CTA Case No. 3098 (Decision)

l.\I,PI J8l!'� OF, ,'.;_ I 1.0 l.IPPI' � ��~ COUR'f OF TAX M,.,PE..It.t -9 m n "tm:r~., vJULIE CARPENTER, Petitioner, - versus - C.T.A. CASE NO. 3098 COMMISSIONER OF INTERNAL REVENUE, Respondento X - - - .- -----X DE C I S I 0 N Petitioner Julie Carpenter filed with this Court on May 23, 1980 a petition for review praying that respondent Commissioner of Internal Revenue desists from collecting the amount of ~7,553.76, represe n ting deficiency income tax allegedly assesse d against h r for the year 1974 and that the warrant of distraint and levy which was issued to enforce the collection thereof be cancelle d. Petitioner i s a Filip~no citizen , who , in 1974, was the advertising manager of Newsweek and as such received the total amou n t of ~55 , 572 . 0 0 as salary and commission for said year . She filed her i ncome tax return on April 15, 1975 showing therein a refund- able amount of ~1 Al4.91. Thereafter, respondent's Examiner Edgardo Morales � of the Wi th h o lding Tax Divis i on, Bu r eau o f I nter ri-al 298

DECISION - CTA CASE NO. 3 098 - 2- Re v e nue, und e r Letter of Authority No . 6063 dated August 14 1 19 7 5 , cond ucte d an inv esti gation of peti- tion e~ 's income tax return, a nd inst ea d o f are- f und ab1e s u m, resulted in a finding of a defici e ncy income tax in the ~mount of ~ 7,5 5 3.76 alleg e dly du and collectible fro m petitione r for th e ye~r 1974 {pp. 11-~2 , BIR r ec. ) ~ comp u t e d a s follo ws: Ne t Income p e r r e turn � � ���� .1?35,206.09 Unallowable deduction and additional income: Inter e st � � � � � � ~3, 1 53 . 81 Represe n t a tion �� $ 9,583.00 Cont r ibutions � � � -~_39.i.Q. 'I'ota1 disallowa nce � � � � � � � � � .1?13, 976.21 Net income per i nvestigatio n � � �� .1?49,1 85.10 Less personal exe mp tion � � � � � � � --lJ~O O �.~Q Amount subject to tax � � � � � � � .1?47 , 383.0 0 Les s amount previously assessed � � 12,609:00 Amount of tax withheld � � � � �~ De f i ci e ncy tax due � � � � ��� ~ 5 ,620.0 0 14 % mo. in t . from 3-16-~5 to a- ~ o-77 � � � 1,933 . 76 Total amount d u e & collectibe l � � � Ll.t22~ Based on the fi ndings and rec ommendation of Examine r Morales , r espondent Commiss i oner of Inte rnal Revenue sent a letter of a ssessment and d e mand date d October 7, 197 7 and reques ting petitione r to pay the a fo res aid amount . of .1?7,553. 76. Upon rece ipt thereof , petitioner, throug h coun s .1, p r otes t ed the asses sm~ nt in a letter of d ove mber 15, 197�7 asserting that ,

DECISION - CTA CASE NO. 309 8 -3 - under th. provision of Section 3 0 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 h e 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 p e titioner to " pr e sent th e p a ~rs i~~o rt o f the d e du ct ions clai me d at the Withholding Ta x Divi s ion, . Room 208, BIR Bldg., East Triangle , Diliman, Quezon City, on January 1 2, 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 Febru a ry 13, 1978, "(othe�d._ise,) �we {he} .wi l L.E.E_~ed with the collection of the s aid amou n 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 , Dec e 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 colle ction of the 300

DECISION - CTA CASE NO . 3098 - 4- deficiency i n come tax in quest ion be effected. The 1st Indorsement of Exami ne r Morale s dateJ Octobe r 29, 1979 (p. 22 , l3IH rc c .) _is quot ed be l o w: "1st Indors e me nt October 29, 1979 Respectfully r e turned to t he Ch i ef , Withholding Tax Divi s i o n , the entire docket bearing on the case of Miss Julie Carpenter, 2021 M. H. d e l Pilar St., Manila, with the info rma- tion that a re'nvestigation canno.t be ~ s u ed a .s sub ject taxpayer _2J_jler or represen tative 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 MORA LES Examiner" This l st indorsement was followed by a 2nd indorsement d ated Janu ary 14, 1980 of Victor De o ferio , Jr., Revenue Serv ice Chief, Bureau of I nte rnal Revenue, re ite rating 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

DECISION - CTA CASE NO. 3098 - 5- whether or not peti tioner Julie Ca r penter is entitled to the dedu~tions claimed by h e 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 v e nu e , in his Answe r dated September 5, 1980 (p . 38, CTA rec.) .to th e 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 , n eg 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. Pe tit 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 d uly 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 upo n her filing a bond 30 ~2

DECISION - CTA CASE NO. 309 8 -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 ent e 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 gros s �.income? Since the deduction of expenses from gross income is a mattet of legislative gr ace , only those expenses which are expressly provided by law are to be allowe d . Ge n erally , howeve r, before an expense is a llowed as deduction from gross income, i~ mus t satisfy t h ree requirements : (1) The e x pense mu~t be both ord inary "and necess a ry; 30J

DECISION - CTA CASE NO. 3 09 8 - 7- (2) The expen se 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 Int ernal 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 expe n se to b e ordinary , mu s t be reasonab l e in amount. (19 55 CCI-I Fed . Tax Course , par. 40 3 ) X X X X X An e xpense is con s ider e d n ecess ary if it is appropriate and helpful to t he taxpaye r 's bu s iness or occupa tion . When an expense is c alled necessary, it is merely dis t i n g ui shed from perso~a l ex- penditure o r f rom one not per t inent to the busi n ess of the taxpayer. ( 1 955 CCH, Fed . Tax Cours e , par . 4 0 3) �." It is obvious that under Section 30 of t he National Interna l Re v 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 reaso nably connected with the business of the t ax- paye r. If t hese expenses were incurred for the e n te r ta inme nt of custome r s , pro spe c tive c ustome rs

DECISION - CTA CASE NO. 3098 - 8- and suppliers of goods and services, the same are prope rly deauctible if it can 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 e ceipts of expenses a s howing as to wh o was entertained by petit ion er by the se expenses and for wh at ' occasion th ese e xpe n ses 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 instanc e , 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 conn e cte d in the realization thereof. (John Hick s vs . Cell. -d . / of Int. Rev . , CTA Cas e No. 58 , Oct . 19 , 19 55. ) The entertainment expenses claimed as deduction in the sum of P9 ,58 3. 00 is , ther efore , disal l owed. - - _ - B. Contributi.ons in the a mou nt of Pl,.23 9~.40 . To be allowed as deduction from gros s income , these expenses must me et the f oll o wing prer e quisite s : 306

DECISION - CTA CASE NO. 3098 - 9- 1. The se must have been made to any of the organi za tion ment ion e d un~er Sect ion 30(h) o ~ th e 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 con n e cti on , Commi ss i oner Jose Ara~as , in his book, The National Internal Reve nue Cod e of 1977 , at page 289 , citing Section 116 of Re v e nue Regu lat ions No. 2, has this to say : "In connection with the claim for deduction of charitable c on tribu tions or gifts , there shall be stated in the returns of income the n ame and add r ess of each organization to which a gift was ma d e and th e appropriate date a nd a moun t of the gift in each case. Such contribution or gifts will only 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 Reve n ue Code as ame nde d , are d e du c 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

DECISION - CTA CASE NO. 3098 - 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 cent um 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 sa ti sf i ed : l. There is an indebtedness ; 2 . The indebtedness is that of the t axpaye r; 3. The interest was paid or accrued during the taxable year ; and 4. Payment of interest is stipulated in writin g. (Per Rev. Re g . No . 7 8 , cited o n page 1 25, CTA rec . ') The prerequisi t es above stated are s imp li 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 pre se nted for marki n g her doc umentary ev i de nce consi st ing of Exhibits A to C-4- 6 , coun se 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 amou nt o f P3 , 153. 8l, the admission of which was deferred until af ter petitioner shall ha ve p rese nted the "Contr act of S ale 11 � Ha ve the contract of s'ale bee n pr esen t ed , 30 .J

DECISION - CTA CASE NO . 3 0 98 - 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 o wa b l e interest deduction . WliEHJ.::i"lJiU:: , f inc! ing tile dec i:..; ion oi r cs pondcn t Commissioner of I n ternal 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 . SO ORDERED . Quezon Ci t y , Me t ro Munila , Nov/pber 4, 1 9 83 . / CO~ NSTANT~~~ R~UIN As soc ia te :Judge WE CONCUR: ca~ AMANT~ E ~ / f )~ .4a ) Presiding Judge 30;J