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1.) COMMISSIONER OF INTERNAL REVENUE vs.

PROCTER & GAMBLE PHILIPPINE MANUFACTURING


CORPORATION and THE COURT OF TAX APPEALS

DOCTRINE: A "person liable for tax" has been held to be a "person subject to tax" and properly considered a
"taxpayer." The terms liable for tax" and "subject to tax" both connote legal obligation or duty to pay a tax. It is very
difficult, indeed conceptually impossible, to consider a person who is statutorily made "liable for tax" as not "subject to
tax." By any reasonable standard, such a person should be regarded as a party in interest, or as a person having
sufficient legal interest, to bring a suit for refund of taxes he believes were illegally collected from him.

FACTS: For the taxable year 1974 ending on 30 June 1974, and the taxable year 1975 ending 30 June 1975, private
respondent Procter and Gamble Philippine Manufacturing Corporation ("P&G-Phil.") declared dividends payable to its
parent company and sole stockholder, Procter and Gamble Co., Inc. (USA) ("P&G-USA"), amounting to P24,164,946.30,
from which dividends the amount of P8,457,731.21 representing the thirty-five percent (35%) withholding tax at source
was deducted. On 5 January 1977, private respondent P&G-Phil. filed with petitioner Commissioner of Internal Revenue a
claim for refund or tax credit in the amount of P4,832,989.26 claiming, among other things, that pursuant to Section 24 (b)
(1) of the National Internal Revenue Code ("NITC"), as amended by Presidential Decree No. 369, the applicable rate of
withholding tax on the dividends remitted was only fifteen percent (15%) (and not thirty-five percent [35%]) of the
dividends. There being no responsive action on the part of the Commissioner, P&G-Phil., on 13 July 1977, filed a petition
for review with public respondent Court of Tax Appeals ("CTA") docketed as CTA Case No. 2883. On 31 January 1984, the
CTA rendered a decision ordering petitioner Commissioner to refund or grant the tax credit in the amount of
P4,832,989.00. On appeal by the Commissioner, the Court through its Second Division reversed the decision of the CTA
and held that:

(a) P&G-USA, and not private respondent P&G-Phil., 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 twenty percent (20%) which represents the
difference between the regular tax of thirty-five percent (35%) on corporations and the tax of fifteen percent (15%) on
dividends; and

(c) private respondent 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%."

ISSUES:

A.) whether or not the BIR should be allowed to question the capacity of P&G-Phil. to bring the present claim for refund or
tax credit.

B.) whether or not P&G-Phil., being a mere withholding agent, falls within the meaning of the term Taxpayer and thus
has the capacity to bring the present claim for refund or tax credit.

HELD:

A.) NO. It is commonplace that in the absence of explicit statutory provisions to the contrary, the government must follow
the same rules of procedure which bind private parties. It is, for instance, clear that the government is held to compliance
with the provisions of Circular No. 1-88 of this Court in exactly the same way that private litigants are held to such
compliance, save only in respect of the matter of filing fees from which the Republic of the Philippines is exempt by the
Rules of Court.

More importantly, there arises here a question of fairness should the BIR, unlike any other litigant, be allowed to raise for
the first time on appeal questions which had not been litigated either in the lower court or on the administrative level. For,
if petitioner had at the earliest possible opportunity, i.e., at the administrative level, demanded that P&G-Phil. produce an
express authorization from its parent corporation to bring the claim for refund, then P&G-Phil. would have been able
forthwith to secure and produce such authorization before filing the action in the instant case. The action here was
commenced just before expiration of the two (2)-year prescriptive period.
B.) YES. A "person liable for tax" has been held to be a "person subject to tax" and properly considered a "taxpayer." The
terms liable for tax" and "subject to tax" both connote legal obligation or duty to pay a tax. It is very difficult, indeed
conceptually impossible, to consider a person who is statutorily made "liable for tax" as not "subject to tax." By any
reasonable standard, such a person should be regarded as a party in interest, or as a person having sufficient legal
interest, to bring a suit for refund of taxes he believes were illegally collected from him.

In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, this Court pointed out that a withholding
agent is in fact the agent both of the government and of the taxpayer, and that the withholding agent is not an ordinary
government agent:

The law sets no condition for the personal liability of the withholding agent to attach. The reason is to
compel the withholding agent to withhold the tax under all circumstances. In effect, the responsibility for
the collection of the tax as well as the payment thereof is concentrated upon the person over whom the
Government has jurisdiction. Thus, the withholding agent is constituted the agent of both the Government
and the taxpayer. With respect to the collection and/or withholding of the tax, he is the Government's
agent. In regard to the filing of the necessary income tax return and the payment of the tax to the
Government, he is the agent of the taxpayer. The withholding agent, therefore, is no ordinary government
agent especially because under Section 53 (c) he is held personally liable for the tax he is duty bound to
withhold; whereas the Commissioner and his deputies are not made liable by law. (Emphasis supplied)

If, as pointed out in Philippine Guaranty, the withholding agent is also 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, such authority may reasonably be held to include the authority to file a claim for refund and to bring an action
for recovery of such claim. This implied authority is especially warranted where, is in the instant case, the withholding
agent is the wholly owned subsidiary of the parent-stockholder and therefore, at all times, under the effective control of
such parent-stockholder. In the circumstances of this case, it seems particularly unreal to deny the implied authority of
P&G-Phil. to claim a refund and to commence an action for such refund.

We believe that, even now, there is nothing to preclude the BIR from requiring P&G-Phil. to show some written or telexed
confirmation by P&G-USA of the subsidiary's authority to claim the refund or tax credit and to remit the proceeds of the
refund., or to apply the tax credit to some Philippine tax obligation of, P&G-USA, before actual payment of the refund or
issuance of a tax credit certificate. What appears to be vitiated by basic unfairness is petitioner's position that, although
P&G-Phil. is directly and personally liable to the Government for the taxes and any deficiency assessments to be
collected, the Government is not legally liable for a refund simply because it did not demand a written confirmation of
P&G-Phil.'s implied authority from the very beginning. A sovereign government should act honorably and fairly at all times,
even vis-a-vis taxpayers.

We believe and so hold that, under the circumstances of this case, P&G-Phil. is properly regarded as a "taxpayer" within
the meaning of Section 309, NIRC, and as impliedly authorized to file the claim for refund and the suit to recover such
claim.

2.) VICENTE MADRIGAL and his wife, SUSANA PATERNO vs. JAMES J. RAFFERTY, Collector of Internal Revenue,
and VENANCIO CONCEPCION, Deputy Collector of Internal Revenue

DOCTRINE: 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.
(See Fisher, "The Nature of Capital and Income.") The Supreme Court of Georgia expresses the thought in the following
figurative language: "The fact is that property is a tree, income is the fruit; labor is a tree, income the fruit; capital is a tree,
income the fruit." (Waring vs. City of Savannah [1878], 60 Ga., 93.) A tax on income is not a tax on property. "Income," as
here used, can be defined as "profits or gains."

FACTS: Vicente Madrigal and Susana Paterno were legally married prior to January 1, 1914. The marriage was
contracted under the provisions of law concerning conjugal partnerships (sociedad de gananciales). On February 25,
1915, Vicente Madrigal filed sworn declaration on the prescribed form with the Collector of Internal Revenue, showing, as
his total net income for the year 1914, the sum of P296,302.73. Subsequently Madrigal submitted the claim that the said
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. The general
question had in the meantime been submitted to the Attorney-General of the Philippine Islands who in an opinion dated
March 17, 1915, held with the petitioner Madrigal. The revenue officers being still unsatisfied, the correspondence
together with this opinion was forwarded to Washington for a decision by the United States Treasury Department. The
United States Commissioner of Internal Revenue reversed the opinion of the Attorney-General, and thus decided against
the claim of Madrigal.

After payment under protest, and after the protest of Madrigal had been decided adversely by the Collector of Internal
Revenue, action was begun by Vicente Madrigal and his wife Susana Paterno in the Court of First Instance of the city of
Manila against Collector of Internal Revenue and the Deputy Collector of Internal Revenue for the recovery of the sum of
P3,786.08, alleged to have been wrongfully and illegally collected by the defendants from the plaintiff, Vicente Madrigal,
under the provisions of the Act of Congress known as the Income Tax Law. The burden of the complaint was that if the
income tax for the year 1914 had been correctly and lawfully computed there would have been due payable by each of
the plaintiffs the sum of P2,921.09, which taken together amounts of a total of P5,842.18 instead of P9,668.21,
erroneously and unlawfully collected from the plaintiff Vicente Madrigal, with the result that plaintiff Madrigal has paid as
income tax for the year 1914, P3,786.08, in excess of the sum lawfully due and payable.

ISSUES:

A.) whether or not the income tax should be divided into two because of the existing conjugal property.

B.) whether or not the construction given in U.S. Tax laws is entitled to great weight.

HELD:

A.) NO. 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.

B.) YES. In connection with the decision above quoted, it is well to recall a few basic ideas. The Income Tax Law was
drafted by the Congress of the United States and has been by the Congress extended to the Philippine Islands. Being
thus a law of American origin and being peculiarly intricate in its provisions, the authoritative decision of the official who is
charged with enforcing it has peculiar force for the Philippines. It has come to be a well-settled rule that great weight
should be given to the construction placed upon a revenue law, whose meaning is doubtful, by the department charged
with its execution. (U.S. vs. Cerecedo Hermanos y Cia. [1907], 209 U.S., 338; In re Allen [1903], 2 Phil., 630; Government
of the Philippine Islands vs. Municipality of Binalonan, and Roman Catholic Bishop of Nueva Segovia [1915], 32 Phil.,
634.) We conclude that the judgment should be as it is hereby affirmed with costs against appellants. So ordered.

3.) EISNER VS. MACOMBER

DOCTRINE: A "stock dividend" shows that the company's accumulated profits have been capitalized, instead of
distributed to the stockholders or retained as surplus available for distribution in money or in kind should opportunity offer.
Far from being a realization of profits of the stockholder, it tends rather to postpone such realization, in that the fund
represented by the new stock has been transferred from surplus to capital, and no longer is available for actual
distribution.
FACTS: On January 1, 1916, the Standard Oil Company of California, a corporation of that state, out of an authorized
capital stock of $100,000,000, had shares of stock outstanding, par value $100 each, amounting in round figures to
$50,000,000. In addition, it had surplus and undivided profits invested in plant, property, and business and required for the
purposes of the corporation, amounting to about $45,000,000, of which about $20,000,000 had been earned prior to
March 1, 1913, the balance thereafter. In January, 1916, in order to readjust the capitalization, the board of directors
decided to issue additional shares sufficient to constitute a stock dividend of 50 percent of the outstanding stock, and to
transfer from surplus account to capital stock account an amount equivalent to such issue. Appropriate resolutions were
adopted, an amount equivalent to the par value of the proposed new stock was transferred accordingly, and the new stock
duly issued against it and divided among the stockholders.

Defendant in error, being the owner of 2,200 shares of the old stock, received certificates for 1, 100 additional shares, of
which 18.07 percent, or 198.77 shares, par value $19,877, were treated as representing surplus earned between March 1,
1913, and January 1, 1916. She was called upon to pay, and did pay under protest, a tax imposed under the Revenue Act
of 1916, based upon a supposed income of $19,877 because of the new shares, and, an appeal to the Commissioner of
Internal Revenue having been disallowed, she brought action against the Collector to recover the tax. In her complaint,
she alleged the above facts and contended that, in imposing such a tax the Revenue Act of 1916 violated article 1, 2, cl.
3, and Article I, 9, cl. 4, of the Constitution of the United States, requiring direct taxes to be apportioned according to
population, and that the stock dividend was not income within the meaning of the Sixteenth Amendment. A general
demurrer to the complaint was overruled upon the authority of Towne v. Eisner, 245 U. S. 418, and, defendant having
failed to plead further, final judgment went against him. To review it, the present writ of error is prosecuted.

ISSUE: whether or not in legal or accounting terms the stock dividend was to be regarded as a taxable income.

HELD: NO. In the majority opinion, Justice Mahlon Pitney ruled that this stock dividend was not a realization of income by
the taxpayer-shareholder for purposes of the Sixteenth Amendment: We are clear that not only does a stock dividend
really take nothing from the property of the corporation and add nothing to that of the shareholder, but that the antecedent
accumulation of profits evidenced thereby, while indicating that the shareholder is richer because of an increase of his
capital, at the same time shows he has not realized or received any income in the transaction.

The Court noted that in Towne v. Eisner, it had clearly stated that stock dividends were not income, as nothing of value
was received by Towne - the company was not worth any less than it was when the dividend was declared, and the total
value of Towne's stock had not changed.
Although the Eisner v. Macomber Court acknowledged the power of the Federal Government to tax income under the
Sixteenth Amendment, the Court essentially said this did not give Congress the power to tax as income anything
other than income, i.e., that Congress did not have the power to re-define the term income as it appeared in the
Constitution:
Throughout the argument of the Government, in a variety of forms, runs the fundamental error already
mentioneda failure to appraise correctly the force of the term "income" as used in the Sixteenth Amendment, or at least
to give practical effect to it. Thus, the Government contends that the tax "is levied on income derived from corporate
earnings," when in truth the stockholder has "derived" nothing except paper certificates which, so far as they have any
effect, deny him [or "her" in this case, Mrs. Macomber] present participation in such earnings. It [the government]
contends that the tax may be laid when earnings "are received by the stockholder," whereas [s]he has received none; that
the profits are "distributed by means of a stock dividend," although a stock dividend distributes no profits; that under the
Act of 1916 "the tax is on the stockholder's share in corporate earnings," when in truth a stockholder has no such share,
and receives none in a stock dividend; that "the profits are segregated from his [her] former capital, and [s]he has a
separate certificate representing his [her] invested profits or gains," whereas there has been no segregation of profits, nor
has [s]he any separate certificate representing a personal gain, since the certificates, new and old, are alike in what they
representa capital interest in the entire concerns of the corporation.
The Court ordered that Macomber be refunded the tax she overpaid

4.) COMMISSIONER VS. TOURS SPECIALIST

DOCTRINE: 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 taxpayers benefit; and it is not necessary that there
must be a law or regulation which would exempt such monies or receipts within the meaning of gross receipts under the
Tax Code
FACTS: The Commissioner of Internal Revenue filed a petition to review on certiorari to the CTA decision which ruled that
the money entrusted to private respondent Tours Specialist (TS), earmarked and paid for hotel room charges of tourists,
travellers and/or foreign travel agencies do not form part of its gross receipt subject to 3% independent contractors tax.

Tours Specialist derived income from its activities and services as a travel agency, which included booking tourists in local
hotels. To supply such service, TS and its counterpart tourist agencies abroad have agreed to offer a package fee for the
tourists (payment of hotel room accommodations, food and other personal expenses). By arrangement, the foreign tour
agency entrusts to TS the fund for hotel room accommodation, which in turn paid by the latter to the local hotel when
billed. Despite this arrangement, CIR assessed private respondent for deficiency 3% contractors tax as independent
contractor including the entrusted hotel room charges in its gross receipts from services for years 1974-1976 plus
compromise penalty.

During cross-examination, TS General Manager stated that the payment through them is only an act of accommodation
on (its) part and the agent abroad instead of sending several telexes and saving on bank charges they take the option to
send the money to (TS) to be held in trust to be endorsed to the hotel. Nevertheless, CIR caused the issuance of a
warrant of distraint and levy, and had TS bank deposits garnished.

ISSUE: whether or not the amounts received by a local tourist and travel agency included in a package fee from tourists
or foreign tour agencies, intended or earmarked for hotel accommodations form part of gross receipts subject to 3%
contractors tax.

HELD: NO. Money entrusted to Tour Specialist, earmarked and paid for hotel room charges does not form part of its
gross receipt subject to the 3% independent contractor's tax under NIRC. 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
taxpayers benefit; and it is not necessary that there must be a law or regulation which would exempt such monies or
receipts within the meaning of gross receipts under the Tax Code. Parenthetically, the room charges entrusted by the
foreign travel agencies to the private respondents do not form part of its gross receipts within the definition of the Tax
Code. The said receipts never belonged to the private respondent. The private respondent never benefited from their
payment to the local hotels. This arrangement was only to accommodate the foreign travel agencies. If the hotel room
charges entrusted to petitioner will be subject to 3% contractor's tax as what CIR would want to do in this case, that would
in effect do indirectly what PD 31 would not like hotel room charges of foreign tourist to be subject to hotel room tax.

Moreover, 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 arrangement was
only an act of accommodation on the part of the private respondent. This evidence was not refuted. In essence, 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. 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.

5: Commission of Internal Revenue vs. Javier, Jr.

Facts:

- On June 3, 1977, Victoria Javier, the wife of Private Respondent, received $999,973.70 from the Prudential Bank
& Trust Co. in Pasay City. Her sister Mrs. Dolores Ventosa, through some banks in the United States including
Mellon Bank, N.A., remitted said amount.
- When the Private Respondent Javier, Jr. filed his Income Tax Return for the taxable year of 1977 showing a gross
income of P53,053.38 and a net income of P48,053.88 while noting in the footnote that he was a 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, the Commissioner of Internal Revenue demanded from him the payment of P1,615.96 and
P9,287,297.51 as deficiency assessment for the years of 1976 and 1977 respectively.
- When Respondent Javier refused to pay the tax deficiency assessed for 1977, the Petitioner insisted that amount
erroneously remitted to Private-Respondents wife was definitely taxable, imposing as well a 50% fraud penalty
against him.
- Aggrieved, Private-Respondent filed an appeal with the CTA on December 10, 1981.
- In the now assailed order dated July 27, 1983, the CTA ordered the 50% fraud penalty be deleted since the
Private-Respondent could not be considered to have willfully and deliberately defrauded the government. The
CTA noted that he included the erroneously remitted amount in the footnote of his tax return, thus it could not be
said that Respondent Javier filed a false or fraudulent return falling within the ambit of Sec. 72 of the Tax Code.
- With its Motion for Reconsideration and Motion for New Trial denied, the CIR filed a Petitioner for Review from the
Decision, contending that the imposition of the 50% fraud penalty was proper since the return filed by Private-
Respondent was fraudulent, not properly declaring the $999,973.70 erroneously remitted to him.
- For his part, Respondent maintained that he did not commit any clear and convincing fraud that would warrant the
imposition of the 50% fraud penalty under Sec. 72 of the Tax Code, the inclusion in the footnote being an
invitation to the Commissioner to make an investigation and make proper assessment.

Issue: Whether or not the 50% fraud penalty imposition was proper.

Held: NO, the Court ruled that the imposition of the 50% fraud penalty under Sec. 72 was improper.

- The Court ruled that there was no fraud in the filing of the return, noting that the annotation in the footnote
constituted only as an error or mistake of fact or law not constituting fraud.
- Citing Aznar vs. CTA, the Court held that fraud in relation to the filing of income tax return consists of willful
deception and deliberately done in order to avoid the tax. Negligence, whether slight or gross, is not equivalent to
the fraud with intent to evade the tax contemplated by law.
- The Court further held that fraud is never imputed and the courts never sustain findings of fraud upon
circumstances which, at most, create only suspicion and the mere understatement of a tax is not itself proof of
fraud for the purpose of tax evasion. A fraudulent return is always an attempt to evade a tax, but a merely false
return may not be.
- Applying the foregoing, the Court noted there was no actual and intentional fraud through willful and deliberate
misleading of the government agency concerned, the BIR, headed by the Petitioner. 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.
- Finally, the Court held that the imposition of the fraud penalty in this case is not justified by the facts. Respondent
may be guilty of swindling charges, perhaps even for greed by spending most of the money he received, 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.

6: Gutierrez, et al. vs. Court of Tax Appeals, et al.

Facts:

- The Republic of the Philippines, on behalf of the U.S. Government, instituted condemnation proceedings in the
CFI of Pampanga in order to expropriate lands that were to be used for the expansion of the Clark Field Air Base.
Owning a parcel of land covered by the expansion program, the Republic included in the complaint Maria Morales
and her husband Blas Gutierrez.
- Of the P156,960.00 sum deposited by the Republic of the Phils. upon instituting the proceedings, P34,580.00 was
paid by the Provincial Treasurer of Pampanga by order of the CFI of Pampanga.
- By November 29, 1949, the CFI of Pampanga rendered its Decision dated November 29, 1949 setting the price
for the lots to be expropriated at P2,500.00 for some while P3,000.00 for the rest. Included in the Decision was
the order granting Maria Morales P94,305.75 as compensation for her land and the order denying the claim for
consequential damages prayed for by the other defendants.
- In order to avoid a protracted appeals process, a compromise agreement was reached by all the parties involved
pegging the compensation of all the lands at P2,500.00 without any distinction. This agreement was approved by
the Supreme Court on January 9, 1950.
- Sometime in 1950, the Spouses Blas Gutierrez and Maria Morales then received the sum of 59,785.75, the
balance of the award after deducting the advance given to them by the Provincial Treasurer.
- By January 28, 1953 however, the Collector of Internal Revenue demanded that Gutierrez and Morales pay
P8,481.00 as deficiency tax for the year 1950. Naturally, they opposed the demand contending, among others,
that the compensation paid to them by the Government for their property was not income derived from any sale,
dealing, or disposition of property as referred to by Sec. 29 of the Tax and is therefore not taxable.
- The Collector denied the request of the spouses to withdraw the demand, later causing a Warrant of Distraint and
Levy on their properties found in Mabalacat, Pampanga.
- Aggrieved, Spouses Morales and Gutierrez appealed the CIR assessment with the CTA praying that the just
compensation received by them were exempt from taxation and that the CIR be enjoined from further taking any
measures to collect any taxes imposed upon them.
- In a Decision dated August 31, 1955, the CTA held that contrary to their claims, the gain derived by Gutierrez and
Morales from the expropriation of their property constituted taxable income and as such was capital gain and that
the same was taxable in 1950, the year when the full amount was realized.
- Additionally, the CTA also found that the imposition of 50% surcharge was unwarranted, since both Gutierrez and
Morales acted in good faith and without intent to defraud the Government when they failed to include in their gross
income the proceeds they received from the expropriation.
- Not content with the ruling, both the spouses Gutierrez and Morales appealed from the decision of the CTA by
way of Petition for Review by Certiorari.
- For its part, the Spouses Gutierrez and Morales maintain that the CTA erred in ruling that compensation from an
expropriation proceeding is considered included as capital gain and therefore subject to income tax.

Issue: Whether or not the CTA correctly ruled on the case.

Held: Yes, the Court held that the CTA did not err in issuing its contested Decision.

- As to the contention of the Sps. Gutierrez and Morales, the Court ruled that the proceeds from an expropriation
proceeding are subject to income tax. Citing Sec. 29(a) of the Tax Code, the Court noted that gross income gains,
profits, and income derived, among others, from sales or dealings in property growing out of ownership or use of
or interest in such property.
- In addition, the Court also cited Sec. 37(a) of the same Code, ruling that gains, profits, and income from the sale
of real property located in the Philippines shall be treated as gross income from sources within the Philippines.
- With the property to be expropriated being located in the Phils, compensation or income derived therefrom
ordinarily has to be considered as income from sources within the Philippines and subject to taxing power of the
Government.
- The acquisition by the Government of private properties through the exercise of the power of eminent domain,
said properties being justly compensated, is embraced within the meaning of the term "sale" or "disposition of
property," and the proceeds derived therefrom is subject to income tax as capital gain pursuant to the provisions
of Section 37-(a)-(5) in relation to Section 29-(a) of the Tax Code.
- The taxpayers maintain that since, at the request of the U. S. Government, the proceeding to expropriate the land
in question necessary for the expansion of the Clark Field Air Base was instituted by the Philippine Government
as part of its obligation under the Military Bases Agreement, the compensation accruing therefrom must
necessarily fall under the exemption provided for by Section 29-(b)-6 of the Tax Code.
- The Court however ruled that this stand was untenable because while the condemnation or expropriation of
properties was provided for in the Agreement, the exemption from tax of the compensation to be paid for the
expropriation of privately owned lands located in the Philippines was not given any attention, and the internal
revenue exemptions specifically taken care of by said agreement applies only to members of the U. S. Armed
Forces serving in the Philippines and U. S. nationals working in these Islands in connection with the construction,
maintenance, operation and defense of said bases.

7. James vs. United States (366 U.S. 213) May 15, 1961

Facts:

- In a 4-year period spanning 1951 to 1954, Petitioner James, a union official, embezzled an amount in excess of
$738,000.00 from his employer union and from an insurance company doing business with the said union.
- For failing to report the embezzled money as gross income, Petitioner James was convicted for willfully attempting
to evade the federal income tax due for each year of the 4-year period, in violation of Sec. 145(b) of the Internal
Revenue Code of 1939 and Sec. 7201 of the Internal Revenue Code of 1954. He was sentenced to imprisonment
for 3 years.
- Aggrieved, Petitioner appealed with the 7th Circuit of the Court of Appeals which affirmed the ruling.
- Having no avenue left, Petitioner filed this Petition for Certiorari, challenging his conviction on account of another
case (Commissioner vs. Wilcox) wherein the U.S. Supreme Court ruled that embezzled money cannot be
considered part of gross income and does not constitute as taxable income to the embezzler in the year of the
embezzlement under Sec. 22(a) of the Internal Revenue Code of 1939. Not being taxable, Petitioner maintained
that he too could not be held guilty of tax evasion.

Issue: Whether or not Petitioner may still be held liable for willful tax evasion.

Held: No, the U.S. Supreme Court ruled that James may not be held liable.

- The Court noted that a felony conviction under Sec. 145(b) of the Internal Revenue Code of 1939 requires an
element of willfulness on the part of the person to account for his taxes or evade his obligation to do so. It
contemplates an evil motive and want of justification.
- Applying the foregoing to James, the Court believed that his indictment could not be sustained since James
lacked the element of willfulness to evade accounting for his taxes, since during the time the alleged crime was
committed the doctrine laid down by Commisioner vs. Wilcox was still in effect.
- However, the U.S. Supreme Court noted that embezzled money forms part of the gross income of the embezzler
and is therefore taxable with the ruling of the Court in Rutkin v. U.S. (1952) which was promulgated 6 years after
the Wilcox case.
- In Rutkin v. U.S., the Court therein held that, while not specifically overturning the doctrine laid down in
Commissioner v. Wilcox, extorted money forms part of the taxpayers gross income under Sec. 22(a) of the IRC
and is therefore taxable. The Court ruled as such because Rutkins extortion victim had consented to the taking.
- Comparing the factual antecedents in the Rutkin case with those under the Wilcox case, the Court, while ruling in
the Rutkin case, highlighted that 1) Wilcox had no legal right to the taxable gain (embezzled money); and 2) was
under an unqualified duty and obligation to repay the money to his employer. To the Courts opinion, it was this
absence of the unqualified duty to repay the money that made the extorted money form part of the gross income
and therefore taxable.
- Noting both the Wilcox case and the Rutkin case, the U.S. Supreme Court in this case finally declared that Rutkin,
effectively, overturned the Wilcox doctrine. The Court ruled that both Wilcox and Rutkin obtained the money by
means of a criminal act; that neither had a bona fide claim of right to the funds; and that Rutkins obligation to
repay the extorted money to the victim was any less than that of Wilcox. The victim of an extortion, like the victim
of an embezzlement, has a right restitution. Consent on the part of the victim therefore was immaterial.
- To further bolster its ruling, the Court pointed that a liberal interpretation has always been given to Sec. 22(a) of
the Internal Revenue Code and to what is considered included as gross income.
- From the plain wording of Sec. 22(a), and the more recent Sec. 61(a) of the 1954 Internal Revenue Code, gross
income includes all income from whatever source derived. It encompasses all accessions to wealth, clearly
realized, and over which the taxpayers have complete dominion.
- Further, the Court held that a gain constitutes taxable income when its recipient has such control over it that, as a
practical matter, he derives readily realizable economic value from it.
- Applying the foregoing to the case at hand, the Court concluded that the nature of the gain, be it lawful or
unlawful, was inconsequential in the determination of whether or not it forms part of the taxpayers gross income.

8: Commissioner vs. Glenshaw Glass Co. (348 U.S. 426) March 28, 1955

Facts:

- The case is a consolidation of two separate cases before the Third Circuit, Court of Appeals, appealed to the U.S.
Supreme Court by way of Certiorari.
- In issue in both cases is whether or not money received as exemplary damages for fraud (or the punitive two-
thirds portion of a treble damage antitrust recovery) must be reported by a taxpayer as gross income under Sec.
22(a) of the Internal Revenue Code of 1939.
- In this consolidated petition, the Commissioner of the Internal Revenue Services assessed both the Glenshaw
Glass Co. and the William Goldman Theatres, Inc. for tax deficiencies.
- In the Glenshaw case, the Commissioner maintained that when Glenshaw Glass Co. received $800,000.00 as
part of a settlement agreement, it did not report $324,529.94 as income for the tax year of 1947. For its part,
Glenshaw contended that the said amount represented punitive damages for fraud and anti-trust violations.
- In the William Goldman case, the Commissioner also maintained that when William Goldman Theatres, Inc.
received $375,000.00 as treble damages, it only reported $125,000.00 as gross income, claiming the balance of
$250,000.00 as non-taxable punitive damages.
- With the Tax Court siding with both Glenshaw and William Goldman in their claim of non-taxability, and the Third
Circuit of the Court of Appeals affirming, Petitioner then came before the Supreme Court to argue its case.
- Both Glenshaw and William Goldman contend that punitive damages cannot be considered as gross income,
considering that one could characterize them as windfalls flowing from the culpable conduct of third parties.

Issue: Whether or not money received as damages is considered gross income.

Held: Yes, they are to be considered as part of gross income.

- The Supreme Court held that from the plain meaning of Sec. 22(a) of the Tax Code, as well as the language used
by the U.S. Congress to exert the full measure of its taxing power, gross income includes, among others, those
gains or profits and income derived from any source whatsoever.
- From the provision, it is clear that, contrary to the Respondents arguments, the U.S. Congress applied no
limitations as to the source of taxable receipts, nor restrictive labels as to their nature.
- Further, the U.S. Supreme Court held that it was of no moment that the punitive damages came from the culpable
conduct of third parties. The mere fact that the payments were extracted from the wrongdoers as punishment for
unlawful conduct cannot detract from their character as taxable income to the receipts.
- Finally, the U.S. Supreme Court noted that to rule otherwise would do violence to the plain meaning of the statute
and restrict a clear legislative attempt to bring the taxing power to bear upon all receipts constitutionally taxable.

9. Tan vs. CIR

Facts: Two consolidated cases assail the validity of RA 7496 or the Simplified Net Income Taxation Scheme ("SNIT"),
which amended certain provisions of the NIRC, as well as the Sec 6 Revenue Regulations No. 2-93, promulgated by
public respondents pursuant to said law.

1. It is asserted that the enactment of Republic Act


No. 7496 violates the following provisions of the Constitution:

Article VI, Section 26(1) Every bill passed by the Congress shall embrace only one subject which shall
be expressed in the title thereof.
Article VI, Section 28(1) The rule of taxation shall be uniform and equitable. The Congress shall evolve
a progressive system of taxation.
Article III, Section 1 No person shall be deprived of . . . property without due process of law, nor shall
any person be denied the equal protection of the laws.
2. Petitioners, assail Section 6 of Revenue Regulations No. 2-93 that public respondents have exceeded their rule-making
authority in applying SNIT to general professional partnerships.

Issues: (1) WON the amendatory law is unconstitutional


(2) WON public respondents have exceeded their authority in promulgating SECTION 6, Revenue Regulations
No. 2-93, to carry out Republic Act No. 7496.
Ruling:
(1) Art. VI , Sec 26(1) No. Petitioner contends that the title of Republic Act No. 7496 is a misnomer or, at least,
deficient for being merely entitled, "Simplified Net Income Taxation Scheme for the Self-Employed and
Professionals Engaged in the Practice of their Profession

The objectives of Constitution which are (a) to avoid log-rolling legislation; (b) to avoid surprises or even fraud upon the
legislature, and; (c) to fairly apprise the people, through such publications of its proceedings appear to us to have been
sufficiently met.

Art. VI, Sec 28(1) Issue on Uniformity: No. What may instead be perceived to be apparent from the amendatory
law is the legislative intent to increasingly shift the income tax system towards the schedular approach 2 in the income
taxation of individual taxpayers and to maintain, by and large, the present global treatment 3 on taxable corporations. We
certainly do not view this classification to be arbitrary and inappropriate. With the legislature primarily lies the discretion to
determine the nature, object, extent, coverage and, situs of taxation. This court cannot freely delve into those matters
which, by constitutional fiat, rightly rest on legislative judgment. Having arrived at this conclusion, the plea of petitioner to
have the law declared unconstitutional for being violative of due process must fail.

(2) No evident intention of the law, either before or after the amendatory legislation, to place in an unequal footing the
income tax treatment of professionals who practice their respective professions individually and of those who do it
through a general professional partnership.

The real objection of petitioners is focused on the administrative interpretation of public respondents that would apply
SNIT to partners in general professional partnerships. There is a difference in the tax treatment between individuals
engaged in business or in the practice of their respective professions and partners in general professional
partnerships. The fact of the matter is that a general professional partnership, unlike an ordinary business partnership
(which is treated as a corporation for income tax purposes and so subject to the corporate income tax), is not itself an
income taxpayer. The income tax is imposed not on the professional partnership, which is tax exempt, but on the
partners themselves in their individual capacity on their distributive shares of partnership profits. Section 23 of the Tax
Code, which has not been amended at all by Republic Act 7496, is explicit:
Sec. 23. Tax liability of members of general professional partnerships. (a) Persons exercising a
common profession in general partnership shall be liable for income tax only in their individual capacity,
and the share in the net profits of the general professional partnership to which any taxable partner would
be entitled whether distributed or otherwise, shall be returned for taxation and the tax paid in accordance
with the provisions of this Title.

There is, then and now, no distinction in income tax liability between a person who practices his profession alone or
individually and one who does it through partnership (whether registered or not) with others in the exercise of a common
profession. Exempt partnerships are not similarly identified as corporations nor even considered as independent taxable
entities for income tax purposes. A general professional partnership is such an example. 4Here, the partners themselves,
not the are liable for the payment of income tax in their individual capacity COMPUTED on their respective and
distributive shares of profits. In the determination of the tax liability, a partner does so as an individual, and there is no
choice on the matter. Sec 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the above standing rule
as now so modified by Republic Act
No. 7496 on basically the extent of allowable deductions applicable to all individual income taxpayers on their non-
compensation income.

10. CIR vs. Visayas Electric

Facts: Respondent Company is the holder of a legislative franchise to operate and maintain an electric light, heat, and
power system in the City of Cebu, certain municipalities in the Province of Cebu, and other surrounding places.
Respondent company established a pension fund, known as the "Employees' Reserve for Pensions." Said fund is for the
benefit of its "present and future" employees, in the event of retirement, accident or disability. Every month thereafter an
amount has been set aside for this purpose. It is taken from the gross operating receipts of the company. This reserve
fund was later invested by the company in stocks of San Miguel Brewery, Inc., for which dividends have been regularly
received. But these dividends were not declared for tax purposes. The Auditor General gave notice that the dividends are
not tax exempt; but that such dividends may be excluded from gross receipts for franchise tax purposes, provided the
same are declared for income tax purposes. 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. The company elected the latter.

A report of the Revenue Examiner of Cebu after an investigation revealed, however, that the "company itself is the
custodian or has the complete control of the fund." That report disagreed with the action of the Provincial Auditor, instead
considered the dividends as subject to corporate income tax. Said report further disclosed that some payments of the
franchise tax were made after fifteen days although within twenty days of the month allegedly contrary the Tax Code,
which imposes a 25% surcharge and (b) the company had not paid additional residence tax. The CIR assessed the
company for: (a) deficiency income tax plus interest and 50% surcharge; (b) additional residence tax; and (c) 25%
surcharge for late payment of franchise taxes. The company went to the CTA on petition for review, which sustained the
correctness of the additional residence tax assessments 3 but freed the company from liability for deficiency income tax
and the 25% surcharge for late payment of franchise taxes.

Issue: WON the respondent company is still liable for the deficiency income tax on dividends from the stock investment of
its employees' reserve fund for pensions?

Ruling: No. Applying Section 8 of the companys legislative franchise, CTA held that the dividends are not subject to
income tax. Tax Court is incorrect. What is envisioned in the statute granting exemption is the last underscored portion
thereof which speaks of its receipts, revenues and profits, "from which taxes the grantee is exempted." The heavy accent
is on the word its. The receipts, revenues and profits, which could be tax-exempt under the statute, must be the
company's not somebody else's. The disputed income are not receipts, revenues or profits of the company. They do
not go to the general fund of the company. They are dividends from the San Miguel Brewery, Inc. investment which form
part of and are added to the reserve pension fund which is solely for the benefit of the employees. Said company was
merely acting, with respect to such fund, as trustee for its employees. A valid express trust has thus been created. 7 And,
for tax purposes, the employees' reserve fund is a separate taxable entity. Given the fact that the dividends are returns of
the trust estate and not of the grantor company, we must say that petitioner misconceived the import of the law when he
assessed said dividends as part of the income of the company. Similarly, the tax court should not have considered them at
all as the company's "receipts, revenues and profits" which are exempt from income tax. This state of facts calls for inquiry
into the applicability of Section 56 of the Tax Code, subject to the exception introduced by the amendatory law, RA 1983,
which in part reads:
SEC. 56. Imposition of tax (a) Application of tax. The taxes imposed by this Title upon individuals shall apply
to the income of estate or of any kind of property held in trust, including

(1) Income accumulated in trust for the benefit of unborn or unascertained person or persons with contingent
interests and income accumulated or held for future distribution under the terms of the will or trust;

The tax exemption in RA 1983 was conceived in order to encourage the formation of pension trust systems for the benefit
of laborers and employees. The second requirement in paragraph (b) of Section 56 of the Tax Code as it was inserted by
RA 1983 non-diversion of fund was written into the statute to insure that the trust fund and its income will be used
"for the exclusive benefit" of the employees.

(b) Exception: The tax imposed by this Title shall not apply to employees' trust which forms part of a pension,
stock bonus or profit-sharing plan of an employer for the benefit of some or all of his employees. (2) if under the trust
instrument it is impossible for any part of the corpus or income to be used for, or diverted to, purposes other than for the
exclusive benefit of his employees

Wanting, however, are sufficient data which would justify this Court to make a conclusive statement that the trust qualifies
under Section 56 (b). The only written evidence of record of the creation of the pension trust is the minutes of the board of
directors' meeting in which an admission made by the respondent company that the strict requirements of Section 56 (b)
of the Tax Code on the formation of employees' trust funds for pension had not been strictly complied with. The absence
of such plan prevents us from taking a view which fits the purpose of the statute. Coming into play then is Section 56 (a)
which directs that the "taxes imposed by this Title upon individuals shall apply to the income ... of any kind of property
held in trust." For which reason, the income received by the employees' trust fund from January 1, 1957 is subject to the
income tax prescribed for individuals.

11. CIR v. CA, CTA , GCL Retirement Plan

Facts: Private Respondent, GCL Retirement Plan (GCL, for brevity) is an employees' trust maintained by the employer,
GCL Inc., to provide retirement, pension, disability and death benefits to its employees. The Plan was approved and
qualified as exempt from income tax by Petitioner CIR Revenue in accordance with Rep. Act No. 4917. GCL made
investments and earned therefrom interest income from which was withheld the fifteen per centum (15%) final
witholding tax imposed by PD No. 1959. GCL filed with CIR a claim for refund for the amounts withheld. GCL disagreed
with the collection of the 15% final withholding tax from the interest income as it is an entity fully exempt from income tax
as provided under Rep. Act No. 4917 in relation to Sec 56 (b) of the Tax Code. The refund requested having been denied,
Respondent GCL elevated the matter to respondent Court of Tax Appeals (CTA). The latter ruled in favor of GCL, holding
that employees' trusts are exempt from the 15% final withholding tax on interest income and ordering a refund of the tax
withheld. Upon appeal, originally to this Court, but referred to respondent Court of Appeals, the latter upheld the CTA
Decision.

Petitioner contends that that the exemption from withholding tax on interest on bank deposits previously extended by
PDNo. 1739 if the recipient (individual or corporation) of the interest income is exempt from income taxation, and the
imposition of the preferential tax rates if the recipient of the income is enjoying preferential income tax treatment, were
both abolished by PD No. 1959. Petitioner's position is that from 15 October 1984 when Pres. Decree No. 1959 was
promulgated, employees' trusts ceased to be exempt and thereafter became subject to the final withholding tax. Upon the
other hand, GCL contends that the tax exempt status of the employees' trusts applies to all kinds of taxes, including the
final withholding tax on interest income. That exemption, according to GCL, is derived from Section 56(b) and not from
Section 21 (d) or 24 (cc) of the Tax Code, as argued by Petitioner.

Issue: Whether or not the GCL Plan is exempt from the final withholding tax on interest income from money placements
and purchase of treasury bills required by Pres. Decree No. 1959.

Ruling: Yes. GCL Plan was qualified as exempt from income tax by the Commissioner of Internal Revenue in accordance
with Rep. Act No. 4917. In so far as employees' trusts are concerned, the foregoing law should be taken in relation to then
Section 56(b) of the Tax Code, as amended by RA No. 1983. This provision specifically exempted employee's trusts from
income tax and is repeated hereunder for emphasis:

Sec. 56. Imposition of Tax. (a) Application of tax. The taxes imposed by this Title upon individuals shall
apply to the income of estates or of any kind of property held in trust.
(b) Exception. The tax imposed by this Title shall not apply to employee's trust which forms part of a
pension, stock bonus or profit-sharing plan of an employer for the benefit of some or all of his
employees . . .

Employees' trusts or benefit plans normally provide economic assistance to employees upon the occurrence of certain
contingencies, particularly, old age retirement, death, sickness, or disability. It provides security against certain hazards to
which members of the Plan may be exposed. It is an independent and additional source of protection for the working
group. What is more, it is established for their exclusive benefit and for no other purpose.The tax advantage in Rep. Act
No. 1983, Section 56(b), was conceived in order to encourage the formation and establishment of such private Plans for
the benefit of laborers and employees outside of the Social Security Act.

The tax-exemption privilege of employees' trusts, as distinguished from any other kind of property held in trust, springs
from the foregoing provision. It is unambiguous. Manifest therefrom is that the tax law has singled out employees' trusts
for tax exemption. It is evident that tax-exemption is likewise to be enjoyed by the income of the pension trust. Otherwise,
taxation of those earnings would result in a diminution accumulated income and reduce whatever the trust beneficiaries
would receive out of the trust fund. This would run afoul of the very intendment of the law. There can be no denying either
that the final withholding tax is collected from income in respect of which employees' trusts are declared exempt

12. CATALINA BUAN VDA. DE ESCONDE, CONSTANCIA ESCONDE VDA.


DE PERALTA, ELENITA ESCONDE and BENJAMIN ESCONDE,
petitioners, vs . HONORABLE COURT OF APPEALS and PEDRO
ESCONDE, respondents.

This petition for review on certiorari seeks the reversal of the January 22, 1992 decision in of the Court of Appeals
affirming the Decision of the Regional Trial Court. The lower court declared that petitioners' action for reconveyance of real
property based on an implied trust has been barred by prescription and laches.

Petitioners Constancia, Benjamin and Elenita, and private respondent Pedro, are the children of the late Eulogio Esconde
and petitioner Catalina Buan. Eulogio Esconde was one of the children and heirs of Andres Esconde. Andres is the
brother of Estanislao Esconde, the original owner of the disputed lot who died without issue on April 1942. Survived by his
only brother, Andres, Estanislao left an estate consisting of four (4) parcels of land in Samal, Bataan. Eulogio died in April,
1944 survived by petitioners and private respondent. At that time, Lazara and Ciriaca, Eulogio's sisters, had already died
without having partitioned the estate of the late Estanislao Esconde.

The heirs of Lazara, Ciriaca and Eulogio executed a deed of extrajudicial partition. Since the children of Eulogio, with the
exception of Constancia, were then all minors, they were represented by their mother and judicial guardian, petitioner
Catalina Buan vda. de Esconde who renounced and waived her usufructuary rights over the parcels of land in favor of her
children in the same deed.

Transfer Certificate of Title No. 394 for Lot No. 1700 was issued on February 11, 1947 in the name of private respondent
but Catalina kept it in her possession until she delivered it to him in 1949 when private respondent got married. Sometime
in December, 1982, Benjamin discovered that Lot No. 1700 was registered in the name of his brother, private respondent.
Believing that the lot was co-owned by all the children of Eulogio Esconde, Benjamin demanded his share of the lot from
private respondent. However, private respondent asserted exclusive ownership thereof pursuant to the deed of
extrajudicial partition and, in 1985 constructed a "buho" fence.

Petitioners herein filed a complaint before the Regional Trial Court against private respondent for the annulment of TCT.
The lower court dismissed the complaint. It found that the deed of extrajudicial partition was an unenforceable contract as
far as Lot No. 1700 was concerned because petitioner Catalina Buan vda. De Esconde, as mother and judicial guardian of
her children, exceeded her authority as such in "donating" the lot to private respondent or waiving the rights thereto of
Benjamin and Elenita in favor of private respondent

Because of the unenforceability of the deed, a trust relationship was created with private respondent as trustee and
Benjamin and Elenita. "Although the parties to the partition did not either contemplate or express it in said document, the
resulting trust arose or was created by operation of Article 1456 of the new Civil Code.

The lower court ruled that the action had been barred by both prescription and
laches. Having been registered in the name of private respondent on February
11, 1947, the action to annul such title prescribed within ten (10) years on February 11, 1957 or more than thirty (30) years
before the action was filed on June 29, 1987.
Petitioners elevated the case to the Court of Appeals which affirmed the lower
court's decision.

ISSUE: (1) WON Article 1456 be applied

(2) WON the case should be denied by reason of prescription and latches

HELD:

(1) We hold that the trial court correctly applied Article 1456.

"ARTICLE 1456. If property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a
trustee of an implied trust for the benefit of the person from whom the property comes."

Trust is the legal relationship between one person having an equitable ownership in property and another person owning
the legal title to such property, the equitable ownership of the former entitling him to the performance of certain duties and
the exercise of certain powers by the latter. Trusts are either express or implied.

An express trust is created by the direct and positive acts of the parties, by some writing or deed or will or by words
evidencing an intention to create a trust. No particular words are required for the creation of an express trust, it being
sufficient that a trust is clearly intended. Implied trusts are those which, without being expressed, are deducible from the
nature of the transaction as matters of intent or which are super induced on the transaction by operation of law as matters
of equity, independently of the particular intention of the parties.

(2) Having filed their action only on June 29, 1987, petitioners act ion has been barre d by
prescription. Not only that. Laches has also circumscribed the action for, whether the implied trust is constructive or resulting,
this doctrine applies. Private respondent was given the entirety of Lot No. 1700; the trust relationship between him and
petitioners was a constructive, not resulting, implied trust. Petitioners, therefore, correctly questioned private
respondent's exercise of absolute ownership over the property. Unfortunately, however, petitioners assailed it long after
their right to do so had prescribed. The rule that a trustee cannot acquire by prescription ownership over property
entrusted to him until and unless he repudiates the trust, applies to express trusts and resulting implied trusts.

However, in constructive implied trusts, prescription may supervene even if the trustee does not repudiate the relationship.
Necessarily, repudiation of the said trust is not a condition precedent to the running of the prescriptive period.

13. GILBERT G. GUY, Petitioner versus THE COURT OF APPEALS (8TH DIVISION), NORTHERN ISLANDS CO.,
INCORPORATED, SIMNY G. GUY, GERALDINE G. GUY, GLADYS G. YAO, and EMILIA TABUGADIR, Respondents.

FACTS: Gilbert, petitioner, is the son of Francisco and Simny Guy. Respondents, Geraldine, Gladys and Grace are his
sisters. The family feud involves the ownership and control of 20,160 shares of stock of Northern Islands Co., Inc.
(Northern Islands).

Northern Islands is a family-owned corporation. In November 1986, they incorporated Lincoln Continental as a holding
company of the 50% shares of stock of Northern Islands in trust for their daughters, respondents. In December 1986,
upon instruction of spouses Guy, Atty. Andres Gatmaitan, president of Lincoln Continental, indorsed in blank Stock
Certificate No. 132 (covering 8,400 shares) and Stock Certificate No. 133 (covering 11,760 shares) and delivered them to
Simny.

In 1984, spouses Guy found that their son Gilbert has been disposing of the assets of their corporations without authority.
In order to protect the assets of Northern Islands, the 20,160 shares covered by the two Stock Certificates were then
registered in the names of respondent sisters, thus enabling them to assume an active role in the management of
Northern Islands.

Thereafter, Simny was elected President; Grace as Vice-President for Finance; Geraldine as Corporate Treasurer; and
Gladys as Corporate Secretary. Gilbert retained his position as Executive Vice President. This development started the
warfare between Gilbert and his sisters.

Lincoln Continental filed a Complaint for Annulment of the Transfer of Shares of Stock against respondents. The complaint
basically alleges that Lincoln Continental owns 20,160 shares of stock of Northern Islands; and that respondents, in order
to oust Gilbert from the management of Northern Islands, falsely transferred the said shares of stock in respondent sisters
names.

The trial court held that the complaint was baseless and an unwarranted suit among family members. That based on the
evidence, Gilbert was only entrusted to hold the disputed shares of stock in his name for the benefit of the other family
members; and that it was only when Gilbert started to dispose of the assets of the familys corporations without their
knowledge that respondent sisters caused the registration of the shares in their respective names.

On appeal, the Court of Appeals affirmed the Trial Court. Hence this petition.

ISSUE: Whether or not Gilbert was merely trust for the Guy sisters.

HELD: There was no doubt that Lincoln Continental held the disputed shares of stock of Northern Islands merely in trust
for the Guy sisters as found by the trial court and affirmed by the CA. In fact, the evidence proffered by Lincoln
Continental itself supports this conclusion.

Article 1440 of the Civil Code provides that:

A person who establishes a trust is called the trustor; one in whom confidence is reposed as regards
property for the benefit of another person is known as the trustee; and the person for whose benefit the
trust has been created is referred to as the beneficiary.

In the early case of Gayondato v. Treasurer of the Philippine Island, this Court defines trust, in its technical sense,
as a right of property, real or personal, held by one party for the benefit of another. Differently stated, a trust is a
fiduciary relationship with respect to property, subjecting the person holding the same to the obligation of dealing with the
property for the benefit of another person.

Both Lincoln Continental and Gilbert claim that the latter holds legal title to the shares in question. However, there
was no evidence to support their claim. Rather, the evidence on record clearly indicates that the stock certificates
representing the contested shares are in respondents possession. Significantly, there is no proof to support his allegation
that the transfer of the shares of stock to respondent sisters is fraudulent. As aptly held by the Court of Appeals, fraud is
never presumed but must be established by clear and convincing evidence. Gilbert failed to discharge this burden. We,
agree with the Court of Appeals that respondent sisters own the shares of stocks, Gilbert being their mere trustee.

14. MIGUEL J. OSSORIO PENSION FOUNDATION, INCORPORATED,


petitioner, vs . COURT OF APPEALS and COMMISSIONER OF
INTERNAL REVENUE, respondents.

FACTS:

The Miguel J. Ossorio Pension Foundation, Incorporated (petitioner or MJOPFI) , a non-stock and non-profit corporation,
was organized for the purpose of holding title to and administering the employees trust or retirement funds (Employees
Trust Fund) established for the benefit of the employees of Victorias Milling Company, Inc. (VMC). MJOPFI as trustee,
claims that the income earned by the Employees Trust Fund is tax exempt under Section 53(b) of the National Internal
Revenue Code (Tax Code).

MJOPFI decided to invest part of the Employees Trust Fund to purchase a lot in the Madrigal Business Park (MBP lot) in
Alabang, Muntinlupa. MJOPFI alleges that its investment in the MBP lot came about upon the invitation of VMC, which
also purchased two lots.

MJOPFI claims that since it needed funds to pay the retirement and pension benefits of VMC employees and to reimburse
advances made by VMC, petitioners Board of Trustees authorized the sale of its share in the MBP lot. VMC negotiated
the sale of the MBP lot with Metrobank for P81,675,000. Metrobank, as withholding agent, paid the Bureau of Internal
Revenue (BIR) P6,125,625 as withholding tax on the sale of real property. Since Lot 1 has been sold for P81,675,000.00
(gross of 7.5% withholding tax and 3% brokers commission, MJOPFIs share in the proceeds of the sale
is P40,500,000.00 (gross of 7.5% withholding tax and 3% brokers commission. However, MJO Pension Fund is indebted
to VMC representing pension benefit advances paid to retirees amounting to P21,425,141.54, thereby leaving a balance
of P14,822,358.46 in favor of MJOPFI.Check for said amount of P14,822,358.46 will therefore be issued to MJOPFI as its
share in the proceeds of the sale of Lot 1.
Since MJOPFI, as trustee, purchased 49.59% of the MBP lot using funds of the Employees Trust Fund, MJOPFI asserts
that the Employees Trust Funds 49.59% share in the income tax paid (or P3,037,697.40 rounded off toP3,037,500)
should be refunded. MJOPFI maintains that the tax exemption of the Employees Trust Fund rendered the payment
ofP3,037,500 as illegal or erroneous.

On 5 May 1997, petitioner filed a claim for tax refund. The BIR, through its Revenue District Officer, wrote MJOPFI stating
that under Section 26 of the Tax Code, MJOPFI is not exempt from tax on its income from the sale of real property. The
BIR asked MJOPFI to submit documents to prove its co-ownership of the MBP lot and its exemption from tax.

MJOPFI replied that the applicable provision granting its claim for tax exemption is not Section 26 but Section 53(b) of the
Tax Code. MJOPFI claims that its co-ownership of the MBP lot is evidenced by Board Resolution Nos. 92-34 and 96-46
and the memoranda of agreement among petitioner, VMC and its subsidiaries.

MJOPFI elevated its claim to the Commissioner of Internal Revenue (CIR) on 26 October 1998. The CIR did not act on
petitioners claim for refund. Hence, MJOPFI filed a petition for tax refund before the CTA. On 24 October 2000, the CTA
rendered a decision denying the petition.

MJOPFI filed its Petition for Review before the Court of Appeals. On 20 May 2003, the CA rendered a decision denying
the appeal. The CA also denied petitioners Motion for Reconsideration. Aggrieved by the appellate courts Decision,
petitioner elevated the case before this Court.

ISSUE:

1. WON petitioner or the Employees Trust Fund is estopped from claiming that the Employees Trust Fund is the
beneficial owner of 49.59% of the MBP lot and that VMC merely held 49.59% of the MBP lot in trust for the Employees
Trust Fund?

2. WON petitioner or the Employees Trust Fund is not estopped, whether they have sufficiently established that the
Employees Trust Fund is the beneficial owner of 49.59% of the MBP lot, and thus entitled to tax exemption for its share in
the proceeds from the sale of the MBP lot.

HELD: 1. Not estopped. Article 1452 of the Civil Code provides:

Art. 1452. If two or more persons agree to purchase a property and by common consent the legal
title is taken in the name of one of them for the benefit of all, a trust is created by force of law in favor of
the others in proportion to the interest of each. (Emphasis supplied)

For Article 1452 to apply, all that a co-owner needs to show is that there is common consent among the purchasing
co-owners to put the legal title to the purchased property in the name of one co-owner for the benefit of all. Once this
common consent is shown, a trust is created by force of law. The BIR has no option but to recognize such legal trust
as well as the beneficial ownership of the real owners because the trust is created by force of law. The fact that the title
is registered solely in the name of one person is not conclusive that he alone owns the property.

Thus, this case turns on whether petitioner can sufficiently establish that petitioner, as trustee of the Employees
Trust Fund, has a common agreement with VMC and VFC that petitioner, VMC and VFC shall jointly purchase the MBP
lot and put the title to the MBP lot in the name of VMC for the benefit petitioner, VMC and VFC.

We rule that petitioner, as trustee of the Employees Trust Fund, has more than sufficiently established that it has an
agreement with VMC and VFC to purchase jointly the MBP lot and to register the MBP lot solely in the name of VMC for
the benefit of petitioner, VMC and VFC.

The CTA ruled that the documents presented by petitioner cannot prove its co-ownership over the MBP lot
especially that the TCT, Deed of Absolute Sale and the Remittance Return disclosed that VMC is the sole owner and
taxpayer. However, the appellate courts failed to consider the genuineness and due execution of the notarized
Memorandum of Agreement acknowledging petitioners ownership of the MBP lot. The BIR failed to present any clear and
convincing evidence to prove that the notarized Memorandum of Agreement is fictitious or has no legal effect. Likewise,
VMC, the registered owner, did not repudiate petitioners share in the MBP lot. Further, Citytrust, a reputable banking
institution, has prepared a Portfolio Mix Analysis for the years 1994 to 1997 showing that petitioner
invested P5,504,748.25 in the MBP lot. Absent any proof that the Citytrust bank records have been tampered or falsified,
and the BIR has presented none, the Portfolio Mix Analysis should be given probative value.

2. YES! Income from Employees Trust Fund is Exempt from Income Tax

Tax exemption cannot arise by implication and any doubt whether the exemption exists is strictly construed against
the taxpayer. Further, the findings of the CTA, which were affirmed by the CA, should be given respect and weight in the
absence of abuse or improvident exercise of authority.

Section 53(b) and now Section 60(b) of the Tax Code provides:

SEC. 60. Imposition of Tax. -

(A) Application of Tax. - xxx

(B) Exception. - The tax imposed by this Title shall not apply to employees trust which forms part
of a pension, stock bonus or profit-sharing plan of an employer for the benefit of some or all of his
employees (1) if contributions are made to the trust by such employer, or employees, or both for the
purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust
in accordance with such plan, and (2) if under the trust instrument it is impossible, at any time prior to the
satisfaction of all liabilities with respect to employees under the trust, for any part of the corpus or income
to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive
benefit of his employees: Provided, That any amount actually distributed to any employee or distributee
shall be taxable to him in the year in which so distributed to the extent that it exceeds the amount
contributed by such employee or distributee.

Petitioners Articles of Incorporation state that its purpose is to hold legal title to, control, invest and administer in the
manner provided, pursuant to applicable rules and conditions as established, and in the interest and for the benefit of its
beneficiaries and/or participants,the private pension plan as established for certain employees of Victorias Milling
Company, Inc., and other pension plans of Victorias Milling Company affiliates and/or subsidiaries; and The SC has long
been settled the tax-exemption privilege of income derived from employee's trusts.

The tax-exempt character of the Employees' Trust Fund has long been settled. It is also settled that petitioner
exists for the purpose of holding title to, and administering, the tax-exempt Employees Trust Fund established for the
benefit of VMCs employees. As such, petitioner has the personality to claim tax refunds due the Employees' Trust Fund.

In Citytrust Banking Corporation as Trustee and Investment Manager of Various Retirement Funds v. Commissioner
of Internal Revenue,the CTA granted Citytrusts claim for refund on withholding taxes paid on the investments made by
Citytrust in behalf of the trust funds it manages, including petitioner.

Similarly, in BIR Ruling [UN-450-95], Citytrust wrote the BIR to request for a ruling exempting it from the payment of
withholding tax on the sale of the land by various BIR-approved trustees and tax-exempt private employees' retirement
benefit trust fundsrepresented by Citytrust. The BIR ruled that the private employees benefit trust funds, which included
petitioner, have met the requirements of the law and the regulations and therefore qualify as reasonable retirement benefit
plans within the contemplation of Republic Act No. 4917 (now Sec. 28(b)(7)(A), Tax Code). The income from the trust fund
investments is therefore exempt from the payment of income tax and consequently from the payment of the creditable
withholding tax on the sale of their real property.

Thus, the documents issued and certified by Citytrust showing that money from the Employees Trust Fund was
invested in the MBP lot cannot simply be brushed aside by the BIR as self-serving, in the light of previous cases holding
that Citytrust was indeed handling the money of the Employees Trust Fund. These documents, together with the
notarized Memorandum of Agreement, clearly establish that petitioner, on behalf of the Employees Trust Fund, indeed
invested in the purchase of the MBP lot. Thus, the Employees' Trust Fund owns 49.59% of the MBP lot.

Since petitioner has proven that the income from the sale of the MBP lot came from an investment by the
Employees' Trust Fund, petitioner, as trustee of the Employees Trust Fund, is entitled to claim the tax refund
of P3,037,500 which was erroneously paid in the sale of the MBP lot.

15. OA & HEIRS OF JULIA BUNALES V. COMMISSIONER OF INTERNAL REVENUE

FACTS:
JULIA BUNALES died on March 23, 1944, leaving as heirs:
o Lorenzo Oa Surviving spouse
o 5 children
1948 Civil case was instituted in the CFI of Manila for the settlement of her estate
o Lorenzo Oa appointed administrator
1949 administrator submitted the project of partition; which was approved by the court
3 of the heirs (Luz, Virginia & Lorenzo Oa) were still minors when the partition was approved, Lorenzo Oa filed
a petition for appointment as guardian of the minors granted!
The project of partition shows that the heirs have undivided 1/2 interest in:
o 10 parcels of land with a total assessed value of P87, 860,
o 6 houses with a total assessed value of P17, 590, &
o An undetermined amount to be collected from the War Damage Commission
They later on received from said commission P50, 000.00 more or less
Amount was not divided among them but was used in the rehabilitation of properties owned by
them in common
Of the 10 parcels of land, 2 were acquired after the death of the decedent with money from the Philippine Trust
Company in the amount of P72.173.00
No attempt was made to divide the properties listed; properties remained under the management of
Lorenzo Oa
o Used the properties in business by leasing or selling them
o Investing the income derived and proceeds from the sales thereof in real properties
As a result, petitioners properties & investments gradually increased from P105,450.00 in 1949 to
P480,005.20 in 1956 said incomes are recorded in the books of account kept by Lorenzo Oa; where
corresponding shares of the petitioners in the net income for the year are also known
Petitioners returned for income tax purposes their shares in the net income derived from said properties every
year; however, petitioners did not actually receive their shares in the yearly income
o Income was always left with Oa who invested them in real properties & securities
On the basis of the foregoing facts Commissioner of Internal Revenue decided that petitioners formed an
unregistered partnership & therefore, subject to corporate income tax
o He assessed against the petitioners the amounts of P8092 & P13 899 as corporate income taxes for 1955
and 1956
Petitioners protested against the assessment and asked reconsideration of the ruling that they have formed an
unregistered partnership denied
ISSUES:

W/N Petitioners should be considered as co-owners of the properties or or must be deemed to have formed an
unregistered partnership
Assuming they have formed an unregistered partnership, should this not be only in the sense that they have
invested as a common fund the profits earned by the properties owned by them in common and the loans granted
to them upon the security of the said properties, with the result that as far as their respective shares in the
inheritance are concerned, the total income thereof should be considered as that of co-owners and not of the
unregistered properties
Assuming they are taxable as an unregistered partnership, should not the various amounts paid by them as
individual income taxes on their respective shares of the profits be deducted from the deficiency corporate taxes
assessed against such unregistered partnership
HELD:

The Tax Court found that in 1949, "the properties remained under the management of Lorenzo T. Oa who
used said properties in business by leasing or selling them and investing the income derived therefrom
and the proceeds from the sales thereof in real properties and securities," as a result of which said
properties and investments steadily increased yearly
All these became possible because petitioners never actually received any share of the income or profits from
Lorenzo T. Oa, and instead, they allowed him to continue using said shares as part of the common fund
for their ventures, even as they paid the corresponding income taxes on the basis of their respective
shares of the profits of their common business
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. Oa as a common fund in
undertaking several transactions or in business, with the intention of deriving profit to be shared by them
proportionally, such act was tantamount to actually contributing such incomes to a common fund and, in
effect, they thereby formed an unregistered partnership
It is true that in Evangelista vs. Collector, it was stated, among the reasons for holding the appellants therein to be
unregistered co-partners for tax purposes, that their common fund "was not something they found already in
existence" and that "it was not a property inherited by them pro indiviso,"
o But it is certainly far fetched to argue therefrom, that, in all instances where an inheritance is not actually
divided, there can be no unregistered co- partnership.
For tax purposes, the co-ownership of inherited properties is automatically converted into an unregistered
partnership the moment the said common properties and/or the incomes derived therefrom are used as a
common fund with intent to produce profits for the heirs in proportion to their respective shares in the
inheritance as determined in a project partition either duly executed in an extrajudicial settlement or
approved by the court in the corresponding testate or intestate proceeding.
Petitioners' reliance on Article 1769, par. (3) of the Civil Code,providing that: "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 any property from which the returns are derived," and, for that matter, on any other provision of
said code on partnerships is unavailing

In Evangelista, this Court clearly differentiated the concept of partnerships under the Civil Code from that of
unregistered partnerships which are considered as "corporations" under the NIRC
o "To begin with, the tax in question is one imposed upon 'corporations', which, strictly speaking, are distinct
and different from 'partnerships'. When our Internal Revenue Code includes 'partnerships' among the
entities subject to the tax on 'corporations', said Code must allude, therefore, to organizations which are
not necessarily 'partnerships', in the technical sense of the term.. Likewise, as defined in section 84(b) of
said Code, 'the term corporation includes partnerships, no matter how created or organized.' This
qualifying expression clearly indicates that a joint venture need not be undertaken in any of the standard
forms, or in conformity with the usual requirements of the law on partnerships, in order that one could be
deemed constituted for purposes of the tax on corporation. Again, pursuant to said section 84(b), the term
'corporation' includes, among other, 'joint accounts, (cuentas en participacion)' and 'associations', none
ofwhich has a legal personality of its own, independent of that of its members. Accordingly, the lawmaker
could not have regarded that personality as a condition essential to the existence of the partnerships
therein referred to. In fact, as above stated, 'duly registered general co- partnerships' which are
possessed of the aforementioned personality have been expressly excluded by law
Similarly the American Law provides: Under the term 'partnership' it includes not only a partnership as known as
common law but, as well, a syndicate, group, pool, joint venture, or other unincorporated organization which
carries on any business, financial operation, or venture, and which is not, within the meaning of the Code, a trust,
estate, or a corporation. . .
o For purposes of the tax on corporations, our National Internal Revenue Code, includes these
partnerships with the exception only of duly registered general co-partnerships within the
purview of the term 'corporation.'
In connection with the second ground, it is alleged that, if there was an unregistered partnership, the holding
should be limited to the business engaged in apart from the properties inherited by petitioners.
o Taxable income of the partnership should be limited to the income derived from the acquisition and
sale of real properties and corporate securities and should not include the income derived from the
inherited properties.
It is admitted that the inherited properties and the income derived therefrom were used in the business of buying
and selling other real properties and corporate securities.
Accordingly, the partnership income must include not only the income derived from the purchase and sale of other
properties but also the income of the inherited properties
Besides, as already observed earlier, the income derived from inherited properties may be considered as
individual income of the respective heirs only so long as the inheritance or estate is not distributed or, at
least, partitioned,
o But the moment their respective known shares are used as part of the common assets of the heirs to be
used in making profits, it is but proper that the income of such shares should be considered as the part of
the taxable income of an unregistered partnership
Third ground it is only fair and equitable that the various amounts paid by the individual petitioners as income tax
on their respective shares of the unregistered partnership should be deducted from the deficiency income tax
The partnership profits distributable to the partners (petitioners herein) should be reduced by the amounts of
income tax assessed against the Partnership.
Consequently, each of the petitioners in his individual capacity overpaid his income tax for the years in question,
but the income tax due from the partnership has been correctly assessed.
o Since the individual income tax liabilities of petitioners are not in issue in this proceeding, it is not proper
for the Court to pass upon the same
The case of petitioners as regards the point under discussion is simply that of a taxpayer who has paid the wrong
tax, assuming that the failure to pay the corporate taxes in question was not deliberate.
Of course, such taxpayer has the right to be reimbursed what he has erroneously paid, but the law is very clear
that the claim and action for such reimbursement are subject to the bar of prescription
o And since the period for the recovery of the excess income taxes in the case of herein petitioners has
already lapsed, it would not seem right to virtually disregard prescription merely upon the ground that the
reason for the delay is precisely because the taxpayers failed to make the proper return and payment of
the corporate taxes legally due from them.
CTA affirmed

16. EVANGELISTA V. COLLECTOR OF INTERNAL REVENUE & CTA

FACTS:

Petitioners (Eufemia Evangelista, Manuela Evangelista, Francisca Evangelista) borrowed from their father
the sum of P59,140.00 which they used to buy real properties
1943 petitioners bought from Josefina Florentino a lot including improvements thereon for P100,000.00 as of
1948
o Property has an assessed value of P57,517.00
1944 petitioners purchased from Josefa Oppus 21 parcels of land including improvements thereon for P18,99.99
o Assessed value: P8, 255.00 as of 1948
1944 petitioners purchased from the Insular Investments, Inc., a lincluding improvements thereon for
P108,825.00
o Assessed value: P4,983.00 as of 1943;
1944 petitioners bought from Mrs. Valentin Afable a lot including improvements thereon for P237,234.14.
o Assessed value: P59,140.00 as of 1948;
They appointed their brother Simeon Evangelista to:
o Manage their properties with full power to lease;
o Collect and receive rents;
o Issue receipts therefor;
o In default of such payment, to bring suits against the defaulting tenant;
o Sign all letters, contracts, etc., for and in their behalf, and
o Endorse and deposit all notes and checks for them;
Petitioners had the real properties rented or leased to various tenants
From the month of March, 1945 up to December, 1945, the total amount collected as rents on their real properties
was P9,599.00 while the expenses amounted to P3,650.00 thereby leaving them a net rental income of
P5,948.33
1946 they realized a gross rental income in the sum of P24,786.30, out of which amount was deducted the sum
of P16,288.27 for expenses thereby leaving them a net rental income of P7,498.13;
1948 they realized a gross rental income of P17,453.00 out of the which amount was deducted the sum of
P4,837.65 as expenses, thereby leaving them a net rental income of P12,615.35."
1954 Collector of Internal Revenue demanded the payment of income tax on corporations, real estate
dealer's fixed tax and corporation residence tax for the years 1945-1949
Said letter of demand and the corresponding assessments were delivered to petitioners on December 3, 1954,
whereupon they instituted the present case in the Court of Tax Appeals, with a prayer that "the decision of the
respondent contained in his letter of demand dated September 24, 1954" be reversed, and that they be absolved
from the payment of the taxes in question, with costs against the respondent
CTA rendered the decision for the respondent
MR denied!
ISSUE: W/N petitioners are subject to the tax on corporations provided for in section 24 of Commonwealth Act No. 466,
otherwise known as the National Internal Revenue Code, as well as to the residence tax for corporations and the real
estate dealers' fixed tax.

HELD:

Partnership, as has been defined in the civil code refers to two or more persons who bind themselves to
contribute money, properly, or industry to a common fund, with the intention of dividing the profits among
themselves. Thus, petitioners, being engaged in the real estate transactions for monetary gain and
dividing the same among themselves constitute a partnership so far as the Code is concerned and are
subject to income tax for corporation.
Upon consideration of all the facts and circumstances surrounding the case, the court is satisfied that their
purpose was to engage in real estate transactions for monetary gain and then divide the same among
themselves, because:
o Said common fund was not something they found already in existence. They created it purposely. What is
more they jointly borrowed a substantial portion thereof in order to establish said common fund.
o They invested the same, not merely in one transaction, but in a series of transactions. The number of
lots (24) acquired and transactions undertaken, is strongly indicative of a pattern that was not limited to the
conservation and preservation of the aforementioned common fund or even of the property acquired by
petitioners in February, 1943.
o The aforesaid lots were not devoted to residential purposes of petitioners herein. The properties were
leased separately to several persons, who, from 1945 to 1948 inclusive, paid the total sum of
P70,068.30 by way of rentals.
o Since August, 1945, the properties have been under the management of one person, namely, Simeon
Evangelista, with full power to lease, to collect rents, to issue receipts, to bring suits, to sign letters and
contracts, and to indorse and deposit notes and checks.
o Petitioners have not testified or introduced any evidence, either on their purpose in creating the set
up already adverted to, or on the causes for its continued existence.

The collective effect of these circumstances is such as to leave no room for doubt on the existence of said intent
in petitioners herein
When our Internal Revenue Code includes "partnerships" among the entities subject to the tax on "corporations",
said Code must allude, therefore, to organizations which are not necessarily "partnerships", in the
technical sense of the term.
Likewise, as defined in section 84(b) of said Code, "the term corporation includes partnerships, no matter
how created or organized."
o This qualifying expression clearly indicates that a joint venture need not be undertaken in any of the
standard forms, or in conformity with the usual requirements of the law on partnerships, in order that one
could be deemed constituted for purposes of the tax on corporations.
Again, pursuant to said section 84(b), the term "corporation" includes, among other, "joint accounts, and
"associations", none of which has a legal personality of its own, independent of that of its members. .

As regards the residence tax for corporations, section 2 of Commonwealth Act No. 465 provides in part:
o "Entities liable to residence tax. Every corporation, no matter how created or organized, whether
domestic or resident foreign, engaged in or doing business in the Philippines shall pay an annual
residence tax of five pesos and an annual additional tax which, in no case, shall exceed one thousand
pesos, in accordance with the following schedule: . . .
"The term 'corporation' as used in this Act includes joint-stock company, partnership, joint account association or
insurance company,no matter how created or organized."
Considering that the pertinent part of this provision is analogous to that of sections 24 and 84(b) of our
National Internal Revenue Code(Commonwealth Act No. 466), and that the latter was approved on June
15, 1939, the day immediately after the approval of said Commonwealth Act No. 465 (June 14, 1939), it is
apparent that the terms "corporation" and "partnership" are used in both statutes with substantially the
same meaning. Consequently, petitioners are subject, also, to the residence tax for corporations.
Lastly, the records show that petitioners have habitually engaged in leasing the properties above mentioned for a
period of over twelve years, and that the yearly gross rentals of said properties from 1945 to 1948 ranged from
P9,599 to P17,453. Thus, they are subject to the tax provided in section 193 (q) of our National Internal
Revenue Code, for "real estate dealers," inasmuch as, pursuant to section 194(s) thereof:
o "'Real estate dealer' includes any person engaged in the business of buying, selling, exchanging, leasing,
or renting property or his own account as principal and holding himself out as a full or part- time dealer in
real estate or as an owner of rental property or properties rented or offered to rent for an aggregate
amount of three thousand pesos or more a year. . . .."
CTA decision affirmed

17. PASCUAL & DRAGON V. CIR & CTA

FACTS:

June 1965 petitioners (PASCUAL & DRAGON) bought 2 parcels of land from Santiago Bernardino
May 1966 they bought another 3 parcels of land from Juan Roque
The first 2 parcels of land were sold by petitioners in 1968 to Marenir Development Corporation
While the 3 parcels of land were sold by petitioners to Erlinda Reyes and Maria Samson
Petitioners realized a net profit in the sale made in 1968 in the amount of P165,224.70, while they realized a net
profit of P60,000.00 in the sale made in 1970.
The corresponding capital gains taxes were paid by petitioners in 1973 and 1974 by availing of the tax amnesties
granted in the said years.
However, in a letter, Acting BIR Commissioner Efren I. Plana, petitioners were assessed and required to
pay a total amount of P107,101.70 as alleged deficiency corporate income taxes for the years 1968 and
1970.
o Petitioners protested the said assessment in a letter of June 26, 1979 asserting that they had availed of
tax amnesties way back in 1974.
In a reply, respondent Commissioner informed petitioners that in the years 1968 and 1970, petitioners as co-
owners in the real estate transactions formed an unregistered partnership or joint venture taxable as a corporation
under Section 20(b) and its income was subject to the taxes prescribed under Section 24, both of the National
Internal Revenue Code;
o That the unregistered partnership was subject to corporate income tax as distinguished from
profits derived from the partnership by them which is subject to individual income tax; and
o That the availment of tax amnesty did not relieve them from the tax liability of the unregistered
partnership.
Hence, the petitioners were required to pay the deficiency income tax assessed.
Petitioners filed a petition for review with the respondent Court of Tax Appeals.
o CTA Affirmed decision of commissioner
o It ruled that on the basis of the principle enunciated in Evangelista, an unregistered partnership was in
fact formed by petitioners which like a corporation was subject to corporate income tax distinct
from that imposed on the partners.
In a separate dissenting opinion, Associate Judge Constante Roaquin stated that considering the
circumstances of this case, although there might in fact be a co-ownership between the petitioners, there was no
adequate basis for the conclusion that they thereby formed an unregistered partnership which made
them liable for corporate income tax under the Tax Code
ISSUE: W/N the petitioners should be treated as an unregistered partnership or a co-ownership for the purposes of
income tax.

HELD:

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 representative just assumed these conditions to be present on the
basis of the fact that petitioners purchased certain parcels of land and became co-owners thereof.
In Evangelista, there was a series of transactions where petitioners purchased twenty-four (24) lots
showing that the purpose was not limited to the conservation or preservation of the common fund or even the
properties acquired by them.
o The character of habituality peculiar to business transactions engaged in for the purpose of gain
was present.
In the instant case, the transactions were isolated.
o The character of habituality peculiar to business transactions for the purpose of gain was not present.
In Evangelista, the properties were leased out to tenants for several years. The business was under the
management of one of the partners. Such condition existed for over 15 years.
o None of the circumstances are present in the case at bar
o The co-ownership started only in 1965 and ended in 1970.
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.
o 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 clear evidence of co-ownership between the petitioners
o There is no adequate basis to support the proposition that they thereby formed an unregistered
partnership
o The two isolated transactions whereby they purchased properties and sold the same a few years
thereafter did not thereby make them partners
o They shared in the gross profits as co-owners and paid their capital gains taxes on their net profits and
availed of the tax amnesty thereby
Under the circumstances, they cannot be considered to have formed an unregistered partnership which is
thereby liable for corporate income tax, as the respondent commissioner proposes.
And even assuming fo that such unregistered partnership appears to have been formed, since there is no such
existing unregistered partnership with a distinct personality nor with assets that can be held liable for
said deficiency corporate income tax,
o Petitioners can be held individually liable as partners for this unpaid obligation of the partnership
However, as petitioners have availed of the benefits of tax amnesty as individual taxpayers in these transactions,
they are thereby relieved of any further tax liability arising therefrom
Petition granted; CTA decision reversed & set aside; Another decision hereby rendered relieving petitioners of the
corporate income tax

18. AFISCO INSURANCE CORP V.CIR

Herein petitioners are 41 non-life insurance corporations, organized and existing under the laws of the Philippines
Upon issuance by them of Erection, Machinery Breakdown, Boiler Explosion and Contractors' All Risk insurance
policies, the petitioners on August 1, 1965 entered into a Quota Share Reinsurance Treaty and a Surplus
Reinsurance Treaty with the Munchener Ruckversicherungs-Gesselschaft (hereafter called Munich), a non-
resident foreign insurance corporation.
The reinsurance treaties required petitioners to form a [p]ool; accordingly, a pool composed of the petitioners
was formed on the same day
April 14, 1976 - the pool of machinery insurers submitted a financial statement and filed an "Information Return of
Organization Exempt from Income Tax" for 1975, on the basis of which, the CIR assessed them deficiency corporate
taxes in the amount of P1,843,273.60, and withholding taxes of P1,768,799.39 and P89,438.68 on dividends
paid to Munich and to the petitioners, respectively.
Assessments were protested by the petitioners
Jan 27, 1986 - CIR denied the protest and ordered the petitioners, assessed as "Pool of Machinery Insurers,"
to pay deficiency income tax, interest, and with[h]olding tax
APPEAL! CA ruled that the pool of machinery insurers was a partnership taxable as a corporation,
and that the latter's collection of premiums on behalf of its members, the ceding companies, was
taxable income. It added that prescription did not bar the BIR from collecting the taxes due, because
"the taxpayer cannot be located at the address given in the information return filed."
Hence, this Petition for Review

ISSUES:

1. WON the Clearing House was a partnership or association subject to tax as a corp YES!
SEC. 24. Rate of tax on corporations. (a) Tax on domestic corporations. A tax is hereby imposed upon the
taxable net income received during each taxable year from all sources by every corporation organized in, or existing
under the laws of the Philippines, no matter how created or organized, but not including duly registered general co-
partnership (compaias colectivas), general professional partnerships, private educational institutions, and building
and loan associations . . . ."
The term 'corporation' shall include partnerships, no matter how created or organized, joint-stock companies,
joint accounts (cuentas en participacion), associations, or insurance companies, but does not include general
professional partnerships [or] a joint venture or consortium formed for the purpose of undertaking construction
projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or
consortium agreement under a service contract without the Government.
'General professional partnerships' are partnerships formed by persons for the sole purpose of exercising
their common profession, no part of the income of which is derived from engaging in any trade or business.
Clearly, the Philippine legislature included in the concept of corporations those entities that resembled
them such as unregistered partnerships and associations.
In Evangelista v. CIR, the Court held that Section 24 covered these unregistered partnerships and even
associations or joint accounts, which had no legal personalities apart from their individual members
". . . Accordingly, a pool of individual real property owners dealing in real estate business was considered a
corporation for purposes of the tax in Sec. 24 of the Tax Code
The term 'partnership' includes a syndicate, group, pool, joint venture or other unincorporated organization,
through or by means of which any business, financial operation, or venture is carried on . . .
Article 1767 of the Civil Code recognizes that a partnership is formed when persons contract "to devote to a common
purpose either money, property, or labor with the intention of dividing the profits between themselves
Meanwhile, an association implies associates who enter into a "joint enterprise . . . for the transaction of business
In the case before us, the ceding companies entered into a Pool Agreement or an association that would
handle all the insurance businesses covered under their quota-share reinsurance treaty and surplus
reinsurance treaty with Munich
The following indicates a partnership or an association covered by Section 24 of the NIRC:
(1) The pool has a common fund, consisting of money and other valuables that are deposited in the name and
credit of the pool.
This common fund pays for the administration and operation expenses of the pool.
(2) The pool functions through an executive board, which resembles the board of directors of a corporation,
composed of one representative for each of the ceding companies.
(3) The pool itself is not a reinsurer and does not issue any insurance policy; however, its work is indispensable,
beneficial and economically useful to the business of the ceding companies and Munich, because without it they
would not have received their premiums.
The ceding companies share "in the business ceded to the pool" and in the "expenses" according to a "Rules
of Distribution" annexed to the Pool Agreement.
Profit motive or business is, the primordial reason for the pool's formation.
". . . The fact that the pool does not retain any profit or income does not obliterate an antecedent fact, that
of the pool being used in the transaction of business for profit. It is apparent, that their association or
coaction was indispensable to the transaction of the business. . .
The petitioners' reliance on Pascual v. Commissioner is misplaced.
In Pascual, there was no unregistered partnership, but merely a co-ownership which took up only two isolated
transactions.

2. WON the remittances to petitioners and MUNICHRE of their respective shares of reinsurance premiums
were "dividends" subject to tax YES!
The pool is a taxable entity distinct from the individual corporate entities of the ceding companies.
The tax on its income is obviously different from the tax on the dividends received by the said companies;
therefore, the latter cannot individually claim the income tax paid by the former as their own.
Clearly, there is no double taxation
The tax exemptions claimed by petitioners cannot be granted, since their entitlement thereto remains unproven and
unsubstantiated
The sections of the 1977 NIRC which they cite are inapplicable, because these were not yet in effect when the
income was earned and when the subject information return for the year ending 1975 was filed.
Petitioners' claim that Munich is tax-exempt based on the RP-West German Tax Treaty is unpersuasive, because the
CIR assessed the pool for corporate taxes on the basis of the information return it had submitted for the year ending
1975, a taxable year when said treaty was not yet in effect.
Although petitioners omitted in their pleadings the date of effectivity of the treaty, the Court takes judicial notice
that it took effect only later, on December 14, 1984.
3. WON the respondent Commissioner's right to assess the Clearing House had already prescribed NO!
They claim that the subject information return was filed by the pool on April 14, 1976.
On the basis of this return, the BIR telephoned petitioners on Nov 11, 1981, to give them notice of its letter of
assessment dated March 27, 1981. Thus, the petitioners contend that the five-year statute of limitations then
provided in the NIRC had already lapsed, and that the internal revenue commissioner was already barred by
prescription from making an assessment
The prescriptive period was tolled under then Section 333 of the NIRC because " the taxpayer cannot be
located at the address given in the information return filed and for which reason there was delay in sending the
assessment
The law clearly states that the said period will be suspended only "if the taxpayer informs the Commissioner
of Internal Revenue of any change in the address."

HELD: The petition is devoid of merit. We sustain the ruling of the Court of Appeals that the pool is taxable as a
corporation, and that the government's right to assess and collect the taxes had not prescribed.

19. CIR V. BATANGAS TRANSPO CO.

Respondent companies are two distinct and separate corporations engaged in the business of land transportation by
means of motor buses, and operating distinct and separate lines.
Batangas Transportation was organized in 1918, while Laguna Bus was organized in 1928.
Each company has a fully paid up capital of 1M.
Before the last war, each company maintained separate head offices, that of Batangas Transportation being in
Batangas, Batangas, while the Laguna Bus had its head office in San Pablo Laguna.
Each company also kept and maintained separate books, fleets of buses, management, personnel, maintenance
and repair shops, and other facilities.
Joseph Benedict managed the Batangas Transportation, while Martin Olson was the manager of the Laguna Bus.
Max Blouse was the President of both corporations and owned about 30 per cent of the stock in each company.
During the war, the American officials of these two corporations were interned in Santo Tomas, and said
companies ceased operations. They also lost their respective properties and equipment.
After Liberation, sometime in April, 1945, the two companies were able to acquire 56 auto buses from the United
States Army, and the two companies divided said equipment equally between themselves, registering the same
separately in their respective names.
In March, 1947, after the resignation of Martin Olson as Manager of the Laguna Bus, Joseph Benedict, who was
then managing the Batangas Transportation, was appointed Manager of both companies by their respective
Board of Directors.
The head office of the Laguna Bus in San Pablo City was made the main office of both corporations.
The placing of the two companies under one sole management was made by Max Blouse, President of both
companies, by virtue of the authority granted him by resolution of the Board of Directors of the Laguna Bus on
August 10, 1945, and ratified by the Boards of the two companies in their respective resolutions of October 27,
1947.
According to the testimony of joint Manager Joseph Benedict, the purpose of the joint management, which was called
"Joint Emergency Operation", was to economize in overhead expenses; that by means of said joint operation, both
companies had been able to save the salaries of their workforce amounting to about P200k or about P100k for each
company.
At the end of each calendar year, all gross receipts and expenses of both companies were determined and the net
profits were divided fifty-fifty, and transferred to the books of accounts of each company, and each company " then
prepared its own income tax return from this fifty per centum of the gross receipts and expenditures, assets
and liabilities thus transferred to it from the 'Joint Emergency Operation' and paid the corresponding income
taxes thereon separately".
Under the theory that the two companies had pooled their resources in the establishment of the Joint
Emergency Operation, thereby forming a joint venture, the Collector wrote the bus companies that there was due
from them the amount of P422,210.89 as deficiency income tax and compromise for the years 1946 to 1949,
The Collector restrained, seized, and advertised for sale all the rolling stock of the two corporations, thereby
forcing respondent companies to file a surety bond of P422,210.89 to guarantee the payment of the income tax
assessed by him.
After some negotiations between the parties, the Collector, informed the respondents "that after crediting the
overpayment made by them of their alleged income tax liabilities for the aforesaid years, pursuant to the doctrine of
equitable recoupment, the income tax due from the 'Joint Emergency Operation' for the years 1946 to 1949, is
P54,143.54
The respondent companies appealed from said assessment of P54,143.54 to the CTA, but before filing his
answer, the Collector set aside his original assessment of P54,143.54 and reassessed the alleged income tax
liability of respondents of P148,890.14, claiming that he had later discovered that said companies had been
"erroneously credited in the last assessment with 100 per cent of their income taxes paid when they should in fact
have been credited with only 75 per cent thereof, since under Section 24 of the Tax Code dividends received by
them from the Joint Emergency Operation as a domestic corporation are returnable to the extent of 25 per cent".
CTA: Reversed CIR Decision
The Joint Emergency Operation or joint management of the two companies "is not a corporation within the
contemplation of section 84 (b) of the NIRC much less a partnership, association or insurance company", and
therefore was not subject to the income tax under the provisions of section 24 of the same Code, separately and
independently of respondent companies;
Ordered the companies to pay P54,143.54 and/or P148,890.14.
It did not pass upon the question of WON in the appeal taken to it by respondent companies, the Collector could
change his original assessment by increasing the same from P54,143.14 to P148,890.14, to correct an error
committed by him in having credited the Joint Emergency Operation, totally or 100 per cent of the income taxes
paid by the respondent companies for the years 1946 to 1949, inclusive, by reason of the principle of equitable
recoupment, instead of only 75 per cent.

ISSUES:

1. WON the two transportation companies herein involved are liable to the payment of income tax as a
corporation YES!
The Joint Emergency Operation organized and operated by them is a corporation within the meaning of Section 84 of
the Revised Internal Revenue Code; consequently, it is liable to income tax provided for in section 24 of the same
code
Although no legal personality may have been created by the Joint Emergency Operation, nevertheless, said Joint
Emergency Operation, joint venture, or joint management operated the business affairs of the two companies as
though they constituted a single entity, company or partnership, thereby obtaining substantial economy and profits in
the operation.
The two companies contributed money to a common fund to pay the sole general manager, the accounts and office
personnel attached to the office of said manager, as well as for the maintenance and operation of a common
maintenance and repair shop.
Said common fund was also used to buy spare parts, and equipment for both companies, including tires.
Said common fund was also used to pay all the salaries of the personnel of both companies, such as drivers,
conductors, helpers and mechanics, and at the end of each year, the gross income or receipts of both companies
were merged, and after deducting therefrom the gross expenses of the two companies, also merged, the net
income was determined and divided equally between them, wholly and utterly disregarding the expenses incurred
in the maintenance and operation of each company and of the individual income of said companies.

2. WON the CIR after the appeal from his decision has been perfected, and after the CTA has acquired
jurisdiction over the same, but before said Collector has filed his answer with that court, may still modify
his assessment subject of the appeal by increasing the same, on the ground that he had committed error
in good faith in making said appealed assessment YES!
The SC held that pending appeal before the CTA, the CIR may still amend his appealed assessment
For the information and guidance of the taxpayer:
there should be a definite and final assessment on which he can base his decision whether or not to
appeal; that when the assessment is appealed by the taxpayer to the CTA, the Collector loses control and
jurisdiction over the same, the jurisdiction being transferred automatically to the Tax Court, which has exclusive
appellate jurisdiction over the same;
that the jurisdiction of the Tax Court is not revisory but only appellate, and therefore, it can act only upon the
amount of assessment subject of the appeal to determine whether it is valid and correct from the
standpoint of the taxpayer- appellant;
that the Tax Court may only correct errors committed by the Collector against the taxpayer, but not those
committed in his favor, unless the Government itself is also an appellant; and
that unless this be the rule, the CIR and his agents may not exercise due care, prudence and pay too much
attention in making tax assessments, knowing that they can at any time correct any error committed by them even
when due to negligence, carelessness or gross mistake in the interpretation or application of the tax law, by
increasing the assessment, naturally to the prejudice of the taxpayer who would not know when his tax
liability has been completely and definitely met and complied with, this knowledge being necessary for the
wise and proper conduct and operation of his business; and
that lastly, while in the USA, on appeal from the decision of the CIR to the Board or CTA, the Commissioner may
still amend or modify his assessment, even increasing the same, the law in that jurisdiction expressly
authorizes the Board or Court of Tax Appeals to redetermine and revise the assessment appealed to it.
The majority, however, holds, not without valid arguments and reasons,
that the Government is not bound by the errors committed by its agents and tax collectors in making tax
assessments, specially when due to a misinterpretation or application of the tax laws, more so when done
in good faith; that
the tax laws provide for a prescriptive period within which the tax collectors may make assessments and
reassessments in order to collect all the taxes due to the Government, and that if the CIR is not allowed to amend
his assessment before the CTA and since he may make a subsequent reassessment to collect additional sums
within the same subject of his original assessment, that would lead to multiplicity of suits which the law does not
encourage;
that since the CIR, in modifying his assessment, may not only increase the same, but may also reduce it, if he
finds that he has committed an error against the taxpayer, and may even make refunds of amounts erroneously
and illegally collected, the taxpayer is not prejudiced;
that the hearing before the CTA partakes of a trial de novo and the Tax Court is authorized to receive evidence,
summon witnesses, and give both parties, the Government and the taxpayer, opportunity to present and
argue their sides, so that the true and correct amount of the tax to be collected may be determined and decided,
whether resulting in the increase or reduction of the assessment appealed to it.
The result is that the ruling and doctrine now being laid by this Court is, that pending appeal before the Court of Tax
Appeals, the Collector of Internal Revenue may still amend his appealed assessment, as he has done in the
present case.

3. (Raised in the appeal) WON the two respondent transportation companies is liable for 25 % surcharge due
to their failure to file an income tax return for the Joint Emergency Operation
The surcharge of 50% is being imposed by the Collector in case of:
willful neglect to file the return or list within the time prescribed by law, or
false or fraudulent return or
list is willfully made the CIR
In case of any failure to make and file a return or list within the time prescribed by law or by the Collector or other
internal revenue officer, not due to willful neglect, the Collector 25% of its amount,
Exception: when the return is voluntarily and without notice from the Collector or other officer filed after such time,
shown that the failure was due to a reasonable cause, no such addition shall be made to the tax.
In the case at bar, the failure to file an income tax return for the Joint Emergency Operation was due to a
reasonable cause, the honest belief of respondent companies that there was no such corporation within the
meaning of the Tax Code, and that their separate income tax return was sufficient compliance with the law.

20. GATCHALIAN V. COLLECTOR

Plaintiff are all residents of Pulilan, Bulacan, and that defendant is the CIR of Ph
Prior to Dec 15, 1934- plaintiffs pooled together certain amount of money in order for them to purchase one
sweepstakes ticket, valued at p2.00
the said ticket was registered in the name of Jose Gatchalian and Company;
After the drawing of the raffle, the above-mentioned ticket bearing No. 178637 won one of the third prizes in
the amount of P50,000 and that the corresponding check thereof was drawn by the National Charity
Sweepstakes Office in favor of Jose Gatchalian & Company against the PNB, which check was cashed by
Jose Gatchalian & Company;
On Dec 29, 1934, Jose Gatchalian was required by income tax examiner Alfredo David to file the corresponding
income tax return covering the prize won by Jose Gatchalian & Company
The said return was signed by Jose Gatchalian on that same day
On Jan 8, 1935, the defendant made an assessment against Jose Gatchalian & Company requesting the
payment of the sum of P1,499.94 to the deputy provincial treasurer of Pulilan, Bulacan, giving to said Jose
Gatchalian & Company until Jan 20, 1935 within which to pay the said amount of P1,499.94
On Jan 20, 1935, the plaintiffs, through their attorney, sent to defendant a reply, requesting exemption from
payment of the income tax to which reply there were enclosed 15 separate individual income tax returns filed
separately by each one of the plaintiffs, respectively
Defendant denied plaintiffs' request for exemption from the payment of tax and reiterated his demand for the
payment of the sum of P1,499.94 as income tax and gave plaintiffs until February 10, 1935 within which to
pay the said tax;
In view of the failure of the plaintiffs to pay the amount of tax demanded by the defendant, defendant
issued a warrant of distraint and levy against the property of the plaintiffs
to avoid embarrassment thereto, the said plaintiffs through Gregoria Cristobal, Maria C. Legaspi and
Jesus Legaspi, paid under protest the sum of P601.51 as part of the tax and penalties to the
municipal treasurer of Pulilan, Bulacan, as evidenced by official receipt No. 7454879 and requested
defendant that plaintiffs be allowed to pay under protest the balance of the tax and penalties by
monthly installments;
GRANTED! On the condition that plaintiffs file the usual bond secured by two solvent persons to
guarantee prompt payment of each installments as it becomes due;
Complied with
On July 16, 1935 the said plaintiffs formally protested against the payment of the sum of P602.51,
Defendant overruled the protest and denied refund of what has been paid for
Consequently, defendant ordered the municipal treasurer of Pulilan, Bulacan to execute within five days the
warrant of distraint and levy issued against the plaintiffs
In order to avoid annoyance and embarrassment arising from the levy of their property, the plaintiffs
through Jose Gatchalian, Guillermo Tapia, Maria Santiago and Emiliano Santiago, paid under protest to
the municipal treasurer of Pulilan, Bulacan the sum of P1,260.93 representing the unpaid balance
of the income tax and penalties demanded by defendant as evidenced by income tax receipt No.
35811
on September 3, 1936, the plaintiffs formally protested to the defendant against the payment of said
amount and requested the refund thereof,
the defendant overruled the protest and denied the refund thereof
Plaintiffs demanded upon defendant the refund of 1,863.44 paid under protest by them
Defendant refused and still refuses to refund the said amount notwithstanding the plaintiffs' demands.

ISSUES:

1. WON the plaintiffs formed a partnership (liable for the payment of income tax), or merely a community of
property (exempt from such payment) without a personality of its own PARTNERSHIP!!!
According to the stipulation facts the plaintiffs organized a partnership of a civil nature because each of them put up
money to buy a sweepstakes ticket for the sole purpose of dividing equally the prize which they may win, as they did
in fact in the amount of P50,000.
The partnership was not only formed, but upon the organization thereof and the winning of the prize, Jose Gatchalian
personally appeared in the office of the Philippines Charity Sweepstakes, in his capacity as co-partner, as such
collection the prize, the office issued the check for P50,000 in favor of Jose Gatchalian and company, and the said
partner, in the same capacity, collected the said check.

2. WON they should pay the tax collectively or whether the latter should be prorated among them and paid
individually- COLLECTIVELY!
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 under the aforesaid section 10 (a) of Act No. 2833, as amended by section 2 of Act No.
3761.
There is no merit in plaintiff's contention that the tax should be prorated among them and paid individually, resulting in
their exemption from the tax.

21. REYES VS. CIR

FACTS:

Petitioners Florencio & Angel Reyes, father & son, purchased a lot and building known as the Gibbs Building,
situated at 671 Dasmarinas Street, Manila for 835,000.
375,000 was paid leaving an unpaid balance of 460,000 representing the mortgage obligation of the vendors w/
China Banking Corporation, which mortgage obligations were assumed by the vendees.
The initial payment of 375,000 was shared equally by the petitioners.
At the time of the purchase, the building was leased to various tenants, whose rights were under a lease contract
w/ the original owners which the purchaser & petitioners, agreed to respect.
The administration of the building was entrusted to an administrator who collected the rents, kept its books and
records and rendered statement of accounts to the owners.
The gross income of the building from the rentals amounted to 90,000 annually.
Petitioners divided equally the income of the operation & maintenance.
An assessment was made by the CIR against the petitioners for the sum of 46,647 as income tax, surcharge &
compromise for the years 1951 to 1954.
Thereafter, another assessment was made against petitioners, this time, for back income taxes plus surcharge
and compromise in the amount of 25, 973.75 covering the years 1955 and 1956.
Petitioners contend that the said assessment was futile.
On appeal to the CTA, the CTA ruled that the petitioners are liable for the income tax due.
In the joint decision of the CTA, the tax liability for the years 1951 to 1954 was reduced to 37,128 and for the
years 1955 and 1956 to 20,619 as income tax due from the partnership formed by the petitioners.
CTA applied the provisions of the NIRC, the first of which imposes income ta on corporations organized or existing
under the laws of the PH, no matter how created or organized but not including duly registered general co-
partnerships which according to the second provision, includes partnerships no matter how organized.

ISSUE:

Whether or not the petitioners are subject to the tax on corporations provided for in the NIRC?

HELD:

Article 1767 of the Civil Code defined the contract of partnership.


The essential elements of partnership are: an agreement to contribute money, property or industry to a common
fund & the intent to divide the profits among the contracting parties.
The first element is undoubtedly present in the case at bar.
Admittedly, the petitioners have agreed to, and did contribute money and property to a common fund.
When the NIRC includes partnerships among the entities subject to tax on corporations, the code must allude,
therefore, to organizations which are not necessarily partnerships, in the technical sense of term.
As defined in Section 84(b) of the code, the term corporations include partnerships no matter how created or
organized.
Said qualification clearly indicates that a joint venture need not be undertaken in any of the standard forms, or in
conformity w/ the requirements of partnerships.
It is therefore clear that petitioners constitute a partnership in so far as the code is concerned, hence, they are
subject to the income tax for corporations.

22. PHILEX MINING CORP VS. COMMISSIONER

FACTS:

Petitioner Philex Mining Corp entered into an agreement w/ Baguio Gold Mining Corporation for the former to
manage the latters mining claim known as the Sto. Nino Mine located in Benguet.

The partys agreement was denominated as Power of Attorney and provided for several terms:
1. Within three (3) years from date thereof, the PRINCIPAL (Baguio Gold) shall make available to
the MANAGERS (Philex Mining) up to ELEVEN MILLION PESOS (P11,000,000.00), in such
amounts as from time to time may be required by the MANAGERS within the said 3-year period,
for use in the MANAGEMENT of the STO. NINO MINE. The said ELEVEN MILLION PESOS
(P11,000,000.00) shall be deemed, for internal audit purposes, as the owners account in the Sto.
Nino PROJECT. Any part of any income of the PRINCIPAL from the STO. NINO MINE, which is
left with the Sto. Nino PROJECT, shall be added to such owners account.

2. Whenever the MANAGERS shall deem it necessary and convenient in connection with the
MANAGEMENT of the STO. NINO MINE, they may transfer their own funds or property to the
Sto. Nino PROJECT, in accordance with the following arrangements:

(a) The properties shall be appraised and, together with the cash, shall be carried by the Sto.
Nino PROJECT as a special fund to be known as the MANAGERS account.

(b) The total of the MANAGERS account shall not exceed P11,000,000.00, except with prior
approval of the PRINCIPAL; provided, however, that if the compensation of the MANAGERS as
herein provided cannot be paid in cash from the Sto. Nino PROJECT, the amount not so paid in cash
shall be added to the MANAGERS account.

(c) The cash and property shall not thereafter be withdrawn from the Sto. Nino PROJECT until
termination of this Agency.

(d) The MANAGERS account shall not accrue interest. Since it is the desire of the PRINCIPAL to
extend to the MANAGERS the benefit of subsequent appreciation of property, upon a projected
termination of this Agency, the ratio which the MANAGERS account has to the owners account will be
determined, and the corresponding proportion of the entire assets of the STO. NINO MINE, excluding the
claims, shall be transferred to the MANAGERS, except that such transferred assets shall not include mine
development, roads, buildings, and similar property which will be valueless, or of slight value, to the
MANAGERS. The MANAGERS can, on the other hand, require at their option that property originally
transferred by them to the Sto. Nino PROJECT be re-transferred to them. Until such assets are
transferred to the MANAGERS, this Agency shall remain subsisting.

Philex made advances of cash & property in accordance w/ the agreement. However, the mine suffered
continuing losses over the years which resulted to Philex Minings withdrawal as manager of the mine and the
eventual cessation of mine operations.

The parties executed a Compromise with Dation in Payment wherein Baguio Gold admitted an
indebtedness to petitioner in the amount of 179,394,000.00 and agreed to pay the same in three segments by first
assigning Baguio Golds tangible assets to Philex Mining, transferring to the latter Baguio Golds equitable title in
its Philo drill assets and finally settling the remaining liability through properties that Baguio Gold may acquire in
the future.

The parties executed an Amendment to Compromise with Dation in Payment where the parties
determined that Baguio Golds indebtedness to petitioner actually amounted to 259,137,245.00, which sum
included liabilities of Baguio Gold to other creditors that petitioner had assumed as guarantor.

These liabilities pertained to long-term loans amounting to US$11,000,000.00 contracted by Baguio Gold.

The debt of Baguio Gold amounted to 112,136,000.

Said amount was deducted by the petitioner from its gross income in its annual income tax return as loss on the
settlement of receivables from Baguio Gold against reserves & allowances

BIR disallowed the amount as deduction for bad debt.


Petitioner contented that it entered a contract of agency evidenced by the Power of Attorney and that the
advances made by petitioners were in the nature of a loan and thus deductible from its gross income.

CTA rejected said claim and averred that it is a partnership rather than an agency.

ISSUE:

Whether or not the amount in question can be considered as a bad debt hence deductible from the gross
income.

HELD:

No. The advances made were not debts of Baguio Gold to petitioner in as much as the latter was not under the
obligation to return the same to the former under the Power of Attorney

The Power of Attorney was the basis in determining the true nature of the business relationship between
petitioner & Baguio Gold.

An examination of the above revealed that a partnership or joint venture was indeed the intent of the parties.

While a corporation (petitioner) generally cannot enter into a contract of partnership unless authorized by law or
its charter, it has been held that it may enter into a joint venture akin to a particular partnership.

The Power of Attorney clearly indicates that the parties intended to create a partnership and establish a common
fund for the said purpose.

There was joint interest in the profits as well, as shown by the 50-50 sharing in the income of the mine.

The totality of the circumstances and the stipulations in the parties agreement indubitably lead to the conclusion
that a partnership was formed between petitioner and Baguio Gold.

In sum, petitioner cannot claim the advances as a bad debt deduction from its gross income. Deductions for
income tax purposes partake of the nature of tax exemptions and are strictly construed against the taxpayer, who
must prove by convincing evidence that he is entitled to the deduction claimed.

In this case, petitioner failed to substantiate its assertion that the advances were subsisting debts of Baguio Gold
that could be deducted from its gross income. Consequently, it could not claim the advances as a valid bad debt
deduction.

23. AIR CANADA VS CIR

FACTS:

Air Canada is a foreign corporation organized and existing under the laws of Canada.
On April 24, 2000, it was granted an authority to operate as an offline carrier by the CAB, subject to certain
conditions, which would expire on April 24, 2005.
As an off-line carrier, it does not have flights originating from or coming to the PH.
On July 1, 1999, Air Canada engaged the services of Aerotel Ltd., Corp. as its general sales agent in the
Philippines.
Aerotel sells passage documents in the PH.
For the period ranging from the third quarter of 2000 to the second quarter of 2002, Air Canada, through Aerotel,
filed quarterly and annual income tax returns and paid the income tax on Gross Philippine Billings in the total
amount of P5,185,676.77.
On November 28, 2002, Air Canada filed a written claim for refund of alleged erroneously paid income taxes
amounting to P5,185,676.77 before the BIR.
It found basis from the revised definition of Gross Philippine Billings under Section 28 of the NIRC.
To prevent the running of the prescriptive period, Air Canada filed a Petition for Review before the Court of Tax
Appeals on November 29, 2002.
On December 22, 2004, the Court of Tax Appeals First Division rendered its Decision denying the Petition for
Review and, hence, the claim for refund.
It found that Air Canada was engaged in business in the Philippines through a local agent that sells airline tickets
on its behalf. As such, it should be taxed as a resident foreign corporation at the regular rate of 32%.
According to the CTA Air Canada was deemed to have established a permanent establishment in the Philippines
under Article V of the Republic of the Philippines-Canada Tax Treaty by the appointment of the local sales agent,
in which the petitioner uses its premises as an outlet where sales of airline tickets are made.
Air Canada filed a motion for reconsideration which was denied. Hence, the petition.

ISSUE/S:

Whether or not Air Canada, as an offline international carrier selling passage documents through a
general sales agent in the Philippines, is a resident foreign corporation within the provisions of the
Section 28 of NIRC.

Whether or not Air Canada is subject to the 21/2% tax on Gross Philippine Billings pursuant to Section 28
of NIRC.

Whether or not Air Canada is entitled to the refund of P5,185,676.77 pertaining allegedly to erroneously
paid tax on Gross Philippine Billings from the third quarter of 2000 to the second quarter of 2002.

HELD:

1. Yes, petitioner, an offline carrier, is a resident foreign corporation for income tax purposes.
Petitioner falls within the definition of resident foreign corporation under Section 28 of the NIRC.
Petitioner was issued by the CAB an authority to operate as an offline carrier in the Philippines for a period of five
years, or from April 24, 2000 until April 24, 2005.
Petitioner is, therefore, a resident foreign corporation that is taxable on its income derived from sources within the
Philippines.
Petitioner's income from sale of airline tickets, through Aerotel, is income realized from the pursuit of its business
activities in the Philippines.
2. No, petitioner, as an offline international carrier with no landing rights in the Philippines, is not liable to tax on
Gross Philippine Billings under Section 28 of the NIRC.
Under the foregoing provision, the tax attaches only when the carriage of persons, excess baggage, cargo, and
mail originated from the Philippines in a continuous and uninterrupted flight, regardless of where the passage
documents were sold.
Not having flights to and from the Philippines, petitioner is clearly not liable for the Gross Philippine Billings tax.
While petitioner is taxable as a resident foreign corporation under Section 28 of the NIRC on its taxable income
from sale of airline tickets in the Philippines, it could only be taxed at a maximum of 1 1/2% of gross
revenues, pursuant to Article VIII of the Republic of the Philippines-Canada Tax Treaty that applies to petitioner as
a "foreign corporation organized and existing under the laws of Canada
3. No, the CTA properly denied petitioner's claim for refund of allegedly erroneously paid tax on its Gross
Philippine Billings, on the ground that it was liable instead for the regular 32% tax on its taxable income received
from sources within the Philippines.
Its determination of petitioner's liability for the 32% regular income tax was made merely for the purpose of
ascertaining petitioner's entitlement to a tax refund and not for imposing any deficiency tax.
The taxpayer cannot simply refuse to pay tax on the ground that the tax liabilities were off-set against any alleged
claim the taxpayer may have against the government. Such would merely be in keeping with the basic policy on
prompt collection of taxes as the lifeblood of the government.