December 29, 2006

BIR RULING [DA-745-06]

Section 34 (D); RR 2; No. 45-91

Isla Lipana & Co.

29th Floor Philamlife Tower
8767 Paseo de Roxas
1226 Makati City
Attention: Atty. George J. Lavadia
Principal, Tax Services

Gentlemen :

This refers to your letter dated February 28, 2006 requesting on behalf of your
client, PIC Philippines, Inc. (PIC), for con rmation of your opinion that inventory
devaluations on account of hog deaths are ordinary business losses under Section 34
(D) (1) (a) of the Tax Code and not casualty losses under Section 34 (D) (1) (b) of the
same Code.
It is represented that PIC is a domestic corporation engaged in the business of
reselling, trading, or dealing with farmers or hog raisers on wholesale basis including
the production of breeders through the use of biotechnology techniques and the raising
of hogs for sale. It is registered with the Bureau of Internal Revenue (BIR) under
Taxpayer Identification No. 216-292-537-300.
PIC currently maintains its hog inventory in three (3) farms located in Panabo
City, Davao del Norte; San Pablo City, Laguna; and Lopez, Quezon, respectively.
From scal years ending June 30, 2002 to 2005 (FY 2002 to 2005), PIC suffered
hog deaths of approximately 7,530. 97.41% of all hog deaths are attributable to the
deaths of piglets which are classi ed as suckling pigs, nursery piglets or nishing pigs.
From being newly-born to six months of age, these piglets have naturally low resistance
and immunity which render them highly vulnerable to disease and illness. aIAcCH

Suckling pig deaths account for almost 50% of total pig mortality. The leading
causes of deaths are biological weaknesses, cannibalism by the lactating sows,
starvation, cold weather, suffocation due to trampling. On the other hand, nursery piglet
deaths constitute twenty- ve percent (25%) of all hog deaths and are due to diarrhea,
respiratory illnesses, atropic rhinitis, stress, heart attack, overcrowding, meningitis,
pneumonia, tail biting. Lastly, nishing pigs, which comprise twenty-three percent (23%)
of all hog deaths, fall victims to heart failures caused by extreme heat, ghting, diarrhea,
poor conditioning, stress, meningitis and pneumonia.
The annual mortality rate from FYs 2002 to 2005 averages 5.46% of total pigs.
The inventory value of such deaths since FY 2002 amounts to approximately
P14,975,897.00. Consistent with the pig mortality rates, pigs up to six (6) months of
age account for a very substantial portion, i.e. at least eighty-eight percent (88%), of the
value of total hog deaths.
In reply, please be informed that Section 34 (D) of the Tax Code provides, viz:
"(D) Losses. —
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 (1) In General. — Losses actually sustained during the taxable year and
not compensated for by insurance or other forms of indemnity shall be allowed
as deductions:
(a) If incurred in trade, profession or business;
(b) Of property connected with the trade, business or profession, if
the loss arises from fires, storms, shipwreck, or other
casualties, or from robbery, theft or embezzlement.
xxx xxx xxx."
Losses under Section 34 (D) (1) (a), i.e. normally incurred in the trade, profession
or business, are considered ordinary losses while losses under Section 34 (D) (1) (b),
i.e. arising from res, storms, shipwreck, or other casualties, are considered casualty
losses. Although both losses are quali ed as allowable deductions from gross income,
their distinction lies mainly in the additional requirement for deductibility in the case of
casualty losses. The last paragraph of Section 34 prescribes the submission of a
declaration of loss to the Bureau of Internal Revenue within ninety (90) days but not
earlier than thirty (30) days from the date of discovery of the casualty giving rise to the
loss. AaSHED

In determining whether a loss is an ordinary loss or a casualty loss, the

Unnumbered BIR Ruling dated November 21, 1996 is instructive, viz:
"The issue to be resolved therefore is not whether the said expense was
supported by the required certification but whether said inventory losses were
incurred in the normal business operation of herein taxpayer."
Thus, the main issue to be resolved is whether or not the hog deaths suffered by
PIC constitute ordinary losses.
As narrated above, the annual average mortality rate of hogs in PIC is
approximately 5.46% of total inventory. The deaths are due to natural causes such as
biological weaknesses, cannibalism by the lactating sows, starvation, cold weather,
suffocation due to trampling, diarrhea, respiratory illness, atropic rhinitis, heart attack,
overcrowding, tail biting, extreme heat, ghting, poor conditioning, stress, meningitis
and pneumonia. This inherent reality in the business of hog-raising is con rmed by
industry statistics which reveal that Philippine hog farms experience hog deaths at an
annual average of 3.843% of total hog population 3.843% with the highest at 10.742%
and a lowest at 1.105%.
For this matter, Section 100 of Revenue Regulations No. 2 (Income Tax
Regulations) specifically provides, viz:
"Section 100. Losses of farmers. — Losses incurred in the operation of
farms as business enterprises are deductible from gross income. . . . . A farmer
engaged in raising and selling stock, cattle, sheep, horses, etc. is not entitled to
claim as a loss the value of animals that perished from among those animals
that were raised on the farm, except as such loss is re ected in an inventory if
used. . . . ."
Consistent with Section 34 (D) of the Tax Code and implicitly recognizing the
common and natural occurrence of mortalities in the business of raising of animals, the
foregoing provision allows those engaged in the raising and selling of animals to claim
animal deaths as operating losses as deductions from gross income. TCEaDI

However, a separate deduction for losses cannot be claimed for the value of
animals that were already accounted for or implicit in the ending inventory valuation. In
other words, losses from hog deaths accounted for through inventory devaluations
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 (adjustments) cannot be further deducted from gross income. Otherwise, the same
loss will effectively be recognized twice in the books resulting in the understatement of
gross income.
In the same unnumbered BIR Ruling cited above, it was held that ordinary losses
are considered allowable deductions under the Tax Code, viz:
"As it was actually ascertained/established that the alleged inventory losses
occurred from the normal business operation of the taxpayer . . ., we can
properly allow the deduction of this expense under Section 29(d)(2) of the Tax
Code."
In any case, the animal deaths due to the causes stated above are not considered
casualty losses. Section 5 of Revenue Regulations No. 12-77 (Re: Substantiation
requirement for losses arising from casualty, robbery, theft or embezzlement)
implementing Section 29 (now Section 34) of the Tax Code, as amended, de nes
"casualty" as the complete or partial destruction of property resulting from an
identi able event of a sudden, unexpected, or unusual nature. It denotes accident, some
sudden invasion by a hostile agency, and excludes progressive deterioration through
steadily operating cause. (BIR Ruling No. 45-91 dated March 13, 1991 )
As mentioned above, hog deaths suffered by PIC are due to natural causes which
cannot, in any way, be construed as "casualties" contemplated under Section 34 (D) (1)
(b) of the Tax Code in relation to RR 12-77 for the simple reason that such causes are
not "sudden, unexpected, or unusual" events.
Therefore, this O ce is of the opinion and hereby con rms that inventory
devaluations on account of hog deaths are considered ordinary losses under Section
34 (D) (1) (a) of the Tax Code of 1997 and not casualty losses under Section 34 (D) (1)
(b) of the same Code.
This ruling is being issued on the basis of the foregoing facts as represented.
However, if upon investigation, it will be disclosed that the facts are different, then this
ruling shall be considered as null and void.

Very truly yours,

Commissioner of Internal Revenue

By:
(SGD.) JAMES H. ROLDAN
Assistant Commissioner
Legal Service

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