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  • CIR V. Isabela Cultural Corp.: GR NO 172231 February 12, 2007

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    Mary Anne
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    This case involves Isabela Cultural Corporation's (ICC) claim for deduction of expenses paid for legal and auditing services under the accrual method of accounting for tax year 1986. The Court held that under the accrual method, expenses not claimed as deductions in the year they are incurred cannot be claimed in the succeeding year. ICC failed to prove that the requirements for deductibility - that the expenses were ordinary, necessary, and related to its business - were met for tax year 1986. The case was remanded to the Bureau of Internal Revenue to re-compute ICC's tax liability.

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    preferential lien belongs to the government

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    CIR V Maritime Shipping

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    This case involves Isabela Cultural Corporation's (ICC) claim for deduction of expenses paid for legal and auditing services under the accrual method of accounting for tax year 1986. The Court held that under the accrual method, expenses not claimed as deductions in the year they are incurred cannot be claimed in the succeeding year. ICC failed to prove that the requirements for deductibility - that the expenses were ordinary, necessary, and related to its business - were met for tax year 1986. The case was remanded to the Bureau of Internal Revenue to re-compute ICC's tax liability.

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    33 views2 pages

    CIR V. Isabela Cultural Corp.: GR NO 172231 February 12, 2007

    Uploaded by

    Mary Anne
    This case involves Isabela Cultural Corporation's (ICC) claim for deduction of expenses paid for legal and auditing services under the accrual method of accounting for tax year 1986. The Court held that under the accrual method, expenses not claimed as deductions in the year they are incurred cannot be claimed in the succeeding year. ICC failed to prove that the requirements for deductibility - that the expenses were ordinary, necessary, and related to its business - were met for tax year 1986. The case was remanded to the Bureau of Internal Revenue to re-compute ICC's tax liability.

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    © All Rights Reserved
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    CIR V. Isabela Cultural Corp.

    GR NO 172231 February 12, 2007

    FACTS:

    ISSUE: W/N Isabela who uses accrual method can claim on 1986 only

    HELD: case is remanded to the BIR for the computation of Isabela Cultural Corporation’s
    liability under Assessment Notice No. FAS-1-86-90-000680.

    NO. The requisites for the deductibility of ordinary and necessary trade, business, or
    professional expenses, like expenses paid for legal and auditing services, are:
    (a) the expense must be ordinary and necessary;
    (b) it must have been paid or incurred during the taxable year; - qualified by Section 45 of
    the National Internal Revenue Code (NIRC) which states that: "[t]he deduction provided
    for in this Title shall be taken for the taxable year in which ‘paid or accrued’ or ‘paid or
    incurred’, dependent upon the method of accounting upon the basis of which the net
    income is computed
    (c) it must have been paid or incurred in carrying on the trade or business of the taxpayer;
    and (d) it must be supported by receipts, records or other pertinent papers.
     Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual
    method of accounting, expenses not being claimed as deductions by a taxpayer in the
    current year when they are incurred cannot be claimed as deduction from income for
    the succeeding year. Thus, a taxpayer who is authorized to deduct certain expenses
    and other allowable deductions for the current year but failed to do so cannot deduct
    the same for the next year.
     The accrual method relies upon the taxpayer’s right to receive amounts or its
    obligation to pay them, in opposition to actual receipt or payment, which characterizes
    the cash method of accounting. Amounts of income accrue where the right to receive
    them become fixed, where there is created an enforceable liability. Similarly, liabilities
    are accrued when fixed and determinable in amount, without regard to indeterminacy
    merely of time of payment.
     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 all-events test requires the right to income or liability be fixed,
    and the amount of such income or liability be determined with reasonable accuracy.
    However, the test does not demand that the amount of income or liability be known
    absolutely, only that a taxpayer has at his disposal the information necessary to
    compute the amount with reasonable accuracy. The all-events test is satisfied where
    computation remains uncertain, if its basis is unchangeable; the test is satisfied where
    a computation may be unknown, but is not as much as unknowable, within the taxable
    year. The amount of liability does not have to be determined exactly; it must be
    determined with "reasonable accuracy." Accordingly, the term "reasonable accuracy"
    implies something less than an exact or completely accurate amount.
     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 income or
    deduction.
     In the instant case, the expenses for professional fees consist of expenses
    for legal and auditing services. The expenses for legal services pertain to the 1984
    and 1985 legal and retainer fees of the law firm Bengzon Zarraga Narciso Cudala
    Pecson Azcuna & Bengson, and for reimbursement of the expenses of said firm in
    connection with ICC’s tax problems for the year 1984. As testified by the Treasurer of
    ICC, the firm has been its counsel since the 1960’s. - failed to prove the burden

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