C. F.

CALANOC vs CIR
FACTS To solicit and receive contributions for the orphans and destitute
children of the Child Welfare Workers Club of the Social Welfare
Commission, CF Calanoc financed and promoted a boxing and wrestling
exhibition. The CIR found that the gross sales generated by the exhibition
amounted to P26, 553.00; the expenditures incurred was P25,157.62; and the
net profit was only P1,375.30. Upon examination of the receipts, the CIR also
found the following items of expenditures: (a)P461.65 for police protection; (b)
P460.00 for gifts; (c) P1,880.05 for parties; and (d)several items for
representation. Calanoc remitted to SWC P1,375.30 only. Based on its
findings, the CIR assessed Calanoc an amusement tax of P7,378.57.

ISSUE: Petitioner Calanoc questions the VALIDITY of the assessment of

AMUSEMENT tax against him (as financer of the exhibition)

DECISION: Expenses were excessive and not justified, not deductible.

Calanoc denied having received the stadium fee P1,000, which was not
included in the receipts. And that even if he did, he could not be made to pay
almost seven times the amount as amusement tax. Evidence was submitted,
however, that the said stadium fee of P1,000, was paid by the O-SO Beverages
directly to the stadium management for advertisement privileges on the day of
the exhibition. Since the fee was paid by the concessionaire, Calanoc had no
right to include the P1,000 stadium fee among the items of his expenses. It
results, therefore, that P1,000 went into Calanocs pocket unaccounted.
Furthermore petitioner admitted that he could not justify the other expenses,
such as those for police protection and gifts. He claims further that the
accountant who prepared the statement of receipts was already dead and could
no longer be questioned on the items contained in said statement. Most of the
items of expenditures contained in the statement submitted to the CIR were
either exorbitant or not supported by receipts. The payment of P461.65 for
police protection was illegal as it was a consideration given by Calanoc to the
police for the performance by the latter of the functions required of them to be
rendered by law. The expenditures of P460 for gifts, P1,880.05 for parties, and
other items for representation ere rather excessive, considering that the purpose
of the exhibition was for a charitable cause
 KUENZLE & STREIFF, INC. vs. THE
COLLECTOR OF INTERNAL REVENUE
FACTS:

Case is a review of a decision of the Court of Tax Appeals declaring petitioner

liable for deficiency income tax. Petitioner is a domestic corporation engaged
in the importation of textiles, hardware, sundries, chemicals, pharmaceuticals,
lumbers, groceries, wines and liquor; in insurance and lumber; Petitioner
deducted from its gross income certain items: salaries, directors' fees and
bonuses of its non-resident president and vice-president; bonuses of its resident
officers and employees; and interests on earned but unpaid salaries and
bonuses of its officers and employees Respondent disallowed the deductions of
the items; assessed and demanded from petitioner the payment of deficiency
income taxes; Court of Tax Appeals allowing as deductible all items
comprising directors' fees and salaries of the non-resident president and vice-
president, but disallowing the bonuses insofar as they exceed the salaries of the
recipients, as well as the interests on earned but unpaid salaries and bonuses.

ISSUE: How much of additional compensation paid as bonuses may be

considered reasonable in order that it may be allowed as deduction?

HELD: There is no fixed test for determining the Reasonableness of a given

bonus as compensation. However, "in determining whether the particular
salary or compensation payment is reasonable, the situation must be
considered as a whole

Section 30 (a)(1) and (b)(1) of the National Internal Revenue Code:

SEC. 30. Deductions from gross income.

In computing net income there shall be allowed as deductions

(a) Expenses:(1) In general.


All the 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;
(b) Interest:(1) In general.

All ordinary and necessary expenses paid or incurred in carrying on a trade or

business, including a reasonable allowance for salaries or other compensation
for personal services actually rendered, may be allowed as deductions in
computing the taxable income during the year. Here it is admitted that the
bonuses paid to the officers and employees of petitioner, whether resident or
non-resident, were paid to them as additional compensation for personal
services actually rendered and as such can be considered as ordinary and
necessary expenses incurred in the business within the meaning of the law,
the only question in dispute being how much of said bonuses may be
considered reasonable in order that it may be allowed as deduction.
Petitioner gave:

non-resident president and vice president for the years 1950 and1951 bonuses
equal to 133-1/2% of their annual salaries and bonuses equal to 125-2/3% for
the year 1952, resident officers and employees it gave them much more on the
alleged reason that they deserved them 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.

COURT:

This depends upon many factors, one of them being "the amount and the
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"

Visayan terminal vs CIR

FACTS:

Visayan Terminal Co. Inc., is a corporation organized for the purpose of

handling arrastre operations in the port of Cebu.

Visayan filed its income tax return for 1951reporting a gross income of
P420,633.40and claimed deductions amounting to P379,036.95, leaving a net
income of P41,596.45 on which it paid income tax in the sum of P8,319.20.
The sum of P379,036.95 claimed as deductions consisted of various items,
among which were the following:
1.Salaries

(a) Salary and bonus of Juan Eugenio Lo P1,875.00 (b) Salary of Felix Go Chan 250.00(c)
Salary of Teomino TiuTiam 250.00 P 2,375.002. Representation expenses 75,855.883.
Miscellaneous expenses(a) Christmas bonus given to various persons P1,500.00(b) Tips to
ships' officers 4,800.00 6,300.00TOTAL
P84,530.88

The claimed deductions were disallowed by the CIR giving rise to a deficiency
assessment of P 18 991.00

Upon reconsideration, the CIR allowed P 1875.00 as deduction for salaries

and P532.00 for miscellaneous expenses but maintained the disallowance of
P75 855.90as representation expenses

On appeal to the CTA, the Tax Court allowed a deduction of P10 000.00 as
reasonable representation expenses based on a comparison of the gross income
and the representation expenses for the years 1950 to 1952 and disallowed the
rest of the amount
Visayan raises the issue of this disallowance in this present appeal

ISSUE:
1. W/N Visayan is entitled to claim deductions for representation expenses in
the amount of P75 855.90?
HELD/RATIO
1. NO

The Tax Court based its allowance of ONLY P10 000.00 on a comparison
of the gross income of Visayan versus its representation expenses as
summarized below:Year Gross Income Net Profit RepresentationExpense1949
P722,135.42 P61,257.53 P83,703.541950 451,303.21 33,023.78 10,424.391951 420,479.39
41,596.45 75,855.88
1952 425,326.86 34,207.31 63,618.64

The Tax Court held that the gross income for 1950 was greater than in
1951and 1952 and yet the expenses for that year was only a little over P10
000.00

Hence, this figure is a reasonable amount considering that that

Some of therepresentation expenses claimed had been evidenced by vouchers or
chits, but others were reimbursed "without presentation of supporting papers

The aforementioned vouchers or chits were allegedly "destroyed when the

house of Buenaventura M. Veloso, treasurer of appellant, where the records
were kept was burned";

Accordingly,
"it is not possible to determine the actual amount covered by supporting papers
and the amount without supporting papers"

Thus the Court is left with no choice but to deduce a reasonable amount
of representation expenses based on the available data

The Court explained that

"representation expenses fall under the category of business expenses which"
are allowable deductions from gross income if they meet the conditions
prescribed by law", particularly section 30(a) (1) of the National Internal
Revenue Code
To be deductible, said business expenses must
"ordinary and necessary expenses paid or incurred in carrying on any trade or
business"

Further, those expenses "must also, meet the test of reasonableness in

amount", this test being "inherent in the phase `ordinary and necessary'"

The evidence bears out the fact that the expenses were not liquidated. The
receipts or vouchers were allegedly lost and no proof other than oral testimony
served to substantiate the claims or deductions

Thus the CTA was fully justified in extrapolating the allowable deductions
from the data available to it

Further, the amount of P10 000.00 appears reasonable in light of the expenses
and gross income for the other years

SANTIAGO GANCAYCO vs CIR

FACTS: The CIR claims that Santiago Gancayco has deficiency income tax
for 1949 amounting toP16,860.31.Gancayco argues that the CIR failed to
deduct two items from his return, namely: (a) for farming expenses,
P27,459.00; and (b) for representation expenses, P8,933.45.DECISION: No
evidence for farming and representation expenses, not deductible No evidence
was presented as to the nature of the said "farming expenses" other than the
bare statement of Gancayco that they were spent for the "development and
cultivation of (his) property". No specification was made either as to the actual
amount spent for purchase of tools, equipment or materials, or the amount
spent for improvement. The CIR found that the entire amount was spent
exclusively for clearing and developing the farm which were necessary to place
it in a productive state. It is not, therefore, an ordinary expense but a capital
expenditure. Accordingly, it is not deductible but it may be amortized, in
accordance with section 75 of Revenue Regulations No. 2.2. As for
representation expenses, they were properly disallowed by the CIR because,
apart from the absence of receipts, invoices, or vouchers of the expenditures in
question, Gancayco could not specify the items constituting the same, or when
or on whom or on what they were incurred
 Zamora vs CIR
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
 Cohan vs Commissioner
Facts: Petitioner George Cohan is a theatrical producer and actor. In the
production of his plays Cohan was obliged to be free-handed in entertaining
actors, employees, and, dramatic critics. He had also to travel much, at times
with his attorney. These expenses amounted to substantial sums, but he kept
no account and probably could not have done so. At the trial before the Board
(The Internal Revenue Service) he estimated that he had spent eleven thousand
dollars in this fashion during the first six months of 1921, twenty-two thousand
dollars, between July first, 1921 and June thirtieth, 1922, and as much for his
following fiscal year, fifty-five thousand dollars in all. The Board refused to
allow him any part of this, on the ground that it was impossible to tell how
much he had in fact spent, in the absence of any items or details i.e that Cohan
did not keep his receipts.

Issue: May the refusal of the IRS be justified, in view of the finding that he
had spent much and that the sums were allowable expenses?

Held: No, the IRS may not validly refuse Cohans expenses.

Absolute certainty in such matters is usually impossible and is not necessary;

the Board should make as close an approximation as it can, bearing heavily if
it chooses upon the taxpayer whose inexactitude is of his own making. But to
allow nothing at all appears to us inconsistent with saying that something was
spent. True, we do not know how many trips Cohan made, nor how large his
entertainments were; yet there was obviously some basis for computation, if
necessary by drawing upon the Board's personal estimates of the minimum of
such expenses.

US vs Gilmore
Facts of the case
Don Gilmore was the primary owner and managing officer of three different
franchises of General Motors in California. In 1955, Don Gilmore and his
wife, Dixie Gilmore, divorced. The trial court determined that the divorce was
absolute without alimony for Dixie, which meant that Don successfully
protected his assets from Dixie's claims that his assets were community
property. Don's legal expenses totaled about $40,000 for the taxable years of
1953 and 1954. The Internal Revenue Code allows deductions from gross
income for "ordinary and necessary expenses incurred during the taxable year
for the conservation of property held for the production of income."
Gilmore sued in the Court of Claims to recover alleged overpayment of
income taxes related to the legal expenses incurred during the divorce. The
Court of Claims held that the legal expenses were attributable to Gilmore's
successful resistance of his wife's claims to certain assets and were therefore
deductible for federal income tax purposes. However, the Commissioner of
Internal Revenue found that these expenditures were personal or family
expenses and therefore not deductible. The U.S. Supreme Court granted
certiorari to address the question in the administration of the tax laws.

Issue: Does the origin and character of a claim control the basic test of whether
the expense was "business" or "personal" and therefore whether it is
deductible?

None of respondent's expenses in resisting a divorce decree are deductible for

income tax purposes

Held: Yes.

The Court held that the origin and character of a claim with respect to expense
incurred, rather than its potential consequences for the taxpayer, controls the
basic test of whether an expense is classified as business or personal; therefore
legal expenses are deductible as expenses incurred for conservation of property
held for production of income. Dixie Gilmore's claims stemmed from the
marital relationship and not from income-producing activity; therefore the
claims in this case were personal, rather than business, expenses.
In their dissenting opinion, Justice Hugo L. Black and Justice William O.
Douglas wrote that the majority opinion based its analysis on an unjustly
narrow interpretation of the Internal Revenue Code. They argued that the legal
expenses in this specific case should be considered business expenses.