Fernandez Hermanoz v.

CIR, 29 SCRA 552

Facts: Fernandez Hermanos Inc. is a domestic corporation organized for the principal purpose of
engaging in business as an investment company. The CIR disallowed the following deductions:
1. losses in Mati Lumber Co in 1950
2. losses or bad debts in Palawan Manganese Mines Inc in 1951
3. losses in Balamban Coal Mines in 1950 and 1951
4. losses in Hacienda Dalupiri and Hacienda Samal from 1950-1954
Held:
The Supreme Court discussed the allowance or disallowance of each in the following manner:

1. Allowed. These losses represent the shares of stock (worth P8,050) petitioner acquired from Mati
in Jan. 1, 1948. The petitioner was correct in writing off and claiming as a deduction in 1950 the
amount on the ground that the lumber company had ceased operations and became insolvent in
that year. The CIR was incorrect in arguing that since the company still owned a sawmill and some
equipment, the shares of stock still had value. The proper assessment would be to treat as income
for the year in which petitioner gets the proceeds from the liquidation of those assets.

2. Disallowed. These losses represent part of the loans extended by the petitioner to its 100% owned
subsidiary. Petitioner advanced financial assistance to Palawan from 1945 to 1952. By way of
payment, Palawan was to give petitioner 15% of net profits. Whether Palawan was able to pay the
loans or not because it continued to operate at a loss is immaterial. Petitioner cannot properly claim
as a loss the advances given to Palawan in 1951 for that year. There can be no partial writing off as a
loss or bad debt under the Tax Code. Those losses or bad debts ascertained within the taxable year
are deductible in full or not at all. Petitioner continued to give Palawan advances even beyond 1951.
It was only in 1956 when Palawan decided to cease operations.

3. Disallowed. These losses represent sums spent by the petitioner for the operation of its Balamban
coal mines in 1950 and 1951. The petitioner should have treated them as losses in 1952 when the
mines were abandoned and not in 1950 and 1951 on the ground that the mines made no sales of
coal during those years.

4. Allowed. These losses represent sums spent by petitioner for the operation of the 2 haciendas.
The amounts were properly reported as deductions for the correct years. The only reason why the
CIR disallowed them was on the ground that the farms were operated solely for pleasure or as a
hobby and not for profit. But the Supreme Court is not convinced, and being for business, the
petitioner may properly deduct the same.