Deduction for Expenses Incurred for Taxpayer's Son-Employee

May 21, 1958 BIR RULING NO. 292-58 1st Indorsement Respectfully returned to the Regional Director, Regional District No. 3, Manila, the papers bearing on the income tax case of Mr. Apolonio A. Aguirre. Opinion is requested as to whether the abovementioned taxpayer may be allowed to claim as an item of deduction in his 1955 income tax return, the amount of P10,214.00 representing expenses incurred by him for his son, Pedro Aguirre, who is his employee. LLphil To be deductible as business expenses in computing net income, it is essential that the expenses have been paid or incurred in carrying on a trade or business. A taxpayer, to be entitled to business expense deduction must be actually engaged in carrying on a trade or business; the expenses sought to be deducted must relate to the carrying on of a business; and must be directly connected with the carrying on of the taxpayer's business (47 C. J. D. p. 403) Expenses to be deductible must have been paid or incurred in carrying on a business. Expenses incurred in order to permit a taxpayer to carry on a business are not deductible unless the expense may be said to have been incurred in the carrying on the business itself. (Vol. 4, Mertens Law of Federal Income Taxation p. 308) In order that the taxpayer's activities may be characterized as a trade or business it is not necessary that the taxpayer have a reasonable expectation of a profit from the conduct of the enterprise. It is necessary, however, that enterprise be initialed and conducted in good faith by the taxpayer with the intention of making a profit or of producing income (Vol. 4 Mertens, p. 310) It appearing that Mr. Apolonio A. Aguirre is engaged in the pawnshop and rental business during the year 1955, the amount of P10,214.00 expended by him for the said year for his son while on an observation trip abroad to study cattle raising and paper pulp manufacturing in which business the taxpayer was not engaged, the aforesaid expenses cannot be allowed as a business expense deduction, because the same was not incurred in relation to the operation of the pawnshop and rental business in which the taxpayer is actually engaged. Moreover, the expenses incurred by Mr. Apolonio A. Aguirre is furthering his son's education is of a personal character and hence not deductible from his gross income (Sec. 31(a)(1) Tax Code) As the expense involved is personal in nature and is not proximately related to the business conducted by the taxpayer, the same is not a proper deduction from his gross income as a loss. LLjur (SGD.) JOSE ARAAS Commissioner of Internal Revenue