Deductions From Gross Income 2

C. Sec.
36(A) of the NIRC

(A) General Rule. - In computing net income, no deduction shall in any case
be allowed in respect to -
(1) Personal, living or family expenses;
(2) Any amount paid out for new buildings or for permanent improvements,
or betterments made to increase the value of any property or estate;
This Subsection shall not apply to intangible drilling and development costs
incurred in petroleum operations which are deductible under Subsection (G)
(1) of Section 34 of this Code.
(3) Any amount expended in restoring property or in making good the
exhaustion thereof for which an allowance is or has been made; or
(4) Premiums paid on any life insurance policy covering the life of any officer
or employee, or of any person financially interested in any trade or business
carried on by the taxpayer, individual or corporate, when the taxpayer is
directly or indirectly a beneficiary under such policy.
D. Sec. 45 of the NIRC

SEC. 45. Period for which Deductions and Credits Taken. - The deductions
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, unless in order to clearly reflect
the income, the deductions should be taken as of a different period. In the case
of the death of a taxpayer, there shall be allowed as deductions for the taxable
period in which falls the date of his death, amounts accrued up to the date of his
death if not otherwise properly allowable in respect of such period or a prior
period.
E. Sec 34 (K)
(K) Additional Requirements for Deductibility of Certain Payments. - Any

amount paid or payable which is otherwise deductible from, or taken into
account in computing gross income or for which depreciation or amortization
may be allowed under this Section, shall be allowed as a deduction only if it is
shown that the tax required to be deducted and withheld therefrom has been
paid to the Bureau of Internal Revenue in accordance with this Section 58 and 81
of this Code.
F. CIR vs. Isabela Cultural Corporation, GR No. 172231 dated February 12, 2007
Lessons Applicable: Accrual method, burden of proof in accrual method,
deductibility of ordinary and necessary trade, business, or professional expenses,
all events test
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
ISSUE: W/N Isabela who uses accrual method can claim on 1986 only
HELD: NO. case is remanded to the BIR for the computation of Isabela Cultural
Corporation’s liability under Assessment Notice No. FAS-1-86-90-000680.
 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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C. Sec.

36(A) of the NIRC

D. Sec. 45 of the NIRC

(K) Additional Requirements for Deductibility of Certain Payments. - Any

 The requisites for the deductibility of ordinary and necessary trade,

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