Casualty loss

JUST recently, we saw a lot of business establishments being flooded due to intense rains brought about by tropical storm Karding and the habagat (south-west monsoon). As a result, some taxpayers may have sustained losses in the form of damage to their equipment, machinery or merchandise.
Fortunately, our tax laws take cognizance of this predicament by allowing casualty losses to be claimed as deduction for income tax purposes.  However, there are specific guidelines on the time and manner by which the taxpayers should claim casualty losses. Non-compliance with these guidelines may result in the disallowance of deduction during BIR’s audit examination.
To avoid the disallowance, it is important to know and comply with the deadline for reporting, the facts to be established and the documentary requirements for claiming casualty losses.

DEFINITION
Casualty loss refers to the complete or partial destruction of property resulting from an identifiable event of sudden, unexpected, or unusual nature, such as those arising from storm, fire, shipwreck, or other casualty, or from theft or robbery (Revenue Regulation 12-77).

REQUISITES FOR DEDUCTIBILITY
Under BIR Revenue Memorandum Order No. 31-2009, the taxpayer claiming casualty losses must comply with the following requisites:

1. The losses were incurred for properties actually used in the business of the taxpayer. The loss of assets not used in business and/or are personal in nature shall not be allowed;
2. The concerned properties must have been reported as part of the taxpayer’s assets based on accounting records and financial statements in the preceding year;
3. The amount of loss compensated by insurance cannot not be claimed as deductible loss; and
4. The deduction of assets as capital losses must be properly recorded in the accounting reports (with the adjustment of the applicable accounts).

DOCUMENTARY REQUIREMENTS
To establish the requisites, the following documents must be submitted to the BIR:

1. Sworn declaration of loss filed within45 days after the date of the event causing the loss, stating the following:
   • Nature of the event that gave rise to such loss and the time of its occurrence;
   • Description and location of the damaged properties;
   • Items needed to compute the losses (cost or other basis of the properties; depreciation allowed, if any; value of the property before and after the event; and cost of repair);
   • Amount of insurance or other compensation received;
2. The Financial Statement for the year immediately preceding the event; and
3. Proof of the elements of the losses claimed:
   • Photographs of the properties before and after the typhoon to show the extent of the damage.
   • Documentary evidence for determining the cost or valuation of the damaged properties (cancelled checks, vouchers, receipts, and other evidence of costs);
   • Insurance policy, in the event that there is an insurance coverage for the properties; and
   • Police report, in cases of robbery/theft during the typhoon and/or as a consequence of looting.

Failure to report a theft or robbery to the police can be held against the taxpayer. However, a mere report of an alleged theft or robbery to the police authorities is not considered as conclusive proof of the loss.

All documents and other evidence submitted to prove the losses shall be subject to verification by the concerned BIR office, and should be kept by the taxpayer as part of his tax records, and be made available to the duly-authorized Revenue Officer/s, upon audit of his Income Tax Return and the declaration of loss.

Weather advisories, like rainfall alert from NDRRMC, are effective tools to save lives and avoid damage to properties. Yet, loss is sometimes inevitable. For this reason, deduction for casualty loss is allowed in the computation of income tax provided that the taxpayer claiming it strictly complies with the requirements set by law and the BIR.

source:  Daily Guardian Column By: Atty. Edward G. Gialogo

Court stops BIR seizure of Pacquiao assets

The Court of Tax Appeals (CTA) has lifted the Bureau of Internal Revenue seizure orders on the assets of boxing great, Sen. Manny Pacquiao, as it directed the BIR to stop its efforts to collect P3.29 billion in taxes while the case remains pending.

Pacquiao’s legal battle, however, is not yet over as it is set to proceed to the trial stage. Pretrial conference of the case is scheduled for Aug. 30.

Citing the BIR’s “violations of rules and irregularities,” the CTA First Division ordered the bureau to “cease and desist” from implementing its final decision on disputed assessment (FDDA) dated May 14, 2013.

The FDDA set at P3.29 billion the final amount of the deficiency tax liabilities imposed on Pacquiao and his wife Jinkee for 2008 and 2009.

In a resolution dated July 27, the CTA also withdrew the tax lien annotated on the titles of the Pacquiaos’ General Santos City properties.

A tax lien prevents the couple from disposing of the property and secures it to satisfy the government’s claim for taxes.

No more bond
Moreover, the CTA spared the billionaire from the requirement of posting a bond first as a condition for stopping the BIR’s tax collection efforts.

The BIR “utterly failed to comply with necessary requirements under pertinent laws and issuances” in assessing the couple’s liabilities, read the decision signed by Presiding Justice Roman G. del Rosario and Associate Justices Erlinda P. Uy and Cielito N. Mindaro-Grulla.

Because of the irregularities, the CTA would be “dispensing the required cash deposit or bond provided under Section 11 of the [Republic Act] No. 1125.”

The CTA found “no prima facie evidence of fraud or tax evasion” established by the BIR during its preliminary investigation.

The BIR failed to show that it conducted procedures to verify and determine “the schemes employed and the extent of the fraud” on the Pacquiaos’ part, the court said.

The BIR did not even specify in its May 2, 2012, formal letter of demand (FLD) the “best possible sources” of information it used in computing their tax underpayments.

Newspaper articles
Documentary evidence presented to the CTA showed that the BIR used newspaper and magazine articles to establish that Pacquiao earned income in the United States in the form of guaranteed payouts and his cut of pay-per-view revenues and ticket sales.

The reports were not “corroborated by other more sufficient evidence” and the BIR did not at least confirm the veracity of the articles with the authors, the court said.

The BIR notices were hounded by procedural flaws, too. For one, the FLD was not even addressed to Jinkee despite being held jointly liable with her husband.

The warrants of distraint and/or levy and garnishment—which paved the way for the seizure of the Pacquiaos’ bank accounts—were found to be prematurely issued. These were dated July 1, 2013, though the couple received the FDDA only on July 2, 2013.

On giving the couple due process, the BIR failed to prove that a notice of formal conference was issued or even any record to show that the conference actually took place.

Jayson Fernandez, the Pacquiaos’ lawyer, told the BIR in a Jan. 31, 2012, letter that he only learned of the proceedings by chance and asked for it to be rescheduled, but the BIR did not reply.

It failed to show the court the protest letter where the Pacquiaos supposedly admitted that they attended the conference.

The agency also failed to justify why it included the years 1995 to 2006 in the scope of its electronic letter of authority that authorized the tax audit.

The CTA had to evaluate the validity of the BIR notices after the Supreme Court ruled on April 19, 2016, that when imposing the bond requirement, it should make a preliminary determination of whether the BIR violated the law in its tax collection efforts.

The case reached the Supreme Court because the Pacquiaos questioned the CTA requirement for them to first deposit P3.29 billion in cash or post a P4.948-billion surety bond before the stay order against the garnishment on April 22, 2014, can take effect.

In its April 2016 decision, the high tribunal said the CTA should have conducted a preliminary hearing first before imposing the bond requirement.

The Supreme Court reminded the CTA that in case of doubt, the scale should tip in favor of the taxpayer’s right to due process and equal protection.

source:  Philippine Daily Inquirer