INDOPCO V. COMMISSIONER (TAX)

Petitioner's expenses do not qualify for deduction under Section 162(a).

Deductions are exceptions to the norm of capitalization and are allowed only if there is clear provision for them in the Code and the taxpayer has met the burden of showing a right to the deduction. Commissioner v. Lincoln Savings & Loan Assn holds simply that the creation of a separate and distinct asset may be a sufficient condition for classification as a capital expenditure, not that it is a prerequisite to such classification. Nor does Lincoln Savings prohibit reliance on future benefit as means of distinguishing an ordinary business expense from a capital expenditure.

Although the presence of an incidental future benefit may not warrant capitalization, a taxpayer's realization of benefits beyond the year in which the expenditure is incurred is important in determining whether the appropriate tax treatment is immediate deduction or capitalization. The record in the instant case amply supports the lower court's findings that the transaction produces significant benefits to petitioner extending beyond the tax year in question.

ESSO STANDARD EASTERN V. COMMISSIONER (TAX)

Issue: Whether the margin fees may be considered as ordinary and necessary business expenses.

Ruling: For an item to be deductible as business expense, the expense must be ordinary and necessary; it must be paid or incurred within the taxable year; and it must be paid or incurred in carrying on a trade or business. In addition, the taxpayer must substantially prove by evidence or records the deductions claimed under the law; otherwise, the same will be disallowed.

An expense is considered necessary when the expense 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.

Assuming that the expenditure is ordinary and necessary in the operation of the business, the expenditure, to be allowable deduction as business expense must be determined from the nature of the expenditure itself and on the extent and permanence of the work accomplished by the expenditure.

Herein, ESSO has not shown that the remittance to the head office of part of its profits was made in furtherance of its own trade or business. The petitioner merely assumed that all corporate expenses are necessary and appropriate in the absence of a showing that they are illegal or ultra vires, which is erroneous. Claims for deductions are matter of legislative grace and do not turn on mere equitable considerations.

BASILAN ESTATES V. CIR AND CTA (TAX)

The first question for resolution is whether depreciation shall be determined on the acquisition cost or on the reappraised value of the assets.

DEPRECIATION is the gradual diminution in the useful value of tangible property resulting from wear and tear and normal obsolescense. The term is also applied to amortization of the value of intangible assets, the use of which in the trade or business is definitely limited in duration. Depreciation commences with the acquisition of the property and its owner is not bound to see his property gradually waste, without making provision out of earnings for its replacement. Accordingly, the law permits the taxpayer to recover gradually his capital investment in wasting assets free from income tax.

Precisely, Section 30 (f)(1) states:

In general - a reasonable allowance for deterioration of property arising out of its use or employment in the business or trade, or out of its not being used: Provided, that when the allowance authorized under this subsection shall equal the capital invested by the taxpayer... no further allowance shall be made...

...allows deduction from gross income for depreciation but limits the recovery to the capital invested in the asset being depreciated.

The income tax law does not authorize the depreciation of an asset beyond its acquisition cost. Hence, a deduction over and above such cost cannot be claimed and allowed. The reason is that deductions from gross income are privileges, not matters of right. They are not created by implication but upon clear expression in the law.

Moreover, the recovery, free of income tax, of an amount more than the invested capital in an asset will transgress the underlying purpose of a depreciation allowance. for then what the taxpayer would recover will be, not only the acquisition cost but also some profit. Recovery in due time thru depreciation on 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 has no justification in the law. The determination therefore, of the Commissioner disallowing said amount, affirmed by the CTA is sustained.

The second question for resolution is whether the miscellaneous expenses and officer's travelling expenses are allowable expenses as the same could not be supported by appropriate papers.

On this ground, the petitioner may be sustained for under Section 337 of the Tax Code, receipts and papers supporting such expenses need be kept by the taxpayer for a period of 5 years from the last entry. At the time of the investigation, said 5 years have lapsed. Taxpayer's stand on this issue is therefore sustained.

The third question is on the unreasonably accumulated profits.

Section 25 of the Tax Code which imposes a surtax on profits unreasonably accumulated provides:

Sec. 25. Additional tax on corporations improperly accumulating profits or surplus - (a) Imposition of tax. - If any corporation, except banks, insurance companies, or personal holding companies, domestic or foreign, is formed or availed of for the purpose of preventing imposition of tax upon its shareholders or members or the shareholders or members of another corporation, through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, there is levied and assessed against such corporation, for each taxable year, a tax equal to 25% of the undistributed portion of its accumulated profits or surplus which shall be in addition to the tax imposed by Section 24, and shall be computed, collected, and paid in the same manner and subject to the same provisions of law, including penalties, as that tax.

Petitioner failed to provide sufficient explanation. In order to determine whether profits were accumulated for the reasonable needs of the business or to avoid the surtax upon shareholders, the controlling intention of the taxpayer is that which is manifested at the time of the accumulation, not subsequently declared intentions which are merely the products of afterthought. As correctly held by the CTA, while certain expenses of the corporation were credited against large amounts, the unspent balance was retained by the stockholders without refunding them to petitioner at the end of each year. These advances were in fact indirect loans to the stockholders indicating the unreasonable accumulation or surplus beyond the needs of the business.