China Banking Corporation v CA

Facts:

China Banking Corporation made a 53% equity investment (P16,227,851.80) in the First CBC Capital a
Hongkong subsidiary engaged in financing and investment with deposit-taking function.

It was shown that CBC has become insolvent so China Banking wrote-off its investment as worthless and
treated it as a bad debt or as an ordinary loss deductible from its gross income.

CIR disallowed the deduction on the ground that the investment should not be classified as being
worthless. It also held that assuming that the securities were worthless, then they should be classified as
a capital loss and not as a bad debt since there was no indebtedness between China Banking and CBC.

Issue:

Whether or not the investment should be classified as a capital loss.

Held:

Yes. Section 29.d.4.B of the NIRC contains provisions on securities becoming worthless. It conveys that
capital loss normally requires the concurrence of 2 conditions:

a. there is a sale or exchange

b. the thing sold or exchanges is a capital asset.

When securities become worthless, there is strictly no sale or exchange but the law deems it to be a
loss. These are allowed to be deducted only to the extent of capital gains and not from any other
income of the taxpayer. A similar kind of treatment is given by the NIRC on the retirement of certificates
of indebtedness with interest coupons or in registered form, short sales and options to buy or sell
property where no sale or exchange strictly exists. In these cases, The NIRC dispenses with the standard
requirements.

There is ordinary loss when the property sold is not a capital asset.

In the case, CBC as an investee corporation, is a subsidiary corporation of China Banking whose shares in
CBC are not intended for purchase or sale but as an investment. An equity investment is a capital asset
of the investor. Unquestionably, any loss is a capital loss to the investor.
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Additional notes:

*The loss cannot be deductible as bad debt since the shares of stock do not constitute a loan extended
by it to its subsidiary or a debt subject to obligatory repayment by the latter.