Consolidated Mines v. CTA, CA (1974) Notes: From Atty.

Ingles Reviewer: Accrual basis is the default meaning, you report income when earned and report expense when incurred, i.e. when its legally due, demandable and enforceable. From ehow.com: Accrual accounting and cash basis accounting are the two most common accounting methods used by U.S. companies. Accrual accounting records transactions as they occur; cash basis accounting records transactions only when cash changes hands. However, companies may select any accounting method that accurately records financial transactions and is used consistently. Hybrid accounting methods usually combine aspects from both accrual and cash basis accounting, according to company operations Facts: Consolidated Mines domestic corp engaged in mining The Company has certain mining claims located in Masinloc, Zambales. Consolidated wanted to relieve itself of the work and expense necessary for developing the claims, the Company, on July 9, 1934, entered into an agreement (Exhibit L) with Benguet, a domestic anonymous partnership engaged in the production and marketing of chromite, whereby the latter undertook to "explore, develop, mine, concentrate and market" the pay ore in said mining claims o Benguet was to contribute the capital and equipment it is going to need to develop the mines 1954: Consolidateds auditor claimed a refunds with the CIR Hence, examiners of the Bureau of Internal Revenue investigated the income tax returns filed by the Company The examiners reported that for the years 1951 to 1954 : (1) the Company had not accrued as an expense the share in the company profits of Benguet Consolidated Mines as operator of the Company's mines, although for income tax purposes the Company had reported income and expenses on the accrual basis; (2) The depletion and depreciation expenses had been overcharged CTA reduced deficiency tax. While on appeal, the CA ordered Benguet Mines to pay the CIR deficiency taxes for 3 years amounting to P202K Tax Court subscribed to the theory of the Company that Benguet Consolidated Mining Company had no right to share in "Accounts Receivable," hence one-half thereof may not be accrued as an expense of the Company for a given year The Company used the accrual method of accounting in computing its income. One of its expenses is the amount-paid to Benguet as mine operator, which amount is computed as 50% of "net income." But Consolidated does not deduct at the end of each calendar year what the Commissioner alleges is "50% of the share of Benguet in the accounts receivable. Consolidated deducts Benguet's 50% if and when the "accounts receivable" are actually paid. It would seem, therefore, that the Company has been deducting a portion of this expense (Benguet's share as mine operator) on the "cash & carry" basis.

ISSUE: 1. Whether or not the accounting system used by the Company justifies such a treatment of Accounts Receivable 2. Whether said method used by the Company, and characterized by the Commissioner as a "hybrid method," may be allowed under the provisions of our tax code HELD: Consolidated and Benguet are using the accrual method and not the hybrid method method of computing compensation the basis were "cash receipts" and "cash payments." Once determined in accordance with the stipulated bases and procedure, then the amount due Benguet for each month accrued at the end of that month, whether the Company had made payment or not (see par. XIV of the agreement). To make the Company deduct as an expense one-half of the "Accounts Receivable" would, in effect, be equivalent to giving Benguet a right which it did not have under the contract, and to substitute for the parties' choice a mode of computation of compensation not contemplated by them. 18 Since Benguet had no right to one-half of the "Accounts Receivable," the Company was correct in not accruing said one-half as a deduction.