BIR Ruling

January 11, 1972 Quality Tobacco Corporation 23rd and Chicago Sts. Port Area, Manila Gentlemen : This refers to your letter dated December 29, 1971 requesting in effect information as to whether or not, in the circumstances hereinbelow presented, the interest obligations which you have deducted from gross income in prior years (your accounting system being on the accrual basis) but subsequently condoned constitute taxable income to you in the year of condonation. Case I It appears that in 1969, you entered into contract for the supply of locally grown tobacco to a foreign buyer. The contract states that you are liable to a penalty interest in cases of delayed shipment without qualification. This contract was subsequently amended to relieve you from the penalty interest where the delay was due to causes beyond your control. This amendment was made in 1971. In the meantime, however, pending the negotiation of the amendment, you deducted the penalty interests from gross income in 1969 and 1970. Case II In 1969 also, you had an outstanding account in favor of "Y" which the latter assigned with your consent to "Z" who is your sole and exclusive purchasing agent abroad for your manufacturing needs. Subsequently, you negotiated with "Z" for the elimination of the interest on said account who agreed in view of your continuous and exclusive patronage of its service and of your assurance for the continuance of such patronage. In reply, I have the honor to inform you as follows: Jurisprudence recognize the principle that "An obligation once deducted but not paid, represents income when, because of subsequent circumstances, it is cancelled or it may be determined with reasonable certainty that it will never be enforced. None of the cases attached any importance to the means by which the cancellation is effected. That is immaterial, the controlling factors being the previous deductions offsetting income otherwise taxable and the subsequent release of the indebtedness before payment." (Helvering vs. Jane Holding Co. Mallinckredt, et. al. vs. Helvering, 24, AFTR, p. 426) Accordingly, it is the opinion of this Office as it hereby holds, that the interest obligations which you deducted from gross income in 1969 and 1970 in both of the case indicated above are taxable income to you in 1971, the year when they were condoned. Very truly yours, MISAEL P. VERA Commissioner of Internal Revenue