Cases:

Itemized deductions from gross income o Ordinary and necessary expenses

ESSO STANDARD EASTERN, INC. VS. CIR (1989, Cruz) Facts: Petitioner ESSO deducted from its 1959 gross income, as part of its ordinary and necessary business expenses the amount it spent for drilling and exploration of its petroleum concessions. The CIR disallowed this claim on the basis that such can be allowed only when a dry hole results, which prompted ESSO to file an amended return where it asked for the refund of P323,279.00 by reason of its abandonment as dry holes of several of its oil wells. Petitioner also claimed as ordinary and necessary expenses in the same return the amount of P340,822.04, representing margin fees it had paid to the Central Bank on its profit remittances to its New York head office. The CIR granted a tax credit of P221,033.00 only and disallowed the deduction claimed for the margin fees paid. The CIR assessed ESSO for a deficiency income tax for 1960 in the amount of P367,994.00, plus 18% interest amounting to a total of P434,232.92. The deficiency was from the disallowance of the margin fees of Pl,226,647.72 paid by ESSO to the Central Bank on its profit remittances to its New York head office. ESSO applied the tax credit given to it by the CIR and paid under protest the additional amount of P213,201.92 it claimed a refund of P39,787.94 as overpayment on the interest on its deficiency income tax. It argued that the 18% interest should have been imposed not on the total deficiency of P367,944.00 but only on the amount of P146,961.00, the difference between the total deficiency and its tax credit of P221,033.00. this claim was denied by the CIR and also denied the claims of ESSO for refund of overpayment of its 1959 and 1960 income taxes, holding that the margin fees paid to the Central Bank could not be considered taxes or allowed as deductible business expenses. ESSO appealed to the CTA. The CTA denied petitioner's claim for refund of P102,246.00 for 1959 and P434,234.92 for 1960 but sustained its claim for P39,787.94 as excess interest. ISSUE: 1. WoN the margin fees paid by ESSO to the Central Bank could be considered taxes therefore deductible under sec. 30(c)1 of the NIRC? 2. WoN the margin fees paid by ESSO to the Central Bank could be considered deductible business expenses under sec. 30(a)2 of the NIRC?
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ARGUMENTS: Petitioner: Petitioner argues that margin fees are taxes and cites the legislative history of the Margin Fee Law (R.A. 2009) 3 saying that it was only a revival of the 17% excise tax on foreign exchange imposed by R.A. 601 which was a revenue measure formally proposed by President Carlos P. Garcia the measure was one of the major sources of revenue used to finance the ordinary operating expenditures of the government. Thus being a form of tax can be deducted from its gross income pursuant to sec. 30c. In the alternative, petitioner claims that if the margin fees were not considered taxes then they should nevertheless be considered necessary and ordinary business expenses and therefore still deductible from its gross income. The fees were paid for the remittance by ESSO as part of the profits to the head office in the Unites States and they claim that such remittance was an expenditure necessary and proper for the conduct of its corporate affairs. HELD/RATIO: Held: 1. NO. The margin fees paid by ESSO are not a tax but rather an exaction designed to curb excessive demands upon the countrys international reserve. 2. NO. The margin fees could also not be considered ordinary and necessary expenses under the NIRC. Ratio: On the FIRST ISSUE: The court held that there was no need to look into the legislative history and intent of the RA providing for the margin fees as the language was clear and unambiguous. It cited two previous cases already decided by the SC where it was held that margin fee IS NOT A TAX. In Caltex (Phil.) Inc. v. Acting Commissioner of Customs it was held that A margin levy on foreign exchange is a form of exchange control or restriction designed to discourage imports and encourage exports, and ultimately, 'curtail any excessive demand upon the international reserve' in order to stabilize the currency. The SC held that a tax is levied to provide revenue for government operations, while the proceeds of the margin fee are applied to strengthen our country's international reserves. The margin fee was therefore imposed by the state in the exercise of its police power and not its power to tax. On the SECOND ISSUE: (more relevant to the topic in the syllabus) The SC cited the case of Atlas Consolidated Mining and

Development Corporation v. Commissioner of Internal Revenue

Sec. 30(c) of the National Internal Revenue Code - provides that all taxes paid or accrued during or within the taxable year and which are related to the taxpayer's trade, business or profession are deductible from gross income. 2 SEC. 30. Deductions from gross income in computing net income there shall be allowed as deductions (a) Expenses: (1) In general. All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; 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 purpose of the trade or

where the Court laid down the rules on the deductibility of business expenses: When a taxpayer claims a deduction, he must point to some specific provision of the statute in

business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity. (2) Expenses allowable to non-resident alien individuals and foreign corporations. In the case of a nonresident alien individual or a foreign corporation, the expenses deductible are the necessary expenses paid or incurred in carrying on any business or trade conducted within the Philippines exclusively. 3 R.A. 2009: An Act to Authorize the Central Bank of the Philippines to Establish a Margin Over Banks' Selling Rates of Foreign Exchange 1

which that deduction is authorized andmust be able to prove that he is entitled to the deduction which the law allows. An item of expenditure, in order to be deductible under the section of the statute or the NIRC, must fall squarely within its language. STATUTORY TEST OF DEDUCTIBILITY:( to be deductible as a business expense)three conditions must be present o the expense must be ordinary and necessary o it must be paid or incurred within the taxable year, and o it must be paid or incurred in carrying on a trade or business o Under this test the taxpayer must also substantially prove by evidence or records the deductions claimed under the law, otherwise, the same will be disallowed. The mere allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its deduction. It was also discussed in the Atlas case what the terms ordinary and necessary encompass. The SC Court never attempted to define with precision the terms 'ordinary and necessary but provided certain guidelines to be considered: o NECESSARY- where the expenditure is appropriate and helpful in the development of the taxpayer's business. o ORDINARY- when it connotes a payment which is normal in relation to the business of the taxpayer and the surrounding circumstances. The term 'ordinary' does not require that the payments be habitual or normal in the sense that the same taxpayer will have to make them often; the payment may be unique or non-recurring to the particular taxpayer affected. There is thus no hard and fast rule on the matter. The right to a deduction depends in each case on the particular facts and the relation of the payment to the type of business in which the taxpayer is engaged. The intention of the taxpayer often may be the controlling fact in making the determination. Applying the Atlas case to the facts of this case, the SC agreed with the reasoning of the CTA where it stated that margin fees are not expenses in connection with the production or earning of petitioner's incomes in the Philippines. They were expenses incurred in the disposition of said incomes; expenses for the remittance of funds after they have already been earned by petitioner's branch in the Philippines for the disposal of its Head Office in New York which is already another distinct and separate income taxpayer. The margin fees were therefore NOT appropriate and helpful in the development of petitioner's business in the Philippines exclusively or were incurred for purposes proper to the conduct of the affairs of petitioner's branch in the Philippines exclusively or for the purpose of realizing a profit or of minimizing a loss in the Philippines exclusively. If at all, the margin fees were incurred for purposes proper to the conduct of the corporate affairs of Standard Vacuum Oil Company in New York, but certainly not in the Philippines. The SC held that petitioner failed to show that the remittance to the head office of part of its profits was made in furtherance of its own trade or business. The petitioner merely presumed that all corporate expenses are necessary and appropriate in the absence of a showing that they are illegal or ultra vires.

It agreed with the CIR in asserting the paramount rule which is: that claims for deductions are a matter of legislative grace and do not turn on mere equitable considerations ... . The taxpayer in every instance has the burden of justifying the allowance of any deduction claimed." DISPOSITIVE: The decision of the Court of Tax Appeals denying the petitioner's claims for refund of P102,246.00 for 1959 and P434,234.92 for 1960, is AFFIRMED, with costs against the petitioner. CIR v. CTA & SMITH KLINE & FRENCH OVERSEAS (1984) DOCTRINE: A multinational firm doing business in the Philippines can claim as its deductible share a ratable part of overhead expenses based upon the ratio of the local branch's gross income to the total gross income, worldwide, of the multinational corporation. FACTS: Smith Kline and French Overseas Company, a multinational firm domiciled in Philadelphia, Pennsylvania, is engaged in the importation, manufacture and sale of pharmaceuticals drugs and chemicals. It is licensed to do business in the Philippines. Among the deductions it claimed from its gross income was P501,040 ($77,060) as its share of the head office overhead expenses. In its amended return, there was an overpayment "arising from underdeduction of home office overhead." It made a formal claim for the refund of the alleged overpayment. Without awaiting the action of the CIR on its claim, Smith Kline filed a petition for review with the Court of Tax Appeals. The CTA ordered the Commissioner to refund the overpayment or grant a tax credit to Smith Kline. The Commissioner appealed to this Court. ISSUE/HELD: WON the refund should be granted: YES RATIO: Where an expense is clearly related to the production of Philippine-derived income or to Philippine operations (e.g. salaries of Philippine personnel, rental of office building in the Philippines), that expense can be deducted from the gross income acquired in the Philippines without resorting to apportionment. The overhead expenses incurred by the parent company in connection with finance, administration, and research and development, all of which direct benefit its branches all over the world, including the Philippines, fall under a different category however. These are items which cannot be definitely allocated or Identified with the operations of the Philippine branch. For 1971, the parent company of Smith Kline spent $1,077,739. Under section 37(b) of the Revenue Code and section 160 of the regulations, Smith Kline can claim as its deductible share a ratable part of such expenses based upon the ratio of the local branch's gross income to the
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total gross income, worldwide, of the multinational corporation. The weight of evidence bolsters its position that the amount of P1,427,484 represents the correct ratable share, the same having been computed pursuant to section 37(b) and section 160. Decision of CTA is affirmed. CIR v. GENERAL FOODS (2003) FACTS: In its income tax return, respondent corporation claimed as deduction, among other business expenses, the amount for media advertising for Tang, one of its products. ISSUE: WON the subject media advertising expense for Tang incurred by respondent was an ordinary and necessary expense fully deductible under the NIRC HELD: Not deductible. Deductions for income tax purposes partake of the nature of tax exemptions; hence, must be strictly construed. To be deductible from gross income, the subject advertising expense must be ordinary and necessary. There being no hard and fast rule on the reasonableness of an advertising expense, 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. The amount claimed as media advertising expense for Tang alone was almost one-half of its total claim for marketing expenses. Furthermore, it was almost double the amount of respondent corporation's general and administrative expenses. The subject expense for the advertisement of a single product is inordinately large. Said venture of respondent to protect its brand franchise was tantamount to efforts to establish a reputation, and should not, therefore, be considered as business expense but as capital expenditure, which normally should be spread out over a reasonable period of time. o Interest Tax Arbitrage Rule Optional Treatment of interest incurred to acquire business property Rule on a cash basis individual paying interest in advance Related party interest payments (double taxed) Financing petroleum explorations

2. On March 1, 1956, the petitioner filed with the Bureau of Internal Revenue his income tax return for the calendar year 1955, claiming, among others, a deduction for interest amounting to P9,706.45 and reporting a taxable income of P65,982.12. On the basis of this return, he was assessed the sum of P21,052.91, as income tax, which he paid 3. Subsequently, on November 10, 1956, the petitioner filed an amended return for the calendar year 1955 (based on Section 30(b) (1) of the Tax Code, which authorizes the deduction from gross income of interest paid within the taxable year on indebtedness.), claiming therein an additional deduction in the amount of P47,868.70 representing interest paid on the donee's gift tax, thereby reporting a taxable net income of P18,113.42 and a tax due thereon in the sum of P3,167.00. Procedural History for First Refund Claim: 4. The respondent (BIR) denied the claim for refund. 5. The case be elevated to the Appellate Division of the Bureau of Internal Revenue for decision. The reiterated claim was denied on October 14, 1957. 6. Later, on November 6, 1957, he requested the respondent to hold his action on the case in abeyance until after the Court of Tax Appeals renders its division on a similar case. 7. Meanwhile, the Bureau of Internal Revenue considered the transfer of 12,500 shares of stock of La Tondea Inc. to be a transfer in contemplation of death pursuant to Section 88(b) of the National Internal Revenue Code. Consequently, the respondent assessed against the petitioner the sum of P191,591.62 as estate and inheritance taxes on the transfer of said 12,500 shares of stock. The amount of P17,002.74 paid on June 22, 1955 by the petitioner as gift tax, including interest and surcharge. 8. On August 12, 1958, the petitioner once more filed an amended income tax return for the calendar year 1955, claiming, in addition to the interest deduction of P9,076.45 appearing in his original return, a deduction in the amount of P60,581.80, representing interest on the estate and inheritance taxes on the 12,500 shares of stock, thereby reporting a net taxable income for 1955 in the amount of P5,400.32 and an income tax due thereon in the sum of P428.00. Procedural History for the Refund Claims (including the refund for the interest in the gift tax and the interest in the estate and inheritance taxes) 9. CTA ordered the petitioner to refund to the respondent the amount of P20,624.01 representing alleged over-payment of income taxes for the calendar year 1955. 10. The Commissioner of Internal Revenue now seeks the reversal of the Court of Tax Appeal's ruling on the aforementioned petition for review. ISSUE: 1. Whether or not a tax is an indebtedness (by extension, can interest on tax be considered debts?) HELD/RATIO: 1. YES. Tax, under certain circumstances, can be considered an indebtedness. While "taxes" and "debts" are distinguishable legal concepts, in certain cases as in the suit at bar, on account of their nature, the distinction becomes inconsequential. This qualification is recognized even in the United States.

Case: CIR v. Palanca (1966, Regala, J.) FACTS: 1. Sometime in July, 1950, the late Don Carlos Palanca, Sr. donated in favor of his son, the petitioner, herein shares of stock in La Tondea, Inc. amounting to 12,500 shares. For failure to file a return on the donation within the statutory period, the petitioner was assessed the sums of P97,691.23, P24,442.81 and P47,868.70 as gift tax, 25% surcharge and interest, respectively, which he paid on June 22, 1955.

The rule is settled that although taxes already due have not, strictly speaking, the same concept as debts, they are, however obligations that may be considered as such. While the distinction between "taxes" and "debts" is recognized, the variance in their legal conception does not extend to the interests paid on them, at least insofar as Section 30 (b) (1) of the National Internal Revenue Code is concerned (Commissioner of Internal Revenue vs. Prieto, G.R. No. L-13912). In this case, the taxpayer sought the allowance as deductible items from the gross income of the amounts paid by them as interests on delinquent tax liabilities. The rationale of this Court's in the case of Prieto, that interests on taxes should be considered as interests on indebtedness within the meaning of Section 30(b) (1) of the Tax Code, is applicable in this case. The interpretation the Court has placed upon the said section was predicated on the congressional intent, not on the nature of the tax for which the interest was paid. DISPOSITIVE: WHEREFORE, the decision appealed from is affirmed in full, without pronouncement on costs. o Taxes Taxes not allowed as deductions destroys the progressivity of income tax; not business connected; may result to double benefit Optional treatment of foreign income taxes paid

Commissioner had revoked the license of First CBC Capital as a "deposit-taping" company, the latter could still exercise, however, its financing and investment activities. Assuming that the securities had indeed become worthless, respondent Commissioner of Internal Revenue held the view that they should then be classified as "capital loss," and not as a bad debt expense there being no indebtedness to speak of between petitioner and its subsidiary. CTA sustained the CIR. ISSUES: WON the investment that has become worthless should be classified as bad debt or as an ordinary loss deductible from its gross income. HELD/RATIO: NO The equity investment in shares of stock held by CBC of approximately 53% in its Hongkong subsidiary, the First CBC Capital (Asia), Ltd., is not an indebtedness, and it is a capital, not an ordinary asset. Section 33(1) of the NIRC: (1) Capital assets. - The term 'capital assets' means property held by the taxpayer (whether or not connected with his trade or business), but does not include: stock in trade of the taxpayer or other property of a kind which would properly be 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. Assuming that the equity investment of CBC has indeed become "worthless," the loss sustained is a capital, not an ordinary loss. Section 33. Capital gains and losses: (c) Limitation on capital losses. - Losses from sales or exchange of capital assets shall be allowed only to the extent of the gains from such sales or exchanges. If a bank or trust company incorporated under the laws of the Philippines, a substantial part of whose business is the receipt of deposits, sells any bond, debenture, note, or certificate or other evidence of indebtedness issued by any corporation (including one issued by a government or political subdivision thereof), with interest coupons or in registered form, any loss resulting from such sale shall not be subject to the foregoing limitation an shall not be included in determining the applicability of such limitation to other losses. Equity holdings cannot come close to being, within the purview of "evidence of indebtedness" under the second sentence of the aforequoted paragraph. Verily, it is for a like thesis that the loss of petitioner bank in its equity investment in the Hongkong subsidiary cannot also be deductible as a bad debt. The shares of stock in question do not constitute a loan extended by it to its subsidiary (First CBC Capital) or a debt subject to obligatory repayment by the latter, essential elements to constitute a bad debt, but a long term investment made by CBC The capital loss sustained by CBC can only be deducted from capital gains if any derived by it during the same taxable year that the securities have become "worthless. At all events, it may not be amiss to once again stress that the basic rule is still that any capital loss can be deducted only from capital gains under Section 33(c) of the NIRC. Dispositive: The decision of the Court of Appeals disallowing the claimed deduction of P16,227,851.80 is AFFIRMED.
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Losses Casualty losses The tax side of disasters (RR 12-77 & 10-79) Related party losses incurred in a transaction conducted for profit Capital loss deductible only from capital gain

Case: CHINA BANKING CORPORATION V CA, (2000, Vitug, J.) FACTS: China Banking Corporation made a 53% equity investment in the First CBC Capital (Asia) Ltd., a Hongkong subsidiary engaged in financing and investment with "deposit-taking" function. The investment amounted to P16,227,851.80, consisting of 106,000 shares with a par Value of P100 per share. In 1986, First CBC Capital (Asia), Ltd., has become insolvent. With the approval of Bangko Sentral, China Bank wrote-off as being worthless its investment in First CBC Capital (Asia), Ltd., in its 1987 Income Tax Return and treated it as a bad debt or as an ordinary loss deductible from its gross income. Commissioner of internal Revenue disallowed the deduction and assessed petitioner for income tax deficiency in the amount of P8,533,328.04, inclusive of surcharge, interest and compromise penalty. CIR Arguments: The disallowance of the deduction was made on the ground that the investment should not be classified as being "worthless" and that, although the Hongkong Banking

Net Operating Loss Carry-Over (NOLCO)

o Case:

Bad debts

PHILIPPINE REFINING CO v CA (1995) FACTS: Philippine Refining Corp (PRC) was assessed deficiency tax payments for the year 1985 in the amount of around 1.8M. This figure was computed based on the disallowance of the claim of bad debts by PRC. PRC duly protested the assessment claiming that under the law, bad debts and interest expense are allowable deductions. When the BIR subsequently garnished some of PRCs properties, the latter considered the protest as being denied and filed an appeal to the CTA which set aside the disallowance of the interest expense and modified the disallowance of the bad debts by allowing 3 accounts to be claimed as deductions. However, 13 supposed bad debts were disallowed as the CTA claimed that these were not substantiated and did not satisfy the jurisprudential requirement of worthlessness of a debt The CA denied the petition for review. ISSUE: Whether or not the CA was correct in disallowing the 13 accounts as bad debts. RULING:YES. Both the CTA and CA relied on the case of Collector vs. Goodrich International, which laid down the requisites for worthlessness of a debt to wit: In said case, we held that for debts to be considered as "worthless," and thereby qualify as "bad debts" making them deductible, the taxpayer should show that (1) there is a valid and subsisting debt. (2) the debt must be actually ascertained to be worthless and uncollectible during the taxable year; (3) the debt must be charged off during the taxable year; and (4) the debt must arise from the business or trade of the taxpayer. Additionally, before a debt can be considered worthless, the taxpayer must also show that it is indeed uncollectible even in the future. Furthermore, there are steps outlined to be undertaken by the taxpayer to prove that he exerted diligent efforts to collect the debts, viz.: (1) sending of statement of accounts; (2) sending of collection letters; (3) giving the account to a lawyer for collection; and (4) filing a collection case in court. PRC only used the testimony of its accountant Ms. Masagana in order to prove that these accounts were bad debts. This was considered by all 3 courts to be self-serving. The SC said that PRC failed to exercise due diligence in order to ascertain that these debts were uncollectible. In fact, PRC did not even show the demand letters they allegedly gave to some of their debtors. o Cases: BASILAN ESTATES, INC. v. CIR (1967, Bengzon, J.) Depreciation

FACTS Basilan Estates, Inc. 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 assessed the corporation 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 o Upon non-payment, a warrant of distraint and levy was issued but it was not executed because the corp. 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. On December 20, 1960, the corporation filed before the CTA 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. o The CTA held that there was no prescription and affirmed the CIR assessment in toto ISSUE 1) Whether the Commissioner's right to collect deficiency income tax has prescribed 2) Whether depreciation shall be determined on the acquisition cost or on the reappraised value of the assets 3) Whether there have there been unreasonably accumulated profits 4) Whether petitioner is exempt from the penalty tax under Republic Act 1823 amending Section 25 of the Tax Code HELD 1) NO To show prescription, the annotation on the notice "No accompanying letter 11/25/" is advanced as indicative of the fact that receipt of the notice was after March 24, 1959, the last date of the five-year period within which to assess deficiency tax, since the original returns were filed on March 24, 1954. The Court cannot accept this interpretation of the petitioner, considering the presence of circumstances leading to the presumption of regularity in the performance of official functions. o The notice of assessment shows the assessment to have been made on February 26, 1959, well within the five-year period. On the right side of the notice is also stamped "Feb. 26, 1959" denoting the date of release, according to Bureau of Internal Revenue practice o The Commissioner himself in his letter answering petitioner's request to lift the warrant of distraint and levy asserts that notice had been sent o Besides, even granting that notice had been received by the petitioner late, under Section 331 of the Tax Code requiring five years within which to assess deficiency taxes, the assessment is deemed made when notice to this effect is released, mailed or sent by the Collector to the taxpayer and it is not required that the notice be received within the five-year period 2) ACQUISITION COST
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Petitioner claimed deductions for the depreciation of its assets up to 1949 on the basis of their acquisition cost. As of January 1, 1950 it changed the depreciable value of said assets by increasing it to conform with the increase in cost for their replacement. Accordingly, from 1950 to 1953 it deducted from gross income the value of depreciation computed on the reappraised value. The CIR found that the reappraised assets depreciated in 1953 were the same ones upon which depreciation was claimed in 1952. And for the year 1952, the Commissioner had already determined, with taxpayer's concurrence, the depreciation allowable on said assets to be P36,842.04, computed on their acquisition cost at rates fixed by the taxpayer. Hence, the Commissioner pegged the deductible depreciation for 1953 on the same old assets at P36,842.04 and disallowed the excess thereof in the amount of P10,500.49. 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. 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. The law permits the taxpayer to recover gradually his capital investment in wasting assets free from income tax. o Section 30(f)(1) 4 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, not matters of right. They are not created by implication but upon clear expression in the law. o 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 through depreciation of investment made is the philosophy behind depreciation allowance. 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 of the CIR disallowing said amount is sustained.

In the unreasonable accumulation of P347,507.01 are included P200,000 for electrification of driers and mechanization and P50,000 for malaria control which were reserved way back in 1948 but reverted to the general fund only in 1953. o If there were any plans for these amounts to be used in further expansion through projects, it did not appear in the records as was properly indicated in 1948 when such amounts were reserved. o Thus, while in 1948 it was already clear that the money was intended to go to future projects, in 1953 upon reversion to the general fund, no such intention was shown. Such reversion therefore gave occasion for the Government to consider the same for tax purposes. The P250,000 reverted to the general fund was sought to be explained as later used elsewhere (in other industries and facilities). o Persuasive jurisprudence on the matter such as those in the United States has it that: "In order to determine whether profits were accumulated for the reasonable needs of the business or to avoid the surtax upon shareholders, the controlling intention of the taxpayer is that which is manifested at the time of the accumulation, not subsequently declared intentions which are merely the products of after-thought." o The reversion here was made because the reserved amount was not enough for the projects intended, without any intent to channel the same to some particular future projects in mind. Petitioner questions why the examiner covered the period from 1948-1953 when the taxable year on review was 1953. The surplus of P347,507.01 was taken by the examiner from the balance sheet of petitioner for 1953. o To check the figure arrived at, the examiner traced the accumulation process from 1947 until 1953, and petitioner's figure stood out to be correct. o There was no error in the process applied, for previous accumulations should be considered in determining unreasonable accumulations for the year concerned. "In determining whether accumulations of earnings or profits in a particular year are within the reasonable needs of a corporation, it is necessary to take into account prior accumulations, since accumulations prior to the year involved may have been sufficient to cover the business needs and additional accumulations during the year involved would not reasonably be necessary

3) YES The Commissioner found that in violation of Sec. 25 of the Tax Code (which imposes 25% surtax on profits unreasonably accumulated), petitioner had unreasonably accumulated profits as of 1953 in the amount of P347,507.01

(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

4) NO Petitioner wishes to avail of the exempting proviso in Sec. 25 of the Internal Revenue Code as amended by RA 1823, approved June 22, 1957, whereby accumulated profits or surplus if invested in any dollar-producing or dollar-earning industry or in the purchase of bonds issued by the Central Bank, may not be subject to the 25% surtax. It must be pointed out that the unreasonable accumulation was in 1953. The exemption was by virtue of RA 1823 which amended Sec. 25 only on June 22, 1957 more than three years after the period covered by the assessment. DISPOSITIVE
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Basilan Estates, Inc. is liable for the payment of deficiency income tax and surtax for the year 1953 in the amount of P88,977.42, computed as follows: Net Income per return P40,142.90 Add: Over-claimed depreciation 10,500.49 P50,643.39 P10,128.67 8,028.00 P2,100.67

Net income per finding 20% tax on P50,643.39 Less: Tax already assessed

There was adequate basis for the writing off of the stock as worthless securities. Assuming that the Company would later somehow realize some proceeds from its sawmill and equipment, which were still existing as claimed by the Commissioner, and that such proceeds would later be distributed to its stockholders such as the taxpayer, the amount so received by the taxpayer would then properly be reportable as income of the taxpayer in the year it is received.

Deficiency income tax Add:

(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. Pursuant to the agreement mentioned above, petitioner gave to Palawan Manganese Mines, Inc. yearly advances starting from 1945, which advances amounted to P587,308.07 by the end of 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. Under the circumstances, was the sum of P353,134.25 properly claimed by petitioner as deduction in its income tax return for 1951, either as losses or bad debts? It will be noted that in giving advances to Palawan Manganese Mine Inc., petitioner did not expect to be repaid. It is true that some testimonial evidence was presented to show that there was some agreement that the advances would be repaid, but no documentary evidence was presented to this effect. 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. The Tax Court's disallowance of the write-off was proper. The Solicitor General has rightly pointed out that the taxpayer has taken an "ambiguous position" and "has not definitely taken a stand on whether the amount involved is claimed as losses or as bad debts but insists that it is either a loss or a bad debt." We 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.

25% surtax on P347,507.01 86,876.75 P88,977.42 ===========

Total tax due and collectible

The judgment appealed from is modified to the extent that petitioner is allowed its deductions for travelling and miscellaneous expenses, but affirmed insofar as the petitioner is liable for P2,100.67 as deficiency income tax for 1953 and P86,876.75 as 25% surtax on the unreasonably accumulated profit of P347,507.01. No costs. So ordered. FERNANDEZ HERMANOS INC. (petitioner) Versus CIR and CTA (respondent) Teehankee, J. Facts: Petitioner Fernandez Hermanos is an investment corporation. The corporations discussed below are its subsidiaries. These four appeals involve two decisions of the Court of Tax Appeals determining the taxpayer's income tax liability for the years 1950 to 1954 and for the year 1957. Both the taxpayer and the Commissioner of Internal Revenue, as petitioner and respondent in the cases a quo respectively, appealed from the Tax Court's decisions, insofar as their respective contentions on particular tax items were therein resolved against them. Issue: Proper/Improper Allowances/Disallowances of Losses Held: 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.

(c) Disallowance of losses in Balamban Coal Mines (1950 and 1951). The Court sustains the Tax Court's disallowance of the sums of P8,989.76 and P27,732.66 spent by the taxpayer for the operation of its Balamban coal mines in Cebu in 1950 and 1951, respectively, and claimed as losses in the taxpayer's returns for said years. The
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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." The taxpayer's claim that these expeditions should be allowed as losses for the corresponding years that they were incurred, because it made no sales of coal during said years, since the promised road or outlet through which the coal could be transported from the mines to the provincial road was not constructed, cannot be sustained. 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: Petitioner deducted losses in the operation of its Hacienda Dalupiri the sums of P17,418.95 in 1950, P29,125.82 in 1951, P26,744.81 in 1952, P21,932.62 in 1953, and P42,938.56 in 1954. These deductions were disallowed by respondent on the ground that the farm was operated solely for pleasure or as a hobby and not for profit. This conclusion is based on the fact that the farm was operated continuously at a loss. From the evidence, we are convinced that the 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. It does not appear that the farm was used by petitioner for entertainment, social activities, or other non-business purposes. Therefore, it is entitled to deduct expenses and losses in connection with the operation of said farm. Section 100 of Revenue Regulations No. 2, otherwise known as the Income Tax Regulations, authorizes farmers to determine their gross income on the basis of inventories. Said regulations provide: "If gross income is ascertained by inventories, no deduction can be made for livestock or products lost during the year, whether purchased for resale, produced on the farm, as such losses will be reflected in the inventory by reducing the amount of livestock or products on hand at the close of the year." Evidently, petitioner determined its income or losses in the operation of said farm on the basis of inventories. We quote from the memorandum of counsel for petitioner: "The Taxpayer deducted from its income tax returns for the years from 1950 to 1954 inclusive, the corresponding yearly losses sustained in the operation of Hacienda Dalupiri, which losses represent the excess of its yearly expenditures over the receipts; that is, the losses represent the difference between the sales of livestock and the actual cash disbursements or expenses." As the Hacienda Dalupiri was operated by petitioner for business and since it sustained losses in its operation, which losses were determined by means of inventories authorized under Section 100 of Revenue Regulations No. 2, it was error for respondent to have disallowed the deduction of said losses. The same is

true with respect to loss sustained in the operation of the Hacienda Samal for the years 1951 and 1952. The Commissioner questions that the losses sustained by the taxpayer were properly based on the inventory method of accounting. He concedes, however, "that the regulations referred to does not specify how the inventories are to be made. The Tax Court, however, felt satisfied with the evidence presented by the taxpayer ... which merely consisted of an alleged physical count of the number of the livestock in Hacienda Dalupiri for the years involved." The Tax Court was satisfied with the method adopted by the taxpayer as a farmer breeding livestock, reporting on the basis of receipts and disbursements. We find no Compelling reason to disturb its findings.

Dispositive: ACCORDINGLY, the judgment of the Court of Tax Appeals, subject of the appeals in Cases Nos. L-21551 and L-21557, as modified by the crediting of the losses of P36,722.42 disallowed in 1951 and 1952 to the taxpayer for the year 1953 as directed in paragraph 1 (c) of this decision, is hereby affirmed. The judgment of the Court of Tax Appeals appealed from in Cases Nos. L-24972 and L-24978 is affirmed in toto. No costs. So ordered Charitable and other contributions Contributions to pension trusts Premium Payments on Health and/or Hospitalization Insurance of an Individual Taxpayer Optional standard deduction Personal and additional exemptions RA 9504, Minimum Wage Earner Law Individual taxpayers exempt from income tax o Senior citizens whose annual taxable income does not exceed the poverty level o Exemptions granted under international agreements Special tax rules applicable to individual taxpayers o Those earning one type of returnable income o Those who earn mixed income compartmentalized approach in determining taxable income. Legal basis of the compartmentalized approach. o Passive Income tax paid at source (FWT) Interest, Royalties, Prizes and Other Winnings Cash and/or Property Dividends o o o