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BIR considered the donation by Carlos Sr. as a transfer in Where statutes impose a personal liability for a tax, the tax becomes at least
contemplation of death so Carlos Jr. was assessed P191,591.62 as in a broad sense, a debt.
estate and inheritance taxes. Carlos paid P17,002.74 on June 22,
1955 as gift tax (includes interest and surcharge) which was applied
In our jurisdiction, the rule is settled that although taxes already due have
to his estate and inheritance tax liability. Petitioner paid P60,581.80
as interest for delinquency. not, strictly speaking, the same concept as debts, they are, however
obligations that may be considered as such. (Sambrano vs. Court of Tax
August 1958, Carlos Jr. filed again an amended ITR for 1955 Appeals, G.R. no. L-8652, March 30, 1957).
claiming the following: As interest deductions: P9,706.45 (as in the
original ITR) + P60,581.80 (interest on the estate and inheritance In a more recent case Commissioner of Internal Revenue vs. Prieto, G.R.
taxes); Net Taxable income: P5,400.32; Income tax due: P428.00;
No. L-13912, September 30, 1960, we explicitly announced that while the
claimed a refund of P20,624.01 (P21,052.01 – P428) Even before
BIR ruled on his claim, Carlos Jr. filed petition for review before CTA distinction between "taxes" and "debts" was recognized in this jurisdiction,
the variance in their legal conception does not extend to the interests paid on
CTA: BIR should refund Carlos P20,624.01 them, at least insofar as Section 30 (b) (1) of the National Internal Revenue
Code is concerned. Thus, under the law, for interest to be deductible, it must
ISSUE: be shown that there be an indebtedness, that there should be interest upon
it, and that what is claimed as an interest deduction should have been paid or
WON there is a difference between “indebtedness” and “taxes” to determine accrued within the year. It is here conceded that the interest paid by
the deductible interest
respondent was in consequence of the late payment of her donor's tax, and
HELD: the same was paid within the year it is sought to be deducted.
NO. The CIR seeks the reversal of the Court of Tax Appeal's ruling on the In both this and the Prieto case, the taxpayer sought the allowance as
aforementioned petition for review. Specifically, he takes issue with the said deductible items from the gross income of the amounts paid by them as
court's determination that the amount paid by respondent Palanca for interest interests on delinquent tax liabilities. Of course, what was involved in the
on his delinquent estate and inheritance tax is deductible from the gross
cited case was the donor's tax while the present suit pertains to interest paid
income for that year under Section 30 (b) (1) of the Revenue Code. CIR
urges that a tax is not an indebtedness. He adopts the view that "debts are on the estate and inheritance tax. This difference, however, submits no
due to the government in its corporate capacity, while taxes are due to the appreciable consequence to the rationale of this Court's previous
government in its sovereign capacity. A debt is a sum of money due upon determination that interests on taxes should be considered as interests on
contract express or implied or one which is evidenced by a judgment. Taxes indebtedness within the meaning of Section 30(b) (1) of the Tax Code. The
are imposts levied by government for its support or some special purpose interpretation we have placed upon the said section was predicated on the
which the government has recognized."
congressional intent, not on the nature of the tax for which the interest was
In view of the distinction, then, the Commissioner submits that the
paid.
deductibility of "interest on indebtedness" from a person's income tax under
Section 30(b) (1) cannot extend to "interest on taxes."
Thus, shares of stock; like the other securities defined in Section
20(t)[4] of the NIRC, would be ordinary assets only to a dealer in
securities or a person engaged in the purchase and sale of, or an
China Banking Corp. V. CA
active trader (for his own account) in, securities.
China Banking Corp. v. CA
Section 20(u) of the NIRC defines a dealer in securities thus" (u)
G.R. No. 125508 July 19, 2000
The term 'dealer in securities' means a merchant of stocks or
VITUG, J.
securities, whether an individual, partnership or corporation, with
Lessons Applicable: Capital asset, capital loss, inventory depends on the nature of
an established place of business, regularly engaged in the
the business
purchase of securities and their resale to customers; that is, one
Laws Applicable:
who as a merchant buys securities and sells them to customers
FACTS:
with a view to the gains and profits that may be derived
Petitioner China Bank made a 53% equity investment in First CBC Capital
therefrom."
(Asia) Ltd., a Hongkong Subsidiary of P 16,227, 851.80
In the hands, however, of another who holds the shares of stock
1906: with the approval of the Bangko Sentral, it wrote of as worthless
by way of an investment, the shares to him would be capital
investment for being insolvent in its 1987 Income Tax Return treated as
assets. When the shares held by such investor become worthless,
bad debts o ordinary loss deductible.
the loss is deemed to be a loss from the sale or exchange of
CIR contends it should be capital loss.
capital assets.
CTA and CA on Petition for Review on Certiorari: upheld CIR contention
Loss sustained by the holder of the securities, which are capital
ISSUE: W/N Capital loss (NOT Ordinary Loss)
assets (to him), is to be treated as a capital loss as if incurred from
a sale or exchange transaction. A capital gain or a capital loss
HELD: Yes. Petition is DENIED
normally requires the concurrence of two conditions for it to
Equity investment is a capital asset resulting in a capital gain or a capital
result: (1) There is a sale or exchange; and (2) the thing sold or
loss. A capital asset is defined negatively in Section 33(1) of the NIRC
exchanged is a capital asset. When securities become worthless,
(1) Capital assets. - The term 'capital assets' means property held
there is strictly no sale or exchange but the law deems the loss
by the taxpayer (whether or not connected with his trade or
anyway to be "a loss from the sale or exchange of capital assets
business), but does not include:
Capital losses are allowed to be deducted only to the extent of
stock in trade of the taxpayer; or
capital gains, i.e., gains derived from the sale or exchange of
other property of a kind which would properly be
capital assets, and not from any other income of the taxpayer.
included in the inventory of the taxpayer if on hand at
the close of the taxable year; or
property held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or business;
or
property used in the trade or business, of a character
which is subject to the allowance for depreciation
provided in subsection (f) of section twenty-nine; or
real property used in the trade or business of the
taxpayer
PHIL. REFINING COMPANY V. CA (1996) giving the account to a lawyer for collection; and (4) filing a collection
Phil. Refining Company v. CA case in court.
G.R. No. 118794 May 8, 1996 The only evidentiary support given by PRC for its aforesaid claimed
REGALADO, J. deductions was the explanation or justification posited by its financial
adviser or accountant. Not a single document was offered to show that
Lessons Applicable: deductibility of bad debts, penalties of 25% surcharge, the Remoblas Store and CM Variety Store were burned, even just a
interest of 20, civil penalties are compensatory (not penal), civil penalties police report or an affidavit attesting to such loss by fire. The account
and interest are automatic of Tomas Store in the amount of P16,842.79 is uncollectible, claims
petitioner PRC, since the owner thereof was murdered and left no
Laws Applicable: visible assets which could satisfy the debt. Withal, just like the accounts
of the two other stores just mentioned, petitioner again failed to
FACTS: Petitioner Philippine Refining Company (PRC) was assessed by present proof of the efforts exerted to collect the debt, other than the
respondent Commissioner of Internal Revenue (Commissioner) to pay a aforestated asseverations of its financial adviser. The accounts of
deficiency tax for the year 1985 in the amount of P1,892,584 Aboitiz Shipping Corporation and J. Ruiz Trucking in the amounts of
PRC protested that the amounts are bad debts and interest expense P89,483.40 and P69,640.34, respectively, both of which allegedly arose
which are allowable and legl deductions. But, CIR ignored it and issued from the hijacking of their cargo and for which they were given 30%
a warrant of garnishment against PRC's deposits at City Trust Bank. rebates by PRC, are claimed to be uncollectible. Again, petitioner failed
PRC filed a Petition for Review with the CTA who reversed the to present an iota of proof, not even a copy of the supposed policy
interest expense disallowance but maintained the 13 bad debts regulation of PRC that it gives rebates to clients in case of loss arising
disallowance. from fortuitous events or force majeure, which rebates it now passes
PRC elevated the case to CA who dismissed the case for failing to satisfy off as uncollectible debts.
the requirements of worthlessness of a debt: Findings of the CTA having recognized expertise will not ordinarily be
(1) there is a valid and subsisting debt reviewed absent a showing of gross error or abuse on its part.
(2) debt must be actually ascertained to be worthless and 2. YES.
uncollectible during the taxable year Sec. 248 and 249 of the tax code clearly provides that civil penalty is
(3) debt must be charged off during the taxable year imposed in case of failure to pay the tax within the prescribed time for
(4) debt must arise from the business or trade of the taxpayer its payment and deficiency tax or any surcharge or interest on the due
(5) uncollectible even in the future date appearing in the notice and demand of the commissioner. Thus,
(6) exerted diligent effort to collect penalties of 25% surcharge and interest of 20% shall accrue from April
ISSUES: 11, 1989.
1. W/N bad debts requirements are met to be deductible as Tax laws imposing penalties for delinquencies, so we have long held,
assessed by the CA are intended to hasten tax payments by punishing evasions or neglect
2. W/N PRC should be liable for penalties and interests of duty in respect thereof. If penalties could be condoned for flimsy
reasons, the law imposing penalties for delinquencies would be
HELD: petition at bar is DENIED rendered nugatory, and the maintenance of the Government and its
1. NO. multifarious activities will be adversely affected
Furthermore, there are steps outlined to be undertaken by the taxpayer
to prove that he exerted diligent efforts to collect the debts, viz: (1) BASILAN ESTATES, INC. v. CIR
sending of statement of accounts; (2) sending of collection letters; (3) G.R. No. L-22492 September 5, 1967
Bengzon, J.P., J.
Doctrine: then what the taxpayer would recover will be, not only the acquisition cost, but
The income tax law does not authorize the depreciation of an asset beyond its also some profit. Recovery in due time thru depreciation of investment made is
acquisition cost. Hence, a deduction over and above such cost cannot be claimed the philosophy behind depreciation allowance; the idea of profit on the
and allowed. The reason is that deductions from gross income are privileges, not investment made has never been the underlying reason for the allowance of a
matters of right. They are not created by implication but upon clear expression in deduction for depreciation.
the law.
FERNANDEZ HERMANOS, INC. VS. CIR- ALLOWABLE TAX DEDUCTIONS
Facts: Basilan Estates, Inc. claimed deductions for the depreciation of its assets Category: Income Taxation
on the basis of their acquisition cost. As of January 1, 1950 it changed the That the circumstances are such that the method does not reflect the taxpayer ’ s
depreciable value of said assets by increasing it to conform with the increase in income with reasonable accuracy and certainty and proper and just additions of
cost for their replacement. Accordingly, from 1950 to 1953 it deducted from personal expenses and other non-deductible expenditures were made and correct ,
gross income the value of depreciation computed on the reappraised value. fair and equitable credit adjustments were given by way of eliminating non-
CIR disallowed the deductions claimed by petitioner, consequently assessing taxable items.
the latter of deficiency income taxes.
FACTS:
Issue: Whether or not the depreciation shall be determined on the acquisition
cost rather than the reappraised value of the assets • Four cases involve two decisions of the Court of Tax Appeal s determining the
taxpayer ' s income tax liability for the years 1950 to 1954 and for the year
Held: Yes. The following tax law provision allows a deduction from gross 1957. Both the taxpayer and the Commissioner of Internal Revenue, as
income for depreciation but limits the recovery to the capital invested in the petitioner and respondent in the cases a quo respectively , appealed from the
asset being depreciated: Tax Court's decisions , insofar as their respective contentions on particular tax
(1)In general. — A reasonable allowance for deterioration of property arising items were therein resolved against them. Since the issues raised are inter
out of its use or employment in the business or trade, or out of its not being related, the Court resolves the four appeals in this joint decision.
used: Provided, That when the allowance authorized under this subsection shall • The taxpayer , Fernandez Hermanos, Inc. , is a domestic corporation organized
equal the capital invested by the taxpayer . . . no further allowance shall be for the principal purpose of engaging in business as an " investment company "
made. . . . wi th main office at Manila. Upon verification of the taxpayer's income tax
returns for the period in quest ion, the Commissioner of Internal Revenue
The income tax law does not authorize the depreciation of an asset beyond its assessed against the taxpayer the sums of P13,414.00, P119,613.00, P11,698.00,
acquisition cost. Hence, a deduction over and above such cost cannot be claimed P6,887.00 and P14,451.00 as alleged deficiency income taxes for the year s
and allowed. The reason is that deductions from gross income are privileges, 1950, 1951, 1952, 1953 and 1954, respectively. Said assessments were the
not matters of right. They are not created by implication but upon clear result of alleged discrepancies found upon the examination and verification of
expression in the law [Gutierrez v. Collector of Internal Revenue, L-19537, May the taxpayer's income tax returns for the said years, summarized by the Tax
20, 1965]. Court in its decision of June 10, 1963 in CTA Case No. 787, as follows:
Depreciation is the gradual diminution in the useful value of tangible property ISSUE: The correctness of the Tax Court's rulings with respect to the
resulting from wear and tear and normal obsolescense. It commences with the disputed items of disallowances enumerated in the Tax Court's summary
acquisition of the property and its owner is not bound to see his property reproduced
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 HELD:
an asset will transgress the underlying purpose of a depreciation allowance. For
That the circumstances are such that the method does not reflect the taxpayer’s
income with reasonable accuracy and certainty and proper and just additions of JOSE GATCHALIAN ET AL. v. COLLECTOR OF INTERNAL REVENUE, GR No.
personal expenses and other non-deductible expenditures were made and 45425, 1939-04-29
correct , fair and equitable credit adjustments were given by way of eliminating
non-taxable items. Facts:
plaintiffs are all residents of the municipality of Pulilan, Bulacan, and that
Proper adjustments to conform to the income tax laws. Proper adjustments for defendant is the Collector of Internal Revenue of the Philippines;... plaintiffs, in
non-deductible items must be made. The following non-deductibles , as the case order to enable them to purchase one sweepstakes ticket valued at two pesos
may be, must be (P2), subscribed and paid therefor the amounts as follows:... immediately
added to the increase of decrease in the net worth: thereafter... plaintiffs purchased... from... ne of the duly authorized agents of the
National Charity Sweepstakes Office one ticket bearing No. 178637... and that
1. Personal living or family expenses the said ticket was registered in the name of Jose Gatchalian and Company... as a
2. Premiums paid on any life insurance policy result, the above-mentioned ticket bearing No. 178637 won one of the third
3. Losses from sales or exchanges of property between members of the family prizes in the amount of P50,000... and... which check was cashed... by Jose
4. Income taxes paid Gatchalian & Company
5. Other non-deductible taxes
6. Election expenses and other expense against public policy Gatchalian was required by income tax examiner Alfredo David to file the
7. Non-deductible contributions corresponding income tax return covering the prize won by Jose Gatchalian &
8. Gifts to others Company and that... the said return was signed by
9. Estate inheritance and gift taxes Gatchalian... efendant made an assessment against... requesting the payment of
10. Net Capital Loss the sum of P1,499.94 to the deputy provincial treasurer of Pulilan, Bulacan...
plaintiffs, through their attorney, sent to defendant a reply... requesting
On the other hand, non- taxable items should be deducted therefrom. These exemption from the payment of the income tax to which reply there were
items are necessary adjustments to avoid the inclusion of what otherwise are enclosed fifteen (15)... separate individual income tax returns filed separately
non-taxable receipts. They are: by each one of the plaintiffs... defendant... denied plaintiffs' request... for
1. inheritance gifts and bequests received exemption from the payment of tax... in view of the failure of the plaintiffs to pay
2. non- taxable gains the amount of tax demanded by the defendant, notwithstanding subsequent
3. compensation for injuries or sickness demand... issued a warrant of distraint and levy against the property of the
4. proceeds of life insurance policies plaintiffs... plaintiffs,... through Gregoria Cristobal, Maria C. Legaspi and Jesus
5. sweepstakes Legaspi,... paid under protest the sum of P601.51... as part of the tax... and
6. winnings requested defendant that plaintiffs be allowed to pay under protest the
7. interest on government securities and increase in net worth are not taxable if balance... plaintiffs demanded upon defendant the refund of the total sum of
they are shown not to be the result of unreported income but to be the result of P1,863.44... paid under protest by them but that defendant refused and still
the correction of errors in the taxpayer’s entries in the books relating to refuses to refund the said amount... notwithstanding the plaintiffs' demands.
indebtedness Issues:
Whether the plaintiffs formed a partnership, or merely a community of property
without a personality of its own
Ruling:
There is no doubt that if the plaintiffs merely formed a community of property
the latter is exempt from the payment of income tax under the law. But
according to the stipulated facts the plaintiffs organized a partnership of a civil
nature because each of them put up money... to buy a sweepstakes ticket for the
sole purpose of dividing equally the prize which they may win, as they did in
fact in the amount of P50,000 (article 1665, Civil Code). The partnership was
not only formed, but upon the organization thereof and the winning of... the
prize, Jose Gatchalian personally appeared in the office of the Philippine Charity
Sweepstakes, in his capacity as co-partner, as such collected the prize, the office
issued the check for P50,000 in favor of Jose Gatchalian and company, and the
said partner,... in the same capacity, collected the said check. All these
circumstances repel the idea that the plaintiffs organized and formed a
community of property only.
Having organized and constituted a partnership of a civil nature, the said entity
is the one bound to pay the income tax which the defendant collecte
There is no merit in... plaintiffs' contention that the tax should be prorated
among them and paid individually, resulting in their exemption from the tax.
Principles: