Timber Exploitation Contract Entered into Between ADECOR and the GSP and BSP

April 7, 1960 BIR RULING NO. 158-60 Mr. Angel M. Vecino Attorney-at-Law R-208 Martinez Bldg. Dasmarias, Manila S i r : Reference is made to your letter dated April 5, 1960 requesting information as to the correctness of the advice you gave your client, Aguinaldo Development Corporation, hereafter referred to as ADECOR, relative to the treatment for income tax purposes of the cost of construction of logging roads in connection with its logging operations under its own timber concession and under the timber exploitation contract it entered into with both the Girl and Boy Scouts Organizations of the Philippines, hereafter referred to as GSP and BSP, respectively. You allege that you advised your client to charge the total cost of constructing the logging roads to operations in the year in which the expenses were incurred. In support of your opinion you cite the following authorities: cdtech "Costs of a licensee of property in improving it are ordinary expenses. They are deductions only in the year incurred. Unlike a lessees, a licensee does not amortize these costs over the remaining period of validity of the license." (J.K. Lasser's Handbook of Tax Accounting Methods, 1951 ed., p., 59). "The road that was constructed by appellee belongs to the government by the right of accession not only because it is inherently incorporated or attached to the timber land leased to appellee but also because upon the expiration of the concession, said road would ultimately pass to the national government (Articles 440 and 445, New Civil Code; Tabotabo vs. Molero, 22 Phil. 418). In the second place, while the road was constructed by appellee primarily for its use and benefit, the privilege is not exclusive, for, under the lease contract entered into by the appellee and the government, its use can also be availed of by employees of the government and by the public in general. Since the road in question cannot be considered as an improvement which belongs to appellee, although in part, is for its benefit, it is clear that the same cannot be the subject of assessment within the meaning of section 2 of Commonwealth Act No. 470. . . .. Appellee vs. The Provincial Government of Surigao, Defendant-Appellant, G.R. No. L-9023, NOV. 13, 1956). In reply, I have the honor to inform you as follows: It appears from the timber exploitation contract entered into between ADECOR and the GSP and BSP that the logging roads constructed by the former shall automatically become the property of the latter. There is no question that under its own timber concession, the logging roads constructed by ADECOR shall become the property of the Government. Under the circumstances, the authorities cited by you are obviously in point. In the case of Converse vs. Earle, 43 AFTR p. 1308, the facts of which are almost on all fours with the case of your client, it was held that the cost of construction of logging roads constituted ordinary and necessary expenses paid by plaintiff during the taxable year in carrying on his business and did not constitute capital expenditures. In the light of the foregoing, this Office is of the opinion and so holds that the cost of construction of the logging roads incurred by your client in connection with its logging operations under its own timber concession and under its timber exploitation contract with the GSP and BSP constitute ordinary and necessary expense deductible from gross income in the year incurred. cdta Very truly yours, MELECIO R. DOMINGO Commissioner of Internal Revenue