Esso Standard Eastern Inc. vs. CIR (G.R. Nos.

L-28508-9, July 7, 1989)

Post under case digests, Taxation at Saturday, March 10, 2012 Posted by Schizophrenic Mind
Facts: In CTA Case No. 1251, Esso Standard Eastern Inc.
(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.
This claim was disallowed by the Commissioner of Internal
Revenue (CIR) on the ground that the expenses should be
capitalized and might be written off as a loss only when a "dry
hole" should result. Esso then filed an amended return where it
asked for the refund of P323,279.00 by reason of its
abandonment as dry holes of several of its oil wells. Also
claimed as ordinary and necessary expenses in the same return
was the amount of P340,822.04, representing margin fees it had
paid to the Central Bank on its profit remittances to its New
York head office.

On August 5, 1964, the CIR granted a tax credit of P221,033.00
only, disallowing the claimed deduction for the margin fees paid
on the ground that the margin fees paid to the Central Bank
could not be considered taxes or allowed as deductible business
expenses.

Esso appealed to the Court of Tax Appeals (CTA) for the refund
of the margin fees it had earlier paid contending that the margin
fees were deductible from gross income either as a tax or as an
ordinary and necessary business expense. However, Essos
appeal was denied.

Issues:
(1) Whether or not the margin fees are taxes.

(2) Whether or not the margin fees are necessary and ordinary
business expenses.

Held:
(1) No. A tax is levied to provide revenue for government
operations, while the proceeds of the margin fee are applied to
strengthen our country's international reserves. The margin fee
was imposed by the State in the exercise of its police power and
not the power of taxation.

(2) No. 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. Since the
margin fees in question were incurred for the remittance of
funds to Esso's Head Office in New York, which is a separate
and distinct income taxpayer from the branch in the Philippines,
for its disposal abroad, it can never be said therefore that the
margin fees were appropriate and helpful in the development of
Esso's business in the Philippines exclusively or were incurred
for purposes proper to the conduct of the affairs of Esso's branch
in the Philippines exclusively or for the purpose of realizing a
profit or of minimizing a loss in the Philippines exclusively. If at
all, the margin fees were incurred for purposes proper to the
conduct of the corporate affairs of Esso in New York, but
certainly not in the Philippines.

HOSPITAL DE SAN J UAN DE DIOS, INC. vs. COMMISSIONER OF
INTERNAL REVENUE
Facts: Petitioner is engaged in both taxable and non-taxable operations. For the years 1952 to 1955, the petitioner allocated its
administrative expenses. The respondent disallowed, however, the interests and dividends from sharing in the allocation of
administrative expenses on the ground that the expenses incurred in the administration or management of petitioner's investments
are not allowable business expenses inasmuch as they were not incurred in 'carrying on any trade or business' within the
contemplation of Section 30 (a)(1) of the Revenue
Code. Hence, were assessed for deficiency income taxes.
Issue: WON administrative expenses should be considered as a deduction/allocated to its interest and dividend income for income
tax purposes.
Held: No. the principle of allocating expenses is grounded on the premise that the taxable income was derived from carrying on a
trade or business, as distinguished from mere receipt of interests and dividends from one's investments, the Court of Tax Appeals
correctly ruled that
said income should not share in the allocation of administrative expenses. Hospital de San Juan De Dios, Inc., according to its
Articles of Incorporation, was established for purposes "which are benevolent, charitable and religious, and not for financial gain". It
is not carrying on a trade or business for the word "business" in its ordinary and common use means "human efforts which have for
their end living or reward; it is not commonly used as descriptive of charitable, religious, educational or social agencies" or "any
particular occupation or employment habitually engaged in especially for livelihood or gain" or "activities where profit is the purpose
or livelihood is the motive."

199 SCRA 825 Taxation Law NIRC Remedies 50% Penalty for Fraudulent Returns
In 1977, Victoria Javier received a $1 Million remittance in her bank account from her sister
abroad, Dolores Ventosa. Melchor Javier, Jr., the husband of Victoria immediately withdrew the
said amount and then appropriated it for himself.
Later, the Mellon Bank, a foreign bank in the U.S.A. filed a complaint against the Javiers for
estafa. Apparently, Ventosa only sent $1,000.00 to her sister Victoria but due to a clerical error
in Mellon Bank, what was sent was the $1 Million.
Meanwhile, Javier filed his income tax return. In his return, he place a footnote which states:
Taxpayer was recipient of some money received from abroad which he presumed to be a gift but
turned out to be an error and is now subject of litigation.
The Commissioner of Internal Revenue (CIR) then assessed Javier a tax liability amounting to
P4.8 Million. The CIR also imposed a 50% penalty against Javier as the CIR deemed Javiers
return as a fraudulent return.
ISSUE: Whether or not Javier is liable to pay the 50% penalty.
HELD: No. It is true that a fraudulent return shall cause the imposition of a 50% penalty upon a
taxpayer filing such fraudulent return. However, in this case, although Javier may be guilty of
estafa due to misappropriating money that does not belong to him, as far as his tax return is
concerned, there can be no fraud. There is no fraud in the filing of the return. Javiers notation on
his income tax return can be considered as a mere mistake of fact or law but not fraud. Such
notation was practically an invitation for investigation and that Javier had literally laid his cards
on the table. The government was never defrauded because by such notation, Javier opened
himself for investigation.
It must be noted that the fraud contemplated by law is actual and not constructive. It must be
intentional fraud, consisting of deception willfully and deliberately done or resorted to in order to
induce another to give up some legal right.