Guidelines to be Followed in Verifying Losses Claimed by Taxpayers on Account of Typhoons and in Determining the Amounts to be Allowed as Deduction from the Gross Income of Said Taxpayers

February 5, 1971 REVENUE MEMORANDUM CIRCULAR NO. 06-71 SUBJECT : Guidelines to be Followed in Verifying Losses Claimed by Taxpayers on Account of Typhoons and in Determining the Amounts to be Allowed as Deduction from the Gross Income of said Taxpayers TO : All Internal Revenue Officers and others concerned This Office takes cognizance of the typhoons which visited the Philippines in 1970. Since these typhoons resulted in extensive damage to property, this Office anticipates that many taxpayers will claim losses arising from said typhoons as deductions in their income tax returns. Consequently, there is a need to promulgate certain guidelines to insure uniformity in verifying losses claimed by taxpayers on account of said typhoons and in determining the amounts to be allowed as deduction. In this regard, the attention of all concerned is invited to the following discussion: I. Application . Section 30(d) of the National Internal Revenue Code provides the legal basis for the deduction of typhoon losses. Under the said section losses "actually sustained during the taxable year and not compensated for by insurance or otherwise" shall be deductible for income tax purposes. II. Amount of Loss Deductible In general, the amount of casualty loss deductible is limited to the difference between the value of the property immediately preceding the casualty and its value immediately thereafter, but not in excess of an amount equal to the cost or other adjusted basis of the property, or depreciated cost in the case of property used in business, reduced by any insurance or other compensation received. To Illustrate: 1.Property not used in business: Value of property before casualty P15,000 Value of property after casualty 10,000 Insurance recovered 3,000 In the given facts, the casualty loss would be: Value of property before casualty P15,000 Value of property after casualty 10,000 Loss due to casualty P5,000 ====== However, the loss deductible for income tax purposes would only be P2,000 in view of the partial recovery thru insurance: Loss due to casualty P5,000 Less: Proceeds from insurance policy 3,000 Loss deductible P2,000 ====== 2.Property used in business: 1)Total destruction: In case of losses arising from total destruction of properties used in business (ordinary asset) the net book value (Cost less accumulated depreciation) immediately preceding the casualty should be used as the basis in claiming losses, also to be reduced by any amount of insurance or compensation received. To Illustrate: Given: Acquisition cost of property P10,000 Accumulated depreciation 5,000 Insurance recovered 2,500 Then: Acquisition cost P10,000 Less: Accumulated depreciation 5,000 Amount of loss suffered P5,000 Less: Amount recovered through insurance 2,500 Allowable loss due to typhoon 2,500 ====== 2)Partial damages: In case of losses arising from partial damages of property used in business, the replacement cost to restore the property back to its normal operating condition should be used for purposes of computing deductible losses; but in no case shall the deductible loss be more than the net book value of the property as a whole immediately before the casualty. The excess over the net book value immediately before the casualty should be capitalized subject to depreciation over the remaining useful life of the property which in no case shall be less than five (5) years. To Illustrate: Given: Acquisition cost P100,000 Accumulated depreciation 90,000 Net book value 10,000 ====== Estimated remaining life 5 years Replacement cost of damaged portion P20,000 In the above example, the loss deductible for tax purposes would be limited to P10,000 which is equal to the net book value of the whole property: Net book value P10,000 Replacement cost 20,900 Excess of replacement cost to be capitalized P10,000 ====== Consequently, the new cost basis subject to depreciation charges over the remaining useful life of the property of five (5) years whichever is longer, would be P20,000 as shown hereunder: Net book value before casualty P10,000 Add: Excess of replacement cost over net book value 10,000 New Cost basis P20,000 ====== 20,000 Yearly depreciation = 4,000 5 yrs. III. Proof of Loss . The burden of proof is upon the taxpayer to substantiate his claim for deduction. He should invariably be required to submit evidence showing the following: 1.The name of the typhoon and when it occurred; 2.A brief description of the property subject of the claim for loss and the location thereof; 3.The character of his interest in the property subject of the claim for loss; 4.Depreciation already allowed, if any; 5.The amount of insurance or other compensation received or recoverable; 6.The value of repairs or cost of restoration, including that provided without cost by disaster relief agencies; 7.The cost or other basis of the property, evidenced by purchase contract, deed, etc. (improvement should be supported by checks, receipts, etc.) Photographs of the property as it existed before it was damaged will be helpful in showing the condition and value of the property prior to the casualty. Photographs taken after the casualty which show the extent of the damage will be helpful in establishing the condition and value of the property after it was damaged. Photographs showing the condition and value of the property after it was repaired, restored or replaced may also be helpful. Furthermore, since the valuation of the property is of extreme importance in determining the amount of loss sustained, the taxpayer should be prepared to come forward with cancelled checks, vouchers, receipts and other evidences of cost; and where records have been destroyed, or where no evidence of cost can be obtained, the assessed value as of the date of acquisition should be accepted as cost of the property. The foregoing evidence should be attached to the income tax return of the taxpayer. Examiners should verify the correctness of the facts constituting the evidence. The result of said verification shall form part of the report of the examiners. Please be guided accordingly. cdt MISAEL P. VERA Commissioner of Internal Revenue APPROVED: CESAR A. VIRATA Secretary of Finance ANNEX A March 8, 1971 The Honorable The Secretary of Finance Manila S i r : I am forwarding herewith Revenue Memorandum Circular No. 6-71, the subject matter of which is "Guidelines to be followed in verifying losses claimed by taxpayers on account of typhoons and in determining the amounts to be allowed as deduction from the gross income of said taxpayers", for your approval. Very truly yours, MISAEL P. VERA Commissioner of Internal Revenue ANNEX B February 11, 1971 The Honorable The Secretary of Finance Manila Re: Proposed Memorandum Circular Prescribing a Uniform Rate of Exchange for Internal Revenue Tax Purposes S i r : With reference to the above subject matter and the unfavorable comment of the Central Bank Governor in his memorandum dated January 29, 1971, this Office hereby respectfully reiterates its proposal, with one modification, for reasons to be discussed hereunder. In the preparation of the said Circular, we have taken into account the manifold problems that will arise in the administration of our tax laws, more particularly the provisions of the Tax Code on income taxation, side by side with the floating rate of exchange. Of these problems, we have singled out the more pressing ones and they are: 1.The problem that will confront taxpayers, whether residing here or abroad, receiving income in foreign currencies regularly. A typical example of this is a Filipino citizen employed in the United States and receiving a monthly salary in dollars. To require these taxpayers whose numbers run into thousands to convert their income into pesos on a day-to-day basis in accordance with Central Bank Circular 289 will be inhuman and run counter to our voluntary tax compliance program. We say inhuman because in order to comply strictly with the Central Bank Circular, an ordinary taxpayer will have to employ resources beyond his own capabilities. So intricate a problem as the conversation of a foreign currency to pesos will need expertise with which an average taxpayer is not equipped. You will note, Sir, that in the past few years, we have launched a voluntary tax compliance program on a grand scale and we have regularly sent BIR experts abroad to help Filipinos in the preparation of their income tax returns. A strict compliance with Central Bank Circular 289, as suggested by the Central Bank Governor, will run counter to our efforts to convince Filipino expatriates to pay taxes to the Philippine Government. We say this because to follow the said suggestions would add an unreasonable burden on the shoulders of the still half-convinced Filipinos residing abroad. 2.The problems that will confront our revenue examiners in the verification of the income declared by such taxpayers and the tax credit claimed by them. We take into account the fact that a regular examination of income tax returns can be made only after the lapse of a long period of time from the date of filing of the said returns. The man-hours which will be spent by our examiner in the laborious tasks of checking the correctness of the conversion of the taxpayers' foreign income into pesos will not be commensurate with the advantages which may be derived from a strict adherence to Central Bank Circular 289. In anticipation of the above problems, we have arrived at a consensus that the use of an average rate would be more effective and we proceeded to take the simple average rate of exchange during the year 1970 as follows: Month Average Rate February 21-27 P5.628/1 US dollar March 6.096 April 6.162 May 6.121 June 6.192 July 6.230 August 6.269 September 6.370 October 6.435 November 6.435 December 6.435 Simple Average for 1970 6.216 ===== We rounded off the said average to P6.25 for expediency and this is the rate we propose to adopt for internal revenue tax purposes for 1970. In preparing our circular, we took into consideration all possible dollar transactions affecting tax administration. As a matter of fact, we grouped these dollar transactions into the following: 1.Habitual transactions such as salaries, wages or other compensation for personal services, royalty payments and the like, for which we recommend the uniform rate of P6.25; 2.Isolated or casual transactions like dividend payments and occasional sales of property for which we insist on the use of the rate of exchange quoted by the Central Bank on the date of such transaction, in accordance with Central Bank Circular 289; and 3.Importations of goods into the country which are subject to advance sales or compensating taxes for which we recommend adherence to Section 204 of the Tariff and Customs Code. With respect to the recommendation that the cut-off date be February 21, 1970 when Central Bank Circular 289 became effective, we have revised our circular to conform therewith. In view of all the foregoing, it is hereby respectfully urged that the attached Revenue Memorandum Circular be approved. Very truly yours, MISAEL P. VERA Commissioner of Internal Revenue