BIR Ruling No. 026-62

January 26, 1962 BIR RULING NO. 026-62 2nd Indorsement Returned to the Revenue Operations Head (Assessment) the herein papers bearing on the 1959 income tax case of Mr. Manuel Uy. cd In his 1959 income tax return, Mr. Uy declared as his total gross income from business the sum of P449,460.48. He claimed as deduction therefrom the sum of P573,604.24 thereby resulting in a loss of P124,143.76. (See: Income Tax Return, p. 10, Docket). Of the said amount claimed as deduction, P219,068.80 represents the cost of unsold sweepstakes and/or lottery tickets after the 1959 draws which, obviously, was treated as a business loss. (See: Memo of Mr. Castor Ayeras, pp. 26-29, Docket). That Department has requested for a ruling on the "treatment" of the cost of unsold tickets for income tax purposes. Two question have been raised in this connection, namely: (1) whether or not the cost of the unsold tickets should be included in the cost of sale in determining the gross income from the buying and selling of sweepstakes tickets; and, (2) whether or not the cost of the unsold tickets is deductible from the gross income as a business loss in determining the net income. The cost of the unsold tickets should not be included in the cost of sales because only the cost of goods sold can be deducted from the total sales in determining gross income. (Sec. 43, Income Tax Regulations). Hence, is a sweepstakes agent purchased 100 booklets at P33.00 and sold only 95 booklets at P40.00, his gross income shall be P3,800 less P3,135 or P665.00. As regards the second question, it is believed that the cost of the unsold tickets of a sweepstakes agent constitutes his investment in a wagering transaction. A sweepstakes agent who has in his possession unsold tickets at the time of the draw becomes like the ordinary purchases who participated in the chance of winning prizes. His position becomes that of a wagerer in which case, whatever losses he may incur therefrom can be allowed as a deduction only up to the extent of the gains realized in the wager. (Sec. 30(d)(6), Tax Code. It should be noted in this connection, however, that the law just cited presupposes that the gains realized from wagering are reported as income. Since under the law (R. A. No. 1169) sweepstakes winning are exempt from the income tax and are, therefore, not reported as income, it follows that no losses incurred therefrom can be allowed as a deduction from gross income. Consequently, Mr. Uy cannot deduct from his gross income the cost of the unsold tickets. That Department is instructed to issue the corresponding deficiency assessment against Mr. Uy and all other sweepstakes agents similarly situated in accordance with the foregoing ruling. cdtech MELECIO R. DOMINGO Commissioner of Internal Revenue