CTA Case No. 599 (Decision)

I..~P!JIU.iL Of HIE .i' tU Lll"Pl~r:� '"'.OUR1~ OF TAJ A..?PEAt.l rn,.... f''~ Jt'f.tt" Pl\MPANG/ , STJC:!~R r11LLS 1 Petitioner, - versus - COMMISSIONER OF INTE RNAL REV!:l'fUE:, Respondent. X- - - - - - - --X D E C 1 [) I 0 N This is ar. appeul from the decision of res- pendent Commissio Der of Internal Revenue dated April 51 1955 deruanding paym�=nt oi the su:u of ~97,280.00 , ~69,50 2 .00 anu ?12,788.00 ~s defi- ciency i ncome taxes for the years 1951, 1952 and 19531 respectively (pp. 241-244, DIR rec.),�com- puted as follows: 1951 Net incorn.e per orig inr:t ~ invc:: stic_::ation ~429 , 965.30 Deduct: Depreciation 8n nPW assets acnuired from 1946 to 1948 ?51S,867.82 Error in addition 78 . 92 Tot c>l Less: Bad debts pre-war Planters r:tc~ount Pl57,938.93 Crop loan _ 8,790.78 P 1 6(., 729.71 Le:::; s: Mr. Jos e Yulo acct.l26,629.76 40 , 09 9.95 16,8 116.79 Net Income per reinvestigation P413 , 118.51 Tax cue thereon � � ~ � � � � � � � � � � � F' 97,2SD.OO 39 :1

-~ l l DECI SI ON CTA CASE NO. 599 - 2- 1952 Net income per original investigation 1? 412,060.29 Deduct : 57,318.87 P354,74J:.42 Depreciation on a ssets p 91,327.00 acquired in 1947 to 1948 p 50 q .'2 6 9 " 8 7 21�,825.00 Error in addition f+ 69,502.00 7,049 .00 P/.81 1 544.20 Net inc6me per reinvestigation Tax due thereon � � � � � � � � � ~ � � � e � Less: Tax already as sessed Deficiency tax due � � � � � � � �� �� -1953 Net income pPr ori gine l investiy~tion Deduct: Inventory u dju ~;t.rr11 ~ nt P17.l 1 74U 0 82 Depreciation on as ~ ets acqui red from 1946 to 1948 47,691.50 ... Error in addition ___1,~.164.20 220�604,52 Net income per ~einvestigatio n p 63~939 .68 Tax due thereon � � � � � � � � � � � � � � ~ 12,788,.00f I ~.. As borne out by the records, petitioner is a corporation organized and exis ting under the laws of the Republic of the Philippines. At that time of organization, it has as its principal office at Del Carmen, Floridabli3.nca, P.ampanga and v>'as engaged in .. the milling and processing of sugar into finished products. � In the early part of 1955, an exam iner of the Bureau of Internal Revenue investiga ted petitioner and examined its bcoke of accounts. Accordingly, . b ased on the investi g dtion, res pondent wrote pei- tioner a letter dated April 5 1 1955, encl osi ng there- in three assessruent nvtices namely: No. 40-ECAR- 5-54-51 for 1?111,491. 00; and No9 40-ACR-7-54-52 .3 9 �

DECI SION CTA CASE NO . 599 - 3- f o r ~85# 5 52.00 ; and No. 40-FCAR- 5-54- 53 for P71,672,00 ( See Annexes "A II. C 11 11 I & nDu. Peti tidm for Review, pp . 1 2-24 1 CTA rec,), demanding from the l atter the n aymen t of the aforesaid amounts r e pre s~ nting the alleged deficiency income taxes due from peti- tioner for the years 1951, 1952 and 19531 respectively , computed as follm,,s: Net loss per return � � � � � � � � � � � (P557 1 922.06) Ad& the foll 0wing dis a llowances - 1. Wur Damu ge L o r.;D cs � , P66 0,1 S0 .9 1 2 , Pre-war loans t o planters written o f f 168 309.48 3, Depreciati on � , � 139,379,57 4, Loss on sale of a ss e t s 20,047 . 40 _;}__8L_�_8 7. 3.�. . . . . . . . . Net i ncome ps per invest igat i on TAX DUE THEREON � � � � � ~4?.9~.: 9 ~~ ~111 , 491.,3Q - --1952 P'l06,517.00 1 71,748 0 82 Net income as per return � � � � � � � � 132,318,38 Add : Inventory adjustment �� � ��� , _!,476!09 Depreciation � � � � � � � � � � � F- 412,060 0 29 Loss on assets fully depreci ated � 1:?107,377.00 . . Net i ncome as per i nvesti y atjon � � � � ~ -~ 1,825.06 Tax due thPreon � � � � � � � � � � p 85,552,0Q. Les s tax already assess ed � � � � � � � � Defic i ency income tax duP � � � � � � � � -1953 (P 381 107.00) Net loss as per return o � � o � , � � � }3? , 651. 2Q. Add: Bad deb ts written 1:?284,544,20 of f (pre-war accounr) � ?188,950 . 00 Deprec i ati on � � � o � 1 30 1 515.12 Undeclared sale of deprecjated assets � � 3,186,08 Net income as per investig a tion � � � � � TAX DUE THEREON � � � � � � � � � � � � r �- 7h 672 .~oo Not convinced of the legality of the assess- ments, petitioner f iled a prote s t with respondent . ,. 3 9 5

DECISION CTA CASE NO. 599 - 4- on December 13, 1955 (pp. 293-297, BIR rec.) on the ground that respondent's field exnminer has misinterpreted various questions of fact and law with respect to this case, and reque~ting respondent either to withdraw said assessments, or to instruct his field examiners to conduct a reinvest igation. In a letter dated June 1, 1955 (p. 189, BIR rec .), respondent reque~ted peti l i,;nt: r 1..:.0 execute a wa ivt::r . on the running or the statute of the limitations up to December 31, 1957, which peti tioner did, as evidenced by the waiver petitioner had executed and sign~d thru its respaDsihle officer. {po 194, BIR rec.) On October 18 1 1955, after a careful study of the case, res~ondent wrote a letter to petitioner reducing the assessments of the alleged deficiency income taxes for the years 1951, 1952 end 1953 to � P97,Z8o.oo, P69 1 502a00 and Pl2 ,788, .00, respectively, which revised assessments were received by petitioner on October 181 1955. (pp. 287-286, BIR rec.) On December 9, 1955 1 petitioner again ~ro- tested the assessments OA the gr0und that the amounts of deficienc~ asse ss~e nts were not arrived at by respondent on the bases of a just a~preciation of the facts and law invclved, 2nd, therefore, 39G

-, DECI S ION - CTA CASE NO. 5 99 - 5- reques t e d f or another rej. nve s ti g~ ti on . (p p . 2 4 9 tp 253, BIR r e c .) Conseq uently , r e s p ond e nt conduc t e_d another reinvestigation and rendered h is decis i on on Sep- t ember 26 1 1 95 8 (pi 361, BIR rec.), ':lhich was rece ived by petitioner on October 29, 1 958. Respendent, in a memorandum dated June 23 1 1958 addre s s P.d to t h e H.pgi o n a l Dir e ctc� r , Sa n Fer- nando , p ,"'t mp i tn(Ju (up. 343-347, ~nn rnc .) h <t.:. l L .>t c d down the di ~ allowed items claimed by p etitioner in the taxable years in q uestion. 1 9 51 Pre-war plant ers accounts ~208,409.,43 written off 82,432.83 De pre c i ation on cost of 20,047.80 reha b ilitc. tion 660,150.91 Loss on s ~ le of asse t War damag e lo sses 1952 .. De p re ciati o n on cost of ~ 74,999.51 . rehabilitation Los s .of assets fully 1,476 .09 depr E" ciated 1953 Depr e ci n ti o n o~ c o st of reha b il i ta t j_cn F' 81,659.82 Undeclared sale o f depreciated a ss ets 3,186.08 Bad d eb t s written off 188,950.00 .� Re s pondent, in a 1ettPr dated September 26 1 1958 (p. 361 1 BIR rec. ) , informed petit ioner tha t with 39 7

���- -----------. DEC131C 'J - CTA ~hS E NC. 599 - 6- r egards t o its d eficienc y income tax liabi l ities for the yea r s 19 51 , 1952 and 1953 in the total and amount of P179 1 5 70 . 0 0/ t hat <1fter a tho.ro ugh re- i nvestigation and study of the case, he came to the conclu si on t h at no valid r~asons exist to warra n t modification of the previous asses~ment against t~ e petitioner a n d that pe~ition~r failed to substantiAte or justify the ~tnrPnc Dtion cd deductions i u i ts inc . Hne tax r0U1r n.s for the years 1951, 195?. and 19 53 . At thisjunc ture , it should be stated that assessment s are presumed to be correct unless th8 contrary i s shown , and the burden of proof rest L" u p on the taxpayer to o v e r c ome this presumption. The determinati on , ho wever, of R deficiency by the government is onl y p r i~a fa c ie correct. (Gu- tierrez vs. Collec tor o f Internal Revenue, L-19537, ., May ~0, 1967, 14 SCR~ 33 ; Tan GuR~ vs . Court of Tax Appea l s, L-23676, .'\pril 2 7, 1967, '19 :::>C:RA 903; . Rep u blic v~. Ph~ l ipp i ne Rabbit Bu s Line , Inc. L-26862, March 30 , 1970 , 32 s cqA 211.) In view of the afores a i d legal pr ~s umption and the d efe nse of re::,;;ondF;nt t 'h a t t h e a h cve i t.erns of 11eduction ; Are dis~lllowc31Jle rwc,:> uf.e in the bvo reinvestigations conducted by hi 3 office, no justi- ficati c n <?xis t ed to w.:trr c'mt 1\toclificai:: i on o f the 3!) ,j

DECISICl'J CTA CASL NO. 599 - 7- qustioned deficiency assessment, t he c ourt will now proce ed t o assess the evidence of ~he parti e s present ed, not only in the heari nn before thP appellate division of the Rure au of Internal Revenu e butalso before this Court. We will the n determine whether petitioner has properly subs- t antiated h is claimed deductions fo r his 1951, 1952 abd 1953 i ncome t ax re turns. At thP outset, hear- inqs before t his Court partakes o f a trial de � ~ and shall thPrefor recieve P.Vidence, summon witnPSSPs, and give both parties, the government and the taxpayer, opportuni t y t o present and araue their sides in orde r that the true anrl ~ orrect amount of the tax liabi l ity mav be fi nally deter- mined and decided. (Collector of Internal Revenue vs. Ra tangas Transportati on Companv & Laguna .. Tayabas ~us Companv, L-9692, January 6, 1958, 102 Phil. S2 2 .} . We shall now discu ~s the disallo wed items i n the orde r listed by respondent in his memorandum and ascertain whether or not petitioner is entitled to these deductions; Petit ion er did no~ go to trial but admitted the fi ndi ngs o f fa cts of the respondent. ThG i~es are as fol::.ows: (a) WhethPr or not the uncollected portion 3 9 ..

DECI SIOt,�r C~A CASS KO . 599 - 8- of pre-war loans is deductib l e a s b~d debts for in c ome tax purpose s : (b) Whether or not depreciation of pre-war assets is deducti ble in any l 2xable year at the option of the tax~ayer: (c) Whether or net the yre- war losses may be claimed duLing the t axable years after the war; and, (d) Whether or not a loss on the sale of ful l y depr eciated capital a s sets is deduc tible. ~ r e-war Pl n nter s Loan written o ff as bad debts in 195 1 - ~208,409 , 43 The rec ords show that petitionPr granted p r e- war loans to the sugar planters numbering, all in all, two hundred thirty fou r (234 ) loans. Peti- tioner alleged thet after the war, it exertPd efforts to collect said loans. Written demands were made to the planters-debtors. As pointed out by petitioner, it found cut later that scme of the planters-borrowers h�ere either dead or their .. whereahouts c a n not be located. While the others, who survived the war, could not p ay bec ause they were victims of the rav a ges of World ~ar II. Pe t itioner's unpaid pre-w~r loans to the planters �ere written off in 1951 based on its belief t hat after the 1,-.; a r, the polanters-del."'~tcr ~ lvere no longer in a position to pay their full indebtedness on account o :=: the �vJidcspread, <1.lmo:; L c o n, p lete

--, I DECI:::>ImJ CTA CASE NO. 599 - 9- devastation c aused by the war to the nation's pr.oducti ve p o �.Ner. P e titioner clc< imed that because of this state of c<ffa ir then exist.ing, .it was con- fronted wi t h the choice of either retarding the reh2 bilitQ tion of its businr~s by insisting en complete payment of said lodns by the planters- debtors, or to wri t e off the pre-war unp~id loans ~s bad debts. PHtit i oner w~s, thPrefore, forced by circumstances tu implement the seco nd choice, i.e. to consider the pre-war lo2ns to planter~ as debts v.rhi ch has become bad in 19 51. So thu t i n the year 1951, petitioner 2nd some surviving planters entered into a milling c on t ract wherein the indebtedness o f the pl2nters were reduced to the extent of t b.e difference Letween the full pre- war indebtedness and the amount granted as their w3.r damage claim, and tl 12t tlJis difference between the full pre-war accounts and their rHrtuced indebtert- !less is the unco l lected acccnnts 2nd claimed as bad debts. The provision of the milli!lg contract (p. 6, Petition ~0 r Review, Po 6, CTA rec.) entered into . ~y ~ nd be tween pAtitioners ~ nd rlantErs -bo rrowers contained the fol l owing stipulation i-1~3 herein quoted below:

DECI SICN CT~ CASE NO. 599 - 10 - 11 4 � SETTLEMENTS OF PRE-vlAR ACCOUN'1'S 11 l t is exp res3ly stipulated that: at the o utb reak of the war in December, 1941, the PLANTER was indebted to the CENTH/~L . (petitioner) in the sum of ~ . and it is hereby agreed that said indebted- ness of the PLANTER shall be reduced to the total per centage thereof that the war damage commission ;nay be used in the p3y- ment of th8 approved war damage claim. Example: If the total percent ~ge used by the war d~mage commission in paying war damage cl aims is 10% of the ~p rr o v0rt clAim, and the recogriz.e~d prf~-,....,ar indebt:cdness of the f�lrmt.ers is l-~1, ooo.no, thf:'ir ;, .:1id indebtednes:.:; sha ll be rcuuccd to 40% or P4oo.oo. 11 l t is however, expressly s tipulated that 4% of the entire sugar production of the plantation to be taken out of the rlanters 1 participation shal l be retained by the central to be applied to the liqui- dation of the reduced indetedness of the planters, as herein above provided, until such reduced indebtedness shall have been fully paid ... Petitioner, in s upport of its contention that the indebtedness written off are allowable, cited Mertens as authority, stating that - 11 The diffPr- ence between the face amount of the ncte anct the amount received i n compromise is an a llowable bad debt deduction, provided the d ebtor has no assets out of which the entire amount may be co llected. The deduction is allowable even though the tax- � payer executes releas~s from the obli gatio n, p ro- vided that s uch releases are executed after bona fide determinuticn of worthlessness hy the

DECISION CTA CASE NO. 599 - 11 - taxpayer." (Jacob Mertens, Jr. Law of Federal Income Taxation, Vol. 51 2 Ed. p. 447.) On the basis of the above ~rovisi0n of the milling -contrac t , petitioner had considered as deductible the difference between the full pre- war indebtedness and the war darqa ge payments to the planters- borrowers as bad debts in the amount of P20f3 1 409. 113. On the o ther hand, rt; spondt::nt r.l<dms that the amount of P208,409 . 43 1 representjng pre- � wa~ accounts to planters written off in the taxable year 1951, should be disallowed as deductible bad debt. Respondent asserts that petitioner failed to substantiate its claim by showing that the planters- debtors were incapable of p aying their indebtedness. Respondent nlleged that the planters had s uf fici ent income and properties with � whic h to pay their obligations as this was sho"Vm b y the fact that plnntcrs-d'ebtors have e xecuted a new milling contract wi th the p~t i tione r, and the governme nt had ~t res sed the fact t h at the debts were even partially settled. (p. 3, Resp's Memo ., p. 224 1 CTA rec.) .� We find the c onten t ion of res ~ondent untenable. A partially s e ttled debt wh i ch has b ~ en previously 40 3

DECISION C~A CASE NO. 599 - 12 - charged off with in a taxable year es deductibl e bad debt can be cl~ imed as deduction in the year it was sustained .. The reporting made by petitioner of income recoveries f r om bad debts in his subsequent income tax returns, i. e .. , in 1953 1 1954 and 1955 in the amounts of P35,16S .. oo, P 35, 168 .,0 0 and P33,186.oo, respec tively (p. 345, BIR rec.) wil l only show thnt it hils no in tention to defrd u rl the State of its lawful rev en ue .. The contention of respund~nt will not n~ga te the glaring facts clearly in petitioner's memo- randum dated June 71 1978 to the effec t that af ter the war, petitioner had exerted all efforts to col lect said loans and that written demands were made to the planters-borrowers for the payment thereofo According to petitioner, many of the .. planters-borrowers were e i ther dead or coula no longer be located. Those plante{s that surv i ved the war ~ere in no position to me et t h eir obli- gations on acco unt generally of the almost complete des~ruction c� the nation's productive power of w1d ch the plantArs are net pxcepted ., Peti t ioner 1 � further 1 ma ir. t;, j.ncc1 the. L :~ he j n<Jbi.l i ty of the planters -borrowers to pay their obligations was caused by the war, and that despite written 4 0 �~

DECISI C;l~ - CTA CASE NO . �9 9 - 13 - demands aga inst the borrowers, no payments were made by then . Al l these circumstances brought the petition8 r to decide c:tnd in fuct treated the loons us bad d8bts which i t n o w clai~s to be ded uc tible as of the yPar 1951, which this Court find;, merito ri o u s. It is a ccrrh.IOD kiiO'JIIlP.dqe that the devast a ting Aff8cts cf tile last I�Jcrld the clc>irn of petit ioner of its writting off tile bad debts for the loans of its pre- war planters in seid year. As admitted by b o th parties , the debts we re incurred before the 8dvent of the Second World War which had bP.en very destructive tc many. planters and their credi t ors al i ke and have ad- ve r-sely affected them both fillcmcialJ y. These condj tions cot1lo not have made possible the early settlement of their indebtedness. Indeed, no . on e was spare~ frcm th e r a v 2ges ~nd losses caused by thP. war. ln a lesser dcgr8e of siLuation , wh8re a debt w2 s con s iclerPc3 ':Jc �r t hle:.;:.;, it was t ::; ken judicial notice by t~. e Court th ;1t <J 'Dus iness depre ~s ion will require a less specific performa nce to prove that a given c3 Pb~ is v.IOrthless." (See Higginbothans Baily Log3r, 8 BTA 566 , 579.) It .� 40r!'

DECI3ION - CT A CASE NOe 599 - 14 - was therefore, correct for petitioner to, instead of waiting for an opportunity for these planters to pay their debts wh :i.ch was not then_possible, reduce the planter's indebtedness by cnterina i nto a new milling contract, and the reduced indebtedne ss of the pl ~ nte rs written off by peti- tioner as bad debts. And it could not be good managemr-:>nt to keep the unpaid ilCcotm 1.�i nlive, which are !:;ubjt�ct tu cLiim:; fu1� Lhuir p .1yrncnt frurit yec1r� to year, which indeed call s for ~o r e expenditures. This Court had ruled, in several cases, that it is foolish to spend good mon ey to recover the bad accounts. And, moreover, in order thdt a tax- . pay er 1nay be entitled to deuucticns , the law. ('lees not reouire him to be an incorrigibl e optimist. (Goodrich International Rubber co. vs. Collector of Internal Revenue, CTA Case No. 4~8, June B, 1963; G.R~ No. L-22265 1 Dec. 22 1 196 7 1 2J. ~CRA, mod ified in G.R. No. L-22 6 5 Dec. 22 , 1967', 21 SCRA 1336; El Porvenir Rubber Products, Jn ce vs. Vera, CTA Cases ~ ! 0 s. 1702 and 1705 1 J uly 26, 1 9o9 .) Bad debts writt�n off in 1953 - rl88 1 950.00 . Petit:ior.Pr clc:.imed this arc,ot.mc a ~ b<1d dcJ; ts in it~ ir.corne tax return i~ 1953. This item was disallowed by re!;r.)ondl'I"1t as shown i n his rr.emorandum dated June 23, 1958 addressed to the Regional 40 G

DECI SIOJ'J - CTA CASE NO. 599 - 15 - Director, San Fernando, Pampanya. (?p. 345-347, ~IR rec.) Respondent, in disallowing the claim for aforesaid bad rlebt deduct ion, asserted that the disallowed pre-war accounts sho~ld have been written off in the year petitioner st3rted its mill!ng operations. Re spondent also argued that pEtitioner started fl1 i 11 i n q ope r ctl ion s in 1. h 1: y etJ r 1 91 7 ,:;n d i t h i1 c1 taY..en s ix y ea r s to deterrnin(~ whett:er:- Lht~ debts are collectible or not. Respondent 2lso stated . \ that, in a subs~q~ent reinvestigation made, pe- titioner had reported as miscellaneous income partial recoveries of these pre-war accounts in the years 1953-55. (p. 345~ BIR rec.) Respond e nt, therefore, insisted that the s2id accounts should have been written off at the beginning of their operations, i.e., i~nediately after t he war. Bad .debts, in order to be deductible, should be actually ascertained to he worthless in a particular year and charged off in th~t taxable ye ~ r in its bocl<:s of nccounts, and, tb .J.t. before the debt may be charged off, and consequently deduct said debt, it must be ascertnined and demonstrated in a reasonabl e degree of certainty of thP uncollectibility of the debt. 407

DEJelSION - CTA CASE NO. 599 - 16 - Contrarily, peti t ioner, in a letter dated December 20 1 1955, had clP-arly shmvn the validity of i ts claim for the allo,4ance of bad debts for the tax~ble year 1953. Petitioner listed do~n the breakdown of thi s bad debts items (pp. 299-30 2, BIR rec.) as follows: (a) Accounts less than F50 .. 00 not ? 1,.325 .. 42 circulari:r.ed 70,785.04 (b) Account circul <- ,rL~Pd \�rith 2,837.40 lett-er s rr-:'t urncd rn<trkl ~ d Pl801 277.18 ( C:lecc<J!>C!d) or whcre<.~b('ut.: ; unknown (c) Accounts circularized with letters received by addre2see but no reply received by petitioner (d) Accounts circularized with letters received and a cJ<-n mvledged by ::~ddres.see but claiming no i~debtedness (e) Accounts circuli=1rized 1.Vf10Se letters on which return receipt w2s no~ received an~ have n u knowledge if a<..klressE:e received thE:: letter Tot a 1 Plus written off 42% of indebtedness 8,672, 82 of � planters "''hO signed rnill ing con~ract during 1952-1953 F-'188,950.04 l\ccordinrJ to peti t i cner, the i +: ems (a) N. (b) repr esen t v::ric ,ls� indiv idu al accounts 'A'h.i.ch were quite small, the expenses incurred for the collection of the se i terns �,vould be ')ro~>sly un- proportionate to the amounts to be collectedo

DECISION - CTA CASE NO. 599 - 17 - Items (c) 1 (d) and (e) reoresent accounts of debtors whose whereabout are unknown and failed to receive letters of demand. Some of the debtors refused to pay3 claiming no indevtedness and some alleging the reasons that they (debtors- planters) do not have any account of fertilizers as no fertilizers were given to them by petitioner and/or thdt sujd fertili~er were eith e r taken back by petitioner before the war and which were later confiscated by the Japanese. Petitioner has ascertained that the inabilitv of the planters-borrowers to pay their obligations consisting of pre-war loans was due to the damages sustained by them during t he last war and that despite petitioner's written demands, no payment has been made by them. Petitio ner, therefore, c oncludes that the deductions for bad debt is justified. 1 This �court finds the co ntention of res ~ ondent I untenable. In the first plac e, res ponoe nt 1 s exa- miner admitted in the reinvestigation renort that efforts were indeed exerted by petitioner to ascertain the wo rthlessne ss of the debt as shown convincingly in a let~er dated December 20, 1955 addressed to res pondent Collector (now Commissioner) of Internal Revenue. (pp . 347, 343. BI R r ec .) Respondent can not now Le allowed to claim that petiticner . 4 0 !_

DECISICN CTA CASE NO. 599 - 18 - had failed in its efforts to present evidence sho~ing that the planters-borrowers were indeed inc apable of meeting thei r obligations � . ~ere, I it has been shown that the planter s loan accounts were actually and duly ascertained in the year they were claimed as deductible, i . e., in 1951 and 1953 as bad and th~t these deductions were made in utmost good faith. Tn the light of the High Court deci s i on, it had ruled thus "xxx Our statute pArmits the deduction of debts actually ascertained tn be worthless within the taxable year; obviously, to prevent arbitrary action by the taxpayer, to unduly avoid tax liability . The requirement of ascertainment of worthlessnAss requires proof of two facts: (1) that the taxpayer did in fact ascertain the debt to be worthless, in the year for which the deduction is sought; anrl (2) that i n doino sc, he acted in good faith. (Collector of Internal Revenue vs. Goodrich International Rubber Co., 21 SCRA, 1336 1 1341.) As to the claim of re spo ndent that ~he p artial settlement or collection of d e bts by thP debtors- planters are evidence against or deterrents to thP deduction of bad deb ts in t he income tax returns of petiticner finds no support in law. This Court held that the subsequent collection of a bad debt oreviously charged off in a prior year does not render the deduction unallowablea 41. 0

DECISICl~ CTA c::...sL i~O. 599 - 19 - Respondent'~ ~ain a rgu ment in di::;allowing the d educti on of th.:; alleged bad debts is that petiti 2ner was ab l e to collect Home of the debts or parts the::r C:of in s ubscc1uent ~rears, whicl-1 fJrovPd that the debts were not uncollectible in the ye ars they we re sc d ecl2red and charged off by peti~icPer. Tha t a debt previo usly found to be wo rthl eGs and char9ed off in a prior year , was s~bnequ ently collected do e .s not rer.dPr the dr><:Juc"lion IJ r, - unallowuble or ill8~ :1. (Philiprdne Trust CrJmJ '�"'1ny v s . Coll Pctor of Internal Hevf~ nu P 1 C''i.'t\ CcJ[..; f; ~~ 0 � 16 7, J anu i.J ry 30 1 1961.) The taxpayer need no t wait uncertain future eve nts, nor wait until some turn of d1e wheel of fortune may bring the debtors affluence 0 (Jacob Mertew:; Jr., Lav1 .2.f Federal l 0 c o me T a x -=1. t i o..:'21 Vo 1 � 5 1 Ch �::l p .. 3 0 1 p � l 2 3 � ) It is the re .o~~ , onc.len t 1 s opinion that the pre-war accounts of t~e deb t ors-p 1 a nters~cu1d be written off in the year the C' .lrc.:.,any started their milling opera tions in 1947 or imrrcd ia tely after the war. This claim cannot be H u ~tainPd . The � charging of f of a pa rtial ly wcrlhless debt need not ue pr.ysic::tl ly !ila�-, e .i r. t'he :'cAr i t bec0mes ~o~thlPS~ o The word ~~barged-o f f within poi !'lting to Lh e ur:c ;:; llec U t i1 i tv of the d er.,ts rather t .h <� n j ust the r:oc;uiremellt of -'" nl p hy s i cA l ( u . � c: �..,; �.� �-, ~� I .� ~ r' � , .41 1

DEC::r S I (; l'- C~A CASE NO. 599 - 20 - Jr. 1 LavJ o f Fe d e r al Inccme Taxa t j on, Vol. 5 1 ChoptE r ]0, p . 36 . ) Depre ci ation a ll owance fo r the ye~rs 19Sl, 1 9 5 2 .-1 nd 1 9 5 1 in ~-h~ rPsne c tive 2rnonnts of ~ 82,�13?..P3 , 1' 7 4 , 9<;9. ': 1 .:md ~81 , ,:::/:19 . ~2. t o r ehaL i lit ~> tE' i t s pn.:'- '.Vc=> r a:, .sct:s arc.: c;:ip i t 3 l expendi tu L C'::.: . (P p . 295-296, ~I R r~c o ) ~e allocated HS ~eprcc! ~ ~ian a llo~ C1 ~ces to pa r ~ t icu) _r ; ~~up of 6s s et~ , wi~~ n ut 0ronf that th8 t ive g 5 2 6 3 1 Y ( ln .r... > � .L.., - - ... . I .' �"�.l.. .'�. � P~: C � ) � au t l:X�r i ty : � 11 1 t is no t n e c e;_;~~ <:> r:y cf t~2u.rf3e to c..l ll n catr~ tl:e ex:)er1\.1:: t � < rF;~ i n min utiae to eac~ i~divl0u~l p i ece of rropcrty where 41 ~!

DECI SICL - 21 - itAms rolc.' i- ~::.; to sev �_;r,' l rJepre c i<1ii.ng prope r t i es , it is .SIHficie;-,t if the expe Ddi ~ urc s are div i ded by reason eble ~pport ion~ent pr o ces s o~ a perc~ntage basis among the sev er2 l praocrti es bencf i ted ." (Jacob l�'lertens: La1,r �of Ft! deral Inc0:<1e 'Za x a ti on , Vol. 4 1 f'� 60 .) Re ~::p on 6 ent, in a men:cranollm dr-t t ed June 11, 1979, hod l i s ted down, i~ ~etai l (~. 4 1 ~esp . f'-1emo., pp . 225-226, C'ri\ re c .,) t: 1e fcllmvir..g on i t s a~~ets, t0 wit: 1. General expenses various P65 3,~37.57 2 . Cost of sale of s u;ar 60 ~ of thP total cc~t nf ~a le as es tim2 t ed by the manager 596,195 . 8h 3. Gener rl l e~pen~es v ario u s 1,320.27 4 � General expen ~ws car~ ag e 31 986 � 32 5. GP.n e ral ex;,1er.ses c1 ub me~� s 419.71 6. Gc�ner>:->1 e YDE� n ::.;es huspit 3l 6 1 2 06.46 7. Gene r a l expAn~eG in mai~ tenance in r� r c ces s ..2.'1 , 573 0 ? 7 Tot:<:'ll Pl , 3l6 1 6f.9 . 47 The abo ve an~unt o f r~habiljtQtiun expenses (Pp. 4-5, Re s p . !1emo .l' pp . 22[:'> - 22.6 1 CT .~ u:c.) were distribui.: <?;d t o t he fr.~llowing 2ssc;.t.s, J.s per J cu rn a.1 Entry No. 2nn , on Scp t~ DbP r 20 , 194 ~ . 1 � L <:mJ iZ"" <; !..-c:v E::r.H~n t. s F 41 202.43 2. Bui l ding e q uipment~ 268,786.86 3. Huc':li '1 Pri es C'{Ui~)ment 71 ?., 8 7 8.70 4. Rai lro "l d . er;u:i..p:nent 24 1 ,829.60 5. Aqric u l tur <1l t!Ach_ineriF:s 6. Furn~ture & Fixtures 201 020.G 2 7. Autotr uck t~~velers 3,932.81 To t a 1 58 , ? 23.2 3 .t-�1 , 316, 669. 4 7 On this s c o re, r<:; s;�CfL~cnt_ <:;:~:_ .- t ' . ~, L(jlat ~erein petitioner started milling after the

DE:Cl.SlON CTA CASE NO. 599 - 22 - � world War II, or in 1947. Respondent observed that pet.i tioner had capitalized the general expenses by treating thP. same as rehabilitation _expense s and apportioning these expenses to various assets accounts, and depreciated these rehabilitation expPnses in accordance with a ratP. of deoreciation for each item. Respondent attacked this nrocedure, which was adooted by petitioner, a nd maintained, after reinvestigation, that these genera l or reha- bilitation expenses are not capital expenditu~es subject to depreciation allowances as these ex- penses did not increase the value of petitioner's assets. Respondent concludes therPfore that the dPpreciation allowances are imp roper and cannot be deprecia ted . We find the stand taken by petitioner un- tenable. Jn the first p lace, thPre is no law or jurisprudence which suppo r ts the legality of the manner in .which petitioner tr ~ ated, f o r depreciation allowances purvoses, the aforesaid general or rehabilit~Lion expenses. Although it may be said that the rehabilitation expenses partakes of the nature of capital expenditures, it cannot be depreciable unless added to the cost and inrreasinq thereby the value of the assets of petitio ner . 41 ;~

DECI .SIOU - CTA C~ ~ E NO. 599 - 23 - Expenditures muy con .c.:ti t-.ute cap i tal investme nts, but t~at does not necessarily mectn tha t all capi tn l invest ~e nt ~ust he included i n the c aiJi tal suin recov er:a"!Jl8 by deprecia tion. To be so included, they mu s t ei th er ente r into th e cost of wa st ing or - depre ci at ing property or TTI'Js t b e rea ... sonabl y attributabl e to such p roper ty (Jacob Merten s , Jr., La w o f Fed 2ral Income T a Y a t i o n, Vo 1 o 4 , Ch ap � 2 3 , p � �1 0 2 � ) The reha bi li t Ation exp8nses of pe titione r not being C CI pi td l expend i t:ur ~s which incr c.:,J R E-d the v ~lue of the company ' s properti e s or c onst itu~ e iml-:ol over.�,~ nt of the as !--. e t ::.; to whid1 t~ey a re allocated,.' thpy ~e n not be allowed e s dep reci a tio n a l l o \van c e s , We will n ow ccnsidPr ~h e wa r dam ao e lo s ses . in th e sum of Jt?60 ,l~.S� l_ c l a .i,rned <3S c~ ed ucti on In it s 1 9 51 illcc;rr�e t. ox n::tu rr., p p t: it:i�-::ne r cl a i me d as deductio n tre ,_<;::a unt cf P G6 0 ,l 50 .91 as w.:1r dar:.2<;;�- l 0sses .. R:=:: .c:po n <J<:nt asse rted th a t the los~ ~s ur e de duc t i hJ2 o nl y d ~ ring ~h e t a x~blo years in which these lo s s es we r e s~s t 3 ined. Res- pondent cite d, in sunpo r t of his p0si t ion , the rul in; of t.hc ;~ e c r <=.:t.:. ry o f ..Tu <:: t ice in Opin i e n No. 162, s e ri es of 1 952 dated Aug ust 2 3, 1 952 a nd Genera 1 Ci rc u l -:' r 1'10 .' V-11 9 . Re spo:v_i r]r:t furt he r urge us that the. claim of peti -ticner fer cJed11ct ion for its vJa r losses in 19 51 c a nnot ))e a ll o;.,ied since .41 ~

DECISION - CTA CASE NO. 599 - 24 - t hese losses were sustained during the Japanese occupation (cit i n g the case cf Hi lado vs. Coll . o f Int . Rev. , G. R. No. � L- 9408g Oct. 31~ 1956, 100 Phil. 288) and not i n 1951. This Court finds the respondent�s claim of disallowanc e of the war damage losses in accor dance with law. This issue has been s q uarely settled t hus 11 X x x. The q Uf: [;;tion in r- ~ : g�1rd t o the deductibility of wa r lo sses h a~ already been settled by the Supreme Court in two . cases. "It has been hel d that a loss s ustain ed in 1 945 as a result of military o perations by the United States fer the liberation o f thP Philippin es was not compensated fo r by i nsur ance or othArwi sR, within the mean i nn of Sec tion 30(d) of the Revenue Code, and, thPref or e s uch loss is deductible o~ly in the y ear s ustained . ;x x x. (Yulo vs. Aran e t a , CTA Case No. 84 1 July 8, 1958: citinq Cu Unjie ng v . B.T.A., GR No . L- 6 296 . Sen tember 29 , 1956 ; Hil ado v. Col l . of In t. Rev ., 100 Ph i l o 288 , ��� c i t.) See also Conso l idated Hines , Inc. vs. Commi s sione r, _CTA Case No s o 56 5 and 578 , May 6 , 1 961.) Re spondenf 1 s de c ision disallowing'th ~ war damage losses claimed by petitioner is, there forP 1 sustained .. ~es o n the salP of its asse ts in the amount s:>.L.E_2 0 , 047 o80 in 1 951. Respo nden t disallowed this item of ~20 1 047 . 80 allegedly incurred by petitioner on the sale of its assets in 1 95 1 on the ground t hAt s a i d a ~ se ts at the time of the sale had already been f ully 41 G

DEC L;IO ~�: CTA CASE NO. 599 - 25 - depreciated. An e nt t his i ssue, petitioner maintains th2 t n ormal d epr e ciation cannot be taken a g ains t the pwn e r of the property who harl absulut~l y no control ove r it. Pet it ione r f urther cla i rns th.:o. t no d epre- ci~tion shou ld be taken durirg a f o~ccd stoppage in operat.ions occa s i o11ed by the war. ( pp . 178- In the f:Lrst p l c. ce, p eti tic ,ne r f ailed to subs�- t antiate t his claim of loss in the sale of its asse t s o -\s co rre ct.l y ma in t<>ir.ed by r es~ ,onden t, s i n c e the as . ets in q u ~s ti on were d epreciated when the S3:T.P was ? l rr.ady in use and whj d depreci<Jt_ion o ccu rred c c,r. tir: u ous l y E.:VC:r1 when icl le o r tempe r a - riiy not u Ged , ~nd after h r vin~ b e ~ n fully d epre- c iated in value, a sa l e , th~reafter made of the asse t s \'Jill n rJ t bring t'tb o ut G. Jn~" ~' r e .:.a.: ltir~g fr om the sa l e s u l:-jc: ct of cl-1 iii . fo r a ll o w;:Jr: ce o The cl a im f o r lo s ses in the '; -J.le of the assetE3 in th e sum of P20 ,0 17. 80 c a nn o t be s u s t ~ i n Pd o Loss e s on the sale of asse t s ful l y deprecia ted 4g a in, petitlcrer cl3ims that no r ma l depre- 41 7

DECI.SICN CTA Cl �.s;:; NO. 399 - :?6 - Fcrce s f~r which it had n0 centr a l. �rie hclve .::>]n~n.dy (Je ci dcd this in th e i rni, ie c~ iatPly [lre - c e ding issue of the d e~ur~5. hility of th~ loss on th ~ s~ l c of petitioner's a~se t in ~te sum of the s~ l ~ e xceeJs the p rc ~~rti~s� se J.ling p rice, th ~ re wi l l ~P n o l os~ . (Ji'lcob ~1ert:en s , .Tr., L r1 w of F' Pd rr.:J l 51.) ',Je theref o re fin d n ::s ~�c nclent 1 s a ct of <5:i s - assets i n tf"P aincunt. of ~- 1,476.09 in 1952 to be CCl rrect. Undecl ared sa l~ 0 f de~ r~ci a ted n.sse ts in the sum of � 3,J.26w 08 for t~e year 1 9 53. two r_, r ec ._ ( 2 ) .~">fJ�. l' l'l ',J l'ocJ� ,~Jl.l, t, .>C'-'' I c:c le of d e p r _r:.-,_ c 1. "' t E; r~l , 1 ~:- �" .e..,...,". 1 ] . o.r, .r, ..;. .,_., n o t . r ~..-, c (_'r."'' r.. l' z-c0 c�3 s ince �,.;ay of depn:.c i~-. t i <. n . Re~; pondcnt rn i:dn t"' j n s , further, that ga in rn a~ inste a d be re a li z2~ a s ~ r es ult of the ~~ ::..1le o f U>c . ~ e prc ci 3 tc 6 c-:s ~; ets � t. r��" tt1E�' las :=;E:s 1)r 1 . i vrne 1.1i � ': t:�ly i.~" r c: c edir ; ~J i:::; ~ ;,Jc~:; , i.e . concern in g the ~ isallow 2nce by us nf th e lo sses ari s in g from t i':e .S ' �le of c. hc <'fs r;f: ts full y . 41 lj

DECISI ON - CTA CASR NO. 599 - 7.7 - we deprecir� ted,/ eq u ;:<L ly uphold r esponder-.t 1 s cl c terrr.ina- tionthat th e und e cl a r ed se:1. le of dcp r c ci a-t.ed asse t s in the <:HnC' unt of i;)3 , l f6.tJ�< i ~; not '-'iPd ucti blrc: and, hence, inc l u d i b l e a.s irwc ,rr� e subjec t i�o L .lX fer 1 953., Ac c ordi n gly, pe~i~ionpr' s i~c or.e tax l ia- bi li ty for �.::.h r:o tw o ye a rs 195 1 C:l ~� d i953 i s rc::com- p u ted ns fo llows : 1 9 51 N0t l oss ~ Pr return (P5 77, 92L ., 06) Ac'Jj: r� GGO , l r)o . q l v.J c1 r r'! ;J rn <t<J r l o ~� : ~ ,., ."; 1 39 , 379 . 57 De pree i il t~ iun 20 , 047.4 0. Lo ss on saJ. e o f assets To t.a l F81 9 , 577. P8 Ded'lct: Depreci a-t i on on n m,r ;.:tsse t s ~ C ']U ired from 1 9 46 to 1 9 48 ~5 6,86 7. 82 Error i n cidditicr~ 7 P. o92 55 , 946 .74 7 62 1 63 1.14 Net income a s pe r inve s ti 0~ ti on ~204, 70 9 . 00 Tax due thereon: = ~ of ~201 1 7 09 . Gl P51 , 177.77 X lf, j~ =P B,lB6.3 E 3/1 of 10o , ooo . no = P 7 S, 0CJo ., or x ;JO~{ = 15 , oco.oo r204 ,7o9.oe - ? 1 26 ,1 77.27 = r: 7 B,53 l~ Pl x 28% = 2! , 988 .. 90 P 15 ,177. 00 .: 9 5 3 !�l et lo ss l)P .r ret, ;r n (F38 1 l07.CO) Add: 3, 1 86 . 08 1 3l ,7 01. 70 Dc1:r P c L: t.i.c )n ;:� 9 ~l 1 5 ~).1 � 2 0 Unc:Jr:.cl,lrc::d ::;c.i lr:; .:-Jf ?17 l 1 71 8.P2 d e I"' r c:~ c i a t :e cl c1 ~3 .: e t :5 17, 691.5 0 To t,~~ l 1 , 1 64 . 20 220 , 604 . ~0 (l? 1 2 5 , 0 1 0 0 3 2 ) Ded uct: lnv entcry nc~j t �::.t..rn r� nt De pre c :t. ,~ t i oq on u3Sf' t2 acqcired frc~ 1946 to 1948 Error in <Jd d:iticn Ne t los s

DECI .3 I ON CTA CA~F NO. 599 - 28 - Pet.i t i one r i s 1 iabl f' for 19 5 2 in L~t ,me tax in the afT1ount of P69,502 . 00 ClS determined Qre viou sly by r ~sp ondent Commi ss i one r o f In ~e rn a l Revenu e . WH ERE FO?S , the d~ ci s i o n 0f res ponde nt appealed from i s here by modified. Pe t i tioner i s, there fore, ord8r e d t o :'ay thP- amou n ts vf P4S, l77., UO an d P69 ,50 2 .00 or a tota l c:f !:114, 6 79 .00 o.s defi ci ency income t u xes for: t.h e yP-ars 19Sl rlllcl. l 9 52 rPspcclive ly, p lus thr! :_; ur: C'h-. t rg r ;tnc1 jnt.~r:c.'; l ~vhi. c h h�-tV E.' dCCTLH.:> Lt tl1ereon p u r s uant to ::ec t ion 51 (P.) of the Tex �code n.s amended. Hi t h c o~~ t su C u ezn n Ci~y , October 6 , 1 982 � ..,._,.r-1;;;.....o......"'T ' ' - r:: � c or~~ T f.. I T ~� RU ....;... U l ~J ( J.:. sscci2te J ud g~ '/,'F. CC: JCl.Jn.: .Fre :.:; i tl in . .42 0