G.R. No. 172231 February 12, 2007
YNARES-SANTIAGO, J.
Lessons Applicable: Accrual method, burden of proof in accrual method, deductibility of ordinary and necessary trade, business, or professional expenses, all events test
Laws Applicable:
FACTS:
- BIR disallowed Isabela Cultural Corp. deductible expenses for services which were rendered in 1984 and 1985 but only billed, paid and claimed as a deduction on 1986.
- After CA sent its demand letters, Isabela protested.
- CTA found it proper to be claimed in 1986 and affirmed by CA
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