TAX 1 INCOME TAXATION Prof. Dina D. Lucenario 1 Sem A.Y.

2010-2011

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OVERVIEW AND GENERAL PRINCIPLES; INCOME HERNANDO CONWI, ET AL VS. CTA AND CIR Facts: Petitioners are employees of Procter and Gamble (Philippine Manufacturing Corporation, subsidiary of Procter & Gamble, a foreign corporation).During the years 1970 and 1971, petitioners were assigned to other subsidiaries of Procter & Gamble outside the Philippines, for which petitioners were paid US dollars as compensation. Petitioners filed their ITRs for 1970 and 1971, computing tax due by applying the dollar-to-peso conversion based on the floating rate under BIR Ruling No. 70-027. In 1973, petitioners filed amened ITRs for 1970 and 1971, this time using the par value of the peso as basis. This resulted in the alleged overpayments, refund and/or tax credit, for which claims for refund were filed. CTA held that the proper conversion rate for the purpose of reporting and paying the Philippine income tax on the dollar earnings of petitioners are the rates prescribed under Revenue Memorandum Circulars Nos. 7-71 and 41-71. The refund claims were denied. Issues: 1. WON petitioners' dollar earnings are receipts derived from foreign exchange transactions; NO. 2. WON the proper rate of conversion of petitioners' dollar earnings for tax purposes in the prevailing free market rate of exchange and not the par value of the peso; YES. Held: For the proper resolution of income tax cases, 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 as to their claim that their dollar earnings are not receipts derived from foreign exchange transactions. For a foreign exchange transaction is simply that — a transaction in foreign exchange, foreign exchange being "the conversion of an amount of money or currency of one country into an equivalent amount of money or currency of another." When petitioners were assigned to the foreign subsidiaries of Procter & Gamble, they were earning in their assigned nation's

currency and were ALSO spending in said currency. There was no conversion, therefore, from one currency to another. The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of Procter & Gamble. It was a definite amount of money which came to them within a specified period of time of two years as payment for their services. And in the implementation for the proper enforcement of the National Internal Revenue Code, Section 338 thereof empowers the Secretary of Finance to "promulgate all needful rules and regulations" to effectively enforce its provisionsPursuant to this authority, Revenue Memorandum Circular Nos. 7-71 and 41-71 were issued to prescribed a uniform rate of exchange from US dollars to Philippine pesos for INTERNAL REVENUE TAX PURPOSES for the years 1970 and 1971, respectively. Said revenue circulars were a valid exercise of the authority given to the Secretary of Finance by the Legislature which enacted the Internal Revenue Code. And these are presumed to be a valid interpretation of said code until revoked by the Secretary of Finance himself. Petitioners are citizens of the Philippines, and their income, within or without, and in these cases wholly without, are subject to income tax. Sec. 21, NIRC, as amended, does not brook any exemption. DENIED FOR LACK OF MERIT. CIR V BRITISH OVERSEAS AIRWAYS CORPORATION AND CTA Facts: BOAC is UK-owned corporation which, during the periods covered by CIR's assessments of deficiency income taxes against it, had no landing rights for traffic purposes in the Philippiens, and was not granted a CPC by the Civil Aeronautics Board (except for a 9-month period, partly in 1961 and partly in 1962, when it was granted a temporary landing permit by the CAB). BOAC did not carry passengers and/or cargo to or from the Philippines during such period, but it maintained a general sales agent inthe Philippines - Wamer Barnes and Company, Ltd., and later Qantas Airways - which was responsible for selling BOAC tickets covering passenges and cargo.

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TAX 1 INCOME TAXATION Prof. Dina D. Lucenario 1 Sem A.Y. 2010-2011

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First CTA case: 1. CIR assessed deficiency income taxes for the years 1959 to 1963 protested by BOAC. 2. Subsequent investigation resulted in the issuance of a new assessment for the years 1959 to 1967 - BOAC paid this new assessment under protest. 3. BOAC filed a claim for refund – denied by the CIR, for which a petition for review was filed with the CTA. Second CTA case: 4. BOAC was assessed deficiency income taxes, interests and penalty for fiscal years 1968-1969 and 1970-1971, and additional amounts of compromise penalties for violation of the NIRC provision on the filing of corporation returns. 5. BOAC requested that the assessment be countermanded and set aside – denied by the CIR, for which another petition for review was filed with the CTA. CTA reversed the CIR, saying: the proceeds of sales of BOAC passage tickets in the Philippines 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 place where services are rendered determines the source.) Issue: WON 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; YES. Held: 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 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. 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. CTA DECISION SET ASIDE. MADRIGAL V RAFFERTY Facts: Vicente Madrigal and Susana Paterno were legally married prior to January 1, 1914, contracted under the provisions of law concerning conjugal partnerships. In 1915, Madrigal filed a sworn declaration with the CIR showing that his total net income for the year 1914 was P296,302.73. Subsequently Madrigal submitted the claim that the said

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TAX 1 INCOME TAXATION Prof. Dina D. Lucenario 1 Sem A.Y. 2010-2011

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P296,302.73 did not represent his income for the year 1914, but was in fact the income of the conjugal partnership existing between himself and his wife Susana Paterno, and that in computing and assessing the additional income tax provided by the Act of Congress of October 3, 1913, the income declared by Vicente Madrigal should be divided into two equal parts, one-half to be considered the income of Vicente Madrigal and the other half of Susana Paterno. After payment under protest, and after the protest of Madrigal had been decided adversely by the CIR, action was begun by Madrigal and his wife Paterno in the CFI of Manila against Collector of Internal Revenue and the Deputy Collector of Internal Revenue. CFI decided against Madrigal and Paterno. Appellees contend that the taxes imposed by the Income Tax Law are as the name implies taxes upon income tax and not upon capital and property; that the fact that Madrigal was a married man, and his marriage contracted under the provisions governing the conjugal partnership, has no bearing on income considered as income, and that the distinction must be drawn between the ordinary form of commercial partnership and the conjugal partnership of spouses resulting from the relation of marriage. Issue: WON the additional income tax should be divided into two equal parts because of the conjugal partnership Held: Income as contrasted with capital or property is to be the test. The essential difference between capital and income is that capital is a fund; income is a flow. A fund of property existing at an instant of time is called capital. A flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is called an income. Capital is wealth, while income is the service of wealth. Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the property of her husband Vicente Madrigal during the life of the conjugal partnership. She has an interest in the ultimate property rights and in the ultimate ownership of property acquired as income after such income has become capital. Susana Paterno has no absolute right to one-half the income of the conjugal partnership. Not being seized of a separate estate, Susana Paterno cannot make a separate return in order to receive the benefit of the exemption which would arise by reason of the

additional tax. As she has no estate and income, actually and legally vested in her and entirely distinct from her husband's property, the income cannot properly be considered the separate income of the wife for the purposes of the additional tax. Moreover, the Income Tax Law does not look on the spouses as individual partners in an ordinary partnership. The husband and wife are only entitled to the exemption of P8,000 specifically granted by the law. The higher schedules of the additional tax directed at the incomes of the wealthy may not be partially defeated by reliance on provisions in our Civil Code dealing with the conjugal partnership and having no application to the Income Tax Law. The aims and purposes of the Income Tax Law must be given effect. JUDGMENT AFFIRMED.

INTERNATIONAL FREIGHTING vs COMMISSIONER Facts: As employee bonuses, IFC, a subsidiary of DuPont, gave out shares of the latter's stock, which was worth $24,858 at the time it was distributed, but which only cost $16,153 to acquire from DuPont. IFC contended that it was entitled to a deduction of the full amount ($24,858) because the employees who received the stock had to pay tax on the said full amount. The IRS contended that the deduction should only be the cost of the stock as acquired from DuPont, arguing that the value should be calculated as the cost to IFC, not the market value. The Tax Court found for IFC; the Appellate Court affirmed. Issue: WON the taxpayer is entitled to a deduction of $24,858 (the fair market value of the stock) or only of $16,153 (the cost) Held: IFC had a net gain of $8,705 (from paying only $16,153 for something which had a final market value of $24,858), which they should pay taxes on. The fair market value of the stock at the time of delivery to the employees was properly deducted by the taxpayer as compensation expenses; the distribution of stock resulted in taxable gain to the taxpayer because it is not a gift; delivery of the shares was a ‘disposition’ of the stock for valid consideration [the services]; even though no ‘money’ or ‘property’ was received on the taxpayer’s disposition of the stock, the taxpayer received “money’s worth” consideration – the services.

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000 was entered in an intermediary account.Y.) WON lower court erred in holding that the amount of P125.000. is not subject to income tax.831.000. that is. On January 2.007 which. having lost P100. of the 500 shares sold to Feldstein by Anderson. with an authorized capital of P600.000. All of said shares were subscribed by the incorporator Anderson. The unpaid balance of P530. and received in payment thereof the sum of P50. and the sum of P75. who paid in cash. upon the debit side of which was entered the sum of P300. It is an intangible moral profit. the loss of P125. Said sum of P125. as the total of the 500 shares. which corresponds to Feldstein for his participation in the share of the corporation.000. the total amount of P70. at the rate of P500 each. 1923. he incorporated said partnership under the firm name of Erlanger & Galinger. Anderson sold to Simon Feldstein 200 shares at the rate of 2 to 1.000 in the transaction.007 debited to Feldstein's account.000 suffered by Anderson at the hearing.000 was entered upon the credit side of Anderson's underwriting account. January 1. In 1915.000.000. 1924.169 was debited in Anderson's personal account and that of P95.000.TAX 1 INCOME TAXATION Prof.007. It appears. becomes a part of the assets. Lucenario 1 Sem A.000. it does form part of the capital with which it was established. on different dates. Inc. which is the proportion of the participation of each in the 4 . susceptible of valuation in money. the total amount debited in Simon Feldstein's account is P320. thereby reducing the balance thereof from P530. by reason of the sale of said 500 shares. Anderson's debt of P530. once it is valuated and used.000 at which Anderson assessed the good will of the business' the latter. Dina D. Therefore. which represents the value.000 with a loss of P50. in place of his personal account.000. which moral profit. in the same proportion of 7/12 for the former and 5/12 for the latter. which was opened in the corporation in Anderson's name.000. divided into 1.) WON lower court erred in holding that the amount of P155.000. YES 2. that is. the sum of P134. that with the P100.000. or a total amount of P125.838. the amount of P230. Said deductions were approved by the Bureau of Internal Revenue.000 to P230. has been debited in Feldstein's account. With said elimination. This amount exceeds the sum of P250. 2010-2011 ST DIGESTS ANDERSON V POSADAS Facts: William H. found by the appellant as losses recovered.007 was the proportional part of the P300. Anderson sold 300 more shares to Feldstein at the rate of 3 to 1.00 paid by Feldstein on account of the 500 shares bought by him Anderson. In view of said losses. to the latter's loss.000 was restored. has been recovered. plus the sum of P125. and the above-stated sum of P95.. acquired by the business by reason of the confidence reposed in it by the public. As the Collector of Internal Revenue attempted to collect tax on the P300. deducted from the profits by reason of losses suffered temporarily on the capital. which in effect was so done by debiting said sum in his capital account and crediting it in the good will account. Anderson deducted the sum of P50. If the goodwill. is not subject to income tax. called underwriting account. 1918. due to the efficiency and honesty shown by the manager and personnel thereof in conducting the same on account of the courtesy accorded its customers. found by the appellant as proceeds from the sale of good will. the sum of P300. therefore. receiving in payment thereof the sum of P 50.831 in Feldstein's capital account. be restored thereto. thereby eliminating the underwriting account. The good will of P155. at the par value of P500 each.000.000 created by Anderson has been beneficial not only to him but also to Feldstein in the proportion of 7/12 for Anderson and 5/12 for Feldstein. To Feldstein's account was debited the sum of P125. there was opened in Anderson's name a good will account. which is equivalent to 5/12 of the good will of P300. 1918. On January 2d of the same year. together with the P100. agreed with the former to eliminate said good will. and it is but just that the sum of P125. On said date. amounts to P225. the good reputation of the business is acquired in the course of its management and operation.000 which correspondent to Feldstein. Anderson had purchased the business of Erlanger & Galinger. on December 29.000 from his return for the year 1919.200 shares at the par value of P500 each. at the rate of 7/12 for Anderson and 5/12 for Feldstein. On the same date.000 from the taxable income stated by him in his return for the year 1918.000 paid by him for the 500 shares which he had bought of Anderson. YES Held: Goodwill is the reputation of good name of an establishment. On January 1. Issues: 1. for the abovestated 500 shares.

The benefit received by Anderson does not consist merely in the sum of P90. Limpan duly filed its 1956 and 1957 income tax returns.00 covering the same period. Limpan is deemed to have constructively received such rentals in 1957. As above noted. Isabelo P. so as to justify the turn over to Limpan a certain value of its properties to be applied to the rentals of the land and in exchange for whatever rentals they may collect from the tenants who refused to recognize the new owner or vendee of the buildings.250. or any part thereof. Defense 4: Limpan likewise alleged in its petition that the rates of depreciation applied by respondent Commissioner of its buildings in the above assessment are unfair and inaccurate.00. 1955.00 from certain tenants. Hence.690. RATIO (DEFENSE 1): The excuse that previous land owners retained ownership of the lands and only later transferred or disposed of the ownership of the buildings existing thereon to Limpan. the examiners of the BIR conducted an investigation of petitioner's 1956 and 1957 income tax returns and. CTA sided with CIR. Held: This appeal is manifestly unmeritorious.630.199. they discovered and ascertained that petitioner had underdeclared its rental incomes by P20. reasoning out that the previous owners of the leased building has to collect part of the total rentals in 1956 to apply to their payment of rental in the land in the amount of P21. or by any document or unbiased evidence. Defense 1: Limpan disclaimed having received or collected the amount of P20. Defense 3: (TOPIC) Tenant Go Tong deposited in court his rentals amounting to P10. Isabelo P.500. It commenced actual business operations on July 1.412 and Feldstein's capital account increased by P64. respectively. is not only unusual but uncorroborated by the alleged transferors.00. Lim was not presented as witness to confirm accountant Solis nor was his 1957 personal income tax return submitted in court to establish that the rental income which he allegedly collected and received in 1957 were reported therein.00 and P16. did not turn the same over to petitioner corporation in said year but did so only in 1959.502. P90. CIR demanded for payment of deficiency income tax and surcharge against Limpan amounting to P30.260. who collected and received P13. as unreported rental income for 1956.TAX 1 INCOME TAXATION Prof. hence.588 for Feldstein. Lim. 2010-2011 ST DIGESTS shares of the corporation Erlanger & Galinger..098. RATIO (DEFENSE 2): Limpan’s denial and explanation of the nonreceipt of the remaining unreported income for 1957 is not substantiated by satisfactory corroboration.336.412.00 was not declared as income in its 1957 tax return because its president.00. Inc. that is. He also realized a gain of P70. RATIO (DEFENSE 3 – WHEN IS INCOME TAXABLE): Since deposit by Tenant Go Tong was resorted by him to due to the refusal of Limpan to accept the same. reporting therein net incomes of P3.00 and P2.81 and P11. mostly situated in Manila and in Pasay City. Issue: WON Limpan understated its income.800.838 from the sale of 500 shares to Feldstein.00 during these taxable years and had claimed excessive depreciation of its buildings in the sums of P4.00 and P81.220. was dismissed by said sum of P90.588. without merit.412 for Anderson and P64. Its real properties consist of several lots and buildings. The payment by the sub-tenant in 1957 should LIMPAN vs CIR Facts: Limpan is engaged in the business of leasing real properties. Limpan understated its income. inasmuch as Anderson's personal debt for the balance of the unpaid shares. added to gather. for which it paid the corresponding taxes therefor in the sums of P657.36.380. over which the corporation had no actual or constructive control. JUDGMENT IS REVERSED OVERVIEW AND GENERAL PRINCIPLES. 5 . Dina D.199. Lucenario 1 Sem A. Sometime in 1958 and 1959.Y.250 more than the sum of P155. Said benefits. that is. P6.000 on which the defendant and appellant Collector of Internal Revenue is attempting to collect tax from him. WHEN IS INCOME TAXABLE Defense 2: Amount totalling P31.00. in the course thereof. make a total of P161. this case.287.

an entity separate and distinct from the owner thereof. there was no constructive receipt for the dividends.07 per cent.000. The notice was not sent to the taxpayer for the purpose of giving effect to the assessment. the estate of the late Esteban dela Rama filed its income tax return (ITR) for the year 1950. however invested or employed. stock dividend is not taxable.877 because of the new shares. as income of the stockholder and without apportionment. Held: No. but a gain. She was called upon to pay. of which 18. notice must be sent to the administrator of the estate. 1913. a stock dividend made lawfully and in good faith against profits accumulated by the corporation. MACOMBER: Revenue Act of 1916 . and January 1. as representative of the estate. the BIR claims that the estate had received in 1950 cash dividend from the Dela Rama Steamship Co. the assessment could not become final and executory. Macomber. EISNER vs MACOMBER Facts: Standard Oil Company of California. not a growth or increment of value in the investment. a profit. proceeding from the property. The first debt was not proven to exist and the second debt was due from Hijos de I. being 'derived'-that is. something of exchangeable value. instead of distributed to the stockholders or retained as surplus available for distribution in money or in kind should opportunity 6 .Y. When an estate is under administration.877. since it is income just the same regardless of its source..200 shares of the old stock. and to transfer from surplus account to capital stock account an amount equivalent to such issue. severed from the capital. but should be determined by a consideration of actual facts. in so far as it considers stock dividends as income.77 shares. BIR claims that the cash dividends were applied in the deceased’s account and this constituted constructive receipt by the estate or by the heirs. In this case. dela Rama. of which about $20. Inc. or 198. who has the legal obligation to pay and discharge all debts of the estate and to perform all orders of the court. a tax imposed based upon a supposed income of $ 19.100 additional shares. and the findings of the Tax Court in this respect should not be disturbed when not shown to be arbitrary or in abuse of discretion. The debts to which they were applied were not proven to have existed. benefit and disposal. Lucenario 1 Sem A.. legal notice of the assessment was sent to two heirs. violated the Constitution of the United States. were treated as representing surplus earned between March 1. When the notice to this effect is released. 1916. neither one of whom had any authority to represent the estate. 1913. In this case. REPUBLIC vs DELA RAMA Facts: In 1951.TAX 1 INCOME TAXATION Prof. 2010-2011 ST DIGESTS have been reported as rental income in said year. received certificates for 1. Issue: WON Congress has the power to tax. In order to readjust the capitalization. which was not declared in the ITR. provided it be understood to include profit gained through a sale or conversion of capital assets and not a gain accruing to capital.000. A 'stock dividend' shows that the company's accumulated profits have been capitalized. Income tax is assessed on income tax is assessed on income that has been received. RATIO (DEFENSE 4) : Depreciation is a question of fact and is not measured by theoretical yardstick.that is income derived from property. Constructive delivery occurs only when it is shown that the debts to which the dividends were applied actually existed and were legally demandable and chargeable to the deceased. and coming in. received or drawn by the recipient (the taxpayer) for his separate use. and did pay under protest.being the owner of 2. from labor. It appearing that the person liable for the payment of the tax did not receive the assessment. income was not received due to failure to deliver – either actually or constructively.000. mailed or sent to the taxpayer for the purpose of giving effect to said assessment. since it is the said administrator. and said notice could not produce any effect. had surplus and undivided profits amounting to $45. the board of directors decided to issue stock dividend of 50 percent of the outstanding stock. Later. Held: No. Income may be defined as the gain derived from capital.000 had been earned prior to March 1. Issue: WON there was constructive payment of dividends and thus constructive receipt by the estate or by the heirs. Dina D. or from both combined. par value $19.

patented. and subject to business risks which may result in wiping out the entire investment. any excess damages serve to realize prior appreciation. Raytheon gave evidence to support its valuation of the patents. the basis of goodwill is zero because it consists of costs that are themselves immediately deductible -. with a clause requiring the licensee to only buy from RCA. its basis will be treated as zero. The essential and controlling fact is that the stockholder has received nothing out of the company's assets for his separate use and benefit. Far from being a realization of profits of the stockholder. Raytheon chose to allocate $60. did the Tax Court err in holding that there was insufficient evidence to enable it to determine what part of the lump sum payment was properly allocable to the settlement?\ Held: Tax law treats recoveries as "income" when they represent compensation for loss of profits.Y."In lieu of what were the damages awarded?" Tax law treats business good will not as future profits (which are fully taxable when recovered as damages).000 to settle Raytheon's claims under the Federal Anti-Trust Laws. the Court treated the basis as zero because Raytheon was unable to establish it." Since Raytheon could not establish the cost basis of its good will. 2010-2011 ST DIGESTS offer." At trial. to substance and not to form. (Thus. tax law does not exempt compensatory damages just because they are a return of capital -.000) by introducing evidence of its profitability.exemption applies only to the portion that recovers the cost basis of that capital. It did not immediately argue that any damage recovery for loss of good will is always taxable as income.) In this case. it protested that "[t]here exists no clear evidence of what the amount was paid for so that an accurate apportionment can be made.they are a "return" of this capital. at the same time shows he has not realized or received any income in the transaction.000 constituted income.000 of the settlement to the value of the patents. rather. Thus.. the record is devoid of evidence as to the amount of that basis. We are clear that not only does a stock dividend really take nothing from the property of the corporation and add nothing to that of the shareholder.or a return of capital.. the test for taxability is: What loss were the damages designed to compensate for? -. thus claiming only this amount as income and excluding the remaining $350.TAX 1 INCOME TAXATION Prof. but in the same transaction also acquired rights to some 30 patents. the amount of any nontaxable capital recovery cannot be ascertained. Issues: First: Are damages for the destruction of business good will taxable income -. Thus.expenses 7 . RCA licensed a competing tube to many of the same manufacturers.000 attributable to the suit is thus taxable income. but that the antecedent accumulation of profits evidenced thereby. Lucenario 1 Sem A. it tends rather to postpone such realization. on the contrary. Dina D. Having regard to the very truth of the matter.000 as damages. it also assessed the value of its lost business good will (at $3. The Commissioner determined that the $350. of which any recovery of basis is non-taxable? Second: If the recovery is non-taxable. However.000 of the $410. Generally. damages for its destruction are designed to compensate for the destruction of a capital asset -. and licensed to manufacturers. but as present capital -. still remains the property of the company. RCA paid $410. In this case. he has recived nothing that answers the definition of income within the meaning of the Sixteenth Amendment. and should be taxed as income. while indicating that the shareholder is the richer because of an increase of his capital. This Court agrees with the Tax Court that "in the absence of evidence of the basis . In its tax return. the second question as to allocation between this and the ordinary income from patent licenses is not present. eventually leading to the complete destruction of Raytheon’s business good will in this product market. The Court concludes that the $350. every dollar of his original investment. These antitrust practices caused a significant decline in Raytheon’s market share. together with whatever accretions and accumulations have resulted from employment of his money and that of the other stockholders in the business of the company. RAYTHEON PRODUCTION V CIR Facts: Raytheon built up business good will on a rectifier tube that it developed. and declined to state how much of its payment should be allocated between the patent license rights versus the settlement of the suit. in that the fund represented by the new stock has been transferred from surplus to capital.000.even though evidence of future profitability must be introduced to evaluate it. and no longer is available for actual distribution.

the Court of Tax Appeals sufficiently explained the services of a local travel agency. the fund for hotel room accommodation. Commissioner. on December 6. evidence presented by the private respondent shows that the amounts entrusted to it by the foreign tourist agencies to pay the room charges of foreign tourists in local hotels were not diverted to its funds. This evidence was not refuted. It included the following holdings: Under the tax code. Notes: Raytheon Production Corp.Y. As quoted earlier. In this case. be paid through them.00. rendered to foreign customers.93 for the years 1974 to 1976. that the hotel room charges.Despite this arrangement. as the case may be. as a rule. The respondent differentiated between the package fee — offered by both the local travel agency and its correspondent counterpart tourist agencies abroad and the requests made by some tour agencies abroad to local tour agencies wherein the hotel room charges in some specific cases..93. The procedure observed is that the billing hotel sends the bill to the petitioner. 1979. travelers and/or foreign travel agencies does not form part of its gross receipts subject to the 3% independent contractor's tax under the National Internal Revenue Code of 1977. or by their foreign travel agencies to the local hotels or shops. a recovery (as damages) of present capital is not. Held: NO. the payments of the hotel room accommodations. etc. petitioner received from respondent the 3% deficiency independent contractor's tax assessment in the amount of P122. denied. 1943). In addition to the deficiency contractor's tax of P122. in some specific cases.. It is settled law that. earmarked and paid for hotel room charges of tourists. goodwill can acquire a basis. or the particular groups of tourists by code name or group designation and also the duration of their stay for purposes of payment. the basis is treated as zero because Raytheon is unable to establish it.946. cert.946. this arrangement was only an act of accommodation on the part of the private respondent. like the herein private respondent. In order to ably supply these services to the foreign tourists. tourists themselves. 113 (1st Cir.g. v. it is also settled law that compensatory damages are not tax-exempt just because they are a return of capital. damages for the destruction of goodwill (rewarded under the Federal Anti-Trust Laws) are compensating for the destruction of a capital asset -. respondent Commissioner of Internal Revenue assessed petitioner for deficiency 3% contractor's tax as independent contractor by including the entrusted hotel room charges in its gross receipts from services for the years 1974 to 1976. Issue: WON the money entrusted to private respondent Tours Specialists. the petitioner then pays the local hotel with the funds entrusted to it by the foreign tour correspondent agency. 779 (1944) is a United States income tax case which discusses the tax deductibility of damages for loss of business good will. any excess damages serve to realize prior appreciation.It is also the case that some tour agencies abroad request the local tour agencies. would be paid to the local hotels through them. as a portion of the cost of purchasing another business. while a recovery (as court-ordered damages) of future profits is taxable. which in turn is paid by petitioner tour agency to the local hotel when billed. Inc. 323 U.2d 110. Lucenario 1 Sem A. Dina D.S.TAX 1 INCOME TAXATION Prof.93. the foreign tour agency entrusts to the petitioner Tours Specialists. 144 F.Tours Specialists. Exemption applies only to the portion of these damages that recovers the cost basis of that capital. However. Upon receipt of the bill. CIR vs TOURS SPECIALIST Facts: For the years 1974 to 1976. Inc. and should be taxed as income. Inc. The local hotel identifies the individual tourist. food and other personal expenses of said tourists. such as Tours in the case. but present capital. with total amount due P 122. Although the fee to be paid by said tourists is quoted by Tours. are paid directly either by 8 .they are a "return" of this capital. PR. petitioner was assessed to pay a compromise penalty of P500. However. 2010-2011 ST DIGESTS for advertising. By this arrangement. Consequently. business good will is not the present value of future profits. Moreover. from lodging to transport. had derived income from its activities as a travel agency by servicing the needs of foreign tourists and travelers and Filipino "Balikbayans" during their stay in this country. Thus. petitioner and its correspondent counterpart tourist agencies abroad have agreed to offer a package fee for the tourists.946. e.

" In the case at bar.615. Dolores Ventosa.973. and praying that the excess amount of US$999. 1978 thus: "Taxpayer was the recipient of some money from abroad which he presumed to be a gift but turned out to be an error and is now subject of litigation that it was an "error or mistake of fact or law" not constituting fraud. As stated earlier. the room charges entrusted by the foreign travel agencies to the private respondent do not form part of its gross receipts within the definition of the Tax Code. demanding that petitioner (private respondent herein) pay on or before December 15.000.000. through some banks in the United States. Javier may be guilty of swindling charges. Javier. the imposition of the fraud penalty in this case is not justified by the extant facts.A. that such notation was practically an invitation for investigation and that Javier had literally "laid his cards on the table. Error or mistake of law is not fraud. As demonstrated in the above-mentioned case.053. gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do not belong to them and do not redound to the taxpayer's benefit. immediate." He however received a letter from the acting Commissioner of Internal Revenue together with income assessment notices for the years 1976 and 1977. JAVIER Facts: Victoria L.96 and P9. his wife and other defendants. He wrote the BIR saying that he was paying the deficiency income assessment for the year 1976 but denying that he had any undeclared income for the year 1977 and requested that the assessment for 1977 be made to await final court decision on the case filed against him for filing an allegedly fraudulent return. The petitioner's zealousness to collect taxes from the unearned windfall to Javier is highly commendable. 9 . The government was not induced to give up some legal right and place itself at a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities because Javier did not conceal anything.Y. 1980 the amount of P1. and it is not necessary that there must be a law or regulation which would exempt such monies and receipts within the meaning of gross receipts under the Tax Code. is definitely taxable.000. The Fiscal of Pasay City filed an Information with the then Circuit Criminal Court Javier and his wife with the crime of estafa. COMMISSIONER OF INTERNAL REVENUE v. the wife of Melchor received from the Prudential Bank and Trust Company in Pasay City the amount of US$999. The private respondent never benefited from their payment to the local hotels. headed by the herein petitioner.00 be returned on the ground that the defendants are trustees of an implied trust for the benefit of Mellon Bank with the clear.51 as deficiency assessments for the years 1976 and 1977 respectively. the petitioner's assertion that the hotel room charges entrusted to the private respondent were part of the package fee paid by foreign tourists to the respondent is not correct. there was no actual and intentional fraud through willful and deliberate misleading of the government agency concerned.TAX 1 INCOME TAXATION Prof. Unfortunately.297. and continuing duty to return the said amount from the moment it was received. misapplied. Under the Tax Code. a taxpayer who files a false return is liable to pay the fraud penalty of 50% of the tax due from him or of the deficiency tax in case payment has been made on the basis of the return filed before the discovery of the falsity or fraud.70 remitted by her sister.00 was a clerical error and should have been US$1.000. The said receipts never belonged to the private respondent. claiming that its remittance of US$1. Parenthetically. Mrs. this arrangement was only to accommodate the foreign travel agencies. The bank. among which is Mellon Bank. We are persuaded considerably by the private respondent's contention that there is no fraud in the filing of the return and agree fully with the Court of Tax Appeals' interpretation of Javier's notation on his income tax return filed on March 15. 2010-2011 ST DIGESTS In essence. Javier filed his Income Tax Return for the taxable year 1977 showing a gross income of P53. the Bureau of Internal Revenue. N.88 and stating in the footnote of the return that "Taxpayer was recipient of some money received from abroad which he presumed to be a gift but turned out to be an error and is now subject of litigation.053. filed a complaint with the CFI against Javier. The CIR wrote back saying that "the amount of Mellon Bank's erroneous remittance which you were able to dispose. alleging that they misappropriated. Issue: WON a taxpayer who merely states as a footnote in his income tax return that a sum of money that he erroneously received and already spent is the subject of a pending litigation and there did not declare it as income is liable to pay the 50% penalty for filing a fraudulent return Held: NO. Lucenario 1 Sem A. The evidence is clear to the effect that the amounts entrusted to the private respondent were exclusively for payment of hotel room charges of foreign tourists entrusted to it by foreign travel agencies.00 only.287. and converted to their own personal use and benefit the amount.38 and a net income of P48."The Commissioner also imposed a 50% fraud penalty against Javier. Dina D.

Held: There is a need for proof of such persuasive character as would lead to a conclusion that there was a violation of the due process and equal protection clauses. At the end of each calendar year. Sison. the Joint Emergency Operation involved in the present is a corporation within the meaning of section 84 (b) of the Internal Revenue Code. Issue: Whether BP 135 violates the due process and equal protection clauses. Held: Yes. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation. Under the theory that the two companies had pooled their resources in the establishment of the Joint Emergency Operation. and one set of office of clerical force. There is ample justification to adopt the gross system of income taxation Facts: To economize their expenses. thereby forming a joint venture.89 as deficiency income tax and compromise for the years 1946 to 1949. BTC and LTBC entered into a joint management called Joint Emergency Operation. all gross receipts and expenses of both companies were determined and the net profits were divided fifty-fifty. and so is liable to income tax under section 24 of the code 10 . Recipients of compensation income are not entitled to make deductions for income tax purposes as there is no practically no overhead expense. the 50% surcharge imposed as fraud penalty by the petitioner against the private respondent in the deficiency assessment should be deleted. as taxpayer. SISON VS. fifteen inspectors.000 for each company. Where the differentitation conforms to the practical dictates of justice and equity. ANCHETA Facts: Batas Pambansa 135 was enacted. TAXPAYERS. similar to the standards of equal protection.Y. assets and liabilities thus transferred to it from the `Joint Emergency Operation' and paid the corresponding income taxes thereon separately". such as recipients of compensation income as against professionals. while continuing the system of net income taxation as regards professional and business income. that it amounts to class legislation. as defined in section 84 (b). SCHEDULAR TAX SYSTEM to compensation income. special agents. 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. the presumption of validity must prevail. and that it transgresses against the equal protection and due process clauses of the Constitution as well as the rule requiring uniformity in taxation. The theory of the Collector is the Joint Emergency Operation was a corporation distinct from the two respondent companies.000 or about P100.210. Taxpayers may be classified into different categories. inclusive.TAX 1 INCOME TAXATION Prof. the Collector wrote the bus companies that there was due from them the amount of P422. OVERVIEW AND GENERAL PRINCIPLES. 2010-2011 ST DIGESTS perhaps even for greed by spending most of the money he received. one assistant manager. Absent such showing. Lucenario 1 Sem A. it is not discriminatory within the meaning of the clause and is therefore uniform." As ruled by respondent Court of Tax Appeals. INCOME TAX SYSTEMS. alleged that its provision (Section 1) unduly discriminated against him by the imposition of higher rates upon his income as a professional. both of the National Internal Revenue Code. Dina D. and transferred to the book of accounts of each company. and so liable to income tax under section 24. and the rule on uniformity in taxation. but the records lack a clear showing of fraud committed because he did not conceal the fact that he had received an amount of money although it was a "subject of litigation. the savings in one year amounting to about P200. and each company "then prepared its own income tax return from this fifty per centum of the gross receipts and expenditures. CORPORATIONS CIR V BATANGAS TAYABAS BUS CO. while professionals and businessmen have no uniform costs or expenses necessaryh to produce their income. Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. Because of such operation the two companies had been able to save the salaries of one manager.

Instead.405. in relation to Section 84(b) of the Tax Code. petitioner’s properties and investment gradually increased from P 105.00 in 1949 to P 480. Petitioners protested against the assessment and asked for reconsideration of the ruling that they have formed an unregistered partnership. Oña as a common fund in undertaking several transactions or in business. nevertheless. the gross receipts and income in the gross expenses of two companies are exactly the same for purposes of the payment of income tax. no attempt was made to divide the properties listed therein. said law defined the term "corporation" as including partnerships no matter how created or organized. COMMISION OF INTERNAL REVENUE Facts: Julia Bunales died on March 23. it must refer to organizations which are not necessarily partnerships in the technical sense of the term. CORPORATIONS. Collector of Internal Revenue et al said. Respondent CIR decided that petitioners formed an unregistered partnership and therefore. Dina D. They treated the profit derived from the sale as capital gain and paid and income tax on one-half thereof. in order that one could be deemed constituted for purposes of the tax on corporations". sometimes in different provinces or territories. the petitioners sold them to the Walled City Securities Corporation and Olga Canda. A civil case was instituted in the CFI of Manila for the settlement of her estate. 11 . TAXPAYERS. CO-OWNERSHIP. San Juan and transferred the rights to the same to his four children.” In view of this. subject to the payment of the deficiency corporate income taxes assessed against them by respondent CIR. What was actually done in this case was that.TAX 1 INCOME TAXATION Prof.Y.. After having held the lots for more than a year. although no legal personality may have been created by the Joint Emergency Operation. and considering that the Batangas Transportation and the Laguna Bus operated different lines. and that furthermore. therefore. thereby obtaining substantial economy and profits in the operation. Held: From the moment petitioners allowed not only the incomes from their respective shares of the inheritance but even the inherited properties themselves to be used by Lorenzo T. and are. “when the Tax Code includes "partnerships" among the entities subject to the tax on corporations. or joint management operated the business affairs of the two companies as though they constituted a single entity. that besides. to enable them to build their residences. they thereby formed an unregistered partnership within the purview of the provisions of the Tax Code. As a result. the properties remained under the management of Lorenzo who used the said properties in business by leasing or telling them and investing the income derived therefrom and the proceeds from the sales thereof in real properties and securities. 1944 leaving as heirs her surviving spouse Lorenzo T. V.20 in 1956. subject to the corporate income tax pursuant to Section 24. the petitioners. Issue: Did petitioners constitute an unregistered partnership. said section 84 (b) provides that the term "corporation" includes "joint accounts" (cuentas en participacion) and "associations". with the intention of deriving profit to be shared by them proportionately. purchased to lots located in Greenhills. under different franchises. with different equipment and personnel. 2010-2011 ST DIGESTS The court citing the case of Eufemia Evangelista et al. vs. none of which has a legal personality independent of that of its members. in effect. OBILLOS JR. Lucenario 1 Sem A. CIR Jose Obillos Sr. such act was tantamount to actually contributing such incomes to a common fund and. company or partnership. Lorenzo was appointed administrator of the deceased’s estate. A project of partition shows that the heirs have undivided ½ interest in 10 parcels of land. it cannot possibly be true and correct to say that the end of each year.0005. Oña and her five children. thereby indicating that "a joint venture need not be undertaken in any of the standard forms. PARTNERSHIP. GPP ONA VS. Although the court approved the project of partition. said Joint Emergency Operation joint venture. 6 houses and an undetermined amount to be collected from the War Damage Commission. or in conformity with the usual requirements of the law on partnerships.

TAX 1 INCOME TAXATION Prof. Dina D. Lucenario 1 Sem A.Y. 2010-2011

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The CIR required the petitioners to pay corporate income tax on the total profit in addition to individual income tax on their shares thereof. The Commissioner also considered the share of the profits of each petitioner in the sum as distributive dividend taxable in full and required them to pay deficiency income taxes. The Commissioner acted on the theory that the petitioners had formed an unregistered partnership or joint venture within the meaning Sections 24a and 84b of the Tax Code. Issue: Whether the petitioners have formed a taxable unregistered partnership Held: NO. The Court held that it was an error to consider the petitioners as having formed a partnership under Article 1767 NCC simply because they allegedly contributed money to buy the two lots, sold the same and divided the profit among themselves. Their original purpose was to divide the lots for residential purposes. If later on they found it not feasible to build their residences on the lots because of the high cost of construction, then they had no choice but to sell the lots to dissolve the co-ownership. The division of the profit was merely incidental to the dissolution of the co-ownership. “The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in a property from which the returns are derived (Article 1769.3).” There must be an unmistakable intention to form a partnership or joint venture. REYES V. COMMISSIONER Facts: Petitioners, father and son, purchased a lot and a building (Gibbs Bldg.) situated in Manila. The initial payment of P 375 000.00 was shared equally by the petitioners. At the time of the purchase, the building was leased to various tenants, whose rights under the lease contracts with the original owners, the purchasers (the petitioners) agreed to respect. The administration of the building was entrusted to an administrator, who collected the rents, negotiated leases, made necessary repairs and performed such other functions necessary for the

conservation and preservation of the building. The petitioners divided the income of operation and maintenance equally among themselves. The respondent CIR assessed the petitioners in two separate occasion income tax for the years 1) 1951-1954, and 2) 1955-1956. The petitioners failed to have the assessments reconsidered. They took the matter to the Court of Tax Appeals, where the two cases were heard jointly. The respondent CTA reduced the tax liability of the petitioners for both periods and held the same as income tax due “from the partnership formed” by the petitioners. Hence this petition for review. Issue: Whether the petitioners are subject to the tax on corporations provided for in Sec. 24 of Commonwealth Act 466 (The National Internal Revenue Code) Held: YES. The petitioners constitute a partnership, insofar as the NIRC is concerned, and are therefore subject to the income tax for corporations. The essential elements of a partnership are: (i) an agreement to contribute money, property or industry to a common fund; and (ii) the intent to divide the profits among the contracting parties. The first element is present. The petitioners have agreed to, and did, contribute money and property to a common fund. The second element is likewise present. It can be deduced from the facts surrounding the case that the purpose of the petitioners was to engage in real estate transactions for monetary gain and divide the same among themselves, which they in fact did. On petitioners’ defense that they are co-owners, not partners: For purposes of taxation, the NIRC included partnerships, with the exception only of duly registered general co-partnerships, within the purview of the term ‘corporation’. A corporation is, strictly speaking, distinct from a partnership. But when the NIRC included ‘partnerships’ among the entities subject to the tax on ‘corporations’, said Code must have alluded to organizations, which are not necessarily ‘partnerships’ in the technical sense of the term. The Code likewise states that “the term corporation includes partnerships, no matter how created or organized”. This qualifying expression clearly

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TAX 1 INCOME TAXATION Prof. Dina D. Lucenario 1 Sem A.Y. 2010-2011

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indicates that a joint venture need not be undertaken in any of the standard forms, or in conformity with the legal requirements on partnerships, in order that one could be deemed constituted for the purposes of the tax on corporations GATCHALIAN V. CIR Facts: The plaintiffs contributed money to purchase a sweepstakes ticket, which was registered in the name of Gatchalian and Company. The ticket won one of the prizes amounting to P 50 000.00 and the corresponding check was drawn in favor of Gatchalian and Company. Gatchalian was required by the income tax examiner to file the corresponding income tax return covering the prize won. The CIR made an assessment against Gatchalian and Company. The plaintiffs requested exemption from payment but was denied. The plaintiffs paid under protest then brought an action to recover their payment. Issue: Whether the plaintiffs formed a partnership and therefore liable for the payment of income tax Held: YES. The plaintiffs organized a partnership of 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. The partnership was not only formed but upon the organization thereof and the winning of the prize, Gatchalian personally claimed the prize in his capacity as co-partner. Having organized and constituted a partnership of a civil nature, the said entity is the one bound to pay the income tax, which the defendant collected. EVANGELISTA v. CIR Facts: The Evangelistas purchased various lands using the money they borrowed from their father. These lands were leased. CIR claims income tax (on corporations, real estate dealer, corporation residence) from them. Issue: WON Evangelistas are liable to pay income tax

Held: Yes. They are liable to pay income tax.Petitioners are liable for to pay income tax on corporations. They have formed a partnership which is taxable as a corporation under the NIRC. The proof of real estate business are: i) Common fund is created purposely, borrowed from father, ii) Invested money in series of transactions, iii) Lots are not used for residential purposes, iv) Properties are managed by one person, v) Condition (business) existing for 10 years, vi) Petitioners did not give evidence contrary to purpose of a business. CIR vs. BATANGAS TRANSPORTATION COMPANY Batangas Transportation and Laguna-Tayabas Bus were placed under joint management (“Joint Emergency Operation”) to economize overhead expenses. CIR claims tax deficiencies from the two companies on the basis that the Joint Emergency Operation is a corporation distinct from the two companies. Issue: WON the Joint Emergency Operation is liable to pay for deficiency income tax Held: Yes. They are liable because it is a separate entity from the two companies. The Joint Emergency Operation operates as a single entity, company or partnership obtaining profits from operations. Two companies contributed money to a common fund to pay for operational expenses. Expenses and income are merged. The Joint Emergency Operation falls under the definition of a corporation (Sec 84(b)The term 'corporation' includes partnerships, no matter how created or organized, joint-stock companies, joint accounts, associations or insurance companies, but does not include duly registered general copartnerships) under the NIRC, hence is liable to pay income tax.

TAN v. CIR Facts: Tan bought knitting materials that he used to make undershirts. He was assessed with percentage tax on the sale of undershirts. The defense was that he was not liable to pay the tax because RA 901 grants tax exemption to the knitting industry. Issue: WON tan is liable to pay for percentage tax on sale of undershirts.

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TAX 1 INCOME TAXATION Prof. Dina D. Lucenario 1 Sem A.Y. 2010-2011

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Held: Yes. Tan is liable. The sales tax exemption granted for cotton knitting materials under RA 901 prevents the deduction of this cost from the value of gross sales of undershirts. The purpose of authorizing the deduction of the costs of materials manufactured from the gross selling price under the NIRC, is to avoid or prevent double taxation. It prevents a second assessment of the percentage tax on the material that went into the production of the manufactured articles. Here, since the knitting materials used in making the undershirts were not subjected to sales tax, it need not be deducted from the gross selling price of the undershirts, as there would be no double taxation. MANUEL PASCUAL AND RENATO DRAGON PETITIONERS VS. CIR AND CTA Facts: Petitioners Pascual and Dragon bought two (2) parcels of land on June 22, 1965 and another three (3) parcels of land on May 28, 1966. They sold the first two parcels in 1968 and the three parcels in 1970. They paid the corresponding capital gains taxes in 1973 and 1974 by availing of the tax amnesties granted in the said years. However, in 1979, they were assessed and required to pay deficiency corporate income taxes for the years 1968 and 1970. The respondent Commissioner informed petitioners that in 1968 and 1970, petitioners as co-owners in real estate transactions formed an unregistered partnership or joint venture taxable as a corporation under Sec. 20(b) and its income was subject to the taxes prescribed under Sec. 24, both of the NIRC. Issue: WON the co-ownership between the petitioners constitutes an unregistered partnership/joint venture which is taxable as a corporation. Held:: The co-ownership between the petitioners does not constitute an unregistered partnership. The petitioners shall be relieved of the corporate tax liability. There is no evidence that petitioners entered into an agreement to contribute money, property or industry to a common fund, and that they intended to divide the profits among themselves. Respondent commissioner and/or his representatives just assumed these conditions

to be present on the basis of the fact that petitioners purchased certain parcels of land and became co-owners thereof. The purchase of the lands and the subsequent sale thereof were isolated transactions. In this case, the character of habituality peculiar to business transactions for the purpose of gain was not present. In Evangelista vs CIR, the court stated that there are two essential elements of a partnership: (a) an agreement to contribute money, property or industry to a common fund; and (b) intent to divide the profits among the contracting parties. In the said case, there was a series of transactions where petitioners purchased 24 lots which demonstrate the character of habituality peculiar to business transactions. The court also held that that the sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a joint or common right or interest in the property. There must be a clear intent to form a partnership, the existence of a juridical personality different from the individual partners, and the freedom of each party to transfer or assign the whole property. In the present case, there is no adequate basis to support the proposition that the petitioners formed an unregistered partnership on the basis of their co-ownership. The two isolated transactions did not make them partners. They shared in the gross profits as co-owners and paid their capital gains taxes on their net profits and availed of tax amnesty. Under these circumstances, they cannot be considered to have formed an unregistered partnership. AFISCO INSURANCE CORP. ET AL. VS. CA, CTA AND CIR Facts: The petitioners are 41 local insurance firms which entered into Reinsurance Treaties with Munich, a non-resident foreign insurance corporation. The reinsurance treaties required them to form an “insurance pool” or “clearing house” in order to facilitate the handling of the business they contracted with Munich. The CIR assessed the insurance pool deficiency corporate taxes and withholding taxes on dividends paid on Munich and to the petitioners respectively. The assessments were protested by the petitioners.

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profit must have been the object as indeed. Susana Realty. Commissioner is misplaced. May the insurance pool be deemed a partnership or an association that is taxable as a corporation? 2. which involved a partnership that engaged in a series of transactions spanning more than 10 years. Petitioners' reliance on Pascual v. It is apparent. the executive board of the pool did not exercise control and management of its funds and the pool was not engaged in business of reinsurance from which it could have derived income for itself.Y. there was no unregistered partnership. The CA did not err in applying Evangelista. c. they in fact entered into a joint venture and engaged in leasing business. Lucenario 1 Sem A. There are unmistakable indicators that it is a partnership or an association covered by NIRC. CIR Facts: Solidbank and Susana Realty. The fact that the pool does not retain any profit or income does not obliterate an antecedent fact that of the pool is being used in the transaction of business for profit. 494 of the Civil Code and asserted that a “Buy-Out” of the share of one to the other co-owner is a more practical solution. consisting of money and other valuables that are deposited in the name and credit of the pool. as in the case before us. became co-owners of three (3) parcels of land with a four-storey building thereon when Solidbank acquired ½ ownership and interest of Susana Realty. In the present case. but merely a coownership which took up only 2 isolated transactions. on the other hand. The petitioners belie the existence of a partnership because. formed a taxable corporation. Though the pool itself is not a reinsurer. SOLIDBANK CORPORATION VS. The parties agreed to settle amicably and the court rendered judgment approving the compromise agreement. profit was earned. b. Dina D. there was no common fund. The CIR said that since the purpose and activities that arose from the transaction was a leasing business activity. Issues: 1. A former employee of Susana Realty filed an information against Solidbank and Susana Realty stating that as a result of the amicable settlement. Solidbank and Susana Realty waived their claims against each other and are therefore subject to and liable for donor’s tax. In Pascual. Though the profit was apportioned among the members. 2010-2011 ST DIGESTS The CA ruled that the insurance pool was a partnership taxable as a corporation and that the latter’s collection of premiums on behalf of its members was taxable income. because the facts obtaining therein are not on all fours with the present case. Solidbank filed a complaint for partition. It demanded the portion of the property owned in common pursuant to Art. a. The pool has a common fund. The CIR denied the letter of protest of the petitioners and held that they were unregistered partners of the subject property and are subject to corporate income tax. according to them. Years after. The pool functions through an executive board which resembles the BOD of a corporation. and petitioners admit that their association or co-action was indispensable to the transaction of the business. pointed out that the true intention of the parties are not to become parties and to operate the acquired property for profit but for it to ultimately sell and convey the acquired 15 . hence. the reinsurers did not share the same risk or solidary liability. rather. If together they have conducted business.TAX 1 INCOME TAXATION Prof. it follows that the petitioners did not merely enter into a co-ownership agreement. beneficial and economically useful to the business of the ceding companies and Munich because without it they would not have received their premiums. Profit motive or business is therefore the primordial reason for the pool’s formation. The title of the property was awarded to Solidbank. this is one a matter of consequence as it implies that profit actually resulted. its work is indispensable. Should the pool’s remittances to member companies and to Munich be taxable as dividends? Held: The pool is taxable as a corporation. the ceding companies entered into a Pool Agreement or an association that would handle all the insurance businesses covered under their quotasharing reinsurance treaty and surplus reinsurance treaty with Munich. Inc.

CORPORATIONS. Solidbank occupied more than half of the two buildings for its own business needs. 2010-2011 ST DIGESTS property in favor of Solidbank in the future since the latter was using the building as its head office in its banking operations. TAXPAYER. There are two essential elements of a partnership: (a) an agreement to contribute money. On October 4. was reached by the petitioners to purposely contribute money. 2. In compliance with said order. The sharing of the gross returns does not of itself establish a partnership whether or not the persons sharing therein have a joint or common right or interest in the property.Y. The agreement for administration of property is but a mere incident of the co-ownership and not an act reflective of their intention to engage in a mutual fund for profit or business. and (b) intent to divide the profits among the contracting parties. However. and the freedom to transfer or assign any interest in the property by one with the consent of the others. such fact does not per se mean that they are engaged in partnership. Facts: Eastern Isles Import Corp and Eastern Isles Inc. The fact that those who agree to form a co-ownership share or do not share any profits made by the use of the property held in common does not convert their venture into a partnership. 3. Although petitioners realized net income or profit from the lease of their building. The act of Solidbank in constructing the building without Susana Realty’s consent negates any mutual agreement between them to form a partnership. 4. There is no authority given to Solidbank to transfer or assign any interest in the property which may be construed as indicative of partnership. Aside from the circumstance of profit. The intent is evident that it bought the ½ of the property for its own personal use. RESIDENT FOREIGN CORPORATIONS WINSHIP V. property or industry to a common fund and that no intent to divide the profits arising from the use of the common fund in a business activity was ever contemplated by the parties. were owned by American citizens. Issue: WON Solidbank and Susana Realty formed an unregistered partnership which is subject to corporate income tax. Both companies held current account deposits with Philippine Trust Corporation.TAX 1 INCOME TAXATION Prof. Dina D. 1943. property or industry to a common fund.PHIL. the Japanese Military Administration in the Philippines issued an order requiring all deposit accounts of the hostile people (including corporations) to be transferred to the Bank of Taiwan. the presence of other elements constituting partnership is necessary such as the clear intent to form a partnership. CIR has alleged that they contributed capital to engage in a leasing business activity. Aside from the circumstance of profit. the existence of a juridical personality different from that of the individual partners. These facts established the absence of intent to form a partnership over the property in question. the presence of other elements constituting partnership must be considered. The Deed only granted it administration. It is also important to note that Solidbank demolished the ½ portion of the building and constructed a new 10-storey building without the prior approval and consent of Susana Realty. Solidbank acted on its own in handling its business affairs. save for one or two shares. Lucenario 1 Sem A. the petitioners would seem to be covered by the essential elements. At first glance. Held: What Solidbank and Susana Realty had entered into under the “Deed of Sale with Option and Agreement for Administration of Property” (Deed) is a transaction resulting in co-ownership and not unregistered partnership. The existence of a juridical personality different from that of the individual partners is absent in this case for the following reasons: 1. a more exhaustive scrutiny of the facts and jurisprudence led the court to believe that no agreement. It is manifest from the wordings of the Deed that the real intention was to sell petitioner Susana Realty’s share to Solidbank. were corporations organized under the laws of the Philippines whose capital stocks. Petitioners did not create a common fund to engage in leasing business. the Philippine Trust Company transferred and paid the credit balances of the current account deposits 16 . An isolated transaction whereby two or more persons contribute funds to buy certain real estate for profit in the absence of other circumstances showing a contrary intention cannot be considered a partnership. TRUST CO. direct or implied.

Davis Winship who insituted an action against Phil. Petitioners argue that following the principal-agent relationship theory. Phil. When Phil Trust Co.. 2010-2011 ST DIGESTS of the two corporations to the Bank of Taiwan. and are in progressive pursuit of. a foreign corporation duly organized and existing under the laws of Japan with a branch office in Manila seeks the reversal of a CTA decision which denied its claim for refund or tax credit in the amount of P229. the regular sale of tickets. Issue: WON there was a valid transfer of deposit to Bank of Taiwan releasing Phil Trust Co from any obligation to its depositors.40 representing an alleged overpayment of branch profit remittance tax withheld from dividends by Atlantic Gulf and Pacific Co. is attributable only to the head office. the generation of sales being the paramount objective.. MARUBENI V CIR Facts: Marubeni Corporation. Held: Valid.Y. CORPORATIONS. Held: BOAC is a resident corporation. and not of the Philippine branch. Trust Company to recover the sums of deposited money after his request was refused in 1947. “Those activities were in exercise of the functions which are normally incident to. it was assessed taxes by the CIR on its sale of tickets within the Philippines. being a non-resident foreign corporation and not engaged in trade or business in the Philippines. Japan. Dina D. 54. If BOAC is a non-resident.TAX 1 INCOME TAXATION Prof. The alleged overpaid taxes were incurred for the remittance of dividend income to the head office in Japan. The independent investment. although contract of carriage was performed outside the country. is subject to tax on income earned from Philippine sources at the rate of 35 % of its gross income but expressly made subject to the special rate of 25% under Article 10(2) (b) of the Tax Treaty of 1980 concluded between the Philippines and Japan. Issue: WON Marubeni is a resident or a non-resident foreign corporation under Philippine laws. BOAC sold tickets and received the fare within the country. the purpose and object of its organization as an international air carrier.. In fact. TAXPAYER. Issues: WON BOAC was a resident corporation or a corporation doing business in the Philippines. The Court of Tax Appeals view that Marubeni. of Manila (AG&P). Christern Henefeld and Co. Marubeni Japan is a resident foreign corporation subject only to the 10 % intercorporate final tax on dividends received from a domestic corporation. its main activity. it was released from any obligation to the depositors or their transferee. In the case of Filipinas Compañia de Seguros vs. The pre-war current deposit accounts of the corporations were subsequently transferred to S. Held: Petitioner is a non-resident foreign corporation and thus taxed 35 % of its gross income from all sources within the Philippines. For the years 1959 to 1967.424. transferred the deposits in question to the Bank of Taiwan in compliance with the order of the Japanese Military Administration. CORPORATIONS NON-RESIDENT FOREIGN CIR VS BOAC Facts: BOAC is a foreign corporation/airline without landing rights in the Philippines. There should be no doubt then that BOAC was 17 . and income arising from such. the court held that the nationality of a private corporation is determined by the character or citizenship of its controlling stockholders. The CIR is ordered to refund or grant as tax credit in favor of petitioner the amount representing overpayment of taxes on dividends received. it being conceded that the controlling stockholders of said corporations were American citizens. Lucenario 1 Sem A. is the very lifeblood of the airline business. This pronouncement is of course decisive as to the hostile character of the 2 corporations was concerned. Inc. The Philippine branch cannot now claim the increments as ordinary consequences of its trade or business in the Philippines and avail itself of the lower tax rate of 10 %. The investment of Marubeni Japan to its Phillipine branch was made for purposes peculiarly germane to the conduct of the corporate affairs of Marubeni Japan. whether or not revenue from said sales are considered taxable income from within the Philippines. Under the 1977 Tax code: a resident corporation is one doing business in the Philippines or having an office or place of business within the country.

with a branch office operating in the country. Under our tax treaty with Japan. The foreign corporation becomes liable as a distinct taxpayer from its branch office. Issue: WON Marubeni is a resident or non-resident foreign corporation. is considered a taxpayer. basing their arguments on a BIR ruling on their query that only profits remitted abroad that are “effectively connected” with the business of the company should be subject to profit remittance tax. and even if it did. PROCTER AND GAMBLE Facts: For taxable year 1974-1975. the principal-agent relationship does not apply in this case. but withheld 10% as dividend tax and 15% as profit remittance tax. More specifically. "taxpayer" is defined as "any person subject to tax imposed by the Title [on Tax on Income]".” The enumeration in the tax code regarding income is not an exclusive enumeration. within the Philippines and thus taxable at 25% of gross income and since 10% dividend tax and 15% profit remittance tax was already paid. Marubeni now seeks refund or tax credit for overpayment of branch remittance tax withheld from dividends by Atlantic Gulf. Authority of P&G Phil to claim a refund: Under the NIRC. The latter remitted dividends to Marubeni. CIR VS. MARUBENI VS. Held: A resident foreign corporation is one that is "engaged in trade or business" within the Philippines. the sale of tickets in the Philippines is the activity that produces the income. it was P&G USA that was entitled to claim the refund. not P&G Phil. Marubeni is a non-resident foreign corporation as regards its investments in AG&P. Lucenario 1 Sem A. activity or service that produced the income. The CIR however erred in merely adding the 10% and 15% taxes already paid together. under the code. “The source of an income is the property. Procter and Gamble remitted dividends to its parent company in the US. Thus. withholding 35% on gross income. CIR denied the claim for refund stating that while the dividends was not income made by Marubeni’s Philippine branch. What was under question in that case was an excise tax as opposed to the instant case where income tax is at issue. Income refers to flow of wealth (as opposed to capital which refers to a fund). there is no refund forthcoming. 35% tax on gross income is imposed on non-resident foreign corporations for sources within the country.000 approximately. In 1977. a non-resident corporation. Marubeni countered that it is a resident foreign corporation subject only to 10% tax on dividends based on the principal-agent relationship theory and the fact that it has a branch office in the country. A discounted rate of 15% on dividends received from a domestic corporation is given to Marubeni on condition that Japan will extend a tax credit to it of 20%. it claimed for refund or tax credit arguing that under PD 369. While generally. CIR Facts: Marubeni is a Japanese corporation.” The definition of gross income is broad enough to cover sales of tickets.Y. These taxes have different tax bases. a foreign corporation is the same juridical entity when doing business in the country through a branch. that relationship is set aside. 8 For the source of income to be considered as coming from the Philippines. 2010-2011 ST DIGESTS "engaged in" business in the Philippines through a local agent during the period covered by the assessments. we have agreed that the 25% is only the maximum rate imposable. and concluding that it was equivalent to the 25% tax imposable. In BOAC's case. it is still income made by Marubeni corporation. and with shares of stock in Atlantic Gulf (AG&P).TAX 1 INCOME TAXATION Prof. While Marubeni has a branch in the Philippines. Issue: Whether P&G Phil could be considered a taxpayer? Whether 15% tax rate is applicable to P&G? Held: Vis. the applicable tax rate on it was 15% and not 35%. The withholding agent. Thus. it is sufficient that the income is derived from activity within the Philippines. JAL vs CIR case stating that sale of tickets without physical act of transportation is not taxable under carrier’s tax is inapplicable. It raised this issue to the CTA which held that the US does not allow tax credit for P&G. P&G Phil failed to meet requirements to avail of the 15%. licensed to do business in the Philippines. Dina D. Generally. with 18 . Marubeni could still claim refund of Php 144. as the entity liable for payment of the tax. when the foreign corporation transacts business in the country independently of its branch office.

x 35%— ———— P35.00— Phil. the US does comply with the provision for at least 20% crediting of taxes paid in the Philippines and thus. particularly in this case where the agent is a subsidiary of the beneficial owner. i. After computations.e. NIRC Amount of dividend tax waived by Philippine government under Section 24 (b) (1). COMPUTATIONS BY THE COURT BELOW: Amount (1)..75— P65. NIRC Regular dividend tax. the amount of the "deemed paid" tax credit which US tax law allows under Section 902.00 — 35. the Court looked at 1) the amount of dividend tax waived by the Philippine government 2) the amount deemed paid tax credit which the US allows P&G USA 3) to see whether the amount of tax waived is at least equal to the amount of tax credit. P100. 15% tax rate: The ordinary thirty-five percent (35%) tax rate applicable to dividend remittances to non-resident corporate stockholders of a Philippine corporation. Dina D. The withholding agent is also the agent of the beneficial owner of the dividends vis. i. as Philippine Regular Philippine corporate income tax rate Pretax net corporate income earned by P&G- x 15%— ———— P 9." applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. P65. may be computed arithmetically as follows: P65. Lucenario 1 Sem A. NIRC Reduced dividend tax Regular dividend tax under Section 24 (b) (1). 2010-2011 ST DIGESTS regard to the collection of tax. Dividends remittable to P&G-USA Reduced dividend tax rate under Section 24 (b) (1).TAX 1 INCOME TAXATION Prof.00— Vis.00— 19 . the Court found that since the tax credit was actually higher than the tax waived. In answering the issue. Tax Code. the amount of the dividend tax waived by the Philippine government is arithmetically determined in the following manner: P100.00 ———— P65. while also acting as the agent of the taxpayer in filing and payment. goes down to fifteen percent (15%) if the country of domicile of the foreign stockholder corporation "shall allow" such foreign corporation a tax credit for "taxes deemed paid in the Philippines. payment such that there is an implied authority to also claim for a refund. it is the agent of the government.75— NIRC — 9.75— P22.Y. NIRC Amount (2).75— ———— P13..00— x 35%— Section ———— P 22. The Court reviewed the US tax laws and found that the US does credit Philippine corporate income tax paid by US corporations in the Philippines against its own taxes.00— Paid to the BIR by P&G-Phil. corporate income tax.e.00— Dividends remittable to P&G-USA USA. Reduced dividend tax under Section 24 (b) (1). P&G USA may avail of the 15% tax rate instead of the 35% tax rate.00— Available for remittance as dividends to P&GDividends remittable to P&G-USA Regular Philippine dividend tax rate under 24 (b) (1).

The Revenue Examiner of Cebu conducted a separate investigation for the BIR and also discovered that the company is the custodian or has complete control of the fund but disagreed with the Provincial Auditor and instead considered the dividends as subject to the corporate income tax under Sec. Dina D. and power system in Cebu City. Issues: 1. P3. 259 of the Tax Code which imposes a 25% surcharge of the franchise taxes remain unpaid for fifteen days and Sec. Act 3499 as basis. They do not go to the general fund of the company. 2 of Act 465 for not paying additional residence tax.05 as 25% surcharge for late payment of franchise taxes for the years 1957. An amount is set aside for this purpose every month and is taken from the gross operating receipts of the company. 24 of the NIRC. for which dividends have been regularly received but these dividends were not declared for tax purposes. (Visayan) holds a legislative franchise to operate and maintain an electric light.75— ———— P55. This reserve fund was later invested by the company in stocks of San Miguel Brewery. Facts: Visayan Electric Co. The disputed income are not receipts. TAXPAYERS.00— Phil. VISAYAN ELECTRIC CO. The Examiner also concluded that Visayan violated Sec.TAX 1 INCOME TAXATION Prof. Section 902. to P&G-USA P 55. some municipalities in the Province of Cebu and other surrounding places.850 as additional residence tax from 1954 to 1959. and disability. Is it also liable for 25% surcharge on alleged late payment of franchise tax? Held: 1. The company chose the latter. not covered by the legal issue of what tax rate to apply. Is Visayan Electric Company liable for deficiency income tax on dividends from the stock investment of its employees' reserve fund for pensions? 2.75 is much higher than P13. Dividends actually remitted by P&G-Phil. specifically and clearly complies with the requirements of Section 24 (b) (1). They 20 .Y. the dividends are therefore not tax exempt but that such dividends may be excluded from gross receipts for franchise tax purposes provided that they are declared for income tax purposes. heat. Because of this. the Provincial Auditor of Cebu allowed the company the option to declare the dividends either as part of the company’s income for income tax purposes or as part of its income for franchise tax purposes.00 = P29. 2010-2011 ST DIGESTS — 9. and 1959.25— P35. 8. Plus. revenues or profits of the company. 1958. ESTATES AND TRUSTS CIR V. the Commissioner of Internal Revenue assessed P2. It established a pension fund known as the Employees’ Reserve for Pensions for the benefit of its present and future employees in the event of a retirement.30 as deficiency income tax for 1953 to 1958 plus interest and 50% surcharge.00 profits earned by P&G-Phil. CIR requiring that P&G show that it was indeed given the tax credit: That is a matter of administration.419. accident. and P35. Since P29. Lucenario 1 Sem A. Dividend tax withheld at the reduced (15%) rate Dividends actually remitted to P&G-USA Philippine corporate income tax paid by P&Gto the BIR. With the Examiner’s report as the basis. Visayan appealed to the CA which sustained the additional residence tax but freed the company from liability for deficiency income tax and the 25% surcharge for late payment of franchise taxes and cited Sec.75 10 ————————— Amount of accumulated P 65. US Tax Code. the NIRC does not require that the tax credit shall have been granted before applying the 15% tax rate instead of the 35%. informing them that since the company retained full control of the fund. NIRC. The Auditor General sent Visayan a letter in 1949. Inc.00 (the amount of dividend tax waived by the Philippine government). in excess of income tax.443.25 ———— x P35. Vis.

as trustee for its employees when it sets aside monthly amounts from its gross operating receipts for that fund. It does not refer to the time limit or the date on which the taxes must be paid. thus reducing its common shares to 127. investment which form part of and are added to the reserve pension fund which is solely for the benefit of the employees to be distributed among them. Inc. The tax cannot be immediately demandable at the end of each calendar quarter because the transactions on the last day of the quarter must have to be included in the computation of the taxpayer’s return for each particular quarter. write down the deductions. Correspondingly.287 shares were respectively received by the Don Andres estate and Doña Carmen from ANSCOR. Since Sec.S. destroy the intention to create a trust.TAX 1 INCOME TAXATION Prof. Doña Carmen requested a ruling from the United States Internal Revenue Service (IRS).290 and 46. Visayan then. the CIR misconceived the import of the law when he assessed such dividends as part of the income of the company.963 common shares he transferred 1. 21 . holds it in trust for the beneficiaries mentioned in the resolution creating the trust. a citizen and resident of the United States. 332 applies and thus. 183 grants 20 days after the last day of each quarter and Sec. But where there is a period. as her conjugal share. The fund may not be diverted for any other purpose and the trust created is irrevocable.864 common shares for 138. 331 of the Tax Code. then the period for Visayan to pay the franchise tax is within 20 days after the end of each quarter and if such tax remains unpaid for 15 days after that 20 days. Dina D. then the period is controlling. predecessor of ANSCOR. Jose and Andres. The other half formed part of his estate. And for tax purposes. 183 is controlling. internal revenue taxes should be assessed within 5 years after the return is filed and since the Company was in good faith and the CIR made the honest mistake of assessing income tax based on corporate tax and not on income tax.140 preferred shares. But the trust fund is still subject to tax under individuals under Sec. then Sec.659 shares as stock dividend declarations. in effect. Jr. formed the corporation "A. in the absence of any condition therein which would. as their initial investments in ANSCOR. then the 25% surcharge shall be imposed upon them. Doña Carmen Soriano. 183 provides that taxes shall be paid within 20 days after the end of each month while the franchise extended to Visayan states that the taxes are due and payable quarterly. with respect to the reserve fund. (both foreigners). submit the quarterly return and pay the tax. But the 50% surcharge cannot be imposed on Visayan because there was no willful or fraudulent neglect to file a return.50. Visayan’s franchise indicated that franchise tax shall be due and payable quarterly or every 3 months.727.250 shares each to his two sons. inquiring if an exchange of common with preferred shares may be considered as tax avoidance scheme under Section 367 of the 1954 U.Y. But under Sec. which gives the taxed entity 15 days to pay the tax. Sec. Doña Carmen exchanged her whole 138. And there is no such condition because nothing in the company’s act suggests that it reserved the power to revoke the fund or appropriate it for itself. then Sec. who are all non-resident aliens. ANSCOR is wholly owned and controlled by the family of DAS. Stock dividends worth 46. It is well impossible for the taxpayer to add up his income. every three months. he had 185. When DAS’ shares was at 14. Therefore. one-half of that shareholdings or 92. 183 and the franchise payment period given to Visayan in the franchise. before imposing the 25% surcharge.495 of which are original issues and the balance of 134. The estate of Don Andres exchanged 11. 2010-2011 ST DIGESTS are dividends from the San Miguel Brewery. IRS: exchange is only a recapitalization scheme and not tax avoidance. while retaining legal title and custody over the property. 56 (a) of the Tax Code. When DAS died. that is.154 shares . CIR v CA Facts: Don Andres Soriano (DAS).140 of its common shares for remaining 11. and at the same time go to the nearest revenue office. the tax on the employees’ reserve fund as individual income tax may still be collected within 10 years. the employees’ reserve fund is a separate taxable entity.577[14] shares were transferred to his wife. Lucenario 1 Sem A. Visayan is merely acting. The due and payable quarterly in the franchise only indicates the frequency of payment of the franchise tax. 259 grants another 15 days grace period after that. Revenue Act. Soriano y Cia". If there is no period.860 of the newly reclassified preferred shares. There is no conflict between Sec. 2. In this case. and compute the net amount taxable as of the last working hour of the last day of the quarter.

from being made use of as a device for the actual distribution of cash dividends." PURPOSE OF EXCEPTION: prevent the issuance and cancellation or redemption of stock dividends. and cannot be subjected to income tax until that gain has been realized. CTA and CA:IFO BIR. the most important is the third. whether or not the acquired stock is cancelled. essentially equivalent to the distribution of a taxable dividend. the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent it represents a distribution of earnings or pofits accumulated after March first. 2010-2011 ST DIGESTS Pursuant to several board resolutions. the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent it represents a distribution of earnings or profits accumulated after March first. ANSCOR redeemed stock dividends issued just 2 to 3 years earlier. Lucenario 1 Sem A.D. which when paid becomes the absolute property of the stockholder." Of these. ANSCOR redeemed common shares from the Don Andres’ estate reducing the latter’s common shareholdings to 19. (CAPITAL = wealth or fund . a reacquisition of stock by a corporation which issued the stock In exchange for property. (b) the transaction involves stock dividends and (c) the "time and manner" of the transaction makes it "essentially equivalent to a distribution of taxable dividends. BIR: ANSCOR should be assessed for deficiency withholding tax-atsource.) The determining factor for the imposition of income tax is whether any gain or profit was derived from a transaction.727. thus. It should be noted that capital and income are different. However. which is taxable. are considered unrealized gain. subject to income tax such that: "A stock dividend representing the transfer of surplus to capital account shall not be subject to tax." Stock dividends issued by the corporation. REDEMPTION CANCELLATION: For the exempting clause of Section 83(b) to apply. Dina D. – (b) Stock dividends – A stock dividend representing the transfer of surplus to capital account shall not be subject to tax. essentially equivalent to the distribution of a taxable dividend.TAX 1 INCOME TAXATION Prof. Held: ANSCOR’s redemption of stock dividends is considered as essentially equivalent to a distribution of taxable dividends while the exchange of stocks are not considered as such.[30] based on the transactions of exchange and redemption of stocks despite the claim of ANSCOR that it availed of the tax amnesty under Presiential Decree (P. pursuant to Sections 53 and 54 of the 1939 Revenue Code. ANSCOR is liable for the withholding tax-at-source for its redemption of stock dividends. The time alone that lapsed from the issuance to the redemption is not a sufficient indicator to determine 22 .) 23 which were amended by P. The invoked decrees do not cover Sections 53 and 54 in relation to Article 83(b) of the 1939 Revenue Act under which ANSCOR was assessed. the income earner cannot escape income tax. Issue: Whether ANSCOR’s redemption of stocks from its stockholder as well as the exchange of common with preferred shares can be considered as "essentially equivalent to the distribution of taxable dividend. if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption. nineteen hundred and thirteen. retired or held in the treasury. EXCEPTION (TEST OF TAXABILITY): "However. ANSCOR’s business purpose for both redemptions of stocks is to partially retire said stocks as treasury shares in order to reduce the company’s foreign exchange remittances in case cash dividends are declared. in whole or in part. Having realized gain from that redemption. nineteen hundred and thirteen. if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption." TAX ON STOCK DIVIDENDS: GENERAL RULE: Proportionate Test: stock dividends once issued form part of the capital and. it is indispensable that: (a) there is redemption or cancellation. Section 83(b) of the 1939 Revenue Act provides: "Sec.Y.D. which is fundamentally not taxable." making the proceeds thereof taxable under the provisions of the above-quoted law. As stated in the board Resolutions. Depending on the circumstances. REDEMPTION = repurchase. 83. INCOME = income is profit or gain or the flow of wealth. in whole or in part.’s 67 and 157. the proceeds of redemption of stock dividends are essentially distribution of cash dividends. Distribution of dividends or assets by corporations. With respect to the third requisite.

EXEMPT INDIVIDUALS. its 23 . It is also important to know whether the issuance of stock dividends was dictated by legitimate business reasons.and (3) it is not exempted by law or treaty from income tax. without more. Was this transaction used as a "continuing plan. Reagan. (2) that the gain or profit is realized or received. a civilian employee of an American corporation providing technical assistance to the United States Air Force in the Philippines pursuant to the Military Bases Agreement. the transaction having taken place at the Clark Field Air Base at Pampanga. EXEMPT TAX PAYERS. Since the sale was made in Clark. 2010-2011 ST DIGESTS taxability It is a must to consider the factual circumstances as to the manner of both the issuance and the redemption. There is nothing in the Military Bases Agreement that lends support to such an assertion. It is the net effect rather than the motive and plans of the taxpayer that guides the implementation of Sec 83(b)." "device" or "artifice" to evade payment of tax? NET EFFECT (in the transaction):= not evidence or testimony to be considered but an interference to be drawn or a conclusion to be reached. Nothing is better settled than that the Philippines being independent and sovereign. Lucenario 1 Sem A. there is no other conclusion but that the proceeds thereof are essentially considered equivalent to a distribution of taxable dividends. whether income was realized through the redemption of stock dividends. He disputes the payment of the income tax assessed on him by on an amount realized by him on a sale of his automobile to another American. Decision 1: No. 000 preferred shares. It has not become foreign soil or territory. UNDER TAX TREATY REAGAN vs CIR Facts: William C. produces no realized income to the subscriber. After considering the manner and the circumstances by which the issuance and redemption of stock dividends were made.Y. the exchange of shares. Both the Tax Court and the Court of Appeals found that ANSCOR reclassified its shares into common and preferred and that parts of the common shares of the Don Andres estate and all of Doña Carmen’s shares were exchanged for the whole 150.TAX 1 INCOME TAXATION Prof. CTA: The sale having taken place on what indisputably is Philippine territory. Reagan’s liability for the income tax due as a result thereof was unavoidable. CONTENTION OF REAGAN: Clark Air Force is foreign soil or territory for purposes of income tax legislation. There was no change in their proportional interest after the exchange. have been preserved.which is not a flow of wealth for tax purposes. the presence of which might negate a tax evasion plan. The issuance of stock dividends and its subsequent redemption must be separate. and not related. The issue of taxable dividend may arise only once a subscriber disposes of his entire interest and not when there is still maintenance of proprietary interest. The test of taxability under the exempting clause of Section 83(b) is. Dina D. for the redemption to be considered a legitimate tax scheme THREE ELEMENTS in IMPOSING INCOME TAX: (1) there must be gain or profit. actually or constructively. This country's jurisdictional rights in the said place. the sale is considered outside Philippine territory and therefore beyond the Philippines’ jurisdictional power to tax. certainly not excluding the power to tax. distinct. There is only a modification of the subscriber’s rights and privileges . TIME ELEMENT= factor to show a device to evade tax and the scheme of cancelling or redeeming the same shares is a method usually adopted to accomplish the end sought. In this case. Issue 1: WON Clark Air Force Field is a foreign territory. EXCHANGE OF COMMON WITH PREFERRED SHARES: EXCHANGE = act of taking or giving one thing for another involving reciprocal transfer and is generally considered as a taxable transaction.

Par. Lucenario 1 Sem A. own residential properties and that James Robertson is now a retired Federal Civil Service employee and presently living with his family in Olongapo CIR vs ROBERTSON Consolidated Facts: The “AMERICANS” are as follows: 24 .S. must be traced up to the consent of the nation itself. 2010-2011 ST DIGESTS authority may be exercised over its entire domain. Robert Cathey is a United States born citizen who first came to the Philippines with the U. CONTENTION OF THE AMERICANS: No national of the United States serving in or employed in the Philippines in connection with the construction. Reagan was liable for the income tax arising from a sale of his automobile in the Clark Field Air Base. Navy's various installations overseas with eventual assignment at Subic Bay. the Philippine Government merely consents that the United States exercise jurisdiction in certain cases. operation or defense of the bases and residing in the Philippines by reason only of such employment. CONTENTION OF CIR: Frank Robertson and James Robertson. NOTE (from digestor): The liability arose out of the fact that the income was earned in the Philippines and not that Reagan was not exempted under the Military Bases Agreement. maintenance. maintenance.All exceptions. John Garrison is a Philippine born American citizen also repatriated to the United States. They resided in the Philippines until repatriated to the United States and took residence their.S. Issue 2: WON Reagan. shall be liable to pay income tax in the Philippines except in respect of income derived from Philippine sources or sources other than the United States sources. Dina D. maintenance. Federal Government with a job at the Navy. The consent was given purely as a matter of comity. turned a U. as a US national. (Basis: Article XII.Y. Military Base in the Philippines in connection with the bases’ construction. Frank and James Robertson were American citizens born in the Philippines. He returned to the Philippines in assigned at the U.TAX 1 INCOME TAXATION Prof. is exempt from paying income tax under Militaty Bases Agreement. Federal Government for the U. or his spouse and minor children and dependent parents of either spouse. and defense. Navy's civilian employee with station at Makati. It is not and can not on principle or authority be construed as a limitation upon the rights of the Philippine Government. All told. They can flow from no other legitimate source. operation. inclusive of interests and penalties. Their incomes are solely derived from salaries from the U. which clearly is and cannot otherwise be other than. CONTENTION OF REAGAN: A national of the United States serving in the Philippines in connection with the construction. Any restriction upon it. The jurisdiction of the nation within its own territory is necessarily exclusive and absolute. Subic Bay. Decision: No. Soon after. civilian employees in the U.S. Frank was employed by the U. would imply a diminution of its sovereignty to the extent of the restriction.S. within our territorial jurisdiction to tax. 2 of the RP-US Military Bases Agreement). or expediency over the bases as part of the Philippine territory or divested itself completely of jurisdiction over offenses committed therein. deriving validity from an external source. courtesy. government by reason of their employment in the U. and upon discharge from the military service.S.S. Naval Base. operation or defense of the military bases and residing in the Philippines only by reason of such employment is not to be taxed on his income unless derived from Philippine source or sources other than the United States sources.S. to the full and complete power of a nation within its own territories. liberation force. Bases in the Philippines. Their work brought them to the U. By the Military Bases Agreement. Federal Government in its military installations. Navy Shipguard. Soon after he was employed by the U. James was employed by the U. therefore.S.S. Olongapo. CIR wanted to collect income taxes of the Americans for the taxable years 1969-1972.S.S. the aforementioned are citizens of the United States.

which Sinco Corp paid most of its accounts payables. G. A cursory reading of said case shows that Reagan was at one time a civilian employee of an American corporation providing technical assistance to the U. of the bases. Sinco Educational Corporation is non-stock and was capitalized by V.S. who was its founder and president. the facts in said case are different from those obtaining in the present suit. residing in the Philippines by reason of such employment. operation or defense. CONTENTION OF COLLECTOR: A great portion of the net profits realized by the corporation was channeled and redounded to the personal benefit of V. Inc. Air Force in the Philippines. Sinco. Department of Finance which is a condition precedent before an educational institution can avail itself of the exemption under consideration not provided by Sinco Educational Corporation. to have such surplus.The Collector of Internal Revenue assessed against the college an income tax for the years 1950 and 1951 in the aggregate sum of P5. Said circumstances are all present in the case at bar. It was his contention that in legal contemplation the sale was made outside Philippine territory and therefore beyond our jurisdictional power to tax. EXEMPT TAXPAYERS. and the income derived is from the U. Regulation No. 25 . Sinco is also the largest owner of Community Publishers. Issue: WON the Americans are tax exempt. citizens working in the Military Bases from the burden of paying Philippine Income Tax without distinction as to whether born locally or born in their country of origin. It bears repeating as so disclosed in the records that the Americans together with families upon repatriation had since acquired domicile and residency in the United States. Commissioner of Internal Revenue are different from the circumstances of the case herein and the ruling obtained in the former case cannot be invoked or applied in support of CIR’s contention. under said section 27 (e). Not until after several years of a hiatus..S. naval base. Held: Yes. V. Sinco and members of his immediate family. to institutions which do not hope. which circumstance indicate that respondents' residence in this country is not by reason only of his employment in the U. Federal Government. This corporation continued the operations of Foundation College of Dumaguete. Garrison lived in the Philippines uninterrupted except for a two-year stint in Okinawa. which was paid by the college. (TOPIC) Proof of exemption required by section 24. the Americans did return to the Philippines not so much of honoring a pledge nor of sentimental journey but by reason of taking up assigned duties with the United States military bases in the Philippines where they were gainfully employed by the U. CASE VIS-A-VIS REAGAN vs CIR: The circumstances in the case of Reagan vs. CTA ruled in favor of the American Citizens. G.364. CONTENTION OF SINCO Corp: We are exempted from income tax under section 27 (it is organized and maintained exclusively for the educational purposes and no part of its net income inures to the benefit of any private individual) of the NIRC.S. And. The basic intendment of the law was to exempt all U.Y. Cathey owns the house at Quezon City where he presently resides. Sinco established and operated an educational institution known as. 2.TAX 1 INCOME TAXATION Prof. Sinco Educational Institution was organized. G.S. Dina D.. The college derived profits by way of tuition fees. obtained employment with the United States Federal Service. EXEMPT CORPORATIONS COLLLECTOR V SINCO Facts: Vicente G. (TOPIC) Limit the benefits of the exemption. Lucenario 1 Sem A. 2010-2011 ST DIGESTS City. or propose. the transaction having taken place at the Clark Field Air Base in Pampanga. He questioned the payment of the income tax assessed on him by respondent Commissioner of Internal Revenue on an amount realized by him on a sale of his automobile to a member of the US Marine Corps.S. maintenance.77. Clearly. In order to avail oneself of the tax exemption under the RPUS Military Bases Agreement: he must be a national of the United States employed in connection with the construction. CTA ruled in favor of Sinco.

offering elementary. scientific. It cannot be said that the failure to observe the proof of exemption requirement called for constitutes a waiver of the right to enjoy the exemption. and the lower court held. in general. With regard to the account of the Community Publishers. no part of the net income of which is distributed to any private stockholder or individual: Provided. 1951. may redound to the benefit of the institution itself. That the income of whatever kind and character from any of its properties..TAX 1 INCOME TAXATION Prof. Under this view. to have such surplus. Quezon. Dina D. Lucenario 1 Sem A. 1950 assessment notices for the deficiency income tax for the years 1947. Collectors contention would limit the benefits of the exemption. or propose. these are my salary for the reason that I never collected this salary for which reason it was carried in the books as accrued expenses. secondary and collegiate courses to the public. 2010-2011 ST DIGESTS CONTENTION OF V. At any rate. if adopted. for no one can predict the financial condition of the institution upon its dissolution. The CIR assessed the sum of P2. to institutions which do not hope. the exemption would apply only to schools which are on the verge of bankruptcy JESUS SACRED HEART COLLEGE V COLLECTOR Facts: Jesus Sacred Heart College is an educational organization operating in Lucena. it cannot be positively asserted that the same will redound to the benefit of its stockholders. Inc. is to nullify and defeat the aforementioned exemption. 1948 and 1949 were forwarded by the CIR to the college. Held: Not subject to income tax (1) The court noted that the CIR has not even tried to demonstrate the presence of the college's purpose to make a profit over and above the cost of instruction.. The final result of Collector’s contention. On appeal. The CIR's pretense would limit the benefits of the exemption to institutions which do not hope. or propose. charitable. to have such surplus.241. On Aug 16." Issue: WON the net income from tuition and other fees collected and received by an educational institution from its students is subject to income tax. Indeed.. or educational purposes. To hold otherwise would be tantamount to incorporating into our tax laws some legislative matter by administrative regulation. it has been held by several authorities that the mere provision for the distribution of its assets to the stockholders upon dissolution does not remove the right of an educational institution from tax exemption. Held: No. Sinco said that this is a distinct and separate corporation although he is one of its stockholders. athletic. (3) Every responsible organization must be run .. Issue: WON Sinco Educational Corporation is exempted. which is precisely the opposite of the objective consistently sought by our laws. that it is exempt from taxation under NIRC Sec 27 (e) which provides: 26 . however. 27. The amount was paid by the plaintiff on August 13. whenever possible. under said section 27. except income expressly exempted by this title. cultural.Y. Under this view. by operating within the limits of its own resources. real or personal. the exemption would apply only to schools which are on the verge of bankruptcy. SINCO: With regard to funds going to my accounts. to have a surplus. The main evidence of the purpose of a corporation should be its articles of incorporation and by-laws.86 in income tax for realized net incomes from tuition and other fees. the college maintained. it should always strive. especially its regular income. shall be liable to the tax imposed under this Code. — The following organizations shall not be taxed under this Title in respect to income received by them as such — xxx xxx xxx (f) Corporation or association organized and operated exclusively for religious. Article 21 of the college's by-laws states that it is a non-profit corporation (2) To hold that an educational Institution is subject to income tax whenever it is so administered as to reasonably assure that it will not incur in deficit. SEC. 1951. the college filed a claim for refund which was denied on August 24. On December 15. the effect. would be to discourage the establishment of colleges in the Philippines. The CIR asserts that the income in question was derived form an "activity conducted for profit. Exemptions from tax on corporations. 1951. of the interpretation advocated by the CIR would be to deny the exemption whenever there is net income. While the acquisition of additional facilities. In other words. G.

27. real or personal. Sec. so to speak. The term "educational institution" or "institution of learning" has acquired a well-known technical meaning.615. which conducts various programs and activities that are beneficial to the public. and (2) the income it seeks to be exempted from taxation is used actually.TAX 1 INCOME TAXATION Prof. pursuant to its religious. and allow it to continue with its laudable work. non-profit institution. The leasing of facilities and the operation of the parking lot were reasonably incidental to and reasonably necessary for the accomplishment of the objectives of the YMCA. The rentals and parking fees were just enough to cover the costs of operation and maintenance only. or from any of their activities conducted for profit. the CIR elevated the case to the SC. and exclusively for educational purposes. for deficiency income tax. stating that the YMCA should not be subject to income tax.00 from parking fees collected from non-members. 2010-2011 ST DIGESTS CIR V CA and YMCA (1998) Facts: YMCA is a non-stock.80 from leasing out a portion of its premises to small shop owners and P44. recreation. the income of whatever kind and character of the foregoing organizations from any of their properties. neither should we. but found nothing in them that even hints that it is a school or an educational institution. Dina D. educational and charitable objectives. non-profit educational institution. On July 2. Issue: WON the rental income of the YMCA from its real estate subject to tax. Where the law does not distinguish.Y. directly. — The following organizations shall not be taxed under this Title in respect to income received by them as such — xxx xxx xxx (g) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare. and other non-profitable purposes. Is the YMCA an educational instutution? Held: Not tax-exempt and not an educational institution (1) The exemption claimed by the YMCA is expressly disallowed by the very wording of the last paragraph of then Section 27 of the NIRC which mandates that the income of exempt organizations (such as the YMCA) from any of their properties. YMCA formally protested the assessment which was denied by the CIR. The Court has examined the "Amended Articles of Incorporation" and "By-Laws" of the YMCA. (2) For the YMCA to be granted the exemption it claims under the aforecited provision. The YMCA filed a petition for review at the Court of Tax Appeals who issued a ruling in favor of the YMCA. However. As pointed out earlier. especially the young people. shall be subject to the tax imposed under this Code. The CIR elevated the case to the Court of Appeals.829. the membership dues are very insufficient to support its program. Under the Education Act of 1982. be subject to the tax imposed by the same Code. 1984. Earnings from rentals parking charges constitute the bulk of its income which is channeled to support its many activities and attainment of its objectives. Exemptions from tax on corporations. no part of the net income of which inures to the benefit of any private stockholder or member. Not satisfied with the decision. regardless of the disposition made of such income.259. 20 the Court is duty-bound to abide strictly by its literal meaning and to refrain from resorting to any convoluted attempt at construction. (h) Club organized and operated exclusively for pleasure. The CA 6 initially decided in favor of the CIR but later on reversed its decision stating that the little income from small shops and parking fees helps to keep YMCA's head above the water. the CIR issued an assessment in the amount of P415. In 1980. xxx xxx xxx Notwithstanding the provisions in the preceding paragraphs. real or personal. Lucenario 1 Sem A. the Court notes that not a scintilla of evidence was submitted by private respondent to prove that it met the said requisites. it must prove with substantial evidence that (1) it falls under the classification non-stock. Because the last paragraph of said section unequivocally subjects to tax the rent income of the YMCA from its real property. such term refers to schools.01 including surcharge and interest. The rental income is taxable regardless of whence such income is derived and how it is used or disposed of. The school system is synonymous with formal education which "refers to the hierarchically structured and chronologically graded learnings organized 27 . the YMCA earned an income of P676. of which the members of the Constitutional Commission are deemed cognizant.

XAVIER SCHOOL V CIR C. Issue: (1) WON the ADMU though IPC is an independent contractor pursuant to sec 205 of the tax code (2) WON ADMU is subject to 3% contractor's tax under the same section. 2010-2011 ST DIGESTS and provided by the formal school system and for which certification is required in order for the learner to progress through the grades or move to the higher levels. CIR V CA and Ateneo (1997) Facts: Ateneo de Manila University is a non-stock. 1958. ADMU is not a contractor selling its services for a fee but an academic institution conducting these researches pursuant to its commitments to education and.Y. 1955. categorically found that these activities conducted on YMCA's property were aimed not only at fulfilling the needs and requirements of its members as part of YMCA's youth program but. The IPC is a Philippine unit engaged in social science studies of Philippine society and culture. The fact that it accepted sponsorship for IPC's unfunded projects is merely incidental. By its very nature. private foundations and government agencies. Held: ADMU is not an independent contractor and therefore. to public service. The consideration was for P778. it bears stressing that private respondent is a non-stock. not subject to the 3% contractor's tax. Bellosillo.TAX 1 INCOME TAXATION Prof. 1969 Petitioner is a duly organized private non-stock corporation for educational purposes. Xavier School realized however that the property they bought was inadequate and inappropriately situated to meet the expanding needs of an educational institution. For another. In the instant case. On July 8. It is also well to stress that the questioned transactions of Ateneo's Institute of Philippine Culture cannot be deemed either as a contract of sale or a contract of a piece of work. To fall under its coverage. Collector of Internal Revenue 17 this Court categorically held and found YMCA to be an educational institution exclusively devoted to educational and charitable purposes and not operated for profit. Section 205 of the National Internal Revenue Code requires that the independent contractor be engaged in the business of selling its services. at raising funds to finance the multifarious projects of the Association. is not engaged in business.T.475. non-profit educational corporation. Manila to be used as a school side. more importantly. there was no transfer of ownership over the research data obtained or the results of research projects undertaken by the Institute of Philippine Culture. as adverted to earlier. 1682. 1983. the school purchased from Ortigas and Company parcels of land in San Juan 28 . J: Dissenting The word "income" as used in tax statutes is to be taken in its ordinary sense as gain or profit. as a unit of the private respondent. there is no question that in leasing its facilities to small shop owners and in operating parking spaces. 1983.043. On September 12. On December15. Occasionally. non-profit educational institution with auxiliary units and branches all over the Philippines. Xavier school purchased the Echague property in Quiapo. and the Court of Appeals in its resolution of 25 September 1995. assessing it the sum of P174. Both the Court of Tax Appeals. which has no legal personality separate and distinct from that of ADMU. CASE NO. Undisputedly. it accepts sponsorships for its research activities from international organizations. One such auxiliary unit is the Institute of Philippine Culture (IPC).A. The court finds no evidence that Ateneo's Institute of Philippine Culture ever sold its services for a fee to anyone or was ever engaged in a business apart from and independently of the academic purposes of the university.97 for alleged deficiency in contractor's tax on the services rendered by IPC. the established facts show that IPC. Dina D. There was no sale either of objects or services because.00 payable on 32 quarterly installments plus interest of 6% per annum. For one. October 8.The CA ruled in favor of ADMU. In YMCA of Manila v. ADMU filed a protest contesting the validity of the assessment. ADMU received from petitioner Commissioner of Internal Revenue a demand letter dated June 3. They transfered to another site in Manila soon after. Lucenario 1 Sem A. private respondent is mandated by law to undertake research activities to maintain its university status. a contract of sale requires a transfer of ownership. YMCA does not engage in any profit-making business. ultimately.

Xavier deposited the amount of P120. therefore. with the agreement that the loan is payable as soon as the Echague property is sold. GROSS INCOME AND EXCLUSIONS. Petitioner contends that as a non-profit educational institution. (c) Interest earned in 1959 and 1960 from Filipinas Investment & Finance Corp. which gain was taxable.00. By December of 1959. The money used by Xavier to purchase the new school lot was borrowed from the Jesuit Central Procure.403.47 derived from the sale of Echague property in 1959. On July 15. Gutierrez had bought real estate in 1943 using Commonwealth pesos at Php 35. The protective mantle of income tax benefit or exemption cannot be extended to a private educational institution which chooses to descend from its high pedestal of tax preference or immunity to the level of an ordinary private corporation engaged in profitable undertaking or business.000 and claimed that he sold it in 1953 for Php 30. gained from the sale. respondent demanded from petitioner payment of the deficiency income taxes for 1959. Issue: The principal issue to be resolved by this Court is whether or not petitioner is exempt from income tax under the provisions of Section 27(e) of the Tax Code on income derived from the following sources: (a) Gain of P896. therefore. for P1.00 was deposited ast it was allegedly not needed in the construction of the San Juan property. he obtained a loss instead of a gain from the said sale.392.293. Finally. he argues. real estate broker.400. Inc.000. Gutierrez only declared 50% of the profit claiming that the lots were capital assets.00 and it was left with Filipinas as a revolving fund for the retirement pay of petitioner's faculty members and other employees. Lucenario 1 Sem A. thus 100% of the profits was deductible 29 . Kowloon. The CIR claimed that they were ordinary assets instead. The CIR also claimed that Gutierrez under-reported profits made for sale of real property.052. Held: (1) On the gain on real estate . INCOME FROM WHATEVER SOURCE GUTIERREZ V COLLECTOR Facts: Gutierrez. For income tax purposes.00 with interest of 9% per annum to a depositary which was later on organized into Filipinas Investment & Finance Corporation.029. that the incidental gain from the sale of the Echague property and the replacement thereof by the more expensive San Juan property are covered by the statutory exemption prescribed by Section 27(e) (2) On interest earned . It appears that from the proceeds of the sale.Y. Hongkong.. In 1956 the CIR assessed deficiency income tax against Gutierrez due to disallowances of claimed deductions (discussed in greater detail in the HELD portion). We hold.000. 2010-2011 ST DIGESTS P421.000. Therefore. On February 13. in four other sales. paid real estate broker’s privilege tax for the years 1951 through 1954. it is exempt from the income tax under Section 27(e) of the Tax Code. the gain from the sale of the property in question was realized by petitioner in 1959. the sale of the Echague property was considered by respondent as a cash sale in 1959 because 25% or more of the purchase price was paid by the vendee in that year. Hence.TAX 1 INCOME TAXATION Prof.840.18.taxable we are convinced that the interests and dividend realized by petitioner for a number of years were not incidental to its educational activities because a private educational institution which deviates from its purely educational purposes and activities shall be treated like any private domestic corporation engaged in business for profit with respect to income derived therefrom. 1959.. the said deposit was reduced to P40. The said amount of P120. the CIR argued that Japanese military notes were used to acquire the property such that under the Ballantyne Scale of Values. 1960 and 1962 amounting to P134. 1963. Xavier agreed to sell the Echague property to Continental Oil Co. as the construction work progressed. (b) Interests earned in 1960 and 1962 on the unpaid balance of the selling price of said property due from Continental Oil Co. Inc..exempt The sale of the Echague property and the acquisition and improvements of the San Juan property are isolated and incidental transactions devoid of any profit motive. Gutierrez. On the other hand. the purchase price was only Php 26.41 which assessment was disputed by petitioner. Dina D.

educational organizations. To be deductible. For the years 1959 to 1967. athletic. car depreciation 50% √ Vis. charitable.Y. the purchase price and selling price must be in the same currency. 2010-2011 ST DIGESTS Issue: Whether Gutierrez’ claimed deductions were proper and allowable? Whether the Ballantyne Scale of Values should be used in determining the taxable income? Whether the four lots sold were capital assets on which only 50% of profit is taxable? Held: Vis. relocation. whether real estate is capital or ordinary assets: The property sold was used in the ordinary course of business. CIR V BOAC Repair of apartments rental √ Litigation expenses collect rent to √ Facts: BOAC is a foreign corporation/airline without landing rights in the Philippines. it was assessed taxes by the 30 . salary of driver. donation Not deductible but integrated into the cost of capital assets for which incurred and depreciated yearly x Gutierrez was an officer of the chamber of commerce which sponsored the National Convention. religious. pol. SC: 50% deductible. Lucenario 1 Sem A. These were made in pursuit of or in enhancement of business. societies for the prevention of cruelty to children or animals x Car expenses. Maintenance expenses are deductible Ordinary and necessary expense √ Not deductible unless shown to be among those specified in law: government. and registration (strengthened title over property). iron door for residence. and the recognized rate is the Ballantyne Scale Vis. it is considered as ordinary assets and fully taxable. so the purchase price in Japanese notes have to be converted to Commonwealth pesos. survey. he was also president of the Homeowners’ Assn. rehabilitation of veterans. they must be 1) ordinary and necessary 2) paid or incurred within the taxable year 3) paid or incurred in carrying on a trade or business CLAIMED DEDUCTION Transportation expenses for funeral of friends. living or family expenses are not deductible X Expenses in watching over laborers (part of construction costs). iron bars etc (augmented value of apartments). contributions.TAX 1 INCOME TAXATION Prof. subd. price of comments on the rules of court. the deductions: Deductions from gross income are an act of legislative grace.. scientific. 50% was deemed reasonable The repair did not increase their value or prolong their life. lunch and corregidor cruise of Homeowners’ Association RATIO FOR (DIS) ALLOWANCE Personal. Dina D. In determining the gain or loss from sale of property. use of Ballantyne Scale of Values: no showing that Gutierrez used Commonwealth pesos to acquire property. expenses in attending National Convention of Filipino Businessmen. car was used for both personal and business purpose. Depreciation of residence Furniture given as commission. opera tickets. cultural. depreciated ratably over lifespan Alms to indigent family. therefore. Commissions given in consideration for bringing about a profitable transaction are part of the cost of business transactions 1/3 disallowed by CIR. what is not expressly granted by Congress is withheld The Tax Code allows the deduction of business expenses from gross income. real estate tax unpaid by former owner (part of costs of acquiring property).

Income refers to flow of wealth (as opposed to capital which refers to a fund). Macomber paid.877.877 because of the new shares. “The source of an income is the property. a tax imposed based upon a supposed income of $ 19.100 additional shares. JAL vs CIR case stating that sale of tickets without physical act of transportation is not taxable under carrier’s tax is inapplicable. Thus. Under the 1977 Tax code: a resident corporation is one doing business in the Philippines or having an office or place of business within the country. the sale of tickets in the Philippines is the activity that produces the income. Issue: Whether stock dividends representing accumulated company earnings reinvested into the corporation is taxable income? Held: NO. Dina D.200 shares of the old stock. and to transfer from surplus account to capital stock account an amount equivalent to such issue. 2010-2011 ST DIGESTS CIR on its sale of tickets within the Philippines. being the owner of 2. retaining the same proportionate share in the corporation before the distribution of stock dividends. Lucenario 1 Sem A.g. or 198. it is sufficient that the income is derived from activity within the Philippines. 1913.000 had been earned prior to March 1.” The enumeration in the tax code regarding income is not an exclusive enumeration.000. but that the antecedent accumulation of profits evidenced thereby..” Stock dividends are not income because the shareholder received nothing of value from the corporation. 1916. A stock dividend is really a cash dividend that is used to acquire additional shares.000. the generation of sales being the paramount objective. BOAC sold tickets and received the fare within the country.000.Y.TAX 1 INCOME TAXATION Prof. although contract of carriage was performed outside the country. Macomber.77 shares. whether or not revenue from said sales are considered taxable income from within the Philippines. Stock dividends are not taxable income. CONTENTION OF MACOMBER: Revenue Act of 1916 . Macomber was given 1. which would include anything which may be regarded as income. its main activity. of which about $20. Issues: Whether BOAC was a resident corporation or a corporation doing business in the Philippines. at the same time shows he has not realized or received any income in the transaction.07 per cent. the purpose and object of its organization as an international air carrier. Macomber owned 2. there is no taxable income to speak of. received certificates for 1. were treated as representing surplus earned between March 1. Mrs.200 shares in Standard Oil. DISSENT: Justice Brandeis: Congress can tax “income from whatever source”. The Collector of Internal Revenue assessed income tax on the said shares. What was under question in that case was an excise tax as opposed to the instant case where income tax is at issue. the regular sale of tickets. and are in progressive pursuit of. Where a shareholder received no actual cash or other property from the corporation. and January 1. regardless of the medium (e. In order to readjust the capitalization. while indicating that the shareholder is richer because of an increase of his capital. EISNER V MACOMBER Facts: Mrs.” The definition of gross income is broad enough to cover sales of tickets. and did pay under protest. “…A stock dividend really take(s) nothing from the property of the corporation and add(s) nothing to that of the shareholder. She was called upon to pay. activity or service that produced the income. of which 18. is the very lifeblood of the airline business. If BOAC is a non-resident. 8 For the source of income to be considered as coming from the Philippines. had surplus and undivided profits amounting to $45. par value $19. In BOAC's case. the board of directors decided to issue stock dividend of 50 percent of the outstanding stock. in so far as it considers stock dividends as income. violated the Constitution of the United States. which Mrs. The said company declared a 50% stock dividend. In fact. 31 . 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. “Those activities were in exercise of the functions which are normally incident to. 1913. Standard Oil Company of California.100 additional shares. Held: BOAC is a resident corporation. This case involves her action for refund of said payment. cash or stocks).

Melchor Javier. or from both combined. The latter filed a claim for the return of the amount. on the contrary. as income of the stockholder and without apportionment.053. he has recived nothing that answers the definition of income within the meaning of the Sixteenth Amendment. Victoria’s husband filed his income tax return for 1977showing a gross income of P53. together with whatever accretions and accumulations have resulted from employment of his money and that of the other stockholders in the business of the company.38 and a net income of P48. severed from the capital. received or drawn by the recipient (the taxpayer) for his separate use. the landlord. it tends rather to postpone such realization. benefit and disposal. relief from a liability. 2010-2011 ST DIGESTS Issue: WON Congress has the power to tax. drawing from the ruling in Eisner.811. Victoria Javier received from the Prudential Bank and Trust Co. and no longer is available for actual distribution. Far from being a realization of profits of the stockholder. whether cash or property. regardless of the medium of exchange. A year after. the same money received by his wife.70 remitted by her sister. Dolores Ventosa. Before the breach of the lease contract. the tenant tore down a building valued at $12. will be forfeited in favor of Bruun. which he thought was a 32 . however invested or employed. something of exchangeable value. The CIR assessed Bruun for the difference between the value of the old improvements and the value of the new ones. alleging it had committed a clerical error in the remittance since only US $1. Bruun argues that the gain was not taxable income. HELVERING V BRUUN Facts: Bruun.053. every dollar of his original investment. a stock dividend made lawfully and in good faith against profits accumulated by the corporation. Income may be defined as the gain derived from capital. and coming in. Having regard to the very truth of the matter. still remains the property of the company. payment of the taxpayer's indebtedness. being 'derived'-that is. in that the fund represented by the new stock has been transferred from surplus to capital. while indicating that the shareholder is the richer because of an increase of his capital. stock dividend is not taxable.973. Realization of gain need not be in cash.43 and built another. not a growth or increment of value in the investment. through Mellon Bank NA. The fact that the gain is a portion of the value of property received by the taxpayer in the transaction does not negative its realization. instead of distributed to the stockholders or retained as surplus available for distribution in money or in kind should opportunity offer. from labor. a profit. but at the end of the lease.TAX 1 INCOME TAXATION Prof.” For gain to be taxable. or other profit realized from the completion of a transaction. but a gain.Y. these improvements. The primary requirement is that the taxpayer acquired valuable assets. CIR V JAVIER Facts: In 1977. he argues that gain to be taxable must be severable from the capital which gave rise to it Issue: Whether or not the gain derived from the increased value of the improvements is taxable income? Held: Yes. A 'stock dividend' shows that the company's accumulated profits have been capitalized. We are clear that not only does a stock dividend really take nothing from the property of the corporation and add nothing to that of the shareholder. and subject to business risks which may result in wiping out the entire investment. a landlord. Dina D. at the same time shows he has not realized or received any income in the transaction.000 should have been remitted. The essential and controlling fact is that the stockholder has received nothing out of the company's assets for his separate use and benefit. along with the leased property.245. Lucenario 1 Sem A. The lease agreement included a stipulation that the tenant may tear down buildings and improvements on the leased property and add new ones. provided it be understood to include profit gained through a sale or conversion of capital assets and not a gain accruing to capital. separability from the original capital is not a requisite. valued at $64. to substance and not to form.that is income derived from property. Decision: No.38 but stating in the footnote that he received money from abroad. US$999. “Gain may occur as a result of exchange of property. but that the antecedent accumulation of profits evidenced thereby. proceeding from the property. entered into a 99-year lease with a tenant who defaulted on rental payments.68.

SAL E OF TICKETS IN PHIL TAXABLE SOURCE WITHIN PHIL: Several cases including CIR v BOAC have already ruled on the issue stating that "The source of an income is the property. Held: No. WON proceeds from JAL tickets sold in the Phil are taxable income from sources within the Philippines (yes) 2. In the BOAC case. Javier did not conceal anything from the government. there can be no conclusion other than that JAL is a resident foreign corporation. Since JAL constituted PAL as local agent to sell its airline tickets. INCOME FROM WHATEVER SOURCE. activity or service that produced the income. JAL constituted the Philippine Air Lines (PAL). such as the appointment of a local agent. CIR sent JAL deficiency income tax assessment notices and a demand letter for a total amount of P2.” Since the source of income in case at bar was the sales of JAL tickets in the Philippines. JAL to pay the deficiency income taxes. SITUS OF INCOME. A 50% fraud penalty was also assessed against Javier. (JAL). DOING BUSINESS IN THE PHIL: JAL is a resident foreign corporation under Section 84 (g) of the National Internal Revenue Code of 1939. the fraud must be intentional. BOAC filed two separate cases with the CTA protesting these assessments. However. arguing that the money received from Mellon Bank was part of his taxable income. Lucenario 1 Sem A. during the period covered by the assessments in this case. and later Qantas Airways (Qantas) who sold BOAC tickets covering passengers and cargoes. The CTA decision on the joined 1 and 2 cases reversed the CIR decision stating that the proceeds of sales of BOAC passage tickets in the Philippines by Warner and Qantas do not st nd 33 . For the source of income to be considered as coming from the Philippines. and not one of a temporary character. It did not carry passengers and/or cargo to or from the country. there must be continuity of conduct and intention to establish a continuous business. and there being no such income during the period in question. it was taxable only on income from Philippine sources as determined under Section 37 of the Tax Code. Dina D. is a foreign corporation engaged in the business of international air carriage which did not hold transporting operations in the Phillippines as it did not have a license to do so. and occurred within. it was not liable for the deficiency income tax liabilities assessed CTA: reversed CIR ruling Issues: 1. The CIR made a deficiency assessment against Javier. 2010-2011 ST DIGESTS gift by mistake and is now the subject of a court action. To merit the penalty. Issue: Whether Javier is liable for the 50% fraud penalty. the flow of wealth proceeded from. it was assessed by the CIR for deficiency income tax with interest. enjoying the protection accorded by the Philippine government.687. Philippine territory. Ltd (Warner). Warner Barnes and Company.099. consisting of deception willfully and deliberately done or resorted to in order to induce another to give up some legal right. On two separate occasions. doing business in the Philippines. it is sufficient that the income is derived from activity within the Philippines. CIR v BOAC Facts: BOAC is a British airline corporation with no landing rights for traffic purposes in the Philippines.Y. WON JAL is engaged in trade or business in the Philippines (yes) Held: JAL tickets sold in the Phil are taxable sources within the Phil and JAL is engaged in trade or business in the Phil.52 JAL: as a non-resident foreign corporation.TAX 1 INCOME TAXATION Prof. it was stated that in order that a foreign corporation may be regarded as doing business within a State. GROSS INCOME AND EXCLUSIONS. CTA: IFO of BOAC. as its general sales agent in the Philippines to sell JAL plane tickets and reservations for cargo spaces which were used by the passengers or customers on the facilities of JAL. it maintained general sales agents in the Philippines. and is thus taxable as income tax. FROM SOURCES WITHIN THE PHILIPPINES CIR V JAPAN AIRLINES 202 SCRA 450 Facts: Japan Air Lines. Error or mistake of law is not fraud. Inc.

TAX 1 INCOME TAXATION Prof. and their delivery to the NDC — were done in Tokyo. Clearly. CTA: IFO of BIR except for a slight reduction of the tax deficiency in the sum of P900. TEST OF TAXABILITY: The test of taxability is the "source". the payment of the stipulated price. For the source of income to be considered as coming from the Philippines. In BOAC's case. said income is not subject to Philippine income tax.74.580. Pursuant thereto. 2010-2011 ST DIGESTS constitute BOAC income from Philippine sources "since no service of carriage of passengers or freight was performed by BOAC within the Philippines" and." which in this case is the NDC. as required by the shipbuilders. it cannot alter the fact that income from the sale of tickets was derived from the Philippines.Y. Lucenario 1 Sem A. INCOME FROM SOURCE WITHIN THE PHIL: NDC is a domestic corporation and a resident of the Philippines. The NDC remitted to the shipbuilders in Tokyo the total amount of US$4. Income from transportation is income from services so that the place where services are rendered determines the source. therefore. The interest it paid is on the promissory notes issued by it. The situs of the source of payments is the Philippines.) Held: SC affirmed the CTA ruling. it is sufficient that the income is derived from activity within the Philippines. Initial payments were made in cash and through irrevocable letters of credit. Dina D. enjoying the protection accorded by the Philippine government. and. NDC: Japanese shipbuilders were not subject to tax under the above provision because all the related activities — the signing of the contract. the construction of the vessels.115. 14 promissory notes were signed for the balance by the NDC and. Facts: The National Development Company (NDC) entered into contracts in Tokyo with several Japanese shipbuilding companies for the construction of twelve ocean-going vessels. the remaining payments and the interests thereon were remitted in due time by the NDC to Tokyo. No tax was withheld. Philippine territory. the flow of wealth should share the burden of supporting the government thus revenue from BOAC tickets sales in the Philippines is subject to income tax. ACTIVITY VS.234. activity or service that produced the income. and occurred within. thus subject to income tax (YES) Held: CTA ruling reversed. Issue: WON the Japanese shipbuilders were liable for (withholding) tax on the interest remitted to them under Section 37 of the Tax Code (Yes.00. INCOME SOURCE: The Tax Code does not speak of activity but of "source. The purchase price was to come from the proceeds of bonds issued by the Central Bank. Meanwhile. BOAC liable for the deficiency taxes. representing the compromise penalty. The flow of wealth proceeded from. the sale of tickets in the Philippines is the activity that produces the income. and the source of an income is that activity which produced the income.066. Issue: (Related to topic FROM SOURCES WITHIN THE PHIL) WON the revenue derived by BOAC from sales of tickets in the Philippines for air transportation constitute income of BOAC from Philippine sources. NDC v CIR 151 SCRA 395 34 . the interest remitted to the Japanese shipbuilders in Japan on the unpaid balance of the purchase price of the vessels acquired by petitioner is interest derived from sources within the Philippines subject to income tax under the then Section 24(b)(1) of the National Internal Revenue Code. The vessels were eventually completed and delivered to the NDC in Tokyo. the SOURCE OF INCOME is the property. CIR: held the NDC liable for deficiency taxes for taxes it did not withhold from the interest it paid the Japanese shipbuilders in the total sum of P5. therefore.70 as interest on the balance of the purchase price. The tickets exchanged hands here and payments for fares were also made here in Philippine currency. In consideration of such protection. Even if the BOAC tickets sold covered the "transport of passengers and cargo to and from foreign cities". FROM SOURCES WITHIN THE PHILIPPINES: The definition of GROSS INCOME is broad and includes proceeds from sales of transport documents.

Accordingly. 2010-2011 ST DIGESTS "SEC. and interest on bonds. petitioner filed and paid its Quarterly and Annual Income Tax Returns. — (a) Gross income from sources within the Philippines. or place where the contract is signed. while having no landing rights in the country. bonds or notes or the place of payment. — The following items of gross income shall be treated as gross income from sources within the Philippines: (1) Interest. SC: IFO of BIR. constitutes income from a Philippine source. petitioner filed its administrative claim for income tax refund with the BIR. activity or service that produced the income. — Interest derived from sources within the Philippines. AC’s gross revenues sourced within the Philippines are taxable. 35 . BIR: no response. the sale of tickets in the Philippines is the activity that produces the income. In both the BOAC case and the case at bar. Issue: WON revenue derived by an international air carrier from sales of tickets in the Philippines for air transportation. Corporation (Aerotel). Pursuant to Section 28(A)(1) of the NIRC of 1997. The law specifies: `Interest derived from sources within the Philippines. 2002. corporate or otherwise. It entered into an agreement with Aerotel Ltd. a Canadian corporation. it shall be subject to an income tax equivalent to 32% of the taxable income derived from its sale of passage documents here in the Philippines. is the determining factor of the source of interest income. notes. PENALTY: The imposition of the deficiency taxes on the NDC is a penalty for its failure to withhold the same from the Japanese shipbuilders. taxable for income tax under Section 24(b)(2) of the NIRC. as amended.TAX 1 INCOME TAXATION Prof. is a resident foreign corporation subject to tax on income received from Philippine sources. 37.' Nothing there speaks of the `act or activity' of non-resident corporations in the Philippines. if the obligor is a resident of the Philippines the interest payment paid by the obligor can have no other source than within the Philippines. TREATY: Moreover. Through Aerosol. notes. which. AC: revenue derived from sales of tickets in the Philippines on its off-line flights through Aerotel cannot be subject to income tax because the same is not sourced within the Philippines. AC is a resident foreign corporation under Section 22 of the NIRC of 1997. The tickets exchanged hands here and payments for fares were also made here in Philippine currency. and thus is AIR CANADA V CIR Facts: Air Canada (AC). and interest on bonds. Income from sources within the Philippines. AC maintained Aerotel as its General Sales Agent in the Philippines. under the RP-Canada Tax Treaty. Dina D. Lucenario 1 Sem A. On November 28. Such liability is imposed by Section 53(c) of the Tax Code. AC has an outlet where sales of tickets are made. although it does not operate any airplane in the Philippines. So AC appealed to the SC. It states that 'an enterprise carrying on a business or enterprise in the Philippines through a permanent establishment' is subject to tax in the Philippines. AC was a resident foreign corporation earning income through its ticket sales agent in the Philippines and this income is subject to income tax. was granted an authority to operate as an off-line carrier by the Civil Aeronautics Board (CAB) subject to certain conditions. An international airline which has appointed a ticket sales agent in the Philippines and which allocates fares received to various airlines on the basis of their participation in the services rendered. SOURCE OF INCOME: The source of an income is the property. For the taxable quarters covering the 3rd Quarter of the taxable year 2000 up to the 2nd Quarter of the taxable year 2002. AC filed a motion for reconsideration. The situs of the source of payments is the Philippines. NDC was remiss in the discharge of its obligation as the withholding agent of the government and so should be held liable for its omission. or other interest-bearing obligations of residents.Y. corporate or otherwise. (YES. to sell AC services. or other interest-bearing obligations of residents. tasked. among others. The residence of the obligor who pays the interest rather than the physical location of the securities.) Held: Affirmed its original judgment and dismissed AC’s case. whereby Aerotel was appointed as AC’s Passenger General Sales Agent for the territory defined in the agreement.. and accordingly.

(PHILIPPINE BRANCH) Facts: Smith Kline and French Overseas Company (Smith Kline) is a multinational firm domiciled in Philadelphia licensed to do business in the Philippines. — From the items specified in section 37(a). Without awaiting the action of the Commissioner of Internal Revenue on its claim. which is reproduced in Presidential Decree No. Issue: WON there was an overpayment of income tax. They made a formal claim for the refund of the alleged overpayment stating that they received from their international independent auditors. Lucenario 1 Sem A. (YES) Held: CTA ruling affirmed.COURT OF TAX APPEALS and SMITH KLINE & FRENCH OVERSEAS CO. 37. in its amended return. However. Smith Kline declared a net taxable income of P1. and other deductions properly apportioned or allocated thereto and a ratable part of any other expenses. losses. By reason of the new adjustment.484).489. or other deductions which cannot definitely be allocated to some item or class of gross income. Smith Kline's tax liability was greatly reduced from P511. Smith Kline’s amended return is conformity with law. 36 . The remainder.TAX 1 INCOME TAXATION Prof.000 COMMISSIONER OF INTERNAL REVENUE vs. the National Internal Revenue Code of 1977 and reads: SEC. In its 1971 income tax return. an authenticated certification to the effect that the Philippine share in the unallocated overhead expenses of the main office was actually $219. manufacture and sale of pharmaceuticals drugs and chemicals. — From the items of gross income specified in subsection (a) of this section there shall be deducted the expenses. Smith Kline made a formal claim for an income tax refund alleging that it had overpaid the amount of P324. Smith Kline filed a petition for review with the Court of Tax Appeals. Among the deductions claimed from gross income was P501. losses. It was further stated in the certification that the allocation was made on the basis of the percentage of gross income in the Philippines to the gross income of the corporation as a whole.000. if any.255 from underdeduction of home office overhead". CTA: CIR to refund the overpayment or grant a tax credit to Smith Kline. Commonwealth Act No. and other deductions properly apportioned or allocated thereto and a ratable part of any expenses.427.040 as its share of its head office overhead expenses. losses or deductions which can not definitely be allocated to some item or class of gross income. losses. Section 37 of the old National Internal Revenue Code. Income form sources within the Philippines. xxx xxx xxx While Revenue Regulations No. Apportionment of deductions. there was an overpayment of P324. 1158.Y.547 (P1. including therein: Interest on bonds of a domestic corporation P9. It is engaged in the importation.992 resulting in an overpayment of P324.255. 466. Dina D.277 and paid P511. as being derived specifically from sources within the Philippines there shall be deducted the expenses. — xxx xxx xxx (b) Net income from sources in the Philippines. 2 of the Department of Finance contains the following provisions on the deductions to be made to determine the net income from Philippine sources: SEC.255 "arising from underdeduction of home office overhead". derived gross income from all sources for 1939 of P180. The remainder shall be included in full as net income from sources within the Philippines.247 to P186. The ratable part is based upon the ratio of gross income from sources within the Philippines to the total gross income. shall be included in full as net income from sources within the Philippines.247 as tax due. 2010-2011 ST DIGESTS deemed to have had established a permanent establishment carrying on a business covered under the RP-Canada Tax Treaty. 160. Example: A non-resident alien individual whose taxable year is the calendar year.

Smith Kline can claim as its deductible share a ratable part of such expenses based upon the ratio of the local branch's gross income to the total gross income. No. financing and the construction business.g.000.000 Royalty for the use of patents within the Philippines 12. rental of office building in the Philippines). is the net income from sources within the Philippines. 4(b) of E. The remainder of the expense.O. RATABLE PARTS: However. It is duly registered to engage in such business in the Philippines and maintains a branch office in Manila. administration.000.000. 2010-2011 ST DIGESTS Dividends on stock of a domestic corporation 4.000 properly apportioned to the income from sources within the Philippines and P6. province of Leyte.000 is properly allocated to income from sources without the Philippines. December 18. A ratable part thereof. determined under section 37(c). CTA and CA: Marubeni had properly availed of the tax amnesty under E.R. No. a ratable part (one-fifth) of the expenses which could not be allocated to any item or class of gross income. and research and development. based upon the relation of gross income from sources within the Philippines to the total gross income. including the Philippines cannot be definitely allocated or identified with the operations of the Philippine branch. The remainder of the gross income was from sources without the Philippines.000 Total P36. Thus. P30.000 that is. One of the contracts was with the National Development Company (NDC) in connection with the construction and installation of a wharf/port complex at the Leyte Industrial Development Estate in the municipality of Isabel. 2001. 41 and 64 and declared the deficiency taxes subject of said case as deemed cancelled and withdrawn. Under section 37(b) of the Revenue Code and section 160 of the regulations. 41. Each contract was for a piece of work and since the projects called for the construction and installation of facilities in the Philippines. Nos.] Facts: Marubeni Corporation (Marubeni) is a Japanese corporation engaged in general import and export trading.Y.000 [representing P8. CIR VS MARUBENI [G. cannot be definitely allocated to any class of income. that expense can be deducted from the gross income acquired in the Philippines without resorting to apportionment. shall be deducted in computing net income from sources within the Philippines. CIR: Marubeni is disqualified from availing of the amnesties because the latter falls under the exception in Sec. hence. Marubeni is liable for deficiency income. salaries of Philippine personnel. of the multinational corporation. contractor's and commercial broker's taxes.000 is properly allocated to income from sources within the Philippines and the amount of P40. Issue: WON Marubeni properly availed the tax exemption 37 . where an expense is clearly related to the production of Philippinederived income or to Philippine operations (e.000 Gain from sale of real property located within the Philippines 11. all of which direct benefit its branches all over the world. subject to internal revenue taxes.TAX 1 INCOME TAXATION Prof. The other contract was with the Philippine Phosphate Fertilizer Corporation (Philphos) for the construction of an ammonia storage complex also at the Leyte Industrial Development Estate. Lucenario 1 Sem A.000. FROM SOURCES WITHIN THE PHIL: Based on the aforementioned laws. Work performed on the contracts were done in the Philippines and therefore income derived is subject to Philippine income tax. CIR : Marubeni has an undeclared income from two (2) contracts in the Philippines. these are deducted from the P36. P22. the entire income therefrom constituted income from Philippine sources. Of these expenses the amount of P8. branch profit remittance. the overhead expenses incurred by the parent company in connection with finance. worldwide. Dina D.] The remainder. The expenses of the taxpayer for the year amounted to P78.000 of gross income from sources within the Philippines expenses amounting to P14.O. one-fifth of the total gross income was from sources within the Philippines. 137377.

These services were rendered outside the taxing jurisdiction of the Philippines and are therefore not subject to contractor's tax. CTA (after CFI referred to the case to it): denied the claim. The reinsurance contracts were prepared and signed by the foreign reinsurers in England and sent to Manila where CIC.. The service of "design and engineering. Reinsurance premiums came from sources outside the Philippines! (1) The contracts of reinsurance. 2010-2011 ST DIGESTS (Related to SITUS) WON the work done on the two contracts were done in the Philippines and WON they are subject to income tax. were likewise fabricated and manufactured by the sub-contractors in Japan. 4(b) of E. the evidence is clear that some pieces of equipment and supplies were completely designed and engineered in Japan. No work done were not done in the Philippines and are not subject to income tax. erection and installation. (2) The reinsurers. the work therein were not all performed in the Philippines because some of them were completed in Japan in accordance with the provisions of the contracts. ALEXANDER HOWDEN V COLLECTOR Facts: The Commonwealth Insurance Co. (3) Section 37 of the Tax Code. whereby the former agreed to cede to them a portion of the premiums on insurance on risks it has underwritten in the Philippines. the boats and mobile equipment for the NDC project and the ammonia storage tanks and refrigeration units were made and completed in Japan. They. not being engaged in business in the Philippines. . Alexander Howden & Co.00 as income tax thereon.47 to AHCL. were prepared and signed abroad. 4(b) of E.112. does not include reinsurance premiums. engineering and manufacture of the materials and equipment under Japanese Yen Portion I were made and completed in Japan.297. supply and delivery. Lucenario 1 Sem A. They were already finished products when shipped to the Philippines. . SITUS: A contractor's tax is a tax imposed upon the privilege of engaging in business. Case dismissed. Held: Yes tax exemption properly availed. so that their situs lies outside the Philippines. While the construction and installation work were completed within the Philippines. electrical and instrumental apparatus. These acts occurred in two countries — Japan and the Philippines. and is directly collectible from the person exercising the privilege. out of which the reinsurance premiums were earned. pipes and structures.TAX 1 INCOME TAXATION Prof. construction. 64 is concerned. AHCL: instituted an action in the CFI of Manila for the recovery of the amount claims. Pursuant to the aforesaid contracts. " of the two projects involved two taxing jurisdictions. direction and control of testing and commissioning.297. and. taxable in England. No. CIC. All services for the design. as such.pursuant to reinsurance contracts signed by the reinsurers abroad 38 . Ltd. received the reinsurance premiums as income from their business conducted in England and. remitted P798. signed them. While Marubeni was an independent contractor under the terms of the two contracts. In behalf of AHCL.77. However. represented the aforesaid British insurance companies. insofar as the contractor's tax which is a tax on business covered by E. with accrued interest thereon in the amount of P4.985.resident foreign reinsurance companies. supervision. (CIC). as reinsurance premiums.O. as AHCL's gross income for calendar year 1951. Nos. The other construction supplies listed under the Offshore Portion such as the steel sheets. It is generally in the nature of an excise tax on the exercise of a privilege of selling services or labor rather than a sale on products. It also paid the BIR P66. thru a non-resident foreign insurance broker. 41.O. No. filed in April 1952 an income tax return declaring the sum of P798. Issue (related to SITUS OF INCOME): Are portions of premiums earned from insurances locally underwritten by a domestic corporation. (AHCL) also a British corporation not engaged in business in this country. a domestic corporation. however.O. CA decision affirmed. 41 and 64 and was disqualified from availing the business tax amnesty granted therein. CIC. entered into reinsurance contracts with 32 British insurance companies not engaged in trade or business in the Philippines. Marubeni’s contracts did not fall under the exception in Sec.. fabrication.47.Y. enumerating what are income from sources within the Philippines. these were not finished products when shipped to the Philippines.. ceded to and received by non. Dina D. coordination. The two sets of ship unloader and loader. respondent already fell under the exception in Sec.

which may require adjustment and the activities of agents in the Philippines with respect to the settlement of losses arising thereunder. plaintiff Manila Electric Company. subject to income tax or not? (YES) Held: SOURCES WITHIN THE PHILIPPINES: Reinsurance premiums remitted by domestic insurance corporations to foreign reinsurance companies are considered income of the latter derived from sources within the Philippines. After all. regardless of whether the contract is executed in a foreign country and with a foreign corporation. MANILA ELECTRIC COMPANY vs. while business implies continuity of transactions. It subjects foreign corporations not doing business in the Philippines to tax for income from sources within the Philippines. subsection (c) of Section 53 and Section 54 of the National Internal Revenue Code. Section 24 of the Tax Code does not require a foreign corporation to be engaged in business in the Philippines. Activities that create income and business in the course of which an income is realized are two different things. a domestic corporation. in New York . found it "innocent of the charges of violating. Dina D. The insurance was entered into in behalf of said plaintiff by its broker in New York City . Issue: WON petitioner violated Sec 53 (c) of the Tax Code. the Commonwealth of the Philippines . At any rate. Precisely. vs. GROSS INCOME: “gross receipts" of amounts that do not constitute return of capital. An income may be earned by a corporation in the Philippines although such corporation conducts all its business abroad. The rule therefore is: Where the insured against is within the Philippines. such as payment of dividends when received in cash. the tax actually collected in this case was computed not on the basis of gross premium receipts but on the net premium income that is. in order for its income from sources within the Philippines to be taxable.TAX 1 INCOME TAXATION Prof. and certain incidents of the contract are to be attended to in the Philippines. foreign corporations not engaged in business in the Philippines would be exempt from taxation on their income from sources within the Philippines. sending of an adjuster into the Philippines in case of dispute. certain real and personal properties situated in the Philippines ." Hence. 2427.Y.. payment of policies and taxes. YATCO 69 Phil 89 Facts: In 1935. 2010-2011 ST DIGESTS but signed by the domestic corporation in the Philippines. Plaintiff through its broker paid. assessed and levied a tax of one per centum on said premiums. under the authority of section 192 of act No. as amended. benefits the foreign corporation. The insurance companies are foreign corporations not licensed to do business in the Philippines and having no agents therein. are part of the gross income of a taxpayer. after deducting general expenses. 39 . THE PHILIPPINE GUARANTY CO. and the risk insured against is also within the Philippines. to said insurance company premiums in the sum of P91.696. Held: YES. willfully or negligently. Lucenario 1 Sem A. CIR Facts: The Philippine Guaranty moves for the reconsideration of SC decision holding it liable for the payment of income tax which it should have withheld and remitted to the BIR in the total sum of P375. The grounds raised spring from movant's view that the CTA as well as the SC. by protecting the properties insured. Issue: WON MERALCO is liable to pay the tax on the insurance premiums. REINSURANCE PREMIUM IS AN ITEM OF GROSS INCOME: Section 37 of the Tax Code is not an all-inclusive enumeration. and it is but reasonable that the latter should pay a just contribution. such as reinsurance premiums. INC. it argues that it cannot be held liable for the said assessment.00. which plaintiff paid under protest. The New York Insurance Company and the United States Guaranty Company by issuing said policies cover risks on properties within the Philippines .345. An activity may consist of a single act. insured with the city of New York Insurance Company and the United States Guaranty Company. or making of proof of loss. the Commonwealth of the Philippines has the power to impose the tax upon the insured. If by source of income is meant the business of the taxpayer. The Collector of Internal Revenue.

as correctly held by CTA. the reasonable amount they would have spent for house rental and utilities such as light. a surcharge of fifty per centum of the amount of such tax or deficiency tax. — The Commissioner of Internal Revenue shall assess all income taxes. is also supported by the evidence. The Hendersons are childless and are the only two in the family. The fact that she had herself operated on for tumors while in New York was but incidental to her stay there and she GROSS INCOME AND EXCLUSIONS. and travelling allowance of his wife. the taxpayers are entitled only to a ratable value of the allowances in question. the BIR reassessed the spouses' income and came up with deficiency taxes. not due to willful neglect.. The BIR considered as part of their taxable income the taxpayer-husband' s allowances for rental. the fact that the taxpayers had to live or did not have to live in the apartments chosen by the husbandtaxpayer' s employer-corporatio n is of no moment. that they occupied at the Embassy Apartments. Inc. and that as regards the wife-taxpayer' s travelling allowance. in case any payment has been made on the basis of such return before the discovery of the falsity or fraud. the Commissioner of Internal Revenue shall add to the tax twenty-five per centum of its amount. the findings of the CTA that the wife-taxpayer had to make the trip to New York at the behest of her husband's employer-corporatio n to help in drawing up the plans and specifications of a proposed building. COMPENSATION INCOME CIR vs. The large quarters. he did not receive the money for said allowances. no such addition shall be made to the tax . residential expenses. In November 1953. Issue: WON the said allowances are part of the spouses’ taxable income. bonus paid to him. In due time. Surcharges for failure to render returns and for rendering false and fraudulent returns. The evidence substantially supports the findings of the CTA. that as regards the entrance fee to the Marikina Gun and Country Club. and only the amount of P4. and the excess considered as expenses of the corporation. Dina D. and the Hendersons accordingly paid their tax dues. Section 72 of the Tax Code provides: SEC. etc. Lucenario 1 Sem A. Nevertheless. the BIR sent them assessment notices. it should not be considered as part of their income because she merely accompanied him in his business trip to New York as his secretary at the behest of his employer. telephone. except that. for no part of the allowances in question redounded to their personal benefit or was retained by them. . HENDERSON Facts: The spouses Arthur Henderson—President of American International Underwriters for the Philippines. withholding tax and entrance fee to the Marikina Gun 40 . and Country Club paid by his employer for his account.Y. Likewise. subsistence. exceeded their personal needs. but that they lived in the apartment paid for by his employer for its convenience (the spouses entertained corporate guests there) and that they had no choice but to live there. They claim that as regards the husband-taxpayer' s allowances for rental and utilities. No part of the allowance for travelling expenses redounded to the benefit of the taxpayers. 72. Still. reliance on the advice of its auditors and opinion of the Commissioner of Internal Revenue — it is exempted from paying the surcharge (but not the tax due). Movant was found by the CTA and the SC to have violated Section 53(c) by failing to file the necessary withholding tax return and to pay tax due. In case of willful neglect to file the return or list within the time prescribed by law or in case a false or fraudulent return or list is willfully made. the same should not be considered as part of their income for it was an expense of his employer and his membership therein was merely incidental to his duties.800 annually. water. In case of any failure to make and file a return or list within the time prescribed by law or by the Commissioner or other internal-revenue officer. Hence.—and Marie Henderson filed with the BIR returns of annual net income for the years 1948 to 1952. electricity and telephone.. should be the amount subject to tax. and it is shown that the failure to file it was due to a reasonable cause. The spouses asked for reconsideration of the foregoing assessment. the Commissioner of Internal Revenue shall add to the tax or to the deficiency tax. it was paid for him by his employer. therefore. Held: NO. when a return is voluntarily and without notice from the Commissioner or other officer filed after such time.. after investigation. 2010-2011 ST DIGESTS Held: YES.TAX 1 INCOME TAXATION Prof. Neither was a part thereof retained by them. water. finding that movant's violation was due to a reasonable cause — namely.

Issue: WON taxing the salary of a judicial officer in the Philippines is a diminution of such salary and so violates the Constitution. (CIR and the Financial Officer of the Supreme Court) from making any deduction of withholding taxes from their salaries. NITAFAN vs. CIR (G.TAX 1 INCOME TAXATION Prof. A modest nest egg which the senior citizen may look forward to is thus avoided. Wenceslao Polo and Maximo Savellano Jr. pages 16-17]. The Hon.61. on 10 December 1982 under the provisions of Section 12 [c] of Commonwealth Act 186. CASTANEDA Facts: Private respondent Efren Castaneda retired from the government service as Revenue Attache in the Philippine Embassy in London . Judgment under review is modified. [Manual on Leave Administration Course for Effectiveness published by the Civil Service Commission. Held: The SC hereby makes of record that it had then discarded the ruling in Perfecto v Meer and Endencia v David. The Government recognizes that for most public servants. 2010-2011 ST DIGESTS must have merely taken advantage of her presence in that city to undergo the operation. No. contrary to Section 10. 41 . Dina D. Civil Service Commission. DAVID Facts: This is a joint appeal from the decision of the CFI Manila declaring section 13 of Republic Act No. They submit that “any tax withheld from their emoluments or compensation as judicial officers constitutes a decreased or diminution of their salaries. is applied for by an officer or employee who retires.” Issue: WON a deduction of withholding tax a diminuition of the salaries of Judges/Justices. interpellations and opinions expressed regarding the constitutional provision in question until it was finally approved by the Commission disclosed that the true intent of the framers of the 1987 Constitution. In the exercise of sound personnel policy. Issue: WON terminal leave pay received by a government official or employee on the occasion of his compulsory retirement from the government service is subject to withholding [income] tax. In the recent case of Jesus N. Article VIII of the 1987 Constitution. the Government encourages unused leaves to be accumulated. he received. resigns or is separated from the service through no fault of his own. Terminal leave payments are given not only at the same time but also for the same policy considerations governing retirement benefits. in adopting it. The Court has already ruled that the terminal leave pay received by a government official or employee is not subject to withholding [income] tax. CIR vs. Borromeo vs. Held: NO. Upon retirement. that declared the salaries of members of the Judiciary exempt from payment of the income tax and considered such payment as a diminution of their salaries during their continuance in office. ENDENCIA vs. CIR ordered to refund the sum of P5. as amended.13 allegedly representing income tax thereon. England . retirement pay is always less than generous if not meager and scrimpy. 78780) Facts: Petitioners David Nitafan. The Court hereby reiterates that the salaries of Justices and Judges are property subject to general income tax applicable to all income earners and that the payment of such income tax by Justices and Judges does not fall within the constitution protection against decrease of their salaries during their continuance in office. were duly appointed and qualified Judges of the RTC National Capital Judicial Region. The debates. more commonly known as terminal leave. 590 which legalizes the collection of income tax on the salary of judicial officers unconstitutional.Y. and ordering the appellant Saturnino David as Collector of Internal Revenue to make a refund to petitioners who are judicial officers. terminal leave pay from which CIR withheld P12.. They seek to prohibit and/or perpetually enjoin respondents.986. was to make the salaries of members of the Judiciary taxable. Lucenario 1 Sem A.R.557. among other benefits. the Court explained the rationale behind the employee's entitlement to an exemption from withholding [income] tax on his terminal leave pay as follows: Commutation of leave credits.

13TH MONTH PAY AND OTHER BENEFITS CIR V CASTANEDA 203 SCRA 72 Facts: Efren Castaneda worked as Revenue Attache in the Philippine Embassy in London. The CIR assessed income tax on the amount he realized for the sale. or become incapacitated to discharge the duties of their office. Such being its purpose. not as a private grant. not restrictively. The Court cited Borromeo v Civil Service Commission wherein the Court ruled that the commutation of leave credits is encouraged by the government in order to augment the meager retirement benefit that government employees receive. it is to be construed. and each Associate Justice. Republic Act No. limitations and pervading principles of the Constitution and to the administration of justice without respect to person and with equal concern for the poor and the rich. Lucenario 1 Sem A. 590. This act of interpreting the Constitution or any part thereof by the Legislature is an invasion of the well-defined and established province and jurisdiction of the Judiciary. like the clause in respect of tenure. Section 9. Until the Congress shall provide otherwise. GROSS INCOME AND EXCLUSIONS. a US citizen. Issue: Whether or not terminal leave pay received by a government official or employee on the occasion of his compulsory retirement from the government service is subject to income tax? Held: NO. INCOME EXEMPT UNDER TREATY REAGAN V CIR 30 SCRA 968 Facts: Petitioner William Reagan. but. which shall not be diminished during their continuance in office.” received a terminal leave pay. The members of the Supreme Court and all judges of inferior courts shall hold office during good behavior. The CA affirmed. Congress says that taxing the salary of a judicial officer is not a decrease of compensation. COMPENSATION INCOME. A terminal leave pay is hence considered part of retirement benefit since it is given not only at the same point in time in the employment of an employee but also for the same policy considerations governing retirement benefits. Dina D. CTA ruled in favor of Castaneda. As said by Justice Van Devanter of the US Supreme Court in the case of Evans vs. but in accord with its spirit and the principle on which it proceeds. COMPENSATION INCOME. Private Respondent Castaneda filed a formal claim with petitioner CIR and later on with the CTA asking for a tax refund contending that the cash equivalent of his terminal leave pay is exempt from income tax. but as a limitation imposed in the public interest. He filed a claim for tax refund with the CTA contending that the sale was made outside of the Philippine territory and pursuant to the GROSS INCOME AND EXCLUSIONS. to attract good and competent men to the bench and to promote that independence of action and judgment which is essential to the maintenance of the guaranties. 9. The CIR through the Office of the Solicitor General argued that a terminal leave pay is incomed derived from employer-employee relationship citing section 28 of the NIRC. Gore: “The primary purpose of the prohibition against diminution was not to benefit the judges. The tax exemption was not primarily intended to benefit judicial officers. in other words. but was grounded on public policy. 2010-2011 ST DIGESTS Held: YES. he 42 . 557 from his terminal leave pay as income tax. The CIR withheld P12. fifteen thousand pesos.TAX 1 INCOME TAXATION Prof. England. sold his automobile to a member of the United States Marine Corps at the Clark Field Air Base at Pampanga. Upon his retirement from service. By legislative fiat as enunciated in section 13.Y. the Chief Justice of the Supreme Court shall receive an annual compensation of sixteen thousand pesos. until they reach the age of seventy years. A terminal leave pay is not part of income of the government official or employee but actually a retirement benefit and hence is exempted from income tax. Article VIII of our Constitution states that: SEC. They shall receive such compensation as may be fixed by law.

The tax exemption privilege of GCL is derived from RA no. Dina D. PENSIONS/RETIREMENT BENEFITS/SEPARATION PAY CIR v CA 203 SCRA 72 supra Held: Terminal leave pay is not part of income but of retirement benefits and hence exempted from income tax. pension. the provisions on final tax and withholding thereof amended by PD 1959 are embraced within the title on “Income Tax”. Held: GCL is exempted. courtesy. 2010-2011 ST DIGESTS Military Bases Agreement exempting US nationals residing in the Philippines and employed in the military bases from income tax. GCL. 24 and 53 GROSS INCOME AND EXCLUSIONS. GCL contends that the exemption they enjoy is derived from Section 56 (b) NIRC and not from the provisions amended by PD 1959. or expediency over the bases as part of the Philippine territory or divested itself completely of jurisdiction over offenses committed therein…All jurisdictional rights granted to the United States and not exercised by the latter are reserved by the Philippine itself. PD 1959 being a general law cannot repeal by implication specific provisions in RA 4917 and section 56 of the NIRC. CTA ruled in favor of the CIR.Y. Taxation of employees’ trust would result in the diminution of accumulated income of the employee contrary to the law. Moreover. PD 1959 (amended section 21(d) and 24 (cc) of the NIRC). In response to the cases cited by the Petitioner declaring as “importation” the acquisition of goods from the US military and hence is subject to taxation. CA affirmed. The consent was given purely as a matter of comity. a decree governing the rules on withholding interests on bank deposits. the Court held that these pronouncements were merely obiter and do not control. GCL made investments which earned and later on subjected to income tax by the CIR. Since Section 56 explicitly exempts employees’ trust from “the taxes imposed by this Title”. A terminal leave pay is given to the employee at the same time and for the same policy consideration as a retirement benefit.TAX 1 INCOME TAXATION Prof. disability and death benefits to its employees. 4917 and Sec 56(b) (now 53(b) of the tax code) which categorically exempts employees’ trust from income taxation. What is controlling is the decision in People v Acierto: “By the Military Bases Agreement. CTA ordered the refund. The deletion of the tax exemption and preferential tax rates under the old law by PD 1959 is deemed not extended to employees’ trusts. The tax advantage was given to employees’ trust or benefit plans to encourage private plans to provide economic assistance to employees in times of contingencies. According to CIR. abolished the exemption previously enjoyed by individual and corporations exempted from income taxation. the Philippine Government merely consents that the United States exercise jurisdiction in certain cases. it should be noted. these decisions were made to prevent tax evasion.” Facts: GLC Retirement Plan is an employees’ trust maintained by employer. Clark Air Base is deemed a Philippine territory. For purposes of income taxation. Inc. it follows that employees’ trust are exempt even from income tax covered by sec 21. Moreover. COMPENSATION INCOME. to provide retirement. GCL filed a claim for refund. RA 4917 exempts GCL Retirement Plan from income tax. Lucenario 1 Sem A. Issue: WON Clark Air base is a base outside of Philippine jurisdiction and hence the sale actually took place in a foreign country? Held: NO. CIR V GCL RETIREMENT PLAN 207 SCRA 487 43 .

Taxing terminal leave pay would result to double taxation. SC ruled that Zialcita need not file a formal request for refund since the aforementioned ruling is binding on the CIR as intervenormovant. The CIR would like the Court to clarify the applicability of the Zialcita Resolution to other government officials and employees and WON a written request for refund from the taxpayer-retiree is still necessary for those who have already retired and from whose retirement benefits withholding taxes have been deducted. WON Zialcita's accumulated leave credits are exempted from income tax. Commonwealth Act No. There is no logic in withholding income tax of employees’ trust when it is not supposed to pay income tax at all.a terminal leave pay is a retirement gratuity which is also exempted under section 28 (b). Held: The Zialcita resolution applies only to employees of the Judiciary.3. The Financial Management and Budget Office asked the court to clarify the Zialcita ruling. she is still deemed to have worked on that day entitling her to a salary which is taxed on its entirety without any deductions for any leaves not utilized. 90-6-015-SC Facts: Atty. Lucenario 1 Sem A. Held: YES . c. 2. b. Issue No. 7 (f) of the NIRC since it is given upon retirement and in consideration of the retirees' meritorious services. EXCLUSIONS 44 . should file a written request for refund within two years from the date of the promulgation of this resolution. Moreover.186 Sections 12 (c) and 28 (C) provide that a retiree is entitled to the commutation of the unused vacation and sick leave and such benefit shall be exempted from all types of taxes. the terminal leave pay is a benefit given after and as a direct consequence of retirement. e. Terminal leave pay is exempted even regardless of the manner of discharge of the employee from service. INTEREST INCOME. other retirees from whom withholding taxes on terminal leave pay have been deducted. Dina D. Held: The Court gave five reasons upholding their earlier ruling: a. 2010-2011 ST DIGESTS Furthermore. final withholding tax is collected from income. The Court also said that the authorities concerned will have to determine the rules on each case as it arises. This entitles him to the benefit of commutation under EO1077 and a corresponding exemption under Section 28(b) 7(b) of the NIRC. Zialcita’s discharge from service is without his fault. taxing terminal leave pay would amount to DOUBLE TAXATION. The motion for reconsideration is denied.WON the employee used her vacation or sick leave.TAX 1 INCOME TAXATION Prof.Y. The Chief of the Finance Division of the Court likewise asked the Court WON the Zialcita ruling is applicable to those who avail of optional retirement and to those who are separated from the service through no fault of their own. GROSS INCOME AND EXCLUSIONS. Income tax has already been paid by the employee during her employment. It is not extended to other government employees absent an actual case and controversy. Issue No. Terminal leave pay is not part of salary since it accrues during and as a consequence of severance from service. Issue No. PASSIVE INCOME. Bernardo Zialcita was a former employee of the Court who filed a motion for reconsideration on the decision of the Fiscal Management and Budget Office to tax his terminal leave pay and leave credits. d. However. IN RE ZIALCITA AM No.In accordance with Section 286 of the Revised Administrative Code. The Court en Banc ruled in favor of Zialcita ordering the Fiscal Management and Budget Office to refund Zialcita and further declared that henceforth no terminal leave pay of any retirees of the Court shall be subjected to withholding tax. The CIR filed a motion for reconsideration and clarification.1.

Moreover. entered into a loan and sales contract with Mitsubishi Corp. 29.36. will sell to Mitsubishi all the copper concentrates produced from said machine. When interest payments were paid by Atlas to Mitsubishi. 2010-2011 ST DIGESTS CIR v Mitsubishi Metal 181 SCRA 214 Facts: Atlas Consolidated Mining and Development Corp. the transaction between Eximbank and Mitsubishi was executed in the latter’s own independent capacity. which in fact is silent on this matter. No. mostly situated in Manila and in Pasay City. To finance Altas’ loan. Sometime in 1958 and 1959. but in the case of such obligations issued after approval of this Code. like R. It commenced actual business operations on July 1.098. . — Interest upon the obligations of the Government of the Republic of the Philippines or any political subdivision thereof. 82. 1407. reporting therein net incomes of P3. controlled and finance by the Japanese Government. — .00 and P16. Such loan was granted. RENTALS/LEASES LIMPAN vs CIR Facts: Limpan is engaged in the business of leasing real properties.81 and P11. pursuant to Section 29 (b)(7)(A) which excludes from gross income investments in loans by financing institutions owned.00 and P2. Mitsubishi is not among the entities enumerated under Section 29 (b)(7)(A) entitled to tax exemption. reading as follows: "SEC.260.Y.A. . The two are the only signatories in the said contract.00 during these taxable years and had claimed excessive depreciation of its buildings in the sums of P4. for which it paid the corresponding taxes therefor in the sums of P657.A.SUPRA Held: There is no basis for saying that the interest payments were obligations of the Republic of the Philippines and that the promissory notes of the NDC were government securities exempt from taxation under Section 29(b)[4] of the Tax Code. In this distinct and separate contract. C. No. only to the extent provided in the act authorizing the issue thereof. 1955.690. construing tax exemptions grant strictly. 311 does carry such authorization but. a Japanese corporation.00 covering the same 45 . LLpr GROSS INCOME AND EXCLUSIONS. the loan was granted to Mitsubishi and not to Atlas. or enjoying refinancing by foreign governments. Dina D.220.A. the examiners of the BIR conducted an investigation of petitioner's 1956 and 1957 income tax returns and. The law invoked by the petitioner as authorizing the issuance of securities is R. No. a 15% withholding tax was assessed by the CIR. Gross Income.A.00 and P81. they discovered and ascertained that petitioner had underdeclared its rental incomes by P20.. PASSIVE INCOME. The loan and sale contract is strictly an agreement between Mitsubishi and Atlas. On the other hand. Held: NO. R. NDC v CIR 151 SCRA 395 . emphasis supplied).287.A. Limpan duly filed its 1956 and 1957 income tax returns.199. — The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (4) Interest on Government Securities. Mitsubishi asked filed a claim for tax credit arguing that it should not have been taxed as it was merely acting as an agent of Eximbank. Its real properties consist of several lots and buildings. Issue: WON Mitsubishi is a mere conduit of Eximbank. No. in the course thereof. Atlas. Mitsubishi agreed to loan US $ 20 M to Atlas in order for the latter to purchase a new concentrator for copper production. (As amended by Section 6. a financing institution owned. in turn. respectively. (b) Exclusions from gross income. Mitsubishi applied for a loan with the Eximbank. Lucenario 1 Sem A.00. controlled. 182 as amended by C. No. does not exempt from taxes the interests on such securities. 1407.TAX 1 INCOME TAXATION Prof. In the said contract.336.

Lim. RATION (DEFENSE 3 .00 was not declared as income in its 1957 tax return because its president. DECISION: This appeal is manifestly unmeritorious. Defense 2: Amount totalling P31. is not only unusual but uncorroborated by the alleged transferors. so as to justify the turn over to Limpan a certain value of its properties to be applied to the rentals of the land and in exchange for whatever rentals they may collect from the tenants who refused to recognize the new owner or vendee of the buildings.TAX 1 INCOME TAXATION Prof. Defense 4: Limpan likewise alleged in its petition that the rates of depreciation applied by respondent Commissioner of its buildings in the above assessment are unfair and inaccurate. CIR demanded for payment of deficiency income tax and surcharge against Limpan amounting to P30. CIR V SC JOHNSON Facts: S. 46 . this case. Defense 3: (TOPIC) Tenant Go Tong deposited in court his rentals amounting to P10.00 from certain tenants.380. RATIO (DEFENSE 1): The excuse that previous land owners retained ownership of the lands and only later transferred or disposed of the ownership of the buildings existing thereon to Limpan. Lucenario 1 Sem A. GROSS INCOME ROYALTIES AND EXCLUSIONS. a domestic corporation organized and operating under the Philippine laws. marketing and production from SC Johnson and Son. did not turn the same over to petitioner corporation in said year but did so only in 1959. a non-resident foreign corporation based in the U. RATIO (DEFENSE 4) : Depreciation is a question of fact and is not measured by theoretical yardstick. CTA sided with CIR. Lim was not presented as witness to confirm accountant Solis nor was his 1957 personal income tax return submitted in court to establish that the rental income which he allegedly collected and received in 1957 were reported therein.00. entered into a license agreement with SC Johnson and Son. Defense 1: Limpan disclaimed having received or collected the amount of P20. A.502. reasoning out that the previous owners of the leased building has to collect part of the total rentals in 1956 to apply to their payment of rental in the land in the amount of P21. JOHNSON AND SON. or any part thereof.Y. Limpan understated its income. since it is income just the same regardless of its source. without merit. Dina D. package and distribute the products covered by the Agreement and secure assistance in management.00.TOPIC): Since deposit by Tenant Go Tong was resorted by him to due to the refusal of Limpan to accept the same. pursuant to which the [respondent] was granted the right to use the trademark. Isabelo P. Hence. Limpan is deemed to have constructively received such rentals in 1957. over which the corporation had no actual or constructive control.00. INC. Issue: WON appeal is meritorious – whether Limpan understated its income.800.A. S. PASSIVE INCOME.500.C. hence. As above noted.S. and the findings of the Tax Court in this respect should not be disturbed when not shown to be arbitrary or in abuse of discretion. Isabelo P.199. patents and technology owned by the latter including the right to manufacture. United States of America (USA). U.630. RATIO (DEFENSE 2): Limpan’s denial and explanation of the nonreceipt of the remaining unreported income for 1957 is not substantiated by satisfactory corroboration. or by any document or unbiased evidence. who collected and received P13. but should be determined by a consideration of actual facts.. The payment by the sub-tenant in 1957 should have been reported as rental income in said year. as unreported rental income for 1956. 2010-2011 ST DIGESTS period.

[respondent] filed with the International Tax Affairs Division (ITAD) of the BIR a claim for refund of overpaid withholding tax on royalties arguing that.00 representing overpaid withholding tax on royalty payments.C.266. or from the use of or the right to use. 2010-2011 ST DIGESTS The said License Agreement was duly registered with the Technology Transfer Board of the Bureau of Patents. or scientific equipment. such royalties may also be taxed in the Contracting State in which they arise. Since the agreement was approved by the Technology Transfer Board. the least of: (iii) the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State.603. [respondent] was obliged to pay SC Johnson and Son.C. (i) 25 percent of the gross amount of the royalties.The Court of Tax Appeals rendered its decision in favor of S. Dina D. The RP-Germany Tax Treaty provides: (2) However. secret formula or process. Lucenario 1 Sem A. the preferential tax rate of 10% should apply to the [respondent]. beginning July. plan. USA is entitled to the “Most Favored Nation” Tax rate of 10% on Royalties as provide in the RP-US Tax Treaty in relation to the RP-West Germany Tax Treaty? 47 . Trade Marks and Technology Transfer under Certificate of Registration No. any patent. We therefore submit that royalties paid by the [respondent] to SC Johnson and Son.C. Johnson) then filed a petition for review before the Court of Tax Appeals (CTA). USA is only subject to 10% withholding tax pursuant to the most-favored nation clause of the RP-US Tax Treaty [Article 13 Paragraph 2 (b) (iii)] in relation to the RPWest Germany Tax Treaty [Article 12 (2) (b)]” (Petition for Review [filed with the Court of Appeals] The RP-US Tax Treaty states that: 1) Royalties derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States. 2) However. 8064. 1993. design or model. 1992 to May. Thus. USA royalties based on a percentage of net sales and subjected the same to 25% withholding tax on royalty payments which [respondent] paid for the period covering July 1992 to May 1993 in the total amount of P1. is subject to approval. commercial.For the use of the trademark or technology. the tax imposed by that Contracting State shall not exceed. For as long as the transfer of technology. and b) In the case of the Philippines. trademark. (ii) 15 percent of the gross amount of the royalties. under Philippine law. Inc. and according to the law of that State.443. “the antecedent facts attending [respondent's] case fall squarely within the same circumstances under which said MacGeorge and Gillete rulings were issued. but the tax so charged shall not exceed: b) 10 percent of the gross amount of royalties arising from the use of. and Issue: Whether the Court of Appeals erred in ruling that SC Johnson and Son. only apply if the contract giving rise to such royalties has been approved by the Philippine competent authorities. commercial or scientific experience. or the right to use. where the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities. or for information concerning industrial.TAX 1 INCOME TAXATION Prof. Private respondent S. 1993. in the case of royalties arising in the Republic of the Philippines. (S. industrial. 15 percent of the gross amount of the royalties. Johnson & Son. Johnson and ordered the Commissioner of Internal Revenue to issue a tax credit certificate in the amount of P963.Y.00 On October 29. the limitation of the tax rate mentioned under b) shall.2 The Commissioner of Internal Revenue thus filed a petition for review with the Court of Appeals which rendered the decision finding no merit in the petition and affirming in toto the CTA ruling. a) In the case of the United States. this petition. The Commissioner did not act on said claim for refund.

trade mark. Education and Training. Therefore. April 25. PHILAMLIFE filed with the Honorable Court on July 29. is taxed at 10% of the gross amount of said royalty under certain conditions. The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax crediting. Inc. Without waiting for respondent to resolve the claim for refund. a nonresident foreign corporation with principal place of business in Pembroke. the CIR issued in favor of PHILAMLIFE a Tax Credit Memo (T. Said claim was followed up by another letter dated July 6.125. 1980. Article 24 of the RP-Germany Tax Treaty expressly allows crediting against German income and corporation tax of 20% of the gross amount of royalties paid under the law of the Philippines. The rate of 10% is imposed if credit against the German income and corporation tax on said royalty is allowed in favor of the German resident.00 made on December 16. On the basis of the aforesaid issuance of tax credit. the royalty income of a German resident from sources within the Philippines arising from the use of.R. Accounting and Auditing Services and Corporate and Personnel Services for PHILAMLIFE’s US Branch in the field of monetary and investment trading. design or model. CTA Case # 3504. secret formula or process. 141-80) in the amount of P643. This would mean that private respondent must prove that the RP-US Tax Treaty grants similar tax reliefs to residents of the United States in respect of the taxes imposable upon royalties earned from sources within the Philippines as those allowed to their German counterparts under the RP-Germany Tax Treaty. the Philippine tax paid on income from sources within the Philippines is allowed as a credit against German income and corporation tax on the same income. Article 23 of the RP-US Tax Treaty. effective January 1. which is the counterpart provision with respect to relief for double taxation. 31283. 1981. the tax on royalties under the RP-US Tax Treaty is not paid under similar circumstances as those obtaining in the RP-West Germany Tax Treaty. PHIL.Y. 11978. That means the rate of 10% is granted to the German taxpayer if he is similarly granted a credit against the income and corporation tax of West Germany. SP No. Tayao-Jaguros FACTS: Philippine American Life Insurance Co.TAX 1 INCOME TAXATION Prof. Lucenario 1 Sem A. for a fee of not exceeding $250. (PHILAMLIFE) a domestic corporation entered into a Management Services Agreement with American International Reinsurance Co.125. Underwriting and Marketing. Inc. LIFE V CIR DETAILS: CA-G. On November 18. in a letter dated March 12. Since the RP-US Tax Treaty does not give a matching tax credit of 20 percent for the taxes paid to the Philippines on royalties as allowed under the RP-West Germany Tax Treaty. 1995. 3743. or the right to use. PHILAMLIFE. The clear intent of the “matching credit” is to soften the impact of double taxation by different jurisdictions. does not provide for similar crediting of 20% of the gross amount of royalties paid. the credit shall be 20% of the gross amount of such royalty. The RP-US Tax Treaty contains no similar “matching credit” as that provided under the RP-West Germany Tax Treaty. Inc. Dina D. 1972. On the other hand.R. filed with respondent a claim for the refund of a second erroneous tax payment of P643. J. AM. private respondent cannot be deemed entitled to the 10 percent rate granted under the latter treaty for the reason that there is no payment of taxes on royalties under similar circumstances. 1980. whereby.00 representing erroneous payment of withholding tax at source on remittances to AIGI for services rendered abroad in 1979.. AIRCO shall perform for PHILAMLIFE Investment. AIRCO merged with American International Group. plan.. the concessional tax rate of 10 percent provided for in the RP-Germany Tax Treaty should apply only if the taxes imposed upon royalties in the RP-US Tax Treaty and in the RP-Germany Tax Treaty are paid under similar circumstances.000. 1982 the petition docketed as CTA 48 . To illustrate. On September 30. Bermuda. In the case of royalties for which the tax is reduced to 10 or 15 percent according to paragraph 2 of Article 12 of the RP-West Germany Tax Treaty. 2010-2011 ST DIGESTS Held: Under Article 24 of the RP-West Germany Tax Treaty.5 The rationale for the most favored nation clause. (AIRCO). No. Hence. the “most favored nation” clause in the RP-West Germany Tax Treaty cannot be availed of in interpreting the provisions of the RPUS Tax Treaty. 1982 wherein PHILAMLIFE alleged that the claim for refund of the amount paid in 1980 is exactly the same subject matter as in the previous claim for refund in 1979. any patent. (AIGI) with the latter as the surviving corporation and successor-in-interest in AIRCO's Management Services Agreement with PHILAMLIFE.00 per annum.

periodical or casual gains.125. assistance or services in connection with technical management or administration of an insurance business — a commercial undertaking. assistance or services rendered in connection with the technical management and administration of any scientific. rents. 141-80) in the amount of P643. or equitable considerations in cancelling the previous approval of petitioner's claim for refund more than 5 years thereafter. with AIGI deriving income from said agreement. denied PHILAMLIFE's claim for refund of P643. the income derived for the services performed by AIGI for PHILAMLIFE under the said management contract shall be considered as income from services within the Philippines.T. Thus while it is true petitioner AIGI has no properties in the Philippines. annuities. the SC held that the rule on prescription of assessment and the filing of formal protest will not apply in the C. the supply of any assistance that is auxiliary and subsidiary to. industrial. AIGI is well-within the ambit of Section 37 (a)(7) of the Tax Code. or right as is mentioned in paragraph (a). project or scheme". The decision of the CIR revoking the tax credit memo he has issued and issuing an assessment accordingly was actually a denial 49 . venture. (2) Whether or not the CIR is barred by prescription. from the heading 'Investments' to 'Personnel'. in a letter dated April 15. compensation for advisory services performed abroad by the personnel of a non-resident foreign corporation not doing business in the Philippines are subject to Philippine withholding income tax. Basically. and others (Sec.125. or commercial knowledge or information. PHILAMLIFE’s contention that AIGI is not covered by Sec. the test of taxability is the 'source'. advice. profits and income and capital gains. project of scheme. dividends.125. Without protesting the assessment for the amount of P643. and is furnished as a means of enabling the application or enjoyment of. 3943. after investigation. 2010-2011 ST DIGESTS Case # 3540. technical.D.00 as deficiency withholding tax at source for 1979. RULING: Yes. 37 (a) (7) as amended by P. ordering PHILAMLIFE to pay P643.125.00 as withholding tax at source for 1980.R. that the advisory services were rendered/performed abroad by the personnel of AIGI. seeking the annulment of said assessment. the services call for the supply by the nonresident foreign corporation of technical and commercial information. any such equipment as is mentioned in paragraph (b) or any such knowledge or information as is mentioned in paragraph (c). 1981 until it is paid. technical. and the technical advice. assistance or services rendered in connection with the technical management and administration of any scientific. or technical advice. industrial or commercial undertaking.T. Therefore. Case No. premiums. . laches. on a motion for reconsideration by the CIR. 3540. the agreement with PHILAMLIFE is necessary for the latter company's efficient operation and growth. the CIR. 37 (a) (4) of the NIRC’s meaning of rentals and royalties from properties located in the Philippines since it does not have properties located in the Philippines from which rentals and royalties can be derived is untenable.00 as deficiency withholding tax at source for 1979 plus increments.TAX 1 INCOME TAXATION Prof. 37 (a) (4) states that those enumerated therein shall be treated as gross income from source within the Philippines including rentals and royalties for the supply of scientific. 1980 and requested the latter to pay the amount of P643.00 with interest at 20% per annum until paid on the presumption that it has utilized the tax credit memo already issued. salaries. emoluments or other fixed or determinable annual. industrial or commercial knowledge or informations.A. venture. ISSUE/S: The issues presented to the Court are the ff. Sec.Y. 1985. knowledge.: (1) Whether or not compensation for advisory services admittedly performed abroad by the personnel of a non-resident foreign corporation not doing business in the Philippines (AIGI) are subject to Philippine withholding income tax. The CTA ordered PHILAMLIFE to pay the CIR the amount of P643.00 with interest at the rate of 20% per annum from March 9. 3943.T. the CIR cancelled the Tax Credit Memo (T.125. Dina D. .125. royalties (including remuneration for technical services). but rather as expressed under the expanded meaning of "royalties". it includes " royalties for the supply of scientific. A reading of the various management services enumerated in the said Management Services Agreement will show that they can easily fall under any of the aforequoted expanded meaning of royalties. industrial or commercial undertaking. No. docketed as C. seeking said refund. (3) Whether or not CTA can amend its decision. 1985 the petition. 1457) As to the second issue. During the pendency of C. estoppel. Moreover.A Case No. and the source of an income is "that activity . In our jurisprudence. Case No.A. any property. PHILAMLIFE filed with this Honorable Court on June 14. a non-resident foreign corporation not doing business in the Philippines. after it has determined. It is not the presence of any property from which one derives rentals and royalties that is controlling. Lucenario 1 Sem A.00 previously issued to PHILAMLIFE on November 18. which produced the income". AIGI being a non-resident foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to 35% of the gross income received during each taxable year from all sources within the Philippines as interest.

On October 19. The projected transfer of his shares in the name of MANTRASCO could not. Ratio: Income tax is assessed on income tax is assessed on income that has been received. would continue under the management of the respondents. dela Rama. the CTA did not err in amending its March 10. Selph.E. Castro REPUBLIC V DELA RAMA Facts: In 1951. MANTRASCO (Guam).000 common shares. and the rest. the same may still be amended. No. Inc.660. the rules on prescription of action in the case of recovery of tax erroneously or illegally collected shall apply. McDonald. In this case. Inc. which was not declared in the ITR. and E. a trust agreement on his and the respondents' interests in MANTRASCO was executed by and among Reese. DIVIDENDS were applied were not proven to have existed. 24. But justice and equity demand that the period during which the CIR approved the herein claim for refund up to the time it was subsequently cancelled should be deducted from the counting of the two year prescriptive period. On February 29.R.Y. The first debt was not proven to exist and the second debt was due from Hijos de I. the law firm of Ross.500. as representative of the estate. Issue: WON there was constructive payment of dividends and thus constructive receipt by the estate or by the heirs. On February 2.TAX 1 INCOME TAXATION Prof. GROSS INCOME AND EXCLUSIONS. the BIR claims that the estate had received in 1950 cash dividend from the Dela Rama Steamship Co. As to the third issue.973. L-28398. mailed or sent to the taxpayer for the purpose of giving effect to said assessment. The debts to which they FACTS: In 1952. the assessment could not become final and executory. CIR V MANNING DETAILS: G.D. 1954 Reese died. the estate of the late Esteban dela Rama filed its income tax return (ITR) for the year 1950. It appearing that the person liable for the payment of the tax did not receive the assessment. Later. notice must be sent to the administrator of the estate.700 of these were owned by Julius S.000 divided into 25. Held: No. 1985. 1952. however. there was no constructive receipt for the dividends. MANTRASCO. legal notice of the assessment was sent to two heirs. an entity separate and distinct from the owner thereof. 1993 decision acting upon the timely motion for reconsiderations filed by both PHILAMLIFE and the CIR. BIR claims that the cash dividends were applied in the deceased’s account and this constituted constructive receipt by the estate or by the heirs. Carrascoso and Janda as Trustees. and said notice could not produce any effect. Simmons (Respondents). PASSIVE INCOME. The CIR sent income tax assessments to the 3 Respondents for alleged undeclared stock dividends received in 1958 from the Manila Trading and Supply Co. Therefore. since it is the said administrator. by John L. income was not received due to failure to deliver – either actually or constructively. (MANTRASCO) valued at P7. August 6. the MANTRASCO had an authorized capital stock of P2. 1985 when the same was cancelled by the respondent only one year and four months had elapsed from the two year period of prescription when Petitioner filed CTA 3943 on June 4. By deducting the period when PHILAMLIFE received the tax credit memo on March 9. 1955. Manning. at 100 shares each.. in view of Reese's desire that upon his death MANTRASCO and its two subsidiaries. and the respondents. neither one of whom had any authority to represent the estate.. be immediately effected for lack of sufficient funds to cover initial payment on the shares. 1975. Said decision having not attained its finality. and the Port Motors. In this case. Dina D. W. Constructive delivery occurs only when it is shown that the debts to which the dividends were applied actually existed and were legally demandable and chargeable to the deceased. To interpret otherwise. after MANTRASCO made a partial 50 . 1981 to May 15. 2010-2011 ST DIGESTS of the claim for refund covering the 1979 withholding tax at source which was previously granted. When the notice to this effect is released. When an estate is under administration. corrected or modified by the Court. will be opening an avenue for respondent to technically deprive any legitimate claimant-taxpayer of his erroneously or illegally paid taxes by simply granting the same at the start but only to be revoked later upon the expiration of the two year period. who has the legal obligation to pay and discharge all debts of the estate and to perform all orders of the court. Reese. The notice was not sent to the taxpayer for the purpose of giving effect to the assessment. J. Lucenario 1 Sem A. Inc.

participates neither in dividends. Dividend means any distribution made by a corporation to its shareholders. They weren’t treasury shares. Dina D. were only . A stock dividend. 1963 the entire purchase price of Reese's interest in MANTRASCO was finally paid in full by the latter. On December 22." On April 14. for otherwise equal distribution of voting powers among stockholders will be effectively lost and the directors will be able to perpetuate their control of the corporation. On the same date.Y. McDonald PhP 2. on September 14.92. which is distributed to stockholders in lieu of a cash dividend. an examination of MANTRASCO's books was ordered by the BIR. Manning PhP 2. as follows: J.700 shares in Reese's name was cancelled and a new certificate was issued in the name of MANTRASCO. such share.4% prior to the declaration of the stock dividends in 1958. donation. out of its earnings or profits.TAX 1 INCOME TAXATION Prof.767. ISSUE: Whether or not the 24. E. the BIR examiners concluded that the distribution of Reese's shares as stock dividends was in effect a distribution of the "asset or property of the corporation as may be gleaned from the payment of cash for the redemption of said stock and distributing the same as stock dividend.92. 1958 the 24. 1958. W. On May 4. (b) the respondents failed to declare the said stock dividends as part of their taxable income for the year 1958. their declaration as treasury stock dividend in 1958 was a complete nullity and plainly violative of public policy. The essence of a stock dividend was the segregation out of surplus account of a definite portion of the corporate earnings as part of the permanent capital resources of the corporation by the device of capitalizing the same. he further argues. may be re-issued or sold again.700 shares declared as stock dividends were treasury shares. It is a conversion of surplus or undivided profits into capital stock. It is the assumption of both parties that the 24.700 shares.700 shares in the Treasury to be reverted back to the capital account of the company as a stock dividend to be distributed to shareholders of record on December 22. Carrascoso and Janda. but rose to 33 1/3% each after the said declaration. representing a total book value or acquisition cost of P7. as trustees for and in behalf of MANTRASCO. Simmons PhP 2.700 shares are stock dividends.700 shares declared as dividends had been proportionately distributed to the respondents. at a special meeting of MANTRASCO stockholders. 1958.700 shares declared as stock dividends were treasury shares. Since such package 51 .700 shares of Reese as absolutely outstanding shares of Reese's estate until they were fully paid. but only from retained earnings. Selph.660.E. but being in the treasury they do not have the status of outstanding shares. the new certificate was endorsed to the law firm of Ross. a resolution was passed authorizing the reversion of the 24.067. and in the meantime that Reese's interest had not been fully paid. and (c) from 1956 to 1961 several amounts were paid by MANTRASCO to Reese’s estate by virtue of the trust agreement.423. nor in the meetings of the corporation as voting stock.436. 2010-2011 ST DIGESTS payment of Reese's shares. The declaration by the respondents and Reese's trustees of MANTRASCO's alleged treasury stock dividends in favor of the former is actually the respondents’ way of using the trust instrument as a convenient technical device to bestow upon themselves the full worth and value of Reese’s corporate holdings with the use of the very earnings of the companies. and the issuance to the stockholders of additional shares of stock representing the profits so capitalized. Respondents challenged the assessments but was denied by CIR so it appealed to the CTA which rendered judgment absolving the respondents from any liability for receiving the questioned stock dividends on the ground that their respective one-third interest in MANTRASCO remained the same before and after the declaration of stock dividends and only the number of shares held by each of them had changed. They are therefore issued shares. Meanwhile. On the basis of their examination. though it still represents a paid-for interest in the property of the corporation.430.973. Treasury shares are stocks issued and fully paid for and re-acquired by the corporation either by purchase. because dividends cannot be declared by the corporation to itself. RULING: No. The foregoing essential features of a treasury stock are lacking in the questioned shares. 1965 the Commissioner of Internal Revenue issued notices of assessment for deficiency income taxes to the respondents for the year 1958. not having been retired by the corporation re-acquiring it. Lucenario 1 Sem A. the said distribution being in effect a distribution of cash.D. the certificate for the 24. The respondents' interests in MANTRASCO. Consequently. The 24.973. forfeiture or other means. as long as it is held by the corporation as a treasury share. whether in money or in other property.12.660) of the shares redeemed from Reese by MANTRASCO which were subsequently distributed to the respondents as stock dividends in 1958 should be taxed as income of the respondents for that year.729. The examination disclosed that (a) as of December 31. On November 25.L. Such being the true nature of the 24. cannot be declared out of outstanding corporate stock. A reading of the Trust Agreement will reveal that the manifest intention of the parties was to treat the 24. although a treasury share. CIR appealed to the SC contending that the full value (P7. 1964 the trust agreement was terminated and the trustees delivered to MANTRASCO all the shares which they were holding in trust. 1962. being one payable in capital stock.

Consequently. 2833? Held: Stock dividends are not "income. It filed its income tax return for its fiscal year ending September 30.91 as income tax on said stock dividend. He paid under protest.700 shares. coming to a person or corporation for services. There has been no separation or segregation of his interest. e." and as such cannot be taxed under Act No. when it provided for an "income tax. upon demand of CIR Trinidad the sum of P889.g. firms or individuals. to the extent of the aggregate amount paid. as in effect having been distributed to the respondents. those earnings. However.Y. The stockholder who receives a stock dividend has received nothing but a representation of his increased interest in the capital of the corporation. Trial court ruled in favor of CIR. Thus. Issue: Are the stock dividends in the present case “income" and taxable as such under the provisions of section 25 of Act No. as that term is generally used in its common acceptation. for income tax purposes. Such is consequently subject to income tax as being. or profit from investments.800. There was. there is no evidence from which it can be inferred that prior to the passage of the stockholders' resolution of December 22. should be taxed for each of the corresponding years when payments were made to Reese's estate on account of his 24. that is that the income means money received. 2010-2011 ST DIGESTS device was not designed to carry out the usual stock dividend purpose of corporate expansion reinvestment. 2833 which provides for a tax upon income." intended to tax only the "income" of corporations.TAX 1 INCOME TAXATION Prof. a distribution of earnings to the respondents. albeit illegally. With regard to payments made with MANTRASCO earnings in 1958 and the years before. the acquisition of additional facilities and other capital budget items. All the property or capital of the corporation still belongs to the corporation. He cannot use it for the reason that it is still the property of the corporation and not the property of the individual holder of stock dividend. Since the earnings of MANTRASCO over a period of years were used to gradually wipe out the holdings therein of Reese. As those payments accrued in favor of the respondents in 1958 they are and should be liable. managing agents and administrators. They are used to show the increased interest or proportional shares in the capital of each stockholder. Lucenario 1 Sem A. 1957. Fisher instituted an action for the recovery of that sum. A certificate of stock represented by the stock dividend is simply a statement of his proportional interest or participation in the capital of the corporation. while indeed those earnings were utilized in those years to gradually pay off the value of Reese's holdings in MANTRASCO. by MANTRASCO to buy off Reese's shares. 1958 the contributed equity of each of the respondents rose correspondingly. The Legislature. Ratio: Stock dividends represent undistributed increase in the capital of corporations for a particular period. hence this appeal. Dina D. Case is remanded to the CTA for the recomputation of the income tax liabilities of the respondents in accordance with this decision and with the Tax Code. the CIR should not assess the total acquisition cost of the alleged treasury stock dividends in one lump sum. Upon 52 . they cannot be allowed to deflect their income tax responsibilities. in truth and in fact. the CIR’s assessment of fraud penalty and imposition of interest charges are in accordance with law. a flow of cash benefits to the respondents. interest. Note the distinction between extraordinary cash dividend and stock dividends declared: CM HOSKINS V CIR Facts: Petitioner is a domestic corporation engaged in the real estate business as brokers. appropriated and partitioned among themselves the stockholders' equity representing Reese's interests in MANTRASCO. in effect. from 1955 to 1958. FISHER V TRINIDAD Facts: In 1919 the Philippine American Drug Company declared stock dividends and Fisher’s share as a stockholder was P24. but to exclusively expand the capital base of the respondents in MANTRASCO. It was only by virtue of the authority contained in the said resolution that the respondents actually.

Y.TAX 1 INCOME TAXATION Prof. assessed against it deficiency income taxes.977. Hence this appeal. 2010-2011 ST DIGESTS verification of its return. are 'reasonable when measured by the amount and quality of the services performed with relation to the business of the particular taxpayer'. by way of corporate resolutions authorizing payment of inordinately large commissions and fees to its controlling stockholder. Lucenario 1 Sem A. Issue: w/n the bonuses paid may be deductible. The total of said bonuses resulted in a net taxable income. disallowed four items of deduction and assessed against it an income tax deficiency plus interests. Hoskin’s supervision fees may be deductible from the company’s income tax Held: CTA decision affirmed. The amounts it paid to its top officers as bonus or "additional remuneration" were taken either from operating funds from the year's business operations. when added to the salaries. Hoskins. Mr. a domestic corporation. the payment to Mr. CIR. KUENZLE V CIR Facts: Petitioner. M. 'the employees' qualifications and contributions to the business venture' (7) general economic conditions'. and (3) bonuses. In the case of the amounts taken from the general reserve it seems clear that the company had to resort to the use of such reserve funds because the item of expense to be met could not be considered as ordinary or necessary — and was 53 . Held: No. i. petitioner. 1954 and 1955. CIR disallowed as deductions. Issue: w/n the payment of Mr.6% of its stock with four other nominal shareholders holding one share each. ruling that bonuses in question were not reasonable within the purview of the Tax Code. CTA Decision affirmed. CTA affirmed CIR. CIR) Allowing or disallowing as deductible expenses the amounts paid to corporate officers by way of bonus is determined by the CIR exclusively for income tax purposes.977. Hoskins owned 99. bonuses and allowances. the CIR. Conditions precedent to the deduction of bonuses to employees: (1) payment of the bonuses is in fact compensation. Petitioner appeals the CTA’s ruling arguing that payment of the same was allowed via a resolution of the Petitioner’s Board of directors. Specifically. (Kuenzle v. Instead it would appear that they were diverted from this purpose and used to pay the bonuses. Petitioner filed with a CTA a petition contesting the assessments.e. CTA correctly ruled that the additional payment of P99. The CTA upheld CIR's disallowance of one of the items of deduction.91 could not be accorded the treatment of ordinary and necessary expenses allowed as deductible items within the purview of the Tax Code. CIR) Factors in determining the reasonableness of a given bonus as compensation: (1) amount and quality of the services performed with relation to the business (2) payment must be 'made in good faith' (3) character of the taxpayer's business. or from its general reserve. (founder and controlling stockholder) the amount of P99. Hoskins is practically the sole owner of C. (2) must be for personal services actually rendered. to dilute and diminish its corresponding corporate tax liability. Dina D. the corporation so created. amounts paid by petitioner as bonuses to its officers and staff members. Normally. filed its income tax returns for the taxable years 1953. its locality. Upon a verification of the returns.6% of petitioner’s total authorized capital stock and was also a salesman-broker. but he chose to incorporate his business with himself holding virtually absolute control thereof with 99. declaring net losses.. the volume and amount of its net earnings. Mr. Hoskins. the type and extent of the services rendered (4) salary policy of the corporation (5) size of the particular business (6). is bound to conduct itself in accordance with corporate norms and comply with its corporate obligations. receiving a 50% share of the sales commissions earned apart from his monthly salary. it is bound to pay the income tax imposed by law on corporations and may not legally be permitted. Having chosen to use the corporate form with its legal advantages of a separate corporate personality as distinguished from his individual personality. the amounts taken from the first source should have constituted profits of the corporation distributable as dividends amongst its shareholders.91 representing 50% of supervision fees earned. (Kuenzle v.

a transaction took place. was incorporated for the purpose of carrying on in the Philippine Islands the business of wine..). The HK Co. the stockholders by resolution directed that the company be voluntarily liquidated and its capital distributed among the stockholders. When the corporation was dissolved and in process of complete liquidation and its shareholders surrendered their stock to it and it paid the sums in question to them in exchange. Inc. Distribution took place on June 8. It was stipulated in the deed of sale that the sale and transfer of the HK Co. The Board of Directors of Manila Wine Merchants. al. The HK Co. 2010-2011 ST DIGESTS therefore beyond the purview of the provisions of Section 30(a) (1) of the National Internal Revenue Code Petitioner also contend that payment of these is its general salary policy: low salary but with substantial bonuses at the end of each year. and the PH Co... whether individual or corporation. As a result of the sale of its business and assets to PH Co. They could not consistently deem all the business and assets of the corporation sold as of June 1. CFI ruled in favor of CIR hence the appeal. That money in the hands of the corporation formed a part of its income and was properly taxable to it under the Income Tax Law. The Appellants duly filed Income Tax Returns.) Non-resident alien individual appellants contend that if the distributions received by them were to be considered as a sale of their stock to the HK Co. was at the time of the sale of its business in the Philippines. Plantiffs paid under written protest and sought recovery. distributed this surplus to the shareholders (Appellants included). (HK Co. association. the scheme may be utilized to freely achieve some other purpose — evade payment of taxes. 3. Lucenario 1 Sem A. as a going concern. Therefore. is a taxable income or a deductible loss as the case may be. CIR contends that they were liquidating dividends. the gain realized or loss sustained by the stockholder. 1937. beer. which was dissolved and in process of complete liquidation. or insurance company distributes all of its assets in complete liquidation or dissolution. Philippine income tax had been paid by HK Co. SC: The distributions under consideration were not ordinary dividends.. they are taxable as liquidating dividends. 2. Ltd. and still say that said corporation. partnership. al (Plaintiff-appellants) were stockholders of Manila Wine Merchants.).” Appellants received the distributions in question in exchange for the surrender and relinquishment by them of their stock in the HK Co. WISE & CO V MEER Facts: Wise & Co. on the said surplus from which the said distributions were made. and spirit merchants and the other objects set out in its memorandum of association. was a domestic corporation domiciled and doing business also in the Philippines. Meer (CIR) made deficiency assessments. recommended to the stockholders that they adopt resolutions necessary to sell its business and assets to Manila Wine Merchants.. (Subsequent Motion for Reconsideration by Wise.000. (PH Co. et. However the application of such policy should not result in producing a net loss for the employer at the end of the year. et. a foreign corporation duly authorized to do business in the Philippines.Y. its earnings. Inc. the profit realized by them does not constitute income from Philippine sources and is not subject to Philippine taxes. made a distribution from its earnings for the year 1937 to its stockholders. Held: CFI judgment affirmed.) Appellants contend that the amounts received by them and on which the taxes in question were assessed and collected were ordinary dividends. Hence. "since all steps in the carrying out of this so-called sale took place outside the Philippines. for if that were to be the case. distributed ordinary dividends to them thereafter. 54 . joint-account. a Philippine corporation.) Are such liquidating dividends taxable income? SC: Income tax law states that “Where a corporation. a surplus was realized and the HK Co. At a special general meeting of the shareholders of the HK Co. The HK Co. Ltd. 1937.. shall take effect on June 1. The shareholder who received the consideration for the stock earned that much money as income of his own. Dina D. denied) ISSUES and RULINGS: 1. for the sum of P400. on which the defendant. which again was properly taxable to him under the Income Tax Law.." SC: This contention is untenable.TAX 1 INCOME TAXATION Prof.

As capital. and continues in business as before. Subsequently. for the redemption to be considered a legitimate tax scheme. the CA. The test of taxability under the exempting clause of is. Before the realization. Redemption cannot be used as a cloak to distribute corporate earnings. Hence. In its decision. The redemption converts into money the stock dividends which become a realized profit or gain and consequently. As such. whether or not the acquired stock is cancelled. and stock dividend declarations were made. 2010-2011 ST DIGESTS profits. On Exchange of Common With Preferred Shares: Reclassification of shares does not always bring any substantial alteration in the subscriber’s proportional interest. ANSCOR filed a petition for review with the CTA assailing the tax assessments on the redemptions and exchange of stocks." CIR V CA (1999) General Rule: Stock dividends issued by the corporation are considered unrealized gain. RATIO: On Tax on Stock Dividends: 55 . As realized income. in whole or in part. based on the transactions of exchange and redemption of stocks. Essentially. distinct. On Redemption and Cancellation: Redemption is repurchase. ANSCOR further increased its capital stock and proceeded with reclassification of common shares into preferred shares. Dina D.Y. Issue: Whether ANSCOR’s redemption of stocks from its stockholder as well as the exchange of common with preferred shares can be considered as "essentially equivalent to the distribution of taxable dividend. affirmed the ruling of the CTA. stock dividends are nothing but a representation of an interest in the corporate properties. wholly owned and controlled by him and his family. Profits derived from the capital invested cannot escape income tax. The issuance of stock dividends and its subsequent redemption must be separate. had been earned and acquired in the Philippines. whether income was realized through the redemption of stock dividends. this petition. the Tax Court reversed CIR’s ruling. like priority in dividend declarations or absence of voting rights yet neither the Facts: Don Andres Soriano formed ANSCOR." making the proceeds thereof taxable under the provisions of the above-quoted law. it is not yet subject to income tax. ANSCOR’s capital stock was increased. But the exchange is different – there would be a shifting of the balance of stock features. The determining factor for the imposition of income tax is whether any gain or profit was derived from a transaction. ANSCOR’s redemption stock dividends is considered as essentially equivalent to a distribution of taxable dividends for which it is LIABLE for the withholding tax-at-source. including those from whose proceeds the distributions in question were made. and cannot be subjected to income tax until that gain has been realized. and not related.TAX 1 INCOME TAXATION Prof. Pursuant to a Board Resolution. the proceeds of the redeemed stock dividends can be reached by income taxation regardless of the existence of any business purpose for the redemption.000 shares originally issued in 1937. and assets. the corporation gets back some of its stock. Lucenario 1 Sem A. Don Andres died.963 shares of the 5. Revenue examiners issued a report proposing that ANSCOR be assessed for deficiency withholding tax-at-source. essentially equivalent to the distribution of a taxable dividend. it is clear that said distributions were income "from Philippine sources. the apparent intention to avoid tax becoms doubtful as the intention to evade becomes manifest. After examining ANSCOR’s books of account and records. reducing the estate’s shareholdings. the major part of which consisted in the purchase price of the business. distributes cash or property to the shareholder in payment for the stock. retired or held in the treasury. the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent it represents a distribution of earnings or profits accumulated. a reacquisition of stock by a corporation which issued the stock in exchange for property. ANSCOR successively redeemed shares from the Don Andres estate in effect. and his shareholdings went to his estate and to his wife. the stockholder’s separate property. Exception: If a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption. Otherwise. Held: CA decision modified. In a petition for review. He subscribed to 4.

or that he paid interest.000. as to the advances from ET Yuchengco. 2. and that said percentage should be in lieu of all taxes on the franchise or earnings thereof.Y. since he “paid” them off by assigning his shares in a certain Mico Equities. informal dividends. The burden of proving that such amount was a loan is upon Yuchengco. under and by virtue of a special franchise granted by the Philippine Commission under which the grantee.000 which he advanced are indeed loans and that he has the intent to repay.890. plaintiff paid to the stockholder corporations as dividends duly and lawfully declared by the plaintiff for said years the aggregate sum of P1. The court held that the dividend income pertaining to the remaining shares should be taxable income to him for the year. 2833 as amended). petitioner was able to prove through the accounts payable ledger of ET Yuchengco Inc that the PHILIPPINE TELEPHONE & TELEGRAPH COMPANY v. Issues: 1. 2010-2011 ST DIGESTS reclassification nor exchange per se. produces no realized income to the subscriber. YUCHENGCO V CIR amount of P126. Yuchengco and his family owned 99. and he failed to prove such.106) which he held in trust for various corporations. The deficiency of Yuchengco arose from disallowance by the CIR of certain deductions he claimed from his income tax return and the addition of incomes he allegedly earned in the same year.00 at regular intervals during the year. taxable as income to Yuchengco. yields realize income for tax purposes. Yuchengco’s contention that such amount are loans. Dina D.which is not a flow of wealth for tax purposes.890. levied and assessed against the plaintiff. both of which stockholders are foreign corporations During the aforesaid years 1927. However. as well as during the years prior thereto. Inc.) The court found that Yuchengco was only a nominal holder of some of the shares. should pay to the Insular Treasurer each year. there is no evidence that Yuchengco gave a note or any containing fixed terms for repayment. Certifications were issued as evidence of Yuchengco’s nominal holdings.00 were not bona fide loans but were in reality. 102 shares out of 38. the exchange of shares.) whether dividend income from Rizal Commercial Banking Corporation are taxable income. CIR Facts: Plaintiff is a domestic corporation transacting the business of furnishing telephone service in the Island of Luzon. two per centum (2%) of their gross receipts from the telephone. without more. the corporation duly paid to the Insular Treasurer the full percentages corresponding of the franchise referred to in the last preceding paragraph. The defendant. in the Philippine Islands. 1928 and 1929. In the year 1974. In this case. or that he gave any security for such “loans”. telegraph or other electrical transmission business transacted under said franchise. The mere effect of such assignment is the offsetting of the “loans” but such is not enough evidence that the amount was a bona fide loan. their successors or assigns. However the certifications only accounted for part of the shares in Yuchengco’s name (only 16.99% of the total outstanding shares of PMMIC.055. Facts: Appeal seeking redetermination of a deficiency income tax which CIR assessed against Yuchengco for the year 1974. Held: 1. to PMMIC is unavailing. 2. he was merely holding such shares in trust for the corporations and that all dividends were paid to these corporations which declared and paid the taxes due thereon.000. and demanded of the latter the payment of the sum of 56 .TAX 1 INCOME TAXATION Prof. he received the total of P 1. 1928 and 1929. and who received dividends from the plaintiff out of its operations under said franchise. acting under the provisions of sections 9 (b) and 13 (f) of the Income Tax Law (Act No. were the Philippine Islands Telephone & Telegraph Company and the Telephone Investment Corporation. During the years 1927. Among the stockholders holding stock in the plaintiff corporation during the said years 1927. There is only a modification of the subscriber’s rights and privileges . Moreover. Lucenario 1 Sem A. are disguised dividends. that although the shares were in his name.) The advances made by Yuchengco from PMMIC in the amount of P 1.014. 1928 and 1929.) whether the advances taken by Yuchengco from Pan Malayan Management Investment Corporation and ET Yuchengco.

and so is subject to taxation thereupon.014. there being no constitutional restriction.. Held: YES. notwithstanding the tax exemption or commutation granted to plaintiff by its charter stated in paragraph 3 hereof. Corporation paid under protest. There seems to be no question that the dividends of a domestic corporation. whether it represents earnings or profits of the corporation or an increase in the value of corporate assets. and evidently it was not the intention of the Philippine Commission to extend such privilege to parties other than the original holders of the franchise and their grantee. Issue: WON the appellant is bound to pay said taxes in view of the exemption granted in its favor by section 5 of Act No. Reference is herein made to said cases. and representing a distribution to stockholders of profits of the corporation. as distinguished from one paid in treasury stock or in stock of a subsidiary or other corporation.. and Posadas vs. Barnes & Co. (Swan Brewing Co. A. Menzi (73 Law. it has been held that a stock dividends in the ordinary sense. being a dividend on corporate stock paid in newly issued stock of the corporation.J.65 as income taxes on the aforesaid amount of P1. C. paid in money or its equivalent. At the beginning of the year 1923 the plaintiff purchased and acquired all the assets. C. and the taxability of a dividend is not affected by the fact that the profits out or been accumulated by the corporation during a long period of time or even before taxes on income were imposed by law. 1368 of the Philippine Commission. although on the latter point there is also authority to the contrary..TAX 1 INCOME TAXATION Prof. vs. 1573 and cases therein cited. is income of the recipients.) In the cases of Posadas vs. and has since. PROCEEDS FROM LIFE INSURANCE 57 . during all time covered by the complaint. within the meaning of the statute. ANNUITIES AND INSURANCE PROCEEDS. and accordingly is taxable statute. are subject to the payment of said tax. PASSIVE INCOME . such dividends may be taxed and that the statute discloses a purpose to tax them. . 1572. 2010-2011 ST DIGESTS P30. ... 1573 and cases cited therein. the exemption only relates to the income and earnings of the franchise and it should not be construed as including those which cease to belong to the franchise or to the corporation holding it. Rex [1914]. as distinguished from a stock dividends representing a capitalization of profits or of an increase in the value of corporate assets. 231-P.055.) The same rule applies to dividends which are paid and delivered to the stockholders in the form of stock dividends: Except where a statute imposing a tax upon incomes otherwise specifically provides. (61 C. Dina D. liabilities and franchises of the said Philippine Islands Telephone & Telegraph Company. is income. for they have been delivered to its stockholders as their own. Warner. because they ceased to be the property of the corporation and became of the stockholders. the dividends paid by the plaintiff as stated in paragraph 6 hereof. only for the purpose of showing that if stock dividends are subject to income tax. GROSS INCOME AND EXCLUSIONS. The Philippine Legislature has power to lay a tax in respect of the advantage resulting to recipients from the allotment and delivery of such dividends shares. The law did not exempt from the payment of said tax those dividends paid and delivered to stockholders. (61 C.421. said: . EXCLUSIONS. among other things.J. . and from distributions of capital and liquidating dividends. pp. which are paid and delivered in cash to foreign corporations as stockholders. been operating a telephone system on the Island of Luzon under the franchise granted by Act No. within the meaning of a statute imposing a tax upon incomes.) Respondent rightly concedes that.) the Supreme Court of the United States. ed. 1368 of the Philippine Commission establishing said franchise. . . coming from this court. since corporate profit first become income of the stockholders when they are distributed as dividends.Y. An ordinary dividend on corporate stock. Lucenario 1 Sem A. 339 et seq. a fortiori the dividends paid and delivered in cash to stockholders should be subject thereto. As the law clearly provides. .

It is not so certain that the proceeds of life insurance policies paid to corporate beneficiaries upon the death of the insured are likewise exempt. it may be said that the law is indefinite in phraseology and does not permit us unequivocally to hold that the proceeds of life insurance policies received by corporations constitute income which is taxable. Velhagen. the clause is inserted "exempt from the provisions of this law. WINNINGS/AWARDS/REWARDS PASSIVE INCOME . 740 disallowing in audit the payment of informer's reward to petitioner Savellano in the NCA case on the ground that payment of an informer's reward under Section 281 of the National Internal Revenue Code is conditioned upon the actual recovery or collection of revenues. Inc. or P2. to protect itself against the loss it might suffer by reason of the death of its manager.. resulting in a zero effect in revenues realized or recovered. particularly when in the exemption in favor of individual beneficiaries in the chapter on this subject..74 as income tax on the proceeds of the insurance policy mentioned in the preceding paragraph. By a letter dated November 28. Elser.986. Inc.165. Respondent 58 . The plaintiff charged as expenses of its business all the said premiums and deducted the same from its gross incomes as reported in its annual income tax returns. INC V. in order to protect itself against the loss that it might suffer by reason of the death of its manager. Canada. Considering. We do not believe that this fact signifies that when the plaintiff received P104. 1930. Savellano furnished the Bureau of Internal Revenue (BIR) with a confidential affidavit of information denouncing the National Coal Authority (NCA) and the Philippine National Oil Company (PNOC) for non-payment of taxes totalling P234 Million on interest earnings of their respective money placements with the Philippine National Bank (PNB) since October 15. JUAN POSADA Facts: Plaintiff.. Upon the death of said A.000. Fabrica de Tabacos. thru its local agent E.88. are taxable as income under the Philippine Income Tax Law Held: NO. the purport of the stipulated facts. THE COMMISSIONER OF INTERNAL REVENUE v THE COMMISSION ON AUDIT Facts: Petitioner Tirso B. it thereby realized a net profit in this amount. A. together with the interests and the dividends accruing thereon.957. speaks of the proceeds of life insurance policies as income. But at least.00 paid by NCA. took out the insurance on the life of its manager. in exempting individual beneficiaries. which tax the plaintiff paid under instant protest on July 2. and that defendant overruled said protest on July 9. 1986. therefore. considering the uncertainty of Philippine law. since two (2) government agencies were involved.924.75. designated itself as the sole beneficiary of said policy on the life of its said manager. Respondent Commission on Audit (COA) rendered COA Decision No. In reality. Velhagen in the year 1929. but this is a very slight indication of legislative intention. and no such revenue or income was actually realized or recovered on any benefit accrued to the government.148. El Oriente. what the plaintiff received was in the nature of an indemnity for the loss which it actually suffered because of the death of its manager. who had had more than thirty-five years' experience in the manufacture of cigars in the Philippines. The income realized by the BIR out of the withholding taxes paid by the NCA was a reduction of the income of the latter. Lucenario 1 Sem A. Jr. 2010-2011 ST DIGESTS EL ORIENTE FABRICA DE TABACOS. It will be recalled that El Oriente. aggregating P104. Fabrica de Tabacos. the plaintiff received all the proceeds of the said life insurance policy. It is true that the Income Tax Law. an insurance policy on the life of the said A. of Toronto. procured from the Manufacturers Life Insurance Co. Dina D. then BIR Commissioner Bienvenido Tan. Issue: WON the proceeds of insurance taken by a corporation on the life of an important official to indemnify it against loss in case of his death. which deductions were allowed by the defendant upon a showing made by the plaintiff that such premiums were legitimate expenses of its (plaintiff's) business.E.397. 1984 to said date. 1930.88 from the insurance on the life of its manager. It is sufficient for our purposes to direct attention to the anomalous and vague condition of the law. and considering the lack of express legislative intention to tax the proceeds of life insurance policies paid to corporate beneficiaries. GROSS INCOME AND EXCLUSIONS. The defendant Collector of Internal Revenue assessed and levied the sum of P3. Velhagen for the sum of $50.957. recommended to the Minister of Finance payment to petitioner Savellano of an informer's reward equivalent to 15% of the amount of P15.TAX 1 INCOME TAXATION Prof.Y." we deem it reasonable to hold the proceeds of the life insurance policy in question as representing an indemnity and not taxable income. It is certain that the proceeds of life insurance policies are exempt.

Inasmuch as the compromise settlement arose from a money judgment involving ownership over real property.] Facts: The petitioner was awarded the following as money judgments 1) rental income of subject properties and improvements from 1967 up to the time of the satisfaction of the judgment. DAMAGES ISHWAR JETHMAL RAMNANI AND SONYA JETHMAL RAMNANI. Unless transferred to the Philippine government through the vehicle of taxation. when said revenues are subjected to tax. as provided in Article 7(1) of the RP-US Tsx Treaty where the location of the real property is the situs of income taxation and not the residence of the alienator. under the following terms: a. 1993 or on or before September 3. CASE NO. on July 19. possess legal personalities separate and distinct from the Philippine government. Thereafter the Regional Trial Court (Branch 119) of Pasay City.000. OTHER TYPES OF PASSIVE INCOME. c. Clearly. casual gains. 5108. it being sufficient for its operation that the person or entity concerned is subject to.000. The law on the matter makes no distinction whatsoever between delinquent taxpayers in this regard. GROSS INCOME AND EXCLUSIONS. respondent. the portion thereof corresponding to such tax becomes.Y.A.00. September 13.TAX 1 INCOME TAXATION Prof. vs. 5) Attorney's fees equal to 10% of total award. revenue laws. Although both are government-owned and controlled corporations. 2) payment of the cash value of the subject two parcels of land and their improvements. b.00. PASSIVE INCOME . profits. no part of their revenues is available for appropriation by the Legislature for expenditure in government projects. Issue: WON petitioners are resident alien Held: Yes. P40 Million upon the signing hereof by the Parties. whether private persons or corporations. to be applied to and expended for their own exclusive purpose. and the informer's report thereof resulted in the recovery of revenues. NCA and PNOC. such revenues remain said agencies' in their entirety. and violated. or public or quasi-public agencies. 1993 or on or before August 4.One of the reasons for respondent COA's disallowance of the informer's reward under consideration is that there was actually no revenue realized or recovered as two (2) government agencies were involved. 2010-2011 ST DIGESTS COA also impugned the propriety of the claim for informer's reward based on inter-governmental violations. 1993. 3) moral damages of P500. Issue: Whether or not the COA’s position as to the infiormer’s reward is correct Held: No. petitioners. and income. and 6) Legal interest of 6% per annum from the time this Judgment becomes final until they are fully paid. Their revenues do not automatically devolve to the general coffers of the government. then. 1993 a Tripartite Agreement was entered into by the parties to finally settle the award for money judgment at P65 Million. Dina D. However. 4) exemplary damages of P200. 1996. issued an Order for the partial writ of execution . P10 Million within thirty (30) days from July 5. NCA and PNOC perform proprietary functions. This view is simplistic and merits no concurrence. It overlooks the fact that the two (2) government agencies involved. revenue for the government accruing to the General Fund. Lucenario 1 Sem A.T. The establishment of a home even temporarily here in the Philippines for the accomplishment of a purpose even if he has the intention to return to his domicile abroad categorizes an individual as a 59 . the income is taxable in the Philippines notwithstanding the fact that the recipients thereof are American citizens. THE COMMISSIONER OF INTERNAL REVENUE. in its own. [C. The BIR in a letter that 30% shall be held from the payment of the 65M which represents the final income tax on the receipt of the income by non-resident American citizen. 1993. That the informer's reward was sought and given in relation to tax delinquencies of government agencies provides no reason for disallowance. such as rents. P15 Million within sixty (60) days from July 5.

1993. DEDUCTIONS IN GENERAL ZAMORA v.265. while not all the itemized expenses are supported by receipts. Zamora for dollar allocation shows that she went abroad on a combined medical and business trip. which is already another distinct and separate income taxpayer. 1992. should be subject to the 5% withholding tax pursuant to Section 50(b) of the NIRC. ISSUE: WON the margin fees were deductible from gross income either as a tax or as an ordinary and necessary business expense HELD: Neither. 1990. Claims for the deduction of promotion expenses or entertainment expenses must also be substantiated or supported by record showing in detail the amount and nature of the expense incurred. L-15290. COLLECTOR [G. No. Petitioner has paid his Community Residence Certificates for the years 1987. Neither are they necessary and ordinary business expenses. absolute certainty is usually not possible.R. WON to allow as deduction all or merely one-half of the promotion expenses of Mrs. representing rental income. Manila.000. Nos. if it chooses. the moral and exemplary damages as well as the attorney's fees are not subject to income tax.Y. The fees were paid for the remittance by ESSO as part of the profits to the head office in the United States. 1991. The amount of P24. The moral and exemplary damages as well as the attorney's fees are not subject to income tax. upon the taxpayer whose inexactness is of his own making. The Collector of Internal Revenue found that the promotion expenses incurred by his wife for the promotion of the Bay View Hotel and Farmacia Zamora were not allowable deductions. 1988.] FACTS: Mariano Zamora. CIR [G. To be deductible as a business expense. 1993 and you are set to leave the country very soon. R-1 to R-7. The then Commissioner of Immigration even approved the change of his status of admission from temporary visitor to immigrant/resident alien under Section 13(e) of the Philippine Immigration Act (Exhibit "B"). in relation to Section 1(c) of Revenue Regulations No. There is no doubt that petitioner Ishwar Ramnani is an American citizen who frequently comes to the Philippines for the most part of the year to oversee his various investments as shown by his passport entries. The statement of respondent in her Ruling. DEDUCTIONS AND EXEMPTIONS.00) should not therefore form part of the taxable base for income tax purposes since this is not income but a mere return Or capital.R. considered 50% of the said amount as business expense and the other 50%. While in situations like the present. the CTA should make as close an approximate as it can. on the ground that.] FACTS: Petitioner ESSO claimed as ordinary and necessary expenses in the same return the margin fees it paid to the Central Bank on its profit remittances to its New York head office.000. 1993 and 1994 (Exhibits R. inclusive). Mariano Zamora contends that the whole amount of the promotion expenses in his income tax returns. Lucenario 1 Sem A. The capital investment of P600. the absence of some supporting receipts has been sufficiently and satisfactorily established. ISSUE: In the absence of receipts. Held: Yes. Issue: WON the money judgment issued in their favor are subject to income tax. owner of the Bay View Hotel and Farmacia Zamora. 60 . filed his income tax returns. 1963. the expense must be paid or incurred in carrying on a trade or business. 28508-9. Dina D. 2010-2011 ST DIGESTS resident. 6-85. dated October 20. Such remittance was an expenditure necessary and proper for the conduct of its corporate affairs. 1989. should be allowed and not merely one-half of it.TAX 1 INCOME TAXATION Prof. July 7.00. the Collector and the CTA in their decisions. Considering that the application of Mrs. The margin fees were imposed by the State in the exercise of its police power and not the power of taxation. There having been no means by which to ascertain which expense was incurred by her in connection with the business of Mariano Zamora and which was incurred for her personal benefit.879. 1989. not all of her expenses came under the category of ordinary and necessary expenses. bearing heavily. Zamora claimed in Mariano Zamora's income tax returns HELD: One-half only. ESSO STANDARD v. it is very clear that you are a non-resident alien not engaged in trade or business in the Philippines" is not supported by evidence and the records of this case. as her personal expenses. that "since you just came to the Philippines last September 10. May 31. part thereof constituted her personal expenses.00 (US$150.

The question whether the sum is due from Gancayco as deficiency income tax hinges on the validity of his claim for deduction of two (2) items. 1961. the right to a deduction depends on a number of factors such as but not limited to: the type and size of business in which the taxpayer is engaged. the volume and amount of its net earnings. HOSKINS v. CIR G. 1976. a domestic corporation engaged in the development and management of subdivisions. namely: (a) for farming expenses. and should not. 2003.] FACTS: In its income tax return. there is basis for holding that the operation of subdivisions is really incidental to the main business of the broker.R.] FACTS: Petitioner Santiago Gancayco seeks the review of a decision of the Court of Tax Appeals. As to the supervision fees for the development and management of the subdivisions. The subject expense for the advertisement of a single product is inordinately large. sale of subdivision lots and collection of installments due for a fee which the real estate owners pay as compensation for each of the services rendered. respondent corporation claimed as deduction. or betterments made to increase the value of any property or estate. No. COLLECTOR [G. April 20. To be deductible from gross income. too. and (b) for representation expenses. the services rendered by Hoskins in collecting the amounts due on the sales of lots on the installment plan are incidental to its brokerage service in selling the lots.R. No. ISSUE: WON the two claimed deductions are allowable C. contending that said income is subject to the real estate broker's percentage tax. GENERAL FOODS [G. hence. There being no hard and fast rule on the reasonableness of an advertising expense. The amount claimed as media advertising expense for ‘Tang’ alone was almost one-half of its total claim for marketing expenses. its commissions on installment sales should likewise be taxable. GANCAYCO v. The development. Lucenario 1 Sem A. failed to pay the real estate broker's tax on its income derived from the supervision and collection fees. June 22. If the broker's commissions on the cash sales of lots are subject to the brokerage percentage tax.’ one of its products. Furthermore. Consequently. Hence. the amount for media advertising for ‘Tang. management and supervision services were necessary to bring about the sales of the lots and were inseparably linked thereto. requiring him to pay deficiency income tax. no deduction shall be allowed in respect of any amount paid out for new buildings or for permanent improvements. the nature of the expenditure itself. The cost of farm machinery. be considered as business expense but as capital expenditure. HELD: No. ISSUE: WON the subject media advertising expense for ‘Tang’ incurred by respondent was an ordinary and necessary expense fully deductible under the NIRC HELD: Not deductible.R.Y. No. are subject to the real estate broker's percentage tax. it was almost double the amount of respondent corporation's general and administrative expenses. Deductions for income tax purposes partake of the nature of tax exemptions. they. L-28383. April 24. which normally should be spread out over a reasonable period of time. 2010-2011 ST DIGESTS CIR v. the intention of the taxpayer and the general economic conditions. petitioner-appellant claimed that the supervision and collection fees do not form part of its taxable gross compensation. therefore. In computing net income. among other business expenses. With respect to the collection fees. the Commissioner of Internal Revenue demanded the payment of the percentage tax plus surcharge. Dina D. 143672. the subject advertising expense must be ordinary and necessary.] FACTS: Petitioner-appellant. which fees were paid out of the proceeds of the sales of the subdivision lots.TAX 1 INCOME TAXATION Prof. ISSUE: WON the supervision and collection fees received by a real estate broker are deductible from its gross compensation HELD: No. equipment and farm building represents a capital investment and is not an allowable 61 . L-13325. On the other hand. Said venture of respondent to protect its brand franchise was tantamount to efforts to establish a reputation. must be strictly construed. which is the sale of the lots on commission.M.

Held: Philippine Acetylene Company is not an industry as defined in Sec 6 of RA No. and interests on savings in bank accounts are incomes. 2010-2011 ST DIGESTS deduction as an item of expense.TAX 1 INCOME TAXATION Prof. it is a tax on income.R. It imported from the United States a custombuilt liquefied petroleum gas tank. For the said importation.] FACTS: Petitioner is a domestic corporation engaged in mining. COMMISSIONER OF COMPANY CUSTOMS VS PHILIPPINE ACETYLENE Facts: Philippine Acetylene Company is engaged in the manufacture of oxygen. under Certificate of Renewal No. It cites as basis for its exemption Sec 6 of RA No. the company was assessed a special import tax amounting to PhP 3. not in merely packaging an already finished product. Furthermore. To be an industry. a fraction was disallowed. As for Gancayco's claim for representation expenses. imported into the Philippines. ISSUE: WON the 35% transaction tax is a business tax that constitutes an allowable deduction from gross income HELD: No. as it is not an industry exempt from the payment of such tax. August 16. It is nothing but packaging. The process is certainly not production in any sense. Pursuant to this authority. the liquefied gas. 1394 and. the petitioner borrowed funds from several financial institutions and paid the corresponding 35% transaction tax due thereon. It was granted by the Securities and Exchange Commission. 1394. WESTERN MINOLCO v. yet they are not included in the gross income when income taxes are paid because these are subject to final withholding taxes. and packaging of liquefied petroleum gas in cylinders and tanks. they are not deductible. 1394.683. whether or not certain taxes are on income is not necessarily determined by their deductibility or non-deductibility from gross income. were not an ordinary expense but a capital expenditure. acetylene and nitrogen. petitioner could not specify the items constituting the same. The operation for which the company employs the gas tank in question does not involve manufacturing or production. The company paid the tax under protest. 1983. Dina D. but is merely placed in smaller cylinders for convenience. for. The petitioner who borrowed funds from several financial institutions by issuing commercial papers merely withheld the 35% transaction tax before paying to the financial institutions the interests earned by them and later remitted the same to the respondent Commissioner of Internal Revenue.1394 which states that special import taxes shall not be imposed on machinery. shares of stock. Whatever collecting procedure is adopted does not change the nature of the tax. The company maintains that it is an industry as defined in Sec 6 of RA No. The decision of the CTA is reversed and Philippine Acetylene Company is held liable for the payment of the special import tax. capital gains on real property. The 35% transaction tax is imposed on interest income from commercial papers issued in the primary money market. Such disallowance is justified by the record. invoices or vouchers of the expenditures. L-61632.00. accessories and spare parts. The Court of Tax Appeals sustained Philippine Acetylene Company’s contention and declared the latter exempt from the payment of the special import tax. Petitioner applied for a refund alleging that it was not liable to pay the 35% transaction tax. Issue: Whether or not Philippine Acetylene Company may be considered engaged in an industry as contemplated in Sec 6 of RA No.Y. equipment. R-1056. when obtained from the refinery. exempt from the payment of the special import tax. therefore. When sold to consumers. Income in the form of dividends. authority to borrow money and issue commercial papers. Hence. Philippine Acetylene Company argues that it is exempt from the payment of the special import tax. or when or on whom or on what they were incurred. 62 . Being a tax on interest. No. the farming expenses allegedly incurred for clearing and developing the farm which were necessary to place it in a productive state. has to be placed in some kind of container to facilitate its transportation. the company must be engaged in some productive enterprise. CIR [G. Accordingly. it undergoes no change or transformation. for the use of industries. apart from the absence of receipts. Lucenario 1 Sem A. particularly copper concentrates for export mined from mineral lands.

BPI contends that BPI and PNB are banks of similar type and operating under similar conditions. not a manufacturer. in turn. The CTA held that Arnoldus Carpentry Shop. It is not liable for the deficiency contractor’s tax assessed by the CIR. The charter contains a clause to the effect that no law shall be made or enforced imposing a charge or taxation upon BPI which shall not apply equally to other banks of a similar type operating under similar conditions. Inc. protested the assessment maintaining that it is a manufacturer and therefore entitled to tax exemption on its gross export sales under Sec 202 (e) of the National Internal Revenue Code. exporting. Inc.. Inc. Inc. The Court affirmed the decision of the CTA holding that Arnoldus Carpentry Shop. of any and all nature and description. A contractor under Sec 205 (16) [now Sec 170 (q)] of the Tax Code is one whose activity consists essentially of the sale of all kinds of services. 2612. processing.Y. Inc. under Sec 187 (x) [now Sec 157 (x)] of the Tax Code. The CIR did not collect taxes upon the circulating notes of PNB because of the exemption granted to the latter by Sec 18 of Act No.23) plus charges and interest. The business of Arnoldus Carpentry Shop. Thus. is an independent contractor under Sec 205 (16) [now Sec 169 (q)] of the Tax Code. 1790. Inc. After the examination. Dina D. importing. manufacturing. is a manufacturer as defined in the Tax Code and not a contractor. Inc. the CIR concluded that Arnoldus Carpentry Shop. Under Sec 18 of the PNB Charter. Lucenario 1 Sem A. The company sells goods which it keeps in stock and not services. The CIR stood by its initial finding that Arnoldus Carpentry Shop. through Act No. BANK OF THE PHILIPPINE ISLANDS VS TRINIDAD Facts: Bank of the Philippine Islands is a domestic banking corporation. REVENUE VS ARNOLDUS Facts: Arnoldus Carpentry Shop. Inc. The Philippine Legislature. effectively reversing the decision of the CIR. therefore. is one who by physical or chemical process alters the exterior texture or form or inner substance of any raw material or manufactured or partially manufactured product. 2612. The term manufacturer had been considered in its ordinary and general usage. does not fall under this definition. is a manufacturer or contractor. On the other hand. was assessed deficiency tax (PhP 88. a manufacturer. BPI argues that it should also be exempt from the payment or taxes upon its circulating notes. doors. etc. Arnoldus Carpentry Shop. 2010-2011 ST DIGESTS COMMISSIONER OF INTERNAL CARPENTRY SHOP. Essentially. trading and dealing in cabinet shop products. buying. Inc. it is provided that the circulating notes of PNB shall be exempt from any and all taxes. Inc. The Commissioner of Internal Revenue conducted an investigation of the business tax liabilities of Arnoldus Carpentry Shop. Held: Arnoldus Carpentry Shop. Inc. BPI should also be entitled to the same exemptions and privileges granted to PNB. Whether or not BPI is exempt from the payment or taxes upon its circulating notes 63 . Arnoldus Carpentry Shop. As a result of this classification. windows. selling. cabinets. not liable for the amount assessed as deficiency contractor’s tax. is a manufacturer. Issue: Whether Arnoldus Carpentry Shop. is a domestic corporation engaged in the business of preparing. The Collector of Internal Revenue collected internal revenue taxes upon BPI’s circulating notes issued by the bank for the years 1919-1921. Inc. is a manufacturer.TAX 1 INCOME TAXATION Prof. Issue: Whether or not BPI and PNB are banks of similar type and operating under similar conditions. If found a manufacturer. the company is. falls under this definition. The company is entitled to the tax exemption under Sec 202 (d) and (e) [now Sec 167 (d) and (e)] of the Tax Code. wood and metal home and office furniture. including their component parts and materials. created the Philippine National Bank. This tax deficiency was a consequence of the 3% tax imposed on the company’s gross export sales which. and Arnoldus Carpentry Shop. resulted from the CIR’s finding that categorized the company as a contractor. operating under a special charter granted by the Philippine Legislature through Act No. is a contractor. Inc. Arnoldus Carpentry Shop. INC.972. appealed to the Court of Tax Appeals.

the former being the subsidiary of the latter. so unless BPI can show clearly that it has been granted the status of exemption. BPI is not exempt from the payment of taxes upon its circulating notes. This Section allows the collection from banks of taxes on capitals. or defend crime. GM appointed Yutivo as importer for the Visayas and Mindanao. Issue: Whether or not SM has a personality separate and distinct from Yutivo. The intention to minimize taxes. an American corporation licensed to do business in the Philippines. VS COURT OF TAX APPEALS Facts: Yutivo Sons Hardware Co. 64 . as already stated. sold them to the public in the Visayas and Mindanao. The Court used Sec 1499 of the Administrative Code of 1917 in ruling that BPI is not tax exempt. when used in the context of fraud. (2) that assuming that the separate personality of SM may be disregarded.Y. and (3) that the surcharge has been erroneously imposed by the CIR. This is because fraud is never lightly to be presumed. Its shares were subscribed in five equal proportions by the descendants of the founders of Yutivo. or in the case of two corporations merge them into one. ALLOCATION YUTIVO SONS HARDWARE CO. The CTA ruled in favor of CIR and ruled that the creation of SM is for Yutivo to evade taxes. rendered it unnecessary to decide the question as to whether BPI and PNB are of similar type or operating under similar conditions. "when the notion of legal entity is used to defeat public convenience. Dina D. As importer. Said tax being collected only once on original sales. 2010-2011 ST DIGESTS Held: The Court noted that subsequent to the filing of the action. the latter. branch. was organized to engage in the business of selling cars. then it cannot avail itself of such entitlement. However. Lucenario 1 Sem A. Held: It is an elementary and fundamental principle of corporation law that a corporation is an entity separate and distinct from its stockholders and from other corporations to which it may be connected. instrumentality or alter ego of the latter. paid sales tax on the basis of its selling price to SM. must be proved to exist by clear and convincing evidence amounting to more than mere preponderance." However. DEDUCTIONS AND EXEMPTIONS. SM was not organized purposely as a tax evasion device. The CIR claimed that the taxable sales were the retail sales by SM to the public and not the sales at wholesale made by Yutivo to the latter inasmuch as SM and Yutivo were one and the same corporation. the sales tax already paid by Yutivo should first be deducted from the selling price of SM in computing the sales tax due on each vehicle. In the same way that GM used to pay sales taxes based on its sales to Yutivo. This development. Yutivo was investigated by the CIR and was assessed deficiency sales tax plus surcharge. justify wrong. Yutivo alleged the following before the Court of Tax Appeals: (1) that there is no valid ground to disregard the corporate personality of SM and to hold that it is an adjunct of petitioner Yutivo. SM paid no sales tax on its sales to the public. PNB paid to the CIR PhP 519. it may be disregarded. When GM withdrew from the Philippines. GM paid sales tax prescribed by sections 184. in turn. protect fraud. or legally entitle him to a refund of any taxes which he has paid. Inc. is collected only once on original sales. The fact that one person may not have paid or been required to pay his taxes does not exempt another from the payment of his legal taxes. Exemptions are strictly construed against the taxpayer. as it is owned and controlled by Yutivo and is a mere subsidiary. Yutivo paid no further sales tax on its sales to the public. Southern Motors. DEDUCTIONS IN GENERAL.TAX 1 INCOME TAXATION Prof. and Yutivo continued its previous arrangement of selling exclusively to SM. deposits.043. and since such sales tax." the law will regard the corporation as an association of persons. 185 and 186 of the Tax Code on the basis of its selling price to Yutivo. and circulation. When the corporation is the "mere alter ego or business conduit of a person. according to the Court. adjunct conduit.03 as taxes upon its circulating notes. it runs counter to the fact that there was no tax to evade. Moreover. is a domestic corporation engaged in the importation and sale of hardware supplies and equipment. and cannot be justified by a mere speculation. trucks and spare parts. as importer. the cars and trucks purchased by Yutivo from GM were sold by Yutivo to SM which. It is not entitled to a refund of the payments it made for that purpose. It bought a number of cars and trucks from General Motors Overseas Corporation.

Atlas elevated the issue to the Court of Tax Appeals. K. Atlas claimed the following items as deductible from its gross income: (1) transfer agent’s fee. In GR No. Dina D. and should. Macker & Co. L-26924. Under Sec 30 (a) (1) of the Tax Code. Lucenario 1 Sem A. contends that such fee constitutes an ordinary and necessary business expense.499. All transactions between Yutivo and SM are recorded and effected by mere debit or credit entries against the reciprocal account maintained in their respective books of accounts and indicate the dependency of SM as branch upon Yutivo. (2) stockholders relation service fee. (5) provision for contingencies. the cost of obtaining stock subscription.. 2010-2011 ST DIGESTS The SC however agreed that SM was actually owned and controlled by petitioner as to make it a mere subsidiary or branch of the latter created for the purpose of selling the vehicles at retail and maintaining stores for spare parts as well as service repair shops. For one thing. Whether PhP 17. The Commissioner of Internal Revenue disallowed all these items. promotion expenses. ORDINARY/NECESSARY BUSINESS EXPENSES ATLAS CONSOLIDATED MINING & COMMISSIONER OF INTERNAL REVENUE DEVT CORP VS Facts: Atlas Consolidated Mining & Devt Corp is a corporation engaged in the mining industry. and (3) it must be paid or incurred in carrying a trade or business. especially when taken together. and commission or fees paid for the sale of stock reorganization are capital expenditures. therefore. Macker & Co. expenses relating to the recapitalization and reorganization of a corporation. according to the Court. The corporation 65 . The Court sustained the ruling of the CTA that the expenditure paid to P.98 or PhP 6. DEDUCTIONS AND EXEMPTIONS. K. Whether or not the US stock listing expenses should be disallowed for not being ordinary and necessary and not incurred in trade or business. The stockholders relation service fee is not deductible from Atlas’ gross income. (2) it must be paid or incurred within the taxable year. The fee was paid to the PR firm as compensation for services carrying on the selling campaign in an effort to sell Atlas’ additional capital stock. (4) suit expenses. labeled as stockholders relation service fee is an allowable deduction as business expense. L-26911. P. Issue: In GR No. the accounting system maintained by Yutivo shows that it maintained a high degree of control over SM accounts. ALLOWABLE DEDUCTIONS.Y. Such is not an ordinary expense because. (3) US stock listing expenses.666. except for the stockholders relation service fee and the suit expenses. be allowed as a deductible expense from the company’s gross income. In GR No.499.TAX 1 INCOME TAXATION Prof.666. denominated as stockholders relation service fee is not an ordinary expense. In GR No. It was assessed deficiency income tax for the year 1958 as a result of the disallowance of certain items claimed by the company as deductions from its gross income. three conditions have to be complied with before a business expense is allowed as a deduction from gross income: (1) the expense must be ordinary and necessary. L-26911.98 and not PhP 6. The CIR also contends that the correct amount of disallowance for suit expenses should be PhP 17. The CTA rendered a decision allowing the said items. The CIR also argues that the US stock listing expenses should be disallowed for not being ordinary and necessary and not incurred in trade or business. the CIR argues that the transfer agent’s fee and the US stock listing fee should not have been allowed as deductions from gross income in the absence of proof of payment for such expenses. Atlas argues that the CTA should not have disallowed the stockholders relation service fee. whether or not the transfer agent’s fee and the US stock listing fee should have been allowed as deduction in the absence of proof of payments. Held: GR No. Consideration of various other circumstances. Both Atlas and the CIR went to the Supreme Court to appeal the CTA decision. L-26911. as required under Sec 30 (a) (1) of the National Internal Revenue Code. L-26924.65. whether or not the expenses paid for the services rendered by a public relations firm.65 is the correct amount of disallowance for suit expenses. indicates that Yutivo treated SM merely as its department or adjunct.

where the records were kept was burned). The Court of Tax Appeals allowed representation expenses but set the limit at PhP 10. they allowed as deductions all items comprising directors' fees and salaries of the non-resident president and vice president. Petitioner gave to its non-resident president and vice president for the years 1950 and 1951 bonuses equal to 133-1/2% of their annual salaries and bonuses equal to 125 2/3% for the year 1952. do not exceed a reasonable compensation for the services rendered" VISAYAN CEBU TERMINAL INTERNAL REVENUE CO. directors' fees and bonuses of its non-resident president and vice-president. The respondent disallowed the said deductions hence they were assessed for deficiency income taxes. VS COLLECTOR OF Facts: Visayan Cebu Terminal Co. as well as the interests on earned but unpaid salaries and bonuses. Failure to assert a question within a reasonable time warrants a presumption that the party entitled to assert it either has abandoned or declined to assert it. The Court agreed with the CTA that the CIR cannot raise the issue of payment for the first time on appeal. Petitioner however gave its resident officers and employees higher bonuses on the alleged reason because of their valuable contribution to the business of the corporation which has made it possible for it to realize huge profits during the aforesaid years.98. The Court reiterated that it is well-settled that litigation expenses incurred in defense or protection of title are capital in nature and not deductible.00 may be considered reasonably necessary as the company’s representation expenses based on figures presented during the proceedings. The Court sustained the finding of the CTA that PhP 10. bonuses of some of its resident officers and employees. The fees paid by Atlas partake of the latter. Dina D. The fact of payment was never controverted by the CIR during the proceedings. further agreed with the computation made by the CTA.88). The Collector of Internal Revenue disallowed the entire amount of representation expenses. INC. payments to the stock exchange made annually or in a recurring manner are considered ordinary and necessary business expenses (Chesapeake Corporation case). vs. The stock listing fee is paid annually to a stock exchange for the privilege of having Atlas’ stock listed. The Court sustained the CIR that the correct amount of disallowance for litigation or suit expenses is PhP 17. provided such payments.TAX 1 INCOME TAXATION Prof. but disallowing the bonuses insofar as they exceed the salaries of the recipients. Bonuses to employees made in good faith and as additional compensation for the services actually rendered by the employees are deductible. Because of the company’s failure to provide evidence for all such expenses (the corporation claims that the supporting papers were destroyed when the house of the company treasurer.000. Issue: Whether or not the full amount of representation expenses should be allowed as a deduction from Visayan’s gross income. However.000. THE COLLECTOR OF INTERNAL REVENUE Facts: Petitioner claimed as a deduction for income tax purposes for the years 1950. Inc. INC. L-26924. is a corporation organized for the purpose of handling arrastre operations in the port of Cebu. Upon re-examination by the respondents. Held: No. the Court should determine from all available data the amount properly deductible as representation expenses.499. A single payment made to the stock exchange is considered a capital expenditure (Domes Mines case).855. 1951 and 1952 salaries. when added to the stipulated salaries. The Court held that the US stock listing fee is an ordinary and necessary business expense and was correctly allowed by the CTA as a deduction. Held: The Court sustained the Tax Court in holding that representation expenses fall under the category of business expenses which are allowable deductions from gross income if they meet the following requisites laid down in the Tax Code—they must be ordinary and necessary expense paid or incurred in carrying on any trade or business and they must meet the test of reasonableness in amount. and (3) miscellaneous expenses. Issue: WON the excessive bonuses and interest should be allowed as a deduction for income tax purposes. and interests on earned but unpaid salaries and bonuses of its officers and employees. 2010-2011 ST DIGESTS GR No.Y. (2) representation expenses (PhP 75. Lucenario 1 Sem A. KUENZLE & STREIFF.00. The Court 66 . Visayan filed its income tax return for 1951 claiming the following items as deductions from the company’s gross income: (1) salaries.

however. The non-resident officers had rendered the same amount of efficient personal service and contribution to deserve equal treatment in compensation and other emoluments with the particularity that their liberation yearly salaries had been much smaller. when added to the salaries. in the affirmative. The examiner recommended disallowance of the deduction. Issue: WON the bonuses. It does not necessarily follow that they should be given greater amount of additional compensation in the form of bonuses than what was given to the non-resident officers. Here the items involved are unclaimed salaries and bonus participation which in our opinion cannot constitute indebtedness within the meaning of the law because while they constitute an obligation on the part of the corporation. (2) it must be for personal services actually rendered. it is necessary to determine whether "personal services" have been "actually rendered" by said officers.Y. petitioner-appellant. Being non-resident President and Vice. . . The Commissioner of Internal Revenue disallowed a portion of the bonus. said commissions and directors' fees. but petitioner insisted otherwise. THE COMMISSIONER OF INTERNAL REVENUE. director’s fees and commissions are valid deductions for income tax purposes. the resident Treasurer and Manager of petitioner. and. No. There is also no justification for the payment of the director’s fees. November 28. ALHAMBRA CIGAR & CIGARETTE MANUFACTURING COMPANY. [G. non-residents of the Philippines. The said officers of petitioner are.R. bonuses. are in the nature of dividend distributions. vs.President of Petitioner corporation of which they are the controlling stockholders. The willingness of the corporation to pay interest thereon cannot be considered a justification to warrant deduction. for purposes of income tax.187. payment of which was based on a certain percentage of the annual profits of petitioner. Kuenzle and Streiff on the ground of increased costs of living. it must be paid "on indebtedness" (Section 30.48 was deducted from the gross income as additional remuneration paid to the officers of petitioner and that such amount was taken from the net profit which petitioner derived from an isolated transaction (sale of a parcel of its land) which is not in the course of or carrying on of petitioner's trade or business. of the petitioner. However In this case. The bonus paid to each of said officers was reduced to the amount equivalent to that paid to Mr. it is not the latter's fault if they remained unclaimed. commission and director’s fees as deductions. respondent-appellee. There is no fixed test for determining the reasonableness of a given bonus as compensation. Under the law. are "reasonable . COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX APPEALS Facts: Upon investigation of petitioner's 1957 income tax returns of its Fish Nets Division. . Streiff. W. As correctly held by the court of tax appeals. Whenever a controversy arises on the deductibility. L-23226. Dina D. commissions and director’s fees paid to A. Eggmann. A. in order that interest may be deductible. respectively. claiming that the payment of the allowance or bonus was 67 . the Bureau of Internal Revenue examiner found that the amount of P61. P. who were the President and Vice-President. (b) (1) of the National Internal Revenue Code). Held: No. when measured by the amount and quality of the services performed with relation to the business of the particular taxpayer". of certain items for alleged compensation officers of a corporation. what is the "reasonable allowance" therefor. Hence was assessed for deficiency income tax. Lucenario 1 Sem A. Interest should also be disallowed. It is therefore imperative to show that there is an existing indebtedness which may be subjected to the payment of interest. The prevailing circumstances should be considered. Kuenzle and H. Deductible amount of bonuses is not limited to the amount of salary of its recipient. As to commissions and directors' fees there is no evidence of any particular service rendered by them to petitioner to warrant payment of commissions. 1967.] Facts: The petitioner claimed as deductible expense for income tax purposes salaries. Petitioner seeks to justify the increase in the salaries of Messrs. the bonuses given to resident employees were higher than its non-resident officers on the reason that the resident officers and employees had performed their duty well and rendered efficient service. AGUINALDO INDUSTRIES CORPORATION (FISHING NETS DIVISION) vs.TAX 1 INCOME TAXATION Prof. and (3) the bonuses. 2010-2011 ST DIGESTS Requisites for deductibility of employee bonuses: (1) the payment of the bonuses is in fact compensation.

March 30. Respondent has not proven that said debts were worthless.TAX 1 INCOME TAXATION Prof. The ascertainment of worthlessness of bad debts requires proof of two facts: (1) that the taxpayer did in fact ascertain the debt to be worthless in the year the deduction is sought. [G. receipts or chits would have been issued by the entities to which the payments had been made. COLLECTOR OF INTERNAL REVENUE. petitioner.Y.] Facts: The CIR disallowed the bad debts and representation expense claimed as deduction of the respondent for tax purposes. They do not establish payment of said alleged expenses to the entities in which the same are said to have been incurred. Dina D. JAMIR. The petitioner considered as an undeclared income so much of respondents expenditures for said months as was in excess of his reported income for the same months Issue: WON the expenditure method was properly applied. K. he acted in good faith. and (2) in so doing. COLLECTOR OF INTERNAL REVENUE. The taxpayer must show that he had reasonably investigated the relevant facts and had drawn a reasonable inference from the information thus obtained by him. Thus. No. The "expenditures method" of determining income should be applied by deducting the aggregate yearly expenditures from the declared yearly income. In this case the respondent properly explained that the income derived from the advances from customers were entered in his books of account in subsequent months. The bonus given should be considered as deductible for income tax purposes only if payment was made for service actually rendered and it is reasonable and necessary. Good faith is not enough. To collect for the alleged bad debts. 1967. Issue: WON the bad debts are valid deduction for income tax purposes Held: No. not by the entities in which the alleged expenses had been incurred. there is absolutely no evidence of any service actually rendered by petitioner's officers which could be the basis of a grant to them of a bonus out of the profit derived from the sale. but by the officers of Goodrich who allegedly paid them. petitioner. 1962.R. If the expenses had really been incurred. the payment of a bonus to them out of the gain realized from the sale cannot be considered as a selling expense. The Petitioner claimed that the respondent under declared its income based on the expenditure method. and it would have been easy for Goodrich or its officers to produce such receipts. respondent. vs. ALBERTO M. respondent. L-22265. vs. Those issued by said officers merely attest to their claim that they had incurred and paid said expenses. 2010-2011 ST DIGESTS pursuant to its by-laws. According to Goodrich the claim for deduction of the representation expense is based upon receipts issued. Lucenario 1 Sem A. there were payments made after it has been written off and proves that there is undue haste in claiming it as bad debts. No. Held: No.. 901 Held: No. On the other hand. [G. Petitioner may not raise the question of tax exemption for the first time on review where such question was not raised at the administrative forum Issue: WON the bonus given to the officers of petitioner as share in the profit realized from the sale of the land is deductible expense for tax purposes Held: No. L-16552. Issue: WON the representation expense are valid deductions. In this case. Held: No. December 22. the respondent sent demand letters. There were subsequent collections after the debts have been written.] Facts: The CIR assessed the respondent for deficiency income taxes. nor can it be deemed reasonable and necessary so as to make it deductible for tax purposes. not the expenditures incurred each month from the declared income therefor. 68 . GOODRICH INTERNATIONAL RUBBER CO. The records show that the sale was effected through a broker who was paid by petitioner a commission for his services. The Court of Tax Appeals held the petitioner liable for deficiency income tax plus surcharge and interest Issue: WON the profit derived from the sale of its land is tax-exempt income under Republic Act No. There is no evidence that the debtors cannot pay them.R.

and not for financial gain". INC. Dina D. Held: No. April 30.. Neither is there any comparative study of the peculiar situation of the two enterprises in relation to other concerns. Hence. petitioner. Issue: WON the value of medicines is a deductible loss Held: No. Issue: WON campaign contribution should be allowed as a deduction. negligible differences in salaries cannot reasonably show that the salary is excessive or that profits are channeled to the stockholders thru salaries.. however. the Court of Tax Appeals correctly ruled that said income should not share in the allocation of administrative expenses. three-fourths (3/4) of said amounts. their value. Amount expended for political campaign purposes or payments to campaign funds are not deductible either as business expenses or as contribution 69 . Issue: WON administrative expenses should be considered as a deduction/allocated to its interest and dividend income for income tax purposes. [C. CASE NO. the interests and dividends from sharing in the allocation of administrative expenses on the ground that the expenses incurred in the administration or management of petitioner's investments are not allowable business expenses inasmuch as they were not incurred in 'carrying on any trade or business' within the contemplation of Section 30 (a)(1) of the Revenue Code. A corporation has the right to fix the compensation of its employees There is no comparative study of the profits of the two enterprises in relation to other concerns similarly situated. according to its Articles of Incorporation. vs. It is not carrying on a trade or business for the word "business" in its ordinary and common use means "human efforts which have for their end living or reward. the principle of allocating expenses is grounded on the premise that the taxable income was derived from carrying on a trade or business. The respondent disallowed. The deduction of salaires was disallowed because the said officers are also stockholders of the corporation and that their salaries are excessive compared to those of officers of other corporation holding similar positions and doing the same volume of business. COMMISSIONER OF INTERNAL REVENUE Facts: Petitioner is engaged in both taxable and non-taxable operations. value of medicines. no other evidence was presented to substantiate this claim of petitioner.] Facts: The CIR disallowed salaries of some of its officers. as distinguished from mere receipt of interests and dividends from one's investments. vs. religious. as deductions. Held: Yes. 695. For the years 1952 to 1955. The general rule is that the employer is given a wide latitude of discretion in the amount of salaries paid to the employees. Lucenario 1 Sem A. Hospital de San Juan De Dios. charitable and religious. nor is there a comparison of the nature and volume of the work performed by the officers involved. were assessed for deficiency income taxes. Issue: WON the salaries and expenses should be allowed as a deduction. The deductible as loss on the ground that the aforesaid medicines were no longer fit for sale as the dates of their efficacy have expired should be disallowed. the car having been used by Jamir "more for business than for personal purposes". respondent. HOSPITAL DE SAN JUAN DE DIOS. Held: No. it is not commonly used as descriptive of charitable. was established for purposes "which are benevolent.TAX 1 INCOME TAXATION Prof." FELIX MONTENEGRO.A.T. campaign contribution and miscellaneous expense as deduction for income tax purposes hence the petitioner was assessed for deficiency income taxes. the lower court allowed. Held: Yes. the petitioner allocated its administrative expenses. COMMISSIONER OF INTERNAL REVENUE. the car was used by Jamir for both personal and business purposes.Y. 2010-2011 ST DIGESTS Issue: WON the deduction for car depreciation and driver’s expense is proper. INC. Aside from self serving testimonial evidence. Inc. educational or social agencies" or "any particular occupation or employment habitually engaged in especially for livelihood or gain" or "activities where profit is the purpose or livelihood is the motive. 1969. In this case. and their expiry dates. Since no two business enterprises are exactly in the same situation. There is not even a list of the medicines.

TAX 1 INCOME TAXATION Prof. Dina D. Lucenario 1 Sem A.Y. 2010-2011

ST

DIGESTS

COLLECTOR V. PHILIPPINE EDUCATION CO. FACTS: Respondent lost all its pre-war books of accounts and records, with the exception of a copy of the trial balance sheet. It employed an accounting firm and paid it the sum of P 13, 045.48. to prepare and prove it’s war damage claim. In filing its income tax return respondent claimed said sum as deduction under section 30 of the NIRC. Petitioner disallowed the same and instead assessed additional P2,405.14 as deficiency income tax. CTA reversed upon appeal and declared respondent exempt from the deficiency income tax in question. ISSUE: Whether or not the expense in question was ordinary and necessary and whether or not it was paid or incurred in carrying on respondent’s business. HELD: Yes. The law does not say that the expense must be for or on account of transactions in one’s trade or business. Ordinarily an expense will be considered necessary where the expenditure is appropriate and helpful in the development of the taxpayer’s business. It is sufficient that the expense were incurred for purposes proper to the conduct of the corporate affairs or for the purpose of realizing a profit or of minimizing a loss. The fee in question was paid by the respondent to recover its lost assets occasioned by the war and thereby to be so rehabilitated as to be able to carry on its business. Also, it should be noted that even if there is no law exempting the proceeds of war damage claims from taxes, the war damage compensation would still not be subject to tax, not being an income. Compensation for injury to capital is never income. DOCTRINE: To carry on its business the taxpayer not only must have sufficient assets but must preserve the same and recover any that should be lost. The fee or expense paid to recover its lost assets occasioned by the war and thereby to be so rehabilitated as to be able to carry on its business is not required that it must be for or on account of transactions in one’s trade or business. DEDUCTIONS AND EXEMPTIONS; ALLOWABLE DEDUCTIONS; INTEREST EXPENSE

CIR v. PALANCA FACTS: Don Carlos Palanca, Sr. donated in favor of his son, the petitioner, herein shares of stock in La Tondeña, Inc. amounting to 12,500 shares. For failure to file a return on the donation within the statutory period, the petitioner was assessed the sums of P97,691.23, P24,442.81 and P47,868.70 as gift tax, 25% surcharge and interest, respectively, which he paid on June 22, 1955. The petitioner filed with the BIR his income tax return for the calendar year 1955, claiming, among others, a deduction for interest amounting to P9,706.45 and reporting a taxable income of P65,982.12. On the basis of this return, he was assessed the sum of P21,052.91, as income tax, which he paid, as follows: Petitioner filed an amended return for the calendar year 1955, claiming therein an additional deduction in the amount of P47,868.70 representing interest paid on the donee's gift tax, thereby reporting a taxable net income of P18,113.42 and a tax due thereon in the sum of P3,167.00. The claim for deduction was based on the provisions of Section 30(b) (1) of the Tax Code, which authorizes the deduction from gross income of interest paid within the taxable year on indebtedness. A claim for the refund of alleged overpaid income taxes for the year 1955 amounting to P17,885.01, which is the difference between the amount of P21,052.01 he paid as income taxes under his original return and of P3,167.00, was filed together with this amended return. BIR denied the claim. On August 12, 1958, the petitioner once more filed an amended income tax return for the calendar year 1955, claiming, in addition to the interest deduction of P9,076.45 appearing in his original return, a deduction in the amount of P60,581.80, representing interest on the estate and inheritance taxes on the 12,500 shares of stock, thereby reporting a net taxable income for 1955 in the amount of P5,400.32 and an income tax due thereon in the sum of P428.00. Again this was denied. CTA reversed. ISSUE/S: 1) Whether the amount paid by respondent Palanca for interest on his delinquent estate and inheritance tax is deductible from the gross income for that year under Section 30 (b) (1) of the Revenue Code; 2) Whether the claim for refund has prescribed.

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HELD: 1) Yes. While "taxes" and "debts" are distinguishable legal concepts, in certain cases as in the suit at bar, on account of their nature, the distinction becomes inconsequential. We do not see any element in this case which can justify a departure from or abandonment of the doctrine in the Prieto case. In both this and the said case, the taxpayer sought the allowance as deductible items from the gross income of the amounts paid by them as interests on delinquent tax liabilities. Of course, what was involved in the cited case was the donor's tax while the present suit pertains to interest paid on the estate and inheritance tax. This difference, however, submits no appreciable consequence to the rationale of this Court's previous determination that interests on taxes should be considered as interests on indebtedness within the meaning of Section 30(b) (1) of the Tax Code. 2) No. The 30-day period under Section 11 of Republic Act 1125 did not even commence to run in this incident. It should be recalled that while the herein petitioner originally assessed the respondent-claimant for alleged gift tax liabilities, the said assessment was subsequently abandoned and in its lieu, a new one was prepared and served on the respondent-taxpayer. In this new assessment, the petitioner charged the said respondent with an entirely new liability and for a substantially different amount from the first. While initially the petitioner assessed the respondent for donee's gift tax in the amount of P170,002.74, in the subsequent assessment the latter was asked to pay P191,591.62 for delinquent estate and inheritance tax. Considering that it is the interest paid on this latter-assessed estate and inheritance tax that respondent Palanca is claiming refund for, then the thirty-day period under the abovementioned section of Republic Act 1125 should be computed from the receipt of the final denial by the Bureau of Internal Revenue of the said claim. In the second place, the claim at bar refers to the alleged overpayment by respondent Palanca of his 1955 income tax. Inasmuch as the said account was paid by him by installment, then the computation of the twoyear prescriptive period, under Section 306 of the National Internal Revenue Code, should be from the date of the last installment. DOCTRINE: While "taxes" and "debts" are distinguishable legal concepts, in certain cases as in the suit at bar, on account of their nature, the distinction becomes inconsequential.

CIR V VIUDA DE PRIETO FACTS: Respondent conveyed by way of gifts to her four children, namely, Antonio, Benito, Carmen and Mauro, all surnamed Prieto, real property with a total assessed value of P892,497.50. After the filing of the gift tax returns on or about February 1, 1954, the petitioner CIR appraised the real property donated for gift tax purposes at P1,231,268.00, and assessed the total sum of P117,706.50 as donor's gift tax, interest and compromises due thereon. Of the total sum of P117,706.50 paid by respondent on April 29, 1954, the sum of P55,978.65 represents the total interest on account of deliquency. This sum of P55,978.65 was claimed as deduction, among others, by respondent in her 1954 income tax return. Petitioner, however, disallowed the claim and as a consequence of such disallowance assessed respondent for 1954 the total sum of P21,410.38 as deficiency income tax due on the aforesaid P55,978.65, including interest up to March 31, 1957, surcharge and compromise for the late payment. Under the law, for interest to be deductible, it must be shown that there be an indebtedness, that there should be interest upon it, and that what is claimed as an interest deduction should have been paid or accrued within the year. It is here conceded that the interest paid by respondent was in consequence of the late payment of her donor's tax, and the same was paid within the year it is sought to be declared. ISSUE/S: Whether or not such interest was paid upon an indebtedness within the contemplation of section 30 (b) (1) of the Tax Code. HELD: Yes. The term "indebtedness" as used in the Tax Code of the United States containing similar provisions as in the above-quoted section has been defined as an unconditional and legally enforceable obligation for the payment of money. Although taxes already due have not, strictly speaking, the same concept as debts, they are, however, obligations that may be considered as such. The term "debt" is properly used in a comprehensive sense as embracing not merely money due by contract but whatever one is bound to render to another, either for contract, or the requirement of the law.

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DIGESTS

It follows that the interest paid by herein respondent for the late payment of her donor's tax is deductible from her gross income under section 30(b) of the Tax Code above quoted. This conclusion finds support in the established jurisprudence in the United States after whose laws our Income Tax Law has been patterned. Thus, under sec. 23(b) of the Internal Revenue Code of 1939, as amended , which contains similarly worded provisions as sec. 30(b) of our Tax Code, the uniform ruling is that interest on taxes is interest on indebtedness and is deductible. DOCTRINE: The term "indebtedness" as used in the Tax Code of the United States containing similar provisions as in the abovequoted section has been defined as an unconditional and legally enforceable obligation for the payment of money. PAPER INDUSTRIES V CA FACTS: Petitioner is registered with the BOI as a preferred pioneer enterprise with respect to its integrated pulp and paper mill, and as a preferred non-pioneer enterprise with respect to its integrated plywood and veneer mills. It received from the CIR two (2) letters of assessment and demand (a) one for deficiency transaction tax and for documentary and science stamp tax; and (b) the other for deficiency income tax for 1977, for an aggregate amount of P88,763,255.00. Picop protested the assessment of deficiency transaction tax and documentary and science stamp taxes. These protests were not formally acted upon by respondent CIR. On 26 September 1984, the CIR issued a warrant of distraint on personal property and a warrant of levy on real property against Picop, to enforce collection of the contested assessments; in effect, the CIR denied Picop's protests. Thereupon, Picop went before the CTA. Picop and the CIR both went to the Supreme Court on separate Petitions for Review of the above decision of the CTA. In two (2) Resolutions dated 7 February 1990 and 19 February 1990, respectively, the Court referred the two (2) Petitions to the Court of Appeals. The Court of Appeals consolidated the two (2) cases and rendered a decision, dated 31 August 1992, which further reduced the liability of Picop to P6,338,354.70.

Picop now maintains that it is not liable at all to pay any of the assessments or any part thereof. It assails the propriety of the thirty-five percent (35%) deficiency transaction tax which the Court of Appeals held due from it in the amount of P3,578,543.51. Picop also questions the imposition by the Court of Appeals of the deficiency income tax of P1,481,579.15, resulting from disallowance of certain claimed financial guarantee expenses and claimed year-end adjustments of sales and 3 cost of sales figures by Picop's external auditors. The CIR, upon the other hand, insists that the Court of Appeals erred in finding Picop not liable for surcharge and interest on unpaid transaction tax and for documentary and science stamp taxes and in allowing Picop to claim as deductible expenses. ISSUE/S: 1) Whether Picop is liable for the thirty-five percent (35%) transaction tax; 2) Whether Picop is liable for interest and surcharge on unpaid transaction tax; 3) Whether Picop is entitled to deduct against current income interest payments on loans for the purchase of machinery and equipment; 4) Whether Picop is entitled to deduct against current income net operating losses incurred by Rustan Pulp and Paper Mills, Inc; 5) Whether Picop is entitled to deduct against current income certain claimed financial guarantee expenses; 6) Whether Picop had understated its sales and overstated its cost of sales for 1977; 7) Whether Picop is liable for the corporate development tax of five percent (5%) of its income for 1977. HELD: 1) We agree with the CTA and the Court of Appeals that Picop's tax exemption under R.A. No. 5186, as amended, does not include exemption from the thirty-five percent (35%) transaction tax. In the first place, the thirty-five percent (35%) transaction tax is an income tax, that is, it is a tax on the interest income of the lenders or creditors. It is thus clear that the transaction tax is an income tax and as such, in any event, falls outside the scope of the tax exemption granted to registered pioneer enterprises by Section 8 of R.A. No. 5186, as amended. 2) Section 51 (c) and (e) of the 1977 Tax Code did not authorize the imposition of a surcharge and penalty interest for failure to pay the thirtyfive percent (35%) transaction tax imposed under Section 210 (b) of the same Code. The corresponding provision in the current Tax Code very

72

7) The adjusted net income of Picop for 1977.A. 6) The CIR has made out at least a prima facie case that Picop had understated its sales and overstated its cost of sales as set out in its Income Tax Return. It is important to note at the outset that in our jurisdiction.749. Picop must be held liable for the five percent (5%) corporate development tax in the amount of P2. In the instant case. without any regard to the Title of the Code where provisions imposing particular taxes are textually located.00. For the CIR has a right to assume that Picop's Books of Accounts speak the truth in this case since. only banks or other financial institutions are in the regular business of raising money by issuing bonds or other instruments to the general public.196.528. Neither does our 1977 NIRC compel the capitalization of interest payments on such a loan. Even Picop's own vouchers were not submitted in evidence and the BIR Examiners denied that such vouchers and other documents had been exhibited to them. Its net worth figure or total stockholders' equity as reflected in its Audited Financial Statements for 1977 is P464. The issuance of debenture bonds is certainly conceptually distinct from pulping and paper manufacturing operations.687. is P48. to be sure. 2010-2011 ST DIGESTS clearly embraces failure to pay all taxes imposed in the Tax Code. Thus it is that R.434. R. 5186. RPPM.A. they are not to be extended beyond the ordinary and reasonable intendment of the language actually used by the legislative authority in granting the exemption. to benefit from the operating losses accumulated by another corporation or enterprise. Moreover. to be "strictly construed. No. INC.Y. Since its adjusted net income for 1977 thus exceeded ten percent (10%) of its net worth. 5186. 5186 introduced the carry-over of net operating losses as a very special incentive to be granted only to registered pioneer enterprises and only with respect to their registered operations.367. 4) After prolonged consideration and analysis of this matter. No. as will be seen below. The 1977 Tax Code is simply silent on a taxpayer's right to elect one or the other tax treatment of such interest payments. they embody what must appear to be admissions against Picop's own interest. We consider and so hold that there is nothing in Section 7 (c) of R.00 in its 1977 Income Tax Return must be disallowed. the Court is unable to agree with the CTA and Court of Appeals on the deductibility of RPPM's accumulated losses against Picop's 1977 gross income. 73 .355. 5186 which either requires or permits such a result. DOCTRINE: It is thus clear that the transaction tax is an income tax and as such. falls outside the scope of the tax exemption granted to registered pioneer enterprises by Section 8 of R. 3) We have already noted that our 1977 NIRC does not prohibit the deduction of interest on a loan incurred for acquiring machinery and equipment. to grant Picop's claimed deduction would be to permit Picop to purchase a tax deduction and RPPM to peddle its accumulated operating losses. CIR v. Picop. in any event.A. We conclude that the deduction claimed by Picop in the amount of P44.00.75. But no one contends that issuance of bonds was a principal or regular business activity of Picop." that is. as amended.A.106. cash vouchers can only confirm the fact of disbursement but not necessarily the purpose thereof. Tax exemptions are. 5) We must support the CTA and the Court of Appeals in their foregoing rulings. both in 1977 and at present. the rule applicable in respect of corporations not registered with the BOI as a preferred pioneer enterprise — is that net operating losses cannot be carried over. Accordingly. Indeed. losses may be deducted from gross income only if such losses were actually sustained in the same year that they are deducted or charged off.TAX 1 INCOME TAXATION Prof. In effect. ITOGON-SUYOC MINES. to allow the deduction claimed by Picop would be to permit one corporation or enterprise. as already noted. Dina D. that result makes non-sense of the legislative purpose which may be seen clearly to be projected by Section 7 (c). the ordinary rule — that is. the general rule that interest payments on a legally demandable loan are deductible from gross income must be applied. Under our Tax Code. No. Lucenario 1 Sem A. We conclude that the CTA and the Court of Appeals did not err in allowing the deductions of Picop's 1977 interest payments on its loans for capital equipment against its gross income for 1977. No. A taxpayer has the burden of proving entitlement to a claimed deduction.

for which it was not liable at all. an interest in the amount of P1.S. When the matter was taken up before the Court of Tax Appeals. "unfair and unjust" to do so. and specially of the 50% surcharge Held: NO. It is an admitted fact though that respondent was clearly entitled to it. Inc. Issue: WON the acquittal is a bar to the collection of the taxes assessed. it deducted right away the amount represented by claim for refund filed eight (8) months back. Case 141) holding petitioner Maria B. ISSUE/S: Whether CTA should not have absolved respondent corporation "from liability to pay the sum of P1. We conclude that the 74 . for the previous year's income tax. the taxpayer involved." HELD: No. Instead of waiting for the sum involved to be delivered to it. Instead. 55. This is made plain by the fact that such surcharges are enforceable.83 was charged by petitioner Commissioner of Internal Revenue on the sum withheld on the ground that no deduction on such refund should be allowed before its approval.20 "which after all was paid to and received by the government even before the incidence of the tax in question. and petitioner did not allege otherwise. As to the 50% surcharge. The obligation to pay the tax is not a mere consequence of the felonious acts charged in the information. since that duty is imposed by statute prior to and independently of any attempts on the part of the taxpayer to evade payment. That it had a right to do according to the law. the above assessment representing interest was set aside in the decision of September 30. nor is it a mere civil liability derived from crime that would be wiped out by the judicial declaration that the criminal acts charged did not exist.A. to hold that petitioner should not repose an interest on the aforesaid sum of P13. the applicability of the legal provision allowing such a deduction from the amount of the tax to be paid cannot be disputed. DOCTRINE: It could not be error for the Court of Tax Appeals. it deducted the said amount from the tax that it had to pay. the very United States Supreme Court that rendered the Coffey decision has subsequently pointed out that additions of this kind to the main tax are not penalties but civil administrative sanctions. Ed.TAX 1 INCOME TAXATION Prof." CASTRO v. 55 (section 5) that is separate and distinct from that providing for criminal prosecution (section 7). and costs. No. 303 U. 1965. Lucenario 1 Sem A.Y.66.512. The imposition of such an interest by petitioner is not supported by law. duly paid in full its liability according to its income tax return for the fiscal year 1960-61.512.T. by distraint or civil suit. and ordering her to pay a deficiency war profits tax (including surcharges and interest) in the amount of P1.155. 492).S.. and that they are provided in a section of R. There is no question respondent was entitled to a refund. provided primarily as a safeguard for the protection of the state revenue and to reimburse the government for the heavy expense of investigation and the loss resulting from the taxpayer's fraud (Helvering vs. 317 U. With regard to the tax proper. Mitchell. like the primary tax itself. a claim subsequently favorably acted on by petitioner Commissioner of Internal Revenue but after the date of such payment of the 1960-1961 tax. Nor could he do so. entitling respondent to refund. Accordingly. COLLECTOR Facts: This is an appeal from a decision of the Court of Tax Appeals (in its C." It would be.83 as 1% monthly interest for delinquency in the payment of income tax for the fiscal year 1960-1961.A. Dina D. 390. so it alleged. considering the admitted fact of overpayment. The National Internal Revenue Code provides that interest upon the amount determined as a deficiency shall be assessed and shall be paid upon notice and demand from the Commissioner of Internal Revenue. It is true a doubt could have arisen due to the fact that as of the time such a deduction was made. Under all the circumstances disclosed therefore. Castro liable under the War Profits Tax Law. Spies vs. Castro was previously acquitted in the criminal case instituted against her for violation of the War Profits Tax Law.S. 82 L. We agree but we go farther. as it suffered a loss instead.514. 917. the Commissioner of Internal Revenue had not as yet approved such a refund. entitling respondent to refund.20 "which after all was paid to and received by the government even before the incidence of the tax in question.155. 2010-2011 ST DIGESTS FACTS: Respondent Itogon-Suyoc Mines. considering the admitted fact of overpayment. U.360. according to the Court of Tax Appeals. to hold that petitioner should not repose an interest on the aforesaid sum of P13. the state correctly points out in its brief that the acquittal in the criminal case could not operate to discharge petitioner from the duty to pay the tax. Republic Act No. It could not be error for the Court of Tax Appeals.

St. In allowing the items in question. An examination of the record discloses. "in the absence of a statutory provision clearly or expressly directing or authorizing such payment. and which was duly probated in the Superior Court of California on April 11. we may presume. under Republic Act of California National Association. In connection with the deduction of P652.47 representing the amount of indebtedness allegedly incurred by the decedent during his lifetime 2.0. G. Paul's Hospital (G. P2. YES. it found no basis for departing from the findings of the probate court. No. In his will executed in San Francisco on May 22. LEDNICKY Facts: V. we see no ground to reverse this finding of fact which. COLLECTOR v.805. the spouses paid the total amount of P326.50 representing the amount of realty taxes paid in 1951 on the decedent's two parcels of land in Baguio City. Whether or not the estate is entitled to the payment of interest on the amount it claims to have overpaid the government and to be refundable to it. E. if any actually results after a recomputation on the basis of this decision is hereby denied in line with our recent decision in Collector of Internal Revenue v. L-9771. [GR L-18286] In compliance with local law.59 as withholding tax. the Tax Court had before it the pertinent order of the probate court which was submitted in evidence by respondents. filed their income tax return for 1956. The amendment consists in a claimed deduction of P205.50 for real estate taxes. 1951 .24 paid in 75 . Walter G.22. the National Government cannot be required to pay interest. Whether or not the estate is entitled to the following deductions: P8. inclusive of the withheld taxes. Lucenario 1 Sem A.287. Walter G. May 31.TAX 1 INCOME TAXATION Prof. P652.52 for funeral expenses. L-12127. 1951 in San Francisco." DEDUCTIONS AND EXMEPTIONS. California. p. Under the circumstances. Respondent's claim for interest on the amount allegedly overpaid. and none has been cited by respondents.41. had also been presented for consideration. and have derived all their income from Philippine sources for the taxable years under question. the spouses filed an amended income tax return for 1956. on 15 April 1957.41 was assessed after deducting P4. (Gutierrez v. ALLOWABLE DEDUCTIONS. Perez vs. 2.809. Stevenson.A. 1959) wherein we held that. which it would appear.Y. 1945. 100. Lednicky and Maria Valero Lednicky. Issue: 1. Pursuant to the Commissioner of Internal Revenue’s assessment notice. 1909 to Beatrice Mauricia Stevenson another British subject) died on February 22. supra).65 and a net income of P733. Collector. 1951. May 29.086. Collector.017. are husband and wife.939. Stevenson (born in the Philippines on August 9. As the Tax Court said. Held: 1. that while still living. No. that the foregoing items were considered deductible by the Tax Court on the basis of their approval by the probate court to which said expenses. and the finding of its existence by the Tax Court is conclusive upon us. TAXES CIR v. the spouses. On 17 March 1959. record). reporting therein a gross income of P1. It is to be supposed that the probate court would not have approved said items were they not supported by evidence presented by the estate. 1874 of British parents and married in the City of Manila on January 23. NO. "AA-2".604. which respondents claim was disallowed by the Tax Court. on 27 March 1957.R.R. whereto he and his wife moved and established their permanent residence since May 10. as it must have been satisfied that those expenses were actually incurred. 2010-2011 ST DIGESTS defense of jeopardy and estoppel by reason of the petitioner's acquittal is untenable and without merit.44 on which the amount of P317.247.39 for judicial and administration expenses. FISHER Facts: This case relates to the determination and settlement of the hereditary estate left by the deceased Walter G.S. however. Whether or not there was fraud committed by the taxpayer justifying the imposition of the surcharge is an issue of fact to be inferred from the evidence and surrounding circumstances. Stevenson instituted his wife Beatrice as his sole heiress to the following real and personal properties acquired by the spouses while residing in the Philippines. Stevenson obtained we are not inclined to pass upon the claim of respondents in respect to the additional amount of P86. and the laws applicable thereto. we find that this claim has in fact been allowed. 1947. and P10. Dina D. (Exh.52 for funeral expenses which was disapproved by the court a quo for lack of evidence. U.395. both American citizens residing in the Philippines.

00. Law’s intent that right to deduct income taxes paid to foreign government taken as an alternative or substitute to claim of tax 76 .052. 1952. inheritance and gift taxes. and for which the spouses paid a total sum of P196. Exchange and bank charges in remitting payment totaled P4. the spouses filed with the US Internal Revenue Agent in Manila their Federal income tax return for the years 1947.51. representing taxes paid to the US Government on income derived wholly from Philippine sources. reporting a gross income of P1. and (D) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed. totaling P516. the amount of any such taxes paid or accrued during the taxable year to any foreign country. Baltimore. Manila Branch. they paid P570. Paragraph (c) (3) (b) of the Tax Code. which was docketed therein as CTA Case 570. reads: “If the taxpayer signifies in his return his desire to have the benefits of this paragraph. In 1959.82.588. they filed an amended return for 1957.012. claiming deduction of P190. which the taxpayer’s net income from sources without the Philippines taxable under this Title bears to his entire net income for the same taxable year. with costs against said spouses.269. the tax imposed by this Title shall be credited with (B) Alien resident of the Philippines. the spouses filed their domestic income tax return for 1955. except (A) The income tax provided for under this Title. were made in 1955 to the US Director of Internal Revenue. After audit. they filed an amended income tax return. the spouses requested the refund of P112.00. Back in 1955.143. filed on 28 February 1958. — In the case of an alien resident of the Philippines.75 as overpayment (CTA Case 783). and excess profits taxes imposed by the authority of any foreign country. allows a similar credit to citizens of the Philippines residing in such country. 1. the Commissioner determined a deficiency of P16. interest accruing up to 15 May 1955.91. including penalties and delinquency interest in the amount of $264. The spouses brought suit in the Tax Court. Credits against tax for taxes of foreign countries Paragraph 3 (B) of the subsection (Credits against tax for taxes of foreign countries). Lucenario 1 Sem A. on the basis of this amended return. which was later reduced to P150. (c) (4) Limitation on credit.” 3.15 and therewith filed a claim for refund of the sum of P166. in imposing such taxes.799. and (B) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken. if the foreign country of which such alien resident is a citizen or subject. which the taxpayer’s net income from sources within such country taxable under this Title bears to his entire net income for the same taxable year.” 2. — The amount of the credit taken under this section shall be subject to each of the following limitations: (A) The amount of the credit in respect to the tax paid or accrued to any country shall not exceed the same proportion of the tax against which such credit is taken. through the National City Bank of New York. inclusive of withholding taxes. which amount the spouses paid on 5 December 1956.124. the spouses filed their petition with the tax court on 11 April 1959 as CTA Case 646.520. (B) Income. and exchange and bank charges. Limitation on credit The tax credit so authorized is limited under paragraph 4 (A and B) of the same subsection. Paragraph (c) (4) of the Tax Code. On 11 August 1958 the said respondents amended their Philippines income tax return for 1955 to including US Federal income taxes. but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) of this subsection (relating to credit for taxes of foreign countries). Payment of these federal income taxes.252. 1953 and 1954 on income from Philippine sources on a cash basis. and.67. Maryland.Y. The Supreme Court reversed the decisions of the Court of Tax Appeals. and affirmed the disallowance of the refunds claimed by the spouses. On the strength thereof.65. [GR L-18165] On 28 February 1956.437.” 4. — Taxes paid or accrued within the taxable year.345.80. however. 1951. Issue: WON there should be a refund for the spouses Held: NO.554.550. war-profits.00.90.771. When the Commissioner of Internal Revenue failed to answer the claim for refund.755. Simultaneously with the filing of the amended return.384. 2010-2011 ST DIGESTS 1956 to the US government as federal income tax for 1956. [GR 21434] The facts are similar to above cases but refer to the spouses’ income tax returns for 1957. in the following terms: “Par.TAX 1 INCOME TAXATION Prof. (C) Estate. The Tax Court decided for the spouses. Dina D. the amendment upon the original being a lesser net income of P1. Section 30 (c-1) of the Philippine Internal Revenue Code Section 30 (c) (1) (Deduction from gross income) provides that “in computing net income there shall be allowed as deductions: (c) Taxes: (1) In general. spouses seek refund of P90.63 and a net income of P1.00. On 19 April 1956.116.

docketed.Y. without contributing to the production of the wealth that is being taxed. When double taxation. 6579. vs. 5.TAX 1 INCOME TAXATION Prof. As between the Philippines. Lucenario 1 Sem A. to claim a tax credit and waive the deduction. at the request of the U. Life Ins. so that unless the alien resident has a right to claim such tax credit if he so chooses. since the former’s right to burden the taxpayer is solely predicated on his citizenship. in order that it could take immediate possession of the same. t the commencement of the action. This danger of double credit certainly can not exist if the taxpayer can not claim benefit under either of these headings at his option. which was provisionally fixed as the value of the lands sought to be expropriated. The Republic of the Philippines. instituted condemnation proceedings in the Court of the First Instance of Pampanga. the Republic of the Philippines. the statute assumes that the taxpayer in question also may signify his desire. thereby subordinating our own taxes to those levied by a foreign government. or the option to deduct from gross income disappears altogether. while the taxpayers would have to pay two taxes on the same income. Manuf. Manila vs. In the present case. Everytime the rate of taxation imposed upon an alien resident is increased by his own government. as Civil Case No. regardless of the taxpayer’s right to claim a tax credit. c-3). Tax income should accrue to benefit of the Philippines Double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity (cf. and the proceeds for the Philippines diminished. Co. his deduction from Philippine taxes would correspondingly increase. Meer. 6. he is precluded from deducting the foreign income taxes from his gross income.960. 357). Pampanga. 89 Phil. it is the latter right that should be conditioned upon the taxpayer’s waiving the deduction. Had the law intended that foreign income taxes could be deducted from gross income in any event. c-1) and by tax credit (subs. Gaz. GUTIERREZ v.deductions). the foreign taxes would always be deductible. and their mention in the list of nondeductible items in Section 30 (c) might as well have been omitted. Such a result is incompatible with the status of the Philippines as an independent and sovereign state. for the purpose of expropriating the lands owned by Maria Morales and others needed for the expansion of the Clark Field Air Base. Danger of double credit does not exist if taxpayer cannot claim benefit from either headings at his option The purpose of the law is to prevent the taxpayer from claiming twice the benefits of his payment of foreign taxes. Any relief from the alleged double taxation should come from the United States. the Philippine government only receives the proceeds of one tax. 77 . while the right to a tax credit under subsection (c-3) would have been expressly conditioned upon the taxpayer’s not claiming any deduction under subsection (c-1). and not from the Philippines. or at least expressly limited to taxes on income from sources outside the Philippine Islands. so that he must be entitled to a tax credit (the spouses admittedly are not so entitled because all their income is derived from Philippine sources). To allow an alien resident to deduct from his gross income whatever taxes he pays to his own government amounts to conferring on the latter power to reduce the tax income of the Philippine government simply by increasing the tax rates on the alien resident. where the income was earned and where the taxpayer is domiciled. otherwise. Dina D. 724-C of the cadastral survey of Mabalacat. where that income was not earned and where the taxpayer did not reside. Government and pursuant to the terms of the Military Bases Agreement of March 14. 1947. 148. Interisland Gas Service. in which case the right to reduction under subsection (c-1-B) would have been made absolute or unconditional (by omitting foreign taxes from the enumeration of non. COLLECTOR Facts: Maria Morales was the registered owner of an agricultural land designated as Lot No. it is indisputable that justice and equity demand that the tax on the income should accrue to the benefit of the Philippines. For it is obvious that in prescribing that such deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) (relating to credits for taxes paid to foreign countries). 52 Off. 2010-2011 ST DIGESTS credit for such foreign income tax Construction and wording of Section 30 (c) (1) (B) of the Internal Revenue Act shows the law’s intent that the right to deduct income taxes paid to foreign government from the taxpayer’s gross income is given only as an alternative or substitute to his right to claim a tax credit for such foreign income taxes under section 30 (c) (3) and (4). by deduction from gross income (subs.S. and the United States. therein plaintiff deposited with the Clerk of the Court of First Instance of Pampanga the sum of P156.

2010-2011 ST DIGESTS On January 27.305. The question of fraud being a question of fact and the lower court having made the finding that "the evidence of this case does not warrant the imposition of the 50 per cent surcharge". on the ground that the taxpayers' income tax return for 1950 is false and/or fraudulent. Federal Income Taxation. insofar as their respective contentions on particular tax items were therein resolved against them. the Collector of Internal Revenue demanded of the petitioners the payment of P8.960 made by therein plaintiff. ALLOWABLE DEDUCTIONS. the spouses Blas Gutierrez and Maria Morales received the sum of P59. After due hearing. It should be noted that the Court of Tax Appeals found that the evidence did not warrant the imposition of said surcharge because the petitioners therein acted in good faith and without intent to defraud the Government. on the ground that the worthlessness of said stock in the year 1950 had not been clearly established.TAX 1 INCOME TAXATION Prof. 724-C which was one of the expropriated lands. CIR Facts: These four appeals involve two decisions of the Court of Tax Appeals determining the taxpayer's income tax liability for the years 1950 to 1954 and for the year 1957. Sometime in 1950. upon order of the Court. Issue: Proper/Improper Allowances/Disallowances of Losses Held: Re allowances/disallowances of losses. 1948. the value of the condemned properties in making their findings. The Commissioner contends that although the said Company was no longer in operation in 1950. acquired by the taxpayer on January 1. Chapter 55).75 as compensation for Lot No. All the facts and circumstances surrounding the conduct of the tax payer's business and all the facts incident to the preparation of the alleged fraudulent return should be considered. — The Commissioner of Internal Revenue questions the Tax Court's allowance of the taxpayer's writing off as worthless securities in its 1950 return the sum of P8.Y. which values were based on the reports of the Commission on Appraisal whose members were chosen by both parties and by the Court. The CIR contended that petitioners-appellants failed to include from their gross income. (a) Allowance of losses in Mati Lumber Co. 1949. We are constrained to refrain from giving any consideration to the question raised by the Solicitor General. LOSSES FERNANDEZ HERMANOS v. In a notice of assessment dated January 28. inclusive of surcharges and penalties. DEDUCTIONS AND EXEMPTIONS. The question of fraud is a question of fact which frequently requires a nicely balanced judgement to answer. in filing their income tax return for 1950. it still had its sawmill and equipment which must be of considerable value.75 presenting the balance remaining in their favor after deducting the amount of P34.580 (PNB Check 721520-Exh. In virtue of said decision. for it is already settled in this jurisdiction that in passing upon petitions to review decisions of the Court of Tax Appeals.580 already withdrawn from the compensation to them. Issue: WON petitioners should pay surcharge Held: NO. We have to confine ourselves to questions of law.481 as alleged deficiency income tax for the year 1950.785.75 which they had received as compensation for their land taken by the Government by expropriation proceedings. the sum of P34. (1950). the Court of First Instance of Pampanga rendered decision dated November 29. appealed from the Tax Court's decisions. R) was paid by the Provincial treasurer of Pampanga to Maria Morales out of the original deposit of P156.050. 1953.00 representing the cost of shares of stock of Mati Lumber Co. which took into consideration the different conditions affecting. There was adequate 78 . for taxation purposes. Dina D. The lower court exonerated petitioners from the 50 per cent surcharge imposed on the latter. defendant Maria Morales was to receive the amount of P94. Both the taxpayer and the Commissioner of Internal Revenue.305. (Mertens. the amount of P94. It is the contention of respondent Collector of Internal Revenue that such transfer of property. as petitioner and respondent in the cases a quo respectively. is "sale" and that the income derived therefrom is taxable.000 per hectare for the others. Lucenario 1 Sem A.500 per hectare for some of the lots and P3. wherein it fixed as just compensation P2. 1949.

The Tax Court's disallowance of the write-off was proper.M. and claimed as losses in the taxpayer's returns for said years.. Inc. The Tax Court correctly held that the losses "are deductible in 1952.C.82 in 1951.938.134. and not in 1950 and 1951.Y. It is true that some testimonial evidence was presented to show that there was some agreement that the advances would be repaid. when the mines were abandoned.744. 21103. (See 1955 PH Fed. it continued to suffer losses. Lucenario 1 Sem A.07 as of 1951 were 5 investments and not loans. The Solicitor General has rightly pointed out that the taxpayer has taken an "ambiguous position " and "has not definitely taken a stand on whether the amount involved is claimed as losses or as bad debts but insists that it is either a loss or a bad debt.932.732. P21. P26. (b) Disallowance of losses in or bad debts of Palawan Manganese Mines. While it continued to give advances. Pursuant to the agreement mentioned above.81 in 1952.989. Inc. which were still existing as claimed by the Commissioner. if there were no earnings or profits.25. This conclusion is based on the fact that the farm was operated continuously at a loss. amounting to P587." The taxpayer's claim that these expeditions should be allowed as losses for the corresponding years that they were incurred. 2010-2011 ST DIGESTS basis for the writing off of the stock as worthless securities. By 1951." 4 We sustain the government's position that the advances made by the taxpayer to its 100% subsidiary.25 properly claimed by petitioner as deduction in its income tax return for 1951. It has been held that the voluntary advances made without expectation of repayment do not result in deductible losses. Par. we are convinced that the Hacienda Dalupiri was operated by petitioner for business and not pleasure.76 and P27. since the promised road or outlet through which the coal could be transported from the mines to the provincial road was not constructed. It does not appear that the farm was used by petitioner for entertainment. it decided to write off as worthless the sum of P353. yearly advances starting from 1945. These deductions were disallowed by respondent on the ground that the farm was operated solely for pleasure or as a hobby and not for profit. when they were still in 9 operation. The memorandum agreement signed by the parties appears to be very clear that the consideration for the advances made by petitioner was 15% of the net profits of Palawan Manganese Mines. Assuming that the Company would later somehow realize some proceeds from its sawmill and equipment. but no documentary evidence was presented to this effect. — The Court sustains the Tax Court's disallowance of the sums of P8.134. 63.07 by the end of 1951.134.125. (c) Disallowance of losses in Balamban Coal Mines (1950 and 1951). Taxes. Dina D.1awphîl. and that such proceeds would later be distributed to its stockholders such as the taxpayer. 13. Therefore. Despite these advances and the resumption of operations by Palawan Manganese Mines.308.25. either as losses or bad debts? It will be noted that in giving advances to Palawan Manganese Mine Inc. Inc. and P42.164) 79 . respectively. and here it was the event of actual abandonment of the mines in 1952. citing G. because it made no sales of coal during said years. it is entitled to deduct expenses and losses in connection with the operation of said farm. — The taxpayer appeals from the Tax Court's disallowance of its writing off in 1951 as a loss or bad debt the sum of P353. there was no obligation to repay those advances.95 in 1950. petitioner became convinced that those advances could no longer be recovered. (1951). social activities. the amount so received by the taxpayer would then properly be reportable as income of the taxpayer in the year it is received. petitioner did not expect to be repaid.66 spent by the taxpayer for the operation of its Balamban coal mines in Cebu in 1950 and 1951. which advances amounted to P587. Inc. Under the circumstances.308. p. cannot be sustained. Inc. was the sum of P353. which it had advanced or loaned to Palawan Manganese Mines. In other words. petitioner gave to Palawan Manganese Mines.62 in 1953.nèt From the evidence. or other nonbusiness purposes. Palawan Manganese Mines. It was mainly a cattle farm.56 in 1954. Inc.. Some definite event must fix the time when the loss is sustained.TAX 1 INCOME TAXATION Prof. (d) and (e) Allowance of losses in Hacienda Dalupiri (1950 to 1954) and Hacienda Samal (1951-1952). P29. — The Tax Court overruled the Commissioner's disallowance of these items of losses thus: Petitioner deducted losses in the operation of its Hacienda Dalupiri the sums of P17. CB 19391.418. although a few race horses were also raised.

We find no Compelling reason to disturb its findings." (Pages 21-22. Lucenario 1 Sem A. 1955. accordingly. authorizes farmers to determine their gross income on the basis of inventories. petitioner determined its income or losses in the operation of said farm on the basis of inventories. as surety.. Dina D." 11 The Tax Court was satisfied with the method adopted by the taxpayer as a farmer breeding livestock. L. however. plus interest.TAX 1 INCOME TAXATION Prof. petitioner insisting that the P44. solidarily executed a performance bond in the penal sum of P30.490. The Tax Court.00 as deductible loss from its gross income and. however. petitioner required San Jose and one Ramon Cuervo to execute an indemnity agreement obligating themselves. paid the amount of P136.00.490. 2. petitioner claimed the said amount of P44. to secure the performance of San Jose's contractual obligation to produce and supply logs to the latter. as deficiency income tax for the year 1957. whether purchased for resale. The Court of Appeals.898. On October 1. as principal. Accordingly. that is. felt satisfied with the evidence presented by the taxpayer . produced on the farm. solidarily. on June 17.. appeal was taken to the Tax Court.. which losses represent the excess of its yearly expenditures over the receipts. as such losses will be reflected in the inventory by reducing the amount of livestock or products on hand at the close of the year. no deduction can be made for livestock or products lost during the year. 80 .00 as its income tax for 1957.490.00 and assessed against petitioner the sum of P8. petitioner. The Commissioner of Internal Revenue disallowed the claimed deduction of P44. is a domestic corporation engaged in the bonding business. 1957 except for a slight modification apropos the award of attorney's fees. He concedes.Y. the Court of First Instance adjudged San Jose and petitioner liable. Galang Machinery Co. CIR Facts: Petitioner Plaridel Surety & Insurance Co..) As the Hacienda Dalupiri was operated by petitioner for business and since it sustained losses in its operation.600. and Constancio San Jose. On November 9. Said regulations provide: "If gross income is ascertained by inventories. 2. The same is true with respect to loss sustained in the operation of the Hacienda Samal for the years 1951 and 1952. Memorandum for Petitioner. which merely consisted of an alleged physical count of the number of the livestock in Hacienda Dalupiri for the years involved. which losses were determined by means of inventories authorized under Section 100 of Revenue Regulations No. Inc. To afford itself adequate protection against loss or damage on the performance bond. 1950.. to indemnify petitioner for whatever liability it may incur by reason of said performance bond.2 San Jose later failed to deliver the logs to Galang Machinery3 and the latter sued on the performance bond. Whereupon. 10 The Commissioner questions that the losses sustained by the taxpayer were properly based on the inventory method of accounting. PLARIDEL SURETY v. the losses represent the difference between the sales of livestock and the actual cash disbursements or expenses. San Jose constituted a chattel mortgage on logging machineries and other movables in petitioner's favor1 while Ramon Cuervo executed a real estate mortgage. 2010-2011 ST DIGESTS Section 100 of Revenue Regulations No. We quote from the memorandum of counsel for petitioner: "The Taxpayer deducted from its income tax returns for the years from 1950 to 1954 inclusive. otherwise known as the Income Tax Regulations. Petitioner filed its protest which was denied. the corresponding yearly losses sustained in the operation of Hacienda Dalupiri.00 in favor of the P. In its income tax return for the year 1957. it also directed San Jose and Cuervo to reimburse petitioner for whatever amount it would pay Galang Machinery." Evidently. reporting on the basis of receipts and disbursements. 1952. The same judgment was likewise affirmed by this Court4 on January 11.00 which it paid to Galang Machinery was a deductible loss. "that the regulations referred to does not specify how the inventories are to be made. it was error for respondent to have disallowed the deduction of said losses. affirmed the judgment of the lower court.

obtained a final judgment against third persons for reimbursement of payments made. litigated. the taxpayer must seek his redress and may not secure a loss deduction until he establishes that no recovery may be had. Petitioners. 2. Hence.TAX 1 INCOME TAXATION Prof. it still cannot be considered as a "bad debt" or expense since there is no indebtedness between petitioner and First CBC. Citing Cu 6 Unjieng Sons. It should be classified as a "capital loss.227. Sec. losses sustained during the taxable year and not compensated for by insurance or otherwise. 81 . Capital assets are defined in the negative by Sec 33(1) of the NIRC as property held by the TP exclusive of items primarily for the sale to customers in the ordinary course of business. Board of Tax Appeals. On the other hand. However. Dina D. securities. however to this effect in the Cu Unjieng case is not as authoritative as petitioner would have it since it was there found that the taxpayer had no legal right to compensation either by insurance or otherwise. Subsequently.00—or P30. But assuming that there was no reasonable expectation of recovery.000 shares with par value of P100 per share. petitioner's submission is that its case is an exception.851. Sec.490.Y. Now. Petitioner. 30 (d) (2) of the Tax Code requires a charge-off as one of the conditions for loss deduction: In the case of a corporation. not ordinary. with ultimate collection reasonably clear. Even assuming that the securities had become worthless. and American cases also. or being. Lucenario 1 Sem A. The Commissioner of Internal Revenue disallowed the deduction saying that the investment could not be considered "worthless" since First CBC could still exercise its financing and investment activities even if it was no longer licensed as a depository. under the same court decision. It should follow. 23(f) thereof provides merely: In the case of a corporation. that the loss deduction can not be claimed in 1957. then. or a person actively engaged in trading in the same for his own account. who had the burden of proof14 failed to adduce evidence that there was a charge-off in connection with the P44. an asset. or property used in trade or business." Held: The SC found in favor of respondents. the taxpayer (petitioner) must exhaust his remedies first to recover or reduce his loss. 2010-2011 ST DIGESTS Issue: WON the amount Plaridel paid to Galang Machinery is a deductible loss Held: NO.80 consisting of 106. An equity investment in shares of stock cannot be considered as an indebtedness of First CBC Capital to China Bank. effected payment to Galang Machinery pursuant to a final decision occurred in 1957. The amount China Bank invested in First CBC is. 1. in fact. Clearly. v. as in the present case. petitioner argues that even if there is a right to compensation by insurance or otherwise. the rule is that loss deduction will be denied if there is a measurable right to compensation for the loss. First CBC was found to be insolvent.9 In other words. the deduction can be taken in the year of actual loss where the possibility of recovery is remote. None of them involved a taxpayer who had.00 — which it paid to Galang Machinery. all losses actually sustained and charged-off within the taxable year and not compensated for by insurance or otherwise. petitioner's loss is compensable otherwise (than by insurance). (Emphasis supplied) Mertens12 states only four (4) requisites because the United States 13 Internal Revenue Code of 1939 has no charge-off requirement. Not and indebtedness. Capital asset. as the Tax Court put it. There is no question that the year in which the petitioner Insurance Co. So where there is reasonable ground for reimbursement. San Jose and Cuervo were obligated to reimburse petitioner for whatever payments it would make to Galang Machinery. The pronouncement.7 And the American cases cited8 are not in point. Inc.600. are ordinary assets only in the hands of a dealer. CHINA BANKING CORPORATION V COURT OF APPEALS Facts: Petitioners mad a 53% equity investment in First CBC Capital (Asia) Limited to the amount of P16. still no loss deduction can be had. The former has no obligation to repay the latter the amount invested. wrote off as worthless its investment in the company and treated it as a bad debt or ordinary loss deductible from its gross income. In those cases. there was either no legally enforceable right at all or such claimed right was still to be. such as equity holdings. with the approval of the BSP.

it filed an amended ITR for the same taxable years showing that it actually incurred a loss of P871. respectively. 3. respectively. Petitioner thus filed for a refund of the P12. already deriving profits from its operations. In effect. which shall engage in new and necessary industries. It is clear that the law intended that taxexempt and non-exempt industries be treated separately as reflected in EO 341. the gross income from both tax-exempt and non-exempt industries and its liability should be based on the difference between its consolidated gross income and its consolidated allowable deductions. The same provision enumerates assets which are not subject to the said limitation but equity holdings are not one of them. 2. PHILIPPINE SUGAR ESTATE CORP V COLLECTOR OF INTERNAL REVENUE Facts: Respondent Domingo made an assessment on an additional income of petitioners in the amount of P16. Lucenario 1 Sem A. a tax exemption granted to an entrepreneur engaged in a tax-exempt industry cannot be extended to benefit non-exempt industries in which the same entrepreneur is concurrently engaged. 1. Subsequently. and other allied products of which the last two were covered by RA 35 In 1953 and 1954. presumably. rods. Such conduct of the petitioner proves that such loss never occurred.956.80 Petitioner assails the validity of the assessment alleging that the inventory in question was not sold but were lost to looters during a fire which occurred in the city.Y.29.407. Strictly speaking. The alleged loss of the plywood and kegs of nails was never reported in the books of the petitioner nor in the petitioner's ITR for that year. kegs of nails. It received certain sums from said corporation representing dividends on its shares of stock as 82 . petitioner presented the testimony of the Chief of Police of Dumaguete City affirming the occurrence of the fire. no sale occurs when securities held as capital assets become worthless. Section 33 of the NIRC provides that the capital loss sustained can only be deducted from any capital gain derived within the taxable year.37 and P104.63 coming from: 1. the law treats it as a loss from a sale just the same. HELD:The assessments were valid. there was neither any record in petitioner's books nor any receipt or other piece of evidence to show receipt of the supposed loan. Marcelo Steel cannot consolidate. Nonetheless.902. 2. Single capital . the sale of plywood. As such. petitioner filed its ITR showing a net income of P34. the petitioner claimed that the cash credit balance appearing in their books was actually a loan secured by petitioners.896. The purpose of RA 35 is to encourage the establishment of new and necessary industries for the economic growth of the country. It was accordingly assessed P12. the manufacture of wire fences.TAX 1 INCOME TAXATION Prof. Section 29(d)(4)(B) of the NIRC treats the worthlessness of the securities held as capital assets as a loss resulting from the sale or exchange of capital assets. which was incorporated in RA 901. Dina D. derived solely from its wire fence manufacturing business. Similarly. 2. i grants a subsidy to entrepreneurs who blaze a trail in a new industry since there are greater risks involved in the same and an ROI is usually not immediately forthcoming. a cash credit balance of P7. Also. series 0f 1950. Held: Petition has no merit. The losses were arrived at by consolidating the gross income and the gross allowable deductions of its three industries.07.58 and P58.750 it initially paid in taxes on the theory that since it is a corporation organized with a single capital to answer for all its financial obligations. The justification is simply not there since such industries are. THE CITY LUMBER. 2. To this end. MARCELO STEEL CROP V COLLECTOR OF INTERNAL REVENUE Facts: RA 35 granted a four-year tax exemption from all internal revenue taxes to enterprises.750 in taxes which it paid. the manufacture of steel nails.The fact that all three industries are organized under a single capital is of no moment. and GI sheets amouting to P 7. directly payable by such enterprise or person. INC V DOMINGO Petitioner corporation was engaged in: 1.386. a later incarnation of the same law. 4. 678.00. 2010-2011 ST DIGESTS 3. the manufacture of steel bars.329. Facts: Petitioner owned shares of stock in several different companies and 154 liberty bonds at par value of P100 each. 1.

to this Law. it invoked the ruling in Fox v Edwards wherein it was ruled that any unduly paid income tax may be refunded without the necessity of a protest. the petitioner miserably failed to show any of the foregoing. (NOTE: In the rest of the case. Section 19 of Act 2833 provides that "all administrative. Apart from such testimony. As per the ruling in Collector v Goodrich. the ground for the refund invoked was the illegality o the collection since the dividends and interest were exempt from payment of income tax. the Commissioner for Internal Revenue disallowed such deductions and assessed petitioner to pay a deficiency tax for the year of 83 . Subsequently. Petitioner paid the deficiency tax under protest which the Commissioner denied. petitioner filed a demand for refund.. the debt must be charged off during the taxable year. It paid said amount without protest. sending of collection letters.. and general provisions of law. Petitioner filed its ITR inclusive of the sums above-stated for which it was assessed an amount in taxes. including laws in relation to the assessment. Upon a petition for review. filing a collection case in court. special. 2. and refund of internal revenue taxes not hereto fore repealed and not inconsistent with. Respondent denied the claim for refund because plaintiff failed to lodge a protest concurrently when it paid its tax liability as per Sec 1579 of the Revised Administrative Code. the TP must also show that it is indeed uncollectible even in the future. Plaintiff countered by saying that the applicable law is Act No. In the letter-demand. 2. Held: The SC found in favor of the Collector.Y. 3685. giving the account to a lawyer for collection.Controlling law . 2. and 4... the CTA modified the findings of the Commissioner by reducing the deficiency tax assessment on the basis that three of the sixteen supposed bad debts could be allowed as deductions. Section 1579 of the Revised Administrative Code finds application to Act 2833. a TP must show: 1... petitioner filed its ITR where it claimed 16 items amounting to P713.applicable. Furthermore. Subsequently. The Court found that this lacked the required probity to establish that the accounts it claimed as bad debts were indeed worthless. as amended by Act No.TAX 1 INCOME TAXATION Prof. remission. the debt must arise from the business or trade of the TP. Dina D. I may have overlooked it. 1. 2833 which requires no protest. the Court said. Held: The SC upheld the ruling of the CA which it found to be in accordance with the SC's ruling in Collector v Goodrich. 3. The CA later on agreed with the CTA. Although in the present petition. to qualify as a bad debt. In addition. the ground invoked is that the income tax on dividends had already been paid at the source. In the case at bar. before a debt can be considered worthless. that there is a valid and subsisting debt. that the debt must be actually ascertained to be worthless and uncollectible durring the taxable year. and 4. BAD DEBTS PHILIPPINE REFINING COMPANY V COURT OF APPEALS Facts: In 1985. collection. 2010-2011 ST DIGESTS well as interst on the said liberty bonds. In addition. Lucenario 1 Sem A. sending statements of accounts to the debtors.There is no need to distinguish between the two laws in this case. The only piece of evidence it offered to show the worthlessness of the debts was the testimony of the company's financial adviser or accountant.070. the petitioner failed to introduce even a single iota of evidence to bolster its claim of worthlessness. 3. Fox v Edwards is not controlling since the law specifically applied therein did not require the lodging of a protest concurrently with the payment for a TP to retain such right to protest." By virtue of this saving clause.) 1985. (NOTE fr digester: I did not find anything on losses or bad debts in this case. It held the petitioner failed to substantiate the “worthlessness” of the 13 debts which it claimed as deductions.93 as bad debts and therefor deductible.this Law are. the Court presents the allegation of the petitioner as to why it could not collect on any of the 13 debts followed by DEDUCTIONS AND EXEPTIONS. ALLOWABLE DEDUCTIONS. the TP must undertake several steps to prove that he exerted diligent efforts to collect the debt: 1.

without making provision out of earnings for its replacement. and the continuing failure/clear inability of the debtors to pay off their obligations. of an amount more than the invested capital in an asset will transgress the underlying purpose of a 84 . no further allowance shall be made. respondent Goodrich filed it ITR in which it claimed an aggregate amount (consisting of 18 individual accounts) of P50. . INC. . Accordingly. At any rate. the pursuit of legal remedies for the collection on these debts. L-22265) Facts: In 1951 and 1952. The SC rejected the claim for deduction of 10 items because Goodrich failed to establish that that the debts were actually worthless or that it had reasonable grounds to believe them to be so in 1951. free of income tax. The recovery. . The income tax law does not authorize the depreciation of an asset beyond its acquisition cost.” obviously to prevent arbitrary action by the TP to unduly avoid tax liability. a deduction over and above such cost cannot be claimed and allowed. That when the allowance authorized under this subsection shall equal the capital invested by the taxpayer . It commences with the acquisition of the property and its owner is not bound to see his property gradually waste. not matters of right. They are not created by implication but upon clear expression in the law. Some of the items claimed by Goodrich can rightfully be written off as bad debts. from 1950 to 1953 it deducted from gross income the value of depreciation computed on the reappraised value. No. it's endorsement of the accounts to counsel for collection. claimed deductions for the depreciation of its assets on the basis of their acquisition cost. Common among these 8 was the action of Goodrich in persistently demanding payment from its debtors. He must furthermore show that he had reasonably investigated the relevant facts and had drawn a reasonable inference from the information thus obtained by him.41 as deductible for being bad debts. respondent failed to prove that the debts were indeed worthless and that the debtors had no ability to pay them. CIR disallowed the deductions claimed by petitioner. this appeal by the Government. On the contrary. Hence. Inc. Good faith on the part of the TP is not enough.Y. (21 SCRA 1336. The Collector of Internal Revenue disallowed the deductions and accordingly assessed Goodrich accordingly. DEPRECIATION BASILAN ESTATES. 1950 it changed the depreciable value of said assets by increasing it to conform with the increase in cost for their replacement.455. The reason is that deductions from gross income are privileges. Issue:Whether or not the depreciation shall be determined on the acquisition cost rather than the reappraised value of the assets. Lucenario 1 Sem A. The following tax law provision allows a deduction from gross income for depreciation but limits the recovery to the capital invested in the asset being depreciated: (1)In general. of these 10 accounts some payments were actually made (some in full) after they had been characterized as bad debts and written off. DEDUCTIONS AND EXEMPTIONS. Depreciation is the gradual diminution in the useful value of tangible property resulting from wear and tear and normal obsolescense. 2010-2011 ST DIGESTS a statement how the petitioner failed to introduce evidence to substantiate such allegation. Held: Yes. consequently assessing the latter of deficiency income taxes. . — A reasonable allowance for deterioration of property arising out of its use or employment in the business or trade. ALLOWABLE DEDUCTIONS.TAX 1 INCOME TAXATION Prof. CIR Facts: Basilan Estates. v. . or out of its not being used: Provided. The law permits the deduction of debts “actually ascertained to be worthless within the taxable year. Dina D. As of January 1. Hence. The Court however ruled that 8 of the 18 claimed bad debts can be allowed as deductions. Held: Petition is partially meritorious.) Collector of Internal Revenue v Goodrich International Rubber Co. Goodrich protested the assessment and subsequently filed an appeal with the CTA which allowed the deductions for bad debts.

Held: The CTA was approximately correct in holding that the rate of depreciation must be 2.00 as promotion expenses should be allowed and not merely one-half of it. petitioner alleged that the CTA erred in disallowing the promotion expenses incurred by his wife for promotion of the above businesses. Recovery in due time thru depreciation of investment made is the philosophy behind depreciation allowance.957. absolute certainty is usually no possible. owner of the Bay View Hotel and Farmacia Zamora. Cases Nos.000. Section 30. Zamora could not even remember how much money she had when she left abroad in 1951. styles of furniture and decorative designs. They also purchased a lot located inQuezon City for P68. 1951. provides that in computing net income. on the ground that. 1944.959.957.the reference to Bulletin F. bought a piece of land located in Manila on May 16.00 on January 19. representing alleged deficiency income tax and surcharge due from said estate. and how the alleged amount of P20. Zamora v.00 as business expenses and the other 50%.478. Second issue – disallowance/reduction of the rate of depreciation of Bayview Hotel (from 3.TAX 1 INCOME TAXATION Prof. Zamora. the absence of some supporting receipts has been sufficiently and satisfactorily established . the CTA should make as close an approximation as it can. Zamora obtained only the sum of P5. Since promotion expenses constitute one of the deductions in conducting a business. 1951. L-15289 and L-15281 Mariano Zamora and his deceased sister Felicidad Zamora. L-15290 and L-15280:Mariano Zamora. bearing heavily.000. which facts were not denied by Mariano Zamora. partly in Philippine currency and partly in Japanese war notes. claimed that the CTA erred in reducing the amounts and giving credence to the uncorroborated testimony of Mariano Zamora that he bought the said real property in question during the Japanese occupation. For then what the taxpayer would recover will be. not only the acquisition cost. to pay the sum of P235. upon the taxpayer whose inexactness is of his own making. while not all the itemized expenses are supported by receipts. the respondents considered 50% of the said amount of P20. First issue – disallowance of the entire promotion expenses incurred by Mrs.Y. The CTA reduced the sum due Zamora and on appeal.5% to 2. The CTA ordered the estate of the late Felicidad Zamora (represented by Esperanza A. for P132. The CIR. There having been no means by which to ascertain which expense was incurred by her in connection with the business of Mariano Zamora and which was incurred for her personal benefit. she stated that she was going abroad on a combined medical and business trip. depreciation of the Bayview Hotel Bldg. on the other hand.957. same must testify these requirements. 1944. of the Tax Code. CIR Facts: These are 4 cases regarding deficiency income taxes allegedly incurred by the Zamoras. While in situations like the present. 2010-2011 ST DIGESTS depreciation allowance.5%. An average hotel building’s estimated useful 85 . in carrying on any trade or business. as her personal expenses.50.000 on February 9. Cases Nos. and(3) the changing modes in architecture. and in applying the Ballantyne scale of values for determining the cost of his Manila property. Also. Held: The 50% allocation is very fair to Zamora. Mrs. Zamora Petitioner: The CTA erred in disallowing P10. The Collector of Internal Revenue found that he failed to file his return of the capital gains derived from the sale of certain real properties and claimed deductions which were not allowable.00 and sold it for P75.50 as promotion expenses incurred by his wife for the promotion of the BayView Hotel and Farmacia Zamora. a publication by the IRS. which they sold for P94. there shall be allowed as deductions all the ordinary and necessary expenses paid or incurred during the taxable year.00 from the Central Bank and that in her application for dollar allocation. "must meet the taste of a fickle public". Lucenario 1 Sem A. 2) the hotel has no room for improvement.000.5%) Petitioner: Contends that 1) the Ermita district is becoming a commercial district.00 on March 5. if it chooses. He contends that the whole amount of P20. Manila. should have been first proved as law to be subject of judicial notice. as special administratrix of her estate). there being no receipt to explain the alleged business expenses as well as the personal expenses that might have been incurred. The alleged expenses were not supported by receipts.to purchase machinery for a new Tiki-Tiki plant. but also some profit.00 was spent.and to observe hotel management in modern hotels. Claim for the deduction of promotion expenses or entertainment expenses must also be substantiated or supported by record showing in detail the amount and nature of the expenses incurred. the idea of profit on the investment made has never been the underlying reason for the allowance of a deduction for depreciation. Respondents: Mrs. Dina D. filed his income tax returns the years 1951 and 1952.

ALLOWABLE DEDUCTIONS. but it has a strong persuasive effect considering that the same has been the result of scientific studies and observation for a long period in the United States after whose Income Tax Law ours is patterned." Verily.000. courts are permitted to look into and investigate the antecedents or the legislative history of the statutes involved. As the value of the Japanese war notes in May. Dina D.75 (P1.88 is taxable. 1954.500. develop. This being the case. the gain derived from the sale isP15. and that (B) for the year 1956 (1) the Company had overstated its claim for depletion.00 and the expense of sale in thesum of P9.361.00 and that as the property was sold for P75. 50% of which in the sum of P8.111. it is allowed a deprecation rate of 2. (A) for the years 1951 to 1954 (1) the Company had not accrued as an expense the share in the company profits of Benguet Consolidated Mines as operator of the Consolidated's mines. the said properties being capital assets held for more than one year.500. although for income tax purposes the Consolidated had reported income and expenses on the accrual basis.000. and since the gain derived or loss sustained in the disposition of this property is to reckoned in terms of Philippine Peso.750.959. and the decision appealed from is affirmed. after investigation of the BIR.Y.75). should be applied.500.75.25. Lucenario 1 Sem A. but inasmuch as it also depends on the use and location. the total undeclared income of petitioners derived from the sales of the Manila and Quezon City properties in 1951 is P17. Disposition: The petitions are dismissed. must be reduced in terms of the genuine Philippine Peso to determine the cost of acquisition. Manila and in Quezon City. Consequently. instead of having a refund. as the owner of several mining claims. was 1 ½ of the genuine Philippine Peso (Ballantyne Scale).00 or P71. 2010-2011 ST DIGESTS life is 5 years. the acquisition cost of the property in question is P66. and market the ore in the mining claims.00 was in Philippine currency. because it is quite incredible that real property with an assessed value of P46. 1944 when the Manila property was bought.000. Third issue-the undeclared capital gains derived from the sales in 1951 of certain real properties in Malate. change in population and other. results that since the sum of P66.361.00 in 1951. and 1956.00 in Japanese war notes in May. the value of the Japanese war notes used in the purchase of the property. However.00 in Philippine currency (P66. with 5% surcharge and 1% monthly interest. the company was instead assessed for deficiency income taxes for the years 1953.750. It is true that Bulletin F has no binding force. Once profit is 86 . therefore. 1944 is equivalent to P5.5% which corresponds to a useful life of 40 years.910. the CTA was correct in giving credence to Zamora’s testimony that the same was purchased inPhilippine currency. In the agreement. DEPLETION CONSOLIDATED MINES V CTA Facts: Cosolidated Mines filed a refund for overpayments of income taxes for the year 1951. adopted and given judicial recognition.TAX 1 INCOME TAXATION Prof. and (3) the claims for audit and legal fees and miscellaneous expenses for 1953 and 1954 had not been properly substantiated. the Ballantyne Scale of values.000.00 plus P15. DEDUCTIONS AND EXEMPTIONS. For the Quezon City property.00or P1.00 plus P5.000.679. Held: The CTA’s appraisal in this case is correct. concentrate.75.00 was not entirely paid in Japanese War notes but ½ thereof or P66. The cost basis of property acquired in Japanese war notes is the equivalent of the war notes in genuine Philippine currency in accordance with the Ballantyne Scale of values. Thus. and that the determination of the gain derived or loss sustained in the sale of such property is not affected by the decline at the time of sale.555.000.00 each.500. According to the investigation. mine. to be reimbursed by consolidated. which was the result of an impartial scientific study. (2) depletion and depreciation expenses had been overcharged. after deducting from the selling price the cost of acquisition in the sum of P68. the owners thereof Mariano and Felicidad Zamora derived a capital gain of P3. it was provided that benguet is to provide the funds necessary for the expenses until such time the properties are on a profit producing basis. in the purchasing power of the Philippine currency. It. It was found by the CTA that the purchase price of P132. and (2) certain claims for miscellaneous expenses were not duly supported by evidence Background info: Consolidated and Benguet entered into a development agreement whereby Consolidated.00 should have been soldin Japanese war notes with an equivalent value in Philippine currency of only P17. allowed Benguet to explore. acquired during the Japanese occupation.239.00 divided by 12).

" Once determined in accordance with the stipulated bases and procedure. and (2) the method of computation agreed upon between Consolidated and Benguet in determining the amount of compensation that was to be paid by the former to the latter. and if not. (2) the 87 . (1) the basis of the property. the taxpayer has the burden of justifying the allowance of any deduction claimed. Lucenario 1 Sem A. depletion is wholly a creation of the statute — “solely a matter of legislative grace. which amount is computed as 50% of “net income. the burden of proof to show that a disallowance of depletion by the Commissioner is incorrect or that an allowance made is inadequate is upon the taxpayer. “After Benguet has been fully reimbursed for its expenditures. The question is whether or not the accounting system used by Consolidated justifies such a treatment of this item. ON DEPLETION: The first issue raised by Consolidated is with respect to the rate of mine depletion used by the Court of Tax Appeals. that Consolidated has been deducting a portion of this expense (Benguet's share as mine operator) on the "cash & carry" basis.” Hence. being free to do so. and this is true with respect to the value of the property constituting the basis of the deduction. even if payment has not been made. Such division of net profits shall be based on the receipts. This burden-of-proof rule has been frequently applied and a value claimed has been disallowed for lack of evidence. 30(g) (1) (B)].) it set forth a very detailed computation of the depletion rate. then the amount due Benguet for each month accrued at the end of that month.” It appears that by 1953 Benguet had completely recouped its advances. it deducts Benguet's 50% if and when the "accounts receivable" are actually paid. in effect. One of its expenses is the amount-paid to Benguet as mine operator. it being understood however. During the time Benguet is being reimbursed for all its expenditures. Consolidated used the accrual method of accounting in computing its income.” The Consolidated deducts as an expense 50% of cash receipts minus disbursements. and requires only that taxable income generally be based on the method of accounting regularly employed in keeping the taxpayer's books. Here. SC considered the evidence presented (testimony of Eligio Garcia and the Report to Stockholders (which includes the Balance Sheet as of 1946). and characterized by the Commissioner as a "hybrid method. Dina D. The Tax Code provides that in computing net income there shall be allowed as deduction. and shall continue until such time as the 90% of the net profits pertaining to Benguet hereunder shall equal the amount of such expenditures. be equivalent to giving Benguet a right which it did not have under the contract. the net profits resulting from the operation of the claims shall be divided 90% to Benguet and 10% to Consolidated. the net profits from the operation shall be divided between Benguet and Consolidated share and share alike.depletion is different from depreciation In determining the amount of cost depletion allowable the following three facts are essential. in the case of mines. namely. determining the value of each component of the formula of depletion. whether said method used by Consolidated. had contracted that in the method of computing compensation the basis were "cash receipts" and "cash payments." However. It is said that accounting methods for tax purposes comprise a set of rules for determining when and how to report income and deductions. provided that the method clearly reflects income. a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof which has been mined and sold during the year for which the return is made [Sec. 2010-2011 ST DIGESTS derived. etc.TAX 1 INCOME TAXATION Prof. The parties. A deduction cannot be accrued until an actual liability is incurred. As an income tax concept. and to substitute for the parties' choice a mode of computation of compensation not contemplated by them. whether Consolidated had made payment or not. because they were then dividing the profits share and share alike. To make Consolidated deduct as an expense one-half of the "Accounts Receivable" would. Issue: WON Consolidated’s accounting method is allowed Held: YES. that the net profits as the term is used in this agreement shall be computed by deducting from gross income all operating expenses and all disbursements of any nature whatsoever as may be made in order to carry out the terms of this agreement." may be allowed under the provisions of the NIRC. geological report on the estimated amount of ore in the claims. As in connection with all other tax controversies. viz: Rate of Depletion Per Unit = Cost of Mine Property / Estimated ore Deposit of Product Mined and sold . expenditures from its own resources shall be charged against the subsequent gross income of the properties. It would seem. but does not deduct at the end of each calendar year what the Commissioner alleges is "50% of the share of Benguet" in the "accounts receivable.Y. The U. therefore.S. and expenditures during each calendar year. Internal Revenue Code allows each taxpayer to adopt the accounting method most suitable to his business. Here we have to distinguish between (1) the method of accounting used by Consolidated in determining its net income for tax purposes.

2d 688. It has been held that the basis of the accrual system of accounting is that obligations incurred in the normal course of business will be discharged in due course. This is so because of a fundamental difference in the ends the two concepts serve.079. April 26. in consonance with the constitutional mandate to acquire big landed estates and apportion them among landless tenants-farmers. is the date that fixes liability. said children. Dina D. the tenants who have all been tilling the lands in Nasugbu for generations expressed their desire to purchase from Roxas y Cia.048. It turned out however that the Government did not have funds to cover the purchase price. in the case of a deduction) is to be determined must have existed in the year in which the obligation became binding or enforceable. Jur. 2010-2011 ST DIGESTS estimated total recoverable units in the property. their recognition. it will almost always differ from accounting income. At the conclusion of the WW2. Roxas y Cia. Gain or loss may not said to be fixed or accrued when the obligation is contingent upon the happening of a future event. formed a partnership called Roxas y Compania. Disposition Decision modified Footnotes in the case that are helpful: While taxable income is based on the method of accounting used by the taxpayer. The date of the accrued right to receive income. the amount of P1. a valid obligation upon which the profit (or loss. basis means the dollar amount of the taxpayer's capital or investment in the property which he is entitled to recover tax free during the period he is removing the mineral in the deposit. For the reason that Roxas y Cia. 33 Am. even though it may not be actually received until a later year. As used as an element in cost depletion. subdivided its Nasugbu farm lands and sold them to the farmers on installment. while a deduction for a liability is to be accrued and taken when the liability becomes fixed and certain.500 hectares to the Government for distribution to actual occupants for a price of P2. even though it may not be paid until a later year. To manage the above-mentioned properties. The CIR demanded from Roxas y Cia the payment of deficiency income taxes resulting from the inclusion as income of Roxas y Cia. hence. on the other hand. the parcels which they actually occupied. of the unreported 50% of the net profits for 1953 and 1955 derived from the sale of the Nasugbu farm lands to the tenants. namely. Conferences were held with the farmers in the early part of 1948 and finally the Roxas brothers agreed to sell 13. Collateral for such loan were the lands proposed to be sold to the farmers. the tax law will not recognize deductions for contingent future losses except in very limited situations. CTA. Eduardo Roxas and Jose Roxas. slow to recognize deductions or losses." but in order to be accruable in the taxable year.TAX 1 INCOME TAXATION Prof.000. 1968 Facts: Don Pedro Roxas and Dona Carmen Ayala. and (3) the number of units recovered during the taxable year in question. DEDUCTIONS AND EXEMPTIONS. allowed the farmers to buy the lands for the same price but by installment.Y. The Roxas brothers protested the assessment but inasmuch as said protest was denied. and contracted with the Rehabilitation Finance Corporation to pay its loan from the proceeds of the yearly amortizations paid by the farmers. Tax law is aimed at collecting revenue. For its part. and so a special arrangement was made for the Rehabilitation Finance Corporation to advance to Roxas y Cia. and the disallowance of deductions from gross income of various business expenses and contributions claimed by Roxas y Cia. the Commissioner considered the partnership as engaged in the business of real estate.47 plus P300. Spanish subjects. the Government.00 as loan. GR No L-25043. Thus. persuaded the Roxas brothers to part with their landholdings.000. transmitted to their grandchildren by hereditary succession several properties. that the deductions have been "paid or accrued" or "paid and incurred. or the obligation to pay or expend money constituting a deductible loss. CHARITABLE AND OTHER CONTRIBUTIONS ROXAS v. and the Roxas brothers.00 for survey and subdivision expenses. Under the arrangement. Under the accrual system income is accruable in the year in which the taxpayer's right thereto becomes fixed and definite.500. Good accounting. Once this fundamental difference in approach is accepted. Antonio Roxas. Lucenario 1 Sem A. ALLOWABLE DEDUCTIONS. income tax accounting methods can be understood more easily. No duty or liability to pay an income tax upon a transaction arises until the taxable year in which the event constituting the condition precedent occurs under any system of accounting. they instituted 88 . It is quick to treat an item as income. 100% of the profits derived therefrom was taxed. Accounting attempts to match cost against revenue.

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an appeal in the CTA which sustained the assessment. Hence, this appeal. Issue: Is Roxas y Cia. liable for the payment of deficiency income for the sale of Nasugbu farmlands? Held: NO. The proposition of the CIR cannot be favorably accepted in this isolated transaction with its peculiar circumstances in spite of the fact that there were hundreds of vendees. Although they paid for their respective holdings in installment for a period of 10 years, it would nevertheless not make the vendor Roxas y Cia. a real estate dealer during the 10-year amortization period. It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled them for generations was not only in consonance with, but more in obedience to the request and pursuant to the policy of our Government to allocate lands to the landless. It was the bounden duty of the Government to pay the agreed compensation after it had persuaded Roxas y Cia. to sell its haciendas, and to subsequently subdivide them among the farmers at very reasonable terms and prices. However, the Government could not comply with its duty for lack of funds. Obligingly, Roxas y Cia. shouldered the Government's burden, went out of its way and sold lands directly to the farmers in the same way and under the same terms as would have been the case had the Government done it itself. For this magnanimous act, the municipal council of Nasugbu passed a resolution expressing the people's gratitude. In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale in question. Hence, pursuant to Section 34 of the Tax Code the lands sold to the farmers are capital assets, and the gain derived from the sale thereof is capital gain, taxable only to the extent of 50%. DEDUCTIONS AND EXEMPTIONS; NON-DEDUCTIBLE EXPENSE CIR v JAMIR Facts: For the year 1954, Alberto M. K. Jamir declared a gross income of P75,858.65 and claimed deductions aggregating P58,134.50, thereby showing a net income of P17,774.15, upon which he paid P1,634 as income tax. The Collector of Internal Revenue, however, assessed, as deficiency income tax due from him, the sum of P16,395.

Jamir appealed to the Court of Tax Appeals, which reduced the amount due as deficiency income tax to P552.00 Issue: Whether Jamir had an undeclared income for the year 1954 aggregating P31,274.91. Held: No. It appears that, by using the so-called "expenditures method", the Government considered as an undeclared income Jamir's expenditures for February and May were in excess of his reported income for the same months. Although the Court of Tax Appeals, in effect, sanctioned the adoption of the "expenditures method", it held that the same should be applied by deducting the aggregate yearly expenditures from the declared yearly income, not the expenditures incurred each month from the declared income therefor. In the case at bar, Jamir's total income for the year 1954 (P75,858.65) exceeded (Pl7,774.15) the total deductions (P58,134.50) claimed by him. Jamir introduced evidence that the said sums of P1,281.24 and P29,993.67 represented advances made to him by customers in the months of February and May, 1954, and that the income derived from the corresponding transactions were entered in his books of account in subsequent months, and this explanation was found by the Court of Tax Appeals to have been proven satisfactorily. The next question raised by appellant refers to Jamir's claim for car depreciation and salary of his driver. Although petitioner had disallowed one-half (1/2) of these claims, it appearing that the car was used by Jamir for personal and business purposes, the lower court allowed, as deductions, three-fourths (3/4) of said amounts, the car having been used by Jamir "more for business than for personal purpose". Petitioner assails this as an error, but, considering the circumstances, we agree with the deduction of ¾ by the lower court. It is next urged that Jamir committed fraud and the 50% surcharge should not have been eliminated. But since Jamir did not have the undeclared income of P31,274.91, upon which the contested assessment is mainly based, it follows necessarily that he was not guilty of the fraud and that the 50% surcharge has been properly eliminated. Disposition: the decision appealed from is hereby affirmed.

Atlas Consolidated Mining v. CIR

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Facts: CIR assessed Atlas deficiency income tax for 1957 to 1958 which amounted to morethan P700K. CIR asserted that in 1957, Atlas was still not entitled to exemption fromthe income tax under RA 909 because the same covers only gold mines and Atlas isnot engaged in that. Atlas protested before the Sec of Finance and Sec ruled that exemption provided in RA 909 embraces all new mines and old mines, whether gold or other minerals. Hence, Sec recomputed and eliminated P500K+ in 1957 and reduced P215K to P39K in 1958. Atlas appealed to this assessments assailing the disallowance of the following items: transfer agent s fees, stockholders relation service fee, US stock listing expenses, suit expenses, provision for contingency. CTA disallowed the items except the stockholders relation service fee and suit expenses. Also CTA ruled that the exemption from payment of the corporate income tax of Atlas was good only up to the first quarter of 1958, hence it computed for its net taxable income for the remaining ¾ of the year. Atlas appealed asserting that the annual public relations expense is a deductible expense from gross income because it is an ordinary and necessary business expense. Issue: WON this fee paid for the services rendered by a public relations firm in the US labeled as stockholders relation service fee is an allowable deduction. Held: No. it is a capital expenditure and not an ordinary expense. The principle is recognized that when a taxpayer claims a deduction, he must point to some specific provision of the statute in which that deduction is authorized and must be able to prove that he is entitled to the deduction which the law allows. As previously adverted to, the law allowing expenses as deduction from gross income for purposes of the income tax is Section 30 (a) (1) of the National Internal Revenue which allows a deduction of "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." An item of expenditure, in order to be deductible under this section of the statute, must fall squarely within its language. We come, then, to the statutory test of deductibility where it is axiomatic that to be deductible as a business expense, three conditions are imposed, namely: (1) the expense must be ordinary and necessary, (2) it must be paid or incurred within the taxable year, and (3) it must be paid or incurred in carrying in a trade or business. In addition, not only must the taxpayer meet the

business test, he must substantially prove by evidence or records the deductions claimed under the law, otherwise, the same will be disallowed. The mere allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its deduction. Assuming that the expenditure is ordinary and necessary in the operation of the taxpayer's business, the answer to the question as to whether the expenditure is an allowable deduction as a business expense must be determined from the nature of the expenditure itself, which in turn depends on the extent and permanency of the work accomplished by the expenditure. The expenditure of P25,523.14 paid to P.K. Macker & Co. as compensation for services carrying on the selling campaign in an effort to sell Atlas' additional capital stock of P3,325,000 is not an ordinary expense in line with the decision of U.S. Board of Tax Appeals in the case of Harrisburg Hospital Inc. vs. Commissioner of Internal Revenue. Accordingly, as found by the Court of Tax Appeals, the said expense is not deductible from Atlas gross income in 1958 because expenses relating to 1) recapitalization and reorganization of the corporation, 2) the cost of obtaining stock subscription 3)promotion expenses and 4) commission or fees paid for the sale of stock reorganization are capital expenditures. The burden of proof that the expenses incurred are ordinary and necessary is onthe taxpayer. The claimed business expense must also be supported by appropriate documents such as invoices, official receipts, and contracts, to be made available in case of a tax audit by the Bureau of Internal Revenue. GANCAYCO V COLLECTOR Facts:
     

Gancayco filed his Income tax Return (ITR) for 1949. CIR notified him that his liability is Php 9.793.62, which he paid 1950 CIR after a year wrote to Gancayco saying that there was tax due from him for a total of Php 29,554.05 Gancayco asked for reconsideration and the tax assessed was reduced CIR issued a warrant of distraint for the deficient liability Gancayco filed petition with CTA

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CTA: Required Gancayco to pay Php 16, 860.31 for tax deficiency in 1949 Gancayco: the right to collect the deficiency income tax is barred by the statute of limitations. : the 5 yr period for judicial action should be counted from May 12 50, the date of original assessment SC: Section 316 provides: The civil remedies for the collection of internal revenue taxes, fees, or charges, and any increment thereto resulting from delinquency shall be (a) by distraint of goods, chattels, or effects, and other personal property of whatever character, including stocks and other securities, debts, credits, bank accounts, and interest in and rights to personal property, and by levy upon real property; and (b) by judicial action. Either of these remedies or both simultaneously may be pursued in the discretion of the authorities charged with the collection of such taxes. No exemption shall be allowed against the internal revenue taxes in any case. : Deduction for expenses may be allowed, however in this case, Gancayco was not able to prove any expense as there were no receipts or other proofs. CTA AFFIRMED DEDUCTIONS AND EXEMPTIONS; NON-DEDUCTIBLE EXPENSES; ILLEGAL EXPENSES CALANOC V COLLECTOR Facts:  Calanoc was authorized to solicit and receive contributions for the orphans and destitute kids of the Child Welfare Workers Club of the Social Welfare Commission.  Dec 1949, Calanoc financed and promoted a boxing exhibition at the Rizal Memorial Stadium for said charitable purpose  He applied for exemption from payment of the amusement tax as provided in Sec 260 NIRC  CIR investigated the tax case of Calanoc and it was found that there was gross sale of Php 26,553, expenditure of 25,157 and profit of 1,375.30

 Profit was remitted to Social Welfare Commission.  CIR demanded Calanoc oto pay 533  Sec of Finance denied the application of Calanoc for exemption from payment of amusement tax CTA: Affirmed the assessment of 7k Calanoc; denies receving a stadium fee of 1k : Although it was shown that 1k was paid by O-OSO Beverages : His accountant is dead SC: the items of expenditures for deduction are exorbitant and not supported by receipts CTA Affirmed 3M PHILIPPINES, INC., petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent. [G.R. No. 82833. September 26, 1988.] Facts: The petitioner claimed as deductions for income tax purposes "business expenses" in the form of royalty payments to its foreign licensor which the respondent Commissioner of Internal Revenue disallowed. The petitioner claimed the following deductions royalties and technical service fees and pre-operational cost of tape coater. The amount was not allowed as entire deduction. The petitioner argues that the law applicable to its case is only Section 29(a)(1) of the Tax Code and not Circular No. 393 of the Central Bank. Issue: WON the royalty payments are valid deductible expense. WON the Tax Code is applicable. Held: No. Although the Tax Code allows payments of royalty to be deducted from gross income as business expenses, it is CB Circular No. 393 that defines what royalty payments are proper. Improper payments of royalty are not deductible as legitimate business expenses. Section 3c of CB Circular No. 393 provides for payment of royalties only on commodities manufactured by the licensee under the royalty agreement not on the wholesale price of finished products imported by the licensee from the licensor. entral Bank Circulars, like CB Circular No. 393 (dated December 7, 1973, published in the Official Gazette issue of December 17, 1973 [69 O.G. No. 51, p. 11737] issued by the Central Bank in the exercise of fits authority under the Central Bank Act, duly published in

91

All that the law requires in order that an unmarried individual may be considered as head of a family is that the relatives enumerated be dependent upon him for their chief support. through legal fiction. TAXABLE INCOME [G. vs. 2010-2011 ST DIGESTS the Official Gazette. his benefactor is not the head of a family. While the adoption agreement was executed at a time when the law applicable to adoption is Rule 100 of the Rules of Court. or by adoption. oppositor-appellant. In the absence of continuous actual residence together. relationship by marriage. If. DEDUCTIONS AND EXEMPTIONS. and whose right to exercise family control and provide for these dependent individuals is based upon some moral or legal obligation. recognized natural or adopted children.] Facts: The appellant refused to recognize the appellee as head of a family within the meaning of section (b) of the National Internal Revenue Code (Commonwealth Act No. RESIDENT FOREIGN CORPORATIONS. LUIS SANTOS-YÑIGO and LIGIA MIGUEL DE SANTOSYÑIGO. one or more legitimate. or a child or other dependent is away at school or on a visit. Held: Yes. through force of circumstances a parent is obliged to maintain his dependent children with relatives or in a boarding house while he lives elsewhere. however. conflicts. moreover. The said children were born after the agreement for adoption was executed by petitioners and the parents of the minor. 1959. 1954.R. have the force and effect of law (Cases cited) and binding on everybody. friction. For an unmarried individual to fall within the term "head of a family" under Section 23 (b) of the National Internal Revenue Code. for otherwise. whether or not a person with dependent relatives is a head of a family within the meaning of the statute must depend on the character of the separation. or in pursuance of the procedure laid down by the rule. which does not prohibit persons who have legitimate children from adopting. According to the respondent-appellee he has a brother below 21 years old mainly dependent upon him for support. The purpose of adoption is to afford to persons who have no child of their own the consolation of having one by creating.TAX ON CORPORATIONS: BASES AND RATES. such agreement can not have the effect of establishing the relation of paternity and filiation by fiction of law without the sanction of court. the additional exemption applies.] Held: Yes. petitioners-appellees. If. June 28. 590) and assessed him for deficiency taxes. The fact that the father is still alive and continues to exercise parental authority over his minor children is of no moment. it is enough that he has either of the following who is dependent upon him for his chief support: a father or mother or both. provided such brother. respondents.Y. without necessity. 466. Partial 92 . The only valid adoption in this jurisdiction is that one made through court. In the matter of the adoption of the minor MARCIAL ELEUTERIO RESABA. CALSADO and COURT OF TAX APPEALS. If a father is absent on business. L-6294. and differences may arise resulting from the infiltration of foreign element into a family which already counts with children upon whom the parents can shower their paternal love and affection.R.000. PERSONAL EXEMPTIONS Facts: The petitioners adopted a child while they have two legitimate children of their own. *For tax purposes . Dina D. petitioner. one or more brothers or sisters. the common home being still maintained. the allowed personal exemption is Php50. L10293.A head of family is an individual who actually supports and maintains in one household one or more individuals. No.TAX 1 INCOME TAXATION Prof. *Under RA 9504 Regardless of the classification. as amended by Republic Act No. vs. ORLANDO V. February 27. Issue: WON the adoption is valid COLLECTOR OF INTERNAL REVENUE. the additional exemption may still apply. Issue: WON the respondent is classified as head of the family. No. [G. sister or child is less than 21 years of age. the relation of paternity and filiation where none exists by blood relationship. the dependent continuously makes his home elsewhere. who are closely connected with him by blood relationship. irrespective of the question of support. A resident alien with children abroad is not thereby entitled to credit as the head of a family. Lucenario 1 Sem A. This purpose rejects the idea of adoption by persons who have children of their own. Chief support means principal or main support. REPUBLIC OF THE PHILIPPINES.

The CIR denied the same. section 11 NV REEDERIT V CIR Facts: NV Reederij was a foreign shipping corporation which was called on Philippine ports to load cargoes for foreign destination on only two occasions--in 1963 and 1964. It does not have a branch office in the Philippines. the taxable income of FCNETB consists of gross income from all sources within the Philippines. one in 1963 and the other in 1964. NV Reederij is a FCNEBT. Royal Interocean Lines.] BANK OF AMERICA NT & SA. BRANCH PROFIT REMITTANCE TAX BANK OF AMERICA NT & SA. petitioner. 103092. No. 3. NV Redeerij does not have a license to do business in RP. Pursuant to Section 15 of the NIRC. Held: Denied. The SC called Reederij's business transaction in 1963 and 1964 only as "casual business activity". HONORABLE COURT OF APPEALS. the CIR filed for and in behalf of NV Redeerij. July 21. its husbanding agent. RESIDENT FOREIGN CORPORATIONS. The Court said that "in order for a business activity to be considered as engaged in trade or business. [G. The tax was based on net profits after income tax without deducting the amount corresponding to 93 . vs.Y. THE HONORABLE COURT OF APPEALS AND THE COMMISSIONER OF INTERNAL REVENUE. No. 2.72 on profit from its regular banking unit operations and P445." A casual business activity does not mean that one is engaged in business or trade. respondents. Dina D. 2010-2011 ST DIGESTS support not amounting to chief support will not entitle the taxpayer to claim exemption as a head of a family. On the assumption that the petitioner is a foreign corporation engaged in trade or business in the Philippines.] Facts: The petitioner corporation paid 15% branch profit remittance tax in the amount of P7. 1994. July 21. Issue: The petitioners raised the issue of WON NV Reederij was a foreign corporation engaged in trade and business in the Philippines to the Supreme Court.460. its business transaction must be CONTINUOUS. Regulation No. The Court refuted the assertion of the petitioners that Section 37 (e) does not distinguish between an engaged and a not engaged foreign corporation. The Petitioners further argued that the lower courts erred in holding that because NV Reederij disregarded Section 163 of Revenue Regulations No. The tax rate is imposed on the net income of a FCETB. 193 in 1964. vs.538. TAX ON CORPORATIONS: BASES AND RATES.R. AND THE COMMISSIONER OF INTERNAL REVENUE. petitioner. The Supreme Court took primary consideration of the following facts: 1. On the other hand.TAX 1 INCOME TAXATION Prof. Reederij is a FCNEBT. Lucenario 1 Sem A.250. The court said that the rules for computing net income of foreign steamship companies are only for those engaged in trade or business in the Philippines. 175 in 1963 and $ 137. respondents. It only made two calls in Philippine ports. [G. Hence. 103106.2. There is a need for the aforementioned rules for FCETB because foreign steamship corporation derives income from sources within and without the Philippines since they are involved in the business of transportation service between points in the Philippines and points outside of the Philippines. assessing the deficiency income tax of the latter as a nonresident foreign corporation not engaged in trade or business in the Philippines under Section 24 (b) (1) of the Tax Code.984. Royal Interocean filed a written protest against the assessment made by the CIR. NV Reederij did not pay any income tax on these freight receipts. 1994. paid for income tax of the said vessels. The CTA upheld the decision of the CIR but modified it by eliminating the 50% fraud compromise penalties imposed upon the petitioner. Reederij is a foreign corporation not engaged in business and trade in the Philippines. The court said that Section 37 (e) of the NIRC as implemented by Section 163 of the Regulations providing for the rules on the determination of net income of foreign steamship company doing business in the Philippines only explicitly applies to FCETB.790.25 on profit from its foreign currency deposit unit operations or a total of P7.R. The freight fees for these transactions were paid abroad in the amount of $ 98.97.

not of the branch. The transaction becomes one of the foreign corporation. 2010-2011 ST DIGESTS the 15% tax. 1989) Facts: Marubeni Corporation is a foreign corporation.244. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office.228. For the first and third quarters of 1981 AG&P declared and paid cash dividends to Marubeni and withheld the corresponding 10% final dividend tax thereon. Marubeni appealed to the CTA which affirmed the denial of the CIR.260 shares including that of nominee) was made for purposes peculiarly germane to the conduct of the corporate affairs of Marubeni Japan. Issue: WON the branch profit remittance tax should be based on actual remittance hence. Held: Yes. Marubeni is a non-resident foreign corporation. with a Philippine branch office. The SC quoted the Solicitor General’s contention that the general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply. Consequently. and it should be understandable if. In the 15% remittance tax. Marubeni seeks the reversal of the decision of the Court of Tax Appeals denying its claim for refund or tax credit representing alleged overpayment of branch profit remittance tax withheld from dividends by Atlantic Gulf and Pacific Co. and not on the amount before profit remittance tax. but also of the withheld 15% profit remittance tax based on the remittable amount after deducting the final withholding tax of 10%. the 15% profit remittance tax itself should not form part of the tax base.85. Dina D.339. but certainly not of 94 . Petitioner filed a claim for refund with the Bureau of Internal Revenue of that portion of the payment which corresponds to the 15% branch profit remittance tax. the principal-agent relationship is set aside." There is absolutely nothing equivocal or uncertain about the language of the provision. The taxpayer is a single entity. the taxpayer is the foreign corporation. WON Marubeni is a resident or a non-resident foreign corporation under Philippine laws. The 10% final dividend tax and the 15% branch profit remittance tax for both the first and third quarters of 1981 were paid to the Bureau of Internal Revenue by AG&P. 2. It is understood that the branch becomes its agent here. Hence. the SC Petition Issues: 1. net not only of the 10% final dividend tax for the first and third quarters of 1981. which is P45.088. not the branch or the resident foreign corporation. The tax is imposed on the amount sent abroad.Y. it is the local branch of the corporation. on the ground that the tax should have been computed on the basis of profits actually remitted. 1980 between the Philippines and Japan. for the first and third quarters of 1981. So that when the foreign corporation transacts business in the Philippines independently of its branch. Lucenario 1 Sem A. The BIR ruled that the dividends received by Marubeni from AG&P are not income arising from the business activity in which Marubeni is engaged. Thus. the alleged overpaid taxes were incurred for the remittance of dividend income to the head office in Japan which is a separate and distinct income taxpayer from the branch in the Philippines. which is P53. . of Manila (AG&P). organized and existing under the laws of Japan and duly licensed to engage in business under Philippine laws. AG&P directly remitted the cash dividends to Marubeni's head office in Tokyo. The CIR denied Marubeni’s claim on the grounds that said dividend income is subject to the 25 % tax pursuant to the Tax Treaty dated February 13. MARUBENI vs CIR 177 (SCRA 500 September 14. Marubeni sought a ruling from the BIR on whether or not the dividends it 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. which remits the tax to the Philippine Government.82. following the principal agent relationship theory. using its own local funds. said dividends if remitted abroad are not considered branch profits for purposes of the 15% profit remittance tax. the law specifies its own tax base to be on the "profit remitted abroad. WON Marubeni is liable for the branch profit remittance tax Held: 1. Marubeni claimed for the refund or issuance of a tax credit representing profit tax remittance erroneously paid on the dividends remitted by AG& P to the head office in Tokyo.TAX 1 INCOME TAXATION Prof. Japan. Accordingly. AG&P as withholding agent paid 15% branch profit remittance on cash dividends declared and remitted to Marubeni at its head office in Tokyo. such as in this case. There can be no other logical conclusion considering the undisputed fact that the investment (totalling 283.

1982. Issue: The issues presented to the Court are: (1) Whether or not the branch profits tax are computed based on the profits actually remitted abroad or on the total branch profits out of which the remittance is made. 2nd Issue: Passive income should not be included for purposes of computing the branch profit remittance tax. It also cited BIR Ruling dated January 21. 1982).948. Under Section 24 (b) (2) (ii). should be computed based on the profits actually remitted abroad and not on the total branch profits out of which the remittance as clarified in Memorandum Circular No. as distinguished from profit which is remittable. In all the corporate quarterly income tax returns filed by Compania with the BIR. Thus. It cannot be deducted as an expense despite being an exaction on profit realized for remittance abroad because it is not enumerated under Section 30. Burroughs Limited as authority. The Commissioner of Internal Revenue ( CTA Case # 4451. 8-82 was upheld as valid under CIR v. on the other hand. the entire profit of the Branch Office.Y.267. Bank of America and the use of the word remitted was clarified 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). Section 24(b)(2)(ii) of the NIRC should be interpreted to mean that the branch profit remittance tax should be computed based only on the profit remitted abroad and not on the total branch profit. argues that the 15% branch profit remittance tax is imposed and collected at source. then what should apply as taxable base in computing the 15% branch profit remittance tax is the amount applied for with the Central Bank as profit to be remitted abroad and not the total amount of branch profits. 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 %. the dividends in dispute are not subject to the 15 % profit remittance tax nor to the 10 % intercorporate dividend tax. are still included for purposes of computing the branch profits remittance tax. which are already subjected to the final tax. It is thus clear that Marubeni. exporter. importer. The CIR. The interests received from savings deposit with PhilTrust. there must be an actual remittance. On July 6. the tax base should be the amount actually applied for by the Branch with the Central Bank of the Philippines as profit to be remitted abroad. Hence. On May 1988. the rule is interest and dividends received by a foreign corporation during each taxable year from all sources within the Philippines shall not be considered as branch profits unless the same are effectively connected with the conduct of its trade or business.96. it filed for a claim for refund in the amount of PhP 593.61 representing alleged overpaid branch profit remittances taxes because. NIRC. Burroughs Limited is not applicable to the case at bar because the branch profit remittance tax paid in that case was made in 1979 and thus. Held: 1st Issue: The 15% branch profit remittance tax imposed by Section 24 (b) (2) (ii). MC No.TAX 1 INCOME TAXATION Prof. interests received from money market placements 95 . 2. 882) dated March 17. the recipient being a non-resident stockholder Compañia General de Tabacos de Filipinas v. NIRC. Lucenario 1 Sem A. 23 August 1993) Facts: Compañia General de Tabacos Filipinas (Compania) is a foreign corporation duly licensed by Philippine laws to engage in business through its Branch Office. 1982. CIR v. using as tax base. 8-82 was not applied because it cannot be given retroactive effect by virtue of Section 327 of the NIRC. after the effectivity of MC No. MC No. and (2) Whether or not passive income. it paid 15% branch profit remittance tax for 1985 and 1986 in the amount of PhP 3. 2010-2011 ST DIGESTS the branch in the Philippines.148. NIRC. 882. dated March 17. has been clarified in the BIR Ruling dated January 21. Dina D. No. The phrase "effectively connected" was interpreted to mean income derived from the business activity in which the corporation is engaged. so the tax base should be the total branch profit and amount actually applied for by the branch with the Central Bank of the Philippines as profit to be remitted abroad pursuant to Revenue Memorandum No. Moreover. in view of the fact that Compania’s branch profit remittance tax for 1985 (partial) and 1986 were paid on May 3. 8-82 (March 17. 8-82 (MC No. The phrase 'any profit remitted abroad' in Section 24 (b) (2) (ii). 1988. and general merchants. having made this independent investment attributable only to the head office. 1988. it was indicated and shown that it is engaged in the business as leaf tobacco dealer. the 15% branch profit remittance tax is an income tax and is not deductible from the gross (profit) income. Since it is imposed and collected at source. according to Compania. 1980 and CIR v. 1980 as to be construed to mean the profit to be remitted.

pursuant to Section 24(c) and (d) of the NIRC. 369. to determine the amount of the 20 percentage points dividend tax waived by the Philippine government under Section 24 (b) (1).731. Compania has sufficiently established a right to be refunded the amount of branch profit remittance tax paid on these interests and dividends which were included as part of the branch profits for 1985 (partial) and 1986. the US allows P&G-USA a “deemed paid” tax credit in an amount equivalent to 20 percentage points waived by the Philippines. 1991. from which dividends the amount of PhP 8. Dina D. No. In 1977. TAX ON CORPORATIONS: BASES AND RATES. NON-RESIDENT FOREIGN CORPORATIONS. as amended by P. CIR appealed to the nd SC.989. Using the formula under the NIRC. Procter and Gamble Co. CIR gave no response so P&G-Phil filed a petition for tax refund/credit at the CTA which granted the tax refund/credit in the amount of PhP 4. J. Since P29. P&G-Phil filed a claim for refund or tax credit in the amount of PhP 4.. The NIRC requires that the US "shall allow" P&G-USA a "deemed paid" tax credit in an amount equivalent to the 20 percentage points waived by the Philippines for the dividend tax rate of P&G-USA to be reduced to 15%.30.832. DIVIDENDS CIR V PROCTER AND GAMBLE DETAILS: G.21 representing the thirty-five percent (35%) withholding tax at source was deducted. Thus. 2010-2011 ST DIGESTS and interest on Land Bank Bonds and cash dividends received from Philippine Long Distance Telephone Company (PLDT) and Tabacalera Industrial Development Corporation of the Phils. In order to determine whether US tax law complies with the requirements for applicability of the reduced or preferential 15% dividend tax rate under Section 24 (b) (1). Section 96 .34 representing overpaid 15% branch profit remittance tax on interest and dividends received. to its US parent P&G-USA. Furthermore..25 of dividends actually remitted (after withholding at the rate of 15%) by P&G-Phil. Inc. (P&GUSA) amounting to PhP 24. the tax base should be the amount applied for with the Central Bank for remittance without prior deduction of the 15% branch profit remittance tax. Feliciano FACTS: For 1974 and 1975. 24 (b) (1) of the NIRC.R. it is necessary: a. for every P55. In this case.00 for every PhP 100.946.25.75 is much higher than P13. 8-82 and the jurisprudence cited. Under the US Tax Law. b. To include them again as subject to branch profit remittance tax under the same Section 24(b)(2)(ii) would be contrary to law. to determine the amount of the "deemed paid" tax credit which US tax law must allow to P&G-USA. CIR must refund Compania in the amount of PhP 121. Procter and Gamble Philippine Manufacturing Corporation (P&G-Phil) declared dividends to its parent company and sole stockholder. Consequently. In order to be legally entitled to the 15% reduced tax rate.696. No. and which hence goes to P&G-USA. a tax credit of P29.TAX 1 INCOME TAXATION Prof." ISSUE: What is the applicable dividend tax rate in the instant case: the regular 35% rate or the reduced 15% rate? RULING: The reduced 15% tax rate is the applicable dividend tax rate. grounds: (a) P&G-USA. the amount of dividend tax waived by the Phil Gov’t is PhP 13.00 (the amount of dividend tax waived by the Phil Gov’t).00.Y. to ascertain that the amount of the "deemed paid" tax credit allowed by US law is at least equal to the amount of the dividend tax waived by the Philippine Government. the amount of the "deemed paid" tax credit which US Tax Law allows under Section 902. and not P&G-Phil.D.832. are not effectively connected with its trade or business. NIRC.989.457.26 with the Commissioner of Internal Revenue (CIR) claiming that pursuant to Section 24 (b) (1) of the NIRC. the 2 Division of which granted its appeal and reversed the decision of the CTA based on the ff. dividends and interest are subject to final tax. NIRC. Tax Code is PhP 55. and P&G-Phil failed to meet certain conditions necessary in order that "the dividends received by its non-resident parent company in the US (P&G-USA) may be subject to the preferential tax rate of 15% instead of 35%.00 of pretax net income earned by P&G-Phil.164. the US Tax Law should comply with the requirements for applicability of the reduced or preferential 15% dividend tax rate under Sec. and c. NIRC. It is also the minimum amount of the "deemed paid" tax credit that US tax law shall allow if P&G-USA is to qualify for the reduced or preferential dividend tax rate under Section 24 (b) (1). was the proper party to claim the refund or tax credit here involved. (b) there is nothing in Section 902 or other provisions of the US Tax Code that allows a credit against the US tax due from P&G-USA of taxes deemed to have been paid in the Philippines equivalent to 20% which represents the difference between the regular tax of 35% on corporations and the tax of 15% on dividends. following MC No.75 is allowed by Section 902 US Tax Code for Philippine corporate income tax "deemed paid" by the parent but actually paid by the wholly-owned subsidiary. the applicable rate of withholding tax on the dividends remitted was only 15% and not 35% of the dividends. L-66838 December 2. Thus. Lucenario 1 Sem A.

2010-2011 ST DIGESTS 902. Ltd. Dina D. As to the issue of whether the US Tax Code allows a credit against the US tax due from P&G-USA of taxes deemed to have been paid in the Phils equivalent to 20%. Section 24 (b) (1).or majority-owned subsidiary in (for instance) the US. however. P&G-Phil. are tax credits available or applicable against the US corporate income tax of P&G-USA. NIRC. CIR V WANDER PHILIPPINES Facts: Wander Philippines is a domestic corporation which was a whollyowned subsidiary of Glaro S.e. not by P&G-USA. tax" income to subject to its own taxing power) by allowing the investor additional tax credits which would be applicable against the tax payable to such home country.. In the second quarter of both 1975 and 1976. P&G-Phil. would not benefit from the reduction of the Philippine dividend tax rate unless its home country gives it some relief from double taxation (i. US law grants to P&G-USA a "deemed paid' tax credit for a proportionate part of the corporate income tax actually paid to the Philippines by P&G-Phil. Wander paid 35% withholding tax return on the dividends it remitted to Glaro. for taxes collected by the US government on dividend remittances to the Philippine corporation. NIRC. above. under Section 24 (b) (1). The concept of "deemed paid" tax credit. The foreign investor. requires the home or domiciliary country to give the investor corporation a "deemed paid" tax credit at least equal in amount to the twenty (20) percentage points of dividend tax foregone by the Philippines. This "deemed paid" concept merely reflects economic reality. Accordingly.. US Tax Code. In other words. SC held that since the withholding agent. P&G-Phil. then it is an agent of the beneficial owner of the dividends with respect to the filing of the necessary income tax return and with respect to actual payment of the tax to the government. pay income taxes to the US government. is entitled to the tax refund or tax credit which it seeks.P. of P&G-USA as a part of the economic cost of carrying on business operations in the Philippines through the medium of P&G-Phil. The parent-corporation P&G-USA is "deemed to have paid" a portion of the Philippine corporate income tax although that tax was actually paid by its Philippine subsidiary. Thus.A. US Tax Code. withheld) from the dividend remittances to P&G-USA. therefore.e. it filed a claim for refund in the Appellate division of the CIR contending that it is liable only for 15% withholding tax (not 35%)under Section 24 (b) (1) of the NIRC. as it were. which is embodied in Section 902. b. These tax credits are allowed because of the US congressional desire to avoid or reduce double taxation of the same income stream. deemed paid by P&GUSA are not "phantom taxes" but instead Philippine corporate income taxes actually paid here by P&G-Phil. at all times. a close examination of the US Tax Law shows that it grants P&G-USA a tax credit for the amount of the dividend tax actually paid (i. and thus it also has the authority to file a claim for refund and to bring an action for recovery of such claim. the BIR must give a tax credit to a Philippine corporation for taxes actually paid by it to the US government—e. and here earning profits. What is. but "deemed paid" by P&G-USA. in the assumption that a positive incentive effect would thereby be felt by the investor. NIRC. NIRC.. US tax law treats the Philippine corporate income tax as if it came out of the pocket. second-tier taxation) (the home country would simply have more "post-R. is both an agent of the government (Phil Gov’t) and the taxpayer (P&G-USA).g. since the Philippine corporate income tax was in fact paid and deducted from revenues earned in the Philippines. The CIR failed to act on the claim. in this case. must be allowed by US law to P&G-USA. specifically and clearly complies with the requirements of Section 24 (b) (1). the "deemed paid" tax credit which. thus reducing the amount remittable as dividends to P&G-USA. is the same "deemed paid" tax credit that Philippine law allows to a Philippine corporation with a wholly. it seems particularly unreal to deny the implied authority of P&G-Phil. 97 . This Section of the NIRC is the equivalent of Section 901 of the US Tax Code. the withholding agent is the wholly owned subsidiary of the parent-stockholder and therefore. is exactly the same "deemed paid" tax credit found in our NIRC and which Philippine tax law allows to Philippine corporations which have operations abroad (say. a Swiss Corporation not engaged in trade or business in the Philippines.Y.. It is also useful to note that both (i) the tax credit for the Philippine dividend tax actually withheld. to claim a refund and to commence an action for such refund. Clearly. in the United States) and which.. As to the issue of standing. Section 24 (b) (1). Lucenario 1 Sem A. seeks to promote the in-flow of foreign equity investment in the Philippines by reducing the tax cost of earning profits here and thereby increasing the net dividends remittable to the investor. and (ii) the tax credit for the Philippine corporate income tax actually paid by P&G Phil. This implied authority is especially true where in this case. under US law. under the effective control of such parent-stockholder. Under Section 30 (c) (3) (a). In the circumstances of this case. NIRC. The next year.TAX 1 INCOME TAXATION Prof.

Petition is dismissed. which should receive the reimbursement.Y." 2. Wander is the proper entity which should receive the refund or credit of overpaid withholding tax on dividends paid or remitted by Glaro. with a Philippine branch office. NLRC). Issue: WON Wander is entitled to the preferential rate of 15% withholding tax on dividends declared and remitted to its parent corporation. for the dividends received from a domestic corporation to be liable to tax. the condition on Section 24 (b) was fulfilled." Moreover. Lucenario 1 Sem A.TAX 1 INCOME TAXATION Prof. but also of the withheld 15% profit remittance tax based on the remittable amount after deducting the final withholding tax of 10%. Wander is not just a withholding agent of the Philippine Government. The Court said that according to Section 53 (b) the obligation of the withholding agent is compulsory. WON Switzerland allowed as tax credit the "deemed paid" 20% Philippine Tax on such dividends. Switzerland does not impose any income tax on dividends received by Swiss corporation from corporations domiciled in foreign countries. Glaro . The Court held in the affirmative. as the Philippine counterpart. Japan. The 10% final dividend tax and the 15% branch profit remittance tax for both the first and third quarters of 1981 were paid to the Bureau of Internal Revenue by AG&P. According to petitioner. subject to the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to 20%. it does not mean an abdication of its responsibility to its mother company. the tax shall be 15% of the dividends received. AG&P directly remitted the cash dividends to Marubeni's head office in Tokyo. 1989) FACTS: Marubeni Corporation is a foreign corporation. Marubeni seeks the reversal of the decision of the Court of Tax Appeals denying its claim for refund or tax credit representing alleged overpayment of branch profit remittance tax withheld from dividends by Atlantic Gulf and Pacific Co. the preferential rate of 15% will be imposed as withholding tax. which owns it. net not only of the 10% final dividend tax for the first and third quarters of 1981. The Petitioner submits that Wander being merely a withholding agent is not entitled to a tax refund. (The decision was discussed by answering two interrelated sub-issues) WON Wander is the proper party to claim the refund? Yes. CIR filed the instant petition to the SC. It this case. plus penalties consisting of surcharge and interest (Section 54. of Manila (AG&P). it "would run counter to the very spirit and intent of said law and definitely will adversely affect foreign corporations’ interest here and discourage them from investing capital in our country. MARUBENI vs CIR (177 SCRA 500 September 14. the Court said "Wander may be assessed for deficiency withholding tax at source. 2010-2011 ST DIGESTS The CTA granted the tax refund holding that Wander is entitled to preferential rates of 15% withholding tax on dividends remitted to its foreign parent company. Therefore. it is the taxpayer. Even if it acts as such. This is also the reason why. organized and existing under the laws of Japan and duly licensed to engage in business under Philippine laws. Thus. AG&P as withholding agent paid 15% branch profit remittance on cash dividends declared and remitted to Marubeni at its head office in Tokyo. Hence. 1977 holding that since the Swiss government does not impose any tax on the dividends to be received by a parent corporation in the Philippines. 98 . The SC rationalized its decision by quoting the CTA—that if they would deny the refund. According to Section 24 (b) (1) of the Tax Code. The Court held that the petitioner's argument is untenable. Switzerland did not impose income tax on the dividends received by Glaro. Dina D. for the first and third quarters of 1981. the Court made mention of the CIR ruling of May 19. For the first and third quarters of 1981 AG&P declared and paid cash dividends to Marubeni and withheld the corresponding 10% final dividend tax thereon. since the use of withholding agents is a device to ensure collection of taxes from aliens which are outside the tax jurisdiction of the country.

Dina D. or service that produced the income.. and accordingly taxable.. The BIR ruled that the dividends received by Marubeni from AG&P are not income arising from the business activity in which Marubeni is engaged. said dividends if remitted abroad are not considered branch profits for purposes of the 15% profit remittance tax. "the tax base upon which the 15 % branch profit remittance tax is imposed is the profit actually remitted abroad. and thus. being a non-resident foreign corporation with respect to the transaction in question. subject to the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from the non-resident foreign corporation. which shall be collected and paid as provided in Section 53 (d) of this Code.which was responsible for selling BOAC tickets covering passengers and cargoes. The Commissioner of Internal Revenue assessed deficiency income taxes against BOAC. 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. Accordingly. Marubeni claimed for the refund or issuance of a tax credit representing profit tax remittance erroneously paid on the dividends remitted by AG& P to the head office in Tokyo. the tax shall be 15% of the dividends received. This 20 % represents the difference between the regular tax of 35 % on non-resident foreign corporations which Marubeni would have ordinarily paid. the SC Petition ISSUE: WON Marubeni is liable for the tax on dividend income HELD: No. From 1959 to 1972. CORPORATIONS. Lucenario 1 Sem A.TAX 1 INCOME TAXATION Prof.. it operates air transportation services and sells transportation tickets over the routes of the other airline members.Y. While the tax on dividends is directly levied on the dividends received. a discounted rate of 15% is given to Marubeni on dividends received from a domestic corporation (AG&P) on the condition that its domicile state (Japan) extends in favor of Marubeni. constitute income of BOAC from Philippine sources. Hence. Ltd. INTERNATIONAL CARRIERS BOAC v CIR Facts: British Overseas Airways Corp (BOAC) is a 100% British Government-owned corporation engaged in international airline business and is a member of the Interline Air Transport Association. BOAC had no landing rights for traffic purposes in the Philippines and thus. the applicable provision of the Tax Code is Section 24 (b) (1) (iii) in conjunction with the Philippine-Japan Treaty of 1980 which provides: (b) Tax on foreign corporations. CTA erred in ruling that no refund was forthcoming to it because the taxes thus withheld totalled the 25 % rate imposed by the Philippine-Japan Tax Convention. However. TAX ON CORPORATIONS: BASES AND RATES. 1980 between the Philippines and Japan. activity. Held: The source of an income is the property.Warner Barnes & Co. Qantas Airways . being a non-resident foreign corporation. as a general rule. and later. Marubeni appealed to the CTA which affirmed the denial of the CIR.. . Marubeni is entitled to a refund. 2010-2011 ST DIGESTS Marubeni sought a ruling from the BIR on whether or not the dividends it 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." Marubeni. For the source of income to be considered as SPECIAL 99 .. (iii) On dividends received from a domestic corporation liable to tax under this Chapter. Proceeding to apply the above section to the case at bar. Issue: Whether the revenue derived by BOAC from ticket sales in the Philippines. did not carry passengers and/or cargo to or from the Philippines but maintained a general sales agent in the Philippines . Marubeni. is taxed 35 % of its gross income from all sources within the Philippines. taxes deemed to have been paid in the Philippines equivalent to 20 % which represents the difference between the regular tax (35 %) on corporations and the tax (15 %) on dividends as provided in this Section. — (1) Non-resident corporations — . The CIR denied Marubeni’s claim on the grounds that said dividend income is subject to the 25 % tax pursuant to the Tax Treaty dated February 13. a tax credit of not less than 20 % of the dividends received. and the 15 % special rate on dividends received from a domestic corporation.

inventory and even its sales for the period is adequate to meet the normal needs of the business. PD 68.Y. On February 7. the flow of wealth should share the burden of supporting the government. The court held the vessel owners first were required to exhaust administrative remedies as mandated. The case is remanded to the district court for further proceedings consistent with this opinion. For these reasons. and an importer/indentor. and occurred within Philippine territory. Issue: WON petitioners are liable to pay ad valorem taxes. 1985. PETROLEUM SERVICE CONTRACTOR AND SUBCONTRACTOR ZAPATA MARINE SERVICES V CTA Facts: Plaintiff-vessel owners allege that ad valorem taxes were imposed illegally on their vessels because they are used in international trade and therefore enjoy a constitutional exemption from taxation. 2010-2011 ST DIGESTS coming from the Philippines. 108067. The flow of wealth proceeded from.00) pesos for taxable year 1981. engaged in the manufacture of pharmaceutical products and chemicals. in turn. The district court granted summary judgment dismissing all the suits as premature. the CIR sent an assessment letter to petitioner and demanded the payment of deficiency income tax of one hundred nineteen thousand eight hundred seventeen (P119. Issue: WON the company is liable for the surtax on undue accumulation of earnings Held: The company is liable for the surtax The tax on improper accumulation of surplus is essentially a penalty tax to discourage tax avoidance through corporate surplus accumulation. Petitioner through SGV. it is sufficient that the income is derived from activity within the Philippines. that the taxes were not properly apportioned for the time the vessels actually spent in Cameron Parish. a wholesaler of imported finished goods. Lucenario 1 Sem A. A thorough review of petitioner’s financial statement reveals that the corporation had considerable liquid funds consisting of cash accounts receivable. the tickets exchanged hands here and payment for fares were also made here in the Philippine currency. it would have been placed under Title V of the Tax Code covering taxes on business. the vessel owners' challenge to the imposition of ad valorem taxes assessed against allegedly exempt property presents a tax legality challenge. Pursuant to the Churchill Farms case. designed to compel corporations to distribute earnings so that the said earnings by shareholders could. Hence this appeal. enjoying the protection accorded by the Philippine government. its external accountant. ensures that international airlines are taxed on their income from Philippine sources. in relation to PD 1355. In consideration of such protection. The situs of the source of payments is the Philippines. TAX ON CORPORATIONS: BASES AND RATES. protested the assessments stating that the surtax for the undue accumulation of earnings was not proper because the said profits were retained to increase petitioner’s working capital and would be used for reasonable business needs of the company. Held: We find a challenge to a tax assessment need not contest the validity of the ad valorem tax itself to constitute a legality challenge. Herein. 100 . TAX ON CORPORATIONS: BASES AND RATES. the taxpayer has the right to challenge both the validity of the law itself and the constitutionality of the administration of an otherwise valid law. The CTA's found no need for petitioner to set aside a portion of its retained earnings as working capital reserve since it had considerable liquid funds. Plaintiffs properly proceeded in district court. The company appealed the case to the CTA which denied the petition.817. the sale of tickets in the Philippines is the activity that produced the income. be taxed. The 2 1/2% tax on gross billings is an income tax. January 20.R. 2000) Facts: Cyanamid is a wholly owned subsidiary of American Cyanamid Co.TAX 1 INCOME TAXATION Prof. ACCUMULATED EARNINGS TAX IMPROPERLY Cyanamid Phil v CIR (G. No. the plaintiff-vessel owners alternatively pleaded the vessels did not have the proper tax situs in Cameron Parish for ad valorem tax assessment. the judgment of the court of appeal is reversed. In addition to the constitutional exemption. The CIR refused the company's petition for the cancellation of the assessment notices. SPECIAL CORPORATIONS. Dina D. Hence. If it had been intended as an excise tax or percentage tax.

74 was spent for the construction of several buildings was refuted by the Declaration of Real Property (value) it made on those same buildings. Acme Commercial Company and investments in US Treasury bonds. Issue: WON Antonio Tuason. Furthermore. 2010-2011 ST DIGESTS PD 1739 enumerates the corporations exempt from the imposition of improperly accumulated tax namely: (a) banks. Since the company as of the time of the assessment in 1981. No. while the CTA found that the company had been distributing dividends of about 85. and levied a 25% surtax on unreasonable accumulation of surplus for the years 1975-1978 which amounted to Php1. CIR v Antonio Tuason Inc. as rationalized by petitioner.000 worth of surtax and interest. it also had investments in unrelated businesses. It allegation that P1. However. (b) non-bank financial intermediaries. and (d) corporations organized primarily and authorized by the Central Bank of the Philippines to hold shares of stocks of banks.672.R.88 are subject to the 25% surtax.151. petitioner did not establish by clear and convincing evidence that such accumulation of profit was for the immediate needs of the business. is liable for the 25% surtax on undue accumulation of surplus for the years 1975 to 1978.776.720 out of its accumulated surplus profits of P3. Lucenario 1 Sem A. Inc. not intentions declared subsequently. if the failure to pay dividends were for the purpose of using the undistributed earnings and profits for the reasonable needs of the business. MANILA WINE MERCHANTS V CIR Facts: Manila Wine Merchants disputes the CTA decision finding it liable for improperly accumulating profit for the year 1957 and liable for Php 86. In the instant case. as of 1981 the working capital of Cyanamid was P25. According to Tuason. its remaining accumulated surplus profits of P2.TAX 1 INCOME TAXATION Prof. The touchstone of liability is the purpose behind the accumulation of the income and not the consequences of the accumulation. (c) insurance companies. the accumulated profits must be used within a reasonable time after the close of the taxable year. 1989 Facts: On February 27. the Commissioner points out that the corporation did not use up its surplus profits. which are mere afterthoughts.000 was in excess of reasonable needs of business and was unrelated to its business of selling wines and liquor. it must be shown that the controlling intention of the taxpayer is manifested at the time of accumulation. the investments in US Treasury bonds with a face value of US$ 175. or more than twice its current liabilities which projects adequacy in working capital. Tuason Inc. Inc. thus subject to the 25% surtax 101 .88 for 1975-1978. the CIR assessed Antonio Tuason. Dina D. There appeared no reason to expect an impending ‘working capital deficit’ which could have necessitated an increase in working capital. while these investments were actually made. 1981.305.489. G. had invested in its business operations only P 773.Y. such as the Wack Wack Golf. Based on the company's financial statements.991.77% of its income. In particular. Petitioner does not fall among those exempt classes. Held: It is liable for the 25% surtax It is plain to see that the company's failure to distribute dividends to its stockholders in 1975-1978 was for reasons other than the reasonable needs of the business.98.525. 85749 May 15.146.858.00. that purpose would not fall within the interdiction of the statute". The enormous discrepancy between the alleged investment cost and the declared market value of these pieces of real estate was not denied nor explained by the company. In order to determine whether profits are accumulated for the reasonable needs of the business to avoid the surtax upon shareholders. Union Insurance. While the CTA said that the income from the other investments were minimal and thus cannot be designated as improperly accumulated earnings. surplus profits were set aside by the company to build up sufficient capital for its expansion program. Thus.263. protested the assessment's 25% surtax on the ground that the accumulation of surplus profits during the years in question was solely for the purpose of expanding its business operations as real estate broker.

2010-2011 ST DIGESTS Wine merchants petitioned the Court against the decision alleging that the US treasury bonds were held by it to be used in its importation.S. it is necessary to take into account prior accumulations. Lucenario 1 Sem A. To justify an accumulation of earnings and profits for the reasonably anticipated future needs. since accumulations prior to the year involved may have been sufficient to cover the business needs and additional accumulations during the year involved would not reasonably be necessary. The mere recognition of a future problem and the discussion of possible and alternative solutions is not sufficient. In other words. it allegedly planned to buy property and construct its own building but had to wait until its stockholder base was 60% Filipino before being able to do so) They also allege that the surtax cannot be imposed in 1957 for accumulation that occurred in 1951 (when they bought the shares) Issue: 1) whether the purchase of the U.TAX 1 INCOME TAXATION Prof.S. It is improperly accumulated earnings. Definiteness of plan coupled with action taken towards its consummation are essential. Dina D.'" 102 . petitioner claims that the surtax of 25% should be based on the surplus accumulated in 1951 and not in 1957. If the earnings and profits were distributed. Commissioner of Internal Revenue: 'In determining whether accumulations of earnings or profits in a particular year are within the reasonable needs of a corporation.A. The Court stated: A prerequisite to the imposition of the tax has been that the corporation be formed or availed of for the purpose of avoiding the income tax (or surtax) on its shareholders. the controlling intention of the taxpayer is that which is manifested at the time of accumulation not subsequently declared intentions which are merely the product of afterthought. Treasury shares in 1951 by it (petitioner) should not be subject to the surtax in 1957. The case of Basilan Estates. petitioner asserts that the surplus profits allegedly accumulated in the form of U. American cases likewise hold that investment of the earnings and profits of the corporation in stock or securities of an unrelated business usually indicates an accumulation beyond the reasonable needs of the business. To determine the "reasonable needs" of the business in order to justify an accumulation of earnings. if the distribution were not made to them. Finally. Inc. the shareholders would be required to pay an income tax thereon whereas. VIS. and it was generally held that if the corporation did not prove an immediate need for the accumulation of the earnings and profits. considering all the circumstances of the case. they would incur no tax in respect to the undistributed earnings and profits of the corporation. In order to determine whether profits are accumulated for the reasonable needs of the business as to avoid the surtax upon shareholders. the accumulation was not for the reasonable needs of the business.e. or on the shareholders of any other corporation by permitting the earnings and profits of the corporation to accumulate instead of dividing them among or distributing them to the shareholders. such accumulation must be used within a reasonable time after the close of the taxable year. ISSUE 2: The rule is now settled in Our jurisprudence that undistributed earnings or profits of prior years are taken into consideration in determining unreasonable accumulation for purposes of the 25% surtax. and the penalty tax would apply. An accumulation of earnings or profits (including undistributed earnings or profits of prior years) is unreasonable if it is not required for the purpose of the business.Y. the Courts of the United States have invented the so-called "Immediacy Test" which construed the words "reasonable needs of the business" to mean the immediate needs of the business.A. Treasury bonds by petitioner in 1951 can be construed as an investment to an unrelated business and whether it represented earnings and profits improperly accumulated beyond the reasonable needs of the business 2) whether the penalty tax of twenty-five percent (25%) can be imposed on such improper accumulation in 1957 despite the fact that the accumulation occurred in 1951 Held: YES. A speculative and indefinite purpose will not suffice. and future expansion (i. vs. The touchstone of liability is the purpose behind the accumulation of the income and not the consequences of the accumulation.

After the petitioner took possession of the mentioned parcels. However. petitioner filed on February 14. On the basis of this amount. did not employ any broker nor did he put up advertisements in the matter of the sale thereof. he instructed his attorney-in-fact. or whether the business is to be comminuted into its component parts. ISSUE: Whether or not the sale of the La Suiza Bakery was a sale of a capital asset so that the profits derived from the sale is taxable up to 50 per cent only.ñët HELD: The sale of the "La Suiza Bakery" was a sale not of a single asset but of individual assets that made up the business. (2) property primarily for sale to customers in the ordinary course of his trade or business. He filed a petition for refund but the Tax Court held that the sale of the bakery did not constitute a sale of a single asset but of individual assets.000. only 50 per cent of it was taxable under the National Internal Revenue Code. FERRER v.R. Moreover. when Petitioner obtained by inheritance the parcels in question.00.09 as having been realized from the sale of the bakery.00 as income tax on February 15. claiming that the bakery was a capital asset which he had held for more than twelve months. Lucenario 1 Sem A. each part to be tested against the definition of a capital assets in the Tax Code.000. Under the circumstances.1äwphï1.678. to sell them. Here. And since petitioner failed to point out what part of the price he had received could be fairly attributed to each asset. he paid P2.030. ISSUE: WON the properties which the petitioner inherited and subsequently sold in small lots to other persons should be regarded as capital assets HELD: No. showing a net profit of P19. they were ordinary assets.00. CAPITAL ASSET V ORDINARY ASSET TUASON v. and (4) real property used in trade or business. The small lots were then sold over the years on a uniform 10-year annual amortization basis. 2010-2011 ST DIGESTS ORDINARY ASSETS AND CAPITAL ASSETS. The term ‘capital assets’ includes all the properties of a taxpayer whether or not connected with his trade or business. and therefore. transferred to him was not merely the duty to respect the terms of any contract thereon. the Commissioner considered the petitioner's profits from the sales of the mentioned lots as ordinary gains and advised the latter to pay deficiency income tax. so that the profit from its sale was a long term capital gain. the petitioner's sales of the several lots forming part of his rental business cannot be characterized as other than sales of non-capital assets. the record discloses that the petitioner owned other real properties which he was putting out for rent. J. (3) property used in the trade or business of the taxpayer and subject to depreciation allowance. from which he periodically derived a substantial income. then subdivided into small lots. Petitioner was receiving rental payments from the mentioned 28 small lots. Petitioner later requested the respondent to refund to him the sum of P2. some of which were capital assets while others were ordinary assets. Petitioner's attorney-in-fact. In fact.00 was sold at the same price. petitioner nevertheless contends that there is neither factual nor legal basis for concluding that the good-will of the bakery which he had acquired for P10. LINGAD [G. After deducting the total book value of the assets and the incidental expenses from the gross selling price. Antonio Araneta. 1956. 1956 his ITR. Petitioner's attorney-in-fact had Lot 29 filled. Dina D. The 28 small lots were sold to their respective occupants on a 10-year installment basis.Y. and for which he had to pay the real estate dealer's tax (which he used to deduct from his gross income). The petitioner states that he sold the assets of the bakery at their stated book value and that whatever amount of the selling price exceeded the total book value of the assets minus the good-will should be attributed to the 103 . the Tax Court correctly denied his claim.439. L-24248 July 31.TAX 1 INCOME TAXATION Prof. No. COLLECTOR FACTS: Petitioner was the sole proprietor of the "La Suiza Bakery" which he sold to Juan Pons for the sum of P100. even if the leases executed by his deceased mother thereon already expired. but as well the correlative right to receive and enjoy the fruits of the business and property which the decedent established and maintained. considering that petitioner owned it for more than twelve months. 1974] FACTS: Petitioner inherited from his mother 29 tracts of land. Petitioner reported his income from the sale of the small lots as long-term capital gains. While agreeing with the Tax Court that the good-will of the business is a capital asset. except: (1) stock in trade or other property included in the taxpayer's inventory.

liable for the payment of deficiency income for the sale of Nasugbu farmlands? HELD: NO. Although they paid for their respective holdings in installment for a period of 10 years. Conferences were held with the farmers in the early part of 1948 and finally the Roxas brothers agreed to sell 13. The Roxas brothers protested the assessment but inasmuch as said protest was denied. and so a special arrangement was made for the Rehabilitation Finance Corporation to advance to Roxas y Cia.47 plus P300. To manage the above-mentioned properties.Y. For this reason. including its tangible assets. Roxas y Cia. said children. Antonio Roxas. The proposition of the CIR cannot be favorably accepted in this isolated transaction with its peculiar circumstances in spite of the fact that there were hundreds of vendees. it is incumbent upon the taxpayer to show not only the cost basis of each asset. but more in obedience to the request and pursuant to the policy of our Government to allocate lands to the landless. Obligingly. namely. CTA. to sell its haciendas. taxable only to the extent of 50%.500 hectares to the Government for distribution to actual occupants for a price of P2. We believe that any profit which the petitioner may have gained in the same must have come from the sale of the other assets of the business which must have been sold for amounts other than their stated book value. the parcels which they actually occupied. persuaded the Roxas brothers to part with their landholdings.000. 104 . a real estate dealer during the 10-year amortization period. allowed the farmers to buy the lands for the same price but by installment. 100% of the profits derived therefrom was taxed. Dina D. For its part. April 26.500. the tenants who have all been tilling the lands in Nasugbu for generations expressed their desire to purchase from Roxas y Cia. Eduardo Roxas and Jose Roxas. Collateral for such loan were the lands proposed to be sold to the farmers. 1968) FACTS: Don Pedro Roxas and Dona Carmen Ayala. In short. the Commissioner considered the partnership as engaged in the business of real estate. pursuant to Section 34 of the Tax Code the lands sold to the farmers are capital assets. At the conclusion of the WW2. the amount of P1. and the disallowance of deductions from gross income of various business expenses and contributions claimed by Roxas y Cia. they instituted an appeal in the CTA which sustained the assessment. Under the arrangement.048. Roxas y Cia. However. the municipal council of Nasugbu passed a resolution expressing the people's gratitude. Lucenario 1 Sem A. the Government could not comply with its duty for lack of funds. went out of its way and sold lands directly to the farmers in the same way and under the same terms as would have been the case had the Government done it itself. shouldered the Government's burden. and contracted with the Rehabilitation Finance Corporation to pay its loan from the proceeds of the yearly amortizations paid by the farmers. transmitted to their grandchildren by hereditary succession several properties. (GR No L-25043. In fine.00 for survey and subdivision expenses.079. For this magnanimous act. ROXAS v. hence. cannot be considered a real estate dealer for the sale in question. 2010-2011 ST DIGESTS latter alone.TAX 1 INCOME TAXATION Prof. of the unreported 50% of the net profits for 1953 and 1955 derived from the sale of the Nasugbu farm lands to the tenants. and the gain derived from the sale thereof is capital gain. DOCTRINE: In order to ascertain the capital and/or ordinary gains taxes properly payable on the sale of a business. this appeal. It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled them for generations was not only in consonance with. Hence. subdivided its Nasugbu farm lands and sold them to the farmers on installment.000. and to subsequently subdivide them among the farmers at very reasonable terms and prices. and the Roxas brothers. It was the bounden duty of the Government to pay the agreed compensation after it had persuaded Roxas y Cia. The CIR demanded from Roxas y Cia the payment of deficiency income taxes resulting from the inclusion as income of Roxas y Cia. Roxas y Cia. in consonance with the constitutional mandate to acquire big landed estates and apportion them among landless tenants-farmers. it would nevertheless not make the vendor Roxas y Cia. It turned out however that the Government did not have funds to cover the purchase price. Hence. Spanish subjects.00 as loan. it is urged that whatever profit was made from the sale came solely from the bakery's good-will which the Tax Court held to be a capital asset. the Government. only 50 per cent of which was taxable. but also what portion of the selling price is fairly attributable to each asset. For the reason that Roxas y Cia. ISSUE: Is Roxas y Cia. formed a partnership called Roxas y Compania.

The property is an ordinary asset.000. Inc. it withdrew its 2. The spouses were accordingly assessed a deficiency income tax on said profits. Sec 34 (a) (1) of the Tax Code broadly defines capital assets as “property held by the taxpayer…[except] property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business…. CIR (GR No L-49102. Any gain resulting from the sale or exchange of an asset is a capital gain or an ordinary gain depending on the kind of asset involved in the transaction. The CTA upheld the CIR. At the time of the transaction. Inasmuch as the parent corporation.TAX 1 INCOME TAXATION Prof.66. In this case. Lucenario 1 Sem A. which had a capital stock of P300.995 shares of stock from its stockholders and replaced them. Plaintiffs duly paid the tax but contested the assessment alleging that there was no profit in the exchange.000 divided into shares with par value of P100 each. On the other hand. were also the directors of Motor Service. IN GENERAL W.980.980.000 shares of stock outstanding. Defendants reckoned the difference of P66. Thus. The Calasanz filed with the Court of Tax Appeals a petition for review. with shares of stock from Motor Service. Central Motor eventually owned 2. Inc.995 shares of stock it had acquired from Motor Service. Thus.000 shares of stock outstanding.995 shares of stock of Motor Service. each share must have been worth P166.C. share for share.Y. the spouses Calasanz declared the profits they realized from the sale of the subdivided lots as taxable capital gains. the board of Central Motor passed a resolution resolving to transfer to its stockholders the 2. The assets of a taxpayer are classified into ordinary assets and capital assets. had a net worth of P499. Central Motor. Gains from its sale are ordinary income taxable in full. Ogan and Bohol Land Transportation Co v Bibian L Meer. Ogan and Bohol Land Transportation became owners of 100 and 200 shares of stock of the Motor Service Company. L-26284 October 9. the inherited property was substantially improved and very actively sold. 2833 as amended by Act No 2926 in relation to section 2(a) of the same act. not as capital gains. The lots were then sold to the public for profit. which was capitalized at P300. then it's net worth must have also been P499. 2010-2011 ST DIGESTS ORDINARY ASSETS AND CAPITAL ASSETS.66. Improvements were introduced to make the lots saleable.66 between the value of the shares of stock of the two corporations as taxable income received by the plaintiffs from the above transaction and assessed them accordingly for it pursuant to section 2(c) paragraph (3) in relation of Act No. the shares of stock of Central Motor had a par value of P100/share while the shares of stock of Motor Service had a market value of P166.C. upon review of the ITR. On 5 May 1936. In their income tax return for the year 1957. 30 May 1949) Facts: Plaintiffs respectively owned 100 and 200 shares of stock of the Central Motor Supply Company. And since the company also had 3. Central Motor had no other assets other than shares of stock it acquired from Motor Service Company. Inc. similarly divided into P3.” Properties falling under the exception just mentioned are ordinary assets. Pursuant to this.000 shares valued at P100 each. Since the company had 3. W. The Commissioner of Internal Revenue. 1986 (144 SCRA 664)] Facts: Ursula Calasanz inherited from her father an agricultural land. A property which is a capital asset may be reclassified as an ordinary asset if it is shown that the activity in which it is used is in furtherance of or in the course of the taxpayer’s trade or business. Dina D. CAPITAL ASSET V ORDINARY ASSET & TREATMENT OF SALE OR EXCHANGE OF CAPITAL ASSETS WHICH ARE NOT REAL PROPERTY CALASANZ VS COMMISSIONER OF INTERNAL REVENUE [GR No. TAX FREE EXCHANGES AND OTHER EXEMPT TRANSACTIONS. Issue: Whether the gains realized from the sale of the lots are taxable in full as ordinary income or capital gains taxable at capital gain rates. each share of Motor Service must 105 . had no other assets other than it's shares in Motor Service. she had the land surveyed and subdivided into lots. the subsidiary company. In order to liquidate her inheritance. concluded that the profits from the sale of the lots should be treated as ordinary income. In the main. It held that the gains from the sale of the lots are ordinary income taxable in full. as it so happens. leaving only 5 shares of stock under the ownership of the five directors of Central Motors who. they argue that Motor Service. the property may be treated as held primary for sale to customers in the ordinary course of the heir’s business. Held: The Court sustained decision of the CTA.

he says. Thus. Likewise.. although denominated differently. (the so-called parent company). That. do not became stockholders of the Motor Service Co. and interest for the year 1959. Dina D. 2010-2011 ST DIGESTS have been worth P166. A corporate merger where the new corporation continues to operate the business of the old corporation is not subject to capital gains tax. Thus. they earn positive benefit and advantages.Y. There cannot be any question that there was in the transaction of May 5. the parties themselves stipulated that the fair market value of each share of stock of Motor Service was at P166. Inc. Meanwhile. in the present case. they are also the majority and controlling stockholders of the new corporation (Eastern Theatrical. and liabilities to the new corporation in exchange for stocks. Held: The Supreme Court upheld the decision of the CA. such as the right to vote their stocks at the stockholders' meeting of the second corporation. the CIR ruled that the merger was not undertaken for a bona fide business purpose but to avoid liability for the capital gains tax on the exchange of the old for the new shares of stock.000. as a result of a transaction of exchange. The CIR claimed that the new corporation did not actually issue stocks in exchange for the properties of the old corporation at the time of the supposed merger. According to the respondents the merger was necessary to continue the exhibition of films at two theaters (Lyric and Capitol) since the old corporation has pending booking contracts with the theaters.TAX 1 INCOME TAXATION Prof. The respondents elevated the case to the Court of Appeals. the transaction on 5 May 1936 was merely a simplification of the corporate relations between a parent corporation and its subsidiary. there actually was no separation of identities between the two companies. plaintiffs have no cause of action for the recovery of the amounts they paid. The plaintiffs went further to argue that. Inc.. HELD: The SC found in favor of the defendants.. MERGER OR CONSOLIDATION CIR V RUFINO Facts: The CIR held the respondents liable for deficiency income tax.). Thus. The exchange. an exchange of one property with another. and the stockholders in the Central Motor Co. which was organized for 25 years. the old corporation transferred all its business assets. the old corporation has a collective bargaining agreement with its employees that will be terminated if the merger did not push through. (the so-called subsidiary company). which was P2 million. the subsidiary should not have been considered to exist. was only on paper since it was not possible for the new corporation to effect the exchange provided for in the agreement because it had a capital of only P200. When the stockholders of one corporation became the stockholders of the other. goodwill. It upheld the findings of the trial court where an examiner of the BIR determined that each share of stock of the Motor Service Company for Central Motor Supply Company was valued at P100. each having distinct legal personalities. The two corporations signed a deed of assignment providing for the terms of the merger. here is no dispute that the two corporations are different from each other. there was no profit realized. assuming that the shares of Motor Service was worth more than the shares of Central Motor. surcharge. which reversed the decision of the CIR. TAX FREE EXCHANGES AND OTHER EXEMPT TRANSACTIONS. as against the capitalization of the old corporation. at the date of the exchange. In addition. the shares of stock of the parent corporation represent the exact same physical assets as those represented by the shares of stock of the subsidiary corporation and that the transaction on 5 May 1936 was not a taxable transaction. Lucenario 1 Sem A. Plaintiffs alleged that. and one cannot be identified with the other. and.66 at the time of the transaction. Inc. nor enjoy the rights and privilege of the same. Neither can plaintiffs' claims as to the singleness of the identity of the two companies be upheld. The respondents were majority stockholders of the old corporation (Eastern Theatrical Co. it cannot be denied that there was an increase in the value held by plaintiffs. Clearly. in truth. by the mere fact of being stockholders thereof.66. they profited by the difference of share values at the rate of P66. Through the merger.. Inc.66 per share.).. 19336. However. both having different rights and responsibilities under the law. The 106 .

that for sales tax purposes. there was a valid merger although the actual transfer of the properties was not made on the date of the signing of the deed of assignment.. Held: Yes.033. If the new corporation intended to evade the capital gains tax.] Facts: The purpose clause of the Articles of Incorporation of Liddell & Co. P134. so the Company appealed to the CTA. paid sales taxes on the basis of its sales to Liddell Motors. Issue: Whether or not Liddell is liable for deficiency taxes. L-9687. was engaged in business as an importer and at the same time retailer of Oldsmobile and Chevrolet passenger cars and GMC and Chevrolet trucks. Later. Wherefore. and (2) certain claims for miscellaneous expenses were not duly supported by evidence. vs.R.TAX 1 INCOME TAXATION Prof. 1961. No. EXCHANGE OF PROPERTY FOR SHARES OF STOCK LIDDELL & CO. Lucenario 1 Sem A. May 1961 . then it would have dissolved immediately after the merger occurred. Dina D. the new corporation had to first increase its capitalization in order to make the transfer of stock. Deficiency sales tax should be based on the selling price to the public after deducting the tax paid on the original sales.846. although for income tax purposes the Company had reported income and expenses on the accrual basis. Contrary to the claim of the petitioner.01 and P71. 1954 and 1956. CIR sent the Company a demand letter requiring it to pay deficiency income taxes. 2010-2011 ST DIGESTS merger.. to the public were considered as the original sales of Liddell & Co. a domestic corporation. because the latter's auditor claimed the refund of P107. and that (B) for the year 1956 (1) the Company had overstated its claim for depletion. THE COLLECTOR OF INTERNAL REVENUE. Inc. A taxpayer may not deny tax liability on the ground that the sales were made through another and distinct corporation when it is proved that the latter is virtually owned by the former or that they are practically one and the same corporation. ACCOUNTING LEASEHOLD PERIODS AND METHODS. Inc. Also. INC. TERMINATION OF CONSOLIDATED MINES V CTA (August 29. Since then. respondent-appellee. Inc. but nullified the assessments for the years 1951 and 1952 on the ground that 107 . petitioner-appellant. Examiners reported that (A) for the years 1951 to 1954 (1) the Company had not accrued as an expense the share in the company profits of Benguet Consolidated Mines as operator of the Company's mines. Inc.Y. stopped retailing cars and trucks. Liddell & Co. was amended so as to limit its business activities to importations of automobiles and trucks. it conveyed them instead to Liddell Motors. must be undertaken for a bona fide business purpose and not solely for the purpose of escaping taxation. and (3) the claims for audit and legal fees and miscellaneous expenses for 1953 and 1954 had not been properly substantiated. 1974) Facts: The BIR investigated the income tax returned filed by the Company. hence was assessed for deficiency taxes.. There was also no indication that the old corporation wanted to evade taxation because it was clear from the evidence presented that the new corporation continued the business of the old corporation sine the merger. which happened 27 years ago.CTA rendered judgment ordering the Company to pay the amounts of P107. he concluded. (2) depletion and depreciation expenses had been overcharged. [G. Liddell & Co. it should be noted that the SEC approved the merger although this was done after the deed of assignment was signed. It was not possible to make the transfer then and there because the old corporation had to surrender its net assets first to the new corporation before the latter could issue its own stock to the shareholders of the old corporation. In other words. CIR determined that the latter was but an alter ego of Liddell & Co. Liddell & Co. considering said sales as its original sales.82 as deficiency income taxes for the years 1953.392. CIR refused to reconsider. when it was incorporated.472. those sales made by Liddell Motors.00 representing alleged overpayments of income taxes for the year 1951.56. respectively. however. which in turn sold the vehicles to the public with a steep mark-up. June 30. TAX FREE EXCHANGES AND OTHER EXEMPT TRANSACTIONS.

and if not. To make the Company deduct as an expense one-half of the "Accounts Receivable" would. PEREZ V CTA Held: In civil cases. Here we have to distinguish between (1) the method of accounting used by the Company in determining its net income for tax purposes. disbursements. Issue: WON the accounting system used by the Company justifies such a treatment of the item. had contracted that in the method of computing compensation the basis were "cash receipts" and "cash payments. and approved by the Tax Court. During the years from 1946 to 1950. it deducts Benguet's 50% if and when the "accounts receivable" are actually paid. 1954 and 1956. the same meaning must be given to "net profits" as used in par." The Company deducts as an expense 50% of cash receipts minus disbursements. Reyes is engaged in the optical. VIII that in the computation of "net profits" (to be divided on the 90%-10% sharing arrangement) only "cash payments" received and "cash disbursements" made by Benguet were to be considered. which amount is computed as 50% of "net income. then the amount due Benguet for each month accrued at the end of that month.382." hence one-half thereof may not be accrued as an expense of the Company for a given year. being free to do so. must be equated with "cash receipts. It would seem. On the presumption that the parties were consistent in the use of the term. but was consistent in its use of the accrual method of accounting. The CIR questions what he characterizes as the "hybrid" or "mixed" method of accounting utilized by the Company.” may be allowed under the Code Held: It is clear from par. Lucenario 1 Sem A." the Company was correct in not accruing said one-half as a deduction. Dina D.82 for the years 1953. 2010-2011 ST DIGESTS they were issued beyond the five-year period prescribed by Section 331 of the National Internal Revenue Code. therefore. in effect. and to substitute for the parties' choice a mode of computation of compensation not contemplated by them. the Company did not have the liability to pay Benguet any part of that item. and (2) the method of computation agreed upon between the Company and Benguet in determining the amount of compensation that was to be paid by the former to the latter." and. whether the Company had made payment or not (see par.TAX 1 INCOME TAXATION Prof. further reduced the deficiency income tax liabilities of the Company to P79." The language used by the parties show their intention to compute Benguet's 50% share on the excess of actual receipts over Since Benguet had no right to one-half of the "Accounts Receivable. the application of the net worth method does not require identification of the sources of the alleged unreported income and the determination of the tax deficiency by the government is prima facie correct.93. and "gross income. P51. The Company was not using a hybrid method of accounting. XIV of the agreement). without considering "Accounts Receivable" and "Accounts Payable" as factors in the computation. One of its expenses is the amount-paid to Benguet as mine operator.Y. but does not deduct at the end of each calendar year what the Commissioner alleges is "50% of the share of Benguet" in the "accounts receivable. in treating the share of Benguet in the net profits from the operation of the mines in connection with its income tax returns. that the Company has been deducting a portion of this expense (Benguet's share as mine operator) on the "cash & carry" basis." Once determined in accordance with the stipulated bases and procedure. even if payment has not been made. The Company used the accrual method of accounting in computing its income.24 and P71. be equivalent to giving Benguet a right which it did not have under the contract. August 1961 – CTA reconsidered. WON said method used by the Company. The parties." However.812. Benguet then did not have a right to share in "Accounts Receivable. X. he filed his income on the basis of the “cash receipts and 108 .528. respectively. And a deduction cannot be accrued until an actual liability is incurred." accordingly. Both the Company and the CIR appealed. and characterized by the CIR as a “hybrid method. correspondingly. subscribing to the theory of the Company that Benguet had no right to share in "Accounts Receivable. CIR V REYES (1958) Facts: Respondent Aurelio P. office equipment and haberdashery business.

The assessment was seasonably protested by the petitioner. specially between friends and relatives. Issue: Whether the liability to withhold tax at source on income payments to non-resident corporations arises upon remittance of the amounts due to the foreign creditors or upon accrual thereof 109 . Issue 2: Whether it the disallowance by the Tax Court of alleged personal loans made to him. Lucenario 1 Sem A. inclusive of interest and compromise penalties.TAX 1 INCOME TAXATION Prof. royalties and guarantee fees paid by the petitioner to non-resident corporations. this Petition for Review on Certiorari. the appellant Reyes has not shown adequate reason to depart from the said ruling.00. Books of account do not prove per se that they are veracious. consisted of interest and compromise penalties for alleged late payment of withholding taxes due on interest loans. such transactions are easily concocted.04) as deficiency income tax for the aforementioned years. which were not noted in his books and records. The taxpayer cannot expect the tax authorities to depend upon his account books and records when he has himself introduced evidence of their unreliability. received on 27 December 1979 a a letter of demand from the CIR assessing it for deficiency withholding tax at source (P829 748. Issue 1: Whether it was proper for the CIR to use the “net worth” or “inventory” method. They used as their basis of investigation the “net worth method” of determining income (aka the “inventory method”). earning.Y. however. This is specially true where the supposed borrower has a pending tax assessment. (Filipinas). for the period from the 4. The CA affirmed in toto the CTA decision.77). The CTA rendered a decision ordering Reyes to pay the aggregate amount of P210 759. receipts or output do not exceed P5000. The CIR denied the protest. 2010-2011 ST DIGESTS disbursement method” and made the corresponding tax payments thereon. Held 2 : YES. it is not enough to prove the existence of such loans by the presentation of promissory notes or “vales” signed by the borrower. together with the corresponding penalties. The SC has already decided in favor of the lawfulness of the “net worth” or “inventory” method in Perez vs. FILIPINAS SYNTHETIC V CA FACTS: The case is a consolidation of two Petitions for Review on Certiorari (Rule 45) seeking to set aside the decision of the Court of Appeals. 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. which ruled against the former. or of checks or vouchers evidencing payment. 1947. In the case of personal loans. Hence. wherein all transaction and results of operations must be shown. Upon conclusion of the examination. 1948 and 1950. That the personal loans in question affect the determination of the taxpayer’s income tax is attested by his attempt to prove the existence of such loans to reduce the deficiency income tax assessed against him. arguing that for Philippine internal revenue tax purposes. Section 334 of the Revenue Code provides in clear and unmistakable language that all persons required by law to pay internal revenue taxes must keep a journal and a ledger or their equivalent. The bulk of the deficiency withholding tax assessement. the CIR issued a deficiency assessment (P641 470. Dina D. However. such persons are required to keep and use a simplified set of textbooks. Both parties appealed from the decision. Held 1: YES. Reyes failed to secure a revision of the deficiency assessment and so he filed a Petition for Review of the CIR’s decision with the Court of Tax Appeals.20 representing the deficiency income tax and 50% surcharge corresponding to the taxable years 1946. The internal revenue examiners conducted a verification of the said income tax returns for the taxable years of 1946 to 1950. where the gross quarterly sales. “vales”. CTA (GR l-10507. Filipinas brought a Petition for Review before the CTA. Filipinas Synthetic Fiber Corp. The reason is so that all taxes due the Government may be readily and accurately ascertained and determined any time of the year. a domestic corporation. checks and other similar documents deserve scant consideration.) Moreover.quarter of 1974 to the 4. and promissory notes. By the very nature of loan transactions between individuals.quarter of 1975.

which ruled that Filipinas cannot claim that there is no duty to withhold and remit income taxes yet because the loan contract was not yet due and demandable. it had taken advantage of the benefit provided in the law allowing for deductions from gross income. This is allowed under the law. The amount must be reasonably susceptible of accurate estimate. COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE. (Wyeth) is a domestic corporation engaged in the manufacture and sale of assorted pharmaceutical and nutritional products. unconditional and enforceable. the foreign corporation was going to earn income in an ascertained amount. In view of said reports the Commissioner of Internal Revenue sent the Company a letter of demand requiring it to pay certain deficiency income The Supreme Court affirmed the CA decision. and There must be a reasonable expectation that the amount will be paid in due course. Quarter of 1973 on accrued royalties. It is now estopped from claiming otherwise. Having “written off” the amounts as business expense in its books. a clear and imminent certainty that at the maturity of the loan contracts. Facts: Wyeth Suaco Laboratories. wherein the effect of the transactions and other events on assets and liabilities are recognized and reported in the time periods to which they relate rather than when cash is received or paid. Consequently. it is the right to receive income. it allegedly failed to remit withholding tax at source for the 4.00 representing alleged overpayments of income taxes for the year 1951. a domestic corporation engaged in mining. Wyeth recorded accrued royalties and dividends payable as well as the withholding tax at source payable on these incomes. The report thereof disclosed that Wyeth was paying royalties to its foreign licensors as well as remuneration for technical services to Wyeth International Laboratories of London. had filed its income tax returns for 1951.TAX 1 INCOME TAXATION Prof. Having deducted and withheld the tax at source payable in its books of accounts. CONSOLIDATED MINES. remuneration for technical services and cash dividends. Under the accrual basis method of accounting. so much that petitioner already deducted as business expense the said amount as interests due to the foreign corporation.. 1954. it had represented to the BIR that the amounts so deducted were incurred as business expense in the form of interest and royalties paid to the foreign corporations. its auditor. which was paid on 31 October of the same year. Filipinas having adopted the accrual method of accounting in reporting its income. Inc.472. income is reportable when all the events have occurred that fix the taxpayer’s right to receive the income and the amount can be determined with reasonable accuracy. ACCOUNTING PERIODS AND METHODS. 2010-2011 ST DIGESTS Held: There was a definite liability. Thus. The right to receive the amount must be valid. iii. However. not the actual receipt. 1974] Facts: The Company. resulting in a deficiency withholding tax at source (P3 178 994. Wyeth was obligated to remit the same to the BIR. (1991) 110 . Felipe Ollada. RECORDING OF INCOME AND EXPENSES/KEEPING OF BOOKS CIR V WYETH SUACO LABORATORIES. vs. ii. claimed the refund of the sum of P107. 1952. Wyeth was also found to have declared cash dividends on 27 September 1973. In 1957 examiners of the Bureau of Internal Revenue investigated the income tax returns filed by the Company because on August 10. [GRN L-18853 August 29. the BIR Wyeth on its tax liabilities.Y. 1953 and 1956. petitioner. Issue: Whether withholding tax at source should only be remitted to the BIR once the income subject to withholding tax at source have actually been paid Held: Wyeth adopted the accrual method of accounting. INC. Lucenario 1 Sem A. Its accounting period is on a fiscal year basis ending 31 October of every year. Thus. Moreover. An investigation and examination of Wyeth’s books of account were conducted. Requisites of Accrual Method i. INC. Dina D.15). respondents. that determines when to include the amount in gross income.

but the Commissioner refused to reconsider.392. hereafter referred to as Benguet. 1954 and 1956. The Tax Court nullified the assessments for the years 1951 and 1952 on the ground that they were issued beyond the five-year period prescribed by Section 331 of the National Internal Revenue Code. under the methods of accounting permitted under Section 38. P51. 565. Internal Revenue Code2 allows each taxpayer to adopt the accounting method most suitable to his business. upon motion of the Company. and if not. 1961.TAX 1 INCOME TAXATION Prof. whether said method used by the Company." However. questions what he characterizes as the "hybrid" or "mixed" method of accounting utilized by the Company. P134. and 1956. 578." It is said that accounting methods for tax purposes1 comprise a set of rules for determining when and how to report income and deductions.93. unless in order to clearly reflect the income the deductions should be taken as of a different period ." The Company deducts as an expense 50% of cash receipts minus disbursements. The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer. on the other hand.Y. it deducts Benguet's 50% if and when the "accounts receivable" are actually paid. The question is whether or not the accounting system used by the Company justifies such a treatment of this item. but does not deduct at the end of each calendar year what the Commissioner alleges is "50% of the share of Benguet" in the "accounts receivable.R. The Company requested a reconsideration of the assessment. With respect to methods of accounting.56. Lucenario 1 Sem A. therefore. that the Company has been deducting a portion of this expense (Benguet's share as mine operator) on the "cash & carry" basis.033.82 for the years 1953. hence the Company appealed to the Court of Tax Appeals." may be allowed under the aforequoted provisions of our tax code. 39. respectively. on August 7.S..R. provided that the method clearly reflects income. in treating the share of Benguet in the net profits from the operation of the mines in connection with its income tax returns (G.4 111 .24 and P71. the Tax Code states: "Sec. which amount is computed as 50% of "net income. Nos. 1961 the Tax Court rendered judgment ordering the Company to pay the amounts of P1 07. General Rules. while that for 1956 was contested in CTA Case No.. Nos. had no right to share in "Accounts Receivable. . any such amounts are to be properly accounted for as of a different period . The assessments for 1951 to 1954 were contested in CTA Case No.82 as deficiency income taxes for the years 1953.01 and P71. as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer but if no such method of accounting has been so employed or if the method employed does not clearly reflect the income the computation shall be made in accordance with such methods as in the opinion of the Commissioner of Internal Revenue does clearly reflect the income "Sec." hence one half thereof may not be accrued as an expense of the Company for a given year.The deductions provided for in this Title shall be taken for the taxable year in which 'paid or accrued' or 'paid or incurred' dependent upon the method of accounting upon the basis of which the net income is computed.528. The Commissioner. In this amended decision the Tax Court subscribed to the theory of the Company that Benguet Consolidated Mining Company. respectively. . One of its expenses is the amount paid to Benguet as mine operator. 1954 and 1956. The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year. and requires only that taxable income generally be based on the method of accounting regularly employed in keeping the taxpayer's books. Deficiency income tax assessment notices for said years were also sent to the Company. and characterized by the Commissioner as a "hybrid method. and approved by the Tax Court. L-18843 & L-18844). the Tax Court reconsidered its decision and further reduced the deficiency income tax liabilities of the Company to P79. Period in which items of gross income included. Dina D. "Sec. However. 40. Both the Company and the Commissioner appealed to this Court. Upon agreement of the parties the two cases were heard and decided jointly. L-18853 & L-18854).812.3 The Company used the accrual method of accounting in computing its income.846.382. 38. . Period for which deductions and credits taken. On May 6. The U. It would seem. The Company questions the rate of mine depletion adopted by the Court of Tax Appeals and the disallowance of depreciation charges and certain miscellaneous expenses (G. 2010-2011 ST DIGESTS taxes for the years 1951 to 1954. unless.

Expenditures from its own resources thereafter shall be charged against the subsequent gross income of the properties as provided in paragraph X hereof. a domestic anonymous partnership engaged in the production and marketing of chromite. when did Benguet's 50% share in the "Accounts Receivable" CIR argues that Consolidated Mines is using a “hybrid” or “mixed” method of accounting since it did not deduct as an expense the one-half 112 . All payments due Consolidated by Benguet under the terms of this agreement with respect to expenditures made and ore settlements received during the preceding calendar month.00) per month. Dina D. 1939 (Exhibit L-1) and October 2. concentrate and market" the pay ore in said mining claims. Lucenario 1 Sem A. develop. are as follows: "IV. II and III hereof until such time as the said properties are on a profit producing basis and agrees thereafter to expend additional funds from its own resources. advances and disbursements as aforesaid the net profits from the operation shall be divided between Benguet and Consolidated share and share alike. As soon as practicable after the close of each month Benguet shall furnish Consolidated with a statement showing its expenditures made and ore settlements received under this agreement for the preceeding month which statement shall be taken as accepted by Consolidated unless exception is taken thereto or to any item thereof within ten days in writing in which case the dispute shall be settled by agreement or by arbitration as provided in paragraph XXII hereof. "VIII. and shall continue until such time as the ninety per cent (90%) of the net profits pertaining to Benguet hereunder shall equal the amount of such expenditures. 1941 (Exhibit L-2). however. it being understood however. and expenditures during each calendar year. advances and disbursements. Such expenditures from its own resources prior to the time the said properties are put on a profit producing basis shall be reimbursed as provided in paragraph VIII hereof. Such division of net profits shall be based on the receipts. "VII. because they were. The net profits shall be computed as provided in Paragraph X hereof. "XIII. however. that the net profits as the term is used in this agreement shall be computed by deducting from gross income all operating expenses and all disbursements of any nature whatsoever as may be made in order to carry out the terms of this agreement. on July 9. While Benguet is being reimbursed for all its expenditures.5 It appears that by 1953 Benguet had completely recouped said advances. then dividing the profits share and share alike.producing basis. It may." There is no question with respect to the 90%-10% sharing of profits while Benguet was being reimbursed the expenses disbursed during the period it was trying to put the mines on a profit. mine. Zambales. After Benguet has been fully reimbursed for its expenditures. entered into an agreement (Exhibit L) with Benguet. if the income from the said claims is insufficient therefor. advances and disbursements hereunder as evidenced by said statements of accounts. Benguet further agrees to provide such funds from its own resources as are in its judgment necessary for the exploration and development of said claims and properties. shall be payable on or before the twentieth day of each month. as amended by the supplemental agreements of September 14. As heretofore stated the question is: Under the arrangement between the Company and Benguet. It is understood that Benguet shall receive no compensation for services rendered as manager or technical consultants in connection with the carrying out of this agreement. "XIV. whereby the latter undertook to "explore. The pertinent provisions of their agreement. 1934. Because it wanted to relieve itself of the work and expense necessary for developing the claims. for the purchase and construction of said concentrator plant and for the installation of the proper transportation facilities as provided in paragraphs I. in the exploration and development of said properties or in the enlargement or extension of said concentration and transportation facilities if in its judgment good mining practice requires such additional expenditures. "X. the Company. Otherwise. the sole compensation of Benguet shall be its proportion of the net profits of the operation as herein above set forth. Such expenses.Y.000. 2010-2011 ST DIGESTS For a proper understanding of the situation the following facts are stated: The Company has certain mining claims located in Masinloc. shall not exceed the sum of One Thousand Pesos (P1. the net profits resulting from the operation of the aforesaid claims or properties shall be divided ninety per cent (90%) to Benguet and ten per cent (10%) to Consolidated. charge against the operation actual additional expenses incurred in its Manila Office in connection with the carrying out of the terms of this agreement including traveling expenses of consulting staff to the mines.TAX 1 INCOME TAXATION Prof.

62 under the terms specified by the Tax Court.881.. Held: YES. and not on the basis of 35% which was withheld and paid to and collected by the government. Inc. in effect.00 was withheld and paid to the Bureau of Internal Revenue.Y. Again. Held: Here we have to distinguish between (1) the method of accounting used by the Company in determining its net income for tax purposes." the Company was correct in not accruing said one-half as a deduction. It is wholly-owned subsidiary of the Glaro S. Dina D.. the appealed decision is hereby modified by ordering Consolidated Mines. had contracted that in the method of computing compensation the basis were "cash receipts" and "cash payments. Wander filed with the BIR a claim for refund and/or tax credit in the amount of P115. and (2) the method of computation agreed upon between the Company and Benguet in determining the amount of compensation that was to be paid by the former to the latter. Issue: Whether or not private respondent Wander is entitled to the preferential rate of 15% withholding tax on dividends declared and remitted to its parent corporation. requires their recognition. The fact that it became a withholding agent of the government which was not by choice but by compulsion under Section 53 (b) of the Tax Code. In fact. WHEREFORE. that said corporation is first and foremost a wholly owned subsidiary of Glaro. income tax accounting methods can be understood more easily. 2d 688. then the amount due Benguet for each month accrued at the end of that month.92.400. 1976. whether the Company had made payment or not. 33 Am.TAX 1 INCOME TAXATION Prof. respectively. be equivalent to giving Benguet a right which it did not have under the contract. The parties. Malayan Insurance Co. or the total sum of P191. to pay the Commissioner of Internal Revenue the amounts of P76. on wich 35% tax in the amount of P124.. contending that it is liable only to 15% withholding tax in accordance with Section 24 (b) (1) of the Tax Code. Thus. 2010-2011 ST DIGESTS of the Accounts Receivables as part of the 50-50 profit sharing scheme between Consolidated and Benguet Mines. on July 14. Jur. Glaro dividends in the amount of P222." It is a device to insure the collection by the Philippine Government of taxes on incomes. by aliens who are outside the taxing jurisdiction of this Court (Commissioner of Internal Revenue vs. Glaro. as amended by Presidential Decree Nos.00. To make the Company deduct as an expense one-half of the "Accounts Receivable" would. Thus. Wander is the proper entity who should for the refund or credit of overpaid withholding tax on dividends paid or remitted by Glaro. as the Philippine counterpart.00.00. Lucenario 1 Sem A. 18 Since Benguet had no right to one-half of the "Accounts Receivable.320. Wander filed a withholding tax return for the second quarter ending June 30. but was consistent in its use of the accrual method of accounting. It is quick to treat an item as income. Wander filed its withholding tax return for the second quarter and remitted to its parent company. The Company was not using a hybrid method of accounting.00 was withheld and paid to the BIR. Therefore. on which 35% withholding tax thereof in the amount of P77.647. (From footnote 1 of the case) While taxable income is based on the method of accounting used by the taxpayer.254. WITHHOLDING OF TAXES CIR V WANDER PHILIPPINES Facts: Wander Philippines). This is so because of a fundamental difference in the ends the two concepts serve.511. NLRC). P48.200. it will almost always differ from accounting income. Good accounting. Accounting attempts to match cost against revenue. Once this fundamental difference in approach is accepted. Inc. 21 SCRA 944).000. plus penalties consisting of surcharge and interest (Section 54. being free to do so. Tax law is aimed at collecting revenue. Ltd.56 and P66. slow to recognize deductions or losses.A. is a domestic corporation organized under Philippine laws. on the other hand. It will be recalled. 1954 and 1956. 369 and 778. 1976 on the dividends it remitted to Glaro amounting to P355. and to substitute for the parties' choice a mode of computation of compensation not contemplated by them. Wander may be assessed for deficiency withholding tax at source.700. this Court construing Section 53 (b) of the Internal Revenue Code held that "the obligation imposed thereunder upon the withholding agent is compulsory. a Swiss corporation not engaged in trade or business in the Philippines. derived from sources in the Philippines. 113 .14 as deficiency income taxes for the years 1953." Once determined in accordance with the stipulated bases and procedure. the tax law will not recognize deductions for contingent future losses except in very limited situations. cannot by any stretch of the imagination be considered as an abdication of its responsibility to its mother company. Sometime in 1995.

In the case at bar. nevertheless. however. petitioner having adopted the ‘accrual method’ of accounting in reporting its incomes. royalties. While it may be true that claims for refund are construed strictly against the claimant. the withholding agent is explicitly made personally liable for the income tax withheld under Section 54. the dividends received from a domestic corporation liable to tax. 32922 ‘that there was a definite liability. 24-71-003-154-84 dated 12 September 1984 as well as the decision of the Court of Tax Appeals . a clear and imminent certainty that at the maturity of the loan contracts. Since the taxpayer failed to pay the withholding tax on interest.” 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 114 . versus Commissioner of Internal Revenue”. in CTA Case No. and to the modus vivendi of withholding tax at source come to the fore. In the aforecited provision of law. after a careful examination of pertinent records.. an inquiry as to the nature of accrual method of accounting.Y. Lucenario 1 Sem A. the Court concurred in the finding by the Court of Appeals in CA GR.. the tax shall be 15% of the dividends received. the withholding tax rate of 15% is hereby affirmed. 1977 ruling of petitioner that "since the Swiss Government does not impose any tax on the dividends to be received by the said parent corporation in the Philippines. consisted of interest and compromise penalties for alleged late payment of withholding taxes due on interest loans.vs. The bulk of the deficiency withholding tax assessment. royalties and guarantee fees paid by the petitioner to non-resident corporations. to deny private respondent the privilege to withhold only 15% tax provided for under Presidential Decree No. The aforementioned case held that “the liability of the taxpayer to withhold and pay the income tax withheld at source from certain payments due to a non-resident foreign corporation attaches at the time of accrual payment or remittance thereof” and “the withholding agent/corporation is obliged to remit the tax to the government since it already and properly belongs to the government. the withholding tax due thereon is ultimately paid to the government upon remittance abroad of the amount accrued. 369. Dina D. for the period from the fourth quarter of 1974 to the fourth quarter of 1975. And to determine the same. 3307 entitled “Construction Resources of Asia. This is allowed under the law. 71-003 and BIR Ruling No.77. subject to the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to 20% which represents the difference between the regular tax (35%) on corporations and the tax (15%) dividends.” It is petitioner’s submission that the withholding taxes on the said interest income and royalties were paid to the government when the subject interest and royalties were actually remitted abroad. as aptly stated by respondent Court. The method of withholding tax at source is a procedure of collecting income tax. amending Section 24 (b) (1) of the Tax Code. Besides. SP No. Stated otherwise.748. 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”. Respondent denied the protest in a letter dated 14 May 1985 . Inc. The provisions of law then in force are silent as to when does the duty to withhold the taxes arise. on the following ground: “For Philippine internal revenue tax purposes.. whatever amount has accrued in the books. the fact that Switzerland did not impose any tax or the dividends received by Glaro from the Philippines should be considered as a full satisfaction of the given condition. it is significant to note that the conclusion reached by respondent Court is but a confirmation of the May 19.TAX 1 INCOME TAXATION Prof. 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: NO. would run counter to the very spirit and intent of said law and definitely will adversely affect foreign corporations" interest here and discourage them from investing capital in our country. For. inclusive of interest and compromise penalties. the procedure used by the herein petitioner. COURT OF APPEALS (1999) Facts: Filipinas Synthetic Fiber Corporation a domestic corporation received a letter of demand from the Commissioner of Internal Revenue assessing it for deficiency withholding tax at source in the total amount of P829. so much so that petitioner already deducted as business expense the said amount as interests due to the foreign corporation... Accordingly." FILIPINAS SYNTHETIC FIBER CORPORATION. and guarantee fee at the time of their accrual and in the books of the corporation the aforesaid assessment is therefore legal and proper. 2010-2011 ST DIGESTS Based on the NIRC. the condition imposed under the above-mentioned section is satisfied. citing BIR Ruling No. the foreign corporation was going to earn income in an ascertained amount.

The Commissioner did not act on said claim for refund. is based there. this petition for review by the CIR.603. No. pursuant to which the [respondent] was granted the right to use the trademark. S. COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX APPEALS. The United States is the state of residence since the taxpayer. respondents.C." CIR versus S. 1989. 115 . Johnson and ordered the CIR to issue a tax credit certificate representing overpaid withholding tax on royalty payments.A. 13. Hence. Under the RP-US Tax Treaty. Having “written-off” the amounts as business expense in its books. Moreover.e. Isuse: Whether SC JOHNSON AND SON. "the tax base upon which the 15% branch profit remittance tax is imposed is the profit actually remitted abroad. Under Article 13 thereof.. patents and technology. [G. S. S. For the use of the trademark or technology. with a restraint on the tax that may be collected by the state of source. trademarks. USA royalties based on a percentage of net sales and subjected the same to 25% withholding tax on royalty payments which respondent paid for the period covering July 1992 to May 1993 in the total amount of P1.b.TAX 1 INCOME TAXATION Prof. i. the Court of Tax Appeals rendered its decision in favor of S. located within the Philippines. instead of 25% they paid. A. Co. as provided in the RP-US Tax Treaty in relation to the RP-West Germany Tax Treaty Held: NO.Y.] – SUPRA Held: The respondents correctly concluded that the dividends in dispute were neither subject to the 15% profit remittance tax nor to the 10% intercorporate dividend tax. MARUBENI CORPORATION (formerly Marubeni — Iida. entered into a license agreement with SC Johnson and Son. but such amount shall not exceed the limitations provided by United States law for the taxable year.443.). patents and technology owned by the latter including the right to manufacture. the recipient being a non-resident stockholder. the Philippines may impose one of three rates — 25 % of the gross amount of the royalties. Ltd. JOHNSON AND SON.C. 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. Par. U. USA is entitled to the “most favored nation” tax rate of 10% on royalties. and COURT OF APPEALS (1999) Facts: Private respondent is a domestic corporation organized and operating under the Philippine laws. vs. the state of residence and the state of source are both permitted to tax the royalties. it had taken advantage of the benefit provided in the law allowing for deductions from gross income.iii). 2010-2011 ST DIGESTS demandable. INC. 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. respondent was obliged to pay SC Johnson and Son.. Respondent filed with the International Tax Affairs Division (ITAD) of the BIR a claim for refund of overpaid withholding tax on royalties arguing that. marketing and production from SC Johnson and Son.S. On appeal.R. Dina D. Lucenario 1 Sem A. United States of America (USA). U. petitioner. The state of source is the Philippines because the royalties are paid for the right to use property or rights. 76573. or the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third state. It is estopped from claiming otherwise now. C.00. 2. 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). they should only be liable to 10% withholding tax imposed on royalties based on the RP-US Treaty (Art. the method employed to give relief from double taxation is the allowance of a tax credit to citizens or residents of the United States (in an appropriate amount based upon the taxes paid or accrued to the Philippines) against the United States tax.. package and distribute the products covered by the Agreement and secure assistance in management. a nonresident foreign corporation based in the U. September 14. However. Furthermore. Johnson and Son. 15 % when the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities. A.

ordering the latter to pay the assessed deficiency but deleting the 5% surcharge for late payment of tax. Lim Tian Co.98.00. The 5% balance remained outstanding until final liquidation and adjustment. the taxpayer had no choice but to account the copra outturn as accrued income. thereby also decreasing the defendant’s net taxable income by the same amount. the weight before shipment. such copra was no longer in the taxpayer’s bodega. A deficiency income tax of P 10 O74. it only collected 95% of the amount aooearing in the letter of credit covering every copra outturn. the concessional tax rate of 10 % provided for in the RP-Germany Tax Treaty should apply only if the taxes imposed upon royalties in the RP-US Tax Treaty and in the RP-Germany Tax Treaty are paid under similar circumstances. Private respondent must prove that the RP-US Tax Treaty grants similar tax reliefs to residents of the United States in respect of the taxes imposable upon royalties earned from sources within the Philippines as those allowed to their German counterparts under the RP-Germany Tax Treaty. a non-resident foreign 116 . should have been treated as accrued income for 1951 instead of as stock on hand on 01 January 1952. Said beginning inventory. employs the accrual method of accounting. INC. expressly allows crediting against German income and corporation tax of 20% of the gross amount of royalties paid under the law of the Philippines.TAX 1 INCOME TAXATION Prof.Y. 15 April 1988) Facts: Procter and Gamble Philippines is a wholly owned subsidiary of Procter and Gamble USA (PMC-USA).00) already partially collected.e. Dina D. took up the copra outturn in question as copra on hand in the beginning inventory of 1952. Lim Tian Co. Yes.00 outstanding as of 31 December 1951. its net taxable.00 copra outturn formed part of the “cost of goods sold”. it diminished the net sales by P95 500. its beginning inventory for 1952 did not state the truth in considering the copra outturn as copra on hand. (1966) Facts: Lim Tian Teng Sons & Co.00 plus surcharge (P 5 037. The CIR assessed Lim Tian Co. it no longer owned the copra. Lim Tian Co. by observing regularly its own system of accounting. which is the counterpart provision with respect to relief for double taxation. copra purchased during the year and copra on hand as of 31 December 1952 were deducted as “cost of goods sold” from the total gross sales for the purpose of determining the net sales. The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax crediting. Issue: Whether the assessment is correct Held. This it did not. i. Article 23 of the RP-US Tax Treaty. Lim Tian Co. (Lim Tian Co. Second.. does not provide for similar crediting of 20% of the gross amount of royalties paid. 2010-2011 ST DIGESTS Given the purpose underlying tax treaties and the rationale for the most favored nation clause. The lower court ruled against WITHHOLDING OF TAXES & TAX ON CORPORATIONS: BASES AND RATES.00) and later on filed with the CFI of Cebu for the collection of deficiency income tax. The CIR eliminated the P95 500. Following such method.’ income tax return for 1952 is fraudulent. Procter & Gamble Philippines (160 SCRA 560 GR L-66838. for on 31 December 1951. the copra outturn in the amount of P95 500. Since the P95 500. On the other hand. thus increasing the taxpayer’s net income for 1952 and consequently. as part of its outstanding stock as of 31 December 1951. Lucenario 1 Sem A. First. This procedure of treating the copra outturn is inconsistent with the defendant’s accounting method. On 30 March 1953. Filed its income tax return for 1952 based on accrued income and expenses. Inc. Lim Tian Co. Article 24 of the RP-Germany Tax Treaty. To allow for loss in weight due to shrinkage. DIVIDENDS Commissioner vs. together with expenses. NON-RESIDENT FOREIGN CORPORATIONS. It took up as part of the beginning inventory for 1952 the copra outturn shipped in 1951 (P95 500.00 outturn from the beginning inventory for 1952 and considered it as accrued income for 1951. REPUBLIC V LIM TIAN TENG SONS & CO. As appearing from its 1952 income tax return. Its return showed a loss of P 55 109. for brevity) is a domestic corporation engaged in the exportation of copra.

reduced the regular rate of dividend tax to a maximum of 20% of the gross amount of dividends paid to US parent corporations. Issue: W/N P&G Philippines is entitled to the refund or tax credit. COURT OF APPEALS 117 . Dina D. is completely meritorious. and deducted 35% withholding tax at source. not engaged in trade and business therein. P&G USA. and (ii) the tax credit for the Philippine corporate income tax actually paid by P&G Philippines but ³deemed paid´ by P&G USA. PMC Philippines. and established a treaty obligation on the part of the United States that it ³shall allow´ to a US parent corporation receiving dividends from its Philippine subsidiary ³a [tax] credit for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine [subsidiary] Commissioner vs. Since the US Congress desires to avoid or reduce double taxation of the same income stream. IN GENERAL GARRISON vs. Held: The issue raised is one made for the first time before the Supreme Court. to present the income tax return of PMC-USA for 1975 when the dividends were received. Facts: Procter and Gamble Philippines declared dividends payable to its parent company and sole stockholder. filed a claim for the refund of 20 percentage point portion of the 35 percentage whole tax paid with the Commissioner of Internal Revenue. under the Philippines-United States Convention ³With Respect to Taxes on Income. the applicable rate of withholding tax on the dividends remitted was only 15%. The real party in interest is PMC-USA. the claimant failed to show or justify the tax return of the disputed 15% as it failed to show the actual amount credited by the US Government against the income tax due from PMC-USA on the dividends received from PMC Philippines. 369. it is axiomatic that the state can never be allowed to jeopardize the government’s financial position. Held: YES. claiming that pursuant to Section 24(b)(1) of the National Internal Revenue Code. It then filed a claim with the Commissioner of Internal Revenue for a refund or tax credit. Herein. Under the same underlying principle of prior exhaustion of administrative remedies. 2010-2011 ST DIGESTS corporation in the Philippines. Lucenario 1 Sem A. as a minimum. by treaty commitment. Such tax credit for ³taxes deemed paid in the Philippines´ must. if not rents or royalties.Y.´ the Philippines.´ applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. In 1977. 1991) RESOLUTION (Motion for Reconsideration of the 1988 SC DECISION) RETURNS AND PAYMENT OF TAXES. issues not raised in the lower court cannot be generally raised for the first time on appeal. For the taxable years 1974 and 1975. The ordinary 35% tax rate applicable to dividend remittances to non-resident corporate stockholders of a Philippine corporation goes down to 15% if the country of domicile of the foreign stockholder corporation ³shall allow´ such foreign corporation a tax credit for ³taxes deemed paid in the Philippines. on the judicial level. it allows a tax credit of both (i) the Philippine dividend tax actually withheld. which should prove that it is entitled under the US Tax Code to a US Foreign Tax Credit equivalent to at least 20 percentage points spared or waived as otherwise considered or deemed paid by the Government. invoking the tax-sparing provision of Section 24 (b) as the withholding agent of the Philippine Government with respect to dividend taxes paid by PMC-USA. Nonetheless. Moreover. Procter & Gamble Philippines (204 SCRA 377 December 2. and to submit duly authenticated document showing that the US government credited teh 20% tax deemed paid in the Philippines. as amended by PresidentialDecree No. PMC-USA is the sole shareholder of PMC Philippines and is entitled to receive income from PMC Philippines in the form of dividends. PMC Philippines filed its income tax return and also declared dividends in favor of PMCUSA.TAX 1 INCOME TAXATION Prof. reach an amount equivalent to 20 percentage points which represents the difference between the regular 35% dividend tax rate and the preferred 15% tax rate. The submission of the Commissioner that PMC Philippines is but a withholding agent of the government and therefore cannot claim reimbursement of alleged overpaid taxes. Issue: Whether PMC Philippines is entitled to the 15% preferential tax rate on dividends declared and remitted to its parent corporation.

An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of the Philippines for purposes of income tax. when it can be finally ascertained if the taxpayer has still to pay additional income tax. almost all of the appellants were born in the Philippines. Section 292 (now Section 230) provides a two-year prescriptive period to file a suit for a refund of a tax erroneously or illegally paid. Lucenario 1 Sem A. then a literal application of Section 292 (Section 230) would lead to absurdity and inconvenience. to be adjusted at the end of the calendar or fiscal year. TMX Sales. 2010-2011 ST DIGESTS Facts: Garrison and five others were charged for violation of NIRC by not filing their income tax returns.TAX 1 INCOME TAXATION Prof. The aliens should file their income tax returns. citing that the claim is already barred because 2 years from payment of the income tax has already lapsed. filed a suit for a refund on March 14. Therefore. the two-year prescriptive period provided in Section 292 (now Section 230) of the Tax Code should be computed from the time of filing the Adjustment Return or Annual Income Tax Return and final payment of income tax. These made the Garrison et al resident aliens and not merely transients or sojourners. to claim exemption. bases.010. This is reinforced by Section 87 (now Section 69) which provides for the filing of adjustment returns and final payment of income tax. The most reasonable and logical application of the law would be to compute the two-year prescriptive period at the time of filing the Final Adjustment Return or the Annual Income Tax Return. counted from the time the tax was paid. Issue: WON TMX is entitled to tax refund. is not yet barred by prescription. Since the two-year prescriptive period should be counted from the filing of the Adjustment Return on April 15. However. They are all US citizens employed in the US Naval Base in Olongapo City.S. Dina D. Inc. TMX SALES Facts: TMX Sales claims tax refund for losses in incurred on 1981. CIR denied. based on its Adjustment Return. which is the date of the last installment. and none whatever "from Philippine sources or sources other than the US sources. Whether he is a transient or not is determined by his intentions with regards to the length and nature of his stay. Also. Inc." This burden is not overcome by Garrison et al. 1982. A literal application of Section 292 (now Section 230) would thus pose no problem as the two-year prescriptive period reckoned from the time the quarterly income tax was paid can be easily determined." None of them may be considered a non-resident alien who is not under any legal duty to file an income tax return under the Philippine Tax Code. 1984. is equivalent to the tax paid during the first quarter. Inc. the claim for refund of TMX Sales. But a literal application of this provision in the case at bar which involves quarterly income tax payments may lead to absurdity and inconvenience. ACCRA INVESTMENTS CORPORATION VS. cannot be ascertained. or if he is entitled to a refund of overpaid income tax. COURT OF APPEALS RETURNS AND PAYMENT OF TAXES. 118 . Held: Yes. Here. Each of the petitioners fall within the letter of the codal precept that an "alien residing in the Philippines" is obliged "to file an income tax return. Issue: WON the aliens are exempt from filing income tax returns Held: No. if the quarter in which the overpayment is made. TMX claim is not yet barred. Consequently. should be treated as advances or portions of the annual income tax due. the aliens have the burden to prove that for that year they had derived income exclusively from their employment in connection with the U. Here. the filing of quarterly income tax returns and payment of quarterly income tax should only be considered mere installments of the annual tax due. to return to another country is not sufficient to constitute him as transient.Y. CORPORATIONS CIR vs. These quarterly tax payments which are computed based on the cumulative figures of gross receipts and deductions.00 claimed by private respondent TMX Sales. the amount of P247. A mere floating intention indefinite as to time. Here. Their defense was that they are not resident aliens but only special temporary visitors and are exempt from filing income tax returns. repatriated to the US and came back to stay in the Philippines up to the present time.

In having applied the first alternative date — “the end of the tax year” in order to determine whether the corporation’s claim for refund had been seasonably filed.751. It provides that “The corporate quarterly declaration shall be filed within sixty (60) days following the close of each of the first three quarters of the taxable year. however. Section 230 of the Tax Code provides that “ No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected. It is asking for the recovery of the sum of P82. but such suit or proceeding may be maintained. that the two-year prescriptive period under Section 306 (now part of Section 230) of the Revenue Code starts to run with respect to payments effected through the withholding tax system. ACCRA elevated the case to the Supreme Court. ACCRA filed with the Supreme Court a petition for review. A taxpayer. as amended. With the denial of their motion for reconsideration.142. per se. refund or credit any tax. penalty or sum has been paid under protest or duress. the corporation’s withholding agents had paid the corresponding taxes withheld at source to the BIR from February to December 1981. The distinction is essential in the resolution of this case for it spells the difference between being barred by prescription and entitlement to a refund. no such suit or proceeding shall begin after the expiration of two years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment: Provided. ACCRA Investment Corporation filed with the BIR its annual corporate income tax return for the calendar year ending 31 December 1981 reporting a net loss of P2. commission and consultancy income of the corporation to the BIR from February to December 1981. or of any penalty claimed to have been collected without authority. or when the tax liability falls due. It is from this latter date then. Dina D. the CTA dismissed the petition for review after a finding that the two-year period within which the corporation’s claim for refund should have been filed had already prescribed pursuant to Section 292 of the NIRC of 1977. the appellate court failed to appreciate properly the attending circumstances of the case.00. in paying his taxes. Lucenario 1 Sem A. On 27 January 1988.91. The final adjustment return shall be filed on or before the 15th day of the 4th month following the close of the fiscal year. It directed the Commissioner of Internal Revenue to refund to the corporation the amount of P82. ACCRA declared as creditable all taxes withheld at source by various withholding agents totaling P82.751. The corporation is not claiming a refund of overpaid withholding taxes. where on the face of the return upon which payment was made. and not “from the date of the filing of the income tax return” as posited by the corporation. The corporation filed a claim for refund inasmuch as it had no tax liability against which to credit the amounts withheld. The CTA denied ACCRA’s motion for reconsideration for having been filed out of time. 230 of the NIRC of 1986). 2010-2011 ST DIGESTS Facts: On 15 April 1982..91. Pending action of the Commissioner of Internal Revenue on its claim for refund. such payment appears to have been erroneously paid. In any case.” Payment is a mode of extinguishing obligations. as the case may be.TAX 1 INCOME TAXATION Prof. Herein.751. Section 70 (b) of the Tax Code states when the income tax return of corporations must be filed. The Supreme Court granted the petition. or of any sum alleged to have been excessive or in any manner wrongfully collected. which the Court referred to the CA for proper determination and disposition. i. whether or not such tax. “from the end of the tax year when a taxpayer is deemed to have paid all taxes withheld at source”. that the Commissioner may.Y. until a claim for refund or credit has been duly filed with the Commissioner. even without a written claim therefor. the refundable or creditable amount determined upon the petitioner corporation’s filing of the its final adjustment tax return on or before 15 April 1982 when its tax liability for the year 1981 fell due. The withholding agents paid and remitted amounts representing taxes on rental. A taxpayer whose income is withheld at source will be deemed to have paid his tax liability when the same falls due at the end of the tax year.” 119 . and (2) when the tax liability falls due. performs and extinguishes his tax obligation for the year concerned. reversed and set aside the decision of the Court of Appeals.00.957. On 14 January 1989. In the said return. ACCRA filed a petition for review with the CTA asking for the refund of the amounts withheld as overpaid income taxes. The case of Gibbs v. The CA affirmed the decision of the CTA opining that the two-year prescriptive period in question commences “from the date of payment of the tax” as provided under Section 292 of the Tax Code of 1977 (now Sec. Commissioner of Internal Revenue presented two alternative reckoning dates of refund claim: (1) the end of the tax year.e.91.

On the basis of the corporate income tax return which ACCRA filed on 15 April 1982. as amended.00 representing the 3% of 15% withholding tax on the storage credits. Petitioner appealed the adverse decision of the CTA to the CA but the latter dismissed the appeal.00 reflected on a creditable income tax in its annual final adjustment return. Asia Australia Express Ltd. as the case may be.” Anent claims for refund.869. petitioner filed a supplemental petition on 11 March 1986. 292 in relation to Sec. Before the Court could formally hear the case.00 against its 1984 tax dues consistent with the provision of Sec. On February 28. SAN CARLOS MILLING CO. Lucenario 1 Sem A. 86 coupled with an alternative request for a refund or tax credit of the same.00. on the date of the filing of the adjusted final tax return. Dina D.Y.” in the case of domestic corporations. In CIR vs. as reflected thereon.TAX 1 INCOME TAXATION Prof. at the earliest. ACCRA had no tax liability for the year 1981. The rationale in computing the two-year prescriptive period with respect to the corporation’s claim for refund from the time it filed its final adjustment return is the fact that it was only then that the corporation could ascertain whether it made profits or incurred losses in its business operations.957. Consequently. Accordingly the final adjustment income tax return for the taxable year 1983 reflected the amount of P781. 69 of the Tax Code. The corporation duly complied with this requirement. payment thereof would have been due at the time the return was filed pursuant to subparagraph (c) of Section 70 of the NIRC which provides that “The income tax due on the corporate quarterly returns and the final income tax returns computed in accordance with Section 68 and 69 shall be paid at the time the declaration or return is filed as prescribed by the Commissioner of Internal Revenue. hence. refers to the final adjustment return as mentioned in Section 69 of the Tax Code of 1986. after having unilaterally effected a set-off of its creditable income tax vis-à-vis income tax liabilities.” There is the need to file a return first before a claim for refund can prosper inasmuch as the Commissioner mandates that the corporate taxpayer opting to ask for a refund must show in its final adjustment return the income it received from all sources and the amount of withholding taxes remitted by its withholding agents to the BIR. with respect to the 1981 taxable year. Had there been any.00 carried over as tax credit and P4. Before the respondent could act on the claim petitioner filed a petition for review on 18 July 1984. it still had a credible income tax of P4. which was earlier denied by the respondent. 120 . CIR Facts: Petitioner had for the taxable year 1982 a total income tax overpayment of P781. VS. 2010-2011 ST DIGESTS The corporation’s taxable year is on a calendar year basis. INC. The CIR disallowed the proffered automatic credit scheme but treated the request as an ordinary claim for refund/tax credit under Sec.393. 13-78 requires that “Claims for tax credit or refund of income tax deducted and withheld on income payments shall be given due course only when it is shown on the return that the income payment received was declared as part of the gross income and the fact of withholding is established by a copy of the statement duly issued by the payor to the payee showing the amount paid and the amount of tax withheld therefrom. or (b) Be refunded the excess amount paid. petitioner signified its intention to apply the total creditable amount of 785. therefore was then its tax liability if any fell upon its final adjustment return. which partly reads “Every corporation liable to tax under Section 24 shall file a final adjustment return covering the total taxable income for the preceding calendar or fiscal year. 295 of the Tax Code and subjected the same for verification/investigation. 1990. In 17 May 1984. However.” The term “return. section 8 of Revenue Regulation No.470. The “date of payment”. The application of the amount for the 1983 tax liabilities remained unutilized in view of petitioner’s net loss for the year.393. it reported a net loss of P2. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable income of that year the corporation shall either: (a) Pay the excess tax still due. the Supreme Court ruled that the two-year prescriptive period within which to claim a refund commences to run. the CTA dismissed the petition and held that prior investigation by and authority from the CIR are necessary before a taxpayer could avail of the provisions of Sec. Issue: Whether or not the option for either a refund or automatic tax credit scheme ipso facto confer on the taxpayer the right to avail the same. ACCRA had until 15 April 1982 within which to file its final adjustment return.00 creditable income tax.142.470.

and the tax amount to be credited. estates and trusts is allowed. Once a taxpayer opts for either a refund or the automatic tax credit scheme. 121 . then such excess payment may be claimed as a refund. An investigation as a matter of procedure. this does not ipso facto confer on him the right to avail of the same immediately. 7-93 provides that should there still be payment after crediting is made against the quarterly income taxes due for the entire succeeding taxable year. Dina D.Y. Lucenario 1 Sem A. Revenue Reg. As regards automatic crediting. It seems however that automatic crediting of excess tax payment against the quarterly income taxes due for the succeeding year of individuals. is necessary to enable the Commissioner to determine the correctness of the petitioner’s returns. No. and signified his option in accordance with the regulation.TAX 1 INCOME TAXATION Prof. no automatic crediting of the overpaid income tax against taxes due in the succeeding quarters of the following year is allowed. 2010-2011 ST DIGESTS Held: As for corporations and partnerships taxable as corporations.

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