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

August 4, 1972 REVENUE MEMORANDUM CIRCULAR NO. 33-72 SUBJECT : Guidelines to be Followed in Verifying Losses Claimed by Taxpayers on Account of Typhoons, Floods and Other Disasters 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 disastrous floods which caused heavy damage in Central Luzon and other parts of the country and anticipates that taxpayers would claim losses arising from said floods and typhoons as deductions in their income tax returns. Consequently, Revenue Memorandum Circular No. 6-71 , dated February 5, 1971, is hereby updated to take into account new factors not covered therein: I. Application . Section 30(d) of the National Internal Revenue Code provides the legal basis for the deduction of casualty losses due to floods and typhoons. 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 . (a) 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: (a) 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 P2.500 ===== (b) 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 be 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 10,000 Replacement cost 20,000 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 years 3. Farm Losses . In the case of losses sustained by farmers, the following rules are hereby promulgated: (a) Loss of Livestock . The loss sustained in the death of livestock shall be allowed as a deduction to the extent of the acquisition cost only if no inventories are taken into account in determining the income from the business of farming. If inventories are taken into account in determining the income from the trade or business of farming, no deductions shall be allowed for losses sustained during the taxable year upon livestock or other products, whether purchased for resale or produced on the farm, to the extent such losses are reflected in the inventory on hand at the close of the taxable year. (b) Other farm losses . Where ground is prepared and planted or stocked as in the case of sugar, coconut and other agricultural plantations, rice and corn lands, truck farms and orchards, fishponds and other farms and its value is completely destroyed by the overflow or seepage of water from natural causes, the cost of the preparation and planting or stocking up to the time of the disaster shall be a deductible loss in the year in which it is incurred. 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. A brief description of the property subject of the claim for loss and the location thereof; 2. The character of his interest in the property subject of the claim for loss; 3. Depreciation already allowed, if any; 4. The amount of insurance or other compensation received or recoverable; 5. The value of repairs or cost of restoration, including that provided without cost by disaster relief agencies; 6. 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 kept by the taxpayer as part of his tax records and be made available to the investigating examiner. 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. IV. Repealing Clause . The provisions of Revenue Memorandum Circular No. 6-71 dated February 5, 1971 are hereby revoked with the issuance of this Revenue Memorandum Circular. Please be guided accordingly. aisa dc MISAEL P. VERA Commissioner of Internal Revenue APPROVED: CESAR VIRATA Secretary of Finance