PLARIDEL SURETY V. CIR (TAX)

The rule is that loss deduction will be denied if there is a measurable right to compensation for the loss, with ultimate collection reasonably clear. So where there is reasonable ground for reimbursement, the taxpayer must seek his redress and may not secure a loss deduction until he establishes that no recovery may be had. In other words, as the Tax Court put it, the taxpayer (petitioner) must exhaust his remedies first to recover or reduce his loss.

It is on record that petitioner had not exhausted its remedies, especially against Cuervo who was solidarily liable with San Jose for reimbursement to it. No evidence was submitted that anything was really done on the matter. It right to reimbursement is not only secured by the mortgages executed by San Jose and Cuervo but also by a final and executory judgment in the civil case itself. Thus, other properties of San Jose and Cuervo were subject to levy and execution. but no writ of execution, satisfied or not, was ever submitted. Neither has it been established that Cuervo was insolvent. The only evidence is the testimony that it is not really known if Cuervo really has properties or not. This is not substantial proof of insolvency. Thus, it was too premature for petitioner to claim a loss deduction.

But assuming that there was no reasonable expectation of recovery, still no loss deduction can be had. section 30(d)(2) of the Tax Code requires a charge-off as one of the conditions for loss deduction:

In case of a corporation, all losses actually sustained and charged-off within the taxable year and not compensated for by insurance or otherwise.

Petitioner who had the burden of proof failed to adduce evidence that there was a charge0off in connection with the amounts in issue which it paid to Galang Machinery.

In connection with the claimed interest deduction, the Solicitor General points out that this question was never raised before the Tax Court. Petitioner through counsel, had admitted that the only issue in this case was whether the entire amount paid by it was or was not a deductible loss. The alleged interest deduction not having been properly litigated as an issue before the Tax Court, it is now too late to raise and assert it before this Court.