COLLECTOR OF INTERNAL REVENUE, PETITIONER, VS. GOODRICH INTERNATIONAL RUBBER CO., RESPONDENT.

Appeal by the Government from a decision of the Court of Tax Appeals,
setting aside the assessments made by the Commissioner of Internal Revenue, in
the sums of P14,128.00 and P8,439.00, as deficiency income taxes alleged­ly due
from respondent Goodrich International Rubber Company — hereinafter referred to
as Goodrich — for the years 1951 and 1952, respectively.

These assessments were based on disallowed deductions, claimed by
Goodrich, consisting of several alleged bad debts, in the aggregate sum of
P50,455.41, for the year 1951, and the sum of P30,138.88, as representation
expenses allegedly incurred in the year 1952.  
Goodrich had appealed from said as­sessments to the Court of Tax
Appeals, which, after appropriate proceedings, rendered, on June 8, 1963, a decision allowing the
deduction for bad debts, but disallowing the alleged representa­tion
expenses.  On motion for reconsideration
and new trial, filed by Goodrich, on November
19, 1963, the Court of Tax Ap­peals amended its aforementioned
decision and allowed said deductions for representation expenses.  Hence, this appeal by the Government.

The alleged representation expenses are:

The claim for deduction thereof is based upon receipts issued, not
by the entities in which the alleged expenses had been incurred, but by the officers of Goodrich who allegedly paid them.

The claim must be rejected. 
If the expenses had real­ly been incurred, receipts or chits would have
been issued by the entities to which the payments had been made, and it would
have been easy for Goodrich or its officers to produce such re­ceipts.  Those issued by said officers merely attest
to their claim that they had incurred and paid said expenses.  They do not establish payment of said alleged
expenses to the entities in which the same are said to have been incurred.  The Court of Tax Appeals erred, therefore, in
allowing the deduction thereof.

The alleged bad debts are:

The issue, in connection with these debts, is whether or not the
same had been properly deducted as bad debts for the year 1951.  In this connection, we find:

Portillo’s Auto Seat Cover (P730.00):

This debt was incurred in 1950. 
In 1951, the debtor paid P70.00, leaving a balance of P630.31.  That same year, the account was written off
as bad debt (Exhibit 3-C-4).  Coun­sel for Goodrich had merely sent two (2)
letters of demand in 1951 (Exh. B-14).  In 1952, the debtor paid the full balance (Exhibit
A).

Visayan Rapid Transit
(P17,810.26):

This debt was, also, incurred in 1950.  In 1951, it was charged off as bad debt,
after the debtor had paid P275.21.  No
other payment had been made.  Taxpayer’s
Accountant testified that, according to its branch manager in Cebu, he had been unable to collect the balance.   The debtor had merely pro­mised and kept on
promising to pay.  Taxpayer’s counsel
stated that the debtor had gone out of business and became insolvent, but no
proof to this effect was introduced.

Bataan
Auto Seat Cover (P373.13):

This is the balance of a debt of P474.13 contracted in 1949.  In 1951, the debtor paid P100.00.  That same year, the balance of P373.13 was
charged off as bad debt.  The next year, the
debtor paid the additional sum of P50.00.

Tres Amigos Auto Supply
(P1,370.31):

This account had been outstanding since 1949.  Counsel for the taxpayer had merely sent
demand letters (Exh. B-13) without success.

P. C. Teodoro (P650.00):

In 1949, the account was P751.91. 
In 1951, the debtor paid P101.91, thus leaving a balance of P650.00,
which the taxpayer charged off as bad debt in the same year.  In 1952, the debtor made another payment of P160.00.

Ordnance Service, P. A. (P386.42):

In 1949, the outstanding account of this government agency was
P817.55.  Goodrich’s counsel sent demand
letters (Exh. B-8). 
In 1951, it paid Goodrich P431.13. 
The balance of P386.42 was written off as bad debt that same year.

Ordnance Service, P.C. (P796.26):

In 1950, the account was P796.26. 
It was referred to counsel for collection.  In 1951, the account was written off as a bad
debt.  In 1952, the debtor paid it in
full.

National Land
Settlement Administration (P3,020.76):

The outstanding account in 1949 was P7,041.51.  Col­lection letters were sent (Exh. B-7).  In 1951,
the debtor paid P4,020.75, leaving a balance of P3,020.76, which was written
off, that same year, as a bad debt.  This
office was under li­quidation, and its Board of Liquidators promised to pay
when funds shall become available.

National Coconut Corporation (P644.74):

This account had been outstanding since 1949.  Col­lection letters were sent (Exh. B-12) without success. 
It was written off as bad debt in 1951, while the corporation was under
a Board of Liquidators, which promised to pay upon availability of funds.  In 1961, the debt was fully paid.

Interior Caltex Service Station  (P1,505.87):

The original account was P2,705.87, when, in 1950, it was turned
over for collection to counsel for Goodrich (p. 156, CTA Records).   Counsel began sending letters of col­lection
in April 1950.  Interior Caltex made partial payments, so that as of December, 1951,
the balance outstanding was P1,505.87. 
The debtor paid P200, in 1952; P113.20, in 1954; P750.00, in 1961; and
P300.00 in 1962.  The account had been
written off as bad debt in 1951.

The claim for deduction of these ten (10) debts should be
rejected.  Goodrich has not established
either that the debts are actually worthless or that it had reasonable grounds
to believe them to be so in 1951.  Our
statute 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 requires proof
of two facts:  (1) that the taxpayer did
in fact as­certain the debt to be worthless, in the year for which the de­duction
is sought; and (2) that, in so doing, he acted in good faith.^[1]

Good faith on the part of the taxpayer is not enough.  He must show, also, that he had reasonably
investigated the relevant facts and had drawn a reasonable inference from the
information thus obtained by him.^[2]
Respondent herein has not adequately made such showing.

The payments made, some in full, after some of the foregoing
accounts had been characterized as bad debts, mere­ly stresses the undue haste
with which the same had been writ­ten off. 
At any rate, respondent has not proven that said debts were
worthless.  There is no evidence that the
debtors can not pay them.  It should be
noted also that, in violation of Revenue Regulations No. 2, Section 102,
respondent had not attached to its income tax returns a statement showing the
propriety of the deductions therein made for alleged bad debts.

Upon the other hand, we find that the following accounts were
properly written off:

San Juan Auto Supply (P4,530.64):

This account was contracted in 1950.  Referred, for collection, to respondent’s
counsel, the latter secured no payment. 
In November, 1950, the corresponding suit for collection was filed (Exh. C).  The
debtor’s counsel was al­lowed to withdraw, as such, the debtor having failed to
meet him.  In fact, the debtor did not
appear at the hearing of the case. 
Judgment was rendered in 1951 for the creditor (Exh.
C-2).   The corresponding writ of
execution (Exh. C-3) was returned unsatisfied, for no
properties could be attached or levied upon.

PACSA (P45.36),

Philippine Naval Patrol (P14.18),

Surplus Property Commission (P277.68),

Alvarez Auto Supply (P285.62):

These four (4) accounts were 2 or 3 years old in 1951.  After the collectors of the creditor had
failed to collect the same, its counsel wrote letters of demand (Exhs. B-10, B-11, B-6 and B-2) to no avail.  Considering the small amounts involved in
these accounts, the taxpayer was justified in feeling that the un­successful
efforts therefore exerted to collect the same sufficed to warrant their being
written off.1

Lion Shoe Store (P11,686.93),

Ruiz Highway
Transit  (P2,350.00), and

Esquire Auto Seat Cover (P3,536.94):

These three (3) accounts were among those referred to counsel for
Goodrich for collection.  Up to 1951, when
they were written off, counsel had sent 17 letters of demand to Lion Shoe Store
(Exh. B); 16 demand letters to Ruiz Highway Transit (Exh. B-1); and 6 letters of demand to Esquire Auto Seat
Cover (Exh. B-5). 
In 1951, Lion Shoe Store, Ruiz Highway Transit, and Esquire Auto Seat
Cover had made partial payments in the sums of P1,050.00, P400.00, and P300.00,
respectively.  Sub­sequent to the
write-off, additional small payments were made and accounted for as income of
Goodrich.  Counsel interviewed the debtors,
investigated their ability to pay and threatened law suits.  He found that the debtors were in strained
financial con­dition and had no attachable or leviable
property.  Moreover, Lion Shoe Store was
burned twice, in 1948 and 1949.  There­after,
it continued to do business on limited scale. 
Later, it went out of business. 
Ruiz Highway Transit, had more debts than assets.  Counsel, therefore, advised respondent to
write off these accounts as bad debts without going to court, for it would be
“foolish to spend good money after bad.”

The deduction of these eight (8) accounts, aggregating
P22,627.35, as bad debts should be allowed.

WHEREFORE, the decision appealed from should be, as it is
hereby, modified, in the sense that respondent’s alleged representation
expenses are totally disallowed, and its claim for bad debts allowed up to the
sum of P22,627.35 only.  Without special
pronouncement as to costs.

IT IS SO ORDERED.

Reyes, JBL, Dizon, Makalintal, Bengzon, Zaldivar, Sanchez, Ruiz Castro, Angeles, and Fernando, JJ., concur.

^[1]
T. H. Low, 19 BTA 980; Sec. 30.27, Mertens, Vol. 5,
p. 392.

^[2]
Kahn v. Comm., 108 F (2d) 748 (CCA 2nd, 1940) aff’g
38 BTA 1417.

1 Richard Downing, et al, 43 BTA
1147, E. H. McConnel, 6 BTA 116; Fairmont Home
Furniture Co., 23 BTA 909; The Great Northern Pacific Grocery Co., BTA Memo,
Op., Cit. 87140, October 10, 1938; cited in Mertens,
Vol. 5, pp. 418-419.