TAX DIGESTED CASES

MARCH 23, 2017

Tan vs. Del Rosario

G.R. No. 109289, October 3, 1994

Facts: Republic Act No 17946 limited the allowable deductions from gross income of single
proprietorship and professionals in the computation of their taxable income. It was argued
that this violated the requirement of uniformity in taxation and due process because single
proprietorships and professionals were taxed differently from corporations and partnerships.

Issue: Whether or not deductions should be uniform for all?

Decision: Petition dismissed. Uniformity does not prohibit classification so long as the
requirements for a valid classification under the equal protection clause are complied with.
Shifting the taxation of individuals to the scheduled system which makes the income tax
depend on the kind of taxable income and maintaining for corporations the global treatment
which treat in common all kinds if taxable income of the taxpayer is not arbitrary.

Esso Standard Eastern vs. Commissioner

GR 28508-9, 7 July 1989
First Division, Cruz (J): 4 concur

Facts: ESSO deducted from its gross income for 1959, as part of its ordinary and necessary
business expenses, the amount it had spent for drilling and exploration of its petroleum
conscessions. The Commissioner disallowed the claim on the ground that the expenses
should be capitalized and might be written off as a loss only when a dry hole should result.
Hence, ESSO filed an amended return where it asked for the refund of P323,270 by reason of
its abandonment, as dry holes, of several of its oil wells. It also claimed as ordinary and
necessary expenses in the same return amount representing margin fees it had paid to the
Central Bank on its profit remittances to its New York Office.

Issue: Whether the margin fees may be considered ordinary and necessary expenses when
paid.

Held: For an item to be deductible as a business expense, the expense must ebe 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 taxpayrer must substantially
prove by evidence or records teh deductions claimed under law, otherwise, the same will be
disallowed. There has been no attempt to define ordinary and necessary with precision.
However, as guiding principle in the proper adjudication of conflicting claims, an expenses is
considered necessary where the expenditure is appropriate and helpdul in the development
of the taxpayers 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 taxpayers business; the
expenditure, to be an allowable deduction as a business expense, must be determined from
the nature of the expenditure itself, and on the extent and permanency 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 presumed 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 a matter of legislative grace and do not turn on mere equitable
considerations.