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Tax Digests

Tax Digests

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Published by Stef Macapagal
digests for taxation law cases suggested by the excellent bar review center
digests for taxation law cases suggested by the excellent bar review center

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Published by: Stef Macapagal on Jul 22, 2010
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11/21/2013

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STEPHANIE LUZETTE M. MACAPAGAL
TAXATION LAW DIGESTS FOR CASES SUGGESTED BY EXCELLENT
1
 
1
 1.
 
 R
UFINO
 AN V 
.
 
 R
 AMON 
 D
 EL
 R
OSARIO
,
 
 J 
 R
.
 
(237 
 
 SCRA
 
 324)
Topic: Taxation of general professional partnerships v. ordinary business partnerships Facts:
Petitioners challenge the constitutionality of RA 7496, commonly known as the Simplified Net Income TaxationScheme (SNIT).
 Issue and Ruling:
1.
 
 W/
N the SNIT applies to partners in general professional partnerships. YES. There is no distinction in income tax liability between a person who practices his profession alone orindividually and one who does it through a partnership (whether registered or not) with others in the exercise of acommon profession. Under the present income tax system, all individuals deriving income from any source whatsoever are treated in almost invariably the same manner and under a common set of rules. Although the generalprofessional partnership is exempt from the payment of taxes (but it still has an obligation to file an income tax returnmainly for administration and data), the partners themselves are liable for the payment of income tax in theirindividual capacity computed on their respective and distributive shares of profits.
 Notes:
D
ifferences between general professional partnerships and ordinary business partnerships:a.
 
 A general professional partnership, unlike an ordinary business partnership (which is treated as acorporation for income tax purposes and so subject to the corporate income tax), is not itself an incometaxpayer. The income tax is imposed not on the professional partnership, which is tax exempt, but on thepartners themselves in their individual capacity computed on their distributive shares of partnership profits. b.
 
Ordinary business partnerships, no matter how created or organized, are ³taxable partnerships.´ Generalprofessional partnerships are ³exempt partnerships.´ Under the Tax Code on income taxation, the generalprofessional partnership is deemed to be no more than a mere mechanism or a flow-through entity in thegeneration of income by, and the ultimate distribution of such income to, respectively, each of the individualpartners.
 2.
 
OMMISSIONER OF 
 I 
 NTERNAL
 R
 EVENUE V 
.
 
 B
 RITISH 
O
VERSEAS 
 A
 IRWAYS 
ORP 
.
 
(149
 
 SCRA
 
 395)
Topic: Test of taxability of income of resident foreign corporations Facts:
 British Airways, a foreign company, is protesting a deficiency income tax assessment by the Commissioner of InternalRevenue for the period covering the years 1959-1963. It contends that although it maintained a general sales agent inthe Philippines which was responsible for selling British Airways tickets covering passengers and cargoes, it did notactually carry passengers and
/
or cargo to or from the Philippines within the stated period and thus should not have bee assessed taxes.
 Issues and Ruling:
 1.
 
 W/
N British Airways was a resident foreign corporation doing business in the Philippines during the statedperiod. YES.
D
uring the stated period, British Airways maintained a general sales agent in the Philippines which exercisedfunctions which are normally incident to, and are in progressive pursuit of, the purpose and object of its organizationas an international air carrier. In fact, its main activity, the regular sale of tickets, is the very lifeblood of the airline business, the generation of sales being the paramount objective. Accordingly, it is a resident foreign corporation
 
STEPHANIE LUZETTE M. MACAPAGAL
TAXATION LAW DIGESTS FOR CASES SUGGESTED BY EXCELLENT
2
 
2
subject to tax upon its total net income received in the preceding taxable year from all sources within the Philippines,according to Section 24(b)(2) of the same Code.2.
 
 W/
N the revenue of British Airways from ticket sales in the Philippines for air transportation constituteincome of British Airways subject to taxation in the Philippines, although they did not actually carry passengers and
/
or cargo to or from the Philippines within the stated period. YES. The absence of flight operations to and from the Philippines is not determinative of the source of income or thesite of income taxation. The test of taxability is the ³source,´ and the source of an income is that activity whichproduced the income. Even if the British Airways tickets sold covered the ³transport of passengers and cargo to andfrom foreign cities,´ it cannot alter the fact that income from the sale of tickets was derived from the Philippines. Thepassage documentations in these cases were sold in the Philippines and the revenue therefrom was derived from anactivity regularly pursued within the Philippines. The word ³source´ conveys one essential idea, that of origin, and theorigin of the income herein is the Philippines.
 Note:
  Although there is no specific criterion as to what constitutes ³doing´ or ³engaging in´ or ³transacting´ business asstated under Section 20(h) of the 1977 Tax Code, the terms imply a continuity of commercial dealings andarrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some functionsnormally incident to, and in progressive prosecution of, commercial gain or for the purpose and object of the businessorganization.
 3.
 
 F 
 ILIPINAS 
 S 
YNTHETIC 
 F 
 IBER
ORP 
.
.
 
CA
 
(316
 
 SCRA
 
 480)
Topic: When does the liability to hold tax at source on income payments accrue?  Facts:
 Filipinas Synthetic Fiber Corp., a domestic corporation, is protesting part of the deficiency withholding tax assessedupon it by the Commissioner of Internal Revenue which pertains to interest and compromise penalties for the allegedlate payment of withholding taxes due on interest loans, royalties, and guarantee fees paid by Filipinas SyntheticFiber Corp. to non-resident corporations.
 Issue and Ruling:
 1.
 
 W 
hether the liability to withhold tax at source on income payments to non-resident foreign corporationsarises upon remittance of the amounts due to the foreign creditors or upon accrual thereof.The Tax Code is silent as to when the duty to withhold the taxes arise. Thus, to determine the same, an inquiry as tothe nature of the accrual method of accounting (which is the method used by the petitioner) must be made. Under theaccrual basis method, it is the right to receive income, and not the actual receipt, that determines when to include theamount in gross income. Therefore, the liability arises UPON REMITTANCE OF THE AMOUNTS, and not uponaccrual thereof.
 Notes:
 Under the accrual basis method of accounting, income is reportable when all the events have occurred that fix thetaxpayer¶s right to receive the income, and the amount can be determined with reasonable certainty.Requisites of the accrual method of accounting:a.
 
That the right to receive the amount must be valid, unconditional and enforceable; b.
 
The amount must be reasonably susceptible of accurate estimate; andc.
 
There must be a reasonable expectation that the amount will be paid in due course.
 
STEPHANIE LUZETTE M. MACAPAGAL
TAXATION LAW DIGESTS FOR CASES SUGGESTED BY EXCELLENT
3
 
3
 4.
 
OMMISSIONER OF 
 I 
 NTERNAL
 R
 EVENUE V 
.
 
 I 
 SABELA
ULTURAL
ORP 
.
 
(515 
 
 SCRA
 
 556)
Topic: The all-events test; when deductions from income taxes may be claimed  Facts:
 
 W 
hen the Bureau of Internal Revenue disallowed Isabela Cultural Corporation¶s claimed deductions for the years1984-1986 in their 1986 taxes for expense deductions, to wit:(1)
 
Expenses for auditing services for the year ending 31
D
ecember 1985;(2)
 
Expenses for legal services for the years 1984 and 1985; and(3)
 
Expense for security services for the months of April and May 1986. As such, the former charged the latter for deficiency income taxes. Isabela Cultural Corporation contests theassessment.
 Issues and Ruling:
 1.
 
For a taxpayer using the accrual method, when do the facts present themselves in such a manner that thetaxpayer must recognize income or expense?The accrual of income and expense is permitted when the all-events test has been met. This test requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the reasonable accurate determination of such incomeor liability. The test does not demand that the amount of income or liability be known absolutely, only that a taxpayerhas at his disposal the information necessary to compute the amount with reasonable accuracy. The all-events test issatisfied where computation remains uncertain, if its basis is unchangeable; the test is satisfied where a computationmay be unknown, but is not as much as unknowable, within the taxable year.2.
 
 W/
N the deductions were properly claimed by Isabela Cultural Corporation.The deductions for expenses for professional fees consisting of expenses for legal and auditing services are NOTallowable. However, the deductions for expenses for security services were properly claimed by Isabela CulturalCorporation. For the legal and auditing services, Isabela Cultural Corporation could have reasonably known the feesof those firms that it hired, thus satisfying the ³all-events test.´ As such, per Revenue Audit Memorandum Order No.1-2000, they cannot validly be deducted from its gross income for the said year and were therefore properly disallowed by the BIR. As for the security services, because they were incurred in 1986, they could be properly claimed as deductions for the said year.
 Notes:
 The requisites for the deductibility of ordinary and necessary trade, business, or professional expenses, like expensespaid for legal and auditing services, are:a.
 
The expense must be ordinary and necessary; b.
 
It must have been paid or incurred during the taxable year;c.
 
It must have been paid or incurred in carrying on the trade or business of the taxpayer; andd.
 
It must be supported by receipts, records, or other pertinent papers.Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of accounting, expenses not being claimed as deductions by a taxpayer in the current year when they are incurred cannot be claimed as deductionfrom income for the succeeding year. Thus, a taxpayer who is authorized to deduct certain expenses and otherallowable deductions for the current year but failed to do so cannot deduct the same for the next year.

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