Republic of the Philippines v. Sps.

Marcelino
G.R. No. 205473, December 10, 2019
SC First Division
Caquioa, J

Lessons Applicable:  Capital Gains Tax on Expropriation

Laws Applicable: Section 6 Rule 67

FACTS:
•    RTC Order dated August 23, 2012 and Order dated January 10, 2013 directed the
expropriation of a 100 sqm. Lot in Valuenzuela City covered by Transfer Certificate of Title
(TCT) No. V-16548 issued in the name of Sps. Marcelino and Sps. Bunsay and orderining
Department of Public Works and Highways (DPWH) to pay Sps. Bunsay consequential damages
equivalent to the value of the capital gains tax (CGT) and other taxes necessary to transfer the
Disputed Property in its name.
•    Department of Public Works and Highways (DPWH) filed a Motion for Partial
Reconsideration (MPR) praying for the deletion of the award for just compensation representing
replacement cost of improvements and equivalent value of CGT and other taxes necessary to
transfer
•    RTC granted the MPR in part by excluding the replacement cost of improvements
•    DPWH filed a Petition for review on certiorari filed under Rule 45 of the Rules of Court
against the Order dated August 23, 2012 and Order dated January 10, 2013

ISSUE: W/N RTC award for consequential damages should include equivalent value of CGT
and other taxes necessary to transfer

HELD:  NO.  While award of consequential damages equivalent value of CGT and other taxes
necessary to transfer must be struck down for being erroneous, it is just and equitable to direct
Republic to shoulder such taxes to preserve the compensation awarded as a consequence of the
expropriation.  Compensation, to be just, must be of such value as to fully rehabilitate the
affected owner; it must be sufficient to make the affected owner whole.

•    CGT, being a tax on passive income, is imposed by National Internal Revenue Code (NIRC)
on the seller as a consequence of the latter’s presumed income from the sale or exchange of real
property.  However, the transfer of real property by way of expropriation is not an ordinary sale
contemplated under Art. 1458 of the Civil Code.  It is akin to a “forced sale” or one which arises
not from consensual agreement of the vendor and vendee, but by compulsion of law.  Unlike in
an ordinary sale wherein the vendor sets and agrees on the selling price, the compensation paid
to the affected owner in an expropriation proceeding comes in the form of just compensation
determined by the court.  Just compensation is defined as the fair and full equivalent of the loss
incurred by the affected owner.
•    Section 6 Rule 67 of the Rules of Court mandates that in no case shall xxx the owner be
deprived of the actual value of his property so taken.  Since just compensation requires that real,
substantial, full and ample equivalent be given for the property taken, the loss incurred by the
affected owner necessarily includes all incidental costs to facilitate the transfer of the
expropriated property to the expropriating authority including the CGT, other taxes and fees due
on the forced sale. 

CIR V GENERAL FOODS
14 Feb

GR No. 143672| April 24, 2003 | J. Corona

  Test of Reasonableness

Facts:

Respondent corporation General Foods (Phils), which is engaged in the manufacture of “Tang”,
“Calumet” and “Kool-Aid”, filed its income tax return for the fiscal year ending February 1985
and claimed as deduction, among other business expenses, P9,461,246 for media advertising for
“Tang”.

The Commissioner disallowed 50% of the deduction claimed and assessed deficiency income
taxes of P2,635,141.42 against General Foods, prompting the latter to file an MR which was
denied.

General Foods later on filed a petition for review at CA, which reversed and set aside an earlier
decision by CTA dismissing the company’s appeal.

Issue:

W/N the subject media advertising expense for “Tang” was ordinary and necessary expense fully
deductible under the NIRC

Held:

No. Tax exemptions must be construed in stricissimi juris against the taxpayer and liberally in
favor of the taxing authority, and he who claims an exemption must be able to justify his claim
by the clearest grant of organic or statute law. Deductions for income taxes partake of the nature
of tax exemptions; hence, if tax exemptions are strictly construed, then deductions must also be
strictly construed.
To be deductible from gross income, the subject advertising expense must comply with the
following requisites: (a) the expense must be ordinary and necessary; (b) it must have been paid
or incurred during the taxable year; (c) it must have been paid or incurred in carrying on the trade
or business of the taxpayer; and (d) it must be supported by receipts, records or other pertinent
papers.

While the subject advertising expense was paid or incurred within the corresponding taxable year
and was incurred in carrying on a trade or business, hence necessary, the parties’  views conflict
as to whether or not it was ordinary. To be deductible, an advertising expense should not only be
necessary but also ordinary.

The Commissioner maintains that the subject advertising expense was not ordinary on the
ground that it failed the two conditions set by U.S. jurisprudence: first, “reasonableness” of the
amount incurred and second, the amount incurred must not be a capital outlay to create
“goodwill” for the product and/or private respondent’s business. Otherwise, the expense must be
considered a capital expenditure to be spread out over a reasonable time.

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

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

Advertising is generally of two kinds: (1) advertising to stimulate the current sale of

merchandise or use of services and (2) advertising designed to stimulate the future sale of
merchandise or use of services. The second type involves expenditures incurred, in whole or in
part, to create or maintain some form of goodwill for the taxpayer’s trade or business or for the
industry or profession of which the taxpayer is a member. If the expenditures are for the
advertising of the first kind, then, except as to the question of the reasonableness of amount,
there is no doubt such expenditures are deductible as business expenses. If, however, the
expenditures are for advertising of the second kind, then normally they should be spread out over
a reasonable period of time.

The company’s media advertising expense for the promotion of a single product is doubtlessly
unreasonable considering it comprises almost one-half of the company’s entire claim for
marketing expenses for that year under review. Petition granted, judgment reversed and set
aside.
 C. M. Hoskins & Co. Inc. v Commissioner of Internal Revenue
Facts:

Hoskins, a domestic corporation engaged in the real estate business as broker, managing agents and
administrators, filed its income tax return (ITR) showing a net income of P92,540.25 and a tax liability of
P18,508 which it paid.

CIR disallowed 4 items of deductions in the ITR. Court of Tax Appeals upheld the disallowance of an item
which was paid to Mr. C. Hoskins representing 50% of supervision fees earned and set aside the
disallowance of the other 3 items.

Issue:

Whether or not the disallowance of the 4 items were proper.

Held:

NOT deductible.  It did not pass the test of reasonableness which is:

General rule, bonuses to employees made in good faith and as additional compensation for services
actually rendered by the employees are deductible, provided such payments, when added to the
salaries do not exceed the compensation for services rendered.

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

·         Payment of bonuses is in fact compensation

·         Must be for personal services actually rendered

·         Bonuses when added to salaries are reasonable when measured by the amount and quality of services
performed with relation to the business of the particular taxpayer.

There is no fixed test for determining the reasonableness of a given bonus as compensation. This
depends upon many factors.

In the case, Hoskins fails to pass the test. CTA was correct in holding that the payment of the company
to Mr. Hoskins of the sum P99,977.91 as 50% share of supervision fees received by the company was
inordinately large and could not be treated as an ordinary and necessary expenses allowed for
deduction.
Tax Case Digest: CIR v. Isabela Cultural
Corp. (2007)
THIRD DIVISION
G.R. No. 172231 February 12, 2007
YNARES-SANTIAGO, J.

Lessons Applicable: Accrual method, burden of proof in accrual method, deductibility of ordinary and
necessary trade, business, or professional expenses, all events test

Laws Applicable:

FACTS:

 BIR disallowed Isabela Cultural Corp. deductible expenses for services which were rendered in
1984 and 1985 but only billed, paid and claimed as a deduction on 1986.  
 After CA sent its demand letters, Isabela protested.
 CTA found it proper to be claimed in 1986 and affirmed by CA

ISSUE: W/N Isabela who uses accrual method can claim on 1986 only

HELD: case is remanded to the BIR for the computation of Isabela Cultural Corporation’s liability under
Assessment Notice No. FAS-1-86-90-000680.

NO

 The requisites for the deductibility of ordinary and necessary trade, business, or professional
expenses, like expenses paid for legal and auditing services, are: 
o (a) the expense must be ordinary and necessary; 
o (b) it must have been paid or incurred during the taxable year; - qualified by Section 45
of the National Internal Revenue Code (NIRC) which states that: "[t]he deduction
provided for in this Title shall be taken for the taxable year in which ‘paid or accrued’ or
‘paid or incurred’, dependent upon the method of accounting upon the basis of which
the net income is computed
o (c) it must have been paid or incurred in carrying on the trade or business of the
taxpayer; and 
o (d) it must be supported by receipts, records or other pertinent papers.
 Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of
accounting, expenses not being claimed as deductions by a taxpayer in the current year when
they are incurred cannot be claimed as deduction from income for the succeeding year. Thus, a
taxpayer who is authorized to deduct certain expenses and other allowable deductions for the
current year but failed to do so cannot deduct the same for the next year.
 The accrual method relies upon the taxpayer’s right to receive amounts or its obligation to pay
them, in opposition to actual receipt or payment, which characterizes the cash method of
 accounting. Amounts of income accrue where the right to receive them become fixed, where
there is created an enforceable liability. Similarly, liabilities are accrued when fixed and
determinable in amount, without regard to indeterminacy merely of time of payment.
o The accrual of income and expense is permitted when the all-events test has been met.
This test requires: (1) fixing of a right to income or liability to pay; and (2) the availability
of the reasonable accurate determination of such income or liability.
 The all-events test requires the right to income or liability be fixed, and the
amount of such income or liability be determined with reasonable accuracy.
However, the test does not demand that the amount of income or liability be
known absolutely, only that a taxpayer has at his disposal the information
necessary to compute the amount with reasonable accuracy. The all-events test
is satisfied where computation remains uncertain, if its basis is unchangeable;
the test is satisfied where a computation may be unknown, but is not as much
as unknowable, within the taxable year. The amount of liability does not have to
be determined exactly; it must be determined with "reasonable accuracy."
Accordingly, the term "reasonable accuracy" implies something less than an
exact or completely accurate amount.
o The propriety of an accrual must be judged by the facts that a taxpayer knew, or could
reasonably be expected to have known, at the closing of its books for the taxable year. 
 Accrual method of accounting presents largely a question of fact; such that the taxpayer bears
the burden of proof of establishing the accrual of an item of income or deduction.
o In the instant case, the expenses for professional fees consist of expenses for legal and
auditing services. The expenses for legal services pertain to the 1984 and 1985 legal and
retainer fees of the law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson,
and for reimbursement of the expenses of said firm in connection with ICC’s tax
problems for the year 1984. As testified by the Treasurer of ICC, the firm has been its
counsel since the 1960’s. - failed to prove the burden