Tax Deductions Cases

TAX 1 DEDUCTIONS CASES UNDER BUSINESS EXPENSES
G.R. No. 172231
February 12, 2007
the CTA which held that the petition is premature because the final notice of
assessment cannot be considered as a final decision appealable to the tax court.
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 this Court on July 1, 2001, in G.R. No. 135210. 8 The
case was thus remanded to the CTA for further proceedings.
COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
ISABELA CULTURAL CORPORATION, Respondent.
DECISION
YNARES-SANTIAGO, J.:
Petitioner Commissioner of Internal Revenue (CIR) assails the September 30, 2005
Decision1 of the Court of Appeals in CA-G.R. SP No. 78426 affirming the February
26, 2003 Decision2 of the Court of Tax Appeals (CTA) in CTA Case No. 5211, which
cancelled and set aside the Assessment Notices for deficiency income tax and
expanded withholding tax issued by the Bureau of Internal Revenue (BIR) against
respondent Isabela Cultural Corporation (ICC).
The facts show that on February 23, 1990, ICC, a domestic corporation, received
from the BIR Assessment Notice No. FAS-1-86-90-000680 for deficiency income
tax in the amount of P333,196.86, and Assessment Notice No. FAS-1-86-90000681 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., for the year
ending December 31, 1985;4
3
(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 1985.5
(c) Expense for security services of El Tigre Security &
Investigation Agency for the months of April and May 1986.6
(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. 7
On March 23, 1990, ICC sought a reconsideration of the subject assessments. On
February 9, 1995, however, it received a final notice before seizure demanding
payment of the amounts stated in the said notices. Hence, it brought the case to
On February 26, 2003, the CTA rendered a decision canceling 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.
Likewise, the CTA found that ICC in fact withheld 1% expanded withholding tax on
its claimed deduction for security services as shown by the various payment orders
and confirmation receipts it presented as evidence. The dispositive portion of the
CTAs Decision, reads:
WHEREFORE, in view of all the foregoing, Assessment Notice No. FAS-1-86-90000680 for deficiency income tax in the amount of P333,196.86, and Assessment
Notice No. FAS-1-86-90-000681 for deficiency expanded withholding tax in the
amount of P4,897.79, inclusive of surcharges and interest, both for the taxable
year 1986, are hereby CANCELLED and SET ASIDE.
SO ORDERED.9
Petitioner filed a petition for review with the Court of Appeals, which affirmed the
CTA decision,10 holding that although the professional services (legal and auditing
services) were rendered to ICC in 1984 and 1985, the cost of the services was not
yet determinable at that time, hence, it could be considered as deductible
expenses only in 1986 when ICC received the billing statements for said services.
It further ruled that ICC did not understate its interest income from the promissory
notes of Realty Investment, Inc., and that ICC properly withheld and remitted
taxes on the payments for security services for the taxable year 1986.
Hence, petitioner, through the Office of the Solicitor General, filed the instant
petition contending that since ICC is using the accrual method of accounting, the
expenses for the professional services that accrued in 1984 and 1985, should have
been declared as deductions from income during the said years and the failure of
ICC to do so bars it from claiming said expenses as deduction for the taxable year

1986. As to the alleged deficiency interest income and failure to withhold expanded
withholding tax assessment, petitioner invoked the presumption that the
assessment notices issued by the BIR are valid.
The issue for resolution is whether the Court of Appeals correctly: (1) sustained
the deduction of the expenses for professional and security services from ICCs
gross income; and (2) held that ICC did not understate its interest income from
the promissory notes of Realty Investment, Inc; and that ICC withheld the required
1% withholding tax from the deductions for security services.
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.11
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".
Accounting methods for tax purposes comprise a set of rules for determining when
and how to report income and deductions. 12 In the instant case, the accounting
method used by ICC is the accrual method.
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.13
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.14
For a taxpayer using the accrual method, the determinative question is, when do
the facts present themselves in such a manner that the taxpayer must recognize
income or expense? The accrual of income and expense is permitted when the allevents test has been met. This test requires: (1) fixing of a right to income or
liability to pay; and (2) the availability of the reasonable accurate determination of
such income or liability.
The all-events test requires the right to income or liability be fixed, and the
amount of such income or liability be determined with reasonable accuracy.
However, the test does not demand that the amount of income or liability be
known absolutely, only that a taxpayer has at his disposal the information
necessary to compute the amount with reasonable accuracy. The all-events test is
satisfied where computation remains uncertain, if its basis is unchangeable; the
test is satisfied where a computation may be unknown, but is not as much as
unknowable, within the taxable year. The amount of liability does not have to be
determined exactly; it must be determined with "reasonable accuracy."
Accordingly, the term "reasonable accuracy" implies something less than an exact
or completely accurate amount.[15]
The propriety of an accrual must
could reasonably be expected to
taxable year.[16] Accrual method
such that the taxpayer bears the
item of income or deduction.17
be judged by the facts that a taxpayer knew, or

have known, at the closing of its books for the
of accounting presents largely a question of fact;
burden of proof of establishing the accrual of an
Corollarily, 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 one who claims an exemption must be able to justify the
same by the clearest grant of organic or statute law. An exemption from the
common burden cannot be permitted to exist upon vague implications. And since a
deduction for income tax purposes partakes of the nature of a tax exemption, then
it must also be strictly construed.18
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. As testified by the Treasurer
of ICC, the firm has been its counsel since the 1960s. 19 From the nature of the
claimed deductions and the span of time during which the firm was retained, ICC
can be expected to have reasonably known the retainer fees charged by the firm
as well as the compensation for its legal services. The failure to determine the
exact amount of the expense during the taxable year when they could have been
claimed as deductions cannot thus be attributed solely to the delayed billing of
these liabilities by the firm. For one, ICC, in the exercise of due diligence could
have inquired into the amount of their obligation to the firm, especially so that it is
using the accrual method of accounting. For another, it could have reasonably
determined the amount of legal and retainer fees owing to its familiarity with the
rates charged by their long time legal consultant.
As previously stated, the accrual method presents largely a question of fact and
that the taxpayer bears the burden of establishing the accrual of an expense or
income. However, ICC failed to discharge this burden. As to when the firms
performance of its services in connection with the 1984 tax problems were
completed, or whether ICC exercised reasonable diligence to inquire about the
amount of its liability, or whether it does or does not possess the information
necessary to compute the amount of said liability with reasonable accuracy, are
questions of fact which ICC never established. It simply relied on the defense
of delayed billing by the firm and the company, which under the
circumstances, is not sufficient to exempt it from being charged with

knowledge of the reasonable amount of the expenses for legal and
auditing services.
In the same vein, the professional fees of SGV & Co. for auditing the financial
statements of ICC for the year 1985 cannot be validly claimed as expense
deductions in 1986. This is so because ICC failed to present evidence showing that
even with only "reasonable accuracy," as the standard to ascertain its liability to
SGV & Co. in the year 1985, it cannot determine the professional fees which said
company would charge for its services.
ICC thus failed to discharge the burden of proving that the claimed expense
deductions for the professional services were allowable deductions for the taxable
year 1986. Hence, per Revenue Audit Memorandum Order No. 1-2000, they cannot
be validly deducted from its gross income for the said year and were therefore
properly disallowed by the BIR.
As to the expenses for security services, the records show that these
expenses were incurred by ICC in 1986 20 and could therefore be properly
claimed as deductions for the said year.
Anent the purported understatement of interest income from the promissory notes
of Realty Investment, Inc., we sustain the findings of the CTA and the Court of
Appeals that no such understatement exists and that only simple interest
computation and not a compounded one should have been applied by the BIR.
There is indeed no stipulation between the latter and ICC on the application of
compounded interest.21 Under Article 1959 of the Civil Code, unless there is a
stipulation to the contrary, interest due should not further earn interest.
Likewise, the findings of the CTA and the Court of Appeals that ICC truly withheld
the required withholding tax from its claimed deductions for security services and
remitted the same to the BIR is supported by payment order and confirmation
receipts.22 Hence, the Assessment Notice for deficiency expanded withholding tax
was properly cancelled and set aside.
In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount of
P333,196.86 for deficiency income tax should be cancelled and set aside but only
insofar as the claimed deductions of ICC for security services. Said Assessment
is valid as to the BIRs disallowance of ICCs expenses for professional services.
The Court of Appeals cancellation of Assessment Notice No. FAS-1-86-90-000681
in the amount of P4,897.79 for deficiency expanded withholding tax, is sustained.
WHEREFORE, the petition is PARTIALLY GRANTED. The September 30, 2005
Decision of the Court of Appeals in CA-G.R. SP No. 78426, is AFFIRMED with the
MODIFICATION that Assessment Notice No. FAS-1-86-90-000680, which disallowed
the expense deduction of Isabela Cultural Corporation for professional and security
services, is declared valid only insofar as the expenses for the professional fees of
SGV & Co. and of the law firm, Bengzon Zarraga Narciso Cudala Pecson Azcuna &
Bengson, are concerned. The decision is affirmed in all other respects.
The case is remanded to the BIR for the computation of Isabela Cultural
Corporations liability under Assessment Notice No. FAS-1-86-90-000680.
SO ORDERED.

[G.R. No. 143672. April 24, 2003]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. GENERAL FOODS
(PHILS.), INC., respondent.
DECISION
CORONA, J.:
Petitioner Commissioner of Internal Revenue (Commissioner) assails the
resolution[1] of the Court of Appeals reversing the decision [2] of the Court of Tax
Appeals which in turn denied the protest filed by respondent General Foods
(Phils.), Inc., regarding the assessment made against the latter for deficiency
taxes.
The records reveal that, on June 14, 1985, respondent corporation, which is
engaged in the manufacture of beverages such as Tang, Calumet and KoolAid, filed its income tax return for the fiscal year ending February 28, 1985. In
said tax return, respondent corporation claimed as deduction, among other
business expenses, the amount of P9,461,246 for media advertising for Tang.
On May 31, 1988, the Commissioner disallowed 50% or P4,730,623 of the
deduction claimed by respondent corporation. Consequently, respondent
corporation was assessed deficiency income taxes in the amount of P2,635,
141.42. The latter filed a motion for reconsideration but the same was denied.
On September 29, 1989, respondent corporation appealed to the Court of Tax
Appeals but the appeal was dismissed:
With such a gargantuan expense for the advertisement of a singular product, which
even excludes other advertising and promotions expenses, we are not prepared
to accept that such amount is reasonable to stimulate the current sale of
merchandise regardless of Petitioners explanation that such expense does not
connote unreasonableness considering the grave economic situation taking place
after the Aquino assassination characterized by capital fight, strong deterioration of
the purchasing power of the Philippine peso and the slacking demand for consumer
products (Petitioners Memorandum, CTA Records, p. 273). We are not convinced
with such an explanation. The staggering expense led us to believe 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 term good will can hardly be said to
have any precise signification; it is generally used to denote the benefit arising
from connection and reputation (Words and Phrases, Vol. 18, p. 556 citing Douhart
vs. Loagan, 86 III. App. 294). As held in the case of Welch vs. Helvering, efforts
to establish reputation are akin to acquisition of capital assets and,
therefore, expenses related thereto are not business expenses but capital
expenditures. (Atlas Mining and Development Corp. vs. Commissioner of Internal
Revenue, supra). For sure 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 (Mertens, supra, citing
Colonial Ice Cream Co., 7 BTA 154).
WHEREFORE, in all the foregoing, and finding no error in the case appealed from,
we hereby RESOLVE to DISMISS the instant petition for lack of merit and ORDER
the Petitioner to pay the respondent Commissioner the assessed amount
of P2,635,141.42 representing its deficiency income tax liability for the fiscal year
ended February 28, 1985.[3]
Aggrieved, respondent corporation filed a petition for review at the Court of
Appeals which rendered a decision reversing and setting aside the decision of the
Court of Tax Appeals:
Since it has not been sufficiently established that the item it claimed as a
deduction is excessive, the same should be allowed.
WHEREFORE, the petition of petitioner General Foods (Philippines), Inc. is hereby
GRANTED. Accordingly, the Decision, dated 8 February 1994 of respondent Court
of Tax Appeals is REVERSED and SET ASIDE and the letter, dated 31 May 1988 of
respondent Commissioner of Internal Revenue is CANCELLED.
SO ORDERED.[4]
Thus, the instant petition, wherein the Commissioner presents for the Courts
consideration a lone issue: 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).
It is a governing principle in taxation that tax exemptions must
construed in strictissimi juris against the taxpayer and liberally in favor of
taxing authority;[5] and he who claims an exemption must be able to justify
claim by the clearest grant of organic or statute law. An exemption from
common burden cannot be permitted to exist upon vague implications. [6]
be
the
his
the
Deductions for income tax purposes partake of the nature of tax exemptions;
hence, if tax exemptions are strictly construed, then deductions must also be
strictly construed.
We then proceed to resolve the singular issue in the case at bar. Was the
media advertising expense for Tang paid or incurred by respondent corporation
for the fiscal year ending February 28, 1985 necessary and ordinary, hence, fully
deductible under the NIRC? Or was it a capital expenditure, paid in order to create
goodwill and reputation for respondent corporation and/or its products, which
should have been amortized over a reasonable period?
Section 34 (A) (1), formerly Section 29 (a) (1) (A), of the NIRC
provides:

(A) Expenses.(1)
Ordinary and necessary trade, business or professional expenses.(a)
In general.- There shall be allowed as deduction from

gross income all ordinary and necessary expenses paid
or incurred during the taxable year in carrying on, or
which are directly attributable to, the development,
management, operation and/or conduct of the trade,
business or exercise of a profession.
Simply put, 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.[7]
The parties are in agreement that the subject advertising expense was paid
or incurred within the corresponding taxable year and was incurred in carrying on a
trade or business. Hence, it was necessary. However, their views conflict as
to whether or not it was ordinary. To be deductible, an advertising
expense should not only be necessary but also ordinary. These two
requirements must be met.
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 [8] 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.[9]
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.[10]
True, it is the taxpayers prerogative to determine the amount of advertising
expenses it will incur and where to apply them. [11] Said prerogative, however, is
subject to certain considerations. The first relates to the extent to which the
expenditures are actually capital outlays; this necessitates an inquiry into the
nature or purpose of such expenditures.[12] The second, which must be applied in
harmony with the first, relates to whether the expenditures are ordinary and
necessary. Concomitantly, for an expense to be considered ordinary, it must
be reasonable in amount. The Court of Tax Appeals ruled that respondent
corporation failed to meet the two foregoing limitations.
We find said ruling to be well founded. Respondent corporation incurred the
subject advertising expense in order to protect its brand franchise. We consider
this as a capital outlay since it created goodwill for its business and/or
product. The P9,461,246 media advertising expense for the promotion of a single
product, almost one-half of petitioner corporations entire claim for marketing
expenses for that year under review, inclusive of other advertising and promotion

expenses of P2,678,328 andP1,548,614 for consumer promotion, is doubtlessly
unreasonable.
It has been a long standing policy and practice of the Court to respect the
conclusions of quasi-judicial agencies such as the Court of Tax Appeals, a highly
specialized body specifically created for the purpose of reviewing tax cases. The
CTA, by the nature of its functions, is dedicated exclusively to the study and
consideration of tax problems. It has necessarily developed an expertise on the
subject. We extend due consideration to its opinion unless there is an abuse or
improvident exercise of authority.[13] Since there is none in the case at bar, the
Court adheres to the findings of the CTA.
Accordingly, we find that the Court of Appeals committed reversible error
when it declared the subject media advertising expense to be deductible as an
ordinary and necessary expense on the ground that it has not been established
that the item being claimed as deduction is excessive. It is not incumbent upon
the taxing authority to prove that the amount of items being claimed is
unreasonable. The burden of proof to establish the validity of claimed deductions is
on the taxpayer.[14] In the present case, that burden was not discharged
satisfactorily.
WHEREFORE, premises considered, the instant petition is GRANTED. The
assailed decision of the Court of Appeals is hereby REVERSED and SET
ASIDE. Pursuant to Sections 248 and 249 of the Tax Code, respondent General
Foods (Phils.), Inc. is hereby ordered to pay its deficiency income tax in the
amount ofP2,635,141.42, plus 25% surcharge for late payment and 20% annual
interest computed from August 25, 1989, the date of the denial of its protest, until
the same is fully paid.
SO ORDERED.

G.R. No. L-29790 February 25, 1982
Selling price of land
P432,031.00
AGUINALDO INDUSTRIES CORPORATION (FISHING NETS

DIVISIONS), petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX
APPEALS, respondents.
DEDUCT:
PLANA , J.:
and other expenses
191.05
This is a petition for review of the decision and resolution of the Court of Tax
Appeals in CTA Case No. 1636 holding the petitioner liable for the sum of
P17,123.93 as deficiency income tax for l957, plus 5% surcharge and 1% monthly
interest for late payment from December 15, 1957 until full payment is made.
Relocation survey
450.00
As summarized by the respondent Court, the facts are:
Commission
51,723.72
Documentary stamps
2,294.05
Topographic survey
450.00
Officer's remuneration
61,187.48
... Aguinaldo Industries Corporation is a domestic corporation engaged in

two lines of business, namely: (a) the manufacture of fishing nets, a taxexempt 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 two 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 Bureau of Internal
Revenue 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, the details of said transaction being as follows:
Purchase price of land
P71,120.00
Registration, documentary stamps
P71,761.05
ADD SELLING EXPENSES
NET PROFIT
186,416.30
P 244,416.70
Upon recommendation of aforesaid examiner that the said sum of

P61,187.48 be disallowed as deduction from gross income, petitioner
asserted in its letter of February 19, 1958, that said amount should be
allowed as deduction because it was paid to its officers as allowance or
bonus pursuant to Section 3 of its by-laws which provides as follows:
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 20'7o 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 P17,133.00 does not even represent the
entire 20%, allocated as allowance in Section 3 of 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 P90.00
representing dividends from investment of the Fish Nets Division. (Pages
2-5, Decision.)

Upon the submission of the case for judgment on the basis of the pleadings and
BIR official records, the respondent Court rendered the questioned decision.
Subsequently, on a motion for reconsideration filed by petitioner, the respondent
Court issued a resolution dated September 30, 1968 imposing a 5% surcharge and
1% monthly interest on the deficiency assessment.
Dissatisfied, petitioner has come to this Court on errors assigned in its brief.
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 Republic Act 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.
To allow a litigant to assume a different posture when he comes before the court
and challenge the position he had accepted at the administrative level, would be to
sanction
a
procedure
whereby
the
court
which
is
supposed
toreview administrative determinations would not review, but determine and
decide for the first time, a question not raised at the administrative forum. This
cannot be permitted, for the same reason that underlies the requirement of prior
exhaustion of administrative remedies to give administrative authorities the prior
opportunity to decide controversies within its competence, and in much the same
way that, on the judicial level, issues not raised in the lower court cannot be raised
for the first time on appeal.
In the instant case, up to the time the questioned decision of the respondent Court
was rendered, the petitioner had always implicitly admitted that the disputed
capital gain was taxable, although subject to the deduction of the bonus paid to its
corporate officers. It was only after the said decision had been rendered and on a
motion for reconsideration thereof, that the issue of tax exemption was raised by
the petitioner for the first time. It was thus not one of the issues raised by
petitioner in his petition and supporting memorandum in the Court of Tax Appeals.
We therefore hold that petitioner's belated claim for tax exemption was properly
rejected.
The remaining issues in this appeal are: (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; and (2) whether or not petitioner is liable for surcharge and interest for
late payment.
Anent the first question, 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 intra-corporate 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. As stated by this Court in Alhambra Cigar and Cigarette Manufacturing
Co. vs. Collector of Internal Revenue, G.R. No. L-12026, May 29, 1959, construing
Section 30 (a) (1) of the Tax Code:
. . . . whenever a controversy arises on the deductibility, for purposes of
income tax, of certain items for alleged compensation of officers of the
taxpayer, two (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
Then, this Court quoted with approval the appealed decision:
. . . 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.
This posture is in line with the doctrine in the law of taxation that the taxpayer
must show that its claimed deductions clearly come within the language of the law
since allowances, like exemptions, are matters of legislative grace.
We now come to the issue regarding the imposition of 5% surcharge and 1% monthly interest
for late payment of the deficiency tax on petitioner's income which was earned in 1957 and
assessed on May 30, 19-08.
The applicable law is Section 51 of the Tax Code which, before its amendment by Republic Act
2343 effective June 20, 1959, reads as follows:
SEC. 51. Assessment and payment of income tax Assessment of tax. All
assessments shall be made by the Collector of In ternal Revenue and all persons and
corporations subject to tax shall be notified of the amount for which they are
respectively liable on or before the first day of May of each successive year.

(b) Time of payment. The total amount of tax imposed by this Title shall be paid
on or before the fifteenth day of May following the close of the calendar year, by the
person subject to tax, and, in the case of a corporation, by the president, vicepresident, or other responsible officer thereof. If the return is made on the basis of a
fiscal year, the total amount of the tax shall be paid on or before the f if teenth day
of the fifth month following the close of the fiscal year.
xxx xxx xxx
(e) Surcharge and interest in case of delinquency. To any sum or sums due and
unpaid after the dates prescribed in subsections (b), (c) and (d) for the payment of
the same, there shall be added the sum of five per centum on the amount of tax
unpaid and interest at the rate of one per centum a month upon said tax from the
time the same became due, except from the estates of insane, deceased, or
insolvent persons.
Applying the foregoing provisions, the respondent Court said:
It should be observed that, under the old Section 51 (e), the 5% surcharge and
interest on deficiency was imposed from the time the tax became due, and said
interest was imposable in case of non-payment on time, not only on the basic
income tax, but also on the deficiency tax, since the deficiency was part and parcel
of the taxpayer's income tax liability. It should further be observed that, although
the Commissioner (formerly Collector) of Internal Revenue, under the old Section 51
(a) was required to assess the tax due, based on the taxpayer's return, and notify
the taxpayer of said assessment, still, under subsection (b) of the same old Section
51, the time prescribed for the payment of tax was fixed, whether or not a notice of
the assessment was given to the taxpayer (See Central Azucarera Don Pedro v.
Court of Tax Appeals, et al. G.R. Nos. L-23236 & 23254, May 31, 1967).
Inasmuch as petitioner had filed its income tax return for 1957 on the fiscal year
basis ending June 30, 1957, the deficiency income tax in question should have been
paid on or before November 15, 1957-the fifteenth day of the fifth month following
the close of the fiscal year (See Sec. 51 (b), supra). It follows that petitioner is liable
to the 5% surcharge and 1% monthly interest for late payment, not from June 30,
1958, but from November 15, 1957. Consequently, the payment of surcharge and
interest on deficiency being statutory and therefore mandatory, petitioner is also
hable, aside from the basic tax above mentioned, for the 5% surcharge and 1%
monthly interest for late payment of the deficiency income tax from November 15,
1957 until paid. (CTA Resolution dated Sept. 30, 1968.)
The rule as to when interest and surcharges on delinquency tax payments become chargeable
is wen settled and the respondent Court applied it correctly. Construing the same provisions of
the old Section 51 (e) and the Section 51 (d) of the Tax Code, as amended by Republic Act
2343, this Court held that the interest and surcharges on deficiency taxes are imposable upon
failure of the taxpayer to pay the tax on the date fixed in the law for the payment thereof,
which was, under the unamended Section 51 of the Tax Code, the fifteenth day of the fifth
month following the close of the fiscal year in the case of taxpayers whose tax returns were
made on the basis of fiscal years. [Commissioner of Internal Revenue vs. Connel Bros. Co.
(Phil.), 40 SCRA 416.]
The rule has to be so because a deficiency tax indicates non-payment of the correct tax, and
such deficiency exists not only from the assessment thereof but from the very time the
taxpayer failed to pay the correct amount of tax when it should have been paid (Ibid.) and the
imposition thereof is mandatory even in the absence of fraud or wilful failure to pay the tax is
full.
As regards interest, the reason is
The imposition of 1% monthly is but a just compensation to the State for the delay
in paying the tax and for the concomitant use by the taxpayer of funds that rightfully
should be in the government s hands. (U.S. vs. Goldstein, 189 F (2d) 752; Ross vs.
U.S. 148 Fed. Supp. 330; U.S. vs. Joffray 97 Fed. (2d) 488.) The fact that the
interest charged is made proportionate to the period of delay constitutes the best
evidence that such interest is not penal but compensator (Castro vs. Collector of
Internal Revenue, G.R. L-12174, Dec. 28, 1662, Resolution on Motion for
Reconsideration.)
As regards the prescribed 5% surcharge, this Court has had occasion to cite the reason for the
strict enforcement thereof.
Strong reasons of policy support a strict observance of this rule. Tax laws imposing
penalties for deliquencies are clearly intended to hasten tax payments or to punish
evasion or neglect of duty in respect thereof. If delays in tax payments are to be
condoned for light reasons, the law imposing penalties for delinquencies would be
rendered nugatory, and the maintenance of the government and its multifarious
activities would be as precarious as taxpayers are wining or unwilling to pay their
obligations to the state in time. Imperatives of public welfare will not approve of this
result. (Jamora vs. Meer, 74 PhiL 22.)
WHEREFORE, the judgment under review is affirmed in toto. Costs against the petitioner.
SO ORDERED.

G.R. No. L-26911 January 27, 1981
ATLAS CONSOLIDATED MINING & DEVELOPMENT
CORPORATION, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
G.R. No. L-26924 January 27, 1981
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ATLAS CONSOLIDATED MINING & DEVELOPMENT CORPORATION and
COURT OF TAX APPEALS,respondents.
On October 9, 1962, Atlas protested the assessment asking for its reconsideration
and cancellation. 2 Acting on the protest, the Commissioner conducted a
reinvestigation of the case.
On October 25, 1962, the Secretary of Finance ruled that the exemption provided
in Republic Act 909 embraces all new mines and old mines whether gold or other
minerals. 3 Accordingly, the Commissioner recomputed Atlas deficiency income tax
liabilities in the light of the ruling of the Secretary of Finance. On June 9, 1964, the
Commissioner issued a revised assessment entirely eliminating the assessment of
P546,295.16 for the year 1957. The assessment for 1958 was reduced from
P215,493.96 to P39,646.82 from which Atlas appealed to the Court of Tax Appeals,
assailing the disallowance of the following items claimed as deductible from its
gross income for 1958:
Transfer agent's fee.........................................................P59,477.42
DE CASTRO, J.:
These are two (2) petitions for review from the decision of the Court of Tax Appeals
of October 25, 1966 in CTA Case No. 1312 entitled "Atlas Consolidated Mining and
Development Corporation vs. Commissioner of Internal Revenue." One (L-26911)
was filed by the Atlas Consolidated Mining & Development Corporation, and in the
other L-26924), the Commissioner of Internal Revenue is the petitioner.
This tax case (CTA No. 1312) arose from the 1957 and 1958 deficiency income
tax assessments made by the Commissioner of Internal Revenue, hereinafter
referred to as Commissioner, where the Atlas Consolidated Mining and
Development Corporation, hereinafter referred to as Atlas, was assessed
P546,295.16 for 1957 and P215,493.96 for 1958 deficiency income taxes.
Atlas is a corporation engaged in the mining industry registered under the laws of
the Philippines. On August 20, 1962, the Commissioner assessed against Atlas the
sum of P546,295.16 and P215,493.96 or a total of P761,789.12 as deficiency
income taxes for the years 1957 and 1958. For the year 1957, it was the opinion of
the Commissioner that Atlas is not entitled to exemption from the income tax
under Section 4 of Republic Act 909 1 because same covers only gold mines, the
provision of which reads:
New mines, and old mines which resume operation, when certified to as
such by the Secretary of Agriculture and Natural Resources upon the
recommendation of the Director of Mines, shall be exempt from the
payment of income tax during the first three (3) years of actual
commercial production. Provided that, any such mine and/or mines
making a complete return of its capital investment at any time within the
said period, shall pay income tax from that year.
For the year 1958, the assessment of deficiency income tax of P761,789.12 covers
the disallowance of items claimed by Atlas as deductible from gross income.
Stockholders relation service fee....................................25,523.14

U.S. stock listing expenses..................................................8,326.70
Suit expenses..........................................................................6,666.65
Provision for contingencies..................................... .........60,000.00
Total....................................................................P159,993.91
After hearing, the Court of Tax Appeals rendered a decision on October 25,
1966 allowing the above mentioned disallowed items, except the items
denominated by Atlas as stockholders relation service fee and suit
expenses. 4Pertinent portions of the decision of the Court of Tax Appeals read as
follows:
Under the facts, circumstances and applicable law in this case, the unallowable
deduction from petitioner's gross income in 1958 amounted to P32,189.79.
Stockholders relation service fee.................................... P25,523.14
Suit and litigation expenses................................................ 6,666.65
Total................................................................................... P32,189.79
As the exemption of petitioner from the payment of corporate income tax under
Section 4, Republic Act 909, was good only up to the Ist quarter of 1958 ending
on March 31 of the same year, only three-fourth (3/4) of the net taxable
income of petitioner is subject to income tax, computed as follows:
1958

Total net income for 1958.................................P1,968,898.27
Net income corresponding to taxable period April 1 to Dec. 31, 1958, 3/4 of
P1,968,898.27..........................................................1,476,673.70
Add: 3/4 of promotion fees of

P25,523.14..............................................................P19,142.35
Litigation expenses........................................................................6, 666.65
It is the contention of Atlas that the amount of P25,523.14 paid in 1958 as annual
public relations expenses is a deductible expense from gross income under Section
30 (a) (1) of the National Internal Revenue Code. Atlas claimed that it was paid
for services of a public relations firm, P.K Macker & Co., a reputable public
relations consultant in New York City, U.S.A., hence, an ordinary and
necessary business expense in order to compete with other corporations
also interested in the investment market in the United States. 5 It is the
stand of Atlas that information given out to the public in general and to the
stockholder in particular by the P.K MacKer & Co. concerning the operation of the
Atlas was aimed at creating a favorable image and goodwill to gain or maintain
their patronage.
The decisive question, therefore, in this particular appeal taken by Atlas to this
Court is whether or not the expenses paid for the services rendered by a
public relations firm P.K MacKer & Co. labelled as stockholders relation
service fee is an allowable deduction as business expense under Section
30 (a) (1) of the National Internal Revenue Code.
Net income per decision..........................................11, 02,4 2.70

Tax due thereon.........................................................412,695.00
Less: Amount already assessed .............................405,468.00
DEFICIENCY INCOME TAX DUE............................P7,227.00
Add: 1/2 % monthly interest

from 6-20-59 to 6-20-62 (18%)....................................P1,300.89
TOTAL AMOUNT DUE & COLLECTIBLE............P8,526.22
From the Court of Tax Appeals' decision of October 25, 1966, both parties appealed
to this Court by way of two (2) separate petitions for review docketed as G. R. No.
L-26911 (Atlas, petitioner) and G. R. No. L-29924 (Commissioner, petitioner).
G. R. No. L-26911Atlas appealed only that portion of the Court of Tax Appeals'
decision disallowing the deduction from gross income of the so-called stockholders
relation service fee amounting to P25,523.14, making a lone assignment of error
that
THE COURT OF TAX APPEALS ERRED IN ITS CONCLUSION THAT THE
EXPENSE IN THE AMOUNT OF P25,523.14 PAID BY PETITIONER IN 1958
AS ANNUAL PUBLIC RELATIONS EXPENSES WAS INCURRED FOR
ACQUISITION OF ADDITIONAL CAPITAL, THE SAME NOT BEING
SUPPORTED BY THE EVIDENCE.
The principle is recognized that when a taxpayer claims a deduction, he must point
to some specific provision of the statute in which that deduction is authorized and
must be able to prove that he is entitled to the deduction which the law allows. As
previously adverted to, the law allowing expenses as deduction from gross income
for purposes of the income tax is Section 30 (a) (1) of the National Internal
Revenue which allows a deduction of "all the ordinary and necessary expenses paid
or incurred during the taxable year in carrying on any trade or business." An item
of expenditure, in order to be deductible under this section of the statute, must fall
squarely within its language.
We come, then, to the statutory test of deductibility where it is axiomatic that to
be deductible as a business expense, three conditions are imposed, namely: (1)
the expense must be ordinary and necessary, (2) it must be paid or
incurred within the taxable year, and (3) it must be paid or incurred in
carrying in a trade or business. 6 In addition, not only must the taxpayer
meet the business test, he must substantially prove by evidence or
records the deductions claimed under the law, otherwise, the same will be
disallowed. The mere allegation of the taxpayer that an item of expense is ordinary
and necessary does not justify its deduction. 7
While it is true that there is a number of decisions in the United States delving on
the interpretation of the terms "ordinary and necessary" as used in the federal tax
laws, no adequate or satisfactory definition of those terms is possible. Similarly,
this Court has never attempted to define with precision the terms "ordinary and
necessary." There are however, certain guiding principles worthy of serious
consideration in the proper adjudication of conflicting claims. Ordinarily, an
expense will be considered "necessary" where the expenditure is
appropriate and helpful in the development of the taxpayer's
business. 8 It is "ordinary" when it connotes a payment which is normal in
relation to the business of the taxpayer and the surrounding
circumstances. 9 The term "ordinary" does not require that the payments be
habitual or normal in the sense that the same taxpayer will have to make them
often; the payment may be unique or non-recurring to the particular taxpayer
affected. 10

There is thus no hard and fast rule on the matter. The right to a deduction depends
in each case on the particular facts and the relation of the payment to the type of
business in which the taxpayer is engaged. The intention of the taxpayer often may
be the controlling fact in making the determination. 11 Assuming that the
expenditure is ordinary and necessary in the operation of the taxpayer's business,
the answer to the question as to whether the expenditure is an allowable deduction
as a business expense must be determined from the nature of the expenditure
itself, which in turn depends on the extent and permanency of the work
accomplished by the expenditure. 12
G. R. No. L-26924-In his petition for review, the Commissioner of Internal Revenue
assigned as errors the following:
It appears that on December 27, 1957, Atlas increased its capital stock from
P15,000,000 to P18,325,000. 13 It was claimed by Atlas that its shares of stock
worth P3,325,000 were sold in the United States because of the services rendered
by the public relations firm, P. K. Macker & Company. The Court of Tax Appeals
ruled that the information about Atlas given out and played up in the mass
communication media resulted in full subscription of the additional shares issued
by Atlas; consequently, the questioned item, stockholders relation service fee, was
in effect spent for the acquisition of additional capital, ergo, a capital expenditure.
II
We sustain the ruling of the tax court that the expenditure of P25,523.14 paid to
P.K. Macker & Co. as compensation for services carrying on the selling campaign in
an effort to sell Atlas' additional capital stock of P3,325,000 is not an ordinary
expense in line with the decision of U.S. Board of Tax Appeals in the case of
Harrisburg Hospital Inc. vs. Commissioner of Internal Revenue. 14 Accordingly, as
found by the Court of Tax Appeals, the said expense is not deductible from Atlas
gross income in 1958 because expenses relating to recapitalization and
reorganization of the corporation (Missouri-Kansas Pipe Line vs. Commissioner of
Internal Revenue, 148 F. (2d), 460;Skenandos Rayon Corp. vs. Commissioner of
Internal Revenue, 122 F. (2d) 268, Cert. denied 314 U.S. 6961), the cost of
obtaining stock subscription (Simons Co., 8 BTA 631), promotion expenses
(Beneficial Industrial Loan Corp. vs. Handy, 92 F. (2d) 74), and commission or fees
paid for the sale of stock reorganization (Protective Finance Corp., 23 BTA 308) are
capital expenditures.
That the expense in question was incurred to create a favorable image of the
corporation in order to gain or maintain the public's and its stockholders'
patronage, does not make it deductible as business expense. As held in the case
of Welch vs. Helvering, 15 efforts to establish reputation are akin to
acquisition of capital assets and, therefore, expenses related thereto are
not business expense but capital expenditures.
We do not agree with the contention of Atlas that the conclusion of the Court of
Tax Appeals in holding that the expense of P25,523.14 was incurred for acquisition
of additional capital is not supported by the evidence. The burden of proof that the
expenses incurred are ordinary and necessary is on the taxpayer 16 and does not
rest upon the Government. To avail of the claimed deduction under Section 30(a)
(1) of the National Internal Revenue Code, it is incumbent upon the taxpayer to
adduce substantial evidence to establish a reasonably proximate relation petition
between the expenses to the ordinary conduct of the business of the taxpayer. A
logical link or nexus between the expense and the taxpayer's business must be
established by the taxpayer.
I
THE COURT OF TAX APPEALS ERRED IN ALLOWING THE
DEDUCTION FROM GROSS INCOME OF THE SO- CALLED
TRANSFER AGENT'S FEES ALLEGEDLY PAID BY RESPONDENT;
THE COURT OF TAX APPEALS ERRED IN ALLOWING THE

DEDUCTION FROM GROSS INCOME OF LISTING EXPENSES
ALLEGEDLY INCURRED BY RESPONDENT;
III
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE
AMOUNT OF P60,000 REPRESENTED BY RESPONDENT AS
"PROVISION FOR CONTINGENCIES" WAS ADDED BACK BY
RESPONDENT TO ITS GROSS INCOME IN COMPUTING THE
INCOME TAX DUE FROM IT FOR 1958;
IV
THE COURT OF TAX APPEALS ERRED IN DISALLOWING ONLY THE
AMOUNT OF P6,666.65 AS SUIT EXPENSES, THE CORRECT
AMOUNT THAT SHOULD HAVE BEEN DISALLOWED BEING
P17,499.98.
It is well to note that only in the Court of Tax Appeals did the Commissioner raise
for the first time (in his memorandum) the question of whether or not the business
expenses deducted from Atlas gross income in 1958 may be allowed in the
absence of proof of payments. 17 Before this Court, the Commissioner reiterated
the same as ground against deductibility when he claimed that the Court of Tax
Appeals erred in allowing the deduction of transfer agent's fee and stock listing fee
from gross income in the absence of proof of payment thereof.
The Commissioner contended that under Section 30 (a) (1) of the National Internal
Revenue Code, it is a requirement for an expense to be deductible from gross
income that it must have been "paid or incurred during the year" for which it is
claimed; that in the absence of convincing and satisfactory evidence of payment,
the deduction from gross income for the year 1958 income tax return cannot be
sustained; and that the best evidence to prove payment, if at all any has been
made, would be the vouchers or receipts issued therefor which ATLAS failed to
present.
Atlas admitted that it failed to adduce evidence of payment of the deduction
claimed in its 1958 income tax return, but explains the failure with the allegation
that the Commissioner did not raise that question of fact in his pleadings, or even

in the report of the investigating examiner and/or letters of demand and
assessment notices of ATLAS which gave rise to its appeal to the Court of Tax
Appeal. 18 It was emphasized by Atlas that it went to trial and finally submitted
this case for decision on the assumption that inasmuch as the fact of payment was
never raised as a vital issue by the Commissioner in his answer to the petition for
review in the Court of Tax Appeal, the issues is limited only to pure question of law
whether or not the expenses deducted by petitioner from its gross income for
1958 are sanctioned by Section 30 (a) (1) of the National Internal Revenue Code.
carrying on the taxpayer's business which was gold mining and selling, which
business is strikingly similar to Atlas.
On this issue of whether or not the Commissioner can raise the fact of payment for
the first time on appeal in its memorandum in the Court of Tax Appeal, we fully
agree with the ruling of the tax court that the Commissioner on appeal cannot be
allowed to adopt a theory distinct and different from that he has previously
pursued, as shown by the BIR records and the answer to the amended petition for
review. 19 As this Court said in the case of Commissioner of Customs vs.
Valencia 20 such change in the nature of the case may not be made on appeal,
specially when the purpose of the latter is to seek a review of the action taken by
an administrative body, forming part of a coordinate branch of the Government,
such as the Executive department. In the case at bar, the Court of Tax Appeal
found that the fact of payment of the claimed deduction from gross income was
never controverted by the Commissioner even during the initial stages of routinary
administrative scrutiny conducted by BIR examiners. 21 Specifically, in his answer
to the amended petition for review in the Court of Tax Appeal, the Commissioner
did not deny the fact of payment, merely contesting the legitimacy of the
deduction on the ground that same was not ordinary and necessary business
expenses. 22
We find the Chesapeake decision controlling with the facts and circumstances of
the instant case. In Dome Mines, Ltd case the stock listing fee was disallowed as a
deduction not only because the expenditure did not meet the statutory test but
also because the same was paid only once, and the benefit acquired thereby
continued indefinitely, whereas, in the Chesapeake Corporation case, fee paid to
the stock exchange was annual and recurring. In the instant case, we deal with the
stock listing fee paid annually to a stock exchange for the privilege of having its
stock listed. It must be noted that the Court of Tax Appeal rejected the Dome
Mines case because it involves a payment made only once, hence, it was held
therein that the single payment made to the stock exchange was a capital
expenditure, as distinguished from the instant case, where payments were made
annually. For this reason, we hold that said listing fee is an ordinary and necessary
business expense
As consistently ruled by this Court, the findings of facts by the Court of Tax Appeal
will not be reviewed in the absence of showing of gross error or abuse. 23 We,
therefore, hold that it was too late for the Commissioner to raise the issue of fact
of payment for the first time in his memorandum in the Court of Tax Appeals and in
this instant appeal to the Supreme Court. If raised earlier, the matter ought to
have been seriously delved into by the Court of Tax Appeals. On this ground, we
are of the opinion that under all the attendant circumstances of the case,
substantial justice would be served if the Commissioner be held as precluded from
now attempting to raise an issue to disallow deduction of the item in question at
this stage. Failure to assert a question within a reasonable time warrants a
presumption that the party entitled to assert it either has abandoned or declined to
assert it.
On the second assignment of error, aside from alleging lack of proof of payment of
the expense deducted, the Commissioner contended that such expense should be
disallowed for not being ordinary and necessary and not incurred in trade or
business, as required under Section 30 (a) (1) of the National Internal Revenue
Code. He asserted that said fees were therefore incurred not for the production of
income but for the acquisition petition of capital in view of the definition that an
expense is deemed to be incurred in trade or business if it was incurred for the
production of income, or in the expectation of producing income for the business.
In support of his contention, the Commissioner cited the ruling in Dome Mines, Ltd
vs. Commisioner of Internal Revenue 24 involving the same issue as in the case at
bar where the U.S. Board of Tax Appeal ruled that expenses for listing capital stock
in the stock exchange are not ordinary and necessary expenses incurred in
On the other hand, the Court of Tax Appeal relied on the ruling in the case
of Chesapeake
Corporation
of
Virginia
vs. Commissioner of
Internal
Revenue 25 where the Tax Court allowed the deduction of stock exchange fee in
dispute, which is an annually recurring cost for the annual maintenance of the
listing.
On the third assignment of error, the Commissioner contended that the Court of
Tax Appeal erred when it held that the amount of P60,000 as "provisions for
contingencies" was in effect added back to Atlas income.
On this issue, this Court has consistently ruled in several cases adverted to earlier,
that in the absence of grave abuse of discretion or error on the part of the tax
court its findings of facts may not be disturbed by the Supreme Court. 26 It is not
within the province of this Court to resolve whether or not the P60,000
representing "provision for contingencies" was in fact added to or deducted from
the taxable income. As ruled by the Court of Tax Appeals, the said amount was in
effect added to Atlas taxable income. 27 The same being factual in nature and
supported by substantial evidence, such findings should not be disturbed in this
appeal.
Finally, in its fourth assignment of error, the Commissioner contended that the CTA
erred in disallowing only the amount of P6,666.65 as suit expenses instead of
P17,499.98.
It appears that petitioner deducted from its 1958 gross income the amount of
P23,333.30 as attorney's fees and litigation expenses in the defense of title to the
Toledo Mining properties purchased by Atlas from Mindanao Lode Mines Inc. in Civil
Case No. 30566 of the Court of First Instance of Manila for annulment of the sale
of said mining properties. On the ground that the litigation expense was a capital
expenditure under Section 121 of the Revenue Regulation No. 2, the investigating
revenue examiner recommended the disallowance of P13,333.30. The
Commissioner, however, reduced this amount of P6,666.65 which latter amount
was affirmed by the respondent Court of Tax Appeals on appeal.

There is no question that, as held by the Court of Tax Ap- peals, the litigation
expenses under consideration were incurred in defense of Atlas title to its mining
properties. In line with the decision of the U.S. Tax Court in the case of Safety Tube
Corp. vs. Commissioner of Internal Revenue, 28 it is well settled that litigation
expenses incurred in defense or protection of title are capital in nature and not
deductible. Likewise, it was ruled by the U.S. Tax Court that expenditures in
defense of title of property constitute a part of the cost of the property, and are not
deductible as expense. 29
Surprisingly, however, the investigating revenue examiner recommended a partial
disallowance of P13,333.30 instead of the entire amount of P23,333.30, which,
upon review, was further reduced by the Commissioner of Internal Revenue.
Whether it was due to mistake, negligence or omission of the officials concerned,
the arithmetical error committed herein should not prejudice the Government. This
Court will pass upon this particular question since there is a clear error committed
by officials concerned in the computation of the deductible amount. As held in the
case of Vera vs. Fernandez, 30 this Court emphatically said that taxes are the
lifeblood of the Government and their prompt and certain availability are imperious
need. Upon taxation depends the Government's ability to serve the people for
whose benefit taxes are collected. To safeguard such interest, neglect or omission
of government officials entrusted with the collection of taxes should not be allowed
to bring harm or detriment to the people, in the same manner as private persons
may be made to suffer individually on account of his own negligence, the
presumption being that they take good care of their personal affair. This should not
hold true to government officials with respect to matters not of their own personal
concern. This is the philosophy behind the government's exception, as a general
rule, from the operation of the principle of estoppel.31
WHEREFORE, judgment appealed from is hereby affirmed with modification that
the amount of P17,499.98 (3/4 of P23,333.00) representing suit expenses be
disallowed as deduction instead of P6,666.65 only. With this amount as part of the
net income, the corresponding income tax shall be paid thereon, with interest of
6% per annum from June 20, 1959 to June 20,1962.
SO ORDERED.

G.R. No. L-15290
May 31, 1963
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 (C.T.A. Case No. 234, now L15290). On appeal by Zamora, the Court of Tax Appeals on December 29, 1958,
modified the decision appealed from and ordered him to pay the reduced total sum
of P30,258.00 (P22,980.00 and P7,278.00, as deficiency income tax for the years
1951 and 1952, respectively), within thirty (30) days from the date the decision
becomes final, plus the corresponding surcharges and interest in case of
delinquency, pursuant to section 51(e), Int. Revenue Code. With costs against
petitioner.
MARIANO ZAMORA, petitioner,

vs.
COLLECTOR OF INTERNAL REVENUE and COURT OF TAX
----------------------------G.R. No. L-15280
May 31, 1963
Having failed to obtain a reconsideration of the decision, Mariano Zamora appealed

(L-15290), alleging that the Court of Tax Appeals erred
COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
MARIANO ZAMORA, respondent.
(1) In dissallowing P10,478.50, as promotion expenses incurred by his wife for

the promotion of the Bay View Hotel and Farmacia Zamora (which is of
P20,957.00, supposed business expenses):
----------------------------G.R. No. L-15289
(2) In disallowing 3-% per annum as the rate of depreciation of the Bay View
Hotel Building;
May 31, 1963
ESPERANZA A. ZAMORA, as Special Administratrix of Estate of FELICIDAD

ZAMORA, petitioner,
vs.
COLLECTOR OF INTERNAL REVENUE and COURT OF TAX
----------------------------G.R. No. L-15281
(3) In disregarding the price stated in the deed of sale, as the costs of a Manila
property, for the purpose of determining alleged capital gains; and
(4) In applying the Ballantyne scale of values in determining the cost of said
property.
The Collector of Internal Revenue (L-15280) also appealed, claiming that the Court
of Tax Appeals erred
May 31, 1963
COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
ESPERANZA A. ZAMORA, as Special Administratrix, etc. respondent.
Office
of
the
Solicitor
Rodegelio M. Jalandoni for respondents.
General
for
petitioner.
(1) In giving credence to the uncorroborated testimony of Mariano Zamora that

he bought the said real property in question during the Japanese occupation,
partly in Philippine currency and partly in Japanese war notes, and
(2) In not holding that Mariano Zamora is liable for the payment of the sums of
P43,758.00 and P7,625.00 as deficiency income taxes, for the years 1951 and
1952, plus the 5% surcharge and 1% monthly interest, from the date said
amounts became due to the date of actual payment.
PAREDES, J.:
In the above-entitled cases, a joint decision was rendered by the lower court
because they involved practically the same issues. We do so, likewise, for the same
reason.
Wherefore, the parties respectfully pray that the foregoing stipulation of facts
be admitted and approved by this Honorable Court, without prejudice to the
parties adducing other evidence to prove their case not covered by this
stipulation of facts. 1wph1.t
Cases Nos. L-15290 and L-15280
Cases Nos. L-15289 and L-15281
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
Mariano Zamora and his deceased sister Felicidad Zamora, bought a piece of land
located in Manila on May 16, 1944, for P132,000.00 and sold it for P75,000.00 on
March 5, 1951. They also purchased a lot located in Quezon City for P68,959.00 on
January 19, 1944, which they sold for P94,000 on February 9, 1951. The CTA
ordered the estate of the late Felicidad Zamora (represented by Esperanza A.

Zamora, as special administratrix of her estate), to pay the sum of P235.50,
representing alleged deficiency income tax and surcharge due from said estate.
Esperanza A. Zamora appealed and alleged that the CTA erred:
The Commissioner of Internal Revenue likewise appealed from the decision,
claiming that the lower court erred:
(1) In giving credence to the uncorroborated testimony of Mariano
Zamora that he bought the real property involved during the Japanese
occupation, partly in genuine Philippine currency and partly in Japanese
war notes; and
(2) In not holding that Esperanza A. Zamora, as administratrix, is liable
for the payment of the sum of P613.00 as deficiency income tax and 50%
surcharge for 1951, plus 50% surcharge and 1% monthly interest from
the date said amount became due, to the date of actual payment.
It is alleged by Mariano Zamora 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 P20,957.00 as
promotion expenses in his 1951 income tax returns, should be allowed and not
merely one-half 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
P20,957.00 was spent by Mrs. Esperanza A. Zamora (wife of Mariano), during her
travel to Japan and the United States to purchase machinery for a new Tiki-Tiki
plant, and to observe hotel management in modern hotels. The CTA, however,
found that for said trip Mrs. Zamora obtained only the sum of P5,000.00 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 Zamora. No evidence had been submitted as to where Mariano
had obtained the amount in excess of P5,000.00 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 amount
of P20,957.00 was spent.
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 (Vol. 4, Mertens, Law
of Federal Income Taxation, sec. 25.03, p. 307). 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 (N.H. Van Socklan, Jr. v. Comm. of
Int. Rev.; 33 BTA 544). 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 Zamora and which was incurred for
her personal benefit, the Collector and the CTA in their decisions, considered 50%
of the said amount of P20,957.00 as business expenses and the other 50%, as her
personal expenses. We hold that said allocation is very fair to Mariano Zamora,
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 P20,957.00. 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.
In the case of Visayan Cebu Terminal Co., Inc. v. Collector of Int. Rev., G.R. No. L12798, May 30, 1960, it was declared that 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, We are of the opinion that the CTA, did not commit error in
allowing as promotion expenses of Mrs. Zamora claimed in Mariano Zamora's 1951
income tax returns, merely one-half or P10,478.50.
Petitioner Mariano Zamora alleges that the CTA erred in disallowing 3-% per annum as the
rate of depreciation of the Bay View Hotel Building but only 2-%. In justifying depreciation
deduction of 3-%, Mariano Zamora contends that (1) the Ermita District, where the Bay View
Hotel is located, is now becoming a commercial district; (2) the hotel has no room for
improvement; and (3) the changing modes in architecture, styles of furniture and decorative
designs, "must meet the taste of a fickle public". It is a fact, however, that the CTA, in
estimating the reasonable rate of depreciation allowance for hotels made of concrete and steel
at 2-%, the three factors just mentioned had been taken into account already. Said the CTA
Normally, an average hotel building is estimated to have a useful life of 50 years, but
inasmuch as the useful life of the building for business purposes depends to a large
extent on the suitability of the structure to its use and location, its architectural
quality, the rate of change in population, the shifting of land values, as well as the
extent and maintenance and rehabilitation. It is allowed a depreciation rate of 2-%
corresponding to a normal useful life of only 40 years (1955 PH Federal Taxes,
Par 14 160-K). Consequently, the stand of the petitioners can not be sustained.
As the lower court based its findings on Bulletin F, petitioner Zamora, argues that the same
should have been first proved as a law, to be subject to judicial notice. Bulletin F, is a
publication of the US Federal Internal Revenue Service, which was made after a study of the

lives of the properties. In the words of the lower court: "It contains the list of depreciable
assets, the estimated average useful lives thereof and the rates of depreciation allowable for
each kind of property. (See 1955 PH Federal Taxes, Par. 14, 160 to Par. 14, 163-0). It is true
that Bulletin F has no binding force, but it has a strong persuasive effect considering that the
same has been the result of scientific studies and observation for a long period in the United
States after whose Income Tax Law ours is patterned." Verily, courts are permitted to look into
and investigate the antecedents or the legislative history of the statutes involved (Director of
Lands v. Abaya, et al., 63 Phil. 559). Zamora also contends that his basis for applying the 3-
% rate is the testimony of its witness Mariano Katipunan, who cited a book entitled "Hotel
Management Principles and Practice" by Lucius Boomer, President, Hotel Waldorf Astoria
Corporation. As well commented by the Solicitor General, "while the petitioner would deny us
the right to use Bulletin F, he would insist on using as authority, a book in Hotel management
written by a man who knew more about hotels than about taxation. All that the witness did
(Katipunan) . . . is to read excerpts from the said book (t.s.n. pp. 99-101), which admittedly
were based on the decision of the U.S. Tax Courts, made in 1928 (t.s.n. p. 106)". In view
hereof, We hold that the 2-% rate of depreciation of the Bay View Hotel building, is
approximately correct.
The next items in dispute are the undeclared capital gains derived from the sales in 1951 of
certain real properties in Malate, Manila and in Quezon City, acquired during the Japanese
occupation.
The Manila property (Esperanza Zamora v. Coll. of Int. Rev., Case No. L-15289). The CTA held
in this case, that the cost basis of property acquired in Japanese war notes is the equivalent of
the war notes in genuine Philippine currency in accordance with the Ballantyne Scale of values,
and that the determination of the gain derived or loss sustained in the sale of such property is
not affected by the decline at the time of sale, in the purchasing power of the Philippine
currency. It was found by the CTA that the purchase price of P132,000.00 was not entirely paid
in Japanese War notes but thereof or P66,000.00 was in Philippine currency, and that during
certain periods of the enemy occupation, the value of the Japanese war notes was very much
less than the value of the genuine Philippine currency. On this point, the CTA declared
Finally, it is alleged that the purchase price of P132,000.00 was not entirely paid in
Japanese war notes, Mariano Zamora, co-owner of the property in question, testified
that P66,000.00 was paid in Philippine currency and the other P66,000.00 was paid
in Japanese war notes. No evidence was presented by respondent to rebut the
testimony of Mariano Zamora; it is assailed merely as being improbable. We have
examined this question thoroughly and we are inclined to give credence to the
allegation that a portion of the purchase price of the property was paid in Philippine
money. In the first place, it appears that the Zamoras owned the Farmacia Zamora
which continued to engage in business during the war years and that a considerable
portion of its sales was paid for in genuine Philippine currency. This circumstance
enabled the Zamoras to accumulate Philippine money which they used in acquiring
the property in question and another property in Quezon City. In the second place,
P132,000.00 in Japanese war notes in May, 1944 is equivalent to only P11,000.00.
The property in question had at the time an assessed value of P27,031.00 (in
Philippine currency). Considering the well known fact that the assessed value of real
property is very much below the fair market value, it is incredible that said property
should have been sold by the owner thereof for less than one-half of its assessed
value. These facts have convinced us of the veracity of the allegation that of the
purchase price of P132,000.00 the sum of P66,000.00 was paid in Philippine
currency, so that only the sum of P66,000.00 was paid in Japanese War notes.
This being the case, the Ballantyne Scale of values, which was the result of an impartial
scientific study, adopted and given judicial recognition, should be applied. As the value of the
Japanese war notes in May, 1944 when the Manila property was bought, was 1 of the
genuine Philippine Peso (Ballantyne Scale), and since the gain derived or loss sustained in the
disposition of this property is to reckoned in terms of Philippine Peso, the value of the Japanese
war notes used in the purchase of the property, must be reduced in terms of the genuine
Philippine Peso to determine the cost of acquisition. It, therefore, results that since the sum of
P66,000.00 in Japanese war notes in May, 1944 is equivalent to P5,500.00 in Philippine
currency (P66,000.00 divided by 12), the acquisition cost of the property in question is
P66,000.00 plus P5,500.00 or P71,500.00 and that as the property was sold for P75,000.00 in
1951, the owners thereof Mariano and Felicidad Zamora derived a capital gain of P3,500.00 or
P1,750.00 each.
The Quezon City Property (Mariano Zamora v. Coll. of Customs, Case No. 15290). The Zamoras
alleged that the entire purchase price of P68,959.00 was paid in Philippine currency. The
collector, on the other hand, contends that the purchase price of P68,959.00 was paid in
Japanese war notes. The CTA, however, giving credence to Zamora's version, said
. . . If , as contended by respondent, the purchase price of P68,959.00 was paid in
Japanese war notes, the purchase price in Philippine currency would be only
P17,239.75 (P68,959.00 divided by 4, 34.00 in war notes being equivalent to P1.00
in Philippine currency). The assessed value of said property in Philippine currency at
the time of acquisition was P46,910.00. It is quite incredible that real property with
an assessed value of P46,910.00 should have been sold by the owner thereof in
Japanese war notes with an equivalent value in Philippine currency of only
P17,239.75. We are more inclined to believe the allegation that it was purchased
for P68,959.00 in genuine Philippine currency. Since the property was sold for
P94,000.00 on February 9, 1951, the gain derived from the sale is P15,361.75, after
deducting from the selling price the cost of acquisition in the sum of P68,959.00 and
the expense of sale in the sum of P9,679.25.
The above appraisal is correct, and We have no plausible reason to disturb the same.
Consequently, the total undeclared income of petitioners derived from the sales of the Manila
and Quezon City properties in 1951 is P17,111.75 (P1,750.00 plus P15,361.75), 50% of which
in the sum of P8,555.88 is taxable, the said properties being capital assets held for more than
one year.
IN VIEW HEREOF, the petition in each of the above-entitled cases is dismissed, and the
decision appealed from is affirmed, without special pronouncement as to costs.

G.R. No. L-24059
November 28, 1969
C. M. HOSKINS & CO., INC., petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
Ross,
Salcedo,
Del
Rosario,
Bito
and
Misa
for
petitioner.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General
Felicisimo R. Rosete and Special Attorney Michaelina R. Balasbas for respondent.
TEEHANKEE, J.:
We uphold in this taxpayer's appeal the Tax Court's ruling that payment by the
taxpayer to its controlling stockholder of 50% of its supervision fees or the amount
of P99,977.91 is not a deductible ordinary and necessary expense and should be
treated as a distribution of earnings and profits of the taxpayer.
Petitioner, a domestic corporation engaged in the real estate business as brokers,
managing agents and administrators, filed its income tax return for its fiscal year
ending September 30, 1957 showing a net income of P92,540.25 and a tax liability
due thereon of P18,508.00, which it paid in due course. Upon verification of its
return, respondent Commissioner of Internal Revenue, disallowed four items of
deduction in petitioner's tax returns and assessed against it an income tax
deficiency in the amount of P28,054.00 plus interests. The Court of Tax Appeals
upon reviewing the assessment at the taxpayer's petition, upheld respondent's
disallowance of the principal item of petitioner's having paid to Mr. C. M. Hoskins,
its founder and controlling stockholder the amount of P99,977.91 representing
50% of supervision fees earned by it and set aside respondent's disallowance of
three other minor items. The Tax Court therefore determined petitioner's tax
deficiency to be in the amount of P27,145.00 and on November 8, 1964 rendered
judgment against it, as follows:
WHEREFORE, premises considered, the decision of the respondent is
hereby modified. Petitioner is ordered to pay to the latter or his
representative the sum of P27,145.00, representing deficiency income tax
for the year 1957, plus interest at 1/2% per month from June 20, 1959 to
be computed in accordance with the provisions of Section 51(d) of the
National Internal Revenue Code. If the deficiency tax is not paid within
thirty (30) days from the date this decision becomes final, petitioner is
also ordered to pay surcharge and interest as provided for in Section 51
(e) of the Tax Code, without costs.
Petitioner questions in this appeal the Tax Court's findings that the disallowed
payment to Hoskins was an inordinately large one, which bore a close relationship
to the recipient's dominant stockholdings and therefore amounted in law to a
distribution of its earnings and profits.
We find no merit in petitioner's appeal.
As found by the Tax Court, "petitioner was founded by Mr. C. M. Hoskins in 1937,
with a capital stock of 1,000 shares at a par value of P1.00 each share; that of
these 1,000 shares, Mr. C. M. Hoskins owns 996 shares (the other 4 shares being
held by the other four officers of the corporation), which constitute exactly 99.6%
of the total authorized capital stock (p. 92, t.s.n.); that during the first four years
of its existence, Mr. C. M. Hoskins was the President, but during the taxable period
in question, that is, from October 1, 1956 to September 30, 1957, he was the
chairman of the Board of Directors and salesman-broker for the company (p. 93,
t.s.n.); that as chairman of the Board of Directors, he received a salary of
P3,750.00 a month, plus a salary bonus of about P40,000.00 a year (p. 94, t.s.n.);
that he was also a stockholder and officer of the Paradise Farms, Inc. and Realty
Investments, Inc., from which petitioner derived a large portion of its income in the
form of supervision fees and commissions earned on sales of lots (pp. 97-99,
t.s.n.; Financial Statements, attached to Exhibit '1', p. 11, BIR rec.); that as
chairman of the Board of Directors of petitioner, his duties were: "To act as a
salesman; as a director, preside over meetings and to get all of the real estate
business I could for the company by negotiating sales, purchases, making
appraisals, raising funds to finance real estate operations where that was
necessary' (p. 96, t.s.n.); that he was familiar with the contract entered into by
the petitioner with the Paradise Farms, Inc. and the Realty Investments, Inc. by
the terms of which petitioner was 'to program the development, arrange financing,
plan the proposed subdivision as outlined in the prospectus of Paradise Farms, Inc.,
arrange contract for road constructions, with the provision of water supply to all of
the lots and in general to serve as managing agents for the Paradise Farms, Inc.
and subsequently for the Realty Investment, Inc." (pp. 96-97. t.s.n.)
Considering that in addition to being Chairman of the board of directors of
petitioner corporation, which bears his name, Hoskins, who owned 99.6% of its
total authorized capital stock while the four other officers-stockholders of the firm
owned a total of four-tenths of 1%, or one-tenth of 1% each, with their respective
nominal shareholdings of one share each was also salesman-broker for his
company, receiving a 50% share of the sales commissions earned by petitioner,
besides his monthly salary of P3,750.00 amounting to an annual compensation of
P45,000.00 and an annual salary bonus of P40,000.00, plus free use of the
company car and receipt of other similar allowances and benefits, the Tax Court
correctly ruled that the payment by petitioner to Hoskins of the additional sum of
P99,977.91 as his equal or 50% share of the 8% supervision fees received by
petitioner as managing agents of the real estate, subdivision projects of Paradise
Farms, Inc. and Realty Investments, Inc. was inordinately large and could not be
accorded the treatment of ordinary and necessary expenses allowed as deductible
items within the purview of Section 30 (a) (i) of the Tax Code.
If such payment of P99,977.91 were to be allowed as a deductible item, then
Hoskins would receive on these three items alone (salary, bonus and supervision
fee) a total of P184,977.91, which would be double the petitioner's reported net
income for the year of P92,540.25. As correctly observed by respondent. If
independently, a one-time P100,000.00-fee to plan and lay down the rules for
supervision of a subdivision project were to be paid to an experienced realtor such
as Hoskins, its fairness and deductibility by the taxpayer could be conceded; but
here 50% of the supervision fee of petitioner was being paid by it to Hoskins every
year since 1955 up to 1963 and for as long as its contract with the subdivision
owner subsisted, regardless of whether services were actually rendered by

Hoskins, since his services to petitioner included such planning and supervision and
were already handsomely paid for by petitioner.
The fact that such payment was authorized by a standing resolution of petitioner's
board of directors, since "Hoskins had personally conceived and planned the
project" cannot change the picture. There could be no question that as Chairman
of the board and practically an absolutely controlling stockholder of petitioner,
holding 99.6% of its stock, Hoskins wielded tremendous power and influence in the
formulation and making of the company's policies and decisions. Even just as
board chairman, going by petitioner's own enumeration of the powers of the office,
Hoskins, could exercise great power and influence within the corporation, such as
directing the policy of the corporation, delegating powers to the president and
advising the corporation in determining executive salaries, bonus plans and
pensions, dividend policies, etc.1
Petitioner's invoking of its policy since its incorporation of sharing equally sales
commissions with its salesmen, in accordance with its board resolution of June 18,
1946, is equally untenable. Petitioner's Sales Regulations provide:
Compensation of Salesmen
8. Schedule I In the case of sales to prospects discovered and worked
by a salesman, even though the closing is done by or with the help of the
Sales Manager or other members of the staff, the salesmen get one-half
(1/2) of the total commission received by the Company, but not exceeding
five percent (5%). In the case of subdivisions, when the office
commission covers general supervision, the 1/2-rule does not apply, the
salesman's share being stipulated in the case of each subdivision. In most
cases the salesman's share is 4%.(Exh. "N-1").2
It will be readily seen therefrom that when the petitioner's commission covers
general supervision, it is provided that the 1/2 rule of equal sharing of the sales
commissions does not apply and that the salesman's share is stipulated in the case
of each subdivision. Furthermore, what is involved here is not Hoskins' salesman's
share in the petitioner's 12% sales commission, which he presumably collected
also from petitioner without respondent's questioning it, but a 50% share besides
in petitioner's planning and supervision fee of 8% of the gross sales, as mentioned
above. This is evident from petitioner's board's resolution of July 14, 1953 (Exhibit
7), wherein it is recited that in addition to petitioner's sales commission of 12% of
gross sales, the subdivision owners were paying to petitioner 8% of gross sales as
supervision fee, and a collection fee of 5% of gross collections, or total fees of 25%
of gross sales.
The case before us is similar to previous cases of disallowances as deductible items
of officers' extra fees, bonuses and commissions, upheld by this Court as not being
within the purview of ordinary and necessary expenses and not passing the test of
reasonable compensation.3 In Kuenzle & Streiff, Inc. vs. Commissioner of Internal
Revenuedecided by this Court on May 29, 1969,4 we reaffirmed the test of
reasonableness, enunciated in the earlier 1967 case involving the same parties,
that: "It is a general rule that 'Bonuses to employees made in good faith and as
additional compensation for the services actually rendered by the employees are
deductible, provided such payments, when added to the stipulated salaries, do not
exceed a reasonable compensation for the services rendered' (4 Mertens Law of
Federal Income Taxation, Sec. 25.50, p. 410). The conditions precedent to the
deduction of bonuses to employees are: (1) the payment of the bonuses is in fact
compensation; (2) it must be for personal services actually rendered; and (3) the
bonuses, when added to the salaries, are 'reasonable . . . when measured by the
amount and quality of the services performed with relation to the business of the
particular taxpayer' (Idem., Sec. 25, 44, p. 395).
"There is no fixed test for determining the reasonableness of a given bonus as
compensation. This depends upon many factors, one of them being 'the amount
and quality of the services performed with relation to the business.' Other tests
suggested are: payment must be 'made in good faith'; 'the character of the
taxpayer's business, the volume and amount of its net earnings, its locality, the
type and extent of the services rendered, the salary policy of the corporation'; 'the
size of the particular business'; 'the employees' qualifications and contributions to
the business venture'; and 'general economic conditions' (4 Mertens, Law of
Federal Income Taxation, Secs. 25.44, 25.49, 25.50, 25.51, pp. 407-412).
However, 'in determining whether the particular salary or compensation payment is
reasonable, the situation must be considered as whole. Ordinarily, no single factor
is decisive. . . . it is important to keep in mind that it seldom happens that the
application of one test can give satisfactory answer, and that ordinarily it is the
interplay of several factors, properly weighted for the particular case, which must
furnish the final answer."
Petitioner's case fails to pass the test. On the right of the employer as against
respondent Commissioner to fix the compensation of its officers and employees,
we there held further that while the employer's right may be conceded, the
question of the allowance or disallowance thereof as deductible expenses for
income tax purposes is subject to determination by respondent Commissioner of
Internal Revenue. Thus: "As far as petitioner's contention that as employer it has
the right to fix the compensation of its officers and employees and that it was in
the exercise of such right that it deemed proper to pay the bonuses in question, all
that We need say is this: that right may be conceded, but for income tax purposes
the employer cannot legally claim such bonuses as deductible expenses unless
they are shown to be reasonable. To hold otherwise would open the gate of
rampant tax evasion.
"Lastly, We must not lose sight of the fact that the question of allowing or
disallowing as deductible expenses the amounts paid to corporate officers by way
of bonus is determined by respondent exclusively for income tax purposes.
Concededly, he has no authority to fix the amounts to be paid to corporate officers
by way of basic salary, bonus or additional remuneration a matter that lies more
or less exclusively within the sound discretion of the corporation itself. But this
right of the corporation is, of course, not absolute. It cannot exercise it for the
purpose of evading payment of taxes legitimately due to the State."
Finally, it should be noted that we have here a case practically of a sole
proprietorship of C. M. Hoskins, who however chose to incorporate his business
with himself holding virtually absolute control thereof with 99.6% of its stock with
four other nominal shareholders holding one share each. Having chosen to use the
corporate form with its legal advantages of a separate corporate personality as

distinguished from his individual personality, the corporation so created, i.e.,
petitioner, is bound to comport itself in accordance with corporate norms and
comply with its corporate obligations. Specifically, it is bound to pay the income tax
imposed by law on corporations and may not legally be permitted, by way of
corporate resolutions authorizing payment of inordinately large commissions and
fees to its controlling stockholder, to dilute and diminish its corresponding
corporate tax liability.
ACCORDINGLY, the decision appealed from is hereby affirmed, with costs in both
instances against petitioner.

G.R. No. L-15922
November 29, 1961
C. F. CALANOC, petitioner,
vs.
THE COLLECTOR OF INTERNAL REVENUE, respondent.
Francisco
M.
Gonzales
for
petitioner.
Office of the Solicitor General and Special Attorney Librada del Rosario-Natividad
for respondent.
LABRADOR, J.:
This is a petition to review the decision of the Court of Tax Appeals affirming an
assessment of P7,378.57, by the Collector of Internal Revenue as amusement tax
and surcharge due on a boxing and wrestling exhibition held by petitioner Calanoc
on December 3, 1949 at the Rizal Memorial Stadium.
By authority of a solicitation permit issued by the Social Welfare Commission on
November 24, 1949, whereby the petitioner was authorized to solicit and receive
contributions for the orphans and destitute children of the Child Welfare Workers
Club of the Commission, the petitioner on December 3, 1949 financed and
promoted a boxing and wrestling exhibition at the Rizal Memorial Stadium for the
said charitable purpose. Before the exhibition took place, the petitioner applied
with the respondent Collector of Internal Revenue for exemption from payment of
the amusement tax, relying on the provisions of Section 260 of the National
Internal Revenue Code, to which the respondent answered that the exemption
depended upon petitioner's compliance with the requirements of law.
After the said exhibition, the respondent, through his agent, investigated the tax
case of the petitioner, and from the statement of receipts which was furnished the
agent, the latter found that the gross sales amounted to P26,553.00; the
expenditures incurred was P25,157.62; and the net profit was only P1,375,30.
Upon examination of the said receipts, the agent also found the following items of
expenditures: (a) P461.65 for police protection; (b) P460.00 for gifts; (c)
P1,880.05 for parties; and (d) several items for representation.
Out of the proceeds of the exhibition, only P1,375.38 was remitted to the Social
Welfare Commission for the said charitable purpose for which the permit was
issued.
On November 24, 1951, the Collector of Internal Revenue demanded from the
petitioner payment of the amount of 533.00; the expenditures incurred was
P25,157.62; and the net profit was only P1,375,38. Upon examination of the
Secretary of Finance dated June 15, 1948, authorizing denial of application for
exemption from payment of amusement tax in cases where the net proceeds are
not substantial or where the expenses are exorbitant. Not satisfied with the
assessment imposed upon him, the petitioner brought this case to the Court of Tax
Appeals for review.
After hearing, the tax court rendered the decision sought herein to be reviewed.
Hence, this petition.
Before this Court, the petitioner questions the validity of the assessment of
P7,378.57 imposed upon him by the respondent, as affirmed by the tax court. He
denies having received the stadium fee P1,000, which is not included in the
receipts, and claims that if he did, he can not be made to pay almost seven times
the amount as amusement tax. But evidence was submitted that while he did not
receive said stadium fee of P1,000, said amount was paid by the O-SO Beverages
directly to the stadium for advertisement privileges in the evening of the
entertainments. As the fee was paid by said concessionaire, petitioner had no right
to include the P1,000 stadium fee among the items of his expenses. It results,
therefore, that P1,000 went into petitioner's pocket which is not accounted for.
Furthermore petitioner admitted that he could not justify the other expenses, such
as those for police protection and gifts. He claims further that the accountant who
prepared the statement of receipts is already dead and could no longer be
questioned on the items contained in said statement.
We have examined the records of the case and we agree with the lower court that
most of the items of expenditures contained in the statement submitted to the
agent are either exorbitant or not supported by receipts. We agree with the tax
court that the payment of P461.65 for police protection is illegal as it is a
consideration given by the petitioner to the police for the performance by the latter
of the functions required of them to be rendered by law. The expenditures of
P460.00 for gifts, P1,880.05 for parties and other items for representation are
rather excessive, considering that the purpose of the exhibition was for a charitable
cause.
WHEREFORE, the decision sought herein to be reviewed is hereby affirmed, with
costs against the petitioner.

G.R. Nos. L-12010 and L-12113
October 20, 1959
KUENZLE & STREIFF, INC., petitioner,

vs.
THE COLLECTOR OF INTERNAL REVENUE, respondents.
BAUTISTA ANGELO, J.:
This is a petition for review of a decision of the Court of Tax Appeals, as later
modified, declaring petitioner liable for the total sum of P33,187.00 as deficiency
income tax due for the years 1950, 1951 and 1952.
Petitioner is a domestic corporation engaged in the importation of textiles,
hardware, sundries, chemicals, pharmaceuticals, lumbers, groceries, wines and
liquor; in insurance and lumber; and in some exports. In the income tax returns
for the years 1950, 1951 and 1952 it filed with respondent, petitioner deducted
from its gross income certain items representing salaries, directors' fees and
bonuses of its non-resident president and vice-president; bonuses of its resident
officers and employees; and interests on earned but unpaid salaries and bonuses
of its officers and employees. The income tax computed in accordance with these
returns was duly paid by petitioner.
On July 2, 1953, after disallowing the deductions of the items representing
director's fees, salaries and bonuses of petitioner's non-resident president and
vice-president; the bonus participation of certain resident officers and employees;
and the interests on earned but unpaid salaries and bonuses, respondent assessed
and demanded from petitioner the payment of deficiency income taxes in the sums
of P26,370.00, P53,865.00 and P44,112.00 for the years 1950, 1951 and 1952,
respectively. Petitioner requested for the re-examination of this assessment, and
June 8, 1955, respondent modified the same by allowing as deductible all items
comprising directors' fees and salaries of the non-resident president and vicepresident, but disallowing the bonuses insofar as they exceed the salaries of the
recipients, as well as the interests on earned but unpaid salaries and bonuses.
Hence, for the years 1950, 1951 and 1952, respondent made a new assessment
and demanded from petitioner as deficiency income taxes the amounts of
P10,147.00, P26,783.00 and P20,481.00, respectively. Petitioner having taken the
case on appeal to the Court of Tax Appeals, the latter modified the assessment of
respondent as stated in the early part of this decision.
From this decision both parties have appealed, petitioner from that portion which
holds that the measure of the reasonableness of the bonuses paid to its nonresident president and vice-president should be applied to the bonuses given to
resident officers and employees in determining their deductibility and so only so
much of said bonuses as applied to the latter should be allowed as deduction, and
respondent from that portion of the decision which allows the deduction of so much
of the bonuses which is in excess of the yearly salaries paid to the respective
recipients thereof.
The law involved here is Section 30 (a)(1) and (b)(1) of the National Internal
Revenue Code, the pertinent provisions of which we quote:
SEC. 30. Deductions from gross income. In computing net income

there shall be allowed as deductions
(a) Expenses:
(1) In general. All the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or business,
including a reasonable allowance for salaries or other compensation for
personal services actually rendered;
(b) Interest:
(1) In general. The amount of interest paid within the taxable year on
indebtedness, except on indebtedness incurred or continued to purchase
or carry obligations the interest upon which is exempt from taxation as
income under this Title.
It would appear that all ordinary and necessary expenses paid or incurred in
carrying on a trade or business, including a reasonable allowance for salaries or
other compensation for personal services actually rendered, may be allowed as
deductions in computing the taxable income during the year. It likewise appears
that the amount of interests paid within the taxable year on any indebtedness may
also be deducted from the gross income. Here it is admitted that the bonuses paid
to the officers and employees of petitioner, whether resident or non-resident, were
paid to them as additional compensation for personal services actually rendered
and as such can be considered as ordinary and necessary expenses incurred in the
business within the meaning of the law, the only question in dispute being how
much of said bonuses may be considered reasonable in order that it may be
allowed as deduction.
It should be noted that petitioner gave to its non-resident president and vice
president for the years 1950 and 1951 bonuses equal to 133-1/2% of their annual
salaries and bonuses equal to 125-2/3% for the year 1952, whereas with regard to
its resident officers and employees it gave them much more on the alleged reason
that they deserved them because of their valuable contribution to the business of
the corporation which has made it possible for it to realize huge profits during the
aforesaid years. And the Court of Tax Appeals ruled that while the bonuses given to
the non-resident officers are reasonable considering their yearly salaries and the
services actually rendered by them, the bonuses given to the resident officers and
employees are, however, quite excessive, the court saying on this point that "there
is no special reason for granting greater bonuses to such lower ranking officers
than those given to Messrs. Kuenzle and Streiff." Petitioner now disputes this ruling
insofar as the resident officers and employees are concerned contending that the
same is not in accordance with the usual pattern to be followed in determining the
reasonableness of a given compensation because it ignores the nature, extent and
quality of the services actually rendered by its resident officers and employees.
It is a general rule that "Bonuses to employees made in good faith and as
additional compensation for the services actually rendered by the
employees are deductible, provided such payments, when added to the

stipulated salaries, do not exceed a reasonable compensation for the
services rendered" (4 Mertens, Law of Federal Income Taxation, Sec.
25.50, p. 410). The condition precedents to the deduction of bonuses to
employees are: (1) the payment of the bonuses is in fact compensation;
(2) it must be for personal services actually rendered; and (3) the
bonuses, when added to the salaries, are reasonable when measured by
the amount and quality of the services performed with relation to the
business of the particular taxpayer" (Idem, Sec. 25.44, p. 395). Here it is
admitted that the bonuses are in fact compensation and were paid for services
actually rendered. The only question is whether the payment of said bonuses
is reasonable.
There is no fixed test for determining the reasonableness of a given bonus as
compensation. This depends upon many factors, one of them being "the amount
and the quality of the services performed with relation to the business." Other
tests suggested are: payment must be "made in good faith"; "the character of the
taxpayer's business, the volume and amount of its net earnings, its locality, the
type and extent of the services rendered, the salary policy of the corporation"; "the
size of the particular business"; "the employees' qualifications and contributions to
the business venture"; and "general economic conditions" (4 Mertens, Law of
Federal Income Taxation, Sec. 25.44, 25.49, 25.50, 25.51, pp. 407-412). However,
"in determining whether the particular salary or compensation payment is
reasonable, the situation must be considered as a whole.
Ordinarily, no single factor is decisive. It is important to keep in mind that it
seldom happens that the application of one test can give satisfactory answer, and
that ordinarily it is the interplay of several factors, properly weighted for the
particular case, which must furnish the final answer" (Idem.).
Considering the different tests formulated above, was the trial court justified in
holding that the reasonableness of the amount of bonuses given to resident
officers and employees should follow the same pattern for determining the
reasonableness of the amount of bonuses given to non-resident officers?
Petitioner contends that it is error to apply the same measure of reasonableness to
both resident and non-resident officers because the nature, extent and quality of
the services performed by each with relation to the business of the corporation
widely differ, as can be plainly seen by considering the factors already mentioned
above, to wit, the character, size and volume of the business of the taxpayer, the
profits made, the volume and amount of its earnings, the salary policy of the
taxpayer, the amount and quality of the services performed, the employees
qualifications and contributions to the business venture, and the general economic
conditions prevailing in the place of business. And elaborating on these factors in
connection with the business of petitioner, its counsel made a detailed exposition of
the facts and figures showing in a nutshell that through the efficient management,
personal effort and valuable contribution rendered by the resident officers and
employees, the corporation realized huge profits during the year 1950, 1951 and
1952, which entitle them to the bonuses that were given to them for those years,
especially having in mind the after-liberation policy of the corporation of giving
salaries at low levels because of the unsettled conditions that prevailed after the
war and the imposition of controls on exports and imports and in the uses of
foreign exchange without prejudice of making up later for that shortcoming by
giving them additional compensation in the form of bonuses if the financial

situation of the corporation would warrant. As the General Manager Jung testified,
the payments of bonuses were strictly based on the amount of work performed,
the nature of responsibility, the years of service, and the cost of living.
While it may be admitted that the resident officers and employees had performed
their duty well and rendered efficient service and for that reason were given
greater amount of additional compensation in the form of bonuses than what was
given to the non-resident officers. The reason for this is that, in the opinion of the
management itself of the corporation, said non-resident officers had rendered the
same amount of efficient personal service and contribution to deserve equal
treatment in compensation and other emoluments with the particularity that their
liberation yearly salaries had been much smaller.
Thus, according to counsel for petitioner, the following is the contribution made by
said non-resident officers of the corporation: "A.P. Kuenzle and H.A. Streiff, had
dedicated abroad, especially in New York City, New York, U.S.A. and Zurich,
Switzerland, their full time and attention to the services of Kuenzle & Streiff, Inc.;
engaging themselves exclusively in the purchases abroad of the merchandise for
the supply of the import business of the Kuenzle & Streiff, Inc., taking care of its
orders of the importation of the merchandise and also of their shipments to the
said company, making contacts and effecting transactions with the suppliers
abroad, and directing, controlling and supervising the business operations and
affairs of the company by directives. They have been the policy-makers for the
company. All decisions to be made by the company on important matters and
anything and everything outside of the routinary have always been determined by
them and made only upon their instructions which had been strictly adhered to by
the management of the Company. A.P. Kuenzle and H.A. Streiff have been the
president and vice president, respectively, of the company for many years before
1950, 1951 and 1952 and during these particular years up to the present." Indeed,
the trial court was justified in expressing the view that "there is no special reason
for granting greater bonuses to such lower ranking officers than those given to
Messrs. Kuenzle and Streiff." We concur in this observation.
The contention of respondent that the trial court erred also in allowing the
deduction bonuses in excess of the yearly salaries of their respective recipients
predicated upon his own decision that the deductible amount of said bonuses
should be only equal to their respective yearly salaries cannot also be sustained.
This claim cannot be justified considering the factors we have already mentioned
that play in the determination of the reasonableness of the bonuses or additional
compensation that may be given to an officer or an employee which, if properly
considered, warrant the payment of the bonuses in question to the extent allowed
by the trial court. This is specially so considering the post-war policy of the
corporation in giving salaries at low levels because of the unsettled conditions
resulting from war and the imposition of government controls on imports and
exports and on the use of foreign exchange which resulted in the diminution of the
amount of business and the consequent loss of profits on the part of the
corporation. The payment of bonuses in amounts a little more than the yearly
salaries received considering the prevailing circumstances is in our opinion
reasonable.

As regards the amount of interests disallowed, we also find the ruling of the trial
court justified. There is no dispute that these items accrued on unclaimed salaries
and bonus participation of shareholders and employees. Under the law, in order
that interest may be deductible, it must be paid "on indebtedness" (Section 30,
(b)(1) of the National Internal Revenue Code). It is therefore imperative to show
that there is an existing indebtedness which may be subjected to the payment of
interest. Here the items involved are unclaimed salaries and bonus participation
which in our opinion cannot constitute indebtedness within the meaning of the law
because while they constitute an obligation on the part of the corporation, it is not
the latter's fault if they remained unclaimed. It is well settled rule that the term
indebtedness is restricted to its usual import which "is the amount which one has
contracted to pay the use of borrowed money." Since the corporation had at all
times sufficient funds to pay the salaries of its employees, whatever an
employee may fail to collect cannot be considered an indebtedness for it is
the concern of the employee to collect it in due time. The willingness of the
corporation to pay interest thereon cannot be considered a justification to warrant
deduction.
Wherefore, the decision appealed from is affirmed, without pronouncement as to
costs.

(i) Deductions under special laws
--------------------------------------------------------------Q: Name some special laws which provide for deductible business
expenses.
1. Republic Act 10028 (Expanded Breastfeeding Promotion Act)
The law provides that the expenses incurred by a private health and non-health
facility, establishment or institution, in complying with the provisions of this Act,
shall be deductible expenses for income tax purposes up to twice the actual
amount incurred provided:
1. That the deduction shall apply for the taxable period when the expenses were
incurred
2. That all health and non-health facilities, establishments and institutions shall
comply with the provisions of this Act within six (6) months after its approval
3. That such facilities, establishments or institutions shall secure a "Working
Mother-Baby-Friendly Certificate" from the Department of Health to be filed with
the Bureau of Internal Revenue, before they can avail of the incentive.
2. Republic Act 8502 (Jewelry Industry Development Act)
The law provides for a deduction from taxable income of fifty percent (50%) of
expenses incurred in training schemes in connection with the Act and which shall
be deductible during the financial year the expenses were incurred.
3. Republic Act 8525 (Adopt a school act)
The law provides for a deduction from the gross income equivalent to fifty percent
(50%) of expenses incurred in connection with the said act.
4. Republic Act 9999 (Free Legal Assistance Act)
The law provides that a lawyer or professional partnerships rendering actual free
legal services, as defined by the Supreme Court, shall be entitled to an allowable
deduction from the gross income, the amount that could have been collected for
the actual free legal services rendered or up to ten percent (10%) of the gross
income derived from the actual performance of the legal profession, whichever is
lower
5. RA No. 9994 (Expanded Senior Citizens Act) in relation to RR 7-2010
[July 20, 2010]
The law provides that discounts given to senior citizens on certain goods and
services shall be deductible from gross income. Also, private establishments
employing senior citizens shall be entitled to additional deductions from gross
income equivalent to fifteen (15%) of the total amount paid as salaries and wages
to senior citizens.
6. RA No. 7277, as amended (Magna Carta of Disabled Persons) in relation
to RR 7-2010 [July 20, 2010]
The law provides that sales discounts given to persons with disabilities shall be
deductible from gross income subject to certain conditions.
Q: What is the nature of deductions?
Deductions partake of the nature of tax exemptions. Hence, they are likewise
strictly construed against the taxpayer. CIR V. ISABELA CULTURAL
CORPORATION [G.R. NO. 172231, FEBRUARY 12, 2007]
Q: ABC Corp failed to claim expenses for professional services that
accrued in past years. May ABC Corp still claim these expenses as
deductions?
No. In COMMISSIONER OF INTERNAL REVENUE VS. ISABELA CULTURAL
CORPORATION (FEBRUARY 12, 2007), Isabela Corp failed to claim the
expenses for professional services that accrued in 1984 and 1985 during the said
years. Instead, it sought to claim them as deductions during the taxable year of
1986. The Supreme Court held that one of the requisites for the deductibility of a
business expenses is that it must have been paid or incurred during the taxable
year. Hence, the professional fees should have been claimed as deductions during
the years where they were paid or incurred.
Q: Are advertising expenses deductible from gross income?
It depends on the nature of the advertising expense. In COMMISSIONER OF
INTERNAL REVENUE VS. GENERAL FOODS (PHILS.) INC. [APRIL 24, 2003],
General Foods claimed as deductions its advertising expenses for its product
Tang. The CIR disallowed the deduction arguing that the advertising expenses are
not business expenses but capital expenditures.
The Supreme Court ruled in favor of the CIR. 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
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. 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. The advertising expense incurred by General
Foods fall under the second type.
Q: Can a bonus given to corporate officers be deducted from gross income
from the sale of one of its properties on the representation that corporate
officers, by virtue of their positions, contributed to the consummation of
the sale?
No. In AGUINALDO INDUSTRIES CORPORATION VS. COMMISSIONER OF
INTERNAL REVENUE [FEBRUARY 25, 1982], Aguinaldo Industries sought to
claim as deductions the bonuses given to its corporate officers from the sale of one
of its properties. The Supreme Court held that the said bonuses cannot be
deducted because there is no evidence that the said officers did any work which
would be the basis of the grant of the bonuses. One of the requisites for the
deductibility of bonuses is that they are given for personal services actually
rendered.
Q: Are litigation expenses deductible as a business expense?
No. As held in ATLAS CONSOLIDATED MINING & DEVELOPMENT
CORPORATION VS. COMMISSIONER OF INTERNAL REVENUE (JANUARY 27,
1981), litigation expenses incurred in defense or protection of title are capital in
nature and not deductible.
Q: ABC Corporation paid a PR firm to campaign for the sale of ABCs
additional capital stock. Is the compensation paid to the PR firm
deductible as a business expense?
No. In ATLAS CONSOLIDATED MINING & DEVELOPMENT CORPORATION
VS. COMMISSIONER OF INTERNAL REVENUE (JANUARY 27, 1981), the
Supreme Court held that this is not deductible because it is a capital expenditure.
Expenses relating to the recapitalization and reorganization of the corporation,
promotion expenses and commission or fees for the sale of stock reorganization
are capital expenditures.

Q: A, a hotel owner, claimed as deduction promotion expenses incurred by
his wife for the promotion of the hotel. Half of the said expenses were
disallowed as deductions because on the finding that his wife went abroad
on a combined business and medical trip. Is the disallowance proper?
Yes. In ZAMORA VS. COLLECTOR OF INTERNAL REVENUE [MAY 31, 1963],
Zamora, a hotel owner, claimed as deduction promotion expenses incurred by his
wife for the promotion of the hotel. On appeal, the CTA only allowed 50% of the
promotional expenses as deductions because it was found in the Central Bank
dollar allocation that his wife went abroad on a combined business and medical
trip.
The Supreme Court stated that promotional expenses are deductible but must be
substantiated. 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
of this, the Supreme Court held CTA did not commit error in allowing as promotion
expenses in As income tax returns at merely one-half.
Q: Are bonuses to employees allowable deductions from gross income?
Yes provided that:
1. They are made in good faith
2. They are given for personal services actually rendered
3. The bonus when added to salaries is reasonable when measured by the amount
and quality of the services performed with relation to the business of the particular
taxpayer.
(see KUENZLE & STREIFF V. COLLECTOR [106 PHIL. 355]; C.M. HOSKINS &
CO., INC. VS. COMMISSIONER OF INTERNAL REVENUE [NOVEMBER 28,
1969])
Q: A, an experienced realtor, was paid supervision fees in the amount of
P100,000 annually by XYZ Corporation for a three-year project, an amount
when combined with his salary and bonuses is double the XYZs income.
Are the supervision fees deductible?
No. In C.M. HOSKINS & CO., INC. VS. COMMISSIONER OF INTERNAL
REVENUE [NOVEMBER 28, 1969], Hoskins & Co. claimed as deductions the
payment of P100,000 to its founder and controlling stockholder, Hoskins
representing 50% of the 8% supervision fees the company received as managing
agent for Paradise Farms. In this case, the Supreme Court held that such was not
deductible for failing to pass the reasonableness test. If allowed, Hoskin would be
receiving on his salary, bonus, and supervision fees at total of P185,000 which is
double the companys reported net income. The Supreme Court stated that if it
was a one-time payment, it could have been deducted since Hoskin was an
experienced realtor. However, the P100,000 supervision fee was being paid every
year (for three years) for the entire duration of the companys project with
Paradise Farms.
Are police protection fees and gifts for an exhibition for charitable
purposes deductible as a business expense?
No. In CALANOC VS. COLLECTOR OF INTERNAL REVENUE [NOVEMBER 29,
1961], at issue in this case is the deductibility of the expenses incurred for police
protection and for gifts and parties in connection with the boxing and wrestling
exhibition that Calanoc financed and promoted whose proceeds would be given to
the orphans and destitute children of the Child Welfare Workers Club of the Social
Welfare Commission. The Supreme Court held that the police protection fees were
not deductible as they are illegal since it was consideration for the performance of
functions required of policemen by law. As to the gifts and parties, they were
deemed excessive considering that the purpose of the exhibition was for a
charitable cause.
Q: ABC Corporation claimed as deductions bonuses it gave to its nonresident president and vice-president and the bonuses it gave to its
resident officers and employees. The company gave its resident officers
and employees much more. The deductions for bonuses given to resident
officers and employees were disallowed for being excessive and for no
special reason. Is the disallowance proper?
It would depend on the nature, extent, and quality of the services actually
rendered by the resident officers and employees. In KUENZLE & STREIFF, INC.
VS. COLLECTOR OF INTERNAL REVENUE [OCTOBER 20, 1959], the Supreme
Court held that the bonuses to its resident officers and employees were reasonable
taking into account the situation at the time when the services were rendered:
unsettling conditions after the war, the imposition of controls on exports and
imports, and he use of foreign exchange which resulted in diminution of the
amount of business.

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TAX 1 DEDUCTIONS CASES UNDER BUSINESS EXPENSES

G.R. No. 172231

February 12, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

(b) Expenses for the legal services [inclusive of retainer fees] of

TAX 1 DEDUCTIONS CASES UNDER BUSINESS EXPENSES

be judged by the facts that a taxpayer knew, or

Corollarily, it is a governing principle in taxation that tax exemptions must be

TAX 1 DEDUCTIONS CASES UNDER BUSINESS EXPENSES

TAX 1 DEDUCTIONS CASES UNDER BUSINESS EXPENSES

TAX 1 DEDUCTIONS CASES UNDER BUSINESS EXPENSES

Ordinary and necessary trade, business or professional expenses.(a)

In general.- There shall be allowed as deduction from

Simply put, to be deductible from gross income, the subject advertising

Furthermore, the subject P9,461,246 media advertising expense for Tang

TAX 1 DEDUCTIONS CASES UNDER BUSINESS EXPENSES

TAX 1 DEDUCTIONS CASES UNDER BUSINESS EXPENSES

Selling price of land

AGUINALDO INDUSTRIES CORPORATION (FISHING NETS

and other expenses

As summarized by the respondent Court, the facts are:

... Aguinaldo Industries Corporation is a domestic corporation engaged in

Purchase price of land

Registration, documentary stamps

Upon recommendation of aforesaid examiner that the said sum of

TAX 1 DEDUCTIONS CASES UNDER BUSINESS EXPENSES

TAX 1 DEDUCTIONS CASES UNDER BUSINESS EXPENSES

TAX 1 DEDUCTIONS CASES UNDER BUSINESS EXPENSES

Stockholders relation service fee....................................25,523.14

TAX 1 DEDUCTIONS CASES UNDER BUSINESS EXPENSES

Add: 3/4 of promotion fees of

Net income per decision..........................................11, 02,4 2.70

Add: 1/2 % monthly interest

TAX 1 DEDUCTIONS CASES UNDER BUSINESS EXPENSES

THE COURT OF TAX APPEALS ERRED IN ALLOWING THE

TAX 1 DEDUCTIONS CASES UNDER BUSINESS EXPENSES

TAX 1 DEDUCTIONS CASES UNDER BUSINESS EXPENSES

TAX 1 DEDUCTIONS CASES UNDER BUSINESS EXPENSES

May 31, 1963

MARIANO ZAMORA, petitioner,

May 31, 1963

Having failed to obtain a reconsideration of the decision, Mariano Zamora appealed

COLLECTOR OF INTERNAL REVENUE, petitioner,

(1) In dissallowing P10,478.50, as promotion expenses incurred by his wife for

----------------------------G.R. No. L-15289

May 31, 1963

ESPERANZA A. ZAMORA, as Special Administratrix of Estate of FELICIDAD

May 31, 1963

COLLECTOR OF INTERNAL REVENUE, petitioner,

(1) In giving credence to the uncorroborated testimony of Mariano Zamora that

Cases Nos. L-15290 and L-15280

Cases Nos. L-15289 and L-15281

TAX 1 DEDUCTIONS CASES UNDER BUSINESS EXPENSES

TAX 1 DEDUCTIONS CASES UNDER BUSINESS EXPENSES

TAX 1 DEDUCTIONS CASES UNDER BUSINESS EXPENSES

November 28, 1969

C. M. HOSKINS & CO., INC., petitioner,

TAX 1 DEDUCTIONS CASES UNDER BUSINESS EXPENSES

TAX 1 DEDUCTIONS CASES UNDER BUSINESS EXPENSES

TAX 1 DEDUCTIONS CASES UNDER BUSINESS EXPENSES

November 29, 1961

TAX 1 DEDUCTIONS CASES UNDER BUSINESS EXPENSES

October 20, 1959

KUENZLE & STREIFF, INC., petitioner,