Professional Documents
Culture Documents
1. RR No. 10-02 dated July 10, 2002 CIR vs. Isabela Cultural Corporation
Requisites of Business Expenses to be FACTS:
deductible? Isabela Cultural Corp.(ICC for brevity) , a domestic
1. Ordinary and Necessary corporation received from BIR assessment notice no.
2. Pair or incurred within taxable year FAS-1-86-90000680 (680 for brevity) for deficiency
3. Substantiated with official receipts or income tax in the amount of PhP 333,196.86 and
adequate records assessment notice no. FAS-1-86-90-000681 (681 for
4. paid or incurred in carrying trade or business brevity) for deficiency expanded withholding tax in
5. if subject to withholding taxes proof of the amount of PhP 4,897.79, inclusive of surcharge
payment to the Bureau of Internal Revenue must and interest both for the taxable year 1986. The
be shown. deficiency income tax of PhP 333,196 arose from BIR
6. must be reasonable (not too lavish) disallowance of ICC claimed expenses deductions for
professional and security services billed to and paid
Ceiling on Entertainment Expense is by ICC in 1986.
imposed upon the ffg: The deficiency expanded withholding tax of
1. IND engaged in Business PhP4,897.79 was allegedly due to the failure of ICC to
2. IND engaged in practice of profession withhold 1% expanded withholding tax on its claimed
3. Domestic Coporations PhP244,890 deduction for security services.
4. Resident Corporations Court of Tax Appeal and Court of Appeal affirmed that
5. GPP including its members the professional services were rendered to ICC in
1984 and 1985, the cost of the service was not yet
Ceiling: Actual amount but not more than .50% determinable at that time, hence, it could be
of net sales for those engaged in sale of goods or considered as deductible expenses only in 1986
properties; 1% of net revenue for those engaged when ICC received the billing statement for said
in sale of services and exercise of profession or service. It further ruled that ICC did not state its
lease of properties interest income from the promissory notes of Realty
Investment and that ICC properly withheld the
remitted taxes on the payment for security services which overstate the interest income, when it applied
for the taxable year 1986. compounding absent any stipulation.
Petitioner contend that since ICC is using the accrual Petitioner appealed to CA, which affirmed CTA, hence
method of accounting, the expenses for the the petition.
professional services that accrued in 1984 and 9185 ISSUE: Whether or not the expenses for professional
should have been declared as deductions from and security services are deductible.
income during the said years and the failure of ICC to HELD:
do so bars it from claiming said expenses as No. One of the requisites for the deductibility of
deduction for the taxable year 1986. ordinary and necessary expenses is that it must have
ISSUE (1): WON CA is correct in sustaining the been paid or incurred during the taxable year. This
deduction of the expenses for professionals and requisite is dependent on the method of accounting
security services form ICC gross income? of the taxpayer. In the case at bar, ICC is using the
ISSUE (2): WON CA correctly held that ICC did not accrual method of accounting. Hence, under this
understate its interest income from the promissory method, an expense is recognized when it is
notes of Realty Investment, Inc; that ICC withheld the incurred. Under a Revenue Audit Memorandum, when
required 1% withholding tax from the deduction for the method of accounting is accrual, expenses not
security services. being claimed as deductions by a taxpayer in the
HELD(1): NO current year when they are incurred cannot be
Revenue Audit Memorandum Order No.1-2000 claimed in the succeeding year.
provides that under the accrual method of The accrual of income and expense is permitted
accounting, expenses not being claimed as when the all-events test has been met. This test
deductions by a tax payer in the current year when requires: 1) fixing of a right to income or liability to
they are incurred cannot be claimed as deductions pay; and 2) the availability of the reasonable
from the income for the succeeding year. accurate determination of such income or liability.
HELD(2): The test does not demand that the amount of income
Sustaining the finding of the CTA and CA that no such or liability be known absolutely, only that a taxpayer
understatement exist and that only simple interest has at its disposal the information necessary to
computation and not a compounded one should have compute the amount with reasonable accuracy.
been applied by the BIR. There is no indeed no From the nature of the claimed deductions and the
stipulation between the latter and ICC on the span of time during which the firm was retained, ICC
application of compound interest. can be expected to have reasonably known the
Under Article 1959 of the Civil Code, unless there is a retainer fees charged by the firm. They cannot give
stipulation to the contrary, interest due should not as an excuse the delayed billing, since it could have
further earn interest. inquired into the amount of their obligation and
reasonably determine the amount.
CIR vs. Isabela Cultural Corporation
FACTS: CIR v General Foods, Inc. GR No. 172231
Isabela Cultural Corporation (ICC), a domestic FACTS:
corporation received an assessment notice for Respondent corporation General Foods (Phils), which
deficiency income tax and expanded withholding tax is engaged in the manufacture of Tang, Calumet
from BIR. It arose from the disallowance of ICCs and Kool-Aid, filed its income tax return for the
claimed expense for professional and security fiscal year ending February 1985 and claimed as
services paid by ICC; as well as the alleged deduction, among other business expenses,
understatement of interest income on the three P9,461,246 for media advertising for Tang. The
promissory notes due from Realty Investment Inc. Commissioner disallowed 50% of the deduction
The deficiency expanded withholding tax was claimed and assessed deficiency income taxes of
allegedly due to the failure of ICC to withhold 1% e- P2,635,141.42 against General Foods, prompting the
withholding tax on its claimed deduction for security latter to file an MR which was denied. General Foods
services. later on filed a petition for review at CA, which
ICC sought a reconsideration of the assessments. reversed and set aside an earlier decision by CTA
Having received a final notice of assessment, it dismissing the companys appeal.
brought the case to CTA, which held that it is ISSUE: W/N the subject media advertising expense
unappealable, since the final notice is not a decision. for Tang was ordinary and necessary expense fully
CTAs ruling was reversed by CA, which was deductible under the NIRC
sustained by SC, and case was remanded to CTA. CTA HELD: No.
rendered a decision in favor of ICC. It ruled that the Tax exemptions must be construed in stricissimi juris
deductions for professional and security services against the taxpayer and liberally in favor of the
were properly claimed, it said that even if services taxing authority, and he who claims an exemption
were rendered in 1984 or 1985, the amount is not must be able to justify his claim by the clearest grant
yet determined at that time. Hence it is a proper of organic or statute law. Deductions for income
deduction in 1986. It likewise found that it is the BIR taxes partake of the nature of tax exemptions;
hence, if tax exemptions are strictly construed, then half of the companys entire claim for marketing
deductions must also be strictly construed. expenses for that year under review. Petition
To be deductible from gross income, the subject granted, judgment reversed and set aside.
advertising expense must comply with the following
requisites: (a) the expense must be ordinary and CIR v General Foods, Inc. GR No. 172231
necessary; (b) it must have been paid or incurred FACTS:
during the taxable year; (c) it must have been paid In its income tax return, respondent corporation
or incurred in carrying on the trade or business of the claimed as deduction, among other business
taxpayer; and (d) it must be supported by receipts, expenses, the amount for media advertising for
records or other pertinent papers. Tang, one of its products.
While the subject advertising expense was paid or ISSUE:
incurred within the corresponding taxable year and WON the subject media advertising expense for
was incurred in carrying on a trade or business, Tang incurred by respondent was an ordinary and
hence necessary, the parties views conflict as to necessary expense fully deductible under the NIRC
whether or not it was ordinary. To be deductible, an HELD: Not deductible.
advertising expense should not only be necessary Deductions for income tax purposes partake of the
but also ordinary. nature of tax exemptions; hence, must be strictly
The Commissioner maintains that the subject construed. To be deductible from gross income, the
advertising expense was not ordinary on the ground subject advertising expense must be ordinary and
that it failed the two conditions set by U.S. necessary. There being no hard and fast rule on the
jurisprudence: first, reasonableness of the amount reasonableness of an advertising expense, the right
incurred and second, the amount incurred must not to a deduction depends on a number of factors such
be a capital outlay to create goodwill for the as but not limited to: the type and size of business in
product and/or private respondents business. which the taxpayer is engaged; the volume and
Otherwise, the expense must be considered a capital amount of its net earnings; the nature of the
expenditure to be spread out over a reasonable time. expenditure itself; the
There is yet to be a clear-cut criteria or fixed test for intention of the taxpayer and the general economic
determining the reasonableness of an advertising conditions. The amount claimed as media advertising
expense. There being no hard and fast rule on the expense for Tang alone was almost one-half of its
matter, the right to a deduction depends on a total claim for marketing expenses. Furthermore, it
number of factors such as but not limited to: the type was almost double the amount of respondent
and size of business in which the taxpayer is corporation's general and administrative expenses.
engaged; the volume and amount of its net earnings; The subject expense for the advertisement of a
the nature of the expenditure itself; the intention of single product is inordinately large. Said venture of
the taxpayer and the general economic conditions. It respondent to protect its brand franchise was
is the interplay of these, among other factors and tantamount to efforts to establish a reputation, and
properly weighed, that will yield a proper evaluation. should not, therefore, be considered as business
The Court finds the subject expense for the expense but as capital expenditure, which normally
advertisement of a single product to be inordinately should be spread out over a reasonable period of
large. Therefore, even if it is necessary, it cannot be time.
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. ATLAS CONSOLIDATED MINING & DEVT CORP VS
The second type involves expenditures incurred, in COMMISSIONER OF INTERNAL REVENUE
whole or in part, to create or maintain some form of FACTS:
goodwill for the taxpayers trade or business or for Atlas Consolidated Mining & Devt Corp is a
the industry or profession of which the taxpayer is a corporation engaged in the mining industry. It was
member. If the expenditures are for the advertising assessed deficiency income tax for the year 1958 as
of the first kind, then, except as to the question of a result of the disallowance of certain items claimed
the reasonableness of amount, there is no doubt by the company as deductions from its gross income.
such expenditures are deductible as business Atlas claimed the following items as deductible from
expenses. If, however, the expenditures are for its gross income: (1) transfer agents fee, (2)
advertising of the second kind, then normally they stockholders relation service fee, (3) US stock listing
should be spread out over a reasonable period of expenses, (4) suit expenses, (5) provision for
time. contingencies. The
The companys media advertising expense for the Commissioner of Internal Revenue disallowed all
promotion of a single product is doubtlessly these items. Atlas elevated the issue to the Court of
unreasonable considering it comprises almost one- Tax Appeals. The CTA rendered a decision allowing
the said items, except for the stockholders relation Failure to assert a question within a reasonable time
service fee and the suit expenses. Both Atlas and the warrants a presumption that the party entitled to
CIR went to the Supreme Court to appeal the CTA assert it either has abandoned or declined to assert
decision. In GR No. L-26911, Atlas argues that the it. The Court held that the US stock listing fee is an
CTA should not have disallowed the stockholders ordinary and necessary business expense and was
relation service fee. The corporation contends that correctly allowed by the CTA as a deduction. The
such fee constitutes an ordinary and necessary stock listing fee is paid annually to a stock exchange
business expense, and should, therefore, be allowed for the privilege of having Atlas stock listed. A single
as a deductible expense from the companys gross payment made to the stock exchange is considered a
income. In GR No. L-26924, the CIR argues that the capital expenditure (Domes Mines case). However,
transfer agents fee and the US stock listing fee payments to the stock exchange made annually or in
should not have been allowed as deductions from a recurring manner are considered ordinary and
gross income in the absence of proof of payment for necessary business expenses (Chesapeake
such expenses. The CIR also argues that the US stock Corporation case). The fees paid by Atlas partake of
listing expenses should be disallowed for not being the latter. The Court reiterated that it is well-settled
ordinary and necessary and not incurred in trade or that litigation expenses incurred in defense or
business, as required under Sec 30 (a) (1) of the protection of title are capital in nature and not
National Internal Revenue Code. The CIR also deductible. The Court sustained the CIR that the
contends that the correct amount of disallowance for correct amount of disallowance for litigation or suit
suit expenses should be PhP 17,499.98 and not PhP expenses is PhP 17,499.98.
6,666.65.
ISSUE: ATLAS CONSOLIDATED MINING & DEVT CORP VS
In GR No. L-26911, whether or not the expenses paid COMMISSIONER OF INTERNAL REVENUE
for the services rendered by a public relations firm, P.
K. Macker & Co., labeled as stockholders relation FACTS:
service fee is an allowable deduction as business
expense. In GR No. L-26924, whether or not the
transfer agents fee and the US stock listing fee Atlas is a corporation engaged in the mining industry
should have been allowed as deduction in the registered. On August 1962, CIR assessed against
absence of proof of payments. Whether or not the US Atlas for deficiency income taxes for the years 1957
stock listing expenses should be disallowed for not and 1958. For the year 1957, it was the opinion of
being ordinary and necessary and not incurred in the CIR that Atlas is not entitled to exemption from
trade or business. Whether PhP 17,499.98 or PhP the income tax under RA 909 because same covers
6,666.65 is the correct amount of disallowance for only gold mines. For the year 1958, the deficiency
suit expenses. income tax covers the disallowance of items claimed
HELD: by Atlas as deductible from gross income. Atlas
GR No. L-26911. Under Sec 30 (a) (1) of the Tax protested for reconsideration and cancellation, thus
Code, three conditions have to be complied with the CIR conducted a reinvestigation of the case.
before a business expense is allowed as a deduction
from gross income: (1) the expense must be ordinary
and necessary, (2) it must be paid or incurred within On October 1962, the Secretary of Finance ruled that
the taxable year, and (3) it must be paid or incurred the exemption provided in RA 909 embraces all new
in carrying a trade or business. The Court sustained mines and old mines whether gold or other minerals.
the ruling of the CTA that the expenditure paid to P. Accordingly, the CIR recomputed Atlas deficiency
K. Macker & Co. denominated as stockholders income tax liabilities in the light of said ruling. On
relation service fee is not an ordinary expense. The June 1964, the CIR issued a revised assessment
fee was paid to the PR firm as ompensation entirely eliminating the assessment for the year
for services carrying on the selling campaign in an 1957. The assessment for 1958 was reduced from
effort to sell Atlas additional capital stock. Such is which Atlas appealed to the CTA, assailing the
not an ordinary expense because, according to the disallowance of the following items claimed as
Court, expenses relating to the recapitalization and
deductible from its gross income for 1958: Transfer
reorganization of a corporation, the cost of obtaining
agent's fee, Stockholders relation service fee, U.S.
stock subscription,
promotion expenses, and commission or fees paid for stock listing expenses, Suit expenses, and Provision
the sale of stock reorganization are capital for contingencies. The CTA allowed said items as
expenditures. The stockholders relation service fee deduction except those denominated by Atlas as
is not deductible from Atlas gross income. stockholders relation service fee and suit expenses.
GR No. L-26924. The Court agreed with the CTA that
the CIR cannot raise the issue of payment for the first Both parties appealed the CTA decision to the SC by
time on appeal. The fact of payment was never way of two (2) separate petitions for review. Atlas
controverted by the CIR during the proceedings. appealed only the disallowance of the deduction from
gross income of the so-called stockholders relation It appears that on December 1957, Atlas increased
service fee. its capital stock. It claimed that its shares of stock
were sold in the United States because of the
ISSUE/HELD: W/N the annual public relations services rendered by the public relations firm. The
expense (aka stockholders relation service fee) paid information about Atlas given out and played up in
to a public relations consultant is a deductible the mass communication media resulted in full
expense from gross income subscription of the additional shares issued by Atlas;
consequently, the stockholders relation service fee,
the compensation for services carrying on the selling
RATIO: Section 30 (a) (1) of the Tax Code allows a
campaign, was in effect spent for the acquisition of
deduction of "all the ordinary and necessary
additional capital, ergo, a capital expenditure, and
expenses paid or incurred during the taxable year in
not an ordinary expense. It is not deductible from
carrying on any trade or business." An item of
Atlas gross income in 1958 because expenses
expenditure, in order to be deductible under this
relating to recapitalization and reorganization of the
section of the statute, must fall squarely within its
corporation, the cost of obtaining stock subscription,
language. To be deductible as a business expense,
promotion expenses, and commission or fees paid for
three conditions are imposed, namely: (1) the
the sale of stock reorganization are capital
expense must be ordinary and necessary, (2) it must
expenditures. That the expense in question was
be paid or incurred within the taxable year, and (3) it
incurred to create a favorable image of the
must be paid or incurred in carrying in a trade or
corporation in order to gain or maintain the public's
business. In addition, not only must the taxpayer
and its stockholders' patronage, does not make it
meet the business test, he must substantially prove
deductible as business expense. As held in a US
by evidence or records the deductions claimed under
case, efforts to establish reputation are akin to
the law, otherwise, the same will be disallowed. The
acquisition of capital assets and, therefore, expenses
mere allegation of the taxpayer that an item of
related thereto are not business expense but capital
expense is ordinary and necessary does not justify its
expenditures.
deduction.
Commissioner of Internal Revenue vs. Vda. De SEC. 30 Deductions from gross income. In
Prieto (1960) computing net income there shall be allowed as
FACTS: deductions
On December 4, 1945, the respondent conveyed by
way of gifts to her four children, namely, Antonio,
Benito, Carmen and Mauro, all surnamed Prieto, real (b) Interest:
property with a total assessed value of P892,497.50.
After the filing of the gift tax returns on or about (1) In general. The amount of interest paid
February 1, 1954, the petitioner Commissioner of within the taxable year on indebtedness,
Internal Revenue appraised the real property except on indebtedness incurred or
donated for gift tax purposes at P1,231,268.00, and continued to purchase or carry obligations
assessed the total sum of P117,706.50 as donor's gift the interest upon which is exempt from
tax, interest and compromises due thereon. Of the
taxation as income under this Title.
total sum of P117,706.50 paid by respondent on April
29, 1954, the sum of P55,978.65 represents the total
interest on account of deliquency. This sum of The term "indebtedness" as used in the Tax Code of
P55,978.65 was claimed as deduction, among others, the United States containing similar provisions as in
by respondent in her 1954 income tax return. the above-quoted section has been defined as an
Petitioner, however, disallowed the claim and as a unconditional and legally enforceable obligation for
consequence of such disallowance assessed the payment of money.
respondent for 1954 the total sum of P21,410.38 as
deficiency income tax due on the aforesaid
To give to the quoted portion of section 80 of our
P55,978.65, including interest up to March 31, 1957,
surcharge and compromise for the late payment. Income Tax Regulations the meaning that the
petitioner gives it would run counter to the provision
Under the law, for interest to be deductible, it must of section 30(b) of the Tax Code and the construction
be shown that there be an indebtedness, that there given to it by courts in the United States. Such effect
should be interest upon it, and that what is claimed would thus make the regulation invalid for a
as an interest deduction should have been paid or "regulation which operates to create a rule out of
accrued within the year. It is here conceded that the harmony with the statute, is a mere nullity." As
interest paid by respondent was in consequence of already stated, section 80 implements only section
the late payment of her donor's tax, and the same 30(c) of the Tax Code, or the provision allowing
was paid within the year it is sought to be declared. deduction of taxes, while herein respondent seeks to
To sustain the proposition that the interest payment be allowed deduction under section 30(b), which
in question is not deductible for the purpose of provides for deduction of interest on indebtedness.
computing respondent's net income, petitioner relies
heavily on section 80 of Revenue Regulation No. 2
(known as Income Tax Regulation) promulgated by
the Department of Finance, which provides that "the PAPER INDUSTRIES v CA ( Dec. 1, 1995)
word `taxes' means taxes proper and no deductions
should be allowed for amounts representing interest, FACTS:
surcharge, or penalties incident to delinquency." The On various years (1969, 1972 and 1977), Picop
court below, however, held section 80 as inapplicable obtained loans from foreign creditors in order to
finance the purchase of machinery and equipment interest," that is to say, interest "calculated" or
needed for its operations. In its 1977 Income Tax computed (and not incurred or paid) for the
Return, Picop claimed interest payments made in purpose of determining the "opportunity cost"
1977, amounting to P42,840,131.00, on these loans of investing funds in a given business. Such
as a deduction from its 1977 gross income. "theoretical" or imputed interest does not arise
The CIR disallowed this deduction upon the ground from a legally demandable interest-bearing
that, because the loans had been incurred for the obligation incurred by the taxpayer who
purchase of machinery and equipment, the interest however wishes to find out, e.g., whether he would
payments on those loans should have been have been better off by lending out his funds and
capitalized instead and claimed as a depreciation earning interest rather than investing such funds in
deduction taking into account the adjusted basis of his business. One thing that Section 79 quoted above
the machinery and equipment (original acquisition makes clear is that interest which does constitute a
cost plus interest charges) over the useful life of such charge arising under an interest-bearing
assets. obligation is an allowable deduction from gross
Both the CTA and the Court of Appeals sustained the income.
position of Picop and held that the interest deduction Only if sir asks: (For further discussion of CIRs
claimed by Picop was proper and allowable. In the contention)
instant Petition, the CIR insists on its original It is claimed by the CIR that Section 79 of Revenue
position. Regulations No. 2 was "patterned after" paragraph
ISSUE: Whether Picop is entitled to deductions 1.266-1 (b), entitled "Taxes and Carrying Charges
against income of interest payments on loans for the Chargeable to Capital Account and Treated as Capital
purchase of machinery and equipment. Items" of the U.S. Income Tax Regulations, which
HELD: YES. paragraph reads as follows:
Interest payments on loans incurred by a taxpayer
(whether BOI-registered or not) are allowed by the (B) Taxes and Carrying Charges. The items
NIRC as deductions against the taxpayer's gross thus chargeable to capital accounts are
income. The basis is 1977 Tax Code Sec. 30 (b). 2
Thus, the general rule is that interest expenses are
deductible against gross income and this certainly (11) In the case of real property, whether
includes interest paid under loans incurred in improved or unimproved and whether
connection with the carrying on of the business of productive or nonproductive.
the taxpayer. In the instant case, the CIR does not
dispute that the interest payments were made by (a) Interest on a loan (but not theoretical
Picop on loans incurred in connection with the interest of a taxpayer using his own funds).
carrying on of the registered operations of Picop, i.e.,
the financing of the purchase of machinery and
equipment actually used in the registered operations The truncated excerpt of the U.S. Income Tax
of Picop. Neither does the CIR deny that such interest Regulations quoted by the CIR needs to be related to
payments were legally due and demandable under the relevant provisions of the U.S. Internal Revenue
the terms of such loans, and in fact paid by Picop Code, which provisions deal with the general topic of
during the tax year 1977. adjusted basis for determining allowable gain or loss
The contention of CIR does not spring of the 1977 Tax on sales or exchanges of property and allowable
Code but from Revenue Regulations 2 Sec. 79.3 depreciation and depletion of capital assets of the
However, the Court said that the term interest here taxpayer:
should be construed as the so-called "theoretical
Present Rule. The Internal Revenue Code,
2 Sec. 30. Deduction from Gross Income. The following may be and the Regulations promulgated thereunder
deducted from gross income:xxx xxx xxx
(b) Interest: provide that "No deduction shall be allowed
(1) In general. The amount of interest paid within the for amounts paid or accrued for such taxes
taxable year on indebtedness, except on indebtedness incurred or
continued to purchase or carry obligations the interest upon which is
and carrying charges as, under regulations
exempt from taxation as income under this Title: . . . (Emphasis prescribed by the Secretary or his delegate,
supplied) are chargeable to capital account with
respect to property, if the taxpayer elects, in
accordance with such regulations, to treat
such taxes orcharges as so chargeable."
3 Sec. 79. Interest on Capital. Interest calculated for cost-keeping or
other purposes on account of capital or surplus invested in the At the same time, under the adjustment of
business, which does not represent a charge arising under an interest-bearing
basis provisions which have just been
obligation, is not allowable deduction from gross income. (Emphases
supplied) discussed, it is provided that adjustment
shall be made for all "expenditures, receipts, (d) Taxes assessed against local benefits of a kind
losses, or other items" properly chargeable to tending to increase the value of the property
a capital account, thus including taxes and assessed.
carrying charges; however, an exception Provided, That taxes allowed under this Subsection,
exists, in which event such adjustment to the when refunded or credited, shall be included as part
capital account is not made, with respect to of gross income in the year of receipt to the extent of
taxes and carrying charges which the the income tax benefit of said deduction.
(2) Limitations on Deductions. - In the case of a
taxpayer has not elected to capitalize but for
nonresident alien individual engaged in trade or
which a deduction instead has been
business in the Philippines and a resident foreign
taken. 22 (Emphasis supplied) corporation, the deductions for taxes provided in
paragraph (1) of this Subsection (C) shall be allowed
The "carrying charges" which may be capitalized only if and to the extent that they are connected with
under the above quoted provisions of the U.S. income from sources within the Philippines.
Internal Revenue Code include, as the CIR has (3) Credit Against Tax for Taxes of Foreign Countries. -
pointed out, interest on a loan "(but not theoretical If the taxpayer signifies in his return his desire to
interest of a taxpayer using his own funds)." What have the benefits of this paragraph, the tax imposed
the CIR failed to point out is that such "carrying by this Title shall be credited with:
charges" may, at the election of the taxpayer, either (a) Citizen and Domestic Corporation. - In the case of
a citizen of the Philippines and of a domestic
be (a) capitalized in which case the cost basis of the
corporation, the amount of income taxes paid or
capital assets, e.g., machinery and equipment, will
incurred during the taxable year to any foreign
be adjusted by adding the amount of such interest country; and
payments or alternatively, be (b) deducted from (b) Partnerships and Estates. - In the case of any
gross income of the taxpayer. Should the taxpayer such individual who is a member of a general
elect to deduct the interest payments against its professional partnership or a beneficiary of an estate
gross income, the taxpayer cannot at the same or trust, his proportionate share of such taxes of the
time capitalize the interest payments. In other words, general professional partnership or the estate or
the taxpayer is not entitled to both the deduction trust paid or incurred during the taxable year to a
from gross income and the adjusted (increased) foreign country, if his distributive share of the income
basis for determining gain or loss and the allowable of such partnership or trust is reported for taxation
depreciation charge. The U.S. Internal Revenue under this Title.
Code does not prohibit the deduction of interest on a An alien individual and a foreign corporation shall not
loan obtained for purchasing machinery and be allowed the credits against the tax for the taxes of
equipment against gross income, unless the taxpayer foreign countries allowed under this paragraph.
(4) Limitations on Credit. - The amount of the credit
has also or previously capitalized the same interest
taken under this Section shall be subject to each of
payments and thereby adjusted the cost basis of
the following limitations:
such assets. (a) The amount of the credit in respect to the tax
paid or incurred to any country shall not exceed the
same proportion of the tax against which such credit
is taken, which the taxpayer's taxable income from
sources within such country under this Title bears to
his entire taxable income for the same taxable year;
and
3. TAXES (b) The total amount of the credit shall not exceed
i. Sec. 34(C) of the NIRC the same proportion of the tax against which such
(1) In General. - Taxes paid or incurred within the credit is taken, which the taxpayer's taxable income
taxable year in connection with the taxpayer's from sources without the Philippines taxable under
profession, trade or business, shall be allowed as this Title bears to his entire taxable income for the
deduction, except same taxable year.
(a) The income tax provided for under this Title; (5) Adjustments on Payment of Incurred Taxes. - If
(b) Income taxes imposed by authority of any foreign accrued taxes when paid differ from the amounts
country; but this deduction shall be allowed in the claimed as credits by the taxpayer, or if any tax paid
case of a taxpayer who does not signify in his return is refunded in whole or in part, the taxpayer shall
his desire to have to any extent the benefits of notify the Commissioner; who shall redetermine the
paragraph (3) of this subsection (relating to credits amount of the tax for the year or years affected, and
for taxes of foreign countries); the amount of tax due upon such redetermination, if
(c) Estate and donor's taxes; and any, shall be paid by the taxpayer upon notice and
demand by the Commissioner, or the amount of tax
overpaid, if any, shall be credited or refunded to the
taxpayer. In the case of such a tax incurred but not refund in the amount of P150,269.00 as
paid, the Commissioner as a condition precedent to alleged overpaid income tax for 1955
the allowance of this credit may require the taxpayer o Facts:
to give a bond with sureties satisfactory to and to be In Feb 1956 Sps filed ITR for 1955 =
approved by the Commissioner in such sum as he gross income of P1,7771,124.63 and net
may require, conditioned upon the payment by the income of P1,052,550.67
taxpayer of any amount of tax found due upon any 1956 sps filed an amended ITR
such redetermination. The bond herein prescribed Back in 1955, sps filed with the US
shall contain such further conditions as the Internal Revenue Agent in Manila their
Commissioner may require. federal ITR for the years 1947,1951-54
(6) Year in Which Credit Taken. - The credits provided on income from Phil sources on a cash
for in Subsection (C)(3) of this Section may, at the basis
option of the taxpayer and irrespective of the method 1958 Sps amended their Phil ITR for
of accounting employed in keeping his books, be 1955 to include the deductions of US
taken in the year which the taxes of the foreign Federal income taxes, interest accrued
country were incurred, subject, however, to the up to May 15, 1955, and exchange and
conditions prescribed in Subsection (C)(5) of this bank charges
Section. If the taxpayer elects to take such credits in CTA case 570 was filed
the year in which the taxes of the foreign country
G.R. No. 21434 formerly CTA Case No. 783,
accrued, the credits for all subsequent years shall be
facts are similar but refer to Lednickys OTR
taken upon the same basis and no portion of any
for 1957 filed in Feb 1958
such taxes shall be allowed as a deduction in the
o In 1959 sps filed amended return for
same or any succeeding year.
1957 claiming deductions
(7) Proof of Credits. - The credits provided in
representing taxes paid to US Govt.
Subsection (C)(3) hereof shall be allowed only if the
* Tac xourt held that the taxes may be deducted
taxpayer establishes to the satisfaction of the
because the Sps did not signify in their ITRa desire
Commissioner the following:
to avail themselves of the benefits of paragraph 3(B)
(a) The total amount of income derived from sources
of Sec. 30
without the Philippines;
COMMON ISSUE: WON a citizen of the US residing in
(b) The amount of income derived from each country,
Phils who derives income wholly from sources within
the tax paid or incurred to which is claimed as a
the Phils may deduct from his gross income the
credit under said paragraph, such amount to be
income taxes he has paid to US govt for the taxable
determined under rules and regulations prescribed
year?
by the Secretary of Finance; and
HELD/RATIO:
(c) All other information necessary for the verification
and computation of such credits. SC: CIR correct that the construction and
wording of Sec. 30c(1)B of the Internal
CASES: Revenue Act shows the laws intent that the
right to deduct income taxes paid to foreign
CIR V LEDNICKY government from the taxpayers gross
income is given only as an alternative or
FACTS: substitute to his right to claim a tax credit for
Resp spouses V.E. Lednicky and Maria Valero such foreign income taxes
o (B) Income, war-profits, and excess
Lednicky are American Citizens residing in
the Philippines and derived their income from profits taxes imposed by the
Philippine sources for the taxable years in authority of any foreign country; but
question this deduction shall be allowed in the
case of a taxpayer who does not
1957 Sps filed their ITR for 1956 reporting a
signify in his return his desire to have
gross income P1,017,287.65 and a net
any extent the benefits of paragraph
income of P733,809.44 on which
(3) of this subsection (relating to
P317,395.40 was assessed after deducting
credit for foreign countries)
P4,805.59 as withholding tax.
So that unless the alien resident has a right
Sps paid 326,247.41 on April 1957
to claim such tax credit if he so chooses, he
March 1959 Sps filed an amended ITR for is precluded from deducting the foreign
1956. They claimed a deduction of income taxes from his gross income.
P205,939.24 paid in 1956 to US govt.
For it is obvious that in prescribing that such
Respondents requested refund of 112,437.90
deduction shall be allowed in the case of a
CIR failed to answer the claim for refund, taxpayer who does not signify in his return
resps filed their petition with the Tax Court his desire to have any extent benefits of
G.R. No. L-18169 formerly CTA case paragraph 3, the statute assumes that the
570[different case/year] is also a claim for
taxpayer in question may signify his desire to answer the claim for refund, the spouses filed their
claim a tax credit and waive the deduction; petition with the tax court on 11 April 1959 as CTA
otherwise, the foreign taxes would always be Case 646. [GR L- 18165] On 28 February 1956, the
deductible and their mention in the list on spouses filed their domestic income tax return for
non-deductible items in Sec. 30c might as 1955, reporting a gross income of P1,771,124.63 and
well have been omitted or at least expressly a net income of P1,052,550.67. On 19 April 1956,
limited to taxes on income from sources they filed an amended income tax return, the
outside the Philippine Islands amendment upon the original being a lesser net
Had the law intended that foreign income income of P1,012,554.51, and, on the basis of this
taxes could be deducted from gross income amended return, they paid P570,252.00, inclusive of
in any event, regardless of the taxpayers withholding taxes. After audit, the Commissioner
right to claim a tax credit, it is the latter right determined a deficiency of P16,116.00, which
that should be conditioned upon the amount the spouses paid on 5 December 1956. Back
taxpayers waiving the deduction in 1955, however, the spouses filed with the US
No danger of double credit/taxation. Internal Revenue Agent in Manila their Federal
o Double taxation becomes obnoxious only income tax return for the years 1947, 1951, 1952,
where the taxpayer is taxed twice for the 1953 and 1954 on income from Philippine sources on
benefit of the same governmental entity a cash basis. Payment of these federal income taxes,
o The Philippine government only receives including penalties and delinquency interest in the
the proceeds of one tax amount of $264,588.82, were made in 1955 to the
o Justice and equity demand that the tax US Director of Internal Revenue, Baltimore, Maryland,
on the income should accrue to the through the National City Bank of New York, Manila
benefit of the Philippines Branch. Exchange and bank charges in remitting
o Any relief from the alleged double payment totaled P4,143.91. On 11 August 1958 the
said respondents amended their Philippines income
taxation should come from the US since
tax return for 1955 to including US Federal income
the formers right to burden the taxpayer
taxes, interest accruing up to 15 May 1955, and
is solely predicated in is citizenship,
exchange and bank charges, totaling P516,345.15
without contributing to the production of
and therewith filed a claim for refund of the sum of
wealth that is being taxed
P166,384.00, which was later reduced to
o To allow an alien resident to deduct from
P150,269.00. The spouses brought suit in the Tax
his gross income whatever taxes he pays
Court, which was docketed therein as CTA Case 570.
to his own government amounts to
[GR 21434] The facts are similar to above cases but
conferring on the latter the power to
refer to the spouses income tax returns for 1957,
reduce the tax income of the Philippine
filed on 28 February 1958, and for which the spouses
government simply by increasing the tax
paid a total sum of P196,799.65. In 1959, they filed
rates on the alien resident.
an amended return for 1957, claiming deduction of
P190,755.80, representing taxes paid to the US
CIR vs. Lednicky [G.R. Nos. L-18169, L-18286, &
Government on income derived wholly from
L-21434. July 31, 1964.]
Philippine sources. On the strength thereof, spouses
FACTS:
seek refund of P90,520.75 as overpayment (CTA
V. E. Lednicky and Maria Valero Lednicky, are
Case 783). The Tax Court decide for the spouses. The
husband and wife, both American citizens residing in
Commissioner thus elevated under separate petitions
the Philippines, and have derived all their income
for review of the corresponding decisions of the Court
from Philippine sources for the taxable years under
of Tax Appeals to the Supreme Court. Since these
question. [GR L-18286] In compliance with local law,
cases involve the same parties and issues akin to
the spouses, on 27 March 1957, filed their income
each case presented, the Court decided them jointly.
tax return for 1956, reporting therein a gross income
HELD:
of P1,017,287.65 and a net income of P733,809.44
The Supreme Court reversed the decisions of the
on which the amount of P317,395.41 was assessed
Court of Tax Appeals, and affirmed the disallowance
after deducting P4,805.59 as withholding tax.
of the refunds claimed by the spouses, with costs
Pursuant to the Commissioner of Internal Revenues
against said spouses.
assessment notice, the spouses paid the total
1. Section 30 (c-1) of the Philippine Internal Revenue
amount of P326,247.41, inclusive of the withheld
Code Section 30 (c) (1) (Deduction from gross
taxes, on 15 April 1957. On 17 March 1959, the
income) provides that in computing net income
spouses filed an amended income tax return for
there shall be allowed as deductions: (c) Taxes: (1) In
1956. The amendment consists in a claimed
general. Taxes paid or accrued within the taxable
deduction of P205,939.24 paid in 1956 to the US
year, except (A) The income tax provided for under
government as federal income tax for 1956.
this Title; (B) Income, war-profits, and excess profits
Simultaneously with the filing of the amended return,
taxes imposed by the authority of any foreign
the spouses requested the refund of P112,437.90.
country; but this deduction shall be allowed in the
When the Commissioner of Internal Revenue failed to
case of a taxpayer who does not signify in his return non-deductible items in Section 30 (c) might as well
his desire to have to any extent the benefits of have been omitted, or at least expressly limited to
paragraph (3) of this subsection (relating to credit for taxes on income from sources outside the Philippine
taxes of foreign countries); (C) Estate, inheritance Islands. Had the law intended that foreign income
and gift taxes; and (D) Taxes assessed against local taxes could be deducted from gross income in any
benefits of a kind tending to increase the value of the event, regardless of the taxpayers right to claim a
property assessed. tax credit, it is the latter right that should be
2. Paragraph (c) (3) (b) of the Tax Code; Credits conditioned upon the taxpayers waiving the
against tax for taxes of foreign countries Paragraph 3 deduction; in which case the right to reduction under
(B) of the subsection (Credits against tax for taxes of subsection (c-1-B) would have been made absolute
foreign countries), reads: If the taxpayer signifies in or unconditional (by omitting foreign taxes from the
his return his desire to have the benefits of this enumeration of non- deductions), while the right to a
paragraph, the tax imposed by this Title shall be tax credit under subsection (c-3) would have been
credited with (B) Alien resident of the Philippines. expressly conditioned upon the taxpayers not
In the case of an alien resident of the Philippines, the claiming any deduction under subsection (c-1).
amount of any such taxes paid or accrued during the 5. Danger of double credit does not exist if taxpayer
taxable year to any foreign country, if the foreign cannot claim benefit from either headings at his
country of which such alien resident is a citizen or option The purpose of the law is to prevent the
subject, in imposing such taxes, allows a similar taxpayer from claiming twice the benefits of his
credit to citizens of the Philippines residing in such payment of foreign taxes, by deduction from gross
country; income (subs. c-1) and by tax credit (subs. c-3). This
3. Paragraph (c) (4) of the Tax Code; Limitation on danger of double credit certainly can not exist if the
credit The tax credit so authorized is limited under taxpayer can not claim benefit under either of these
paragraph 4 (A and B) of the same subsection, in the headings at his option, so that he must be entitled to
following terms: Par. (c) (4) Limitation on credit. a tax credit (the spouses admittedly are not so
The amount of the credit taken under this section entitled because all their income is derived from
shall be subject to each of the following limitations: Philippine sources), or the option to deduct from
(A) The amount of the credit in respect to the tax gross income disappears altogether.
paid or accrued to any country shall not exceed the 6. When double taxation; Tax income should accrue
same proportion of the tax against which such credit to benefit of the Philippines Double taxation becomes
is taken, which the taxpayers net income from obnoxious only where the taxpayer is taxed twice for
sources within such country taxable under this Title the benefit of the same governmental entity (cf.
bears to his entire net income for the same taxable Manila vs. Interisland Gas Service, 52 Off. Gaz. 6579,
year; and (B) The total amount of the credit shall not Manuf. Life Ins. Co. vs. Meer, 89 Phil. 357). In the
exceed the same proportion of the tax against which present case, while the taxpayers would have to pay
such credit is taken, which the taxpayers net income two taxes on the same income, the Philippine
from sources without the Philippines taxable under government only receives the proceeds of one tax.
this Title bears to his entire net income for the same As between the Philippines, where the income was
taxable year. earned and where the taxpayer is domiciled, and the
4. Laws intent that right to deduct income taxes paid United States, where that income was not earned
to foreign government taken as an alternative or and where the taxpayer did not reside, it is
substitute to claim of tax credit for such foreign indisputable that justice and equity demand that the
income tax Construction and wording of Section 30 tax on the income should accrue to the benefit of the
(c) (1) (B) of the Internal Revenue Act shows the Philippines. Any relief from the alleged double
laws intent that the right to deduct income taxes taxation should come from the United States, and not
paid to foreign government from the taxpayers gross from the Philippines, since the formers right to
income is given only as an alternative or substitute burden the taxpayer is solely predicated on his
to his right to claim a tax credit for such foreign citizenship, without contributing to the production of
income taxes under section 30 (c) (3) and (4); so that the wealth that is being taxed.
unless the alien resident has a right to claim such tax 7. Fundamental doctrine of income taxation The
credit if he so chooses, he is precluded from fundamental doctrine of income taxation provides
deducting the foreign income taxes from his gross that the right of a government to tax income
income. For it is obvious that in prescribing that such emanates from its partnership in the production of
deduction shall be allowed in the case of a taxpayer income, by providing the protection, resources,
who does not signify in his return his desire to have incentives, and proper climate for such production.
to any extent the benefits of paragraph (3) (relating 8. Interpretation cannot result to an absurd situation
to credits for taxes paid to foreign countries), the The interpretation given by the spouses to the
statute assumes that the taxpayer in question also revenue law provision in question operates, in its
may signify his desire, to claim a tax credit and waive application, to place a resident alien with only
the deduction; otherwise, the foreign taxes would domestic sources of income in an equal, if not in a
always be deductible, and their mention in the list of better, position than one who has both domestic and
foreign sources of income, a situation which is
manifestly unfair and short of logic.
9. Erroneous interpretation would subrogate
Philippine taxes to those levied by a foreign
government To allow an alien resident to deduct from
his gross income whatever taxes he pays to his own
government amounts to conferring on the latter
power to reduce the tax income of the Philippine
government simply by increasing the tax rates on the
alien resident. Everytime the rate of taxation
imposed upon an alien resident is increased by his 4. LOSSES
own government, his deduction from Philippine taxes Refer to such losses which do not come under the
would correspondingly increase, and the proceeds for category of bad debts, inventory losses,
the Philippines diminished, thereby subordinating our depreciation, etc and which arise in taxpayers
own taxes to those levied by a foreign government. profession trade or business
Such a result is incompatible with the status of the
Philippines as an independent and sovereign state. Kinds of Losses:
a. Ordinary- incurred in trade or business or
Commissioner of Internal Revenue vs W.E. practice of profession
Lednicky and Maria Lednicky b. Capital Losses- deductible to the extent of
GR Nos. L-18262 and L-21434, 1964 capital gains
FACTS: 1. Losses from sale or exchange of capital
Spouses are both American citizens residing in the assets
Philippines and have derived all their income from 2. Losses resulting from securities becoming
Philippine sources for taxable years in question. worthless and which are capital assets
3. Losses from Short Sale of property
On March, 1957, filed their ITR for 1956, reporting 4. Losses due to failure to exercise privilege or
gross income of P1,017,287.65 and a net income of P option to buy or sell property
733,809.44. On March 1959, file an amended c. Special Losses- ie. Wagering Losses(to the extent
claimed deduction of P 205,939.24 paid in 1956 to of gain in such transactions), losses on wash sales
the United States government as federal income tax (sec 38)
of 1956.
ISSUE: i. Sec 34(D) of the NIRC
Whether a citizen of the United States residing in the Losses- Losses actually sustained during the taxable
Philippines, who derives wholly from sources within year and not compensated for by insurance or other
the Philippines, may deduct his gross income from forms of indemnity shall be allowed as deductions:
the income taxes he has paid to the United States (a) If incurred in trade, profession or business;
government for the said taxable year? (b) Of property connected with the trade, business or
HELD: profession, if the loss arises from fires, storms,
An alien resident who derives income wholly from shipwreck, or other casualties, or from robbery, theft
sources within the Philippines may not deduct from or embezzlement.
gross income the income taxes he paid to his home Prescription/ when must submit report to Sec
country for the taxable year. The right to deduct of Finance: not be less than thirty (30) days nor more
foreign income taxes paid given only where than ninety (90) days from the date of discovery of
alternative right to tax credit exists. Section 30 of the the casualty or robbery, theft or embezzlement
NIRC, Gross Income Par. C (3): Credits against tax giving rise to the loss.
per taxes of foreign countries. If the taxpayer
signifies in his return his desire to have the benefits ii. Casualty Losses
of this paragraph, the tax imposed by this shall be a. RMO 31-09 dated October 16, 2009
credited with: Paragraph (B), Alien resident of the -prescribes the policies and guidelines for declaration
Philippines; and, Paragraph C (4), Limitation on and reporting or casualty losses incurred as result of
credit. An alien resident not entitled to tax credit for Typhoons Ondoy and Pepeng
foreign income taxes paid when his income is derived Requirements:
wholly from sources within the Philippines. Double 1. Sworn Declaration of Loss ( filed within 45 days
taxation becomes obnoxious only where the taxpayer after date of event)
is taxed twice for the benefit of the same 2. Proof of the elements of the losses claimed such
governmental entity. In the present case, although as photos, documents, insurance policy, police report
the taxpayer would have to pay two taxes on the (a mere allged theft or robbery to police authorities is
same income but the Philippine government only not considered conclusive proof)
receives the proceeds of one tax, there is no
obnoxious double taxation.
Taxpayer engaged in trade and business- may claim b) For mines other than oil and gas wells, a
business deductions casualty losses for properties net operating loss (realized without the
used in business that were damaged or reported as benefit of incentives provided for under the
losses Omnibus Investments Code of 1997) incurred
in any of its first ten(10) years of operation
Extent of loss to be deducted-> do not include the may be carried over as a deduction from
amount covered by insurance taxable income for the next five (5) years
immediately following the year of such loss.
Destruction of property-> net book value c) No substantial Change in Ownership (75%
immediately preceding disaster Rule)