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CIR v. CA, ROH Auto (BIR Rules and Regulations) Commissioner v.

Facts: (G.R. # 119761; 08-29-1996) by yurei™
EO41 was promulgated declaring a one-time tax amnesty
on unpaid income taxes, later amended to include estate and Facts:
donor's taxes and taxes on business, for the taxable years 1. RA 7654 was enacted by Congress on June 10, 1993 and took
1981 to 1985. effect July 3, 1993. It amended partly Sec. 142 (c) of the NIRC
Availing itself of the amnesty, R.O.H. Auto Products filed, 2. Fortune Tobacco manufactured the following cigaretter brands:
tax amnesty returnms and paid the amnesty taxes due. Hope, More and Champion. Prior to RA 7654, these 3 brands
Prior to this availment, CIR assessed the ROH deficiency were considered local brands subjected to an ad valorem tax of
income and business taxes in an aggregate amount of 20 to 45%. Applying the amendment and nothing else, (see
P1,410,157.71. footnote below) the 3 brands should fall under Sec 142 (c) (2)
ROH wrote back to state that since it had been able to NIRC and be taxed at 20 to 45%.
avail itself of the tax amnesty, the deficiency tax notice should
3. However, on July 1, 1993, petitioner Commissioner of Internal
forthwith be cancelled and withdrawn.
Revenue issued Revenue Memorandum Circular37-93 which
The request was denied by the Commissioner on the
ground that Revenue Memorandum Order No. 4-87, dated 09 reclassified the 3 brands as locally manufactured cigarettes
February 1987, implementing Executive Order No. 41, had bearing a foreign brand subject to the 55% ad valorem tax. The
construed the amnesty coverage to include only assessments reclassification was before RA 7654 took effect.
issued by the Bureau of Internal Revenue after the 4. In effect, the memo circular subjected the 3 brands to the
promulgation of the executive order on 22 August 1986 and not provisions of Sec 142 (c) (1) NIRC imposing upon these brands
to assessments theretofore made. a rate of 55% instead of just 20 to 45% under Sec 142 (c) (2)
5. There was no notice and hearing. CIR argued that the memo
ISSUE: circular was merely an interpretative ruling of the BIR which did
Is ROH covered by the tax amnesty? YES. not require notice and hearing.
Was the CIR’s position correct? NO.
Issue: WON RMC 37-93 was valid and enforceable – No; lack of
Ratio Decidendi: notice and hearing violated due process required for promulgated
1. The added exception urged by petitioner Commissioner rules. Moreover, it infringed on uniformity of taxation / equal
based on Revenue Memorandum Order No. 4-87, further
protection since other local cigarettes bearing foreign brands had
restricting the scope of the amnesty clearly amounts to an
not been included within the scope of the memo circular.
act of administrative legislation quite contrary to the
mandate of the law which the regulation ought to
implement. Ratio:
2. The authority of the Secretary of Finance, in conjunction with 1. Contrary to petitioner’s contention, the memo was not a mere
the CIR, to promulgate rules and regulations for the interpretative rule but a legislative rule in the nature of
enforcement of internal revenue laws cannot be subordinate legislation, designed to implement a primary
controverted. Neither can it be disputed that such rules and legislation by providing the details thereof. Promulgated
regulations, as well as administrative opinions and rulings, legislative rules must be published.
ordinarily should deserve weight and respect by the courts. 2. On the other hand, interpretative rules only provide guidelines
Much more fundamental than either of the above, however, to the law which the administrative agency is in charge of
is that all such issuances must not override, but must enforcing.
remain consistent and in harmony with, the law they seek to 3. BIR, in reclassifying the 3 brands and raising their applicable tax
apply and implement. Administrative rules and regulations rate, did not simply interpret RA 7654 but legislated under its
are intended to carry out, neither to supplant nor to modify, quasi-legislative authority.
the law. BELLOSILLO separate opinion: the administrative issuance was not
3. If, as the Commissioner argues, EO 41 had not been
quasi-legislative but quasi-judicial. Due process should still be
intended to include 1981-1985 tax liabilities already
observed of course but use Ang Tibay v. CIR.
assessed prior to 22 August 1986, the law could have
simply so provided in its exclusionary clauses. It did not.
The conclusion is unavoidable, and it is that the executive
order has been designed to be in the nature of a general
grant of tax amnesty subject only to the cases specifically
excepted by it

Holding: CA affirmed.

Sec. 142 (c) ... There shall be... collected on cigarettes... a tax at the rates
prescribed below... :
(1) On locally manufactured cigarettes which are currently classified
and taxed at 55%  55%
(2) On other locally manufactured cigarettes (already at 20 to 45%) 
20 to 45%
CIR V. CA, CTA, & Fortune Tobacco CIR v. Telefunken (BIR Rules and Regulations)
(BIR Rules and Regulations) FACTS: Telefunken is a domestic corporation registered with
Facts: the Board of Investments (BOI) as an export producer on a
CIR, through RMC 37-93, aims to collect deficiencies on preferred pioneer status under RA 6135.
ad valorem taxes against Fortune Tobacco following a From October 1979 to September 1981, Telefunken produced
reclassification of foreign branded cigarettes, as per RA 7654. semi-conductor devices amounting to P92,843,774.00 which
Fortune Tobacco raised the issue of the propriety of the were entirely sold to foreign markets. BIR denied Telefunken’s
assessment to the CTA, which decided against the CIR. CTA request for a tax refund/tax credit from the contractor’s tax
was affirmed by CA. which it paid for said amount.
Telefunken contended that under the provisions of Section 7 of
RA 6135 in relation to Section 8 (a) of RA 5186 (The
ISSUE: Investment Act), it was exempted from the payment of all
Is RMC 37-93 a mere interpretative ruling, therefore not national internal revenue taxes for the period in question,
requiring, for its effectivity, hearing and filing with the UP Law except for income tax.
Center? NO. Section 7 of RA. 6135 (the law under which Telefunken is
registered) provides that registered export producers in a
Ratio Decidendi: pioneer status are entitled to the incentives provided in
1. When an administrative rule is merely interpretative, its section 8 (a) of RA 5186.
applicability needs nothing further than its bare issuance for On the other hand CIR argues that the law speaks of firms
it gives no real consequence more than what the law itself registered under RA 5186 only and thus, the privilege of tax
has already prescribed. exemption does not apply to firms registered under RA 6135.
2. When, upon the other hand, the administrative rule goes
beyond merely providing for the means that can facilitate or ISSUE: WON Telefunken, registered under RA 6135 as a
render least cumbersome the implementation of the law but pioneer export producer, is exempted from payment of the 3%
substantially adds to or increases the burden of those contractor's tax from October 1979 to September 1981.
governed, it behooves the agency to accord at least to HELD: YES.
those directly affected a chance to be heard, and thereafter 1. The controlling statute is Section 205 (16) of the 1977
to be duly informed, before that new issuance is given the National Internal Revenue Code which states:
force and effect of law. Sec. 205. Contractors, proprietors or operators of dockyards
3. A reading of RMC 37-93, particularly considering the and others. A contractor's tax of three percentum of gross
circumstances under which it has been issued, convinces receipts is hereby imposed on the following:
us that the circular cannot be viewed simply as a corrective xxx xxx xxx
measure or merely as construing Section 142(c)(1) of the (16) Business agents and other independent contractors
NIRC, as amended, but has, in fact and most importantly, including private detective or watchman agencies, except
been made in order to place "Hope Luxury," "Premium gross receipts of a pioneer enterprise registered with the Board
More" and "Champion" within the classification of locally of Investments under Republic Act 5186. (As amended by P.D.
manufactured cigarettes bearing foreign brands and to No. 1457 , June 11, 1978)
thereby have them covered by RA 7654. There is no difference between the gross receipts of
4. Specifically, the new law would have its amendatory pioneer enterprises registered with the Board of
provisions applied to locally manufactured cigarettes which Investments under RA 6135 and the gross receipts of
at the time of its effectivity were not so classified as bearing registered pioneer enterprises under RA 5186. In fact
foreign brands. (Prior to the issuance of the questioned the CIR himself had ruled in this vein on February 4,
circular, "Hope Luxury," "Premium More," and "Champion" 1974 in the case of Asian Transmission Corporation.
cigarettes were in the category of locally manufactured This 1974 ruling was based the same on Section
cigarettes not bearing foreign brand subject to 45% ad 191(16) of the Tax Code which states:
valorem tax.)
5. Hence, without RMC 37-93, the enactment of RA 7654,
would have had no new tax rate consequence on private
respondent's products.
6. Evidently, in order to place "Hope Luxury," "Premium More," 2
Sec. 7. Incentives to registered export producers — Registered
and "Champion" cigarettes within the scope of the export producers. — Registered export producers unless they already
amendatory law and subject them to an increased tax rate, enjoy the same privileges under other laws shall be entitled to the
the now disputed RMC 37-93 had to be issued. incentives set forth in parahraphs (h), (i) and (j) of Section 7 of
7. In so doing, the BIR not simply intrepreted the law; verily, it Republic Act Numbered Fifty-one hundred eigthy-six, known as the
Investment Incentives Act; and registered export producers that are
legislated under its quasi-legislative authority. The due
pioneer enterprises shall be entitled also to the incentives set
observance of the requirements of notice, of hearing, and of forth in paragraphs (a), (b) and (c) of Section 8 of the said Act. In
publication should not have been then ignored. addition to the said incentives, and in lieu of other incentives provided
in Section 7 and in Section 9 of that Act, registered export producer
shall be entitled to benefits and incentives as enumerated hereunder:
Holding: CTA, CA affirmed.

“ Pursuant to Section 7 of Republic Act No. 6135, that corporation as
a registered export producer on a pioneer status is entitled to the same
tax incentives granted to a pioneer industry set forth in section 8(a) of
republic Act No. 5186. Under this latter provision, a pioneer industry is
exempt from all taxes under the National Internal Revenue Code,
except income tax. In other words, both a registered export
producer on a pioneer status under Republic Act No. 6135 and a
pioneer industry under Republic Act No. 5186 are entitled to the
same tax exemption benefits under the Tax Code.”
Sec. 191. Contractors, proprietors or operators of dockyards, CIR v. Mega Gen. Merch (BIR Rules and
and others. — A contractor's tax of three per centum of the Regulations)
gross receipts is hereby imposed on the following: FACTS:
xxx xxx xxx (BACKGROUND)Prior to the promulgation of P.D. No. 392 on
(16) Business agents and other independent contractors February 18, 1974, importations of all kinds of paraffin wax
except persons, associations and corporations under contract were subject to 7% advance sales tax on landed costs plus
for embroidery and apparel for export, as well as their agents 25% mark up pursuant to Section 183(b) now Section 197(II) in
and contractors and except gross receipts of or from a pioneer relation to Section 186 (now Section 200) of the Tax Code.
industry registered with the Board of Investments under the With the promulgation of P.D. No. 392, a new provision for the
provisions of Republic Act Numbered Five Thousand one imposition of specific tax was added to Section 142 of the Tax
hundred and eighty-six. (Emphasis supplied) 4
Code (effective Feb 18 1974)
A comparison of the above with the previously quoted Section On April 1975 Mega wrote the CIR for clarification as to
205(16) of the 1977 Tax Code reveals that both provisions whether imported crude paraffin wax is subject to specific tax
specifically mention pioneer industries registered with the or advance sales tax. On May 14, 1975 Former Commissioner
Board of Investments under Republic Act No. 5186 as exempt Misael P. Vera in his reply ruled that only wax used as high
from payment of the contractor's tax. pressure lubricant and micro crystallin is subject to specific tax;
2. Also, this 1974 ruling has not been abrogated with the that paraffin which was used as raw material in the
passage of the 1977 Tax Code, Section 205(16) which manufacture of candles, wax paper, matches, crayons, drugs,
expressly mentions only pioneer enterprises registered with the appointments etc., is subject to the 7% advance sales tax, the
Board of Investments under RA 5186 as exempt from the tax to be based on the landed cost thereof, plus 25% mark-up.
contractor's tax (though with no reference being made Due to Commissioner Vera's ruling Mega filed several
regarding pioneer enterprises registered under RA 6135). claims for tax refund/tax credit of the specific tax paid by
Lastly, under Sec. 246 of the National Internal Revenue them.
Code, rulings of the BIR may not be given retroactive However, on January 28, 1977, then Acting CIR Efren Plana
effect, if the same is prejudicial to the taxpayer. denied Mega’s claim. According to him the law does not make
any distinction as to the kind of wax subject to specific tax.
During the pendency of Mega’s request for reconsideration, an
investigation was conducted by the BIR in connection with the
importations of wax and petroleum that arrived in the
country on or subsequent to the date of the ruling of
January 28, 1977 and it was ascertained that Mega owes
the government specific tax for importation of paraffin wax
on June 21, 1977 and August 17, 1977 which gave rise to the
letter of assessment dated May 8, 1978.
Prior, however, to the issuance of said letter of assessment of
May 8, 1978, CIR in a letter dated January 11, 1978, granted
Mega’s claim for refund or tax credit since the importation
which had arrived in Manila on April 18, 1975 was covered by
the ruling of May 14, 1975 (before its revocation by the ruling
of January 28, 1977).
Issue: WON Mega’s importation of crude paraffin wax on June
21 and August 17, 1977 are subject to specific tax under
Section 142(i) of the Tax Code promulgated on February 18,
HELD: Yes.
Contrary to the CTA’s ruling , the Court believes that the letter
of Commissioner Plana dated January 11, 1978 did not in any

Section 142. Specific tax on manufactured oils and other
fuels.—On refined and manufactured mineral oils and other
motor fuels, there shall be collected the following taxes:

xxx xxx xxx

(i) Greases, waxes and petroleum, per kilogram,

thirty-five centavos; ...

Excerpt from CTA ruling:
“ To make petitioner liable for specific tax after it has made the importations, would surely
prejudice petitioner as it would be subject to a tax liability of which the Bureau of Internal
Revenue has not made it fully aware. As a result, the rulings of May 8, 1978 and February 15,
1980 having been issued long after the importations on June 21 and August 1 7, 1977 in
question cannot be applied with legal effect in this case because to do so will violate the
prohibition against retroactive application of the rulings of executive bodies. Rulings or
circulars promulgated by the Commissioner of Internal Revenue, such as the rulings of
January 28, 1977 and those of May 8, 1978 and February 15, 1980, can not have any
retroactive application, where to do so, as it did in the case at bar, would prejudice the
way revoke his ruling dated January 28,1977 which ruling CIR v. Burroughs (BIR Rules and Regulations)
applied the specific tax to wax (without distinction). The FACTS:In March 1979, the branch office of Burroughs Ltd. in
reason he removed in 1978 private respondent's liability the country applied with the Central Bank for authority to remit
for the specific tax was NOT because he wanted to revoke, to its parent company abroad branch profit amounting to
expressly or implicitly, his ruling of January 28, 1977 but P7,647,058.00.
because the P321,436.79 tax referred to importation On March 14, 1979, it paid the 15% branch profit remittance
BEFORE January 28, 1977 and hence still covered by the 6
tax pursuant to Sec. 24 (b) (2) (ii) . Based on this law
ruling of Commissioner Vera, Burroughs Ltd remitted to its head office the amount of
Mega’s request for refund of the amount of P321,436.79 was P6,499,999.30
granted in CIR’s letter dated January 11, 1978 because the However on December 24, 1980 Burroughs Ltd. filed a written
importation of private respondent was made on April claim for the refund or tax credit of the amount of P172,058.90
18,1975 wherein petitioner made clear that all importation of representing alleged overpaid branch profit remittance tax.
crude paraffin wax only after the ruling of January 28, 1977, is BIR ruled in favor of the refund on January 21, 1980.
subject to specific tax CIR contends that there should be no refund because
The importation which gave rise to the assessment in the Memorandum Circular No. 8-82 dated March 17, 1982 had
amount of P275,652.00 subject of this case, was made on revoked and/or repealed the BIR ruling of January 21, 1980.
June 27, 1977 and August 17, 1977 and that the petitioner's Said memorandum circular states-
ruling of January 28,1977 was not revoked or overruled by his “Considering that the 15% branch profit remittance tax is
letter of January 11, 1978 granting respondent corporation's imposed and collected at source, necessarily the tax base
request for refund of the amount of P321,436.79. should be the amount actually applied for by the branch with
the Central Bank of the Philippines as profit to be remitted
Issue: WON Burroughs Limited is entitled to a refund (in the
amount of P172,058.90).
Held: Yes. In a BIR ruling dated January 21, 1980 by then
Acting Commissioner of Internal Revenue Hon. Efren I. Plana
the aforequoted provision had been interpreted to mean that
"the tax base upon which the 15% branch profit remittance tax
... shall be imposed...(is) the profit actually remitted abroad
and not on the total branch profits out of which the remittance
is to be made."
What is applicable in the case at bar is still the BIR Ruling of
January 21, 1980 because Burroughs Ltd. paid the branch
profit remittance tax in question on March 14, 1979.
Memorandum Circular No. 8-82 dated March 17, 1982
cannot be given retroactive effect in the light of Section
327 of the National Internal Revenue Code.
The prejudice that would result to private Burroughs Ltd. by a
retroactive application of Memorandum Circular No. 8-82 is
beyond question for it would be deprived of the substantial
amount of P172,058.90.

Sec. 24. Rates of tax on corporations....

(b) Tax on foreign corporations. ...

(2) (ii) Tax on branch profits remittances. Any profit remitted abroad by a branch to its head
office shall be subject to a tax of fifteen per cent (15 %) ...

Sec. 327. Non-retroactivity of rulings. Any revocation, modification, or reversal of any of
the rules and regulations promulgated in accordance with the preceding section or any of the
rulings or circulars promulgated by the Commissioner shag not be given retroactive application
if the revocation, modification, or reversal will be prejudicial to the taxpayer except in the
following cases (a) where the taxpayer deliberately misstates or omits material facts from his
return or in any document required of him by the Bureau of Internal Revenue; (b) where the
facts subsequently gathered by the Bureau of Internal Revenue are materially different from
the facts on which the ruling is based, or (c) where the taxpayer acted in bad faith. (ABS-CBN
Broadcasting Corp. v. CTA, 108 SCRA 151-152)
ABS-CBN v. CTA (BIR Rules and Regulations) withholding income tax for the years 1965, 1966, 1967 and
FACTS: ABS-CBN is engaged in the business of telecasting 1968.
local as well as foreign films acquired from foreign corporations 11
not engaged in trade or business within the Philippines. The HELD: No. Sec. 338-A (now Sec. 327) of the Tax Code
applicable law wrt the income tax of non-resident corporations applies in this case. Rulings or circulars promulgated by the
is section 24 (b) of the National Internal Revenue Code, as CIR have no retroactive application where to so apply
amended by Republic Act No. 2343 dated June 20, 1959 .
8 them would be prejudicial to taxpayers. The retroactive
On April 12, 1961, in implementation of said provision, the CIR application of Memorandum Circular No. 4-71 prejudices ABS-
issued General Circular No. V-334 .
Pursuant to the CBN since:
foregoing, ABS-CBN dutifully withheld and turned over to the
BIR the amount of 30% of one-half of the film rentals paid by a) it was issued only in 1971, or 3 years after 1968, the last
it to foreign corporations not engaged in trade or business year that petitioner had withheld taxes under General Circular
within the Philippines. The last year that ABS-CBN withheld No. V-334.
taxes pursuant to the foregoing Circular was in 1968.
b) the assessment and demand on petitioner to pay deficiency
10 withholding income tax was also made three years after 1968
On June 27, 1968, RA 5431 amended Section 24 (b) of the
Tax Code increasing the tax rate from 30 % to 35 % and for a period of time commencing in 1965.
revising the tax basis from "such amount" referring to rents,
etc. to "gross income." c) ABS-CBN was no longer in a position to withhold taxes due
from foreign corporations because it had already remitted all
On February 8, 1971, the CIR issued Revenue film rentals and no longer had any control over them when the
Memorandum Circular No. 4-71, revoking General Circular new Circular was issued.
No. V-334, and holding that the latter was "erroneous for lack And in so far as the enumerated exceptions (to non-
of legal basis," because "the tax therein prescribed should be retroactivity) are concerned, ABS-CBN does not fall under any
based on gross income without deduction whatever. of them.
On the basis of this new Circular, CIR issued against ABS-
CBN a letter of assessment and demand requiring them to pay
deficiency withholding income tax on the remitted film rentals
for the years 1965 through 1968 and film royalty as of the
end of 1968 in the total amount of P525,897.06.

ISSUE: WON respondent can apply General Circular No. 4-71

retroactively and issue a deficiency assessment against
petitioner in the amount of P 525,897.06 as deficiency

(b) Tax on foreign corporations.-(1) Non-resident corporations.- There shall be levied,
collected, and paid for each taxable year, in lieu of the tax imposed by the preceding
paragraph, upon the amount received by every foreign corporation not engaged in trade or
business within the Philippines, from an sources within the Philippines, as interest, dividends,
rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or
other fixed or determinable annual or periodical gains, profits, and income, a tax equal to
thirty per centum of such amount. (Emphasis supplied)

“ In connection with Section 24 (b) of Tax Code, the amendment introduced by Republic Act
No. 2343, under which an income tax equal to 30% is levied upon the amount received by
every foreign corporation not engaged in trade or business within the Philippines from all
sources within this country as interest, dividends, rents, salaries, wages, premiums, annuities,
compensations, remunerations, emoluments, or other fixed or determinable annual or
periodical gains, profits, and income, it has been determined that the tax is still imposed on
income derived from capital, or labor, or both combined, in accordance with the basic principle
of income taxation (Sec. 39, Income Tax Regulations), and that a mere return of capital or
investment is not income (Par. 5,06, 1 Mertens Law of Federal 'Taxation). Since according to
the findings of the Special Team who inquired into business of the non-resident foreign film
distributors, the distribution or exhibition right on a film is invariably acquired for a
consideration, either for a lump sum or a percentage of the film rentals, whether from a parent
company or an independent outside producer, a part of the receipts of a non-resident foreign
film distributor derived from said film represents, therefore, a return of investment.

xxx xxx xxx “

Amended version:
As inserted by Republic Act No. 6110 on August 9, 1969, it provides:
(b) Tax on foreign corporations.-(1) Non-resident corporations.-A foreign corporation not
engaged in trade or business in the Philippines including a foreign life insurance company not
engaged in the life insurance business in the Philippines shall pay a tax equal to thirty-five Sec. 338-A. Non-retroactivity of rulings. - Any revocation, modification, or reversal of and of
per cent of the gross income received during each taxable year from all sources within the the rules and regulations promulgated in accordance with the preceding section or any of the
Philippines, as interests, dividends, rents, royalties, salaries, wages, premiums, annuities, rulings or circulars promulgated by the Commissioner of Internal Revenue shall not be given
compensations, remunerations for technical services or otherwise, emoluments or other fixed retroactive application if the relocation, modification, or reversal will be prejudicial to
or determinable annual, periodical or casual gains, profits, and income, and capital gains, the taxpayers, except in the following cases: (a) where the taxpayer deliberately mis-states or
Provided however, That premiums shah not include reinsurance premiums. (Emphasis omits material facts from his return or any document required of him by the Bureau of Internal
supplied) Revenue: (b) where the facts subsequently gathered by the Bureau of Internal Revenue are
materially different from the facts on which the ruling is based; or (c) where the taxpayer acted
in bad faith. (italics for emphasis)
CIR v. Benguet Corp (BIR Rules and Regulations) While it is true, as CIR alleges, that government is not
FACTS:(Benguet Corporation is a domestic corporation estopped from collecting taxes which remain unpaid on
engaged in the exploration, development and operation of account of the errors or mistakes of its agents and/or officials
mineral resources, and the sale or marketing thereof to various and there could be no vested right arising from an erroneous
entities. It is a value added tax (VAT) registered enterprise.) interpretation of law, these principles must give way to
exceptions based on and in keeping with the interest of justice
The transactions in question occurred during the period and fairplay. (then the Court cited the ABS-CBN case).
between 1988 and 1991. Under Sec. 99 of NIRC as amended
by E.O. 273 s. 1987 then in effect, any person who, in the (sub-issue)
course of trade or business, sells, barters or exchanges goods, 2. The adverse effect is that Benguet Corp became the
unexpected and unwilling debtor to the BIR of the amount
renders services, or engages in similar transactions and any
equivalent to the total VAT cost of its product, a liability it
person who imports goods is liable for output VAT at rates of previously could have recovered from the BIR in a zero-rated
either 10% or 0% (zero-rated) depending on the classification scenario or at least passed on to the Central Bank had it
of the transaction under Sec. 100 of the NIRC. known it would have been taxed at a 10% rate. Thus, it is
clear that Benguet suffered economic prejudice when its
In January of 1988, Benguet applied for and was granted consummated sales of gold to the Central Bank were
by the BIR zero-rated status on its sale of gold to Central taken out of the zero-rated category. The change in the VAT
rating of Benguet’s transactions with the Central Bank resulted
Bank. On 28 August 1988 VAT Ruling No. 3788-88 was
in the twin loss of its exemption from payment of output
issued which declared that the sale of gold to Central Bank is VAT and its opportunity to recover input VAT, and at the
considered as export sale subject to zero-rate pursuant to same time subjected it to the 10% VAT sans the option to
Section 100 of the Tax Code, as amended by EO 273. pass on this cost to the Central Bank, with the total
prejudice in money terms being equivalent to the 10% VAT
Relying on its zero-rated status and the above issuances, levied on its sales of gold to the Central Bank.
Benguet sold gold to the Central Bank during the period of 1
3. Even assuming that the right to recover Benguets excess
August 1989 to 31 July 1991 and entered into transactions that
payment of income tax has not yet prescribed, this relief would
resulted in input VAT incurred in relation to the subject sales of
only address Benguet’s overpayment of income tax but not the
gold. It then filed applications for tax refunds/credits
other burdens discussed above. Verily, this remedy is not a
corresponding to input VAT.
feasible option for Benguet because the very reason why it
was issued a deficiency tax assessment is that its input VAT
However, such request was not granted due to BIR VAT
was not enough to offset its retroactive output VAT. Indeed,
Ruling No. 008-92 dated 23 January 1992 that was issued
the burden of having to go through an unnecessary and
subsequent to the consummation of the subject sales of
cumbersome refund process is prejudice enough.
gold to the Central Ban`k which provides that sales of gold to
the Central Bank shall not be considered as export sales and
thus, shall be subject to 10% VAT. BIR VAT Ruling No. 008-
92 withdrew, modified, and superseded all inconsistent BIR

Both petitioner and Benguet agree that the retroactive

application of VAT Ruling No. 008-92 is valid only if such
application would not be prejudicial to the Benguet pursuant
Sec. 246 of the NIRC.

WON Benguet’s sale of gold to the Central Bank during the
period when such was classified by BIR issuances as zero-
rated could be taxed validly at a 10% rate after the
consummation of the transactions involved. NO.

SUB ISSUE: (WON there was prejudice to Benguet Corp due

to the new BIR VAT Ruling. YES.

(main issue):
1. At the time when the subject transactions were
consummated, the prevailing BIR regulations relied upon by
Benguet ordained that gold sales to the Central Bank were
zero-rated. Benguet should not be faulted for relying on the
BIRs interpretation of the said laws and regulations.
BPI Leasing v.CA,CTA,CIR (BIR Rules &
FACTS:For the calendar year 1986, BLC paid the CIR a total
of P1,139,041.49 representing 4% "contractor’s percentage
tax" imposed by Section 205 of the NIRC based on its gross
rentals from equipment leasing for said year.

On November 10, 1986, CIR issued Revenue Regulation 19-

86. Section 6.2 thereof provided that finance and leasing
companies registered under RA 5980 shall be subject to gross
receipt tax of 5%-3%-1% on actual income earned. This
means that companies registered under Republic Act
5980, such as BLC, are not liable for "contractor’s
percentage tax" under Section 205 but are, instead, subject
to "gross receipts tax" under Section 260 (now Section 122)
of the NIRC.

Since BLC had earlier paid the "contractor’s percentage tax for
its 1986 lease rentals BLC filed a claim for a refund with the
CIR on April 1988 for the amount representing the difference
between what it had paid as "contractor’s percentage tax" and
what it should have paid for "gross receipts tax."


1. WON Revenue Regulation 19-86 is legislative rather than
interpretative in character.

2. WON it should retroact to the date of effectivity of the law it

seeks to interpret.

1. NO. Section 1 of Revenue Regulation 19-86 plainly states
that it was promulgated pursuant to Section 277 of the NIRC.
Section 277 (now Section 244) is an express grant of authority
to the Secretary of Finance to promulgate all needful rules and
regulations for the effective enforcement of the provisions of
the NIRC.

2.NO. The principle is well entrenched that statutes, including

administrative rules and regulations, operate prospectively
only, unless the legislative intent to the contrary is manifest by
express terms or by necessary implication. In the present
case, there is no indication that the revenue regulation may
operate retroactively.

Furthermore, there is an express provision stating that it "shall

take effect on January 1, 1987," and that it "shall be
applicable to all leases written ON OR AFTER the said
date." Being clear on its prospective application, it must be
given its literal meaning and applied without further
interpretation. Thus, BLC is not in a position to invoke the
provisions of Revenue Regulation 19-86 for lease rentals it
received prior to January 1, 1987.

Administrative issuances may be distinguished according to their nature and substance:
legislative and interpretative. A legislative rule is in the matter of subordinate legislation,
designed to implement a primary legislation by providing the details thereof. An interpretative
rule, on the other hand, is designed to provide guidelines to the law which the administrative
agency is in charge of enforcing.
Conwi v. CTA (income tax defined) Commissioner v. BOAC (income tax defined)
FACTS: Petitioners Conwi et al. are Filipino citizens and FACTS: British Overseas Airways Corp. (BOAC), a wholly
employees of P&G. During the years 1970-1971, they were owned British corporation, is engaged in international airline
assigned to other foreign subsidiaries of P&G for which they business. From 1959 to 1972, it had no landing rights for
were paid in dollars. They filed their corresponding income tax traffic purposes in the Phil. but maintained a general sales
returns but subsequently claimed a refund. The alleged agent in the Phil. which was responsible for selling BOAC
overpayment of income tax resulted from the use of floating tickets covering passengers and cargoes. The CIR assessed
rates as dollar-to-peso conversion basis provided under BIR deficiency income taxes against BOAC.
Ruling 70-027. In its amended return, petitioners claimed that HELD: The definition of gross income in the Tax Code is
the par value of the peso should be used as conversion basis broad and comprehensive to include proceeds from sales of
under RA 265. transport documents. The words 'income from any source
HELD: No overpayment of tax. Income may be defined as whatever' disclose a legislative policy to include all income
an amount of money coming to a person or corporation not expressly exempted within the class of taxable income
within a specified time, whether as payment for services, under our laws. Income means "cash received or its
interest, or profit from investment. Unless otherwise equivalent"; it is the amount of money coming to a
specified, it means cash or its equivalent. Income can person within a specific time ...; it means something
also be thought of as a flow of the fruits of one's labor. distinct from principal or capital. For, while capital is a
The dollar earnings of petitioners are the fruits of their fund, income is a flow. As used in our income tax law,
labors in the foreign subsidiaries of P&G. It was a definite "income" refers to the flow of wealth.
amount of money which came to them within a specified period The source of an income is the property, activity or
of time of two years as payment for their services. Since service that produced the income. For the source of income
petitioners are citizens of the Philippines, their incomes, within to be considered as coming from the Philippines, it is
or without, are subject to income tax in accordance with Sec. sufficient that the income is derived from activity within the
21 NIRC (now, Sec. 23). As income of the petitioners, RMC 7- Philippines. Herein, the sale of tickets in the Philippines is the
71 and 41-71, reiterating BIR Ruling 70-027, shall apply. activity that produced the income. The tickets exchanged
These RMCs were issued to prescribe a uniform rate of hands here and payments for fares were also made here in
exchange for internal revenue tax purposes. Philippine currency. The situs of the source of payments is
the Philippines. The flow of wealth proceeded from, and
occured within, Philippine territory, enjoying the protection
accorded by the Philippine Government. Hence, income of
BOAC from the ticket sales is subject to Phil. income tax.
Madrigal v. Rafferty (income tax defined) Fisher v. Trinidad (Definition of Income Tax,
FACTS: Vicente Madrigal and Susana Paterno were married Realization Test of Determining Income)
with CPG as their property relations. Vicente filed his 1914 Fisher was a stockholder in Phil-Am Drug Company. The
income tax return but later claimed a refund on the contention company declared a stock dividend with Fisher’s share of the
that it was the income of the conjugal partnership. Vicente dividend amounting to P24,800. Collector of Internal Revenue
claimed that the income should be divided into two with each Trinidad demanded P889 income tax on said dividend, which
spouse filing a separate return. Hence, Vicente claimed that Fisher protested against but voluntarily paid.
each spouse should be entitled to the P8,000 exemption, Issue: WON stock dividends can be classified as income and
which would result in a lower amount of income tax due. taxable under Act No. 2833 providing for tax upon income?
HELD: The essential difference between capital and income Held: No, the receipt of stock dividends merely represents an
is that capital is a fund; income is a flow. A fund of increase in value of the assets of a corporation. The court
property existing at an instant of time is called capital. A defines stock dividends as “increase in capital of corps, firms,
flow of services rendered by that capital by the payment of partnerships, etc for a particular period.” They represent the
money from it or any other benefit rendered by a fund of increase in the proportional share of each stockholder in the
capital in relation to such fund through a period of time is company’s capital. It is not a distribution of the corp’s profits to
called income. the stockholder. It only increases the stockholder’s SOURCE
Capital is wealth, while income is the service of of income (capital), but does not increase income itself.
wealth. A tax on income is not a tax on property. Income can Issue: Definition of income tax
be defined as profits or gains. Held: Act No. 2833 taxed any distribution by a corporation out
Susana, has an inchoate right in the property of her of its earnings or profits. From the various definitions of income
husband during the life of the conjugal partnership. Her tax cited, an income tax is a tax on the yearly profits arising
interest in the ultimate property rights and in the ultimate from property, salary, private revenue, capital invested, and all
ownership of property acquired as income lies after such other sources of income. What is taxed is the profit, not the
income has become capital. She has no absolute right to ½ source.
the income of the conjugal partnership. Not being seized of a Issue: When is income realized (Test of Realization)
separate estate, Susana cannot make a separate return in Held: Stock dividend in this case is not taxable for income
order to receive the benefit of the exemption which would arise because the stockholder has received nothing out of the
by reason of the additional tax. As she has no estate and company's assets for his separate use and benefit. Instead, his
income, actually and legally vested in her and entirely original investment along with whatever gains which resulted
distinct from her husband’s property, the income cannot from the use of his and other stockholder’s money remains
properly be considered the separate income of the wife for property of the company. The fact that it is not yet his means
purposes of the additional tax. the capital is still subject to business risks that can wipe out his
entire investment. All he has received is a stock certificate
indicating the increase in his capital in the company.
Thus we can say that income has been realized when there
has been a separation of the interest of the stockholder from
the general capital of the corporation. This separation of
interest happens when the company declares a cash dividend
on the shares of shareholders.
Limpan Investment Corp. v. CIR (Actual v. Republic v. dela Rama (Actual v. Constructive receipt)
Constructive receipt) FACTS: The BIR assessed deficiency income tax against the
BIR assessed deficiency taxes on Limpan Corp, a company estate of the late Esteban dela Rama for the cash dividends it
that leases real property, for underdeclaring its rental income allegedly received but failed to include in its income tax return.
for years 1956-57 by around P20K and P81K respectively. The cash dividends were declared by the Dela Rama
Petitioner appeals on the ground that portions of these Steamship Co in favor of the decedent and were applied as
underdeclared rents are yet to be collected by the previous payment of the latter’s account with the former.
owners and turned over or received by the corporation. ISSUE: Whether crediting of accounts in the books of the
Petitioner cited that some rents were deposited with the court, company constituted a constructive receipt by the estate or the
such that the corporation does not have actual nor constructive heirs of Esteban de la Rama of the dividends, and this dividend
control over them. was an income of the estate and was, therefore, taxable? NO
The sole witness for the petitioner, Solis (Corporate Secretary- HELD: If the debts to which the dividends were applied really
Treasurer) admitted to some undeclared rents in 1956 and existed and legally demandable and chargeable against the
1957, and that some balances were not collected by the deceased, there was constructive receipt of the dividends. If
corporation in 1956 because the lessees refused to recognize there were no such debts, then there was no constructive
and pay rent to the new owners and that the corp’s president receipt. The existence and validity of the first debt was in
Isabelo Lim collected some rent and reported it in his personal dispute and no proof was adduced to show the existence and
income statement, but did not turn over the rent to the validity of the debt. As to the second debt, the alleged debtor
corporation. He also cites lack of actual or constructive control Hijos dela Rama, Inc. was an entity separate and distinct from
over rents deposited with the court. the deceased. Hence, its debts could not be charged against
Issue: WON the BIR was correct in assessing deficiency taxes the estate.
against Limpan Corp. for undeclared rental income Appellant cites the case of Herbert v. Commissioner of Internal
Held: Yes. Petitioner admitted that it indeed had undeclared Revenue, 81 F. (2d) 912 as authority that the crediting of
income (although only a part and not the full amount assessed dividends against accounts constitutes payment and
by BIR). Thus, it has become incumbent upon them to prove constructive receipt of the dividends. The citation of authority
their excuses by clear and convincing evidence, which it has misses the point in issue. In that case the existence of the
failed to do. indebtedness of Leon S. Herbert to the corporation that
Issue: When is there constructive receipt of rent? declared the dividends and against which indebtedness the
With regard to 1957 rents deposited with the court, and dividends were applied, was never put in issue, and was
withdrawn only in 1958, the court viewed the corporation as admitted. In the instant case, the existence of the obligations
having constructively received said rents. The non-collection has been disputed and, as the trial court found, has not been
was the petitioner’s fault since it refused to refused to accept proved. It having been shown in the instant case that there was
the rent, and not due to non-payment of lessees. Hence, no basis for the assessment of the income tax, the assessment
although the corporation did not actually receive the rent, it is itself and the sending of notices regarding the assessment
deemed to have constructively received them. would neither have basis, and so that assessment and the
notices produced no legal effect that would warrant the
collection of the tax.
Eisner v Macomber (Realization Test) Gutierrez v Court of Tax Appeals
There is no taxable income until there is a separation from (Income from whatever source)
capital of something of exchangeable value, thereby supplying
the realization or transmutation which would result in the Maria Morales (Gutierrez is her husband) was the registered
receipt of income. owner of an agricultural land in Mabalacat Pampanga. The
Republic, pursuant to the Military Bases Agreement, instituted
The taxpayer owned 2,200 shares of stock in a company. The expropriation proceedings for the expansion of the Clark Field
company declared a 50% stock dividend in 1916, so the Air Base.
taxpayer received an additional 1,100 shares of which 198.77
shares represented the surplus of the company earned The land was expropriated; Morales, compensated its fair
between 1913 and 1916. The shares that represented the market value. CIR included the amount paid by the Republic in
surplus had a par value of $19,877 and the Commissioner assessing taxes on Morales’ gross income. Morales protested,
treated the par value of these shares as included in the arguing that due compensation from property expropriated was
taxpayer’s taxable income. The taxpayer asserted that the not "income derived from sale, dealing or disposition of
stock dividend was not income under the 16th amendment. property" referred to by section 29 of the Tax Code and
The District court found for the taxpayer. therefore not taxable. CIR denied Morales’ protest,
Issue: contending that section 29 is intended to be broad enough in
WON the payment of a stock dividend to a stockholder of a its construction to subsume “income from any source” as
company is includable as taxable income? taxable.

Held: No. The Court understood a stock dividend to be a Issue:

method of recapitalizing surplus, and spreading that capital WON compensation from expropriation is taxable as part of
among the stockholders in proportion to the shares that they gross income
held. Thus, the shareholder's capital investment had grown
and was worth more if it were to be sold, but he still owned the Held: Yes. The acquisition by government of private property
same proportion of the company as he did previously. A stock through expropriation proceedings, said property being justly
dividend takes nothing from the property of the company and compensated, is embraced within the meaning of the term
adds nothing to that of the shareholder. The sixteenth “sale” or “disposition of property,” and the proceeds of the
amendment gave Congress the power to tax 'income', and in transaction clearly fall within the definition of gross income .
the common meaning of the word, 'income' did not include
unrealized gains that were still the property of the company. These words disclose a legislative policy to include all income
Using Towne v. Esiner's definition of income being a 'gain not expressly exempted within the class of taxable income
derived from capital' under the Revenue act of 1913, the Court under our laws, irrespective of the voluntary or involuntary
analogized 'capital' as being separate from 'income' in the way action of the taxpayer in producing the gains.
that a tree is separate from its fruit.

The Government argued that it was nevertheless a 'gain' to the

stockholder because it could be sold for more. However, the
Court stated that the taxpayer had not sold yet, and that his
investment was still exposed to the business risks that could
wipe it out. The taxpayer does not realize increased worth in
property unless he receives 'something of exchangeable value
proceeding from the property.' A stock dividend is different
from a cash dividend which is subsequently reinvested
because cash dividends actually transfer the company's
property to the stockholder. A stock dividend does not.

SEC. 29. GROSS INCOME. - (a) General definition. - "Gross income" includes gains,
profits, and income derived from salaries, wages, or compensation for personal service of
whatever kind and in whatever form paid, or from professions, vocations, trades, businesses,
commerce, sales or dealings in property, whether real or personal, growing out of ownership or
use of or interest in such property; also from interests, rents, dividends, securities, or the
transactions of any business carried on for gain or profit, or gains, profits, and income derived
from any source whatsoever.
Collector v Henderson (Compensation Income) Pirovano v CIR (Compensation Income)
Arthur Henderson is the president of the American Sec. 32[B] of the NIRC provides that Gifts, bequests and
International Underwriters for the Phils., Inc., a domestic devises are excluded from gross income liable to tax. Instead,
corporation engaged in insurance business. such donations are subject to estate or gift taxes. However, if
The CIR included as part of the spouses’ personal taxable the amount is received on account of services rendered,
income the allowances for rental of the apartment furnished by whether constituting a demandable debt or not (such as
the employer-corporation, including utilities, and the allowance remuneratory donations under Civil Law), the donation is
for travel expenses of Mrs. Henderson. considered taxable income.

The spouses did not live in the apartments and nor did they De la Rama Steamship Co. insured the life of Enrico Pirovano
avail of the travel expenses. As such, they did not pay for taxes who was then its President and General Manager. The
corresponding to the allowances. Hence, the CIR assessed company initially designated itself as the beneficiary of the
deficiency income taxes against the spouses. policies but, after Pirovano’s death, it renounced all its rights,
title and interest therein, in favor of Pirovano’s heirs.
WON allowances given by an employer, but unavailed of by an The CIR subjected the donation to gift tax. Pirovano’s heirs
employee, are taxable on the latter’s personal income. contended that the grant was not subject to such donee’s tax
because it was not a simple donation, as it was made for a full
Held: No. No part of the allowances in question redounded to and adequate compensation for the valuable services by the
the benefit of the spouses ultimately or was retained by them. late Priovano (i.e. that it was remuneratory).
The Hendersons are entitled only to a ratable value of the
allowances – the reasonable amount they would have spent for Issue:
house rental and utilities – which would be the only part of the WON the donation is remuneratory and therefore not subject to
allowances at issue subject to their personal tax. The same is donee’s tax, but rather taxable as part of gross income.
true with the allowances as no part of the allowance for
traveling expenses redounded to the benefit of the Held: No. The donation is not remuneratory. There is nothing
Hendersons. Hence, the traveling allowance is likewise not on record to show that, when the late Enrico Pirovano
taxable. rendered services as President and General Manager of the
De la Rama Steamship Co. and was “largely responsible for
the rapid and very successful development of the activities of
the company", he was not fully compensated for such services.
The fact that his services contributed in a large measure to the
success of the company did not give rise to a recoverable debt,
and the conveyances made by the company to his heirs
remain a gift or a donation. The company’s gratitude was the
true consideration for the donation, and not the services
E. Rodriguez, Inc. v. Collector (Income from dealings Tuason v. Lingad (net capital gain)
in property, Net capital gain (loss) FACTS: In his 1957 tax return the petitioner as before treated
Some of petitioner’s lands were subject of expropriation under his income from the sale of the small lots (P119,072.18) as
RA No. 333. The court awarded the expropriation to the capital gains and included only ½ thereof as taxable income. In
Republic of the Phils. Petitioner negotiated with the this return, the petitioner deducted the real estate dealer's tax
government thru the Capital City Planning Commission, he paid for 1957. It was explained, however, that the payment
resulting in a compromise agreement as follows: Govt will pay of the dealer's tax was on account of rentals received from the
petitioner the sum of around P1.2M for the expropriated mentioned 28 lots and other properties of the petitioner. On the
property of which around P0.62M were in tax-exempt basis of the 1957 opinion of the Collector of Internal Revenue,
Government Bonds. the revenue examiner approved the petitioner's treatment of
his income from the sale of the lots in question. In a
In its income tax return for 1950, Petitioner did not include the memorandum dated July 16, 1962 to the Commissioner of
P0.62M worth of bonds it received from the Govt in its Internal Revenue, the chief of the BIR Assessment Department
computation of profits / losses. The BIR however assessed advanced the same opinion, which was concurred in by the
deficiency tax on this portion to the amount of around P63K. Commissioner of Internal Revenue.
Petitioner contends that the payment in tax-exempt bonds On January 9, 1963, however, the Commissioner reversed
exempts such portion from income taxation. It contends that himself and considered the petitioner's profits from the sales of
this tax exemption is an inducement offered by the Govt to the the mentioned lots as ordinary gains.
landowners. Petitioner refers to RA No. 1400 which expressly ISSUE: Whether the properties in question which the petitioner
provides that payment of the Govt shall not be considered as had inherited and subsequently sold in small lots to other
income of the landowners for income tax purposes. persons should be regarded as capital assets. NO
Issue: WON the P 0.62M portion paid by the Govt in the form RATIO: As thus defined by law, the term "capital assets"
of bonds should be included in determining the profit / loss of includes all the properties of a taxpayer whether or not
petitioner for income tax connected with his trade or business, except: (1) stock in trade
Held: Yes, this portion paid in Bonds should be included for or other property included in the taxpayer's inventory; (2)
income tax purposes. The income derived from the sale of land property primarily for sale to customers in the ordinary course
to the Govt is different from the income derived from interests of his trade or business; (3) property used in the trade or
earned or profits earned from the exchange of the said bonds. business of the taxpayer and subject to depreciation
The tax exemption only covers the latter. Petitioner must pay allowance; and (4) real property used in trade or business. If
income tax on his profit on the sale of land, whether payment the taxpayer sells or exchanges any of the properties above-
was in the form of cash or bonds. Reference to RA No. 1400 enumerated, any gain or loss relative thereto is an ordinary
merely strengthens this decision because RA No. 333 does not gain or an ordinary loss; the gain or loss from the sale or
explicitly provide for income tax exemption, unlike the former. exchange of all other properties of the taxpayer is a capital
The court reiterated that exemption from taxation is not favored gain or a capital loss.
and presumed, and that tax exemption is strictly construed vs. The sales concluded on installment basis of the subdivided lots
the taxpayer. comprising Lot 29 do not deserve a different characterization
for tax purposes. The following circumstances in combination
show unequivocally that the petitioner was, at the time material
to this case, engaged in the real estate business: (1) the
parcels of land involved have in totality a substantially large
area, nearly seven (7) hectares, big enough to be transformed
into a subdivision, and in the case at bar, the said properties
are located in the heart of Metropolitan Manila; (2) they were
subdivided into small lots and then sold on installment basis
(this manner of selling residential lots is one of the basic
earmarks of a real estate business); (3) comparatively valuable
improvements were introduced in the subdivided lots for the
unmistakable purpose of not simply liquidating the estate but of
making the lots more saleable to the general public; (4) the
employment of J. Antonio Araneta, the petitioner's attorney-in-
fact, for the purpose of developing, managing, administering
and selling the lots in question indicates the existence of
owner-realty broker relationship; (5) the sales were made with
frequency and continuity, and from these the petitioner
consequently received substantial income periodically; (6) the
annual sales volume of the petitioner from the said lots was
considerable, e.g., P102,050.79 in 1953; P103,468.56 in 1954;
and P119,072.18 in 1957; and (7) the petitioner, by his own tax
returns, was not a person who can be indubitably adjudged as
a stranger to the real estate business. Under the
circumstances, this Court finds no error in the holding below
that the income of the petitioner from the sales of the lots in
question should be considered as ordinary income.
Calasanzv.CIR(tax as capital gain/tax as ordinary income?) Gonzales v. CTA (Is interest from sale to
Facts: Petitioner inherited agricultural land. Wanting to government capital gain or ordinary income?)
liquidate the same, she developed the area into a subdivision, Facts:
divided the same into lots, made improvements such as roads, • Estate sold to the government in expropriation
gutters, drainage, and lighting, and subsequently sold proceedings. Amount still due from the government:
individual lots to the public for profit. P1.3M. Using this amount at a rate of 6%/annum,
• CIR claims that petitioner is a real-estate dealer and thus interest on the same: P0.53M. Since their were 6
required to pay real estate tax as well as a deficiency heirs to the estate, each had a share of P89k of the
income tax on profits derived from sale of lots based on interest;
rates of ordinary income.
• Argument of petitioner: inherited land is capital asset. • Tentative return was prepared and filed for each of
Inheritance had to be improved in order to be liquidated in the two petitioners (heirs) in the case with the
the only possible and advantageous way. It would be amounts of P213k as capital gain, and the amount of
difficult to sell the entire estate and thus has to be P89k (share on interest) as ordinary income.
• Counter argument of respondent: petitioner involved in a • Petitioners seek a refund based on the argument that
series of real-estate transactions for profit thus can be “the accessory follows the principal”: thus the P89k
considered “doing business” owing to continuity and should be considered as part of capital gain, and be
frequency of said transactions. Thus converting the taxed as such, rather than ordinary income.
investment property to a business property. Issue: WON interest received should be taxed as capital gain
Issue: WON petitioner is a real-estate dealer; WON the gains or ordinary income.
realized from the sale of the lots are taxable in full as ordinary Held: Yes.
income or capital gains taxable at capital gain rates. Ratio:
Held: Real-estate dealer. Tax as ordinary income. • Eminent domain = “sale/disposition of property” within
Ratio: Sec. 29 of the (then) Tax Code; profit from such
• See Sec. 39(a)(1) of the NIRC. Statutory definition is condemnation proceedings constitutes capital gain. –
negative in nature. If the asset is not among the affirming Gutierrez v. CTA;
exceptions, it is a capital asset. Conversely, assets falling
within the exceptions are ordinary assets. And • But interest from such a sale does not partake of the
necessarily, any gain resulting from the sale or exchange same nature as the sale itself. Interest is
of an asset is a capital gain or an ordinary gain depending compensation for the delay in the return of such
on the kind of asset involved in the transaction. capital. In fact, authorities support the conclusion that
• Though the Tuasan case offered guidelines in for income tax purposes, interest does not form part
determining whether property was sold in the regular of the price paid by the Government in condemnation
course of business or whether it was sold as a capital proceedings; and may not be treated as part of the
asset, there is no rigid rule and each must, in the last capital gain.
analysis, rest upon its own peculiar facts and
circumstances. In this case: • Regarding interest: “the additional payment was
o Business element of development very apparent, necessary to give the owners the full equivalent of the
land originally devoted to rice/fruit trees. value of the property at the time it was taken. XXX It
o Existence of contracts receivables – installment is not a capital gain upon an asset sold.” – Kieselback
basis of payments suggesting the number, v. CIR (US);
continuity and frequency of the sales.
o Another factor: lots were advertised for sale to
the public, commission sales paid out.
• Petitioner’s defense of “sale for the purpose of liquidation”
rebutted. US jurisprudence has rejected the liquidation
test in determining whether or not a tax payer is carrying
on a trade or business. “The liquidation sale may be
conducted in the most advantageous manner to the seller
and he will not lose the benefits of the capital gain
provision of the statute unless he enters the real estate
business and carries on the sale in the manner in which
such a business is ordinarily conducted. In that event, the
liquidation constitutes a business and a sale in the
ordinary course of such a business and the preferred tax
status is lot.”
• “Property initially classified as a capital asset may
thereafter be treated as an ordinary asset if a combination
of the factors indubitably tend to show that the activity
was in furtherance of or in the course of the taxpayer’s
trade or business. Thus, a sale of inherited real property
usually gives capital gain or loss even though the property
has to be subdivided or improved or both to make it
saleable. However, if the inherited property is
substantially improved or very actively sold or both it may
be treated as held primarily for sale to customers in the
ordinary course of the heir’s business.”
CIR v. Rufino (Merger/Consolidation) CIR v. Binalbagan Estate (Merger, Consolidation)
Facts: Facts:
• Corporation engaged in the theater/amusement business. • Upon advice of then President Roxas, BISCOM in order to
Old corporation’s charter was about to end. New achieve economy in the rehabilitation of destroyed sugar
corporation formed to absorb assets of the first and mills and to lower costs of operation. Binalbagan Estate
continue operations. and Isabela Sugar proposed to merge their assets to form
a new corporation to be known as. Previously however
• Because of a prohibition in the old Corporation Law, it was Binalbagan Estate’s records were lost during World War II.
necessary for the Old and New corporation to enter into a • A committee was formed (Westly Committee) to ascertain
merger that involved a Deed of Assignment that mandated the contribution and participation of both corporations in
transfer of assets of the old corporation to the new BISCOM: Binalbagan’s tangible assets were pegged at
corporation in exchange for New corporation stocks to be P2.54M, sugar quota at P1.48M while Isabela’s tangible
issued to the shareholders of the Old corporation. Actual assets were placed at P2.44M. Merged was effected with
transfer of property was not made on the date of the 216,000 BISCOM shares allotted to Binalbagan Estate.
merger. Later, Binalbagan sold its shares to (and paid in
installment by) Phil. Planters Investment Corp. Income tax
• BIR questions the series of transactions leading to the returns reported by Binalbagan were as follows: 1951,
merger claiming that it was not undertaken for bona fide P14k; 1952, 37k; P1953, 139k.
business purposes but merely to avoid liability for the • CIR however assessed deficiency income tax in the sums
capital gains tax on the exchange of the old for the new of P267k, P36k, and 127k for 1951, 1952, and 1953,
shares of stock. respectively. In said assessments, he spread over 1951,
Issue: Was there a valid merger which would allow the 1952, and 1953 the gain realized form the sale of
exchange to be exempt from capital gains tax? Binalbagan’s BISCOM shares in accordance with Sec. 43
Held: Yes. of the National Revenue
Ratio: Code.
• The Court finds no impediment to the later exchange of • Binalbagan paid under protest. CTA found the appraisal
property for stock between the two corporations made by the Westly Committee the correct acquisition
retroacting to the day of the merger. It was necessary for value and thus ordered the refund.
the old corporation to surrender its assets first to the new Issue: Did the Westly Committee make the correct
corporation before the latter could issue its own stock to calculation? How much did Binalbagan gain when it sold
the shareholders of the old corporation. The said issuance 176,945 nonpar value BISCOM shares to PPIC?
required a resolution from a special stockholders meeting Held: Yes
in order to make the Deed of Assignment valid. Ratio:
• To determine gain or loss from the sale of nonpar value
• The basic consideration is the purpose of the merger since BISCOM shares, the basis is the acquisition cost of said
this would determine whether the exchange of properties shares. Binalbagan however did not pay for them in cash
involved would be subject or not to capital gains tax. The but with its tangible assets and sugar quota. This brings us
criterion laid down by law is that the merger must be to the question value of the latter’s tangible assets and
undertaken for a bona fide business purpose and not sugar quote as of 1946 when Binalbagan acquired the
solely for the purpose of escaping the burden of taxation. 216,000 nonpar value shares of BISCOM in exchange
• If the operation of the merger “is one having no business • CIR bases its assessment on the fact that P824k was the
or corporate purpose – a mere devise which put on the acquisition cost as determined by Mr. Ramos.
form of a corporate reorganization as a disguise for o SC: Considering that records were destroyed, no
concealing its real character, and the sole object and showing how this figure was established. The
accomplishment of which was the consummation of a CIR places much emphasis on what he asserts
preconceived planS to transfer a parcel of corporate as estoppel in pais and contends that because
shares to the petitioner, a corporation is created but is the said amount appears in Binalbagan’s book,
nothing more than a contrivance. It was brought into the same should be held controlling. WE do not
existence for no other purpose; it performed, as it was find this contention material herein inasmuch as
intended from the beginning it should perform, no other whether or the P824k is held the correct
function. When that limited function had been exercised, it acquisition cost of the tangible assets in question,
immediately was put to death.” – this would be a devious the same would not determine the profits realized
form of conveyance masquerading as a corporate from the sale of Binalbagan’s BISCOM shares to
reorganization and nothing else. PPC. The basis in computing the taxable gain
from the sale of Binalbagan’s BISCOM shares is
• No such intention is apparent in the instant case. It is the fair market value (FMV) of the assets and
clear that the purpose of the merger was to continue the sugar quota in question. At any rate,
business of the old corporation, whose corporate life was Binalbagan’s error in carrying the figure P824k in
about to expire, through the new corporation to which all its books and using the same in its income tax
the assets and obligation of the former had been returns for 1951, 1952, and 1953 neither
transferred. Strong factor in favor of this: no dissolution of benefited Binalbagan, nor prejudiced the
new corporation right after the merger. On the contrary, government
the New Corporation continued to operate the places of
amusement originally owned by the old corporation. o SC: Even assuming that the amount was as
claimed, this cannot be considered the
acquisition cost as claimed by CIR. We are not
called upon to decide the income tax due on the
profit which may have been realized by Commisioner v. Manning (Disguised Dividend)
Binalbagan’s when it acquired the 216,000 FACTS: MANTRASCO had 25,000 common shares, wherein
BISCOM shares IN EXCHANGE for its tangible 24,700 of which was owned by Reese. The rest of the shares
assets, in which case the basis would be the were owned by private respondents. A trust agreement was
acquisition cost of said assets pursuant to then executed between them, the manifest intention of which was to
Sec. 35(b) of the Tax Code – Gutierrez v. CTA. make respondents the sole owners of Reese’s interest in
The controversy rests on whatever tax is MANTRASCO upon his death.
imposable on the gain obtained from the sale of When Reese died, MANTRASCO made partial payment of
BISCOM shares to PPIC. In short, the first Reese’s shares and a new certificate was issued in the favor of
transaction was an exchange. The second, a MANTRASCO.
sale. The basis in determining the gain in such Thereafter, MANTRASCO’s stockholders issued a
sale is the cost of shares. Thus “where the Resolution declaring that the 24,700 be reverted to the capital
consideration is property, its amount is account of the company as a stock dividend to be distributed to
determined by its FMV at the time of the respondent. Eventually, all the shares were paid and
exchange and not by the original cost of the distributed to private respondents.
consideration. It is the same as if the property BIR claims that the distribution of Reese’s share as
given in exchange had first been sold and the stock dividend was in effect a distribution of the “asset or
purchase price then immediately used to buy the property” of the corporation as may be gleamed from the
property whose cost basis is under consideration. payment of cash for the redemption of said stock and upon
The consideration for property surrendered distribution of the same to respondents; hence, taxable as
therein.” income of respondents. On the other hand, respondents claim
that their respective shares remained the same before and
o Accepted formula for computing the taxable gain after the declaration of the stock dividends and only the
or income received during the year which the number of shares held by them had changed, therefore, they
gross profit was realized is found in Sec. 43 of are not liable for taxes.
the then Tax Code. (Gross Profit/Selling Price) x Both parties were on the assumption that the stock
Installment Received = Profit for the year dividends were treasury shares.
HELD: They were not treasury shares. Treasury shares are
stocks issued and fully paid for and reacquired by the same
corporation either by purchase, donation, forfeiture or other
means. Although they are issued shares, they do not have the
status of outstanding shares being in the treasury. Such share,
as long as it is held by the corporation as such, participates
neither as dividends, because dividends cannot be declared by
the corporation to itself, nor in the meetings of the corporation
as a voting stock, for otherwise equal voting powers among
stockholders will be effectively lost and the directors will be
able to perpetuate their control of the corporation. These
essential features of a treasury stock are lacking in the
questioned shares.
The intention of the parties to the trust agreement was
to treat the 24,700 shares of Reese as absolutely outstanding
shares of Reese’s estate until they were fully paid. Such being
their nature, their declaration as treasury stock was a complete
nullity, being violative of public policy. A stock dividend, being
one payable in capital stock, cannot be declared out of
outstanding corporate stock, but only from retained earnings.
When the companies involved parted of their earnings
to “buy” the corporate holdings of Reese, they were in ultimate
effect making a distribution of such earnings to the
respondents. All these amounts are subject to income tax.
C.M. Hoskin v. Commissioner (disguised dividend) Kuenzle vs CIR (disguised dividend)
FACTS: The petitioner company is engaged in the real estate Petitioner, a domestic corporation, filed its income tax returns
business as brokers, managing agents and administrators. It for the taxable years 1953, 1954 and 1955, declaring net
was founded by Mr. C.M. Hoskins who owned 996 shares out losses of P2,085.84, P4,953.91 and P9,246.07 respectively.
of its 1,000 shares. The other 4 shares were owned by other Upon a verification thereof, the respondent, on September 9,
officers of the corporation. 1957, assessed against it the deficiency income taxes in
At the time that this controversy arose, Hoskin was the question, arrived at as follows:
President, Chairman of the Board of Directors, stockholder and For the year 1953, by disallowing as deductions all
was also a salesman-broker of the company which entitled him amounts paid that year by the petitioner as bonus to its officers
to salaries and bonuses including 50% of the supervision fees and staff-members in the aggregate sum of P175,140.00, this
that was collected by the company from its clients (amounting resulting in a net taxable income of petitioner amounting to
to Php99,977.91). P173,054.16; for the taxable years 1954 and 1955, the similar
The CIR disallowed the deduction made by the petitioner in its disallowance as deductions of a portion of the bonuses paid by
income tax return of the amount representing the supervision petitioner in said years to its officers and staff-members in the
fees. aggregate sums of P88,193.33 for 1954 and P90,385.00 for
HELD: The payment by the taxpayer to its controlling 1955, resulted likewise in a net taxable income for petitioner in
stockholder of 50% of its supervision fees is not deductible the sum of P83,239.42 for 1954 and P81,138.93 for 1955.
ordinary and necessary expense and should be treated as Tax Court and CIR considered bonuses given as
distribution of earnings and profits of the taxpayer. “unreasonable” construing Section 30(a) (1) of the Revenue
The amount was inordinately large. Code . Petitioners contends that respondent and tax court
Bonus to employees made in good faith and as additional acted in an arbitrary manner.
compensation are deductible, PROVIDED, such payment, ISSUE: Whether or not the bonuses are to be considered
when added to the stipulated salaries, do not exceed a reasonable so as to be considered deductible under the
reasonable compensation for the services rendered. The Revenue Code.
conditions precedent to the deduction of bonuses are as HELD: NO. Court agrees with respondent that bonuses given
follows: (a) the payment of the bonuses is in fact cannot be deducted. It is a general rule that `Bonuses to
compensation; (b) it must be for personal services actually employees made in good faith and as additional compensation
rendered; and (c) the bonuses, when added to the salaries, are for the services actually rendered by the employees are
reasonable. deductible, provided such payments, when added to the
Although there’s no fixed test in determining what is stipulated salaries, do not exceed a reasonable compensation
reasonable, some tests used are as follows: i. Amount and for the services rendered' (4 Mertens Law of Federal Income
quality of the services performed; ii. Good faith; iii. Character of Taxation, Sec. 25.50, p. 410). The condition precedents to the
the taxpayer’s business; iv. Volume and amount of its deduction of bonuses to employees are: (1) the payment of the
earnings; v. locality, type and extent of the services rendered; bonuses is in fact compensation; (2) it must be for personal
vi. Salary policy; vii. Size of the business; viii. Employee’s services actually rendered; and (3) bonuses, when added to
qualifications and contributions to the business; and ix. the salaries, are `reasonable ... when measured by the amount
General economic condition. and quality of the services performed with relation to the
For income tax purposes, the employer cannot legally such business of the particular taxpayer' (Idem., Sec. 25.44, p. 395).
bonuses as deductible unless they are shown to be Petitioner fails such test considering that (1) recipients of
reasonable. bonuses were top officers, all foreigners, who were not
The question of allowing or disallowing as deductible evidenced to have any special talent, extraordinary training or
expenses the amounts paid to corporate officers by did anything to contribute materially to petitioner company's
way of bonus is determined by the CIR exclusively for success, (2) there were Filipino employees who were not given
income tax purposes. any increases at all , (3) bonuses were made at times that
Although admittedly, it is the corporation’s discretion to fix the petitioner allegedly suffered net losses and (4) petitioner
amounts to be paid to its corporate officers, this right is NOT admits that the amounts it paid to its top officers in 1953 as
absolute. It cannot be used for the purpose of evading bonus or "additional remuneration" were taken either from
payment of taxes. operating funds, that is, funds from the year's business
The corporation was practically of a sole proprietorship of operations, or from its general reserve. Normally, the amounts
Hoskin. taken from the first source should have constituted profits of
the corporation distributable as dividends amongst its
Hoskin had virtually absolute control of the company and as he shareholders. Instead it would appear that they were diverted
has chosen to conduct his business as a corporation, he has from this purpose and used to pay the bonuses for the year
also bound himself with the corporate norms and obligations. 1953.
He is bound to pay income tax imposed on corporations and Petitioner justifies payment of these bonuses to its top officials
may not diminish his tax liability by way of corporate by saying that its general salary policy was to give a low salary
resolutions authorizing payment of inordinately large but to grant substantial bonuses at the end of each year, so
commissions and fees to its controlling stockholder. that its officers may receive considerable lump sums with

Now Article Section 34 (a) (1) of 1997 NIRC:
(A) Expenses. -
(1) Ordinary and Necessary Trade, Business or Professional Expenses.-
(a) In General. - There shall be allowed as deduction from gross
income all the ordinary and necessary expenses paid or incurred during
the taxable year in carrying on or which are directly attributable to, the
development, management, operation and/or conduct of the trade,
business or exercise of a profession, including:
(i) A reasonable allowance for salaries, wages, and other
forms of compensation for personal services actually
rendered, including the grossed-up monetary value of fringe
benefit furnished or granted by the employer to the employee:
Provided, That the final tax imposed under Section 33 hereof
has been paid;
which to purchase whatever expensive objects or items they Commissioner vs JAL (Gross or taxable income from
might need. While We are not prepared to hold that such policy sources within the Philippines)
is unreasonable, still We believe that its application should not Respondent Japan Air Lines, Inc. (hereinafter referred to as
result in producing a net loss for the employer at the end of the JAL for brevity), is a foreign corporation engaged in the
year, for if that were to be the case, the scheme may be business of international air carriage. From 1959 to 1963, JAL
utilized to freely achieve some other purpose — evade did not have planes that lifted or landed passengers and cargo
payment of taxes. in the Philippines as it had not been granted then by the Civil
Aeronautics Board (CAB) a certificate of public convenience
and necessity to operate here. However, since mid-July, 1957,
JAL had maintained an officeat the Filipinas Hotel, Roxas
Boulevard, Manila. Said office did not sell tickets but was
maintained merely for the promotion of the company's public
relations and to hand out brochures, literature and other
information playing up the attractions of Japan as a tourist spot
and the services enjoyed in JAL planes.
On July 17, 1957, JAL constituted the Philippine Air Lines
(PAL), as its general sales agent in the Philippines. As an
agent, PAL, among other things, sold for and in behalf of JAL,
plane tickets and reservations for cargo spaces which were
used by the passengers or customers on the facilities of JAL.
On June 2, 1972, JAL received deficiency income tax
assessment notices and a demand letter from petitioner
Commissioner of Internal Revenue (hereinafter referred to as
Commissioner for brevity), all dated February 28, 1972, for a
total amount of P2,099,687.52 inclusive of 50% surcharge and
interest, for years 1959 through 1963
On June 19, 1972, JAL protested said assessments alleging
that as a non-resident foreign corporation, it was taxable only
on income from Philippine sources as determined under
Section 37 of the Tax Code, and there being no such income
during the period in question, it was not liable for the deficiency
income tax liabilities assessed . The Commissioner resolved
otherwise and in a letter-decision dated December 21, 1972,
denied JAL's request for cancellaton of the assessment .
ISSUE: Whether or not proceeds from JAL ticket sales in the
Philippines are taxable as income from sources within the
HELD: YES. The issues in the case at bar have already been
laid to rest in no less than three cases resolved by this Court.
Anent the first issue, the landmark case of Commissioner of
Internal Revenue vs. British Overseas Airways Corporation
(G.R. No.L-65773-74, April 30, 1987, 149 SCRA 395) has
categorically ruled:
"The source of an income is the property, activity or
service that produced the income. For the source of
income to be considered as coming from the
Philippines, it is sufficient that the income is derived
from activity within the Philippines. In BOAC's case,
the sale of tickets in the Philippines is the activity that
produces the income. The tickets exchanged hands
here and payments for fares were also made here in
Philippine currency. The situs of the source of
payments is the Philippines. The flow of wealth
proceeded from, and occurred within, Philippine
territory, enjoying the protection accorded by the
Philippine government. In consideration of such
protection, the flow of wealth should share the burden
of supporting the government.
"x x x x x x
"True, Section 37(a) of the Tax Code, which
enumerates items of gross income from sources
within the Philippines, namely: (1) interest, (2)
dividends, (3) service, (4) rentals and royalties, (5)
sale of real property, and (6) sale of personal
property, does not mention income from the sale of
tickets for international transportation. However, that
does not render it less an income from sources within
the Philippines.
Section 37, by its language does not intend the enumeration to NDC vs Commissioner (Gross or taxable income from
be exclusive. It merely directs that the types of income listed sources within the Philippines)
therein be treated as income from sources within the The National Development Co. (NDC) entered into contracts in
Philippines. A cursory reading of the section will show that it Tokyo with several Japanese shipbuilding companies for the
does not state that it is an all-inclusive enumeration, and that construction of 12 ocean-going vessels. Initial payments were
no other kind of income may be so considered (British Traders made in cash and through irrevocable letters of credit. When
Insurance Co., Ltd. vs. Commissioner of Internal Revenue, 13 the vessels were completed and delivered to the NDC in
SCRA 719 [1965]). Tokyo, the latter remitted to the shipbilders the amount of US$
"x x x x x x 4,066,580.70 as interest on the balance of the purchase price.
"The absence of flight operations to and from the No tax was withheld. The Commissioner then held NDC liable
Philippines is not determinative of the source of on such tax in the total amount of P5,115,234.74 under
income or the situs of income taxation. x x x The test ISSUE: Whether or not NDC is liable for tax
of taxability is the `source'; and the source of an HELD: YES. NDC argues that the Japanese shipbuilders were
income is that activity x x x which produced the not subject to tax under the above provision because all the
income (Howden & Co., Ltd. vs. Collector of Internal related activities — the signing of the contract, the construction
Revenue, 13 SCRA 601 [1965]). Unquestionably, the of the vessels, the payment of the stipulated price, and their
passage documentations in these cases were sold in delivery to the NDC — were done in Tokyo. The law, however,
the Philippines and the revenue therefrom was 15
does not speak of activity but of "source," which in this case
derived from a business activity regularly pursued is the NDC. This is a domestic and resident corporation with
within the Philippines. x x x The word `source' principal offices in Manila.
conveys one essential Idea, that of origin, and the The petitioner also forgets that it is not the NDC that is being
origin of the income herein is the Philippines (Manila taxed. The tax was due on the interests earned by the
Gas Corporation vs. Collector of Internal Revenue, 62 Japanese shipbuilders. It was the income of these companies
Phil. 895 [1935])." and not the Republic of the Philippines that was subject to the
The above ruling was adopted en toto in the subsequent case tax the NDC did not withhold.
of Commissioner of Internal Revenue vs. Air India and the In effect, therefore, the imposition of the deficiency taxes on
Court of Tax Appeals (G.R. No. L-72443, January 29, 1988, the NDC is a penalty for its failure to withhold the same from
157 SCRA 648) holding that the revenue derived from the the Japanese shipbuilders. Such liability is imposed by Section
sales of airplane tickets through its agent Philippine Air Lines, 53(c) of the Tax Code, thus:
Inc., here in the Philippines, must be considered taxable Section 53(c). Return and Payment. — Every person required
income, and more recently, in the case of Commissioner of to deduct and withhold any tax under this section shall make
Internal Revenue vs. American Airlines, Inc. and Court of Tax return thereof, in duplicate, on or before the fifteenth day of
Appeals (G.R. No. 67938, December 19, 1989, 180 SCRA April of each year, and, on or before the time fixed by law for
274), it was likewise declared that for the source of income to the payment of the tax, shall pay the amount withheld to the
be considered as coming from the Philippines, it is sufficient officer of the Government of the Philippines authorized to
that the income is derived from activities within this country receive it. Every such person is made personally liable for such
regardless of the absence of flight operations within Philippine tax, and is indemnified against the claims and demands of any
territory. person for the amount of any payments made in accordance
with the provisions of this section. (As amended by Section 9,
R.A. No. 2343.)

Income from Sources Within the Philippines.-

(A) Gross Income From Sources Within the

Philippines. - The following items of gross income shall be
treated as gross income from sources within the Philippines:

(1) Interests. - Interests derived from sources within

the Philippines, and interests on bonds, notes or other
interest-bearing obligation of residents, corporate or
Howden vs Collector (Gross or taxable income from CIR v. Mitsubishi Metal (Exclusions under the Tax Code
sources within the Philippines) – certain passive income of foreign govts from Phil.
In 1950 the Commonwealth Insurance Co., a domestic Investments)
corporation, entered into reinsurance contracts with 32 British Mitsubishi Metal entered into Loan and Sales contract with
insurance companies not engaged in trade or business in the Atlas Mining and Devt Corp. for the capacity expansion of
Philippines, whereby the former agreed to cede to them a Atlas’ mines in Cebu. Under the terms, Mitsubishi agreed to
portion of the premiums on insurances on fire, marine and extend a US$20M loan in exchange for copper concentrates
other risks it has underwritten in the Philippines. Alexander from Atlas. To comply with said contract, Mitsubishi loaned
Howden & Co., Ltd., also a British corporation not engaged in JPN Y4.32B from Export-Import Bank of Japan (which is
business in this country, represented the aforesaid British owned and controlled by Japanese govt), and JPN Y2.88B
insurance companies. The reinsurance contracts were from a consortium of Japanese banks.
prepared and signed by the foreign reinsurers in England and 15% withholding tax was assessed on interest payments by
sent to Manila where Commonwealth Insurance Co. signed Atlas to Mitsubishi. Mitsubishi applied for tax credit on the
them. amount withheld, saying that it was a mere agent to Ex-Im
On May 12, 1954, within the two-year period provided for by Bank. It also claimed a tax credit on the portion loaned from a
law, Alexander Howden & Co., Ltd. filed with the Bureau of consortium of Japanese banks, stating that said loans
Internal Revenue a claim for refund of the P66,112.00, later ultimately came from Ex-Im Bank also. Respondents rely on
reduced to P65,115.00, because Alexander Howden & Co., Sec. 29 (b) (7,A) of NIRC which excludes from gross income:
Ltd. agreed to the payment of P977.00 as income tax on the (A) Income received from their investments in the Philippines in
P4,985.77 accrued interest. A ruling of the Commissioner of loans, stocks, bonds or other domestic securities, or from
Internal Revenue, dated December 8, 1953, was invoked, interest on their deposits in banks in the Philippines by (1)
stating that it exempted from withholding tax reinsurance foreign governments, (2) financing institutions owned,
premiums received from domestic insurance companies by controlled, or enjoying refinancing from themS.
foreign insurance companies not authorized to do business in Appellate division of BIR granted the tax credit for which
the Philippines. Subsequently, Alexander Howden & Co., Ltd. Mitsubishi executed a waiver and disclaimer in favor of Atlas. It
instituted an action in the Court of First Instance of Manila for stated that Mitsubishi was a mere arranger and conduit of Ex-
the recovery of the aforesaid amount claimed. Pursuant to Im Bank of Japan, thus falling within the exclusion of the NIRC.
Section 22 of Republic Act 1125 the case was certified to the During the pendency of the case above, another 15% tax was
Court of Tax Appeals. On November 24, 1961 the Tax Court withheld for which Atlas filed another claim for tax credit on the
denied the claim. same basis and was again granted. Hence the appeal by the
ISSUE: Whether or not portions of premiums earned from Commissioner.
insurances locally underwritten by a domestic corporation, Issue: WON Mitsubishi is indeed merely a conduit of Ex-Im
ceded to and received by non-resident foreign reinsurance Bank, which determines WON the interest payments are
companies, thru a non-resident foreign insurance broker, excluded from gross income taxation
pursuant to reinsurance contracts signed by the reinsurers Held: No.The loan between Ex-Im Bank and Mitsubishi is a
abroad but signed by the domestic corporation in the distinct and separate contract from that between Mitsubishi
Philippines, subject to income tax or not? and Atlas. Mitsubishi is the principal party in the contract
HELD: YES. The source of an income is the property, activity between itself and Atlas. They are reciprocally obligated to
or service that produced the income. The reinsurance each other. Mitsubishi was obliged to provide the funds for the
premiums remitted to appellants by virtue of the reinsurance installation of new machinery, while Atlas was obliged to sell
contracts, accordingly, had for their source the undertaking to copper concentrate to Mitsubishi for 15yrs. The contract is not
indemnify Commonwealth Insurance Co. against liability. Said a contract of agency and had nothing to do with Ex-Im bank.
undertaking is the activity that produced the reinsurance Thus, the contract does not fall within the ambit of Sec. 29 (b)
premiums, and the same took place in the Philippines. In the (7,A) of NIRC, and the interest payments are not excluded
first place, the reinsured, the liabilities insured and the risks from the 15% withholding tax.
originally underwritten by Commonwealth Insurance Co., upon The court reiterated that exemption from taxation is not favored
which the reinsurance premiums and indemnity were based, and presumed, and that tax exemption is strictly construed vs.
were all situated in the Philippines. Secondly, contrary to the taxpayer.
appellants' view, the reinsurance contracts were perfected in
thePhilippines, for Commonwealth Insurance Co. signed them
last in Manila. 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. And, thirdly,
the parties to the reinsurance contracts in question evidently
intended Philippine law to govern. Article 11 thereof provided
for arbitration in Manila, 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. Furthermore, the contracts
provided for the use of Philippine currency as the medium of
exchange and for the payment of Philippine taxes.
CIR v. General Foods (Phils.), Inc. (Requisites for CIR v. Isabela Cultural
deductibility, nature: ordinary and necessary)
FACTS: General Foods (Phils.) Inc. manufactures beverages
such as Kool-Aid, Calumet and Tang. In Feb 1985, they
claimed as deduction P9,461,246 (the media advertising for
Tang). CIR disallowed half of this amount and assessed the
company a deficiency income tax of P2,635,141.42. MR was
denied, CTA affirmed CIR. CA reversed CTA and cancelled the
ISSUE: Whether or not the subject media advertising expense
for "Tang" incurred by respondent corporation was an ordinary
and necessary expense fully deductible under the National
Internal Revenue Code (NIRC)? NO
HELD: The advertising expense is not an ordinary and
necessary expense, but a capital expenditure that should be
spread out over a reasonable time. It failed to meet the two
conditions set by US jurisprudence: (1) reasonableness of the
amount incurred [their advertising expense was almost double
the amount of their administrative expense] and (2) not be a
capital outlay to create goodwill. Advertising is generally of 2
kinds: (1) stimulate current sale of merchandise and (2)
stimulate future sale of merchandise. The first kind is allowed,
subject to reasonableness of the expenditure. The second is
normally spread out over time. The company’s advertising
expense falls under the second kind, as the company admitted
it is to “protect the brand franchise”.
Aguinaldo v. Com Com v. Soriano Cia
Gutierrez v. Collector Gancayo v. Collector
Roxas v. CTA Com v. Prieto
CIR v. Lednicky CIR v. Bicolandia
Plaridel Security Com v. Priscilla Estate
Fernandez Hermanos v. Com Collector v. Goodrich
• Commissioner assessed Goodrich based on disallowed deductions,
claimed by Goodrich, consisting of several alleged bad debts, in the
aggregate sum of P50,455.41, for the year 1951, and the sum of P30,138.88,
as representation expenses allegedly incurred in the year 1952. (For the
values of the individual debts and expenses, please see original)
• Goodrich had appealed from said assessments to the Court of Tax
Appeals, which, after appropriate proceedings, rendered, on June 8, 1963, a
decision allowing the deduction for bad debts, but disallowing the alleged
representation expenses.
• On motion for reconsideration and new trial, filed by Goodrich, the
Court of Tax Appeals amended its aforementioned decision and allowed said
deductions for representation expenses.
WON the claims for deduction based on alleged representation
expenses must be allowed.
• NO. The claim for deduction thereof is based upon receipts issued,
not by the entities in which the alleged expenses had been incurred, but by
the officers of Goodrich who allegedly paid them.
• The claim must be rejected. If the expenses had really been incurred,
receipts or chits would have been issued by the entities to which the
payments had been made, and it would have been easy for Goodrich or its
officers to produce such receipts.
• These issued by said officers merely attest to their claim that they
had incurred and paid said expenses. They do not establish payment of said
alleged expenses to the entities in which the same are said to have been
incurred. The Court of Tax Appeals erred, therefore, in allowing the
deduction thereof.
Whether or not the debts had been properly deducted as bad debts for
the year 1951.
• The claim for deduction of ten (10) debts should be rejected.
o Goodrich has not established either that the debts are
actually worthless or that it had reasonable grounds to believe
them to be so in 1951. Our statute permits the deduction of debts
"actually ascertained to be worthless within the taxable year,"
obviously to prevent arbitrary action by the taxpayer, to unduly
avoid tax liability.
o The requirement of ascertainment of worthlessness requires
proof of two facts: (1) that the taxpayer did in fact ascertain the
debt to be worthlessness, in the year for which the deduction is
sought; and (2) that, in so doing, he acted in good faith.
o Good faith on the part of the taxpayer is not enough. He must
show, also, that he had reasonably investigated the relevant facts
and had drawn a reasonable inference from the information thus
obtained by him.2 Respondent herein has not adequately made
such showing.
o The payments made, some in full, after some of the foregoing
accounts had been characterized as bad debts, merely stresses
the undue haste with which the same had been written off. At any
rate, respondent has not proven that said debts were worthless.
o There is no evidence that the debtors can not pay them. It
should be noted also that, in violation of Revenue Regulations No.
2, Section 102, respondent had not attached to its income tax
returns a statement showing the propriety of the deductions
therein made for alleged bad debts.
• Upon the other hand, the deduction of eight (8) accounts,
aggregating P22,627.35, as bad debts should be allowed:
o One account was contracted in 1950. Referred, for collection,
to respondent's counsel, the latter secured no payment. In
November, 1950, the corresponding suit for collection was filed.
The debtor's counsel was allowed to withdraw, as such, the
debtor having failed to meet him. In fact, the debtor did not appear
at the hearing of the case. Judgment was rendered in 1951 for the
creditor. The corresponding writ of execution was returned
unsatisfied, for no properties could be attached or levied upon.
o Four (4) accounts were 2 or 3 years old in 1951. After the
collectors of the creditor had failed to collect the same, its counsel
wrote letters of demand to no avail. Considering the small PRC v. CA
amounts involved in these accounts, the taxpayer was justified in FACTS:
feeling that the unsuccessful efforts therefore exerted to collect • Philippine Refining Company (PRC) was assessed by respondent
the same sufficed to warrant their being written off. Commissioner of Internal Revenue (Commissioner) to pay a deficiency tax
o Three (3) accounts were among those referred to counsel for for the year 1985 in the amount of P1,892,584.00.
Goodrich for collection. Up to 1951, when they were written off, • The assessment was timely protested by petitioner on the ground
counsel had sent various letters of demand to them. In 1951, Lion that it was based on the erroneous disallowances of “bad debts” and “interest
Shoe Store, Ruiz Highway Transit, and Esquire Auto Seat Cover expense” although the same are both allowable and legal deductions.
had made partial payments in the sums of P1,050.00, P400.00, Respondent Commissioner, however, issued a warrant of garnishment
and P300.00 respectively. Subsequent to the write-off, additional against the deposits of petitioner at a branch of City Trust Bank, which action
small payments were made and accounted for as income of the latter considered as a denial of its protest.
Goodrich. Counsel interviewed the debtors, investigated their • The Tax Court reversed and set aside the Commissioner’s
ability to pay and threatened law suits. He found that the debtors disallowance of the supposed interest expense but maintained the
were in strained financial condition and had no attachable or disallowance of the bad debts of thirteen (13) debtors in the total sum of
leviable property. Moreover, Lion Shoe Store was burned twice, in P395,324.27 out of 16 debts.
1948 and 1949. Thereafter, it continued to do business on limited
scale. Later; it went out of business. Ruiz Highway Transit, had ISSUE:
more debts than assets. Counsel, therefore, advised respondent WON the Court of Appeals erred in affirming the decision of the Court of Tax
to write off these accounts as bad debts without going to court, for Appeals which disallowed petitioner’s claim for deduction as bad debts of
it would be "foolish to spend good money after bad." several accounts

• NO. For debts to be considered as “worthless,” and thereby qualify as
“bad debts” making them deductible, the taxpayer should show that (1) there
is a valid and subsisting debt; (2) the debt must be actually ascertained to be
worthless and uncollectible during the taxable year; (3) the debt must be
charged off during the taxable year; and (4) the debt must arise from the
business or trade of the taxpayer. Additionally, before a debt can be
considered worthless, the taxpayer must also show that it is indeed
uncollectible even in the future.

• Furthermore, there are steps outlined to be undertaken by the

taxpayer to prove that he exerted diligent efforts to collect the debts, viz: (1)
sending of statement of accounts; (2) sending of collection letters; (3) giving
the account to a lawyer for collection; and (4) filing a collection case in court.

• Petitioner did not satisfy the requirements of “worthlessness of a

debt” as to the thirteen (13) accounts disallowed as deductions. Mere
testimony of the Financial Accountant of the Petitioner explaining the
worthlessness of said debts is seen by this Court as nothing more than a
self-serving exercise which lacks probative value. There was no iota of
documentary evidence (e. g., collection letters sent, report from investigating
fieldmen, letter of referral to their legal department, police report/affidavit that
the owners were bankrupt due to fire that engulfed their stores or that the
owner has been murdered, etc.), to give support to the testimony of an
employee of the Petitioner. Mere allegations cannot prove the worthlessness
of such debts in 1985. Hence, the claim for deduction of these thirteen (13)
debts should be rejected.”
Basilan v. Com Com v. CTA
• The Commissioner assessed Basilan Estates, Inc., a deficiency • In its 1971 original income tax return, Smith Kline declared a net
income tax of P3,912 for 1953 and P86,876.85 as 25% surtax on taxable income of P1,489,277 and paid P511,247 as tax due. Among the
unreasonably accumulated profits as of 1953. On non-payment of the deductions claimed from gross income was P501,040 ($77,060) as its share
assessed amount, a warrant of distraint and levy was issued but the same of the head office overhead expenses.
was not executed because Basilan Estates, Inc. succeeded in getting the • However, in its amended return filed on March 1, 1973, there was an
Deputy Commissioner of Internal Revenue to order the Director of the district overpayment of P324,255 "arising from under-deduction of home office
in Zamboanga City to hold execution and maintain constructive embargo overhead". It made a formal claim for the refund of the alleged overpayment.
instead. Because of its refusal to waive the period of prescription, the • It appears that sometime in October, 1972, Smith Kline received from
corporation's request for reinvestigation was not given due course, and its international independent auditors, Peat, Marwick, Mitchell and Company,
notice was served the corporation that the warrant of distraint and levy would an authenticated certification to the effect that the Philippine share in the
be executed. unallocated overhead expenses of the main office for the year ended
• Basilan Estates, Inc. filed before the CTA a petition for review of the December 31, 1971 was actually $219,547 (P1,427,484). It further stated in
Commissioner's assessment, alleging prescription of the period for the certification that the allocation was made on the basis of the percentage
assessment and collection; error in disallowing claimed depreciations, of gross income in the Philippines to gross income of the corporation as a
travelling and miscellaneous expenses; and error in finding the existence of whole. By reason of the new adjustment, Smith Kline's tax liability was
unreasonably accumulated profits and the imposition of 25% surtax thereon. greatly reduced from P511,247 to P186,992 resulting in an overpayment of
• CTA found that there was no prescription and affirmed the deficiency P324,255.
assessment in toto. • Without awaiting the action of the Commissioner of Internal Revenue
• Basilan Estates, Inc. claimed deductions for the depreciation of its on its claim Smith Kline filed a petition for review with the Court of Tax
assets up to 1949 on the basis of their acquisition cost. As of January 1, Appeals. The Tax Court ordered the Commissioner to refund the
1950 it changed the depreciable value of said assets by increasing it to overpayment or grant a tax credit to Smith Kline. The Commissioner
conform with the increase in cost for their replacement. Accordingly, from appealed to this Court.
1950 to 1953 it deducted from gross income the value of depreciation ISSUE:
computed on the reappraised value. WON the refund or credit of the resulting overpayment is in order.
• The Commissioner found that the reappraised assets depreciated in HELD:
1953 were the same ones upon which depreciation was claimed in 1952. • YES. In section 37 of the old National Internal Revenue Code,
And for the year 1952, the Commissioner had already determined, with Commonwealth Act No. 466, which is reproduced in Presidential Decree No.
taxpayer's concurrence, the depreciation allowable on said assets to be 1158, the National Internal Revenue Code of 1977 and which reads:
P36,842.04, computed on their acquisition cost at rates fixed by the SEC. 37. Income form sources within the Philippines. —
taxpayer. Hence, the Commissioner pegged the deductible depreciation for xxx xxx xxx
1953 on the same old assets at P36,842.04 and disallowed the excess (b) Net income from sources in the Philippines. — From the
thereof in the amount of P10,500.49. items of gross income specified in subsection (a) of this
ISSUE: section there shall be deducted the expenses, losses, and
WON the depreciation of an asset beyond its acquisition cost is allowed. other deductions properly apportioned or allocated thereto
and a ratable part of any expenses, losses, or other
HELD: deductions which cannot definitely be allocated to some
• NO. The claim for depreciation beyond P36,842.04 or in the amount item or class of gross income. The remainder, if any, shall
of P10,500.49 has no justification in the law. The determination of the be included in full as net income from sources within the
Commissioner disallowing said amount, affirmed by the Court of Tax Philippines.
Appeals, is sustained. xxx xxx xxx
• Depreciation is the gradual diminution in the useful value of tangible • Revenue Regulations No. 2 of the Department of Finance contains
property resulting from wear and tear and normal obsolescense. The term is the following provisions on the deductions to be made to determine the net
also applied to amortization of the value of intangible assets, the use of income from Philippine sources:
which in the trade or business is definitely limited in duration. SEC. 160. Apportionment of deductions. — From the items specified in
• Depreciation commences with the acquisition of the property and its section 37(a), as being derived specifically from sources within the
owner is not bound to see his property gradually waste, without making Philippines there shall be deducted the expenses, losses, and other
provision out of earnings for its replacement. It is entitled to see that from deductions properly apportioned or allocated thereto and a ratable part
earnings the value of the property invested is kept unimpaired, so that at the of any other expenses, losses or deductions which can not definitely be
end of any given term of years, the original investment remains as it was in allocated to some item or class of gross income. The remainder shall
the beginning. It is not only the right of a company to make such a provision, be included in full as net income from sources within the Philippines.
but it is its duty to its bond and stockholders, and, in the case of a public The ratable part is based upon the ratio of gross income from sources
service corporation, at least, its plain duty to the public. Accordingly, the law within the Philippines to the total gross income.
permits the taxpayer to recover gradually his capital investment in wasting Example: A non-resident alien individual whose taxable year is the
assets free from income tax. calendar year, derived gross income from all sources for 1939 of
• The income tax law does not authorize the depreciation of an asset P180,000, including therein:
beyond its acquisition cost. Hence, a deduction over and above such cost Interest on bonds of a domestic corporation P9,000
cannot be claimed and allowed. The reason is that deductions from gross Dividends on stock of a domestic corporation 4,000
income are privileges, not matters of right. They are not created by Royalty for the use of patents within the Philippines 12,000
implication but upon clear expression in the law. Gain from sale of real property located within the Philippines 11,000
• Moreover, the recovery, free of income tax, of an amount more than Total P36,000
the invested capital in an asset will transgress the underlying purpose of a that is, one-fifth of the total gross income was from sources within the
depreciation allowance. For then what the taxpayer would recover will be, not Philippines. The remainder of the gross income was from sources
only the acquisition cost, but also some profit. Recovery in due time thru without the Philippines, determined under section 37(c).
depreciation of investment made is the philosophy behind depreciation The expenses of the taxpayer for the year amounted to P78,000. Of
allowance; the idea of profit on the investment made has never been the these expenses the amount of P8,000 is properly allocated to income
underlying reason for the allowance of a deduction for depreciation. from sources within the Philippines and the amount of P40,000 is
properly allocated to income from sources without the Philippines.
The remainder of the expense, P30,000, cannot be definitely allocated Pansacola v. CIR
to any class of income. A ratable part thereof, based upon the relation FACTS:
of gross income from sources within the Philippines to the total gross • Carmelino F. Pansacola filed his income tax return for the taxable
income, shall be deducted in computing net income from sources within year 1997 that reflected an overpayment of P5,950. In it he claimed the
the Philippines. Thus, these are deducted from the P36,000 of gross increased amounts of personal and additional exemptions under Section 35
income from sources within the Philippines expenses amounting to of the NIRC, although his certificate of income tax withheld on compensation
P14,000 [representing P8,000 properly apportioned to the income from indicated the lesser allowed amounts on these exemptions.
sources within the Philippines and P6,000, a ratable part (one-fifth) of • He claimed a refund of P5,950 with the Bureau of Internal Revenue,
the expenses which could not be allocated to any item or class of gross which was denied. Later, the Court of Tax Appeals also denied his claim
income.] The remainder, P22,000, is the net income from sources because according to the tax court, "it would be absurd for the law to allow
within the Philippines. the deduction from a taxpayer’s gross income earned on a certain year of
• From the foregoing provisions, it is manifest that where an expense is exemptions availing on a different taxable year…"
clearly related to the production of Philippine-derived income or to Philippine • On appeal, the Court of Appeals denied his petition for lack of merit.
operations (e.g. salaries of Philippine personnel, rental of office building in The appellate court ruled that Umali v. Estanislao, relied upon by petitioner,
the Philippines), that expense can be deducted from the gross income was inapplicable to his case. It further ruled that the NIRC took effect on
acquired in the Philippines without resorting to apportionment. January 1, 1998, thus the increased exemptions were effective only to cover
• The overhead expenses incurred by the parent company in taxable year 1998 and cannot be applied retroactively.
connection with finance, administration, and research and development, all ISSUE:
of which direct benefit its branches all over the world, including the WON the exemptions under Section 35 of the NIRC, which took effect on
Philippines, fall under a different category however. These are items which January 1, 1998, be availed of for the taxable year 1997.
cannot be definitely allocated or Identified with the operations of the HELD:
Philippine branch. For 1971, the parent company of Smith Kline spent • NO. Prefatorily, personal and additional exemptions under Section 35
$1,077,739. Under section 37(b) of the Revenue Code and section 160 of of the NIRC are fixed amounts to which certain individual taxpayers (citizens,
the regulations, Smith Kline can claim as its deductible share a ratable part resident aliens) are entitled. Personal exemptions are the theoretical
of such expenses based upon the ratio of the local branch's gross income to personal, living and family expenses of an individual allowed to be deducted
the total gross income, worldwide, of the multinational corporation. from the gross or net income of an individual taxpayer. These are arbitrary
amounts which have been calculated by our lawmakers to be roughly
equivalent to the minimum of subsistence, taking into account the personal
status and additional qualified dependents of the taxpayer. They are fixed
amounts in the sense that the amounts have been predetermined by our
lawmakers as provided under Section 35 (A) and (B). Unless and until our
lawmakers make new adjustments on these personal exemptions, the
amounts allowed to be deducted by a taxpayer are fixed as predetermined
by Congress.
• Section 35 (A) and (B) allow the basic personal and additional
exemptions as deductions from gross or net income, as the case maybe, to
arrive at the correct taxable income of certain individual taxpayers. Section
24 (A) (1) (a) imposed income tax on a resident citizen’s taxable income
derived for each taxable year.
• Section 45 provides that the deductions provided for under Title II of
the NIRC shall be taken for the taxable year in which they are "paid or
accrued" or "paid or incurred."
• Moreover, Section 79 (H) requires the employer to determine, on or
before the end of the calendar year but prior to the payment of the
compensation for the last payroll period, the tax due from each employee’s
taxable compensation income for the entire taxable year in accordance with
Section 24 (A). This is for the purpose of either withholding from the
employee’s December salary, or refunding to him not later than January 25
of the succeeding year, the difference between the tax due and the tax
• Therefore, as provided in Section 24 (A) (1) (a) in relation to
Sections 31 and 22 (P) and Sections 43, 45 and 79 (H) of the NIRC, the
income subject to income tax is the taxpayer’s income as derived and
computed during the calendar year, his taxable year. Clearly what the
law should consider for the purpose of determining
Reagan v. Com Com v. Robertson(Exemptions granted under
international agreements)
The respondents in this case are citizens of the United States;
civilian employees in the U.S. Military Base in the Philippines in
connection with its construction, maintenance, operation, and
defense; and incomes are solely derived from salaries from the
U.S. government by reason of their employment in the U.S.
Bases in the Philippines.
The CIR made an assessment for deficiency income taxes of
the respondents for years 1969-1972. A case was brought by
the defendants against the petitioner to the Court of Tax
appeals. Pursuant to Article XII, Par. 2, of the RP-US Military
Bases Agreement of 1947, the Court of Tax Appeals cancelled
and set aside the assessments for deficiency income taxes of
respondents for the taxable years 1969-1972. inclusive of
interests and penalties. The treaty provision is quoted as
No national of the United States serving in or
employed in the Philippines in connection with the
construction, maintenance, operation or defense of
the bases and residing in the Philippines by reason
only of such employment, or his spouse and minor
children and dependent parents of either spouse,
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
The CIR now assails the decision of the CTA, arguing that the
tax exemptions must be construed in strictissimi juris against
the taxpayer, and that the burden of proof is on private to
establish that their residence in the country is by reason only of
their employment in connection with the construction,
maintenance, operation or defense of the U.S. Bases in the
Issue: WON the respondents are exempt from income taxation
Held: Yes. The law and the facts of the case are so clear that
there is no room left to doubt the validity of private
respondents' defense. We find nothing in the said treaty
provision that justified the lifting of the tax exemption privilege.
The CIR has grafted a meaning other than that conveyed by
the plain and clear tenor of the Agreement. An examination of
the words used and the circumstances in which they were
used, shows the basic intendment "to exempt all U.S. citizens
working in the Military Bases from the burden of paying
Philippine Income Tax without distinction as to whether born
locally or born in their country of origin." One must not
distinguish where the law does not distinguish.
Ona v. Com(Test whether an entity is a taxable partnership) Marubeni v. Com (non-resident foreign corporation,
Julia Buñales died leaving as heirs her surviving spouse, branch profit remittance)
Lorenzo T. Oña and her five children. In 1948, A case was Marubeni Corp. of Japan is a foreign corporation duly
instituted for the settlement of her estate. The surviving spouse organized and existing under the laws of Japan and duly
was appointed administrator of the estate of said deceased. licensed to engage in business under Philippine laws with a
On April 14, 1949, the administrator submitted the project of branch office in Manila. Marubeni has equity investments in
partition, which was approved by the Court. Because three of AG&P of Manila. AG&P declared and paid cash to petitioner
the heirs, were still minors when the project of partition was and withheld the corresponding 10% final dividend tax thereon.
approved, their father and administrator of the estate, filed a After deducting the final withholding tax of, AG&P directly
petition for appointment as guardian of said minors. The Court remitted the cash dividends to petitioner's head office in Tokyo,
appointed him guardian of the persons and property of the Japan, net not only of the 10% final dividend tax, but also of
minors. the withheld 15% profit remittance tax based on the remittable
Although the project of partition was approved by the Court on amount. These taxes were paid by AG&P to the BIR.
May 16, 1949, no attempt was made to divide the properties. Marubeni sent a letter query to the BIR, asking for a ruling on
Instead, the properties remained under the management of whether or not the dividends petitioner received from AG&P
Lorenzo who used said properties in business by leasing or are to the 15% profit remittance tax under the National Internal
selling them and investing the income from the sales thereof in Revenue Code. The Commissioner responded, saying that the
real properties and securities. As a result, petitioners' dividends received by Marubeni from AG&P are not income
properties and investments gradually increased from arising from the business activity in which Marubeni is
P105,450.00 in 1949 to P480,005.20 in 1956 . engaged. Accordingly, said dividends if remitted abroad are not
On the basis of the foregoing facts, respondent (Commissioner considered branch profits for purposes of the 15% profit
of Internal Revenue) decided that petitioners formed an remittance tax. However, the said Commissioner denied a
unregistered partnership and therefore, subject to the refund for overpayment, saying that under the Philippines-
corporate income tax, pursuant to Section 24, in relation to Japan Tax Treaty of 1980, the company is subject to 25% tax
Section 84(b), of the Tax Code. on the gross amount of dividends. Therefore, there is nothing
Issues to be refunded (10% + 15% = 25%).
Should petitioners be considered as co-owners of the Marubeni now argues that it is a resident foreign corporation
properties inherited or must they be deemed to have formed an subject only to the 10 % intercorporate final tax on dividends
unregistered partnership subject to tax under the NIRC? received from a domestic corporation. Because it is engaged in
Held: business in the Philippines through its Philippine branch, it
From the moment petitioners allowed not only the incomes must be considered as a resident foreign corporation, that
from their respective shares of the inheritance but even the since the Philippine branch and the Tokyo head office are one
inherited properties themselves to be used by Lorenzo T. Oña and the same entity, whoever made the investment in AG&P,
as a common fund in undertaking several transactions or in Manila does not matter at all.
business, with the intention of deriving profit to be shared by Issues:
them proportionally, such act was tantamonut to actually 1. Is Marubeni a resident or non-resident foreign
contributing such incomes to a common fund and, in effect, corporation?
they thereby formed an unregistered partnership within the 2. Can Marubeni ask for a refund for overpayment?
purview of sec. 24 of the NIRC. Held:
For tax purposes, the co-ownership of inherited properties is 1. Marubeni of Japan is a non-resident foreign corporation.
automatically converted into an unregistered partnership the The general rule that a foreign corporation is the same
moment the said common properties and/or the incomes juridical entity as its branch office in the Philippines cannot
derived therefrom are used as a common fund with intent to apply here. This rule is based on the premise that the
produce profits for the heirs in proportion to their respective business of the foreign corporation is conducted through
shares in the inheritance as determined in a project partition its branch office, following the principal agent relationship
either duly executed in an extrajudicial settlement or approved theory. It is understood that the branch becomes its agent
by the court in the corresponding testate or intestate here. So that when the foreign corporation transacts
proceeding. business in the Philippines independently of its branch, the
principal-agent relationship is set aside. The transaction
becomes one of the foreign corporation, not of the branch.
Consequently, the taxpayer is the foreign corporation, not
the branch or the resident foreign corporation. Corollarily,
if the business transaction is conducted through the
branch office, the latter becomes the taxpayer, and not the
foreign corporation.
2. Yes. Pursuant to the tax treaty, 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, a tax
credit of not less than 20 % of the dividends received. This
20 % represents the difference between the regular tax of
35 % on non-resident foreign corporations which petitioner
would have ordinarily paid, and the 15 % special rate on
dividends received from a domestic corporation.
Hospital de San Juan de Dios v. Pasay(Exemption Cyanamids Phil v. CA (Other taxes: improperly
under the Constitution) accumulated earnings tax)
Facts: The appellant (hospital) was organized as a charitable Facts: Petitioner, Cyanamid is a corporation organized under
institution. Due to electrical Section 5, Ordinance No. 7, series Philippine laws. It is a wholly owned subsidiary of American
of 1945, the City Engineer conducts inspections on buildings, Cyanamid Co. based in Maine, USA. The CIR demanded the
including the building used by the hospital. For this, the Pasay payment of deficiency income tax, which included a 25%
City government charged inspection fees. Under the surtax for the undue accumulation of earnings. Petitioner
ordinance, charitable and religious institutions are exempt from claimed that CIR’s assessment representing the 25% surtax on
paying the said fees. However, fees were charged from the its accumulated earnings had no legal basis for the following
hospital. The trial court admitted that while the hospital was reasons: (a) it accumulated its earnings and profits for
organized as a charitable institution, it is actually managed and reasonable business requirements to meet working capital
operated for profit. needs and retirement of indebtedness; (b) it is a wholly owned
Issue: whether or not the hospital is a charitable subsidiary of American Cyanamid Company, a publicly owned
institution corporation whose shares of stock are listed and traded in the
Held: It is a charitable institution. The general rule that a NY Stock Exchange. Hence, no individual shareholder of
charitable institution does not lose its charitable character and petitioner could have evaded or prevented the imposition of
its consequent exemption from taxation merely because individual income taxes by petitioner’s accumulation of
recipients of its benefits who are able to pay are required to do earnings and profits, instead of distribution of the same.
so, where funds derived in this manner are devoted to the Issue: WON Cyanamid is liable for 25% surtax on
charitable purposes of the institution, applies to hospitals. A improperly accumulated earnings
hospital owned and conducted by a charitable organization, Held: Yes. Under sec. 25 of the NIRC of 1977, if any
devoted for the most part to the gratuitous care of charity corporation is formed or availed of for the purpose of
patients, is exempt from taxation as a building used for preventing the imposition of the tax upon its shareholders
"purposes purely charitable", notwithstanding it receives and through permitting its gains and profits to accumulate instead
cares for pay patients, where any profit thus derived is applied of being divided or distributed, there is levied and assessed
to the purposes of the institution. An institution established, against such corporation a tax equal to 25% of the
maintained, and operated for the purpose of taking care of the undistributed portion of its accumulated profits. The provision
sick, without any profit or view to profit, but at a loss, which is also lists down specific exceptions, under which the petitioner
made up by benevolent contributions, the benefits of which are does not fall. When corporations do not declare dividends,
open to the public generally, is a purely public charity within the income taxes are not paid on the undeclared dividends
meaning of a statute exempting the property of institutions of received by the shareholders. The tax on improper
purely public charity from taxation; the fact that patients who accumulation of surplus is essentially a penalty tax designed to
are able to pay are charged for services rendered, according to compel corporations to distribute earnings so that the said
their ability, being of no importance upon the question of the earnings by shareholders could, in turn, be taxed.
character of the institution. Furthermore, to determine whether profits are accumulated for
the reasonable needs of the business to avoid the surtax upon
shareholders, it must be shown that the controlling intention of
the taxpayer is manifested at the time of accumulation, not
intentions declared later as an afterthought. The accumulated
profits must be used within a reasonable time. In the instant
case, petitioner did not establish by clear and convincing
evidence that such accumulation of profit was for the
immediate needs of the business.
CIR v. Procter &Gamble(taxation of NRFC’s) CIR v. Procter &Gamble(taxation of NRFC’s)
Facts: Procter and Gamble Philippines is a wholly owned CIR vs. Procter and Gamble16 (taxation of NRFC’s)
subsidiary of Procter and Gamble USA (PMC-USA), a non- Facts: refer to facts of the first P&G case
resident foreign corporation in the Philippines, not engaged in Issue:
trade and business therein. PMC-USA is the sole shareholder 1. Whether PMC Philippines is entitled to the 15%
of PMC Philippines and is entitled to receive income from PMC preferential tax rate on dividends declared and remitted to
Philippines in the form of dividends, if not rents or royalties. For its parent corporation
the taxable years 1974 and 1975, PMC Philippines filed its 2. WON the US allows P&G-USA a tax credit for taxes
income tax return and also declared dividends in favor of PMC- deemed paid in the Philippines
USA. In 1977, PMC Philippines, invoking the tax-sparing 3. WON the tax credit reaches an amount equivalent to 20%
provision of Section 24 (b) as the withholding agent of the of the dividends
Philippine Government with respect to dividend taxes paid by Held:
PMC-USA, filed a claim for the refund of 20 percentage point 1. Yes. Section 24(b)(1) of the NIRC says that the ordinary
portion of the 35 percentage whole tax paid with the thirty-five percent (35%) tax rate applicable to dividend
Commissioner of Internal Revenue. remittances to non-resident corporate stockholders of a
Issue: Whether PMC Philippines is entitled to the 15% Philippine corporation, goes down to fifteen percent (15%)
preferential tax rate on dividends declared and remitted to if the country of domicile of the foreign stockholder
its parent corporation. corporation "shall allow" such foreign corporation a tax
Held: The submission of the Commissioner that PMC credit for "taxes deemed paid in the Philippines,"
Philippines is but a withholding agent of the government and applicable against the tax payable to the domiciliary
therefore cannot claim reimbursement of alleged overpaid country by the foreign corporation. In other words, the
taxes, is completely meritorious. The real party in interest is reduced 15% dividend tax rate is applicable if the USA
PMC-USA, which should prove that it is entitled under the US "shall allow" to P&G-USA a tax credit for "taxes deemed
Tax Code to a US Foreign Tax Credit equivalent to at least 20 paid in the Philippines" applicable against the US taxes of
percentage points spared or waived as otherwise considered P&G-USA. The NIRC specifies that such tax credit for
or deemed paid by the Government. Herein, the claimant failed "taxes deemed paid in the Philippines" must, as a
to show or justify the tax return of the disputed 15% as it failed minimum, reach an amount equivalent to 20%, which
to show the actual amount credited by the US Government represents the difference between the regular 35%
against the income tax due from PMC-USA on the dividends dividend tax rate and the preferred 15% dividend tax rate.
received from PMC Philippines; to present the income tax Our NIRC does not require that the US tax law deem the
return of PMC-USA for 1975 when the dividends were parent-corporation to have actually paid the 20% of
received; and to submit duly authenticated document showing dividend tax waived by the Philippines for the 15% rate to
that the US government credited the 20% tax deemed paid in apply. The NIRC only requires that the US "shall allow"
the Philippines. P&G-USA a "deemed paid" tax credit in an amount
equivalent to the 20% waived by the Philippines.
2. Yes. Sec. 901(b)(a) of the US Tax Code gives a tax credit
to US corporations for taxes paid or accrued to any foreign
country. Sec. 902(A)(2) of the said code says that a US
corporation owning at least 10% of the voting stock of a
foreign (eg Philippine) corporation are receiving dividends
therefrom, to the extent that the dividends are paid out of
accumulated profits is deemed to have paid the proportion
of any income taxes paid by such foreign corporation to
any foreign country (ie Philippines) on or with respect to
such accumulated profits, which the amount of such
dividends bears to the amount of such accumulated
profits. Accumulated profits, for purposes of sec. 902(A)(2)
are defined as the amount of gains (in this case, the
dividends) in excess of the income tax.
The parent-corporation P&G-USA is "deemed to have
paid" a portion of the Philippine corporate income tax
although that tax was actually paid by its Philippine
subsidiary, P&G-Phil., not by P&G-USA. This "deemed
paid" concept merely reflects economic reality, since the
Philippine corporate income tax was in fact paid and
deducted from revenues earned in the Philippines, thus
reducing the amount remittable as dividends to P&G-USA.
In other words, US tax law treats the Philippine corporate
income tax as if it came out of the pocket, as it were, of
P&G-USA as a part of the economic cost of carrying on
business operations in the Philippines through the medium
of P&G-Phil. and here earning profits. What is, under US
law, deemed paid by P&G- USA are not "phantom taxes"
but instead Philippine corporate income taxes actually
paid here by P&G-Phil., which are very real indeed.

This is a motion for reconsideration of the earlier CIR vs.
P&G case
3. Yes. It can be shown by the following theoretical BPI v. Com
Assume 100 = corporate net income of P&G-Phil, before taxes
100 – (100 x 35% as income tax) = 65 - available for
remittance to P&G-USA
65 x 20% = 13 (minimum amount tax credit given the US for
taxes deemed paid in the Philippines)

65 – (65 x 15% as dividend tax at the reduced rate) = 55.25 –

divdends actually remitted to P&G-USA

Amount paid by P&G-Phil as income tax = 35

Applying Sec. 902(A)(2) of the US Tax Code

. (
35 ×
 (!""#$#%!&'( )*+,-&./0'& -0"+$' !,&'*-0"+$' &!1'.)
= 29.75 > 13
Therefore, Section 902, US Tax Code, specifically and clearly
complies with the requirements of Section 24 (b) (1), NIRC.
The reduced rate of 15% shall apply.