G.R. No. 118794 May 8, 1996 PHILIPPINE REFINING COMPANY (now known as "UNILEVER PHILIPPINES [PRC], INC.") vs.

COURT OF APPEALS, COURT OF TAX APPEALS, and THE COMMISSIONER OF INTERNAL REVENUE REGALADO, J.: FACTS: This is an appeal by certiorari from the decision of respondent Court of Appeals 1 affirming the decision of the Court of Tax Appeals which disallowed petitioner's claim for deduction as bad debts of several accounts in the total sum of P395,324.27, and imposing a 25% surcharge and 20% annual delinquency interest on the alleged deficiency income tax liability of petitioner. Petitioner Philippine Refining Company (PRC) was assessed by respondent Commissioner of Internal Revenue (Commissioner) to pay a deficiency tax for the year 1985 in the amount of P1,892,584.00. The assessment was timely protested by petitioner on April 26, 1989, on the ground that it was based on the erroneous disallowances of "bad debts" and "interest expense" although the same are both allowable and legal deductions. Respondent Commissioner, however, issued a warrant of garnishment against the deposits of petitioner at a branch of City Trust Bank, in Makati, Metro Manila, which action the latter considered as a denial of its protest. Petitioner accordingly filed a petition for review with the Court of Tax Appeals (CTA) on the same assignment of error, that is, that the "bad debts" and "interest expense" are legal and allowable deductions.In its decision 3 of February 3, 1993 in C.T.A. Case No. 4408, the CTA modified the findings of the Commissioner by reducing the deficiency income tax assessment to P237,381.26, with surcharge and interest incident to delinquency. In said decision, the Tax Court reversed and set aside the Commissioner's disallowance of the interest expense of P2,666,545.19 but maintained the disallowance of the supposed bad debts of thirteen (13) debtors in the total sum of P395,324.27. Petitioner then elevated the case to respondent Court of Appeals which, as earlier stated, denied due course to the petition for review and dismissed the same on August 24, 1994.the reason of the court was that Out of the sixteen (16) accounts alleged as bad debts, We find that only three (3) accounts have met the requirements of the worthlessness of the accounts, hence were properly written off as: bad debts.Mere testimony of the Financial Accountant of the Petitioner explaining the worthlessness of said debts is seen by this Court as nothing more than a self-serving exercise which lacks probative value. There was no iota of documentary evidence (e.g., collection letters sent, report from investigating fieldmen, letter of referral to their legal department, police report/affidavit that the owners were bankrupt due to fire that engulfed their stores or that the owner has been murdered. etc.), to give support to the testimony of an employee of the Petitioner. Mere allegations cannot prove the worthlessness of such debts in 1985. Hence, the claim for deduction of these thirteen (13) debts should be rejected. ISSUE: WON all bad debts should be treated as deductions. RULING: This pronouncement of respondent Court of Appeals relied on the ruling of this Court in Collector vs. Goodrich International Rubber Co., 6 which established the rule in determining the "worthlessness of a debt." 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. On the foregoing considerations, respondent Court of Appeals held that petitioner did not satisfy the requirements of "worthlessness of a debt" as to the thirteen (13) accounts disallowed as deductions. It appears that the only evidentiary support given by PRC for its aforesaid claimed deductions was the explanation or justification posited by its financial adviser or accountant, Guia D. Masagana. Her allegations were not supported by any documentary evidence, hence both the Court of Appeals and the CTA ruled that said contentions per se cannot prove that the debts were indeed uncollectible and can be considered as bad debts as to make them deductible. That both lower courts are correct is shown by petitioner's own submission and the discussion thereof which we have taken time and patience to cull from the antecedent proceedings in this case, albeit bordering on factual settings. The contentions of PRC that nobody is in a better position to determine when an obligation becomes a bad debt than the creditor itself, and that its judgment should not be substituted by that of respondent court as it is PRC

which has the facilities in ascertaining the collectibility or uncollectibility of these debts, are presumptuous and uncalled for. The Court of Tax Appeals is a highly specialized body specifically created for the purpose of reviewing tax cases. Through its expertise, it is undeniably competent to determine the issue of whether or not the debt is deductible through the evidence presented before it. 8 Because of this recognized expertise, the findings of the CTA will not ordinarily be reviewed absent a showing of gross error or abuse on its part. 9 The findings of fact of the CTA are binding on this Court and in the absence of strong reasons for this Court to delve into facts, only questions of law are open for determination. 10 Were it not, therefore, due to the desire of this Court to satisfy petitioner's calls for clarification and to use this case as a vehicle for exemplification, this appeal could very well have been summarily dismissed.

G.R. No. L-25043 April 26, 1968 ANTONIO ROXAS, EDUARDO ROXAS and ROXAS Y CIA., in their own respective behalf and as judicial co-guardians of JOSE ROXAS vs. COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE FACTS: N.B maraming issues pero deductions lang gnwa ko. BENGZON, J.P., J.: Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects, transmitted to their grandchildren by hereditary succession the following properties: (1) Agricultural lands with a total area of 19,000 hectares, situated in the municipality of Nasugbu, Batangas province; (2) A residential house and lot located at Wright St., Malate, Manila; and (3) Shares of stocks in different corporations. To manage the above-mentioned properties, said children, namely, Antonio Roxas, Eduardo Roxas and Jose Roxas, formed a partnership called Roxas y Compania. the Commissioner assessed deficiency income taxes against the Roxas Brothers for the years 1953 and 1955, as follows: 1953 1955 Antonio Roxas P7,010.00 P5,813.00 Eduardo Roxas 7,281.00 5,828.00 Jose Roxas 6,323.00 5,588.00 The deficiency income taxes resulted from the inclusion as income of Roxas y Cia. of the unreported 50% of the net profits for 1953 and 1955 derived from the sale of the Nasugbu farm lands to the tenants, and the disallowance of deductions from gross income of various business expenses and contributions claimed by Roxas y Cia. and the Roxas brothers. For the reason that Roxas y Cia. subdivided its Nasugbu farm lands and sold them to the farmers on installment, the Commissioner considered the partnership as engaged in the business of real estate, hence, 100% of the profits derived therefrom was taxed. The following deductions were disallowed: ROXAS Y CIA.: 1953 Tickets for Banquet in honor of S. Osmea P 40.00 Gifts of San Miguel beer 28.00 Contributions to Philippine Air Force Chapel 100.00 Manila Police Trust Fund 150.00 Philippines Herald's fund for Manila's neediest families 100.00 1955 Contributions to Contribution to Our Lady of Fatima Chapel, FEU ANTONIO ROXAS: 1953 Contributions to Pasay City Firemen Christmas Fund

50.00

25.00 Pasay City Police Dept. X'mas fund 50.00 1955 Contributions to Baguio City Police Christmas fund 25.00 Pasay City Firemen Christmas fund 25.00 Pasay City Police Christmas fund 50.00 EDUARDO ROXAS: 1953 Contributions to Hijas de Jesus' Retiro de Manresa 450.00 Philippines Herald's fund for Manila's neediest families 100.00 1955 Contributions to Philippines Herald's fund for Manila's neediest families 120.00 JOSE ROXAS: 1955 Contributions to Philippines Herald's fund for Manila's neediest families 120.00 The Roxas brothers protested the assessment but inasmuch as said protest was denied, they instituted an appeal in the Court of Tax Appeals on January 9, 1961. The Tax Court heard the appeal and rendered judgment on July 31, 1965 sustaining the assessment except the demand for the payment of the fixed tax on dealer of securities and the disallowance of the deductions for contributions to the Philippine Air Force Chapel and Hijas de Jesus' Retiro de Manresa. Not satisfied, Roxas y Cia. and the Roxas brothers appealed to this Court. The Commissioner of Internal Revenue did not appeal. ISSUE: Are the deductions for business expenses and contributions deductible? RULING: Roxas y Cia. deducted from its gross income the amount of P40.00 for tickets to a banquet given in honor of Sergio Osmena and P28.00 for San Miguel beer given as gifts to various persons. The deduction were claimed as representation expenses. Representation expenses are deductible from gross income as expenditures incurred in carrying on a trade or business under Section 30(a) of the Tax Code provided the taxpayer proves that they are reasonable in amount, ordinary and necessary, and incurred in connection with his business. In the case at bar, the evidence does not show such link between the expenses and the business of Roxas y Cia. The findings of the Court of Tax Appeals must therefore be sustained. The petitioners also claim deductions for contributions to the Pasay City Police, Pasay City Firemen, and Baguio City Police Christmas funds, Manila Police Trust Fund, Philippines Herald's fund for Manila's neediest families and Our Lady of Fatima chapel at Far Eastern University. The contributions to the Christmas funds of the Pasay City Police, Pasay City Firemen and Baguio City Police are not deductible for the reason that the Christmas funds were not spent for public purposes but as Christmas gifts to the families of the members of said entities. Under Section 39(h), a contribution to a government entity is

deductible when used exclusively for public purposes. For this reason, the disallowance must be sustained. On the other hand, the contribution to the Manila Police trust fund is an allowable deduction for said trust fund belongs to the Manila Police, a government entity, intended to be used exclusively for its public functions. The contributions to the Philippines Herald's fund for Manila's neediest families were disallowed on the ground that the Philippines Herald is not a corporation or an association contemplated in Section 30 (h) of the Tax Code. It should be noted however that the contributions were not made to the Philippines Herald but to a group of civic spirited citizens organized by the Philippines Herald solely for charitable purposes. There is no question that the members of this group of citizens do not receive profits, for all the funds they raised were for Manila's neediest families. Such a group of citizens may be classified as an association organized exclusively for charitable purposes mentioned in Section 30(h) of the Tax Code. Rightly, the Commissioner of Internal Revenue disallowed the contribution to Our Lady of Fatima chapel at the Far Eastern University on the ground that the said university gives dividends to its stockholders. Located within the premises of the university, the chapel in question has not been shown to belong to the Catholic Church or any religious organization. On the other hand, the lower court found that it belongs to the Far Eastern University, contributions to which are not deductible under Section 30(h) of the Tax Code for the reason that the net income of said university injures to the benefit of its stockholders. The disallowance should be sustained.

G.R. No. L-24248 July 31, 1974 ANTONIO TUASON, JR. vs. JOSE B. LINGAD, as Commissioner of Internal Revenue FACTS: In 1948 the petitioner inherited from his mother several tracts of land, among which were two contiguous parcels situated on Pureza and Sta. Mesa streets in Manila, with an area of 318 and 67,684 square meters, respectively. When the petitioner's mother was yet alive she had these two parcels subdivided into twenty-nine lots. Twentyeight were allocated to their then occupants who had lease contracts with the petitioner's predecessor at various times from 1900 to 1903, which contracts expired on December 31, 1953. The 29th lot (hereinafter referred to as Lot 29), with an area of 48,000 square meters, more or less, was not leased to any person. It needed filling because of its very low elevation, and was planted to kangkong and other crops. here was no difficulty encountered in selling the 28 small lots as their respective occupants bought them on a 10-year installment basis. Lot 29 could not however be sold immediately due to its low elevation. Sometime in 1952 the petitioner's attorney-in-fact had Lot 29 filled, then subdivided into small lots and paved with macadam roads. The small lots were then sold over the years on a uniform 10-year annual amortization basis.In 1953 and 1954 the petitioner reported his income from the sale of the small lots (P102,050.79 and P103,468.56, respectively) as long-term capital gains. On May 17, 1957 the Collector of Internal Revenue upheld the petitioner's treatment of his gains from the said sale of small lots, against a contrary ruling of a revenue examiner. In his 1957 tax return the petitioner as before treated his income from the sale of the small lots (P119,072.18) as capital gains and included only thereof as taxable income. In this return, the petitioner deducted the real estate dealer's tax he paid for 1957. It was explained, however, that the payment of the dealer's tax was on account of rentals received from the mentioned 28 lots and other properties of the petitioner. On the basis of the 1957 opinion of the Collector of Internal Revenue, the revenue examiner approved the petitioner's treatment of his income from the sale of the lots in question. In a memorandum dated July 16, 1962 to the Commissioner of Internal Revenue, the chief of the BIR Assessment Department advanced the same opinion, which was concurred in by the Commissioner of Internal Revenue. On January 9, 1963, however, the Commissioner reversed himself and considered the petitioner's profits from the sales of the mentioned lots as ordinary gains. On January 28, 1963 the petitioner received a letter from the Bureau of Internal Revenue advising him to pay deficiency income tax for 1957. (TOTAL AMOUNT DUE AND COLLECTIBLE ......................................... P31,095.36) The petitioner's motion for reconsideration of the foregoing deficiency assessment was denied, and so he went up to the Court of Tax Appeals, which however rejected his posture in a decision dated January 16, 1965, and ordered him, in addition, to pay a 5% Surcharge and 1% monthly interest "pursuant to Sec. 51(e) of the Revenue Code." Hence, the present petition. The petitioner assails the correctness of the opinion below that as he was engaged in the business of leasing the lots he inherited from his mother as well other real properties, his subsequent sales of the mentioned lots cannot be recognized as sales of capital assets but of "real property used in trade or business of the taxpayer." The petitioner argues that (1) he is not the one who leased the lots in question; (2) the lots were residential, not commercial lots; and (3) the leases on the 28 small lots were to last until 1953, before which date he was powerless to eject the lessees therefrom. ISSUE: whether the properties in question which the petitioner had inherited and subsequently sold in small lots to other persons should be regarded as capital assets. RULING: As thus defined by law, the term "capital assets" includes all the properties of a taxpayer whether or not connected with his trade or business, except: (1) stock in trade or other property included in the taxpayer's inventory; (2) property primarily for sale to customers in the ordinary course of his trade or business; (3) property used in the trade or business of the taxpayer and subject to depreciation allowance; and (4) real property used in trade or business. 1 If the taxpayer sells or exchanges any of the properties above-enumerated, any gain or loss relative thereto is an ordinary gain or an ordinary loss; the gain or loss from the sale or exchange of all other properties of the taxpayer is a capital gain or a capital loss. 2

Under section 34(b) (2) of the Tax Code, if a gain is realized by a taxpayer (other than a corporation) from the sale or exchange of capital assets held for more than twelve months, only 50% of the net capital gain shall be taken into account in computing the net income. In the case at bar, after a thoroughgoing study of all the circumstances relevant to the resolution of the issue raised, this Court is of the view, and so holds, that the petitioner's thesis is bereft of merit. When the petitioner obtained by inheritance the parcels in question, transferred to him was not merely the duty to respect the terms of any contract thereon, but as well the correlative right to receive and enjoy the fruits of the business and property which the decedent had established and maintained. 7 Moreover, the record discloses that the petitioner owned other real properties which he was putting out for rent, from which he periodically derived a substantial income, and for which he had to pay the real estate dealer's tax (which he used to deduct from his gross income). 8 In fact, as far back as 1957 the petitioner was receiving rental payments from the mentioned 28 small lots, even if the leases executed by his deceased mother thereon expired in 1953. Under the circumstances, the petitioner's sales of the several lots forming part of his rental business cannot be characterized as other than sales of non-capital assets. The sales concluded on installment basis of the subdivided lots comprising Lot 29 do not deserve a different characterization for tax purposes. The following circumstances in combination show unequivocally that the petitioner was, at the time material to this case, engaged in the real estate business: (1) the parcels of land involved have in totality a substantially large area, nearly seven (7) hectares, big enough to be transformed into a subdivision, and in the case at bar, the said properties are located in the heart of Metropolitan Manila; (2) they were subdivided into small lots and then sold on installment basis (this manner of selling residential lots is one of the basic earmarks of a real estate business); (3) comparatively valuable improvements were introduced in the subdivided lots for the unmistakable purpose of not simply liquidating the estate but of making the lots more saleable to the general public; (4) the employment of J. Antonio Araneta, the petitioner's attorney-in-fact, for the purpose of developing, managing, administering and selling the lots in question indicates the existence of ownerrealty broker relationship; (5) the sales were made with frequency and continuity, and from these the petitioner consequently received substantial income periodically; (6) the annual sales volume of the petitioner from the said lots was considerable, e.g., P102,050.79 in 1953; P103,468.56 in 1954; and P119,072.18 in 1957; and (7) the petitioner, by his own tax returns, was not a person who can be indubitably adjudged as a stranger to the real estate business. Under the circumstances, this Court finds no error in the holding below that the income of the petitioner from the sales of the lots in question should be considered as ordinary income.

G.R. No. L-29790 February 25, 1982 AGUINALDO INDUSTRIES CORPORATION (FISHING NETS DIVISIONS), vs. COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, PLANA , J.: FACTS: Aguinaldo Industries Corporation is a domestic corporation engaged in two lines of business, namely: (a) the manufacture of fishing nets, a tax-exempt industry, and (b) the manufacture of furniture Its business of manufacturing fishing nets is handled by its Fish Nets Division, while the manufacture of Furniture is operated by its Furniture Division. For accounting purposes, each division is provided with separate books of accounts as required by the Department of Finance. Under the company's accounting method, the net income from its Fish Nets Division, miscellaneous income of the Fish Nets Division, and the income of the Furniture Division are computed individually. Previously, petitioner acquired a parcel of land in Muntinglupa, Rizal, as site of the fishing net factory. This transaction was entered in the books of the Fish Nets Division of the Company. Later, when another parcel of land in Marikina Heights was found supposedly more suitable for the needs of petitioner, it sold the Muntinglupa property, Petitioner derived profit from this sale which was entered in the books of the Fish Nets Division as miscellaneous income to distinguish it from its tax-exempt income. For the year 1957, petitioner filed 2 separate income tax returns one for its Fish Nets Division and another for its Furniture Division. After investigation of these returns, the examiners of the BIR found that the Fish Nets Division deducted from its gross income for that year the amount of P61,187.48 as additional remuneration paid to the officers of petitioner. The examiner further found that this amount was taken from the net profit of an isolated transaction (sale of aforementioned land) not in the course of or carrying on of petitioner's trade or business. (It was reported as part of the selling expenses of the land in Muntinglupa, Rizal.) Upon recommendation of the examiner that the said sum of P61,187.48 be disallowed as deduction from gross income, petitioner asserted that said amount should be allowed as deduction because it was paid to its officers as allowance or bonus pursuant to its by-laws which provides: From the net profits of the business of the Company shall be deducted for allowance of the President 3% for the first Vice President 1 %, for the second Vice President for the members of the Board of Directors 10% to he divided equally among themselves, for the Secretary of the Board for the General Manager for two Assistant General Managers In this connection, petitioner explains that to arrive at the aforesaid 20% it gets 20% of the profits from the furniture business and adds (the same) to 20 of the profit of the fish net venture. The P61,187.48 which is the basis of the assessment of P17,133 does not even represent the entire 20%, allocated as allowance in its by-laws but only 20% of the net profit of the non-exempt operation of the Fish Nets Division, that is, 20,%, of P305,869.89, which is the sum total of P305,802.18 representing profit from the sale of the Muntinglupa land, P45.21 representing interest on savings accounts, and P90 representing dividends from investment of the Fish Nets Division. Petitioner argues that the profit derived from the sale of its Muntinglupa land is not taxable for it is tax-exempt income, considering that its Fish Nets Division enjoys tax exemption as a new and necessary industry under RA 901. It must be stressed however that at the administrative level, the petitioner implicitly admitted that the profit it derived from the sale of its Muntinglupa land, a capital asset, was a taxable gain which was precisely the reason why for tax purposes the petitioner deducted therefrom the questioned bonus to its corporate officers as a supposed item of expense incurred for the sale of the said land, apart from the P51,723.72 commission paid by the petitioner to the real estate agent who indeed effected the sale. The BIR therefore had no occasion to pass upon the issue. ISSUE: (1) whether or not the bonus given to the officers of the petitioner upon the sale of its Muntinglupa land is an ordinary and necessary business expense deductible for income tax purposes HELD: the applicable legal provision is Sec. 30 (a) (1) of the Tax Code which reads: 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 personal services actually rendered. ... On the basis of the foregoing standards, the bonus given to the officers of the petitioner as their share of the profit realized from the sale of petitioner's Muntinglupa land cannot be deemed a deductible expense for tax purposes, even if the aforesaid sale could be considered as a transaction for Carrying on the trade or business of the petitioner and the grant of the bonus to the corporate officers pursuant to petitioner's by-laws could, as an intracorporate matter, be sustained. The records show that the sale was effected through a broker who was paid by petitioner a commission of P51,723.72 for his services. On the other hand, there is absolutely no evidence of any service actually rendered by petitioner's officers which could be the basis of a grant to them of a bonus out of the profit derived from the sale. This being so, the payment of a bonus to them out of the gain realized from the sale cannot be considered as a selling expense; nor can it be deemed reasonable and necessary so as to make it deductible for tax purposes. Further, (in a case) whenever a controversy arises on the deductibility, for purposes of income tax, of certain items for alleged compensation of officers of the taxpayer, 2 questions become material, namely: (a) Have personal services been actually rendered by said officers? (b) In the affirmative case, what is the reasonable allowance' therefor

In this case, these extraordinary and unusual amounts paid by petitioner to these directors in the guise and form of compensation for their supposed services as such, without any relation to the measure of their actual services, cannot be regarded as ordinary and necessary expenses within the meaning of the law.

[G.R. No. 142299. June 22, 2006.] BICOLANDIA DRUG CORPORATION (FORMERLY ELMAS DRUG CORPORATION) vs. CIR. AZCUNA, J p: Facts: Petitioner Bicolandia Drug Corporation is a domestic corporation principally engaged in the retail of pharmaceutical products. Petitioner has a drugstore located in Naga City under the name and business style of "Mercury Drug." Pursuant to the provisions of R.A. No. 7432, entitled "An Act to Maximize the Contribution of Senior Citizens to Nation Building, Grant Benefits and Special Privileges and for Other Purposes," also known as the "Senior Citizens Act," and Revenue Regulations No. 2-94, petitioner granted to qualified senior citizens a 20% sales discount on their purchase of medicines covering the period from July 19, 1993 to December 31, 1994. When petitioner filed its corresponding corporate annual income tax returns for taxable years 1993 and 1994, it claimed as a deduction from its gross income the respective amounts of P80,330 and P515,000 representing the 20% sales discount it granted to senior citizens. On March 28, 1995, however, alleging error in the computation and claiming that the aforementioned 20% sales discount should have been treated as a tax credit pursuant to R.A. No. 7432 instead of a deduction from gross income, petitioner filed a claim for refund or credit of overpaid income tax for 1993 and 1994, amounting to P52,215 and P334,750, respectively. On December 29, 1995, petitioner filed a Petition for Review with the Court of Tax Appeals (CTA) in order to toll the running of the two-year prescriptive period for claiming for a tax refund. It contended that Section 4 of R.A. No. 7432 provides in clear and unequivocal language that discounts granted to senior citizens may be claimed as a tax credit. The Commissioner of Internal Revenue,maintained that the discount should be deductible from gross sales of value-added tax or other percentage tax purposes. The Court ruled that it is a tax credit. Issue: whether or not petitioner is entitled to the claim for refund of its overpaid income taxes for the years 1993 and 1994 based on the evidence at hand. Held: NO. Petitioner's claim for refund must be denied. The law expressly provides that the discount given to senior citizens may be claimed as a tax credit, and not a refund. Thus, where the words of a statute are clear, plain and free from ambiguity, it must be given its literal meaning and applied without attempted interpretation. Otherwise stated, the matter to be determined is the amount of tax credit that may be claimed by a taxable entity which grants a 20% sales discount to qualified senior citizens on their purchase of medicines pursuant to Section 4(a) of R.A. No. 7432 which states: Sec. 4.Privileges for the Senior citizens. The senior citizens shall be entitled to the following: a) the grant of twenty percent (20%) discount from all establishments relative to utilization of transportation services, hotels and similar lodging establishments, restaurants and recreation centers and purchase of medicines anywhere in the country: Provided, That private establishments may claim the cost 8 as tax credit. The term "cost" in the above provision refers to the amount of the 20% discount extended by a private establishment to senior citizens in their purchase of medicines. This amount shall be applied as a tax credit, and may be deducted from the tax liability of the entity concerned. If there is no current tax due or the establishment reports a net loss for the period, the credit may be carried over to the succeeding taxable year. This is in line with the interpretation of this Court in Commissioner of Internal Revenue v. Central Luzon Drug Corporation 9 wherein it affirmed that R.A. No. 7432 allows private establishments to claim as tax credit the amount of discounts they grant to senior citizens.

Commissioner of Internal Revenue vs. General Foods (Phils.), Inc. (G.R. No. 143672, April 24, 2003) Corona, J., FACTS: General Foods (Phils.), Inc., a corporation engaged in the manufacture of beverages such as Tang, Calumet and Kool-Aid, filed its income tax return for the fiscal year ending February 28, 1985. In the said tax return, General Foods claimed as deduction, among other business expenses, the amount of P9,461,246 for media advertising for Tang. The Commissioner disallowed 50% or P4,730,623 of the deduction claimed by General Foods. Consequently, General Foods was assessed deficiency income taxes in the amount of P2,635,1414.42. General Foods filed a motion for reconsideration but the same was denied. General Foods appealed to the CTA but it was dismissed on the ground that such expenditure was incurred to create or maintain some form of good will for the taxpayers trade or business or for the industry or profession of which the taxpayer is a member. The CTA also ruled that the term good will generally used to denote the benefit arising from connection and reputation efforts to establish reputations are akin to acquisition of capital assets and, therefore, expenses related thereto are not business expenses but capital expenditures. Such expenditure was meant not only to generate present sales but more for future and prospective benefits. Hence, abnormally large expenditures for advertising are usually to be spread over the period of years during which the benefits of the expenditures are received. Thereafter, General Foods filed a petition for review at the Court of Appeals which rendered a decision reversing and setting aside the decision of the CTA. ISSUES: Whether or not the subject media advertising expense for Tang incurred by respondent corporation was an ordinary and necessary expense fully deductible under the National Internal Revenue Code (NIRC). HELD: NO. It is a governing principle in taxation that tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority; and he who claims an exemption must be able to justify his claim by the clearest grant of organic or statute law. An exemption from the common burden cannot be permitted to exist upon vague implications. To be deductible from gross income, the subject advertising expense must comply with the following requisites: (a) the expense must be ordinary and necessary; (b) it must have been paid or incurred during the taxable year; (c) it must have been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must be supported by receipts, records or other pertinent papers. The Commissioner maintains that the subject advertising expense was not ordinary on the ground that it failed the two conditions set by U.S. jurisprudence: first, reasonableness of the amount incurred and second, the amount incurred must not be a capital outlay to create goodwill for the product and/or private respondents business. Otherwise, the expense must be considered a capital expenditure to be spread out over a reasonable time. We agree. There is yet to be a clear-cut criteria or fixed test for determining the reasonableness of an advertising expense. There being no hard and fast rule on the matter, the right to a deduction depends on a number of factors such as but not limited to: the type and size of business in which the taxpayer is engaged; the volume and amount of its net earnings; the nature of the expenditure itself; the intention of the taxpayer and the general economic conditions. It is the interplay of these, among other factors and properly weighed, that will yield a proper evaluation. In the case at bar, the P9,461,246 claimed as media advertising expense for Tang alone was almost one-half of its total claim for marketing expenses. Aside from that, respondent-corporation also claimed P2,678,328 as other advertising and promotions expense and another P1,548,614, for consumer promotion. Furthermore, the subject P9,461,246 media advertising expense for Tang was almost double the amount of respondent corporations P4,640,636 general and administrative expenses. We find the subject expense for the advertisement of a single product to be inordinately large. Therefore, even if it is necessary, it cannot be considered an ordinary expense deductible under then Section 29 (a) (1) (A) of the NIRC. Advertising is generally of two kinds: (1) advertising to stimulate the current sale of merchandise or use of services and (2) advertising designed to stimulate the future sale of merchandise or use of services. The second type involves expenditures incurred, in whole or in part, to create or maintain some form of goodwill for the taxpayers trade or business or for the industry or profession of which the taxpayer is a member. If the expenditures are for the advertising of the first kind, then, except as to the question of the reasonableness of amount, there is no doubt such expenditures are deductible as business expenses. If, however, the expenditures are for advertising of the second kind, then normally they should be spread out over a reasonable period of time. We agree with the Court of Tax Appeals that the subject advertising expense was of the second kind. Not only was the amount staggering; the respondent corporation itself also admitted, in its letter protest to the Commissioner of Internal Revenues assessment, that the subject media expense was incurred in order to protect respondent corporations brand franchise, a critical point during the period under review. The protection of brand franchise is analogous to the maintenance of goodwill or title to ones property. This is a capital expenditure which should be spread out over a reasonable period of time. Respondent corporations venture to protect its brand franchise was tantamount to efforts to establish a reputation. This was akin to the acquisition of capital assets and therefore expenses related thereto were not to be considered as business expenses but as capital expenditures.

Commissioner of Internal Revenue vs. Isabela Cultural Corporation (G.R. No. 172231, February 12, 2007) Ynares-Santiago, J., FACTS: On February 23, 1990, Isabela Cultural Corporation (ICC), a domestic corporation, received from the BIR an assessment notices: (1) for deficiency income tax in the amount of P333,196.86, and (2) for deficiency expanded withholding tax in the amount of P4,897.79, inclusive of surcharges and interest, both for the taxable year 1986. The deficiency income tax of P333,196.86, arose from: (1) The BIRs disallowance of ICCs claimed expense deductions for professional and security services billed to and paid by ICC in 1986, to wit: (a) Expenses for the auditing services of SGV & Co., [3] for the year ending December 31, 1985; (b) Expenses for the legal services [inclusive of retainer fees] of the law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson for the years 1984 and 1985. (c) Expense for security services of El Tigre Security & Investigation Agency for the months of April and May 1986. (2) The alleged understatement of ICCs interest income on the three promissory notes due from Realty Investment, Inc. The deficiency expanded withholding tax of P4,897.79 (inclusive of interest and surcharge) was allegedly due to the failure of ICC to withhold 1% expanded withholding tax on its claimed P244,890.00 deduction for security services. Thereafter, ICC sought a reconsideration of the subject assessments. However, ICC received a final notice before seizure demanding the payment of the amounts stated in the notices. Hence, it brought the case to the CTA which held that the petition is premature because the FAN cannot be considered as a final decision appealable to the tax court. This was reversed This was reversed by the Court of Appeals holding that a demand letter of the BIR reiterating the payment of deficiency tax, amounts to a final decision on the protested assessment and may therefore be questioned before the CTA. This conclusion was sustained by the Supreme Court. The case was thus remanded to the CTA for further proceedings. The CTA rendered a decision cancelling and setting aside the assessment notices issued against ICC. It held that the claimed deductions for professional and security services were properly claimed by ICC in 1986 because it was only in the said year when the bills demanding payment were sent to ICC. Hence, even if some of these professional services were rendered to ICC in 1984 or 1985, it could not declare the same as deduction for the said years as the amount thereof could not be determined at that time. The CTA also held that ICC did not understate its interest income on the subject promissory notes. It found that it was the BIR which made an overstatement of said income when it compounded the interest income receivable by ICC from the promissory notes of Realty Investment, Inc., despite the absence of a stipulation in the contract providing for a compounded interest; nor of a circumstance, like delay in payment or breach of contract, that would justify the application of compounded interest. Petitioner filed a petition for review with the CA, which affirmed the decision of the CTA. ISSUES: Whether or not the Court of Appeals correctly sustained the deduction of the expenses for professional and security services from ICCs gross income. HELD: YES. The requisites for the deductibility of ordinary and necessary trade, business, or professional expenses, like expenses paid for legal and auditing services, are: (a) the expense must be ordinary and necessary; (b) it must have been paid or incurred during the taxable year; (c) it must have been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must be supported by receipts, records or other pertinent papers. The requisite that it must have been paid or incurred during the taxable year is further qualified by Section 45 of the National Internal Revenue Code (NIRC) which states that: [t]he deduction provided for in this Title shall be taken for the taxable year in which paid or accrued or paid or incurred, dependent upon the method of accounting upon the basis of which the net income is computed x x x. Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of accounting, expenses not being claimed as deductions by a taxpayer in the current year when they are incurred cannot be claimed as deduction from income for the succeeding year. Thus, a taxpayer who is authorized to deduct certain expenses and other allowable deductions for the current year but failed to do so cannot deduct the same for the next year. The accrual method relies upon the taxpayers right to receive amounts or its obligation to pay them, in opposition to actual receipt or payment, which characterizes the cash method of accounting. Amounts of income accrue where the right to receive them become fixed, where there is created an enforceable liability. Similarly, liabilities are accrued when fixed and determinable in amount, without regard to indeterminacy merely of time of payment. The amount of liability does not have to be determined exactly; it must be determined with reasonable accuracy. Accordingly, the term reasonable accuracy implies something less than an exact or completely accurate amount. The propriety of an accrual must be judged by the facts that a taxpayer knew, or could reasonably be expected to have known, at the closing of its books for the taxable year. Accrual method of

accounting presents largely a question of fact; such that the taxpayer bears the burden of proof of establishing the accrual of an item of income or deduction. In the instant case, the expenses for professional fees consist of expenses for legal and auditing services. The expenses for legal services pertain to the 1984 and 1985 legal and retainer fees of the law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson, and for reimbursement of the expenses of said firm in connection with ICCs tax problems for the year 1984.

Commissioner of Internal Revenue vs. V.E. Lednicky and Maria Valero Lenicky (G.R. No. L-18169, L-18262 & L-21434, July 31, 1964) Reyes, J.B.L., J., FACTS: The V. E. Lednicky and Maria Valero Lednicky are husband and wife, respectively, both American citizens residing in the Philippines, and have derived all their income from Philippine sources for the taxable years under question. In compliance with local law, the aforesaid respondents, filed their income tax return for 1956, reporting therein a gross income of P1,017,287.65 and a net income of P733,809.44 on which the amount of P317,395.41 was assessed after deducting P4,805.59 as withholding tax. Pursuant to the petitioner's assessment notice, the respondents paid the total amount of P326,247.41, inclusive of the withheld taxes. Thereafter, the respondents Lednickys filed an amended income tax return for 1956. The amendment consists in a claimed deduction of P205,939.24 paid in 1956 to the United States government as federal income tax for 1956. Simultaneously with the filing of the amended return, the respondents requested the refund of P112,437.90. When the petitioner Commissioner of Internal Revenue failed to answer the claim for refund, the respondents filed their petition with the tax court which is now G. R. No. L-18286 in the Supreme Court. G.R. No. L-18169 (formerly CTA Case No. 570) is also a claim for refund in the amount of P150,269.00, as alleged overpaid income tax for 1955. same respondents-spouses filed their domestic income tax return for 1955, reporting a gross income of P1,771,124.63 and a net income of P1,052,550.67. On 19 April 1956, they filed an amended income tax return, the amendment upon the original being a lesser net income of P1,012,554.51, and, on the basis of this amended return, they paid P570,252.00, inclusive of withholding taxes. After audit, the petitioner determined a deficiency of P16,116.00, which amount the respondents paid on 5 December 1956. Back in 1955, however, the Lednickys filed with the U.S. Internal Revenue Agent in Manila their Federal income tax return for the years 1947, 1951, 1952, 1953 and 1954 on income from Philippine sources on a cash basis. Payment of these federal income taxes, including penalties and delinquency interest in the amount of $264,588.82, were made in 1955 to the U. S. Director of Internal Revenue, Baltimore, Maryland, through the National City Bank of New York, Manila Branch. Exchange and bank charges in remitting payment totaled P4,143.91. On 11 August 1958 the said respondents amended their Philippines income tax return for 1955 to include the following deductions: U.S. Federal income taxes P471,867.32 Interest accrued up to May 15, 1955 40,333.92 Exchange and bank Charges 4,143.91 ___________ Total P516,345.15 ========== and therewith filed a claim for refund of the sum of P166,384.00, which was later reduced to P150,269.00. The respondents Lednicky brought suit in the Tax Court, which was docketed therein as CTA Case No. 570. In G.R. No. 21434 (CTA Case No. 783), the facts are similar but refer to respondents Lednickys income tax returns for 1957, filed on February 28, 1958, and for which respondents paid a total sum of P196,799.65. In 1959, they filed an amended return for 1957, claiming deduction of P190,755.80, representing taxes paid to the U.S. Government on income derived wholly from Philippine sources. On the strength thereof, respondents seek refund of P90,520.75 as overpayment. The tax Court again decided for respondents. ISSUES: Whether or not a citizen of the United States residing in the Philippines, who derives income wholly from sources within the Republic of the Philippines, may deduct from his gross income the income taxes he has paid to the United States government for the taxable year on the strength of section 30 (c-1) of the Philippine Internal Revenue Code1. HELD: NO. The Tax Court held that they may be deducted because of the undenied fact that the respondent spouses did not "signify" in their income tax returns a desire to avail themselves of the benefits of paragraph 3 (B)2 of the subsection.
1

"SEC. 30. Deduction from gross income. In computing net income there shall be allowed as deductions "(a) ... (b) ... (c) Taxes: "(1) In general. Taxes paid or accrued within the taxable year, except "(A) The income tax provided for under this Title; "(B) Income, war-profits, and excess profits taxes imposed by the authority of any foreign country; but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) of this subsection (relating to credit for taxes of foreign countries); "(C) Estate, inheritance and gift taxes; and "(D) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed." 2 "Par. (c) (3) Credits against tax for taxes of foreign countries. If the taxpayer signifies in his return his desire to have the benefits of this paragraph, the tax imposed by this Title shall be credited with (A) ... (B) Alien resident of the Philippines. In the case of an alien resident of the Philippines, the amount of any such taxes paid or accrued during the taxable year to any foreign country, if the foreign country of which such alien resident is a citizen or subject, in imposing such taxes, allows a similar credit to citizens of the Philippines residing in such country;"

We agree with appellant Commissioner that the construction and wording of Section 30 (c) (1) (B) of the Internal Revenue Act shows the law's intent that the right to deduct income taxes paid to foreign government from the taxpayer's gross income is given only as an alternative or substitute to his right to claim a tax credit for such foreign income taxes under section 30 (c) (3) and (4); so that unless the alien resident has a right to claim such tax credit if he so chooses, he is precluded from deducting the foreign income taxes from his gross income. Had the law intended that foreign income taxes could be deducted from gross income in any event, regardless of the taxpayer's right to claim a tax credit, it is the latter right that should be conditioned upon the taxpayer's waiving the deduction; in which case the right to reduction under subsection (c-1-B) would have been made absolute or unconditional (by omitting foreign taxes from the enumeration of non- deductions), while the right to a tax credit under subsection (c-3) would have been expressly conditioned upon the taxpayer's not claiming any deduction under subsection (c-1). Petitioners admit in their brief that the purpose of the law is to prevent the taxpayer from claiming twice the benefits of his payment of foreign taxes, by deduction from gross income (subs. c-1) and by tax credit (subs. c-3). This danger of double credit certainly can not exist if the taxpayer can not claim benefit under either of these headings at his option, so that he must be entitled to a tax credit (respondent taxpayers admittedly are not so entitled because all their income is derived from Philippine sources), or the option to deduct from gross income disappears altogether. Much stress is laid on the thesis that if the respondent taxpayers are not allowed to deduct the income taxes they are required to pay to the government of the United States, in their return for Philippine income tax, they would be subjected to double taxation. What respondents fail to observe is that double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity. In the present case, while the taxpayers would have to pay two taxes on the same income, the Philippine government only receives the proceeds of one tax. As between the Philippines, where the income was earned and where the taxpayer is domiciled, and the United States, where that income was not earned and where the taxpayer did not reside, it is indisputable that justice and equity demand that the tax on the income should accrue to the benefit of the Philippines. Any relief from the alleged double taxation should come from the United States, and not from the Philippines, since the former's right to burden the taxpayer is solely predicated on his citizenship, without contributing to the production of the wealth that is being taxed.

G.R. Nos. L-33665-68 February 27, 1987 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. VICENTE A. RUFINO and REMEDIOS S. RUFINO, ERNESTO D. RUFINO and ELVIRA B. RUFINO, RAFAEL R. RUFINO and JULIETA A. RUFINO, MANUEL S. GALVEZ and ESTER R. GALVEZ, and COURT OF TAX APPEALS, respondents. CRUZ, J.: The private respondents were the majority stockholders of the defunct Eastern Theatrical Co., Inc., a corporation organized in 1934, for a period of 25 years. It had an original capital stock of P500,000, which was increased in 1949 to P2,000,000, and was organized to engage in the business of operating theaters, opera houses, places of amusement and other related business enterprises, more particularly the Lyric and Capitol Theaters in Manila. The President of this corporation (the Old Corporation) was Ernesto Rufino. The private respondents are also the majority and controlling stockholders of another corporation, the Eastern Theatrical Co Inc., which was organized on December 8, 1958, for a term of 50 years, with an authorized capital stock of P200,000. This corporation is engaged in the same kind of business as the Old Corporation. The GeneralManager of this corporation (the New Corporation) at the time was Vicente Rufino. In a special meeting of stockholders of the Old Corporation, to provide for the continuation of its business after the end of its corporate life, a resolution was passed authorizing the Old Corporation to merge with the New Corporation by transferring its business, assets, goodwill, and liabilities to the latter, which in exchange would issue and distribute to the shareholders of the Old Corporation one share for each share held by them in the said Corporation. It was expressly declared that the merger of the Old with the New Corporation was necessary to continue the exhibition of moving pictures at the Lyric and Capitol Theaters even after the expiration of the corporate existence of the former, in view of its pending booking contracts, not to mention its collective bargaining agreements with its employees. Pursuant to the said resolution, the Old Corporation and the New Corporation signed a Deed of Assignment providing for the conveyance and transfer of all the business, property, assets and goodwill of the Old Corporation to the New Corporation in exchange for the latter's shares of stock to be distributed among the shareholders on the basis of one stock for each stock held in the Old Corporation except that no new and unissued shares would be issued to the shareholders of the Old Corporation; the delivery by the New Corporation to the Old Corporation of 125,005-3/4 shares to be distributed to the shareholders of the Old Corporation as their corresponding shares of stock in the New Corporation; the assumption by the New Corporation of all obligations and liabilities of the Old Corporation under its bargaining agreement with the Cinema Stage & Radio Entertainment Free Workers (FFW) which included the retention of all personnel in the latter's employ; and the increase of the capitalization of the New Corporation in compliance with their agreement. This agreement was made retroactive to January 1, 1959. The aforesaid transfer was eventually made by the Old Corporation to the New Corporation, which continued the operation of the Lyric and Capitol Theaters and assumed all the obligations and liabilities of the Old Corporation. The resolution of the Old Corporation and the Deed of Assignment were approved in a resolution by the stockholders of the New Corporation in their special meeting. In the same meeting, the increased capitalization of the New Corporation to P2,000,000 was also divided into 200,000 shares at P10 par value each share, and the said increase was registered, with the SEC. As agreed, and in exchange for the properties, and other assets of the Old Corporation, the New Corporation issued to the stockholders of the former stocks in the New Corporation equal to the stocks each one held in the Old Corporation. After an examination by the BIR, the petitioner declared that the merger of the aforesaid corporations was not undertaken for a bona fide business purpose but merely to avoid liability for the capital gains tax on the exchange of the old for the new shares of stock. Accordingly, he imposed the deficiency assessments against the private respondents for the amounts already mentioned. The private respondents' request for reconsideration having been denied, they elevated the matter to the CTA, which reversed the petitioner. ISSUE: WON the private respondents are liable for deficiency assessments? HELD: No. there was a valid merger between the Old Corporation and the New Corporation. Where stocks for stocks were exchanged, and distributed to the stockholders of the corporations, parties to the merger or consolidation, pursuant to a plan of reorganization, such exchange is exempt from capital gains tax. In view of the foregoing, no taxable gain was derived by the old corp from the exchange of their old stocks solely for stocks of the New Corp pursuant to Section 35(c) (2), in relation to (c) (5), of the NIRC which provides in material part as follows: Sec. 35. Determination of gain or loss from the sale or other disposition of property. The gain derived or loss sustained from the sale or other disposition of property, real, personal or mixed, shall be determined in accordance with the following schedule: (c) Exchange of property(1) General Rule. Except as herein provided upon the sale or exchange of property, the entire amount of the gain or loss, as the case may be, shall be recognized. (2) Exceptions. No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation (a) a corporation which is a party to a merger or consolidation, exchanges property solely for stock in a corporation which is a party to the merger or consolidation, (b) a shareholder exchanges stock in a corporation which is a party to the merger or consolidation solely for the stock of another corporation, also a party to the merger or consolidation, or (c) a security holder of a corporation which is a party to the merger

or consolidation exchanges his securities in such corporation solely for stock or securities in another corporation, a party to the merger or consolidation. (5) Definitions.-(a) x x x (b) The term "merger" or "consolidation," when used in this section, shall be understood to mean: (1) The ordinary merger or consolidation, or (2) the acquisition by one corporation of all or substantially all the properties of another corporation solely for stock; Provided, That for a transaction to be regarded as a merger or consolidation within the purview of this section, it must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation; Provided further, That in determining whether a bona fide business purpose exists, each and every step of the transaction shall be considered and the whole transaction or series of transactions shall be treated as a single unit: ... The basic consideration, of course, is the purpose of the merger, as this would determine whether the exchange of properties involved therein shall be subject or not to the capital gains tax. The criterion laid down by the law is that the merger" must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation." We must therefore seek and ascertain the intention of the parties in the light of their conduct contemporaneously with, and especially after, the questioned merger pursuant to the Deed of Assignment of January 9, 1959. It has been suggested that one certain indication of a scheme to evade the capital gains tax is the subsequent dissolution of the new corporation after the transfer to it of the properties of the old corporation and the liquidation of the former soon thereafter. This highly suspect development is likely to be a mere subterfuge aimed at circumventing the requirements of Section 35 of the Tax Code while seeming to be a valid corporate combination. We see no such furtive intention in the instant case. It is clear, in fact, that the purpose of the merger was to continue the business of the Old Corporation, whose corporate life was about to expire, through the New Corporation to which all the assets and obligations of the former had been transferred. What argues strongly, indeed, for the New Corporation is that it was not dissolved after the merger agreement.On the contrary, it continued to operate the places of amusement originally owned by the Old Corporation and transfered to the New Corporation, particularly the Capitol and Lyric Theaters, in accordance with the Deed of Assignment. The New Corporation, in fact, continues to do so today after taking over the business of the Old Corporation 27 years ago. What is also worth noting is that, as in the case of the Old Corporation when it was dissolved on December 31, 1958, there has been no distribution of the assets of the New Corporation since then and up to now, as far as the record discloses. To date, the private respondents have not derived any benefit from the merger of the Old Corporation and the New Corporation almost three decades earlier that will make them subject to the capital gains tax under Section 35. They are no more liable now than they were when the merger took effect in 1959, as the merger, being genuine, exempted them under the law from such tax.

[G.R. No.L-19865. July 31, 1965.] MARIA CARLA PIROVANO, ETC., ET AL., vs. CIR Facts: Enrico Pirovano was the father of the herein petitioners- appellants. Sometime in the early part of 1941, De la Rama Steamship Co. insured the life of said Enrico Pirovano, who was then its President and General Manager until the time of his death, with various Philippine and American insurance companies for a total sum of one million pesos, designating itself as the beneficiary of the policies obtained by it. Due to the Japanese occupation of the Philippines during the second World War, the Company was unable to pay its premiums on the policies issued by its Philippine insurers and these policies lapsed, while the policies issued by its American insurers were kept effective and subsisting, the New York office of the Company having continued paying its premiums from year to year. In the latter part of 1944, said Enrico Pirovano died. the Board of Directors of De la Rama Steamship Co. adopted a resolution granting and setting aside, out of the proceeds receivable the sum of P400,000.00 for equal division among the four (4) minor children of the deceased, said sum of money to be convertible into 4,000 shares of stock of the Company. The Board later modified the resolution by renouncing all its rights, title, and interest to the said amount of P643,000.00 in favor of the minor children of the deceased, subject to the express condition that said amount should be retained by the Company in the nature of a loan to it. It was further modified providing therein that the Company shall pay the proceeds of said life insurance policies to the heirs of the said Enrico Pirovano after the Company shall have settled in full the balance of its present remaining bonded indebtedness. Mrs. Estefania R. Pirovano, in behalf of her children, executed a public document formally accepting the donation. However, the majority stockholders of the Company voted to revoke the resolution approving the donation in favor of the Pirovano children. As a consequence, the herein petitioners-appellants, represented by their natural guardian, Mrs. Estefania R. Pirovano, brought an action for the recovery of said amount. The Court held that the donation was valid and remunerative in nature. (This case is a sequel to the case of Pirovano, vs. De la Rama Steamship Co., 96 Phil. 335.) On March 6, 1955, respondent Commissioner of Internal Revenue assessed the amount of P60,869.67 as donee's gift taxagainst each of the petitioners-appellants.

Issues: 1. Whether a donation made by a corporation to the heirs of a deceased officer out of gratitude for his past service is subject to the donees' gift tax. 2. Whether a donation made out of gratitude for past services is not subject to deduction. Held: 1.

2.

There is nothing on record to show that when the late Enrico Pirovano rendered services as President and General Manager of the De la Rama Steamship Co. he was not fully compensated for such services, or that, because they were "largely responsible for the rapid and very successful development of the activities of the company" (Resol. of July 10, 1946), Pirovano expected or was promised further compensation over and in addition to his regular emoluments as President and General Manager. The fact that his services contributed in a large measure to the success of the company did not give rise to a recoverable debt, and the conveyances made by the company to his heirs remain a gift or donation. This is emphasized by the director's Resolution of January 6, 1947, that "out of gratitude" the company decided to renounce in favor of Pirovano's heirs the proceeds of the life insurance policies in question. The true consideration for the donation was, therefore, the company's gratitude for his services, and not the services themselves. A donation made out of gratitude for past services is not subject to deduction for the value of said services which do not constitute a recoverable debt.

G.R. No. L-15290 May 31, 1963 MARIANO ZAMORA vs.COLLECTOR OF INTERNAL REVENUE and COURT OF TAX APPEALS PAREDES, J.: Mariano Zamora, owner of the Bay View Hotel and Farmacia Zamora, Manila, filed his income tax returns the years 1951 and 1952. The Collector of Internal Revenue found that he failed to file his return of the capital gains derived from the sale of certain real properties and claimed deductions which were not allowable. The collector required him to pay the sums of P43,758.50 and P7,625.00, as deficiency income tax for the years 1951 and 1952, respectively. The CTA modified the decision and ordered him to pay the reduced total sum of P30,258.00 (P22,980 and P7,278, as deficiency income tax for 1951 and 1952, respectively). Mariano alleged that the CTA erred in disallowing P10,478.50 as promotion expenses incurred by his wife for the promotion of the Bay View Hotel and Farmacia Zamora. He contends that the whole amount of P20,957 as promotion expenses in his 1951 income tax returns, should be allowed and not merely of it or P10,478.50, on the ground that, while not all the itemized expenses are supported by receipts, the absence of some supporting receipts has been sufficiently and satisfactorily established. For, as alleged, the said amount of P20,957 was spent by Mrs. Esperanza (wife of Mariano), during her travel to Japan and the US to purchase machinery for a new TikiTiki plant, and to observe hotel management in modern hotels. The CTA, however, found that for said trip Mrs. Zamora obtained only the sum of P5,000 from the Central Bank and that in her application for dollar allocation, she stated that she was going abroad on a combined medical and business trip, which facts were not denied by Mariano. No evidence had been submitted as to where Mariano had obtained the amount in excess of P5,000 given to his wife which she spent abroad. No explanation had been made either that the statement contained in Mrs. Zamora's application for dollar allocation that she was going abroad on a combined medical and business trip, was not correct. The alleged expenses were not supported by receipts. Mrs. Zamora could not even remember how much money she had when she left abroad in 1951, and how the alleged P20,957 was spent. ISSUE: WON the CTA was correct in allowing only P10,478.50, as promotion expenses incurred by his wife for the promotion of the Bay View Hotel and Farmacia Zamora (which is of P20,957, supposed business expenses) HELD: Yes. Section 30, of the Tax Code, provides that in computing net income, there shall be allowed as deductions all the ordinary and necessary expenses paid or incurred during the taxable year, in carrying on any trade or business. Since promotion expenses constitute one of the deductions in conducting a business, same must testify these requirements. Claim for the deduction of promotion expenses or entertainment expenses must also be substantiated or supported by record showing in detail the amount and nature of the expenses incurred. Considering, as heretofore stated, that the application of Mrs. Zamora for dollar allocation shows that she went abroad on a combined medical and business trip, not all of her expenses came under the category of ordinary and necessary expenses; part thereof constituted her personal expenses. There having been no means by which to ascertain which expense was incurred by her in connection with the business of Mariano and which was incurred for her personal benefit, the CIR and the CTA in their decisions, considered 50% of the said amount of P20,957 as business expenses and the other 50%, as her personal expenses. We hold that said allocation is very fair to Mariano, there having been no receipt whatsoever, submitted to explain the alleged business expenses, or proof of the connection which said expenses had to the business or the reasonableness of the said amount of P20,957. While in situations like the present, absolute certainty is usually no possible, the CTA should make as close an approximation as it can, bearing heavily, if it chooses, upon the taxpayer whose inexactness is of his own making. Representation expenses fall under the category of business expenses which are allowable deductions from gross income, if they meet the conditions prescribed by law, particularly section 30 (a) [1], of the Tax Code; that to be deductible, said business expenses must be ordinary and necessary expenses paid or incurred in carrying on any trade or business; that those expenses must also meet the further test of reasonableness in amount; that when some of the representation expenses claimed by the taxpayer were evidenced by vouchers or chits, but others were without vouchers or chits, documents or supporting papers; that there is no more than oral proof to the effect that payments have been made for representation expenses allegedly made by the taxpayer and about the general nature of such alleged expenses; that accordingly, it is not possible to determine the actual amount covered by supporting papers and the amount without supporting papers, the court should determine from all available data, the amount properly deductible as representation expenses. In view hereof, the CTA, did not commit error in allowing as promotion expenses of Mrs. Zamora claimed in Marianos 1951 income tax returns, merely or P10,478.50.