CIR vs.

Isabela Cultural Corporation

Facts: Isabela Cultural Corporation (ICC), a domestic corporation received an assessment notice for
deficiency income tax and expanded withholding tax from BIR. It arose from the disallowance of ICC’s
claimed expense for professional and security services paid by ICC; as well as the alleged understatement
of interest income on the three promissory notes due from Realty Investment Inc. The deficiency
expanded withholding tax was allegedly due to the failure of ICC to withhold 1% e-withholding tax on its
claimed deduction for security services.

ICC sought a reconsideration of the assessments. Having received a final notice of assessment, it brought
the case to CTA, which held that it is unappealable, since the final notice is not a decision. CTA’s ruling
was reversed by CA, which was sustained by SC, and case was remanded to CTA. CTA rendered a
decision in favor of ICC. It ruled that the deductions for professional and security services were properly
claimed, it said that even if services were rendered in 1984 or 1985, the amount is not yet determined at
that time. Hence it is a proper deduction in 1986.

Issue: Whether or not the expenses for professional and security services are deductible.

Held: No. One of the requisites for the deductibility of ordinary and necessary expenses is that it must
have been paid or incurred during the taxable year. This requisite is dependent on the method of accounting
of the taxpayer. In the case at bar, ICC is using theaccrual method of accounting. Hence, under this
method, an expense is recognized when it is incurred. Under a Revenue Audit Memorandum, when the
method of accounting is accrual, expenses not being claimed as deductions by a taxpayer in the current
year when they are incurred cannot be claimed in the succeeding year.

The accrual of income and expense is permitted when the all-events test has been met. This test requires:
1) fixing of a right to income or liability to pay; and
2) the availability of the reasonable accurate determination of such income or liability.

The test does not demand that the amount of income or liability be known absolutely, only that a taxpayer
has at its disposal the information necessary to compute the amount with reasonable accuracy.

From the nature of the claimed deductions and the span of time during which the firm was retained, ICC
can be expected to have reasonably known the retainer fees charged by the firm. They cannot give as an
excuse the delayed billing, since it could have inquired into the amount of their obligation and reasonably
determine the amount.
CIR vs Carlos Palanca

Facts: Don Carlos Palanca, Sr. donated in favor of his son, the petitioner, herein shares of stock in La
Tondeña, Inc. amounting to 12,500 shares. For failure to file a return on the donation within the statutory
period, the petitioner was assessed the sums of P97,691.23, P24,442.81 and P47,868.70 as gift tax, 25%
surcharge and interest, respectively. Don Carlos Palanca filed with the Bureau of Internal Revenue his
income tax return for the calendar year 1955, claiming, among others, a deduction for interest. The latter
filed an amended return for the calendar year 1955, claiming therein an additional deduction in the amount
of P47,868.70 representing interest paid on the donee's gift tax The claim for deduction was based on the
provisions of Section 30(b) (1) of the Tax Code, which authorizes the deduction from gross income of
interest paid within the taxable year on indebtedness.

He filed a claim for the refund of the overpaid taxes but the CIR refused on the ground that that a tax is not
an indebtedness

Issue: WON there is a difference between ‘’indebtedness’’ and ‘’interest’’ insofar as deduction is
concerned.

Held: It should be render in favor of the donor (Carlos Palanca). While "taxes" and "debts" are
distinguishable legal concepts, in certain cases as in the suit at bar, on account of their nature, the
distinction becomes inconsequential to determine the deductible interest. The term "debt" is properly used
in a comprehensive sense as embracing not merely money due by contract, but whatever one is bound to
render to another, either for contract or the requirements of the law. Under the law, for interest to be
deductible, it must be shown that there be an indebtedness, that there should be interest upon it, and that
what is claimed as an interest deduction should have been paid or accrued within the year. It is here
conceded that the interest paid by respondent was in consequence of the late payment of her donor's tax,
and the same was paid within the year it is sought to be deducted.

Section 30(b) (1) of the Tax Code, the pertinent part of which reads:

Sec. 30. Deductions from gross income — In computing net income there shall be allowed as
deductions —

xxx xxx xxx

"Interest:

(1) In general. — The amount of interest paid within the taxable year on indebtedness, except on
indebtedness incurred or continued to purchase or carry obligations the interest upon which is
exempt from taxation as income under this Title.

In our jurisdiction, the rule is settled that although taxes already due have not, strictly speaking, the same
concept as debts, they are, however obligations that may be considered as such. While the distinction
between "taxes" and "debts" was recognized in this jurisdiction, the variance in their legal conception does
not extend to the interests paid on them, at least insofar as Section 30 (b) (1) of the National Internal
Revenue Code is concerned.

TN: Insofar as deductible interest is concerned the law does not make any distinction whether such
interest paid is on the account of a contractual debt or tax.