Collector v Goodrich International Rubber Co. (G.R. No. L-22265)

Facts:

Goodrich claimed for deductions based upon receipts issued, not by entities in which the alleged expenses had been incurred, but by the officers of Goodrich who allegedly paid for them.

The Commissioner disallowed deductions in the amount of P50,455.41 (for the year 1951) for bad debts and P30,188.88 (for year 1952) for representation expenses.

Goodrich appealed from the said assessment to the Court of Tax Appeals (CTA) which allowed the deduction for bad debts but disallowing the alleged representation expenses. CTA amended its decision allowing the deduction of representation expenses.

 The Government appealed to the SC. The alleged bad debts are the following:

1. Portillo's Auto Seat Cover                                        630.31

2. Visayan Rapid Transit                                                 17,810.26

3. Bataan Auto Seat Cover                                           373.13

4. Tres Amigos Auto Supply                                         1,370.31

5. P. C. Teodorolawphil                                                  650.00

6. Ordnance Service, P.A.                                             386.42

7. Ordnance Service, P.C.                                             796.26

8. National land Settlement Administration          3,020.76

9. National Coconut Corporation                               644.74

10. Interior Caltex Service Station                             1,505.87

11. San Juan Auto Supply                                              4,530.64

12. P A C S A                                                                       45.36

13. Philippine Naval Patrol                                            14.18

14. Surplus Property Commission                             277.68

15. Alverez Auto Supply                                                                285.62

16. Lion Shoe Store                                                         1,686.93

17. Ruiz Highway Transit                                                2,350.00

18. Esquire Auto Seat Cover                                        3,536.94

T O T A L                                                                               P50,455.41*

Issue:

Whether or not these bad debts are properly deducted.

Held:

The claim for deduction for debt numbers 1-10 is REJECTED. Goodrich has not established either that the debts are actually worthless or that it had reasonable grounds to believe them to be so.

NIRC permits the deduction of debts “actually ascertained to be worthless within the taxable year” obviously to prevent arbitrary action by the taxpayer, to unduly avoid tax liability.

The requirement of ascertainment of worthlessness require proof of 2 facts:

• 1.       That the taxpayer did in fact ascertain the debt to be worthless
• 2.       That he did so, in good faith.

Good faith on the part of the taxpayer is not enough. He must also how that he had reasonably investigated the relevant facts and had drawn a reasonable inference from the information obtained by him. In the case, Goodrich has not adequately made such showing.

The payments made, after being characterized as bad debts, merely stresses the undue haste with which the same had been written off. Goodrich has not proven that said debts were worthless. There was no evidence that the debtors can not pay them.

SC held that the claim for bad debts are allowed but only up to P22,627.35. (those from Debts 11-18)