INHERENT LIMITATIONS

FACTS:

ESSO deducted from its gross income for 1959, as part of its ordinary and necessary business expenses,
the amount it had spent for drilling and exploration of its petroleum concessions. The Commissioner
disallowed the claim on the ground that the expenses should be capitalized and might be written off as a
loss only when a “dry hole” should result. Hence, ESSO filed an amended return where it asked for the
refund of P323,270 by reason of its abandonment, as dry holes, of several of its oil wells. It also claimed
as ordinary and necessary expenses in the same return amount representing margin fees it had paid to
the Central Bank on its profit remittances to its New York Office.

ISSUE: Whether the margin fees may be considered ordinary and necessary expenses when paid.

HELD:

For an item to be deductible as a business expense, the expense must be ordinary and necessary; it
must be paid or incurred within the taxable year; and it must be paid or incurred in carrying on a trade
or business. In addition, the taxpayer must substantially prove by evidence or records the deductions
claimed under law, otherwise, the same will be disallowed. There has been no attempt to define
“ordinary and necessary” with precision. However, as guiding principle in the proper adjudication of
conflicting claims, an expenses is 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. Assuming that the
expenditure is ordinary and necessary in the operation of the taxpayer’s business; the expenditure, to
be an allowable deduction as a business expense, must be determined from the nature of the
expenditure itself, and on the extent and permanency of the work accomplished by the expenditure.
Herein, ESSO has not shown that the remittance to the head office of part of its profits was made in
furtherance of its own trade or business. The petitioner merely presumed that all corporate expenses
are necessary and appropriate in the absence of a showing that they are illegal or ultra vires; which is
erroneous. Claims for deductions are a matter of legislative grace and do not turn on mere equitable
considerations.
2

Planters Product v. Fertiphil Corp.

G.R. No. 166006 March 14, 2008

REYES, R.T., J.

Lessons Applicable: Bet. private and public suit, easier to file public suit, Apply real party in interest test
for private suit and direct injury test for public suit, Validity test varies depending on which inherent
power

Laws Applicable:

FACTS:

President Ferdinand Marcos, exercising his legislative powers, issued LOI No. 1465 which provided,
among others, for the imposition of a capital recovery component (CRC) on the domestic sale of all
grades of fertilizers which resulted in having Fertiphil paying P 10/bag sold to the Fertilizer and Perticide
Authority (FPA).

FPA remits its collection to Far East Bank and Trust Company who applies to the payment of corporate
debts of Planters Products Inc. (PPI)

After the Edsa Revolution, FPA voluntarily stopped the imposition of the P10 levy. Upon return of
democracy, Fertiphil demanded a refund but PPI refused. Fertiphil filed a complaint for collection and
damages against FPA and PPI with the RTC on the ground that LOI No. 1465 is unjust, unreaonable
oppressive, invalid and unlawful resulting to denial of due process of law.

FPA answered that it is a valid exercise of the police power of the state in ensuring the stability of the
fertilizing industry in the country and that Fertiphil did NOT sustain damages since the burden imposed
fell on the ultimate consumers.

RTC and CA favored Fertiphil holding that it is an exercise of the power of taxation ad is as such because
it is NOT for public purpose as PPI is a private corporation.

ISSUE:

1. W/N Fertiphil has locus standi

2. W/N LOI No. 1465 is an invalid exercise of the power of taxation rather the police power

Held:

1. Yes. In private suits, locus standi requires a litigant to be a "real party in interest" or party who stands
to be benefited or injured by the judgment in the suit. In public suits, there is the right of the ordinary
citizen to petition the courts to be freed from unlawful government intrusion and illegal official action
subject to the direct injury test or where there must be personal and substantial interest in the case
such that he has sustained or will sustain direct injury as a result. Being a mere procedural technicality,
it has also been held that locus standi may be waived in the public interest such as cases of
transcendental importance or with far-reaching implications whether private or public suit, Fertiphil has
locus standi.

2. As a seller, it bore the ultimate burden of paying the levy which made its products more expensive
and harm its business. It is also of paramount public importance since it involves the constitutionality of
a tax law and use of taxes for public purpose.

3. Yes. Police power and the power of taxation are inherent powers of the state but distinct and have
different tests for validity. Police power is the power of the state to enact the legislation that may
interfere with personal liberty on property in order to promote general welfare. While, the power of
taxation is the power to levy taxes as to be used for public purpose. The main purpose of police power
is the regulation of a behavior or conduct, while taxation is revenue generation. The lawful subjects and
lawful means tests are used to determine the validity of a law enacted under the police power. The
power of taxation, on the other hand, is circumscribed by inherent and constitutional limitations.

In this case, it is for purpose of revenue. But it is a robbery for the State to tax the citizen and use the
funds generation for a private purpose. Public purpose does NOT only pertain to those purpose which
are traditionally viewed as essentially governmental function such as building roads and delivery of
basic services, but also includes those purposes designed to promote social justice. Thus, public money
may now be used for the relocation of illegal settlers, low-cost housing and urban or agrarian reform.

Labels: 2008, direct injury test, G.R. No. 166006 March 14, planters product v. fertiphil corp, private suit,
public suit, real party in interest, tax case digest

3
FACTS:

The Municipal Board of Manila enacted Ordinance No. 7522, “An Ordinance Regulating the Operation of
Public Markets and Prescribing Fees for the Rentals of Stalls and Providing Penalties for Violation thereof
and for other Purposes.” Respondent were seeking the declaration of nullity of the Ordinance for the
reason that a) the publication requirement under the Revised Charter of the City of Manila has not been
complied with, b) the Market Committee was not given any participation in the enactment, c) Sec. 3(e)
of the Anti-Graft and Corrupt Practices Act has been violated, and d) the ordinance would violate P.D. 7
prescribing the collection of fees and charges on livestock and animal products.

ISSUE:

What law shall govern the publication of tax ordinance enacted by the Municipal Board of Manila, the
Revised City Charter or the Local Tax Code.

HELD:

The fact that one is a special law and the other a general law creates the presumption that the special
law is to be considered an exception to the general. The Revised Charter of Manila speaks of
“ordinance” in general whereas the Local Tax Code relates to “ordinances levying or imposing taxes, fees
or other charges” in particular. In regard therefore, the Local Tax Code controls.