS Montero

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BIR RULING NO 55EA55

24e Paper Industries Corporation o% t4e P4ilippines ILPicopL,, is a P4ilippine corporation

registered $it4 t4e (oard o% In)estments IL(;IL, as

TAX LAW REVIEW DIGESTS Montero

TAX LAW REVIEW DIGESTS Montero

D&.e$t o( BIR R*)&n. No. 545AD555 +%te+ A*.*$t 953 D555

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a/ Funds a)aila*le %or P4ile& management agreement? and */

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Issue> 9:N disallo$ance is correct

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IM, C4arita*le and ;t4er Contri*utions/ P

egulations, t4e terms 4erein

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R. CAPITAL GAINS %n+ LOSSES "apital assets

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