l.\I, et al. vs. Julie Carpenter filed with this Court on May 23, et al.

DECISION -

Revenue, under Letter of Authority No. 6063 dated August 14, 1975, conducted an investigation of peti- . tioner's income tax return, and instead of a re-. fundable sum, resulted in a finding of a deficiency income tax in the amount of 27,553.76 allegedly due and collectible from petitioner for the year 1974 (pp. 11-12, BIR rec.), computed as follows:

Net Income per return . . 2. « « «© © e 235,206.09 Unallowable deduction and additional income:

Interest . .« « « »« « 83,153.81 Representation ... 9,583.00 Contributions .. - 1,239.40 Total disallowance .....-.

Net income per investigation .

Less personal exemption... .

Amount subject to tax oc ee P13 ,976.21 P49,185.10 1,800.00 B47 ,383.00 eo e@ @# ® @ @ © eeee##* @ & Less amount previously assessed 12,609.00 Amount of tax withheld ..... 6,989.00 Deficiency tax due .....ee BP 5,620.00 14% mo. int. from 3-16-75 to 1,933.76 Total amount due & collectibel .

e + B 7,553.76 Based on the cinainae: and recommendation of Examiner Morales, respondent Commissioner of Internal Revenue sent a letter of assessment and demand dated October 7, 1977 and requesting petitioner to pay the aforesaid amount of 27,553.76. Upon receipt thereof, petitioner, through counsel, protested the assessment in a letter of November 15, 1977 asserting that,

- 3 - under th. provision of Section 30 of the Na tional Internal Revenue Code, as amended , she is legally entitled t o the deductions she had claimed in the total sum of ~13,9 76.21 from he r gross income of ii55,572.00.

It wi_l be shown , however , that as early as Decembe r 9, 1977 , respondent sent a letter r e questing pe titioner to "pr e sent the p a~rs i~~o rt o f the de duct ions claimed at the Withholding Ta x Divi s ion, Room 208, BIR Bldg., East Triangle , Diliman, Quezon .

City, on January 12, 1978, betwee n 9:00 and 10:00 o'clock in the morning, x x x x which x x x should not be later than Februa ry 13, 1978, "(othe£d._ise,) ·we {he} .wi l L.E.E_~ed with the collection of the s aid amoun t of £17,553. 76c_PlL1S the lega l increments in a c c o rda nce with law."

(p. 16, BIR rec. ; unde r·- .

scoring our s .)

On the same date , Dece mber 9, 1977, Revenue Service Chief Leonardo Cabaner o , sent back to Examine r Edga rdo Moralesj the whole docket of petitioner' ~ tax case for r e investigation. In a 1st Indorsement o f Examine r Morales dated Oc t ober 29, 1979, he recommended that the o~igin a l assessment of ~7,553.76 previously asses s ed against petitioner be sustained and the collection of the 300

DECISION -

CTA CASE NO . 3098 - 4 - deficiency i ncome tax in quest ion be effected. The 1st Indorsement of Exami ne r Morale s dateJ Octobe r 29, 1979 (p. 22 , l3IH rcc .) _is quoted be l ow: "1st Indorse ment October 29, 1979 Respectfully r e turned to t he Ch i ef , Withholding Tax Divi s i on , the entire docket bearing on the case of Miss Julie Carpenter, 2021 M. H. de l Pilar St., Manila, with the informa- tion that a re'nvestigation canno.t be ~ s u ed a .s sub ject taxpayer _2J_jler or representative we e not able to come ~ --~~i th -recei:ets or doc'Wi1en ts w ~i cl! w~ill support her claimed expenses . Inasmuch as the case has been long overdue , the same is retur ned with a recommendation that the original assessme nt be sustained, and that the collection of the income tax li ab ility be effected."

(underlining ours )

EDGARDO MORALES

Examiner"

This l st indorsement was followed by a 2nd indorsement dated January 14, 1980 of Victor De oferio , Jr., Revenue Serv ice Chief, Bureau of I nte rnal Revenue, re iterating the i~nedia te collection of said deficiency income tax, and c onsequently, a warrant of distraint and l evy dated April 16, 198 0, was later served upon petitioner Ju l ie Carpenter. Hence, this appeal.

The sole issue raised in this instant case is 301

- 5 - whether or not petitioner Julie Ca r penter is entitled to the dedu~tions claimed by he r in her income tax return for the year 1974 .

To enable one to see the light in the right perspective , respondent Commissioner of Internal Re ve nu e , in his Answe r dated September 5, 1980 (p . 38, CTA rec.) .to the petition for review stated, aJT;ong o the rs, that :

"x

X

X

X

X

"5.

As petitioner refused , ne glected and failed and still continues to refuse , neg l ec t and fail to pay her tax li~ bility , notwithstanding the demand , the issuance and execution of warrants of distraint a nd levy are in order and proper; "6.

Petit ioner was given the chance to present proof that said deductions were actually incurr e d and~id during the taxable year i nvolved;

"7.

The claimed deduction of interest , representation and contri- bution a re not sustained or duly sup- ported by the required evidence ; " 8 .

The assessment against the petitioner in t he tota l sum of P7, 553 .7 6 was made in accordance with law ." During the hearing of this c a se on Augu s t 1, 1980, petitioner's counsel prayed , in a motion for a writ o f injunction , that respondent and/or his agents be restrained from enforcing the warrant of distraint and levy, and not hqving been objected to by respondent, was granted upon her filing a bond 30 ~2 - 6 - from a surety company of good standing . With t~ e fi l ing of the bond by taxpayer Julie Carpenter, which was subsequently approved by the Court, the collection of the deficiency income tax for the year 19 74 was suspended . During the hearing, petitioner presented receipts and othe r documents to justify and support her tlaim of the deductions in controversy.

A. Repre s entation or ente rtainment c x~nses in the sum of P9, 583. 0<2.:._ - It is a cardinal rule in taxation that the "deduction 11 provision in the tax statutes are acts of l e gis l ative grace (Perez vs . Collector o f Internal Revenue , CTA Case No. 1707, Feb. 10 , 1969,

p. 44) _and only tho se expenses which satisfies the legal requirements are allowable . At this point , we quote the treatise of Commissioner Jose AraBas regarding allowable expen ses in his book, Commentar i es on the National I nternal Revenue Code, Volume I , at page 181:

"(30 ) (4 ) - Are all expenses deductible _f r om gross ·.income?

Since the deduction of expenses from gross income is a mattet of legislative g r ace , only those expenses which are expressly provided by law are to be allowe d .

Generally , however, before an expense is allowed as deduction from gross income, i~ mus t satisfy t hree requirements : (1) The e xpense mu~t be both ord inary "and necessa ry;

30J

DECISION -

CTA CASE NO. 309 8 - 7 - (2) The expense must be paid or incuried within the taxable year ; and ( 3) The expense must be incurred i n carry1ng o n a trade or business . {See Gen. El ec t r i c (P.I ) Inc . vs.

Collector o f Internal Re~e n ue , CTA Case No. 111 7 J u l y 14 , 1 967 )

X

X

X

X

X

An expense is ordinary when it is common to i ncur in the trade or business of the taxpayer .

It may vary , depending upon the time , place and circumstances under which it is i ncurred .

x x Also , art expense to be ordinary , mu s t be reasonabl e in amount.

(19 55 CCI-I

Fed . Tax Course , par. 40 3 )

X

X

X

X

X

An e xpense is cons ider e d necessary if it is appropriate and helpful to t he taxpaye r 's bus iness or occupation .

When

an expense is c alled necessary, it is merely dis t i ngui shed from perso~a l ex- penditure o r f rom one not per t inent to the busi ness of the taxpayer.

( 1955 CCH, Fed . Tax Course , par . 4 03) •. " It is obvious that under Section 30 of t he National Internal Rev enue Code , i n order to determine whether expe nses for e n terta i nment are deductible, these e xpe nses must meet the requirements for the allowance of ord i nary and necessary expenses .

These

expenses must be so incurred for a purpose whi c h i s reasonably connected with the business of the t ax- payer.

If t hese expenses were incurred for the e n te r ta inme nt of custome r s , prospec tive c ustome rs

- 8 - and suppliers of goods and services, the same are prope rly deauctible if it ca n be shown that these were incurred for t he promotion of the business of the taxpayer .

However , in the instant case , nowher e can it be found from the r eceipts of expenses a s howing as to who was entertained by petit ioner by the se expenses and for what' occasion these e xpe nses were incurr ed .

These , coupl ed with the fact that Exh ibits B-4 , B-5 , B- 6 , B-7 and B-8 , purportedly receipts of payment for drinks and foods were undated , the r e is s till that big question as to the year these e xpenses were actually paid or incurred. (Pp. 74-78, / CTA r ec . )

In this instance , petitioner had patently fai l ed , by not testi fying in court , to prove that the amounts appearing ther eon indeed r epresented en- tertainment expenses in the year i n question for he r clientele s or customer s , or otherwise e xpe rres incurred in order to bring more income , or directly connecte d in the realization thereof.

(John Hick s vs . Cell.

-d .

/ of Int. Rev . , CTA Case No. 58 , Oct . 19 , 1955. ) The entertainment expenses claimed as deduction in the sum of P9 ,58 3. 00 is , therefore , disal l owed. B. Contributions in the amount of Pl, 23 9~40 .

- - .. _ .

.. - To be allowed as deduction from gros s income , these expenses must meet the f ollowing prer equisite s : 306

- 9 -

1. The se must have been made to any of the organi za tion ment ione d un~er Sect ion 30(h) o ~ the Nat ional Internal Revenue Code;

2. These must not exceed 6% of the taxable net income in case of individuals ;

3. These are evidenced by adequate records or r ece i pts .

In this connection , Commi ss i oner Jose Ara~as , in his book, The National Internal Reve nue Code of 1977 , at page 289 , citing Section 116 of Reve nue Regulations No. 2, has this to say : "I n connection with the claim for deduction of charitable c on tribu tions or gifts , there shall be stated in the returns of income the name and add r ess of each organization to which a gift was ma de and the appropriate date a nd amoun t of the gift in each case.

Such

contribution or gifts will onl y be al- lowed as deductions when the taxpayer attaches to his return the receipt duly signed by the re s pons ible office r of the corporation or association to which the contribution or gift has bee n pa id." Contributions or gifts to the following orga- ni zations unde r Sect ion 30{h) .of the National Interna l Revenue Code as ame nded , are de duc t ible f r om gross income :

(h) Charitable and othe r con t ribu£i~ns .

Contribut1ons or gifts actually paid or made within fue taxable year to or for the use of the Government'of the Philippines or any political

30G

- 10 - subdivision thereof for exclusively public purpose , or to domestic corpo- rations or associations organized and operated exclusively for religious, charitable, scientific, athletic, cul- tural or educational purpose or for the rehabilitation of veterans, or to societies for the prevention of cruelty to children or animals, no part of the net income of which inures to the bene- fit of a ny private stockholder or in- dividual to an amount not in excess of six per centum in the case of an indi- vidual , and three per centum in the case of a corporation , of the taxpayer ' s taxable net income as computed without the benefit of this paragraph."

On this particular item of claimed deduction , it appears in the r ecords of this case that peti- tioner had in fact given gifts or contributions to persons and entities, but apparently not to those mentioned entities for which the contribution or gift is deductible .

Moreover, it does not show in the receipts as Exhs. C to C-46 that these were clearly for religious purposes.

So that, therefore, looking at these receipts by themselves without more, which were presented as evidence of the claimed contributions or g i fts would be very inadequate and deficient to support the charitable contributions in question.

Hence , the allowance of the claimed contributions and gifts is hereby denied.

c. Interest on loans in the amount ot P3,152.81 .-

I

Interest is deductible if and when the following

DECISION -

CTA CASE NO . 30 98 - ll - requisites are prese nt and sati sf i ed : l.

There is an indebtedness ;

2 .

The indebtedness is that of the t a xpayer; 3.

The interest was paid or accrued during the taxable year ; and 4.

Payment of interest is stipulated in writing.

(Per Rev. Reg . No . 78 , cited on page 125, CTA rec . ') The prerequisi t es above stated are s impli f ied by the Internal Revenue Code , thus: 1 .

That there should be a n i ndebtedness; and 2.

That there must be a l ega l liability to pay inte r es t.

It is note d that in one of the hearings of this c ase , particularly that which took place on March 3, 1982 , when pe titioner ' s counsel presented for marking her doc umentary ev i de nce consist ing of Exhibits A to C-4- 6 , counse l for respondent mani- fested tha t they admitted the genuineness and d ue execution of all sa id exhibits except Exhibit · A, which represented interest in the amount o f P3 , 153. 8l, the admission of which was deferred until af ter petitioner shall ha ve presented the "Contr act of

Sale

11 • Ha ve the contract of s'ale been presen t ed , 30.J

DECISION -

CTA CASE NO . 3098 - 12 - the same should have served as a basis for peti- t i oner ' s cl~im f or t he interest deduction . However , petitioner failed to come up and present said "Con- t ract of Sale ," for which reason her claim for deduction of interest is hereby disallowed . The certification (Exh .

A)

~ prese n ted as evidence to prove interest deductibility , " was not properly identified '' thereby rendering said evidence worthless to prove an al l owab l e interest deduction . WliEHJ.::i"lJiU:: , f inc! ing tile dec i:..; ion oi r cspondcn t Commissioner of I nternal Revenue imposing a defic i ency tax for 1974 in t he amount of P7 , 553.71 ag~inst petitioner in order , the @me is her eby affirmed. With costs agai nst petitioner .

WE CONCUR:

ca~~ /f) .4a )

AMANTE ~~

Presiding Judg e / ~ ~

CONSTANT~~ R~UIN

As soc ia te :Judge 30;J