GROSS INCOME

Gross Income means the pertinent items of income referred to in Section 32(A) of the Tax Code. It includes all income derived from
whatever source (unless exempt from tax by law), including, but not limited to, the following items:
(1) Gross income derived from the conduct of Trade or business or the exercise of a profession
(2) Rents
(3) Interests
(4) Prizes and winnings
(5) Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar
items
(6) Annuities
(7) Royalties
(8) Dividends
(9) Gains derived from dealings in property
(10) Pensions
(11) Partners distributive share from the net income of the general professional partnership (GPP) [Sec 32A, NIRC]

GROSS INCOME VIS--VIS NET INCOME VIS--VIS TAXABLE INCOME

(a) Gross income means income, gain or profit subject to tax.

(b) Net income means gross income less statutory deductions and/or exemptions (Sec. 31, NIRC)
(c) Taxable income means the pertinent items of gross income specified in the Tax Code, less the deductions and/or personal and
additional exemptions, if any, authorized for such types of income by the Tax Code or other special laws (Sec. 31, NIRC). It is
synonymous to the term net income [Valencia and Roxas]

Compensation Income

Income arising from an employer-employee (ER-EE) relationship. It means all remuneration for services performed by an EE for his
ER, including the cash value of all remuneration paid in any medium other than cash [Sec. 78(A)], unless specifically excluded by the
Tax Code.

It includes, but is not limited to, salaries and wages, honoraria and emoluments, allowances (e.g., transportation, representation,
entertainment), commissions, fees (including directors fees, if the director is, at the same time, an employee of the payor-
corporation), tips, taxable bonuses, fringe benefits except those subject to Fringe Benefit Tax (FBT) under Section 33 of the Tax
Code, and taxable pensions and retirement pay (e.g. retirement benefits earned without meeting the conditions for exemption
thereof, such as retirement of less than 50 years of age.)

General Rule: every form of compensation income is taxable regardless of how it is earned, by whom it is paid, the label by which it
is designated, the basis upon which it is determined, or the form in which it is received. The basis upon which remuneration is paid is
immaterial. It may be paid on the basis of piece of work, percentage of profits, hourly, weekly, monthly, or annually.

Compensation income including overtime pay, holiday pay, night shift differential pay, and hazard pay, earned by MINIMUM WAGE
EARNERS (MWE) who has no other returnable income are NOT taxable and not subject to withholding tax on wages [RA 9504].
Provided, however, that an employee shall not enjoy the privilege of being a MWE and, therefore, his/her entire earning are not
exempt from income tax and, consequently, from withholding tax if he receives/earns additional compensation such as commissions,
honoraria, fringe benefits, benefits in excess of theallowable statutory amount of P30,000, taxable allowance, and other taxable
income other than the statutory minimum wage (SMW), holiday pay, overtime pay, hazard pay and night shift differential pay.
MWEs receiving other income, such as income from the conduct of trade, business, or practice of profession, except income subject
to final tax, in addition to compensation income are not exempted from income tax on their income earned during the taxable year.
This rule, notwithstanding, the SMW, Holiday Pay, overtime pay, night differential pay and hazard pay shall still exempt from
withholding tax.

Fringe Benefits and De Minimis

Fringe Benefits any good, service, or other benefit furnished or granted by an employer, in cash or in kind, in addition to basic
salaries of an individual employee [Sec. 33, NIRC]
De Minimis privileges of relatively small value as given by the employer to his employees.
Fringe Benefits and De Minimis are not considered compensation subject to income tax and withholding tax.

Fringe Benefits
Special treatment of fringe benefits
Persons liable: The Employer (as a withholding agent), whether individual, professional partnership or a corporation, regardless of
whether the corporation is taxable or not, or the government and its instrumentalities, is liable to remit the fringe benefit tax to the BIR
once fringe benefit is given to a managerial or supervisory employee.
The fringe benefit tax (FBT) is a final tax on the employees income to be withheld by the employer. The withholding and remittance
of FBT shall be made on a calendar quarterly basis.
Managerial employee: one who is vested with the powers or prerogatives to lay down and execute management policies and/or to
hire,

COLLECTOR V HENDERSON
DOCTRINE: Rental allowances and travel allowances by a company are not part of taxable income.
FACTS:
Sps. Arthur Henderson and Marie Henderson filed their annual income tax with the BIR. Arthur is president of American
International Underwriters for the Philippines, Inc., which is a domestic corporation engaged in the business of general non-
life insurance, and represents a group of American insurance companies engaged in the business of general non-life
insurance.

The BIR demanded payment for alleged deficiency taxes. In their computation, the BIR included as part of taxable income:
1) Arthurs allowances for rental, residential expenses, subsistence, water, electricity and telephone expenses 2) entrance fee
to the Marikina Gun and Country Club which was paid by his employer for his account and 3) travelling allowance of his wife

The taxpayers justifications are as follows:

1) as to allowances for rental and utilities, Arthur did not receive money for the allowances. Instead, the apartment is
furnished and paid for by his employer-corporation (the mother company of American International), for the employer
corporations purposes. The spouses had no choice but to live in the expensive apartment, since the company used it to
entertain guests, to accommodate officials, and to entertain customers. According to taxpayers, only P 4,800 per year is the
reasonable amount that the spouses would be spending on rental if they were not required to live in those apartments. Thus,
it is the amount they deem is subject to tax. The excess is to be treated as expense of the company.
2) The entrance fee should not be considered income since it is an expense of his employer, and membership therein is
merely incidental to his duties of increasing and sustaining the business of his employer.

3) His wife merely accompanied him to New York on a business trip as his secretary, and at the employer-corporations
request, for the wife to look at details of the plans of a building that his employer intended to construct. Such must not be
considered taxable income.

The Collector of Internal Revenue merely allowed the entrance fee as nontaxable. The rent expense and travel expenses
were still held to be taxable. The Court of Tax Appeals ruled in favor of the taxpayers, that such expenses must not be
considered part of taxable income. Letters of the wife while in New York concerning the proposed building were presented as
evidence.
 ISSUE: Whether or not the rental allowances and travel allowances furnished and given by the employer-corporation are part
of taxable income?

HELD: NO. Such claims are substantially supported by evidence.

These claims are therefore NOT part of taxable income. No part of the allowances in question redounded to their personal
benefit, nor were such amounts retained by them. These bills were paid directly by the employer-corporation to the creditors.
The rental expenses and subsistence allowances are to be considered not subject to income tax. Arthurs high executive
position and social standing, demanded and compelled the couple to live in a more spacious and expensive quarters. Such
subsistence allowance was a SEPARATE account from the account for salaries and wages of employees. The company did
not charge rentals as deductible from the salaries of the employees. These expenses are COMPANY EXPENSES, not
income by employees which are subject to tax.

CIR vs. CA & Castaneda, GR No. 96016 (1991)

NATURE OF THE CASE:

Petition for review on certiorari on whether terminal leave pay received by a government official or employee on the occasion
of his compulsory retirement from the government service is subject to withholding (income) tax

FACTS:
1. Private Respondent (PR) Efren Castaneda retired from the government service as Revenue Attache in the Philippine
Embassy in London, England on Dec. 10, 1982 under Sec. 12(c) of CA 186, as amended.
2. Upon retirement, he received a terminal pay leave from which Petitioner (P) CIR withheld P12,557.13 allegedly representing
income tax thereon.
3. PR Castaneda filed a formal written claim with P CIR for a refund of the P12,557.13 contending that the cash equivalent of his
terminal leave is exempt from income tax.

COURT DECISIONS:
1. CTA for PR Castaneda
2. CA affirmed CTA

ISSUE:
WON terminal pay is subject to withholding income tax
 CASE FOR PETITIONER:
That the terminal leave pay is income derived from employer-employee relationship, citing Sec. 28, NIR; that as part of the
compensation for services rendered, terminal leave pay is actually part of gross income of the recipient

CASE FOR DEFENDANT: -

SC RULING WITH RATIO:

1. NO; that terminal leave pay received by a government official or employee is not subject to withholding income tax;
2. Borromeo vs. CSC (1991), commutation of leave credits, or terminal leave, is applied for by an officer or employee who
retires, resigns, or is separated from the service through no fault of his own. In the exercise of sound personnel policy, the
Government encourages unused leaves to be accumulated. The Government recognizes that for most public servants,
retirement pay is always less than generous if not meager and scrimpy. A modest nest egg which the senior citizen may look
forward to is thus avoided. Terminal leave payments are given not only at the same time but also for the same policy
considerations governing retirement benefits.

DISPOSITIVE:
Accordingly, the petition for review is hereby DENIED.

Commissioner of Internal Revenue v Filinvest Development Corporation

Petitioner: Commissioner of Internal Revenue
Respondent: Filinvest Development Corporation
July 19, 2011

Emergency Recit: FDC owns 80% of the outstanding shares of FAI and 67.42% of FLI. FDC and FAI entered into a Deed of
Exchange with FLI where the former will transfer parcels of land to the latter and in exchange, shares of stock of FLI were
issued to FDC and FAI. BIR assessed both FDC and FAI for deficiency taxes. One of the bases for the assessment is the
cash advances FDC extended in favor of its affiliates. The CIR argued that they were interest free despite the interest bearing
loans it obtained from banking institutions. I: (see issue 1) R: CIR's power to distribute, apportion or allocate gross income or
deductions between or among controlled taxpayers may be exercised as long as the controlled taxpayer's taxable income is
not reflective of that which it would have realized had it been dealing at arm's length with an uncontrolled taxpayer, the CIR
can make the necessary rectifications in order to prevent evasion of taxes.
However, the to power to impute "theoretical interests" is not included in the broad parameters of CIR. There is no evidence
of actual or possible showing that the advances FDC extended to its affiliates had resulted to the interests subsequently
assessed by the CIR.

Facts: (Youll read this case again under a different topic)

 The owner of 80% of the outstanding shares of respondent Filinvest Alabang, Inc. (FAI), respondent Filinvest Development
Corporation (FDC) is a holding company which also owned 67.42% of the outstanding shares of Filinvest Land, Inc. (FLI).
FDC and FAI entered into a Deed of Exchange with FLI whereby the former both transferred in favor of the latter parcels of
land. In exchange, 463,094,301 shares of stock of FLI were issued to FDC and FAI. As a result of the exchange, FLIs
ownership structure was changed.
FLI requested a ruling from BIR to the effect that no gain or loss should be recognized in the aforesaid transfer of real
properties. Acting on the request, the BIR issued a ruling, finding that the exchange is among those contemplated under Sec
34 (c) (2) of the old NIRC which provides that (n)o gain or loss shall be recognized if property is transferred to a corporation
by a person in exchange for a stock in such corporation of which as a result of such exchange said person, alone or together
with others, not exceeding four (4) persons, gains control of said corporation."
FDC received from the BIR a Formal Notice of Demand to pay deficiency income and documentary stamp taxes, plus
interests and compromise penalties. The deficiency taxes were assessed on the taxable gain supposedly realized by FDC
from the Deed of Exchange it executed with FAI and FLI, on the dilution resulting from the Shareholders Agreement FDC
executed with RHPL as well as the armslength interest rate and documentary stamp taxes imposable on the advances FDC
extended to its affiliates.
o FAI similarly received from the BIR a Formal Letter of Demand for deficiency income taxes.
Both FDC and FAI filed their respective requests for reconsideration/protest. The CIR failed to resolve their request thus,
FDC and FAI filed a petition for review with the CTA pursuant to Sec 228 of the 1997 NIRC.
o They allege that no taxable gain should have been assessed from the subject Deed of Exchange since FDC and FAI
collectively gained further control of FLI as a consequence of the exchange; that correlative to the CIR's lack of authority to
impute theoretical interests on the cash advances FDC extended in favor of its affiliates, the rule is settled that interests
cannot be demanded in the absence of a stipulation to the effect; that not being promissory notes or certificates of obligations,
the instructional letters as well as the cash and journal vouchers evidencing said cash advances were not subject to
documentary stamp taxes; and, that no income tax may be imposed on the prospective gain from the supposed appreciation
of FDC's shareholdings in FAC. They prayed that the subject assessments be cancelled and annulled.
CIR filed its answer, claiming that the transfer should not be considered taxfree
since, with the resultant diminution of its shares in FLI, FDC did not gain further control of said corporation. Also, the cash
advances FDC extended to its affiliates were interest free despite the interest bearing loans it obtained from banking
institutions, the CIR invoked Sec 43 of the old NIRC which, as implemented by RR 2, Sec 179 (b) and (c), gave him:
o "the power to allocate, distribute or apportion income or deductions between or among such organizations, trades or
business in order to prevent evasion of taxes."
The CIR justified the imposition of documentary stamp taxes on the instructional letters as well as cash and journal vouchers
for said cash advances on the strength of Sec 180 of the NIRC and RRs 994 which provide that loan transactions are subject
to said tax irrespective of whether or not they are evidenced by a formal agreement or by mere office memo. The CIR also
argued that FDC realized taxable gain arising from the dilution of its shares in FAC as a result of its Shareholders' Agreement
with RHPL.
 CTA Decision: with the exception of the deficiency income tax on the interest income FDC supposedly realized from the
advances it extended in favor of its affiliates, the rest of deficiency income and documentary stamp taxes assessed against
FDC and FAI are cancelled.
FDC filed a petition for review before the CA. CA reversed the decision of the CTA.

Issues/Held:
1. W/N the advances extended by respondent to its affiliates are subject to income tax NO.
(MAIN)
2. W/N the exchange of shares of stock for property among FDC, FAI and FLI met all the requirements for the nonrecognition
of taxable gain under sec 34 (c) (2) of the old NIRC (now sec 40(c) (2) (c) of the NIRC) YES.
3. W/N the letters of instruction or cash vouchers extended by FDC to its affiliates are deemed loan agreements subject to
DST under sec 180 of the NIRC YES.
4. W/N the gain on dilution as a result of the increase in the value of FDCs shareholdings is taxable NO.

Ratio:

Theoretical Interest Rates (for the advances extended)

Sec 43 of the 1993 NIRC provides that,
o (i)n any case of 2 or more organizations, trades or businesses (whether or not
incorporated and whether or not organized in the Philippines) owned or controlled directly or indirectly by the same interests,
the CIR is authorized to distribute, apportion or allocate gross income or deductions between or among such organization,
trade or business, if he determines that such distribution, apportionment or allocation is necessary in order to prevent evasion
of taxes or clearly to reflect the income of any such organization, trade or business.
It may also be seen that the CIR's power to distribute, apportion or allocate gross income or deductions between or among
controlled taxpayers may be likewise exercised whether or not fraud inheres in the transaction/s under scrutiny. For as long
as the controlled taxpayer's taxable income is not reflective of that which it would have realized had it been dealing at arm's
length with an uncontrolled taxpayer, the CIR can make the necessary rectifications in order to prevent evasion of taxes.
Despite the broad parameters provided, the power to impute "theoretical interests" to the controlled taxpayer's transactions
is not included. There must be proof of the actual or, at the very least, probable receipt or realization by the controlled
taxpayer of the item of gross income sought to be distributed, apportioned or allocated by the CIR.
There is no evidence of actual or possible showing that the advances FDC extended to its affiliates had resulted to the
interests subsequently assessed by the CIR.

Regarding the Deed of Exchange

Sec 34 (c) (2) of the 1993 NIRC:
o Sec. 34. Determination of amount of and recognition of gain or loss.(
c) Exception x x x x No gain or loss shall also be recognized if property is transferred to a corporation by a person in
exchange for shares of stock in such corporation of which as a result of such exchange said person, alone or together with
others, not exceeding four persons, gains control of said corporation; Provided, That stocks issued for services shall not be
considered as issued in return of property.
Since the term "control" is clearly defined as "ownership of stocks in a corporation possessing at least fiftyone percent of the
total voting power of classes of stocks entitled to one vote" under Sec 34 (c) (6) [c] of the 1993 NIRC, the exchange of
property for stocks between FDC FAI and FLI clearly qualify as a taxfree transaction under par 34 (c) (2) of the same
provision.
Inasmuch as the combined ownership of FDC and FAI of FLI's outstanding capital stock adds up to a total of 70.99%, it
stands to reason that neither of said transferors can be held liable for deficiency income taxes the CIR assessed on the
supposed gain which resulted from the subject transfer.

Documentary Stamp Taxes

The instructional letters as well as the journal and cash vouchers evidencing the advances FDC extended to its affiliates
qualified as loan agreements upon which DST may be imposed.
We find that both the CTA and the CA erred in invalidating the assessments issued by the CIR for the deficiency DST.

Dilution of Shares
No reversible error can, finally, be imputed against both the CTA and the CA for invalidating the deficiency income taxes
FDC is supposed to have incurred as a consequence of the dilution of its shares in FAC.
Absent showing of such error here, we find no strong and cogent reasons to depart from said rule with respect to the CTA's
finding that no deficiency income tax can be assessed on the gain on the supposed dilution and/or increase in the value of
FDC's shareholdings in FAC which the CIR failed to establish.

WISE AND CO., INC. VS MEER

G.R. NO. 48231 JUNE 30, 1947

PONENTE: HILADO, J.
Nature of the Case: This is an appeal by Wise & Co., Inc. and its co-plaintiff (stockholders) from the judgment of the Court of
First Instance of Manila absolving the defendant Collector of Internal Revenue from the complaint without costs. The
complaint was for recovery of certain amounts which had been paid by said plaintiffs under written protest.
Facts: On June 1, 1937, Manila Wine Merchants, Ltd., a Hongkong company, was liquidated and its capital stock was
distributed to its stockholders, one of which is the petitioner WISE AND CO., INC. As part of its liquidation, the corporation
was sold to Manila Wine Merchants., Inc. for Php400,000. The said earnings, declared as dividends, were distributed to its
stockholders. The Hongkong company then paid the income tax for the entire earnings. As a result of the sale of its business
and assets, a surplus was realized by the Hongkong company after deducting the dividends. This surplus was also distributed
 to its stockholders. The Hongkong company also paid the income tax for the said surplus. The petitioners then filed their
respective income tax returns. The respondent Commissioner, then, made a deficiency assessment charging the individual
stockholders for taxes on the shares distributed to them despite the fact that income tax was already paid by the Hongkong
company. The petitioners paid the assessed amount in protest. The lower courts ruled in favor of the Commissioner of
Internal Revenue, hence, this action.
Issue(s):
1. Whether the amount received by the petitioners were ordinary dividends or liquidating dividends.
2. Whether such dividends were taxable or not.
3. Whether or not the profits realized by the non-resident alien individual appellants constitute income from the Philippines
considering that the sale took place outside the Philippines.
Held:
1. The dividends are liquidating dividends or payments for surrendered or relinquished stock in a corporation in complete
liquidation. It was stipulated in the deed of sale that the sale and transfer of the corporation shall take effect on June 1, 1937
while distribution took place on June 8. They could not consistently deem all the business and assets of the corporation sold
as of June 1, 1937, and still say that said corporation, as a going concern, distributed ordinary dividends to them thereafter.
2. Yes. Petitioners received the said distributions in exchange for the surrender and relinquishment by them of their stock in
the liquidated corporation. That money in the hands of the corporation formed a part of its income and was properly taxable to
it under the Income Tax Law. When the corporation was dissolved in the process of complete liquidation and its shareholders
surrendered their stock to it and it paid the sums in question to them in exchange, a transaction took place. The shareholder
who received the consideration for the stock earned received that money as income of his own, which again was properly
taxable to him under the Income Tax Law.
3. The contention of the petitioners that the earnings cannot be considered as income from the Philippines because the sale
was made outside the Philippines and is not subject to Philippine tax law is untenable. At the time of the sale, the Hongkong
company was engage in its business in the Philippines. Its successor was a domestic corporation and doing business also in
the Philippines. It must be taken into consideration that the Hongkong company was incorporated for the purpose of carrying
business in the Philippine Islands. Hence, its earnings, profits and assets, including those from whose proceeds the
distribution was made, had been earned and acquired in the Philippines. It is clear that the distributions in questions were
income from Phi lippine sources, hence, taxable under Philippine law.

CIR v. CTA & Anscor, GR. No. 108576

Sometime in the 1930s, Don Andres Soriano, a citizen and resident of the United States, formed the corporation A. Soriano Y Cia,
predecessor of ANSCOR, with a P1,000,000.00 capitalization divided into 10,000 common shares at a par value of P100/share.
ANSCOR is wholly owned and controlled by the family of Don Andres, who are all non-resident aliens. In 1937, Don Andres
subscribed to 4,963 shares of the 5,000 shares originally issued. The authorized capital stock was increased to P2,500,000.00
divided into 25,000 common shares with the same par value with only 10,000 issued and all subscribed by Don Andres. Don Andres
transferred 1,250 shares each to his two sons, Jose and Andres, Jr., as their initial investments in ANSCOR. Both sons are
foreigners.

Stock dividends were declared on 1947, 1949 and 1963.On December 30, 1964 Don Andres died. As of that date, he has a total
shareholdings of 185,154 shares - 50,495 of which are original issues and the balance of 134,659 shares as stock dividend
declarations. One-half of that shareholdings were transferred to his wife, Doa Carmen Soriano, as her conjugal share. The other
half formed part of his estate
.
ANSCOR increased its capital stock to P20M and in 1966 to P30M. In the same year, stock dividends worth 46,290 and 46,287
shares were respectively received by the Don Andres estate and Doa Carmen from ANSCOR. Hence, increasing their accumulated
shareholdings to 138,867 and 138,864 common shares each.

On December 28, 1967, Doa Carmen requested a ruling from the United States Internal Revenue Service (IRS), inquiring if an
exchange of common with preferred shares may be considered as a tax avoidance scheme under Section 367 of the 1954 U.S.
Revenue Act. By January 2, 1968, ANSCOR reclassified its existing 300,000 common shares into 150,000 common and 150,000
preferred shares. The IRS opined that the exchange is only a recapitalization scheme and not tax avoidance. Consequently, Doa
Carmen exchanged her whole 138,864 common shares for 138,860 of the newly reclassified preferred shares. The estate of Don
Andres in turn, exchanged 11,140 of its common shares for the remaining 11,140 preferred shares, thus reducing its (the estate)
common shares to 127,727.

ANSCOR redeemed 28,000 common shares from the Don Andres estate. By November 1968, the Board further increased
ANSCORs capital stock to P75M divided into 150,000 preferred shares and 600,000 common shares. About a year later, ANSCOR
again redeemed 80,000 common shares from the Don Andres estate further reducing the latters common shareholdings to 19,727.
In 1973, after examining ANSCORs books of account and records, Revenue examiners issued a report proposing that ANSCOR be
assessed for deficiency withholding tax-at-source, pursuant to Sections 53 and 54 of the 1939 Revenue Code, for the year 1968 and
the second quarter of 1969 based on the transactions of exchange and redemption of stocks.

Subsequently, ANSCOR filed a petition for review with the CTA assailing the tax assessments on the redemptions and exchange of
stocks.
The bone of contention is the interpretation and application of Section 83(b) of the 1939 Revenue Act which provides:
Sec. 83. Distribution of dividends or assets by corporations.

(b) Stock dividends - A stock dividend representing the transfer of surplus to capital account shall not be subject to tax. However, if a
corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and
cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so
distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent it represents a distribution
of earnings or profits accumulated after March first, nineteen hundred and thirteen. (Italics supplied).
Specifically, the issue is whether ANSCORs redemption of stocks from its stockholder as well as the exchange of common with
preferred shares can be considered as essentially equivalent to the distribution of taxable dividend, making the proceeds thereof
taxable under the provisions of the above-quoted law.

General Rule
Section 83(b) of the 1939 NIRC was taken from Section 115(g)(1) of the U.S. Revenue Code of 1928. It laid down the general rule
known as the proportionate test wherein stock dividends once issued form part of the capital and, thus, subject to income tax.
Specifically, the general rule states that:A stock dividend representing the transfer of surplus to capital account shall not be subject
to tax.

Having been derived from a foreign law, resort to the jurisprudence of its origin may shed light. Under the US Revenue Code, this
provision originally referred to stock dividends only, without any exception. Stock dividends, strictly speaking, represent capital and
do not constitute income to its recipient. So that the mere issuance thereof is not yet subject to income tax as they are nothing but an
enrichment through increase in value of capital investment. As capital, the stock dividends postpone the realization of profits
because the fund represented by the new stock has been transferred from surplus to capital and no longer available for actual
distribution. Income in tax law is an amount of money coming to a person within a specified time, whether as payment for services,
interest, or profit from investment. It means cash or its equivalent. It is gain derived and severed from capital, from labor or from both
combined - so that to tax a stock dividend would be to tax a capital increase rather than the income. In a loose sense, stock
dividends issued by the corporation, are considered unrealized gain, and cannot be subjected to income tax until that gain has been
realized. Before the realization, stock dividends are nothing but a representation of an interest in the corporate properties. As capital,
it is not yet subject to income tax. It should be noted that capital and income are different. Capital is wealth or fund; whereas income
is profit or gain or the flow of wealth. The determining factor for the imposition of income tax is whether any gain or profit was derived
from a transaction.

The Exception

However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the
distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the
amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent it represents a
distribution of earnings or profits accumulated after March first, nineteen hundred and thirteen. (Emphasis supplied).
Although redemption and cancellation are generally considered capital transactions, as such, they are not subject to tax. However, it
does not necessarily mean that a shareholder may not realize a taxable gain from such transactions. Simply put, depending on the
circumstances, the proceeds of redemption of stock dividends are essentially distribution of cash dividends, which when paid
becomes the absolute property of the stockholder. Thereafter, the latter becomes the exclusive owner thereof and can exercise the
freedom of choice. Having realized gain from that redemption, the income earner cannot escape income tax.
As qualified by the phrase such time and in such manner, the exception was not intended to characterize as taxable dividend every
distribution of earnings arising from the redemption of stock dividends. So that, whether the amount distributed in the redemption
should be treated as the equivalent of a taxable dividend is a question of fact, which is determinable on the basis of the particular
facts of the transaction in question. No decisive test can be used to determine the application of the exemption under Section 83(b)
The use of the words such manner and essentially equivalent negative any idea that a weighted formula can resolve a crucial
issue - Should the distribution be treated as taxable dividend. On this aspect, American courts developed certain recognized criteria,
which includes the following:

1) the presence or absence of real business purpose,

2) the amount of earnings and profits available for the declaration of a regular dividend and the corporations past record with respect
to the declaration of dividends,

3) the effect of the distribution as compared with the declaration of regular dividend,

4) the lapse of time between issuance and redemption,

5) the presence of a substantial surplus and a generous supply of cash which invites suspicion as does a meager policy in relation
both to current earnings and accumulated surplus.

REDEMPTION AND CANCELLATION

For the exempting clause of Section 83(b) to apply, it is indispensable that: (a) there is redemption or cancellation; (b) the transaction
involves stock dividends and (c) the time and manner of the transaction makes it essentially equivalent to a distribution of taxable
dividends. Of these, the most important is the third.

Redemption is repurchase, a reacquisition of stock by a corporation which issued the stock in exchange for property, whether or not
the acquired stock is cancelled, retired or held in the treasury. Essentially, the corporation gets back some of its stock, distributes
cash or property to the shareholder in payment for the stock, and continues in business as before. The redemption of stock dividends
previously issued is used as a veil for the constructive distribution of cash dividends. In the instant case, there is no dispute that
ANSCOR redeemed shares of stocks from a stockholder (Don Andres) twice (28,000 and 80,000 common shares). But where did the
shares redeemed come from? If its source is the original capital subscriptions upon establishment of the corporation or from initial
capital investment in an existing enterprise, its redemption to the concurrent value of acquisition may not invite the application of Sec.
83(b) under the 1939 Tax Code, as it is not income but a mere return of capital. On the contrary, if the redeemed shares are from
stock dividend declarations other than as initial capital investment, the proceeds of the redemption is additional wealth, for it is not
merely a return of capital but a gain thereon.

It is not the stock dividends but the proceeds of its redemption that may be deemed as taxable dividends. Here, it is undisputed that
at the time of the last redemption, the original common shares owned by the estate were only 25,247.5. This means that from the
total of 108,000 shares redeemed from the estate, the balance of 82,752.5 (108,000 less 25,247.5) must have come from stock
dividends. Besides, in the absence of evidence to the contrary, the Tax Code presumes that every distribution of corporate property,
in whole or in part, is made out of corporate profits, such as stock dividends. The capital cannot be distributed in the form of
redemption of stock dividends without violating the trust fund doctrine - wherein the capital stock, property and other assets of the
corporation are regarded as equity in trust for the payment of the corporate creditors. Once capital, it is always capital. That doctrine
was intended for the protection of corporate creditors

With respect to the third requisite, ANSCOR redeemed stock dividends issued just 2 to 3 years earlier. The time alone that lapsed
from the issuance to the redemption is not a sufficient indicator to determine taxability. It is a must to consider the factual
circumstances as to the manner of both the issuance and the redemption. The time element is a factor to show a device to evade
tax and the scheme of cancelling or redeeming the same shares is a method usually adopted to accomplish the end sought. Was this
transaction used as a continuing plan, device or artifice to evade payment of tax? It is necessary to determine the net effect of
the transaction between the shareholder-income taxpayer and the acquiring (redeeming) corporation. The net effect test is not
evidence or testimony to be considered; it is rather an inference to be drawn or a conclusion to be reached. It is also important to
know whether the issuance of stock dividends was dictated by legitimate business reasons, the presence of which might negate a tax
evasion plan.

The issuance of stock dividends and its subsequent redemption must be separate, distinct, and not related, for the redemption to be
considered a legitimate tax scheme. Redemption cannot be used as a cloak to distribute corporate earnings. Otherwise, the apparent
intention to avoid tax becomes doubtful as the intention to evade becomes manifest.

Depending on each case, the exempting provision of Sec. 83(b) of the 1939 Code may not be applicable if the redeemed shares
were issued with bona fide business purpose, which is judged after each and every step of the transaction have been considered and
the whole transaction does not amount to a tax evasion scheme.

It is the net effect rather than the motives and plans of the taxpayer or his corporation that is the fundamental guide in administering
Sec. 83(b). This tax provision is aimed at the result. It also applies even if at the time of the issuance of the stock dividend, there was
no intention to redeem it as a means of distributing profit or avoiding tax on dividends. The existence of legitimate business purposes
in support of the redemption of stock dividends is immaterial in income taxation. It has no relevance in determining dividend
equivalence. Such purposes may be material only upon the issuance of the stock dividends. The test of taxability under the
exempting clause, when it provides such time and manner as would make the redemption essentially equivalent to the distribution
of a taxable dividend, is whether the redemption resulted into a flow of wealth. If no wealth is realized from the redemption, there
may not be a dividend equivalence treatment.

The three elements in the imposition of income tax are: (1) there must be gain or profit, (2) that the gain or profit is realized or
received, actually or constructively,and (3) it is not exempted by law or treaty from income tax. Any business purpose as to why or
how the income was earned by the taxpayer is not a requirement. Income tax is assessed on income received from any property,
activity or service that produces the income because the Tax Code stands as an indifferent neutral party on the matter of where
income comes from.

As stated above, the test of taxability under the exempting clause of Section 83(b) is, whether income was realized through the
redemption of stock dividends. The redemption converts into money the stock dividends which become a realized profit or gain and
consequently, the stockholders separate property.Profits derived from the capital invested cannot escape income tax. As realized
income, the proceeds of the redeemed stock dividends can be reached by income taxation regardless of the existence of any
business purpose for the redemption.

A review of the cited American cases shows that the presence or absence of genuine business purposes may be material with
respect to the issuance or declaration of stock dividends but not on its subsequent redemption. The issuance and the redemption of
stocks are two different transactions. Although the existence of legitimate corporate purposes may justify a corporations acquisition
of its own shares under Section 41 of the Corporation Code, such purposes cannot excuse the stockholder from the effects of
taxation arising from the redemption. If the issuance of stock dividends is part of a tax evasion plan and thus, without legitimate
business reasons the redemption becomes suspicious which may call for the application of the exempting clause. The substance of
the whole transaction, not its form, usually controls the tax consequences.

After considering the manner and the circumstances by which the issuance and redemption of stock dividends were made, there is
no other conclusion but that the proceeds thereof are essentially considered equivalent to a distribution of taxable dividends. As
taxable dividend under Section 83(b), it is part of the entire income subject to tax under Section 22 in relation to Section 21of the
1939 Code. Moreover, under Section 29(a) of said Code, dividends are included in gross income. As income, it is subject to income
tax which is required to be withheld at source. The 1997 Tax Code may have altered the situation but it does not change this
disposition.

EXCHANGE OF COMMON WITH PREFERRED SHARES

Exchange is an act of taking or giving one thing for another involving reciprocal transfer and is generally considered as a taxable
transaction. The exchange of common stocks with preferred stocks, or preferred for common or a combination of either for both, may
not produce a recognized gain or loss, so long as the provisions of Section 83(b) is not applicable. This is true in a trade between two
(2) persons as well as a trade between a stockholder and a corporation. In general, this trade must be parts of merger, transfer to
controlled corporation, corporate acquisitions or corporate reorganizations. No taxable gain or loss may be recognized on exchange
of property, stock or securities related to reorganizations.

Both the Tax Court and the Court of Appeals found that ANSCOR reclassified its shares into common and preferred, and that parts
of the common shares of the Don Andres estate and all of Doa Carmens shares were exchanged for the whole 150, 000 preferred
shares. Thereafter, both the Don Andres estate and Doa Carmen remained as corporate subscribers except that their subscriptions
now include preferred shares. There was no change in their proportional interest after the exchange. There was no cash flow. Both
stocks had the same par value. Under the facts herein, any difference in their market value would be immaterial at the time of
exchange because no income is yet realized - it was a mere corporate paper transaction. It would have been different, if the
exchange transaction resulted into a flow of wealth, in which case income tax may be imposed.
Reclassification of shares does not always bring any substantial alteration in the subscribers proportional interest. But the exchange
is different - there would be a shifting of the balance of stock features, like priority in dividend declarations or absence of voting rights.
Yet neither the reclassification nor exchange per se, yields realize income for tax purpose.

MEANING OF INCOME
EISNER VS MACOMER, 1920, 252 US 189

Facts: On January 1, 1916, the Standard Oil Company of California, a corporation of that state, out of an authorized capital
stock of $100,000,000, had shares of stock outstanding, par value $100 each, amounting in round figures to $50,000,000. In
January, 1916, in order to readjust the capitalization, the board of directors decided to issue additional shares sufficient to
constitute a stock dividend of 50 percent of the outstanding stock. Defendant in error, being the owner of 2,200 shares of the
old stock, received certificates for 1, 100 additional shares, of which 18.07 percent, or 198.77 shares, par value $19,877,
were treated as representing surplus earned between March 1, 1913, and January 1, 1916. She was called upon to pay, and
did pay under protest, a tax imposed under the Revenue Act of 1916, based upon a supposed income of $19,877 because of
the new shares, and, an appeal to the Commissioner of Internal Revenue having been disallowed, she brought action against
the Collector to recover the tax. The ground relied upon is that the stock dividend was not income within the meaning of the
Sixteenth Amendment.
Issue: Whether or not stock dividends are considered income.
Held: Income may be defined as the gain derived from capital, from labor, or from both combined," provided it be understood
to include profit gained through a sale or conversion of capital assets. Income is a gain, a profit, something of exchangeable
value, proceeding from the property, severed from the capital, however invested or employed, and coming in, being "derived"
-- that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal -- that is income derived
from property.
On the other hand, a "stock dividend" shows that the company's accumulated profits have been capitalized, instead of
distributed to the stockholders or retained as surplus available for distribution in money or in kind should opportunity offer. Far
from being a realization of profits of the stockholder, it tends rather to postpone such realization, in that the fund represented
 by the new stock has been transferred from surplus to capital, and no longer is available for actual distribution. The essential
and controlling fact is that the stockholder has received nothing out of the company's assets for his separate use and benefit.
It means then that stock dividends can not be considered as income.

Esso Standard Eastern, Inc. vs. CIR, GR Nos. L-28508-9 (1989)

NATURE OF THE CASE:

On appeal before us is the decision of the CTA denying petitioners claims for refund of overpaid income taxes of
P102,246.00 for 1959 and P434,234.93 for 1960

FACTS:
Case 1
1. Petitioner (P) ESSO deducted from its gross income for 1959, as part of its ordinary and necessary business expenses, the
amount it had spent for drilling and exploration of its petroleum concessions
2. Claim was disallowed by CIR on the ground that the expenses should be capitalized and might be written off as a loss only
when a dry hole should result
3. ESSO filed an amended return where it asked for the refund of P323,279 by reason of its abandonment as dry holes of
several of its oil wells
a. Also claimed as ordinary and necessary expenses in the same return was P340,822.04 representing margin fees it
had paid to the Central Bank on its profit remittances to its NY head office
4. CIR granted a tax credit of P221,033 only, disallowing the claimed deduction for the margin fees paid

Case 2
1. CIR assessed ESSO a deficiency income tax of P367,994 for the year 1960 plus 18% interest on P66,238.92 for April 18,
1961 to April 18, 1964 for a total of P434,232.92
a. The deficiency arose from the disallowance of the margin fees of P1,226,647.72 paid by ESSo to the Central Bank on
its profit remittances to its NY head office
2. ESSO settled this deficiency by applying the tax credit of P221,033 representing overpayment on its income tax for 1959 and
paying under protest additional P213,201.92
3. It then claimed the refund of P39,787.94 as overpayment on the interest on its deficiency income tax
a. It argued that the 18% interest should have been imposed not on the total deficiency of P367,944 but only on the
amount of P146,961, the difference between the total deficiency and its tax credit of P221,033

COURT DECISIONS:
1. CIR insisted on charging the 18% interest as well as denied the claims for refund of the overpayment in 1959 and 1960
income taxes holding that the margin fees paid to the CB could not be considered taxes or allowed as deductible business
expenses
2. CTA denied the refund of P102,246 for 1959 and P434,234.92 for 1960, but sustained its claim for P39,787.94 as excess
interest
3. SC affirmed in CIR v ESSO (1989)

ISSUE:
WON RA 2609 is a police measure or a revenue measure; if latter, the margin fees paid by the P to the CB on its profit
remittances to its NY head office should be deductible from ESSOs gross income under Sec. 30(c), NIRC, which provides
that all taxes paid or accrued during or within the taxable year and which are related to the taxpayers trade, business, or
profession are deductible from gross income

CASE FOR PETITIONER:

That margin fees are taxes and cites the background and legislative history of the Margin Fee Law showing that RA2609 was
nothing less than a revival of the 17% excise tax on foreign exchange imposed by RA 601

CASE FOR DEFENDANT:

ESSO prays that if margin fees are not taxes, they should nevertheless be considered necessary and ordinary business
expenses and therefore still deductible from its gross income
1. The fees were paid for the remittance by ESSO as part of the profits to the head office in the US; such remittance was an
expenditure necessary and proper for the conduct of its corporate affairs

SC RULING WITH RATIO:

Police measure
1. We conclude then that the margin fee was imposed by the State in the exercise of its police power and not the power of
taxation
a. A tax is levied to provide revenue for government operations, while the proceeds of the margin fee are applied
to strengthen our countrys international reserve
2. ESSO has not shown that the remittance to the head office of part of its profits was made in furtherance of its own trade or
business. The P merely presumed that all corporate expenses are necessary and appropriate in the absence of a showing
that they are all illegal or ultra vires
3. CIR was correct when it asserted that the paramount rule is that claims for deductions are a matter of legislative grace and do
not turn on mere equitable considerations; the taxpayer in every instance has the burden of justifying the allowance of any
deduction claimed
DISPOSITIVE:
Wherefore, the decision of the CTA denying the Ps claims for refund of P102,246 for 1959 and P434,234.92 for 1960 is
AFFIRMED

ZAMORA VS. CIR

G.R. No. L-15290. May 31, 1963.

FACTS:
Mariano Zamora, owner of the Bay View Hotel and Farmacia Zamora, Manila, filed his income tax returns for the years 1951
and 1952. The Collector of Internal Revenue found that he failed to file his return of the capital gains derived from the sale of
certain real properties and claimed deductions which were not allowable. The Collector required him to pay the sums of
P43,758.50 and P7,625.00, as deficiency income tax for the years 1951 and 1952, respectively.

The CTA modified the decision appealed from and ordered him to pay the reduced total sum of P30,258.00 (P22,980.00 and
P7,278.00, as deficiency income tax for the years 1951 and 1952, respectively),

Mariano Zamora appealed, alleging among others, that the CTA erred in disallowing P10,478.50 as promotion expenses
incurred by his wife for the promotion of the Bay View Hotel and Farmacia Zamora. He contends that the whole amount of
P20,957.00 as promotion expenses in his 1951 income tax returns, should be allowed and not merely one-half of it or
P10,478.50, on the ground that, while not all the itemized expenses are supported by receipts, the absence of some
supporting receipts has been sufficiently and satisfactorily established. For, as alleged, the said amount of P20,957.00 was
spent by Mrs. Esperanza A. Zamora (wife of Mariano), during her travel to Japan and the United States to purchase
machinery for a new Tiki-Tiki plant, and to observe hotel management in modern hotels.

ISSUE:
WON the CTA erred in allowing as promotion expenses of Mrs. Zamora claimed in Mariano Zamora's 1951 income tax
returns, merely one-half or P10,478.50.

RULING:
No. Section 30, of the Tax Code, provides that in computing net income, there shall be allowed as deductions all the ordinary
and necessary expenses paid or incurred during the taxable year, in carrying on any trade or business. Since promotion
expenses constitute one of the deductions in conducting a business, same must satisfy these requirements. Claims for the
deduction of promotion expenses or entertainment expenses must also be substantiated or supported by record showing in
detail the amount and nature of the expense incurred. Considering, as heretofore stated, that the application of Mrs. Zamora
for dollar allocation shows that she went abroad on a combined medical and business trip, not all of her expenses came
under the category of ordinary and necessary expenses; part thereof constituted her personal expenses. There having been
 no means by which to ascertain which expense was incurred by her in connection with the business of Mariano Zamora and
which was incurred for her personal benefit, the Collector and the CTA in their decisions, considered 50% of the said amount
of P20,957.00 as business expense and the other 50%, as her personal expenses. We hold that said allocation is very fair to
Mariano Zamora, there having been no receipt whatsoever, submitted to explain the alleged business expenses, or proof of
the connection which said expenses had to the business or the reasonableness of the said amount of P20,957.00.

Representation expenses fall under the category of business expenses which are allowable deductions from gross income, if
they meet the conditions prescribed by law, particularly section 30 (a) (1), of the Tax Code. To be deductible, they must be
ordinary and necessary expenses paid or incurred in carrying on any trade or business, and should meet the further test of
reasonableness in amount. They should, moreover, be covered by supporting paper; in the absence thereof the amount
properly deductible as representation expenses should be determined from all available data. (Visayan Cebu Terminal Co.,
Inc., vs. CIR)
In sum, the CTA, did not commit error in allowing as promotion expenses of Mrs. Zamora claimed in Mariano Zamora's 1951
income tax returns, merely one-half or P10,478.50.
DISPOSITIVE:
IN VIEW HEREOF, the petition in each of the above-entitled cases is dismissed, and the decision appealed from is affirmed

Kuenzle & Streiff v. CIR

FACTS:

1. Kuenzle & Streiff for the years 1953, 1954 and 1955 filed its income tax return, declaring losses.

2. CIR filed for deficiency of income taxes against Kuenzle & Streiff Inc. for the said years in the amounts of P40,455.00, P11,248.00
and P16,228.00, respectively, arising from the disallowance, as deductible expenses, of the bonuses paid by the corporation to its
officers, upon the ground that they were not ordinary, nor necessary, nor reasonable expenses within the purview of Section 30(a) (1)
of the National Internal Revenue Code.

3. The corporation filed with the Court of Tax Appeals a petition for review contesting the assessments. CTA favored the CIR, however
lowered the tax due on 1954. The corporation moved for reconsideration, but still lost.

4. The Corporation contends that the tax court, in arriving at its conclusion, acted "in a purely arbitrary manner", and erred in not
considering individually the total compensation paid to each of petitioner's officers and staff members in determining the
reasonableness of the bonuses in question, and that it erred likewise in holding that there was nothing in the record indicating that the
actuation of the respondent was unreasonable or unjust.

ISSUE: Whether or not the bonuses in question was reasonable and just to be allowed as a deduction?

HELD: No.

RATIO: It is a general rule that `Bonuses to employees made in good faith and as additional compensation for the services actually
rendered by the employees are deductible, provided such payments, when added to the stipulated salaries, do not exceed a
reasonable compensation for the services rendered. The condition precedents to the deduction of bonuses to employees are: (1) the
payment of the bonuses is in fact compensation; (2) it must be for personal services actually rendered; and (3) bonuses, when added
to the salaries, are `reasonable ... when measured by the amount and quality of the services performed with relation to the business of
the particular taxpayer. Here it is admitted that the bonuses are in fact compensation and were paid for services actually rendered. The
only question is whether the payment of said bonuses is reasonable.

There is no fixed test for determining the reasonableness of a given bonus as compensation. This depends upon many factors, one of
them being the amount and quality of the services performed with relation to the business. Other tests suggested are: payment must
be 'made in good faith'; the character of the taxpayer's business, the volume and amount of its net earnings, its locality, the type and
extent of the services rendered, the salary policy of the corporation'; 'the size of the particular business'; 'the employees' qualifications
and contributions to the business venture'; and 'general economic conditions. However, 'in determining whether the particular salary or
compensation payment is reasonable, the situation must be considered as a whole.

It seems clear from the record that, in arriving at its main conclusion, the tax court considered, inter alia, the following
factors:

1) The paid officers, in the absence of evidence to the contrary, that they were competent, on the other the record discloses no
evidence nor has petitioner ever made the claim that all or some of them were gifted with some special talent, or had undergone some
extraordinary training, or had accomplished any particular task, that contributed materially to the success of petitioner's business
during the taxable years in question.

2) All the other employees received no pay increase in the said years.

3) The bonuses were paid despite the fact that it had suffered net losses for 3 years. Furthermore the corporation cannot use the
excuse that it is 'salary paid' to an employee because the CIR does not question the basic salaries paid by petitioner to the officers and
employees, but disallowed only the bonuses paid to petitioner's top officers at the end of the taxable years in question.

CM HOSKINS & CO., INC. v. CIR (Villarin, P.)

[G.R. No. L-24059; November 28, 1969]
Inordinately large expense cannot be deductible.

Recit-Ready:
Facts: Hoskins, a domestic corporation engaged in the real
estate business as broker, managing agents and
administrators, filed its income tax return (ITR) showing
a net income of P92,540.25 and a tax liability of P18,508
which it paid. CIR disallowed 4 items of deductions in the
ITR. Court of Tax Appeals upheld the disallowance of an
item which was paid to Mr. C. Hoskins representing 50%
of supervision fees earned and set aside the
disallowance of the other 3 items.

Issue/s:
Whether the payment of the company to Mr. Hoskins of the sum
P99,977.91 as 50% share of supervision fees can be treated as
an ordinary and necessary expenses allowed for deduction.

Held: NO. It did not pass the test of reasonableness which is:

General rule: bonuses to employees made in good faith

and as additional compensation for services actually
rendered by the employees are deductible, provided
such payments, when added to the salaries do not
exceed the compensation for services rendered.
 The conditions precedent to the deduction of bonuses to
employees are:
1. Payment of bonuses is in fact compensation
2. Must be for personal services actually rendered
3. Bonuses when added to salaries are reasonable
when measured by the amount and quality of
services performed with relation to the business of
the particular taxpayer.

There is no fixed test for determining the

reasonableness of a given bonus as compensation. This
depends upon many factors.

Facts:
Petitioner, a domestic corporation engaged in the real estate business as brokers, managing agents and administrators, filed its
income tax return (ITR) showing a net income of P92, 540.25 and a tax liability due thereon of P18, 508.00, which it paid in due
course.
Upon verification of its return, CIR disallowed four items of deduction in petitioner's tax returns and assessed against it an income
tax deficiency in the amount of P28,054.00 plus interests.
The CTA upheld respondent's disallowance of the principal item of petitioner's having paid to Mr. C.M. Hoskins, its founder and
controlling stockholder the amount of P99,977.91 representing 50% of supervision fees earned by it and set aside respondent's
disallowance of three other minor items.
Petitioner questions in this appeal the Tax Court's findings that the disallowed payment to Hoskins was an inordinately large one,
which bore a close relationship to the recipient's dominant stockholdings and therefore amounted in law to a distribution of its
earnings and profits.

Issue/s:
Whether the payment of the company to Mr. Hoskins of the sum P99,977.91 as 50% share of supervision fees can be
treated as an ordinary and necessary expenses allowed for deduction.

Held/Ratio: CTA decision is affirmed.

NO. The payment to Mr. Hoskins was inordinately large and cannot be treated as a deductible ordinary and necessary
expense.

Hoskins was the Chairman of the BOD of petitioner corporation. He owned 99.6% of its total authorized capital stock, and was also
salesman-broker for his company. He was also receiving a 50% share of the sales commissions earned by his company as well as
his monthly salary of P3,750.00, amounting to an annual compensation of P45,000.00, plus an annual salary bonus of P40,000.00,
plus free use of the company car and receipt of other similar allowances and benefits, the Tax Court correctly ruled that the payment
by petitioner to Hoskins of the additional sum of P99,977.91 as his equal or 50% share of the 8% supervision fees received by the
company as managing agents of the real estate, subdivision projects of Paradise Farms, Inc. and Realty Investments, Inc. was
inordinately large and could not be accorded the treatment of ordinary and necessary expenses allowed as deductible items within
the purview of Section 30 (a) (i) of the Tax Code.

Similar to previous cases of disallowances as deductible items of officers' extra fees, bonuses and commissions, upheld by the Court
as not being within the purview of ordinary and necessary expenses and not passing the test of reasonable compensation.

It is a general rule that 'Bonuses to employees made in good faith and as additional compensation for the services actually rendered
by the employees are deductible, provided such payments, when added to the stipulated salaries, do not exceed a reasonable
compensation for the services rendered'.

The conditions precedent to the deduction of bonuses to employees are:

1) The payment of the bonuses is in fact compensation;
2) It must be for personal services actually rendered; and
3) The bonuses, when added to the salaries, are 'reasonable when measured by the amount and quality of the services
performed with relation to the business of the particular taxpayer'.

There is no fixed test for determining the reasonableness of a given bonus as compensation. This depends upon many factors, one
of them being 'the amount and quality of the services performed with relation to the business. However, in determining whether the
particular salary or compensation payment is reasonable, the situation must be considered as whole. Ordinarily, no single factor is
decisive it is important to keep in mind that it seldom happens that the application of one test can give satisfactory answer, and that
ordinarily it is the interplay of several factors, properly weighted for the particular case, which must furnish the final answer.
Petitioner's case fails to pass the test. Petitioners contention that it is the right of the employer as against CIR to fix the
compensation of its officers and employees, the Court held further that while the employer's right may be conceded, the question of
the allowance or disallowance thereof as deductible expenses for income tax purposes is subject to determination by CIR for income
tax purposes.

COMMISSIONER OF INTERNAL REVENUE vs. GENERAL FOODS (PHILS.), INC.

G.R. No. 143672 April 24, 2003
J. Corona

FACTS: General Foods, Phils. Inc. is engaged in the manufacture of beverages such as Tang, Calumet and Kool-Aid. It filed
its income tax return for the fiscal year ending February 28, 1985. In said tax return, General Foods claimed, as deduction,
among other business expenses, the amount of P9,461,246 for media advertising for Tang.

The Commissioner disallowed 50% or P4,730,623 of the deduction claimed by General Foods. Consequently, respondent
corporation was assessed deficiency income taxes in the amount of P2,635, 141.42. The latter filed an MR but the same was
denied.

General Foods appealed to the CTA but the appeal was dismissed.

CTA held that considering the grave economic situation taking place after the Aquino assassination, strong deterioration of
the purchasing power of the Philippine peso and the slacking demand for consumer products, such a gargantuan expense for
the advertisement of a singular product was definitely unreasonable.

On appeal, CA reversed the CTA decision and held that since it has not been sufficiently established that the item it claimed
as a deduction is excessive, the same should be allowed. Hence, the case at bar.
ISSUE: Whether the subject media advertising expense for Tang incurred by respondent corporation was an ordinary and
necessary expense fully deductible under the NIRC.

HELD: NO.

Section 34 (A) (1), formerly Section 29 (a) (1) (A), of the NIRC provides:
(A) Expenses.-
(1) Ordinary and necessary trade, business or professional expenses.-
(a) In general.- There shall be allowed as deduction from gross income all ordinary and necessary expenses
paid or incurred during the taxable year in carrying on, or which are directly attributable to, the development,
management, operation and/or conduct of the trade, business or exercise of a profession.
Simply put, to be deductible from gross income, the subject advertising expense must comply with the following
requisites:

(a) the expense must be ordinary and necessary;

(b) it must have been paid or incurred during the taxable year;
(c) it must have been paid or incurred in carrying on the trade or business of the taxpayer; and
(d) it must be supported by receipts, records or other pertinent papers.

The parties are in agreement that the subject advertising expense was paid or incurred within the corresponding taxable year
and was incurred in carrying on a trade or business. Hence, it was necessary. However, their views conflict as to whether or
not it was ordinary. To be deductible, an advertising expense should not only be necessary but also ordinary. These
two requirements must be met.
The Commissioner maintains that the subject advertising expense was not ordinary on the ground that it failed the two
condition: first, reasonableness of the amount incurred and second, the amount incurred must not be a capital outlay to
create goodwill for the product and/or private respondents business. Otherwise, the expense must be considered a
capital expenditure to be spread out over a reasonable time.

There is yet to be a clear-cut criteria or fixed test for determining the reasonableness of an advertising expense. There being
no hard and fast rule on the matter, the right to a deduction depends on a number of factors such as but not limited to:
the type and size of business in which the taxpayer is engaged; the volume and amount of its net earnings; the nature of the
expenditure itself; the intention of the taxpayer and the general economic conditions. It is the interplay of these, among other
factors and properly weighed, that will yield a proper evaluation.

In the case at bar, the P9,461,246 claimed as media advertising expense for Tang alone was almost one-half of its total
claim for marketing expenses. Aside from that, respondent-corporation also claimed P2,678,328 as other advertising and
promotions expense and another P1,548,614, for consumer promotion.

Furthermore, the subject P9,461,246 media advertising expense for Tang was almost double the amount of respondent
corporations P4,640,636 general and administrative expenses.

The SC finds the subject expense for the advertisement of a single product to be inordinately large. Therefore, even if
it is necessary, it cannot be considered an ordinary expense deductible under then Section 29 (a) (1) (A) of the NIRC.

The protection of brand franchise is analogous to the maintenance of goodwill or title to ones property. This is a capital
expenditure which should be spread out over a reasonable period of time.
Respondent corporations venture to protect its brand franchise was tantamount to efforts to establish a reputation. This was
akin to the acquisition of capital assets and therefore expenses related thereto were not to be considered as business
expenses but as capital expenditures.

True, it is the taxpayers prerogative to determine the amount of advertising expenses it will incur and where to apply them.
Said prerogative, however, is subject to certain considerations. The first relates to the extent to which the expenditures are
actually capital outlays; this necessitates an inquiry into the nature or purpose of such expenditures. The second, which must
be applied in harmony with the first, relates to whether the expenditures are ordinary and necessary. Concomitantly, for an
expense to be considered ordinary, it must be reasonable in amount. The Court of Tax Appeals ruled that respondent
corporation failed to meet the two foregoing limitations.

The P9,461,246 media advertising expense for the promotion of a single product, almost one-half of petitioner
corporations entire claim for marketing expenses for that year under review, inclusive of other advertising and promotion
expenses of P2,678,328 and P1,548,614 for consumer promotion, is doubtlessly unreasonable.

Further, it is a governing principle in taxation that tax exemptions must be construed in strictissimi juris against the taxpayer
and liberally in favor of the taxing authority; and he who claims an exemption must be able to justify his claim by the clearest
grant of organic or statute law. An exemption from the common burden cannot be permitted to exist upon vague implications.

Finally, deductions for income tax purposes partake of the nature of tax exemptions; hence, if tax exemptions are strictly
construed, then deductions must also be strictly construed.

CIR vs. Isabela Cultural Corporation

FACTS: Isabela Cultural Corporation (ICC), a domestic corporation received an assessment notice for deficiency income tax
and expanded withholding tax from BIR. It arose from the disallowance of ICCs claimed expense for professional and
security services paid by ICC; as well as the alleged understatement of interest income on the three promissory notes due
from Realty Investment Inc. The deficiency expanded withholding tax was allegedly due to the failure of ICC to withhold 1% e-
withholding tax on its claimed deduction for security services.

ICC sought a reconsideration of the assessments. Having received a final notice of assessment, it brought the case to CTA,
which held that it is unappealable, since the final notice is not a decision. CTAs ruling was reversed by CA, which was
sustained by SC, and case was remanded to CTA. CTA rendered a decision in favor of ICC. It ruled that the deductions for
professional and security services were properly claimed, it said that even if services were rendered in 1984 or 1985, the
amount is not yet determined at that time. Hence it is a proper deduction in 1986. It likewise found that it is the BIR which
overstate the interest income, when it applied compounding absent any stipulation.

Petitioner appealed to CA, which affirmed CTA, hence the petition.

ISSUE: Whether or not the expenses for professional and security services are deductible.

RULING: No. One of the requisites for the deductibility of ordinary and necessary expenses is that it must have been paid or
incurred during the taxable year. This requisite is dependent on the method of accounting of the taxpayer. In the case at bar,
ICC is using the accrual method of accounting. Hence, under this method, an expense is recognized when it is incurred.
Under a Revenue Audit Memorandum, when the method of accounting is accrual, expenses not being claimed as deductions
by a taxpayer in the current year when they are incurred cannot be claimed in the succeeding year.

The accrual of income and expense is permitted when the all-events test has been met. This test requires: 1) fixing of a right
to income or liability to pay; and 2) the availability of the reasonable accurate determination of such income or liability. The
test does not demand that the amount of income or liability be known absolutely, only that a taxpayer has at its disposal the
information necessary to compute the amount with reasonable accuracy.

From the nature of the claimed deductions and the span of time during which the firm was retained, ICC can be expected to
have reasonably known the retainer fees charged by the firm. They cannot give as an excuse the delayed billing, since it
could have inquired into the amount of their obligation and reasonably determine the amount.

CIR vs. CTA and Smith Kline & French Overseas Co. (Philippine branch)

FACTS: Smith Kline and French Overseas Company, a multinational firm domiciled in Pennsylvania, is licensed to do
business in the Phils. It is engaged in the importation, manufacture, and sale of pharmaceutical drugs and chemicals.
 In its original incomes tax return in 1971, Smith Kline declared a net taxable income of P1,489,277 and paid P511,247
as tax due. Among the deductions claimed from gross income was P501,040 as its share of the head office overhead
expenses.
However, in its amended return in 1973, there was an overpayment of P324,255 arising from underdeduction of home
office overhead. It made a formal claim for refund of the alleged overpayment because it appears that sometime in October
1972, Smith Kline received from its international independent auditors an authenticated certification to the effect that the
Philippine share in the unallocated overhead expenses of the main office for the year ended December 1971 was actually
P1,427,484, and that the allocation was made on the basis of the percentage of gross income in the Philippines to gross
income of the corporation as a whole. By reason of the new adjustment, Smith Klines tax liability was greatly reduced from
P511,247 to P186,992, resulting in an overpayment of P324,255.
The CTA rendered a decision in 1980 ordering the Commissioner to refund the overpayment or grant a tax credit to
Smith Kline. The Commissioner appealed.

ISSUE: Is Smith Klines share of the head office overhead expenses incurred outside the Philippines deductible?

HELD: YES. Smith Klines share of the head officer overhead expenses incurred outside the Philippines is deductible.
Section 37 of the old NIRC. Net Income from sources in the Philippines.
From the items of gross income specified in subsection (a) of this section, there shall be deducted the expenses,
losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expenses, losses, or other
deductions which cannot definitely be allocated to some item or class of gross income. The remained, if any, shall be included
in full as net income from sources within the Philippines.
Section 160. Apportionment of deductions.
The ratable part is based upon the ration of gross income from sources within the Philippines to the total gross
income.
EXAMPLE: A non-resident alien individual whose taxable year is the calendar year, derived gross income from all
sources for 1939 of P180,000, including therein:
Interest on bonds of a domestic corporation P9,000
Dividends on stock of a domestic corporation 4,000
Royalty for the use of patents within the Phils 12,000
Gain from sale of real property located in the Phils 11,000
TOTAL 36,000
That is, 1/5 of the total gross income was from sources within the Philippines. The remainder of the gross income was from
sources without the Philippines. The expenses of the taxpayer for the year amount to P78,000. Of these expenses, P8,000 is
properly allocated to income from sources within the Phils and P40,000 is from sources without the Phils. The remainder of
the expense, P30,000, cannot be definitely allocated to any class of income. A ratable part thereof, based upon the relation of
gross income from sources within the Phils to the total gross income shall be deducted in computing net income from sources
 within the Phils. Thus, these are deducted from the P36,000 of gross income from sources within the Phils expenses
amounting to P14,000 (representing P8,000 properly apportioned to the income from sources within the Philippines and
P6,000, a ratable part (1/5) of the expenses which could not be allocated to any item or class of gross income). The
remainder of P22,000 is the net income from sources within the Phils.

From the foregoing provisions, it is manifest that where an expense is clearly related to the production of Philippine-
derived income or to Phil operations (e.g., salaries of Phil personnel, rental of office building in the Phils), that expense can be
deducted from the gross income acquired in the Phils without resorting to apportionment.
The overhead expenses incurred by the parent company in connection with finance, administration, and research and
development, all of which direct benefit its branches all over the world, including the Phils, fall under a different category
however. There are items which cannot be definitely allocated or identified with the operations of the Phil branch. For 1971,
the parent company of Smith Kline spent $1,077,739. Under Sec. 37, Smith Kline can claim as its deductible share a ratable
part of such expenses based upon the ration of the local branchs gross income to the total gross income, worldwide, of the
multinational corporation. Smith Kline also presented ample evidence to support its claim for refund. We hold that Smith
Klines amended 1971 return is in conformity with the law and regulations. The Tax Court correctly held that the refund or
credit of the resulting overpayment is in order.

GUTIERREZ VS. COLLECTOR

GR No. L-9738 and L-9771
May 31, 1957

FACTS:

1. Maria Morales, married to Gutierrez(spouses), was the owner of an agricultural land. The U.S. Gov(pursuant to Military Bases
Agreement) wanted to expropriate the land of Morales to expand the Clark Field Air Base.
2. The Republic was the plaintiff, and deposited a sum of Php 152k to be able to take immediate possession. The spouses wanted
consequential damages but instead settled with a compromise agreement. In the compromise agreement, the parties agreed to keep
the value of Php 2,500 per hectare, except to some particular lot which would be at Php 3,000 per hectare.
3. In an assessment notice, CIR demanded payment of Php 8k for deficiency of income tax for the year 1950.
4. The spouses contend that the expropriation was not taxable because it is not "income derived from sale, dealing or disposition of
property" as defined in Sec. 29 of the Tax Code. The spouses further contend that they did not realize any profit in the said
transaction. CIR did not agree.
5. The spouses appealed to the CTA. The Solicitor General, in representation of the respondent Collector of Internal Revenue, filed
an answer that the profit realized by petitioners from the sale of the land in question was subject to income tax, that the full
compensation received by petitioners should be included in the income received in 1950, same having been paid in 1950 by the
Government. CTA favored SolGen but disregarded the penalty charged.
6. Both parties appealed to the SC.

ISSUES:
1. Whether or not that for income tax purposes, the expropriation should be deemed as income from sale and any profit derived
therefrom is subject to income taxes capital gain?

2. Whether or not there was profit or gain to be taxed?

HELD: Yes to both. CTA decision affirmed. It is subject to income tax.

RATIO 1: It is to be remembered that said property was acquired by the Government through condemnation proceedings and
appellants' stand is, therefore, that same cannot be considered as sale as said acquisition was by force, there being practically no
meeting of the minds between the parties. U.S jurisprudence has held that the transfer of property through condemnation
proceedings is a sale or exchange within the meaning of section 117 (a) of the 1936 Revenue Act and profit from the transaction
constitutes capital gain" "The taking of property by condemnation and the, payment of just compensation therefore is a "sale" or
"exchange" within the meaning of section 117 (a) of the Revenue Act of 1936, and profits from that transaction is capital gain.

SEC. 29. GROSS INCOME. (a) General definition. "Gross income" includes gains, profits, and income derived from salaries,
wages, or compensation for personal service of whatever kind and in whatever form paid, or from professions, vocations, trades,
businesses, commerce, sales or dealings in property, whether real or personal, growing out of ownership or use of or interest in such
property; also from interests, rents, dividends, securities, or the transactions of any business carried on for gain or profit, or gains,
profits, and income derived from any source whatsoever.

SEC. 37. INCOME FROM SOURCES WITHIN THE PHILIPPINES.

(a) Gross income from sources within the Philippines. The following items of gross income shall be treated as gross income from
sources within the Philippines:
xxxxxxxxx
(5) SALE OF REAL PROPERTY. Gains, profits, and income from the sale of real property located in the Philippines;
xxxxxxxxx
It appears then that the acquisition by the Government of private properties through the exercise of the power of eminent domain,
said properties being JUSTLY compensated, is embraced within the meaning of the term "sale" "disposition of property", and the
proceeds from said transaction clearly fall within the definition of gross income laid down by Section 29 of the Tax Code of the
Philippines.

RATIO 2: As to appellant taxpayers' proposition that the profit, derived by them from the expropriation of their property is merely
nominal and not subject to income tax, We find Section 35 of the Tax Code illuminating. Said section reads as follows:

SEC. 35. DETERMINATION OF GAIN OR LOSS FROM THE SALE OR OTHER DISPOSITION OF PROPERTY. The gain derived
or loss sustained from the sale or other disposition of property, real or personal, or mixed, shall be determined in accordance with the
following schedule:
(a) xxx xxx xxx
(b) In the case of property acquired on or after March first, nineteen hundred and thirteen, the cost thereof if such property was
acquired by purchase or the fair market price or value as of the date of the acquisition if the same was acquired by gratuitous title.
xxxxxxxxx
The records show that the property in question was adjudicated to Maria Morales by order of the Court of First Instance of Pampanga
on March 23, 1929, and in accordance with the aforequoted section of the National Internal Revenue Code, only the fair market price
or value of the property as of the date of the acquisition thereof should be considered in determining the gain or loss sustained by the
property owner when the property was disposed, without taking into account the purchasing power of the currency used in the
transaction. The records placed the value of the said property at the time of its acquisition by appellant Maria Morales P28,291.73
and it is a fact that same was compensated with P94,305.75 when it was expropriated. The resulting difference is surely a capital
gain and should be correspondingly taxed.

DISPOSITIVE: WHEREFORE, the decision appealed from by both parties is hereby affirmed, without pronouncement as to costs. It
is so ordered.
3M Philippines, Inc. vs. CIR, GR No. 82833 (1988)

NATURE OF THE CASE:

 Petition for review of the decision of CTA which affirmed the assessment of deficiency income tax on the petitioners (P) 1974
income tax return, for deductions of business expenses in the form of royalty payments to its foreign licensor which the
respondent (R) CIR disallowed

FACTS:
1. 3M Philippines is a subsidiary of the 3M-St. Paul, a non-resident foreign corporation with principal office in Minnesota, USA
2. 3M entered into a Service Information and Technical Assistance Agreement and a Patent and Trademark License Agreement
with 3M-St. Paul where P agreed to pay R a technical service fee of 3% and a royalty of 2% of its net sales
a. Both agreements were submitted to and approved by the CBP
3. 3M claimed the following deductions as business expenses:
a. Royalties and technical service fees of P3,050,646
b. Pre-operational cost of tape coater of P97,485.08
4. CIR allowed a deduction of P797,046.09 only as A for locally manufactured products, and disallowed the rest alleged to have
been paid as A worth of finished products imported by P from the parent company
a. CIR also allowed P19,544.77 for B, because it should be amortized for 5 years hence payment of the disallowed
balance should be spread over the next 4 years

COURT DECISIONS:
1. CIR ordered P to pay P840,540 as deficiency income tax on its 1974 return plus P353,026.80 as 14% interest per annum
from 1975 to 1976, or P1,193,566.80
2. CTA upheld CIRs ruling

ISSUE:
WON royalties are deductible as business expenses

CASE FOR PETITIONER:

1. That the law applicable to its case is only Sec. 29(a)(1) of the Tax Code, which provides that:
(a) Expenses. (1) Business expenses. (A) In general. All ordinary and necessary expenses paid or incurred during
the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for
personal services actually rendered; travelling expenses while away from home in the pursuit of a trade, profession or
business, rentals or other payments required to be made as a condition to the continued use or possession, for the purpose
of the trade, profession or business, for property to which the taxpayer has not taken or is not taking title or in which he has
no equity.
2. That the CBP has no say in the assessment and collection of internal revenue taxes as such power is lodged in the BIR

CASE FOR DEFENDANT: -

 SC RULING WITH RATIO:
1. NO; although the Tax Code allows payments of royalty to be deducted from gross income as business expenses, it is CB
Circular No. 393 that defines what royalty payment are; hence, improper payments of royalty are not deductible as legitimate
business expenses
2. CB Circular No. 393 has the force and effect of law having been issued by the CBP in the exercise of its authority under the
Central Bank Act, duly published in the OG

DISPOSITIVE:
Wherefore, finding no reversible error in the decision of the CTA, the petition for review is denied
Paper Industries Corporation of the Philippines v. CA
G.R. Nos. 106949-50
Feliciano, J.

Nature of the Case:

Petitions for review of a decision of the CA

Facts:
The Paper Industries Corporation (PICOP) received, on April 1983, from the CIR2 letters of assessment and demanded a.
one for deficiency transaction tax and for documentary and science tax; and b. the other for deficiency income tax for 1977, for an
aggregate amount of P 88,763,255.00.
Later, PICOP protested the assessment of deficiency transaction tax and documentary and science stamp taxes. PICOP also
protested the deficiency income tax assessment for 1977. But, said protests were not acted upon by CIR and instead issued a
warrant of distraint on personal property and a warrant of levy on real property against PICOP, to enforce collection of the contested
assessments. Thus, the protests were in effect denied.
PICOP went to CTA. CTA rendered a decision modifying the findings of the CIR and holding PICOP liable for a reduced
aggregate amount of P 20,133,762.33.
After the cases were transferred to CA by the SC (after an appeal by the parties to SC), the CA rendered a decision which
further reduced the liability of PICOP to P 6,338,354.70.

Additional Facts pertinent to Optional Treatment of Interest Expense Topic:

In 3 separate years, PICOP obtained loans from foreign creditors in order to finance the purchase of machinery and
equipment needed for its operations. In its 1977 Income Tax Return, PICOP claimed interest payments made in 1977 on these loans
as a deduction from its 1977 gross income
 CIR disallowed this deduction upon the ground that because the loans had been incurred for the purchase of machinery and
equipment, the interest payments on those loans should have been capitalized instead and claimed as a depreciation deduction
taking into account the adjusted basis of the machinery and equipment over the useful life of such assets.
Both CTA and CA sustained the position of PICP and held that the interest deduction claimed was proper and allowable.

Issue:
WON PICOP liable to pay any of the assessments
(issue as to Interest Expense) WON PICOP is entitled to deduct against current income interest payments on loans for the
purchase of machinery and equipment

Case of the Petitioner:

PICOP maintains that it is not liable to pay. It assails that the proprietary of the 35% deficiency transaction tax which the CA
held due held due. PICOP also questions the imposition by the CA of the deficiency income tax resulting from disallowance of certain
claimed financial guarantee expenses and claimed year-end adjustments of sales and cost of sales figures by PICOPs external
auditors.

Case of CIR:
CIR insists that the Court of Appeals erred in finding PICOP not liable for surcharge and interest on unpaid transaction tax
and for documentary and science stamp taxes and in allowing PICOP as deductible expenses the net operating losses of another
corporation and interest payments on loands for the purchase of machinery and equipment.
The CIR also claims that PICOP should be held liable for interest, surcharge and corporate development tax.

Supreme Court Decision:

Yes. The Supreme Court modified the decision of

Ratio Decidendi (Reasoning of the Court) as to Optional Treatment of Interest Expense:

The Court notes that interest payments on loans incurred by a taxpayer (whether BOI-registered or not) are allowed by the
NIRC as deductions against the taxpayers gross income. This is pursuant to Sec. 30 of the 1977 Tax Code.
Thus, the general rule is that interest expenses are deductible against gross income and this certainly includes interest paid
under loans incurred in connection with the carrying on of the business of the taxpayer.
In the case at hand, the CIR does not dispute that the interest payments were made by PICOP on loans incurred in
connection with the carrying on of the registered operations of PICOP, i.e., the financing of the purchase of machinery and
equipment actually used in the registered operations of PICOP. Neither does the CIR deny that such interest payments were legally
due and demandable under the terms of such loans, and in fact paid by PICOP during the tax year 1977. The CIR has been unable
to point to any provision of the 1977 Tax Code or any other statute that requires the disallowance of the interest payments made by
PICOP.
 The Court notes that the 1977 NIRC does not prohibit the deduction of interest on a loan incurred for acquiring machinery and
equipment. Neither does our 1977 NIRC compel the capitalization of interest payments on such a loan. The 1977 Tax Code is simply
silent on a taxpayers right to elect one or the other tax treatment of such interest payments. Accordingly, the general rule that
interest payments on a legally demandable loan are deductible from gross income must be applied.
As to the argument of CIR that to allow PICOP to deduct its interest payments against its gross income would be to
encourage fraudulent claims to double deductions from gross income, the Court held that they are not persuaded.
So far as the records of the instant cases show, PICOP has not claimed to be entitled to double deduction of its 1977 interest
payments. The CIR has neither alleged nor proved that PICOP had previously adjusted its cost basis for the machinery and
equipment purchased with the loan proceeds by capitalizing the interest payments here involved. The Court will not assume that the
CIR would be unable or unwilling to disallow a double deduction should PICOP, having deducted its interest cost from its gross
income, also attempt subsequently to adjust upward the cost basis of the machinery and equipment purchased and claim, e.g.,
increased deductions for depreciation.

CIR v. PALANCA
FACTS: Don Carlos Palanca, Sr. donated in favor of his son, the petitioner, herein shares of stock in La Tondea, Inc. amounting to
12,500 shares. For failure to file a return on the donation within the statutory period, the petitioner was assessed the sums of
P97,691.23, P24,442.81 and P47,868.70 as gift tax, 25% surcharge and interest, respectively, which he paid on June 22, 1955. The
petitioner filed with the BIR his income tax return for the calendar year 1955, claiming, among others, a deduction for interest
amounting to P9,706.45 and reporting a taxable income of P65,982.12. On the basis of this return, he was assessed the sum of
P21,052.91, as income tax, which he paid, as follows: Petitioner filed an amended return for the calendar year 1955, claiming therein
an additional deduction in the amount of P47,868.70 representing interest paid on the donee's gift tax, thereby reporting a taxable net
income of P18,113.42 and a tax due thereon in the sum of P3,167.00. The claim for deduction was based on the provisions of
Section 30(b) (1) of the Tax Code, which authorizes the deduction from gross income of interest paid within the taxable year on
indebtedness. A claim for the refund of alleged overpaid income taxes for the year 1955 amounting to P17,885.01, which is the
difference between the amount of P21,052.01 he paid as income taxes under his original return and of P3,167.00, was filed together
with this amended return. BIR denied the claim. On August 12, 1958, the petitioner once more filed an amended income tax return
for the calendar year 1955, claiming, in addition to the interest deduction of P9,076.45 appearing in his original return, a deduction in
the amount of P60,581.80, representing interest on the estate and inheritance taxes on the 12,500 shares of stock, thereby reporting
a net taxable income for 1955 in the amount of P5,400.32 and an income tax due thereon in the sum of P428.00. Again this was
denied. CTA reversed.
ISSUE/S: 1) Whether the amount paid by respondent Palanca for interest on his delinquent estate and inheritance tax is deductible
from the gross income for that year under Section 30 (b) (1) of the Revenue Code; 2) Whether the claim for refund has prescribed.
HELD: 1) Yes. While "taxes" and "debts" are distinguishable legal concepts, in certain cases as in the suit at bar, on account of their
nature, the distinction becomes inconsequential. We do not see any element in this case which can justify a departure from or
abandonment of the doctrine in the Prieto case. In both this and the said case, the taxpayer sought the allowance as deductible items
from the gross income of the amounts paid by them as interests on delinquent tax liabilities. Of course, what was involved in the cited
case was the donor's tax while the present suit pertains to interest paid on the estate and inheritance tax. This difference, however,
submits no appreciable consequence to the rationale of this Court's previous determination that
interests on taxes should be considered as interests on indebtedness within the meaning of Section 30(b) (1) of the Tax Code. 2) No.
The 30-day period under Section 11 of Republic Act 1125 did not even commence to run in this incident. It should be recalled that
while the herein petitioner originally assessed the respondent-claimant for alleged gift tax liabilities, the said assessment was
subsequently abandoned and in its lieu, a new one was prepared and served on the respondent-taxpayer. In this new assessment,
the petitioner charged the said respondent with an entirely new liability and for a substantially different amount from the first. While
initially the petitioner assessed the respondent for donee's gift tax in the amount of P170,002.74, in the
subsequent assessment the latter was asked to pay P191,591.62 for delinquent estate and inheritance tax. Considering that it is the
interest paid on this latter-assessed estate and inheritance tax that respondent Palanca is claiming refund for, then the thirty-day
period under the abovementioned section of Republic Act 1125 should be computed from the receipt of the final denial by the Bureau
of Internal Revenue of the said claim. In the second place, the claim at bar refers to the alleged overpayment by respondent Palanca
of his 1955 income tax. Inasmuch as the said account was paid by him by installment, then the computation of the two year
prescriptive period, under Section 306 of the National Internal Revenue Code, should be from the date of the last installment.
DOCTRINE: While "taxes" and "debts" are distinguishable legal concepts, in certain cases as in the suit at bar, on account of their
nature, the distinction becomes inconsequential.

Paper Industries Corporation of the Philippines v. CA

G.R. Nos. 106949-50
Feliciano, J.

Nature of the Case:

Petitions for review of a decision of the CA

Facts:
The Paper Industries Corporation (PICOP) received, on April 1983, from the CIR2 letters of assessment and demanded a.
one for deficiency transaction tax and for documentary and science tax; and b. the other for deficiency income tax for 1977, for an
aggregate amount of P 88,763,255.00.
Later, PICOP protested the assessment of deficiency transaction tax and documentary and science stamp taxes. PICOP also
protested the deficiency income tax assessment for 1977. But, said protests were not acted upon by CIR and instead issued a
warrant of distraint on personal property and a warrant of levy on real property against PICOP, to enforce collection of the contested
assessments. Thus, the protests were in effect denied.
PICOP went to CTA. CTA rendered a decision modifying the findings of the CIR and holding PICOP liable for a reduced
aggregate amount of P 20,133,762.33.
After the cases were transferred to CA by the SC (after an appeal by the parties to SC), the CA rendered a decision which
further reduced the liability of PICOP to P 6,338,354.70.
Additional Facts pertinent to Optional Treatment of Interest Expense Topic:
In 3 separate years, PICOP obtained loans from foreign creditors in order to finance the purchase of machinery and
equipment needed for its operations. In its 1977 Income Tax Return, PICOP claimed interest payments made in 1977 on these loans
as a deduction from its 1977 gross income
CIR disallowed this deduction upon the ground that because the loans had been incurred for the purchase of machinery and
equipment, the interest payments on those loans should have been capitalized instead and claimed as a depreciation deduction
taking into account the adjusted basis of the machinery and equipment over the useful life of such assets.
Both CTA and CA sustained the position of PICP and held that the interest deduction claimed was proper and allowable.

Issue:
WON PICOP liable to pay any of the assessments
(issue as to Interest Expense) WON PICOP is entitled to deduct against current income interest payments on loans for the
purchase of machinery and equipment

Case of the Petitioner:

PICOP maintains that it is not liable to pay. It assails that the proprietary of the 35% deficiency transaction tax which the CA
held due held due. PICOP also questions the imposition by the CA of the deficiency income tax resulting from disallowance of certain
claimed financial guarantee expenses and claimed year-end adjustments of sales and cost of sales figures by PICOPs external
auditors.

Case of CIR:
CIR insists that the Court of Appeals erred in finding PICOP not liable for surcharge and interest on unpaid transaction tax
and for documentary and science stamp taxes and in allowing PICOP as deductible expenses the net operating losses of another
corporation and interest payments on loands for the purchase of machinery and equipment.
The CIR also claims that PICOP should be held liable for interest, surcharge and corporate development tax.

Supreme Court Decision:

Yes. The Supreme Court modified the decision of

Ratio Decidendi (Reasoning of the Court) as to Optional Treatment of Interest Expense:

The Court notes that interest payments on loans incurred by a taxpayer (whether BOI-registered or not) are allowed by the
NIRC as deductions against the taxpayers gross income. This is pursuant to Sec. 30 of the 1977 Tax Code.
Thus, the general rule is that interest expenses are deductible against gross income and this certainly includes interest paid
under loans incurred in connection with the carrying on of the business of the taxpayer.
 In the case at hand, the CIR does not dispute that the interest payments were made by PICOP on loans incurred in
connection with the carrying on of the registered operations of PICOP, i.e., the financing of the purchase of machinery and
equipment actually used in the registered operations of PICOP. Neither does the CIR deny that such interest payments were legally
due and demandable under the terms of such loans, and in fact paid by PICOP during the tax year 1977. The CIR has been unable
to point to any provision of the 1977 Tax Code or any other statute that requires the disallowance of the interest payments made by
PICOP.
The Court notes that the 1977 NIRC does not prohibit the deduction of interest on a loan incurred for acquiring machinery and
equipment. Neither does our 1977 NIRC compel the capitalization of interest payments on such a loan. The 1977 Tax Code is simply
silent on a taxpayers right to elect one or the other tax treatment of such interest payments. Accordingly, the general rule that
interest payments on a legally demandable loan are deductible from gross income must be applied.
As to the argument of CIR that to allow PICOP to deduct its interest payments against its gross income would be to
encourage fraudulent claims to double deductions from gross income, the Court held that they are not persuaded.
So far as the records of the instant cases show, PICOP has not claimed to be entitled to double deduction of its 1977 interest
payments. The CIR has neither alleged nor proved that PICOP had previously adjusted its cost basis for the machinery and
equipment purchased with the loan proceeds by capitalizing the interest payments here involved. The Court will not assume that the
CIR would be unable or unwilling to disallow a double deduction should PICOP, having deducted its interest cost from its gross
income, also attempt subsequently to adjust upward the cost basis of the machinery and equipment purchased and claim, e.g.,
increased deductions for depreciation.

CIR v. LEDNICKY
Facts: V. E. Lednicky and Maria Valero Lednicky, are husband and wife, both American citizens residing in the Philippines, and have
derived all their income from Philippine sources for the taxable years under question. [GR L-18286] In compliance with local law, the
spouses, on 27
March 1957, filed their income tax return for 1956, reporting therein a gross income of P1,017,287.65 and a net income of
P733,809.44 on which the amount of P317,395.41 was assessed after deducting P4,805.59 as withholding tax. Pursuant to the
Commissioner of Internal Revenues assessment notice, the spouses paid the total amount of P326,247.41, inclusive of the withheld
taxes, on 15 April 1957. On 17 March 1959, the spouses filed an amended income tax return for 1956. The amendment consists in a
claimed deduction of P205,939.24 paid in 1956 to the US government as federal income tax for 1956. Simultaneously with the filing
of the amended return, the spouses requested the refund of P112,437.90. When the Commissioner of Internal Revenue failed to
answer the claim for refund, the spouses filed
their petition with the tax court on 11 April 1959 as CTA Case 646. [GR L-18165] On 28 February 1956, the spouses filed their
domestic income tax return for 1955, reporting a gross income of P1,771,124.63 and a net income of P1,052,550.67. On 19 April
1956, they filed an amended income tax return, the amendment upon the original being a lesser net income of P1,012,554.51, and,
on the basis of this amended return, they paid P570,252.00, inclusive of withholding taxes. After audit, the Commissioner determined
a deficiency of P16,116.00, which amount the spouses paid on 5 December 1956. Back in 1955, however, the spouses filed with the
US Internal Revenue Agent in Manila their Federal income tax return for the years 1947, 1951, 1952, 1953 and 1954 on income from
Philippine sources on a cash basis. Payment of these federal income taxes, including penalties and delinquency interest in the
amount of $264,588.82, were made in 1955 to the US Director of Internal Revenue, Baltimore, Maryland, through the National City
Bank of New York, Manila Branch. Exchange and bank charges in remitting payment totaled P4,143.91. On 11 August 1958 the said
respondents amended their Philippines income tax return for 1955 to including US Federal income taxes, interest accruing up to 15
May 1955, and exchange and bank charges, totaling P516,345.15 and therewith filed a claim for refund of the sum of P166,384.00,
which was later reduced to P150,269.00. The spouses brought suit in the Tax Court, which was docketed therein as CTA Case 570.
[GR 21434] The facts are similar to above cases but refer to the spouses income tax returns for 1957, filed on 28 February 1958,
and for which the spouses paid a total sum of P196,799.65. In 1959, they filed an amended return for 1957, claiming deduction of
P190,755.80, representing taxes paid to the US Government on income derived wholly from Philippine sources. On the strength
thereof, spouses seek refund of P90,520.75 as overpayment (CTA Case 783). The Tax Court decided for the spouses.
Issue: WON there should be a refund for the spouses
Held: NO. The Supreme Court reversed the decisions of the Court of Tax Appeals, and affirmed the disallowance of the refunds
claimed by the spouses, with costs against said spouses.
1. Section 30 (c-1) of the Philippine Internal Revenue Code Section 30 (c) (1) (Deduction from gross income) provides that in
computing net income there shall be allowed as deductions: (c) Taxes: (1) In general. Taxes paid or accrued within the taxable
year, except (A) The income tax provided for under this Title; (B) Income, war-profits, and excess profits taxes imposed by the
authority of any foreign country; but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his
desire to have to any extent the benefits of
paragraph (3) of this subsection (relating to credit for taxes of foreign countries); (C) Estate, inheritance and gift taxes; and (D) Taxes
assessed against local benefits of a kind tending to increase the value of the property assessed.
2. Paragraph (c) (3) (b) of the Tax Code; Credits against tax for taxes of foreign countries
Paragraph 3 (B) of the subsection (Credits against tax for taxes of foreign countries), reads: If the taxpayer signifies in his return his
desire to have the benefits of this paragraph, the tax imposed by this Title shall be credited with (B) Alien resident of the Philippines.
In the case of an alien resident of the Philippines, the amount of any such taxes paid or accrued during the taxable year to any
foreign country, if the foreign country of which such alien resident is a citizen or subject, in imposing such taxes, allows a similar
credit to citizens of the Philippines residing in
such country;
3. Paragraph (c) (4) of the Tax Code; Limitation on credit The tax credit so authorized is limited under paragraph 4 (A and B) of
the same subsection, in the following terms: Par. (c) (4) Limitation on credit. The amount of the credit taken under this section
shall be subject to each of the following limitations: (A) The amount of the credit in respect to the tax paid or accrued to any country
shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayers net income from sources
within such country taxable under this Title bears to his entire net income for the same taxable year; and (B) The total amount of the
credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayers net income from
sources without the Philippines taxable under this Title bears to his entire net income for the same taxable year.
4. Laws intent that right to deduct income taxes paid to foreign government taken as an alternative or substitute to claim of
tax credit for such foreign income tax Construction and wording of Section 30 (c) (1) (B) of the Internal Revenue Act shows the
laws intent that the right to deduct income taxes paid to foreign government from the taxpayers gross income is given
only as an alternative or substitute to his right to claim a tax credit for such foreign income taxes under section 30 (c) (3) and (4); so
that unless the alien resident has a right to claim such tax credit if he so chooses, he is precluded from deducting the foreign income
taxes from his gross income. For it is obvious that in prescribing that such deduction shall be allowed in the case of a taxpayer who
does not signify in his return his desire to have to any extent the benefits of paragraph (3) (relating to credits for taxes paid to foreign
countries), the statute assumes that the taxpayer in question also may signify his desire, to claim a tax credit and waive the
deduction; otherwise, the foreign taxes would always be deductible, and their mention in the list of nondeductible items in Section 30
(c) might as well have been omitted, or at least expressly limited to taxes on income from sources outside the Philippine Islands. Had
the law intended that foreign income taxes could be deducted from gross income in any event, regardless of the
taxpayers right to claim a tax credit, it is the latter right that should be conditioned upon the taxpayers waiving the deduction; in
which case the right to reduction under subsection (c-1-B) would have been made absolute or unconditional (by omitting foreign
taxes from the enumeration of non- deductions), while the right to a tax credit under subsection (c-3) would have been expressly
conditioned upon the taxpayers not claiming any deduction under subsection (c-1).
5. Danger of double credit does not exist if taxpayer cannot claim benefit from either headings at his option The purpose of
the law is to prevent the taxpayer from claiming twice the benefits of his payment of foreign taxes, by deduction from gross income
(subs. c-1) and by tax credit (subs. c-3). This danger of double credit certainly can not exist if the taxpayer can not claim benefit
under either of these headings at his option, so that he must be entitled to a tax credit (the spouses admittedly are not so entitled
because all their income is derived from Philippine sources), or the option to deduct from gross income disappears altogether.
6. When double taxation; Tax income should accrue to benefit of the Philippines
Double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity (cf.
Manila vs. Interisland Gas Service, 52 Off. Gaz. 6579, Manuf. Life Ins. Co. vs. Meer, 89 Phil. 357). In the present case, while the
taxpayers would have to pay two taxes on the same income, the Philippine government only receives the proceeds of one tax. As
between the Philippines, where the income was earned and where the taxpayer is domiciled, and the United States, where that
income was not earned and where the taxpayer did not reside, it is indisputable that justice and equity demand that the tax on the
income should accrue to the benefit of the Philippines. Any relief from the alleged double taxation should come from the United
States, and not from the Philippines, since the formers right to burden the taxpayer is solely predicated on his citizenship, without
contributing to the production of the wealth that is being taxed. To allow an alien resident to deduct from his gross income whatever
taxes he pays to his own government amounts to conferring on the latterpower to reduce the tax income of the Philippine
government simply by increasing the tax rates on the alien resident. Everytime the rate of taxation imposed upon an alien resident is
increased by his own government, his deduction from Philippine taxes would correspondingly increase, and the proceeds for the
Philippines diminished, thereby subordinating our own taxes to those levied by a foreign government. Such a result is incompatible
with the status of the Philippines as an independent and sovereign state.
DEDUCTIONS AND EXEMPTIONS; DEDUCTIONS IN GENERAL

ZAMORA v. COLLECTOR [G.R. No. L-15290. May 31, 1963.]

FACTS: Mariano Zamora, owner of the Bay View Hotel and Farmacia Zamora, Manila, filed his income tax returns. The Collector of
Internal Revenue found that the promotion expenses incurred by his wife for the promotion of the Bay View Hotel and Farmacia
Zamora were not allowable deductions. Mariano Zamora contends that the whole amount of the promotion expenses in his income
tax returns, should be allowed and not merely one-half of it, on the ground that, while not all the itemized expenses are supported by
receipts, the absence of some
supporting receipts has been sufficiently and satisfactorily established.
ISSUE: In the absence of receipts, WON to allow as deduction all or merely one-half of the promotion expenses of Mrs. Zamora
claimed in Mariano Zamora's income tax returns
HELD: One-half only. Claims for the deduction of promotion expenses r entertainment expenses must also be substantiated or
supported by record showing in detail the amount and nature of the expense incurred. Considering that the application of Mrs.
Zamora for dollar allocation shows that she went abroad on a combined medical and business trip, not all of her expenses came
under the category of ordinary and necessary expenses; part thereof constituted her personal expenses. There having been no
means by which to ascertain which expense was
incurred by her in connection with the business of Mariano Zamora and which was incurred for her personal benefit, the Collector
and the CTA in their decisions, considered 50% of the said amount as business expense and the other 50%, as her personal
expenses. While in situations like the present, absolute certainty is usually not possible, the CTA should make as close an
approximate as it can, bearing heavily, if it chooses, upon the taxpayer whose inexactness is of his own making.

ESSO STANDARD v. CIR [G.R. Nos. 28508-9. July 7, 1989.]

FACTS: Petitioner ESSO claimed as ordinary and necessary expenses in the same return the margin fees it paid to the Central Bank
on its profit remittances to its New York head office.
ISSUE: WON the margin fees were deductible from gross income either as a tax or as an ordinary and necessary business expense
HELD: Neither. The margin fees were imposed by the State in the exercise of its police power and not the power of taxation. Neither
are they necessary and ordinary business expenses. To be deductible as a business expense, the expense must be paid or incurred
in carrying on a trade or business. The fees were paid for the remittance by ESSO as part of the profits to the head office in the
United States, which is already another distinct and separate income taxpayer. Such remittance was an expenditure necessary and
proper for the conduct of its corporate affairs.

CIR v. GENERAL FOODS [G.R. No. 143672. April 24, 2003.]

FACTS: In its income tax return, respondent corporation claimed as deduction, among other business expenses, the amount for
media advertising for Tang, one of its products.
ISSUE: WON the subject media advertising expense for Tang incurred by respondent was an ordinary and necessary expense fully
deductible under the NIRC
HELD: Not deductible. Deductions for income tax purposes partake of the nature of tax exemptions; hence, must be strictly
construed. To be deductible from gross income, the subject advertising expense must be ordinary and necessary. There being no
hard and fast rule on the
reasonableness of an advertising expense, the right to a deduction depends on a number of factors such as but not limited to: the
type and size of business in which the taxpayer is engaged; the volume and amount of its net earnings; the nature of the expenditure
itself; the
intention of the taxpayer and the general economic conditions. The amount claimed as media advertising expense for Tang alone
was almost one-half of its total claim for marketing expenses. Furthermore, it was almost double the amount of respondent
corporation's general and administrative expenses. The subject expense for the advertisement of a single product is inordinately
large. Said venture of respondent to protect its brand franchise was tantamount to efforts to establish a reputation, and should not,
therefore, be considered as business expense but as capital expenditure, which normally should be spread out over a reasonable
period of time.

C.M. HOSKINS v. CIR G.R. No. L-28383. June 22, 1976.]

FACTS: Petitioner-appellant, a domestic corporation engaged in the development and management of subdivisions, sale of
subdivision lots and collection of installments due for a fee which the real estate owners pay as compensation for each of the
services rendered, failed to pay the real estate broker's tax on its income derived from the supervision and collection fees.
Consequently, the Commissioner of Internal Revenue demanded the payment of the percentage tax plus surcharge, contending that
said income is subject to the real estate broker's percentage tax. On the other hand, petitioner-appellant claimed that the supervision
and collection fees do not form part of its taxable gross compensation.
ISSUE: WON the supervision and collection fees received by a real estate broker are deductible from its gross compensation
HELD: No. With respect to the collection fees, the services rendered by Hoskins in collecting the amounts due on the sales of lots on
the installment plan are incidental to its brokerage service in selling the lots. If the broker's commissions on the cash sales of lots are
subject to the brokerage percentage tax, its commissions on installment sales should likewise be taxable. As to the supervision fees
for the development and management of the subdivisions, which fees were paid out of the proceeds of the sales of the subdivision
lots, they, too, are subject to the
real estate broker's percentage tax. The development, management and supervision services were necessary to bring about the
sales of the lots and were inseparably linked thereto. Hence, there is basis for holding that the operation of subdivisions is really
incidental to the main business of the broker, which is the sale of the lots on commission.

KUENZLE & STREIFF, INC. vs. THE COLLECTOR OF INTERNAL

REVENUE
Facts: Petitioner claimed as a deduction for income tax purposes for the years 1950, 1951 and 1952 salaries, directors' fees and
bonuses of its non-resident president and vice-president; bonuses of some of its resident officers and employees; and interests on
earned but unpaid
salaries and bonuses of its officers and employees. Petitioner gave to its non-resident president and vice president for the years
1950 and 1951 bonuses equal to 133-1/2% of their annual salaries and bonuses equal to 125 2/3% for the year 1952. Petitioner
however gave its resident officers and employees higher bonuses on the alleged reason because of their valuable contribution to the
business of the corporation which has made it possible for it to realize huge profits during the aforesaid years. The respondent
disallowed the said deductions hence they were assessed for deficiency income taxes. Upon re-examination by the respondents,
they allowed as deductions all items comprising directors' fees and salaries of the non-resident president and vice president, but
disallowing the bonuses insofar as they exceed the salaries of the recipients, as well as the interests on earned but unpaid salaries
and bonuses.
Issue: WON the excessive bonuses and interest should be allowed as a deduction for income tax purposes.
Held: No. Bonuses to employees made in good faith and as additional compensation for the services actually rendered by the
employees are deductible, provided such payments, when added to the stipulated salaries, do not exceed a reasonable
compensation for the services
rendered" Requisites for deductibility of employee bonuses: (1) the payment of the bonuses is in fact compensation; (2) it must be for
personal services actually rendered; and (3) the bonuses, when added to the salaries, are "reasonable . . . when measured by the
amount and quality of the services performed with relation to the business of the particular taxpayer". There is no fixed test for
determining the reasonableness of a given bonus as compensation. Deductible amount of bonuses is not limited to the amount of
salary of its recipient. The prevailing circumstances
should be considered. However In this case, the bonuses given to resident employees were higher than its non-resident officers on
the reason that the resident officers and employees had performed their duty well and rendered efficient service. It does not
necessarily follow that they should be given greater amount of additional compensation in the form of bonuses than what was given
to the non-resident officers. The non-resident officers had rendered the same amount of efficient personal service and contribution to
deserve equal treatment in compensation and
other emoluments with the particularity that their liberation yearly salaries had been much smaller. Interest should also be disallowed.
. Under the law, in order that interest may be deductible, it must be paid "on indebtedness" (Section 30, (b) (1) of the National
Internal Revenue Code). It is therefore imperative to show that there is an existing indebtedness which may be subjected to the
payment of interest. Here the items involved are unclaimed salaries and
bonus participation which in our opinion cannot constitute indebtedness within the meaning of the law because while they constitute
an obligation on the part of the corporation, it is not the latter's fault if they remained unclaimed. The willingness of the corporation to
pay interest thereon cannot be considered a justification to warrant deduction.

COLLECTOR OF INTERNAL REVENUE, petitioner, vs. GOODRICH

INTERNATIONAL RUBBER CO., respondent.
[G.R. No. L-22265. December 22, 1967.]
Facts: The CIR disallowed the bad debts and representation expense claimed as deduction of the respondent for tax purposes.
According to Goodrich the claim for deduction of the representation expense is based upon receipts issued, not by the entities in
which the alleged expenses had been incurred, but by the officers of Goodrich who allegedly paid them. To collect for the alleged
bad debts, the respondent sent demand letters. There were subsequent collections after the debts have been written.
Issue: WON the representation expense are valid deductions.
Held: No. If the expenses had really been incurred, receipts or chits would have been issued by the entities to which the payments
had been made, and it would have been easy for Goodrich or its officers to produce such receipts. Those issued by said officers
merely attest to their claim that they had incurred and paid said expenses. They do not establish payment of said alleged expenses
to the entities in which the same are said to have been incurred.
Issue: WON the bad debts are valid deduction for income tax purposes
Held: No. The ascertainment of worthlessness of bad debts requires proof of two facts: (1) that the taxpayer did in fact ascertain the
debt to be worthless in the year the deduction is sought; and (2) in so doing, he acted in good faith. Good faith is not enough. The
taxpayer must show
that he had reasonably investigated the relevant facts and had drawn a reasonable inference from the information thus obtained by
him. In this case, there were payments made after it has been written off and proves that there is undue haste in claiming it as bad
debts. Respondent has not proven that said debts were worthless. There is no evidence that thedebtors cannot pay them.

CIR v. PALANCA
FACTS: Don Carlos Palanca, Sr. donated in favor of his son, the petitioner, herein shares of stock in La Tondea, Inc. amounting to
12,500 shares. For failure to file a return on the donation within the statutory period, the petitioner was assessed the sums of
P97,691.23, P24,442.81 and P47,868.70 as gift tax, 25% surcharge and interest, respectively, which he paid on June 22, 1955. The
petitioner filed with the BIR his income tax return for the calendar year 1955, claiming, among others, a deduction for interest
amounting to P9,706.45 and reporting a taxable income of P65,982.12. On the basis of this return, he was assessed the sum of
P21,052.91, as income tax, which he paid, as follows: Petitioner filed an amended return for the calendar year 1955, claiming therein
an additional deduction in the amount of P47,868.70 representing interest paid on the donee's gift tax, thereby reporting a taxable net
income of P18,113.42 and a tax due thereon in the sum of P3,167.00. The claim for deduction was based on the provisions of
Section 30(b) (1) of the Tax Code, which authorizes the deduction from gross income of interest paid within the taxable year on
indebtedness. A claim for the refund of alleged overpaid income taxes for the year 1955 amounting to P17,885.01, which is the
difference between the amount of P21,052.01 he paid as income taxes under his original return and of P3,167.00, was filed together
with this amended return. BIR denied the claim. On August 12, 1958, the petitioner once more filed an amended income tax return
for the calendar year 1955, claiming, in addition to the interest deduction of P9,076.45 appearing in his original return, a deduction in
the amount of P60,581.80, representing interest on the estate and inheritance taxes on the 12,500 shares of stock, thereby reporting
a net taxable income for 1955 in the amount of P5,400.32 and an income tax due thereon in the sum of P428.00. Again this was
denied. CTA reversed.
ISSUE/S: 1) Whether the amount paid by respondent Palanca for interest on his delinquent estate and inheritance tax is deductible
from the gross income for that year under Section 30 (b) (1) of the Revenue Code; 2) Whether the claim for refund has prescribed.
HELD: 1) Yes. While "taxes" and "debts" are distinguishable legal concepts, in certain cases as in the suit at bar, on account of their
nature, the distinction becomes inconsequential. We do not see any element in this case which can justify a departure from or
abandonment of the doctrine in the Prieto case. In both this and the said case, the taxpayer sought the allowance as deductible items
from the gross income of the amounts paid by them as interests on delinquent tax liabilities. Of course, what was involved in the cited
case was the donor's tax while the present suit pertains to interest paid on the estate and inheritance tax. This difference, however,
submits no appreciable consequence to the rationale of this Court's previous determination that
interests on taxes should be considered as interests on indebtedness within the meaning of Section 30(b) (1) of the Tax Code. 2) No.
The 30-day period under Section 11 of Republic Act 1125 did not even commence to run in this incident. It should be recalled that
while the herein petitioner originally assessed the respondent-claimant for alleged gift tax liabilities, the said assessment was
subsequently abandoned and in its lieu, a new one was prepared and served on the respondent-taxpayer. In this new assessment,
the petitioner charged the said respondent with an entirely new liability and for a substantially different amount from the first. While
initially the petitioner assessed the respondent for donee's gift tax in the amount of P170,002.74, in the
subsequent assessment the latter was asked to pay P191,591.62 for delinquent estate and inheritance tax. Considering that it is the
interest paid on this latter-assessed estate and inheritance tax that respondent Palanca is claiming refund for, then the thirty-day
period under the abovementioned section of Republic Act 1125 should be computed from the receipt of the final denial by the Bureau
of Internal Revenue of the said claim. In the second place, the claim at bar refers to the alleged overpayment by respondent Palanca
of his 1955 income tax. Inasmuch as the said account was paid by him by installment, then the computation of the two year
prescriptive period, under Section 306 of the National Internal Revenue Code, should be from the date of the last installment.
DOCTRINE: While "taxes" and "debts" are distinguishable legal concepts, in certain cases as in the suit at bar, on account of their
nature, the distinction becomes inconsequential.

PAPER INDUSTRIES V CA
FACTS: Petitioner is registered with the BOI as a preferred pioneer enterprise with respect to its integrated pulp and paper mill, and
as a preferred non-pioneer enterprise with respect to its integrated plywood and veneer mills. It received from the CIR two (2) letters
of assessment
and demand (a) one for deficiency transaction tax and for documentary and science stamp tax; and (b) the other for deficiency
income tax for 1977, for an aggregate amount of P88,763,255.00. Picop protested the assessment of deficiency transaction tax and
documentary and science stamp taxes. These protests were not formally acted upon by respondent CIR. On 26 September 1984, the
CIR issued a warrant of distraint on personal property and a warrant of levy on real property against Picop, to enforce collection of
the contested assessments; in effect, the CIR denied Picop's protests. Thereupon, Picop went before the CTA. Picop and the CIR
both went to the Supreme Court on separate Petitions for Review of the above decision of the CTA. In two (2) Resolutions dated 7
February 1990 and 19 February 1990, respectively, the Court referred the two (2) Petitions to the Court of Appeals. The Court of
Appeals consolidated the two (2) cases and rendered a decision, dated 31 August 1992, which further reduced the liability of Picop to
P6,338,354.70. Picop now maintains that it is not liable at all to pay any of the
assessments or any part thereof. It assails the propriety of the thirty-five percent (35%) deficiency transaction tax which the Court of
Appeals held due from it in the amount of P3,578,543.51. Picop also questions the imposition by the Court of Appeals of the
deficiency income tax of P1,481,579.15, resulting from disallowance of certain claimed financial guarantee expenses and claimed
year-end adjustments of sales and cost of sales figures by Picop's external auditors. 3 The CIR, upon the other hand, insists that the
Court of Appeals erred in
finding Picop not liable for surcharge and interest on unpaid transaction tax and for documentary and science stamp taxes and in
allowing Picop to claim as deductible expenses.
ISSUE/S: 1) Whether Picop is liable for the thirty-five percent (35%) transaction tax; 2) Whether Picop is liable for interest and
surcharge on unpaid transaction tax; 3) Whether Picop is entitled to deduct against current income interest payments on loans for the
purchase of machinery and equipment; 4) Whether Picop is entitled to deduct against current income net operating losses incurred
by Rustan Pulp and Paper Mills, Inc; 5) Whether Picop is entitled to deduct against current income certain claimed financial
guarantee expenses; 6) Whether Picop had understated its sales and overstated its cost of sales for 1977; 7) Whether Picop is liable
for the corporate development tax of five percent (5%) of its income for 1977.
HELD: 1) We agree with the CTA and the Court of Appeals that Picop's tax exemption under R.A. No. 5186, as amended, does not
include exemption from the thirty-five percent (35%) transaction tax. In the first place, the thirty-five percent (35%) transaction tax is
an income tax, that is, it is a tax on the interest income of the lenders or creditors. It is thus clear that the transaction tax is an income
tax and as such, in any event, falls outside the scope of the tax exemption granted to registered pioneer enterprises by Section 8 of
R.A. No. 5186, as amended. 2) Section 51 (c) and (e) of the 1977 Tax Code did not authorize the imposition of a surcharge and
penalty interest for failure to pay the thirtyfive percent (35%) transaction tax imposed under Section 210 (b) of the same Code. The
corresponding provision in the current Tax Code very
clearly embraces failure to pay all taxes imposed in the Tax Code, without any regard to the Title of the Code where provisions
imposing particular taxes are textually located. Tax exemptions are, to be sure, to be "strictly construed," that is, they are not to be
extended beyond the ordinary and reasonable intendment of the language actually used by the legislative authority in granting the
exemption. The issuance of debenture bonds is certainly conceptually distinct from pulping and paper manufacturing operations. But
no one contends that issuance of bonds was a principal or regular business activity of Picop; only banks or other financial institutions
are in the
regular business of raising money by issuing bonds or other instruments to the general public.
3) We have already noted that our 1977 NIRC does not prohibit the deduction of interest on a loan incurred for acquiring machinery
and equipment. Neither does our 1977 NIRC compel the capitalization of interest payments on such a loan. The 1977 Tax Code is
simply silent on
a taxpayer's right to elect one or the other tax treatment of such interest payments. Accordingly, the general rule that interest
payments on a legally demandable loan are deductible from gross income must be applied. We conclude that the CTA and the Court
of Appeals did not err in allowing the deductions of Picop's 1977 interest payments on its loans for capital equipment against its gross
income for 1977. 4) After prolonged consideration and analysis of this matter, the Court is unable to agree with the CTA and Court of
Appeals on the deductibility of RPPM's accumulated losses against Picop's 1977 gross income. It is important to note at the outset
that in our jurisdiction, the ordinary rule that is, the rule applicable in respect of corporations not
registered with the BOI as a preferred pioneer enterprise is that net operating losses cannot be carried over. Under our Tax Code,
both in 1977 and at present, losses may be deducted from gross income only if such losses were actually sustained in the same year
that they are deducted or charged off. Thus it is that R.A. No. 5186 introduced the carry-over of net operating
losses as a very special incentive to be granted only to registered pioneer enterprises and only with respect to their registered
operations. In the instant case, to allow the deduction claimed by Picop would be to permit one corporation or enterprise, Picop, to
benefit from the operating
losses accumulated by another corporation or enterprise, RPPM. In effect, to grant Picop's claimed deduction would be to permit
Picop to purchase a tax deduction and RPPM to peddle its accumulated operating losses. We consider and so hold that there is
nothing in Section 7 (c) of
R.A. No. 5186 which either requires or permits such a result. Indeed, that result makes non-sense of the legislative purpose which
may be seen clearly to be projected by Section 7 (c), R.A. No. 5186. We conclude that the deduction claimed by Picop in the amount
of P44,196,106.00 in its 1977 Income Tax Return must be disallowed. 5) We must support the CTA and the Court of Appeals in their
foregoing rulings. A taxpayer has the burden of proving entitlement to a claimed
deduction. Even Picop's own vouchers were not submitted in evidence and the BIR Examiners denied that such vouchers and other
documents had been exhibited to them. Moreover, cash vouchers can only confirm the fact of disbursement but not necessarily the
purpose thereof.
6) The CIR has made out at least a prima facie case that Picop had understated its sales and overstated its cost of sales as set out
in its Income Tax Return. For the CIR has a right to assume that Picop's Books of Accounts speak the truth in this case since, as
already noted,
they embody what must appear to be admissions against Picop's own interest.
7) The adjusted net income of Picop for 1977, as will be seen below, is P48,687,355.00. Its net worth figure or total stockholders'
equity as reflected in its Audited Financial Statements for 1977 is P464,749,528.00. Since its adjusted net income for 1977 thus
exceeded ten percent (10%) of its net worth, Picop must be held liable for the five percent (5%) corporate development tax in the
amount of P2,434,367.75.
DOCTRINE: It is thus clear that the transaction tax is an income tax and
as such, in any event, falls outside the scope of the tax exemption
granted to registered pioneer enterprises by Section 8 of R.A. No. 5186,
as amended.

COLLECTOR v. FISHER
Facts: This case relates to the determination and settlement of the hereditary estate left by the deceased Walter G. Stevenson, and
the laws applicable thereto. Walter G. Stevenson (born in the Philippines on August 9, 1874 of British parents and married in the City
of Manila on January 23, 1909 to Beatrice Mauricia Stevenson another British subject) died on February 22, 1951 in San Francisco,
California, U.S.A. whereto he and his wife moved and established their permanent residence since May 10, 1945. In his will executed
in San Francisco on May 22, 1947, and which was duly probated in the Superior Court of California on April 11, 1951, Stevenson
instituted his wife Beatrice as his sole heiress to the following real and personal properties acquired by the spouses while residing in
the Philippines.
Issue: 1. Whether or not the estate is entitled to the following deductions: P8,604.39 for judicial and administration expenses;
P2,086.52 for funeral expenses; P652.50 for real estate taxes; and
P10,0,22.47 representing the amount of indebtedness allegedly incurred by the decedent during his lifetime
2. Whether or not the estate is entitled to the payment of interest on the amount it claims to have overpaid the government and to be
refundable to it.
Held: 1. YES. An examination of the record discloses, however, that the foregoing items were considered deductible by the Tax
Court on the basis of their approval by the probate court to which said expenses, we may presume, had also been presented for
consideration. It is to be
supposed that the probate court would not have approved said items were they not supported by evidence presented by the estate.
In allowing the items in question, the Tax Court had before it the pertinent order of the probate court which was submitted in evidence
by respondents. (Exh. "AA-2", p. 100, record). As the Tax Court said, it found no basis for departing from the findings of the probate
court, as it must have been satisfied that those expenses were actually incurred. Under the circumstances, we see no ground to
reverse this finding of fact which, under Republic Act of California National Association, which it would appear, that while still living,
Walter G. Stevenson obtained we are not inclined to pass upon the claim of respondents in respect to the
additional amount of P86.52 for funeral expenses which was disapproved by the court a quo for lack of evidence. In connection with
the deduction of P652.50 representing the amount of realty taxes paid in 1951 on the decedent's two parcels of land in Baguio City,
which respondents claim was disallowed by the Tax Court, we find that this claim has in fact been allowed.
2. NO. Respondent's claim for interest on the amount allegedly overpaid, if any actually results after a recomputation on the basis of
this decision is hereby denied in line with our recent decision in Collector of Internal Revenue v. St. Paul's Hospital (G.R. No. L-
12127, May 29, 1959) wherein we held that, "in the absence of a statutory provision clearly or expressly directing or authorizing such
payment, and none has been cited by respondents, the National Government cannot be required to pay interest."

DEDUCTIONS AND EXMEPTIONS; ALLOWABLE DEDUCTIONS;

TAXES
CIR v. LEDNICKY
Facts: V. E. Lednicky and Maria Valero Lednicky, are husband and wife, both American citizens residing in the Philippines, and have
derived all their income from Philippine sources for the taxable years under question. [GR L-18286] In compliance with local law, the
spouses, on 27
March 1957, filed their income tax return for 1956, reporting therein a gross income of P1,017,287.65 and a net income of
P733,809.44 on which the amount of P317,395.41 was assessed after deducting P4,805.59 as withholding tax. Pursuant to the
Commissioner of Internal Revenues assessment notice, the spouses paid the total amount of P326,247.41, inclusive of the withheld
taxes, on 15 April 1957. On 17 March 1959, the spouses filed an amended income tax return for 1956. The amendment consists in a
claimed deduction of P205,939.24 paid in 1956 to the US government as federal income tax for 1956. Simultaneously with the filing
of the amended return, the spouses requested the refund of P112,437.90. When the Commissioner of Internal Revenue failed to
answer the claim for refund, the spouses filed
their petition with the tax court on 11 April 1959 as CTA Case 646. [GR L-18165] On 28 February 1956, the spouses filed their
domestic income tax return for 1955, reporting a gross income of P1,771,124.63 and a net income of P1,052,550.67. On 19 April
1956, they filed an amended income tax return, the amendment upon the original being a lesser net income of P1,012,554.51, and,
on the basis of this amended return, they paid P570,252.00, inclusive of withholding taxes. After audit, the Commissioner determined
a deficiency of P16,116.00, which amount the spouses paid on 5 December 1956. Back in 1955, however, the spouses filed with the
US Internal Revenue Agent in Manila their Federal income tax return for the years 1947, 1951, 1952, 1953 and 1954 on income from
Philippine sources on a cash basis. Payment of these federal income taxes, including penalties and delinquency interest in the
amount of $264,588.82, were made in 1955 to the US Director of Internal Revenue, Baltimore, Maryland, through the National City
Bank of New York, Manila Branch. Exchange and bank charges in remitting payment totaled P4,143.91. On 11 August 1958 the said
respondents amended their Philippines income tax return for 1955 to including US Federal income taxes, interest accruing up to 15
May 1955, and exchange and bank charges, totaling P516,345.15 and therewith filed a claim for refund of the sum of P166,384.00,
which was later reduced to P150,269.00. The spouses brought suit in the Tax Court, which was docketed therein as CTA Case 570.
[GR 21434] The facts are similar to above cases but refer to the spouses income tax returns for 1957, filed on 28 February 1958,
and for which the spouses paid a total sum of P196,799.65. In 1959, they filed an amended return for 1957, claiming deduction of
P190,755.80, representing taxes paid to the US Government on income derived wholly from Philippine sources. On the strength
thereof, spouses seek refund of P90,520.75 as overpayment (CTA Case 783). The Tax Court decided for the spouses.
Issue: WON there should be a refund for the spouses
Held: NO. The Supreme Court reversed the decisions of the Court of Tax Appeals, and affirmed the disallowance of the refunds
claimed by the spouses, with costs against said spouses.
1. Section 30 (c-1) of the Philippine Internal Revenue Code Section 30 (c) (1) (Deduction from gross income) provides that in
computing net income there shall be allowed as deductions: (c) Taxes: (1) In general. Taxes paid or accrued within the taxable
year, except (A) The income tax provided for under this Title; (B) Income, war-profits, and excess profits taxes imposed by the
authority of any foreign country; but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his
desire to have to any extent the benefits of
paragraph (3) of this subsection (relating to credit for taxes of foreign countries); (C) Estate, inheritance and gift taxes; and (D) Taxes
assessed against local benefits of a kind tending to increase the value of the property assessed.
2. Paragraph (c) (3) (b) of the Tax Code; Credits against tax for taxes of foreign countries
Paragraph 3 (B) of the subsection (Credits against tax for taxes of foreign countries), reads: If the taxpayer signifies in his return his
desire to have the benefits of this paragraph, the tax imposed by this Title shall be credited with (B) Alien resident of the Philippines.
In the case of an alien resident of the Philippines, the amount of any such taxes paid or accrued during the taxable year to any
foreign country, if the foreign country of which such alien resident is a citizen or subject, in imposing such taxes, allows a similar
credit to citizens of the Philippines residing in
such country;
3. Paragraph (c) (4) of the Tax Code; Limitation on credit The tax credit so authorized is limited under paragraph 4 (A and B) of
the same subsection, in the following terms: Par. (c) (4) Limitation on credit. The amount of the credit taken under this section
shall be subject to each of the following limitations: (A) The amount of the credit in respect to the tax paid or accrued to any country
shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayers net income from sources
within such country taxable under this Title bears to his entire net income for the same taxable year; and (B) The total amount of the
credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayers net income from
sources without the Philippines taxable under this Title bears to his entire net income for the same taxable year.
4. Laws intent that right to deduct income taxes paid to foreign government taken as an alternative or substitute to claim of
tax credit for such foreign income tax Construction and wording of Section 30 (c) (1) (B) of the Internal Revenue Act shows the
laws intent that the right to deduct income taxes paid to foreign government from the taxpayers gross income is given
only as an alternative or substitute to his right to claim a tax credit for such foreign income taxes under section 30 (c) (3) and (4); so
that unless the alien resident has a right to claim such tax credit if he so chooses, he is precluded from deducting the foreign income
taxes from his gross income. For it is obvious that in prescribing that such deduction shall be allowed in the case of a taxpayer who
does not signify in his return his desire to have to any extent the benefits of paragraph (3) (relating to credits for taxes paid to foreign
countries), the statute assumes that the taxpayer in question also may signify his desire, to claim a tax credit and waive the
deduction; otherwise, the foreign taxes would always be deductible, and their mention in the list of nondeductible items in Section 30
(c) might as well have been omitted, or at least expressly limited to taxes on income from sources outside the Philippine Islands. Had
the law intended that foreign income taxes could be deducted from gross income in any event, regardless of the
taxpayers right to claim a tax credit, it is the latter right that should be conditioned upon the taxpayers waiving the deduction; in
which case the right to reduction under subsection (c-1-B) would have been made absolute or unconditional (by omitting foreign
taxes from the enumeration of non- deductions), while the right to a tax credit under subsection (c-3) would have been expressly
conditioned upon the taxpayers not claiming any deduction under subsection (c-1).
5. Danger of double credit does not exist if taxpayer cannot claim benefit from either headings at his option The purpose of
the law is to prevent the taxpayer from claiming twice the benefits of his payment of foreign taxes, by deduction from gross income
(subs. c-1) and by tax credit (subs. c-3). This danger of double credit certainly can not exist if the taxpayer can not claim benefit
under either of these headings at his option, so that he must be entitled to a tax credit (the spouses admittedly are not so entitled
because all their income is derived from Philippine sources), or the option to deduct from gross income disappears altogether.
6. When double taxation; Tax income should accrue to benefit of the Philippines
Double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity (cf.
Manila vs. Interisland Gas Service, 52 Off. Gaz. 6579, Manuf. Life Ins. Co. vs. Meer, 89 Phil. 357). In the present case, while the
taxpayers would have to pay two taxes on the same income, the Philippine government only receives the proceeds of one tax. As
between the Philippines, where the income was earned and where the taxpayer is domiciled, and the United States, where that
income was not earned and where the taxpayer did not reside, it is indisputable that justice and equity demand that the tax on the
income should accrue to the benefit of the Philippines. Any relief from the alleged double taxation should come from the United
States, and not from the Philippines, since the formers right to burden the taxpayer is solely predicated on his citizenship, without
contributing to the production of the wealth that is being taxed. To allow an alien resident to deduct from his gross income whatever
taxes he pays to his own government amounts to conferring on the latterpower to reduce the tax income of the Philippine
government simply by increasing the tax rates on the alien resident. Everytime the rate of taxation imposed upon an alien resident is
increased by his own government, his deduction from Philippine taxes would correspondingly increase, and the proceeds for the
Philippines diminished, thereby subordinating our own taxes to those levied by a foreign government. Such a result is incompatible
with the status of the Philippines as an independent and sovereign state.

GUTIERREZ v. COLLECTOR
Facts: Maria Morales was the registered owner of an agricultural land designated as Lot No. 724-C of the cadastral survey of
Mabalacat, Pampanga. The Republic of the Philippines, at the request of the U.S.Government and pursuant to the terms of the
Military Bases Agreement of March 14, 1947, instituted condemnation proceedings in the Court of the First Instance of Pampanga,
docketed, as Civil Case No. 148, for the purpose of expropriating the lands owned by Maria Morales and others needed for the
expansion of the Clark Field Air Base. t the commencement of the action, the Republic of the Philippines, therein plaintiff deposited
with the Clerk of the Court of First Instance of Pampanga the sum of P156,960, which was provisionally fixed as the value of the
lands sought to be expropriated, in order that it could take immediate possession of the same. On January 27, 1949, upon order of
the Court, the sum of P34,580 (PNB Check 721520-Exh. R) was paid by the Provincial treasurer of Pampanga to Maria Morales out
of the original deposit of P156,960 made by therein plaintiff. After due hearing, the Court of First Instance of Pampanga rendered
decision dated November 29, 1949, wherein it fixed as just compensation P2,500 per hectare for some of the lots and P3,000 per
hectare for the others, which values were based on the reports of the Commission on Appraisal whose members were chosen by
both parties and by the Court, which took into consideration the different conditions affecting, the value of the condemned properties
in making their findings.
In virtue of said decision, defendant Maria Morales was to receive the amount of P94,305.75 as compensation for Lot No. 724-C
which was one of the expropriated lands. Sometime in 1950, the spouses Blas Gutierrez and Maria Morales received the sum of
P59.785.75 presenting the balance remaining in their favor after deducting the amount of P34,580 already withdrawn from the
compensation to them. In a notice of assessment dated January 28, 1953, the Collector of
Internal Revenue demanded of the petitioners the payment of P8,481 as alleged deficiency income tax for the year 1950, inclusive of
surcharges and penalties. The CIR contended that petitioners-appellants failed to include from their gross income, in filing their
income tax return for 1950, the amount of P94,305.75 which they had received as compensation for their land taken by the
Government by expropriation proceedings. It is the contention of respondent Collector of Internal Revenue that such transfer of
property, for taxation purposes, is "sale" and that the income derived therefrom is taxable. The lower court exonerated petitioners
from the 50 per cent surcharge
imposed on the latter, on the ground that the taxpayers' income tax return for 1950 is false and/or fraudulent.
Issue: WON petitioners should pay surcharge Held: NO. It should be noted that the Court of Tax Appeals found that the evidence
did not warrant the imposition of said surcharge because
the petitioners therein acted in good faith and without intent to defraud the Government.
The question of fraud is a question of fact which frequently requires a nicely balanced judgement to answer. All the facts and
circumstances surrounding the conduct of the tax payer's business and all the facts incident to the preparation of the alleged
fraudulent return should be considered. (Mertens, Federal Income Taxation, Chapter 55). The question of fraud being a question of
fact and the lower court having made the finding that "the evidence of this case does not warrant the imposition of the 50 per cent
surcharge", We are constrained to refrain from giving any consideration to the question raised by the Solicitor General, for it is
already settled in this jurisdiction that in passing upon petitions to review decisions of the Court of Tax Appeals, We have to confine
ourselves to questions of law.

PLARIDEL SURETY v. CIR

Facts: Petitioner Plaridel Surety & Insurance Co., is a domestic corporation engaged in the bonding business. On November 9,
1950, petitioner, as surety, and Constancio San Jose, as principal, solidarily executed a performance bond in the penal sum of
P30,600.00 in favor of the P. L. Galang Machinery Co., Inc., to secure the performance of San Jose's contractual obligation to
produce and supply logs to the latter. To afford itself adequate protection against loss or damage on the performance bond, petitioner
required San Jose and one Ramon Cuervo to execute an indemnity agreement obligating themselves, solidarily, to indemnify
petitioner for whatever liability it may incur by reason of said performance bond. Accordingly, San Jose constituted a chattel
mortgage on logging machineries and other movables in petitioner's favor1 while Ramon Cuervo executed a real estate mortgage.2
San Jose later failed to deliver the logs to Galang Machinery3 and the latter sued on the performance bond. On October 1, 1952, the
Court of First Instance adjudged San Jose and petitioner liable; it also directed San Jose and Cuervo to reimburse petitioner for
whatever amount it would pay Galang Machinery. The Court of Appeals, on June 17, 1955, affirmed the judgment of the lower court.
The same judgment was
likewise affirmed by this Court4 on January 11, 1957 except for a slight modification apropos the award of attorney's fees. In its
income tax return for the year 1957, petitioner claimed the said
amount of P44,490.00 as deductible loss from its gross income and, accordingly, paid the amount of P136.00 as its income tax for
1957. The Commissioner of Internal Revenue disallowed the claimed deduction of P44,490.00 and assessed against petitioner the
sum of P8,898.00, plus interest, as deficiency income tax for the year 1957. Petitioner filed its protest which was denied. Whereupon,
appeal was taken to the Tax Court, petitioner insisting that the P44,490.00 which it paid to Galang Machinery was a deductible loss.
Issue: WON the amount Plaridel paid to Galang Machinery is a deductible loss
Held: NO. There is no question that the year in which the petitioner Insurance Co. effected payment to Galang Machinery pursuant
to a final decision occurred in 1957. However, under the same court decision, San Jose and Cuervo were obligated to reimburse
petitioner for whatever
payments it would make to Galang Machinery. Clearly, petitioner's loss is compensable otherwise (than by insurance). It should
follow, then, that the loss deduction can not be claimed in 1957. Now, petitioner's submission is that its case is an exception. Citing
Cu Unjieng Sons, Inc. v. Board of Tax Appeals,6 and American cases also, petitioner argues that even if there is a right to
compensation by insurance or otherwise, the deduction can be taken in the year of actual loss where the possibility of recovery is
remote. The pronouncement, however to this effect in the Cu Unjieng case is not as authoritative as petitioner would have it since it
was there found that the taxpayer had no legal right to compensation either by insurance or otherwise.7 And the American cases
cited8 are not in point. None of them involved a taxpayer who had, as in the present case, obtained a final judgment against third
persons for reimbursement of payments made. In those cases, there was either no legally enforceable right at all or such claimed
right was still to be, or being, litigated. On the other hand, the rule is that loss deduction will be denied if there is a measurable right to
compensation for the loss, with ultimate collection
reasonably clear. So where there is reasonable ground for reimbursement, the taxpayer must seek his redress and may not secure a
loss deduction until he establishes that no recovery may be had.9 In other words, as the Tax Court put it, the taxpayer (petitioner)
must exhaust his remedies first to recover or reduce his loss. But assuming that there was no reasonable expectation of recovery,
still no loss deduction can be had. Sec. 30 (d) (2) of the Tax Code requires a charge-off as one of the conditions for loss deduction:
In the case of a corporation, all losses actually sustained and charged-off within the taxable year and not compensated for by
insurance or otherwise. Mertens12 states only four (4) requisites because the United States
Internal Revenue Code of 193913 has no charge-off requirement. Sec. 23(f) thereof provides merely: In the case of a corporation,
losses sustained during the taxable year and not compensated for by insurance or otherwise. Petitioner, who had the burden of
proof14 failed to adduce evidence that there was a charge-off in connection with the P44,490.00or P30,600.00 which it paid to
Galang Machinery.

CHINA BANKING CORPORATION V COURT OF APPEALS

Facts: Petitioners mad a 53% equity investment in First CBC Capital (Asia) Limited to the amount of P16,227,851.80 consisting of
106,000 shares with par value of P100 per share.
Subsequently, First CBC was found to be insolvent. Petitioners, with the approval of the BSP, wrote off as worthless its investment in
the company and treated it as a bad debt or ordinary loss deductible from its gross income. The Commissioner of Internal Revenue
disallowed the deduction saying that the investment could not be considered "worthless" since First CBC could still exercise its
financing and investment activities even if it was no longer licensed as a depository. Even assuming that the securities had become
worthless, it still cannot be considered as a "bad debt" or expense since there is no indebtedness between petitioner and First CBC.
It should be classified as a "capital loss."
Held: The SC found in favor of respondents.
1. Not and indebtedness. An equity investment in shares of stock cannot be considered as an indebtedness of First CBC Capital to
China Bank. The former has no obligation to repay the latter the amount invested. The amount China Bank invested in First CBC is,
in fact, an
asset.
2. Capital asset, not ordinary. Capital assets are defined in the negative by Sec 33(1) of the NIRC as property held by the TP
exclusive of items primarily for the sale to customers in the ordinary course of business, or property used in trade or business.
Hence, securities, such as equity holdings, are ordinary assets only in the hands of a dealer, or a person actively engaged in trading
in the same for his own account.
3. Section 29(d)(4)(B) of the NIRC treats the worthlessness of the securities held as capital assets as a loss resulting from the
sale or exchange of capital assets. Strictly speaking, no sale occurs when securities held as capital assets become worthless.
Nonetheless, the law treats it as a loss from a sale just the same.
4. Section 33 of the NIRC provides that the capital loss sustained can only be deducted from any capital gain derived within the
taxable year. The same provision enumerates assets which are not subject to the said limitation but equity holdings are not one of
them.

MARCELO STEEL CROP V COLLECTOR OF INTERNAL REVENUE

Facts: RA 35 granted a four-year tax exemption from all internal revenue taxes to enterprises, directly payable by such enterprise or
person, which shall engage in new and necessary industries. Petitioner corporation was engaged in: 1. the manufacture of wire
fences; 2. the manufacture of steel nails; 3. the manufacture of steel bars, rods, and other allied products
of which the last two were covered by RA 35 In 1953 and 1954, petitioner filed its ITR showing a net income of P34,386.58 and
P58,329.00, respectively, derived solely from its wire fence manufacturing business. It was accordingly assessed P12,750 in taxes
which it paid. subsequently, it filed an amended ITR for the same taxable years showing that it actually incurred a loss of
P871,407.37 and P104,956.29, respectively. The losses were arrived at by consolidating the gross income and the gross allowable
deductions of its three industries. Petitioner thus filed for a refund of the P12,750 it initially paid in taxes on the theory that since it is a
corporation organized with a single capital to answer for all its financial obligations, the gross income from both tax-exempt and non-
exempt industries and its liability should be based on the difference between its consolidated gross income and its consolidated
allowable deductions.
Held: Petition has no merit; Marcelo Steel cannot consolidate. 1. The purpose of RA 35 is to encourage the establishment of new
and necessary industries for the economic growth of the country. In effect, it grants a subsidy to entrepreneurs who blaze a trail in a
new industry since there are greater risks involved in the same and an ROI is usually not immediately forthcoming. As such, a tax
exemption granted to an entrepreneur engaged in a tax-exempt industry cannot be extended to benefit non-exempt industries in
which the same entrepreneur is concurrently engaged. The justification is simply not there since such industries are, presumably,
already deriving profits from its operations. 2. Single capital - The fact that all three industries are organized under a single capital is
of no moment. It is clear that the law intended that tax exempt
and non-exempt industries be treated separately as reflected in EO 341, series 0f 1950, which was incorporated in RA 901, a later
incarnation of the same law.

DEDUCTIONS AND EXEPTIONS; ALLOWABLE DEDUCTIONS; BAD

DEBTS
PHILIPPINE REFINING COMPANY V COURT OF APPEALS
Facts: In 1985, petitioner filed its ITR where it claimed 16 items amounting to P713,070.93 as bad debts and therefor deductible.
Subsequently, the Commissioner for Internal Revenue disallowed such deductions and assessed petitioner to pay a deficiency tax
for the year of 1985. Petitioner paid the deficiency tax under protest which the Commissioner denied.
Upon a petition for review, the CTA modified the findings of the Commissioner by reducing the deficiency tax assessment on the
basis that three of the sixteen supposed bad debts could be allowed as deductions. The CA later on agreed with the CTA.
Held: The SC upheld the ruling of the CA which it found to be in accordance with the SC's ruling in Collector v Goodrich. It held the
petitioner failed to substantiate the worthlessness of the 13 debts which it claimed as deductions. As per the ruling in Collector v
Goodrich, to qualify as a bad debt, a TP must show: 1. that there is a valid and subsisting debt;
2. that the debt must be actually ascertained to be worthless and uncollectible durring the taxable year;
3. the debt must be charged off during the taxable year; and
4. the debt must arise from the business or trade of the TP.
In addition, the Court said, before a debt can be considered worthless, the TP must also show that it is indeed uncollectible even in
the future. Furthermore, the TP must undertake several steps to prove that he exerted diligent efforts to collect the debt:
1. sending statements of accounts to the debtors; 2. sending of collection letters; 3. giving the account to a lawyer for collection; and
4. filing a collection case in court. In the case at bar, the petitioner miserably failed to show any of the foregoing. The only piece of
evidence it offered to show the worthlessness of the debts was the testimony of the company's financial adviser or accountant. The
Court found that this lacked the required probity to establish that the accounts it claimed as bad debts were indeed worthless. Apart
from such testimony, the petitioner failed to introduce even a single iota of evidence to bolster its claim of worthlessness. (NOTE: In
the rest of the case, the Court presents the allegation of the petitioner as to why it could not collect on any of the 13 debts followed by
a statement how the petitioner failed to introduce evidence to substantiate such allegation.)

Collector of Internal Revenue v Goodrich International Rubber Co.

(21 SCRA 1336; No. L-22265)
Facts: In 1951 and 1952, respondent Goodrich filed it ITR in which it claimed an aggregate amount (consisting of 18 individual
accounts) of P50,455.41 as deductible for being bad debts. The Collector of Internal Revenue disallowed the deductions and
accordingly assessed Goodrich accordingly. Goodrich protested the assessment and subsequently filed an appeal
with the CTA which allowed the deductions for bad debts. Hence, this appeal by the Government.
Held: Petition is partially meritorious. Some of the items claimed by Goodrich can rightfully be written off as bad debts. The SC
rejected the claim for deduction of 10 items because Goodrich
failed to establish that that the debts were actually worthless or that it had reasonable grounds to believe them to be so in 1951. The
law permits the deduction of debts actually ascertained to be worthless within the taxable year, obviously to prevent arbitrary action
by the TP to unduly avoid tax liability. Good faith on the part of the TP is not enough. He must furthermore show that he had
reasonably investigated the relevant facts and had drawn a reasonable inference from the information thus obtained by him. At any
rate, respondent failed to prove that the debts were indeed worthless and that the debtors had no ability to pay them. On the
contrary, of these 10 accounts some payments were actually made (some in full) after they had been characterized as bad debts and
written off. The Court however ruled that 8 of the 18 claimed bad debts can be
allowed as deductions. Common among these 8 was the action of Goodrich in persistently demanding payment from its debtors; it's
endorsement of the accounts to counsel for collection; the pursuit of legal remedies for the collection on these debts; and the
continuing failure/clear inability of the debtors to pay off their obligations.

DEDUCTIONS AND EXEMPTIONS; ALLOWABLE DEDUCTIONS;

DEPRECIATION
BASILAN ESTATES, INC. v. CIR
Facts: Basilan Estates, Inc. claimed deductions for the depreciation of its assets on the basis of their acquisition cost. As of January
1, 1950 it changed the depreciable value of said assets by increasing it to conform with the increase in cost for their replacement.
Accordingly, from 1950 to
1953 it deducted from gross income the value of depreciation computed on the reappraised value. CIR disallowed the deductions
claimed by petitioner, consequently assessing the latter of deficiency income taxes.
Issue:Whether or not the depreciation shall be determined on the acquisition cost rather than the reappraised value of the assets.
Held: Yes. The following tax law provision allows a deduction from gross income for depreciation but limits the recovery to the capital
invested in the asset being depreciated: (1)In general. A reasonable allowance for deterioration of property arising out of its use or
employment in the business or trade, or out of its not being used: Provided, That when the allowance authorized under this
subsection shall equal the capital invested by the taxpayer . . . no further allowance shall be made. . . . The income tax law does not
authorize the depreciation of an asset beyond its acquisition cost. Hence, a deduction over and above such cost cannot be claimed
and allowed. The reason is that deductions from gross income are privileges, not matters of right. They are not created by implication
but upon clear expression in the law. Depreciation is the gradual diminution in the useful value of tangible property resulting from
wear and tear and normal obsolescense. It commences with the acquisition of the property and its owner is not bound to see his
property gradually waste, without making provision out of earnings for its replacement. The recovery, free of income tax, of an
amount more than the invested capital in an asset will transgress the underlying purpose of a depreciation allowance. For then what
the taxpayer would recover will be, not only the acquisition cost, but also some profit. Recovery in due time thru depreciation of
investment made is the philosophy behind depreciation allowance; the idea of profit on the investment made has never been the
underlying reason for the allowance of a deduction for depreciation.

Zamora v. CIR
Facts: These are 4 cases regarding deficiency income taxes allegedly incurred by the Zamoras.
Cases Nos. L-15290 and L-15280:Mariano Zamora, owner of the Bay View Hotel and Farmacia Zamora, Manila, filed his income tax
returns the years 1951 and 1952. The Collector of Internal Revenue found that he failed to file his return of the capital gains derived
from the sale of certain real properties and claimed deductions which were not allowable. The CTA reduced the sum due Zamora
and on appeal, petitioner alleged that the CTA erred in disallowing the promotion expenses incurred by his wife for promotion of the
above businesses, depreciation of the Bayview Hotel Bldg, and in applying the Ballantyne scale of values for determining the cost of
his Manila property. The CIR, on the other hand, claimed that the CTA erred in reducing the amounts and giving credence to the
uncorroborated testimony of Mariano Zamora that he bought the said real property in question during the Japanese occupation,
partly in Philippine currency and partly in Japanese war notes. Cases Nos. L-15289 and L-15281 Mariano Zamora and his deceased
sister Felicidad Zamora, bought a piece of land located in Manila on May 16, 1944, for P132,000.00 and sold it for P75,000.00 on
March 5, 1951. They also purchased a lot located inQuezon City for P68,959.00 on January 19, 1944, which they sold for P94,000
on February 9, 1951. The CTA ordered the estate of the late Felicidad Zamora (represented by
Esperanza A. Zamora, as special administratrix of her estate), to pay the sum of P235.50, representing alleged deficiency income tax
and surcharge due from said estate.
First issue disallowance of the entire promotion expenses incurred by Mrs. Zamora
Petitioner: The CTA erred in disallowing P10,478.50 as promotion expenses incurred by his wife for the promotion of the BayView
Hotel and Farmacia Zamora. He contends that the whole amount of P20,957.00 as promotion expenses should be allowed and not
merely one-half of it. on the ground that, while not all the itemized expenses are supported by receipts, the absence of some
supporting receipts has been sufficiently and satisfactorily established - to purchase machinery for a new Tiki-Tiki plant, and to
observe hotel management in modern hotels.
Respondents: Mrs. Zamora obtained only the sum of P5,000.00 from the Central Bank and that in her application for dollar
allocation, she stated that she was going abroad on a combined medical and business trip, which facts were not denied by Mariano
Zamora. The alleged expenses were not supported by receipts. Mrs. Zamora could not even remember how much money she had
when she left abroad in 1951, and how the alleged amount of P20,957.00 was spent. There having been no means by which to
ascertain which expense was incurred by her in
connection with the business of Mariano Zamora and which was incurred for her personal benefit, the respondents considered 50%
of the said amount of P20,957.00 as business expenses and the other 50%, as her personal expenses.
Held: The 50% allocation is very fair to Zamora, there being no receipt to explain the alleged business expenses as well as the
personal expenses that might have been incurred. While in situations like the present, absolute certainty is usually no possible, the
CTA should make as close an approximation as it can, bearing heavily, if it chooses, upon the taxpayer whose inexactness is of his
own making. Section 30, of the Tax Code, provides that in computing net income, there shall be allowed as deductions all the
ordinary and necessary expenses paid or incurred during the taxable year, in carrying on any trade or business. Since promotion
expenses constitute one of the deductions in conducting a business, same must testify these requirements. Claim for the deduction
of promotion expenses or entertainment expenses must also be substantiated or supported by record showing in detail the amount
and nature of the expenses incurred.
Second issue disallowance/reduction of the rate of depreciation of Bayview Hotel (from 3.5% to 2.5%)
Petitioner: Contends that 1) the Ermita district is becoming a commercial district, 2) the hotel has no room for improvement, and(3)
the changing modes in architecture, styles of furniture and decorative designs, "must meet the taste of a fickle public". Also,the
reference to Bulletin F, a publication by the IRS, should have been first proved as law to be subject of judicial notice.
Held: The CTA was approximately correct in holding that the rate of depreciation must be 2.5%. An average hotel buildings
estimated useful life is 5 years, but inasmuch as it also depends on the use and location, change in population and other, it is allowed
a deprecation rate of 2.5% which corresponds to a useful life of 40 years. It is true that Bulletin F has no binding force, but it has a
strong persuasive effect considering that the same has been the result of scientific studies and observation for a long period in the
United States after whose Income Tax Law ours is patterned." Verily, courts are permitted to look into and investigate the
antecedents or the legislative history of the statutes involved.
Third issue-the undeclared capital gains derived from the sales in 1951 of certain real properties in Malate, Manila and in
Quezon City, acquired during the Japanese occupation.
Held: The CTAs appraisal in this case is correct. Consequently, the total undeclared income of petitioners derived from the sales of
the Manila and Quezon City properties in 1951 is P17,111.75 (P1,750.00 plus P15,361.75), 50% of which in the sum of P8,555.88 is
taxable, the said properties being capital assets held for more than one year. The cost basis of property acquired in Japanese war
notes is the equivalent of the war notes in genuine Philippine currency in accordance with the Ballantyne Scale of values, and that
the determination of the gain derived or loss sustained in the sale of such property is not affected by the decline at the time of sale, in
the purchasing power of the Philippine currency. It was found by the CTA that the purchase price of P132,000.00 was not entirely
paid in Japanese War notes but thereof or P66,000.00 was in Philippine currency. This being the case, the Ballantyne Scale of
values, which was the result
of an impartial scientific study, adopted and given judicial recognition, should be applied. As the value of the Japanese war notes in
May, 1944 when the Manila property was bought, was 1 of the genuine Philippine Peso (Ballantyne Scale), and since the gain
derived or loss sustained in
the disposition of this property is to reckoned in terms of Philippine Peso, the value of the Japanese war notes used in the purchase
of the property, must be reduced in terms of the genuine Philippine Peso to determine the cost of acquisition. It, therefore, results
that since the sum of P66,000.00 in Japanese war notes in May, 1944 is equivalent to P5,500.00 in Philippine currency (P66,000.00
divided by 12), the acquisition cost of the property in question is P66,000.00 plus P5,500.00 or P71,500.00 and that as the property
was sold for P75,000.00 in 1951, the owners thereof Mariano and Felicidad Zamora derived a capital gain of P3,500.00or P1,750.00
each. For the Quezon City property, the CTA was correct in giving credence to
Zamoras testimony that the same was purchased inPhilippine currency, because it is quite incredible that real property with an
assessed value of P46,910.00 should have been soldin Japanese war notes with an equivalent value in Philippine currency of only
P17,239.75. Thus, the gain derived from the sale isP15,361.75, after deducting from the selling price the cost of acquisition in the
sum of P68,959.00 and the expense of sale in the sum of P9,679.25.
Disposition: The petitions are dismissed, and the decision appealed from is affirmed.

DEDUCTIONS AND EXEMPTIONS; ALLOWABLE DEDUCTIONS;

CHARITABLE AND OTHER CONTRIBUTIONS
ROXAS v. CTA, GR No L-25043, April 26, 1968
Facts: Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects, transmitted to their grandchildren by hereditary succession
several properties. To manage the above-mentioned properties, said children, namely, Antonio Roxas, Eduardo Roxas and Jose
Roxas, formed a
partnership called Roxas y Compania. At the conclusion of the WW2, the tenants who have all been tilling the lands in Nasugbu for
generations expressed their desire to purchase from Roxas y Cia. the parcels which they actually occupied. For its part, the
Government, in consonance with the constitutional mandate to acquire big landed estates and apportion them among landless
tenants-farmers, persuaded the Roxas brothers to part with their landholdings. Conferences were held with the farmers in the early
part of 1948 and finally the Roxas brothers agreed to sell 13,500 hectares to the Government for distribution to actual occupants for a
price of P2,079,048.47 plus P300,000.00 for survey and subdivision expenses. It turned out however that the Government did not
have funds to cover the purchase price, and so a special arrangement was made for the Rehabilitation Finance Corporation to
advance to Roxas y Cia. The amount of P1,500,000.00 as loan. Collateral for such loan were the lands proposed to be sold to the
farmers. Under the arrangement, Roxas y Cia. allowed the farmers to buy the lands for the same price but by installment, and
contracted with the Rehabilitation Finance Corporation
to pay its loan from the proceeds of the yearly amortizations paid by the farmers. The CIR demanded from Roxas y Cia the payment
of deficiency income taxes resulting from the inclusion as income of Roxas y Cia. of the unreported 50% of the net profits for 1953
and 1955 derived from the sale of the Nasugbu farm lands to the tenants, and the disallowance of deductions from gross income of
various business expenses and contributions claimed by Roxas y Cia. and the Roxas brothers. For the reason that Roxas y Cia.
subdivided its Nasugbu farm lands and sold
them to the farmers on installment, the Commissioner considered the partnership as engaged in the business of real estate, hence,
100% of the profits derived therefrom was taxed. The Roxas brothers protested the assessment but inasmuch as said protest was
denied, they instituted an appeal in the CTA which sustained the assessment. Hence, this appeal.
Issue: Is Roxas y Cia. liable for the payment of deficiency income for the sale of Nasugbu farmlands?
Held: NO. The proposition of the CIR cannot be favorably accepted in this isolated transaction with its peculiar circumstances in spite
of the fact that there were hundreds of vendees. Although they paid for their respective holdings in installment for a period of 10
years, it would nevertheless not make the vendor Roxas y Cia. a real estate dealer during the 10-year amortization period. It should
be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled them for generations was not only in
consonance with, but more in obedience to the request and pursuant to the policy of our Government to allocate lands to the
landless. It was the bounden duty of the Government to pay the agreed compensation after it had persuaded Roxas y Cia. to sell its
haciendas, and to subsequently subdivide them among the farmers at very reasonable terms and prices. However, the Government
could not comply with its duty for lack of funds. Obligingly, Roxas y Cia. shouldered the Government's burden, went out of its way
and sold lands directly to the farmers in the same way and under the same terms as would have been the case had the Government
done it itself. For this magnanimous act, the municipal council of Nasugbu passed a resolution expressing the people's gratitude.
In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale in question. Hence, pursuant to Section 34 of the Tax
Code the lands sold to the farmers are capital assets, and the gain derived from the sale thereof is capital gain, taxable only to the
extent of 50%.

Atlas Consolidated Mining v. CIR

Facts: CIR assessed Atlas deficiency income tax for 1957 to 1958 which amounted to morethan P700K. CIR asserted that in 1957,
Atlas was still not entitled to exemption fromthe income tax under RA 909 because the same covers only gold mines and Atlas isnot
engaged in that. Atlas
protested before the Sec of Finance and Sec ruled that exemption provided in RA 909 embraces all new mines and old mines,
whether gold or other minerals. Hence, Sec recomputed and eliminated P500K+ in 1957 and reduced P215K to P39K in 1958. Atlas
appealed to this assessments assailing the disallowance of the following items: transfer agents fees, stockholders relation service
fee, US stock listing expenses, suit expenses, provision for contingency. CTA disallowed the items except the stockholders relation
service fee and suit expenses. Also CTA ruled that the exemption from payment of the corporate income tax of Atlas was good only
up to the first quarter of 1958, hence it computed for its net taxable income for the remaining of the year. Atlas appealed asserting
that the annual public relations expense is a deductible expense from gross income because it is an ordinary and necessary
business expense.
Issue: WON this fee paid for the services rendered by a public relations firm in the US labeled as stockholders relation service fee is
an allowable deduction.
Held: No. it is a capital expenditure and not an ordinary expense. The principle is recognized that when a taxpayer claims a
deduction, he must point to some specific provision of the statute in which that deduction is authorized and must be able to prove that
he is entitled to the deduction which the law allows. As previously adverted to, the law allowing expenses as deduction from gross
income for purposes of the income tax is Section 30 (a) (1) of the National Internal Revenue which allows a deduction of "all the
ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or business." An item of expenditure, in order to be deductible under this
section of the statute, must fall squarely within its language. We come, then, to the statutory test of deductibility where it is axiomatic
that to be deductible as a business expense, three conditions are imposed, namely: (1) the expense must be ordinary and
necessary, (2) it must be paid or incurred within the taxable year, and (3) it must be paid or incurred in carrying in a trade or
business. In addition, not only must the taxpayer meet the
business test, he must substantially prove by evidence or records the deductions claimed under the law, otherwise, the same will be
disallowed. The mere allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its deduction.
Assuming that the expenditure is ordinary and necessary in the operation of the taxpayer's business, the answer to the question as to
whether the expenditure is an allowable deduction as a business expense must be determined from the nature of the expenditure
itself, which in turn depends on the extent and permanency of the work accomplished by the expenditure. The expenditure of
P25,523.14 paid to P.K. Macker & Co. as compensation for services carrying on the selling campaign in an effort to sell Atlas'
additional capital stock of P3,325,000 is not an ordinary
expense in line with the decision of U.S. Board of Tax Appeals in the case of Harrisburg Hospital Inc. vs. Commissioner of Internal
Revenue. Accordingly, as found by the Court of Tax Appeals, the said expense is not deductible from Atlas gross income in 1958
because expenses relating to 1) recapitalization and reorganization of the corporation, 2) the cost of obtaining stock subscription
3)promotion expenses and 4) commission or fees paid for the sale of stock reorganization are capital expenditures. The burden of
proof that the expenses incurred are ordinary and necessary is onthe taxpayer. The claimed business expense must also be
supported by appropriate documents such as invoices, official receipts, and contracts, to be made available in case of a tax audit by
the Bureau of Internal Revenue.

GANCAYCO V COLLECTOR
Facts:
Gancayco filed his Income tax Return (ITR) for 1949.
CIR notified him that his liability is Php 9.793.62, which he paid 1950
CIR after a year wrote to Gancayco saying that there was tax due from him for a total of Php 29,554.05
 Gancayco asked for reconsideration and the tax assessed wasreduced
CIR issued a warrant of distraint for the deficient liability
Gancayco filed petition with CTA
CTA: Required Gancayco to pay Php 16, 860.31 for tax deficiency in1949
Gancayco: the right to collect the deficiency income tax is barred by thestatute of limitations.
: the 5 yr period for judicial action should be counted from May 12 50, the date of original assessment SC: Section 316 provides: The
civil remedies for the collection of internal revenue taxes, fees, or charges, and any increment thereto resulting from delinquency
shall be (a) by distraint of goods, chattels, or effects, and other personal property of whatever character, including stocks and other
securities, debts, credits, bank accounts, and interest in and rights to personal property, and by levy upon real property; and (b) by
judicial action. Either of these remedies or both simultaneously may be pursued in the discretion of the authorities charged with the
collection of such taxes. No exemption shall be allowed against the internal revenue taxes in any case.
: Deduction for expenses may be allowed, however in this case, Gancayco was not able to prove any expense as there were no
receipts or other proofs. CTA AFFIRMED

3M PHILIPPINES, INC., petitioner, vs. COMMISSIONER OF

INTERNAL REVENUE, respondent. [G.R. No. 82833. September 26,
1988.]
Facts: The petitioner claimed as deductions for income tax purposes "business expenses" in the form of royalty payments to its
foreign licensor which the respondent Commissioner of Internal Revenue disallowed. The petitioner claimed the following deductions
royalties and technical service fees and pre-operational cost of tape coater. The amount was not allowed as entire deduction. The
petitioner argues that the law applicable to its case is only Section 29(a)(1) of the Tax Code and not Circular No. 393 of the Central
Bank.
Issue: WON the royalty payments are valid deductible expense. WON the Tax Code is applicable.
Held: No. Although the Tax Code allows payments of royalty to be deducted from gross income as business expenses, it is CB
Circular No. 393 that defines what royalty payments are proper. Improper payments of royalty are not deductible as legitimate
business expenses. Section 3-c of CB Circular No. 393 provides for payment of royalties only on commodities manufactured by the
licensee under the royalty agreement not on the wholesale price of finished products imported by the licensee from the licensor.
entral Bank Circulars, like CB Circular No. 393 (dated December 7, 1973, published in the Official Gazette issue of December 17,
1973 [69 O.G. No. 51, p. 11737] issued by the Central Bank in the exercise of fits authority under the Central Bank Act, duly
published in the Official Gazette, have the force and effect of law (Cases cited) and
binding on everybody.