Basic Taxation Law: Allowable Deductions From Gross Income
Allowable Deductions From Gross Income
A. Basic Principles
The taxpayer must point to some specific provisions of the statute authorizing the deduction; and
He must be able to prove that he is entitled to the deduction authorized or allowed.
If a taxpayer fails to deduct certain expenses for the taxable year, he cannot deduct them from the income of the next or any succeeding year. (Section 76, Rev. Regs. No. 2)
Not allowed to claim deductions (Tax base: Gross Income):
NRA — NETB
NRFC
B. Cohan Principle Rule
If there is showing that expenses have been incurred but the exact amount thereof cannot be ascertained due to the absence of documentary evidence, it is the duty of the BIR to make an estimate of deduction that may be allowed in computing the taxpayer's taxable income bearing heavily against the taxpayer whose inexactitude is of his own making.
A disallowance of 50% of the taxpayer's claimed deduction is valid.
C. Statutory Test Principle
An expense shall be allowed as a deduction from the gross income under the NIRC as long as the expense is: OCT
both ordinary and necessary;
incurred in carrying a business or trade; and
paid or incurred within the taxable year.
Deductions v. Exclusions
Deductions
amounts deducted from gross income arrive at net income
Exclusions
amounts/items to exempt from tax by virtue of the Tax Code or special law
Deductions v. Personal Exemptions
Deductions
business expenses represent cost of doing business
both individual and corporate taxpayers may claim
Personal Exemptions
personal expenses cover personal, living or family expenses
only individual is entitled
D. Kinds of Allowable Deductions
Itemized deductions BITLB-DDCRP
Business expenses
Interest
Taxes
Losses
Bad debts
Depreciation
Depletion
Charitable and other contributions
Research and development expenditure
Pension trust contribution
Optional Standard Deduction (OSD)
E. Kinds of Itemized Deductions
1. Business expenses
Requisites for deductibility: OTPRT-NP
The expense must be ordinary and necessary.
The expenses must be incurred in trade or business carried on by the taxpayer.
The expenses must be substantiated by proof.
The expenses must be reasonable.
Paid or incurred during the taxable year.
Expenses must not be against public policy, public moral or law.
If subject to withholding tax, proof of payment to BIR must be shown.
The expense must be ordinary and necessary.
There is no hard and fast rule on the matter.
It depends upon particular facts such as, the type of business (custom), intention of the taxpayer, time, place and prevailing circumstances.
The Supreme Court has never attempted to define with precision the terms ordinary and necessary.
However, Section 34(A)[1a] of the NIRC, as amended by R.A. No. 8424, provides that expenses are considered "ordinary and necessary" if they are directly attributable to:
development, management, operation, and or conduct of the trade or business of the taxpayer, or
in the exercise of the taxpayer's profession.
Guiding principles:
✅ Ordinary, when it is normal (common or usual) in relation to the business of the taxpayer and the surrounding circumstances.
✅ Need not be recurring, e.g., lawyer's fee to prosecute Infringement suit.
It is called ordinary in most cases to distinguish it from a capital expenditure.
❌ Recapitalization and reorganization expenses are capital expenditure as well as cost of obtaining stock subscription and promotion expenses.
Necessary, where it is appropriate and helpful in the development of the taxpayer's business.
✅ It is intended to realize a profit or to minimize a loss.
❌ Ransom money paid to secure the return of an individual is not deductible as it has nothing to do with profit-making.
❌ Payment of the debts of bankrupt company to which the taxpayer was an officer to establish his credit is, according to U.S. Supreme Court is not ordinary.
The expenses must be incurred in trade or business carried on by the taxpayer.
This means that the same is not incurred in the trade or business of another.
❌ Stockholder's expense in connection with the acquisition of additional stock in order to sell it to certain company executives in furtherance of a management incentive plan of the company — not incurred in connection with the trade or business of the company.
✅ Fees paid by the taxpayer to recover its lost assets occasioned by the war and to rehabilitate its business — business connected expenses.
❌ Mere holding of investments cannot be considered engaging in business so that the expenses in managing the investments are not considered ordinary and necessary in the pursuit of a trade or business.
❌Margin fees of P340,822.04 paid to the Central Bank by ESSO, a foreign corporation doing business in the Philippines, on its profit remittances to its New York head office are not ordinary and necessary expenses.
Reason: The fees were paid not in the production of income, but in the disposition of said income after it had already been earned.
Hence, it is an expense properly attributable to the head office and not in the carrying on of its trade or business in the Philippines.
The expenses must be substantiated by proof.
It is incumbent upon the taxpayer to establish proximate relation (logical link or nexus) between the expense and the taxpayer's business.
✅ Receipts are the best proof.
Burden of proof lies upon the taxpayer.
In certain cases, this rule is relaxed.
✅ Even if no records/receipts are available, the oral testimony of a CPA, if not contradicted by the government is sufficient.
The expenses must be reasonable
✅ Promotional expenses incurred or paid by Phil. Sugar Estate Development Co. to Algue Inc. amounting to P125,000.00 was reasonable in the light of the efforts exerted in inducing investors and prominent businessman to venture in an experimental enterprise (Vegetable Oil Investment Corp.), and to invest in a new business involving millions of pesos.
Paid or incurred during the taxable year
Cash basis method
deducts expenses in the year in which they are paid.
Accrual basis method
recognizes expenses in the year they accrue.
The propriety of an accrual must be judged by the facts that a taxpayer knew, or could reasonably be expected to have known, at the closing of its books for the taxable year.
Accrual method of accounting presents largely a question of fact; such that the taxpayer bears the burden of proof of establishing the accrual of an item of deduction.
All-events test
requires that the liability be fixed, and the amount of such liability be determined with reasonable accuracy.
The amount of liability does not have to be determined exactly; it must be determined with reasonable accuracy (something less than an exact or complete accurate amount).
CIR v. lsabela Cultural Corporation [515 SCRA 566-567]:
Applying the all-events test, the Supreme Court ruled that the professional fees of SGV & Co., for auditing the financial statements of ICC for the year 1985 cannot be validly claimed as expense deductions in 1986.
Reason: ICC failed to present evidence showing that even with only reasonable accuracy, it cannot determine the professional fees which said company could charge for its services.
Expenses must not be against public policy, public moral or law.
❌ Fines and penalties — against public policy.
✅ Attorney's fee incurred in defending civil action based on illegal act — deductible provided it is business connected.
✅ Even though the defense is unsuccessful — as long as it is business connected — deductible.
❌ Entertainment expenses incurred by officer of a corporation to entertain certain government officials to discuss transactions/dealings at Manila Hotel — against public policy.
❌ The purchase price of political influence to obtain or hold public contracts; dollar allocations from the Central Bank; import control licenses; payments in excess of the maximum amount authorized by law — against public policy.
Reason: To permit a violator to gain a tax advantage through deductions would in effect lessen the degree of punishment intended, or would frustrate the purpose and effectiveness of the public policy that has been violated.
❌ Bribe to obtain protection from arrest or prosecution — against public policy.
If subject to withholding tax, proof of payment to BIR must be shown
Professional expenses — 10%
Rent expense — 10%
Kinds of Business Expenses: PTR-ARMRL
Compensation for personal services
Travelling expenses
Representation and Entertainment Expenses
Advertising and Promotional Expenses
Rent Expense
Cost of material and supplies
Repairs
One-half (1/2) of the value of labor expenses incurred for skills development of enterprise-based trainees, provided that such deduction shall not exceed ten percent (10%) of direct labor wage
Compensation for personal services
Requisites:
Personal services actually rendered;
Compensation is for such services rendered;
Reasonable
What are included in compensation for services which are allowed as deductions from gross income?
wages, salaries, etc.
bonuses in good faith;
commissions, professional fees, vacation-leave pay, retirement pay;
management expenses;
premiums and compensation for injuries if not compensated for by insurance or otherwise;
contribution to pension trust created for the benefit of the employees, including contribution under SSS Act;
other forms of compensation for services actually rendered.
Factors/tests which determine whether compensation paid for services rendered is deductible or not
❌ Any amount paid in the form of compensation which does not partake of the purchase price of services is not deductible.
Example:
Ostensible salary paid by a corporation may be treated as distribution of dividend upon stock.
Ostensible Salary vs. Dividend:
"Ostensible" means something that appears to be true, but might not be.
If a company, especially one with few shareholders, pays high salaries to those same shareholders, it might be disguising a dividend payout as salary. Dividends are generally not deductible for the company, so the BIR (tax authority) might disallow this deduction.
This is likely to occur in the case of a corporation having few stockholders, practically all of whom drew salaries.
✅ Reasonable amount — deductible from gross income;
❌ Excess over reasonable amount — not deductible.
Example:
An ostensible salary may be in part payment for property — Partnership sells out to a corporation; the former partners agreeing to continue in the service of the corporation. The salaries are not merely for services but payment for the transfer of their business.
The form or method of fixing compensation is not decisive as to deductibility.
Contingent compensation may be deductible as long as it is not influenced by any consideration other than securing fair and advantageous terms.
✅ Bonuses are deductible under the following conditions: GRN
Paid in good faith as additional compensation for services rendered;
Reasonable amount. To hold otherwise would open the gate to rampant tax evasion
Not to exceed reasonable compensation when added to stipulated salaries.
Suggested tests: (Consider the date when the contract for services was made, not at the date when the contract is questioned)
good faith;
character of business;
salary policy of the corporation;
type and extent of services;
employee's qualification and contribution;
general economic conditions.
❌ Bonuses granted to corporate officers for the successful sale of a piece of land effected through broker — no services rendered — not deductible as reasonable and necessary expenses.
It is immaterial whether bonuses are paid in cash or in kind or partly in cash and partly in kind.
Other forms of compensation:
Housing and meals;
Courtesy discounts;
Entertainment and gifts to company officers during Christmas and major anniversary, sports tournament and company picnics;
Legitimate expenses (salaries and miscellaneous expenses) of an illegitimate business are deductible based on the theory that the income tax is not a tax on gross income even if such income is earned from an illegal business.
Travelling expenses
Include:
✅ transportation expenses and
✅ meals and
✅ lodging.
Requisites for deductibility: ACR
Paid or incurred while "away from home."
✅ Transportation expenses from main office to branch, from branch office to main office — deductible.
❌ Transportation expenses from office to home; home to office — not deductible.
✅ If a company car is utilized both for business and personal use — proportion to the use.
Paid or incurred in the conduct of trade or business.
Reasonable and necessary expenses.
Representation and Entertainment Expenses (2017 Bar)
Requisites for deductibility: RTTNR
Subject to the rule of substantiation — receipt or adequate records, amount of expense, date and place of expense, purpose of expense and professional or business relationship of expense;
Paid or incurred in the pursuit of trade or business;
Paid or incurred in the taxable year;
Not contrary to law, morals and public policy;
Reasonable.
✅ Dues paid to social, athletic, or sporting club or organization per officer; to professional or business organization (Lions, Kiwanis) — deductible.
❌ Purchase of proprietary shares and playing rights — not deductible.
Advertising and Promotional Expenses
Must be substantiated.
All payments for the purchase of promotional giveaways, contest prizes or similar material must be properly receipted.
All payments for services such as radio and TV time, print ads, advertising expenses must be subjected to withholding tax.
Commissioner of Internal Revenue v. General Foods [Phils.], Inc., 401 SCRA 545:
There is yet to be a clear-cut criteria or fixed test for determining the reasonableness of an advertising expense.
There being no hard and fast rule on the matter, the right to a deduction depends on a number of factors such as but not limited to:
the type and size of business in which the taxpayer is engaged;
the volume and amount of its net earnings;
the nature of the expenditure itself;
the intention of the taxpayer and
the general economic conditions.
It is the interplay of these, among other factors and properly weighed, that will yield a proper evaluation.
Advertising is generally of two kinds:
advertising to stimulate the current sale of merchandise or use of services; and
advertising designed to stimulate the future sale of merchandise or use of services.
The second type involves expenditures incurred, in whole or in part, to create or maintain some form of goodwill for the taxpayer's trade or business or for the industry or profession of which the taxpayer is a member.
✅ If the expenditures are for the advertising of the first kind, then, except as to the question of the reasonableness of the amount, there is no doubt such expenditures are deductible as business expenses.
❌ If, however, the expenditures are for advertising of the second kind, then normally they should be spread out over a reasonable period of time.
The protection of brand franchise is analogous to the maintenance of goodwill or title to one's property.
This is a capital expenditure which should be spread out over a reasonable period of time.
Corporate taxpayer's venture to protect its brand franchise was tantamount to efforts to establish a reputation.
❌ Expenses incurred or paid to promote sale of capital stock for acquisition of additional capital is not deductible from taxable income.
❌ Efforts to establish reputation are akin to acquisition of capital assets and, therefore, expenses related thereto are not business expenses but capital expenditures.
Rent Expense
Business property — at least P500.00 — 5%.
Non-business/residential property — at least P10,000.00 — 5%.
✅ American tax jurisprudence allows seller-lessee in a sale-leaseback transaction to claim rental payments as deduction from gross income.
Cost of material and supplies
Deductible only to the amount actually consumed or used in operation.
Methods utilized to determine materials used:
Actual consumption method (inventory method);
Direct purchase method.
✅ Taxpayer purchases materials but has no record of consumption — deductible provided the net income is clearly reflected by this method.
Repairs
Rules on deductibility
Incidental or ordinary repairs
keeps the asset in its ordinary working condition
does not add material value to the property or prolong its life as distinguished from extraordinary repairs.
✅ Expense for the maintenance and repair of fishponds — deductible — it keeps the fishponds in an ordinary efficient operating condition.
✅ Repairs on the second floor of plant to strengthen it and avoid danger of collapse — deductible
Extraordinary repairs
not deductible
they are capital expenditures.
❌ Expenses necessitated by radical changes in design made during construction are not deductible — part of the cost of the project.
❌ Expenses of repairs to walls and roof of a building to prevent leakage — deductible.
❌ Cost of demolishing a building and erecting a new one is a capital expenditure.
Organization costs are amortized over the life of the corporation.
One-half (1/2) of the value of labor expenses incurred for skills development of enterprise-based trainees, provided that such deduction shall not exceed ten percent (10%) of direct labor wage (R.A. 11534)
Private or proprietary educational institution may, at its option, elect either:
To deduct expenditure otherwise considered as capital outlets of depreciable assets incurred during the taxable year for the expansion of school facilities, or
Deduct allowance for depreciation therefrom.
Direct Labor Wage:
The total salaries and wages paid to employees directly involved in producing the company's goods or services.
Example:
In a factory, assembly line workers would be considered direct labor.
Illustration:
A company spends PHP 15,000 on a training program.
Their total direct labor wage for the year is PHP 200,000.
Calculation of Deduction:
Maximum allowed deduction = 10% of direct labor wage
Maximum allowed deduction = PHP 200,000 x 10%
Maximum allowed deduction = PHP 20,000
Since the company's training expense (PHP 15,000) is less than the maximum deduction (PHP 20,000), they can deduct the full amount (PHP 15,000) from their taxable income.
2. Interest expenses
Definition
amount which one has contracted to pay for the use of borrowed money or amount of compensation paid for the use of money or forbearance from such use.
Requisites for deductibility: ITTS
There must be an indebtedness;
Incurred in connection with taxpayer's trade or business;
Indebtedness must be that of the taxpayer;
The interest must have been stipulated in writing in consonance with Article 1956, New Civil Code which provides that no interest shall be due unless it has been expressly stipulated in writing.
Paid or accrued within the taxable year.
There must be an indebtedness.
❌ No indebtedness — No deduction;
Indebtedness
unconditional and legally enforceable obligation for payment of a sum certain in money;
Embraces:
✅ contractual debts
✅ interest accruing as a result of delinquency for payment of the tax.
However, the following are excluded:
❌ civil penalties
❌ criminal penalties
Distinction between taxes and debts are, on account of their nature and in certain cases, inconsequential.
Correspondingly:
✅ Interest on delinquent tax liabilities is deductible
✅ Interest paid for late payment of donor's tax is deductible
What are included in the term "indebtedness" interest of which is deductible?
✅ Gifts when proven to be bona fide loans
✅ Taxes
✅ Obligations of Joint obliger
✅ Discount on notes issued to bank for loan
Incurred in connection with taxpayer's trade or business
Indebtedness must be that of the taxpayer:
✅ Corporation was allowed interest deduction for payments made on loans obtained in its corporate capacity, using corporate assets as security, through borrowed funds were subsequently loaned to a stockholder.
As long as the corporation is legally responsible for the debt and is making the interest payments, it can deduct interest payments. T
✅ Interest on income tax deficiency on property after transfer to transferee.
As long as the transferee is liable for the interest on this deficiency, they can deduct the interest, as the indebtedness is considered theirs.
❌ Interest on mortgage by legal or equitable owner not directly liable upon indebtedness.
Even though the owner might be paying the interest, the indebtedness is not technically theirs because they are not directly liable for it.
Only the party responsible for the debt can deduct the interest.
The interest must have been stipulated in writing in consonance with Article 1956, New Civil Code which provides that no interest shall be due unless it has been expressly stipulated in writing.
Paid or accrued within the taxable year.
Cash basis
deductible in the year it is actually paid.
Accrual basis
deductible in the year it is accrued even if not actually paid.
Deductible Interest expenses TSDM
Interest on taxes.
Reason: Taxes for this purpose are indebtedness.
❌ Fines, penalties and surcharges on taxes are not deductible.
Interest paid by corporation on scrip dividends.
When a company lacks sufficient cash to pay dividends or wants to invest available cash for business growth, capital expenditure, or other purposes, it may issue scrip dividends.
Instead of cash, shareholders receive certificates (promissory notes) that can be redeemed for shares or future dividends.
Interest on deposits paid by authorized bank of the Central Bank.
Interest paid by legal or equitable owner on mortgage of real property.
✅ American tax jurisprudence allows buyer-lessor in a sale-leaseback transaction to claim interest on loan as deduction from gross income.
Some non-deductible interest expenses PUCN-FPR
Interest on preferred stock which is considered interest on capital by virtue of RMC 17-71 dated July 12, 1971.
Interest on undrawn salaries and bonuses.
Interest on capital for cost keeping.
Reason: No indebtedness.
Interest paid where parties provide no stipulation to pay interest in writing.
Interest on indebtedness if incurred to finance petroleum exploration.
Interest on indebtedness paid in advance through discount or otherwise. (cash basis)
✅ Deductible in the year the indebtedness was paid, not when interest was paid in advance.
Interest between related taxpayers. F-IC-GFB
Members of a family
brothers and sisters (full or half)
spouse
ancestors and
lineal descendants.
Individual and corporate
individual owns directly or indirectly more than 50% of the outstanding stock.
Between corporations
more than 50% of the outstanding stock both owned directly or indirectly by the same individual.
Granter and fiduciary (trustee) of any trust.
Fiduciary and another fiduciary
the same granter.
Fiduciary and beneficiary or such trust.
Theoretical interest
❌ is not deductible as it is merely computed or calculated.
It does not arise from interest bearing obligation.
Optional treatment of interest expense on capital expenditure.
At the option of the taxpayer, interest expense on a capital expenditure incurred to acquire property used in trade, business or exercise of a profession may be allowed as a:
✅ deduction in full in the year when incurred, the provisions of Section 36(A)[2] and [3] of the Tax Code of 1997 to the contrary notwithstanding; or
✅ may be treated as a capital expenditure for which the taxpayer may claim only as a deduction the periodic amortization of such expenditure.
Arbitrage rule on deductible interest
The percentage by which the taxpayer's otherwise allowable deduction for interest expense shall be reduced by twenty percent (20%) of the interest income subjected to final tax effective April 11, 2021.
3. Taxes
Nature and Scope
All taxes, whether national or local, paid or accrued, within the taxable year in connection with the taxpayer's trade or business, except: P-IWE-ED-S-C
❌ Philippine income tax;
❌ Income, war profit, and excess profit taxes imposed by the authority of any foreign country provided the taxpayer chooses to take a tax credit.
✅ If a taxpayer is qualified to take a tax credit for income, war profits and excess profits taxes paid or accrued to a foreign country such taxes, when not taken as tax credit, may be claimed as deductions from gross income;
❌ Estate and donor's tax;
❌ Special assessment tax;
❌ Taxes paid for commodity not connected with the taxpayer's business:
No deductions are allowed for amounts representing:
❌ Interest;
❌ surcharges; and
❌ fines or penalties incident to delinquency
❌ Postage is not a tax.
❌ Automobile registration fees are not considered taxes.
✅ Under Section 4(a), R.A. No. 9257 (Expanded Senior Citizens Act), the twenty percent (20%) discount granted to senior citizens shall be allowed as tax deduction from gross income for the same taxable year that the discount is granted.
Requisites for Deductibility: TBP
Paid or incurred within the taxable year;
Paid or incurred in connection with taxpayer's business;
Deductible only by the person upon whom the tax is imposed by law.
Exceptions:
✅ Taxes of shareholder upon his interest as such and paid by the corporation without reimbursement from him can be claimed by the corporation as deduction.
❌ A corporation paying the tax for the holder of its bond or other obligations containing a tax-free covenant clause cannot claim deduction for such taxes paid by it pursuant to such covenant.
When may deduction for taxes be claimed?
Year paid or incurred in general.
However, in the case of contingent tax liability, the obligation to deduct arises only when the liability is finally determined.
Tax Credit
amount allowed by law to reduce the Philippine income tax due on: AWEP
account of income,
war-profit tax,
excess profit tax,
paid or accrued to a foreign country.
✅ Only domestic corporations are entitled to avail of the tax credit.
Reason/Purpose:
To lessen the harshness of taxation in cases where an income is subject to both foreign tax and Philippine income tax.
The taxpayer has the option either:
to claim foreign income taxes paid as deduction from gross income or
tax credit against the Philippine income tax.
If claimed as tax credit, it is no longer deductible from gross income.
If claimed as tax credit, the allowable tax credit is subject to the following limitations:
The amount of the credit with respect to the tax paid or incurred to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources within such country bears to his entire taxable income for the same taxable year; and
The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer 's taxable income from sources without the Philippines bears to his entire taxable income for the same taxable year.
Example:
A owe PHP 10,000 in Philippine income tax.
A paid PHP 4,000 in income taxes to a foreign country.
If 60% of A’s income comes from the Philippines, the maximum foreign tax credit A can claim is PHP 4,000 (foreign tax) x (60% Philippine income) = PHP 2,400.
Tax Deduction v. Tax Credit
Tax Deduction
Deductible from gross income
Sources: Deductible taxes such as:
business tax
excise tax
percentage tax and
other business connected taxes
Tax Credit
Deductible from Phil. income tax
Sources:
Foreign Income war-profits and
excess profit tax
Tax deduction reduces taxable income;
Tax credit reduces the taxpayer's liability
Administrative conditions for allowance of credit for foreign taxes:
The taxpayer must signify in his income tax return his desire to claim tax credit;
The return must be accompanied by the appropriate form prescribed by the BIR Commissioner, signed and sworn, carefully filled up and containing the information required.
If credit is sought for taxes already paid, receipt for payment must be attached.
4. Losses
Definition
The term implies an unintentional parting with something of value.
It is used in the income tax law in a very broad sense to comprehend all losses which are not general or natural to the ordinary course of business and are not covered under some other heading such as bad debts, inventory losses, depreciation, etc.
Treatment of losses depends upon:
Class of taxpayers;
Nature of losses.
Kinds of losses: OTCC-SOA
Ordinary losses
those incurred in trade or business.
Those incurred in any transaction entered for profit though not connected with the trade, or business.
Casualty losses
those incurred by property connected with the trade or business, if the loss arises from:
fire,
storm,
shipwreck, or
other casualties or from
robbery,
theft or
embezzlement
Capital losses
deductible only to the extent of capital gains:
✅ Losses from sale or exchange of capital assets;
✅ Losses resulting from securities becoming worthless which are capital assets.
Two important requisites:
It becomes worthless upon the happening of an identifiable event which evidences destruction of value.
However, when the decline in value is due to a fluctuation in the market price or to other similar causes the amount of loss is not deductible until it is disposed of.
Must be claimed in the year the worthlessness occurs.
The law requires that it must be considered as a loss from the sale or exchange of capital assets on the last day of the taxable year in which It occurred.
Losses from short sale of property.
Losses due to failure to exercise privilege or option to buy or sell property.
Abandonment losses (oil exploration).
✅ All accumulated exploration and development expenditures pertaining to partially or fully abandoned petroleum operations shall be allowed as deduction.
In all cases, notices of abandonment shall be filed with the BIR.
✅ Subsequently abandoned producing well — the unamortized costs and undepreciated costs of equipment directly used shall be allowed as deduction.
❌ If the well is re-entered and production resumed, or if such equipment or facility is restored into service — the costs shall be included as part of the gross income and shall be amortized or depreciated, as the case may be.
The company gets a tax break for the wasted investment in the abandoned well and its equipment. However, if a well is revived, the previously deducted costs become taxable income again, and the company can resume depreciation or amortization.
Special Kinds of Losses:
Wagering losses
deductible only to the extent of gain or winning.
Illustrations:
Wins > Losses
Gambling winning — 1,000.00
Gambling loss — 500.00
Deductible loss — 500.00
Wins < Losses
Gambling winning — 500.00
Gambling loss — 1,000.00
Deductible loss — 500.00
No Wins
Gambling winning — 0
Gambling loss — 1,000.00
Deductible loss — 0
Humprey v. Com., 35 AFTR, 1572; Fran cis M. Cronon, 33 BTA 668:
Thus, a taxpayer whose gambling transactions resulted in losses of P500 and gains of P400 in another gambling game, would be obliged to report the gain of P400 in order to obtain a deduction of the loss for P500.
Gambling winning — 400.00
Gambling loss — 500.00
Deductible loss — 400.00
❌ The excess of the loss over the gain is not deductible.
✅ On the other hand, the excess of the gain over loss is taxable.
✅ The cost of the unsold tickets of a sweepstakes agent constitutes his investment in a wagering transaction. Losses he may incur therefrom can be allowed as deduction only up to the extent of the gains realized.
But, RA. No. 1169 exempts sweepstake winnings from taxation.
❌ It follows that no losses incurred therefrom can be allowed as deductions from gross income.
❌ Losses from an Illegal transaction are not deductible and they cannot be offset against gains from a legal transaction.
Losses due to voluntary removal of building incident to renewal or replacement
❌ Tax Code does not provide for the deductibility of losses arising from voluntary removal of old building, or scrapping of machinery or equipment.
✅ Rev. Regs. No. 2, Section 87 granted the deductibility of losses sustained if building, machinery or equipment is old, and the demolition or scrapping thereof is made incident to removals or replacements.
This presupposes that the building is already existing on the lot owned by the taxpayer before the demolition.
With respect to the building existing at the time of purchase of the lot up on which the said building is erected, the rules are the following:
❌ When a taxpayer buys a real estate upon which a building is built, the cost to build another building and the cost of removal of the old building is not deductible.
The value of the real estate, exclusive of old improvements, being presumably equal to the purchase price of the land and building plus the cost of removing the useless.
✅ However, if the removal of the building was required by the authorities because the building was a fire hazard, the value of the building and the cost of its removal Will be deductible as losses.
Loss of useful value of capital asset due to changes in business condition.
✅ When taxpayer discontinues the business or discards such assets permanently from use in such business, he may claim as deduction the actual loss sustained.
In determining the amount of loss, adjustment must be made, however, for improvements, depreciation and salvage value of the property.
This is an exception to the rule requiring a sale or other disposition of property in order to establish a loss.
Proof required to establish loss of useful value (Unforeseen causes):
Increase in the cost or change in the manufacture of any product;
New legislation directly makes the continued profitable use of the property impossible.
Non-deductible loss due to loss of useful value:
Useful life of property terminates solely as a result of those gradual processes for which depreciation is authorized;
Inventories.
Domestic Corporations
All losses actually sustained and charged off within the taxable year and not compensated for by insurance.
Foreign Corporations
Losses actually sustained: BTN
In business or trade conducted In the Philippines;
In transaction entered into for profit in the Philippines;
Not compensated for by insurance or otherwise.
Requisites for deductibility (In general): TTCN
The loss claimed as deduction must be that of a taxpayer.
The loss must have been sustained during the taxable year.
Loss evidenced by a closed and completed transaction.
Loss not compensated by insurance or otherwise.
The loss claimed as deduction must be that of a taxpayer.
The taxpayer must prove that the loss was suffered by said taxpayer.
❌ Where a taxpayer operates two phases of industry, one exempt from income tax pursuant to RA. No. 901 and the other taxable losses sustained in the tax-exempt operation cannot be deducted from income of the taxable industry.
❌ If the taxpayer is engaged in several businesses such that its gross income arises from operations of two or more businesses, loss sustained in one line of business cannot be claimed as a deduction or be offset from the income of its other line of businesses.
❌ If a taxpayer derived income from manufacturing and at the same time was engaged in the business of farming, but its farming expenses exceeded its farming income, the taxpayer cannot offset its net loss from farming against its manufacturing income.
The loss must have been sustained during the taxable year
❌ A taxpayer is not allowed to defer the deduction to some other time other than the year in which the loss was actually sustained.
War losses due to enemy attacks and sustained subsequent to 6 December 1941, but not later than 1 July 1942 deductible in the year when the taxpayer was advised by the War Damage Commission.
Loss evidenced by a closed and completed transaction.
The phrase “closed and completed transaction” means that the loss is fixed by an identifiable event occurring in the taxable year in which, under the surrounding facts and circumstances, the basis of an immediate recoupment is not present.
❌ Consequently, where the fact would indicate substantial basis for recoupment and reasonably recognized as such, the matter is not a closed transaction until the receipt of the recoupment fixed the amount of the net loss.
✅ There should be an identifiable cause which fixed the loss.
Loss from sale.
✅ Consumption of the sale is the identifiable event which fixes the loss.
Building, worth P500,000.00, insured for P500,000.00; burned in the year 2000.
The insurer refused to acknowledge its liability; action was brought in court by the insured.
In the year 2001, the parties agreed to compromise the case — P400,000.00.
Loss deductible (P500,000.00 — 400,000.00) = P100,000.00 in the year 2001 when the insurance recovery is definitely established and not 2000.
Closed and completed transaction final settlement and determination of the insurance recovery, event which took place in 2001.
Loss not compensated by insurance or otherwise.
Not indemnified by insurance or other forms of indemnification, insurance or otherwise.
Otherwise means in other ways — refers to compensation due under a title analogous or similar to insurance (ejusdem generis; noscitur a sociis) inasmuch as the latter is a contract establishing a legal obligation, namely:
law,
contract,
quasi-contract,
torts or
crime.
✅ Included — insurance created by operation of law such as the War Damage Corporation Act of the United States.
❌ Excluded (Income Tax Law) hope, or even moral certainty, proposed legislation — authorizing payment of an indemnity, not due either the general principles of law, or under any particular statute — would eventually be approved.
Casualty Losses
fire
storms
robbery
theft or
Embezzlement
Requisites for deductibility SFP
Sworn declaration of loss must be filed with the BIR.
Nature of the event giving rise to loss and time of its occurrence;
Description of the damaged property and Its location;
Items needed to compute the loss such as cost or other basis of the property, depreciation allowed if any, value of the property before and after the event, cost of repair;
Amount of insurance or other compensation received or receivable.
Filed through the nearest RDO within 45 days after the date of the occurrence.
Proof of the elements of the loss claimed, such as the actual nature and occurrence of the event and the amount of the loss.
Casualty loss
documentary proof of costs,
photograph showing extent of damage,
condition or value of the property after it was repaired, restored or replaced.
Robbery, theft or embezzlement losses
amount of loss.
Police report is necessary although not conclusive proof of the loss arising therefrom.
Non-Deductible Losses
Losses in dealings between related taxpayers (except in case of distribution in liquidation)
Members of a family.
Family means taxpayers:
brothers and sisters (whether by whole or by half-blood),
spouse,
ancestors and
lineal descendants.
✅ Loss on a bona fide sale to a son-in-law of the taxpayer's brother deductible
✅ Prohibition applies to indirect sale or exchange.
Consequently, if the taxpayer seeks to deduct a net operating loss, the prohibition does not apply.
Between an individual and corporation.
More than 50% of the outstanding stock of the corporation is owned directly or indirectly by the individual.
Between two corporations:
One or both of the corporations is a personal holding company preceding the date of the sale or exchange;
More than 50% in value of the stock of each corporation is owned directly or indirectly by the same individual;
However, the limitation does not apply where the individual owning more than 50% of the stock of the purchasing corporation owned less than 50% of the stock of the selling corporation.
Between parties to a trust:
Grantor and fiduciary (trustee);
Fiduciary of a trust and fiduciary of another trust — the same grantor;
Fiduciary and beneficiary.
Losses on wash sale (61-day sale)
Points to be considered:
Taxpayer must have bought or sold stocks or securities;
Substantially identical stock or securities are acquired within a period beginning 30 days before the date of sale and ending 30 days after such date;
There must have been sale or disposition of stocks or securities;
Not limited to situations where the replacement is acquired by purchase. It also applies to acquisition through a taxable exchange and the making of an option contract;
The seller is not dealer in securities.
Reasons for non-deductibility of loss from wash sale:
Prevent deduction of losses on sales of stock or securities that were replaced by substantially identical stocks or securities.
Loss is added to the cost of the sub sequently acquired securities/stock. Hence, a mere artificial loss.
Loss due to removal of building if purchased (not existing and not incident to renewal)
Net Operating Loss Carry Over (NOLCO)
Applies to individual and corporate Can be carried over to the next three consecutive taxable years.
Taxpayer is not exempt from income tax.
No substantial change In the owner. ship of the business or enterprise in that not less then 75% in nominal value of the outstanding issued shares or paid up capital of the corporation is held by or on behalf of the same person.
Mines other than oil and gas wells may carry over net operating losses as deduction in the next five years.
5. Bad Debts
Definition
Debts due to the taxpayer which are actually ascertained to be worthless and charged off within the taxable year.
Requisites for deductibility
Existence of a valid debt and subsisting debt (legal and factual).
Debts must be actually ascertained to be worthless.
Debt must be charged off within the year of worthlessness.
Debt arises from business or trade.
Does not arise from transactions between related taxpayers.
Additionally, before a debt can be ascertained to be worthless, the taxpayer must also show that it is indeed uncollectible in the future.
Existence of a valid debt and subsisting debt (legal and factual).
A debt is valid if there exists the relationship of a debtor and creditor.
It is not necessary that the debt shall be due in the sense that it is then collectible.
It must be an outstanding obligation, which if not due at the time, will certainly become due at some future date.
Where the debt, however, is subject to a contingency and such contingency did not occur, there Is no valid subsisting debt.
Repayment of the debt is essential for the existence of the debt.
Understanding that the payment of the alleged debt would never be demanded - there is no debt within the contemplation of the law.
Exception: Even if the debt be uncollectible from Its Inception, it is the right of the endorser or guarantor to deduct payment which he is required to make upon default of the primary debtor.
Debts must be actually ascertained to be worthless.
Worthlessness is not determined by an inflexible formula, but upon the exercise of sound business judgment.
Mere uncertainty of collection or investigation that the debtor is in an unsatisfactory financial condition and that the collection of the debt is doubtful will not suffice. All pertinent facts and evidence must be considered. The burden of proof to show worthlessness is on the taxpayer.
Illustration:
If the creditor could show that during the years he attempted to collect the debt, the debtor had property the title of which was in dispute but which would enable him to pay his debts when the title was cleared, the creditor would be entitled to defer the deduction on the ground that there was no genuine ascertainment of worthlessness.
Factors affecting the worthlessness of a debt
Bankruptcy or insolvency of the debtor;
Insufficiency of the collateral;
Statute of limitation;
Death of the debtor leaving no assets;
Injury of the debtor making it impossible for him to earn a living;
Meager amount involved;
Improbability of success of judicial collection;
Destruction by fire of original invoices evidencing the indebtedness.
Debt must be charged off within the year of worthlessness.
A taxpayer may not defer deduction to a later year of a bad debt. If the charge off is made in a later year, the deduction will be disallowed.
Loss from theft or embezzlement:
Deductible in the year in which it was sustained.
No means of determining the actual date of embezzlement — year of discovery.
Modified by the application of the bad debt theory which holds that since the embezzlement of funds creates a debtor creditor relationship the loss is deductible as bad debt in the year when the right of recovery become worthless.
Deductible bad debts of Domestic and Resident Foreign Corporations — only business debts.
Non-resident Foreign Corporation — not entitled.
Debt arises from business or trade.
Does not arise from transactions between related taxpayers.
Additionally, before a debt can be ascertained to be worthless, the taxpayer must also show that it is indeed uncollectible in the future.
Furthermore, there are steps outlined to be undertaken by the taxpayer to prove that he exerted efforts to collect the debts, viz.:
sending of statements of accounts;
sending of collection letters;
giving the account to a lawyer for collection; and
filing a collection case in court.
In the case of banks, they shall submit a Bangko Sentral ng Pilipinas/Monetary Board written approval of the writing off of the indebtedness from the bank's books of accounts at the end of the taxable year.
As regards insurance or surety company, writing off of a receivable from the books and claimed as bad debts deduction requires declaration of closure due to insolvency or for any such similar reason by the Insurance Commissioner.
Measure of Bad Debts Deductible
Generally, the entire amount of the bad debt.
Not necessarily so in the following instances
Unpaid wages paid in promissory note — amount deductible is the value of the note and not the amount of the unpaid salary or wages;
Distribution of the decedent's assets — only the difference between creditor's claim and property received from the estate;
Account receivable becoming worthless in the hands of the purchaser — only the amount which represents the purchase price and not the face value of the note.
Foreclosure of mortgages:
Only the difference between the debt and the proceeds of the sale Is generally deductible as bad debts.
If no foreclosure occurs and the debtor surrenders the property to the creditor— difference between the basis of the debt and FMV of the property Is deductible.
If the creditor buys the mortgaged property and credits the debt with the purchase price even if such price is less than the indebtedness — no deductible bad debt, the security taking the place of the debt.
Debt partially secured by a mortgage is deductible only to the extent not covered by mortgage.
A debt, say for P100,000.00, compromised for P500,000.00 is deductible to the extent of P50,000.00 or the amount ab solved if the debtor is insolvent.
Unpaid wages, salaries, rents and other similar income, deductible in full provided the same is returned as income.
6. Depreciation
Definition
Gradual diminution in the useful (service) value of tangible property used in trade, profession or business resulting from exhaustion, wear and tear, and obsolescence. It applies also to the amortization of the value of intangible assets, the use of which in trade or business is definitely limited In duration.
Necessity of depreciation allowance
a certain property used in the business gradually approaches a point where its usefulness is exhausted.
By using the property, a gradual sale is made of It, and the depreciation change is the measure of the cost which has been sold.
Requisites for deductibility
The allowance for depreciation must be reasonable.
It must be for property used in trade or business or profession ( depreciable assets).
Depreciable assets:
Tangible property used in trade or business allowance;
Intangible property like patent, copyrights and franchises.
American tax jurisprudence allows buyer lessor in a sale-leaseback transaction to deduct depreciation expense from gross income.
This proceeds from the theory that as lessor, he is the owner of the property subject of the transaction.
Non-depreciable assets:
Inventories or stock;
Land and improvements;
Bodies of minerals subject to depletion;
Automobiles or transportation equipment for personal use (residence);
Building and furnitures for personal use;
Intangibles — use is unlimited;
Personal effects and clothing.
Property kept in repair — subject to depreciation
Properties and costumes used exclusively in business such as theatrical business — may be subject to depreciation.
Rules on the depreciation of properties used in petroleum operation:
Depreciation is allowed-straight line or declining balance method at the option of the service contractor;
Shift from declining to straight line is allowed;
Useful life of properties used — ten (10) years or such shorter life as may be permitted by the BIR;
Properties not used indirectly in petroleum operation — 5 years.
Depreciation deduction is not allowed:
Property amortized to its scrap value and no longer in use (Section 108, Rev. Regs. No. 2);
Beyond the capital investment in the assets being depreciated, otherwise some profit will b e made. These deductions are privileges not matter of right.
In the case of NRA and RFC — only properties located in the Philippines.
In the case of property held by one person for life with remainder to another person (usufruct or fide commissary substitution) — life tenant may claim the deduction as if he were the absolute owner of the property.
Property held in trust — apportion between or among the beneficiaries and trustees in accordance with the trust Instrument.
7. Depletion
Definition
It is the exhaustion of natural resources like mines and oil and gas wells as a result of a production or severance from such mines or wells.
Theory and Purpose of Depletion Allowance
as the product of the mine is sold, a gradual sale is being made of the taxpayer's capital interest in the property.
The purpose is, then, to enable him to recover that capital interest free of income tax at its cost or on some other basis.
Who are entitled
only persons having an economic interest in a mineral land or oil or gas wells.
To acquire an economic interest, the taxpayer must have a capital investment in the property and not mere economic disadvantage.
The taxpayer must have acquired at least, by investment, any interest in oil or gas, or mineral in place, and services, by any form of legal relationship, income derived from the extraction of the oil, gas or mineral to which he must look for a return of his capital.
Requisites for deductibility
Depletible asset-natural resources-mines, gas and oil wells.
Charged off within the taxable year.
Allowance for depletion is computed in accordance with the cost depletion method.
Essential Factors:
Basis of the property;
Estimated total recoverable units in the property;
Number of units recovered during the taxable year.
Depletion deductible:
Domestic Corp. — oil, gas wells or mines lo cated within and without
Resident Corp. — gas wells and mines located in the Philippines.
May the taxpayer deduct exploration and development expenditures paid or incurred during the taxable year?
YES. At taxpayer's option, he may deduct exploration and development expenditures (mines) provided that it shall not exceed 25% of the taxable income from mining operations computed without the benefit of any tax incentives under existing laws.
NO. With respect to improvements of property subject to allowance for depreciation (expenditure) and those paid or incurred for the exploration and development of oil and gas.
Depreciation v. Depletion
Depreciation
Depreciable assets
Depletion
Natural resources
8. Charitable and Other Contributions
Kinds
Ordinary — subject to limitation;
Special — deductible In full.
Entitled
Corporate taxpayer except NRFC — 5% of the Net Income before Charitable Contribution;
Individual taxpayer except NRA-NETB — 10% of the Net Income before Charitable Contribution.
Requisites for deductibility
Contribution or gift must be actually paid during the taxable year.
Requirements/conditions (to be stated in the return):
Name and address of organization;
Approximate date and amount of the gift;
If not in money, FMV of the gift; Signed by the responsible officer of the corporation.
May the deduction of contribution be allowed even in the absence of supporting receipts?
YES. Attachment of receipts for contribution to the return is merely an administrative device for the convenience and facility of the BIR in verifying the income tax return and the requirement cannot deprive the taxpayer of his right to prove his contribution in accordance with the rule 0 of evidence.
Must be given to the organization specified by Tax Code or special law.
The net income of the institution must not inure to the benefit of any member or individual.
Contribution Deductible in Full
Donations to the government or political subdivision including fully-owned government corporation to be used exclusively in undertaking priority activities in
education;
health;
youth and sports development;
human settlement;
science and culture;
economic development.
Donations to international organizations or foreign institutions in compliance with agree ments or treaties.
Donations to accredited non-government organizations (NGO).
Exclusively for:
scientific;
research;
character building;
youth and sports development;
health;
social welfare;
cultural;
charitable;
any combination thereof.
Utilized not later than 15th day of the 3rd month following the close of its taxable year.
Administrative expense must not exceed 30% of total expenses.
Upon dissolution, assets must be distributed to another non-profit domestic corporation or to the state.
Contribution Subject to Limitation (5% or 10% of Net Income before charitable Contribution)
Not in accordance with priority plan.
Conditions are not complied with.
Donation to the government of the Philippines or political subdivision exclusive for public purposes.
Donations to domestic corporations organized exclusively for:
religious;
charitable;
scientific;
cultural:
educational;
rehabilitation of veteran;
social welfare.
Deductible Under Special Laws (In Full)
IBP (P.D. No. 1810)
Development Academy of the Philippines (P.D. No. 205)
Agricultural Department of Southeast Asian Fisheries Development Center (P.D. No. 292)
National Social Action Council (P.D. No. 294)
Task Force on Human Settlement
National Museum, Library and Archives (P.D. No. 373)
Ministry of Youth and Sports Development (P.D. No. 604)
Social Welfare, Cultural and Charitable Institution (P.D. No. 507)
Museum of Philippine Costumes (P.D. No. 1388)
Intramuros Administration (P.D. No. 1616)
Lungsod ng Kabataan (P.D. No. 1631)
Contributions to International Lions Club not Deductible. (BIR Ruling, 16 July 1955)
Prizes and awards granted to athletes in local and international sports tournaments and competitions held in the Philippines or abroad and sanctioned by their national sports associations. (R.A. No. 7549) (2011 Bar)
9. Research and Development Expenditure
In General
A taxpayer may treat research or development expenditures which are paid or incurred by him during the taxable year in connection with his trade, business or profession as ordinary and necessary expenses which are not chargeable to capital account.
The expenditures so treated shall be allowed as deduction during the taxable year when paid or incurred.
Limitations on Deductions
The following expenditures are not deductible:
Any expenditure for the acquisition or improvement of land, or for the improvement of property to be used in connection with research and development of a character which is subject to depreciation; and
Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral, including oil or gas.
10. Employer’s Contribution to Pension Trust
Nature
applicable only to the employer on account of its contribution to a private pension plan for the benefit of its employee.
Purely business in character.
Requisites for deductibility
Employer must have established a pension or retirement plan for the payment of reasonable pension to its employees;
Pension plan is reasonable and actuarially sound;
Funded by the employer ( employer contributes cash);
Amount contributed must no longer be subject to control of the employer;
Payment has not yet been allowed as deduction.
There is no need of special permit from the BIR to put up a pension plan for the benefit of employees.
However, the provision of Section 118 of Rev. Regs. No. 2 must be complied with.
Treatment of Income Pension Plan
Not taxable to the employee.
In case any portion of the funds is reverted back to the employer, said fund forms part of the income of the employer during the taxable year of reversion
Deductible Payments to Pension Trusts
Employer's current liability — amount contributed during the taxable year — ordinary and necessary expenses.
Employer's liability for past services — one tenth (1/10) of the reasonable amount paid by the employer to cover pension liability applicable to the preceding 10 years — payment to pension trust.
F. Optional Standard Reduction (OSD)
Individual Taxpayers Entitled:
Resident Citizen (RC),
Non-resident Citizen (NRC),
Resident Alien (RA).
Individual Taxpayers Not Entitled:
Non-Resident alien whether engaged in trade or business (NRA-ETB and NRA-NETB).
Corporate Taxpayers Entitled:
Domestic Corporation (DC) and
Resident Foreign Corpora tion (RFC).
Limitation: 40% of:
Gross income — DC and RFC
Gross sales or receipts — RC, NRC, RA
Option/Election.
Taxpayer entitled must signify his intention in his income tax return which shall be irrevocable for the taxable year for which the return is made.
General professional partnership and the partners may avail of the OSD only once, either by the general professional partnership or the partners comprising the partnership.
G. Special Deductions Allowed to Insurance Companies Individual Taxpayers Entitled:
Non-life insurance (domestic or foreign doing business in the Philippine).
Net additions, if any, required by law to be made within the year to reserve funds;
Sums other than dividends paid within the year on policy and annuity contracts provided that the released reserve be treated as income for the year released.
Sums other than dividends paid within the year on policy and annuity contracts provided that the released reserve be treated as income for the year released
Mutual marine Insurance companies (Gross income from gross premiums less reinsurance):
Amounts repaid to policy holders on account of premiums previously paid by them;
Interest paid upon those amounts between the date of ascertainment and the date of its payment.
Mutual insurance (other than mutual marine and mutual life) — mutual fire and mutual employer's liability and mutual workmen's compensation and mutual casualty insurance companies:
Portion of the premium deposits returned to the policy holders;
Portion of the premium deposits retained for payment of losses, expenses and reinsurance reserve.
Assessment insurance (domestic or foreign).
Amount actually deposited with officers of the government of the Philippines pursuant to law as addition to guarantee or reserve funds.
I. Items Not Deductible
tems not deductible:
Personal, living or family expenses.
Reason: Non-business expenses.
Amounts paid out for new buildings or for permanent Improvements, or betterment made to Increase the value of any property or estate.
Exception: Intangible drilling end development cost Incurred in petroleum operations.
Reason: Capital expenditure - that results in obtaining benefits of a permanent nature such as land, buildings, and machinery.
Examples of Capital Expenditures:
Cost of defending or perfecting title to property; Architects fee -part of the cost of building;
Commissions paid in selling securities part of the cost;
Expenses of the administrator of the estate-Attorney's fee and Executor's commission-charge to the corpus of the estate; Corporate expenses for reorganization such as incorporation fees, attorney's fee and accountant charge — amortize.
Amount expended in restoring property or in making good the exhaustion thereof for which an allowance has been made.
Reason: Capital Expenditure
Premiums paid on a life insurance policy covering the life of any officer or employee, or of o r business carried on by the taxpayer, individual or corporate, when the taxpayer is directly o r indirectly a beneficiary under such policy.
Premiums paid by a family corporation on the life insurance policy covering the life of its president where the wife is the beneficiary — Not deductlble, corporation being indirectly beneficiary under the policy. (BIR Ruling, 10 November 1960)
Premiums paid by a corporation on life insurance policies covering the lives of two executives naming each other beneficiary-deductible because the corporation is not directly and indirectly the beneficiary of the policies.
Losses from sales or exchanges of property between related taxpayers.
Reason/Purpose:
Members of the same Family
to prevent avoidance of income tax by means of purported or simulated sale or exchange.
Others
the law presumes that the trans actions are devoid of free bargain between the seller and the buyer. It is immaterial whether the sale or exchange is bona fide or not.
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