Philippine Refining Corp vs CA 256 SCRA 667

Facts:
Philippine Refining Corp (PRC) was assessed deficiency tax payments for the year 1985 in the amount of around 1.8M. This figure was computed based on the disallowance of the claim of bad debts by PRC. PRC duly protested the assessment claiming that under the law, bad debts and interest expense are allowable deductions.
When the BIR subsequently garnished some of PRC’s properties, the latter considered the protest as being denied and filed an appeal to the CTA which set aside the disallowance of the interest expense and modified the disallowance of the bad debts by allowing 3 accounts to be claimed as deductions. However, 13 supposed “bad debts” were disallowed as the CTA claimed that these were not substantiated and did not satisfy the jurisprudential requirement of “worthlessness of a debt” The CA denied the petition for review.

Issue:
Whether or not the CA was correct in disallowing the 13 accounts as bad debts

Ruling:
YES. Both the CTA and CA relied on the case of Collector vs. Goodrich International, which laid down the requisites for “worthlessness of a debt” to wit:
In said case, we held that for debts to be considered as "worthless," and thereby qualify as "bad debts" making them deductible, the taxpayer should show that:

1. (1)  there is a valid and subsisting debt;
   
2. (2)  the debt must be actually ascertained to be worthless and uncollectible during the taxable year;
   
3. (3)  the debt must be charged off during the taxable year; and
   
4. (4)  the debt must arise from the business or trade of the taxpayer. Additionally, before a debt can be considered worthless,
   the taxpayer must also show that it is indeed uncollectible even in the future.
   

Furthermore, there are steps outlined to be undertaken by the taxpayer to prove that he exerted diligent efforts to collect the debts, viz.:

1. (1)  sending of statement of accounts;
   
2. (2)  sending of collection letters;
   
3. (3)  giving the account to a lawyer for collection; and
   
4. (4)  filing a collection case in court.
   

PRC only used the testimony of its accountant Ms. Masagana in order to prove that these accounts were bad debts. This was considered by all 3 courts to be self-serving. The SC said that PRC failed to exercise due diligence in order to ascertain that these debts were uncollectible. In fact, PRC did not even show the demand letters they allegedly gave to some of their debtors.