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THE COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents. De la Cuesta, De las Alas and Callanta Law Offices for petitioners. The Solicitor General for respondents
GANCAYCO, J.: The distinction between co-ownership and an unregistered partnership or joint venture for income tax purposes is the issue in this petition. On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino, et al. and on May 28, 1966, they bought another three (3) parcels of land from Juan Roque. The first two parcels of land were sold by petitioners in 1968 toMarenir Development Corporation, while the three parcels of land were sold by petitioners to Erlinda Reyes and Maria Samson on March 19,1970. Petitioners realized a net profit in the sale made in 1968 in the amount of P165,224.70, while they realized a net profit of P60,000.00 in the sale made in 1970. The corresponding capital gains taxes were paid by petitioners in 1973 and 1974 by availing of the tax amnesties granted in the said years. However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I. Plana, petitioners were assessed and required to pay a total amount of P107,101.70 as alleged deficiency corporate income taxes for the years 1968 and 1970. Petitioners protested the said assessment in a letter of June 26, 1979 asserting that they had availed of tax amnesties way back in 1974. In a reply of August 22, 1979, respondent Commissioner informed petitioners that in the years 1968 and 1970, petitioners as co-owners in the real estate transactions formed an unregistered partnership or joint venture taxable as a corporation under Section 20(b) and its income was subject to the taxes prescribed under Section 24, both of the National Internal Revenue Code 1 that the unregistered partnership was subject to corporate income tax as distinguished from profits derived from the partnership by them which is subject to individual income tax; and that the availment of tax amnesty under P.D. No. 23, as amended, by petitioners relieved petitioners of their individual income tax liabilities but did not relieve them from the tax liability of the unregistered partnership. Hence, the petitioners were required to pay the deficiency income tax assessed.
Petitioners filed a petition for review with the respondent Court of Tax Appeals docketed as CTA Case No. 3045. In due course, the respondent court by a majority decision of March 30, 1987, 2 affirmed the decision and action taken by respondent commissioner with costs against petitioners. It ruled that on the basis of the principle enunciated in Evangelista 3 an unregistered partnership was in fact formed by petitioners which like a corporation was subject to corporate income tax distinct from that imposed on the partners. In a separate dissenting opinion, Associate Judge Constante Roaquin stated that considering the circumstances of this case, although there might in fact be a coownership between the petitioners, there was no adequate basis for the conclusion that they thereby formed an unregistered partnership which made "hem liable for corporate income tax under the Tax Code. Hence, this petition wherein petitioners invoke as basis thereof the following alleged errors of the respondent court:
A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE RESPONDENT COMMISSIONER, TO THE EFFECT THAT PETITIONERS FORMED AN UNREGISTERED PARTNERSHIP SUBJECT TO CORPORATE INCOME TAX, AND THAT THE BURDEN OF OFFERING EVIDENCE IN OPPOSITION THERETO RESTS UPON THE PETITIONERS. B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE TRANSACTIONS, THAT AN UNREGISTERED PARTNERSHIP EXISTED THUS IGNORING THE REQUIREMENTS LAID DOWN BY LAW THAT WOULD WARRANT THE PRESUMPTION/CONCLUSION THAT A PARTNERSHIP EXISTS. C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA CASE AND THEREFORE SHOULD BE DECIDED ALONGSIDE THE EVANGELISTA CASE. D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE PETITIONERS FROM PAYMENT OF OTHER TAXES FOR THE PERIOD COVERED BY SUCH AMNESTY. (pp. 12-13, Rollo.)
The petition is meritorious. The basis of the subject decision of the respondent court is the ruling of this Court in Evangelista. 4 In the said case, petitioners borrowed a sum of money from their father which together with their own personal funds they used in buying several real properties. They appointed their brother to manage their properties with full power to lease, collect, rent, issue receipts, etc. They had the real properties rented or leased to various tenants for several years and they gained net profits from the rental income. Thus, the Collector of Internal Revenue demanded the payment of income tax on a corporation, among others, from them.
In resolving the issue, this Court held as follows:
The issue in this case is whether petitioners are subject to the tax on corporations provided for in section 24 of Commonwealth Act No. 466, otherwise known as the National Internal Revenue Code, as well as to the residence tax for corporations and the real estate dealers' fixed tax. With respect to the tax on corporations, the issue hinges on the meaning of the terms corporation and partnership as used in sections 24 and 84 of said Code, the pertinent parts of which read: Sec. 24. Rate of the tax on corporations.—There shall be levied, assessed, collected, and paid annually upon the total net income received in the preceding taxable year from all sources by every corporation organized in, or existing under the laws of the Philippines, no matter how created or organized but not including duly registered general co-partnerships (companies collectives), a tax upon such income equal to the sum of the following: ... Sec. 84(b). The term "corporation" includes partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participation), associations or insurance companies, but does not include duly registered general co-partnerships (companies colectivas). Article 1767 of the Civil Code of the Philippines provides: By the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves. Pursuant to this article, the essential elements of a partnership are two, namely: (a) an agreement to contribute money, property or industry to a common fund; and (b) intent to divide the profits among the contracting parties. The first element is undoubtedly present in the case at bar, for, admittedly, petitioners have agreed to, and did, contribute money and property to a common fund. Hence, the issue narrows down to their intent in acting as they did. Upon consideration of all the facts and circumstances surrounding the case, we are fully satisfied that their purpose was to engage in real estate transactions for monetary gain and then divide the same among themselves, because: 1. Said common fund was not something they found already in existence. It was not a property inherited by them pro indiviso. They created it purposely. What is more they jointly borrowed a substantial portion thereof in order to establish said common fund. 2. They invested the same, not merely in one transaction, but in a series of transactions. On February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944, they purchased 21 lots for P18,000.00. This was soon followed, on April 23, 1944, by the acquisition of another real estate for P108,825.00. Five (5) days later (April 28, 1944), they got a fourth lot for P237,234.14. The number of lots (24) acquired and transcations undertaken, as well as the brief interregnum between each, particularly the last three purchases, is strongly indicative of a pattern or common design that was not limited to the conservation and preservation of the aforementioned common fund or even of the property acquired by petitioners in February, 1943. In other words, one cannot but perceive a character of habituality peculiar to business transactions engaged in for purposes of gain. 3. The aforesaid lots were not devoted to residential purposes or to other personal uses, of petitioners herein. The properties were leased separately to several persons, who,
the collective effect of these circumstances is such as to leave no room for doubt on the existence of said intent in petitioners herein. The remaining three (3) parcels were sold by them in 1970. for petitioners do not even suggest that there has been any change in the utilization thereof. Although. the lots are still being so let. or on the causes for its continued existence. over fifteen (15) years. The character of habituality peculiar to business transactions for the purpose of gain was not present. Respondent commissioner and/ or his representative just assumed these conditions to be present on the basis of the fact that petitioners purchased certain parcels of land and became co-owners thereof. to collect rents. with full power to lease. either on their purpose in creating the set up already adverted to. The foregoing conditions have existed for more than ten (10) years. None of the circumstances are present in the case at bar. The business was under the management of one of the partners.from 1945 to 1948 inclusive. In Evangelista. since Simeon Evangelists became the manager. Thus. Since August. taken singly. they bought another three (3) parcels of land from one seller. 5 and. to sign letters and contracts. Seemingly. Such condition existed for over fifteen (15) years. Simeon Evangelists. In the present case. and that they intended to divide the profits among themselves. they might not suffice to establish the intent necessary to constitute a partnership. and over twelve (12) years. 4. there was a series of transactions where petitioners purchased twentyfour (24) lots showing that the purpose was not limited to the conservation or preservation of the common fund or even the properties acquired by them. It was only 1968 when they sold the two (2) parcels of land after which they did not make any additional or new purchase. 1945. The co-ownership started only in 1965 and ended in 1970. Petitioners have not testified or introduced any evidence. property or industry to a common fund. Justice Angelo Bautista in Evangelista he said: . the properties were leased out to tenants for several years. In Evangelists. to issue receipts. to bring suits.30 by way of rentals. The character of habituality peculiar to business transactions engaged in for the purpose of gain was present. Only one or two of the aforementioned circumstances were present in the cases cited by petitioners herein. namely. the properties have been under the management of one person. since the first property was acquired. They did not sell the same nor make any improvements thereon. 5. there is no evidence that petitioners entered into an agreement to contribute money. the affairs relative to said properties have been handled as if the same belonged to a corporation or business enterprise operated for profit. those cases are not in point. in the concurring opinion of Mr. or. paid the total sum of P70. The transactions were isolated. In the instant case. In 1966. Thus. 6. They did not even try to offer an explanation therefor. petitioners bought two (2) parcels of land in 1965. to be exact. hence.068. and to indorse and deposit notes and checks.
pp. but who severally retain the title to their respective contribution. 50 III 470. From the above it appears that the fact that those who agree to form a co. Civil Code of the Philippines Annotated. 682. and no community of interest as principal proprietors in the business itself which the proceeds derived. section 83. 1953 ed. though they may use it for the purpose of making gains. 1157. are not thereby rendered partners. manage the business. whether such co-owners or co-possessors do or do not share any profits made by the use of the property.S. does not constitute a co-partnership in respect thereto.I wish however to make the following observation Article 1769 of the new Civil Code lays down the rule for determining when a transaction should be deemed a partnership or a co-ownership. by two.) The common ownership of property does not itself create a partnership between the owners. Said article paragraphs 2 and 3. aside from the circumstance of profit.E. and they may. the parties are only tenants in common. and use of such . holding as tenants in common. 142 U. Or the sharing of the gross returns does not of itself establish a partnership whether or not the persons sharing therein have a joint or common right or interest in the property. (2) Co-ownership or co-possession does not itself establish a partnership. 74. his brother. whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived. and to divide the profits of disposing of it. Magee 123 N. provides. 635-636) It is evident that an isolated transaction whereby two or more persons contribute funds to buy certain real estate for profit in the absence of other circumstances showing a contrary intention cannot be considered a partnership. vs. I. Persons who contribute property or funds for a common enterprise and agree to share the gross returns of that enterprise in proportion to their contribution. Sideway.) Where plaintiff. 1067. 673... no partnership existed as between the three parties. agree among themselves as to the management. (Elements of the Law of Partnership by Flord D. This only means that.) In order to constitute a partnership inter sese there must be: (a) An intent to form the same. (c) and such a community of interest. Herring 150 P. without becoming partners. Vol. (3) The sharing of gross returns does not of itself establish a partnership. 233 Mass. the existence of a juridical personality different from that of the individual partners. such as the clear intent to form a partnership.-Municipal Paving Co.) A joint purchase of land. as far as third persons are concerned as enables each party to make contract. p. 35 L.. Mechem 2nd Ed. Ed. nor does an agreement to share the profits and losses on the sale of land create a partnership.12 Ct. (Magee vs. (b) generally participating in both profits and losses. and another agreed to become owners of a single tract of realty. 327. They have no common stock or capital.ownership share or do not share any profits made by the use of the property held in common does not convert their venture into a partnership. whatever their relation may have been as to third parties. the brother and the other not being entitled to share in plaintiffs commission. (Clark vs. the presence of other elements constituting partnership is necessary. 341. and the freedom to transfer or assign any interest in the property by one with the consent of the others (Padilla. and dispose of the whole property.
App. There must be an unmistakable intention to form a partnership or joint venture. the petition is hereby GRANTED and the decision of the respondent Court of Tax Appeals of March 30. as petitioners have availed of the benefits of tax amnesty as individual taxpayers in these transactions. JJ. Griño-Aquino and Medialdea. the existence of a juridical personality different from the individual partners. and the freedom of each party to transfer or assign the whole property. Doctrine: The sharing of gross returns does not of itself establish a partnership. 14. as the respondent commissioner proposes. There is no adequate basis to support the proposition that they thereby formed an unregistered partnership. Wilson. Narvasa.. they cannot be considered to have formed an unregistered partnership which is thereby liable for corporate income tax. Cruz.W. they are thereby relieved of any further tax liability arising therefrom.property and the application of the proceeds therefrom. J. then petitioners can be held individually liable as partners for this unpaid obligation of the partnership p. Under the circumstances. since there is no such existing unregistered partnership with a distinct personality nor with assets that can be held liable for said deficiency corporate income tax. In the present case..) The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a joint or common right or interest in the property.owners and paid their capital gains taxes on their net profits and availed of the tax amnesty thereby. concur. . whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived. 1987 is hereby REVERSED and SET ASIDE and another decision is hereby rendered relieving petitioners of the corporate income tax liability in this case. took no part. They shared in the gross profits as co. 6 363. without pronouncement as to costs. (Spurlock vs. And even assuming for the sake of argument that such unregistered partnership appears to have been formed. 7 However. There must be a clear intent to form a partnership. SO ORDERED. 142 S.160 No. WHEREFROM. The two isolated transactions whereby they purchased properties and sold the same a few years thereafter did not thereby make them partners. there is clear evidence of co-ownership between the petitioners.
The assessments are cancelled. vs. Two Judges of the Tax Court sustained the same. petitioner. Judge Roaquin dissented. liable for corporate income tax.707. for which they earned a profit of P134.336 in addition to individual income tax on their shares thereof. Issue: Whether or not petitioners have indeed formed a partnership or joint venture and thus.12 to buy the two lots. resold the same and divided the profit among themselves. As testified by Jose Obillos. Commissioner acting on the theory that the four petitioners had formed an unregistered partnership or joint venture. the instant appeal. They treated the profit as a capital gain and paid an income tax on one-half thereof or of P16. required the four petitioners to pay corporate income tax on the total profit of P134. . Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself establish a partnership. The petitioners were not engaged in any joint venture by reason of that isolated transaction. There must be an unmistakable intention to form a partnership or joint venture.Facts: For at least one year after their receipt of two parcels of land from their father. WHEREFORE. To regard the petitioners as having formed a taxable unregistered partnership would result in oppressive taxation and confirm the dictum that the power to tax involves the power to destroy. the judgment of the Tax Court is reversed and set aside. Jr. Held: We hold that it is error to consider the petitioners as having formed a partnership under article 1767 of the Civil Code simply because they allegedly contributed P178. Further. respondents. The petitioners contested the assessments.20 including the 50% fraud surcharge and the accumulated interest. the Commissioner of Internal Revenue. That eventuality should be obviated. they had no such intention. One day before the expiration of the five-year prescriptive period.584 for each of them. Hence. whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived". To consider them as partners would obliterate the distinction between a co-ownership and a partnership.584 as a " taxable in full (not a mere capital gain of which is taxable) and required them to pay deficiency income taxes aggregating P56.. AMPANG TAN. THE COMMISSIONER OF CUSTOMS AND COLLECTOR OF CUSTOMS FOR THE PORT OF JOLO. the Commissioner considered the share of the profits of each petitioner in the sum of P33. They were co-owners pure and simple.341. petitioners resold said lots to the Walled City Securities Corporation and Olga Cruz Canda. No costs.88 or P33. a 50% fraud surcharge and a 42% accumulated interest.708.792.
petitioner. on November 26. but we dismissed the case without prejudice. 1955. Soriano for petitioner. The decision of the Commissioner was appealed to the defunct Board of Tax Appeals. the appeal was not perfected in time. Commissioner of Customs. Gaz. Office of the Solicitor General Ambrosio Padilla and Solicitor Felicisimo R. But the Court of Tax Appeals in its resolution dated March 2. In the first case. No. petitioner Ampang Tan filed a petition for review of the decision of the Commissioner of Customs. 1954. reinstated the petition for review filed on October 26. decreeing the forfeiture and seizure of sixty-nine cases of "Camel" cigarettes. 376. vs. 1125. 1954. respondents. Endencia. The question at issue is: Did petitioner Ampang Tan perfect an appeal from the decision of the Commissioner of Customs within the time prescribed? The Court of Tax Appeals held that it is true that April 19.  2245. The case was then appealed to the Supreme Court. Rosete for respondents. Board of Tax Appeals. G. on condition that the petitioner pay the docketing fee on his petition for review. but filing fee in said court was never paid until March 8. 57 Phil. Clemente M. the Court of Tax Appeals held. 1954... INC. 1955. but this motion for reinstatement was denied by the Supreme Court on February 11. and the Court of First Instance never acquired jurisdiction over the case for failure of petitioner to pay the full amount of docketing fee essential to perfect an appeal.. which affirmed the decision of said Commissioner in toto. 49 Off. 1954. R.T. 552. . 1955.RAMON ROCES. Ampang Tan vs. LABRADOR. Subsequently. L-10940. the Commissioner of Customs sustained an order of the Collector of Customs for the Port of Jolo. it appears that in his decision dated February 23.. vs. April 19. but no action was taken thereon because petitioner failed to follow up the said notice of appeal by the payment of the final fee in said court. pursuant to our decision in the case of U.S. J.: Appeal from resolutions from Court of Tax Appeals. the petitioner filed a notice of appeal with the Court of First Instance of Manila. dismissing the above-entitled cases on the ground that the appeals filed by petitioner against the decisions of the Commissioner of Customs were not perfected within the time prescribed by law. 1953. THE COMMISSIONER OF CUSTOMS and COLLECTOR FOR THE PORT OF MANILA. 1955. The docketing fee was paid on March 8. the petitioner filed a motion with the Supreme Court for the reinstatement of the case and in order that the same could be decided pursuant to Section 21 of Republic Act No. 93 Phil. Under the above circumstances. with the Court of First Instance of Manila. citing the case of Lazaro vs.
and that when this Board was declared non-existent the cases should have been considered transferred to the Court of First Instance. relying on its rulings in the case of U. Ramon Roces. Having failed in respect to the latter. Commissioner of Customs. the Court of Tax Appeals issued a resolution reinstating the petition for review provided the petitioner first pay the docketing fee. the appeals have never been perfected. On October 26.S. such dismissal should have no effect upon the pendency of the appeal prosecuted before the Board of Tax Appeals. 1952. So ordered.In the Court of Tax Appeals attempt was made by petitioner herein to prove that offer of payment of the docketing fee was made. for which reason the Court of Tax Appeals correctly held that it is without jurisdiction to consider the appeals. Commissioner of Customs.R. Board of Tax Appeals. Inc. but as in the other case no payment of the docketing fee in the court was ever made. 1954. The decision of the Collector of Customs of Jolo was affirmed by the Commissioner of Customs on October 6. The fact that the petitioner (themselves) presented their notice of appeal with the Commissioner of Customs for the review of the latter's decisions of the Court of First Instance. Against this decision appeal was made to the Supreme Court. Inc vs. but this Court dismissed the appeal without prejudice on April 29. petition for review was filed before the Court of Tax Appeals. No. But if we follow appellant's argument that appeal to the Board of Tax Appeals was validly prosecuted. 1954. the petitioner Ramon Roces. L-10942. This shows that they themselves considered the Board of Tax Appeals never to have existed. vs. which it never was. 1955. Subsequently. with costs against petitioners. but the Court of Tax Appeals found that the evidence submitted to that effect can not be believed. We find no error in the dismissal of the appeals by the Court of Tax Appeals and we affirm its resolutions to that effect.T. . After dismissal of the appeal by the Supreme Court. parallel proceedings took place. and the steps necessary to perfect an appeal must again be made before the cases nay be reviewed by the Court of First Instance. file a notice of appeal with the Commissioner of Customs for a review of the latter's decision by the Court of the First Instance. In this Court no attempt was made to insist that the payment of docketing fee was made with the Commission of Customs upon filing of the notice of appeal therein. by presenting the required notice of the appeal to the Commissioner of Customs and paying the docketing fee in the Court of First Instance. 1954. but this was dismissed without prejudice to whatever action the Supreme Court may take on petitioner's motion of November 26. we come face to face with the fact that in both of the cases the Board of Tax Appeals itself had confirmed the decisions of the Commissioner of Customs in toto. But it is argued that when the Court dismissed the cases without prejudice. In the other case. which affirmed the decision on October 23. to have this case decided by said Tribunal on its Merits. The decision cites the case of Ampang Tan vs. This argument rests on the theory that the board of Tax Appeals was validly constituted body. Sufficient time was given to them to perfect their appeals. wherein it was found that no payment of docket fee in the Court of First Instance was made when the decision of the Commissioner was filed by the petitioner on April 19. Both cases were presented jointly before the Court. supra. 1954. The case was appealed to the Board of Tax Appeals. On March 2. 1952. the Court of Tax Appeals dismissed the petition for review. G.
that of Batangas Transportation in Batangas. Batangas. Padilla.1âwphïl. concur. who was then managing the Batangas Transportation. Bengzon. The following facts are undisputed: Respondent companies are two distinct and separate corporations engaged in the business of land transportation by means of motor buses.14. Before the last war. 1947.000.Arellano Law Foundation OLLECTOR OF INTERNAL REVENUE. Office of the Solicitor General Ambrosio Padilla. President of both companies. was appointed Manager of both companies by their respective Board of Directors. Joseph Benedict managed the Batangas Transportation. which reversed the assessment and decision of petitioner Collector of Internal Revenue. Each company now has a fully paid up capital of Pl.. but before the Collector filed his answer in said court. management. petitioner.). personnel. JJ. pending appeal in the C. while the Laguna Bus had its head office in San Pablo Laguna. respondents. while Laguna Bus was organized in 1928. Lichauco and Picazo for respondents. supposed to represent the deficiency income tax and compromise for the years 1946 to 1949. To show the connection and close relation between the two companies.143.registering the same separately in their respective names. Bautista Angelo. and Laguna-Tayabas Bus Company. and said companies ceased operations. Ozaeta. later referred to as Collector. Solicitor Conrado T. each company maintained separate head offices. J. maintenance and repair shops. 1945. In March. C.. the two companies were able to acquire 56 auto buses from the United States Army. Conception. later referred to as Batangas Transportation. was increased to P148. it should be stated that Max Blouse was the President of both corporations and owned about 30 per cent of the stock in each company.A.T. BATANGAS TRANSPORTATION COMPANY and LAGUNA-TAYABAS BUS COMPANY. Joseph Benedict.54. They also lost their respective properties and equipment. the amount of P54. MONTEMAYOR. Montemayor.nêt The Lawphil Project . and the two companies diveded said equipment equally between themselves.000. fleets of buses. later referred to as Laguna Bus.Paras.J. Limcaoco and Zoilo R. Endencia and Barrera. the American officials of these two corporations were interned in Santo Tomas. sometime in April. Each company also kept and maintained separate books. During the war. and other facilities. After Liberation. Zandoval for petitioner. after the resignation of Martin Olson as Manager of the Laguna Bus.A. and operating distinct and separate lines. Batangas Transportation was organized in 1918. vs. The head office of the Laguna Bus in San Pablo City was made the main office of both corporations. assessing and demanding from the respondents Batangas Transportation Company. by virtue of the authority granted him by resolution of the Board of Directors of the Laguna Bus on August . The placing of the two companies under one sole mangement was made by Max Blouse.T.: This is an appeal from the decision of the Court of Tax Appeals (C. while Martin Olson was the manager of the Laguna Bus..890. inclusive. which amount.
and so liable to income tax under section 24. which was called. thereby forming a joint venture." The respondent companies appealed from said assessment of P54. it reversed the decision of the Collector assessing and demanding from the two companies the payment of the amount of P54. on January 8.10. respondent companies had to file a surety bond in the same amount of P422.89 as deficiency income tax and compromise for the years 1946 to 1949. association or insurance company". the C.000 or about P100.890. inclusive. fifteen inspectors. and transferred to the book of accounts of each company. the Collector set aside his original assessment of P54.210. seized. 1955. the purpose of the joint management. and advertized for sale all the rolling stock of the two corporations.T. assets and liabilities thus transferred to it from the `Joint Emergency Operation' and paid the corresponding income taxes thereon separately". that by means of said joint operation. The theory of the Collector is the Joint Emergency Operation was a corporation distinct from the two respondent companies. all gross receipts and expenses of both companies were determined and the net profits were divided fifty-fifty.54 and reassessed the alleged income tax liability of respondents of P148. claiming that he had later discovered that said companies had been "erroneously credited in the last assessment with 100 per cent of their income taxes paid when they should in fact have been credited with only 75 per cent thereof. the income tax due from the `Joint Emergency Operation' for the years 1946 to 1949.54. found and held. According to the testimony of joint Manager Joseph Benedict.143. that the Joint Emergency Operation or joint management of the two companies "is not a corporation within the contemplation of section 84 (b) of the National Internal Revenue Code much less a partnership. special agents. informed the respondents "that after crediting the overpayment made by them of their alleged income tax liabilities for the aforesaid years.143. one assistant manager. the Collector. "Joint Emergency Operation". and each company "then prepared its own income tax return from this fifty per centum of the gross receipts and expenditures.54 to the Court of Tax Appeals. and therefore was not subject to the income tax under the provisions of section 24 of the same Code.89 to guarantee the payment of the income tax assessed by him. and one set of office of clerical force. After hearing. is in the total amount of P54.143. pursuant to the doctrine of equitable recoupment. inclusive. both of the National Internal Revenue Code.000 for each company.143. That corrected and increased reassessment was embodied in the answer filed by the Collector with the Court of Tax Appeals.54 and/or the . 1945. citing authorities. After some exchange of communications between the parties. Under the theory that the two companies had pooled their resources in the establishment of the Joint Emergency Operation.210. the savings in one year amounting to about P200. both companies had been able to save the salaries of one manager. as defined in section 84 (b). was to economize in overhead expenses. 1947. and ratified by the Boards of the two companies in their respective resolutions of October 27.14. the Collector wrote the bus companies that there was due from them the amount of P422.A. since under Section 24 of the Tax Code dividends received by them from the Joint Operation as a domestic corporation are returnable to the extent of 25 per cent". separately and independently of respondent companies. so. but before filing his answer. At the end of each calendar year. Since the Collector caused to be restrained.
The Tax Court did not pass upon the question of whether or not in the appeal taken to it by respondent companies.R. which court decided in favor of the Collector of Internal Revenue. the facts in that case are as follows: The three Evangelista sisters borrowed from their father about P59. issue receipts. The relatively large amounts invested may be explained by the fact that purchases were made during the Japanese occupation. The properties therein involved were rented to various tenants. that the properties bought with this common fund had been under the management of one person with full power to lease.14 to P148. bring suits. to collect and receive rents. in such a manner that the affairs relative to said properties have been handled as if the same belonged to a corporation or business enterprise operated for profit.. totally or 100 per cent of the income taxes paid by the respondent companies for the years 1946 to 1949. apparently in Japanese military notes. payment of income tax on corporations from the year 1945 to 1949. Justice Roberto Concepcion. 1957. to correct an error committed by him in having credited the Joint Emergency Operation.. with full power to lease. by reason of the principle of equitable recoupment.* G.157.14. Collector of Internal Revenue et al.498 in 1946. and (2) whether the Collector of Internal Revenue. that they contributed to a common fund which they invested in a series of transactions. the three sisters appealed to the Court of Tax Appeals.890. etc. realized a net rental income of P5. No.. but before said Collector has filed his answer with that court. L-9996. bought real properties. on the ground that he had committed error in good faith in making said appealed assessment. including surcharge and compromise. In 1954. such as a lot with improvements for the sum of P100. vs. in the total amount of P6. and that the said sisters had the intention to .890.000 in the same year.14. we deem it unnecessary to extensively discuss the point.143. we affirmed the decision of the Tax Court.000 square meters with improvements thereon for P18. the Collector of Internal Revenue demanded of them among other things. The first question has already been passed upon and determined by this Tribunal in the case of Eufemia Evangelista et al. to bring suits against the defaulting tenants. and the sisters. the three sisters had the purpose to engage in real estate transactions for monetary gain and then divide the same among themselves. parcels of land with a total area of almost P4. on default of such payment.000 in 1944. and P12. In 1945. another lot for P108. Considering the views and rulings embodied in our decision in that case penned by Mr. We found and held that considering all the facts and circumstances sorrounding the case. to collect rents.amount of P148.615 in 1948.000 and adding thereto their own personal funds. and still another lot for P237. and after the Court of Tax Appeals has acquired jurisdiction over the same. after the appeal from his decision has been perfected.000 in the same year.000 in 1943. inclusive. instead of only 75 per cent. promulgated on October 15. The two main and most important questions involved in the present appeal are: (1) whether the two transportation companies herein involved are liable to the payment of income tax as a corporation on the theory that the Joint Emergency Operation organized and operated by them is a corporation within the meaning of Section 84 of the Revised Internal Revenue Code. etc.948 in 1945. the Collector could change his original assessment by increasing the same from P54. On appeal to us. Dissatisfied with the said assessment. the sisters appointed their brother to manage their properties. may still modify his assessment subject of the appeal by increasing the same. P7. sign letters and contracts. to sign all letters and contracts. through their brother as manager. Briefly.
sometimes even what they call "cutthroat competition". said section 84 (b) provides that the term "corporation" includes "joint accounts" (cuentas en participacion) and "associations". Said common fund was also used to buy spare parts. the net income was determined and divided equally between them. Sometimes. or litigations forced upon said operator by its competitors. the gross income or receipts of both companies were merged. can at the end of each year be equal or even approach equality. The decision cites 7A Merten's Law of Federal Income Taxation. Much depends upon the number of lines operated and the length of each line. At other times. said law defined the term "corporation" as including partnerships no matter how created or organized. but litigations before the Public Service Commission. and considering that the Batangas Transportation and the Laguna Bus operated different lines. and after deducting therefrom the gross expenses of the two companies. at least for a time. Said litigation causes expense to the operator. In some lines. including the number of trips made each day. Those familiar with the operation of the business of land transportation can readily see that there are many factors that enter into said operation. in order that one could be deemed constituted for purposes of the tax on corporations". In view of this. the two companies contributed money to a common fund to pay the sole general manager. There can be no question that the receipts and gross expenses of two. this procedure and practice of determining the net income of each company was arbitrary and unwarranted. others break above even. etc. From the standpoint of the income tax law. not only as the result of money claims based on physical injuries ar deaths occassioned by accidents or collisions. such as drivers. depending. In the present case. Said common fund was also used to pay all the salaries of the personnel of both companies. distinct and separate companies operating different lines and in some cases. Said sisters in their appeal insisted that they were mere co-owners. the operator is involved in litigation. the accounts and office personnel attached to the office of said manager.constitute a partnership within the meaning of the tax law. wholly and utterly disregarding the expenses incurred in the maintenance and operation of each company and of the individual income of said companies. under . and that furthermore. that besides. different territories. disregarding as it did the real facts in the case. Some lines are profitable. for the reason that their acts did not create a personality independent of them. as well as for the maintenance and operation of a common maintenance and repair shop. and equipment for both companies. operator is denounced by competitors before the Public Service Commission for violation of its franchise or franchises. but we held that when the Tax Code includes "partnerships" among the entities subject to the tax on corporations. conductors. none of which has a legal personality independent of that of its members. for temporary abandonement of said lines or of scheduled trips. helpers and mechanics. and at the end of each year. while still others are operated at a loss. the operator may enjoy a more or less exclusive exclusive operation. upon the volume of traffic. both passenger and freight. thereby indicating that "a joint venture need not be undertaken in any of the standard forms. and that some of the characteristics of partnerships were absent. it must refer to organizations which are not necessarily partnerships in the technical sense of the term. and different equipment and personnel at least in value and in the amount of salaries. initiated by the operator itself to acquire new lines or additional service and equipment on the lines already existing. not co-partners. of course. also merged. including tires. while in others. or in conformity with the usual requirements of the law on partnerships. sometimes in different provinces or territories. the competition is intense. for making unauthorized trips.
while in the United States of America. and in the light of our ruling in the Evangelista vs.different franchises. this knowledge being necessary for the wise and proper conduct and operation of his business. naturally to the prejudice of the taxpayer who would not know when his tax liability has been completely and definitely met and complied with. that the jurisdiction of the Tax Court is not revisory but only appellate. however. we believe and hold that the Joint Emergency Operation or sole management or joint venture in this case falls under the provisions of section 84 (b) of the Internal Revenue Code. For the foregoing reasons. prudence and pay too much attention in making tax assessments. The second important question to determine is whether or not the Collector of Internal Revenue. and consequently. or joint management operated the business affairs of the two companies as though they constituted a single entity. even increasing the same the law in that jurisdiction expressly authorizes the Board or Court of Tax Appeals to redetermine and revise the assessment appealed to it. that when the assessment is appealed by the taxpayer to the Court of Tax Appeals. on appeal from the decision of the Commissioner of Internal Revenue to the Board or Court of Tax Appeals. with different equipment and personnel. subject of the appeal. it is liable to income tax provided for in section 24 of the same code. may still modify his assessment. company or partnership. and after the Tax Court Appeals has acquired jurisdiction over the appeal. by increasing the same. although no legal personality may have been created by the Joint Emergency Operation. the gross receipts and income in the gross expenses of two companies are exactly the same for purposes of the payment of income tax. holds. nevertheless. there should be a definite and final assessment on which he can base his decision whether or not to appeal. The majority. interesting and vital to the interests of both the Government and the taxpayer. knowing that they can at any time correct any error committed by them even when due to negligence. provoked considerable discussion among the members of this Tribunal. Collector of Internal Revenue case. it cannot possibly be true and correct to say that the end of each year. after appeal from his decision to the Court of Tax Appeals has been perfected. thereby obtaining substantial economy and profits in the operation. more so when done in . and that lastly. said Joint Emergency Operation joint venture. the Commissioner may still amend or modify his assessment. that the Government is not bound by the errors committed by its agents and tax collectors in making tax assessments. the Collector of Internal Revenue and his agents may not exercise due care. specially when due to a misinterpretation or application of the tax laws. a minority of which the writer of this opinion forms part. unless the Government itself is also an appellant. What was actually done in this case was that. This legal point. it can act only upon the amount of assessment subject of the appeal to determine whether it is valid and correct from the standpoint of the taxpayer-appellant. the jurisdiction being transferred automatically to the Tax Court. supra. maintaining that for the information and guidance of the taxpayer. which has exclusive appellate jurisdiction over the same. and therefore. but before the Collector has filed his answer with the court. by increasing the assessment. and that unless this be the rule. but not those committed in his favor. not without valid arguments and reasons. carelessness or gross mistake in the interpretation or application of the tax law. that the Tax Court may only correct errors committed by the Collector against the taxpayer. the collector loses control and jurisdiction over the same.
and since he may make a subsequent reassessment to collect additional sums within the same subject of his original assessment. except that. We are satisfied that the failure to file an income tax return for the Joint Emergency Operation was due to a reasonable cause. summon witnesses. the Collector. the Collector of Internal Revenue may still amend his appealed assessment.good faith. that would lead to multiplicity of suits which the law does not encourage. it is shown that the failure was due to a reasonable cause. The result is that the ruling and doctrine now being laid by this Court is. if he finds that he has committed an error against the taxpayer. is shown by the fact that the Court of Tax Appeals itself subscribed to the idea that the Joint Emergency Operation was not a corporation. and that their separate income tax return was sufficient compliance with the law. provided it is done within the prescriptive period. shall add to the tax twenty-five per centum of its amount. and may even make refunds of amounts erroneously and illegally collected. so that the true and correct amount of the tax to be collected. the honest belief of respondent companies that there was no such corporation within the meaning of the Tax Code. the taxpayer is not prejudiced. not due to willful neglect. There is a third question raised in the appeal before the Tax Court and before this Tribunal. whether resulting in the increase or reduction of the assessment appealed to it. as he has done in the present case. namely. the liability of the two respondent transportation companies for 25 per cent surcharge due to their failure to file an income tax return for the Joint Emergency Operation. in modifying his assessment.890. which we hold to be a corporation within the meaning of the Tax Code. in case any payment has been made on the basis of such return before the discovery of the falsity or fraud. no such addition shall be made to the tax. there are authorities to the effect that . may not only increase the same. The surcharge is being imposed by the Collector under the provisions of Section 72 of the Tax Code. which read as follows: The Collector of Internal Revenue shall assess all income taxes. that pending appeal before the Court of Tax Appeals. The amount so added to any tax shall be collected at the same time in the same manner and as part of the tax unless the tax has been paid before the discovery of the neglect. or fraud. and that if the Collector of Internal Revenue is not allowed to amend his assessment before the Court of Tax Appeals. or in case a false or fraudulent return or list is willfully made the collector of internal revenue shall add to the tax or to the deficiency tax. in which case the amount so added shall be collected in the same manner as the tax. That this belief was not entirely without foundation and that it was entertained in good faith. but may also reduce it. In case of willful neglect to file the return or list within the time prescribed by law. the Government and the taxpayer. when the return is voluntarily and without notice from the Collector or other officer filed after such time. falsity. that since the Collector of Internal Revenue. In case of any failure to make and file a return list within the time prescribed by law or by the Collector or other internal revenue officer. may be determined and decided. and give both parties. opportunity to present and argue their sides. a surcharge of fifty per centum of the amount of such tax or deficiency tax.14. We understand that said 25 per cent surcharge is included in the assessment of P148. that the tax laws provide for a prescriptive period within which the tax collectors may make assessments and reassessments in order to collect all the taxes due to the Government. and so sustained the contention of respondents. that the hearing before the Court of Tax Appeals partakes of a trial de novo and the Tax Court is authorized to receive evidence. Furthermore.
. INC. G. PIONEER INTERCONTINENTAL INSURANCE CORPORATION. CONSOLIDATED INSURANCE CO.. and that in such a case. INC... and that in such a case. a penalty in the form of a surcharge should not be imposed and collected. METROPOLITAN INSURANCE COMPANY. PIONEER INSURANCE & SURETY CORP. pending hearing before said court.. that where the failure to file an income tax return for and in behalf of an entity which is later found to be a corporation within the meaning of section 84 (b) of the Tax Code was due to a reasonable cause. CHARTER INSURANCE CO. PARAMOUNT INSURANCE CORPORATION. and so is liable to incom tax under section 24 of the code. INC.. LTD.... EQUITABLE INSURANCE CORPORATION. CIBELES INSURANCE CORPORATION. NEW ZEALAND INSURANCE CO. . PAN-MALAYAN INSURANCE CORPORATION. on advice of reputable tax accountants and attorneys. PHILIPPINE BRITISH ASSURANCE CO. the imposition of penalties for failure to file return is not warranted1 In view of the foregoing.. that pending appeal in the Court of Tax Appeals of an assessment made by the Collector of Internal Revenue. INC... INC... MALAYAN INSURANCE CO. The respondents are therefore ordered to pay the amount of the reassessment made by the Collector of Internal Revenue before the Tax Court. such as an honest belief based on the advice of its attorneys and accountants.belief in good faith. SOLID GUARANTY.R. CCC INSURANCE CORPORATION. INC. that a corporation was not a personal holding company taxable as such constitutes "reasonable cause" for failure to file holding company surtax returns. INC. PROVIDENT INSURANCE COMPANY OF THE PHILIPPINES. SUMMA INSURANCE CORPORATION. the imposition of penalties for failure to file holding company surtax returns. PHILIPPINE FIRST INSURANCE CO.. 1999 AFISCO INSURANCE CORPORATION. EASTERN ASSURANCE COMPANY & SURETY CORP... 112675 January 25. the Collector. PEOPLE'S TRANS-EAST ASIA INSURANCE CORPORATION. INC. PYRAMID INSURANCE CO.. SANPIRO INSURANCE CORPORATION. STATE BONDING & INSURANCE CO. judgment is hereby rendered.. and the latter may on the basis of the evidence presented before it. holding that the Joint Emergency Operation involved in the present is a corporation within the meaning of section 84 (b) of the Internal Revenue Code. INC.. may amend his appealed assessment and include the amendment in his answer before the court.. No. SEABOARD-EASTERN INSURANCE CO. minus the amount of 25 per cent surcharge. redetermine the assessment. GOVERNMENT SERVICE INSURANCE SYSTEM. INC.. RIZAL SURETY & INSURANCE COMPANY. RELIANCE SURETY & INSURANCE COMPANY.. INC.. MERCANTILE INSURANCE CO. No costs.. EMPIRE INSURANCE COMPANY.. INC.. COMMONWEALTH INSURANCE COMPANY. INC. MALAYAN ZURICH INSURANCE CO.. INC. and with the reversal of the appealed decision of the Court of Tax Appeals. FIDELITY & SURETY COMPANY OF THE PHILS. DEVELOPMENT INSURANCE & SURETY CORPORATION DOMESTIC INSURANCE COMPANY OF THE PHILIPPINE.. FILIPINO MERCHANTS' INSURANCE CO. INC. FEDERAL INSURANCE CORPORATION INC. FGU INSURANCE CORPORATION. SOUTH SEA SURETY & INSURANCE CO.. METRO-TAISHO INSURANCE CORPORATION.. PERLA COMPANIA DE SEGUROS..
are as follows: 7 The petitioners are 41 non-life insurance corporations.: Pursuant to "reinsurance treaties. organized and existing under the laws of the Philippines. a pool composed of the petitioners was formed on the same day. 1976. INC. May the "clearing house" or "insurance pool" so formed be deemed a partnership or an association that is taxable as a corporation under the National Internal Revenue Code (NIRC)? Should the pool's remittances to the member companies and to the said foreign firm be taxable as dividends? Under the facts of this case. 1992 Decision of the Court of 4 Tax Appeals (CTA) which had previously sustained petitioners' liability for deficiency income tax. vs. petitioner.273. Accordingly. The Court of Appeals ruled: WHEREFORE." a number of local insurance firms formed themselves into a "pool" in order to facilitate the handling of business contracted with a nonresident foreign insurance company. 1 2 assailing the October 11. The reinsurance treaties required petitioners to form a [p]ool. the petitioners on August 1. — all assessed as "POOL OF MACHINERY INSURERS. 1993 Court of Appeals (CA) Resolution denying reconsideration.TABACALERA INSURANCE CO. the pool of machinery insurers submitted a financial statement and filed an "Information Return of Organization Exempt from Income Tax" for the year ending in 1975. On April 14.. with costs against petitioner 5 6 The petition also challenges the November 15. a nonresident foreign insurance corporation. Boiler Explosion and Contractors' All Risk insurance policies. the petition is DISMISSED. 1993 Decision of the Court of Appeals in CA-GR SP 25902. interest and withholding tax. Machinery Breakdown. and withholding . 3 which dismissed petitioners' appeal of the October 19. has the goverment's right to assess and collect said tax prescribed? The Case These are the main questions raised in the Petition for Review on Certiorari before us.60. PANGANIBAN. Upon issuance by them of Erection. COURT OF TAX APPEALS and COMISSIONER OF INTERNAL REVENUE.843. respondent. J. as found by the Court of Appeals. COURT OF APPEALS. The Facts The antecedent facts. on the basis of which it was assessed by the Commissioner of Internal Revenue deficiency corporate taxes in the amount of P1. 1965 entered into a Quota Share Reinsurance Treaty and a Surplus Reinsurance Treaty with the Munchener Ruckversicherungs-Gesselschaft (hereafter called Munich).
14 Compromise penaltynon-filing of return 300.39 COLLECTIBLE =========== .438. Velayo and Co.00 =========== Income tax due thereon P1.370.60 —————— TOTAL AMOUNT DUE & P1. On January 27.60 COLLECTIBLE Dividend paid to Munich Reinsurance Company P3.taxes in the amount of P1.768. the Commissioner of Internal Revenue denied the protest and ordered the petitioners.799. assessed as "Pool of Machinery Insurers.019.00 —————— TOTAL AMOUNT DUE & P1.39 and P89." to pay deficiency income tax.273.080.00 —————— 35% withholding tax at source due thereon P1.412.737.20 Add: 25% surcharge 326.944.304. Gorres.00 late payment 300.00 Add: 14% Int. respectively.728. fr.843.799. These assessments were protested by the petitioners through its auditors Sycip.236.298. interest.68 on dividends paid to Munich and to the petitioners.193. 4/15/76 to 4/15/79 545. itemized as follows: Net income per information return P3.768.05 14% interest from 1/25/76 to 1/25/79 137. and with [h]olding tax. 1986.
It added that prescription did not bar the Bureau of Internal Revenue (BIR) from collecting the taxes due.60 Add: 25% surcharge 16." Hence. Whether or not the respondent Commissioner's right to assess the Clearing House had 10 already prescribed. Whether or not the Clearing House. Whether or not the remittances to petitioners and MUNICHRE of their respective shares of reinsurance premiums. 2. The Issues Before this Court. this 9 Petition for Review before us.18 Compromise penaltynon-filing of return 300.563.636. were "dividends" subject to tax. petitioners raise the following issues: 1. pertaining to their individual and separate contracts of reinsurance.884. the ceding companies.68 COLLECTIBLE =========== 8 The CA ruled in the main that the pool of machinery insurers was a partnership taxable as a corporation.00 =========== 10% withholding tax at source due thereon P65.00 late payment 300. The Court's Ruling . because "the taxpayer cannot be located at the address given in the information return filed. was taxable income. was a partnership or association subject to tax as a corporation.390.Dividend paid to Pool Members P655. and which did not insure or assume any risk in its own name.90 14% interest from 1/25/76 to 1/25/79 6.00 —————— TOTAL AMOUNT DUE & P89.438. acting as a mere agent and performing strictly administrative functions. and that the latter's collection of premiums on behalf of its members. and 3.
such as the Court of Tax Appeals which. that it is patently wrong.] as well as the performance of incidental functions. the agency tasked with the enforcement of tax law. and the Court of Appeals. (3) the executive board of the pool did not exercise control and management of 16 its funds. is dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the subject." Petitioners belie the existence of a partnership in this case. did not share the same risk or solidary liability. [I]t has been the long standing policy and practice of this Court to respect the conclusions of quasi-judicial agencies. (2) there was no common 15 fund. and that the government's right to assess and collect the taxes had not prescribed. is accorded much weight 18 and even finality. the 14 reinsurers. and (4) the pool or clearing house "was not and could not possibly have engaged in the business of reinsurance 17 from which it could have derived income for itself. or existing under the laws of the Philippines. a specialized body created for the exclusive purpose 19 of reviewing tax cases. First Issue: Pool Taxable as a Corporation Petitioners contend that the Court of Appeals erred in finding that the pool of clearing house was an informal partnership. provides: Sec. particularly in this case where the findings and conclusions of the internal revenue commissioner were subsequently affirmed by the CTA. The opinion or ruling of the Commission of Internal Revenue.The petition is devoid of merit. maintenance. when there is no showing. — (a) Tax on domestic corporations. Section 24 of the NIRC. the pool did not act or earn income as a reinsurer. collection and 13 custody of funds. Hence. committed no reversible error. 12 Its role was limited to its principal function of "allocating and distributing the risk(s) arising from the original insurance among the signatories to the treaty or the members of the pool based on their ability to absorb the risk(s) ceded[. We sustain the ruling of the Court of Appeals that the pool is taxable as a corporation." The Court is not persuaded. such as records. in affirming the CTA which had previously sustained the internal revenue commissioner." and that their liability was limited to the extent of their allocated share in the 11 original risk thus reinsured. 24. Rate of tax on corporations. as worded in the year ending 1975. Indeed. unless there has been an abuse or 20 improvident exercise of its authority. They point out that the reinsurance policies were written by them "individually and separately. This Court rules that the Court of Appeals. etc. which was taxable as a corporation under the NIRC. . because (1) they. unlike the board of directors of a corporation. by the nature of its functions. — A tax is hereby imposed upon the taxable net income received during each taxable year from all sources by every corporation organized in.
joint venture or other unincorporated organization. — When used in this Title: xxx xxx xxx (B) The term "corporation" shall include partnerships. *** (8 Merten's Law of Federal Income Taxation." Its . xxx xxx xxx Thus. 24 of the Tax Code in Evangelista v. . geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract without the Government. with the intention of dividing the profits among themselves. .no matter how created or organized. Collector of Internal Revenue. no matter how created or organized. Sec. The Supreme Court said: The term "partnership" includes a syndicate. 22. pool. associations. financial operation. and taxable under this Title as a corporation . an income tax of thirty-five percent (35%) is hereby imposed upon the taxable income derived during each taxable year from all sources within and without the Philippines by every corporation. group. . supra. . which amended the Tax Code. a pool of individual real property owners dealing in real estate business was considered a corporation for purposes of the tax in sec. joint-stock companies. 562 Note 63) 22 Art. "General professional partnerships" are partnerships formed by persons for the sole purpose of exercising their common profession. as defined in Section 22 (B) of this Code. . no part of the income of which is derived from engaging in any trade or business. p. Parenthetically. . 1767 of the Civil Code recognizes the creation of a contract of partnership when "two or more persons bind themselves to contribute money. The Court of Appeals 24 astutely applied Evangelista. — (A) In General. . the Court in Evangelista v. through or by means of which any business. — Except as otherwise provided in this Code. private educational institutions. which 23 had no legal personalities apart from their individual members. or Industry to a 25 common fund. 27. — Definition. property. but not including duly registered general copartnership (compañias colectivas). and building and loan associations . or venture is carried on. . the Philippine legislature included in the concept of corporations those entities that resembled them such as unregistered partnerships and associations. general professional partnerships. but does not include general professional partnerships [or] a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum. joint accounts (cuentas en participacion). . the NIRC's inclusion of such entities in the tax on corporations was 21 made even clearer by the tax Reform Act of 1997. Accordingly. Pertinent provisions of the new law read as follows: Sec. Ineludibly. or insurance companies. Rates of Income Tax on Domestic Corporations. coal. Collector of Internal Revenue held that Section 24 covered these unregistered partnerships and even associations or joint accounts.
the pool itself is not a reinsurer and does not issue any insurance policy. . which resembles the board of directors of a corporation. The fact that the pool does not retain any profit or income does not obliterate an antecedent fact. a partnership is formed when persons contract "to devote to a common purpose either money." 27 Meanwhile. Though the profit was apportioned among the members. an association implies associates who enter into a "joint 28 enterprise .requisites are: "(1) mutual contribution to a common stock. that of the pool being used in the transaction of business for profit. as in the case before us. and (2) a joint interest in the 26 profits. ." In other words. therefore. the ceding companies entered into a Pool Agreement or an 30 association that would handle all the insurance businesses covered under their 31 quota-share reinsurance treaty and surplus reinsurance treaty 32 with Munich. The following unmistakably indicates a partnership or an association covered by Section 24 of the NIRC: (1) The pool has a common fund. because the facts obtaining therein are not on all fours with the present case. for the transaction of business. property. 39 The Court of Appeals did not err in applying Evangelista. The ceding companies share "in the business ceded to the pool" and in 36 the "expenses" according to a "Rules of Distribution" annexed to the Pool Agreement. . (3) True. consisting of money and other valuables that are 33 deposited in the name and credit of the pool. this is only a matter of consequence. . as it implies that profit actually 37 resulted. profit must have been the object as. If together they have conducted business. which involved a partnership that engaged in a series of transactions spanning more than ten years. beneficial and economically useful to the business of the ceding companies and Munich. This common fund pays for the 24 administration and operation expenses of the pool. . . In Pascual. its work is indispensable. As aptly found by the CTA: . 29 The petitioners' reliance on Pascuals v. or labor with the intention of dividing the profits between themselves. that their association or coaction was indispensable [to] the transaction of the business. there was no unregistered partnership. Profit motive or business is. however. . and petitioners admit. the primordial reason for the pool's formation. (2) The pool functions through an executive board. composed of one representative for each of the ceding 35 companies. but merely a co-ownership which took up only two isolated transactions. because without it they would not have received their premiums. profit was earned. indeed." In the case before us. Commissioner is misplaced. It is apparent. Second Issue: 38 .
be granted exemption based solely on this provision of the Tax Code. petitioners argue that since Munich was not a signatory to the Pool Agreement. because these were not yet in effect when the income was earned and when the subject information return for the year ending 1975 was filed. Petitioners are clutching at straws. The tax exemptions claimed by petitioners cannot be granted. Section 255 provides that no tax shall ". to the 1975 version of the counterpart sections of the NIRC. Hence. Munich is patently an associate of the ceding companies in the entity formed. hence. Although not a signatory to the Pool Agreement. therefore. Nor can Munich." This cannot be applied to the present case because. .Pool's Remittances are Taxable Petitioners further contend that the remittances of the pool to the ceding companies and Munich are not dividends subject to tax. the remittances it 41 received from the pool cannot be deemed dividends. The sections of the 1977 NIRC which they cite are inapplicable. pursuant to their reinsurance treaties which required the creation of said pool. the pool is a taxable entity distinct from the individual corporate entities of the ceding companies. Referring. ". Munich shared in their income 49 50 and loss. They add that even if such remittances were treated as dividends. because the same subsection specifically taxes dividends. Clearly. Section 24 (b) (1) pertains to tax on foreign corporations. . "exemptions therefrom are highly disfavored in law and he who claims tax exemption must be able to justify his claim or 47 right. as previously discussed. That is. On the other hand. . the Court still cannot justify the exemptions claimed. Double taxation means taxing the same property twice when it should be taxed only once. Under its pool arrangement with the ceding companies. be paid upon reinsurance by any company that has already paid the tax . as well as Article 7 of paragraph 1 43 44 45 and Article 5 of paragraph 5 of the RP-West German Tax Treaty. . It is axiomatic in the law of taxation that taxes are the lifeblood of the nation. a foreign corporation. This is manifest from a reading of Article 3 and 10 of the Quota-Share 48 . the type of remittances forwarded to it by the pool. it cannot be claimed by the ceding companies which are domestic corporations. taxing the same person twice by 46 the same jurisdiction for the same thing" In the instant case. the latter cannot individually claim the income tax paid by the former as their own. They insist that such remittances contravene Sections 24 (b) (I) and 263 of the 1977 NIRC and "would be tantamount to an illegal 40 double taxation as it would result in taxing the same taxpayer" Moreover. the pool is a taxable entity distinct from the ceding companies. there is no double taxation here. since their entitlement thereto remains unproven and unsubstantiated. they would have been exempt under the 42 previously mentioned sections of the 1977 NIRC." Petitioners have failed to discharge this burden of proof. The tax on its income is obviously different from the tax on the dividends received by the said companies. . .
Furthermore. to give them notice of its letter of assessment dated March 27. 1993 are hereby AFFIRMED. because the internal revenue commissioner assessed the pool for corporate taxes on the basis of the information return it had submitted for the year ending 1975. a taxable year when said treaty was not yet in 54 effect. The law clearly states that the said period will be suspended only "if the taxpayer informs the Commissioner of Internal Revenue of any change in the address. 55 1984. Cost against petitioners. On the basis of this return.nêt 51 52 . 1981. Thus." WHEREFORE. on December 14. The foregoing interpretation of Section 24 (b) (1) is in line with the doctrine that a tax exemption must be construed strictissimi juris.1âwphi1. the petitioners contend that the five-year statute of limitations then provided in the NIRC had already lapsed. this Court must not overturn the factual findings of the CA and the CTA. It is axiomatic that in the absence of a clear showing of palpable error or grave abuse of discretion. for they stated that the pool's information return filed in 1980 indicated therein its "present address. The CA and the CTA categorically found that the 57 prescriptive period was tolled under then Section 333 of the NIRC. Finally the petitioners' claim that Munich is tax-exempt based on the RP. as in this case." The Court finds that this falls short of the requirement of Section 333 of the NIRC for the suspension of the prescriptive period.Reinsurance treaty and Articles 3 and 10 of the Surplus Reinsurance Treaty. They claim that the subject information return was filed by the pool on April 14. The Resolution of the Court of Appeals dated October 11. and the statutory exemption claimed 53 must be expressed in a language too plain to be mistaken. the BIR telephoned petitioners on November 11. petitioners admitted in their Motion for Reconsideration before the Court of Appeals that the pool changed its address. and that the internal revenue commissioner was already barred by 56 prescription from making an assessment. Third Issue: Prescription Petitioners also argue that the government's right to assess and collect the subject tax had prescribed. Although petitioners omitted in their pleadings the date of effectivity of the treaty. the petition is DENIED. because "the taxpayer cannot be located at the address given in the information return filed and for 58 which reason there was delay in sending the assessment. 1976. 1993 and November 15. whether the government's right to collect and assess the tax has prescribed involves facts which have been ruled upon by the lower courts. 1981." Indeed. the Court takes judicial notice that it took effect only later.West German Tax Treaty is likewise unpersuasive. We cannot sustain the petitioners.
it is sufficient that the income is derived from the activity coming from the Philippines. it must constitute income from Philippine sources. respondents. partly in 1961 and partly in 1962. (BOAC) a wholly owned British Corporation. Facts: BOAC is a 100% British Government-owned corporation organized and existing under the laws of the United Kingdom It is engaged in the international airline business and is a member-signatory of the Interline Air Transport Association (IATA). it did not carry passengers and/or cargo to or from the Philippines. activity of service that produces the income. and later Qantas Airways which was responsible for selling BOAC tickets covering passengers and cargoes. Gonzaga-Reyes.SO ORDERED. Romero. and was not granted a Certificate of public convenience and necessity to operate in the Philippines by the Civil Aeronautics Board (CAB). it maintained a general sales agent in the Philippines Warner Barnes and Company. is engaged in international airlines business. except for a nine-month period. concur.. The source of income is the property. During the periods covered by the disputed assessments. Consequently. For the source of income to be considered coming from the Philippines. As such it operates air transportation service and sells transportation tickets over the routes of the other airline members. BOAC tickets covering passengers and cargoes the CIR assessed deficiency income taxes against. Issue: Ruling: Yes. The tax code provides that for revenue to be taxable. JJ. Vitug. Ltd. The situs of the s Is BOAC liable to pay taxes? Commissioner SCRA vs BOAC 395 COMMISSIONER OF INTERNAL REVENUE. it has no loading rights for traffic purposes in the Philippines but maintained a general sales agent in the Philippines which was responsible for selling. the sale of tickets is the source of income. petitioner. Purisima. although during the period covered by the assessments. when it was granted a temporary landing permit by the CAB. From 1959to 1972. Footno 149 Facts: British overseas airways corp. .. In this case. BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX APPEALS. it is admitted that BOAC had no landing rights for traffic purposes in the Philippines.vs.
The term implies a continuity of commercial dealings and arrangements. taxable. It is our considered opinion that BOAC is a resident foreign corporation.00 and P1. Thus. accordingly. during the period in question. and. to that extent.132. the performance of acts or works or the exercise of some of the functions normally incident to. BOAC filed a claim for refund which was denied by the CIR. interests. The Tax Court held that the proceeds of sales of BOAC passage tickets in the Philippines by Warner Barnes and Company. do not constitute BOAC income from Philippine sources "since no service of carriage of passengers or freight was performed by BOAC within the Philippines" and.(First Case) Petitioner Commissioner of Internal Revenue assessed BOAC the for deficiency income taxes covering the years 1959 to 1963. and to cancel the deficiency income tax assessments against BOAC in the amount of P534. while having no landing rights here. the Tax Court ordered petitioner to credit BOAC with the sum of P858. and penalty for the fiscal years 1968-1969 to 1970-1971 and the additional amounts of P1. for the years 1959 to 1967. and later by Qantas Airways. constitute income of BOAC from Philippine sources. BOAC paid this new assessment under protest. BOAC requested that the assessment be countermanded and set aside. Subsequent investigation resulted in the issuance of a new assessment. in the dispositive portion of its Decision. "In order that a foreign corporation may be regarded as doing business within a . and in progressive prosecution of commercial gain or for the purpose and object of the business organization. said income is not subject to Philippine income tax. Ltd. Case was then jointly tried. The CTA position was that income from transportation is income from services so that the place where services are rendered determines the source. this Petition for Review on certiorari of the Decision of the Tax Court.. Held: 1. and contemplates. CIR not only denied the BOAC request for refund in the First Case but also re-issued in the Second Case the deficiency income tax assessment in the second case. therefore. Issue/s: Whether or not the revenue derived by private respondent British Overseas Airways Corporation (BOAC) from sales of tickets in the Philippines for air transportation. There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business. the Tax Court rendered the assailed joint Decision reversing the CIR. Yes.800.79. (Second Case) BOAC was assessed deficiency income taxes.00 as compromise penalties for violation of Section 46 (requiring the filing of corporation returns). Hence. Each case must be judged in the light of its peculiar environmental circumstances.000. This was protested by BOAC.307.08 for the fiscal years 1968-69 to 197071.
The site of the source of payments is the Philippines. It gives rise to the obligation of the purchaser of the ticket to pay the fare and the corresponding obligation of the carrier to transport the passenger upon the terms and conditions set forth thereon. The tickets exchanged hands here and payments for fares were also made here in Philippine currency. Section 37(a) of the Tax Code. income is a flow. also from interests. or the transactions of any business carried on for gain or profile." Those activities were in exercise of the functions which are normally incident to. A transportation ticket is not a mere piece of paper. there must be continuity of conduct and intention to establish a continuous business. the regular sale of tickets. trades. and not one of a temporary character. it is sufficient that the income is derived from activity within the Philippines. In fact. and income derived from any source whatever (Sec. That general sales agent. does not mention income from the sale of tickets for international transportation. maintained a general sales agent in the Philippines. binding upon the parties entering into the relationship. enjoying the protection accorded by the Philippine government. it means something distinct from principal or capital. or dealings in property. (3) receiving the fare from the whole trip. and occurred within. dividends. There should be no doubt then that BOAC was "engaged in" business in the Philippines through a local agent during the period covered by the assessments. (4) rentals and royalties. 29). and (6) sale of personal property. and (4) consequently allocating to the various airline companies on the basis of their participation in the services rendered through the mode of interline settlement as prescribed by Article VI of the Resolution No. Income means "cash received or its equivalent". For the source of income to be considered as coming from the Philippines. The Tax Code defines "gross income" thus: "Gross income" includes gains. In consideration of such protection. (2) breaking down the whole trip into series of trips each trip in the series corresponding to a different airline company. from 1959 to 1971. whether real or personal. wages or compensation for personal service of whatever kind and in whatever form paid. and are in progressive pursuit of. (3) service. profits. namely: (1) interest. during the periods covered by the subject . profits. "income" refers to the flow of wealth. (5) sale of real property. securities. it is a resident foreign corporation subject to tax upon its total net income received in the preceding taxable year from all sources within the Philippines. In BOAC's case. (21) dividends. the flow of wealth should share the burden of supporting the government. BOAC. rents. which enumerates items of gross income from sources within the Philippines. Philippine territory. or gains. The source of an income is the property.State. business. However. such as the appointment of a local agent. For. vocations. 850 of the IATA Agreement. that does not render it less an . sales. The flow of wealth proceeded from.assessments. The ordinary ticket issued to members of the traveling public in general embraces within its terms all the elements to constitute it a valid contract. As used in our income tax law. activity or service that produced the income. its main activity. or from profession. growing out of the ownership or use of or interest in such property. True. the sale of tickets in the Philippines is the activity that produces the income. it constitutes the contract between the ticket-holder and the carrier. When issued by a common carrier. the purpose and object of its organization as an international air carrier. is the very lifeblood of the airline business. the generation of sales being the paramount objective. it is the amount of money coming to a person within a specific time. while capital is a fund. commerce. "was engaged in (1) selling and issuing tickets. Accordingly. and income derived from salaries.
The absence of flight operations to and from the Philippines is not determinative of the source of income or the site of income taxation. It merely directs that the types of income listed therein be treated as income from sources within the Philippines. Similarly.. Gorres. net not only of the 10% final dividend tax in the amounts of P764. The test of taxability is the "source". sought a ruling from the Bureau of Internal Revenue on whether or not the dividends petitioner received from AG&P are effectively connected with its conduct or business in the Philippines as to be considered branch profits subject to the 15% profit remittance tax imposed under Section 24 (b) (2) of the National Internal Revenue Code as amended by Presidential Decrees Nos.. business a And even if the BOAC tickets sold covered the "transport of passengers and cargo to and from foreign cities".720 as cash dividends to petitioner and withheld the corresponding 10% final dividend tax thereon. BOAC was an off-line international airline at the time pertinent to this case. For the first quarter of 1981 ending March 31. In a letter dated January 29. AG&P declared and paid cash dividends to petitioner in the amount of P849. but also of the withheld 15% profit remittance tax based on the remittable amount after deducting the final withholding tax of 10%. 1705 and 1773. by its language. for the third quarter of 1981 ending September 30.). Tes MARUBENI CORPORATION (formerly Marubeni-Iida. does not intend the enumeration to be exclusive. A cursory reading of the section will show that it does not state that it is an all-inclusive enumeration. Ltd. it cannot alter the fact that income from the sale of tickets was derived from the Philippines. that of origin. and that no other kind of income may be so considered. Japan. which produced the income. Admittedly. Co. and the origin of the income herein is the Philippines. petitioner. COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX APPEALS Facts: Marubeni Corporation of Japan has equity investments in AG&P of Manila. AG&P directly remitted the cash dividends to petitioner's head office in Tokyo. 1981. through the accounting firm Sycip. ource of payments is the Philippines. Acting Commissioner Ruben Ancheta ruled: . and the source of an income is that activity . Unquestionably. AG&P declared and paid P849. petitioner.748 for the first and third quarters of 1981. Velayo and Company. vs. Section 37. the passage documentations in these cases were sold in the Philippines and the revenue therefrom was derived from a activity regularly pursued within the Philippines. In reply to petitioner's query.720 and withheld the corresponding 10% final dividend tax thereon. The word "source" conveys one essential idea.income from sources within the Philippines..
the amount refundable offsets the liability. Gulf and Pacific Company(AG &P) of Manila to its shareholder out of its profits on the investments of the Marubeni Corporation of Japan. And it appears that the funds invested in the Atlantic Gulf & Pacific Company did not come out of the funds infused by the Marubeni Corporation of Japan to the Marubeni Corporation Philippine Branch. if a resident foreign corporation is engaged in the buying and selling of machineries in the Philippines and invests in some shares of stock on which dividends are subsequently received. it is sufficient that the income arises from the business activity in which the corporation is engaged. said dividend income is subject to the 25 % tax pursuant to Article 10 (2) (b) of the Tax Treaty dated February 13. as amended. As a matter of fact. 1980 between the Philippines and Japan. the Central Bank of the Philippines. While it is true that the Marubeni Corporation Philippine Branch is duly licensed to engage in business under Philippine laws. Accordingly. directly or indirectly. in the investments and in the receipt of the dividends. 5580). The Commissioner pointed that inasmuch as the cash dividends remitted by AG&P to Marubeni Corporation. only profits remitted abroad by a branch office to its head office which are effectively connected with its trade or business in the Philippines are subject to the 15% profit remittance tax. taxable to the said corporation. To be effectively connected it is not necessary that the income be derived from the actual operation of taxpayer-corporation's trade or business. income is taxable to the person who earned it. the dividends under consideration were earned by the Marubeni Corporation of Japan. Subject to certain exceptions not pertinent hereto. nothing is left to be refunded. . treated the Marubeni Corporation of Japan as a non-resident stockholder of the Atlantic Gulf & Pacific Company based on the supporting documents submitted to it. While it is true that said dividends remitted were not subject to the 15% profit remittance tax as the same were not income earned by a Philippine Branch of Marubeni Corporation of Japan. For example.Pursuant to Section 24 (b) (2) of the Tax Code. and neither is it subject to the 10% intercorporate dividend tax. a non-resident foreign corporation. the dividends received by Marubeni from AG&P are not income arising from the business activity in which Marubeni is engaged. the dividends thus earned are not considered 'effectively connected' with its trade or business in this country. and that the taxes withheld of 10 % as intercorporate dividend tax and 15 % as profit remittance tax totals 25 %. said dividends if remitted abroad are not considered branch profits for purposes of the 15% profit remittance tax imposed by Section 24 (b) (2) of the Tax Code. nevertheless. (Revenue Memorandum Circular No. Petitioner claimed for the refund or issuance of a tax credit of P229. Petitioner appealed to the Court of Tax Appeals which affirmed the denial of the refund by the Commissioner of Internal Revenue. It was denied. Japan is subject to 25 % tax. CTA held that the said dividends were distributions made by the Atlantic. Admittedly. being a non-resident stockholder. and hence. In the instant case.424. Petitioner Marubeni Corporation Philippine Branch has no participation or intervention. The investments in the Atlantic Gulf & Pacific Company of the Marubeni Corporation of Japan were directly made by it and the dividends on the investments were likewise directly remitted to and received by the Marubeni Corporation of Japan. hence. the recipient of the dividends.40 "representing profit tax remittance erroneously paid on the dividends remitted by AG&P to head office in Tokyo. such dividends are not the income of the Philippine Branch and are not taxable to the said Philippine branch. as amended. in authorizing the remittance of the foreign exchange equivalent of the dividends in question.
Under the Tax Code. is a resident foreign corporation because it is transacting business in the Philippines. a resident foreign corporation is one that is "engaged in trade or business" within the Philippines. Manila does not matter at all. Petitioner reasons that since the Philippine branch and the Tokyo head office are one and the same entity. In other words. the Marubeni Corporation. whoever made the investment in AG&P. cannot now claim the increments as ordinary consequences of its trade or business in the Philippines and avail itself of the lower tax rate of 10 %. having made this independent investment attributable only to the head office. but certainly not of the branch in the Philippines. Accordingly. But while public respondents correctly concluded that the dividends in dispute were neither subject to the 15 % profit remittance tax nor to the 10 % intercorporate dividend tax. the alleged overpaid taxes were incurred for the remittance of dividend income to the head office in Japan which is a separate and distinct income taxpayer from the branch in the Philippines.We see no significance thereto in the identity concept or principal-agent relationship theory of petitioner because such dividends are the income of and taxable to the Japanese corporation in Japan and not to the Philippine branch. under both Philippine tax and corporate laws." . "the tax base upon which the 15 % branch profit remittance tax is imposed is the profit actually remitted abroad.260 shares including that of nominee) was made for purposes peculiarly germane to the conduct of the corporate affairs of Marubeni Japan. A single corporate entity cannot be both a resident and a nonresident corporation depending on the nature of the particular transaction involved. Hence the instant petition for review Issue: Whether or not Marubeni is a resident or non-resident corporation Held: It is a resident corporation. whether the dividends are paid directly to the head office or coursed through its local branch is of no moment for after all. It is thus clear that petitioner. which. While the tax on dividends is directly levied on the dividends received. the head office and the office branch constitute but one corporate entity. Petitioner contends that precisely because it is engaged in business in the Philippines through its Philippine branch that it must be considered as a resident foreign corporation. There can be no other logical conclusion considering the undisputed fact that the investment (totalling 283. they grossly erred in holding that no refund was forthcoming to the petitioner because the taxes thus withheld totalled the 25 % rate imposed by the Philippine-Japan Tax Convention pursuant to Article 10 (2) (b). the recipient being a non-resident stockholder. To simply add the two taxes to arrive at the 25 % tax rate is to disregard a basic rule in taxation that each tax has a different tax basis.
filed in April 1952 an income tax return declaring the sum of P798. remitted P798. J. filed with the Bureau of Internal Revenue a claim for refund of the P66. G. H. Alexander Howden & Co.115. also a British corporation not engaged in business in this country. Pursuant to Section 22 of Republic Act 1125 the case was certified to the Court of Tax Appeals. Alexander Howden & Co.. within the two-year period provided for by law. ET AL. Salazar. A ruling of the Commissioner of Internal Revenue. Ltd. 1965 ALEXANDER HOWDEN & CO. petitioners. Ltd..452.00... a domestic corporation.. On May 12. the questioned decision of respondent Court of Tax Appeals dated February 12. 1954.P.297.297.. Picazo and Agcaoili for petitioners.112. entered into reinsurance contracts with 32 British insurance companies not engaged in trade or business in the Philippines.. agreed to the payment of P977.77. as Alexander Howden & Co.00 income tax thereon. The Commissioner of Internal Revenue is ordered to refund or grant as tax credit in favor of petitioner the amount of P144. Alexander Howden & Co. marine and other risks it has underwritten in the Philippines.00. represented the aforesaid British insurance companies. Ltd.. Ltd.47. Subsequently. with accrued interest thereon in the amount of P4.47 to Alexander Howden & Co. CHESTER & OTHERS. instituted an action in the Court of First Instance of Manila for the recovery of the aforesaid amount claimed.985. as reinsurance premiums. THE COLLECTOR (NOW COMMISSIONER) Of INTERNAL REVENUE...00 as income tax on the P4. was invoked. later reduced to P65. whereby the former agreed to cede to them a portion of the premiums on insurances on fire. dated December 8. Commonwealth Insurance Co. No.'s gross income for calendar year 1951. Income G. It also paid the Bureau of Internal Revenue P66.. J. In behalf of Alexander Howden & Co. because Alexander Howden & Co. signed them. Sycip. respondent. 1953. Office of the Solicitor General for respondent. No costs.WHEREFORE. Luna and Associates and Lichauco.985.. Pursuant to the aforesaid contracts. Ltd.112. stating that it exempted from withholding tax reinsurance premiums received from domestic insurance companies by foreign insurance companies not authorized to do business in the Philippines.R. . On November 24.77 accrued interest.. LTD. Ltd. BENGZON. 1961 the Tax Court denied the claim.. L-19392 April 14. vs.. Commonwealth Insurance Co.: In 1950 the Commonwealth Insurance Co. in 1951. 1986 which affirmed the denial by respondent Commissioner of Internal Revenue of petitioner Marubeni Corporation's claim for refund is hereby REVERSED. The reinsurance contracts were prepared and signed by the foreign reinsurers in England and sent to Manila where Commonwealth Insurance Co. Ltd.40 representing overpayment of taxes on dividends received..
for Commonwealth Insurance Co.Plaintiffs have appealed. And. thereby squarely raising the following issues: (1) Are portions of premiums earned from insurances locally underwritten by a domestic corporation. the liabilities insured and the risks originally underwritten by Commonwealth Insurance Co. were all situated in the Philippines. If by source of income is meant the business of the taxpayer. the contracts provided for the use of Philippine currency as the medium of exchange and for the payment of Philippine taxes. Secondly. as such. pursuant to reinsurance contracts signed by the reinsurers abroad but signed by the domestic corporation in the Philippines. subject to income tax or not? (2) If subject thereto. . and the same took place in the Philippines. 2 An income may be earned by a corporation in the Philippines although such corporation conducts all its businesses abroad. accordingly. does not include reinsurance premiums. the reinsurance contracts were perfected in the Philippines. (3) Section 37 of the Tax Code. had for their source the undertaking to indemnify Commonwealth Insurance Co. may or may not the income tax on reinsurance premiums be withheld pursuant to Sections 53 and 54 of the National Internal Revenue Code? Section 24 of the National Internal Revenue Code subjects to tax a non-resident foreign corporation's income from sources within the Philippines. the parties to the reinsurance contracts in question evidently intended Philippine law to govern. signed them last in Manila. the reinsured. taxable in England. Appellants should not confuse activity that creates income with business in the course of which an income is realized. were prepared and signed abroad. Article 11 thereof provided for arbitration in Manila. not being engaged in business in the Philippines. according to the laws of the Philippines. of any dispute arising between the parties in regard to the interpretation of said contracts or rights in respect of any transaction involved. In the first place. upon which the reinsurance premiums and indemnity were based. Precisely. activity or service that produced the income. against liability. An activity may consist of a single act. The source of an income is the property. It subjects foreign corporations not doing business in the Philippines to tax for income from sources within the Philippines. The first issue therefore hinges on whether or not the reinsurance premiums in question came from sources within the Philippines. The American cases cited are inapplicable to this case because in all of them the reinsurance contracts were signed outside the jurisdiction of the taxing State. foreign corporations not engaged in business in the Philippines would be exempt from taxation on their income from sources within the Philippines. contrary to appellants' view. out of which the reinsurance premiums were earned. ceded to and received by non-resident foreign reinsurance companies.. received the reinsurance premiums as income from their business conducted in England and. Said undertaking is the activity that produced the reinsurance premiums. Appellants would impress upon this Court that the reinsurance premiums came from sources outside the Philippines. 1 The reinsurance premiums remitted to appellants by virtue of the reinsurance contracts. thirdly. (2) The reinsurers. while business implies continuity of transactions. Section 24 of the Tax Code does not require a foreign corporation to be engaged in business in the Philippines in order for its income from sources within the Philippines to be taxable. so that their situs lies outside the Philippines. Furthermore. for these reasons: (1) The contracts of reinsurance. and. thru a non-resident foreign insurance broker. enumerating what are income from sources within the Philippines.
"gross receipts" of amounts that do not constitute return of capital. It is urged for the applicant that no opposition has been registered against his petition on the issues above-discussed. profits. emoluments. that is. and income". and income of any non-resident alien individual not engaged in trade or business within the Philippines and not having any office or place of business therein. and we see no excuse for failing to take them into account. after deducting general expenses. remunerations" which connote . therefore. rents. the tax actually collected in this case was computed not on the basis of gross premium receipts but on the net premium income. said income should properly share the burden of maintaining the government. The applicant's complaint of unfairness could have some weight if the objections on appeal had been on points not previously passed upon. Appellants further contend that reinsurance premiums not being among those mentioned in Section 37 of the Tax Code as income from sources within the Philippines. with a view to preventing the conferment of citizenship to persons not fully qualified therefor (Lee Ng Len vs. wages" and followed by "annuities. or other fixed or determinable annual or periodical gains. As to appellants' contention that reinsurance premiums constitute "gross receipts" instead of "gross income". by reference. is not an all-inclusive enumeration. not subject to income tax. compensations. as used in Section 53 (b). Such income enjoyed the protection of the Philippine Government.R. are part of the gross income of a taxpayer. As wealth flowing from within the taxing jurisdiction of the Philippines and in consideration for protection accorded it by the Philippines. however.1äwphï1." It does not state or imply that an income not listed therein is necessarily from sources outside the Philippines. 1965). At any rate. dividends. such as reinsurance premiums. The reinsurance premiums in question being taxable.ñët The argument of appellants is that "premiums". the same should not be treated as such. But the deficiencies here in question are not new but well-known. profits. suffice it to say that.Furthermore. Section 54. 3 Such flow. however. No. as used in our income tax law. we turn to the issue whether or not they are subject to withholding tax under Section 54 in relation to Section 53 of the Tax Code. salaries. payment of policies and taxes. Absence of opposition. annuities. It states that "the following items of gross income shall be treated as gross income from sources within the Philippines. Section 37. as correctly observed by the Court of Tax Appeals. that they are not within the scope of "other fixed or determinable annual or periodical gains. salaries. March 31. wages. in the instant case. Appellants maintain that reinsurance premiums are not "premiums" at all as contemplated by Subsection (b) of Section 53. L-20151. is preceded by "rents. compensations. premiums. having been ruled upon repeatedly by this Court. remunerations. proceeded from the Philippines. G. they are not items of income subject to withholding tax. "income" refers to the flow of wealth. Republic. Subsection (b) of Section 53 subjects to withholding tax the following: interest. applies this provision to foreign corporations not engaged in trade or business in the Philippines. does not preclude the scanning of the whole record by the appellate court. that.
annual and periodical income: Income is fixed when it is to be paid in amounts definitely pre-determined. dated October 13. Section 199 of the Income Tax Regulations defines fixed. therefore. whether they be insurance or reinsurance premiums. 1955). because they can be calculated accurately on the basis of the reinsurance contracts. 1959) when the said administrative rulings prevailed. 1955. a bonus. compensation for the use of money. . The principle of legislative approval by re-enactment may briefly be stated thus: Where a statute is susceptible of the meaning placed upon it by a ruling of the government agency charged with its enforcement and the Legislature thereafter re-enacts the provisions without substantial . February 7. 1955 and February 8. It is asserted that since Sections 53 and 54 were "substantially re-enacted" by Republic Acts 1065 (approved June 12. Assuming that reinsurance premiums are not within the word "premiums" in Section 53. the rulings should be given the force of law under the principle of legislative approval by re-enactment. On the other hand. in appellants' view.. 1953. still they may be classified as determinable and periodical income under the same provision of law. invoked a ruling of the Commissioner of Internal Revenue dated December 8. as stated. are determinable and periodical income: determinable. 1954).. The income need not be paid annually if it is paid periodically. Appellants' claim for refund. from time to time. 1956) and 2343 (approved June 20. whether or not at regular intervals.periodical income payable to the recipient on account of some investment or for personal services rendered. which is neither qualified nor defined by the law itself. Since Section 53 subjects to withholding tax various specified income. as well as the decision of the defunct Board of Tax Appeals in the case of Franklin Baker Co. 1505 (approved June 16. determinable." We disagree with the foregoing proposition. inasmuch as they were earned and remitted from time to time. the generic connotation of each and every word or phrase composing the enumeration in Subsection (b) thereof is income.. among them. that is to say. a price for a loan. Perforce. Appellants' brief also cited rulings of the same official. 1953. Reinsurance premiums. 4 thereby attempting to show that the prevailing administrative interpretation of Sections 53 and 54 of the Tax Code exempted from withholding tax reinsurance premiums ceded to non-resident foreign insurance companies. That the length of time during which the payments are to be made may be increased or diminished in accordance with someone's will or with the happening of an event does not make the payments any the less determinable or periodical. therefore. should mean income and should include all premiums constituting income. "Premiums" should. a sum in addition to interest. 1291 (approved June 15. the word "premiums". "premiums". be given a meaning kindred to the other terms in the enumeration and be understood in its broadest sense as "a reward or recompense for some act done. periodical. it is determinable whenever there is a basis of calculation by which the amount to be paid may be ascertained.
was disqualified to sit in this case since he had appeared as counsel for the Commissioner of Internal Revenue and.. such action is to some extent confirmatory that the ruling carries out the legislative purpose. CTA . Barrera. Finally. Concepcion. Thirdly. signed by them and entered upon the record. Conwi v. as an amendment to Sections 24 and 54 of the Tax Code.J. January 31.5 The aforestated principle. Such being the case they may not now be heard to complain on this point. with such judge his objection stating therein the grounds for it. in the case on which appellants rely. when Judge Luciano has given his opinion on the merits of the case. the administrative rulings of the Commissioner of Internal Revenue relied upon by the taxpayers were only contained in letters to taxpayers and never published. took no part. vs. Republic Act 3825 in effect took out from Sections 24 and 54 something which formed a part of the subject matter therein.6 thereby affirming the taxability of reinsurance premiums prior to the aforestated amendment. after the Tax Court rendered judgment in this case. Collector of Internal Revenue. Dizon and Regala. Sections 53 and 54 were never reenacted. Reyes. The party objecting to the judge's competency may file.. It may not be amiss to note that in 1963. The judge shall thereupon proceed with the trial or withdraw therefrom. A litigant cannot be permitted to speculate upon the action of the court and raise an objection of this nature after decision has been rendered. C. in writing. Secondly. 8 WHEREFORE. instead of asking for Judge Luciano's disqualification by raising their objection in the Court of Tax Appeals.B. Luciano. The Rules of Court provides that no judge shall sit in any case in which he has been counsel without the written consent of all the parties in interest.7 Appellants. reinsurance premiums received by foreign corporations not engaged in business in the Philippines. are content to raise it for the first time before this Court.L. concur. as such. L-6741. appellant would argue that Judge Augusto M. what was declared to have acquired the force or effect of law was a regulation promulgated to implement a law. whereas. Makalintal and Zaldivar. 1956. 1505 and 2343 were merely amendments in respect to the rate of tax imposed in Sections 53 and 54. but his action shall be made in writing and made part of the record.. Bautista Angelo. so that the Legislature is not presumed to know said rulings.. exempting from income taxes and withholding tax. who penned the decision appealed from. JJ. however. Bengzon. JJ. Inc. J. what appellants would seek to have the force of law are opinions on queries submitted. the judgment appealed from is hereby affirmed with costs against appellants.. 1291. Interprovincial Autobus Co. Firstly. answered plaintiff's complaint before the Court of First Instance of Manila. It is so ordered. in this case. is not applicable to this case. Congress enacted Republic Act 3825. Republic Acts 1065.change. Paredes.
Income can also be though of as flow of the fruits of one's labor. It shows that the subject matter involved therein are exports products. they’ve computed the tax by applying the dollar-to-peso conversion based on the floating rate provided by the BIR. receipts of sale of foreign exchange and investment but not income tax. Therefore. However. new foreign borrowing and investments-nothing by way of income tax . For a foreign exchange transaction is simply that-foreign exchange being “the conversion of an amount of money of one country into an equivalent amount of money of another country. 2) WON the proper rate of conversion is the prevailing free market rate of exchange. petitioners were assigned outside the Phil with their compensation paid in US dollars. receipts of foreign exchange. 289 provides for specific instances when the par value of the peso shall not be the conversion rate. When they filed their income tax returns for the year 1970. . 2) Yes. HELD: 1) No. they filed an amended tax return using the par value of the peso provided by Sec. Unless otherwise specified. on 1973. For the year 1970 and 1971. They claim for a refund due to overpayment. interest or profit from investment. 289 does not contemplate income tax payments. CB No. The CTA also held that petitioner’s dollar earnings are receipts derived from foreign exchange transactions. ISSUES: 1) WON petitioner’s dollar earnings are receipts derived from foreign exchange transactions. The corporation is a subsidiary of P&G based at Ohio USA. Makati.Petitioners erred in concluding that CB Circ No.40 of RA 265. the conversion should be the prevailing free market rate of exchange. there occurred no actual inward remittances therefore NOT included in Central Bank Circular No. There was no conversion from one currency to another. Petitioners are correct in claiming that their dollar earnings are not receipts derived from foreign exchange transactions. foreign exchange payments. they were earning in their assigned nation’s currency and were also spending in said currency. The Commissioner of the BIR denied the claim of petitioners stating that the basis must be the prevailing free market rate of exchange and not the par value. 289 speaks of receipts for export products.FACTS: Petitioners are Filipino citizens and employees of Procter and Gamble Philippines with an office located at Ayala Ave. 289 does not apply to them. Petitioners argued that since the dollar earnings does not fall within the classification of foreign exchange transaction. 289. CB no. Therefore. When petitioners were assigned to the foreign subsidiaries of P&G. 3) WON petitioners are exempt to pay tax for such income since there were no remittance/ acceptance of their salaries in UD Dollars into the Philippines. Income may be defined as an amount of money coming to a person or corporation within a specified time. invisibles. whether as payment for services. it means cash or its equivalent. they can base their conversion using the par value of the peso. Central Bank Circular no.
Deputy Collector of Internal Revenue. The petitions were denied for lack of merit. 1913. Vicente Madrigal filed sworn declaration on the prescribed form with the Collector of Internal Revenue. as his total net income for the year 1914. The general question had in the meantime been submitted to the Attorney-General of the Philippine Islands who in an opinion dated March 17. and thus decided against the claim of Madrigal. a law of American origin. plaintiffs-appellants. The United States Commissioner of Internal Revenue reversed the opinion of the Attorney-General. On February 25. Even if there was no remittance and acceptance of their salaries and wages in US Dollars into the Philippines. showing. the correspondence together with this opinion was forwarded to Washington for a decision by the United States Treasury Department. L-12287 August 7. Vicente Madrigal and Susana Paterno were legally married prior to January 1. 1915. they are still bound to pay the tax. are subject to income tax. 1915.302. a law of Spanish origin. MALCOLM. and VENANCIO CONCEPCION. Petitioners forgot that they are citizens of the Philippines. onehalf to be considered the income of Vicente Madrigal and the other half of Susana Paterno. and that in computing and assessing the additional income tax provided by the Act of Congress of October 3. Collector of Internal Revenue. the sum of P296. and in this case wholly without or outside the Philippines. held with the petitioner Madrigal. RAFFERTY. The marriage was contracted under the provisions of law concerning conjugal partnerships (sociedad de gananciales). the income declared by Vicente Madrigal should be divided into two equal parts. 1914. J. No.3) No.73 did not represent his income for the year 1914. Subsequently Madrigal submitted the claim that the said P296. Assistant Attorney Round for appellees. with reference to the Civil Code.R. defendants-appellees.302. The revenue officers being still unsatisfied. and their income. Gregorio Araneta for appellants. JAMES J. but was in fact the income of the conjugal partnership existing between himself and his wife Susana Paterno. vs. within or without.73. STATEMENT OF THE CASE. Manila EN BANC G. 1918 VICENTE MADRIGAL and his wife. SUSANA PATERNO. .: This appeal calls for consideration of the Income Tax Law.
erroneously and unlawfully collected from the plaintiff Vicente Madrigal. with the result that plaintiff Madrigal has paid as income tax for the year 1914.000. alleged to have been wrongfully and illegally collected by the defendants from the plaintiff. The burden of the complaint was that if the income tax for the year 1914 had been correctly and lawfully computed there would have been due payable by each of the plaintiffs the sum of P2. The contentions of plaintiffs and appellants having to do solely with the additional income tax. The normal tax thus arrived at was P2. The counter contentions of appellees are that the taxes imposed by the Income Tax Law are as the name implies taxes upon income tax and not upon capital and property.08. the gross income of Vicente Madrigal and Susana Paterno for the year 1914.687. the specific exemption granted to Vicente Madrigal and Susana Paterno. that the fact that Madrigal was a married man.97.716. the profits made by Susana Paterno in her embroidery business. and after the protest of Madrigal had been decided adversely by the Collector of Internal Revenue. the tax upon which was to be paid at source.181. in excess of the sum lawfully due and payable.50.80.08.668. husband and wife. The learned argument of counsel is mostly based upon the provisions of the Civil Code establishing the sociedad de gananciales. together with an analysis of the tax declaration. The dispute between the plaintiffs and the defendants concerned the additional tax provided for in the Income Tax Law. (3) P16. has no bearing on income considered as income. (2) P4. General deductions were claimed and allowed in the sum of P86.18 instead of P9.67.687. is that is should be divided into two equal parts. P3.93 was the sum upon which the normal tax of one per cent was assessed.921.786. The trial court in an exhausted decision found in favor of defendants. and his marriage contracted under the provisions governing the conjugal partnership. P271.842. For the purpose of assessing the normal tax of one per cent on the net income there were allowed as specific deductions the following: (1) P16. ISSUES. the profits made by Vicente Madrigal in a pawnshop company.09. and that the distinction must be drawn between the ordinary form of commercial partnership and the conjugal partnership of spouses resulting from the relation of marriage. which taken together amounts of a total of P5. action was begun by Vicente Madrigal and his wife Susana Paterno in the Court of First Instance of the city of Manila against Collector of Internal Revenue and the Deputy Collector of Internal Revenue for the recovery of the sum of P3. the profits made by Vicente Madrigal in his coal and shipping business. under the provisions of the Act of Congress known as the Income Tax Law. the pleadings. DECISION.614.407. because of the conjugal partnership existing between them.302.879. and the stipulation. without costs.21. and (2) P8. sets forth the basis of defendants' stand in the following way: The income of Vicente Madrigal and his wife Susana Paterno of the year 1914 was made up of three items: (1) P362.086.73. The answer of the defendants. . The resulting net income was P296.15.786. The remainder.80.24. The sum of these three items is P383.After payment under protest. Vicente Madrigal.
If a wife has a separate estate managed by herself as her own separate property. A fund of property existing at an instant of time is called capital. public considerations have demanded an exemption roughly equivalent to the minimum of subsistence. and for the purpose of levying the income tax it is assumed that he can ascertain the total amount of said income. or his income should be included in her return. They are jointly and separately liable for such return and for the payment of the tax. The aim has been to mitigate the evils arising from inequalities of wealth by a progressive scheme of taxation. second edition . T. and such return must include the income of both. extended to the Philippine Islands.000. C. See further Foster's Income Tax." Introduction.000." as here used. "The Income Tax. Income as contrasted with capital or property is to be the test.. 4 Tax Cas. Gibbons vs. making the aggregate of both incomes more than $4.000. Such is the background of the Income Tax Law. 26. in order that a deduction of $4. an annual return of their combined incomes must be made in the manner stated.000 per annum. J. A. To carry out this idea. 136 U. and Towne vs. Rep. Eisner. 49 Week. With these exceptions.) A tax on income is not a tax on property. income the fruit. 93. The essential difference between capital and income is that capital is a fund. 60 Ga." (Waring vs. K. City of Savannah . she may make return of her own income. contains the following: The husband. and in such case the return must be made even though the combined income of both be less than $4. Mahon ." (London County Council vs. can be defined as "profits or gains. "The Nature of Capital and Income. will be imposed only upon so much of the aggregate income of both shall exceed $4. should make and render the return of the aggregate income of himself and wife. Chapter VIII. as the head and legal representative of the household and general custodian of its income. Black on Income Taxes.. B. 77. a return of annual net income is required under the law.. Attorney-General . income is the fruit. the wife's return should be attached to the return of her husband. income is a flow.") The Supreme Court of Georgia expresses the thought in the following figurative language: "The fact is that property is a tree.000. which places the burden on those best able to pay. no less than five answers have been given the course of history. decided by the United States Supreme Court. (See Seligman. 605. however.000. Capital is wealth.) The Income Tax Law of the United States. The tax in such case. 83 L. and receives an income of more than $3. January 7. 549. second edition . S. Chapter IV. The single or married status of the person claiming . 265. 1918. N. "Income. The final stage has been the selection of income as the norm of taxation. S. labor is a tree. while income is the service of wealth. 686..) A regulation of the United States Treasury Department relative to returns by the husband and wife not living apart. and if the husband has other net income. N..S. If the aggregate net income of both exceeds $4. the income tax is supposed to reach the earnings of the entire non-governmental property of the country. although neither one separately has an income of $3.000.From the point of view of test of faculty in taxation. A flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is called an income. (See Fisher.000 may be made from the aggregate of both incomes.. income the fruit. capital is a tree. If either husband or wife separately has an income equal to or in excess of $3.. 70 L. is the result of an effect on the part of the legislators to put into statutory form this canon of taxation and of social reform.
" (Nable Jose vs. Bureau of Insular Affairs. we turn for a moment to consider the provisions of the Civil Code dealing with the conjugal partnership. Gaz. Nable Jose . 1915. The decision of the latter overruling the opinion of the Attorney-General is as follows: TREASURY DEPARTMENT. The aims and purposes of the Income Tax Law must be given effect. The husband and wife are only entitled to the exemption of P8. Moreover. the income cannot properly be considered the separate income of the wife for the purposes of the additional tax. the Income Tax Law does not look on the spouses as individual partners in an ordinary partnership. The point we are discussing has heretofore been considered by the Attorney-General of the Philippine Islands and the United States Treasury Department. Recently in two elaborate decisions in which a long line of Spanish authorities were cited. decided that "prior to the liquidation the interest of the wife and in case of her death. Washington.000 specifically granted by the law.the specific exemption shall be determined as one of the time of claiming such exemption which return is made. D. transmitting copy of correspondence "from the Philippine authorities relative to the method of submission of income tax returns by marred person.) Susana Paterno. C. which constitutes neither a legal nor an equitable estate. FRANK MCINTYRE. Losano . 1265. a mere expectancy. 16 Off. The higher schedules of the additional tax directed at the incomes of the wealthy may not be partially defeated by reliance on provisions in our Civil Code dealing with the conjugal partnership and having no application to the Income Tax Law. Gaz. Washington. War Department. has an inchoate right in the property of her husband Vicente Madrigal during the life of the conjugal partnership. She has an interest in the ultimate property rights and in the ultimate ownership of property acquired as income after such income has become capital. 871. of her heirs. Not being seized of a separate estate. Manuel and Laxamana vs. wife of Vicente Madrigal. in forwarding the papers to the Bureau. Income Tax. otherwise the status at the close of the year.. Chief. 15 Off. As she has no estate and income. and does not ripen into title until there appears that there are assets in the community as a result of the liquidation and settlement. actually and legally vested in her and entirely distinct from her husband's property. is an interest inchoate." You advise that "The Governor-General. Susana Paterno cannot make a separate return in order to receive the benefit of the exemption which would arise by reason of the additional tax. advises that the Insular Auditor has been authorized to suspend action on the warrants in question ." With these general observations relative to the Income Tax Law in force in the Philippine Islands. this court in speaking of the conjugal partnership. Susana Paterno has no absolute right to one-half the income of the conjugal partnership. SIR: This office is in receipt of your letter of June 22..
1913. the entire net income in this case was taxable to Gregorio Araneta. to be administered as in the United States but by the appropriate internal-revenue officers of the Philippine Government. In all instances the income of husband and wife whether from separate estates or not. one return for each half in the names respectively of the husband and wife. and over which her husband has no right in equity. The only occasion for a wife making a return is where she has income from a sole and separate estate in excess of $3. married and living with his wife. 1913). By paragraph M of the statute. and that the refund should be allowed. that the tax was paid and an application for refund made. that Araneta claims the returns are correct on the ground under the Philippine law his wife is entitled to half of his earnings. but that where the husband and wife both make returns (they living together). that Araneta has dominion over the income and under the Philippine law.000. had an income of an amount sufficient to require the imposition of the net income was properly computed and then both income and deductions and the specific exemption were divided in half and two returns made.000. The statute and the regulations promulgated in accordance therewith provide that each person of lawful age (not excused from so doing) having a net income of $3. so that under the returns as filed there would be an escape from the additional tax. tax was assessed against the entire net income against Gregorio Araneta.000 where the person making the return is a single person. It appears further from the correspondence that upon the foregoing explanation. You are therefore advised that upon the facts as stated.000 additional where the person making the return is married and living with consort.000 or over for the taxable year shall make a return showing the facts. its provisions are extended to the Philippine Islands. in which the latter event either the husband or wife may make the return but not both. or married and not living with consort. but together they have an income in excess of $4.000. the amount of deduction from the aggregate of their several incomes shall not exceed $4. is . It may consist of lands or chattels. levying an income tax. that in this case the wife has no "separate estate" within the contemplation of the Act of October 3. The separate estate of a married woman within the contemplation of the Income Tax Law is that which belongs to her solely and separate and apart from her husband. and that the application for refund was properly rejected. and that the application for refund was rejected. and $1. both for the normal and additional tax.until an authoritative decision on the points raised can be secured from the Treasury Department." From the correspondence it appears that Gregorio Araneta. that from the net income so shown there shall be deducted $3. whereupon the matter was submitted to the Attorney-General of the Islands who holds that the returns were correctly rendered. the right to determine its use and disposition. and thereupon the question at issue is submitted through the Governor-General of the Islands and Bureau of Insular Affairs for the advisory opinion of this office. this office holds that for the Federal Income Tax (Act of October 3.
Where the wife has income from a separate estate makes return made by her husband.taken as a whole for the purpose of the normal tax. So ordered. Respectfully. however. G. Government of the Philippine Islands vs. We adopt the findings of facts of the Court of Tax Appeals as follows: For the years 1974 to 1976. In re Allen . In connection with the decision above quoted.S. Gadioma Law Offices for private respondent. and Roman Catholic Bishop of Nueva Segovia .R. travelers and/or foreign travel agencies does not form part of its gross receipts subject to the 3% independent contractor's tax under the National Internal Revenue Code of 1977. Being thus a law of American origin and being peculiarly intricate in its provisions. L-66416 March 21. Inc.. GATES. 630. petitioner.. 209 U.S. the authoritative decision of the official who is charged with enforcing it has peculiar force for the Philippines. J. respondents. Some of the services extended to the tourists consist of booking said tourists and travelers in local hotels for . 1990 COMMISSIONER OF INTERNAL REVENUE. No. whose meaning is doubtful. TOURS SPECIALISTS. by the department charged with its execution. petitioner (Tours Specialists. earmarked and paid for hotel room charges of tourists. while the incomes are added together for the purpose of the normal tax they are taken separately for the purpose of the additional tax. vs. 634. It has come to be a well-settled rule that great weight should be given to the construction placed upon a revenue law. The Income Tax Law was drafted by the Congress of the United States and has been by the Congress extended to the Philippine Islands. it is well to recall a few basic ideas.. and THE COURT OF TAX APPEALS. JR.. 2 Phil.: This is a petition to review on certiorari the decision of the Court of Tax Appeals which ruled that the money entrusted to private respondent Tours Specialists. 32 Phil. In this case. INC. the wife has no separate income within the contemplation of the Income Tax Law. vs. DAVID A..) had derived income from its activities as a travel agency by servicing the needs of foreign tourists and travelers and Filipino "Balikbayans" during their stay in this country. Municipality of Binalonan. (U. 338. Cerecedo Hermanos y Cia. Inc. .. GUTIERREZ. Acting Commissioner.) We conclude that the judgment should be as it is hereby affirmed with costs against appellants.
The procedure observed is that the billing hotel sends the bill to the petitioner. Oct. 1981. t.s. computed as follows: 1974 deficiency percentage tax per investigation P 3.995.n. the petitioner then pays the local hotel with the funds entrusted to it by the foreign tour correspondent agency. It is also the case that some tour agencies abroad request the local tour agencies.s. t. visits and excursions.. 25.. 1981.s. be paid through them. Inc. CTA rec.946..n. 9.. 3-4. food and other personal expenses of said tourists. pp. on December 6. pp. which in turn is paid by petitioner tour agency to the local hotel when billed. 2425. 1982). Despite this arrangement. or by their foreign travel agencies to the local hotels (pp.s.s. Aug.427. p..91 ————— P 4. as a rule.106. February 2. in some specific cases. 5-6. Consequently. The local hotel identifies the individual tourist. By this arrangement. Q-1. the fund for hotel room accommodation. securing permits for them to visit places of interest.39 25% surcharge for late payment 2.s.54 14% interest computed by quarters up to 12-28-79 3. and from the latter to the airport upon their departure from the Philippines. that the hotel room charges.953.n. petitioner received from respondent the 3% deficiency independent contractor's tax assessment in the amount of P122. 17-18. are paid directly either by tourists themselves. inclusive.. p.. and arranging their cultural entertainment..their lodging and board needs. transporting them from their hotels to various embarkation points for local tours. pp. ibid) and restaurants or shops. the payments of the hotel room accommodations. 1981. the foreign tour agency entrusts to the petitioner Tours Specialists.72 1975 deficiency percentage tax per investigation P 8. t. or the particular groups of tourists by code name or group designation and also the duration of their stay for purposes of payment. In order to ably supply these services to the foreign tourists.93 for the years 1974 to 1976.. shopping and recreational activities.n.994. T. p. 10. "U".n.18 P 8. 11. 29 CTA rec.85 . t.63 15% surcharge for late payment 998.n. petitioner and its correspondent counterpart tourist agencies abroad have agreed to offer a package fee for the tourists. O & O-1. as the case may be.847. pp. Q.. respondent Commissioner of Internal Revenue assessed petitioner for deficiency 3% contractor's tax as independent contractor by including the entrusted hotel room charges in its gross receipts from services for the years 1974 to 1976. Exhs. 1979. ibid. 22-23. See also Exh. t. 20. Aug. (Exh. transporting these foreign tourists from the airport to their respective hotels. Although the fee to be paid by said tourists is quoted by the petitioner. Upon receipt of the bill. 77.. 29. such as the petitioner in the case.
that if their payment is made. were paid entirely to the hotel concerned. declaring to the effect that payments of hotel accommodation are made through petitioner without any increase in the room charged (t.808. 31. the hotel cost or charges "is only an act of accomodation on our (its) part" or that the "agent abroad instead of sending several telexes and saving on bank charges they take the option to send money to us to be held in trust to be endorsed to the hotel. a witness.569. is the fact that the room charge is exempt from hotel room tax under P. 25-29.11 ————— P 67.93 ========= In addition to the deficiency contractor's tax of P122. Subsequently on December 11. 9.n.) . 1981. Ibid.342.24 14% interest computed by quarters up to 12-28-79 6. t.845.s. (t.n.n.s. Oct.s. were not considered and have never been considered by it as part of its taxable gross receipts for purposes of computing and paying its constractor's tax. 10.756. 21-25) and that the reason why tourists pay their room charge. (t..946. 25. 1981.s. categorically stated that the amounts entrusted to it by the foreign tourist agencies intended for payment of hotel room charges.D.53 14% interest computed by quarters up to 12-28-79 28. 1982. earmarked to pay hotel room charges. Aug. 17-18).71 1976 deficiency percentage per investigation P 54.276.n.946. Aug. 1979.————— P 10. without any portion thereof being diverted to its own funds. had testified.00. 1981. General Manager of petitioner. 3-4. Feb.. petitioner formally protested the assessment made by respondent on the ground that the money received and entrusted to it by the tourists. The testimony of Serafina Sazon was corroborated by Gerardo Isada." (pp.42 25% surcharge for late payment 13.. Serafina Sazon. pp. on cross-examination. t..s.47 P 17. petitioner was assessed to pay a compromise penalty of P500.910.) Witness Isada stated.93. 2. 5-9. pp. 7.50 ————— ————— Total amount due P 122. Certified Public Accountant and in charge of the Accounting Department of petitioner. pp. pp. or through their foreign tourists agencies.534. 20. her credibility not having been destroyed on cross examination. During one of the hearings in this case.n. thru petitioner's tour agency..97 P 96.
rendered to foreign customers. INTENDED OR EARMARKED FOR HOTEL ACCOMMODATIONS FORM PART OF GROSS RECEIPTS SUBJECT TO 3% CONTRACTOR'S TAX. pp. 42) The following procedure is followed: The billing hotel sends the bill to the . 40-45) The petitioner raises the lone issue in this petition as follows: WHETHER AMOUNTS RECEIVED BY A LOCAL TOURIST AND TRAVEL AGENCY INCLUDED IN A PACKAGE FEE FROM TOURISTS OR FOREIGN TOUR AGENCIES. 101 SCRA 495 ). caused the issuance of a warrant of distraint and levy. In the recent case of Sy Po v. As quoted earlier. the correspondent court found as a fact ". (pp. were received as part of the package fee and. the ruling overlooks the fact that the amounts received. 23) The petitioner premises the issue raised on the following assumptions: Firstly." (Rollo. Raymundo v. therefore. there is no showing and is not established by the evidence. (p.) Taking this action of respondent as the adverse and final decision on the disputed assessment. the Court of Tax Appeals sufficiently explained the services of a local travel agency. (Rollo. De Joya. . The respondent differentiated between the package fee — offered by both the local travel agency and its correspondent counterpart tourist agencies abroad and the requests made by some tour agencies abroad to local tour agencies wherein the hotel room charges in some specific cases. Court of Appeals. Commissioner of Customs. In the instant case. 21 SCRA 444 . we ruled that the factual findings of the Court of Tax Appeals are binding upon this court and can only be disturbed on appeal if not supported by substantial evidence.) And later. . which in turn is paid by petitioner tour agency to the local hotel when billed. The mere possibility that the amounts actually paid could be less than the amounts received is sufficient to destroy the validity of the ruling. 1980. 89 SCRA 43 . Domingo. without deciding the petitioner's written protest. (164 SCRA 524 ). Balbas v.Nevertheless. BIR Rec. the petitioner's lone issue is based on alleged error in the findings of facts of the respondent court. 51. the fund for hotel room accommodation. In the latter case. Inc. respondent. BIR Rec. form part of "gross receipts" as defined by law. only questions of law are open for determination. p. would be paid to the local hotels through them. (Nilsen v. like the herein private respondent. intended for hotel room accommodations. The well-settled doctrine is that the findings of facts of the Court of Tax Appeals are binding on this Court and absent strong reasons for this Court to delve into facts. we find no reason to disregard and deviate from the findings of facts of the Court of Tax Appeals. 49-50. (Rollo. that the foreign tour agency entrusts to the petitioner Tours Specialists. petitioner appealed to this Court. Secondly. that the amounts received and "earmarked" are actually what had been paid out as hotel room charges. p. respondent had petitioner's bank deposits garnished. 26-27) In effect. on June 2. pp. (Rollo.
29 ========= .17 Dec. 22. 1976 142. As regards the petitioner's second assumption. the respondent court stated: . in the Examiners' Worksheet (Exh. p. or the particular group of tourist by code name or group designation plus the duration of their stay for purposes of payment. the following sums made up the hotel room accommodations: July 1976 P 102. evidence presented by the private respondent shows that the amounts entrusted to it by the foreign tourist agencies to pay the room charges of foreign tourists in local hotels were not diverted to its funds.51 ————— Grand Total P 904. 1976 409. BIR Rec.209. [C]ontrary to the contention of respondent. Moreover. . the petitioner's assertion that the hotel room charges entrusted to the private respondent were part of the package fee paid by foreign tourists to the respondent is not correct. . 1976 121. the records show.80 Nov.079. that from July to December 1976 alone.019.77 ========= Oct.134. upon receipt of the bill the private respondent pays the local hotel with the funds entrusted to it by the foreign tour correspondent agency.respondent. This evidence was not refuted. 1976 53. In essence. the local hotel then identifies the individual tourist.915.97 Aug. The evidence is clear to the effect that the amounts entrusted to the private respondent were exclusively for payment of hotel room charges of foreign tourists entrusted to it by foreign travel agencies.995.61 ————— P 282. firstly.55 ————— 622.167. T.19 Sept.702. 1976 P 71. this arrangement was only an act of accommodation on the part of the private respondent.).761.
R. . With these clarifications. the Commissioner appealed two decisions of the Court of Tax Appeals disapproving his levy of amusement taxes upon the Manila Jockey Club. hotel bills. 45) The petitioner opines that the gross receipts which are subject to the 3% contractor's tax pursuant to Section 191 (Section 205 of the National Internal Revenue Code of 1977) of the Tax Code include the entire gross receipts of a taxpayer undiminished by any amount. a duly constituted corporation authorized to hold horse races in Manila. dated 23 October. pp.It is not true therefore. such as the invoices. Since the BIR examiners could not have manufactured the above figures representing "advances for hotel room accommodations. this interpretation is in consonance with B. the owner of horses and jockeys. . as stated by respondent. earmarked and paid for hotel room charges should not form part of the gross receipts. the petitioner argues that since there is no law or regulation that money entrusted. The decision shows that during the period November 1946 to 1950. (108 Phil. (Rollo.I. official receipts and other pertinent documents. 821 ). 68-027. Manila Jockey Club. the horse owners and the jockeys. Manila Jockey Club. Inc. p. the Manila Jockey Club paid amusement tax on its commission but without including the 5-1/2% which pursuant to Executive Order 320 and Republic Act 309 went to the Board of Races. then the said hotel room charges are included in the private respondent's gross receipts for purposes of the 3% contractor's tax. hence binding upon this Court. Section 260 of the Internal Revenue Code provides that the amusement tax was payable by the operator on its "gross receipts"." The petitioner contends that the only exception to this rule is when there is a law or regulation which would exempt such gross receipts from being subjected to the 3% contractor's tax citing the case of Commissioner of Internal Revenue v. Thus. 1968 (implementing Section 191 of the Tax Code) which states that the 3% contractor's tax prescribed by Section 191 of the Tax Code is imposed of the gross receipts of the contractor. however. The Manila Jockey Club. to wit: ." these payments must have certainly been taken from the records of petitioner. In the case of Commissioner of Internal Revenue v. 48-49) The factual findings of the respondent court are supported by substantial evidence. According to the petitioner. (Rollo. [W]hether or not the hotel room charges held in trust for foreign tourists and travelers and/or correspondent foreign travel agencies and paid to local host hotels form part of the taxable gross receipts for purposes of the 3% contractor's tax. the issue to be threshed out is as stated by the respondent court. did not consider as part of its "gross receipts" subject to amusement tax the amounts which it had to deliver to the Board on Races. Inc. to wit: . This view was fully sustained by three opinions of the Secretary of Justice. Ruling No. (supra). The facts of the case show that the monies sought to be taxed never really belonged to the club. that there is no evidence proving the amounts earmarked for hotel room charges. "no deduction whatever being allowed by said law.
The latter being a Government institution. to winning horses and jockeys — admittedly 5%. and for convenience. the Government could not have intended to consider as gross receipt the portion of the funds which it directed the Club to give. wherein only "novato" horses. 104 Phil. Needless to say. The Court of Tax Appeals reversed the Collector..  896). Inc. the law in making a distribution of the total wager funds. each of them must contribute to a common fund (P10. by a private contract. owns only 7-1/2% of the total bets registered by the Totalizer.e. 428. The Club contributes an equal amount . the 5% of the total bets that is set aside for prizes to owners of winning horses should not be included by the Manila Jockey Club. In the same manner.00 per horse). however had a different opinion on the matter and demanded payment of amusement taxes. the facts of the case are: The Manila Jockey Club holds once a year a so called "special Novato race". (i. The Collector of the Internal Revenue. Sy Chuico v.There is no question that the Manila Jockey. took no trouble of separating one item from the other. or knew the Club would give. and actually approves or directs payment of the portion that goes to owners of horses as prizes and bonuses of jockeys. In view of all the foregoing. gross receipts of the proprietor of the amusement place should not include any money which although delivered to the amusement place has been especially earmarked by law or regulation for some person other than the proprietor. Coll. provided for in Section 260 of the National Internal Revenue Code). which portion is admittedly 5% out of that 12-1/2% commission. It is destined for no other object than the payment of prizes and the club cannot otherwise appropriate this portion without incurring liability to the owners of winning horses. agrees to reserve for them a portion of the proceeds of the establishment. horses which are running for the first time in an official [of the club] race). Gaz. It cannot be considered as an item of expense because the sum used for the payment of prizes is not taken from the funds of the club but from a certain portion of the total bets especially earmarked for that purpose. 59 Off. (The situation thus differs from one in which the owner of the amusement place. I am of the opinion that in the submission of the returns for the amusement tax of 10% (now it is 20% of the "gross receipts". In the second case.. It is merely held in trust for distribution as prizes to the owners of winning horses.00 per horse. there would be double taxation.00. and a declaration fee of P1. Coll. but the law itself takes official notice. The 5% does not belong to the club. which should be avoided unless the statute admits of no other interpretation. 55 Off.. 107 Phil.. with its employees or partners. This portion represents its share or commission in the total amount of money it handles and goes to the funds thereof as its own property which it may legally disburse for its own purposes. It is true that the law says that out of the total wager funds 12-1/2% shall be set aside as the "commission" of the race track owner. Gaz. (See Wong & Lee v. The Government could not have meant to tax as gross receipt of the Manila Jockey Club the 1/2% which it directs same Club to turn over to the Board on Races. Inc. Owners of these horses must pay to the Club an inscription fee of P1. may take part. We affirmed the decision of the Court of Tax Appeals and stated: The Secretary's opinion was correct. In addition. 469.  10539. grouped three items under one common denomination. As it did not at that time contemplate the application of "gross receipts" revenue principle.
it paid the tax. after all. As stated earlier. And then. and thereafter distributed both amounts as prizes to horse owners. The petitioner now alleges that P. The said receipts never belonged to the private respondent. The private respondent never benefited from their payment to the local hotels. We resolved the issue in the following manner: We think the reasons for upholding the Tax Court's decision in the first case apply to this one. It would seem unreasonable to regard the ten-peso contribution of the horse owners as taxable receipt of the Club. the Manila Jockey Club never paid amusement tax on the moneys thus contributed by horse owners (P10. this arrangement was only to accommodate the foreign travel agencies. since the latter. and it is not necessary that there must be a law or regulation which would exempt such monies and receipts within the meaning of gross receipts under the Tax Code.00 each) because it entertained the belief that in accordance with the three opinions of the Secretary of Justice herein-above described. the room charges entrusted by the foreign travel agencies to the private respondent do not form part of its gross receipts within the definition of the Tax Code. It did not on the declaration fee of P1. The Manila Jockey Club protested and resorted to the Court of Tax Appeals. holding they were part of its gross receipts.00 per horse) to such common fund. such contributions never formed part of its gross receipts. at the same moment it received the contribution necessarily lost ten pesos too. It was held by it as a trust fund. 1. Since the institution of this yearly special novato race in 1950. He contends that the tax under Section 191 of the Tax Code is in the nature of an excise tax.00 per horse in the special novato race. it at the same time contributed ten pesos out of its own pocket. The Collector of Internal Revenue required the Manila Jockey Club to pay amusement tax on such contributed fund P10. Parenthetically. where it obtained favorable judgment on the same grounds sustained by said Court in connection with the 5% of the total wager funds in the hereinmentioned first case. The ten-peso contribution never belonged to the Club.D. 31 has no relevance to the case. gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do not belong to them and do not redound to the taxpayer's benefit. the total amount of which is added to the 5% participation of horse owners already described herein-above in the first case.00 because it was imposed by the Municipal Ordinance of Manila and was turned over to the City officers. Section 1 thereof provides: Sec.00 per horse.P10. Another objection raised by the petitioner is to the respondent court's application of Presidential Decree 31 which exempts foreign tourists from payment of hotel room tax. — Foreign tourists and travelers shall be exempt from payment of any and all hotel room tax for the entire period of their stay in the country. On the inscription fee of the P1. they were not receipts of the Club. that it is a tax on the exercise of the privilege to engage in business as a contractor and that it is . As demonstrated in the above-mentioned case. when it received the ten-peso contribution.
Accordingly. L & T Co. In the last analysis it is the WHO that will pay the tax indirectly through the contractor and it certainly cannot be said that 'this tax has no bearing upon the World Health Organization. Inc. and to the Voice of America. 31 is clearly established in determining whether or not hotel room charges of foreign tourists in local hotels are subject to the 3% contractor's tax. and collectible from the person exercising the privilege. Farmers." The Court held that the sales tax must be paid by the manufacturer or producer even if the sale is made to tax-exempt entities like the National Power Corporation.D.. And it is an indirect tax on the WHO because. 673. 39 Law. Thus." We agree. held that the said case is not controlling in this case. although it is payable by the petitioner. The Court of Tax Appeals. however. 15 S. direct taxes are those that are demanded from the very person who. (Pollock v. Inc. while indirect taxes are those that are demanded in the first instance from one person in the expectation and intention that he can shift the burden to someone else.. the latter is not relieved from payment of the tax. 28) The same arguments were submitted by the Commissioner of Internal Revenue in the case of Commissioner of Internal Revenue v. The Philippine Acetylene case involved a tax on sales of goods which under the law had to be paid by the manufacturer or producer. (127 Phil.. The Host Agreement. 759). the latter can shift its burden on the WHO. 1957 US 429. the significance of P. should pay them.. an agency of the United States Government. 461) the 3% contractor's tax falls directly on Gotamco and cannot be shifted to the WHO. Said the respondent court: "In context. in specifically exempting the WHO from "indirect taxes. Ct. ed. (148 SCRA 36 ).imposed on." (Rollo.'" Petitioner claims that under the authority of the Philippine Acetylene Company versus Commissioner of Internal Revenue. it is an indirect tax. the fact that the manufacturer or producer might have added the amount of the tax to the price of the goods did not make the sales tax "a tax on the purchaser. although not imposed upon or paid by the Organization directly. it is intended or desired. He sums his arguments by stating that "while the burden may be shifted to the person for whom the services are rendered by the contractor." contemplates taxes which. an agency of the Philippine Government. As the respondent court aptly stated: . realized from the construction of the World Health Organization (WHO) office building in Manila. John Gotamco & Son. since the Host Agreement specifically exempts the WHO from "indirect taxes. et al. We rejected the petitioner's arguments and ruled: We agree with the Court of Tax Appeals in rejecting this contention of the petitioner. The contractor's tax is of course payable by the contractor but in the last analysis it is the owner of the building that shoulders the burden of the tax because the same is shifted by the contractor to the owner as a matter of self-preservation. form part of the price paid or to be paid by it. to justify his imposition of the 3% contractor's tax under Section 191 of the National Internal Revenue Code on the gross receipts John Gotamco & Sons. p.
189. Decided March 8.S. . May 19. No. 190] [252 U. a stock dividend made lawfully and in good faith against profits accumulated by the corporation since March 1. it nonetheless imposes a tax actually on room charges. 51-52) WHEREFORE. Assistant Attorney General Frierson. 189. respondent may claim that the 3% contractor's tax is imposed upon a different incidence i. MACOMBER . 318. 199] Mr. 1919. One way or the other. No pronouncement as to costs. by virtue of the Sixteenth Amendment.D. Justice PITNEY delivered the opinion of the Court. 1913.S. 252 U. .S. v.S. Internal Revenue Collector. that would in effect do indirectly what P. Hughes and George Welwood Murray. MACOMBER. Reargued Oct. 194] Mr.. If the hotel room charges entrusted to petitioner will be subjected to 3% contractor's tax as what respondent would want to do in this case. 1919. 1920. 189 EISNER. both of New York City.S. the instant petition is DENIED. Messrs. . 189 (1920) 252 U. SO ORDERED. 189. the effect would be to impose a tax. Although. for plaintiff in error. for defendant in error. The decision of the Court of Tax Appeals is AFFIRMED. Argued April 16. 31 would not like hotel room charges of foreign tourists to be subjected to hotel room tax. it would not have the effect of promoting tourism in the Philippines as that would increase the costs or expenses by the addition of a hotel room tax in the overall expenses of said tourists. 1919 Restored to Docket for Reargument. pp. and though different. the gross receipts of petitioner tourist agency which he asserts includes the hotel room charges entrusted to it. Charles E. 17 and 20. [252 U. as income of the stockholder and without apportionment. Congress has the power to tax. EISNER v. [252 U. This case presents the question whether.e. (Rollo.
because a reexamination of the question with the additional light thrown upon it by elaborate arguments. She was called upon to pay. based upon a supposed income of $ 19. Appropriate resolutions were adopted. Eisner. 1 The facts. 158. 189. was taxable against the stockholder under the Act of October 3. 1916. In January. both orally and by additional briefs.877 because of the new shares. We are constrained to hold that the judgment of the District Court must be affirmed: First. of which about $20.07 per cent. 3. To review it.. In her complaint she alleged the above facts. the board of directors decided to issue additional shares sufficient to constitute a stock dividend of 50 per cent.77 shares. Eisner. 167) that net income should . Eisner. par value $100 each. R. cl. par value $19.000. the question was whether a stock dividend made in 1914 against surplus earned prior to January 1. in our opinion ( notwithstanding a contention of the government that will be [252 U. A general demurrer to the complaint was overruled upon the authority of Towne v. 1913 (38 Stat. the balance thereafter. amounting in round figures to $50. because the question at issue is controlled by Towne v. c. L. had shares of stock outstanding. Defendant in error.. 1913.000. Ct. which. St. c. In Towne v. p. an amount equivalent to the par value of the proposed new stock was transferred accordingly. 756 et seq.S. 1913. of the outstanding stock. 1916. 38 Sup. 1918D. she brought action against the Collector to recover the tax. 201] shares. secondly. has confirmed the view that the underlying ground of that decision is sound. A. and did pay under protest. amounting to about $45. and article 1. 6336a et seq.S. and business and required for the purposes of the corporation. and.100 additional [252 U. or 198. 418 . and an appeal to the Commissioner of Internal Revenue having been disallowed. which provided (section B.000. and January 1. The case was argued at the last term. of which 18. that it disposes of the question here presented. and that other fundamental considerations lead to the same result.It arises under the Revenue Act of September 8. 4. 2. received certificates for 1. 166.000 had been earned prior to March 1. cl.000. 114. the present writ of error is prosecuted.877. of the Constitution of the United States. requiring direct taxes to be apportioned according to population. 1916. supra. 1916 (39 Stat.S. 16 ). the Standard Oil Company of California. 189. 254. and reargued at the present term. 9. final judgment went against him. and to transfer from surplus account to capital stock account an amount equivalent to such issue. 463 [Comp. 000. 245 U. out of an authorized capital stock of $100.200 shares of the old stock.000. it had surplus and undivided profits invested in plant. 200] noticed). In addition. and the new stock duly issued against it and divided among the stockholders. plainly evinces the purpose of Congress to tax stock dividends as income. property. were treated as representing surplus earned between March 1. a tax imposed under the Revenue Act of 1916. defendant having failed to plead further. and that the stock dividend was not income within the meaning of the Sixteenth Amendment. and contended that in imposing such a tax the Revenue Act of 1916 violated article 1. 1913. in order to readjust the capitalization. a corporation of that state. in outline.]). are as follows: On January 1.000. being the owner of 2.
136 U. it being very clear that Congress intended in . And if.450. to accede to the contention that in Gibbons v. 559 . even though Congress expressly declared it to be taxable as income. but disposed of it upon consideration of the essential nature of a stock dividend disregarding the fact that the one in question was based upon surplus earnings that accrued before the Sixteenth Amendment took effect. such a dividend is not to be regarded as 'income' or 'dividends' within the meaning of the act of 1913. we are unable to see how it can be brought within the meaning of 'incomes' in the Sixteenth Amendment.' Gibbons v. and their interests are not increased.' Suit having been brought by a stockholder to recover the tax assessed against him by reason of the dividend.include 'dividends.S. In short.. and quoted the Amendment. Ct. Ct.. 15 Sup. the District Court sustained a demurrer to the complaint. 203] interests of the shareholders. which discussed the essential nature of a stock dividend.. [10 Sup.S. Ct. The proportional interest of each shareholder remains the same. 912. 202] from any source whatever. 169 U.' and also 'gains or profits and income derived [252 U. after overruling a motion to dismiss made by the government upon the ground that the only question involved was the construction of the statute and not its constitutionality. When the case came here. If the plaintiff gained any small advantage by the change. 242 Fed. 361].' This language aptly answered not only the reasoning of the District Court but the argument of the Solicitor General in this court. 'stock dividends' had received a definition sufficiently clear to be controlling. and examined the question as res nova. and. 38 Sup. Mahon. . Mahon.' It declined. with the result stated. for the reasons thus expressed. What was said by this court upon the latter question is equally true for the former.S. 10 Sup. The only change is in the evidence which represents that interest. 549 . saying ( 245 U. unless it is in fact income.S.S. the sum upon which he was taxed. treated the language of this court in that case as obiter dictum in respect of the matter then before it (242 Fed. What has happened is that the plaintiff's old certificates have been split up in effect and have diminished in value to the extent of the value of the new. L. 136 U. 704): 'It is manifest that the stock dividend in question cannot be reached by the Income Tax Act and could not. Its property is not diminished. R. 255 . 560 S. 'A stock dividend really takes nothing from the property of the corporation. 189. however. 1057. Not only so. 261 [18 Sup. 189. but we rejected the reasoning of the District Court. . 702. 254): 'Notwithstanding the thoughtful discussion that the case received below we cannot doubt that the dividend was capital as well for the purposes of the Income Tax Law as for distribution between tenant for life and remainderman. 1918D. it certainly was not an advantage of $417. Farmers' Loan & Trust Co. A. the new shares and the original shares together representing the same proportional interest that the original shares represented before the issue of the new ones. 158 U. having referred to Pollock v.. The court treated the construction of the act as inseparable from the interpretation of the Sixteenth Amendment. and adds nothing to the [252 U.S. 1057]. United States. we dealt upon the merits with the question of construction only.S. Ct. 706). Ct. proceeded very properly to say (242 Fed. Logan County v. 426 . 549. 601 .. 159. the corporation is no poorer and the stockholder is no richer than they were before.
We adhere to the view then expressed. in Lynch v. but because the conclusion there reached as to the essential nature of a stock dividend necessarily prevents its being regarded as income in any true sense. 247 U. and to the extent that. was neither relied upon nor alluded to in our consideration of the merits in that case. 247 U.S. 545 [62 L. 204] based upon profits earned before the amendment. The fact that the dividend was charged against profits earned before the act of 1913 took effect. 189. Hornby. Eisner cannot be regarded as turning [252 U. 344 .S. 546. Ct. and might rest the present case there. St . Sup. in the ordinary sense of the word.. Ed. Nevertheless. even though they were extraordinary in amount and might appear upon analysis to be a mere realization in possession of an inchoate and contingent interest that the stockholder had in a surplus of corporate assets previously existing. Ed. 38 S. everything that became income. in dividends declared.S. even before the amendment was adopted. it having furnished the entire basis for the conclusion reached. after the adoption of the amendment. Ct. so we can perceive no constitutional obstacle that stands in the way of carrying out this intent when dividends are declared out of a pre-existing surplus. 38 Sup. his interest in them comes to fruition as income. we observed that the decision of the District Court in Towne v. that is. Eisner. without apportionment.' and we distinguished the Peabody Case from the Towne Case upon the ground that 'the dividend of Baltimore & Ohio shares was not a stock dividend but a distribution in specie of a portion of the assets of the Union Pacific. that a dividend paid in stock of another company. Ct. in view of the importance of the matter. Congress was at liberty under the amendment to tax as income.S.' Therefore Towne v. including dividends received in the ordinary course by a stockholder from a corporation. 543. and in Peabody v. that a cash dividend extraordinary in amount. We ruled at the same term. Ct. 349. Eisner it was not contended that any construction of the statute could make it narrower than the constitutional grant. 757 [Comp. Sup.' In Peabody v. 247 U. 38 Sup. and the fact that Congress in the Revenue Act of 1916 declared (39 Stat. In Towne v. In the former case. 6336b]) that a 'stock dividend shall be considered . Not only so. Eisner. Eisner had been reversed 'only upon the ground that it related to a stock dividend which in fact took nothing from the property of the corporation and added nothing to the interest of the shareholder. rather the contrary. 339 . 189. 38 S. 1149]): 'Just as we deem the legislative intent manifest to tax the stockholder with respect to such accumulations only if and when. not because that case in terms decided the constitutional question. were taxable as income although based upon earnings that accrued before adoption of the amendment. 547 (62 L. but merely changed the evidence which represented that interest. for it did not. 350 . 1152). 347 .' we declared ( 247 U.that act to exert its power to the extent permitted by the amendment. 546. it would have been held taxable under the act of 1913 notwithstanding it was [252 U. . concerning 'corporate profits that accumulated before the act took effect. 343.S. 543.. And what we have quoted from the opinion in that case cannot be regarded as obiter dictum. 205] upon the point that the surplus accrued to the company before the act took effect and before adoption of the amendment.S. but had we considered that a stock dividend constituted income in any true sense.
236. 509. incidentally testing the soundness of our previous conclusion.' As repeatedly held.. 38 Sup.S. without regard to form. 2.S. Ct. save only as modified by the amendment. in words lucidly expressing the object to be accomplished: 'The Congress shall have power to lay and collect taxes on incomes.. 158 U. imposed by reason of ownership. 207] as used in common speech. Union Pacific R. Brushaber v. Farmers' Loan & Trust Co. the Sixteenth Amendment was adopted. L. 240 U. 206] the several states. of the original Constitution. 414.S.S. cl. A. as required by article 1. 1917D. and evidently in recognition of the limitation upon the taxing power of Congress thus determined. real and personal. 432. since it cannot by legislation alter the Constitution. For the present purpose we require only a clear definition of the term 'income. 103 . as well as its very clear language. the former depicted as a reservoir supplied from springs. and without regard to any census or enumeration. as cases arise. except as applied to income. 1 .' [252 U. Cas. In Pollock v. 36 Sup. according to truth and substance. in order to determine its meaning in the . c. 189. and section 9. R. 3.income. 112 et seq. 601 . In order. Baltic Mining Co. Afterwards. Stanton v. 4. 912. 17-19. without apportionment among [252 U. 553. and that the latter also may have proper effect. This limitation still has an appropriate and important function. Ann. Ct.S. Peck & Co. that the clauses cited from article 1 of the Constitution may have proper force and effect.S. Ct. but merely removed the necessity which otherwise might exist for an apportionment among the states of taxes laid on income. under the Act of August 27. and to apply the distinction. 165.' as the term is there used. requires also that this amendment shall not be extended by loose construction. and is not to be overridden by Congress or disregarded by the courts. it was held that taxes upon rents and profits of real estate and upon returns from investments of personal property were in effect direct taxes upon the property from which such income arose. it becomes essential to distinguish between what is and what is not 'income. A proper regard for its genesis. 36 Sup. v. 349. 173 S.. so as to repeal or modify. Ct. the former being likened to the tree or the land. 240 U.. 189. those provisions of the Constitution that require an apportionment according to population for direct taxes upon property. 172 . 15 Sup.' we will deal at length with the constitutional question. Lowe. 27). Congress cannot by any definition it may adopt conclude the matter. The fundamental relation of 'capital' to 'income' has been much discussed by economists. to the amount of its cash value. The Sixteenth Amendment must be construed in connection with the taxing clauses of the original Constitution and the effect attributed to them before the amendment was adopted. the latter to the fruit or the crop. from which alone it derives its power to legislate. 1917B. the latter as the outlet stream. 278. cl. Co. this did not extend the taxing power to new subjects. 247 U. to be measured by its flow during a period of time. R. 1894 (28 Stat. therefore. and within whose limitations alone that power can be lawfully exercised. from whatever source derived.. and that Congress could not impose such taxes without apportioning them among the states according to population. 713.
'Income may be defined as the gain derived from capital. The government. Nothing else answers the description. 189. while the significance of the next three words was either overlooked or misconceived. Ct. but to the entire assets. 1054]). it indicates the characteristic and distinguishing attribute of income essential for a correct solution of the present controversy. They state the number of shares to which he is entitled and indicate their par value and how the stock may be transferred. 285].' which was extended to include a variety of meanings. L. 38 S. to the whole. and affairs of the company. to receive a proportionate share of the net assets. 183. Brief as it is. business. After examining dictionaries in common use (Bouv. and having a capital stock divided into shares to which a nominal or par value is attributed.that is income derived from property. to a corporation such as the one in the case at bar. 185 .. since the corporation has full title.). a profit. The stockholder has the right to have the assets employed in the enterprise. remaining after paying creditors. he has no right to withdraw any part of either capital or profits from the common enterprise. 38 S. Ct. 231 U. to receive dividends out of the corporation's profits if and when declared. and. considering its essential character. we find little to add to the succinct definition adopted in two cases arising under the Corporation Tax Act of 1909 (Stratton's Independence v. . 1054). entitled to vote at stockholders' meetings. or until dividend declared. as stockholder. 136. proceeding from the property. and coming in. we shall find it easy to decide the matter at issue.amendment. legal and equitable. 399. not a growth or increment of value in the investment. 469 [62 L. Nor is it the interest of an owner in the assets themselves. Webster's Internat. in the event of liquidation. Ed.S. entitled to have the property and business of the company devoted during the corporate existence to attainment of the common objects. regard must be had to the nature of a corporation and the stockholder's relation to it. severed from the capital. Dict. 208] with a conciseness and lucidity entirely in harmony with the form and style of the Constitution. They show that he or his assignors. 247 U. 467. Mitchell Bros. but. Standard Dict. Doyle v. We refer. Here we have the essential matter: not a gain accruing to capital. Certainly the interest of the stockholder is a capital interest. on the contrary. 469 (62 L. Ed. have contributed capital to the enterprise. 'Derived-from. however invested or employed.' etc. placed chief emphasis upon the word 'gain. having formed also a correct judgment as to the nature of a stock dividend. of course. with the incidental rights mentioned..capital'. 415 . from labor. 185 . something of exchangeable value. 247 U. being 'derived'-that is. organized for profit. and. 'the gain-derived-from-capital. Century Dict. Sup.. The same fundamental conception is clearly set forth in the Sixteenth Amendment-'incomes. 179. 34 S.S. Can a stock dividend. if any. Sup. to which it was applied in the Doyle Case. Ct.' provided it be understood to include profit gained through a sale or conversion of capital assets. divisible or indivisible. his interest pertains not to any part. be brought within the definition? To answer this. and his certificates of stock are but the evidence of it. but a gain. that he is entitled to a corresponding interest proportionate to the whole. Sup. Ed. although basing its argument upon the definition as quoted. benefit and disposal.. received or drawn by the recipient (the taxpayer) for his separate use. immediate or remote. or from both combined. Howbert. Short of liquidation. D. from whatever source derived'-the essential thought being expressed [252 U.S.S. 140 [58 L. Co. 467.
The profits of a corporation.000. 210] quipment. the new stock is issued against this and the certificates delivered to the existing stockholders in proportion to their previous holdings. and business. 189. gives to the stockholders as a body.' 'undivided profits. much less to any one of them. If thereafter the company finds itself in funds beyond current needs it may declare dividends out of such surplus or undivided profits.' This. This. of the 'liability' acknowledged by the corporation to its own shareholders. otherwise it may go on for years conducting a successful business. and looking only to dividends for his return.' If profits have been made and not divided they create additional bookkeeping liabilities under the head of 'profit and loss. the company acknowledges a liability in form to the stockholders equivalent to the aggregate par value of their stock.S.000. under exceptional circumstances in some other divisible property. not the essence. property. need not be in the form of money on hand in excess of what is required to meet current liabilities and finance current operations of the company. a charge is made against surplus account with corresponding credit to capital stock account. or in decrease of outstanding liabilities. For bookeeping purposes. as they appear upon the balance sheet at the end of the year. in essence not a dividend but rather the opposite. The dividend normally is payable in money. but profits so far absorbed in the business as to render it impracticable to separate them for withdrawal and distribution. In order to make the adjustment. the remainder having been absorbed in the acquisition of increased plant. stock in trade. or some other account having like significance. the balance of the year's profits is carried to the credit of undivided profits. it affects only the form. 209] from the company he can do so only by disposing of his stock. This may be adjusted upon the books in the mode adopted in the case at bar-by declaring a 'stock dividend. is merely bookkeeping that does not affect the aggregate assets of the corporation or its outstanding liabilities. the corporation had surplus and undivided profits invested in plant. In this the case is not extraordinary. and when so paid. of the year's profits is in property capable of division. then only (excluding. When only a part is available for dividends. either a claim against the going concern for any particular sum of money. amounting to about $45.' or the like.S. 189. however. however.000. and thus derive income from the capital that he or his predecessor has invested. nothing distributed except paper certificates that evidence an antecedent increase in the value of the stockholder's capital interest resulting from an accumulation of profits by the company. Thus the surplus may increase until it equals or even exceeds the par value of the outstanding capital stock. in addition to outstanding capital stock of $50. but requiring more and more working capital because of the extension of its operations. is no more than a book adjustment. Often. None of these. If he desires to dissociate himself [252 U. of course. sometimes a small part. no part of the assets of the company is separated from the common fund.he has no right to withdraw. or a right to any particular portion of the assets or any share in them unless or until the directors conclude that dividends shall be made and a part of the company's assets segregated from the common fund for the purpose. however.' 'surplus account. a possible advantageous sale of his stock or winding-up of the company) does the stockholder realize a profit or gain which becomes his separate property.000. and required for the purposes of the corporation. and this . especially in a growing business. or surplus. [252 U. only a part. evidenced by a 'capital stock account. only the right to persist. In the present case. or accounts receivable. equal to the proposed 'dividend'. and therefore unable to declare dividends approximating the amount of its profits. subject to the risks of the enterprise.
through a readjustment of accounts on one side of the balance sheet only, increasing 'capital stock' at the expense of [252 U.S. 189, 211] 'SURPLUS'; IT DOES NOT ALTER THE PREEXisting proportionate interest of any stockholder or increase the intrinsic value of his holding or of the aggregate holdings of the other stockholders as they stood before. The new certificates simply increase the number of the shares, with consequent dilution of the value of each share. A 'stock dividend' shows that the company's accumulated profits have been capitalized, instead of distributed to the stockholders or retained as surplus available for distribution in money or in kind should opportunity offer. Far from being a realization of profits of the stockholder, it tends rather to postpone such realization, in that the fund represented by the new stock has been transferred from surplus to capital, and no longer is available for actual distribution. The essential and controlling fact is that the stockholder has received nothing out of the company's assets for his separate use and benefit; on the contrary, every dollar of his original investment, together with whatever accretions and accumulations have resulted from employment of his money and that of the other stockholders in the business of the company, still remains the property of the company, and subject to business risks which may result in wiping out the entire investment. Having regard to the very truth of the matter, to substance and not to form, he has recived nothing that answers the definition of income within the meaning of the Sixteenth Amendment. Being concerned only with the true character and effect of such a dividend when lawfully made, we lay aside the question whether in a particular case a stock dividend may be authorized by the local law governing the corporation, or whether the capitalization of profits may be the result of correct judgment and proper business policy on the part of its management, and a due regard for the interests of the stockholders. And we are considering the taxability of bona fide stock dividends only. [252 U.S. 189, 212] We are clear that not only does a stock dividend really take nothing from the property of the corporation and add nothing to that of the shareholder, but that the antecedent accumulation of profits evidenced thereby, while indicating that the shareholder is the richer because of an increase of his capital, at the same time shows he has not realized or received any income in the transaction. It is said that a stockholder may sell the new shares acquired in the stock dividend; and so he may, if he can find a buyer. It is equally true that if he does sell, and in doing so realizes a profit, such profit, like any other, is income, and so far as it may have arisen since the Sixteenth Amendment is taxable by Congress without apportionment. The same would be true were he to sell some of his original shares at a profit. But if a shareholder sells dividend stock he necessarily disposes of a part of his capital interest, just as if he should sell a part of his old stock, either before or after the dividend. What he retains no longer entitles him to the same proportion of future dividends as before the sale. His part in the control of the company likewise is diminished. Thus, if one holding $60,000 out of a total $100,000 of the capital stock of a corporation should receive in common with other stockholders a 50 per cent. stock dividend, and should sell his part, he thereby would be reduced from a majority to a minority stockholder, having sixfifteenths instead of six- tenths of the total stock outstanding. A corresponding and proportionate decrease in capital interest and in voting power would befall a minority holder should he sell dividend stock; it being in the nature of things impossible for one to dispose of any part of such
an issue without a proportionate disturbance of the distribution of the entire capital stock, and a like diminution of the seller's comparative voting power-that 'right preservative of rights' in the control of a corporation. [252 U.S. 189, 213] Yet, without selling, the shareholder, unless possessed of other resources, has not the wherewithal to pay an income tax upon the dividend stock. Nothing could more clearly show that to tax a stock dividend is to tax a capital increase, and not income, than this demonstration that in the nature of things it requires conversion of capital in order to pay the tax. Throughout the argument of the government, in a variety of forms, runs the fundamental error already mentioned-a failure to appraise correctly the force of the term 'income' as used in the Sixteenth Amendment, or at least to give practical effect to it. Thus the government contends that the tax 'is levied on income derived from corporate earnings,' when in truth the stockholder has 'derived' nothing except paper certificates which, so far as they have any effect, deny him present participation in such earnings. It contends that the tax may be laid when earnings 'are received by the stockholder,' whereas he has received none; that the profits are 'distributed by means of a stock dividend,' although a stock dividend distributes no profits; that under the act of 1916 'the tax is on the stockholder's share in corporate earnings,' when in truth a stockholder has no such share, and receives none in a stock dividend; that 'the profits are segregated from his former capital, and he has a separate certificate representing his invested profits or gains,' whereas there has been no segregation of profits, nor has he any separate certificate representing a personal gain, since the certificates, new and old, are alike in what they represent-a capital interest in the entire concerns of the corporation. We have no doubt of the power or duty of a court to look through the form of the corporation and determine the question of the stockholder's right, in order to ascertain whether he has received income taxable by Congress without apportionment. But, looking through the form, [252 U.S. 189, 214] we cannot disregard the essential truth disclosed, ignore the substantial difference between corporation and stockholder, treat the entire organization as unreal, look upon stockholders as partners, when they are not such, treat them as having in equity a right to a partition of the corporate assets, when they have none, and indulge the fiction that they have received and realized a share of the profits of the company which in truth they have neither received nor realized. We must treat the corporation as a substantial entity separate from the stockholder, not only because such is the practical fact but because it is only by recognizing such separateness that any dividend-even one paid in money or property-can be regarded as income of the stockholder. Did we regard corporation and stockholders as altogether identical, there would be no income except as the corporation acquired it; and while this would be taxable against the corporation as income under appropriate provisions of law, the individual stockholders could not be separately and additionally taxed with respect to their several shares even when divided, since if there were entire identity between them and the company they could not be regarded as receiving anything from it, any more than if one's money were to be removed from one pocket to another. Conceding that the mere issue of a stock dividend makes the recipient no richer than before, the government nevertheless contends extent to which the gains accumulated by the extend to which the gains accumulated by the corporation have made him the richer. There are two insuperable difficulties with this: In the first place, it would depend upon how long he had held the stock
whether the stock dividend indicated the extent to which he had been enriched by the operations of the company; unless he had held it throughout such operations the measure would not hold true. Secondly, and more important for present purposes, enrichment through increase in value [252 U.S. 189, 215] of capital investment is not income in any proper meaning of the term. The complaint contains averments respecting the market prices of stock such as plaintiff held, based upon sales before and after the stock dividend, tending to show that the receipt of the additional shares did not substantially change the market value of her entire holdings. This tends to show that in this instance market quotations reflected intrinsic values-a thing they do not always do. But we regard the market prices of the securities as an unsafe criterion in an inquiry such as the present, when the question must be, not what will the thing sell for, but what is it in truth and in essence. It is said there is no difference in principle between a simple stock dividend and a case where stockholders use money received as cash dividends to purchase additional stock contemporaneously issued by the corporation. But an actual cash dividend, with a real option to the stockholder either to keep the money for his own or to reinvest it in new shares, would be as far removed as possible from a true stock dividend, such as the one we have under consideration, where nothing of value is taken from the company's assets and transferred to the individual ownership of the several stockholders and thereby subjected to their disposal. The government's reliance upon the supposed analogy between a dividend of the corporation's own shares and one made by distributing shares owned by it in the stock of another company, calls for no comment beyond the statement that the latter distributes assets of the company among the shareholders while the former does not, and for no citation of authority except Peabody v. Eisner, 247 U.S. 347, 349 , 350 S., 38 Sup. Ct. 546. Two recent decisions, proceeding from courts of high jurisdiction, are cited in support of the position of the government. [252 U.S. 189, 216] Swan Brewery Co., Ltd. v. Rex, [252 U.S. 189, 1914] A. C. 231, arose under the Dividend Duties Act of Western Australia, which provided that 'dividend' should include 'every dividend, profit, advantage, or gain intended to be paid or credited to or distributed among any members or directors of any company,' except, etc. There was a stock dividend, the new shares being allotted among the shareholders pro rata; and the question was whether this was a distribution of a dividend within the meaning of the act. The Judicial Committee of the Privy Council sustained the dividend duty upon the ground that, although 'in ordinary language the new shares would not be called a dividend, nor would the allotment of them be a distribution of a dividend,' yet, within the meaning of the act, such new shares were an 'advantage' to the recipients. There being no constitutional restriction upon the action of the lawmaking body, the case presented merely a question of statutory construction, and manifestly the decision is not a precedent for the guidance of this court when acting under a duty to test an act of Congress by the limitations of a written Constitution having superior force. In Tax Commissioner v. Putnam (1917) 227 Mass. 522, 116 N. E. 904, L. R. A. 1917F, 806, it was held that the Forty-Fourth amendment to the Constitution of Massachusetts, which conferred upon the Legislature full power to tax incomes, 'must be interpreted as including every item which by any reasonable understanding can fairly be regarded as income' (227 Mass. 526, 531,
If so construed. supra. 116 N. of applying a constitutional amendment in the light of other constitutional provisions that stand in the way of extending it by construction. 535. which instead of being paid out in cash is invested in the business. recognizing the force of the decision in Towne v. 223. like the one which binds us. would the act be constitutional? That Congress has power to tax shareholders upon their property interests in the stock of corporations is beyond question. while a case where money is paid into the hand of the stockholder with an option to buy new shares with it. In this aspect of the case the substance of the transaction is no different from what it would be if a cash dividend had been declared with the privilege of subscription to an equivalent amount of new shares. Eisner. E. E. R. 1864 (13 Stat. profits. the court saying (227 Mass. 904. Hubbard (1870) [252 U.S. A. 217] We cannot accept this reasoning. the court nevertheless said (12 Wall.S. 1917F. 189. thus augmenting its durable assets. 907 [L. not upon the stock dividend. and virtually abandoning the contention that a stock dividend increases the interest of the stockholder or otherwise enriches him. Conceding that the stockholder for certain purposes had no title prior to dividend declared. 806]). 218] 12 Wall. 189.' [252 U. or income of any person. the tax being levied as a matter of convenience at the time such profits become manifest through the stock dividend. L. Ed. shall be included in estimating the annual gains. 911. including its accumulated and undivided profits. which arose under section 117 of the Act of June 30. providing that-'The gains and profits of all companies. 806): 'In essence the thing which has been done is to distribute a symbol representing an accumulation of profits. The government relies upon Collector v.' The court held an individual taxable upon his proportion of the earnings of a corporation although not declared as dividends and although invested in assets not in their nature divisible. was regarded as identical in substance with a case where the stockholder receives no money and has no option. whether incorporated or partnership. insisted as an alternative that by the true construction of the act of 1916 the tax is imposed. entitled to the same. c. The Massachusetts court was not under an obligation. capital accretion for its opposite. 1.116 N. Evidently. 18): . in order to give a sufficiently broad sweep to the new taxing provision. followed by acceptance of the option. But that this would be taxation of property because of ownership. 1917F. 272). but rather upon the stockholder's share of the undivided profits previously accumulated by the corporation. and hence would require apportionment under the provisions of the Constitution. the government. and that such interests might be valued in view of the condition of the company. Upon the second argument. R. A. other than the companies specified in that section. (20 L. 282. is equally clear. and that under it a stock dividend was taxable as income. it was deemed necessary to take the symbol for the substance. is settled beyond peradventure by previous decisions of this court. whether divided or otherwise. accumulation for distribution. 173).
Maryland. A. 278. of the Constitution. L. The Revenue Act of 1916. 4 Wheat. in so far as it imposes a tax upon the stockholder because of such dividend. 407. Justice HOLMES. 254. as income of the stockholder. or raw material for the purpose of being manufactured are investments in which the stockholders are interested. Ct. notwithstanding the Sixteenth Amendment. 254. 220] 'a sense most obvious to the common understanding at the time of its adoption. Butler. 48 N. Judgment affirmed. so that now the Hubbard Case is authority for the power of Congress to levy a tax on the stockholder's share in the accumulated profits of the corporation even before division by the declaration of a dividend of any kind. 601. 38 Sup. Manifestly this argument must be rejected. 245 U. Conceding Collector v. 149 Ind. L. Eisner. 270. 39 L. State. 316. contravenes the provisions of article 1. McCulloch v.. R.S. As we have pointed out. dissenting. 628 S. 158 U. since the amendment applies to income only. Ct. whether held by the original subscribers or by assignees. 63 Am. nor in any particular part of the assets of the corporation. 627 .S. or the accumulated profits behind it. 3. R. Thus. Ct. 69 South. Regarded as an incident to the shares. and that among those incidents is the right to receive all future dividends. 38 Sup. his proportional share of all profits not then divided. and as such are the proper subject of sale. I think that Towne v. not income. 9. gift. 15 Sup. E. still it is true that the owner of a share of stock in a corporation holds the share with all its incidents. 70 Fla. that is.S. THE GOVERNMENT NEVERTHEless insists that the sixteenth Amendment removed this obstacle. and what is called the stockholder's share in the accumulated profits of the company is capital. and article 1. But it was clearly intimated in that case that the construction of the statute then before the Court might be different from that of the Constitution. 1038. it must be regarded as overruled by Pollock v. because it sustained a direct tax upon property not apportioned [252 U. prior to dividend declared. Profits are incident to the share to which the owner at once becomes entitled provided he remains a member of the corporation until a dividend is made. Hubbard was inconsistent with the doctrine of that case.'Grant all that. cl. was right in its reasoning and result and that on sound principles the stock dividend was not income. 425 . I think that the word 'incomes' in the Sixteenth Amendment should be read in [252 U. 189. machinery. 133. A. Rep. Mr. a stockholder has no individual share in accumulated profits. R. A. 102. 637. For it was for public adoption that it was proposed. 418 .' In so far as this seems to uphold the right of Congress to tax without apportionment a stockholder's interest in accumulated earnings prior to dividend declared..S. 223.S. and when such profits are actually appropriated to the payment of the debts of the corporation they serve to increase the market value of the shares. from every point of view we are brought irresistibly to the conclusion that neither under the Sixteenth Amendment nor otherwise has Congress power to tax without apportionment a true stock dividend made lawfully and in good faith. 219] AMONG THE STATES. The known purpose of this Amendment was to get rid of nice . undivided profits are property of the shareholder.' Bishop v. cl. 4. 230. Farmers' Loan & Trust Co. or devise. 771. 2. 912. 1918D. Undivided profits invested in real estate. 245 U. 1918D. St. 158. and to this extent is invalid. 189. State v. 158. 1040.
if he avails himself of the right to subscribe for his pro rata of the new stock. 806. 533. the new stock is paid up with the accumulated profits. They were recognized equivalents. which is evidenced by an assignable instrument. Mr. How these two methods have been employed may be illustrated by the action in this respect (as reported in Moody's Manual.S. Cas. Both of these methods of retaining accumulated profits while in effect distributing them as a dividend had been in common use in the United States for many years prior to the adoption of the Sixteenth Amendment. In order to ensure that all the new stock so offered will be taken. If the stockholder prefers ready money to an increase of his holdings of stock. without increasing its indebtedness. The capital stock is increased. Whether a particular corporation employed one or the other method was determined sometimes by requirements of the law under which the corporation was organized. 1 . Putnam. 189. $1. One method is a simple one. Mr. 1912D. in stock.questions as to what might be direct taxes. keep for corporate purposes accumulated profits. he may sell his right to take new stock pro rata. The other method is slightly more complicated. distribute these profits among its stockholders.000. 227 Mass. S. 734. devised long ago two different methods by which a corporation can. 532. an amount equal to that which it had paid as a chsh dividend to the stockholder. and sometimes by stock market conditions. 222] 1912. with the aid of lawyers. (a) Standard Oil Co. Ann. an Indiana corporation. sometimes it was determined by preferences of the individual officials of the corporation. as the subscription price of the new stock. 31 Sup. On May 15. [252 U. for the payment of a cash dividend equal to the amount which the stockholder will be required to pay to [252 U.S. in effect. 1918 Industrial. . (of Indiana). 221 U. and the new shares of paid-up stock are then distributed among the stockholders pro rata as a dividend.S. A. Whichever method was employed the resultant distribution of the new stock was commonly referred to as a stock dividend. and. he may endorse the dividend check received to the corporation and thus pay for the new stock. since the disintegration pursuant to the decision of this court in 1911. (N. 502. Ct. v. A. 116 N.000 capital stock (all common).) 834. Standard Oil Co. 189. It had on December 31. the price at which it is offered is fixed far below what it is believed will be its market value. Justice BRANDEIS delivered the following [dissenting] opinion: Financiers. R.000. United States. he sells the new stock received as a dividend. as is expected. and the Commercial and Financial Chronicle) of some of the Standard Oil companies. and I cannot doubt that most people not lawyers would suppose when they voted for it that they put a question like the present to rest. I am of opinion that the Amendment justifies the tax. 904. at the same time. R.900 per cent. If the stockholder takes the new stock. In that event the purchaser of the rights repays to the corporation. 1917F. and a large surplus. See Tax Commissioner v.arrangements are made for an increase of stock to be offered to stockholders pro rata at par. 2 . and yet. 221] the company. and paid a simple stock dividend of 2. 34 L. If the stockholder prefers ready money to increasing his holding of the stock in the company.000. it increased its capital stock to $30. Justice DAY concurs in this opinion. E. L. 1911. 522.
000 to $6.000. (of Kentucky). quarterly dividends were paid on this stock at an annual rate of between 15 per cent. if they desire. and 20 per cent. saying: 'The company's business for this year has shown a [252 U. January and April.000. $600. 1916. It had on December 31. $ 660. 224] May 2.. describing the transaction with exactness. the net profits of that year having been $1. says first that the stock was increased from $3. and had at the close of the year again a substantial surplus.' The increase of stock was voted. and it is estimated that by January 1..614. but the company's surplus increased by $2. Of this surplus $902. the company issued a circular to the stockholders.000 (10 per cent. On June 20. quotes the 1917 'high' price for Standard Oil of Kentucky as '375 ex stock dividend..S.000. as the aggregate of dividends for the year 1917.. it paid a simple stock dividend of 33 1/3 per cent.' But later in the report giving. it declared a further stock dividend of 25 per cent. On December 15. the plan being to allow the stockholders. 1914. stock dividend.000 capital stock. and 1916. 1913. was paid February 14. The board feels justified in stating that if the proposition to increase the capital stock is acted on favorably. 1912.000.000. p.347. The company then paid a cash dividend of 100 per cent. on May 1. 1911. 1913. it gives. and these stockholders were offered the right to subscribe for an equal amount of new stock at par and to apply the cash dividend in payment therefor. 1914. dividends paid and surplus for the year. thus increasing the capital to $1. so that on December 31. but it earned considerably more.457 had been earned during the calendar year 1913. 1197. Moody's Manual. the company will have a surplus of over $4. increasing the outstanding capital to $800. July and October). again offering to such stockholders the right to subscribe for an equal amount of new stock at par and to apply the cash dividend in payment therefor.000.' And in reporting specifically the income account of the company for a series of years ending December 31. 189. 1917.000. 1917. 189.000 capital stock (all common) and $3. it had a large surplus over its $3. to stockholders of record January 31.' 4 The Wall Street Journal of [252 U. payable May 1. covering net profits. payable May 1. a cash dividend of $200 per share was declared payable on February 14.701. the Manual says: 'A stock dividend of 200 per cent. it will be proper in the near future to declare a cash dividend of 100 per cent.000 (which was the aggregate paid on the quarterly cash dividend-5 per cent.000. It had on December 31. and adds in a note: 'In addition a stock dividend of 100 per cent. 1917. 6 per cent.000. During the calendar years 1914.000 capital stock (all common). as customary in the Manual the dividend record of the company. and a substantial surplus. 1914. 1913. 710 surplus. a Kentucky corporation. (of Nebraska).). On December 22.000. and one of 100 per cent. On April 15.(b) Standard Oil Co. to purchase the new stock at par. $1. being exchanged for one share of new stock.002. 1917. 2.. 1915. During the calendar year 1912 it paid cash dividends aggregating 20 per cent. and to allow the stockholders the privilege pro rata according to their holdings.000.000. 1916. a Nebraska corporation. to use their cash dividend to pay for the new stock.457 and the dividends paid only $100.3 (c) The Standard Oil Co. The outstanding stock was thus increased to $3.' .S. 223] very good increase in volume and a proportionate increase in profits. 'a cash dividend of 100 per cent. was paid during the year.. the equivalent of a 100 per cent.
Mrs. both under the law of New York and under the law of California. 1913. Matter of Osborne. 137. taxable as income. 2a. 114 N. 1913. Farmers' Loan & Trust Co. 796. Estate of Duffill. whether paid in cash or in stock. issuing rights to take new stock pro rata and paying to each stockholder simultaneously a dividend in cash sufficient in amount to enable him to pay for this pro rata of new stock to be purchased-the dividend so paid to him would have been taxable as income. and without regard to any census or enumeration. Macomber had been made by the more complicated method pursued by the Standard Oil Company of Kentucky. was. E. 209 N.S. Y. the new stock is not to be deemed income. 332. where the question arose in matters of taxation. [252 U. 605. a stockholder in the Standard Oil Company (of California). Glynn. 225] 130 App. 189. 50 L. If such a different result can flow merely from the difference in the method pursued. proclaimed February 25. a corporation organized under the laws of California and having its principal place of business in that state. Div. 172 N. It has been so held in California.It thus appears that among financiers and investors the distribution of the stock. for Congress has. where the question arose as between life tenant and remainderman.' The Revenue Act of September 8. a citizen and resident of New York. by whichever method effected. in the year 1916. E. 183 Pac. 757. as income received during the year 1916. c. by the provisions in the Revenue Act of 1916. It is conceded that if the stock dividend paid to Mrs. that the two methods by which accumulated profits are legally retained for corporate purposes and at the same time distributed as dividends are recognized by them to be equivalents. and that the financial results to the corporation and to the stockholders of the two methods are substantially the same-unless a difference results from the application of the federal Income Tax Law. E. 1097. 756. The dividend was paid by direct issue of the stock to her according to the simple method described above.. But it is contended that. expressly declared its purpose to make stock dividends. and also. In 1917 she was taxed under the federal law on the stock dividend so received at its par value of $100 a share. Such a stock dividend is income. because in both states every dividend representing profits is deemed to be income. 463. The Sixteenth Amendment. by whichever method paid. R. 723. A. Id. Y. 92 N. Y.Cas. It had been so held in New York. whether he retained the cash or whether he returned it to the corporation in payment for his pro rata of new stock. because the simple method was adopted of having the new stock issued direct to the stockholders as paid-up stock. Lowry v. 64 N. Supp. as distinguished from capital. declares: 'The Congress shall have power to lay and collect taxes on incomes. 337. it must be because Congress is without power to tax as income of the stockholder either the stock received under the latter method or the proceeds of its sale. ( N. 1915A. pursued also by the Indiana and Nebraska companies. is called a stock dividend.) 510. 103 N. 1916. Y. 823. People v. whether she retained it or converted it into cash by sale. 460. During that year she received from the company a stock dividend representing profits earned since March 1. 39 Stat. Macomber. S. where the question appears to have arisen only in controversies between life tenant and remainderman. that is. without apportionment among the several states. 298. Ann. from whatever source derived. provided: . 198 N. 450.
433. been commonly understood to mean the returns from time to time received by the stockholder from gains or earnings of the corporation. 199 U. 53. 4 S. 449 S. 26 Sup. why should there be a difference in result dependent upon whether the distribution was made from such securities then in the treasury or from others to be created and issued by the company expressly for that purpose? So far as the distribution may be made from its own issues of bonds. Lithograph Co. to the amount of its cash value.. that the securities had to be created expressly for the purpose of distribution. In determining the scope of the power the substance of the transaction. not its form has been regarded. 446. Sup. 58 . or by selling its own bonds. 110 U. Sup. 421. 1120. Brown v. Jarrolt v. Ct.. McCulloch v. United States. 419. Ct. 444 . 580. 737. 441 S. Likewise whether a dividend declared payable from profits shall be paid in cash or in some other medium is also wholly a matter of financial management.. and payable to its shareholders. 4 Ann. Sarony. 279. before the adoption of the Sixteenth Amendment. 16 Sup. v. 440 . . 442.. 437. 4 Wheat.S. 4 S. 1 Wheat. 189. 4 Pet. United States v. Moberly. Legal Tender Case. and have been held to extend to every means appropriate to attain the end sought. had.S. Realty Co. scrip or stock of another corporation or in issues of its own.S. nor can it conceivably affect the question whether it is taxable as income. 415. . out of its earnings or profits accrued since March first. Martin v. 407.. 110. or by selling its own bonds. How the money shall be raised is wholly a matter of financial management. the money with which to pay it is ordinarily taken from surplus cash in the treasury. or by selling bonds. in bonds. Maryland.. nineteen hundred and thirteen. And if the dividend is paid in its own issues. 326. which stock dividend shall be considered income.S. Craig v.S. 12 Wheat. 316. Ct. Hunter. Missouri. nor by the method or means through which the particular thing distributed as a dividend was procured.. 585 . 103 U. Maryland. 448 . scrip or stock of another corporation then in the treasury. 111 U. Ct.S. South Carolina v. or preferred stock created expressly for the purpose. If some other medium is decided upon. for instance. scrip or stock issued expressly for that purpose.' when applied to the investment of the stockholder in a corporation. 226] be held to mean any distribution made or ordered to be made by a corporation. it is also wholly a question of financial management whether the distribution shall be. If a .'That the term 'dividends' as used in this title shall [252 U. The manner in which it is raised in no way affects the question whether the dividend received by the stockholder is income or capital. Whether it is the one or the other is in no way affected by the medium in which it is paid. A dividend received by a stockholder from a corporation may be either in distribution of capital assets or in distribution of profits. Is there anything in the phraseology of the Sixteenth Amendment or in the nature of corporate dividends which should lead to a departure from these rules of construction and compel this court to hold. Cas. The term 'income. 163 U.. 410. it clearly would make no difference in the decision of the question whether the dividend was a distribution of profits. that Congress is powerless to prevent a result so extraordinary as that here contended for by the stockholder? First.' Hitherto powers conferred upon Congress by the Constitution have been liberally construed. 227] dividend is declared payable in cash. But (if there are profits legally available for distribution and the law under which the company was incorporated so permits) the company may raise the money by discounting negotiable paper. 122. scrip or stock then in the treasury. 189. If the [252 U. 587 S. 427. 304.S. whether in cash or in stock of the corporation.
But that is equally true where the dividend is paid in its bonds or in its preferred stock. 229] as a dividend to the stockholder who afterwards received it? Second. but after the stock has been issued and certificates therefor are delivered to the bankers for sale. would not the stock so distributed be a distribution of profits-and hence. with moneys derived from current profits. One is that the proportion of the stockholder's ownership to the aggregate number of the shares of the company is not changed by the distribution. R. 79 Conn. 8 L. Leland v. Another reason assigned is that the value of the old stock held is reduced approximately by the value of the new stock received. And would it not likewise be income of the stockholder subject to taxation if the purpose of the company in buying the stock so distributed had been from the beginning to take it off the market and distribute it among the stockholders as a dividend. But does the issue of new bonds or of preferred stock created for use as a dividend result in any segregation of assets for the stockholder? In each case he receives a piece of paper which entitles him to certain rights in the undivided property.S. Rep. 189. Various reasons are assigned for making this distinction. That is equally true whether the dividend be paid in cash or in other property. Cas. of course. so that the stockholder after receipt of the stock dividend has no more than he had before it was paid. bonds.dividend paid in securities of that nature represents a distribution of profits Congress may. and even a small one. customarily lowers the then market value of stock because the undivided property represented by each share has been correspondingly reduced. but that the case is different where the distribution is in common stock created for that purpose. (N. Is the result different where the security distributed is common stock? [252 U. 189. 65 Atl. the cash which it had intended to use in paying stockholders a dividend. declares a dividend payable in this stock. had been originally created for the express purpose of being distributed [252 U.S.) 1011. scrip or preferred stock of the company. and taxable as such. to pay the dividend in the common stock which it had planned to sell. Hayden. why should it not be equally income of the stockholder. The argument which appears to be most strongly urged for the stockholders is. Clearly segregation of assets in a physical sense is not an . for instance. 1056. intending at the time of purchase to sell it before the next dividend date and to use the proceeds in paying dividends. purchases. in the interval between its regular dividend dates. 542. tax it as income of the stockholder. 102 Mass. can any one doubt that in such a case the dividend in common stock would be income of the stockholder and constitutionally taxable as such? See Green v. Furthermore. if the common stock created by capitalizing profits. A. be income of the stockholder and taxable as such? If this be conceded. general financial conditions make it undesirable to market the stock and the company concludes that it is wiser to husband. The payment from profits of a large cash dividend. 9 Ann. 547. for working capital. 287. neither maintenance nor change in the proportionate ownership of a stockholder in a corporation has any bearing upon the question here involved. instead. Bissell. 228] Suppose that a corporation having power to buy and sell its own stock. S. 118 Am. when received. no portion of the assets of the company is thereby segregated for the stockholder. deeming it inadvisable either to sell this stock or to raise by borrowing the money necessary to pay the regular dividend in cash. and. that when a stock dividend is made. some of its own common stock as a temporary investment. It has been said that a dividend payable in bonds or preferred stock created for the purpose of distributing profits may be income and taxable as such. St. but later. 156. and the company actually did so? And proceeding a short step further: Suppose that a corporation decided to capitalize some of its accumulated profits by creating additional common stock and selling the same to raise working capital.
See The Collector v. whether profits have been made. They protect themselves from being seriously misled by adopting a system of depreciation charges and reserves. since the gains may be invested in plant or merchandise or other property and perhaps be later lost. of the profits of the individual who is engaged in business alone? And is it not true.231. why Congress. Why may not the stockholder's interest in the gains of the company? The law finds no difficulty in disregarding the corporate fiction whenever that is deemed necessary to attain a just result. proves later to have been paid out of capital.essential of income. There is much authority for the proposition that. no [252 U.S. a partnership or joint stock company is just as distinct and palpable an entity in the idea of the law. dealing with the problem practically. distributed by means of the stock dividend paid. not fundamentally but in form only.) 663.S. Many a cash dividend honestly declared as a distribution of profits. 5 No reason appears. 1. 440.S. 232] stockholder to taxation under the Revenue Act of 1916. 189. Congress in legislating has wisely adopted their practices as its own rules of action. Ct. as distinguished from the individuals composing it. The undivided share of a partner in the year's undistributed profits of his firm [252 U. 231] is taxable as income of the partner. when dividends are paid in cash? The gains of a business. should be limited by the particular view of the relation of the stockholder to the corporation and its property which may. 230] segregation of his share in the gains from that of his partners is had. But we have no occasion to decide the question whether Congress might have taxed to the stockholder his undivided share of the corporation's earnings. in the absence of legislation. indeed. the stockholder cannot know whether he has really received gains. they act upon their own determination. by a firm or by a corporation. 664. also. . income or gains. In other words to render the stockholder taxable there must be both earnings made and a dividend paid. But is not this equally true of the share of a partner in the year's profits of the firm or. from the interest of a partner in the property of the firm. Third. although there. The Government urges that it would have been within the power of Congress to have taxed as income of the stockholder his pro rata share of undistributed profits earned. likewise. Neither earnings without dividend-nor a dividend without earnings-subjects the [252 U. It is argued that until there is a segregation. 236 U. The objection that there has been no segregation is presented also in another form. 35 Sup. because errors in forecast prevent correct ascertainment of values. have been taken by this court. 12 Wall. Strong reasons may be assigned for such a view. Cook on Corporations (7th Ed. Business men. v. in effect. even if no stock dividend representing it had been paid. fix necessarily periods and rules for determining whether there have been net profits-that is. Linn Timber Co. For Congress has in this act limited the income tax to that share of the stockholder in the earnings which is. it can never be determined with certainty whether there have been profits unless the returns at least exceeded the capital originally invested. are ordinarily reinvested in large part. Then. Until a business adventure has been completely liquidated. Hubbard.) 227. although the share in the gain is not evidenced by any action taken by the firm. 189. The stockholder's interest in the property of the corporation differs. 189. The year's gains of a partner is taxable as income. whether conducted by an individual. as is a corporations. under our law.S. See Morawetz on Corporations (2d Ed. 574 . United States. in legislating under a grant of power so comprehensive as that authorizing the levy of an income tax.
but it did limit taxability to such dividends representing profits earned since March 1. 419. have worked considerable hardship. The decision of this court. A. had assigned definitely some part or all of the annual balances remaining after paying the usual cash dividends.6 That rule.S. but paid out in cash dividend after its adoption. 254. would tend to defeat an object. Ann.Fourth. to the stockholder dividends received during the year. if paid in the form of a stock dividend. although earned by the company long before. R. 12 Wheat.S. held that Congress might tax. St. Some of the corporations doing this. Thereby stockholders were given notice that their share also in undistributed profits accumulating thereafter was at some time to be taxed as income. 418 . 543. 38 Sup. whether paid of all dividends in stock. in the attainment of which the American public took. 189. 38 Sup. if indiscriminatingly applied to all stock dividends representing profits earned. 247 U. 189. 1918. is so complete that serious question of the taxability of stock dividends would probably never have been made. 1919. and had taxed.S. involves an exceedingly narrow construction of it. Many corporations. that strong interest which arose from a full conviction of its necessity. 158 L. had assumed that the annual accumulating balances carried as undistributed profits were to be treated as capital permanently invested in the business. without definite assumption of any kind. St. To hold now that earnings both made and paid out after the adoption of the Sixteenth Amendment cannot be taxed as income of the stockholder. had [252 U. if and whenever it should be deemed desirable to capitalize them legally by the issue of additional stock distributed as a dividend to stockholders. Ed. The two cases mainly relied upon to show that this was beyond the power of Congress are Towne v.S. 678): 'To construe the power so as to impair its efficacy. exceeded the power conferred upon it by the Sixteenth Amendment. without this formality. without legally capitalizing any part of their profits. which . It did not limit the taxability to stock dividends representing profits earned within the tax year or in the year preceding. 6336c) to discourage the postponement of distribution for the illegitimate purpose of evading liability to surtaxes. if Congress had undertaken to tax only those dividends which represented profits earned during the year in which the dividend was paid or in the year preceding. And still others.' No decision heretofore rendered by this court requires us to hold that Congress. Eisner. and even prior to the adoption of the Sixteenth Amendment. And Congress sought by section 3 (Comp. But this court. were taxable as income of the stockholder. Other corporations. Chief Justice Marshall in Brown v. would have worked great injustice. 1913. that earnings made before the adoption of the Sixteenth Amendment. and justly took. Maryland. 1918D. 233] so used undivided profits for capital purposes. The equivalency of all dividends representing profits. 245 U. To have made the revenue law apply retroactively so as to reach such accumulated profits. transferred such balances on their books to 'surplus' account-distinguishing between such permanent 'surplus' and the 'undivided profits' account. in view of corporate practice. involved a very liberal construction of the amendment. construing liberally. Ct. As said by Mr. Supp. 339 . to the uses to which permanent capital is ordinarily applied. Congress endeavored in the Revenue Act of 1916 to guard against any serious hardship which might otherwise have arisen from making taxable stock dividends representing accumulated profits. but also the revenue act of 1913. Ct. Fifth. 234] stock dividends. might. Hornby. not only the constitutional grant of power. and have raised serious questions. in providing for the taxation of [252 U. Lynch v. 446 (6 L. Comp.
that a dividend representing [252 U. 4 Ves. 136 U.' 7 Gibbons v. Paine. 189. Mahon. and if in stock belongs to the remainderman. Brander. 1. 1918D. we have no occasion to consider in this case. 549 . Dec. Railroad Co.S. should be disposed of as between life tenant and remainderman. Mahon as the rule of administration for the District of Columbia the so-called Massachusetts rule. 525]). 1057. The so-called English rule. 604. was paid. as this court there pointed out ( 136 U. the third equitable apportionment. Jr. stock or other property. 1059 [34 L. 425 . Justice Gray. representing profits. 2.' and not. 551). that it has come to be known as the 'American rule. on the other hand.' Whether. as [252 U. a question 'between the corporation . if the court finds that the stock dividend was paid from capital or from profits earned before the decedent's death. and Gibbons v. declared in 1868 by Minot v. Ed.S. 560 . received after the decedent's death. the question involved was one 'between the owners of successive interests in particular shares. This court adopted in Gibbons v. The question was in essence: What shall the intention of the testator be presumed to have been? On this question there was great diversity of opinion and practice in the courts of English-speaking countries. 800. Ct. 96 Am. whether in cash. two of these involves an arbitrary rule of distribution. 368. ordinary or extrordinary. the opinion being delivered in 1890 by Mr. a stock dividend. 189. 101.S. an ordinary or an extraordinary one. 159. 38 Sup. 254): 'But it is not necessarily true that income means the same thing in the Constitution and the [an] act. the stock dividend belongs to the life tenant. The so-called Massachusetts rule. 3. 99 Mass. which involved a question arising between life tenant and remainderman. For. See Cook on Corporations ( 7th Ed. 28 Pa. Since then the same question has come up for decision in many of the states. the court shall inquire into the circumstances under which the fund had been earned and accumulated out of which the dividend. A. R. L. if in cash belongs to the life tenant. Mahon is even less an authority for a narrow construction of the power to tax incomes conferred by the Sixteenth Amendment. 235] profits. whether regular. If it finds that the stock dividend was paid out of profits earned since the decedent's death. has found favor in only a few states. Mahon. 705. that where a stock dividend is paid. 22 Wall.. declared in 1799. has been adopted since by so many of the states (including New York and California). whether a regular. Ct.S. it might be desirable for this court to reconsider the question there decided. as in Bailey v. In that case the court was required to determine how. Eisner we have only to bear in mind what was there said ( 245 U. The so-called Massachusetts rule. 236] some other courts have done (see 29 Harvard Law Review. although approved by this court. 10 Sup. So far as concerns Towne v. that a dividend representing profits. Three well-defined rules were then competing for acceptance.S.) 552-558. in view of these facts and the practical results of the operation of the two rules as shown by the experience of the 30 years which have elapsed since the decision in Gibbons v. and belongs to the remainderman if it was an extraordinary dividend.involved a question not of constitutional power but of statutory construction. belongs to the life tenant if it was a regular or ordinary dividend. the stock dividend belongs to the remainderman. The so-called Pennsylvania rule declared in 1857 by Earp's Appeal. in the administration of an estate in the District of Columbia. The so-called Pennsylvania rule. by Brander v.
until its . 116 N. Putnam. however. that Congress possesses the power which it exercised to make dividends representing profits. as the facts in this case illustrate.450 among the shareholders and had the shareholders repaid such sums to the company as the price of the 81. taxable as income. to presume in favor of its validity. R.160 new SHARES. is shown. 904. L. the integrity and the patriotism of the legislative body. Our sole duty is to ascertain their intent as therein expressed. 1917F. be able to escape taxation on a large part of what is actually their income.' Tax Commissioner v.S.and the government. to be deemed capital. with some relaxation. 231. But in construing the Massachusetts Income Tax Amendment. they empowered Congress 'to lay and collect taxes on incomes from whatever source derived. That such a result was intended by the people of the United States when adopting the Sixteenth Amendment is inconceivable. what dividends representing [252 U. necessary and immutable reason why stock dividends should always be treated as capital. C. Limited v. capital and not income. should never be exercised except in a clear case. Swan Brewery Company. L. and by most of the courts of the country. E. the owners of the most successful businesses in America will. 8 In terse. comprehensive language befitting the Constitution. It surely is not clear that the enactment exceeds the power granted by the Sixteenth Amendment. beyond peradventure. 806. 189. And. 189. to the rule that every stock dividend is. 237] WOULD CLEARLY HAVE BEEN PAYable. as this court has so often said. adhered to their rule that every extraordinary dividend is. the high prerogative of declaring an act of Congress invalid. whether the medium in which the dividend is paid be cash or stock. and that it may define. 522. 1914 A.S. not merely argument.450 [252 U. R. That stock dividends representing profits are so regarded. But in 1913 the Judicial Committee of the Privy Council held that a stock dividend representing accumulated profits was taxable like an ordinary cash dividend. A. 238] profits shall be deemed income. but by investors and financiers. In dismissing the appeal these words of the Chief Justice of the Supreme Court of Western Australia were quoted (page 236) which show that the facts involved were identical with those in the case at bar: 'Had the company distributed the �101. It seems to me clear. The Supreme Judical Court of Massachusetts has steadfastly adhered. THE DUTY ON THE �101. by their acts and by their utterances. is not this virtually the effect of what was actually done? I think it is. as it has done. 533. and [which] depended upon the terms of a statute carefully framed to prevent corporations from evading payment of the tax upon their earnings. If stock dividends representing profits are held exempt from taxation under the Sixteenth Amendment. 9 'It is but a decent respect due to the wisdom.' Sixth. which is substantially identical with the federal amendment.' We have.' They intended to include thereby everything which by reasonable understanding can fairly be regarded as income. So far as their profits are represented by stock received as dividends they will pay these taxes not upon their income but only upon the income of their income. 227 Mass. therefore. that court held that the Legislature was thereby empowered to levy an income tax upon stock dividends representing profits. despite ever-renewed protest. not only by the plain people. as between life tenant and remainderman. by which any law is passed. we have examples which should convince us that 'there is no inherent. The King. as between life tenant and remainderman. The courts of England have.
Eisner vs. that thereafter.violation of the Constitution is proved beyond all reasonable doubt. declared a "stock dividend". The defendant demurred to the petition upon the ground that it did not state facts sufficient to constitute cause of action.A. Dekoven vs Alsop. Saunders. 1922 FREDERICK C. Kaufman vs. plaintiff-appellant. For the recovery of that sum (P889.. FISHER. 245 U.S. under the view which we have taken of the facts and the law applicable to the present case. WENCESLAO TRINIDAD. 63 L. that the proportionate share of said stock divided of the appellant was P24. was discussed. Macomber. No. vs. as result of the business for that year.S. unto the appellee the sum of P889. 587. 12 Wheat. paid under protest.S.91) the present action was instituted..' Ogden v. Collector of Internal Revenue. 2833? While the appellant presents other important questions. upon demand of the appellee. 93 Va. based upon similar statutes.. in the month of March.: The only question presented by this appeal is: Are the "stock dividends" in the present case "income" and taxable as such under the provisions of section 25 of Act No. 247 U. Acting Attorney-General Tuason for appellee. 213. 252 U. Charlottesville Woolen Mills. The demurrer was sustained and the plaintiff appealed.800. 418. G. JOHNSON. Eisner. 673. Mitchell Bors.91 as income tax on said stock dividend... 179. 205 Ill. in which the questions before us.R. Justice CLARKE concurs in this opinion. 309. The defendant demurred to the petition in the lower court. that the stock dividend for that amount was issued to the appellant. Among the most important decisions may be mentioned the following: Towne vs. Doyle vs. Opisso for appellants... that he appellant was a stockholder in said corporation. that said corporation. Mr. J. L-17518 October 30. 1920. Co. The facts are therefore admitted. To sustain his appeal the appellant cites and relies on some decisions of the Supreme Court of the United States as will as the decisions of the supreme court of some of the states of the Union. Fisher and De Witt and Antonio M. defendant-appellee. and voluntarily. . 189. doing business in the City of Manila. 269.R. They are simple and may be stated as follows: That during the year 1919 the Philippine American Drug Company was a corporation duly organized and existing under the laws of the Philippine Islands. we deem it unnecessary to discuss them now. the appellant.
" Section 2 of said Act attempts to define what is an income. Constitutional limitations. It is further argued by the appellee that there are no constitutional limitations upon the power of the Philippine Legislature such as exist in the United States. and in support of that contention. nineteen hundred and thirteen. under the guise of an income tax. in its title 1 provides for the collection of an "income tax. . It will be noted from a reading of the provisions of the two laws above quoted that the writer of the law of the Philippine Islands must have had before him the statute of the United States. Macomber (252 U." The Philippine Legislature can not impose a tax upon "property" under a law which provides for a tax upon "income" only. whether in cash or in stock of the corporation. Act No. . There is no question that the Philippine Legislature may provide for the payment of an income tax. that is to say. to the amount of its cash value. . . . 2833.S. . The appellee admits the doctrine established in the case of Eisner vs. a statute expressly . to the amount of the earnings or profits distributed. and payable to its shareholders. the two statutes are here quoted for the purpose of determining the difference. out of its earnings or profits accrued since March first. . and under that law collect a tax upon a carreton or bull cart. if any. 1916. Chapter 463 of an Act of Congress of September 8.. . but it cannot. . and therefore the decision of the Supreme Court of the United States should not be followed in interpreting the statute in force here. he cites a number of decisions. which stock dividend shall be considered income. in the language of the two statutes. The definition follows: The term "dividends" as used in this Law shall be held to mean any distribution made or ordered to be made by a corporation. 189) that a "stock dividend" is not "income" but argues that said Act No. The definition follows: That the term "dividends" as used in this title shall be held to mean any distribution made or ordered to made by a corporation. does not violate the provisions of the Jones Law. Stock dividend shall be considered income. For the purpose of ascertaining the difference in the said statutes ( (United States and Philippine Islands). The Philippine Legislature has no power to provide a tax upon "automobiles" only." Section 25 of said Act attempts to define the application of the income tax. collect a tax on property which is not an "income. in imposing the tax on the stock dividend. 2833 of the Philippine Legislature is an Act establishing "an income tax. The appellee further argues that the statute of the United States providing for tax upon stock dividends is different from the statute of the Philippine Islands.In each of said cases an effort was made to collect an "income tax" upon "stock dividends" and in each case it was held that "stock dividends" were capital and not an "income" and therefore not subject to the "income tax" law. No important argument can be based upon the slight different in the wording of the two sections. providing for an income tax in the United States as well as that in the Philippine Islands. .
000. and purchased. with no debts. or assets of the corporation.000.. and at the end of the year they were P4. To illustrate: A and B form a corporation with an authorized capital of P10. At the end of the first year an inventory of the assets of the corporation is made.000 are issued to each of the incorporators.000. They are used to show the increased interest or proportional shares in the capital of each stockholder. Business for the first year is good. and neither of the stockholders have received a centavo from the business during the year. At the close of the year.. Shares of stock to the amount of P1. and additional stock is issued showing the increase in the actual capital. instead of selling the extra merchandise on hand and thereby reducing the business to its original capital. At the beginning of the year each stockholder held one-half interest in the capital. or property." Generally speaking. and each contributes P1. without amendment. for particular period shows an increase in its capital. when it is discovered that the assets are P4. At the beginning of the year they were P2. and still not a cent in the treasury. etc. Their entire assets are invested in drugs and put upon the shelves in their place of business.000 for the purpose of opening and conducting a drug store. they each still have one- . Neither of the stockholders have withdrawn a penny from the business during the year. A statute providing for an income tax cannot be construed to cover property which is not. If "stock dividends" are not "income" then the law permits a tax upon something not within the purpose and intent of the law. and after the issue of the said stock dividends. in fact income. be applied to another purpose which is entirely distinct and different. Every dollar contributed is invested. and it is then ascertained that the assets or capital of the corporation on hand amount to P4.000. stock dividends represent undistributed increase in the capital of corporations or firms.000 and not P2. with which either A or B could buy a cup of coffee or a pair of shoes for his family. to meet the demands of the growing trade. which represent the actual investment and entire assets of the corporation. by a statutory declaration. They commence business without a cent in the treasury.. etc.000. At the close of the year there is not a centavo in the treasury. change the real nature of a tax which it imposes. for a particular period. Perhaps it would be more logical to determine first what are "stock dividends" in order that we may more clearly understand their relation to "income. All of the receipts during the year have been reinvested in the business. etc. At the close of the year.000 each. joint stock companies. the inventory of the property of the corporation. It is true that the statute in question provides for an income tax and contains a further provision that "stock dividends" shall be considered income and are therefore subject to income tax provided for in said law. A law which imposes an important tax on rice only cannot be construed to an impose an importation tax on corn. with assets of the value of P2. The Legislature cannot. so that the stock theretofore issued does not show the real value of the stockholder's interest. Merchandise is sold.adopted for one purpose cannot. etc. Every peso received for the sale of merchandise was immediately used in the purchase of new stock — new supplies.000. which represents the actual increase of the shares of interest in the business. they agree among themselves to increase the capital they agree among themselves to increase the capital issued and for that purpose issue additional stock in the form of "stock dividends" or additional stock of P1. In other words. It becomes necessary in this connection to ascertain what is an "income in order that we may be able to determine whether "stock dividends" are "income" in the sense that the word is used in the statute.
The incorporators instead of reducing the property to its original capital. buys a farm with one hundred head of cattle for the sum of P10." Webster's International Dictionary defines an income as "the receipt. that the taxable property of the corporation at the beginning of the year was P2. and that the value of the corporate property is now P20. The capital of the corporation increased during the year. in view of that fact. with it. show that the value of his property has increased during the year by P10. interest. defines an income as "the amount of money coming to a person or corporation within a specified time whether as payment or corporation within a specified time whether as payment for services. Another illustration: A. under any theory of business or law. His books. His books at the beginning of the year show that he had property of the value of P10. by reason of business conditions and the increase of the value of both real estate and personal property. issue to themselves "stock dividends" to represent the proportional value or interest of each of the stockholders in the increased capital at the close of the year." The New Standard Dictionary.000. A is not a corporation. including the farm and the cattle. No part of the farm or cattle has been sold and not a single peso was received out of the rents or profits of the capital of the corporation by the stockholders. There is still not a centavo in the treasury and neither has withdrawn a peso from the business during the year.000 instead of P10.000. by selling off a part of its. the farm and the cattle both have increased in value.half interest in the business. especially. were P10.000 as it was at the beginning of the year. has received nothing from the farm or the cattle. Another illustration: C and D organized a corporation for agricultural purposes with an authorized capital stock of P20. it is discovered that the value of the farm and the cattle is P20.000. Every peso contributed is invested.000. In other words. let us ascertain how lexicographers and the courts have defined an "income. A. an individual farmer. and that the tax rolls should be changed in accordance with the changed conditions in the business.000 each contributing P5. At the beginning of the year the assets of the corporation. is analogous to the case before us and. is used in its . for the purpose of ordinary taxation. the annual receipts of a private person or a corporation from property. and at the close of the year and inventory of the property of the corporation is made and it is then found that they have the same farm with its improvements and two hundred head of cattle by natural increase. salary. The assets of his business are not shown therefore by certificates of stock. At the end of the year it is also discovered that. There is no money in the treasury." Bouvier. that at the close of the year it was P4.000.000. or profit from investment. Much time and labor was expanded during the year by the stockholders on the farm in the way of improvements. Neither received a centavo during the year from the farm or the cattle.000.000. by reason of business changes. With that capital they purchased a farm and. At the end of the first year. it is asserted. in his law dictionary. during the year. His books at the close of the year show that he has property of the value of P20. says that an "income" in the federal constitution and income tax act.000. however. but has either of them received an income? It is not denied. the ordinary tax should be increased by P2. one hundred head of cattle. be regarded as an "income" upon which the farmer can be required to pay an income tax? Is there any difference in law in the condition of A in this illustration and the condition of A and B in the immediately preceding illustration? Can the increase of the value of the property in either case be regarded as an "income" and be subjected to the payment of the income tax under the law? Each of the foregoing illustrations.000. edition of 1915.
in his law dictionary. professions. 105 Pa. Such advance constitutes and can be treated merely as an increase of capital. Eisner. from labor. supra. we cannot doubt that the dividend was capital as well for the purposes of the Income Tax Law. Appeal of Braun. 261).. In the case of Doyle vs. 136 U.. later Associate Justice of the Supreme Court of the United States and now Secretary of State of the United States. and adds nothing to the interests of the shareholders." (Gibbons vs. trades. unless it is otherwise specified. Its property is not diminished and their interest are not increased. 255. 198 Pa.S." "An income tax is a tax on the yearly profits arising from property . supra." etc." "undivided profits. the corporation or company acknowledges a liability. 189)..) Mr. Justice Pitney. 179. Justice Holmes. It does not mean choses in action or unrealized increments in the value of the property.S.." If profits have been made by the corporation during a particular period and not divided. Black. supra. (In re Graham's Estate. . .. and cites in support of the definition. or a right to any particular portion of the asset. (146 Northwestern Reporter. said: "Notwithstanding the thoughtful discussion that the case received below. says "An income is the return in money from one's business. they create additional bookkeeping liabilities under the head of "profit and loss. to mean cash or its equivalent. speaking for the court. . or from both combined. . and offices. when stock dividends are declared. in his argument before the Supreme Court of the United States in the case of Towne vs. In the case of Towne vs. . . Justice Hughes. evidenced by a "capital stock account. Mr. Logan County vs. 560. however. Macomber (252 U. again speaking for the court said: "An income may be defined as the gain derived from capital. Mitchell Bros.. Darlington. labor. said in speaking of income that mere advance in value in no sense constitutes the "income" specified in the revenue law as "income" of the owner for the year in which the sale of the property was made. in form.S. . in the case o Gray vs. (247 U. as importing something distinct from principal or capital and conveying the idea of gain or increase arising from corporate activity.common or ordinary meaning and not in its technical. or capital invested. to the stockholders. Mr. Darlington (82 U.. . profit or private revenue. defined an "income" in an income tax law. provided it be understood to include profit gained through a sale or conversion of capital assets. either a claim against the going concern or corporation.S." "surplus account. 812) Mr. . for any particular sum of money. much less to any one of them. 414. or any shares sells or until the directors conclude that dividends shall be made a part of the company's assets segregated from the common fund for that purpose. or the like.S. 169 U. None of these. the definition given by the Supreme Court in the case of Gray vs.' In short.S. 559." For bookkeeping purposes. Mahon. 549. or economic sense. 653). in the case of Eisner vs. speaking for the court. Co. the corporation is no poorer and the stockholder is no richer then they were before. The proportional interest of each shareholder remains the same. ." The Supreme Court of the United States. 'A stock dividend really takes nothing from the property of the corporation. 216. gives to the stockholders as a body. said that the act employs the term "income" in its natural and obvious sense.. U. Justice Pitney.. equivalent to the aggregate par value of their stock. Mr. gains. Eisner.
The dividend normally is payable in money and when so paid, then only does the stockholder realize a profit or gain, which becomes his separate property, and thus derive an income from the capital that he has invested. Until that, is done the increased assets belong to the corporation and not to the individual stockholders. When a corporation or company issues "stock dividends" it shows that the company's accumulated profits have been capitalized, instead of distributed to the stockholders or retained as surplus available for distribution, in money or in kind, should opportunity offer. Far from being a realization of profits of the stockholder, it tends rather to postpone said realization, in that the fund represented by the new stock has been transferred from surplus to assets, and no longer is available for actual distribution. The essential and controlling fact is that the stockholder has received nothing out of the company's assets for his separate use and benefit; on the contrary, every dollar of his original investment, together with whatever accretions and accumulations resulting from employment of his money and that of the other stockholders in the business of the company, still remains the property of the company, and subject to business risks which may result in wiping out of the entire investment. Having regard to the very truth of the matter, to substance and not to form, the stockholder by virtue of the stock dividend has in fact received nothing that answers the definition of an "income." (Eisner vs. Macomber, 252 U.S., 189, 209, 211.) The stockholder who receives a stock dividend has received nothing but a representation of his increased interest in the capital of the corporation. There has been no separation or segregation of his interest. All the property or capital of the corporation still belongs to the corporation. There has been no separation of the interest of the stockholder from the general capital of the corporation. The stockholder, by virtue of the stock dividend, has no separate or individual control over the interest represented thereby, further than he had before the stock dividend was issued. He cannot use it for the reason that it is still the property of the corporation and not the property of the individual holder of stock dividend. A certificate of stock represented by the stock dividend is simply a statement of his proportional interest or participation in the capital of the corporation. For bookkeeping purposes, a corporation, by issuing stock dividend, acknowledges a liability in form to the stockholders, evidenced by a capital stock account. The receipt of a stock dividend in no way increases the money received of a stockholder nor his cash account at the close of the year. It simply shows that there has been an increase in the amount of the capital of the corporation during the particular period, which may be due to an increased business or to a natural increase of the value of the capital due to business, economic, or other reasons. We believe that the Legislature, when it provided for an "income tax," intended to tax only the "income" of corporations, firms or individuals, as that term is generally used in its common acceptation; that is that the income means money received, coming to a person or corporation for services, interest, or profit from investments. We do not believe that the Legislature intended that a mere increase in the value of the capital or assets of a corporation, firm, or individual, should be taxed as "income." Such property can be reached under the ordinary from of taxation. Mr. Justice Pitney, in the case of the Einer vs. Macomber, supra, said in discussing the difference between "capital" and "income": "That the fundamental relation of 'capital' to 'income' has been much discussed by economists, the former being likened to the tree or the land, the
latter to the fruit or the crop; the former depicted as a reservoir supplied from springs; the latter as the outlet stream, to be measured by its flow during a period of time." It may be argued that a stockholder might sell the stock dividend which he had acquired. If he does, then he has received, in fact, an income and such income, like any other profit which he realizes from the business, is an income and he may be taxed thereon. There is a clear distinction between an extraordinary cash dividend, no matter when earned, and stock dividends declared, as in the present case. The one is a disbursement to the stockholder of accumulated earnings, and the corporation at once parts irrevocably with all interest thereon. The other involves no disbursement by the corporation. It parts with nothing to the stockholder. The latter receives, not an actual dividend, but certificate of stock which simply evidences his interest in the entire capital, including such as by investment of accumulated profits has been added to the original capital. They are not income to him, but represent additions to the source of his income, namely, his invested capital. (DeKoven vs. Alsop, 205, Ill., 309; 63 L.R.A. 587). Such a person is in the same position, so far as his income is concerned, as the owner of young domestic animal, one year old at the beginning of the year, which is worth P50 and, which, at the end of the year, and by reason of its growth, is worth P100. The value of his property has increased, but has had an income during the year? It is true that he had taxable property at the beginning of the year of the value of P50, and the same taxable property at another period, of the value of P100, but he has had no income in the common acceptation of that word. The increase in the value of the property should be taken account of on the tax duplicate for the purposes of ordinary taxation, but not as income for he has had none. The question whether stock dividends are income, or capital, or assets has frequently come before the courts in another form — in cases of inheritance. A is a stockholder in a large corporation. He dies leaving a will by the terms of which he give to B during his lifetime the "income" from said stock, with a further provision that C shall, at B's death, become the owner of his share in the corporation. During B's life the corporation issues a stock dividend. Does the stock dividend belong to B as an income, or does it finally belong to C as a part of his share in the capital or assets of the corporation, which had been left to him as a remainder by A? While there has been some difference of opinion on that question, we believe that a great weight of authorities hold that the stock dividend is capital or assets belonging to C and not an income belonging to B. In the case of D'Ooge vs. Leeds (176 Mass., 558, 560) it was held that stock dividends in such cases were regarded as capital and not as income (Gibbons vs. Mahon, 136 U.S., 549.) In the case of Gibbson vs. Mahon, supra, Mr. Justice Gray said: "The distinction between the title of a corporation, and the interest of its members or stockholders in the property of the corporation, is familiar and well settled. The ownership of that property is in the corporation, and not in the holders of shares of its stock. The interest of each stockholder consists in the right to a proportionate part of the profits whenever dividends are declared by the corporation, during its existence, under its charter, and to a like proportion of the property remaining, upon the termination or dissolution of the corporation, after payment of its debts." (Minot vs. Paine, 99 Mass., 101; Greeff vs. Equitable Life Assurance Society, 160 N. Y., 19.) In the case of Dekoven vs. Alsop (205 Ill ,309, 63 L. R. A. 587) Mr. Justice Wilkin said: "A dividend is defined as a corporate profit set aside, declared, and ordered by the directors to be paid to the stockholders on
demand or at a fixed time. Until the dividend is declared, these corporate profits belong to the corporation, not to the stockholders, and are liable for corporate indebtedness. There is a clear distinction between an extraordinary cash dividend, no matter when earned, and stock dividends declared. The one is a disbursement to the stockholders of accumulated earning, and the corporation at once parts irrevocably with all interest thereon. The other involves no disbursement by the corporation. It parts with nothing to the stockholders. The latter receives, not an actual dividend, but certificates of stock which evidence in a new proportion his interest in the entire capital. When a cash becomes the absolute property of the stockholders and cannot be reached by the creditors of the corporation in the absence of fraud. A stock dividend however, still being the property of the corporation and not the stockholder, it may be reached by an execution against the corporation, and sold as a part of the property of the corporation. In such a case, if all the property of the corporation is sold, then the stockholder certainly could not be charged with having received an income by virtue of the issuance of the stock dividend. Until the dividend is declared and paid, the corporate profits still belong to the corporation, not to the stockholders, and are liable for corporate indebtedness. The rule is well established that cash dividend, whether large or small, are regarded as "income" and all stock dividends, as capital or assets (Cook on Corporation, Chapter 32, secs. 534, 536; Davis vs. Jackson, 152 Mass., 58; Mills vs. Britton, 64 Conn., 4; 5 Am., and Eng. Encycl. of Law, 2d ed., p. 738.) If the ownership of the property represented by a stock dividend is still in the corporation and to in the holder of such stock, then it is difficult to understand how it can be regarded as income to the stockholder and not as a part of the capital or assets of the corporation. (Gibbsons vs. Mahon, supra.) the stockholder has received nothing but a representation of an interest in the property of the corporation and, as a matter of fact, he may never receive anything, depending upon the final outcome of the business of the corporation. The entire assets of the corporation may be consumed by mismanagement, or eaten up by debts and obligations, in which case the holder of the stock dividend will never have received an income from his investment in the corporation. A corporation may be solvent and prosperous today and issue stock dividends in representation of its increased assets, and tomorrow be absolutely insolvent by reason of changes in business conditions, and in such a case the stockholder would have received nothing from his investment. In such a case, if the holder of the stock dividend is required to pay an income tax on the same, the result would be that he has paid a tax upon an income which he never received. Such a conclusion is absolutely contradictory to the idea of an income. An income subject to taxation under the law must be an actual income and not a promised or prospective income. The appelle argues that there is nothing in section 25 of Act No 2833 which contravenes the provisions of the Jones Law. That may be admitted. He further argues that the Act of Congress (U.S. Revenue Act of 1918) expressly authorized the Philippine Legislatures to provide for an income tax. That fact may also be admitted. But a careful reading of that Act will show that, while it permitted a tax upon income, the same provided that income shall include gains, profits, and income derived from salaries, wages, or compensation for personal services, as well as from interest, rent, dividends, securities, etc. The appellee emphasizes the "income from dividends." Of course, income received as dividends is taxable as an income but an income from "dividends" is a very different thing from receipt of a "stock dividend." One is an actual receipt
property which is not an income cannot be taxed. and without any finding as to costs.." the same cannot be taxes under that provision of Act No. 189. Having reached the conclusion. that the judgment of the lower court should be revoked. concur. of the Philippine Legislature. J. supported by the great weight of the authority. it is so ordered.. if such be the case. which have reached a different conclusion from the one which we have arrived at in the present case. and the case should have been tried on that question of fact.of profits. has been cited as authority for the proposition that it is incompetent for the Legislature to tax as income any property which by nature is really capital — as a stock dividend is there said to be.S. 64 L. that "stock dividends" are not "income. JJ. as appeals may be taken from this court to the Supreme Court of the United States. Under the guise of an income tax. but declares that stock dividends shall be considered as income to the amount of the earnings or profits distributed.. Separate Opinions STREET. concurring: I agree that the trial court erred in sustaining the demurrer. however.J. Instead of demurring the defendant should have answered and alleged. When the assets of a corporation have increased so as to justify the issuance of a stock dividend. that the stock dividend which was the subject of taxation represents the amount of earnings or profits distributed by means of the issuance of said stock dividend. 2833. In this connection it will be noted that section 25 (a) of Act No. it must appear that he stock dividend represents earning or profits distributed. under which this tax was imposed. the other is a receipt of a representation of the increased value of the assets of corporation. and the burden of proof is on the Collector of Internal Revenue to show this. we are of the opinion. The case of Eisner vs. Inasmuch. In all of the foregoing argument we have not overlooked the decisions of a few of the courts in different parts of the world. we feel bound to follow the same doctrine announced by that court. and so decide. the increase of the assets should be taken account of the Government in the ordinary tax duplicates for the purposes of assessment and collection of an additional tax. ed. C. in authorizing the imposition by . For all of the foregoing reasons. does not levy a tax generally on stock dividends to the extend of the part of the stock nor even to the extend of its value. and the judgment must be reversed. Avanceña.. 2833 which provides for a tax upon income. 521). before the tax can be lawfully assessed and collected. Araullo. In that case the Supreme Court of the United States held that a Congressional Act taxing stock dividends as income was repugnant to that provision of the Constitution of the United States which required that direct taxes upon property shall be apportioned for collection among the several states according to population and that the Sixteenth Amendment. Macomber (252 U. Villamor and Romualdez. Under provision.
000. Can the P10. to the amount of the earnings or profits distributed. that the case before us presents merely a question of statutory construction. there being no constitutional restriction upon the action of the law making body.000. Macomber. The court says: A.000. had not vested Congress with the power to levy direct taxes. in a case where there is no restriction upon the legislative body." The United State statute made stock dividends based upon an advance in the value of the property or investment taxable as income whether resulting from earning or not. under the statute here in force.Congress of taxes upon income. His books at the close of the year show that he has property of the value of P20. the Act with which we are concerned in the present case. on property under the guise of income taxes. however. The assets of his business are not shown therefore by certificate of stock. if not entirely on the decision of the United States Supreme Court in the case of Eisner vs. be regarded as an "income" upon which the farmer can be required to pay an income tax? Is . It results. Macomber by the very circumstance that in those cases the law making body. A.000. vs. it is discovered that the value of the farm and the cattle is P20. His books. during the year has received nothing from the farm or the cattle. His books at the beginning of the year show that he had property of the value of P10. 522). and that given in Act No. as being distinguished from Eisner vs. supra. where in the course of his opinion Mr. requires direct taxes on property to be levied in a particular way. as amended. our statute make stock dividends taxable only to the amount of the earning and profits distributed..000. Such is the situation here. A is not a corporation. for at least two reasons. show that the value of his property has increased during the year by P10. we will endeavor to make it still clearer by borrowing one of the illustrations with which the opinion of the court is provided. At the end of the first year.000. C. Justice Pitney refers to the cases of the Swan Brewery Co. 2833 of the Philippine Legislature. Macomber (252 U. 1916. 189). to the amount of its cash value. Rex ( A. is pointed our in Eisner vs. In this jurisdiction our Legislature has full authority to levy both taxes on property and income taxes. by reason of business conditions and the increase of the value of both real estate and personal property. But the resolution embodied in that decision was evidently reached because of the necessity of harmonizing two different provisions of the Constitution of the United States. The former provides that "stock dividend shall be considered income. and there is no organic provision here in force similar to that which. under the Constitution of the United States. dissenting: In its final analysis the opinion of the court rests principally. there is a radical difference between the definition of a taxable stock dividend given in the United States Income Tax Law of September 8. Though the difference would seem sufficiently obvious. buys a farm with one hundred head of cattle for the sum of P10. under any theory of business or law. is entirely inapplicable to the present case. J." the Philippine Act provides that "Stock dividend shall be considered income. and Tax Commissioner vs. and stock dividends based on the increment income and are not taxable. That the problem should be viewed in this light.S.. Putnam (227 Mass.. 231). an individual farmer. or bodies were under no restriction as to the method of levying taxes. Macomber. construed in the case of Eisner vs. OSTRAND. In the first place. a decision which.
without apportionment among the several states. Why would not the P10. thus increasing its value to P20. labor. gains profits." As will be seen in the secondary sense of the word. And while the increment if in the form of a stock dividend would have been regarded as income under the United States statute and taxes as such. That is precisely the difference between the two statutes and that is the reason the illustration is not in point in this case. and quoted with approval in the decision of the court. It is also one of the reasons why that case is inapplicable here and why most of the arguments in the majority opinion are beside the mark.000. But let us suppose that A had sold the products of the farm during the year for P10. Macomber case. Black's Law Dictionary says — and I am again quoting from the decision of the court — "An income is the return in money from one's business. it is not regarded as income and cannot be so taxes under our statute because it is not based on earnings or profits. and offices?" There can be but one answer. that "An income tax is a tax on the yearly profits arising from the property. to constitute income. from whatever source derived. clause 3. Moreover. There is no reason whatever why the gains derived from the sale of the products of the farm should not be regarded as income whether reinvested in improvements upon the farm or not and there is no reason way a tax levied thereon cannot be considered an income tax. and paragraph 9. it may none the less be regarded as income. the United States supreme Court felt bound to give the word "income" a strict interpretation. the Sixteenth Amendment was adopted and which provided that "The Congress shall have power to lay and collect taxes on incomes. or private revenue. and had invested the money in buildings and improvements on the farm.000 earned during the year and so invested in improvements still be income for the year? And why would not a tax on these earnings be an income tax under the definition given in Black's Law Dictionary. trades. In the Eisner vs. though it would have been entirely appropriate in the Eisner vs.000 over and above his expense. upon this point there is no divergence of view among the lexicographers. Under article 1. clause 4 of the original Constitution of the United States. Congress could not impose direct taxes without apportioning them among the States according to population. professions. Macomber case. or capital invested." The United States Supreme Court therefore says in the Eisner vs. If a farmer stores the gain produced upon his farm without selling. Macomber case: . profits. income need not consist in money. and without regard to any census or enumeration. paragraph 2.there any difference in law in the conditions of A in this illustration and the conditions of A and B in the immediately preceding illustration? Can the increase of the value of the property in either case be regarded as an 'income' and be subjected to the payment of the income tax under the law? I answer no. As it was thought desirable to impose Federal taxes upon incomes and as a levy of such taxes by appointment among the States in proportion to population would lead to an unequal distribution of the tax with reference to the amount of taxable incomes. or earnings need not necessarily be converted into cash.
which conferred upon the legislature full power to tax incomes. as well as its very clear language. . and that the latter also may have proper effect. from which alone it derives its power to legislate.. except as applied to income. 522). and the question was whether this was a distribution of a dividend within the meaning of the act. accumulation for distribution. which provided that "dividend" should include "every dividend. in order to give a sufficiently broad sweep to the new taxing provision. the case presented merely a question of statutory construction. advantage. and that under it a stock dividend was taxable as income. although "in ordinary language the new shares would not be distribution of a dividend. C. the new shares being alloted among the shareholders pro rata. save only as modified by the Amendment. and to apply the distinction as cases arise. the decision of the court might have been different is clearly indicated by the following language: Two recent decisions.A proper regard for its generis." yet within the meaning of the act. 231). 531). and is not to be overridden by Congress or disregarded by the courts. Congress cannot by any definition it may adopt conclude the matter. that the clauses cited from Article I of the constitution may have proper force and effect. capital accretion for its opposite. followed by acceptance of the option." except etc. Sean Brewery Co. requires also that this Amendment shall not be extended by loose construction. and manifestly the decision is not a precedent for the guidance of this court when acting under a duty to test an act of Congress by the limitations of a written Constitution having superior force. are cited in support of the position of the Government. it was held that the 44th Amendment to the constitution of Massachusetts. vs." as the term is there used. Evidently. In Tax Commissioner vs. 227 Mass. in the absence of the peculiar restrictions placed by the Constitution upon taxing power of Congress. was regarded as identical in . The Judicial Committee of the Privy Council sustained the dividend duty upon the ground that. That. it becomes essential to distinguish between what is and what is not "income. it was deemed necessary to take the symbol for the substance. Putnam (1917]. therefore. . since it cannot by legislation alter the Constitution. profit. while a case where money is paid into the hand of the stockholder with an option to buy new shares with it. proceeding from courts of high jurisdiction. "must be interpreted as including every item which by any reasonable understanding can fairly be regarded as income" (pp. or gain intended to be paid or credited to or distributed among any members or director of any company. those provisions of the Constitution that require an apportionment according to population for direct taxes upon property. according to truth and substance. real and personal.. and within whose limitations alone that power can be lawfully exercised. without regard to form. so as to repeal or modify. This limitation still has an appropriate and important functions. 526. such new share were an "advantage" to the recipients. arose under the Dividend Duties Act of Western Australia. There being no constitutional restriction upon the action of the lawmaking body. . There was a stock dividend. Rex ( A. In order.
if any. income. Constitutional limitations upon the power of the Legislature are not stronger than statutory limitations.. perhaps. collect a tax on property which is not an "income." only." Similar provisions are contained in most State Constitutions. a little to broadly stated. therefore. (Lewis Sutherland on Statutory Construction. Reverting to the question of the nature of income. without amendment. Macomber has no application here. in fact. "That no bill which may be enacted into law shall embrace more than on subject.. subject only to the provisions of the Organic Act that "the rule of taxation shall be uniform. says: There is no question that the Philippine Legislature may provide for the payment of an income tax. So also does a stock certificate. 634). Where the prevention of this mischief is not involved. Municipality of Binalonan and Roman Catholic Bishop of Nueva Segovia." The Philippine Legislature cannot impose a tax upon "income" only . A statute providing for an income tax cannot be construed to cover property which is not. their object being to prevent "log-rolling" and the passing of undesirable measures without their being brought properly to the attention of the legislators. Certainly no income tax statute would be declared unconstitutional on that ground for treating dividends as income and providing for their taxation as such. The Massachusetts court was not under an obligation. Phil. The Philippine Legislature has no power to provide a tax upon "automobiles. even it is based on earnings instead of increment in capital it cannot be regarded as income. The majority opinion in discussing this question. The Philippine Legislature has full power to levy taxes both on capital or property and on income. A lawyer might take his fee in stock certificates instead of in . but it cannot. or assigned and it represents a cash value. or sold. of applying a constitutional provisions that stand in the way of extending it by construction. be applied to another purpose which is entirely distinct and different. pars 109 et seq. much will depend on the circumstances of each particular case. under the guise of an income tax. and that subject shall be expressed in the title of the bill. 32. yet it may be negotiated. If the Legislature cannot do the things enumerate it must be by reason of the limitation imposed by the Organic Act." In providing for the income tax the Legislature is therefore entirely free to employ the term "income" in its widest sense and is in nowise limited or hampered by organic limitations such as those imposed upon Congress by the Constitution of the United States. cases where a statute has been declared unconstitutional for dealing with several cognate subjects in the same Act and under the same title. by a statutory declaration. that is to say. the courts have uniformly given such provisions a very liberal construction and there are few. it is argued that a stock certificate has no intrinsic value and that. This is the second reason why the rule laid down in Eisner vs. 2d ed. But neither has a bank check or a time deposit certificate any intrinsic value. a statute expressly adopted for one purpose cannot.substance with a case where the stockholder receives no money and has no option. The Legislature cannot. change the real of a nature of a tax which it imposes.: Government of the Philippine Island vs. A law which imposes an importation tax on rice only cannot be construed to impose an importation tax on corn. like the one which binds us. These assertions while in the main true are. and under that law collect a tax upon a carreton or bull cart.
Pampanga. Rafael Morales for petitioners. respondents. FELIX.. L-9738 and L-9771 May 31. COLLECTOR OF INTERNAL REVENUE. HONORABLE COURT OF TAX APPEALS.net Some of the members of the court agree that stock dividends based on earnings or profits may be taxed as income. BLAS GUTIERREZ. 724-C of the cadastral survey of Mabalacat. The Republic of the . subsec. MARIA MORALES. J. petitioners. 14 and 31. and MARIA MORALES. the plaintiff need not allege that the stock dividends are not base on earnings or profits distributed. petitioner. the presumption is that the tax has been legally collected and the burden is upon the plaintiff both to allege and prove facts showing that the collection is unlawfully or irregular. and THE COLLECTOR OF INTERNAL REVENUE. I think this view is erroneous.money. Alejandro for respondents. If some stock dividends are taxable and others are not. Assistant Solicitor General Ramon L. an allegation that stock dividends in general have been taxed is not sufficient and does not state a cause of action.) Malcolm.R. respondents. vs. and COURT OF TAX APPEALS.: Maria Morales was the registered owner of an agricultural land designated as Lot No. sec. concurs. vs. but take the view that in an action against the Collector of the Internal Revenue for recovering back taxes paid on non-taxable stock dividends. 1957 BLAS GUTIERREZ. Would it be seriously contended that he had received no fee and that his efforts had brought no income?1awph!l. but that question of the taxability or non-taxability of the stock dividends is a matter of defense and should be set up by the defendant by way of answer. J. (Code of Civil Procedure. 334. Republic of the Philippines SUPREME COURT Manila EN BANC G. Nos. Avanceña and Solicitor Jose P.
580 (PNB Check 721520-Exh. In a notice of assessment dated January 28. the Court of First Instance of Pampanga rendered decision dated November 29. 1953. the spouses Blas Gutierrez and Maria Morales received the sum of P59. instituted condemnation proceedings in the Court of the First Instance of Pampanga. 724-C of defendant Maria Morales.Philippines. the . On January 27. In order to avoid further litigation expenses and delay inherent to an appeal.305. This reduction of the price to P2. 1950.500 per hectare did not affect Lot No. 1950.960 made by therein plaintiff. Sometime in 1950.S.75 as compensation for Lot No. upon order of the Court. the Republic of the Philippines.960. 148 for being the husband of the landowner Maria Morales. which project is necessary for the mutual protection and defense of the Philippines and the United States. counsel for petitioner sent a letter to the Collector of Internal Revenue requesting the letter to withdraw and reconsider said assessment. contending among others. But the Court disapproved defendants' claims for consequential damages considering them amply compensated by the price awarded to their said properties.580 already withdrawn from the compensation to them. without distinction. 1953. modifying in part the decision rendered by the Court in the sense of fixing the compensation for all the lands. 1947.481 as alleged deficiency income tax for the year 1950. docketed. 724-C which was one of the expropriated lands. that the compensation paid to the spouses by the Government for their property was not "income derived from sale. Blas Gutierrez was also made a party defendant in said Civil Case No.000 per hectare for the others. that even granting that condemnation of private properties is embraced within the meaning of the word "sale" or "dealing". Government and pursuant to the terms of the Military Bases Agreement of March 14. the parties entered into a compromise agreement on January 7.500 per hectare. 148. On March 5. at P2. defendant Maria Morales was to receive the amount of P94. at the request of the U. R) was paid by the Provincial treasurer of Pampanga to Maria Morales out of the original deposit of P156. dealing or disposition of property" referred to by section 29 of the Tax Code and therefore not taxable. for the purpose of expropriating the lands owned by Maria Morales and others needed for the expansion of the Clark Field Air Base. therein plaintiff deposited with the Clerk of the Court of First Instance of Pampanga the sum of P156. the Collector of Internal Revenue demanded of the petitioners the payment of P8. inclusive of surcharges and penalties. At the commencement of the action.785. wherein it fixed as just compensation P2. which values were based on the reports of the Commission on Appraisal whose members were chosen by both parties and by the Court. the sum of P34. In virtue of said decision.75 presenting the balance remaining in their favor after deducting the amount of P34. which compromise agreement was approved by the Court on January 9. which took into consideration the different conditions affecting. 1949. as Civil Case No.500 per hectare for some of the lots and P3. 1949. After due hearing. the value of the condemned properties in making their findings. which was provisionally fixed as the value of the lands sought to be expropriated. in order that it could take immediate possession of the same.
Pampanga. In that instance. Blas Gutierrez found in Mabalacat.A. and a notice of tax lien was duly registered with the Register of Deeds of San Fernando.e. he advanced the contention that Court had no jurisdiction to entertain the petition. and that penalties should not be imposed on said spouses because granting the assessment was correct. The record further shows that a warrant of distraint and levy was issued by the Collector of Internal Revenue on the properties of Mr. Case No.compensation received by the taxpayers must be considered as income for 1948 and not for 1950 since the amount deposited and paid in 1948 represented more than 25 per cent of the total compensation awarded by the court. that the assessment was made after the lapse of the 3-year prescriptive period provided for in section 51-(d) of the Tax Code. the filing of a verified petition to that effect and that one half of the total assessment should be guaranteed by a bond. profit realized by petitioners from the sale of the land in question was subject to income tax. which they did by filing a petition with said Court to review the assessment made by the Collector. way of taxation. of Internal Revenue. filed an answer on February 11. 213. docketed as C. the emission of the compensation awarded therein was due to an honest mistake. petitioners as just compensation for their property should not be dismissed by. refuting point by point the arguments advanced by the taxpayers. Pampanga. 1954. 65.. in representation of the respondent Collector of Internal Revenue. that said compensation was by law exempt from taxation and that the period to collect the income taxes by summary methods had prescribed.T. that respondent Collector of Internal Revenue be enjoined from carrying out further steps to collect from petitioners methods the said taxes which they alleged to be erroneously assessed and for remedies which would serve the ends of law and justice. that the full compensation received by petitioners should be included in the income received in . This request was denied by the Collector of Internal Revenue. that the amount paid to. The Solicitor General. admitting some of the allegations of petitioners and denying some of them. provided that the taxpayers would agree in writing to the suspension of the running of the period of prescription. it was prayed that the Court render judgment declaring that the taking of petitioners' land by the Government was not a sale or dealing in property. that the spouses Blas Gutierrez and Maria Morales did not realize any profit in said transaction as there were improvements on the land already made and that the purchasing value of the peso at the time of the expropriation proceeding had depreciated if compared to the value of the pre-war peso. 1955. and as special defenses. & Mrs. 1954. The taxpayers then served notice that the case would be brought on appeal to the Court of Tax Appeals. in a letter dated April 26. i. stating that the request would be granted upon compliance by the taxpayers with the requirements of Department of Finance order No. on the same date Counsel for the spouses then requested that the matter be referred to the Conference Staff of the Bureau of Internal Revenue for proper hearing to which the Collector answered in a letter dated December 24. that the compensation in question should be exempted from taxation by reason of the provision of section 29 (b)-6 of the Tax Code.
the amount paid to them as just compensation is exempt from income tax pursuant to Section 29-(b)-(6) of the Tax Code. 2. therefore. 1913. any profit derived therefrom is subject to income tax as capital gain pursuant to the provisions of Section 37-(a)-(5) in relation to Section 29-(a) of the Tax Code. requiring petitioners to pay only the sum of P5. That the Court of Tax Appeals erred in not holding that the capital gain found by the respondent Collector as have been derived by the petitionersappellants from the expropriation of their property is merely nominal not . modified the assessment made by respondent.S. made the following assessments of error: 1. No. that the Collector of Internal Revenue was empowered to collect petitioners' deficiency income tax. that the imposition of the 50 per cent surcharge was in accordance with the Tax Code.1950. 1955. that the gain derived by the petitioners from the expropriation of their property constituted taxable income and as such was capital gain. and that said gain was taxable in 1950 when it realized. for income tax purposes. or judicially thru the ordinary court procedures. same having been paid in 1950 by the Government. 4. L-9738. After due hearing and after the parties filed their respective memoranda. the cost of acquisition and the selling price shall be taken into account without qualification as to the purchasing power of the currency. as appellants in G.654. and. petitioners Blas Gutierrez and Maria Morales. and prayed that the petition for review be dismissed.481 plus the delinquency penalty of 5 per cent for late payment and monthly interest at the rate of 1 per cent from April 1. That the Court of Tax Appeals erred in not holding that. the Court of Tax Appeals rendered decision on August 31. whether administratively thru summary methods. From this decision. 3. Government in connection with the construction. That the Court of Tax Appeals erred in holding that. under the particular circumstances in which the property of the appellants was taken by the Philippine Government.R. petitioners be ordered to pay the amount of P8. both parties appealed to this Court and in this instance. that under the Bases Agreement only residents of the United states are exempt from the payment of income tax in the Philippines in respects to profits derived under a contract with the U. It was also found by said Court that the evidence did not warrant the imposition of the 50 per cent surcharge because the petitioners acted in good faith and without intent to defraud the Government when they failed to include in their gross income the proceeds they received from the expropriated property. holding that it had jurisdiction to hear and determine the case. income from expropriation should be deemed as income from sale. maintenance and operation of the bases. That the Court of Tax Appeals erred in not holding that the respondent Collector is definitely barred by the Statute of Limitations from collecting the deficiency income tax in question. 1953. that in the determination of the gain or loss from the sale of property acquired on or after March 1. up to the date of actual payment and for such other relief that may be deemed just and equitable in the premises.
whether real or personal. The pertinent provisions of the National Internal Revenue Code applicable to the instant cases are the following: SEC. or gains.R. — Gains. . That the Court of Tax Appeals erred in not pronouncing upon the pleadings of the parties that the petitioners-appellants did not derive any capital gain from the expropriation of their property.subject to income tax. securities. and in not holding that the pronouncement of the court in the expropriation case in this respect is binding upon the respondent Collector of Internal Revenue. The facts just narrated are not disputed and the controversy only arose from the assertion by the Collector of Internal Revenue that petitioners-appellants failed to include from their gross income. trades. the amount of P94. profits. — (a) General definition. No. L-9771. and income derived from salaries. profits. SEC. and 5. — (a) Gross income from sources within the Philippines. or compensation for personal service of whatever kind and in whatever form paid. or from professions. — The following items of gross income shall be treated as gross income from sources within the Philippines: xxx xxx xxx (5) SALE OF REAL PROPERTY. The appeal of the respondent Collector of the Internal Revenue was docketed in this Court as G. — "Gross income" includes gains. in filing their income tax return for 1950. and income from the sale of real property located in the Philippines. is "sale" and that the income derived therefrom is taxable.305. businesses. sales or dealings in property. commerce. 29. for taxation purposes. 37. wages. growing out of ownership or use of or interest in such property. rents. dividends. profits. GROSS INCOME.75 which they had received as compensation for their land taken by the Government by expropriation proceedings. and income derived from any source whatsoever. or the transactions of any business carried on for gain or profit. also from interests. It is the contention of respondent Collector of Internal Revenue that such transfer of property. vocations. and in this case the Solicitor General ascribed to the lower court the commission of the following error: That the Court of Tax Appeals erred in holding that respondents are not subject to the payment of the 50 per cent surcharge in spite of the fact that the latter's income tax return for the year 1950 is false and/or fraudulent. INCOME FROM SOURCES WITHIN THE PHILIPPINES.
It appears then that the acquisition by the Government of private properties through the exercise of the power of eminent domain. therefore. Consequently. 1942. However. and the proceeds from said transaction clearly fall within the definition of gross income laid down by Section 29 of the Tax Code of the Philippines.S. for it is held that: The transfer of property through condemnation proceedings is a sale or exchange within the meaning of section 117 (a) of the 1936 Revenue Act and profit from the transaction constitutes capital gain" (1942. and profits from that transaction is capital gain (David S. Kieselbach (CCA 3) 127 F. compensation or income derived therefrom ordinarily has to be considered as income from sources within the Philippines and subject to the taxing jurisdiction of the Philippines. the taxpayers contend. that same cannot be considered as sale as said acquisition was by force. said properties being JUSTLY compensated. this kind of transfer of ownership must perforce be distinguished from sale. U. Int. 42 BTA 139). 40 AFTR 1370) and in Kneipp vs. is embraced within the meaning of the term "sale" "disposition of property". Brown vs. (1949. which reads as follows: SEC. Petitioners-appellants also averred that granting that the compensation thus received is "income". Revenue vs. it is to be remembered that said property was acquired by the Government through condemnation proceedings and appellants' stand is. 29. Com. to the extent required . there being practically no meeting of the minds between the parties. But the authorities in the United States on the matter sustain the view expressed by the Collector of Internal Revenue. U. 85 F Suppl. same is exempted under Section 29-(b)-6 of the Tax Code. xxx xxx xxx (6) Income exempt under treaty. — Income of any kind. — xxx xxx xxx (b) EXCLUSIONS FROM GROSS INCOME. The proposition that income from expropriation proceedings is income from sales or exchange and therefore taxable has been likewise upheld in the case of Lapham vs.S.. — The following items shall not be included in gross income and shall exempt from taxation under this Title. for the purpose of Section 29-(a) of the Tax Code. (24) 359). GROSS INCOME. 902). "The taking of property by condemnation and the. Comm. payment of just compensation therefore is a "sale" or "exchange" within the meaning of section 117 (a) of the Revenue Act of 1936.xxx xxx xxx There is no question that the property expropriated being located in the Philippines. (1949.
or corporations located in bases named in Annex "A" and Annex "B" in order to carry out the purposes of this agreement. and costs thereby incurred. damages. serving in the Philippines in connection with the bases and residing in the Philippines by reason only of such service. or any imports or exports duties. In addition. the compensation accruing therefrom must necessarily fall under the exemption provided for by Section 29-(b)-6 of the Tax Code. shall be liable to pay income tax in the Philippines except in respect of income derived from Philippine sources or sources other than the United States. We find this stand untenable. The United States agrees to reimburse the Philippines for all the reasonable expenses.by any treaty obligation binding upon government of the Philippines. (3) No person referred to in paragraphs 1 and 2 of this said Article shall be liable to pay the government or local authorities of the Philippines any poll or residence tax. (2) No National of the United States serving in the Philippines in connection with the construction. operation or defense of the bases and residing in the Philippines by reason only of such employment. Government. the Philippines. The taxpayers maintain that since.S. or his spouse and minor children and dependent parents of either spouse. the proceeding to expropriate the land in question necessary for the expansion of the Clark Field Air Base was instituted by the Philippine Government as part of its obligation under the Military Bases Agreement. association. shall be liable to pay income tax in the Philippines except in respect of income derived from Philippine sources. the United States shall reimburse the Philippines for the reasonable costs of transportation and removal of any occupants displaced or ejected by reason of the condemnation or expropriation. at the of the U. for the same Military Bases Agreement cited by appellants contains the following: ARTICLE XXII CONDEMNATION OR EXPROPRIATION 1. or any other tax on personal property imported for his own use provided. maintenance. subject to mutual agreements of the two governments. that private owned vehicles shall be subject to payment of the following only: when certified as being used for . Whenever it is necessary to acquire by condemnation or expropriation proceedings real property belonging to private persons. or his dependents. including title value of the property as determined by the Court. will institute and prosecute such condemnation proceeding in accordance with the laws of the Philippines. ARTICLE XII INTERNAL REVENUE EXEMPTION (1) No member of the United States Armed Forces except Filipino citizens.
49 Phil. or any tax in the nature of a license in respect of any service of work for the United. or corporation organized under the laws of the United States. 40 Phil. Metropolitan Water District vs. It is unmistakable that although the condemnation or expropriation of properties was provided for. the exemption from tax of the compensation to be paid for the expropriation of privately owned lands located in the Philippines was not given any attention. States in connection with the construction. nationals working in these Islands in connection with the construction. operation and defense of the bases. xxx xxx xxx The facts brought about by the aforementioned terms of the said treaty need no further elucidation. Armed Forces serving in the Philippines and U. title to the land does not pass to the plaintiff until the indemnity is paid (Calvo vs. De los Angeles. and the internal revenue exemptions specifically taken care of by said Agreement applies only to members of the U. the same cannot be considered as income for 1950 when the balance of P59.75 was actually received.S. We have this much to say. Camus et al. 55 Phil. operation and defense of the bases. the normal license plate fee. if said amount should have been reported as income for 1950 in the return that must have been filed on or before March 1.military purposes by appropriate United States Authorities. the amount of P34. be collected .785. operation and defense of said bases. 1953.580 was not paid to. maintenance. but merely deposited in court and withdrawn by them. it having been made beyond the 3-year period prescribed by section 51-(d) of the Tax Code. 1951. (4) No national of the United States. and notwithstanding possession acquired by the expropriator. the assessment made by the Collector on January 28. Appellant taxpayers cannot say that the title over the property expropriated already passed to the Government when the latter was placed in possession thereof. maintenance. therefore. 1949. appellant taxpayers were still the owners of their whole property that was subject of condemnation proceedings and said amount of P34. Anent appellant taxpayers' allegation that the respondent Collector of Internal Revenue was barred from collecting the deficiency income tax assessment. Now. 605). Before that date (1950)..580 out of the original deposit made by the Government was withdrawn in favor of appellants on January 27. is still within the 3-year prescriptive period provided for by Section 51-d and could. the payment of the value of Maria Morales' Lot 724-C was actually made by the Republic of the Philippines in 1950 and it has to be credited as income for 1950 for it was then when title over said property passed to the Republic of the Philippines. shall be liable to pay income tax in the Philippines in respect of any profits derived under a contract made in the United States with the government of the United States in connection with the construction. Therefore. otherwise. the normal license and registration fees. Zandueta. 550. Although it is true that by order of the Court of First Instance of Pampanga. 783).S. for in condemnation proceedings. maintenance. title does not actually pass to him until payment of the amount adjudged by the Court and the registration of the judgment with the Register of Deeds (See Visayan Refining Company vs.
35. The question of fraud is a question of fact which frequently requires a nicely balanced judgement to answer. on the ground that the taxpayers' income tax return for 1950 is false and/or fraudulent. As to the only question raised by appellant Collector of Internal Revenue in case L9771. — The gain derived or loss sustained from the sale or other disposition of property. Court of Tax Appeals et al. We find Section 35 of the Tax Code illuminating. The records placed the value of the said property at the time of its acquisition by appellant Maria Morales P28. A P. assailing the lower Court's order exonerating petitioners from the 50 per cent surcharge imposed on the latter. or mixed.either by the administrative methods of distraint and levy or by judicial action (See Collector of Internal Revenue vs. only the fair market price or value of the property as of the date of the acquisition thereof should be considered in determining the gain or loss sustained by the property owner when the property was disposed. supra. Reyes et al. 1). without taking into account the purchasing power of the currency used in the transaction. 872. xxx xxx xxx The records show that the property in question was adjudicated to Maria Morales by order of the Court of First Instance of Pampanga on March 23.. 100 Phil.305. All the facts and circumstances surrounding the conduct of the tax payer's business and all the facts incident to the preparation of the alleged fraudulent return should be considered. real or personal. it should be noted that the Court of Tax Appeals found that the evidence did not warrant the imposition of said surcharge because the petitioners therein acted in good faith and without intent to defraud the Government. and Sambrano vs. The resulting difference is surely a capital gain and should be correspondingly taxed. nineteen hundred and thirteen... 872. the cost thereof if such property was acquired by purchase or the fair market price or value as of the date of the acquisition if the same was acquired by gratuitous title. As to appellant taxpayers' proposition that the profit. Zulueta et al.291. Said section reads as follows: SEC. Federal Income ..73 and it is a fact that same was compensated with P94. p. Collector of Internal Revenue vs. derived by them from the expropriation of their property is merely nominal and not subject to income tax. and in accordance with the aforequoted section of the National Internal Revenue Code. shall be determined in accordance with the following schedule: (a) xxx xxx xxx (b) In the case of property acquired on or after March first. DETERMINATION OF GAIN OR LOSS FROM THE SALE OR OTHER DISPOSITION OF PROPERTY.75 when it was expropriated. (Mertens. 100 Phil.. 1929.
mostly situated in Manila and in Pasay City. LIMPAN INVESTMENT CORPORATION. The facts of this case are: Petitioner.50. 1959 to the date of payment.Taxation. Lim and his mother. Paras. 699. Reyes.. petitioner. Chapter 55). concur. We have to confine ourselves to questions of law. Vicente Pantangco Vda. 1955. Reyes. de Lim. who own and control ninety-nine per cent (99%) of its total paid-up capital.1äwphï1.. all of which were acquired from said Isabelo P. respondents.338. plus 50% surcharge and 1% monthly interest from June 30. J. a domestic corporation duly registered since June 21. Bautista Angelo. without pronouncement as to costs. holding and ordering it (petitioner) to pay respondent Commissioner of Internal Revenue the sums of P7. B. and Endencia. with cost. vs. WHEREFORE. J. We are constrained to refrain from giving any consideration to the question raised by the Solicitor General. It commenced actual business operations on July 1.: Appeal interposed by petitioner Limpan Investment Corporation against a decision of the Court of Tax Appeals. Montemayor. Its president and chairman of the board is the same Isabelo P. JJ. Afurong and Atty. Assistant Solicitor General F.L. B.ñët Its real properties consist of several lots and buildings. Vicente L. Rosete. J. Alafriz. It is so ordered. C. A.. . San Luis for petitioner.00 and P30. representing deficiency income taxes. G. Office of the Solicitor General A. Lim..B. ET AL. 1955.B. is engaged in the business of leasing real properties. Lim and Purificacion Ceñiza de Lim.502. REYES.L. the decision appealed from by both parties is hereby affirmed. V.J. The question of fraud being a question of fact and the lower court having made the finding that "the evidence of this case does not warrant the imposition of the 50 per cent surcharge". COMMISSIONER OF INTERNAL REVENUE. Concepcion. Solicitor A. for it is already settled in this jurisdiction that in passing upon petitions to review decisions of the Court of Tax Appeals. Its principal stockholders are the spouses Isabelo P. Saldajeno for respondents. A.. in its CTA Case No.
. .00 Excess Depreciation (Sched. . . .220.098.81 .126. . . 4. . A) . reporting therein net incomes of P3. .459. B) . .Petitioner corporation duly filed its 1956 and 1957 income tax returns. Sometime in 1958 and 1959.287. . . .00 Net income per investigation Tax due thereon Less: Amount already assessed P98.555. they discovered and ascertained that petitioner had underdeclared its rental incomes by P20. . .028.00 P7. . .746.446.00 P109. .287.00 657.260. . . On the basis of these findings. 16.098. .00 2.690. . .00 and P16. in the course thereof.36. .336. A) . . .00 and P81. . P81. computed as follows: 90-AR-C-348-58/56 Net income per audited return Add: Unallowable deductions: Undeclared Rental Receipt (Sched. . . . P20. B) . . .892. . . .00 during these taxable years and had claimed excessive depreciation of its buildings in the sums of P4.00 P24. respectively. .00.338. .00 covering the same period. . .690.199.00 P 3. .199.260.00 Excess Depreciation (Sched.00 P5. . . .00 P4. .549. . .00 Net income per investigation Tax due thereon Less: Amount already assessed Balance Add: 50% Surcharge DEFICIENCY TAX DUE 90-AR-C-1196-58/57 Net income per audited return Add: Unallowable deductions: Undeclared Rental Receipt (Sched. respondent Commissioner of Internal Revenue issued its letter-assessment and demand for payment of deficiency income tax and surcharge against petitioner corporation.338. . . .220. . .00 2.00 and P2. the examiners of the Bureau of Internal Revenue conducted an investigation of petitioner's 1956 and 1957 income tax returns and.00 P22. .81 and P11. for which it paid the corresponding taxes therefor in the sums of P657. . .00 P11. .00 P27. .
who collected and received P13. Sole witness for petitioner corporation in the Tax Court was its Secretary-Treasurer. that a certain tenant (Go Tong) deposited in court his rentals amounting to P10.00. collected part thereof and may have reported the same in his own personal income tax return. 11. .00 as rental income in its 1956 tax return and also the sum of P29. 1959 to the date of payment. over which the corporation had no actual or constructive control. or any part thereof.100. Lim. that a certain tenant (Go Tong deposited in court his rentals (P10. Lim and Vicenta Pantangco Vda.630.00 and that found by respondent Commissioner as unreported rental income. the corporation filed its petition for review before the Tax Appeals court. and that a sub-tenant paid P4.00 10.200.Balance Add: 50% Surcharge DEFICIENCY TAX DUE 20. on the other.00. explaining that part of said amount totalling P31. Solis.00 which ought not be declared as rental income.00 which ought not be declared as rental income in 1957.00. in exchange for whatever rentals the Lims may collect from the tenants. Lim collected P13. with respect to the difference between this omitted income (P12. that same Isabelo P. petition).800. questioning the correctness and validity of the above assessment of respondent Commissioner of Internal Revenue. Petitioner likewise alleged in its petition that the rates of depreciation applied by respondent Commissioner of its buildings in the above assessment are unfair and inaccurate. Isabelo P. It disclaimed having received or collected the amount of P20. Vicente G. had verbally agreed in 1956 to turn over to petitioner corporation six per cent (6%) of the value of all its properties. as president of petitioner corporation. petitioner corporation. hence. which he turned over to petitioner in 1959 only.380. Isabelo P. de Lim. Isabelo P. did not turn the same over to petitioner corporation in said year but did so only in 1959.199. and that a subtenant paid P4.690. reasoning out that 'the previous owners of the leased building has (have) to collect part of the total rentals in 1956 to apply to their payment of rental in the land in the amount of P21. computed at P21. and the same Isabelo P.500.00 from certain tenants. Lim.630.00 was not declared as income in its 1957 tax return because its president. on one hand.50 P30. Lim. or any part thereof. who admitted that it had omitted to report the sum of P12.690.00) found by respondent Commissioner as undeclared in 1956.502.350.50 Petitioner corporation requested respondent Commissioner of Internal Revenue to reconsider the above assessment but the latter denied said request and reiterated its original assessment and demand.500. as unreported rental income for 1957.200. tried to establish that it did not collect or receive the same because.00) and the sum (P20.335. over which the corporation had no actual or constructive control and which were withdrawn only in 1958. as unreported rental income for 1956. And. the same witness Solis also tried to establish that petitioner corporation did not receive or collect the same but that its president. However. with respect to the difference between the admittedly undeclared sum of P29.199. It also denied having received or collected the amount of P81. the former owners.00" (par.00. through the same witness (Solis). (P81.00 as rental income in its 1957 tax return.167.350. plus 5% surcharge and the 1% monthly interest from June 30.00).00) in 1957.00.800.100. in view of the refusal of some tenants to recognize the new owner.
S. This appeal is manifestly unmeritorious.00 claimed by petitioner for the years 1956 and 1957 was excessive. Petitioner having admitted.00 out of P20. Petitioner corporation pursues. Lim and Vicenta Pantangco Vda. The respondent Court erred in holding that the depreciation in the amount of P20. that in the case is lacking. which petitioner denied having unreported in the disputed tax returns.690. Plaridel M. de Lim retained ownership of the lands and only later transferred or disposed of the ownership of the buildings existing thereon to petitioner corporation. II.100.00 for the year 1956. Lim.690.00 for the year 1957. but these payments were not declared in the corresponding returns. hence. testified for the respondent that he personally interviewed the tenants of petitioner and found that these tenants had been regularly paying their rentals to the collectors of either petitioner or its president. and prays that the appealed decision be reversed. the excuse that Isabelo P. With respect to the balance. Mingoa. The respondent Court erred in holding that the petitioner had an unreported rental income of P81. Solis). The respondent Court erred in holding that the petitioner had an unreported rental income of P20.598. and that in applying rates of depreciation to petitioner's buildings.350. the same theory advocated in the court below and assigns the following alleged errors of the trial court in its brief. one of the BIR examiners who personally conducted the investigation of the 1956 and 1957 income tax returns of petitioner corporation. to wit: I.199.199. he adopted Bulletin "F" of the U.00) found by the BIR examiners as unreported rental income for the year 1956 and more than one-third (1/3) of the amount (P29. it was incumbent upon it to establish the remainder of its pretensions by clear and convincing evidence. the Tax Court upheld respondent Commissioner's assessment and demand for deficiency income tax which. the same witness tried to establish that some of its buildings are old and out of style. Isabelo P.00 out of P81.With regard to the depreciation which respondent disallowed and deducted from the returns filed by petitioner. as above stated in the beginning of this opinion.00) ascertained by the same examiners as unreported rental income for the year 1957. through its own witness (Vicente G. Lim was not presented as witness to corroborate the above testimony of Vicente G. III. On the other hand. that it had undeclared more than one-half (1/2) of the amount (P12. Solis. contrary to its original claim to the revenue authorities. so as to justify the alleged verbal agreement whereby they . Federal Internal Revenue Service. they are entitled to higher rates of depreciation than those adopted by respondent in his assessment. On the basis of the evidence. Isabelo P. petitioner has appealed to this Court.
Isabelo P. Collector of internal Revenue & Collector of Internal Revenue vs. E. and petitioner has not shown any arbitrariness or abuse of discretion in the part of the Tax Court in finding that petitioner claimed excessive depreciation in its returns. is not only unusual but uncorroborated by the alleged transferors. MITSUBISHI METAL CORPORATION. May 29. the first assigned error is without merit. The withdrawal in 1958 of the deposits in court pertaining to the 1957 rental income is no sufficient justification for the non-declaration of said income in 1957. since it is income just the same regardless of its source.S. and was not the fault of its tenants. et al. petitioner. Federal Internal Revenue Service. As to the second assigned error. Nos. vs. It appearing that the Tax Court applied rates of depreciation in accordance with Bulletin "F" of the U.. Wherefore. 1963). The payment by the sub-tenant in 1957 should have been reported as rental income in said year. petitioner. COMMISSIONER OF INTERNAL REVENUE. 1990 COMMISSIONER OF INTERNAL REVENUE. Limpan Investment Corporation. since the deposit was resorted to due to the refusal of petitioner to accept the same. Zamora. L-15280. M.R. after whose Income Tax Law ours is patterned (M. the appealed decision should be. suffice it to state that this Court has already held that "depreciation is a question of fact and is not measured by theoretical yardstick. G. Zamora. or by any document or unbiased evidence. for having been the result of scientific studies and observation for a long period in the United States. hence. and the findings of the Tax Court in this respect should not be disturbed when not shown to be arbitrary or in abuse of discretion (Commissioner of Internal Revenue vs. L-15289 and L-15281. Hence. E.would turn over to petitioner corporation six percent (6%) of the value of its properties to be applied to the rentals of the land and in exchange for whatever rentals they may collect from the tenants who refused to recognize the new owner or vendee of the buildings. which this Court pronounced as having strong persuasive effect in this jurisdiction. as it is hereby. L-18282. vs. 1964). As above noted. ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION and the COURT OF TAX APPEALS. May 31. On the third assigned error. No. 80041 January 22. Zamora vs. the foregoing error is devoid of merit. Lim was not presented as witness to confirm accountant Solis nor was his 1957 personal income tax return submitted in court to establish that the rental income which he allegedly collected and received in 1957 were reported therein. With costs against petitioner-appellant. affirmed. Priscila Estate. Zamora vs. petitioner is deemed to have constructively received such rentals in 1957. ATLAS CONSOLIDATED MINING AND DEVELOPMENT . Collector of Internal Revenue and Collector of Internal Revenue vs. L-15290. MITSUBISHI METAL CORPORATION. Inc.. respondents. petitioner's denial and explanation of the non-receipt of the remaining unreported income for 1957 is not substantiated by satisfactory corroboration. but should be determined by a consideration of actual facts".
2 Pursuant to the contract between Atlas and Mitsubishi. it was later noted by respondent Court of Tax Appeals in its decision that on August 27.971.000.000.000.00 from a consortium of Japanese banks. a Japanese corporation licensed to engage in business in the Philippines. whether or not the interest income from the loans extended to Atlas by Mitsubishi is excludible from gross income taxation pursuant to Section 29 b) (7) (A) of the tax code and. respondents.000. The records in the Bureau of Internal Revenue show that the approval of the loan by Eximbank to Mitsubishi was subject to the condition that Mitsubishi would use the amount as a loan to Atlas and as a consideration for importing copper concentrates from Atlas. at about the same time as the approval of its loan for ¥2. if not vacuous to give credit to the cavalier assertion that Mitsubishi was a mere agent in said transaction.00 of said loan was to be used for the purchase of the concentrator machinery from Japan. The total amount of both loans is equivalent to $20.595. 1970. . in turn undertook to sell to Mitsubishi all the copper concentrates produced from said machine for a period of fifteen (15) years. 131.CORPORATION and the COURT OF TAX APPEALS. and duly remitted to the Government. 1 Mitsubishi thereafter applied for a loan with the Export-Import Bank of Japan (Eximbank for short) obviously for purposes of its obligation under said contract. exempt from withholding tax. 1976. United States currency. It was contemplated that $9. The agreement is strictly between Mitsubishi as creditor in the contract of loan and Atlas as the seller of the copper concentrates.320. for the installation of a new concentrator for copper production. interest payments were made by the former to the latter totalling P13. Mitsubishi agreed to extend a loan to Atlas 'in the amount of $20. 1976. 2.971. therefore.00.000. private respondents filed a claim for tax credit requesting that the sum of P1. Under said contract.000. and that Mitsubishi had to pay back the total amount of loan by September 30. whether or not Mitsubishi is a mere conduit of Eximbank which will then be considered as the creditor whose investments in the Philippines on loans are exempt from taxes under the code.880.00. The specific terms and the reciprocal nature of their obligations make it implausible. Its loan application was approved on May 26.01 be applied against their existing and future tax liabilities.00 in United States currency at the then prevailing exchange rate. Cebu. 4 ISSUES: 1. Atlas) entered into a Loan and Sales Contract with Mitsubishi Metal Corporation (Mitsubishi. as amended by Presidential Decree No.01 was withheld pursuant to Section 24 (b) (1) and Section 53 (b) (2) of the National Internal Revenue Code. Mitsubishi executed a waiver and disclaimer of its interest in the claim for tax credit in favor of Atlas. 3 On March 5.000. The corresponding 15% tax thereon in the amount of P1.000.595. one prestation was in consideration of the other. From the categorical language used in the document. 1970 in the sum of ¥4. for brevity).966.79 for the years 1974 and 1975. Atlas Consolidated Mining and Development Corporation (hereinafter. HELD: The loan and sales contract between Mitsubishi and Atlas does not contain any direct or inferential reference to Eximbank whatsoever. FACTS: The records reflect that on April 17. Parenthetically. Atlas.143. 1981. for purposes of the projected expansion of the productive capacity of the former's mines in Toledo.000.000.
" 14 It is too settled a rule in this jurisdiction. WHEREFORE. especially in the case of Eximbank which. which onus petitioners have failed to discharge. are hereby REVERSED and SET ASIDE. vs. or more than a month after the contract between Mitsubishi and Atlas was entered into on April 17. a standard banking practice for evaluating the prospects of due repayment. while Mitsubishis contract with Atlas merely states that the "interest on the amount of the loan shall be the actual cost beginning from and including other dates of releases against loan. respectively. It should also be noted that Eximbank's loan to Mitsubishi imposes interest at the rate of 75% per annum. 1970. not to be distorted by other considerations aliunde.: chanrobles virtual law library The issue posed in this appeal is whether domestic and resident foreign life insurance companies are entitled to return only 25 per cent of their income from dividends under the 1957 amendment of section 24 of the National Internal Revenue Code. dated April 18. The application for the loan was approved on May 20. aside from protecting its financial exposure. There is nothing wrong with such stipulation as the parties in a contract are free to agree on such lawful terms and conditions as they see fit. Respondents postulate that Mitsubishi had to be a conduit because Eximbank's charter prevents it from making loans except to Japanese individuals and corporations. We are not impressed. Respondents. the decisions of the Court of Tax Appeals in CTA Cases Nos. 1970. assuming the truth thereof. J. the pertinent provisions of which read as follows: . Limiting the disbursement of the amount borrowed to a certain person or to a certain purpose is not unusual. therefore. that laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. No. It is complete in itself. CASTRO. L-21258 October 31. The burden of proof rests upon the party claiming exemption to prove that it is in fact covered by the exemption so claimed. Mitsubishi agreed to use the amount as a loan to and in consideration for importing copper concentrates from Atlas. It is true that under the contract of loan with Eximbank. The allegation that the interest paid by Atlas was remitted in full by Mitsubishi to Eximbank. Manila EN BANC G. 1980 and January 15. Petitioner. is too tenuous and conjectural to support the proposition that Mitsubishi is a mere conduit.R. Furthermore. must see to it that the same are in line with the provisions and objectives of its charter. but all that this proves is the justification for the loan as represented by Mitsubishi. THE COURT OF TAX APPEALS and THE COMMISSIONER OF INTERNAL REVENUE. the remittance of the interest payments may also be logically viewed as an arrangement in paying Mitsubishi's obligation to Eximbank. 1981. does not appear to be suppletory or collateral to another contract and is. 2801 and 3015. Whatever arrangement was agreed upon by Eximbank and Mitsubishi as to the manner or procedure for the payment of the latter's obligation is their own concern. 1967 FILIPINAS LIFE ASSURANCE COMPANY.The contract between Eximbank and Mitsubishi is entirely different. Taxation is the rule and exemption is the exception. as to dispense with the need for citations.
dividends and rents from all sources whether from or within the Philippines. .(A) In general there shall be levied. or existing under the laws of the Philippines. on the total investment income received by such company during the preceding taxable year from interest. Rate of Tax on Corporations. . collected. collected and paid annually upon the total net income received in the preceding taxable year from all sources within the Philippines by every corporation organized. contending. collected and paid annually from every insurance company organized in or existing under the laws of the Philippines. assessed. but not including duly registered general copartnerships (companias colectivas). domestic life insurance companies and foreign life insurance companies doing business in the Philippines. . be subject to tax as any other foreign corporation. And provided. chanroblesvirtualawlibrary chanrobles virtual law library (B) Rate of Tax on Life Insurance Companies. On March 18. chanroblesvirtualawlibrary chanrobles virtual law library We agree with the petitioner. on the basis of the history of the proviso. on any investment income received by them from the Philippines. The petitioner appealed to this Court. 24. and chanrobles virtual law library Twenty-eight per centum upon the amount by which such total net income exceeds one hundred thousand pesos. a tax upon such income equal to the sum of the following: chanrobles v irtual law library Twenty per centum upon the amount by which such total net income does not exceed one hundred thousand pesos. it filed an income tax return for 1958 showing the following data: GROSS INCOME . authorized or existing under the laws of any foreign country: . the proviso regarding dividend exclusion is found in subsection (A) which treats of corporations in general. or foreign life insurance company authorized to carry on business in the Philippines. That in the case of dividends received by a domestic or resident foreign corporation from a domestic corporation liable to tax under this Chapter or from a domestic corporation engaged in a new and necessary industry. while they are treated in subsection (B). only twentyfive per centum thereof shall be returnable for purposes of the tax imposed by this section. a tax of six and one-half per centum upon such income: Provided. that the benefits of dividend exclusion are available to all domestic and resident foreign corporations regardless of the business in which they may be engaged. . and a like tax shall be levied. . 1959.Sec. assessed. and paid annually upon the total net income received in the preceding taxable year from all sources by every corporation organized in. chanroblesvirtualawlibrary chanrobles virtual law library The petitioner is a domestic life insurance company. That foreign life insurance companies not doing business in the Philippines shall. however. assessed. no matter how created or organized. but not including purely cooperative companies or associations as defined in section two hundred and fifty-five of this Code. as defined under Republic Act Numbered Nine hundred and one. The Court of Tax Appeals ruled that life insurance companies should report in full their income from dividends because. further. .There shall be levied. .
00 P657.36 10.00 P 3.00 P 5.202.378.186. however.44 15.44 10.47 P51. it filed an amended return.89 P 3.47 P10.317.00 Later.52 .55 P20.378.29 P62.44 57.From interest From dividends TOTAL GROSS INCOME TOTAL DEDUCTIONS Net income Tax assessable: Life Insurance Companies TOTAL TAX DUE P 5.186.317.186.974. as follows: GROSS INCOME From interest From dividends TOTAL GROSS INCOME TOTAL DEDUCTIONS Net income Tax assessable: Life Insurance Companies TOTAL TAX DUE P6126.96.36.199.
1 in its amended return it reported only 25 per cent. although possessed of considerable influence. From a one-paragraph section it has grown into a multi-paragraph one. CORPORATE INCOME TAX: A COMPARATIVE TABLE OF AMENDMENTS6 chanrobles virtual law library . the petitioner. domestic life insurance companies and foreign life insurance companies doing business in the Philippines. The proviso may apply to sections or portions thereof which follow it or even to the entire statute. which it now averred was the correct amount due from it.This was accompanied with a claim for the refund of P2.2 of the dividends from domestic corporations. Consequently. virtual law library chanroblesvirtualawlibrary chanrobles The following table shows the changes which section 24 has undergone at each of the eight different stages of its amendment. there is no clear legislative intention to apply it to the subse-clause or provision (Section 24[B]). G.55. cannot override intention.378. The Tax Court's ratio decidendi reads: As a general rule of statutory construction a proviso is deemed to apply only to the immediately preceding clause or provision. took the matter to the Court of Tax Appeals. with two members voting and another one reserving his vote. But a purely syntactical approach is hardly a safe guide to the meaning of a statute. after all. whereas in its original income tax return the petitioner reported in full its income from dividends amounting to P57. for instance. would be at a loss for words to describe section 24 of our Code. with lengthy sentences qualified at every turn by exceptions and provisos. The position of a proviso. vs. The readability expert.. is not necessarily controlling. August 13. Internal Revenue Code as a "nightmare" of a writing. we are of the opinion that the proviso relative to the returnability of only 25% of such dividends applies only to corporations organized in or existing under the laws of the Philippines .721 representing the difference between P3. as he had not been heard from. et al. (See Collector. Servando de los Angeles.105.5 who once complained of a provision of the U. . in the ascertainment of which the legislative history of a statute is extremely more important. we are constrained to interpret the proviso as affecting only the preceding clause or provision. .29. et al.4 chanrobles virtual law library A resort to legislative history should prove particularly helpful in the case of section 24 of the Code as this section has gone through a miscellany of amendments. while life insurance companies are dealt with in another subsection. which the petitioner had paid as income tax under its original return. and P657.R.S.3 Position. but not including duly registered copartnerships (companias colectivas). The difference is due to the fact that. with the result that its basic outlines are now only vaguely discernible. as in the case at bar. although of the same section. or P15. The Tax Court. L-9899. No. upheld the propriety of the action against the claim of the respondent that it was filed prematurely. 1957). chanroblesvir tualawlibrary chanrobles virtual law l ibrary The claim for refund was filed with the respondent Commissioner of Internal Revenue but. It however denied the claim of the petitioner for refund on the ground that the proviso allowing the return of only 25 per cent of the income from dividends is found in subsection (A) of section 24 of the National Internal Revenue Code. Where.242. to avoid prescription of its action.
collected. further.There shall be levied. 5 Laws & Res. the Philippines. That in the case of dividends received by a domestic or resident foreign corporation from a domestic corporation liable to tax under this Chapter. and paid annually upon the total net income received in the preceding taxable year from all sources within the Philippines by every corporation organized. AS AMENDED. 1 Laws & Res. Rate of tax on corporation. or existing under the laws of the Philippines. Provided. 24. and a like tax shall be levied. as amended. authorized. a tax of TWELVE per centum upon such income. 24. 24. or existing under the laws of. 1939: chanrobles virtual law library Sec. assessed. chanroblesvirtualawlibrary chanrobles virtual law library (2) As amended by Republic Act 82. assessed. and paid annually upon the total net income received in the preceding taxable year from all sources by every corporation organized in. however. only twenty-five per centum thereof shall be returnable for purposes of the tax imposed by this section. and paid annually upon the total net income received in the preceding taxable year from all sources by every corporation organized in.(1) As originally enacted on June 15. assessed. and a like tax shall be levied. assessed. however. assessed. and paid annually upon the total net income received in the preceding taxable year from all sources within the Philippines by every corporation organized. collected. and a like tax shall be levied.There shall be levied. That in the case of dividends received by a domestic or resident foreign . but not including duly registered general copartnerships (compañias colectivas). but not including duly registered general copartnerships (compañias colectivas). authorized. or existing under the laws of any foreign country: Provided. and paid annually upon the total net income received in the preceding taxable year from all sources within the Philippines by every corporation organized. . but not including duly registered general copartnerships (compañias colectivas). That in the case of dividends received by a domestic or resident foreign corporation from a domestic corporation liable to tax under this Chapter. FURTHER. Rate of tax on corporations. and paid annually upon the total net income received in the preceding taxable year from all sources by every corporation organized in. no matter how created or organized. a tax of eight per centum upon such income. shall pay a tax of NINE per centum on their total net income: And provided. assessed. collected. however. . . (3) As amended by Republic Act 590. or existing under the laws of any foreign country.There shall be levied. no matter how created or organized. collected. no matter how created or organized. or existing under the laws of any foreign country: Provided. 250 (1946): Sec. collected. only twenty-five per centum thereof shall be returnable for purposes of the tax imposed by this section. collected. SHALL PAY A TAX OF SIX PER CENTUM ON THEIR TOTAL NET INCOME: AND PROVIDED. Rate of tax on corporations. THAT BUILDING AND LOAN ASSOCIATIONS OPERATING AS SUCH IN ACCORDANCE WITH SECTIONS ONE HUNDRED SEVENTY-ONE TO ONE HUNDRED NINETY OF THE CORPORATION LAW. authorized. a tax [of] SIXTEEN per centum upon such income. That Building and Loan Associations operating as such in accordance with sections one hundred and seventy-one to one hundred and ninety of the Corporation Law. 687 (1950): Sec. or existing under the laws of the Philippines.
no matter how created or organized. authorized or existing under the laws of any foreign country: Provided. shall pay a tax of TWELVE per centum AND TEN PER CENTUM. 27 (1951): Sec.There shall be levied. 275 (1954): Sec. That Building and Loan Associations operating as such in accordance with sections one hundred and seventy-one to one hundred and ninety of the Corporation Law. but not including duly registered general copartnerships (compañias colectivas). 6 Laws & Res. That in the case of dividends received by a domestic or resident foreign corporation from a domestic corporation liable to tax under this Chapter. further. AS WELL AS PRIVATE EDUCATIONAL INSTITUTIONS. assessed. Rate of tax on corporations. 9 Laws & Res. 24. assessed. on their total net income: And provided. collected. only twenty-five per centum thereof shall be returnable for purposes of the tax imposed by this section.corporation from a domestic corporation liable to tax under this Chapter. 24. collected. or existing under the laws of the Philippines. AND chanrobles virtual law library TWENTY-EIGHT PER CENTUM UPON THE AMOUNT BY WHICH SUCH TOTAL NET INCOME EXCEEDS ONE HUNDRED THOUSAND PESOS. RESPECTIVELY. assessed.There shall be levied. and a like tax shall be levied. authorized.7 . That Building and Loan Associations operating as such in accordance with sections one hundred and seventy-one to one hundred and ninety . (5) As amended by Republic Act 1148. a tax upon such income equal to the sum of the following: chanrobles vir tual law library Twenty per centum upon the amount by which such total net income does not exceed one hundred thousand pesos. collected. but not including duly registered general copartnerships (compañias colectivas). or existing under the laws of any foreign country: Provided. or existing under the laws of the Philippines. however. and chanrobles virtual law library Twenty-eight per centum upon the amount by which such total net income exceeds one hundred thousand pesos. and paid annually upon the total net income received in the preceding taxable year from all sources within the Philippines by every corporation organized. and paid annually upon the total net income received in the preceding taxable year from all sources within the Philippines by every corporation organized. assessed. a tax UPON SUCH INCOME EQUAL TO THE SUM OF THE FOLLOWING: chanrobles v irtual law library TWENTY PER CENTUM UPON THE AMOUNT BY WHICH SUCH TOTAL NET INCOME DOES NOT EXCEED ONE HUNDRED THOUSAND PESOS. and paid annually upon the total net income received in the preceding taxable year from all sources by every corporation organized in. and a like tax shall be levied. . collected. Rate of tax on corporations. no matter how created or organized. (4) As amended by Republic Act 600. and paid annually upon the total net income received in the preceding taxable year from all sources by every corporation organized in. only twenty-five per centum thereof shall be returnable for purposes of the tax imposed by this section.
further. . [assessed.] collected.(A)8 IN GENERAL there shall be levied. [assessed. That Building and Loan Associations operating as such in accordance with sections one hundred and seventy-one to one hundred and ninety of the Corporation Law. only twenty-five per centum thereof shall be returnable for purposes of the tax imposed by this section. no matter how created or organized. DOMESTIC LIFE INSURANCE COMPANIES AND FOREIGN LIFE INSURANCE COMPANIES DOING BUSINESS IN THE PHILIPPINES.of the Corporation Law.] collected and paid annually upon the total net income received in the preceding taxable year from all sources within the Philippines by every corporation organized. respectively. 354 (1957): Sec. shall pay a tax of twelve per centum and ten per centum respectively. and paid annually upon the total net income received in the preceding taxable year from all sources by every corporation organized in. OR FOREIGN LIFE INSURANCE COMPANY AUTHORIZED TO CARRY ON BUSINESS IN THE PHILIPPINES. shall pay a tax of twelve per centum and ten per centum. That in the case of dividends received by a domestic or resident foreign corporation from a domestic corporation liable to tax under this Chapter or FROM A DOMESTIC CORPORARION ENGAGED IN NEW AND NECESSARY INDUSTRY AS DEFINED UNDER REPUBLIC ACT NUMBERED NINE HUNDRED AND ONE. 12 Laws & Res. and chanrobles virtual law library Twenty-eight per centum upon the amount by which such total net income exceeds one hundred thousand pesos. 24. as well as private educational institutions. only twenty-five per centum thereof shall be returnable for purposes of the tax imposed by this section.9 chanrobles virtual law library (B) RATE OF TAX ON LIFE INSURANCE COMPANIES.THERE SHALL BE LEVIED. or existing under the laws of the Philippines. ON THE TOTAL INVESTMENT INCOME RECEIVED BY SUCH COMPANY DURING THE PRECEDING TAXABLE YEAR FROM INTEREST. DIVIDENDS AND RENTS . further. authorized or existing under the laws of any foreign country: Provided. BUT NOT INCLUDING PURELY COOPERATIVE COMPANIES OR ASSOCIATIONS AS DEFINED IN SECTION TWO HUNDRED FIFTY-FIVE OF THIS CODE. ASSESSED. however. but not including duly registered general copartnerships (compañias colectivas). as amended. on their total net income: And provided. as well as private educational institutions. as defined under Republic Act Numbered Nine hundred and one. COLLECTED AND PAID ANNUALLY FROM EVERY INSURANCE COMPANY ORGANIZED IN OR EXISTING UNDER THE LAWS OF THE PHILIPPINES. on their total net income: And provided. (6) As amended by Republic Act 1855. That in the case of dividends received by a domestic or resident foreign corporation from a domestic corporation liable to tax under this Chapter or from a domestic corporation engaged in a new and necessary industry. as amended. . a tax upon such income equal to the sum of the following: chanrobles v irtual law library Twenty per centum upon the amount by which such total net income does not exceed one hundred thousand pesos. Rate of tax on Corporations. and a like tax shall be levied.
14 Laws & Res. or existing under the laws of the Philippines. BE SUBJECT TO TAX AS ANY OTHER FOREIGN CORPORATION. as well as private educational institutions. collected. INTEREST PAID WITHIN THE TAXABLE YEAR ON ITS INDEBTEDNESS. . or existing under the laws of any foreign country: Provided.(a) TAX ON DOMESTIC CORPORATIONS. ON ANY INVESTMENT INCOME RECEIVED BY THEM FROM THE PHILIPPINES. a tax upon such income equal to the sum of the following: chanrobles v irtual law library TWENTY-TWO per centum upon the amount by which such total net income does not exceed one hundred thousand pesos. A TAX OF SIX AND ONE-HALF PER CENTUM UPON SUCH INCOME: PROVIDED. HOWEVER.In general there shall be levied. authorized. Rate of tax on corporations. shall pay . Sec. and a like tax shall be levied. EXCEPT ON INDEBTEDNESS INCURRED TO PURCHASE OR CARRY OBLIGATION THE INTEREST UPON WHICH IS WHOLLY EXEMPT FROM TAXATION UNDER EXISTING LAWS. as amended. and chanrobles vir tual law library THIRTY per centum upon the amount by which such total net income exceeds one hundred thousand pesos. collected. DIVIDENDS. however. no matter how created or organized. . That building and loan associations operating as such in accordance with sections one hundred and seventy-one to one hundred and ninety of the Corporation law. AND SUCH INVESTMENT EXPENSES PAID DURING THE TAXABLE YEAR AS ARE ORDINARY AND NECESSARY IN THE CONDUCT OF THE INVESTMENTS: AND THE TOTAL NET INVESTMENT INCOME OF FOREIGN LIFE INSURANCE COMPANIES DOING BUSINESS IN THE PHILIPPINES IS THAT PORTION OF THEIR CROSS WORLD INVESTMENT INCOME WHICH BEARS THE SAME RATIO TO SUCH EXPENSES AS THEIR TOTAL PHILIPPINE RESERVE BEARS TO THEIR TOTAL WORLD RESERVE LESS THAT PORTION OF THEIR TOTAL WORLD INVESTMENT EXPENSES WHICH BEARS THE SAME RATIO TO SUCH EXPENSES AS THEIR TOTAL PHILIPPINE INVESTMENT INCOME BEARS TO THEIR TOTAL WORLD INVESTMENT INCOME. THAT FOREIGN LIFE INSURANCE COMPANIES NOT DOING BUSINESS IN THE PHILIPPINES SHALL.FROM ALL SOURCES WHETHER FROM OR WITHOUT THE PHILIPPINES. and paid annually upon the total net income received in the preceding taxable year from all sources by every corporation organized in. (7) As amended by Republic Act 2343. chanroblesvirtualawlibrary chanrobles virtual law library THE TOTAL NET INVESTMENT INCOME OF DOMESTIC LIFE INSURANCE COMPANIES IS THE GROSS INVESTMENT INCOME RECEIVED DURING THE TAXABLE YEAR FROM RENTS. AND INTEREST LESS DEDUCTIONS FOR REAL ESTATE EXPENSES. but not including duly registered general copartnerships (compañias colectivas). 24. and paid annually upon the total net income received in the preceding taxable year from all sources within the Philippines by every corporation organized. 423 (1959). domestic life insurance companies and foreign life insurance companies doing business in the Philippines. DEPRECIATION.
ANNUITIES. FROM ALL SOURCES WITHIN THE PHILIPPINES. .There shall be levied. interest paid within the taxable year on its indebtedness. and interest less deductions for real estate expenses. dividends. and the total net investment income of foreign life insurance companies doing business in the Philippines is that portion of their gross world investment income which bears the same ratio to such income as their total Philippine reserve bears to their total world reserve less that portion of their total world investment expenses which bear the same ratio to such expenses as their total Philippine investment income bears to their total world investment income.10 collected and paid annually from every life insurance company organized in or existing under the laws of the Philippines. assessed. or foreign life insurance company authorized to carry on business in the Philippines but not including purely cooperative companies or associations as defined in section two hundred fifty-five of this Code. EMOLUMENTS. depreciation.A FOREIGN CORPORATION ENGAGED IN TRADE OR BUSINESS WITHIN THE PHILIPPINES (EXCEPT FOREIGN LIFE INSURANCE COMPANIES) SHALL BE TAXABLE AS PROVIDED IN SECTION (a) OF THIS SECTION. dividends. A TAX EQUAL TO THIRTY PER CENTUM OF SUCH AMOUNT.a tax of twelve per centum and ten per centum. WAGES. be subject to tax as any other foreign corporation. chanroblesvirtualawlibrary chanrobles virtual law library (2) RESIDENT CORPORATIONS. That in the case of dividends received by a domestic or resident foreign corporation from a domestic corporation liable to tax under this Chapter or from a domestic corporation engaged in a new and necessary industry. except on indebtedness incurred to purchase or carry obligation the interest upon which is wholly exempt from taxation under existing laws. PREMIUMS. only twenty-five per centum thereof. COMPENSATIONS. and rents from all sources. a tax of six and one-half per centum upon such income: Provided. UPON THE AMOUNT RECEIVED BY EVERY FOREIGN CORPORATION NOT ENGAGED IN TRADE OR BUSINESS WITHIN THE PHILIPPINES. RENTS. IN LIEU OF THE TAX IMPOSED BY THE PRECEDING PARAGRAPH. REMUNERATIONS. chanroblesvirtualawlibrary chanrobles virtual law library (b) TAX ON FOREIGN CORPORATIONS. AND INCOME. whether from or without the Philippines. That foreign life insurance companies not doing business in the Philippines shall. respectively. on any investment income received by them from the Philippines. AS INTEREST. OTHER FIXED OR DETERMINABLE ANNUAL OR PERIODICAL GAINS. OR. . DIVIDENDS. and such investment expenses paid during the taxable year as are ordinary and necessary in the conduct of the investments. as defined under Republic Act Numbered Nine hundred and one. on their total net income: And provided. chanroblesv irtualawlibrary chanrobles virtual la w library The total net investment income of domestic life insurance companies is the gross investment income received during the taxable year from rents. THERE SHALL BE LEVIED. COLLECTED AND PAID FOR EACH TAXABLE YEAR. chanrobles virtualawlibrary chanrobles virtual law library (c) Rate of tax on life insurance companies. SALARIES. . however. . on the total investment income received by such company during the preceding taxable year from interest. PROFITS. further. shall be returnable for purposes of the tax imposed by this section.(1) NON-RESIDENT CORPORATIONS.
or existing under the laws of the Philippines. annuities. and income. assessed. chanroblesvirtualawlibrary chanrobles virtual law library (b) Tax on foreign corporations. compensating. on their total net income: And provided. or existing under the laws of any foreign country: Provided. authorized. a tax equal to thirty per centum of such amount: PROVIDED.There shall be levied. profits. rents. as interest. or foreign life insurance company authorized to carry on business in the Philippines but not including purely cooperative companies or associations as defined in section two hundred fifty-five of this Code. That in the case of dividends received by a domestic or resident foreign corporation from a domestic corporation liable to tax under this Charter or from a domestic corporation engaged in a new and necessary industry. as defined under Republic Act Numbered Nine hundred and one. . emoluments. as well as private educational institutions. wages.A foreign corporation engaged in trade or business within the Philippines (except foreign life insurance companies) shall be taxable as provided in subsection (a) of this section. as amended. . and paid annually upon the total net income received in the preceding taxable year from all sources within the Philippines by every corporation organized. There shall be levied. 24. further. dividends.(1) Non-resident corporations.11 collected and paid annually from every life insurance company organized or existing under the laws of the Philippines. only twenty-five per centum thereof shall be returnable for purposes of the tax imposed by this section. remunerations. dividends. domestic life insurance companies and foreign life insurance companies doing business in the Philippines. chanroblesvirtualawlibrary chanrobles virtual law library (2) Resident corporations. upon the amount received by every foreign corporation not engaged in trade or business within the Philippines from all sources within the Philippines. and paid for each taxable year. . Rate of tax on corporations. no matter how created or organized.In general there shall be levied. however. 60 O. 780 (1963): Sec. on the total investment income received by such company during the preceding taxable year from interest. .(a) Tax on domestic corporations. HOWEVER. and . a tax upon such income equal to the sum of the following: chanrobles v irtual law library Twenty-two per centum upon the amount by which such total net income does not exceed one hundred thousand pesos.(8) As amended by Republic Act 3825. That building and loan associations operating as such in accordance with sections one hundred and seventy-one to one hundred and ninety of the Corporation Law. salaries. but not including duly registered general copartnerships (compañias colectivas).G. and paid annually upon the total net income received in the preceding taxable year from all sources by every corporation organized in. premiums. collected. . and chanrobles virtual law library Thirty per centum upon the amount by which such total net income exceeds one hundred thousand pesos. and a like tax shall be levied. chanroblesvirtualawlibrary chanrobles virtual law library (c) Rate of tax on life insurance companies. collected. or other fixed or determinable annual or periodical gains. in lieu of the tax imposed by the preceding paragraph. THAT PREMIUMS SHALL NOT INCLUDE REINSURANCE PREMIUMS. shall pay a tax of twelve per centum and ten per centum respectively. collected.
but not including duly registered general copartnership (compañias colectivas). 24. dividends. however. but subject to tax as any other foreign corporation. no matter how created or organized.rents from all sources.G. shall pay a tax of twelve per centum and ten per centum. or existing under the laws of the Philippines. as well as private educational institutions. further. . and a like tax shall be levied. . 60 O. Rate of tax on corporations. collected. and paid annually upon the total net income received in the preceding taxable year from all sources by every corporation organized in. provided.12 only twenty-five per centum thereof shall be returnable for purposes of the tax imposed by this section. on any investment income received by them from the Philippines. and the total net investment income of foreign life insurance companies doing business in the Philippines is that portion of their gross world investment income which bears the same ratio to such income as their total Philippine reserve bears to their total world reserve less that portion of their total world investment expenses which bear the same ratio to such expenses as their total Philippine investment income bears to their total world investment income.In general there shall be levied. interest paid within the taxable year on its indebtedness. domestic life insurance companies and foreign life insurance compaties doing business in the Philippines. (9) As amended by Republic Act 3841. and such investment expenses paid during the taxable year as are ordinary and necessary in the conduct of the investments. as amended. whether from or without the Philippines. on their total net income: And. That building and loan associations operating as such in accordance with sections one hundred and seventy-one to one hundred and ninety of the Corporation Law. and interest less deductions for real estate expenses. a tax of six and one-half per centum upon such income: Provided. chanroblesvirtualawlibrary chanrobles virtual law library . 1095 (1963): Sec. That in the case of dividends received by a domestic or resident foreign corporation from domestic corporation liable to tax under this Chapter or from a domestic corporation engaged in a new and necessary industry. and paid annually upon the total net income received in the preceding taxable year from all sources within the Philippines by every corporation organized. as defined under Republic Act Numbered Nine hundred and one. however. authorized or existing under the laws of any foreign country: Provided. depreciation. except on indebtedness incurred to purchase or carry obligation the interest upon which is wholly exempt from taxation under existing laws. and chanrobles virtual law library Thirty per centum upon the amount by which such total net income exceeds one hundred thousand pesos. respectively. That foreign life insurance companies not doing business in the Philippines shall. collected. a tax upon such income equal to the sum of the following: chanrobles v irtual law library Twenty-two per centum upon the amount by which such total net income does not exceed one hundred thousand pesos. chanroblesv irtualawlibrary chanrobles virtual la w library The total net investment income of domestic life insurance companies is the gross investment income received during the taxable year from rents.(a) Tax on domestic corporations.
chanroblesv irtualawlibrary chanrobles virtual la w library The total net investment income of domestic life insurance companies is the gross investment income received during the taxable year from rents. remunerations. at the corporation-shareholder level when they are received as dividend. Since a corporation cannot deduct from its gross income the amount of dividends distributed to its corporation-shareholders during the taxable year. or foreign life insurance company authorized to carry on business in the Philippines but not including purely cooperative companies or associations as defined in section two hundred fifty-five of this Code. any distributed earnings are necessarily taxed twice. compensatinig. That premiums shall not include reinsurance premiums.A foreign corporation engaged in trade or business within the Philippines (except foreign life insurance companies) shall be taxable as provided in subsection (a) of this section. chanroblesvirtualawlibrary chanrobles virtual law library (c) Rate of tax on life insurance companies. . emoluments. dividends. in lieu of the tax imposed by the preceding paragraph. on any investment income received by them from the Philippines. collected and paid for each taxable year. It is a device for reducing extra or double taxation of distributed earnings.(1) Non-resident corporations. from all sources within the Philippines as interest. a tax of six and one-half per centum upon such income: Provided. At the same time the decision to tax a part (e. rents.There shall be levied. That foreign life insurance companies not doing business in the Philippines shall. upon the amount received by every foreign corporation not engaged in trade or business within the Philippines. be subject to tax as any other foreign corporation. and rents from all sources whether from or without the Philippines. and interest less deductions for real estate expenses. AND CAPITAL GAINS. depreciation. however. and again. or other fixed or determinable annual or periodical OR CASUAL gains. 25 per cent of such . except on indebtedness incurred to purchase or carry obligation the interest upon which is wholly exempt from taxation under existing laws.g. initially at the corporate level when they are included in the corporation's taxable income. salaries. however.(b) Tax on foreign corporations. profits and income.There shall be levied. It will thus be seen that dividend exclusion has always been a dominant feature of corporate income tax. Thus. a tax equal to thirty per centum of such amount: Provided. and the total net investment income of foreign life insurance companies doing business in the Philippines is that portion of their gross world investment income which bears the same ratio to such income as their total Philippine reserve bears to their total world reserve less that portion of their total world investment expenses which bear the same ratio to such expenses as their total Philippine investment income bears to their total world investment income. and such investment expenses paid during the taxable year as are ordinary and necessary in the conduct of the investments.. on the total investment income received by such company during the preceding taxable year from interest. wages. premiums. . annuities. paid within the taxable year on its indebtedness. collected and paid annually from every life insurance company organized in or existing under the laws of the Philippines. . dividends. assessed. without exclusion the successive taxation of the dividend as it passes from corporation to corporation would result in repeated taxation of the same income and would leave very little for the ultimate individual shareholder. . interest. dividends.13 chanrobles virtual law library (2) Resident corporations.
" was added. for income tax purposes. a large portion of which goes directly to reserve funds required by law for the payment of their claims for death benefits.16 virtual law library chanrobles Besides. to change the tax base from premium income to investment income and. that the inclusion of premium receipts in the gross taxable income of life insurance companies was unsound because premium receipts do not constitute income in the sense of gain or profit. to lower the tax on life insurance companies. dividends and rents. Therefore."19 chanrobles virtual law library . second. To be sure. It became generally recognized. The question arose when. To require their inclusion in gross income for purposes of section 24 is to subject them to double taxation. to include premium. the 1957 amendment was intended for a two-fold purpose: first. although.15 the proviso continues to speak of "the tax imposed by this section" (not sub-section). The result is that the proviso on dividend exclusion now appears to qualify only a part of section 24. as noted in passing. with slight modifications. They are really savings deposits of the individual policyholders. to tax an insurance company on account of these "deposits" or "savings" is actually to tax the policyholder for being provident.14 chanrobles virtual law library Until 1957 there had been no question that the proviso on dividend exclusion applied to all domestic and resident foreign life insurance companies. receipts in gross income. were made sub-section (A) while a new sub-section (B). making it doubtful whether after 1957 the income from dividends of domestic and resident foreign life insurance companies still enjoys exemption. entitled "Rate of Tax on Life Insurance Companies. the premiums which a life insurance company receives are already subject to a tax of 3 per cent under section 255 of the Code.17 chanrobles virtual law library The rate of tax was lowered in recognition of the fact that a life insurance company derives profit from its investment income only to the extent that such income exceeds the rate of interest at which the reserve must be maintained. which prompted the amendment of section 24 in 1957 shows no intention to withdraw from life insurance companies the exemption which theretofore had been enjoyed by them along with non-life insurance companies. What constitutes true income for a life insurance company is rather its investment income from interest. life insurance companies were required. cash surrender values and maturity values. chanroblesvirtualawlibrary chanrobles virtual law library Prior to 1957. chanroblesvirtualawlibrary chanrobles virtual law library However.dividends reflects the policy of discouraging complicated corporate structures as well as corporate divisions in the form of parent-subsidiary arrangements adopted to achieve a lower effective corporate income tax rate. And the rate is lower than in ordinary companies because it is six and one half per cent.18 chanrobles virtual law library In sum. by virtue of Republic Act 1855 (1957). a review of the circumstances. however. the original provisions of section 24. "It is a bill which places [life] insurance companies in the same class as other companies. in order to encourage their growth as well as their investment in the development of the national economy. as the then Congressman Ferdinand Marcos described the bill which became Republic Act 1855.
000 the tax on which would be P5. chanrobles virtual law library chanroblesvirtualawlibrary The truth is that section 24 has undergone amendments through a process which. And yet this is just the implication of the interpretation urged on us by the respondents.500 (6-1/2%).If the purpose of the 1957 amendment was to place life insurance companies at par with other companies by taking them on their true income. a domestic life insurance company. Consequently. It seems rather clear that these discriminatory and lopsided results could not have been intended by Congress. or P25. chanrobles virtual law library chanrob lesvirtualawlibrary Nor could it have been the intention of the legislature to discriminate against domestic life insurance companies in favor of resident foreign corporations engaged in other business. indeed. In contrast.20 is no more intellectual than the use of paste pot and scissors. registered general copartnerships are excepted from the coverage of section 24 because they are not subject to tax as an entity. entitled "Rate of Tax on Life Insurance Companies" which was added. then the legislature could not have intended to withdraw from them a privilege which they had then been enjoying in common with non-life insurance companies. that on domestic and resident foreign life insurance companies has remained at 6-1/2 per cent . despite the fact that the rate of tax on it is much lower. Thus. Section 24 was amended twice but in the process more errors were committed. Again.500 more. but also to impose on them a tax burden heavier than that imposed on resident foreign companies not engaged in life insurance. Indeed. Thus.000 from dividends would be required to return only 25 per cent of it. the same word has remained in sub-section (c) even to this date. a resident foreign corporation with an income of P100. to require life insurance companies to report in full their income from dividends would be not only to treat them differently from other companies. within the same year.the lowest among those imposed on various types of corporations. Thus while the word "assessed" was deleted from sub-section (a) in consequence of the adoption of the "pay-as-you-file" system. in Cardozo's phrase. For while Republic Act 3841 was passed ostensibly to add certain words overlooked in the amendment of the section by Republic Act 3825. chanroblesvirtualawlibrary chanrobles virtual law library The reference to domestic and resident foreign life insurance companies in the excepting clause of sub-section (a) is even more awkward because the exception relates to the coverage of the entire section 24 and not simply to a sub-section thereof. 1963. sub-section (A) thereof did not have a title. the proviso on reinsurance premium (which was the reason for the enactment of Republic Act 3825) was inadvertently omitted in the text of section 24 (b) (1). chanroblesvirtualawlibrary chanrobles virtual law library That Congress intended to accord preferential tax treatment to domestic and resident foreign life insurance companies is abundantly clear not only from the history of the 1957 amendment but also from the Comparative Table (supra) which shows that while the rate of tax on corporations in general has been raised. after the amendment of section 24 in 1957. contrary to the first aim of the amendment. required to report all its income from dividends. following the interpretation of the respondents. by no rule of logic can the decision to exclude premium receipts from gross income be considered a decision to include all of dividend income in gross income. would have to pay a tax of P6. It took another amendment in 1959 to correct the deficiency.000 (20% under Republic Act 1855). reliance cannot be placed on its grammatical construction in order to arrive at its meaning. By express provision of section 26 of the Code persons doing business as a general copartnership duly registered in the mercantile registry are subject to income tax "only in their individual . As the Comparative Table shows. or P1. only to commit another error. For. compared to sub-section (B).
Sanchez. petitioner. is the sole shareholder or stockholder of PMC .L." On the other hand.B. U. concur.A.832. by including domestic and resident foreign life insurance companies in the excepting clause it was never the intention to exempt them from the payment of corporate income tax. Bengzon. J.. respondents." On the other hand.21 chanrobles virtual law library Thus. Reyes. Procter and Gamble Philippine Manufacturing Corporation (hereinafter referred to as PMC-Phil. Angeles and Fernando. Bureau of Internal Revenue. we hold that domestic and resident foreign life insurance companies are entitled to the benefits of dividend exclusion. Dizon. life insurance companies are deemed "corporations" for purposes of the Code.P. J. Procter and Gamble Philippine Manufacturing Corporation to be entitled to the sought refund or tax credit in the amount of P4. As such PMC-U. 2883 entitled "Procter and Gamble Philippine Manufacturing Corporation vs. and the respondent Commissioner of Internal Revenue is ordered to refund to the petitioner company the amount of P2. Zaldivar.capacity. 1984 in CTA Case No. herein referred to as PMCUSA). a non-resident foreign corporation in the Philippines. vs. chanroblesvirtualawlibrary chanrobles virtual law library Concepcion.. The antecedent facts that precipitated the instant petition are as follows: Private respondent. the position of the proviso allowing it notwithstanding.makes reliance on its grammatical construction highly unsafe and unsound in arriving at its meaning. not engaged in trade and business therein. chanroblesvirtualawlibrary chanrobles virtual law library ACCORDINGLY." which declared petitioner therein. is engaged in business in the Philippines and is a wholly owned subsidiary of Procter and Gamble. a corporation duly organized and existing under and by virtue of the Philippine laws. the haphazard amendment of section 24 by several legislative acts .. J.00 representing the alleged overpaid withholding tax at source and ordering payment thereof.S.A. Furthermore.: This is a petition for review on certiorari filed by the herein petitioner.). C. the decision appealed from is reversed. Commissioner of Internal Revenue. No pronouncement as to costs. seeking the reversal of the decision of the Court of Tax Appeals dated January 31.22 Since nothing in the history of the 1957 amendment or in the rationale of dividend exclusion indicates the contrary. the exclusion of registered general copartnerships from the coverage of section 24 is justified because by statutory definition they are not anyway considered "corporations. Makalintal. PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION & THE COURT OF TAX APPEALS.J.as a result of which the proviso on dividend exclusion is now found in sub-section (a) .S. JJ. COMMISSIONER OF INTERNAL REVENUE. which is the subject of section 24 as a whole.989..721 as excess income tax for 1958. PARAS.
00 as provided for under Section 24(a) of the Philippine Tax Code.A. For the taxable year ending June 30.197. in the form of dividends. — a) Tax on domestic corporations. (Rollo.460.216..765. or geting under the laws of the Philippines. emoluments or other fixed or determinable. as PMC-U. and capital gains: Provided. in accordance with the following: Twenty-five per cent upon the amount by which the taxable net income does not exceed one hundred thousand pesos. Out of said amount it declared a dividend in favor of its sole corporate stockholder and parent corporation PMC-U.S. annuities.00 and accordingly paid the corresponding income tax thereon equivalent to P25%-35% or P19. After taxation its net profit was P36. but not including general professional partnerships. realized a taxable net income of P56. — A tax is hereby imposed upon the taxable net income received during each taxable year from all sources by every corporation organized in. wages.500. — 41) Non-resident corporation. 24. 122-123). as interest (except interest on foreign loans which shall be subject to 15% tax). compensations. profits. or distributors. PMC-Phil has a legal personality separate and distinct from PMCU. including a foreign life insurance company not engaged in the life insurance business in the Philippines.611.735. owns wholly or by 100% the voting stock of PMC Phil. and is entitled to receive income from PMC-Phil. That cinematograpy film owners. premiums.S.332. annual. which shall be collected and paid as provided in Section 53(d) of this Code. That premiums shall not include re-insurance premium Provided. The first paragraph of subsection (b) of Section 24 of the National Bureau Internal Revenue Code. as amended. Rates of tax on corporation.Phil. salaries.S. taxes deemed to have been paid in the Philippines equivalent to 20% which represents the difference between the regular . shall pay a tax of 15% on their gross income from sources within the Philippines: Provided. the tax shall be 15% of the dividends received. further. no matter how created or organized.00. rents.23 as provided for in Section 24(b) of the Philippine Tax Code which reads in full: SECTION 1. 1974 PMC-Phil. and Thirty-five per cent upon the amount by which the taxable net income exceeds one hundred thousand pesos. still further That on dividends received from a domestic corporation hable to tax under this Chapter. subject to the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from the non-resident foreign corporation.707. royalties. lessors. — A foreign corporation not engaged in trade or business in the Philippines.A. pp. dividends. shall pay a tax equal to 35% of the gross income received during its taxable year from all sources within the Philippines. the pertinent portion of which reads: SEC. in the total sum of P17. In addition. and income. and partnerships. remunerations for technical services or otherwise.A. however. if not rents or royalties.00 which latter amount was subjected to Philippine taxation of 35% or P6.116. is hereby further amended to read as follows: (b) Tax on foreign corporations. periodical or casual gains.
485 P24.832. subsidiaries or branches in the Asia-Pacific Region shall not be subject to tax. 1977 it filed with herein respondent court a petition for review docketed as CTA No.485. 41) On the other hand therein respondent.S.624. As in the 2nd quarter of 1975. or to issue tax credit in its favor in lieu of tax refund. the dispositive portion of the same reading as follows: .A. communications and coordinating centers for their affiliates.735. 63) ruled in favor of the herein petitioner.00. PMC-Phil.457. (Rollo. prayed for the dismissal of said Petition and for the denial of the claim for refund.291. p. Tax withheld at source at 35% P17.497 P4.541." computed as follows: Dividend Income PMCU. (Rollo..A.622 P3. 48) On January 31.46 0 6.tax (35%) on corporations and the tax (15%) on dividends as provided in this section: Provided. invoking the tax-sparing credit provision in Section 24(b) as aforequoted. p.164. as the withholding agent of the Philippine government. Commissioner of qqqInterlaal Revenue. 2883 entitled "Procter and Gamble Philippine Manufacturing Corporation vs. filed a claim with the herein petitioner. p.94 6 P6.966.989. The Commissioner of Internal Revenue.125.00.707.457.98 9 There being no immediate action by the BIR on PMC-Phils' letter-claim the latter sought the intervention of the CTA when on July 13. with respect to the dividend taxes paid by PMC-U.832.159. realized a taxable net income of P8. arising allegedly from the alleged "overpaid withholding tax at source or overpaid withholding tax in the amount of P4. again declared a dividend in favor of PMC-U.11 9 968. for the refund of the 20 percentage-point portion of the 35 percentage-point whole tax paid.196. at the tax rate of 35% or P6.S. Commissioner of Internal Revenue.782. finally That regional or area headquarters established in the Philippines by multinational corporations and which headquarters do not earn or derive income from the Philippines and which act as supervisory. thereafter leaving a net profit of P5. 1974 the Court of Tax Appeals in its decision (Rollo. For the taxable year ending June 30.119 P8.457.952.260.. in his answer.73 1 15% tax under tax sparing proviso P2.A. 1977 PMC-Phil.832.00.94 1 Alleged of over payment P3.00 which was subjected to Philippine taxation at the rate of 25%-35% or P2.S.656.989. 1975 PMC-Phil." praying that it be declared entitled to the refund or tax credit claimed and ordering respondent therein to refund to it the amount of P4.61 1 2.00.49 2 1. In July.00.
(Rollo. From this issue two questions are posed by the petitioner Commissioner of Internal Revenue. 96).00 TO PROCTER & GAMBLE. FEDERAL TAXES TO A UNITED STATES FOREIGN TAX CREDIT EQUIVALENT TO AT LEAST THE 20 PERCENTAGE-POINT PORTION (OF THE 35 PERCENT DIVIDEND TAX) SPARED OR WAIVED OR OTHERWISE CONSIDERED OR DEEMED PAID BY THE PHILIPPINE GOVERNMENT. The Second Division of the Court without giving due course to said petition resolved to require the respondents to comment (Rollo. p. petitioner is entitled to the sought refund or tax credit of the amount representing the overpaid withholding tax at source and the payment therefor by the respondent hereby ordered.946. 1984 resolved to give due course to the petition and to consider respondents' comulent on the petition as Answer. No costs. Petitioner filed his brief on May 13.164. THAT PMC-USA. is the proper party to claim the . USA (PMC-USA FOR SHORT). Petitioner raised the following assignments of errors: I THE COURT OF TAX APPEALS ERRED IN HOLDING WITHOUT ANY BASIS IN FACT AND IN LAW. 1985 (Rollo.S. SO ORDERED. UPON REMITTANCE OF DIVIDEND INCOME IN THE TOTAL SUM OF P24. IS ENTITLED UNDER THE U.832. 83-90). Hence this petition. A NON-RESIDENT FOREIGN CORPORATION UNDER SECTION 24(b) (1) OF THE PHILIPPINE TAX CODE AND A DOMESTIC CORPORATION DOMICILED IN THE UNITED STATES. and they are (1) Whether or not PMC-Phil. while private respondent PMC Phil filed its brief on August 22. REPRESENTING ALLEGEDLY THE DIVIDED TAX OVER WITHHELD BY PMC-PHIL. TAX CODE AGAINST ITS U.989.00. p. Thereupon this Court by resolution dated December 17. II THE COURT OF TAX APPEALS ERRED IN HOLDING. WITHOUT ANY BASIS IN FACT AND IN LAW.S. Said comment was filed on November 8. 93) Petitioner was required to file brief on January 21. p. 1984 (Rollo. 107).Accordingly. 1985 (Rollo. THAT THE HEREIN RESPONDENT PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION (PMC-PHIL. 74). pp. 1985. p. The sole issue in this case is whether or not private respondent is entitled to the preferential 15% tax rate on dividends declared and remitted to its parent corporation. FOR SHORT)IS ENTITLED TO THE SOUGHT REFUND OR TAX CREDIT OF P4.
107 SCRA 726 ). as amended by Public Law 87-834. Garcia v. nor at the Court of Tax Appeals. The real party in interest being the mother corporation in the United States. Internal Revenue Code. a question not raised at the administrative forum.For purposes of this subject. Nonetheless it is axiomatic that the State can never be in estoppel. is but a withholding agent of the government and therefore cannot claim reimbursement of the alleged over paid taxes. is entitled under the U. CIR.S. Servidad. it follows that American entity is the real party in interest. Closely intertwined with the first assignment of error is the issue of whether or not PMCU. 114 SCRA 725 . Co." would be to sanction a procedure whereby the Court-which is supposed to review administrative determinations would not review. the law governing tax credits granted to U. As clearly ruled by Us "To allow a litigant to assume a different posture when he comes before the court and challenges the position he had accepted at the administrative level. C. v.A. 102 SCRA 597 . a domestic corporation which owns at least 10 percent of the voting stock of a foreign corporation from which it receives dividends in any taxable year shall- . issues not raised in the lower court cannot generally be raised for the first time on appeal.A.S. (a) Treatment of Taxes Paid by Foreign Corporation . the remitter or payor of the dividend income. corporations on dividends received from foreign corporations. p. Tax Code to a United States Foreign Tax Credit equivalent to at least the 20 percentage paid portion (of the 35% dividend tax) spared or waived as otherwise considered or deemed paid by the government. on the judicial level. The errors of certain administrative officers should never be allowed to jeopardize the government's financial position.. which to the extent applicable reads: SEC. and should have been the claimant in this case. — a non-resident foreign corporation under Section 24(b)(1) of the Tax Code (the subsidiary of an American) a domestic corporation domiciled in the United States. (Pampanga Sugar Dev. S. and a mere withholding agent for and in behalf of the Philippine Government.. and this is particularly true in matters involving taxation. is completely meritorious. 902 . which should be legally entitled to receive the refund if any. The submission of the Commissioner of Internal Revenue that PMC-Phil. Matialonzo v." Thus it is well settled that under the same underlying principle of prior exhaustion of administrative remedies. but determine and decide for the first time. (Rollo.refund and (2) Whether or not the U. allows as tax credit the "deemed paid" 20% Philippine Tax on such dividends? The petitioner maintains that it is the PMC-U. Inc.S. 129) It will be observed at the outset that petitioner raised this issue for the first time in the Supreme Court.S.S.. He did not raise it at the administrative level. the tax payer and not PMC-Phil.CREDIT FOR CORPORATE STOCKHOLDERS IN FOREIGN CORPORATION. The law pertinent to the issue is Section 902 of the U.A.
profits.(1) to the extent such dividends are paid by such foreign corporation out of accumulated profits [as defined in subsection (c) (1) (a)] of a year for which such foreign corporation is not a less developed country corporation. which the amount of such dividends (determined without regard to Section 78) bears to the amount of such accumulated profits in excess of such income. and excess profits taxes imposed on or with respect to such profits or income. .S. and excess profits taxes (other than those deemed paid). war profits.For purpose of this section.. treating dividends paid in the first 20 days of any year as having been paid from the accumulated profits of the preceding year or years (unless to his satisfaction shows otherwise). (Rollo. profits. or earnings. profits. The Secretary or his delegate shall have full power to determine from the accumulated profits of what year or years such dividends were paid. (A) for purposes of subsections (a) (1) and (b) (1). the private respondent failed: (1) to show the actual amount credited by the U. be deemed to have paid the same proportion of any income. and in other respects treating dividends as having been paid from the most recently accumulated gains.. war profits. be deemed to have paid the same proportion of any income. xxx xxx xxx (c) Applicable Rules (1) Accumulated profits defined . or income in excess of the income. was profits. and (B) for purposes of subsections (a) (2) and (b) (2).A... Among other things. the amount of its gains. as ably argued by the petitioner. war profits. war profits. or excess profits taxes paid or deemed to be paid by such foreign corporation to any foreign country or to any possession of the United States on or with respect to such accumulated profits. the amount of its gains. the private respondent failed to meet certain conditions necessary in order that the dividends received by the non-resident parent company in the United States may be subject to the preferential 15% tax instead of 35%. and (2) to the extent such dividends are paid by such foreign corporation out of accumulated profits [as defined in subsection (c) (1) (b)] of a year for which such foreign corporation is a less-developed country corporation. on the dividends received from private respondent. 55-56) To Our mind there is nothing in the aforecited provision that would justify tax return of the disputed 15% to the private respondent. or excess profits taxes paid or deemed to be paid by such foreign corporation to any foreign country or to any possession of the United States on or with respect to such accumulated profits. government against the income tax due from PMC-U. and excess profits taxes imposed on or with respect to such profits or income by any foreign country. . the term 'accumulated profits' means with respect to any foreign corporation. or income computed without reduction by the amount of the income.S. pp. which the amount of such dividends bears to the amount of such accumulated profits. Furthermore. (2) to present the income tax return of its mother company for .
1984.00.000. the Glaro S.00 was withheld and paid to the Bureau of Internal Revenue. is entitled to the preferential rate of 15% withholding tax on the dividends remitted to its foreign parent company. Commissioner of Internal Revenue. entitled Wander Philippines. is REVERSED and SET ASIDE. on wich 35% tax in the amount of P124. petitioner filed a Motion for Reconsideration but the same was denied in a Resolution dated August 13. On July 5. Ltd. vs. PREMISES CONSIDERED. It is wholly-owned subsidiary of the Glaro S. (Glaro for short).A.00. 369 and 778. Ltd. holding that Wander Philippines. 1984. On March 7. 1976. petitioner file his Answer.200. the petition is GRANTED and the decision appealed from. 1977.T. and (3) to submit any duly authenticated document showing that the U. Wander filed with the Appellate Division of the Internal Revenue a claim for refund and/or tax credit in the amount of P115. Glaro dividends in the amount of P222. On January 19.00.A. SO ORDERED. of Switzerland. Inc.320.S. INC. for short). respondent is hereby ordered to grant a refund and/or tax credit to petitioner in the amount of P115. Herein private respondent. on July 15. Wander filed a petition with respondent Court of Tax Appeals. Wander Philippines. vs. government credited the 20% tax deemed paid in the Philippines. COMMISSIONER OF INTERNAL REVENUE. Wander filed its withholding tax return for the second quarter ending June 30. the instant petition.A. Hence. 1977. 1984 Decision of the Court of Tax Appeals * in C.2884. Inc. Wander filed a withholding tax return for the second quarter ending June 30. On July 18. 1975 and remitted to its parent company.A. Case No. a non-resident foreign corporation.00 representing overpaid withholding tax on dividends remitted by it to the Glaro S. 1984. 1977. WANDER PHILIPPINES.700. 1976 on the dividends it remitted to Glaro amounting to P355. as amended by Presidential Decree Nos. Issues: . on which 35% withholding tax thereof in the amount of P77.1975 when the dividends were received. of Switzerland during the second quarter of the years 1975 and 1976. Petitioner herein. contending that it is liable only to 15% withholding tax in accordance with Section 24 (b) (1) of the Tax Code. having failed to act on the above-said claim for refund. is a domestic corporation organized under Philippine laws. (Wander. Inc. the decretal portion of which reads: WHEREFORE. On October 6. FACTS: This is a petition for review on certiorari of the January 19. a Swiss corporation not engaged in trade or business in the Philippines. respondents. on July 14.440.400. 1975. AND THE COURT OF TAX APPEALS.00 was withheld and paid to the Bureau of Internal Revenue. petitioner. Again. respondent Court of Tax Appeals rendered a Decision. and not on the basis of 35% which was withheld and paid to and collected by the government. Ltd.
is hereby further amended to read as follows: (b) Tax on foreign corporations.. equivalent to 20%. or the difference between the regular 35% rate of the preferential 15% rate. as amended by P. 2. the remitter or payor of the dividend income and a mere withholding agent for and in behalf of the Philippine Government. reads: Sec. Whether petitioners appeal is proper. annual. or at the Court of Tax Appeals. by aliens who are outside the taxing jurisdiction of this Court. The fact that it became a withholding agent of the government which was not by choice but by compulsion under Section 53 (b) of the Tax Code. and income. 1." It is a device to insure the collection by the Philippine Government of taxes on incomes. 369 and 778. Therefore. Thus. profits. the tax shall be 15% of the dividends received. derived from sources in the Philippines. however. remuneration for technical services or otherwise. the law involved in this case. which . and capital gains: . Wander may be assessed for deficiency withholding tax at source. The dispute in this issue lies on the fact that Switzerland does not impose any income tax on dividends received by Swiss corporation from corporations domiciled in foreign countries. that said corporation is first and foremost a wholly owned subsidiary of Glaro. as the Philippine counterpart. including a foreign life insurance company not engaged in the life insurance business in the Philippines. as interest (except interest on foreign loans which shall be subject to 15% tax). It will be recalled. still further That on dividends received from a domestic corporation liable to tax under this Chapter. and not Wander. emoluments or other fixed or determinable. Provided. It will be noted. annuities. cannot by any stretch of the imagination be considered as an abdication of its responsibility to its mother company. shall pay a tax equal to 35% of the gross income received during its taxable year from all sources within the Philippines. Closely intertwined with the first assignment of error is the issue of whether or not Switzerland. In any event. grants to Glaro a tax credit against the tax due it. that Petitioner's above-entitled argument is being raised for the first time in this Court. Section 24 (b) (1) of the Tax Code. it is well settled that under the same underlying principle of prior exhaustion of administrative remedies. premiums. In fact. the submission of petitioner that Wander is but a withholding agent of the government and therefore cannot claim reimbursement of the alleged overpaid taxes. the foreign country where Glaro is domiciled. periodical or casual gains.. is untenable. Glaro. It was never raised at the administrative level. NLRC). as amended. on the judicial level.D. — 1) Non-resident corporation. Wander is the proper entity who should for the refund or credit of overpaid withholding tax on dividends paid or remitted by Glaro. this Court construing Section 53 (b) of the Internal Revenue Code held that "the obligation imposed thereunder upon the withholding agent is compulsory.1. A foreign corporation not engaged in trade or business in the Philippines. which should be legally entitled to receive the refund if any. issues not raised in the lower court cannot be raised for the first time on appeal. whether or not private respondent Wander is entitled to the preferential rate of 15% withholding tax on dividends declared and remitted to its parent corporation. Thus. The first paragraph of subsection (b) of Section 24 of the National Internal Revenue Code. plus penalties consisting of surcharge and interest (Section 54. compensations. dividends. HELD: Petitioner maintains and argues that it is Glaro the tax payer.
For. 369. avers the tax sparing credit is applicable only if the country of the parent corporation allows a foreign tax credit not only for the 15 percentage-point portion actually paid but also for the equivalent twenty percentage point portion spared. respondents. waived or otherwise deemed as if paid in the Philippines. a Swiss foreign-tax credit would be allowed for the whole or for the part. the fact that Switzerland did not impose any tax or the dividends received by Glaro from the Philippines should be considered as a full satisfaction of the given condition. subject to the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to 20% which represents the difference between the regular tax (35%) on corporations and the tax (15%) dividends. of the foreign tax so spared or waived or considered as if paid by the foreign country. it is significant to note that the conclusion reached by respondent Court is but a confirmation of the May 19." Moreover. COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX APPEALS. MARUBENI CORPORATION (formerly Marubeni — Iida. the withholding tax rate of 15% is hereby affirmed. 1977 ruling of petitioner that "since the Swiss Government does not impose any tax on the dividends to be received by the said parent corporation in the Philippines. that private respondent does not cite anywhere a Swiss law to the effect that in case where a foreign tax. which is not present in the instant case. From the above-quoted provision. the dividends received from a domestic corporation liable to tax. Commissioner of Internal Revenue.. vs.). to deny private respondent the privilege to withhold only 15% tax provided for under Presidential Decree No. While it may be true that claims for refund are construed strictly against the claimant. 24 SCRA 198. is spared waived or otherwise considered as if paid in whole or in part by the foreign country. such as the Philippine 35% dividend tax. Petitioner. would run counter to the very spirit and intent of said law and definitely will adversely affect foreign corporations" interest here and discourage them from investing capital in our country. Switzerland did not impose any tax on the dividends received by Glaro. as a matter of principle. . as aptly stated by respondent Court. Besides. Wander claims that full credit is granted and not merely credit equivalent to 20%. the condition imposed under the above-mentioned section is satisfied. petitioner. Accordingly. on the other hand. Co...shall be collected and paid as provided in Section 53 (d) of this Code. Ltd. dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the subject unless there has been an abuse or improvident exercise of authority (Reyes vs. nevertheless. subject to the condition that the country in which the nonresident foreign corporation is domiciled shall allow a credit against the tax due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to 20% which represents the difference between the regular tax (35%) on corporations and the tax (15%) dividends as provided in this section: . amending Section 24 (b) (1) of the Tax Code. the tax shall be 15% of the dividends received. the petition filed is DISMISSED for lack of merit. In the instant case. WHEREFORE. as the case may be. by the very nature of its function. Accordingly. this Court will not set aside the conclusion reached by an agency such as the Court of Tax Appeals which is.
Melquiades C. Gutierrez for petitioner. The Solicitor General for respondents.
FERNAN, C.J.: Petitioner, Marubeni Corporation, representing itself as a foreign corporation duly organized and existing under the laws of Japan and duly licensed to engage in business under Philippine laws with branch office at the 4th Floor, FEEMI Building, Aduana Street, Intramuros, Manila seeks the reversal of the decision of the Court of Tax Appeals 1 dated February 12, 1986 denying its claim for refund or tax credit in the amount of P229,424.40 representing alleged overpayment of branch profit remittance tax withheld from dividends by Atlantic Gulf and Pacific Co. of Manila (AG&P). The following facts are undisputed: Marubeni Corporation of Japan has equity investments in AG&P of Manila. For the first quarter of 1981 ending March 31, AG&P declared and paid cash dividends to petitioner in the amount of P849,720 and withheld the corresponding 10% final dividend tax thereon. Similarly, for the third quarter of 1981 ending September 30, AG&P declared and paid P849,720 as cash dividends to petitioner and withheld the corresponding 10% final dividend tax thereon. 2 AG&P directly remitted the cash dividends to petitioner's head office in Tokyo, Japan, net not only of the 10% final dividend tax in the amounts of P764,748 for the first and third quarters of 1981, but also of the withheld 15% profit remittance tax based on the remittable amount after deducting the final withholding tax of 10%. A schedule of dividends declared and paid by AG&P to its stockholder Marubeni Corporation of Japan, the 10% final intercorporate dividend tax and the 15% branch profit remittance tax paid thereon, is shown below:
1981 FIRST QUARTER (three months ended 3.31.81) (In Pesos) 849,720.44 84,972.00 764,748.00 114,712.20 650,035.80 THIRD QUARTER (three months ended 9.30.81) 849,720.00 84,972.00 764,748.00 114,712.20 650,035.80 TOTAL OF FIRST and THIRD quarters
Cash Dividends Paid 10% Dividend Tax Withheld Cash Dividend net of 10% Dividend Tax Withheld 15% Branch Profit Remittance Tax Withheld Net Amount Remitted to
1,699,440.00 169,944.00 1,529,496.00 229,424.40
The 10% final dividend tax of P84,972 and the 15% branch profit remittance tax of P114,712.20 for the first quarter of 1981 were paid to the Bureau of Internal Revenue by AG&P on April 20, 1981 under Central Bank Receipt No. 6757880. Likewise, the 10% final dividend tax of P84,972 and the 15% branch profit remittance tax of P114,712 for the third quarter of 1981 were paid to the Bureau of Internal Revenue by AG&P on August 4, 1981 under Central Bank Confirmation Receipt No. 7905930. 4 Thus, for the first and third quarters of 1981, AG&P as withholding agent paid 15% branch profit remittance on cash dividends declared and remitted to petitioner at its head office in Tokyo in the total amount of P229,424.40 on April 20 and August 4, 1981.
In a letter dated January 29, 1981, petitioner, through the accounting firm Sycip, Gorres, Velayo and Company, sought a ruling from the Bureau of Internal Revenue on whether or not the dividends petitioner received from AG&P are effectively connected with its conduct or business in the Philippines as to be considered branch profits subject to the 15% profit remittance tax imposed under Section 24 (b) (2) of the National Internal Revenue Code as amended by Presidential Decrees Nos. 1705 and 1773. In reply to petitioner's query, Acting Commissioner Ruben Ancheta ruled:
Pursuant to Section 24 (b) (2) of the Tax Code, as amended, only profits remitted abroad by a branch office to its head office which are effectively connected with its trade or business in the Philippines are subject to the 15% profit remittance tax. To be effectively connected it is not necessary that the income be derived from the actual operation of taxpayer-corporation's trade or business; it is sufficient that the income arises from the business activity in which the corporation is engaged. For example, if a resident foreign corporation is engaged in the buying and selling of machineries in the Philippines and invests in some shares of stock on which dividends are subsequently received, the dividends thus earned are not considered 'effectively connected' with its trade or business in this country. (Revenue Memorandum Circular No. 55-80). In the instant case, the dividends received by Marubeni from AG&P are not income arising from the business activity in which Marubeni is engaged. Accordingly, said dividends if remitted abroad are not considered branch profits for purposes of the 15% 6 profit remittance tax imposed by Section 24 (b) (2) of the Tax Code, as amended . . .
Consequently, in a letter dated September 21, 1981 and filed with the Commissioner of Internal Revenue on September 24, 1981, petitioner claimed for the refund or issuance of a tax credit of P229,424.40 "representing profit tax remittance erroneously paid on the dividends remitted by Atlantic Gulf and Pacific Co. of Manila (AG&P) on April 20 and August 4, 1981 to ... head office in Tokyo. 7 On June 14, 1982, respondent Commissioner of Internal Revenue denied petitioner's claim for refund/credit of P229,424.40 on the following grounds:
While it is true that said dividends remitted were not subject to the 15% profit remittance tax as the same were not income earned by a Philippine Branch of Marubeni Corporation of Japan; and neither is it subject to the 10% intercorporate dividend tax, the recipient of the dividends, being a non-resident stockholder, nevertheless, said dividend income is subject to the 25 % tax pursuant to Article 10 (2) (b) of the Tax Treaty dated February 13, 1980 between the Philippines and Japan. Inasmuch as the cash dividends remitted by AG&P to Marubeni Corporation, Japan is subject to 25 % tax, and that the taxes withheld of 10 % as intercorporate dividend tax and 15 % as profit remittance tax totals (sic) 25 %, the amount refundable offsets the 8 liability, hence, nothing is left to be refunded.
Petitioner appealed to the Court of Tax Appeals which affirmed the denial of the refund by the Commissioner of Internal Revenue in its assailed judgment of February 12, 1986.
In support of its rejection of petitioner's claimed refund, respondent Tax Court explained:
Whatever the dialectics employed, no amount of sophistry can ignore the fact that the dividends in question are income taxable to the Marubeni Corporation of Tokyo, Japan. The said dividends were distributions made by the Atlantic, Gulf and Pacific Company of Manila to its shareholder out of its profits on the investments of the Marubeni Corporation of Japan, a non-resident foreign corporation. The investments in the Atlantic Gulf & Pacific Company of the Marubeni Corporation of Japan were directly made by it and the dividends on the investments were likewise directly remitted to and received by the Marubeni Corporation of Japan. Petitioner Marubeni Corporation Philippine Branch has no participation or intervention, directly or indirectly, in the investments and in the receipt of the dividends. And it appears that the funds invested in the Atlantic Gulf & Pacific Company did not come out of the funds infused by the Marubeni Corporation of Japan to the Marubeni Corporation Philippine Branch. As a matter of fact, the Central Bank of the Philippines, in authorizing the remittance of the foreign exchange equivalent of (sic) the dividends in question, treated the Marubeni Corporation of Japan as a non-resident stockholder of the Atlantic Gulf & Pacific Company based on the supporting documents submitted to it. Subject to certain exceptions not pertinent hereto, income is taxable to the person who earned it. Admittedly, the dividends under consideration were earned by the Marubeni Corporation of Japan, and hence, taxable to the said corporation. While it is true that the Marubeni Corporation Philippine Branch is duly licensed to engage in business under Philippine laws, such dividends are not the income of the Philippine Branch and are not taxable to the said Philippine branch. We see no significance thereto in the identity concept or principal-agent relationship theory of petitioner because such dividends are the income of and taxable to the Japanese corporation in Japan and not to the Philippine 10 branch.
Hence, the instant petition for review. It is the argument of petitioner corporation that following the principal-agent relationship theory, Marubeni Japan is likewise a resident foreign corporation subject only to the 10 % intercorporate final tax on dividends received from a domestic corporation in accordance with Section 24(c) (1) of the Tax Code of 1977 which states:
. is a resident foreign corporation because it is transacting business in the Philippines.. but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed. Public respondents. under both Philippine tax and corporate laws. Petitioner reasons that since the Philippine branch and the Tokyo head office are one and the same entity. however. the Marubeni Corporation. dividends . Accordingly. whether the dividends are paid directly to the head office or coursed through its local branch is of no moment for after all. 11 Thus: Article 10 (1) Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other Contracting State. Japan. — A foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five per cent of the gross income received during each taxable year from all sources within the Philippines as . but expressly made subject to the special rate of 25% under Article 10(2) (b) of the Tax Treaty of 1980 concluded between the Philippines and Japan. The Solicitor General has adequately refuted petitioner's arguments in this wise: . . (2) However. A single corporate entity cannot be both a resident and a non-resident corporation depending on the nature of the particular transaction involved.. Manila does not matter at all. which shall be collected and paid as provided in Sections 53 and 54 of this Code .. such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident. (b) 25 per cent of the gross amount of the dividends in all other cases. and according to the laws of that Contracting State. the head office and the office branch constitute but one corporate entity.. whoever made the investment in AG&P.. is subject to tax on income earned from Philippine sources at the rate of 35 % of its gross income under Section 24 (b) (1) of the same Code which reads: (b) Tax on foreign corporations — (1) Non-resident corporations. being a non-resident foreign corporation and not engaged in trade or business in the Philippines.. Under the Tax Code. Petitioner contends that precisely because it is engaged in business in the Philippines through its Philippine branch that it must be considered as a resident foreign corporation.Dividends received by a domestic or resident foreign corporation liable to tax under this Code — (1) Shall be subject to a final tax of 10% on the total amount thereof. (a) . a resident foreign corporation is one that is "engaged in trade or business" within the Philippines. Central to the issue of Marubeni Japan's tax liability on its dividend income from Philippine sources is therefore the determination of whether it is a resident or a nonresident foreign corporation under Philippine laws. which. are of the contrary view that Marubeni.. .
the latter 12 becomes the taxpayer. In other words.260 shares including that of nominee) was made for purposes peculiarly germane to the conduct of the corporate affairs of Marubeni Japan." 13 Public respondents likewise erred in automatically imposing the 25 % rate under Article 10 (2) (b) of the Tax Treaty as if this were a flat rate. Corollarily. we have agreed to have our right to tax limited to a certain extent to attain the goals set forth in the Treaty. (iii) On dividends received from a domestic corporation liable to tax under this Chapter. A closer look at the Treaty reveals that the tax rates fixed by Article 10 are the maximum rates as reflected in the phrase "shall not exceed. There can be no other logical conclusion considering the undisputed fact that the investment (totalling 283. the principal-agent relationship is set aside. While the tax on dividends is directly levied on the dividends received. not of the branch. but certainly not of the branch in the Philippines. Said section provides: (b) Tax on foreign corporations. Petitioner.. So that when the foreign corporation transacts business in the Philippines independently of its branch. cannot now claim the increments as ordinary consequences of its trade or business in the Philippines and avail itself of the lower tax rate of 10 %. and not the foreign corporation. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office. having made this independent investment attributable only to the head office. being a non-resident foreign corporation with respect to the transaction in question. not the branch or the resident foreign corporation. Consequently." This means that any tax imposable by the contracting state concerned should not exceed the 25 % limitation and that said rate would apply only if the tax imposed by our laws exceeds the same. It is thus clear that petitioner.. the recipient being a non-resident stockholder. "the tax base upon which the 15 % branch profit remittance tax is imposed is the profit actually remitted abroad. following the principal agent relationship theory. The transaction becomes one of the foreign corporation. by reason of our bilateral negotiations with Japan. the applicable provision of the Tax Code is Section 24 (b) (1) (iii) in conjunction with the Philippine-Japan Treaty of 1980. if the business transaction is conducted through the branch office. the tax shall be 15% of the dividends received.The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. It is understood that the branch becomes its agent here. In other words. the alleged overpaid taxes were incurred for the remittance of dividend income to the head office in Japan which is a separate and distinct income taxpayer from the branch in the Philippines. which shall be collected and paid as provided in Section . To simply add the two taxes to arrive at the 25 % tax rate is to disregard a basic rule in taxation that each tax has a different tax basis. But while public respondents correctly concluded that the dividends in dispute were neither subject to the 15 % profit remittance tax nor to the 10 % intercorporate dividend tax. — (1) Non-resident corporations — . they grossly erred in holding that no refund was forthcoming to the petitioner because the taxes thus withheld totalled the 25 % rate imposed by the Philippine-Japan Tax Convention pursuant to Article 10 (2) (b). the taxpayer is the foreign corporation.
440... or decisions of any court in all cases shall be fifteen (15) days counted from the notice of the final order... is taxed 35 % of its gross income from all sources within the Philippines....P1. otherwise known as the Judiciary Reorganization Act of 1980......071.. judgment or decision appealed from . resolution.............P1.. ............... This 20 % represents the difference between the regular tax of 35 % on non-resident foreign corporations which petitioner would have ordinarily paid.....60 ------------------Amount to be refunded to petitioner representing overpayment of taxes on dividends remitted ..... Consequently...300.. petitioner.. a discounted rate of 15% is given to petitioner on dividends received from a domestic corporation (AG&P) on the condition that its domicile state (Japan) extends in favor of petitioner...00 -----------------Cash dividend net of 15 % tax due petitioner ............ taxes deemed to have been paid in the Philippines equivalent to 20 % which represents the difference between the regular tax (35 %) on corporations and the tax (15 %) on dividends as provided in this Section..... 129 which provides that "the period of appeal from final orders..524...... 129. awards..... Respondent Commissioner of Internal Revenue is laboring under the impression that the Court of Tax Appeals is covered by Batas Pambansa Blg...............00 less net amount actually remitted .. being a nonresident foreign corporation.. 24 (b) (1) (iii ) .. a tax credit of not less than 20 % of the dividends received...53 (d) of this Code. [Section 24 (b) (1)].. and the 15 % special rate on dividends received from a domestic corporation....... subject to the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from the nonresident foreign corporation.. However... Proceeding to apply the above section to the case at bar. as a general rule. resolutions.916..P 144 452.. award....... judgments.254......444.40 =========== It is readily apparent that the 15 % tax rate imposed on the dividends received by a foreign non-resident stockholder from a domestic corporation under Section 24 (b) (1) (iii) is easily within the maximum ceiling of 25 % of the gross amount of the dividends as decreed in Article 10 (2) (b) of the Tax Treaty. petitioner is entitled to a refund on the transaction in question to be computed as follows: Total cash dividend paid .....00 less 15% under Sec. .... He alleges that the instant petition for review was not perfected in accordance with Batas Pambansa Blg.1.... There is one final point that must be settled.699..
Two days later. 1986 which affirmed the denial by respondent Commissioner of Internal Revenue of petitioner Marubeni Corporation's claim for refund is hereby REVERSED. 1986. 113703 January 31. 129 as falling within its scope. 1125. G. 1986.A. the whole 30-day period to appeal having begun to run again from notice of the denial of petitioner's motion for reconsideration. The Commissioner of Internal Revenue is ordered to refund or grant as tax credit in favor of petitioner the amount of P144. a party adversely affected by an order. WHEREFORE. ruling. 1986 (the last day for appeal). No. under Section 18 of Republic Act No. DECISION FRANCISCO.452. 1125. Thus. or on May 15. 1986. 1997 -versusA. the questioned decision of respondent Court of Tax Appeals dated February 12. R. COURT OF TAX APPEALS and COURT OF APPEALS. Petitioner. Republic Act No. COMMISSIONER OF INTERNAL REVENUE. Otherwise. On the 30th day. it is evident that the instant appeal was perfected well within the 30-day period provided under R. J. or on November 28. 1125. or decision shall become final. No costs. ruling or decision of the Court of Tax Appeals is given thirty (30) days from notice to appeal therefrom. and notice of which was received by petitioner on November 26.: . Records show that petitioner received notice of the Court of Tax Appeals's decision denying its claim for refund on April 15. 14 From the foregoing. No.This is completely untenable. The cited BP Blg. Respondents.40 representing overpayment of taxes on dividends received. petitioner filed a motion for reconsideration which respondent court subsequently denied on November 17. 1986. SORIANO CORPORATION. said order. Respondent court is not among those courts specifically mentioned in Section 2 of BP Blg. petitioner simultaneously filed a notice of appeal with the Court of Tax Appeals and a petition for review with the Supreme Court. 129 does not include the Court of Tax Appeals which has been created by virtue of a special law.
filed with the respondent. Commissioner of Internal Revenue. Despite said reservation.95 Excess tax payment P273. etc. 1987.244 P255. A.876. 1991.00 [Exh.941.941. private respondent.864.00 Less: Income Tax 1981 tax credit claimed in CTA 3.05 [Exh. the approach turns out short.085.876.190.065. to which no objection was interposed by the petitioner.05 for the year 1985 and P1. the pertinent portion of which reads: In the light of the course respondent has chosen to prove his case.065.811. May 28. 4099. A] P2.399.861.The facts of this case are undisputed. except for the purposes for which they were offered.00 P4. Soriano Corporation [hereinafter referred to as ANSCOR for brevity].399.40 for the year 1986 or a total amount of P1. Respondent is thereby .068. On November 27. CTA Case No. Commissioner of Internal Revenue. In a very recent case [Citytrust Banking Corporation vs.45. On August 7.841. arriving at the foregoing amount as follows: 1985 Prior years' excess income tax payments P3.126. A] Plus: Taxes withheld on Rentals. C] interest 1. a petition for refund of excess tax payments it made to the Bureau of Internal Revenue [BIR] in the amount of P273. 812. the Court of Tax Appeals rendered a decision. 1991] we conclude under similar circumstances: Respondent did not object to the existence of statements and certificates which were offered by petitioner as proof of the withholding taxes but took exception to their contents and purposes.95 Case No.00 [Exh.347.40 [Exh. respondent was not heard to complain about the veracity of the contents of these documents or exhibits nor has it shown any irregularity in the same which will taint their reliability or sufficiency as proofs of the taxes withheld despite the fact that it is well within their competence to do so.620. the petitioner.380. up until the submission of this case for decision. 3964 During trial before the Court of Tax Appeals.085. D] 1986 Taxes withheld by withholding agents Total excess tax payments P1.016. ANSCOR presented evidence to substantiate its claim.208.00 1. When ANSCOR rested its case.126. Court of Tax Appeals. instead of presenting evidence. submitted the case for decision solely upon the evidence adduced by ANSCOR and the pleadings on record.45" 1.
a supplemental motion for reconsideration was filed by the petitioner on September 27." It is evident that what the petitioner sought before the Court of Tax Appeals was actually a new trial on the ground of newly discovered evidence. it held. 1991 by the BIR Official who investigated ANSCOR's claim for refund. however. the petition is hereby GRANTED. the resolution of the above stated issue hinges on the determination of the nature of the BIR report either as newly discovered evidence. Thus. 4201 should be reopened in order to allow petitioner to present in evidence the report of investigation of the BIR officer on private respondent's claim for refund.considered to have admitted the truth of the contents of these exhibits.941. The Court of Tax Appeals. Seeking the admission in evidence of a report submitted only on September 18. those amounts of withheld taxes which are supported by corresponding statements or certificates of withholding taxes admitted in evidence shall be allowed as tax credits. as correctly put by ANSCOR in its Comment to the Petition. 1992. Nor does the failure of respondent affect only the subject of 1985 taxes Against the claimed deductions by petitioner for 1986. that the petitioner cannot be allowed to present the BIR report of September 18. [b] such evidence could not have been discovered and produced at the trial with reasonable diligence."  The petitioner appealed to the Court of Appeals which affirmed the assailed decision and resolution of the Court of Tax Appeals. corroborative or impeaching. Hence. respondent could only give out the perfunctory resistance such as that 'mere allegation of net loss does not ipso facto merit a refund'. among others. and [c] that it is material. 1991 because such report was in the personal physical possession of a subordinate of the petitioner during the trial and is therefore not in the nature of a newly discovered evidence but is merely "forgotten evidence.399. Under Section 1. warranting a trial de novo. denied the petitioner's motion for reconsideration and supplemental motion for reconsideration. and is of such weight that. Rule 13 of the Rules of the Court of Tax Appeals provides that the provisions of Rule 37 of the Rules of Court shall be applicable to motions for new trial before the Court of Tax Appeals. if admitted. 1991. Case No. or "forgotten evidence" which can no longer be considered on appeal. Commissioner of Internal Revenue." On September 17. But respondent for his part. Rule 37 of the Rules of Court. will .45 to be used as payment for its internal revenue tax liabilities. did not present any evidence that would have dispute the correctness of the tax returns and other material facts therein [Citytrust Banking Corporation vs. 1991. xxx xxx xxx WHEREFORE. the requisites for newly discovered evidence as a ground for a new trial are: [a] the evidence was discovered after the trial. supra]. Hence. the petitioner filed a motion for reconsideration of the foregoing decision. which it supported with tax returns as evidence. Respondent is ordered to issue a tax credit memorandum to petitioner in the sum of P1. In a resolution dated December 9. Section 5. not merely cumulative. this Petition for Review on Certiorari raising the singular issue of: "whether CTA.
we cannot agree more with the Court of Appeals when it stated thus: To accept the contrary view of the petitioner would give rise to a dangerous precedent in that there would be no end to a hearing before respondent court because.C. Why such a report of vital significance could not have been prepared and presented during the four  long years that the case was pending before the Court of Tax Appeals is simply beyond our comprehension. We are left with no recourse but to conclude that this is a simple case of negligence on the part of the petitioner. He submits that Section 8 of the Rules of the Court of Tax Appeals declaring that the latter shall not be governed strictly by technical rules of evidence mandates a relaxation of the requirements of new trial on the basis of newly discovered evidence. Perhaps realizing that under the Rules the said report cannot be correctly admitted as newly discovered evidence. petitioner did not even endeavor to explain this circumstance. July 11. the principle of stability of judicial decision. WHEREFORE. S. he can have it set aside by asking to be allowed to present additional evidence without having to comply with the requirements of a motion for a new trial based on newly discovered evidence. INC. a liberal application of the rules of procedure to suit the petitioner's purpose would clearly pave the way for injustice as it would be rewarding an act of negligence with undeserved tolerance. Aside from petitioner's bare assertion that the said report was not yet in existence at the time of the trial. All three requisites must characterize the evidence sought to be introduced at the new trial. Section 5 of the Rules of the Court of Tax Appeals should not be ignored at will and at random to the prejudice of the orderly presentation of issues and their resolution. We agree with the ruling of the respondent Courts that the BIR report of September 18. he miserably failed to offer any evidence to prove that the same could not have been discovered and produced at the trial despite reasonable diligence. For this act of negligence. to a considerable extent. For it should not be forgotten that the first and fundamental concern of the rules of procedure is to secure a just determination of every action. Treaty . 2009. To do so would affect. In the case at bench. Worse.. 11:16 pm Filed under: PUBLIC INTL'L LAW. This is a dangerous proposition and one which we refuse to countenance. JOHNSON AND SON. COMMISIONER OF INTERNAL REVENUE vs. Rule 13. every time a party is aggrieved by its decision. the petitioner invokes a liberal application of the Rules. the petitioner cannot be allowed to seek refuge in a liberal application of the Rules. 1994 is AFFIRMED in toto.probably change the judgment. 1991 does not qualify as newly discovered evidence. the petition is hereby DENIED and the assailed decision of the Court of Appeals dated January 31.
00 On October 29. the preferential tax rate of 10% should apply to the [respondent]. USA is only subject to 10% withholding tax pursuant to the most-favored nation clause of the RP-US Tax Treaty [Article 13 Paragraph 2 (b) (iii)] in relation to the RP-West Germany Tax Treaty [Article 12 (2) (b)]” (Petition for Review [filed with the Court of Appeals] The RP-US Tax Treaty states that: 1) Royalties derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States. . and b) In the case of the Philippines. [respondent] was obliged to pay SC Johnson and Son. “the antecedent facts attending [respondent's] case fall squarely within the same circumstances under which said MacGeorge and Gillete rulings were issued. pursuant to which the [respondent] was granted the right to use the trademark. United States of America (USA). marketing and production from SC Johnson and Son. JOHNSON AND SON.Facts: S.C. the least of: (i) 25 percent of the gross amount of the royalties. and (iii) the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State. package and distribute the products covered by the Agreement and secure assistance in management.603. USA royalties based on a percentage of net sales and subjected the same to 25% withholding tax on royalty payments which [respondent] paid for the period covering July 1992 to May 1993 in the total amount of P1. Since the agreement was approved by the Technology Transfer Board. 8064.For the use of the trademark or technology.A. 15 percent of the gross amount of the royalties. Trade Marks and Technology Transfer under Certificate of Registration No.S. The said License Agreement was duly registered with the Technology Transfer Board of the Bureau of Patents. (ii) 15 percent of the gross amount of the royalties. We therefore submit that royalties paid by the [respondent] to SC Johnson and Son. where the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities.. 1993. U. S. 2) However. a) In the case of the United States. a domestic corporation organized and operating under the Philippine laws.443. INC. A. patents and technology owned by the latter including the right to manufacture. a non-resident foreign corporation based in the U. entered into a license agreement with SC Johnson and Son. [respondent] filed with the International Tax Affairs Division (ITAD) of the BIR a claim for refund of overpaid withholding tax on royalties arguing that. the tax imposed by that Contracting State shall not exceed.
design or model. or scientific equipment. (S. Under Article 24 of the RP-West Germany Tax Treaty. any patent. Thus. In the case of royalties for which the tax is reduced to 10 or 15 percent according to paragraph 2 of Article 12 of the RP-West Germany Tax Treaty.The RP-Germany Tax Treaty provides: (2) However. or the right to use. the credit shall be 20% of the gross amount of such royalty. or the right to use. in the case of royalties arising in the Republic of the Philippines. beginning July.The Court of Tax Appeals rendered its decision in favor of S. For as long as the transfer of technology. trademark. this petition. only apply if the contract giving rise to such royalties has been approved by the Philippine competent authorities. is subject to approval. Johnson) then filed a petition for review before the Court of Tax Appeals (CTA). USA is entitled to the “Most Favored Nation” Tax rate of 10% on Royalties as provide in the RP-US Tax Treaty in relation to the RP-West Germany Tax Treaty? Ruling:. commercial. industrial. secret formula or process. or from the use of or the right to use.C. Inc.266. commercial or scientific experience. Issue: Whether the Court of Appeals erred in ruling that SC Johnson and Son. The rate of 10% is imposed if credit against the German income and corporation tax on said royalty is allowed in favor of the German . is taxed at 10% of the gross amount of said royalty under certain conditions.C. Johnson & Son. design or model. trade mark. the royalty income of a German resident from sources within the Philippines arising from the use of. but the tax so charged shall not exceed: b) 10 percent of the gross amount of royalties arising from the use of. the limitation of the tax rate mentioned under b) shall. under Philippine law.C. plan. secret formula or process. 1992 to May. such royalties may also be taxed in the Contracting State in which they arise.00 representing overpaid withholding tax on royalty payments. Johnson and ordered the Commissioner of Internal Revenue to issue a tax credit certificate in the amount of P963. and according to the law of that State. Private respondent S. The Commissioner did not act on said claim for refund. 1993. the Philippine tax paid on income from sources within the Philippines is allowed as a credit against German income and corporation tax on the same income. any patent.2 The Commissioner of Internal Revenue thus filed a petition for review with the Court of Appeals which rendered the decision finding no merit in the petition and affirming in toto the CTA ruling. plan. or for information concerning industrial. To illustrate.
al. (PH Co.resident.000. INC. al (Plaintiff-appellants) were stockholders of Manila Wine Merchants. Ltd. (HK Co. The Appellants duly filed Income Tax Returns. which is the counterpart provision with respect to relief for double taxation... SC HELD: CFI judgment affirmed. the tax on royalties under the RP-US Tax Treaty is not paid under similar circumstances as those obtaining in the RP-West Germany Tax Treaty. CFI ruled in favor of CIR hence the appeal. At a special general meeting of the shareholders of the HK Co. The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax crediting. Inc. AL.. a Philippine corporation. on which the defendant.).. Ltd. The Board of Directors of Manila Wine Merchants. private respondent cannot be deemed entitled to the 10 percent rate granted under the latter treaty for the reason that there is no payment of taxes on royalties under similar circumstances.. the “most favored nation” clause in the RP-West Germany Tax Treaty cannot be availed of in interpreting the provisions of the RP-US Tax Treaty. a foreign corporation duly authorized to do business in the Philippines. As a result of the sale of its business and assets to PH Co.. WISE & CO.. The HK Co. made a distribution from its earnings for the year 1937 to its stockholders. on the said surplus from which the said distributions were made. ET.5 The rationale for the most favored nation clause. That means the rate of 10% is granted to the German taxpayer if he is similarly granted a credit against the income and corporation tax of West Germany. vs. distributed this surplus to the shareholders (Appellants included). (Subsequent Motion for Reconsideration by Wise. a surplus was realized and the HK Co. denied) ISSUES and RULINGS: . Philippine income tax had been paid by HK Co. The clear intent of the “matching credit” is to soften the impact of double taxation by different jurisdictions. MEER FACTS: Wise & Co. Article 23 of the RP-US Tax Treaty. Article 24 of the RP-Germany Tax Treaty expressly allows crediting against German income and corporation tax of 20% of the gross amount of royalties paid under the law of the Philippines.. et. Since the RP-US Tax Treaty does not give a matching tax credit of 20 percent for the taxes paid to the Philippines on royalties as allowed under the RP-West Germany Tax Treaty. Meer (CIR) made deficiency assessments. The RP-US Tax Treaty contains no similar “matching credit” as that provided under the RP-West Germany Tax Treaty. Plantiffs paid under written protest and sought recovery. Hence. On the other hand.. Inc. does not provide for similar crediting of 20% of the gross amount of royalties paid. This would mean that private respondent must prove that the RP-US Tax Treaty grants similar tax reliefs to residents of the United States in respect of the taxes imposable upon royalties earned from sources within the Philippines as those allowed to their German counterparts under the RP-Germany Tax Treaty. the concessional tax rate of 10 percent provided for in the RP-Germany Tax Treaty should apply only if the taxes imposed upon royalties in the RP-US Tax Treaty and in the RP-Germany Tax Treaty are paid under similar circumstances.). for the sum of P400. et. Therefore. recommended to the stockholders that they adopt resolutions necessary to sell its business and assets to Manila Wine Merchants. the stockholders by resolution directed that the company be voluntarily liquidated and its capital distributed among the stockholders.
is a taxable income or a deductible loss as the case may be. the major part of which consisted in the purchase price of the business. distributed ordinary dividends to them thereafter. 1937. The shareholder who received the consideration for the stock earned that much money as income of his own. It was stipulated in the deed of sale that the sale and transfer of the HK Co. The HK Co. or insurance company distributes all of its assets in complete liquidation or dissolution. "since all steps in the carrying out of this so-called sale took place outside the Philippines. was a domestic corporation domiciled and doing business also in the Philippines. profits. Distribution took place on June 8. When the corporation was dissolved and in process of complete liquidation and its shareholders surrendered their stock to it and it paid the sums in question to them in exchange." SC: This contention is untenable.) Are such liquidating dividends taxable income? SC: Income tax law states that “Where a corporation. and the PH Co. That money in the hands of the corporation formed a part of its income and was properly taxable to it under the Income Tax Law. CIR contends that they were liquidating dividends. as a going concern. 2. They could not consistently deem all the business and assets of the corporation sold as of June 1. whether individual or corporation. beer. the profit realized by them does not constitute income from Philippine sources and is not subject to Philippine taxes. 3. and spirit merchants and the other objects set out in its memorandum of association. association. a transaction took place.) Non-resident alien individual appellants contend that if the distributions received by them were to be considered as a sale of their stock to the HK Co. they are taxable as liquidating dividends. As such. its earnings. the gain realized or loss sustained by the stockholder. SC: The distributions under consideration were not ordinary dividends. 1937. had been earned and acquired in the Philippines. and still say that said corporation. joint-account.1.” Appellants received the distributions in question in exchange for the surrender and relinquishment by them of their stock in the HK Co. it is clear that said distributions were income "from Philippine sources. partnership. shall take effect on June 1. was incorporated for the purpose of carrying on in the Philippine Islands the business of wine. Therefore. Hence. which again was properly taxable to him under the Income Tax Law. was at the time of the sale of its business in the Philippines. and assets. The HK Co.) Appellants contend that the amounts received by them and on which the taxes in question were assessed and collected were ordinary dividends. including those from whose proceeds the distributions in question were made." .. which was dissolved and in process of complete liquidation.