Professional Documents
Culture Documents
and recognition of gain or loss; it is not preclusive of, let alone renders
completely inconsequential, the more specific provisions of the code. Thus,
pursuant, to the same section of the law, no such recognition shall be made if the
sale or exchange is made in pursuance of a plan of corporate merger or
consolidation or, if as a result of an exchange of property for stocks, the
exchanger, alone or together with others not exceeding four, gains control of the
corporation. Then, too, how the resulting gain might be taxed, or whether or not
the loss would be deductible and how, are matters properly dealt with elsewhere
in various other sections of the NIRC. At all events, it may not be amiss to once
again stress that the basic rule is still that any capital loss can be deducted only
from capital gains under Section 33(c) of the NIRC.
PHILIPPINE REFINING COMPANY v COURT OF APPEALS (G.R. No. 118794 May 8, 1996)
FACTS:
This is an appeal by certiorari from the decision of respondent Court of Appeals 1 affirming the
decision of the Court of Tax Appeals which disallowed petitioner's claim for deduction as bad
debts of several accounts in the total sum of P395,324.27, and imposing a 25% surcharge and
20% annual delinquency interest on the alleged deficiency income tax liability of petitioner.
Petitioner Philippine Refining Company (PRC) was assessed by respondent Commissioner of
Internal Revenue (Commissioner) to pay a deficiency tax for the year 1985 in the amount of
P1,892,584.00.
The assessment was timely protested by petitioner on April 26, 1989, on the ground that it was
based on the erroneous disallowances of "bad debts" and "interest expense" although the same
are both allowable and legal deductions. Respondent Commissioner, however, issued a warrant
of garnishment against the deposits of petitioner at a branch of City Trust Bank, in Makati, Metro
Manila, which action the latter considered as a denial of its protest.
Petitioner accordingly filed a petition for review with the Court of Tax Appeals (CTA) on the same
assignment of error, that is, that the "bad debts" and "interest expense" are legal and allowable
deductions. In its decision 3 of February 3, 1993 in C.T.A. Case No. 4408, the CTA modified the
findings of the Commissioner by reducing the deficiency income tax assessment to P237,381.26,
with surcharge and interest incident to delinquency. In said decision, the Tax Court reversed and
set aside the Commissioner's disallowance of the interest expense of P2,666,545.19 but
maintained the disallowance of the supposed bad debts of thirteen (13) debtors in the total sum
of P395,324.27.
Petitioner then elevated the case to respondent Court of Appeals which, as earlier stated, denied
due course to the petition for review and dismissed the same on August 24, 1994.the reason of
the court was that Out of the sixteen (16) accounts alleged as bad debts, We find that only three
(3) accounts have met the requirements of the worthlessness of the accounts, hence were
properly written off as: bad debts.
Mere testimony of the Financial Accountant of the Petitioner explaining the worthlessness of said
debts is seen by this Court as nothing more than a self-serving exercise which lacks probative
value. There was no iota of documentary evidence (e.g., collection letters sent, report from
investigating fieldmen, letter of referral to their legal department, police report/affidavit that the
owners were bankrupt due to fire that engulfed their stores or that the owner has been
murdered. etc.), to give support to the testimony of an employee of the Petitioner. Mere
allegations cannot prove the worthlessness of such debts in 1985. Hence, the claim for deduction
of these thirteen (13) debts should be rejected.
ISSUE: WON all bad debts should be treated as deductions.
RULING: This pronouncement of respondent Court of Appeals relied on the ruling of this Court in
Collector vs. Goodrich International Rubber Co., 6 which established the rule in determining the
"worthlessness of a debt." In said case, we held that for debts to be considered as "worthless,"
and thereby qualify as "bad debts" making them deductible, the taxpayer should show that:
(1) there is a valid and subsisting debt.
(2) the debt must be actually ascertained to be worthless and uncollectible during the taxable
year;
(3) the debt must be charged off during the taxable year; and
(4) the debt must arise from the business or trade of the taxpayer.
Additionally, before a debt can be considered worthless, the taxpayer must also show that it is
indeed uncollectible even in the future.
Furthermore, there are steps outlined to be undertaken by the taxpayer to prove that he exerted
diligent efforts to collect the debts, viz.:
(1)
(2)
(3)
(4)
On the foregoing considerations, respondent Court of Appeals held that petitioner did not satisfy
the requirements of "worthlessness of a debt" as to the thirteen (13) accounts disallowed as
deductions. It appears that the only evidentiary support given by PRC for its aforesaid claimed
deductions was the explanation or justification posited by its financial adviser or accountant,
Guia D. Masagana.
Her allegations were not supported by any documentary evidence, hence both the Court of
Appeals and the CTA ruled that said contentions per se cannot prove that the debts were indeed
uncollectible and can be considered as bad debts as to make them deductible. That both lower
courts are correct is shown by petitioner's own submission and the discussion thereof which we
have taken time and patience to cull from the antecedent proceedings in this case, albeit
bordering on factual settings.
The contentions of PRC that nobody is in a better position to determine when an obligation
becomes a bad debt than the creditor itself, and that its judgment should not be substituted by
that of respondent court as it is PRC which has the facilities in ascertaining the collectibility or
uncollectibility of these debts, are presumptuous and uncalled for. The Court of Tax Appeals is a
highly specialized body specifically created for the purpose of reviewing tax cases. Through its
expertise, it is undeniably competent to determine the issue of whether or not the debt is
deductible through the evidence presented before it.
Because of this recognized expertise, the findings of the CTA will not ordinarily be reviewed
absent a showing of gross error or abuse on its part. 9 The findings of fact of the CTA are binding
on this Court and in the absence of strong reasons for this Court to delve into facts, only
questions of law are open for determination. 10 Were it not, therefore, due to the desire of this
Court to satisfy petitioner's calls for clarification and to use this case as a vehicle for
exemplification, this appeal could very well have been summarily dismissed.
acquisition cost, but also some profit. Recovery in due time thru depreciation of investment
made is the philosophy behind depreciation allowance; the idea of profit on the investment
made has never been the underlying reason for the allowance of a deduction for depreciation.
Accordingly, the claim for depreciation beyond P36,842.04 or in the amount of P10,500.49 has
no justification in the law. The determination, therefore, of the Commissioner of Internal
Revenue disallowing said amount, affirmed by the Court of Tax Appeals, is sustained.
CONSOLIDATED MINES INC v CTA, (GR No. L-18843 & L-18844, August 29, 1975)
FACTS: Consolidated filed a refund for overpayments of income taxes for the year 1951.
However, after investigation of the BIR, instead of having a refund, the company was instead
assessed for deficiency income taxes for the years 1953, 1954 and 1956 with 5% surcharge and
1% monthly interest. After investigation, for the years 1951 and 1954 (1) the company had not
accrued as an expense the share in the company profits of Benguet Consolidated Mines as
operator of the Consolidated Mines, although for income tax purposes the Consolidated had
reported income and expenses on the accrual basis; (2) depletion and depreciation expenses had
been overcharged; and (3) the claims for audit and legal fees and miscellaneous expenses for
1953 and 1954 had not been properly substantiated.; and that (b) for the year 1956 (1) the
company had overstated its claim for depletion; and (2) certain claims for miscellaneous
expenses were not duly supported by evidence. Consolidated and Benguet entered into a
development agreement whereby Consolidated, as the owner of several mining claims, allowed
Benguet to explore, develop, mine, concentrate and market the ore in the mining claims. Once
profit is derived, expenditures from its own resources shall be charged against the subsequent
gross income of the properties.
During the time Benguet is being reimbursed for all its expenditures, the net profits resulting
from the operation of the claims shall be divided 90% of the net profits pertaining to Benguet
and 10% to Consolidated. After Benguet has been fully reimbursed for its expenditures, the net
profits from the operation shall be divided between Benguet and Consolidated share and share
alike, it being understood however, that the net profits as the term is used in this agreement
shall be computed by deducting from gross income all operating expenses and all disbursements
of any nature. By 1953, Benguet had completely recouped its advances. Consolidated used the
accrual method of accounting in computing its income. One of its income is the amount paid to
Benguet as mine operator, which amount is computed as 50% of net income. Consolidated
deducts as an expense 50% of cash receipts minus disbursements, but does not deduct at the
end of each calendar year what the Commissioner alleges is 50% if and when the accounts
receivable are actually paid.
ISSUE: Whether or not Consolidateds accounting method is allowed.
HELD: YES. It is said that accounting methods for tax purposes comprise a set of rules for
determining when and how to report income and deductions. The US Internal Revenue Code
allows taxpayers to adopt the accounting method most suitable to his business, and requires
only that taxable income generally be based on the method of accounting regularly employed in
keeping the taxpayers books, provided that the method clearly reflects income. A deduction
cannot be accrued until an actual liability is incurred, even if payment has not been made.
ON DEPLETION:
The first issue raised by Consolidated is with respect to the rate of mine depletion used by the
CTA.
The Tax Code provides that in computing net income there shall be allowed as deduction, in the
case of mines, a reasonable allowance for depletion thereof not to exceed the market value in
the mine of the product thereof which has been mined and sold during the year for which the
return is made.
(Sec. 30(g) (1) (B) as an income tax concept, depletion is wholly a creation of the statue solely
a matter of legislative grace. Hence, the taxpayer has the burden of justifying the allowance of
any deduction claimed. As in connection with all other tax controversies, the burden of proof to
show that a disallowance of depletion by the Commissioner is incorrect or that an allowance
made is inadequate is upon the taxpayer, and this is true with respect to the value of the
property constituting the basis. of the deduction.
This burden-of-proof rule has been frequently applied and a value claimed has been disallowed
for lack of evidence. Here, SC considered the evidence presented (testimony of Eligio Garcia) and
the Report to Stockholders which includes the Balance Sheet as of 1946), geological report on
the estimated amount of ore in the claims, etc.) it set forth a very detailed computation of the
depletion rate, determining the value of each component of the formula of depletion, viz:
Rate of Depletion Per Unit = Cost of Mine Property/Estimated Ore Deposit of
product Mined and sold depletion is different from depreciation.
In determining the amount of cost depletion allowable the following three facts are essential:
1. The basis of the property,
2. The estimated total recoverable units in the property; and
3. The no. of units recovered during the taxable year in question.
As used as an element in cost depletion, basis means the dollar amount of the taxpayers capital
or investment in the property which he is entitled to recover tax free during the period he is
removing the mineral in the deposit.