Kuenzle & Streiff, Inc. v. CIR, 16 Phil.

670

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

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.

  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.

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?

The bonuses in question were not reasonable considering all material and relevant factors.

"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 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’.

Court allowed—and considered deductible—bonuses in amounts bigger than the ones dividends among
its stockholders. In the present case, on the other hand, it is clear that the ultimate and inevitable result
of the payment of the questioned bonuses would be net losses for petitioner during the taxable years
in which they were paid.

It seems clear from the record that, in arriving at its main conclusion, the tax court considered, inter alia,
the following factors:chanrob1es virtual 1aw library

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.

In the second place, were a good number of other employees—mostly Filipinos—all of whom,
received no pay increase at all during the same years.

In the third place, the salaries and bonuses were paid to petitioner’s top officials despite has suffered net
losses as follows; P2,085.84, P4,953.91, P9,246.07 for the years 1953, 1954 and 1955, respectively.

That the charge of arbitrariness against respondent is without merit is further shown by the following
considerations:chanrob1es virtual 1aw library
virtua1aw library

Neither does the total disallowance of the bonuses paid to some officers and the partial disallowance of
those paid to others show that respondent acted unjustly and unreasonably. The record sufficiently
shows that the total disallowance was more or less due to the fact that the affected officers had
previously received substantial increases in their basic salaries.

The Grant to substantial bonuses at the end of each year should not result in producing a net loss for the
employer at the end of the year, for if that were to be the case, the scheme may be utilized to freely
achieve some other purpose — evade payment of taxes.

Petitioner’s good faith is not overly manifest, considering that the questioned bonuses were fixed and paid
at the end of the years— at a time, therefore, when petitioner fully knew that it was going to suffer a net
loss in its business operations.

Lastly, We must not lose sight of the fact that the question of allowing or disallowing as deductible
expenses the amounts paid to corporate officers by way of bonus is determined by respondent exclusively
for income tax purposes. Concededly, he has no authority to fix the amounts to be paid to corporate
officers by way of basic salary, bonus or additional remuneration—a matter that lies more or less
exclusively within the sound discretion of the corporation itself. But this right of the corporation is, of
course, not absolute. It can not exercise it for the purpose of evading payment of taxes legitimately due to
the State.

--
Repair and Maintenance
G.R. No. L-19537             May 20, 1965

The late LINO GUTIERREZ v. CIR

Lino Gutierrez was primarily engaged in the business of leasing real property for which he paid estate
broker's privilege tax. The above deficiency tax came about by the disallowance of deductions from gross
income representing depreciation, expenses Gutierrez allegedly incurred in carrying on his business, and
the addition to gross income of receipts which he did not report in his income tax returns.

The disallowed business expenses which were considered by the Commissioner either as personal or
capital expenditures consisted of: The overstatement of purchase price of real estate refers to the sale of
two pieces of property in 1953.

In 1943 Gutierrez bought a parcel of land situated along Padre Faura St. in Manila for P35,000.00.
Sometime in 1953, he sold the same for P30,400.00. Expenses of sale amounted to P631.80. In his return
he claimed a loss of P5,231.80. 1 However, the Commissioner, including the said property was bought in
Japanese military notes, converting the buying price to its equivalent in Philippine Commonwealth peso
by the use of the Ballantyne Scale of Values. At P1.30 Japanese military notes per Commonwealth peso,
the acquisition cost of P35,000.00 Japanese military notes was valued at P26,923.00 Philippine
Commonwealth peso. Accordingly, the Commissioner determined a profit of P3,476.92 after restoring to
Gutierrez' gross income the P5,231.80 deduction for loss.

In another transaction, Gutierrez sold a piece of land for P1,200.00. Alleging the said property was
purchased for P1,200.00, he reported no profit hereunder. However, after verifying the deed of
acquisition, the Commissioner discovered the purchase price to be only P800.00. Consequently, he
determined a profit of P400.00 which was added to the gross income for 1953.1äwphï1.ñët

The understatement of profit from the sale of real estate may be explained thus: In 1953 and 1954
Gutierrez sold four other properties upon which he made substantial profits. 2Convinced that said
properties were capital assets, he declared only 50% of the profits from their sale. However, treating said
properties as ordinary assets (as property held and used byGutierrez in his business), the Commissioner
taxed 100% of the profits from their disposition pursuant to Section 35 of the Tax Code.

The issues are: (1) Are the taxpayer's aforementioned claims for deduction proper and allowable?

Ruling: To be deductible (Sec. 30), therefore, an expense must be (1) ordinary and necessary;(2) paid or
incurred within the taxable year; and, (3) paid or incurred in carrying on a trade or business.  3

The transportation expenses which petitioner incurred to attend the funeral of his friends and the cost of
admission tickets to operas were expenses relative to his personal and social activities rather than to his
business of leasing real estate. Likewise, the procurement and installation of an iron door to is residence is
purely a personal expense. Personal, living, or family expenses are not deductible.  4

On the other hand, the cost of furniture given by the taxpayer as commission in furtherance of a business
transaction, the expenses incurred in attending the National Convention of Filipino Businessmen,
luncheon meeting and cruise to Corregidor of the Homeowners' Association were shown to have been
made in the pursuit of his business. Commissions given in consideration for bringing about a profitable
transaction are part of the cost of the business transaction and are deductible.
The record shows that Gutierrez was an officer of the Junior Chamber of Commerce which sponsored the
National Convention of Filipino Businessmen. He was also the president of the Homeowners'
Association, an organization established by those engaged in the real estate trade. Having proved that his
membership thereof and activities in connection therewith were solely to enhance his business, the
expenses incurred thereunder are deductible as ordinary and necessary business expenses.

With respect to the taxpayer's claim for deduction for car expenses, salary of his driver and car
depreciation, one-third of the same was disallowed by the Commissioner on the ground that the taxpayer
used his car and driver both for personal and business purposes. There is no clear showing, however, that
the car was devoted more for the taxpayer's business than for his personal and business needs.  According
to the evidence, the taxpayer's car was utilized both for personal and business needs. We therefore find it
reasonable to allow as deduction one-half of the driver's salary, car expenses and depreciation.

The electrical supplies, paint, lumber, plumbing, cement, tiles, gravel, masonry and labor used to
repair the taxpayer's rental apartments did not increase the value of such apartments, or prolong
their life. They merely kept the apartments in an ordinary operating condition. Hence, the expenses
incurred therefor are deductible as necessary expenditures for the maintenance of the taxpayer's
business.

Similarly, the litigation expenses defrayed by Gutierrez to collect apartment rentals and to eject
delinquent tenants are ordinary and necessary expenses in pursuing his business. It is routinary and
necessary for one in the leasing business to collect rentals and to eject tenants who refuse to pay their
accounts.

The following are not deductible business expenses but should be integrated into the cost of the capital
assets for which they were incurred and depreciated yearly: (1) Expenses in watching over laborers in
construction work. Watching over laborers is an activity more akin to the construction work than to
running the taxpayer's business. Hence, the expenses incurred therefor should form part of the
construction cost. (2) Real estate tax which remained unpaid by the former owner of Gutierrez' rental
property but which the latter paid, is an additional cost to acquire such property and ought therefore to be
treated as part of the property's purchase price. (3) The iron bars, venetian blind and water pump
augmented the value of the, apartments where they were installed. Their cost is not a maintenance
charge, 6 hence, not deductible..  (4) Expenses for the relocation, survey and registration of property tend
to strengthen title over the property, hence, they should be considered as addition to the costs of such
property. (5) The set of "Comments on the Rules of Court" having a life span of more than one year
should be depreciated ratably during its whole life span instead of its total cost being deducted in one
year.

Coming to the claim for depreciation of Gutierrez' residence, we find the same not deductible. A taxpayer
may deduct from gross income a reasonable allowance for deterioration of property arising out of its use
or employment in business or trade. 8 Gutierrez' residence was not used in his trade or business.

Gutierrez also claimed for deduction the fines and penalties which he paid for late payment of taxes.
While Section 30 allows taxes to be deducted from gross income, it does not specifically allow fines and
penalties to be so deducted.

Deductions from gross income are matters of legislative grace; what is not expressly granted by Congress
is withheld. Moreover, when acts are condemned, by law and their commission is made punishable by
fines or forfeitures, to allow them to be deducted from the wrongdoer's gross income, reduces, and so in
part defeats, the prescribed punishment..9
Tax credit v. deduction

G.R. No. 148083             July 21, 2006

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs. BICOLANDIA DRUG CORPORATION (Formerly known as ELMAS DRUG CO.), respondent.

The Facts

In 1992, Republic Act No. 7432, otherwise known as "An Act to Maximize the Contribution of Senior
Citizens to Nation Building, Grant Benefits and Special Privileges and For Other Purposes," granted
senior citizens several privileges, one of which was obtaining a 20 percent discount from all
establishments relative to the use of transportation services, hotels and similar lodging establishments,
restaurants and recreation centers and purchase of medicines anywhere in the country. 1 The law also
provided that the private establishments giving the discount to senior citizens may claim the cost as tax
credit.2 In compliance with the law, the Bureau of Internal Revenue issued Revenue Regulations No. 2-
94, which defined "tax credit" as follows:

Tax Credit – refers to the amount representing the 20% discount granted to a qualified senior
citizen by all establishments relative to their utilization of transportation services, hotels and
similar lodging establishments, restaurants, halls, circuses, carnivals and other similar places of
culture, leisure and amusement, which discount shall be deducted by the said establishments from
their gross income for income tax purposes and from their gross sales for value-added tax or other
percentage tax purposes.3

In 1995, respondent Bicolandia Drug Corporation, a corporation engaged in the business of retailing
pharmaceutical products under the business style of "Mercury Drug," granted the 20 percent sales
discount to qualified senior citizens purchasing their medicines in compliance with R.A. No.
7432.4 Respondent treated this discount as a deduction from its gross income in compliance with Revenue
Regulations No. 2-94, which implemented R.A. No. 7432.

On December 27, 1996, respondent filed a claim for tax refund or credit in the amount of PhP 259,659.00
with the Appellate Division of the Bureau of Internal Revenue—because its net losses for the year 1995
prevented it from benefiting from the treatment of sales discounts as a deduction from gross sales during
the said taxable year.

Petitioner maintained that Revenue Regulations No. 2-94 is valid since the law tasked the Department of
Finance, among other government offices, with the issuance of the necessary rules and regulations to
carry out the objectives of the law.11

The Issue

Whether or not the 20 percent sales discount granted to qualified senior citizens by the respondent
pursuant to R.A. No. 7432 may be claimed as a tax credit, instead of a deduction from gross income or
gross sales.

The Court's Ruling

The petition is not meritorious.

Redefining "Tax Credit" as "Tax Deduction"

Under Revenue Regulations No. 2-94, the tax credit is "the amount representing the 20 percent discount
granted to a qualified senior citizen. It equated "tax credit" with "tax deduction," contrary to the definition
in Black's Law Dictionary, which defined tax credit as:

An amount subtracted from an individual's or entity's tax liability to arrive at the total tax
liability. A tax credit reduces the taxpayer's liability compared to a deduction which
reduces taxable income upon which the tax liability is calculated. A credit differs from
deduction to the extent that the former is subtracted from the tax while the latter is
subtracted from income before the tax is computed.

Tax Credit is not Tax Refund

Petitioner argues that the tax credit is in the nature of a tax refund and should be treated as a return for tax
payments erroneously or excessively assessed against a taxpayer, in line with Section 204(c) of Republic
Act No. 8424, or the National Internal Revenue Code of 1997. Petitioner claims that there should first be
payment of the tax before the tax credit can be claimed. However, in the National Internal Revenue Code,
we see at least one instance where this is not the case. Any VAT-registered person, whose sales are zero-
rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the
sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or
paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been
applied against output tax.19 It speaks of a tax credit for tax due, so payment of the tax has not yet been
made in that particular example.

The Court of Appeals expressly recognized the differences between a "tax credit" and a "tax refund," and
stated that the same are not synonymous with each other, which is why it modified the ruling of the Court
of Tax Appeals.

Looking into R.A. No. 7432

However, while the purpose of the law to benefit senior citizens is praiseworthy, the concerns of the
affected private establishments were also considered by the lawmakers. As in other cases wherein private
property is taken by the State for public use, there must be just compensation. In this particular case, it
took the form of the tax credit granted to private establishments, purposely chosen by the lawmakers.

It is clear that the lawmakers intended the grant of a tax credit to complying private establishments like
the respondent.

If the private establishments appear to benefit more from the tax credit than originally intended, it is not
for petitioner to say that they shouldn't. The tax credit may actually have provided greater incentive for
the private establishments to comply with R.A. No. 7432, or quicker relief from the cut into profits of
these businesses.

Revenue Regulations No. 2-94 Null and Void

Revenue Regulations No. 2-94 being null and void, it must be ruled then that under R.A. No. 7432, which
was effective at the time, respondent is entitled to its claim of a tax credit, and the ruling of the Court of
Appeals must be affirmed.
But even as this particular case is decided in this manner, it must be noted that the concerns of the
petitioner regarding tax credits granted to private establishments giving discounts to senior citizens have
been addressed. R.A. No. 7432 has been amended by Republic Act No. 9257, the "Expanded Senior
Citizens Act of 2003." In this, the term "tax credit" is no longer used. The 20 percent discount granted by
hotels and similar lodging establishments, restaurants and recreation centers, and in the purchase of
medicines in all establishments for the exclusive use and enjoyment of senior citizens is treated in the
following manner:

The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax deduction
based on the net cost of the goods sold or services rendered: Provided, That the cost of the
discount shall be allowed as deduction from gross income for the same taxable year that the
discount is granted. Provided, further, that the total amount of the claimed tax deduction net of
value added tax if applicable, shall be included in their gross sales receipts for tax purposes and
shall be subject to proper documentation and to the provisions of the National Internal Revenue
Code, as amended.23

This time around, there is no conflict between the law and the implementing Revenue Regulations. Under
Revenue Regulations No. 4-2006, "(o)nly the actual amount of the discount granted or a sales discount
not exceeding 20% of the gross selling price can be deducted from the gross income, net of value added
tax, if applicable, for income tax purposes, and from gross sales or gross receipts of the business
enterprise concerned, for VAT or other percentage tax purposes." 24 Under the new law, there is no tax
credit to speak of, only deductions.

Petitioner can find some vindication in the amendment made to R.A. No. 7432 by R.A. No. 9257, which
may be more in consonance with the principles of taxation, but as it was R.A. No. 7432 in force at the
time this case arose, this law controls the result in this particular case, for which reason the petition must
fail.

WHEREFORE, the Petition is hereby DENIED. The assailed Decision of the Court of Appeals
is AFFIRMED. There is no pronouncement as to costs.

G.R. No. L-21551             September 30, 1969

FERNANDEZ HERMANOS, INC., petitioner,

vs. COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

Cases L-21551 and L-21557

The taxpayer, Fernandez Hermanos, Inc., is a domestic corporation organized for the principal purpose of
engaging in business as an "investment company". CIR assessment were the result of alleged
discrepancies found upon the examination and verification of the taxpayer's income tax returns for the
said years, summarized by the Tax Court in its decision of June 10, 1963 in CTA Case No. 787, as
follows:

ISSUE: Whether or not Tax Court's rulings were correct with respect to the disputed items of
disallowances enumerated in the Tax Court's summary reproduced above.

Ruling: The disputed items of disallowances seriatim.

1. Re allowances/disallowances of losses.

(a) Allowance of losses in Mati Lumber Co. (1950). — The Commissioner of Internal Revenue questions
the Tax Court's allowance of the taxpayer's writing off as worthless securities in its 1950 return the sum
of P8,050.00 representing the cost of shares of stock of Mati Lumber Co. acquired by the taxpayer on
January 1, 1948, on the ground that the worthlessness of said stock in the year 1950 had not been clearly
established. The Commissioner contends that although the said Company was no longer in operation in
1950, it still had its sawmill and equipment which must be of considerable value. The Court, however,
found that "the company ceased operations in 1949 when its Manager and owner, a certain Mr.
Rocamora, left for Spain ,where he subsequently died. When the company eased to operate, it had no
assets, in other words, completely insolvent. This information as to the insolvency of the Company —
reached (the taxpayer) in 1950," when it properly claimed the loss as a deduction in its 1950 tax return,
pursuant to Section 30(d) (4) (b) or Section 30 (e) (3) of the National Internal Revenue Code.  2

There was adequate basis for the writing off of the stock as worthless securities.

(b) Disallowance of losses in or bad debts of Palawan Manganese Mines, Inc. (1951). — The taxpayer
appeals from the Tax Court's disallowance of its writing off in 1951 as a loss or bad debt the sum of
P353,134.25, which it had advanced or loaned to Palawan Manganese Mines, Inc. The Tax Court's
findings on this item follow:

Pursuant to the agreement mentioned above, petitioner gave to Palawan Manganese Mines, Inc. yearly
advances starting from 1945 to 1951. Despite these advances and the resumption of operations by
Palawan Manganese Mines, Inc., it continued to suffer losses. By 1951, petitioner became convinced that
those advances could no longer be recovered. While it continued to give advances, it decided to write off
as worthless the sum of P353,134.25.

It will be noted that in giving advances to Palawan Manganese Mine Inc., petitioner did not expect to be
repaid. The memorandum agreement signed by the parties appears to be very clear that the consideration
for the advances made by petitioner was 15% of the net profits of Palawan Manganese Mines, Inc. In
other words, if there were no earnings or profits, there was no obligation to repay those advances.
It has been held that the voluntary advances made without expectation of repayment do not result
in deductible losses.

Petitioner could not sue for recovery under the memorandum agreement because the obligation of
Palawan Manganese Mines, Inc. was to pay petitioner 15% of its net profits, not the advances. No bad
debt could arise where there is no valid and subsisting debt.It has been held that if the debtor
corporation, although losing money or insolvent, was still operating at the end of the taxable year,
the debt is not considered worthless and therefore not deductible.

The Tax Court's disallowance of the write-off was proper. Court sustain the government's position that
the advances made by the taxpayer to its 100% subsidiary, Palawan Manganese Mines, Inc. amounting to
P587,308,07 as of 1951 were investments and not loans. The evidence on record shows that the board of
directors of the two companies since August, 1945, were identical and that the only capital of Palawan
Manganese Mines, Inc. is the amount of P100,000.00 entered in the taxpayer's balance sheet as its
investment in its subsidiary company. This fact explains the liberality with which the taxpayer made such
large advances to the subsidiary, despite the latter's admittedly poor financial condition.

The Tax Court correctly held that the subsidiary company was still in operation in 1951 and 1952 and the
taxpayer continued to give it advances in those years, and, therefore, the alleged debt or investment could
not properly be considered worthless and deductible in 1951, as claimed by the taxpayer. Furthermore,
neither under Section 30 (d) (2) of our Tax Code providing for deduction by corporations of losses
actually sustained and charged off during the taxable year nor under Section 30 (e) (1) thereof providing
for deduction of bad debts actually ascertained to be worthless and charged off within the taxable year,
can there be a partial writing off of a loss or bad debt, as was sought to be done here by the taxpayer. For
such losses or bad debts must be ascertained to be so and written off during the taxable year, are therefore
deductible in full or not at all, in the absence of any express provision in the Tax Code authorizing partial
deductions.

The Tax Court held that the taxpayer's loss of its investment in its subsidiary could not be deducted for
the year 1951, as the subsidiary was still in operation in 1951 and 1952. The correctness of the Tax
Court's ruling in sustaining the disallowance of the write-off in 1951 of the taxpayer's claimed losses is
borne out by subsequent events shown in Cases L-24972 and L-24978 involving the taxpayer's 1957
income tax liability. (Infra, paragraph 6.)

(c) Disallowance of losses in Balamban Coal Mines (1950 and 1951). —The Tax Court correctly held
that the losses "are deductible in 1952, when the mines were abandoned, and not in 1950 and 1951, when
they were still in operation."  Some definite event must fix the time when the loss is sustained, and here it
was the event of actual abandonment of the mines in 1952.

(d) and (e) Allowance of losses in Hacienda Dalupiri (1950 to 1954) and Hacienda Samal (1951-1952).
— The Tax Court overruled the Commissioner's disallowance of these items of losses thus: Hacienda
Dalupiri was operated by petitioner for business and not pleasure. It was mainly a cattle farm, although a
few race horses were also raised. Therefore, it is entitled to deduct expenses and losses in connection with
the operation of said farm.

2. Disallowance of excessive depreciation of buildings (1950-1954). —SC sustain the Tax Court's finding
that the taxpayer did not submit adequate proof of the correctness of the taxpayer's claim that the
depreciable assets or buildings in question had a useful life only of 10 years so as to justify its 10%
depreciation per annum claim, such finding being supported by the record. A 10% annual depreciation
rate was excessive.

G.R. No. L-25043             April 26, 1968

ANTONIO ROXAS, EDUARDO ROXAS and ROXAS Y CIA., in their own respective behalf and
as judicial co-guardians of JOSE ROXAS, petitioners,
vs. COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.

Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects, transmitted to their grandchildren by
hereditary succession the following properties:agricultural land, residential house and lot and shares of
stocks

AGRICULTURAL LANDS: 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.

In 1953 and 1955 Roxas y Cia. derived from said installment payments a net gain of P42,480.83 and
P29,500.71. Fifty percent of said net gain was reported for income tax purposes as gain on the sale of
capital asset held for more than one year pursuant to Section 34 of the Tax Code.

RESIDENTIAL HOUSE: During their bachelor days the Roxas brothers lived in the residential house at
Wright St., Malate, Manila, which they inherited from their grandparents. In fairness to his brothers, Jose
paid to Roxas y Cia. rentals for the house in the sum of P8,000.00 a year.

On June 17, 1958, the Commissioner of Internal Revenue assessed real estate dealer's tax was based on
the fact that Roxas y Cia. received house rentals from Jose Roxas in the amount of P8,000.00. Pursuant to
Sec. 194 of the Tax Code, an owner of a real estate who derives a yearly rental income therefrom in the
amount of P3,000.00 or more is considered a real estate dealer and is liable to pay the corresponding fixed
tax.

The deficiency income taxes resulted 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 Court of Tax Appeals on January 9, 1961

issue: Are the deductions for business expenses and contributions deductible?

RULING: DISALLOWED DEDUCTIONS

Roxas y Cia. deducted from its gross income the amount of P40.00 for tickets to a banquet given in
honor of Sergio Osmena and P28.00 for San Miguel beer given as gifts to various persons. The
deduction were claimed as representation expenses. Representation expenses are deductible from
gross income as expenditures incurred in carrying on a trade or business under Section 30(a) of the
Tax Code provided the taxpayer proves that they are reasonable in amount, ordinary and
necessary, and incurred in connection with his business. In the case at bar, the evidence does not show
such link between the expenses and the business of Roxas y Cia. The findings of the Court of Tax
Appeals must therefore be sustained.

The petitioners also claim deductions for contributions to the Pasay City Police, Pasay City Firemen, and
Baguio City Police Christmas funds, Manila Police Trust Fund, Philippines Herald's fund for Manila's
neediest families and Our Lady of Fatima chapel at Far Eastern University.

The contributions to the Christmas funds of the Pasay City Police, Pasay City Firemen and Baguio City
Police are not deductible for the reason that the Christmas funds were not spent for public purposes but
as Christmas gifts to the families of the members of said entities. Under Section 39(h), a contribution
to a government entity is deductible when used exclusively for public purposes. For this reason, the
disallowance must be sustained. On the other hand, the contribution to the Manila Police trust fund is an
allowable deduction for said trust fund belongs to the Manila Police, a government entity, intended to be
used exclusively for its public functions.

The contributions to the Philippines Herald's fund for Manila's neediest families were disallowed on the
ground that the Philippines Herald is not a corporation or an association contemplated in Section 30 (h) of
the Tax Code. It should be noted however that the contributions were not made to the Philippines Herald
but to a group of civic spirited citizens organized by the Philippines Herald solely for charitable purposes.
There is no question that the members of this group of citizens do not receive profits, for all the funds
they raised were for Manila's neediest families. Such a group of citizens may be classified as an
association organized exclusively for charitable purposes mentioned in Section 30(h) of the Tax Code.

Rightly, the Commissioner of Internal Revenue disallowed the contribution to Our Lady of Fatima chapel
at the Far Eastern University on the ground that the said university gives dividends to its stockholders.
Located within the premises of the university, the chapel in question has not been shown to belong to the
Catholic Church or any religious organization. On the other hand, the lower court found that it belongs to
the Far Eastern University, contributions to which are not deductible under Section 30(h) of the Tax Code
for the reason that the net income of said university injures to the benefit of its stockholders. The
disallowance should be sustained.

Lastly, Roxas y Cia. questions the imposition of the real estate dealer's fixed tax upon it, because although
it earned a rental income of P8,000.00 per annum in 1952, said rental income came from Jose Roxas, one
of the partners. Section 194 of the Tax Code, in considering as real estate dealers owners of real estate
receiving rentals of at least P3,000.00 a year, does not provide any qualification as to the persons paying
the rentals. 1