Fernandez Hermanos, Inc. VS. CIR- Allowable Tax Deductions

Category: Income Taxation

That the circumstances are such that the method does not reflect the taxpayer ’ s income with reasonable accuracy and certainty and proper and just additions of personal expenses and other non-deductible expenditures were made and correct , fair and equitable credit adjustments were given by way of eliminating non- taxable items.

FACTS:

• Four cases involve two decisions of the Court of Tax Appeal s determining the taxpayer ' s income tax liability for the years 1950 to 1954 and for the year 1957. Both the taxpayer and the Commissioner of Internal Revenue, as petitioner and respondent in the cases a quo respectively , appealed from the Tax Court's decisions , insofar as their respective contentions on particular tax items were therein resolved against them. Since the issues raised are inter related, the Court resolves the four appeals in this joint decision.
• The taxpayer , Fernandez Hermanos, Inc. , is a domestic corporation organized for the principal purpose of engaging in business as an " investment company " wi th main office at Manila. Upon verification of the taxpayer's income tax returns for the period in quest ion, the Commissioner of Internal Revenue assessed against the taxpayer the sums of P13,414.00, P119,613.00, P11,698.00, P6,887.00 and P14,451.00 as alleged deficiency income taxes for the year s 1950, 1951, 1952, 1953 and 1954, respectively. Said assessments were the result of alleged discrepancies found upon the examination and verification of the taxpayer's income tax returns for the said years, summarized by the Tax Court in its decision of June 10, 1963 in CTA Case No. 787, as follows:

ISSUE: The correctness of the Tax Court's rulings with respect to the disputed items of disallowances enumerated in the Tax Court's summary reproduced

HELD:

That the circumstances are such that the method does not reflect the taxpayer’s income with reasonable accuracy and certainty and proper and just additions of personal expenses and other non-deductible expenditures were made and correct , fair and equitable credit adjustments were given by way of eliminating non-taxable items.

Proper adjustments to conform to the income tax laws. Proper adjustments for non-deductible items must be made. The following non-deductibles , as the case may be, must be
added to the increase of decrease in the net worth:

1. Personal living or family expenses
2. Premiums paid on any life insurance policy
3. Losses from sales or exchanges of property between members of the family
4. Income taxes paid
5. Other non-deductible taxes
6. Election expenses and other expense against public policy
7. Non-deductible contributions
8. Gifts to others
9. Estate inheritance and gift taxes
10. Net Capital Loss

On the other hand, non- taxable items should be deducted therefrom. These items are necessary adjustments to avoid the inclusion of what otherwise are non-taxable receipts. They are:
1. inheritance gifts and bequests received
2. non- taxable gains
3. compensation for injuries or sickness
4. proceeds of life insurance policies
5. sweepstakes
6. winnings
7. interest on government securities and increase in net worth are not taxable if they are shown not to be the result of unreported income but to be the result of the correction of errors in the taxpayer’s entries in the books relating to indebtedness

Fernandez Hermanos, Inc. VS. CIR- Allowable Tax Deductions