Whether the Indemnity Paid in 1992 Can be Considered as Allowable Deduction from Gross Income for That Year

March 9, 1994 BIR RULING NO. 071-94 39 000-00 071-94 Aguirre Loan Co. Filipino Merchants' Building 135 De la Rosa cor. Legaspi Street Legaspi Village, Makati Metro Manila Attention: Mr . Severino S . Banzon Gentlemen : This refers to your request for a ruling as to whether or not the indemnity paid in 1992 can be considered as allowable deduction from gross income for that year. It is represented that the branch office of your company at Recto Avenue, Binondo, Manila was robbed in a daring daylight hold-up last July 11, 1991 where almost all the valuable items of jewelry pledged as collaterals by your borrowers and cash were taken; that claims for indemnification have been and are still being filed by your borrowers for their stolen jewelry; that the claims are being studied and processed in the meantime by a special committee appointed by the management to determine the amount of indemnification to be paid to each claimant; that the Board of Directors decides on the merits of each claim based on the recommendation of the committee; and that the process necessarily takes time and the indemnity to be paid to all other claimants aside from those already paid will have to be determined the following year 1992. In reply thereto, I have the honor to inform you that deductions shall be taken for the taxable year in which "paid or accrued" or "paid or incurred", dependent upon the method of accounting upon the basis of which the net income is computed, unless in order to clearly reflect the income the deductions should be taken as of a different period. (Section 38, Tax Code, as amended) Thus, deductions are allowed depending on whether the taxpayer is on a cash basis (year when paid) or accrual basis (year when accrued) unless the taxpayer is allowed to adopt other methods designed to truly reflect its income. Accordingly, and since your method of accounting is the cash method, the indemnity paid by you in 1992 to your claimants is deductible as an expense for the year 1992. cdtech Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue