G.R. No. L-15290, L-15280, L-15289, L-15281; May 31, 1963
MARIANO ZAMORA, petitioner, vs. COLLECTOR OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents. (Consolidated Cases)

FACTS

These consolidated cases involve deficiency income tax assessments against Mariano Zamora and the estate of his sister, Felicidad Zamora, for the years 1951 and 1952. The Collector of Internal Revenue assessed deficiencies after finding that Mariano Zamora failed to report capital gains from the sale of real properties and claimed unallowable deductions. For 1951 and 1952, the Collector demanded payments totaling P43,758.50 and P7,625.00 from Mariano Zamora. The Court of Tax Appeals (CTA) modified this, ordering him to pay reduced sums of P22,980.00 and P7,278.00, respectively. Separately, the CTA ordered the estate of Felicidad Zamora to pay P235.50 as deficiency tax. Both parties appealed these CTA decisions. The key transactions involved the 1951 sales of two properties co-owned by the Zamoras: a Manila property purchased in 1944 for P132,000 and sold for P75,000, and a Quezon City property purchased in 1944 for P68,959 and sold for P94,000. Disputes centered on the allowable acquisition cost for calculating capital gains, given the use of Japanese war notes in the purchases, and the disallowance of certain business expense deductions claimed by Mariano Zamora.

ISSUE

The primary issues were: (1) whether the CTA correctly disallowed a portion of the promotion expenses claimed by Mariano Zamora as business deductions; (2) whether the CTA correctly determined the acquisition cost of the sold properties, which were partly purchased with Japanese war notes, for the purpose of computing taxable capital gains; and (3) whether the Collector’s original higher deficiency assessments should be reinstated.

RULING

The Supreme Court affirmed the CTA’s decisions. On the promotion expenses, the Court upheld the disallowance. Mariano Zamora claimed P20,957.00 spent by his wife on a trip to Japan and the United States for business promotion. The CTA found the claim inadequately substantiated, as only P5,000 was officially allocated, the trip was declared as partly medical, and no detailed receipts or credible accounting were presented. The Court ruled that business expense deductions under the Tax Code must be ordinary, necessary, and substantiated by records, which the taxpayer failed to provide.
Regarding the capital gains computation, the Court sustained the CTA’s application of the Ballantyne Scale to convert Japanese war notes to genuine Philippine peso values. For the Manila property bought in May 1944 for P132,000 (half in cash, half in war notes), the war note component (P66,000) was converted at the scientifically recognized rate of 12:1 (war notes to pesos), yielding a cost of P5,500 in Philippine currency. Adding the cash portion (P66,000), the total acquisition cost was P71,500. The sale for P75,000 resulted in a capital gain of P3,500, split between the co-owners. For the Quezon City property, the Court accepted the CTA’s finding that the purchase price of P68,959 was paid in genuine Philippine currency, as it was more credible than the Collector’s claim of payment in war notes, which would have resulted in an improbably low equivalent value compared to the property’s assessed value. Thus, the gain was correctly computed as P15,361.75 after deducting the cost and sales expenses. The