BASILAN ESTATES, INC.

, petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX APPEALS

A Philippine corporation engaged in the coconut industry, Basilan Estates, Inc., with principal offices in
Basilan City, filed on March 24, 1954 its income tax returns for 1953 and paid an income tax of P8,028. On
February 26, 1959, the Commissioner of Internal Revenue, per examiners' report of February 19, 1959,
assessed Basilan Estates, Inc., a deficiency income tax of P3,912 for 1953 and P86,876.85 as 25% surtax
on unreasonably accumulated profits as of 1953 pursuant to Section 25 of the Tax Code. On non-payment
of the assessed amount, a warrant of distraint and levy was issued but the same was not executed because
Basilan Estates, Inc. succeeded in getting the Deputy Commissioner of Internal Revenue to order the
Director of the district in Zamboanga City to hold execution and maintain constructive embargo instead.
Because of its refusal to waive the period of prescription, the corporation's request for reinvestigation was
not given due course, and on December 2, 1960, notice was served the corporation that the warrant of
distraint and levy would be executed.

On December 20, 1960, Basilan Estates, Inc. filed before the Court of Tax Appeals a petition for review of
the Commissioner's assessment, alleging prescription of the period for assessment and collection; error in
disallowing claimed depreciations, travelling and miscellaneous expenses; and error in finding the existence
of unreasonably accumulated profits and the imposition of 25% surtax thereon. On October 31, 1963, the
Court of Tax Appeals found that there was no prescription and affirmed the deficiency assessment in toto.

On February 21, 1964, the case was appealed to Us by the taxpayer, upon the following issue

ISSUE: whether depreciation shall be determined on the acquisition cost or on the reappraised value of the
assets.

RULING:

 Depreciation is the gradual diminution in the useful value of tangible property resulting from wear
and tear and normal obsolescense. The term is also applied to amortization of the value of
intangible assets, the use of which in the trade or business is definitely limited in
duration.2 Depreciation 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. It
is entitled to see that from earnings the value of the property invested is kept unimpaired, so that
at the end of any given term of years, the original investment remains as it was in the beginning. It
is not only the right of a company to make such a provision, but it is its duty to its bond and
stockholders, and, in the case of a public service corporation, at least, its plain duty to the
public.3 Accordingly, the law permits the taxpayer to recover gradually his capital investment in
wasting assets free from income tax.4 Precisely, Section 30 (f) (1) which states:

(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. . . .

allows a deduction from gross income for depreciation but limits the recovery to the capital invested
in the asset being depreciated.
 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,5 not matters of right.6 They are
not created by implication but upon clear expression in the law.7
 Moreover, 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.
 Accordingly, the claim for depreciation beyond P36,842.04 or in the amount of P10,500.49 has no
justification in the law. The determination, therefore, of the Commissioner of Internal Revenue
disallowing said amount, affirmed by the Court of Tax Appeals, is sustained.

Us vs Ludey

Under the income and excess profits provisions of the Revenue Act of 1916, as amended by Revenue Act
of 1917, in determining the existence and amount of profit realized from a sale of oil mining properties --
land, leases, and equipment -- the cost of the property sold is the original cost to the taxpayer (if purchased
after March 1, 1913, or its value on that date if acquired earlier for less) diminished by deductions for
depreciation and depletion occurring between the dates of purchase (or March 1, 1913) and sale. P. 274
U. S. 300.

2. The depreciation charge permitted as a deduction from the gross income in determining the taxable
income of a business for any year represents the reduction, during the year, of the capital assets through
wear and tear of the plant used. P. 274 U. S. 300.

3. When a plant is disposed of after years of use, the thing then sold is not the whole thing originally
acquired. The amount of the depreciation must be deducted from the original cost of the whole in order to
determine the cost of that disposed of in the final sale of properties. P. 274 U. S. 301.

4. This rule applies to mining as well as to mercantile business. P. 274 U. S. 301.

5. The depletion charge permitted as a deduction from the gross income in determining the taxable income
of mines for any year represents the reduction in the mineral contents of the reserves from which the product
is taken. Because the quantity originally in the reserve is not actually known, the percentage of the whole
withdrawn in any year, and hence the appropriate depletion charge, is necessarily a rough estimate. P. 274
U. S. 302.

6. The amounts of depreciation and depletion to be deducted from cost to ascertain gain on a sale of oil
properties are equal to the aggregates of depreciation and depletion which the taxpayer was entitled to
deduct from gross income in his income tax returns for earlier years; but are not dependent on the amounts
which he actually so claimed. P. 274 U. S. 303.

61 Ct.Cls. 126 reversed.

Certiorari (271 U.S. 651) to a judgment of the Court of Claims for an amount exacted as additional income
and excess profits taxes.

Zamora v. Collector

FACTS: Mariano Zamora and his deceased sister Felicidad Zamora, bought lands located in Manila and
Quezon City
Manila property: bought on May 16, 1944, for P132,000.00, and sold it for P75,000.00 on March 5, 1951.

Quezon City property: bought on January 19, 1944 for P68,959.00, and sold it for P94,000 on February 9,
1951.

The CTA ordered the estate of the late Felicidad Zamora to pay the sum of P235.50, representing alleged
deficiency income tax and surcharge due from said estate.

For the Manila property, the CTA held that 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 one
half thereof or P66,000.00 was in Philippine currency, and that during certain periods of the enemy
occupation, the value of the Japanese war notes was very much less than the value of the genuine
Philippine currency.

For the Quezon City property, the Zamoras alleged that the entire purchase price of P68,959.00 was paid
in Philippine currency. The collector, on the other hand, contends that the purchase price of P68,959.00
was paid in Japanese war notes. The CTA, however, gave credence to Zamora's version.

ISSUE: Whether or not the estate is liable for the payment of the sum of P613.00 as deficiency income tax
and 50% surcharge for 1951, plus 50% surcharge and 1% monthly interest from the date said amount
became due, to the date of actual payment.

HELD: For Manila, since the purchase price was not entirely paid in Japanese War notes but also in
Philippine currency, the Ballantyne Scale of values should be applied. As the value of the Japanese war
notes in May, 1944 when the Manila property was bought, was 1 ½ 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 derived a capital gain of P3,500.00 or P1,750.00 each.

For Quezon City, the purchase price was paid in Japanese war notes, the purchase price in Philippine
currency would be only P17,239.75 (P68,959.00 divided by 4, 34.00 in war notes being equivalent to P1.00
in Philippine currency). The assessed value of said property in Philippine currency at the time of acquisition
was P46,910.00. The CTA believes that it was purchased for P68,959.00 in genuine Philippine currency.
Since the property was sold for P94,000.00 on February 9, 1951, the gain derived from the sale is
P15,361.75, 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.

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.

Us VS LUDEY

Ludey brought this suit in the Court of Claims to recover an amount exacted as additional taxes for 1917
under the income and excess profits provisions of the Revenue Act of 1916, September 8, 1916, c. 463,
Tit. I, 39 Stat. 756-759, as amended by the Revenue Act of 1917, October 3, 1917, c. 63, 40 Stat. 300, 329.
The tax was assessed on the alleged gain from a sale in 1917 of oil mining properties which had been
owned and operated by him for several years. The Commissioner of Internal Revenue determined that
there was a gain on the sale of $26,904.15. Ludey insists that there was a loss of $14,777.33. The amount
sued for is the tax assessed on the difference. Whether there was the gain or the loss depends primarily
upon whether deductions for depletion and depreciation are to be made from the original cost in determining
gain or loss on sale of oil mining properties. The question is one of statutory construction or application.
The Court of Claims entered judgment for the plaintiff. 61 Ct.Cls. 126. This Court granted a writ of certiorari.
271 U.S. 651.

The properties consisted, besides mining equipment, in part of oil land held in fee, in part of oil mining
leases. The aggregate original cost of the properties was $95,977.33. Of this amount, $30,977.33 was the
cost of the equipment used in the business; $65,000 the cost of the oil reserves. The 1917 sale price was
$81,200. For the purpose of determining the cost of the properties sold in 1917 the Commissioner deducted
from the original cost $10,465.16 on account of depreciation of the equipment through wear and tear, and
$32,258.81 on account of depletion of the reserves through the taking out of oil by the plaintiff, after March
1, 1913. There was no dispute of fact concerning the correctness of the estimates upon which these
deductions were made. The finding of the depletion was in accordance with the method of computation
employed by the Bureau of Internal Revenue, and there was no objection specifically to the method of
computation. But Ludey insisted that the amount of depletion, if any, could not be found or stated as a fact,
since, in the nature of the case, it was impossible to determine how much oil was recoverable, either when
he acquired the properties or when he disposed of them. The finding of the depreciation was, likewise, in
accordance with the method of computation employed by the bureau, and there was no objection to the
method of computation. But Ludey insisted also in respect to depreciation that the property was, as a matter
of law, unchanged in character and quantity throughout the period of operation.

Until 1924, none of the revenue acts provided in terms that, in computing the gain from a sale of any
property, a deduction shall be made from the original cost on account of depreciation and depletion during
the period of operation] But ever since March 1, 1913, the revenue acts have required that gains from sales
made within the tax year shall be included in the taxable income of the year, and that losses on sales may
be deducted from gross income. And each of the acts has provided that, in computing the taxable income
derived from operating a mine, there may be made a deduction from the gross income for the depreciation
and that some deduction may be made for depletion.

. His contention is that, at the time of the sale in question, Congress had not in terms required the deductions
in the case of any property, and that special reasons exist why the acts should be construed as not requiring
the deductions in the case of oil wells. He urges that a corporation organized for the purpose of utilizing a
wasting property, like an iron mine, is not deemed to have divided a part of its capital merely because it has
distributed the net proceeds of its mining.
The government contends that, in operating the properties, Ludey disposed, in the form of oil, of part of his
capital assets; that, in the extraction of the oil, he consumed so much of the equipment as was represented
by the depreciation, and disposed of so much of the oil reserves as was represented by the depletion; that
the sale of the properties made by him in 1917 was not a sale of all of the property represented by the
original cost of $95,977.33, since physical equipment to the amount of the depreciation and oil reserves to
the amount of the depletion had been taken from it during the preceding years, and that, for this reason,
the cost to plaintiff of the net property sold in 1917 was not $95,977.33, but $53,258.36.

ISSUE

whether, ordinarily, deductions for depreciation and for depletion from the original cost would be proper in
determining whether there had been a profit on a sale of property.

Held

It held that no deduction from original cost should be made here, because of the nature of oil mining
properties. The deduction for depletion was, in its opinion, wrong because oil properties are, in essence,
merely the right to extract from controlled land such oil as the owner of the right can find and reduce to
possession; because the existence of oil in any parcel of land is dependent upon the movement which the
oil makes from time to time under the surface, and because whether there is oil in place which can be
reduced to possession, and if so, how much, cannot be definitely determined. It held that, in the case at
bar, the right to explore for and take out oil may actually have been more valuable at the time of the sale
than at the time of the purchase, and that, for this reason, the removal of the oil by plaintiff during the years
of operation cannot be said to have depleted the capital. It held that the depreciation was not deductible,
because wear and tear of equipment was an expense or incident of the business.

Roxas v CTA

GR No L-25043, April 26, 1968

FACTS:

Antonio, Eduardo and Jose Roxas, brothers and at the same time partners of the Roxas y Compania,
inherited from their grandparents several properties which included farmlands. The tenants expressed their
desire to purchase the farmland. The tenants, however, did not have enough funds, so the Roxases agreed
to a purchase by installment. Subsequently, the CIR demanded from the brothers the payment of deficiency
income taxes resulting from the sale, 100% of the profits derived therefrom was taxed. The brothers
protested the assessment but the same was denied. On appeal, the Court of Tax Appeals sustained the
assessment. Hence, this petition.

ISSUE:

Is Roxas liable?

RULING:

No. It should be borne in mind that the sale of the farmlands 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.
In order to maintain the general public’s trust and confidence in the Government this power must be used
justly and not treacherously. It does not conform with the sense of justice for the Government to persuade
the taxpayer to lend it a helping hand and later on penalize him for duly answering the urgent call.

In fine, Roxas cannot be considered a real estate dealer and is not liable for 100% of the sale. 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%.

G.R. No. L-12287 August 7, 1918

VICENTE MADRIGAL and his wife, SUSANA PATERNO, plaintiffs-appellants,
vs.
JAMES J. RAFFERTY, Collector of Internal Revenue, and VENANCIO CONCEPCION, Deputy
Collector of Internal Revenue, defendants-appellees.

Vicente Madrigal and Susana Paterno were legally married and have conjugal partnership.
Madrigal filed his total net income for the year is P296,302.73.

Subsequently, Madrigal submitted the claim that the said total net income of year 1914 did not represent
his income for the year 1914, but was in fact the income of the conjugal partnership existing between himself
and his wife, and the computing and assessing the additional income tax provided by the Act of Congress
of Oct. 3, 1913, the income declared by Madrigal and the other half of Paterno.

Madrigal and Paterno brought action against Collector of Internal Revenue and the Deputy Collector of
Internal Revenue for the recovery of the sum P3,786.08.

The burden of the complaint was that if the income tax for the year 1914 had been correctly and lawfully
computed there would have been due payable by each of the plaintiff the sum of P2,921.09, which taken
together amount of P5842.18 instead of P9,668.21.

Issue: WON the additional income tax should be divided into equal parts because of the conjugal
partnership existing between them?

Held:

NO.

Paterno has an inchoate right in the property of her husband Madrigal during the lifetime of the conjugal
property. She has an interest in the ultimate ownership of property acquired as income of the conjugal
partnership. Not being seized of the separate estate, Paterno cannot make a separate return in order to
receive the benefit of the exemption which would arise by reason of the additional tax. As she has no estate
or income, actually and legally vested in her and entirely distinct from her husband property, the income
cannot properly be considered the separate income of the wife for the purpose of the additional tax. The
income tax law does not look on the spouses as individual partners in an ordinary partnership.

The higher schedules of the additional tax directed at the incomes of the wealthy may not be partially
defeated by reliance on provisions in our Civil Code dealing with the conjugal partnership and having no
application to the Income Tax Law.

GANCAYCO V. COLLECTOR OF INTERNAL REVENUE

Petitioner Santiago Gancayco seeks the review of a decision of the Court of Tax Appeals, requiring him to
pay P16,860.31, plus surcharge and interest, by way of deficiency income tax for the year 1949.

Gancyaco filed his income tax return for the year 1949. A year later, on May 14, 1951, respondent wrote
the communication Exhibit C, notifying Gancayco, inter alia, that, upon investigation, there was still due
from him, a efficiency income tax for the year 1949, the sum of P29,554.05. Respondent issued a warrant
of distraint and levy against the properties of Gancayco for the satisfaction of his deficiency income tax
liability, and accordingly, the municipal treasurer issued a notice of sale of said property at public auction.
Gancayco filed a petition to cancel the sale and direct that the same be re-advertised at a future date.

ISSUE: The question whether the sum of P16,860.31 is due from Gancayco as deficiency income tax for
1949 hinges on the validity of his claim for deduction of two (2) items, namely: (a) for farming expenses,
P27,459.00; and (b) for representation expenses, P8,933.45.

HELD:

Section 30 of the Tax Code partly reads:

(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; traveling expenses while
away from home in the pursuit of a trade or business; and rentals or other payments
required to be made as a condition to the continued use or possession, for the purposes
of the trade or business, of property to which the taxpayer has not taken or is not taking
title or in which he has no equity.

a) Farming Expenses - no evidence has been presented as to the nature of the said farming expenses
other than the care statement of petitioner that they were spent for the development and cultivation of his
property. No specification has been made as to the actual amount spent for purchase of tools, equipment
or materials or the amount spent for improvement.

b) Representation Expense

Gancayco's claim for representation expenses aggregated P31,753.97, of which P22,820.52 was allowed,
and P8,933.45 disallowed. Such disallowance is justified by the record, for, apart from the absence of
receipts, invoices or vouchers of the expenditures in question, petitioner could not specify the items
constituting the same, or when or on whom or on what they were incurred. The case of Cohan v.
Commissioner, 39 F (2d) 540, cited by petitioner is not in point, because in that case there was evidence
on the amounts spent and the persons entertained and the necessity of entertaining them, although
there were no receipts and vouchers of the expenditures involved therein. Such is not the case of
petitioner herein.