1.

Expenses

CIR V. Isabela Cultural Corp.

 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; - 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
 © 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.
 Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of accounting,
expenses not being claimed as deductions by a taxpayer in the current year when they are incurred cannot be
claimed as deduction from income for the succeeding year. Thus, a taxpayer who is authorized to deduct
certain expenses and other allowable deductions for the current year but failed to do so cannot deduct the
same for the next year.
 The accrual method relies upon the taxpayer’s right to receive amounts or its obligation to pay them, in
opposition to actual receipt or payment, which characterizes the cash method of accounting. Amounts of
income accrue where the right to receive them become fixed, where there is created an enforceable liability.
Similarly, liabilities are accrued when fixed and determinable in amount, without regard to indeterminacy
merely of time of payment.
 The accrual of income and expense is permitted when the all-events test has been met. This test requires: (1)
fixing of a right to income or liability to pay; and (2) the availability of the reasonable accurate determination
of such income or liability.
 The all-events test requires the right to income or liability be fixed, and the amount of such income or liability
be determined with reasonable accuracy. However, the test does not demand that the amount of income or
liability be known absolutely, only that a taxpayer has at his disposal the information necessary to compute
the amount with reasonable accuracy. The all-events test is satisfied where computation remains uncertain, if
its basis is unchangeable; the test is satisfied where a computation may be unknown, but is not as much as
unknowable, within the taxable year. The amount of liability does not have to be determined exactly; it must
be determined with “reasonable accuracy.” Accordingly, the term “reasonable accuracy” implies something
less than an exact or completely accurate amount.
 The propriety of an accrual must be judged by the facts that a taxpayer knew, or could reasonably be
expected to have known, at the closing of its books for the taxable year.
 Accrual method of accounting presents largely a question of fact; such that the taxpayer bears the burden of
proof of establishing the accrual of an item of income or deduction.

CIR V GENERAL FOODS

Tax exemptions must be construed in stricissimi juris against the taxpayer and liberally in favor of the taxing
authority, and he who claims an exemption must be able to justify his claim by the clearest grant of organic or
statute law. Deductions for income taxes partake of the nature of tax exemptions; hence, if tax exemptions are
strictly construed, then deductions must also be strictly construed.

To be deductible from gross income, the subject advertising expense must comply with the following requisites: (a)
the expense must be ordinary and necessary; (b) it must have been paid or incurred during the taxable year; (c) it
must have been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must be supported
by receipts, records or other pertinent papers.
While the subject advertising expense was paid or incurred within the corresponding taxable year and was
incurred in carrying on a trade or business, hence necessary, the parties’ views conflict as to whether or not it was
ordinary. To be deductible, an advertising expense should not only be necessary but also ordinary.

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

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

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

Advertising is generally of two kinds: (1) advertising to stimulate the current sale of merchandise or use of services
and (2) advertising designed to stimulate the future sale of merchandise or use of services. The second type
involves expenditures incurred, in whole or in part, to create or maintain some form of goodwill for the taxpayer’s
trade or business or for the industry or profession of which the taxpayer is a member. If the expenditures are for
the advertising of the first kind, then, except as to the question of the reasonableness of amount, there is no doubt
such expenditures are deductible as business expenses. If, however, the expenditures are for advertising of the
second kind, then normally they should be spread out over a reasonable period of time.
The company’s media advertising expense for the promotion of a single product is doubtlessly unreasonable
considering it comprises almost one-half of the company’s entire claim for marketing expenses for that year under
review. Petition granted, judgment reversed and set aside.

ATLAS CONSOLIDATED MINING v CIR

ISSUE/HELD: W/N the ‘annual public relations expense’ (aka stockholders relation service fee) paid to a public
relations consultant is a deductible expense from gross income

RATIO: Section 30 (a) (1) of the Tax Code 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. 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. 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.

The SC has never attempted to define with precision the terms “ordinary and necessary.” As a guiding principle,
ordinarily, an expense will be considered “necessary” where the expenditure is appropriate and helpful in the
development of the taxpayer’s business. It is “ordinary” when it connotes a payment which is normal in relation to
the business of the taxpayer and the surrounding circumstances. The term “ordinary” does not require that the
payments be habitual or normal in the sense that the same taxpayer will have to make them often; the payment
may be unique or non-recurring to the particular taxpayer affected.
There is thus no hard and fast rule on the matter. The right to a deduction depends in each case on the particular
facts and the relation of the payment to the type of business in which the taxpayer is engaged. The intention of the
taxpayer often may be the controlling fact in making the determination. 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.

It appears that on December 1957, Atlas increased its capital stock. It claimed that its shares of stock were sold in
the United States because of the services rendered by the public relations firm. 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 ‘stockholders relation service fee’, the compensation for services carrying on the selling
campaign, was in effect spent for the acquisition of additional capital, ergo, a capital expenditure, and not an
ordinary expense. It is not deductible from Atlas gross income in 1958 because expenses relating to
recapitalization and reorganization of the corporation, the cost of obtaining stock subscription, promotion
expenses, and commission or fees paid for the sale of stock reorganization 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 a US case,
efforts to establish reputation are akin to acquisition of capital assets and, therefore, expenses related thereto
are not business expense but capital expenditures.

Note: The burden of proof that the expenses incurred are ordinary and necessary is on the taxpayer and does not
rest upon the Government. To avail of the claimed deduction, 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.

H. TAMBUNTING PAWNSHOP, INC. v CIR

To be entitled to claim a tax deduction, the taxpayer must competently establish the factual and documentary
bases of its claim.

We affirm the aforequoted ruling of the CTA En Banc.

The rule that tax deductions, being in the nature of tax exemptions, are to be construed in strictissimi juris against
the taxpayer is well settled.20 Corollary to this rule is the principle 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. 21 An item of expenditure, therefore, must fall
squarely within the language of the law in order to be deductible.22 A mere averment that the taxpayer has
incurred a loss does not automatically warrant a deduction from its gross income.

As the CTA En Banc held, Tambunting did not properly prove that it had incurred losses. The subasta books it
presented were not the proper evidence of such losses from the auctions because they did not reflect the true
amounts of the proceeds of the auctions due to certain items having been left unsold after the auctions. The
rematado books did not also prove the amounts of capital because the figures reflected therein were only the
amounts given to the pawnees. It is interesting to note, too, that the amounts received by the pawnees were not
the actual values of the pawned articles but were only fractions of the real values.

Bearing in mind the principle in taxation that deductions from gross income partake the nature of tax exemptions
which are construed in strictissimi juris against the taxpayer, the Court en banc is not inclined to believe the self-
serving statements of petitioner regarding the misclassified items of office supplies, advertising and rent expenses.
Among the expenses allegedly incurred, courts may consider only those supported by credible evidence and which
appear to have been genuinely incurred in connection with the trade or business of the taxpayer. 24

From the foregoing provision of law, a person who is subject to an internal revenue tax shall issue receipts, sales or
commercial invoices, prepared at least in duplicate. The provision likewise imposed a responsibility upon the
purchaser to keep and preserve the original copy of the invoice or receipt for a period of three years from the close
of the taxable year in which the invoice or receipt was issued. The rationale behind the latter requirement is the
duty of the taxpayer to keep adequate records of each and every transaction entered into in the conduct of its
business. So that when their books of accounts are subjected to a tax audit examination, all entries therein could
be shown as adequately supported and proven as legitimate business transactions. Hence, petitioner’s claim that
the NIRC of 1977 did not require substantiation requirements is erroneous."

In order that the cash vouchers may be given probative value, these must be validated with official receipts. 25

xxxx

Petitioner’s management and professional fees were disallowed as these were supported merely by cash vouchers,
which the Court’s Division correctly found to have little probative value.26

Again, we affirm the foregoing holding of the CTA En Banc for the reasons therein stated. To reiterate, deductions
for income tax purposes partake of the nature of tax exemptions and are strictly construed against the taxpayer,
who must prove by convincing evidence that he is entitled to the deduction claimed. 27 Tambunting did not
discharge its burden of substantiating its claim for deductions due to the inadequacy of its documentary support of
its claim. Its reliance on withholding tax returns, cash vouchers, lessor’s certifications, and the contracts of lease
was futile because such documents had scant probative value. As the CTA En Banc succinctly put it, the law
required Tambunting to support its claim for deductions with the corresponding official receipts issued by the
service providers concerned.

Regarding proof of loss due to fire, the text of Section 29(d) (2) & (3) of P.D. 1158 (NIRC of 1977) then in effect, is
clear enough, to wit:

(2) By corporation. — In the case of a corporation, all losses actually sustained and charged off within the
taxable year and not compensated for by insurance or otherwise.

(3) Proof of loss. — In the case of a non-resident alien individual or foreign corporation, the losses
deductible are those actually sustained during the year incurred in business or trade conducted within the
Philippines, and losses actually sustained during the year in transactions entered into for profit in the
Philippines although not connected with their business or trade, when such losses are not compensated
for by insurance or otherwise. The Secretary of Finance, upon recommendation of the Commissioner of
Internal Revenue, is hereby authorized to promulgate rules and regulations prescribing, among other
things, the time and manner by which the taxpayer shall submit a declaration of loss sustained from
casualty or from robbery, theft, or embezzlement during the taxable year: Provided, That the time to be
so prescribed in the regulations shall not be less than 30 days nor more than 90 days from the date of the
occurrence of the casualty or robbery, theft, or embezzlement giving rise to the loss.

The implementing rules for deductible losses are found in Revenue Regulations No. 12-77, as follows:

(c) Robbery, theft or embezzlement losses. - To support the deduction for losses arising from robbery, theft or
embezzlement, the taxpayer must prove by credible. evidence all the elements of the loss, the amount of the loss,
and the proper year of the deduction. The taxpayer bears the burden of proof, and no deduction will be allowed
unless he shows the property was stolen, rather than misplaced or lost. A mere disappearance of property is not
enough, nor is a mere error or shortage in accounts.

Failure to report theft or robbery to the police may be a factor against the taxpayer. On the other hand, a mere
report of alleged theft or robbery to the police authorities is not a conclusive proof of the loss arising therefrom.
(Bold underscoring supplied for emphasis)

In the context of the foregoing rules, the CT A En Bane aptly rejected Tam bunting's claim for deductions due to
losses from fire and theft. The documents it had submitted to support the claim, namely: (a) the certification from
the Bureau of Fire Protection in Malolos; (b) the certification from the Police Station in Malolos; (c) the accounting
entry for the losses; and (d) the list of properties lost, were not enough. What were required were for Tambunting
to submit the sworn declaration of loss mandated by Revenue Regulations 12-77. Its failure to do so was
prejudicial to the claim because the sworn declaration of loss was necessary to forewarn the BIR that it had
suffered a loss whose extent it would be claiming as a deduction of its tax liability, and thus enable the BIR to
conduct its own investigation of the incident leading to the loss. Indeed, the documents Tambunting submitted to
the BIR could not serve the purpose of their submission without the sworn declaration of loss.

WHEREFORE, the Court AFFIRMS the decision promulgated on April 24, 2006; and ORDERS petitioner to pay the
costs of suit.

2. Interests

Tax arbitrage

the practice of profiting from differences between the way transactions are treated for tax purposes. For
example, in 2014, Company A borrowed money from a bank amounting to P100,000 with 5% annual
interest then immediately deposited in the local depository bank the proceeds from the loan which earns
a 5% annual interest resulting to P5,000 interest expense and P5,000 interest income, respectively.

Assuming, the limitation is not yet in place, the interest income from a deposit is subject to 20% Final
Withholding Tax which means, the Company will only pays P1,000 (P5,000 x 20%) tax on the interest
earned while the interest expense will give a 30% tax benefit amounting P1,500 (P5,000 x 30%).
Combining the effect of the lower final tax and higher tax deductibility would result to a net benefit of
P500 or around 33% (P500/P1,500) of the interest expense.

RMC 31-2009, BIR publishes a BSP memorandum which reiterated the provision of Revenue Regulation
No. 13-2000, that the limitation shall apply regardless of whether or not a tax arbitrage scheme was
entered into by the taxpayer or regardless of the date when the interest bearing loan and the date when
the investment was made, as long as during the taxable year, there is an interest expense incurred on one
side and an interest income earned on the other side, which interest income had been subjected to final
withholding tax.

Now that we already know the explanation behind the 33% interest expense limitation, a question now
arises. How about if the interest income was generated from a Foreign Currency Deposits (FCD) which has
been subjected to 7.5% final withholding tax, do we need to recompute the limitation or just continue
using the stated 33% interest expense limitation?

If we are going to recompute the interest expense limitation based on the rationale explained above, the
33% of interest income non-deductible interest expense would go as high as 75% [(30%-7.5%)/30%] which
 means, 75% of the interest income from a FCD will become non-deductible. In just one looking, it seems
that this will not create any tax exposures on the part of the taxpayers as it is more favorable to the
Bureau of Internal Revenue (BIR), however, a huge amount of Bureau of Internal Revenue (BIR), tax
benefit will be forgone by the taxpayers specially for those who's earning millions of interest from FCD like
banks and other financing companies.

Again, I'd like to reiterate what the Code stated - "the taxpayer’s otherwise allowable deduction for
interest expense should be reduced by 33%.

It reminds me of the hornbook doctrine used in one of the SC decisions which says "if the language of the
law is clear, explicit and unequivocal, it admits no room for interpretation but merely application. A
statute clear and unambiguous on its face need not be interpreted; stated otherwise, the rule is that only
statutes with an ambiguous or doubtful meaning may be the subject of doubtful statutory construction."

CIR, vs. CONSUELO L. VDA. DE PRIETO

FACTS:

Respondent Vda. de Prieto conveyed by way of gifts a real property to her children. The Commissioner of
Internal Revenue appraised the property donated at P1,231,268.00, and assessed the total sum of P117,706.50 as
donor's gift tax, interest and compromises due thereon. Of the total sum of P117,706.50 paid by respondent on
April 29, 1954, the sum of P55,978.65 represents the total interest on account of deliquency. Said sum was
claimed as deduction, among others, by respondent in her 1954 income tax return. Petitioner disallowed the
claim and as a consequence of such disallowance assessed respondent for 1954 deficiency income tax due on the
aforesaid P55,978.65, including interest 1957, surcharge and compromise for the late payment.

ISSUE:

Whether or not interest paid for the late payment of tax is deductible from gross income.

HELD:

YES. For interest to be deductible, it must be shown that:

(1) there be an indebtedness,

(2) there should be interest upon it, and
(3) what is claimed as an interest deduction should have been paid or accrued within the year.

In this case, the last two requirements are undisputed. The only question is if interest on account of late
payments of taxes be considered as indebtedness. Indebtedness has been defined as an unconditional and legally
enforceable obligation for the payment of money. Within the meaning of that definition, it is apparent that a tax
may be considered indebtedness. Although taxes already due have not, strictly speaking, the same concept as
debts, they are, however, obligations that may be considered as such. Where statute imposes a personal liability
for a tax, the tax becomes, at least in a board sense, a debt. It follows that the interest paid by herein respondent
for the late payment of her donor's tax is deductible from her gross income.
In conclusion, interest payment for delinquent taxes is not deductible as tax but the taxpayer is not precluded
thereby from claiming said payment as deduction on account of interest.
PAPER INDUSTRIES CORPORATION OF THE PHILIPPINES (PICOP) v. CA

PICOP reiterates that it is exempt from the payment of the transaction tax by virtue of its tax exemption under R.A.
No. 5186, as amended, known as the Investment Incentives Act, which in the form it existed in 1977-1978, read in
relevant part as follows: "SECTION 8. Incentives to a Pioneer Enterprise. — In addition to the incentives provided
in the preceding section, pioneer enterprises shall be granted the following incentive benefits: (a) Tax Exemption.
Exemption from all taxes under the National Internal Revenue Code, except income tax, from the date of
investment is included in the Investment Priorities Plan x x x”. The Supreme Court holds that that PICOP's tax
exemption under R.A. No. 5186, as amended, does not include exemption from the thirty-five percent (35%)
transaction tax. In the first place, the thirty-five percent (35%) transaction tax is an income tax, a tax on the
interest income of the lenders or creditors as held by the Supreme Court in the case of Western Minolco
Corporation v. Commissioner of Internal Revenue. The 35% transaction tax is an income tax on interest earnings to
the lenders or placers. The latter are actually the taxpayers. Therefore, the tax cannot be a tax imposed upon the
petitioner. In other words, the petitioner who borrowed funds from several financial institutions by issuing
commercial papers merely withheld the 35% transaction tax before paying to the financial institutions the interest
earned by them and later remitted the same to the respondent CIR. The tax could have been collected by a
different procedure but the statute chose this method. Whatever collecting procedure is adopted does not change
the nature of the tax. It is thus clear that the transaction tax is an income tax and as such, in any event, falls
outside the scope of the tax exemption granted to registered pioneer enterprises by Section 8 of R.A. No. 5186,
as amended. PICOP was the withholding agent, obliged to withhold thirty-five percent (35%) of the interest
payable to its lenders and to remit the amounts so withheld to the Bureau of Internal Revenue ("BIR"). As a
withholding, agent, PICOP is made personally liable for the thirty-five percent (35%) transaction tax 10 and if it did
not actually withhold thirty-five percent (35%) of the interest monies it had paid to its lenders, PICOP had only
itself to blame.

NO. The CIR assessed documentary and science stamp taxes, amounting to PhP300,000.00, on the issuance of
PICOP's debenture bonds. Tax exemptions are, to be sure, to be "strictly construed," that is, they are not to be
extended beyond the ordinary and reasonable intendment of the language actually used by the legislative
authority in granting the exemption. The issuance of debenture bonds is certainly conceptually distinct from
pulping and paper manufacturing operations. But no one contends that issuance of bonds was a principal or
regular business activity of PICOP; only banks or other financial institutions are in the regular business of raising
money by issuing bonds or other instruments to the general public. The actual dedication of the proceeds of the
bonds to the carrying out of PICOP's registered operations constituted a sufficient nexus with such registered
operations so as to exempt PICOP from taxes ordinarily imposed upon or in connection with issuance of such
bonds. The Supreme Court agrees with the Court of Appeals on this matter that the CTA and the CIR had erred in
rejecting PICOP's claim for exemption from stamp taxes.

Sky Internet Inc. vs. CA

Respondent, in his Assessment Notice, disallowed some expenses of petitioner assigning the same as
discrepandes, to wit:

a. P3,781,813.60 - this interest expense was paid to Sky Vision, a wholly-owned subsidiary of Sky Internet hence
said expense if unallowable pursuant to Section 34 {B){2)(b) in relation to Section 36 of the National Internal
Revenue Code of 1997; and
b. P 90,954.22- this interest expense was not deducted against interest income subjected to Final Withholding Tax,
thus disallowed
Under Section 36(8)(3) above quoted, two corporations will be considered related parties, if they satisfy the
following essential requirements:

a) More than 50% in value of the outstanding stock of each is owned directly or indirectly by or for the
same individual; and
b) If either one of such corporations is with respect to the taxable year of the corporation preceding the
date of the sale or exchange, was, under the law applicable to such taxable year, a personal holding
company or a foreign personal holding company.

Based on the evidence on record, petitioner and Sky Vision should not be treated as related parties because no
individual owns, directly or indirectly, more than fifty percent (50%) cl the outstanding capital stock of petitioner
and Sky Vision. As stipulated by the parties, a majority of the outstanding shares of stock of petitioner in 1998 was
owned by Sky Vision. On the other hand, Sky Vision's shares of stock in 1998 were owned by various stockholders,
as follows:

It is dear from the provisions cl the law that only those interest expenses incurred between related parties
pursuant to Section 36{8) of the 1997 NIRC are not allowed as deductions from gross income. Considering that
petitioner and Sky Vision are not related parties as defined under Section 36(8) of the 1997 NIRC, the deduction of
the subject interest expenses from petitioner's gross income is proper.

3. Taxes
CIR, vs. CONSUELO L. VDA. DE PRIETO

Although taxes already due have not, strictly speaking, the same concept as debts, they are, however, obligations
that may be considered as such. Where statute imposes a personal liability for a tax, the tax becomes, at least in a
board sense, a debt. It follows that the interest paid by herein respondent for the late payment of her donor's tax
is deductible from her gross income.

In conclusion, interest payment for delinquent taxes is not deductible as tax but the taxpayer is not precluded
thereby from claiming said payment as deduction on account of interest.

4. Losses

5. Bad Debts

(1) There must be an existing indebtedness due to the taxpayer which

must be valid and legally demandable;
(2) The same must be connected with the taxpayer's trade, business or
practice of profession;
(3) The same must not be sustained in a transaction entered into
between related parties enumerated under Sec. 36(B) of the Tax
Code of 1997;
(4) The same must be actually charged off the books of accounts of the
taxpayer as of the end of the taxable year; and
(5) The same must be actually ascertained to be worthless and

Philippine Refining Company vs. CA

Lessons Applicable: deductibility of bad debts, penalties of 25% surcharge, interest of 20, civil penalties
are compensatory (not penal), civil penalties and interest are automatic

 PRC protested that the amounts are bad debts and interest expense which are allowable and legl
deductions. But, CIR ignored it and issued a warrant of garnishment against PRC's deposits at City
Trust Bank.

 (1) there is a valid and subsisting debt

 (2) debt must be actually ascertained to be worthless and uncollectible during the taxable year
 (3) debt must be charged off during the taxable year
 (4) debt must arise from the business or trade of the taxpayer
 (5) uncollectible even in the future
 (6) exerted diligent effort to collect
ISSUES:
1. W/N bad debts requirements are met to be deductible as assessed by the CA
2. W/N PRC should be liable for penalties and interests

HELD: petition at bar is DENIED

1. NO.

 Furthermore, there are steps outlined to be undertaken by the taxpayer to prove that he exerted
diligent efforts to collect the debts, viz: (1) sending of statement of accounts; (2) sending of collection
letters; (3) giving the account to a lawyer for collection; and (4) filing a collection case in court.
 The only evidentiary support given by PRC for its aforesaid claimed deductions was the explanation
or justification posited by its financial adviser or accountant. Not a single document was offered to
show that the Remoblas Store and CM Variety Store were burned, even just a police report or an
affidavit attesting to such loss by fire. The account of Tomas Store in the amount of P16,842.79 is
uncollectible, claims petitioner PRC, since the owner thereof was murdered and left no visible assets
which could satisfy the debt. Withal, just like the accounts of the two other stores just mentioned,
petitioner again failed to present proof of the efforts exerted to collect the debt, other than the
aforestated asseverations of its financial adviser. The accounts of Aboitiz Shipping Corporation and
J. Ruiz Trucking in the amounts of P89,483.40 and P69,640.34, respectively, both of which allegedly
arose from the hijacking of their cargo and for which they were given 30% rebates by PRC, are
claimed to be uncollectible. Again, petitioner failed to present an iota of proof, not even a copy of the
supposed policy regulation of PRC that it gives rebates to clients in case of loss arising from
fortuitous events or force majeure, which rebates it now passes off as uncollectible debts.
 Findings of the CTA having recognized expertise will not ordinarily be reviewed absent a showing of
gross error or abuse on its part.

FERNANDEZ HERMANOS, INC. VS. CIR- ALLOWABLE TAX DEDUCTIONS

Taxation; Income tax; Disallowances of losses; Whereworthless securities were allowed as losses.
—There is adequatebasis for writing off as worthless securities the stock of a lumbercompany which had ceased
operations, even if it still had itssawmill and equipment of some value. Assuming that the
company would later somehow realize some proceeds from itssawmill and equipment and such proceeds would later
bedistributed to its stockholders, the amount so received by thetaxpayer would then properly be reportable as income
of thetaxpayer on the year it is received. In the meantime, it mayproperly be claimed as loss in its tax return pursuant
to Section30(d) 4(b) or Section 30(e) (3) of the National Internal RevenueCode.
Same; Same; Disallowances of losses and bad debts; No partial disallowance or deductions allowed.
—Neither underSection 30(d) (2) of our Tax Code providing for deduction bycorporations of losses actually
sustained and charged off duringthe taxable year nor under Section 30(e) (1) thereof providing fordeduction of bad
debts actually ascertained to be worthless andcharged off within the taxable year, can there be a partial writingoff of
a loss or bad debt. For such losses or bad debts must beascertained to be so and written off during the taxable year,
aretherefore deductible in full or not at all, in the absence of anyexpress provision in the Tax Code authorizing
partial deductions.
Same; Same; Disallowance of depreciation of buildings orassets; Proof of useful life of asset required.
—The taxpayer mustsubmit adequate proof of the useful life of the depreciable assetsor buildings in question so as
to justify its 10% depreciation perannum claim.
Same; Same; When increases in net worth are not taxable.
—Increases in the taxpayer's net worth are not taxable increasesin net worth if they are not the result of the receipt
by it 01unreported or unexplained taxable income, but are shown to bemerely the result of the correction of errors in
its entries in itsbooks relating to its indebtednesses to certain creditors, whichhad been erroneously overstated or
listed as outstanding whenthey had in fact been duly paid