Conwi v.

CTA FACTS: Petitioners are Filipino citizens and employees of Procter and Gamble Philippines with an office located at Ayala Ave. Makati. The corporation is a subsidiary of P&G based at Ohio USA. For the year 1970 and 1971, petitioners were assigned outside the Phil with their compensation paid in US dollars. When they filed their income tax returns for the year 1970, theyve computed the tax by applying the dollar-to-peso conversion based on the floating rate provided by the BIR. However, on 1973, they filed an amended tax return using the par value of the peso provided by Sec.40 of RA 265. They claim for a refund due to overpayment. Petitioners argued that since the dollar earnings does not fall within the classification of foreign exchange transaction; there occurred no actual inward remittances therefore NOT included in Central Bank Circular No. 289. CB no. 289 provides for specific instances when the par value of the peso shall not be the conversion rate. Therefore, they can base their conversion using the par value of the peso. The Commissioner of the BIR denied the claim of petitioners stating that the basis must be the prevailing free market rate of exchange and not the par value. CB No. 289 speaks of receipts for export products, receipts of sale of foreign exchange and investment but not income tax. The CTA also held that petitioners dollar earnings are receipts derived from foreign exchange transactions. ISSUES: 1) WON petitioners dollar earnings are receipts derived from foreign exchange transactions. 2) WON the proper rate of conversion is the prevailing free market rate of exchange. 3) WON petitioners are exempt to pay tax for such income since there were no remittance/ acceptance of their salaries in UD Dollars into the Philippines. HELD: 1) No. Income may be defined as an amount of money coming to a person or corporation within a specified time, whether as payment for services, interest or profit from investment. Unless otherwise specified, it means cash or its equivalent. Income can also be though of as flow of the fruits of one's labor. Petitioners are correct in claiming that their dollar earnings are not receipts derived from foreign exchange transactions. For a foreign exchange transaction is simply that-foreign exchange being the conversion of an amount of money of one country into an equivalent amount of money of another country. When petitioners were assigned to the foreign subsidiaries of P&G, they were earning in their assigned nations currency and were also spending in said currency. There was no conversion from one currency to another. 2) Yes. Central Bank Circular no. 289 does not contemplate income tax payments. It shows that the subject matter involved therein are exports products, invisibles, receipts of foreign exchange, foreign exchange payments, new foreign borrowing and investments-nothing by way of income tax .Petitioners erred in concluding that CB Circ No. 289 does not apply to them. Therefore, the conversion should be the prevailing free market rate of exchange. 3) No. Even if there was no remittance and acceptance of their salaries and wages in US Dollars into the Philippines, they are still bound to pay the tax. Petitioners forgot that they are citizens of the Philippines, and their income, within or without, and in this

case wholly without or outside the Philippines, are subject to income tax. The petitions were denied for lack of merit.

G.R. No. L-45425 April 29, 1939 JOSE GATCHALIAN, ET AL vs. THE COLLECTOR OF INTERNAL REVENUE Facts: Plaintiffs purchased, in the ordinary course of business, from one of the duly authorized agents of the National Charity Sweepstakes Office one ticket for the sum of two pesos (P2), said ticket was registered in the name of Jose Gatchalian and Company. The ticket won one of the third-prizes in the amount of P50,000. Jose Gatchalian was required to file the corresponding income tax return covering the prize won. Defendant-Collector made an assessment against Jose Gatchalian and Co. requesting the payment of the sum of P1,499.94 to the deputy provincial treasurer of Pulilan, Bulacan. Plaintiffs, however through counsel made a request for exemption. It was denied. Plaintiffs failed to pay the amount due, hence a warrant of distraint and levy was issued. Plaintiffs paid under protest a part of the tax and penalties to avoid the effects of the warrant. A request that the balance be paid by plaintiffs in installments was made. This was granted on the condition that a bond be filed. Plaintiffs failed in their installment payments. Hence a request for execution of the warrant of distraint and levy was made. Plaintiffs paid under protest to avoid the execution. A claim for refund was made by the plaintiffs, which was dismissed, hence the appeal. Issue: Whether the plaintiffs formed a partnership hence liable for income tax. Held: Yes. According to the stipulation facts the plaintiffs organized a partnership of a civil nature because each of them put up money to buy a sweepstakes ticket for the sole purpose of dividing equally the prize which they may win, as they did in fact in the amount of P50,000. The partnership was not only formed, but upon the organization thereof and the winning of the prize, Jose Gatchalian personally appeared in the office of the Philippines Charity Sweepstakes, in his capacity as co-partner, as such collection the prize, the office issued the check for P50,000 in favor of Jose Gatchalian and company, and the said partner, in the same capacity, collected the said check. All these circumstances repel the idea that the plaintiffs organized and formed a community of property only.

EVANGELISTA vs. Collector of Internal Revenue Facts: Petitioners borrowed money from their father and purchased several lands. For several years, these lands were leased to tenants by the petitioners. In 1954, respondent Collector of Internal Revenue demanded from petitioners the payment of income tax on corporations, real estate dealer's fixed tax and corporation residence tax for the years 1945-1949. A letter of demand and corresponding assessments were delivered to petitioners. Petitioners claim that they should be absolved from paying said taxes since they are not a corporation. Issue: whether petitioners are subject to the tax on corporations provided for in section 24 of Commonwealth Act. No. 466, otherwise known as the National Internal Revenue Code, as well as to the residence tax for corporations and the real estate dealers fixed tax. Ruling: Yes. Petitioners are subject to the income tax and residence tax for corporation. As defined in section 84 (b) of the Internal Revenue Code, "the term corporation includes partnerships, no matter how created or organized." This qualifying expression clearly indicates that a joint venture need not be undertaken in any of the standard forms, or in conformity with the usual requirements of the law on partnerships, in order that one could be deemed constituted for purposes of the tax on corporations. Partnership, as has been defined in the civil code refers to two or more persons who bind themselves to contribute money, properly, or industry to a common fund, with the intention of dividing the profits among themselves. Thus, petitioners, being engaged in the real estate transactions for monetary gain and dividing the same among themselves constitute a partnership so far as the Code is concerned and are subject to income tax for corporation. Since Sec 2 of the Code in defining corporations also includes joint-stock company, partnership, joint account, association or insurance company, no matter how created or organized, it follows that petitioners, regardless of how their partnership was created is also subject to the residence tax for corporations. Upon consideration of all the facts and circumstances surrounding the case, we are fully satisfied that their purpose was to engage in real estate transactions for monetary gain and then divide the same among themselves, because: 1. Said common fund was not something they found already in existence. It was not property inherited by them pro indiviso. They created it purposely. What is more they jointly borrowed a substantial portion thereof in order to establish said common fund. 2. They invested the same, not merely not merely in one transaction, but in a series of transactions. 3. The aforesaid lots were not devoted to residential purposes, or to other personal uses, of petitioners herein. The properties were leased separately to several persons. 4. Since August, 1945, the properties have been under the management of one person, namely Simeon Evangelista, with full power to lease, to collect rents, to issue receipts, to bring suits, to sign letters and contracts, and to indorse and deposit notes and checks. Thus, the affairs relative to said properties have been handled as if the same belonged to a corporation or business and enterprise operated for profit.

BAUTISTA ANGELO, J., concurring: I wish however to make to make the following observation: Article 1769 of the new Civil Code lays down the rule for determining when a transaction should be deemed a partnership or a co-ownership. Said article paragraphs 2 and 3, provides: (2) Co-ownership or co-possession does not of itself establish a partnership, whether such co-owners or co-possessors do or do not share any profits made by the use of the property; (3) The sharing of gross returns does not of itself establish partnership, whether or not the person sharing them have a joint or common right or interest in any property from which the returns are derived; This only means that, aside from the circumstance of profit, the presence of other elements constituting partnership is necessary, such as the clear intent to form a partnership, the existence of a judicial personality different from that of the individual partners, and the freedom to transfer or assign any interest in the property by one with the consent of the others.

COLLECTOR OF INTERNAL REVENUE vs. BATANGAS TRANSPORTATION COMPANY and LAGUNA-TAYABAS BUS COMPANY Facts: Respondent companies are two distinct and separate corporations engaged in the business of land transportation by means of motor buses, and operating distinct and separate lines. Batangas Transportation was organized in 1918, while Laguna Bus was organized in 1928. Before the last war, each company maintained separate head offices. Each company also kept and maintained separate books, fleets of buses, management, personnel, maintenance and repair shops, and other facilities. During the war, the American officials of these two corporations were interned in Santo Tomas, and said companies ceased operations. They also lost their respective properties and equipment. After Liberation, sometime in April, 1945, the two companies were able to acquire 56 auto buses from the United States Army, and the two companies divided said equipment equally between themselves,registering the same separately in their respective names. In March, 1947, after the resignation of Martin Olson as Manager of the Laguna Bus, Joseph Benedict, who was then managing the Batangas Transportation, was appointed Manager of both companies by their respective Board of Directors. The head office of the Laguna Bus in San Pablo City was made the main office of both corporations. The placing of the two companies under one sole management was made by Max Blouse, President of both companies, by virtue of the authority granted him by resolution of the Board of Directors of the Laguna Bus and ratified by the Boards of the two companies. The purpose of the joint management, which was called, "Joint Emergency Operation", was to economize in overhead expenses. At the end of each calendar year, all gross receipts and expenses of both companies were determined and the net profits were divided fifty-fifty, and transferred to the book of accounts of each company, and each company "then prepared its own income tax return from this fifty per centum of the gross receipts and expenditures, assets and liabilities thus transferred to it from the `Joint Emergency Operation' and paid the corresponding income taxes thereon separately. Under the theory that the two companies had pooled their resources in the establishment of the Joint Emergency Operation, thereby forming a joint venture, the Collector assessed a deficiency income tax and compromise for the years 1946 to 1949, inclusive of compromise against the companies. And after crediting the overpayment made by the two companies, a new assessment for deficiency tax was made by the Collector pursuant to the doctrine of equitable recoupment. Respondent companies appealed to CTA. However the Collector reassessed the companies alleging that it erroneously credited 100% instead of 75% of its income tax liability since dividends received by them from the Joint Operation as a domestic corporation are returnable to the extent of 25%. The theory of the Collector is the Joint Emergency Operation was a corporation distinct from the two respondent companies, as defined in section 84 (b), and so liable to income tax under section 24, both of the National Internal Revenue Code. After hearing, the C.T.A. found and held, citing authorities, that the Joint Emergency Operation or joint

management of the two companies "is not a corporation within the contemplation of section 84 (b) of the National Internal Revenue Code much less a partnership, association or insurance company", and therefore was not subject to the income tax under the provisions of section 24 of the same Code, separately and independently of respondent companies. Issue: Whether the two transportation companies herein involved are liable to the payment of income tax as a corporation on the theory that the Joint Emergency Operation organized and operated by them is a corporation within the meaning of Section 84 of the Revised Internal Revenue Code Held: Yes. The term "corporation" as including partnerships no matter how created or organized, thereby indicating that "a joint venture need not be undertaken in any of the standard forms, or in conformity with the usual requirements of the law on partnerships, in order that one could be deemed constituted for purposes of the tax on corporations"; that besides, said section 84 (b) provides that the term "corporation" includes "joint accounts" (cuentas en participacion) and "associations", none of which has a legal personality independent of that of its members. In the present case, the two companies contributed money to a common fund to pay the sole general manager, the accounts and office personnel attached to the office of said manager, as well as for the maintenance and operation of a common maintenance and repair shop. Said common fund was also used to buy spare parts, and equipment for both companies, including tires. Said common fund was also used to pay all the salaries of the personnel of both companies, such as drivers, conductors, helpers and mechanics, and at the end of each year, the gross income or receipts of both companies were merged, and after deducting therefrom the gross expenses of the two companies, also merged, the net income was determined and divided equally between them, wholly and utterly disregarding the expenses incurred in the maintenance and operation of each company and of the individual income of said companies. What was actually done in this case was that, although no legal personality may have been created by the Joint Emergency Operation, nevertheless, said Joint Emergency Operation joint venture, or joint management operated the business affairs of the two companies as though they constituted a single entity, company or partnership, thereby obtaining substantial economy and profits in the operation.

COMMISSIONER OF INTERNAL REVENUE, petitioner,vs. BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX APPEALS, respondents. Facts: BOAC is a 100% British Government-owned corporation organized and existing under the laws of the United Kingdom It is engaged in the international airline business and is a member-signatory of the Interline Air Transport Association (IATA). As such it operates air transportation service and sells transportation tickets over the routes of the other airline members. During the periods covered by the disputed assessments, it is admitted that BOAC had no landing rights for traffic purposes in the Philippines, and was not granted a Certificate of public convenience and necessity to operate in the Philippines by the Civil Aeronautics Board (CAB), except for a nine-month period, partly in 1961 and partly in 1962, when it was granted a temporary landing permit by the CAB. Consequently, it did not carry passengers and/or cargo to or from the Philippines, although during the period covered by the assessments, it maintained a general sales agent in the Philippines Warner Barnes and Company, Ltd., and later Qantas Airways which was responsible for selling BOAC tickets covering passengers and cargoes. (First Case) Petitioner Commissioner of Internal Revenue assessed BOAC the for deficiency income taxes covering the years 1959 to 1963. This was protested by BOAC. Subsequent investigation resulted in the issuance of a new assessment, for the years 1959 to 1967. BOAC paid this new assessment under protest. BOAC filed a claim for refund which was denied by the CIR. (Second Case) BOAC was assessed deficiency income taxes, interests, and penalty for the fiscal years 1968-1969 to 1970-1971 and the additional amounts of P1,000.00 and P1,800.00 as compromise penalties for violation of Section 46 (requiring the filing of corporation returns). BOAC requested that the assessment be countermanded and set aside. CIR not only denied the BOAC request for refund in the First Case but also reissued in the Second Case the deficiency income tax assessment in the second case. Case was then jointly tried. the Tax Court rendered the assailed joint Decision reversing the CIR. The Tax Court held that the proceeds of sales of BOAC passage tickets in the Philippines by Warner Barnes and Company, Ltd., and later by Qantas Airways, during the period in question, do not constitute BOAC income from Philippine sources "since no service of carriage of passengers or freight was performed by BOAC within the Philippines" and, therefore, said income is not subject to Philippine income tax. The CTA position was that income from transportation is income from services so that the place where services are rendered determines the source. Thus, in the dispositive portion of its Decision, the Tax Court ordered petitioner to credit BOAC with the sum of

P858,307.79, and to cancel the deficiency income tax assessments against BOAC in the amount of P534,132.08 for the fiscal years 1968-69 to 1970-71. Hence, this Petition for Review on certiorari of the Decision of the Tax Court. Issue/s: Whether or not the revenue derived by private respondent British Overseas Airways Corporation (BOAC) from sales of tickets in the Philippines for air transportation, while having no landing rights here, constitute income of BOAC from Philippine sources, and, accordingly, taxable. Held: 1. Yes. It is our considered opinion that BOAC is a resident foreign corporation. There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business. Each case must be judged in the light of its peculiar environmental circumstances. The term implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of commercial gain or for the purpose and object of the business organization. "In order that a foreign corporation may be regarded as doing business within a State, there must be continuity of conduct and intention to establish a continuous business, such as the appointment of a local agent, and not one of a temporary character. BOAC, during the periods covered by the subject - assessments, maintained a general sales agent in the Philippines, That general sales agent, from 1959 to 1971, "was engaged in (1) selling and issuing tickets; (2) breaking down the whole trip into series of trips each trip in the series corresponding to a different airline company; (3) receiving the fare from the whole trip; and (4) consequently allocating to the various airline companies on the basis of their participation in the services rendered through the mode of interline settlement as prescribed by Article VI of the Resolution No. 850 of the IATA Agreement." Those activities were in exercise of the functions which are normally incident to, and are in progressive pursuit of, the purpose and object of its organization as an international air carrier. In fact, the regular sale of tickets, its main activity, is the very lifeblood of the airline business, the generation of sales being the paramount objective. There should be no doubt then that BOAC was "engaged in" business in the Philippines through a local agent during the period covered by the assessments. Accordingly, it is a resident foreign corporation subject to tax upon its total net income received in the preceding taxable year from all sources within the Philippines. The Tax Code defines "gross income" thus: "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 profession, vocations, trades, business, commerce, sales, or dealings in property, whether real or personal, growing out of the 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 profile, or gains, profits, and income derived from any source whatever (Sec. 29[3]). Income means "cash received or its equivalent"; it is the amount of money coming to a person within a specific time; it means something distinct from principal or capital. For, while capital is a fund, income is a flow. As used in our income tax law, "income" refers to the flow of wealth. 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 site 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. A transportation ticket is not a mere piece of paper. When issued by a common carrier, it constitutes the contract between the ticket-holder and the carrier. It gives rise to the obligation of the purchaser of the ticket to pay the fare and the corresponding obligation of the carrier to transport the passenger upon the terms and conditions set forth thereon. The ordinary ticket issued to members of the traveling public in general embraces within its terms all the elements to constitute it a valid contract, binding upon the parties entering into the relationship. True, Section 37(a) of the Tax Code, which enumerates items of gross income from sources within the Philippines, namely: (1) interest, (21) 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 be exclusive. It merely directs that the types of income listed therein be treated as income from sources within the Philippines. A cursory reading of the section will show that it does not state that it is an all-inclusive enumeration, and that no other kind of income may be so considered. The absence of flight operations to and from the Philippines is not determinative of the source of income or the site of income taxation. Admittedly, BOAC was an off-line international airline at the time pertinent to this case. The test of taxability is the "source"; and the source of an income is that activity ... which produced the income. Unquestionably, the passage documentations in these cases were sold in the Philippines and the revenue therefrom was derived from a activity regularly pursued within the Philippines. business a And even if the BOAC tickets sold covered the "transport of passengers and cargo to and from foreign cities", it cannot alter the fact that income from the sale of tickets was derived from the Philippines. The word "source" conveys one essential idea, that of origin, and the origin of the income herein is the Philippines. FELICIANO, J., dissenting: The liability of BOAC to Philippine income taxation in respect of such income depends, not on BOAC's status as a "resident foreign corporation" or alternatively, as a "nonresident foreign corporation," but rather on whether or not such income is derived from "source within the Philippines." A "resident foreign corporation" or foreign corporation engaged in trade or business in the Philippines or having an office or place of business in the Philippines is subject to Philippine income taxation only in respect of income derived from sources within the Philippines. Clearly, whether the foreign corporate taxpayer is doing business in the Philippines and therefore a resident foreign corporation, or not doing business in the Philippines and therefore a non-resident foreign corporation, it is liable to income tax only to the extent that it derives income from sources within the Philippines. The circumtances that a foreign corporation is resident in the Philippines yields no inference that all or any part of its income is Philippine source income. Similarly, the non-resident status of a foreign corporation does not imply that it has no Philippine source income. Conversely, the receipt of Philippine source income creates no presumption that the recipient foreign

corporation is a resident of the Philippines. The critical issue, for present purposes, is therefore whether of not BOAC is deriving income from sources within the Philippines. For purposes of income taxation, it is well to bear in mind that the "source of income" relates not to the physical sourcing of a flow of money or the physical situs of payment but rather to the "property, activity or service which produced the income." There are two possibly relevant source of income rules that must be confronted; (a) the source rule applicable in respect of contracts of service; and (b) the source rule applicable in respect of sales of personal property. 1. Where a contract for the rendition of service is involved, the applicable source rule may be simply stated as follows: the income is sourced in the place where the service contracted for is rendered. Section 37. Income for 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: xxx xxx xxx (3) Services. Compensation for labor or personal services performed in the Philippines;... 2. . Income from the sale of personal property by the producer or manufacturer of such personal property will be regarded as sourced entirely within or entirely without the Philippines or as sourced partly within and partly without the Philippines, depending upon two factors: (a) the place where the sale of such personal property occurs; and (b) the place where such personal property was produced or manufactured. If the personal property involved was both produced or manufactured and sold outside the Philippines, the income derived therefrom will be regarded as sourced entirely outside the Philippines, although the personal property had been produced outside the Philippines, or if the sale of the property takes place outside the Philippines and the personal was produced in the Philippines, then, the income derived from the sale will be deemed partly as income sourced without the Philippines. In other words, the income (and the related expenses, losses and deductions) will be allocated between sources within and sources without the Philippines. In contrast, income derived from the purchase and sale of personal property i. e., trading is, under the Tax Code, regarded as sourced wholly in the place where the personal property is sold. Thus, Section 37 (e) of the Tax Code: (e) Income from sources partly within and partly without the Philippines. ... Gains, profits and income from (1) transportation or other services rendered partly within and partly without the Philippines; or (2) from the sale of personal property produced (in whole or in part) by the taxpayer within and sold without the Philippines, or produced (in whole or in part) by the taxpayer without and sold within the Philippines, shall be treated as derived partly from sources within and partly from sources without the Philippines. Section 159 of Revenue Regulations No. 2 puts the applicable rule succinctly: Section 159. Sale of personal property. Income derived from the purchase and sale of personal property shall be treated as derived entirely from the country in which sold. The word "sold" includes "exchange." The "country" in which "sold" ordinarily means the place where the property is marketed. This Section does not apply to income from the

sale personal property produced (in whole or in part) by the taxpayer within and sold without the Philippines or produced (in whole or in part) by the taxpayer without and sold within the Philippines. It will be seen that the basic problem is one of characterization of the transactions entered into by BOAC in the Philippines. Those transactions may be characterized either as sales of personal property (i. e., "sales of airline tickets") or as entering into a lease of services or a contract of service or carriage. The applicable "source of income" rules differ depending upon which characterization is given to the BOAC transactions. The appropriate characterization, in my opinion, of the BOAC transactions is that of entering into contracts of service, i.e., carriage of passengers or cargo between points located outside the Philippines. The phrase "sale of airline tickets," while widely used in popular parlance, does not appear to be correct as a matter of tax law. The airline ticket in and of itself has no monetary value, even as scrap paper. The value of the ticket lies wholly in the right acquired by the "purchaser" the passenger to demand a prestation from BOAC, which prestation consists of the carriage of the "purchaser" or passenger from the one point to another outside the Philippines. The ticket is really the evidence of the contract of carriage entered into between BOAC and the passenger. The money paid by the passenger changes hands in the Philippines. But the passenger does not receive undertaken to be delivered by BOAC. The "purchase price of the airline ticket" is quite different from the purchase price of a physical good or commodity such as a pair of shoes of a refrigerator or an automobile; it is really the compensation paid for the undertaking of BOAC to transport the passenger or cargo outside the Philippines. The characterization of the BOAC transactions either as sales of personal property or as purchases and sales of personal property, appear entirely inappropriate from other viewpoint. Consider first purchases and sales: is BOAC properly regarded as engaged in trading in the purchase and sale of personal property? Certainly, BOAC was not purchasing tickets outside the Philippines and selling them in the Philippines. Consider next sales: can BOAC be regarded as "selling" personal property produced or manufactured by it? In a popular or journalistic sense, BOAC might be described as "selling" "a product" its service. However, for the technical purposes of the law on income taxation, BOAC is in fact entering into contracts of service or carriage. The very existance of "source rules" specifically and precisely applicable to the rendition of services must preclude the application here of "source rules" applying generally to sales, and purchases and sales, of personal property which can be invoked only by the grace of popular language.

MARUBENI CORPORATION (formerly Marubeni-Iida, Co., Ltd.), petitioner, vs. COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX APPEALS Facts: Marubeni Corporation of Japan has equity investments in AG&P of Manila. For the first quarter of 1981 ending March 31, AG&P declared and paid cash dividends to petitioner in the amount of P849,720 and withheld the corresponding 10% final dividend tax thereon. Similarly, for the third quarter of 1981 ending September 30, AG&P declared and paid P849,720 as cash dividends to petitioner and withheld the corresponding 10% final dividend tax thereon. AG&P directly remitted the cash dividends to petitioner's head office in Tokyo, Japan, net not only of the 10% final dividend tax in the amounts of P764,748 for the first and third quarters of 1981, but also of the withheld 15% profit remittance tax based on the remittable amount after deducting the final withholding tax of 10%. In a letter dated January 29, 1981, petitioner, through the accounting firm Sycip, Gorres, Velayo and Company, sought a ruling from the Bureau of Internal Revenue on whether or not the dividends petitioner received from AG&P are effectively connected with its conduct or business in the Philippines as to be considered branch profits subject to the 15% profit remittance tax imposed under Section 24 (b) (2) of the National Internal Revenue Code as amended by Presidential Decrees Nos. 1705 and 1773. In reply to petitioner's query, Acting Commissioner Ruben Ancheta ruled: Pursuant to Section 24 (b) (2) of the Tax Code, as amended, only profits remitted abroad by a branch office to its head office which are effectively connected with its trade or business in the Philippines are subject to the 15% profit remittance tax. To be effectively connected it is not necessary that the income be derived from the actual operation of taxpayer-corporation's trade or business; it is sufficient that the income arises from the business activity in which the corporation is engaged. For example, if a resident foreign corporation is engaged in the buying and selling of machineries in the Philippines and invests in some shares of stock on which dividends are subsequently received, the dividends thus earned are not considered 'effectively connected' with its trade or business in this country. (Revenue Memorandum Circular No. 55-80). In the instant case, the dividends received by Marubeni from AG&P are not income arising from the business activity in which Marubeni is engaged. Accordingly, said dividends if remitted abroad are not considered branch profits for purposes of the 15% profit remittance tax imposed by Section 24 (b) (2) of the Tax Code, as amended. Petitioner claimed for the refund or issuance of a tax credit of P229,424.40 "representing profit tax remittance erroneously paid on the dividends remitted by AG&P to head office in Tokyo. It was denied. While it is true that said dividends remitted were not subject to

the 15% profit remittance tax as the same were not income earned by a Philippine Branch of Marubeni Corporation of Japan; and neither is it subject to the 10% intercorporate dividend tax, the recipient of the dividends, being a non-resident stockholder, nevertheless, said dividend income is subject to the 25 % tax pursuant to Article 10 (2) (b) of the Tax Treaty dated February 13, 1980 between the Philippines and Japan. The Commissioner pointed that inasmuch as the cash dividends remitted by AG&P to Marubeni Corporation, Japan is subject to 25 % tax, and that the taxes withheld of 10 % as intercorporate dividend tax and 15 % as profit remittance tax totals 25 %, the amount refundable offsets the liability, hence, nothing is left to be refunded. Petitioner appealed to the Court of Tax Appeals which affirmed the denial of the refund by the Commissioner of Internal Revenue. CTA held that the said dividends were distributions made by the Atlantic, Gulf and Pacific Company(AG &P) of Manila to its shareholder out of its profits on the investments of the Marubeni Corporation of Japan, a non-resident foreign corporation. The investments in the Atlantic Gulf & Pacific Company of the Marubeni Corporation of Japan were directly made by it and the dividends on the investments were likewise directly remitted to and received by the Marubeni Corporation of Japan. Petitioner Marubeni Corporation Philippine Branch has no participation or intervention, directly or indirectly, in the investments and in the receipt of the dividends. And it appears that the funds invested in the Atlantic Gulf & Pacific Company did not come out of the funds infused by the Marubeni Corporation of Japan to the Marubeni Corporation Philippine Branch. As a matter of fact, the Central Bank of the Philippines, in authorizing the remittance of the foreign exchange equivalent of the dividends in question, treated the Marubeni Corporation of Japan as a non-resident stockholder of the Atlantic Gulf & Pacific Company based on the supporting documents submitted to it. Subject to certain exceptions not pertinent hereto, income is taxable to the person who earned it. Admittedly, the dividends under consideration were earned by the Marubeni Corporation of Japan, and hence, taxable to the said corporation. While it is true that the Marubeni Corporation Philippine Branch is duly licensed to engage in business under Philippine laws, such dividends are not the income of the Philippine Branch and are not taxable to the said Philippine branch. We see no significance thereto in the identity concept or principal-agent relationship theory of petitioner because such dividends are the income of and taxable to the Japanese corporation in Japan and not to the Philippine branch. Hence the instant petition for review Issue: Whether or not Marubeni is a resident or non-resident corporation Held: It is a resident corporation. Under the Tax Code, a resident foreign corporation is one that is "engaged in trade or business" within the Philippines. Petitioner contends that precisely because it is engaged in business in the Philippines through its Philippine branch that it must be considered as a resident foreign corporation. Petitioner reasons that since the Philippine branch and the Tokyo head office are one and the same entity, whoever made the investment in AG&P, Manila does not matter at all. A single corporate entity cannot be both a resident and a non-resident corporation depending on the nature of the particular transaction involved. Accordingly, whether the dividends are paid directly to the head office or coursed through its local branch is of no moment for after all, the head office and the office branch constitute but one corporate entity, the Marubeni Corporation, which, under both Philippine tax and corporate laws, is a resident foreign corporation because it is transacting business in the Philippines.

In other words, the alleged overpaid taxes were incurred for the remittance of dividend income to the head office in Japan which is a separate and distinct income taxpayer from the branch in the Philippines. There can be no other logical conclusion considering the undisputed fact that the investment (totalling 283.260 shares including that of nominee) was made for purposes peculiarly germane to the conduct of the corporate affairs of Marubeni Japan, but certainly not of the branch in the Philippines. It is thus clear that petitioner, having made this independent investment attributable only to the head office, cannot now claim the increments as ordinary consequences of its trade or business in the Philippines and avail itself of the lower tax rate of 10 %. But while public respondents correctly concluded that the dividends in dispute were neither subject to the 15 % profit remittance tax nor to the 10 % intercorporate dividend tax, the recipient being a non-resident stockholder, they grossly erred in holding that no refund was forthcoming to the petitioner because the taxes thus withheld totalled the 25 % rate imposed by the Philippine-Japan Tax Convention pursuant to Article 10 (2) (b). To simply add the two taxes to arrive at the 25 % tax rate is to disregard a basic rule in taxation that each tax has a different tax basis. While the tax on dividends is directly levied on the dividends received, "the tax base upon which the 15 % branch profit remittance tax is imposed is the profit actually remitted abroad." WHEREFORE, the questioned decision of respondent Court of Tax Appeals dated February 12, 1986 which affirmed the denial by respondent Commissioner of Internal Revenue of petitioner Marubeni Corporation's claim for refund is hereby REVERSED. The Commissioner of Internal Revenue is ordered to refund or grant as tax credit in favor of petitioner the amount of P144,452.40 representing overpayment of taxes on dividends received. No costs.

LIMPAN INVESTMENT CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, ET AL., respondents. Facts: Petitioner, a domestic corporation duly registered since June 21, 1955, is engaged in the business of leasing real properties. It commenced actual business operations on July 1, 1955. Its principal stockholders are the spouses Lim, who own and control ninety-nine per cent (99%) of its total paid-up capital. Its president and chairman of the board is Isabelo P. Lim, one of the spouses. Its real properties consist of several lots and buildings, mostly situated in Manila and in Pasay City, all of which were acquired from said Isabelo P. Lim and his mother, Vicente Pantangco Vda. de Lim. Petitioner corporation duly filed its 1956 and 1957 income tax returns for which it paid the corresponding taxes therefore. Sometime in 1958 and 1959, the examiners of the Bureau of Internal Revenue conducted an investigation of petitioner's 1956 and 1957 income tax returns and, in the course thereof, they discovered and ascertained that petitioner had underdeclared its rental incomes and had claimed excessive depreciation of its buildings covering the same period. On the basis of these findings, respondent Commissioner of Internal Revenue issued its letter-assessment and demand for payment of deficiency income tax and surcharge against petitioner corporation. Petitioner corporation requested respondent Commissioner of Internal Revenue to reconsider the above assessment but the latter denied said request and reiterated its original assessment and demand, plus 5% surcharge and the 1% monthly interest from June 30, 1959 to the date of payment; hence, the corporation filed its petition for review before the Tax Appeals court. It disclaimed having received or collected the amount of unreported rental income for 1956, or any part thereof, reasoning out that 'the previous owners of the leased building have to collect part of the total rentals in 1956 to apply to their payment of rental in the land. It also denied having received or collected the amount as unreported rental income for 1957, or any part thereof, explaining that part of said amount was not declared as income in its 1957 tax return because its president, Isabelo P. Lim, who collected and received P13,500.00 from certain tenants, did not turn the same over to petitioner corporation in said year but did so only in 1959; that a certain tenant (Go Tong) deposited in court his rentals amounting to P10,800.00, over which the corporation had no actual or constructive control; and that a sub-tenant paid P4,200.00 which ought not be declared as rental income.

The Tax Court upheld respondent Commissioner's assessment and demand for deficiency income tax which, as above stated in the beginning of this opinion, petitioner has appealed to this Court. Issue: Is the corporation liable for the assessment? Held: Yes. The withdrawal in 1958 of the deposits in court pertaining to the 1957 rental income is no sufficient justification for the non-declaration of said income in 1957, since the deposit was resorted to due to the refusal of petitioner to accept the same, and was not the fault of its tenants; hence, petitioner is deemed to have constructively received such rentals in 1957. The payment by the sub-tenant in 1957 should have been reported as rental income in said year, since it is income just the same regardless of its source.

CIR vs. ISABELA CULTURAL CORPORATION Facts: ICC, a domestic corporation received an assessment notice for deficiency income tax and expanded withholding tax from BIR. It arose from the disallowance of ICCs claimed expense for professional and security services paid by ICC; as well as the alleged understatement of interest income on the three promissory notes due from Realty Investment Inc. The deficiency expanded withholding tax was allegedly due to the failure of ICC to withhold 1% e-withholding tax on its claimed deduction for security services. ICC sought a reconsideration of the assessments. Having received a final notice of assessment, it brought the case to CTA, which held that it is unappealable, since the final notice is not a decision. CTAs ruling was reversed by CA, which was sustained by SC, and case was remanded to CTA. CTA rendered a decision in favor of ICC. It ruled that the deductions for professional and security services were properly claimed, it said that even if services were rendered in 1984 or 1985, the amount is not yet determined at that time. Hence it is a proper deduction in 1986. It likewise found that it is the BIR which overstate the interest income, when it applied compounding absent any stipulation. Petitioner appealed to CA, which affirmed CTA, hence the petition. Issue: Whether or not the expenses for professional and security services are deductible. Held: No. One of the requisites for the deductibility of ordinary and necessary expenses is that it must have been paid or incurred during the taxable year. This requisite is dependent on the method of accounting of the taxpayer. In the case at bar, ICC is using the accrual method of accounting. Hence, under this method, an expense is recognized when it is incurred. Under a Revenue Audit Memorandum, when the method of accounting is accrual, expenses not being claimed as deductions by a taxpayer in the current year when they are incurred cannot be claimed in the succeeding year. The accrual of income and expense is permitted when the all-events test has been met. This test requires: 1) fixing of a right to income or liability to pay; and 2) the availability of the reasonable accurate determination of such income or liability. The test does not demand that the amount of income or liability be known absolutely, only that a taxpayer has at its disposal the information necessary to compute the amount with reasonable accuracy. From the nature of the claimed deductions and the span of time during which the firm was retained, ICC can be expected to have reasonably known the retainer fees charged by the firm. They cannot give as an excuse the delayed billing, since it could have inquired into the amount of their obligation and reasonably determine the amount.

CIR v. GENERAL FOODS (PHILS.), INC. Facts: On June 14, 1985, respondent corporation, engaged in the manufacture of beverages, filed its income tax return for the fiscal year ending February 28, 1985. Respondent claimed therein advertising expenses as a deduction for one of its product, Tang. CIR allowed only 50% of said deduction, and consequently assessed respondent with deficiency income taxes. Respondent filed a motion for recon but it was denied. It appealed to CTA but it was dismissed, saying that the amount of P9,461,246 is not reasonable. CA reversed CTA, hence the petition. Issue: Whether or not the advertising expense is deductible Held: No. To be deductible the expense must not only be necessary but also ordinary. The SC agreed with CIRs opinion that the expense was not ordinary on the ground that it failed the two conditions of reasonableness and that the amount incurred must not be a capital outlay to create goodwill. There is no hard and fast rule on the matter. The right to a deduction depends on a number of factors such as but not limited to: 1) the type and size of business; 2) the volume and amount of its net earnings; 3) the nature of expense; 4) the intention of the taxpayer and 5) the general economic conditions. In the case at bar, the amount of the claimed expense was almost one-half of its total claim for marketing expenses. Aside from that, it also claimed around P2.6M as other advertising and promotions expense and around P1.5M for consumer production. Furthermore, the claimed expense was almost double the amount of respondent corporations P4.6M general and administrative expenses. Hence, even if the said expense is necessary, it is not ordinary, it being inordinately large for a single product.

PANSACOLA v. CIR Facts: Petitioner Pansacola filed his income tax return for the taxable year 1997 that reflected an overpayment of P5950. In it he claimed the increased amounts of personal and additional exemptions, although his certificate of income tax withheld on compensation indicated the lesser allowed amounts on these exemptions. He claimed a refund which was denied. The CTA also denied the claim, saying that it would be absurd to allow the deduction from a taxpayers gross income earned on a certain year of exemptions availing on a different taxable year. Petitioners recon was denied. CA denied his appeal, hence the petition. Issue: Could exemptions under Sec. 35 of NIRC which took effect on January 1, 1998 be availed of for taxable year 1997? Held: No. What the law considers for the purpose of determining the tax due from an individual taxpayer is his status and qualified dependents at the close of the taxable year and not at the time the return is filed and the tax due thereon is paid. The NIRC took effect on January 1, 1998, hence the increased amounts of personal and additional exemptions can only be allowed as deductions from the individual taxpayers gross or net income for the taxable year 1998 to be filed in 1999. The NIRC made no reference that the increase shall apply on income earned prior to 1998. Nor was there any provision that the it has a retroactive effect. The reliance of petitioner on RA 7167 on adjustment of personal and additional exemptions according to poverty threshold is misplaced. Said law is a social legislation, unlike the one in the case at bar.

CARLOS SUPERDRUG CORP. v. DSWD Facts: Petitioners are domestic corporations and proprietors operating drugstores in the Philippines. Public respondents are DOH, DOJ, DILG and DSWD, which were tasked to monitor the drugstores compliance with the Expanded Seniors Citizen Act. Petitioners assail the constitutionality of Sec. 4(a) of the Expanded Seniors Citizen Act, on the ground that it constitutes deprivation of private property, since compelling them to grant the discount will result in a loss of profit and capital, because they impose a mark-up of only 5% to 10% on branded medicines; and the law failed to provide a tax deduction scheme which will give them just compensation. Issue: Whether or not the Expanded Seniors Citizen Act is unconstitutional. Held: No. The tax deduction scheme does not fully reimburse petitioners for the discount privilege accorded to senior citizens. This is because the discount is treated as a deduction, a tax-deductible expense that is subtracted from the gross income and results in a lower taxable income. Being a tax deduction, the discount does not reduce taxes owed on a peso for peso basis but merely offers a fractional reduction in taxes owed. Hence, were it not for the said law, the discount would be included as part of the gross sales of the company. Petitioners insist by showing a computation of the loss it would sustain based on a sample transaction. SC ruled that such computation is flawed. The law states that the cost of the discount shall be deducted from gross income, not on a per transaction basis. Hence, absent any income statement reflecting effect of the discount, petitioners would not be able to substantiate their claim. Furthermore, their computation is erroneously based on the assumption that their customers consisted wholly of senior citizens. Lastly, the 32% tax rate is to be imposed on income, not on the amount of the discount. The permanent reduction in their total revenues is a forced subsidy corresponding to the taking of private property for public use or benefit, which entitles the petitioners to just compensation. A tax deduction does not offer full reimbursement, as such it would not meet the definition of just compensation. But, the State in the exercise of its police power, in promoting the health and welfare of a special group of citizens, can impose upon a private establishment the burden of partly subsidizing a government program.

DELPHER TRADES CORP. vs. IAC Facts: Delfin Pacheco and his sister are co-owners of a real estate. They leased it to Construction Components Intl., with the terms that if the lessors decide to sell it the lessee shall be given right of first refusal. The lessee assigned its rights to Hydro Pipes Philippines Inc. with consent of the lessors. In the meantime, the leased property was transferred to the DELPHER TRADES by virtue of a deed of exchange of property; that in exchange for these properties, the co-owners acquired 2,500 shares of stock which are equivalent to a 55% majority in the corporation. Hydro Pipes filed a complaint for reconveyance on the ground that it was not given right of first refusal. RTC ruled in its favor, which was affirmed by IAC, hence this petition. Issue: Whether or not the Deed of Exchange was meant to be a Deed of Sale of subject property. Held: No. Considering that the beneficial ownership and control of petitioner corporation remained in the hands of the original co-owners, there was no transfer of actual ownership interests over the land when the same was transferred to petitioner corporation in exchange for the latter's shares of stock. The transfer of ownership, if anything, was merely in form but not in substance. In reality, petitioner corporation is a mere alter ego or conduit of the Pacheco co-owners, hence the corporation and the coowners should be deemed to be the same, there being in substance and in effect an identity of interest. It is to be stressed that by their ownership of the 2,500 no par shares of stock, the Pachecos have control of the corporation. Their equity capital is 55% as against 45% of the other stockholders, who also belong to the same family group. In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What they really did was to invest their properties and change the nature of their ownership from unincorporated to incorporated form by organizing Delpher Trades Corporation to take control of their properties and at the same time save on inheritance taxes.

CHINA BANKING CORP. v. CA Facts: Petitioner China Banking made a 53% equity investment in the First CBC Capital(Asia) Ltd., a Hongkong subsidiary engaged in financing and investment with deposit-taking function. Upon the examination of BSP, First CBC was declared insolvent. With BSPs approval, petitioner wrote-off as worthless investments in First CBC in its 1987 ITR and treated as bad debts or as an ordinary loss deductible from the gross income. CIR disallowed the deduction, saying that it should be classified as capital loss, there being no indebtedness to speak of. Petitioner appealed to CTA, and then to CA, which both sustained the ruling of CIR. Hence the petition. Issue: Can the petitioner claim the write-off of worthless securities as ordinary loss deductible from the gross income? Held: No. Shares of stock would be ordinary assets only to a dealer in securities or a person engaged in the purchase and sale of, or an active trader (for his own account) in, securities. Section 20(u) of the NIRC defines a dealer in securities thus: "(u) The term 'dealer in securities' means a merchant of stocks or securities, whether an individual, partnership or corporation, with an established place of business, regularly engaged in the purchase of securities and their resale to customers; that is, one who as a merchant buys securities and sells them to customers with a view to the gains and profits that may be derived therefrom." In the hands, however, of another who holds the shares of stock by way of an investment, the shares to him would be capital assets. When the shares held by such investor become worthless, the loss is deemed to be a loss from the sale or exchange of capital assets. Section 29(d)(4)(B) of the NIRC states: "(B) Securities becoming worthless. - If securities as defined in Section 20 become worthless during the tax" year and are capital assets, the loss resulting therefrom shall, for the purposes of his Title, be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets." The above provision conveys that the loss sustained by the holder of the securities, which are capital assets (to him), is to be treated as a capital loss as if incurred from a sale or exchange transaction. A capital gain or a capital loss normally requires the concurrence of two conditions for it to result: (1) There is a sale or exchange; and (2) the thing sold or exchanged is a capital asset. When securities become worthless, there is strictly no sale or exchange but the law deems the loss anyway to be "a loss from the sale or exchange of capital assets.A similar kind of treatment is given, by the NIRC on the retirement of certificates of indebtedness with interest coupons or in registered form, short sales and options to buy or sell property where no sale or exchange strictly exists. Capital losses are allowed to be deducted only to the extent of capital gains, i.e., gains derived from the sale or exchange of capital assets, and not from any other income of the taxpayer. In the case at bar, First CBC Capital (Asia), Ltd., the investee corporation, is a subsidiary corporation of petitioner bank whose shares in said investee corporation are not intended for purchase or sale but as an investment. Unquestionably then, any loss therefrom would be a capital loss, not an ordinary loss, to the investor.

"(c) Limitation on capital losses. - Losses from sales or exchange of capital assets shall be allowed only to the extent of the gains from such sales or exchanges. If a bank or trust company incorporated under the laws of the Philippines, a substantial part of whose business is the receipt of deposits, sells any bond, debenture, note, or certificate or other evidence of indebtedness issued by any corporation (including one issued by a government or political subdivision thereof), with interest coupons or in registered form, any loss resulting from such sale shall not be subject to the foregoing limitation and shall not be included in determining the applicability of such limitation to other losses. The exclusionary clause found in the foregoing text of the law does not include all forms of securities but specifically covers only bonds, debentures, notes, certificates or other evidence of indebtedness, with interest coupons or in registered form, which are the instruments of credit normally dealt with in the usual lending operations of a financial institution. Equity holdings cannot come close to being, within the purview of "evidence of indebtedness" under the second sentence of the aforequoted paragraph. Therefore, the loss of petitioner bank in its equity investment in the Hongkong subsidiary cannot also be deductible as a bad debt. The shares of stock in question do not constitute a loan extended by it to its subsidiary (First CBC Capital) or a debt subject to obligatory repayment by the latter, but a long term investment made by CBC.

CYANAMID PHILIPPINES, INC. v. CA Facts: Petitioner is a domestic corporation and is a wholly owned subsidiary of American Cyanamid Co. based in Maine, USA. It is engaged in the manufacture of pharmaceutical products and chemicals, a wholesaler of imported finished goods, and an importer/indentor. On February 7, 1985, the CIR sent an assessment letter to petitioner and demanded the payment of deficiency income tax for taxable year 1981. Petitioner, through its external accountant, Sycip, Gorres, Velayo & Co., claimed, among others, that the surtax(25%- 3.7M) for the undue accumulation of earnings was not proper because the said profits were retained to increase petitioners working capital and it would be used for reasonable business needs of the company. Petitioner contended that it availed of the tax amnesty under Executive Order No. 41, hence enjoyed amnesty from civil and criminal prosecution granted by the law. CIR refused to allow the cancellation of the assessment notices. It stated that the amnesty applies only to assessments issued after August 21, 1986. In the instant case, the assessment was issued on January 30, 1985. Petitioner appealed to CTA. During the pendency of the case, however, both parties agreed to compromise the 1981 deficiency income tax assessment. Petitioner paid a reduced amount as compromise settlement. However, the surtax on improperly accumulated profits remained unresolved. Petitioner claimed that CIRs assessment representing the 25% surtax on its accumulated earnings for the year 1981 had no legal basis for the following reasons: (a) petitioner accumulated its earnings and profits for reasonable business requirements to meet working capital needs and retirement of indebtedness; (b) petitioner is a wholly owned subsidiary of American Cyanamid Company, a corporation organized under the laws of the State of Maine, USA, whose shares of stock are listed and traded in New York Stock Exchange. This being the case, no individual shareholder of petitioner could have evaded or prevented the imposition of individual income taxes by petitioners accumulation of earnings and profits, instead of distribution of the same. CTA denied the petition. CA affirmed CTA, hence the petition. Issue: Is the petitioner liable to the surtax on accumulated earnings? Held: Yes. Section 25 of the old National Internal Revenue Code of 1977 states: "Sec. 25. Additional tax on corporation improperly accumulating profits or surplus "(a) Imposition of tax. -- If any corporation is formed or availed of for the purpose of preventing the imposition of the tax upon its shareholders or members or the shareholders or members of another corporation, through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, there is levied and assessed against such corporation, for each taxable year, a tax equal to twenty-five per-centum of the undistributed portion of its accumulated profits or surplus which shall be in addition to the tax imposed by section twenty-four, and shall be computed,

collected and paid in the same manner and subject to the same provisions of law, including penalties, as that tax. "(b) Prima facie evidence. -- The fact that any corporation is mere holding company shall be prima facie evidence of a purpose to avoid the tax upon its shareholders or members. Similar presumption will lie in the case of an investment company where at any time during the taxable year more than fifty per centum in value of its outstanding stock is owned, directly or indirectly, by one person. "(c) Evidence determinative of purpose. -- The fact that the earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the tax upon its shareholders or members unless the corporation, by clear preponderance of evidence, shall prove the contrary. "(d) Exception -- The provisions of this sections shall not apply to banks, non-bank financial intermediaries, corporation organized primarily, and authorized by the Central Bank of the Philippines to hold shares of stock of banks, insurance companies, whether domestic or foreign. The provision discouraged tax avoidance through corporate surplus accumulation. When corporations do not declare dividends, income taxes are not paid on the undeclared dividends received by the shareholders. The tax on improper accumulation of surplus is essentially a penalty tax designed to compel corporations to distribute earnings so that the said earnings by shareholders could, in turn, be taxed. Petitioner relies on the so-called "Bardahl" formula, which allowed retention, as working capital reserve, sufficient amounts of liquid assets to carry the company through one operating cycle. The "Bardahl" formula was developed to measure corporate liquidity. The formula requires an examination of whether the taxpayer has sufficient liquid assets to pay all of its current liabilities and any extraordinary expenses reasonably anticipated, plus enough to operate the business during one operating cycle. Operating cycle is the period of time it takes to convert cash into raw materials, raw materials into inventory, and inventory into sales, including the time it takes to collect payment for the sales. Using this formula, petitioner contends, Cyanamid needed at least P33,763,624.00 pesos as working capital. As of 1981, its liquid asset was only P25,776,991.00. Thus, petitioner asserts that Cyanamid had a working capital deficit of P7,986,633.00. Therefore, the P9,540,926.00 accumulated income as of 1981 may be validly accumulated to increase the petitioners working capital for the succeeding year. We note, however, that the companies where the "Bardahl" formula was applied, had operating cycles much shorter than that of petitioner. In the present case, the Tax Court opted to determine the working capital sufficiency by using the ratio between current assets to current liabilities. The working capital needs of a business depend upon the nature of the business, its credit policies, the amount of inventories, the rate of turnover, the amount of accounts receivable, the collection rate, the availability of credit to the business, and similar factors. Petitioner, by adhering to the "Bardahl" formula, failed to impress the tax court with the required definiteness envisioned by the statute.

As of 1981 the working capital of Cyanamid was P25,776,991.00, or more than twice its current liabilities. That current ratio of Cyanamid, therefore, projects adequacy in working capital. Said working capital was expected to increase further when more funds were generated from the succeeding years sales. Available income covered expenses or indebtedness for that year, and there appeared no reason to expect an impending working capital deficit which could have necessitated an increase in working capital, as rationalized by petitioner. In order 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 subsequently, which are mere afterthoughts. Furthermore, the accumulated profits must be used within a reasonable time after the close of the taxable year. 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. Hence, the findings of CIR are sustained. Unless rebutted, all presumptions generally are indulged in favor of the correctness of the CIRs assessment against the taxpayer.

CIR v. SOLIDBANK Facts: Solidbank seasonably filed(w/in 20-days at end of each quarter) its Quarterly Percentage Tax Returns. Respondent included the total gross receipts the sum of P350.8 M. representing gross receipts from passive income which was already subjected to 20% final withholding tax. Hence it filed a refund alleging overpayment of gross receipts tax. It relied on the ruling in Asian Bank Corporation vs. Commissioner of Internal Revenue, wherein it was held that the 20% final withholding tax on banks interest income should not form part of its taxable gross receipts for purposes of computing the gross receipts tax. Without waiting for an action from the CIR, respondent filed a petition for review with CTA in order to toll the running of the two-year prescriptive period to judicially claim for the refund. CTA ordered CIR to refund the overpayment to respondent. CIR appealed to CA, which affirmed CTA, hence the petition. Issue: Whether or not the 20% final withholding tax on a banks interest income forms part of the taxable gross receipts in computing the 5% gross receipts tax. Held: Yes. Although the 20% FWT on respondents interest income was not actually received by respondent because it was remitted directly to the government, the fact that the amount redounded to the banks benefit makes it part of the taxable gross receipts in computing the 5% GRT. The 5% GRT is included under Title V. Other Percentage Taxes of the Tax Code and is not subject to withholding. The 20% FWT, on the other hand, falls under Section 24(e)(1) of Title II. Tax on Income. It is a tax on passive income, deducted and withheld at source by the payor-corporation and/or person as withholding agent. The forgoing provisions clearly show that two types of taxes are involved in the present controversy: (1) the GRT, which is a percentage tax; and (2) the FWT, which is an income tax. As a bank, petitioner is covered by both taxes. The argument that there is double taxation cannot be sustained, as the two taxes are different. The one is a business tax which is not subject to withholding while the other is an income tax subject to withholding. The Court ruled that RR No 12-80 governs the case at bar. Section 7 of RR 17-84 states: SEC. 7. Nature and Treatment of Interest on Deposits and Yield on Deposit Substitutes. (a) The interest earned on Philippine Currency bank deposits and yield from deposit substitutes subjected to the withholding taxes in accordance with these regulations need not be included in the gross income in computing the depositors/investors income tax liability in accordance with the provision of Section 29(b), (c) and (d) of the National Internal Revenue Code, as amended. Section 4(e) of RR 12-80, on the other hand, states that the tax rates to be imposed on the gross receipts of banks, non-bank financial intermediaries, financing companies, and other non-bank financial intermediaries not performing quasi-banking activities shall be based on all items of income actually received. By analogy, SC applied to the receipt of income the rules on actual and constructive possession provided in Articles 531 and 532 of our Civil Code.

Article 531 of the Civil Code clearly provides that the acquisition of the right of possession is through the proper acts and legal formalities established therefor. The withholding process is one such act. There may not be actual receipt of the income withheld; however, as provided for in Article 532, possession by any person without any power whatsoever shall be considered as acquired when ratified by the person in whose name the act of possession is executed. In our withholding tax system, possession is acquired by the payor as the withholding agent of the government, because the taxpayer ratifies the very act of possession for the government. There is thus constructive receipt. The processes of bookkeeping and accounting for interest on deposits and yield on deposit substitutes that are subjected to FWT are indeed -- for legal purposes -- tantamount to delivery, receipt or remittance. Besides, respondent itself admits that its income is subjected to a tax burden immediately upon receipt, although it claims that it derives no pecuniary benefit or advantage through the withholding process. There being constructive receipt of such income -- part of which is withheld -- RR 17-84 applies, and that income is included as part of the tax base upon which the GRT is imposed. RR- 12-80 repealed RR 17-84. Section 4(e) of the earlier RR 12-80 provides that only items of income actually received shall be included in the tax base for computing the GRT, but Section 7(c) of the later RR 17-84 makes no such distinction and provides that all interests earned shall be included. The exception having been eliminated, the clear intent is that the later RR 17-84 includes the exception within the scope of the general rule. RR 12-80 imposes the GRT only on all items of income actually received, as opposed to their mere accrual, while RR 17-84 includes all interest income in computing the GRT. RR 12-80 is superseded by the later rule, because Section 4(e) thereof is not restated in RR 17-84. Clearly therefore, as petitioner correctly states, this particular provision was impliedly repealed when the later regulations took effect. Granting that the two regulations can be reconciled, respondents reliance on Section 4(e) of RR 12-80 is misplaced and deceptive. The accrual referred to therein should not be equated with the determination of the amount to be used as tax base in computing the GRT. Such accrual merely refers to an accounting method that recognizes income as earned although not received, and expenses as incurred although not yet paid. Accrual should not be confused with the concept of constructive possession or receipt as earlier discussed. Petitioner correctly points out that income that is merely accrued -earned, but not yet received -- does not form part of the taxable gross receipts; income that has been received, albeit constructively, does. The word actually, used confusingly in Section 4(e), will be clearer if removed entirely. Besides, if actually is that important, accrual should have been eliminated for being a mere surplusage. The inclusion of accrual stresses the fact that Section 4(e) does not distinguish between actual and constructive receipt. It merely focuses on the method of accounting known as the accrual system. Manila Jockey Club case, as applied by CTA does not apply to this case. Earmarking is not the same as withholding. Amounts earmarked do not form part of gross receipts, because, although delivered or received, these are by law or regulation reserved for some

person other than the taxpayer. On the contrary, amounts withheld form part of gross receipts, because these are in constructive possession and not subject to any reservation, the withholding agent being merely a conduit in the collection process. The Manila Jockey Club had to deliver to the Board on Races, horse owners and jockeys amounts that never became the property of the race track. Unlike these amounts, the interest income that had been withheld for the government became property of the financial institutions upon constructive possession thereof. Possession was indeed acquired, since it was ratified by the financial institutions in whose name the act of possession had been executed. The money indeed belonged to the taxpayers; merely holding it in trust was not enough. The government subsequently becomes the owner of the money when the financial institutions pay the FWT to extinguish their obligation to the government. As this Court has held before, this is the consideration for the transfer of ownership of the FWT from these institutions to the government. It is ownership that determines whether interest income forms part of taxable gross receipts. Being originally owned by these financial institutions as part of their interest income, the FWT should form part of their taxable gross receipts.

FILIPINAS SYNTHETIC FIBER CORPORATION v. CA Facts: Filipinas Synthetic Fiber Corporation, a domestic corporation received on December 27, 1979 a letter of demand from the Commissioner of Internal Revenue assessing it for deficiency withholding tax at source in the total amount of P829,748.77, inclusive of interest and compromise penalties, for the period from the fourth quarter of 1974 to the fourth quarter of 1975. The bulk of the deficiency withholding tax assessment, however, consisted of interest and compromise penalties for alleged late payment of withholding taxes due on interest loans, royalties and guarantee fees paid by the petitioner to non-resident corporations. Respondent denied the protest of petitioner, stating that for Philippine internal revenue tax purposes, the liability to withhold and pay income tax withheld at source from certain payments due to a foreign corporation is at the time of accrual and not at the time of actual payment or remittance thereof. CTA ruled in favor of respondent, which CA affirmed, hence the petition. Issue: Whether or not the liability to withhold tax at source on income payments to non-resident foreign corporations arises upon remittance of the amounts due to the foreign creditors or upon accrual thereof. Held: It is upon accrual. The method of withholding tax at source is a procedure of collecting income tax sanctioned by the National Internal Revenue Code. Section 53 (c) of which, provides: Return and Payment - Every person required to deduct and withhold any tax under this section shall make return thereof, ... for the payment of the tax, shall pay the amount withheld to the officer of the Government of the Philippines authorized to receive it. Every such person is made personally liable for such tax, and is indemnified against the claims and demands of any person for the amount of any payments made in accordance with the provision of this section. The law sets no condition for the personal liability of the withholding agent to attach. The reason is to compel the withholding agent to withhold the tax under all circumstances. In effect, the responsibility for the collection of the tax as well as the payment thereof is concentrated upon the person over whom the Government has jurisdiction. Thus, the withholding agent is constituted the agent both the government and the taxpayer. With respect to the collection and/or withholding of the tax, he is the Governments agent. In regard to the filing of the necessary income tax return and the payment of the tax to the Government, he is the agent of the taxpayer. The withholding agent, therefore, is no ordinary government agent especially because under Section 53 (c) he is held personally liable for the tax he is duty bound to withhold; whereas, the Commissioner of Internal Revenue and his deputies are not made liable to law. On the other hand, under the accrual basis method of accounting, income is reportable when all the events have occurred that fix the taxpayers right to receive the income, and the amount can be determined with reasonable accuracy. Thus, it is the right to receive income, and not the actual receipt, that determines when to include the amount in gross income. Gleanable from this notion are the following requisites of accrual method of accounting, to wit: (1) that the right to receive the amount must be valid, unconditional and enforceable, i.e., not contingent upon future time; (2) the amount must be reasonably susceptible of accurate estimate; and (3) there must be a reasonable expectation that the amount will be paid in due course.

In the case at bar, there was a definite liability, a clear and imminent certainty that at the maturity of the loan contracts, the foreign corporation was going to earn income in an ascertained amount, so much so that petitioner already deducted as business expense the said amount as interests due to the foreign corporation. This is allowed under the law, petitioner having adopted the accrual method of accounting in reporting its incomes. Petitioner cannot now claim that there is no duty to withhold and remit income taxes as yet because the loan contract was not yet due and demandable. Having written-off the amounts as business expense in its books, it had taken advantage of the benefit provided in the law allowing for deductions from gross income. Moreover, it had represented to the BIR that the amounts so deducted were incurred as a business expense in the form of interest and royalties paid to the foreign corporations. It is estopped from claiming otherwise now.

CHUA v. CA Facts: Valdes-Choy sold her house and lot to Chua for P10.8M. P100,000 earnest money was paid in check, the balance is made payable on or before July 15, 1989. Chua secured a managers check for P480K at PBCom. He however made a verbal stop payment order because the check was lost. Two deeds of sale for the house and the lot were executed. The capital gains tax amounted to P485K. Chua gave Valdes-Choy a check for the payment of the Capital gains tax. Valdes deposited the check to Traders Royal Bank, and she purchased a managers check worth P480K payable to CIR. Valdes gave the check to her counsel who undertook to pay the capital gains tax. It was at this point that Chua showed to Valdes the check for the balance of the purchase price. Chua required that the property be registered first in his name before he would turn over the check. This angered Valdes so she tore the deeds of sale, as there was no agreement as to registration. Valdes suggested that Chua deposit in an escrow account the balance of the purchase price, and upon such deposit she will cause the issuance of a new TCT in Chuas name. However, nothing came out of the communication of Chuas counsel with the other party. Chua filed a complaint for specific performance against Valdes which was dismissed. He re-filed the complaint. Chua insists that he was ready to pay the balance of the purchase price but withheld payment because Valdes-Choy did not fulfill her contractual obligation to put all the papers in "proper order." Specifically, Chua claims that Valdes-Choy failed to show that the capital gains tax had been paid after he had advanced the money for its payment. For the same reason, he contends that Valdes-Choy may not forfeit the earnest money even if he did not pay on time. The RTC ruled in his favor, ordering among others the payment of the capital gains tax and other fees thereon. CA reversed the decision, stating that the trial court failed to consider Section 34-(a) of the the Tax Code (1977), the last sentence of which provides, that "the amount realized from the sale or other disposition of property shall be the sum of money received plus the fair market value of the property (other than money) received;" and that the computation of the capital gains tax can only be finally assessed by the Commission on Internal Revenue upon the presentation of the Deeds of Absolute Sale themselves, without which any premature computation of the capital gains tax becomes of no moment. At any rate, the computation and payment of the capital gains tax has no bearing insofar as the validity and effectiveness of the deeds of sale in question are concerned, because it is only after the contracts of sale are finally executed in due form and have been duly notarized that the final computation of the capital gains tax can follow as a matter of course. Hence this petition. Issue: Whether Chua can compel Valdes-Choy to cause the issuance of a new TCT in Chua's name even before payment of the full purchase price. Held: No. The contract between the parties is a contract to sell, because of the suspensive condition of full payment of the purchase price. Hence, after the full payment of the purchase price a deed of absolute sale is then executed. Prior to the existence of the contract of sale, the seller is not obligated to transfer ownership to the buyer, even if there is a contract to sell between them. It is also upon the existence of the contract of sale that the buyer is obligated to pay the purchase price to the seller. Since the transfer of ownership is in exchange for the purchase price, these obligations must be simultaneously fulfilled at the time of the execution of the contract

of sale, in the absence of a contrary stipulation. In a contract of sale, the obligation of the seller is to transfer to the buyer ownership of the thing sold. In the sale of real property, the seller is not obligated to transfer in the name of the buyer a new certificate of title, but rather to transfer ownership of the real property. There is a difference between transfer of the certificate of title in the name of the buyer, and transfer of ownership to the buyer. The buyer may become the owner of the real property even if the certificate of title is still registered in the name of the seller. As between the seller and buyer, ownership is transferred not by the issuance of a new certificate of title in the name of the buyer but by the execution of the instrument of sale in a public document. In a contract to sell, the seller is not obligated to transfer ownership to the buyer. Neither is the seller obligated to cause the issuance of a new certificate of title in the name of the buyer. However, the seller must put all his papers in proper order to the point that he is in a position to transfer ownership of the real property to the buyer upon the signing of the contract of sale. In the instant case, Valdes-Choy was in a position to comply with all her obligations as a seller under the contract to sell. First, she already signed the Deeds of Sale in the office of her counsel in the presence of the buyer. Second, she was prepared to turn-over the owner's duplicate of the TCT to the buyer, along with the tax declarations and latest realty tax receipt. Clearly, at this point Valdes-Choy was ready, able and willing to transfer ownership of the Property to the buyer as required by the contract to sell. Chua, however, refused to give to Valdes-Choy the PBCom manager's check for the balance of the purchase price. Chua imposed the condition that a new TCT should first be issued in his name, a condition that is found neither in the law nor in the contract to sell as evidenced by the Receipt. Thus, at this point Chua was not ready, able and willing to pay the full purchase price which is his obligation under the contract to sell. Chua was also not in a position to assume the principal obligation of a vendee in a contract of sale, which is also to pay the full purchase price at the agreed time. The buyer has more interest in having the capital gains tax paid immediately since this is a pre-requisite to the issuance of a new Torrens title in his name. Nevertheless, as far as the government is concerned, the capital gains tax remains a liability of the seller since it is a tax on the seller's gain from the sale of the real estate. Payment of the capital gains tax, however, is not a pre-requisite to the transfer of ownership to the buyer. The transfer of ownership takes effect upon the signing and notarization of the deed of absolute sale. Chua had no reason to fear being swindled. Valdes-Choy was prepared to turnover to him the owner's duplicate copy of the TCT, the signed Deeds of Sale, the tax declarations, and the latest realty tax receipt. There was no hindrance to paying the capital gains tax as Chua himself had advanced the money to pay the same and ValdesChoy had procured a manager's check payable to the Bureau of Internal Revenue covering the amount. It was only a matter of time before the capital gains tax would be paid.

MANILA BANKING CORP. v. CIR Facts: Petitioner is engaged in the commercial banking industry since 1961. In 1987 the Monetary Board of the Bangko Sentral ng Pilipinas (BSP) issued Resolution No. 505, prohibiting petitioner from engaging in business by reason of insolvency. The petitioner ceased operations and its properties were charged to a receiver. Meanwhile RA 8424 Tax Reform Act of 1997 became effective (Jan. 1, 1998), and among its provisions is the imposition of MCIT on Domestic and resident foreign corps. Implementing this law is Revenue Regulations No. 9-98 stating that the law allows a four year period from the time the corporations were registered with the BIR during which the minimum corporate income tax should not be imposed. On June 23, 1999 after 12 years, petitioner was authorized to operate as a thrift bank. Having been registered with BIR on June 21, 1999, it filed its corporate ITR and paid the tax due the following year 2000. Prior to the filing of its income tax return, petitioner sent a letter to the BIR requesting a ruling on whether it is entitled to the four-year grace period reckoned from 1999. BIR issued a ruling stating that it is entitled. It stated that the law provides that the Secretary of Finance, upon the recommendation of the Commissioner, may suspend the imposition of the MCIT on any corporation which suffers losses on account of prolonged labor dispute, or because of force majeure, or because of legitimate business reverses. And being under involuntary receivership comes within the category of legitimate business reverses. Because of the ruling petitioner claimed a refund, for the erroneously paid MCIT. Due to BIRs inaction, petitioner filed a petition for review with CTA. CTA denied the petition., holding that petitioner is not a new corporation, hence not entitled to the grace period. Petitioner filed a petition for review with CA, which affirmed the decision, hence the instant petition. Issue: Whether or not petitioner is entitled for a refund of the MCIT it paid. Held: Yes. For purposes of the MCIT, the taxable year in which business operations commenced shall be the year in which the domestic corporation registered with the Bureau of Internal Revenue (BIR). Firms which were registered with BIR in 1994 and earlier years shall be covered by the MCIT beginning January 1, 1998. The intent of Congress relative to the minimum corporate income tax is to grant a four-year suspension of tax payment to newly formed corporations. Corporations still starting their business operations have to stabilize their venture in order to obtain a stronghold in the industry. Hence, the 4-year suspension. Revenue Regulations No. 9-98, implementing R.A. No. 8424 imposing the minimum corporate income tax on corporations, provides that for purposes of this tax, the date when business operations commence is the year in which the domestic corporation registered with the BIR. However, under Revenue Regulations No. 4-95, which implemented some of the provisions of The Thrift Banks Act (promulgated in 1995) the date of commencement of operations of thrift banks, such as herein petitioner, is the date the particular thrift bank was registered with the SEC or the date when the Certificate of Authority to Operate was issued to it by the Monetary Board of the BSP, whichever comes later. Clearly then, Revenue Regulations No. 4-95, not Revenue Regulations No. 9-98, applies to petitioner, being a thrift bank. It is, therefore, entitled to a grace period of four

years counted from June 23, 1999 when it was authorized by the BSP to operate as a thrift bank. Consequently, it should only pay its minimum corporate income tax after four years from 1999.

BANK OF AMERICA v. CA Facts: Petitioner is a foreign corporation duly licensed to engage in business in the Philippines with Philippine branch office. On July 20, 1982 it paid 15% branch profit remittance tax on profit from its regular banking unit operations and on profit from its foreign currency deposit unit operations. The tax was based on net profits after income tax without deducting the amount corresponding to the 15% tax. Petitioner filed a claim for refund with the BIR of that portion of the payment which corresponds to the 15% branch profit remittance tax, on the ground that the tax should have been computed on the basis of profits actually remitted, which is and not on the amount before profit remittance tax. Subsequently, without awaiting respondent's decision, petitioner filed a petition for review with CTA. CTA upheld petitioners claim. CA reversed CTA, stating that the use of the word remitted may well be understood as referring to that part of the said total branch profits which would be sent to the head office as distinguished from the total profits of the branch (not all of which need be sent or would be ordered remitted abroad). Hence the petition. Issue: Whether or not petitioner is entitled to refund. Held: Yes. There is absolutely nothing in Section 24(b) (2) (ii) of the Tax Code which indicates that the 15% tax on branch profit remittance is on the total amount of profit to be remitted abroad which shall be collected and paid in accordance with the tax withholding device provided in Sections 53 and 54 of the Tax Code. The statute employs "Any profit remitted abroad by a branch to its head office shall be subject to a tax of fifteen per cent (15%)" without more. Nowhere is there said of "base on the total amount actually applied for by the branch with the Central Bank of the Philippines as profit to be remitted abroad, which shall be collected and paid as provided in Sections 53 and 54 of this Code." Where the law does not qualify that the tax is imposed and collected at source based on profit to be remitted abroad, that qualification should not be read into the law. The term "any profit remitted abroad" can only mean such profit as is "forwarded, sent, or transmitted abroad" as the word "remitted" is commonly and popularly accepted and understood. To say therefore that the tax on branch profit remittance is imposed and collected at source and necessarily the tax base should be the amount actually applied for the branch with the Central Bank as profit to be remitted abroad is to ignore the unmistakable meaning of plain words. In the 15% remittance tax, the law specifies its own tax base to be on the "profit remitted abroad." There is absolutely nothing equivocal or uncertain about the language of the provision. The tax is imposed on the amount sent abroad, and the law (then in force) calls for nothing further. The taxpayer is a single entity, and it should be understandable if, such as in this case, it is the local branch of the corporation, using its own local funds, which remits the tax to the Philippine Government. The remittance tax was conceived in an attempt to equalize the income tax burden on foreign corporations maintaining, on the one hand, local branch offices and organizing, on the other hand, subsidiary domestic corporations where at least a majority of all the latter's shares of stock are owned by such foreign corporations.