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3rd Meeting Case Digest

TAXREV LOCK
DE LA SALLE CASE BEFORE THE SC (taken from the DE LA SALLE CTA CASE): Unlike YMCA, which is not an educational institution, DLSU is undisputedly a non-

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stock, non-profit educational institution. It had also submitted evidence to prove that
it actually, directly and exclusively used its income for educational purposes.

Page
CIR CONTENTION:
ISSUE: Whether DLSU' s income and revenues proved to have been used
First, DLSU's rental income is taxable regardless of how such income is derived, used actually, directly and exclusively for educational purposes are
or disposed of. DLSU's operations of canteens and bookstores within its campus even exempt from duties and taxes.
though exclusively serving the university community do not negate income tax
liability. SC: YES!

The Commissioner contends that Article XIV, Section 4 (3) of the Constitution must be The income, revenues and assets of non-stock, non-profit educational institutions
harmonized with Section 30 (H) of the Tax Code, which states among others, that the proved to have been used actually, directly and exclusively for educational purposes
income of whatever kind and character of [a non-stock and non-profit educational are exempt from duties and taxes. XXX
institution] from any of [its] properties, real or personal, or from any of [its] activities
conducted for profit regardless of the disposition made of such income, shall be First, the constitutional provision refers to two kinds of educational
subject to tax imposed by this Code. institutions:
(1) non-stock, non-profit educational institutions and
The Commissioner argues that the CTA En Banc misread and misapplied the case of (2) proprietary educational institutions.
Commissioner of Internal Revenue v. YMCA to support its conclusion that revenues
however generated are covered by the constitutional exemption, provided that, the Second, DLSU falls under the first category. Even the Commissioner admits the status
revenues will be used for educational purposes or will be held in reserve for such of DLSU as a non-stock, non-profit educational institution. XXX
purposes.
Fourth, there is a marked distinction between the treatment of nonstock, non-profit
On the contrary, the Commissioner posits that a tax-exempt organization like DLSU is educational institutions and proprietary educational institutions.
exempt only from property tax but not from income tax on the rentals earned  The tax exemption granted to non-stock, non-profit educational institutions
from property. Thus, DLSU's income from the leases of its real properties is not is conditioned only on the actual, direct and exclusive use of their revenues
exempt from taxation even if the income would be used for educational purposes. and assets for educational purposes.
 While tax exemptions may also be granted to proprietary educational
DLSU's Comment: institutions, these exemptions may be subject to limitations imposed by
Congress (e.g. NIRC).
XXX DLSU stresses that Article XIV, Section 4 (3) of the Constitution is clear that all
assets and revenues (income) of non-stock, non-profit educational institutions used The Commissioner opposes DLSU's claim for tax exemption on the basis of Section 30
actually, directly and exclusively for educational purposes are exempt from taxes and (H) of the Tax Code. The relevant text reads:
duties. XXX
The following organizations shall not be taxed under this Title [Tax on
DLSU thus invokes the doctrine of constitutional supremacy, which renders any Income] in respect to income received by them as such:
subsequent law that is contrary to the Constitution void and without any force and
effect. Section 30 (H) of the 1997 Tax Code insofar as it subjects to tax the xx xx
income of whatever kind and character of a non-stock and non-profit
educational institution from any of its properties, real or personal, or from (H) A non-stock and non-profit educational institution
any of its activities conducted for profit regardless of the disposition made of
such income, should be declared without force and effect in view of the xx xx
constitutionally granted tax exemption on "all revenues and assets of non-stock, non-
profit educational institutions used actually, directly, and exclusively for educational Notwithstanding the provisions in the preceding paragraphs, the income of
purposes." whatever kind and character of the foregoing organizations from
any of their properties, real or personal, or from any of their
DLSU further submits that it complies with the requirements enunciated in the YMCA activities conducted for profit regardless of the disposition made of
case, that for an exemption to be granted under Article XIV, Section 4 (3) of the such income shall be subject to tax imposed under this Code.
Constitution, the taxpayer must prove that: [underscoring and emphasis supplied]

(1) it falls under the classification non-stock, non-profit educational The Commissioner posits that the 1997 Tax Code qualified the tax exemption granted
institution; and to non-stock, non-profit educational institutions such that the revenues and income
(2) the income it seeks to be exempted from taxation is used actually, they derived from their assets, or from any of their activities conducted for profit, are
directly and exclusively for educational purposes. taxable even if these revenues and income are used for educational purposes.

used actually. Inc. on the other hand. which are non-profit shall pay a tax of ten percent (10%) on their taxable income . directly XXX Article XIV. apply to non-stock. nonprofit educational Thus. non-profit educational institutions? NO Page Section 27 (B). non-profit educational institutions prove that its assets and Consistent with Article XIV. and duties. non-profit imposed on the entire taxable income . non-profit educational institutions. While a non-stock.) licensing out its trademarks and intellectual property institutions. then said revenues and income shall be exempt from taxes of twenty percent (20%) on the gross amount. Iconic Beverages – domestic corporation primarily engaged in the business of manufacturing. 2. Section 4 (3) Iconic has no other income but that from SMBI and MPLI.. buying. does not require that the revenues and income must have also been sourced from educational activities or activities related to the purposes of an educational institution. Section 4 (3). assisting the State provide a public good. so long as the revenues and income are used actually. Provided. non- 2 Did the 1997 Tax Code qualify the tax exemption constitutionally-granted to non. non-profit educational (My Philippines Lifestyles. selling (on wholesale) and dealing in alcoholic and non- We find that the text demonstrates the policy of the 1987 Constitution. provided. states that "[p]roprietary educational We answer in the negative. directly. directly and exclusively for educational purposes. directly and exclusively which Iconic treated as passive income (royalties) subject to the final withholding tax for educational purposes. The last paragraph of Section 30 of the Tax Code is without force and exceed 50% of its total gross income. corresponding penalties. and (2) the income it seeks to be exempted from taxation is used actually. license and/or acquire such from the records of the 1986 Constitutional Commission79 to provide broader tax trademarks and other intellectual property rights necessary for the privilege to non-stock. relating to its income derived from SMBI and from MPLI. discernible alcoholic beverages and to own. Section 4 (3) of the Constitution. CIR issued FAN to Iconic for deficiency income taxes. Thus. is not subject to limitations imposed by law (NIRC Sec 30). these limitations do not revenues are used actually. The reduced rate is applicable only if: We now adopt YMCA as precedent and hold that: (1) the proprietary educational institution is nonprofit and (2) its gross income from unrelated trade. with The phrase all revenues is unqualified by any reference to the source of revenues...3rd Meeting Case Digest TAXREV LOCK To be specific. a proprietary educational institution is entitled only to directly and exclusively for educational purposes. thus. Domestic Corporations)." ICONIC BEVERAGES v CIR The addition and express use of the word revenues in Article XIV. effect with respect to non-stock.... XXX institutions . The tax-exemption constitutionally-granted to non-stock. [the regular corporate income tax of 30%] shall be (1) the taxpayer falls under the classification non-stock. Section 4 (3) categorically states that "[a]ll revenues and and exclusively tor educational purpose. and exclusively for educational purposes shall be exempt from taxes and duties. rights in furtherance of its business. that the non-stock. business or activity does not 1. XXX assets . effect for being contrary to the Constitution insofar as it subjects to tax the income and revenues of non-stock. a plain reading of the Constitution would show that Article XIV. Section 4 (3) of the Constitution is not without significance. profit educational institutions shall not be taxed on income received by them as such. that if the gross income from unrelated trade. the royalties must be in the nature of passive income. non-profit educational institutions as recognition of their role in furtherance of its business.  CIR: income in the form of royalties received by Iconic from the above companies should be treated as ordinary business income subject to 30% DIFFERENCE NG NON-PROFIT NON-STOCK sa PROPRIETARY EDUCATIONAL corporate income tax INSTITUTION o to be subject to the 20% final withholding tax. namely: educational institutions . Section 30 provides that exempt organizations like non-stock. non-profit educational institutions. Further. the same shall not be considered passive income subject to 20% final withholding tax .. among others. The tax exemption was seen as beneficial to students who may otherwise be charged unreasonable tuition fees if not for the tax Iconic has entered into License Agreements with SMBI (San Miguel Brewery) and MPLI exemption extended to all revenues and assets of non-stock. non-profit educational institutions used actually. By the Tax Code's clear terms. we declare the last paragraph of Section 30 of the Tax Code without force and institutions.. non-profit educational institution is classified as a tax-exempt o Iconic received said payments in active conduct of business entity under Section 30 (Exemptions from Tax on Corporations) of the Tax Code. purchase.. the reduced rate of 10% corporate income tax. business The Court then (in YMCA case) significantly laid down the requisites for availing the or other activity exceeds fifty percent (50%) of the total gross income derived by such tax exemption under Article XIV. stock. " educational institution. a proprietary educational institution is covered by Section 27 (Rates of Income Tax on ISSUE: Whether Iconic received royalty income in the active conduct of its business. .

370-2011. issuing the bonds directly to a special purpose vehicle considering that the latter was not a Government Securities Eligible Dealer (GSED). the tax rates provided in Section 27(D) of the NIRC of 1997. (petitioners herein) purchased determination as to whether the royalty income is passive income is necessary before the PEACe Bonds on different dates." Audited Financial Statements for the taxable year 2009 clearly show that the main source of petitioner's income is the royalty payments made by SMBI and Subsequently. Inc.0B worth of 10-year Zero[-] Coupon Bonds [would] be auctioned XXX. in a memorandum. In the light of your representation that the PEACe Bonds will be issued only to one entity. The CIR later issued BIR Ruling No. Also on the same day. The T-notes would initially be purchased by a special purpose vehicle on 3 CTA: YES! behalf of CODE-NGO. income generated in active pursuit and performance of petitioner's primary purpose and thus. if the income is generated in the active pursuit and performance of the corporation's primary purposes. A casual apply. Transactions which are occasional. is not passive income. to be classified as "deposit substitutes". including BDO. let it be noted that the rates of tax provided under Section 27(D) ofthe underwriting Agreement with CODE-NGO. the Bureau of Treasury announced that MPLI. Code NGO.e. as amended. as amended. Therefore. the Court finds petitioner's argument bereft of merit. vs. Pursuant to this Thus. All the foregoing only ruling. in reply to CODE-NGO’s letters. declaring that the PEACe Bonds being deposit substitutes are subject to the 20% final withholding tax. the of P11++ billion. RCBC Capital entered into an On this matter. "P30. pertains to certain passive income. He recommended that the From the above definition given by petitioner. 020-2001 on the tax defines passive income by stating what it is not: treatment of the proposed PEACe Bonds. Executive Secretary Alberto Romulo.of the NIRC of 1997 does not distinguish between royalty earned in pursuit of the corporation's primary purpose and one that is not. the Supreme Court explained that the BIR The BIR. incidental and casual do Meanwhile. i. A number of banks. et al. As previously Issue Manager and Lead Underwriter for the offering of the PEACe Bonds. the withholding tax on deposit substitutes will not sporadic transactions do not constitute as the conduct of a trade or business. this petition before the SC. the borrowing of funds must be obtained from twenty (20) or more individuals or corporate lenders at XXX any one time. the same is not passive income xxx29 (Emphasis supplied) Thus. The notice stated that the Bonds "shall be issued to not more than 19 buyers/lenders XXX Petitioner likewise contends that even assuming that petitioner's royalty income was Lastly. Former Treasurer Edeza questioned the propriety of not constitute the doing or engaging in business contemplated by law. where Commissioner Banez confirmed that the PEACe Bonds would not be classified as deposit substitutes and would not be xxx if the income is generated in the active pursuit and performance of subject to the corresponding withholding tax: the corporation's primary purposes.18 (Emphasis supplied) business activity does not amount to engaging in trade or business in the Philippines for income tax purposes. continuous and considerable. The Hon.. kaya mas na-emphasize na hindi niya main business yan kundi  Related to this question is the interpretation of the phrase "borrowing from yung licensing out nga! twenty (20) or more individual or corporate lenders at any one time" under Section 22(Y) of the 1997 National Internal Revenue Code. it stated that "the issue being limited to 19 lenders and while taxable shall not derived in connection with the active conduct of trade or business. the same shall not be Petitioner (Iconic) contends that engaging in a trade or business presupposes that the considered as "deposit substitutes" falling within the purview of the above business activities are regular. in the notice to all GSEDs. the same is not passive income. ISSUE: Whether the PEACe Bonds are "deposit substitutes" and thus subject to 20% alcoholic beverages – na nilalaban ni Iconic na main business niya. On the day of the auction.. the Secretary of Finance directed the Bureau of Treasury to withhold a 20% leads the Court to conclude that petitioner's income from licensing out its IP rights is final tax from the face value of the PEACe Bonds upon their payment at maturity. particularly on whether the reckoning of the 20 lenders includes trading of the bonds in the BDO v RP secondary market CODE-NGO requested an approval from the Department of Finance for the issuance SC: DEPENDE RAW by the Bureau of Treasury of 10-year zero-coupon Treasury Certificates (T- . Hence. may apply to the said royalty income.3rd Meeting Case Digest TAXREV LOCK notes). In view of RCBC Capital sold the Government Bonds in the secondary market for an issue price the Supreme Court's pronouncement as regards the definition of passive income. nag-t-tax ng 20% final tax lang. isolated or definition. whereby RCBC Capital was appointed as the NIRC of 1997. Hence. RCBC which participated on behalf of CODE-NGO was declared as the winning bidder.reflected sa final withholding tax under the 1997 National Internal Revenue Code. Note: wala ring overhead expenses for buying selling manufacturing alcoholic non. Financial Statements. mentioned. it cannot be said that the act of issuance of the Bonds "be done through the ADAPS" and that CODE-NGO "should get licensing out petitioner's IP rights is an incidental transaction considering that its a GSED to bid in its behalf. issued BIR Ruling No. Page In the case of Chamber of Real Estate and Builders Associations. repackaged and sold at a premium to investors as the PEACe Bonds. Section 27(0)(1)  be subject to the 20% final withholding [tax].

promissory notes. At this point. secondary market. that under Section 24223 of the 1997 National Internal Revenue bonds. then it becomes indubitable that funds would be obtained from the "public" as defined in Section 22(Y) of the NIRC. of securities. XXX Provided." XXX It may seem that there was only one lender — RCBC on behalf of CODE-NGO — Hence. However.2 billion borrowing received by the Bureau of Treasury in exchange for issued the Government Bonds. or acceptance of debt instruments for the borrower’s own account. Consequently. That debt instruments issued for interbank call loans with maturity of not more than five (5) days to cover deficiency in reserves against deposit liabilities. for the purpose of relending or purchasing of receivables and other obligations." Indeed. but need bonds at that point in time are deemed deposit substitutes. however. Sale and distribution by GSEDs to various lenders/investors in the orany lender or investor if such be the case. therefore.996 would fall on the same day. funds are simultaneously obtained other than deposits.]" such that if the debt instruments Bonds — all at the time of origination or issuance. 2. XXX PEACe Bonds are deemed deposit substitutes within the meaning of Section 22(Y) of the 1997 National Internal Revenue Code and RCBC Capital/CODE-NGO would have Meaning of "at any one time" been obliged to pay the 20% final withholding tax on the interest or discount from the PEACe Bonds. (20) or more buyers eventually own the instruments. we do "were subsequently sold in secondary markets and so on. from the point of view of the financial market. there is deemed to be a public borrowing and the financing their own needs or the needs of their agent or dealer. 1. or from 20 or more lenders/investors. shall not be considered as deposit substitute debt instruments. WITH REGARD SA BIR RULINGs 3. as the withholding agents. the words "at any one time" Should there have been a simultaneous sale to 20 or more lenders/investors. bankers’ acceptances. a reading be considered a deposit substitute and consequently subject to the 20% final of the underwriting agreement and RCBC term sheet reveals that the settlement dates withholding tax. in the context of the financial market. the phrase "at any one time" for corresponding interest from the PEACe Bonds would likewise be required of any purposes of determining the "20 or more lenders" would mean every transaction lender/investor had the latter turnedaround and sold said PEACe Bonds. simultaneously to 20 or more lenders or investors. or SC: Its interpretation of "at any one time" to mean at the point of origination alone is unduly restrictive. (Emphasis supplied) Tax treatment of income derived from the PEACe Bonds Under the 1997 National Internal Revenue Code. BIR Ruling No.e. endorsement. Subsequent sale or trading by a bondholder to another lender/investor in the secondary market usually through a broker or dealer. 370-2011 is likewise erroneous insofar as it stated XXX that "all . October 18.3rd Meeting Case Digest TAXREV LOCK 4. Further. certificates of assignment or participation and similar instruments with recourse: from the bonds. where the financial assets involved are government securities like We note. the create an ambiguity. RCBC) to whom the BTr entire P10. Congress specifically defined "public" to mean "twenty (20) or more individual or corporate lenders at any one time. whether in executed in the primary or secondary market in connection with the purchase or sale whole or part. Issuance by the Bureau of Treasury of the bonds to GSEDs in the primary Thus. when the PEACe Bonds were supposedly issued to CODE-NGO/RCBC. through the issuance. the seller is not be limited to. the reckoning of "20 or more lenders/investors" is made at any transaction in Code. repurchase agreements. the obligation to withhold the 20% final tax on the Thus. including those between or among banks and quasi-banks. for the sale and distribution by RCBC Capital (as underwriter for CODE-NGO) of the PEACe Bonds to various undisclosed investors at a purchase price of 20-lender rule approximately P11. however. Sale by a financial intermediary-bondholder of its participation interests 4 1997 Tax Code defines: in the bonds to individual or corporate lenders in the secondary market. such as: with a holding period of not less than five (5) years is exempt from the final tax. the Petitioners contend that "there [is]only one (1) lender (i. substitutes. These instruments may include. through any of the foregoing transactions. however. For example. the number of lenders is determinative of whether a debt instrument should to whom the PEACe Bonds were issued at the time of origination. interest income received by individuals from longterm deposits or investments connection with the purchase or sale of the Government Bonds. 2001. Page (Y) The term ‘deposit substitutes’ shall mean an alternative form of obtaining funds from the public (the term 'public' means borrowing from twenty (20) or more individual or corporate lenders at any one time) When. including reverse required to withhold the 20% final withholding tax on the imputed interest income repurchase agreements entered into by and between the Bangko Sentral ng Pilipinas (BSP) and any authorized agent bank." On the other hand. In reality. in such a way that twenty not know as to how many investors the PEACe Bonds were sold to by RCBC Capital. respondents theorize that the the P35 billion worth of PEACe Bonds was sourced directly from the undisclosed word "any" "indicates that the period contemplated is the entire term of the bond and number of investors to whom RCBC Capital/CODE-NGO distributed the PEACe not merely the point of origination or issuance[. should the PEACe Bonds be found to be within the coverage of deposit market. the proper procedure was for the Bureau of Treasury to pay the face value of the PEACe Bonds to the bondholders and for the Bureau of Internal Revenue to collect the unpaid final withholding tax directly from RCBC Capital/CODE-NGO.

SC: YES! Nag agree SC sa sinabi ng SolGen! said dividend income (cash dividend) is subject to the 25 % tax pursuant to Philippines-Japan Tax Treaty. The investments in the Atlantic Gulf & Pacific Company of the Marubeni MARUBENI v CIR Corporation of Japan were directly made by it and the dividends othe investments were likewise directly remitted to and received by the Marubeni Corporation of Japan. There can be no other logical conclusion considering the Japan is subject to 25 % tax. the amount nominee) was made for purposes peculiarly germane to the conduct of the corporate refundable offsets the liability. thus. MARUBENI. Japan Corp. being a non-resident stockholder. Petitioner Marubeni Corporation Philippine Branch has no participation or intervention. And it REPRESENTING OVERPAYMENT OF BRANCH PROFIT REMITTANCE TAX DAHIL appears that the funds invested in the Atlantic Gulf & Pacific Company did not come RESIDENT CORP DAW SIYA. it is. Consequently. the Marubeni Corporation For example. through its branch office. following the principal agent relationship theory. regardless of the number of purchasers/lenders at the time of CTA: XXX the dividends in question are income taxable to the Marubeni Corporation of 5 origination/issuance are considered deposit substitutes. arising from the business activity in which Marubeni is engaged. a non-resident foreign corporation. hence. investments of the Marubeni Corporation of Japan. So. STORY: MARUBENI. and that the taxes withheld of 10 % as intercorporate undisputed fact that the investment (totalling 283. branch in the Philippines. Accordingly. akala niya lusot na siya. mali pagka-tax sa kanya. paid cash dividends and remitted it abroad to MARUBENI JAPAN. not of the branch.260 shares including that of dividend tax and 15 % as profit remittance tax totals (sic) 25 %. SABI ni SOLGEN. Inasmuch as the cash dividends remitted by AG&P to Marubeni Corporation. . Accordingly. said the principal-agent relationship is set aside. nevertheless. . .3rd Meeting Case Digest TAXREV LOCK treasury bonds . MALAKI TALAGA TAX MO! Corporation Philippine Branch. nothing is left to be refunded. MARUBENI CONTENTION: PRINCIPAL-AGENT THEORY Marubeni and Marubeni Philippines are one in the same under the NIRC and Corpo Laws as MARUBENI JAPAN MARUBENI JAPAN sought ruling from BIR on whether such remittances or whether the is duly licensed engaged in business in the Phils thru its MARUBENI Phil branch.had equity investments in Atlantic Gulf. ULUL out of the funds infused by the Marubeni Corporation of Japan to the Marubeni NON-RESIDENT CORP KA. The said dividends were distributions made by the Atlantic. The transaction becomes one of the dividends if remitted abroad are not considered branch profits for purposes of the foreign corporation. MARUBENI JAPAN CLAIMED FOR REFUND OR ISSUANCE OF TAX CREDIT!!! ISSUE 1: WON MARUBENI is a non-resident foreign corporation and shall be taxed as such CIR: denied! Although not subject to branch remittance tax (15%) and final intercorporate tax (10%). as corporation. in the investments and in the receipt of the dividends. MARUBENI JAPAN. Atlantic Gulf declared and Hence. it is sufficient the dividends are paid directly to the head office or coursed through its local branch is that the income arises from the business activity in which the corporation is engaged.  So hindi raw daw dapat ma-tax as resident corporation si MARUBENI. if a resident foreign corporation is engaged in the buying and selling of machineries in the Philippines and invests in some shares of stock Solicitor General Contention in refute: The general rule that a foreign corporation is on which dividends are subsequently received. This not considered 'effectively connected' with its trade or business in this rule is based on the premise that the business of the foreign corporation is conducted country. It is understood that the branch becomes its agent here." Being the subject of this Tokyo. the taxpayer is the foreign 15% profit remittance tax imposed by Section 24 (b) (2) of the Tax Code.subject to 10% final dividend tax (intercorporate final tax) and to 15% branch remittance tax. of no moment for after all. declared void because it completely disregarded the 20 or more and Pacific Company of Manila to its shareholder out of its profits on the Page lender rule added by Congress in the 1997 National Internal Revenue Code. Gulf petition. Petition for Review to SC. Japan. So that when the foreign In the instant case. the dividends thus earned are the same juridical entity as its branch office in the Philippines cannot apply here. dividends received by MARUBENI are effectively connected with its conduct or Hence. XXX the alleged overpaid taxes were incurred for the remittance of dividend income to the head office in Japan which is a separate and distinct income taxpayer from the HENCE. CLAIMS TAX REFUND OR CREDIT directly or indirectly. the head office and the office branch constitute but one corporate entity. amended . must ONLY be taxed at 10% intercorporate final tax as a RESIDENT business in the Philippines as to be considered branch profits subject to the CORPORATION 15% profit remittance tax under the NIRC A single corporate entity cannot be both a resident and a non-resident corporation BIR Ruling: To be effectively connected it is not necessary that the income be derived depending on the nature of the particular transaction involved. the dividends received by Marubeni from AG&P are not income corporation transacts business in the Philippines independently of its branch. whether from the actual operation of taxpayer-corporation's trade or business. not the branch or the resident foreign corporation.

Petitioner. which shall be collected and paid as provided SC: YES! in Section 53 (d) of this Code. question. While the tax on Wander Phils . – KUNG WALANG Treaty ito non-resident foreign corporation taxes deemed to have been mag a apply sana! paid in the Philippines equivalent to 20% which represents the difference between the regular tax (35%) on corporations and the tax (15%) dividends as provided in this section: However. this petition for review on certiorari before the SC.." This means that any tax imposable by the contracting state concerned the Tax Code. as a general rule. the tax shall be 15% of the dividends received. is taxed 35 % of its gross income from is domiciled shall allow a credit against the tax due from the all sources within the Philippines.domestic corporation wholly-owned subsidiary of the Glaro S. being a non. contending rates fixed therein are the maximum rates as reflected in the phrase "shall not that it is liable only to 15% withholding tax in accordance with Section 24 (b) (1) of exceed. Provided. Accordingly. This XXX In the instant case. "the tax base upon which the 15 (Glaro for short). the tax shall be 15% of the dividends received. as amended. XXXX It is readily apparent that the 15 % tax rate imposed on the dividends received by a foreign non-resident stockholder from a domestic corporation under Section 24 ISSUE 2: TAMA BA NA 25% ang TAX NI MARUBENI AS A NON-RES CORP? (b) (1) (iii) is easily within the maximum ceiling of 25 % of the gross amount of the dividends as decreed in the Tax Treaty. Wander filed a petition before the CTA which granted its claim for Petitioner. Ltd. should not exceed the 25 % limitation and that said rate would apply only if the tax  It is well to note that Switzerland (domicile of Glaro) does not impose any income imposed by our laws exceeds the same. a discounted rate of 15% is given to petitioner on dividends received from a domestic corporation (AG&P) on the condition that its domicile state (Japan) extends in favor of petitioner... avers the tax sparing credit is . petitioner.. taxes deemed to have been paid in the 1) Non-resident corporation. reads: shall allow a credit against the tax due from the non-resident foreign corporation. from a domestic corporation liable to tax under this Chapter. having made this independent investment attributable only to the rate on dividends received from a domestic corporation. In other words. A foreign corporation not engaged in trade Philippines equivalent to 20 % which represents the difference or business in the Philippines XXX. . Public respondents likewise erred in automatically imposing the 25 % rate under the Wander remitted to Glaro dividends.3rd Meeting Case Digest TAXREV LOCK affairs of Marubeni Japan. Said section provides: Hence.." 13 Philippines. subject to the condition Proceeding to apply the above section to the case at bar. ISSUE: whether or not private respondent Wander is entitled to the preferential rate (b) Tax on foreign corporations. a tax credit of not less than 20 % of the dividends received. cannot now claim the increments as ordinary consequences of its trade or Page business in the Philippines and avail itself of the lower tax rate of 10 %.A. but certainly not of the branch in the Philippines. dividends is directly levied on the dividends received. [Section 24 (b) (1)].. by reason of our bilateral tax on dividends received by Swiss corporation from corporations domiciled in foreign negotiations with Japan. A closer look at the Treaty reveals that the tax paid to the BIR. still further That on dividends received %) on dividends as provided in this Section. on the other hand.. Wander later filed a claim for refund and/or tax credit. a Swiss corporation not engaged in trade or business in the % branch profit remittance tax is imposed is the profit actually remitted abroad. — (1) Non-resident corporations of 15% withholding tax on dividends declared and remitted to Glaro — . head office. (iii) On dividends received from a domestic corporation liable to tax under this Chapter. subject to the condition that the country in which the non-resident foreign corporation is domiciled Section 24 (b) (1) of the Tax Code. Wander claims that full credit is granted and not merely credit equivalent to 20%. being a non-resident foreign corporation with respect to the transaction in refund/tax credit. on which 35% withholding tax was withheld and Tax Treaty as if this were a flat rate. extent to attain the goals set forth in the Treaty. and the 15 % special 6 clear that petitioner. Switzerland did not impose any tax on the dividends received 20 % represents the difference between the regular tax of 35 % on non-resident by Glaro. Due to BIR inaction. shall pay a tax equal to 35% of the between the regular tax (35 %) on corporations and the tax (15 gross income XXX . It is thus foreign corporations which petitioner would have ordinarily paid. that the country in which the non-resident foreign corporation resident foreign corporation. XXX. SC: NO! MALI RAW YUNG COMPUTATION NA PA-OFFSET OFFSET LANG! CIR v WANDER PHILS TAX SPARING RULE To simply add the two taxes to arrive at the 25 % tax rate is to disregard a basic rule in taxation that each tax has a different tax basis. we have agreed to have our right to tax limited to a certain countries. the applicable provision of the Tax Code is Section 24 (b) (1) (iii) in conjunction with the Philippine-Japan Treaty of 1980.

. as it were. withheld) from the dividend CIR v PROCTOR & GAMBLE remittances to P&G-USA. the applicable rate of withholding tax on the dividends The parent-corporation P&G-USA is "deemed to have paid" a portion of the Philippine remitted was only (15%) (and not [35%]) of the dividends. Presidential Decree No. may be. as aptly stated by respondent Court.. not by P&G-USA. In other words. amending Section 24 (b) (1) of the Tax Code. For.USA are not difference between the regular tax of thirty-five percent (35%) on corporations and "phantom taxes" but instead Philippine corporate income taxes actually paid here by the tax of fifteen percent (15%) on dividends. revenues earned in the Philippines. the fact that Switzerland did not impose any tax or the dividends law deem the parent-corporation to have paid the twenty (20) percentage received by Glaro from the Philippines should be considered as a full points of dividend tax waived by the Philippines. The NIRC specifies that Philippines. US law (Section 902. It is important to note that Section 24 (b) (1). the reduced fifteen percent (15%) dividend tax rate is 7 only for the 15 percentage-point portion actually paid but also for the equivalent applicable if the USA "shall allow" to P&G-USA a tax credit for "taxes deemed paid in Page twenty percentage point portion spared. declared dividends payable to its parent company and sole stockholder. which are very real indeed. thus reducing the amount remittable as dividends to P&G-USA. XXX regular corporate income tax on dividends remitted to foreign parent company The Second Division of the Court. 369. filed a petition for review with CTA which rendered a reality. such as the Philippine 35% dividend tax. US law (Section 901. instead of 35% the same income stream. corporate income tax although that tax was actually paid by its Philippine subsidiary. 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 It is also useful to note that both (i) the tax credit for the Philippine dividend tax 15% instead of 35%. to the US "shall allow" P&G-USA a "deemed paid" tax credit in an amount deny private respondent the privilege to withhold only 15% tax provided for under equivalent to the twenty (20) percentage points waived by the Philippines. b. The NIRC only requires that satisfaction of the given condition. paid in the Philippines equivalent to twenty percent (20%) which represents the and here earning profits. These tax credits are ISSUE: Whether “deemed paid tax credits” available in the US Tax Code should have allowed because of the US congressional desire to avoid or reduce double taxation of been actually paid before one can avail of the 15% special rate. from which amount of dividends thirty-five percent (35%) withholding tax paid' tax credit for a proportionate part of the corporate income tax actually at source was deducted. What is. had failed to prove that its . P&G-Phil.3rd Meeting Case Digest TAXREV LOCK applicable only if the country of the parent corporation allows a foreign tax credit not XXX in the instant case. and (ii) the tax credit for the Philippine corporate income tax actually paid by P&G Phil. actually withheld. as a minimum. that private respondent does not cite anywhere a Swiss law to the effect such tax credit for "taxes deemed paid in the Philippines" must. NIRC. in holding that the applicable dividend tax rate in the instant case was the regular thirty-five percent (35%) rate rather than the SC: NO! reduced rate of fifteen percent (15%). filed with CIR a claim for refund or tax credit claiming that pursuant to Section 24 (b) (1) of the NIRC. P&G-Phil. This "deemed paid" concept merely reflects economic Due to inaction.. SC Division held that there is nothing in the US Tax Code that if it came out of the pocket. but "deemed paid" by P&G-USA. of the foreign tax so spared or waived or considered as if paid by the foreign country. held that P&G-Phil. deemed paid by P&G. US Tax Code) grants to P&G-USA a "deemed P&G-USA. as the case preferred fifteen percent (15%) dividend tax rate. waived or otherwise deemed as if paid in the the Philippines" applicable against the US taxes of P&G-USA. paid to the Philippines by P&G-Phil. reach that in case where a foreign tax. are tax credits available or applicable against the US corporate income tax of P&G-USA. US tax law treats the Philippine corporate income tax as On appeal by CIR. P&G-Phil. since the Philippine corporate income tax was in fact paid and deducted from decision ordering CIR to refund or grant the tax credit prayed for. a difference between the regular thirty-five percent (35%) dividend tax rate and the Swiss foreign-tax credit would be allowed for the whole or for the part. and that P&G-Phil. Tax Code) grants P&G-USA a tax credit for the amount of the dividend tax actually paid (i. XXX a. In other words. under US law. percent (15%). failed to meet P&G-Phil. does not require that the US must give a "deemed paid" tax credit for the dividend tax (20 percentage points) waived by the Philippines in making applicable the preferred divided tax rate of fifteen While it may be true that claims for refund are construed strictly against the claimant. our NIRC does not require that the US tax nevertheless. would run XXX counter to the very spirit and intent of said law and definitely will adversely affect foreign corporations" interest here and discourage them from investing capital in our Close examination of XXX the US Tax Code shows the following: country.e. is spared an amount equivalent to twenty (20) percentage points which represents the waived or otherwise considered as if paid in whole or in part by the foreign country. P&G-Phil. of P&G-USA as a part of the economic cost of allows a credit against the US tax due from P&G-USA of taxes deemed to have been carrying on business operations in the Philippines through the medium of P&G-Phil.

Section 27(D)(5) of the National Internal Revenue Code of 1997 condition for the applicability. On appeal. at the rate here applicable. the National Internal Revenue Code of 1997. it was not entitled to the incentives of tax authorities unless dividends have actually been remitted to the US. . rate goes down from thirty-five percent (35%) to fifteen percent (15%). Since Service to P&G-USA. Denmark. Since the US tax laws can and do change. buildings/machineries sold and it was later dissolved. SMI-ED CONTENTION: CTA En Banc erroneously subjected its sale of machineries to A requirement relating to administrative implementation is not properly imposed as a 6% capital gains tax. NIRC. in the case at bar.as a matter of law.3rd Meeting Case Digest TAXREV LOCK parent.  dito concerned ang court. had in fact been given by the US tax authorities a "deemed paid" 8 tax credit in the amount required by Section 24 (b) (1). there is nothing to prevent the BIR from issuing implementing regulations that would require P&G Phil. of the "deemed paid" tax credit by the US Internal Revenue Service to P&G-USA before the preferential fifteen percent (15%) dividend rate becomes applicable. XXX the position originally taken by the Second Division results in a severe practical Due to BIR inaction. . and machineries. it failed to commence operations. Based on the definition of capital assets under Section 39 of the National Internal Revenue Code of 1997. Upon the is clear that the 6% capital gains tax on domestic corporations applies only on the other hand. Section 24 (b) (1). with the BIR a claim for refund alleging that the amount was erroneously paid.. XXX XXX For petitioner’s properties to be subjected to capital gains tax. NIRC. We conclude that private respondent P&G-Phil. or any Philippine corporation similarly situated. They were not part of the inventory. CTA En Banc likewise dismissed SMI-ED petition. Hence.) comply with the requirements set out in Section 24 (b) (1). the US "deemed paid" tax credit cannot be given by the US SMI-Ed had not commenced operations. of a particular tax rate. etc. that the USA "shall allow a credit against the tax due from [P&G-USA for] taxes SMI-ED Philippines constructed buildings and purchased machineries and equipment. P&G-USA. does not create a tax exemption nor does it provide a tax For the year 2000. But. tax rate. such implementing regulations could also provide that failure of P&G-Phil. However. XXX XXX The properties involved in this case include petitioner’s buildings. for applicability of the fifteen percent (15%) tax rate. Factory temporarily nor revenue regulation issued by the Secretary of Finance requiring the actual grant closed. SMI-Ed subjected its entire gross sales of its properties to 5% final credit. the Philippine subsidiary begins to withhold at the review before the SC. subjected the sale of SMI-Ed’s assets to 6% capital collected." There is neither statutory provision after its registration.PEZA-registered corporation authorized "to engage in the business of paid" tax credit shall have actually been granted before the applicable dividend tax manufacturing ultra high-density microprocessor unit package. which means either the income tax holiday or the 5% preferential tax rate. to submit such certification within a certain SC: NO! period of time. this petition for Once such a ruling is rendered. go push ang 15%. They are not among the exclusions enumerated in Section 39(A)(1) of NOTE: ang legal na pagsagot sa tanong ay sagutin kung mag-aapply ba ang 15%. The Second Division in effect held that the denied the same. As noted several times earlier. It is this practical or operating circularity that is in fact avoided by our BIR gains tax under Section 27(D)(5) and ordered the same to pay deficiency taxes when it issues rulings that the tax laws of particular foreign jurisdictions (e. it is a provision which specifies when a particular (reduced) tax rate is legally tax on PEZA registered corporations and paid taxes therefrom. deemed to have been paid in the Philippines . does not in fact require that the "deemed SMI-ED Phils. that the Philippine dividend tax. would result in the imposition of a deficiency assessment for the twenty (20) percentage points differential. was actually imposed and  CTA Division. instead. it later filed applicable. SMI-ED filed a petition for review before the CTA Division which problem of administrative circularity. is entitled to the tax refund or tax credit which it seeks. to certify to the BIR the amount of the "deemed paid" tax credit actually subsequently granted ISSUE: Whether SMI-ED sale of machineries and equipment is subject to 6% capital by the US tax authorities to P&G-USA or a US parent corporation for the taxable year gains tax involved. Section 24 (b) (1). NIRC. the properties must form part of petitioner’s capital assets. Yung petitioner’s trade or ordinary course of business because petitioner never commenced tanong naman kung nabigyan ba actually ng tax credit.g. avenue na ng BIR at hindi nay an ang pinag uusapan sa kasong ito. None of them were stocks in trade. NIRC. reduced dividend tax rate. equipment. administrative na raw yan. they are capital assets.. SMI-ED v CIR Page XXX [However] Section 24 (b) (1). . merely requires. However. None of the properties were used in Kung ang US mag=-Tax Credit. NIRC. upon the determination or recognition of the applicability of the reduced sale of lands and buildings and not to machineries and equipment. Republic of Vanuatu Hongkong. operations. reduced dividend tax rate is not applicable until the US tax credit for "deemed paid"  CTA Division: fiscal incentives given to PEZA-registered enterprises may be availed taxes is actually given in the required minimum amount by the US Internal Revenue only by PEZA-registered enterprises that had already commenced operations.

the due process clause because it levies income tax even if there is no realized gain. For income to be taxable.association of real estate developers and builders in the Philippines. The National unconstitutional because it is highly oppressive. Kaso sa case. an income tax is arbitrary and confiscatory if it taxes capital because capital SMI-ED. disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets XXX XXX Petitioner is correct in saying that income is distinct from capital. on corporations. assessed an MCIT of 2% of its gross income when such MCIT is greater than the normal corporate income tax imposed under Section 27(A). i. XXX (1) there must be gain. . and only if the normal income tax is suspiciously low. is eliminating all deductible items and at the same time reducing the applicable tax rate. which is subject to income tax. Domestic corporations are imposed a 6% capital gains tax only on the Petitioner (CREMA) claims that the MCIT under Section 27(E) of RA 8424 is presumed gain realized from the sale of lands and/or buildings. Exchange or Disposition of Lands tantamount to a confiscation of capital because gross income. and the sale of machineries and equipment. refund granted! is not income. Clearly. ni SMI-ED para malaman kung entitled nga ba sa refund. nag-declare rin ng losses si SMI-ED. Thus. CREMA argues that the MCIT violates gross income." or is higher than the MCIT. Page classified as capital assets. Section 27(D)(5) of the other direct expenses. gain presumed to have been realized on the sale. there is no legal objection to a broader tax base or taxable income by Under the MCIT scheme. It is imposed in lieu of the normal net income tax. not capital. Furthermore. exchange or We disagree. The CREMA assails the validity of the imposition of minimum corporate income tax (MCIT) MCIT merely approximates the amount of net income tax due from a corporation. the following requisites must exist: tax. Individuals are taxed on capital gains from sale of all real properties located in the Philippines and classified as capital assets." "earnings. ISSUE: whether or not the imposition of the MCIT on domestic corporations is unconstitutional XXX Capital gains of individuals and corporations from the sale of real properties are SC: NO! taxed differently. Section 27(E) of the Tax Code provides for MCIT on domestic pegging the rate at a very much reduced 2% and uses as the base the corporations corporations and is implemented by RR 9-98. unlike net income. beginning on its fourth year of operation. The MCIT is imposed on gross income which is arrived at by deducting the capital CHAMBER OF REAL ESTATE AND BUILDER’S ASSOCIATION (CREMA) v spent by a corporation in the sale of its goods. Respondent is mistaken. Therefore. XXX MCIT IS NOT VIOLATIVE OF DUE For corporations. differently. The income from the sale of petitioner’s denotes a flow of wealth during a definite period of time. However. Tax thereon is generally held to be within the power . the National Internal Revenue Code of 1997 treats the sale of land PROCESS and buildings. were not taken into account. Income is gain derived and machineries and equipment is subject to the provisions on normal corporate income severed from capital. Besides. is and/or Buildings. (2) the gain must be realized or received and NOTE: ending kelangan malaman total ng capital gains tax at normal corporate (3) the gain must not be excluded by law or treaty from income tax based sa sale ng properties ni SMI-ED SAKA i-m-minus sa total na binayad Taxation. CREMA. Any excess of the "income" of particular corporations are found in many jurisdictions.. pegging the tax base of the MCIT to a corporation’s gross income is Capital Gains Realized from the Sale. such as administrative and interest National Internal Revenue Code of 1997 provides: expenses which are equally necessary to produce gross income. other major expenditures. If the regular income tax Statutes taxing the gross "receipts.A final tax of six percent (6%) is hereby imposed on the not realized gain. walang kelangang bayarang income tax si Certainly. the capital is not being taxed. the MCIT is not a tax on capital. it is income.e. In other words.3rd Meeting Case Digest TAXREV LOCK MCIT over the normal tax shall be carried forward and credited against the normal 9 Respondent (BIR) insists that since petitioner’s machineries and equipment are income tax for the three immediately succeeding taxable years. only the presumed gain from the sale of petitioner’s land and/or building Capital is a fund or property existing at one distinct point in time while income may be subjected to the 6% capital gains tax. arbitrary and confiscatory which amounts to deprivation of property without due process of law. It explains that gross Internal Revenue Code of 1997 does not impose the 6% capital gains tax on the income as defined under said provision only considers the cost of goods sold and gains realized from the sale of machineries and equipment. their sales should be subject to capital gains tax. Income means all the wealth which flows into the taxpayer other than a mere return on capital. so ruling ng court. the cost of goods and other direct ROMULO expenses from gross sales. the MCIT is not an additional tax imposition. a corporation. the corporation does not pay the MCIT.

by any factual or legal basis. thus. petitioner does not cite any actual. petitioner failed to support. The Court cannot strike down a law as unconstitutional Due to BIR inaction. Taxation is necessarily burdensome because. Thus. it adversely affects property rights. which not only resulted in substantial losses but actually brought about income. Hence. taken with the reduction of the tax rate from a complete cessation of all businesses. It continued to be the same corporation registered with the unconstitutionality has the burden to demonstrate the supposed violations in SEC and the BIR since 1961. it ceased operations and its assets and liabilities were put under known as the Thrift Banks Act of 1995. 4-95 implementing certain provisions of the said R. 7906. the assignment of gross income. However. by its denied its claim for refund ruling that the payment of MCIT was only proper since it is nature. 2. it later filed a claim for implementation of the MCIT resulted in the confiscation of their property. its allegation that the MCIT is arbitrary and confiscatory. CA affirmed the CTA decision. in declaring that MCIT should be imposed whenever such corporation has Firms which were registered with BIR in 1994 and earlier years zero or negative taxable income. on February 23. In sum. The party alleging the laws not a new corporation. or constitutional. Petitioner alleges that RR 9-98 is a deprivation of property without due process of law because the MCIT is being imposed and collected even when there is actually a loss. otherwise insolvency. it may well be the case that the MCIT would be less than the net income of the corporation which The intent of Congress relative to the minimum corporate income tax is to posts a zero or negative taxable income. implementing the Tax Code on MCIT. 7906. MANILA BANKING CONTENTION: CA erred in ruling that Manila Banking is not entitled or a zero or negative taxable income: to the grace period Sec. means that even if a corporation incurs a net loss in its business operations or reports ISSUE: Whether Manila Banking is entitled to a refund of its minimum corporate zero income after deducting its expenses.27(E) [MCIT] on Domestic Corporations. But the law also states that the MCIT SC: YES! is to be paid only if it is greater than the normal net income. On June 15. it is still subject to an MCIT of 2% of its income tax paid to the BIR for taxable year 1999 gross income. refund of an amount erroneously paid on the basis of the above ruling.A. This shall be covered by the MCIT beginning January 1.A. grant a four (4)-year suspension of tax payment to newly formed corporations. 1995. merely defines the coverage of Section 27(E). the BSP authorized it to operate as a thrift bank. However. Regulation No. XXX Manila Banking had been engaged in commercial banking industry until it was prohibited by the Monetary Board of BSP from engaging in business by reason of Significantly. 1999. Manila Banking filed a petition for review before the CTA which simply because of its yokes. Manila Banking sought BIR Ruling on . as the tax base of the MCIT. specific and concrete negative Manila Banking filed its annual corporate income tax return for the year 1999 (year it experiences of its members nor does it present empirical data to show that the resumed) and paid the corresponding MCIT thereon. the taxable year in which business income or whenever the amount of [MCIT] is greater than the operations commenced shall be the year in which the normal income tax due from such corporation. even though SECTION 27(E) OF RA the receivership is a permanent one. RR 9-98. this petition before the SC. its corporate RR 9-98 MERELY existence was never affected. xxx The MCIT shall be imposed Under RR No. This is consistent with the law which imposes the MCIT on gross income notwithstanding the amount of the net income.  “we find merit in your position that for having just come out of receivership Page XXX Absent any other valid objection. 1998 (1) Imposition of the Tax. Corporations still starting their business operations have to stabilize their venture in order to obtain a stronghold in the industry. not entitled to the 4-yr grace period.3rd Meeting Case Digest TAXREV LOCK of a state to impose. 9-98. the BIR issued Revenue receivership. No. TMBC (Manila Banking) may be qualified to 32% to 2%. there was merely an interruption of its business operations.  it must be emphasized that when herein petitioner was placed under receivership. BIR CONTENTION: Manila Banking must pay MCIT beginning January 1. is not constitutionally objectionable. No. The general rule is that the appointment of the receiver CLARIFIES does not terminate the charter or work a dissolution of the corporation. Section 6 provides: 12 years after Manila Banking has stopped its business operations. understandable terms. ask for suspension of the MCIT. (Emphasis domestic corporation registered with the Bureau of supplied) Internal Revenue (BIR). instead of net proceedings. Congress enacted R. entitlement to the said period. 1998. Obviously. XXX For whenever such corporation has zero or negative taxable purposes of the MCIT.” Moreover. XXX 8424 On appeal. unless it interferes with whether it is covered by the 4-year grace period for the imposition of MCIT reckoned 10 interstate commerce or violates the requirement as to uniformity from the year it resumed operations. BIR issued ruling confirming Manila Banking’s of taxation. It does MANILA BANKING v CIR not come as a surprise then when many companies reported losses in their initial years of operations.

the date of commencement of operations of thrift banks. which are mere afterthoughts. 1999 when it was authorized by the BSP to intentions declared subsequently. including 25% surtax for the undue accumulation of earnings. whether date when the thrift bank was registered with the Securities and domestic or foreign. whichever comes later. there is no Exchange Commission or the date when the Certificate of need to resort to applicable cases decided by the American Federal Courts for Authority to Operate was issued by the Monetary Board of guidance and enlightenment as to whether the provision of Section 25 of the NIRC the Bangko Sentral ng Pilipinas. whichever comes later. date of primarily. vs. It is. should apply to petitioner. the rate of turnover. whichever comes later. its credit policies. In order to determine whether profits are accumulated for the reasonable needs of Clearly then. Period of exemption.21:1 ratio of current assets to current liabilities.A. or personal holding companies. XXX 25 of the NIRC XXX. by clear and convincing evidence that such accumulation of profit was for the immediate needs of the business. the date when business operations called "Bardahl" formula.3rd Meeting Case Digest TAXREV LOCK Sec. 4-95. being a thrift bank. it must be shown that the applies to petitioner. It is clear from the above-quoted provision of Revenue Regulations No. 9-98. under Revenue Regulations No. the operate as a thrift bank. the . the 2. and it was deficiency income tax. Inc. to wit: Bank. BIR. Consequently. engaged in the manufacture of pharmaceutical products and justify an accumulation of earnings. Revenue Regulations No. petitioner did not establish. additional working capital reserve because it had considerable liquid funds based on No. 9-98. non-bank financial intermediaries. this date of commencement of operations of a thrift bank is the date it was registered with petition before the SC. the as working capital reserve as it claims since it had considerable liquid funds (based on amount of inventories. it should only pay its minimum corporate accumulated profits must be used within a reasonable time after the close of income tax after four (4) years from 1999. and demanded the payment of mean the immediate needs of the business. The reference finds no application in the case at bar because under Section Page commencement of operations. which allowed retention. CYANAMID PHILS v CA In Manila Wine Merchants. the taxable year.21:1 ratio of current assets to current liabilities). the Tax Court opted to determine the working capital sufficiency by using the ratio between current assets to current liabilities.. the exceptions to the accumulated earnings tax are expressly enumerated. claimed that the surtax was improper because the said profits need for the accumulation of the earnings and profits. and an importer/indentor States have invented the so-called Immediacy Test which construed the words reasonable needs of the business to CIR sent a letter of assessment to Cyanamid Phils. generally held that if the corporation did not prove an immediate Cyanamid Phils. 4-95 that the On appeal. and authorized by the Central Bank of the Philippines to hold shares of commencement of operations shall be understood to mean the stock of banks. the SEC or the date when the Certificate of Authority to Operate was issued to it by the Monetary Board of the BSP. 7. the Courts of the United chemicals.[30] Since CIR refused to cancel the assessment. entitled to a grace period of controlling intention of the taxpayer is manifested at the time of accumulation. 8424 imposing the minimum corporate income tax on corporations. Hence. Cyanamid appealed to the CTA which denied the former’s petition. fees. 103). In the present case. Vol. Hence. Law of Federal company. The law on the matter is clear and specific. [29] we ruled: Cyanamid Phils – domestic corporation wholly owned subsidiary of American "To determine the reasonable needs of the business in order to Cyanamid Co. 4-95. (Mertens. Commissioner of Internal Revenue. a wholesaler of imported finished goods. corporations organized For purposes of these regulations. the (dividends not declared for the year 1981) were retained to increase Cyanamid Phils’ accumulation was not for the reasonable needs of the business. insurance companies. working capital and that it would be used for reasonable business needs of the and the penalty tax would apply. is ISSUE: whether Cyanamid Phils. The working capital CTA:  there was no need for petitioner to set aside a portion of its retained earnings needs of a business depend upon the nature of the business. Furthermore. All thrift banks XXX shall based on the 2. Income Taxation. therefore. not four (4) years counted from June 23. as working capital reserve. implementing R. However. p. except the corporate income not apply to a publicly-held corporation" citing American jurisprudence to support its tax XXX for a period of five (5) years from the date of position. In the instant case. and charges of  We further reject petitioners argument that "the accumulated earnings tax does whatever nature and description. is liable for the accumulated earnings tax the date the particular thrift bank was registered with the SEC or the date when the Certificate of Authority to Operate was issued to it by the SC: YES! Monetary Board of the BSP. commence is the year in which the domestic corporation registered with the sufficient amounts of liquid assets to carry the company through one operating cycle. 6. the amount of accounts receivable. not Revenue Regulations No. the business to avoid the surtax upon shareholders. such as herein petitioner. Chapter 39. 11 be exempt from the payment of all taxes. CA affirmed CTA decision and likewise dismissed the petition. Petitioner relies on the so- provides that for purposes of this tax. CYANAMID CONTENTION: respondent court erred in concluding it needs not infuse Let it be stressed that Revenue Regulations No.

commissions. wala raw yang FDC then filed a petition for review before the CA which granted the same and relevance dahil naka-enumerate sa Tax Code natin kung sinu-sino lang ang exempt sa annulled/cancelled the deficiency assessment arising from advances FDC extended to accumulated earnings tax.3rd Meeting Case Digest TAXREV LOCK collection rate. 2. For all its harping upon the supposed fact that FDC a stipulation to the effect had resorted to borrowings from commercial banks. as implemented by Revenue Regulations No. FDC from the Deed of Exchange it executed with FAI and FLI. the availability of credit to the business. all presumptions generally are indulged in favor of the correctness of the CIRs assessment against the taxpayer. gains derived from dealings in property. annuities. The compensation for services. remained on the taxpayer. by the very nature of its gave him "the power to allocate. FDC also extended advances (interest-free loans) in favor of its affiliates and likewise entered into a Shareholders Agreement with Reco Herrera PTE XXX we find that the CIR's powers of distribution. Since considerable interest expenses were deducted by FDC CIR v FILINVEST when said funds were borrowed. the CIR had adduced no concrete . gross foregoing deficiency taxes were assessed on the taxable gain supposedly realized by income derived from business. We agree with the tax court that the burden of advances FDC extended to its affiliates were interest free despite the interest bearing proof to establish that the profits accumulated were not beyond the reasonable needs loans it obtained from banking institutions. is dedicated exclusively to the consideration of tax problems and has between or among such organizations. Hence. this petition before the SC. with the exception of the deficiency income tax on petitioners failure to prove the CIR incorrect. FDC and FAI filed a petition for review before the CTA. Inc. CIR CONTENTION: CA erred in reversing the CTAs finding that theoretical interests can be imputed on the advances FDC extended to its affiliates in 1996 and 1997 considering that. Nag-focus ako sa Immediacy Test dahil yan yung its affiliates. This Court will not set aside lightly the NIRC which." improvident exercise of authority. 12 by adhering to the "Bardahl" formula. FDC resorted to interest-bearing fund borrowings from commercial banks. FDC and FAI CONTENTION (among others): that correlative to the CIR's lack of Our circumspect perusal of the record yielded no evidence of actual or possible authority to impute theoretical interests on the cash advances FDC extended in favor showing that the advances FDC extended to its affiliates had resulted to the interests of its affiliates." Otherwise stated. the CIR theorizes that interest income should likewise be declared when the same funds were sourced for the advances FDC extended to its affiliates. failed to impress the tax court with the required CIR CONTENTION (among others): Likewise calling attention to the fact that the cash definiteness envisioned by the statute. the term gross income is understood to mean all income FDC then received from the BIR a Formal Notice of Demand to pay deficiency income from whatever source derived. (FLI). on the dilution resulting rents. probable receipt or realization by the controlled taxpayer of the item of gross income sought to be distributed. to include all income not expressly exempted within the class of taxable income under our laws. While it has interest rate and documentary stamp taxes imposable on the advances FDC extended been held that the phrase "from whatever source derived" indicates a legislative policy to its affiliates. prizes and winnings. Inc. "the amount of money coming to a person within a specific time" or ground that the deficiency income and documentary stamp taxes assessed by the BIR "something distinct from principal or capital. interest. after all. but not limited to the following items: and documentary stamp taxes. (RHPL) for the formation of a Singapore-based joint venture company called income and deductions XXX does not include the power to impute "theoretical Filinvest Asia Corporation (FAC). With CTA: rendered the Decision which. DECISION OF THE COURT OF TAX APPEALS AND IN HOLDING THAT THE ADVANCES EXTENDED BY RESPONDENT TO ITS AFFILIATES ARE NOT FDC and FAI entered into a Deed of Exchange with FLI whereby FDC and FAI SUBJECT TO INCOME TAX transferred to FLI parcels of land in exchange for shares of stock of FLI. the rule is settled that interests cannot be demanded in the absence of subsequently assessed by the CIR. and partners from the Shareholders Agreement FDC executed with RHPL as well as the arms-length distributive share of the gross income of general professional partnership. the term "income" has been variously interpreted to mean "cash received or Both FDC and FAI filed their respective requests for reconsideration/protest. allocated by the CIR. unless there has been an abuse or of taxes.42% of the ISSUE: WHETHER THE COURT OF APPEALS ERRED IN REVERSING THE outstanding shares of Filinvest Land. interests" to the controlled taxpayer's transactions. and similar factors. dividends. conclusion reached by the Court of Tax Appeals which. Filinvest Development Corp (FDC) is a holding company which owns 80% of the outstanding shares of respondent Filinvest Alabang.[31] Unless rebutted. royalties. pensions. apportioned or Due to BIR inaction. distribute or apportion income or deductions function. clearly and conclusively. and similar items. (FAI) and 67. SC: NO! Apart from the above. this Court is the interest income (alleged undeclared income) FDC supposedly realized from the constrained to uphold the correctness of tax courts ruling as affirmed by the Court of advances it extended in favor of its affiliates. of the actual or. Pursuant to Section 28 of the 1993 NIRC. at the very least. plus interests and compromise penalties. including fees. there must be proof were bereft of factual and legal basis. Petitioner. trades or business in order to prevent evasion necessarily developed an expertise on the subject. nakalagay sa syllabus. on the its equivalent". Section 179 (b) and (c). the CIR invoked Section 43 of the old Page of the company. for said purpose. apportionment or allocation of gross Ltd. cancelled the rest of deficiency income Appeals. and documentary stamp taxes assessed against FDC and FAI NOTE: In rel don sa American Jurisprudence na ininvoke ni Cyanamid. including.

On the same date. (b) were all temporarily in nature trustees delivered to MANTRASCO all the shares which they were holding in trust. Carrascoso and Janda. MANTRASCO as the COMPANY. pursuant to Article 1956 of the Civil Code of the Philippines. are liable for deficiency income tax arising as the TRUSTEES.700 shares declared as stock MANTRASCO purchasing the OWNER’S SHARES. and the Port Motors. 3 firm of Ross. al. 2 Treasury shares are therefore issued shares.4% Later. when it is borne in gleaned from the payment of cash for the redemption of said stock and distributing mind that. and the rest. failed to declare the said stock dividends as part of their taxable that FDC had deducted substantial interest expense from its gross income. PETITION BEREFT OF MERIT! al. While admitting that FDC obtained interest-bearing loans from commercial 24. W.3rd Meeting Case Digest TAXREV LOCK proof that said funds were. this petition before the SC. since they were repaid within the duration of one week to three months and were evidenced by mere journal entries. were only . CIR CONTENTION: XXX the Commissioner maintains that the full value (P7. as trustees for and in behalf of Consequently. a trust agreement. he further argues. may be re-issued or sold again. al.700 shares declared as dividends had been proportionately distributed to the Manning et. BIR then examined MANTRASCO’s books and found that the 24.000 common shares.E. More so. the new certificate was endorsed to the law but being in the treasury they do not have the status of outstanding shares. Selph. the "treasury shares. among others. Manning et. said witness testified that Later." 1 they are more or less in agreement that treasury shares are certificate for the 24. The respondents’ interests in MANTRASCO. The trust agreement provides. More significantly. Simmons distributed to the respondents as stock dividends in 1958 should be taxed as income (respondents Manning et. a resolution was passed: “that the 13 affiliates. to accord precipitate credulity to the CIR's bare assertion Manning et. and in the meantime that donation. Manning et al as MANAGERS and a law firm ISSUE: Whether or not Manning et.. re-acquiring it. under the management of Manning et. although a treasury share. but rose to 33 1/3% each after subsidiaries. Inc. the entire purchase price of Reese’s interest in MANTRASCO was finally paid in said advances: (a) were extended to give FLI.. CIR v MANNING CORPO CASE!!! Hence. in view of Reese’s desire that upon his death MANTRASCO and its two prior to the declaration of the stock dividends in 1958. and.clarified that the subject advances were business” Page sourced from the corporation's rights offering in 1995 as well as the sale of its investment in Bonifacio Land in 1997. that from the alleged stock dividends distributed to them by MANTRASCO all shares of stock in the hands of Reese and Manning et. TRUSTEES shall hold such shares until payment for all such shares shall have been made by the company as provided in this agreement. was issued in the name of MANTRASCO. DSCC and FCI financial assistance full by the company and the trust agreement was subsequently terminated and the for their operational and capital expenditures. of the shares redeemed from Reese by MANTRASCO which were subsequently  at 100 shares each. al) of the respondents for that year. In 1952 the Manila Trading and Supply Co. (MANTRASCO) had an ACS of P2. MANTRASCO (Guam). which the latter challenged. the TRUSTEES shall cause the dividends were treasury shares. that the said shares were not. Reese. therefore. al. al.700 of these were owned by Julius S. as long as it is held by the corporation as a treasury share. with Reese as the OWNER. no interest the same as stock dividend. al. Reese’s interest had not been fully paid. because dividends . XXX The CIR then issued notices of assessment for deficiency income taxes to Manning et. shall be deposited to the TRUSTEES. The reasons shall thereupon transfer such shares into the name of the TRUSTEES and the are quite plain. shall be due unless it has been expressly stipulated in writing. such share. FAI. Failing such. Although authorities may differ on the exact legal and accounting status of so-called Reese later died.500. Inc. SC: YES! Upon the death of Reese and the receipt by the TRUSTEES of the initial payment from XXX it is the assumption of both parties that the 24. and that Even if we were. participates neither in dividends. not having been retired by the corporation MANTRASCO. McDonald and E.700 shares in the Treasury be reverted back to the capital account of the company banks.660)  24. after a careful study of OWNER’S SHARES to be transferred into the name of MANTRASCO and such company the trust agreement. would continue the said declaration. was executed. cash vouchers and instructional letters. indeed. al. there income.FDC's Funds Management Department Manager who was as a stock dividend to be distributed to shareholders of record at the close of the sole witness presented before the CTA . XXX treasury shares. We are however convinced.D. Susan Macabelda . the source of the advances the former provided its In a special meeting of MANTRASCO stockholders. After MANTRASCO made a partial payment of Reese’s shares. Manning. by John L. forfeiture or other means. the said distribution being in effect a distribution of cash.973. appealed to the CTA which absolved the respondents from any liability for receiving the questioned stock dividends on the ground that their respective one-third interest in MANTRASCO remained the same before and after the declaration of stock dividends and only the number of shares held by each of them had changed. BIR concluded that the distribution of Reese’s shares as stock dividends was would still be no factual basis for the imputation of theoretical interests on the subject in effect a distribution of the "asset or property of the corporation as may be advances and assess deficiency income taxes thereon.700 shares in Reese’s name was cancelled and a new certificate stocks issued and fully paid for and re-acquired by the corporation either by purchase.000 divided into 25.

the acquisition of additional facilities and other capital budget Board Resolutions. substance. The Board then further increased ANSCOR's capital stock to P75M bestowed unto themselves the full worth and value of Reese’s corporate holdings with divided into 150. this petition before the SC. if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the On December 30. the respondents. that they have not shares to 127. 4 nor in the meetings of the One-half of that shareholdings or 92. income tax laws. The conclusion is thus ineluctable that whenever the companies involved herein parted with a portion of their earnings "to buy" the corporate holdings After examination of books of account and records. XXX based on the transactions of exchange 31 and tax as being. in sum and shares each. in fact.g.864 common shares for 138. XXX were respectively received by the Don Andres estate and Doña Carmen from ANSCOR. Soriano Y (b) Stock dividends — A stock dividend representing the transfer of surplus to capital Cia (now. pursuant to Sections 53 and 54 of earnings to the respondents.727.867 and 138.000 common shares. A stock dividend.700 shares of Reese as absolutely outstanding shares of Reese’s estate until they were fully paid. inquiring if an exchange of common with preferred shares may be stock.290 and 46. ANSCOR reclassified its existing 300. CTA reversed CIR ruling.000 preferred shares and 600. cannot be declared out of outstanding corporate stock. and by making it appear outwardly. as her conjugal share. As stated in the reinvestment.000 common shares from the words. equivalent to the distribution of a taxable dividend. Hence. stock dividends worth 46.000 common shares from the Don Andres' designed to carry out the usual stock dividend purpose of corporate expansion estate. through the formal for the remaining 11. All these amounts are consequently subject to income the 1939 Revenue Code. the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent it represents a distribution of earnings or profits . Don Andres' estate. The other half formed part of his estate. As of that date. 1964.577 shares were transferred to his wife.860 of the newly reclassified preferred periodic earnings of that company and its subsidiaries to directly subsidize their shares. CIR v CA The bone of contention is the interpretation and application of Section 83(b) of the 1939 Revenue Act which provides: Don Andres Soriano – citizen and resident of the US. The declaration by the respondents and Reese’s trustees of MANTRASCO’s alleged treasury stock dividends in favor of the former. Such being the true nature of the 24. About a year the use of the very earnings of the companies. to treat the 24. further reducing the latter's common shareholdings to 19. Hence. brings.140 of its common shares.140 preferred shares. increasing their accumulated shareholdings to 138. thus reducing its (the estate) common declaration of non-existent stock dividends in the treasury. for otherwise equal distribution of voting powers among Carmen Soriano. ANSCOR again redeemed 80. their declaration as treasury stock dividend in 1958 was a complete nullity Doña Carmen requested a ruling from the United States Internal Revenue Service and plainly violative of public policy. Don Andres died. 5 though it still represents a paid-for interest in the Page Later as ANSCOR’s ACS increased.000 preferred shares. in whole or in part. SET ASIDE! ANSCOR's subsequent protest on the assessments was denied by CIR.000 ultimate purpose which the parties to the trust instrument aimed to realize: to make common and 150.727. however.700 shares. cannot be allowed to deflect the respondents’ responsibilities toward our exchange remittances in case cash dividends are declared. in truth and in fact. CTA DECISION ABSOLVING MANNING ET. XXX redemption of stocks. stockholders will be effectively lost and the directors will be able to perpetuate their control of the corporation. a flow of cash benefits to the respondents.S.864 common The manifest intention of the parties to the trust agreement was. exchanged 11. ANSCOR then filed a petition for review before CTA assailing the tax assessments on the redemptions and exchange of stocks. The estate of Don Andres in turn. but only from retained considered as a tax avoidance scheme under Section 367 of the 1954 U. purchase of the said interests. by that declaration they secured to themselves the means to turn around as full owners of Reese’s shares. In other Pursuant to a Board Resolution. However.154 shares. Such package device.287 shares property of the corporation. Revenue examiners assessed of Reese. received any income from those firms when. The IRS opined that the exchange is only a recapitalization scheme and not tax avoidance. AL. but exclusively for expanding the capital base of the respondents in partially retire said stocks as treasury shares in order to reduce the company's foreign MANTRASCO. Consequently. earnings XXX Revenue Act.3rd Meeting Case Digest TAXREV LOCK cannot be declared by the corporation to itself. into clear focus the Later. founder/owner of A. using the trust instrument as a convenient technical device.000 common shares into 150. ANSCOR's business purpose for both redemptions of stocks is to items. essentially he has a total shareholdings (in ANSCOR) of 185. Doña 14 corporation as voting stock. obviously not later. they were in ultimate effect and result making a distribution of such ANSCOR for deficiency withholding tax-at-source. being one payable in capital (IRS). ANSCOR redeemed 28. the records revealed that distribution and cancellation or redemption. ANSCOR) account shall not be subject to tax. e. Doña Carmen exchanged the respondents the sole owners of Reese’s interest in MANTRASCO by utilizing the her whole 138.

247. This tax provision is aimed at the result. (b) the transaction involves stock dividends and (c) the scheme.000 shares redeemed from the estate.3rd Meeting Case Digest TAXREV LOCK accumulated after March first. when it provides "such trust for the payment of the corporate creditors. 107 Such purposes may be material only upon the issuance of the stock capital stock." "device" or "artifice" to exchange of common with preferred shares can be considered as "essentially evade payment of tax? It is necessary to determine the "net effect" of the transaction Page equivalent to the distribution of taxable dividend" making the proceeds thereof between the shareholder-income taxpayer and the acquiring (redeeming) taxable under the provisions of the above-quoted law corporation. there may not be a dividend With respect to the third requisite. But where did the shares redeemed come from? If its source is the original capital subscriptions upon Depending on each case. 94 That doctrine was intended for the protection of corporate creditors. whether or not the acquired stock is cancelled. In the instant business.5) must have come from stock dividends. 83(b) to apply. For the exempting clause of Section. devise which put on the form of a corporate reorganization as a retired or held in the treasury. 95 distribution of a taxable dividend". if the redeemed shares are from stock dividend declarations other than as initial capital investment. 103 which is judged after each and every step of the transaction have been application of Sec. intention to evade becomes manifest. Besides.752. element is a factor to show a device to evade tax and the scheme of cancelling or 15 redeeming the same shares is a method usually adopted to accomplish the end ISSUE: whether ANSCOR's redemption of stocks from its stockholder as well as the sought. 90 Essentially.000 common shares). there is no dispute that ANSCOR redeemed shares of stocks from a stockholder stockholder. a sufficient indicator to determine taxability. The "time" . On the contrary. The test of taxability under the exempting clause. in time of the issuance of the stock dividend. the exempting provision of Sec. It has been ruled that: Redemption is repurchase. the corporation gets back some of its disguise for concealing its real character. If no wealth is realized from the redemption. 83(b) under the 1939 Tax Code. return of capital. Macomber. it is rather an inference to be drawn or a conclusion to be reached. and accomplishment of which was the consummation of a continues in business as before. 83(b). The redemption of stock dividends previously issued preconceived plan. nineteen hundred and thirteen. the apparent intention to avoid tax becomes doubtful as the of taxable dividends. is whether the redemption resulted into a flow of wealth. property and other assets of the corporation are regarded as equity in dividends. and not related. Here. ANSCOR redeemed stock dividends issued just 2 to equivalence treatment. The Court is not concerned with the wisdom of these It is not the stock dividends but the proceeds of its redemption that may be deemed purposes but on their relevance to the whole transaction which can be inferred from as taxable dividends. income is not deemed 3 years earlier.247. It has no relevance in determining "dividend redemption of stock dividends without violating the trust fund doctrine — wherein the equivalence". it is always time and manner" as would make the redemption "essentially equivalent to the capital.5 (108. the proceeds of the redemption is additional wealth. 106 The existence of distribution of corporate property. 93 Once capital. its redemption to the concurrent value of acquisition may not invite the purpose. for it is not merely a return of capital but a gain thereon. the Tax Code presumes that every means of distributing profit or avoiding tax on dividends. and the sole object and stock. 100 Redemption cannot be used as a cloak to distribute corporate "time and manner" of the transaction makes it "essentially equivalent to a distribution earnings. for the redemption to be considered a legitimate tax is redemption or cancellation. there was no intention to redeem it as a the absence of evidence to the contrary. 83(b) of the 1939 Code may establishment of the corporation or from initial capital investment in an existing not be applicable if the redeemed shares were issued with bona fide business enterprise. not to reorganize a business or any part of a is used as a veil for the constructive distribution of cash dividends. it is indispensable that: (a) there distinct.5 91 This means the taxpayer or his corporation" 104 that is the fundamental guide in administering that from the total of 108.000 less 25. but to transfer a parcel of corporate shares to a case. the presence of which might negate a tax evasion plan. in whole or in part. Again. It is a must to consider the factual circumstances as to the manner of both the issuance and the redemption. 96 Was this transaction used as a "continuing plan.000 and 80." Of these. is made out of corporate legitimate business purposes in support of the redemption of stock dividends is profits 92such as stock dividends. it is the "net effect rather than the motives and plans of the original common shares owned by the estate were only 25. 97 The "net effect" test is not evidence or testimony to be considered. distributes cash or property to the shareholder in payment for the stock. 101 Otherwise. the outcome thereof. 98 It is also important SC: to know whether the issuance of stock dividends was dictated by legitimate business reasons. The capital cannot be distributed in the form of immaterial in income taxation. ANSCOR invoked two reasons to justify the redemptions — (1) the alleged "filipinization" program and (2) the reduction of foreign exchange remittances in case cash dividends are declared. it is undisputed that at the time of the last redemption. 105 It also applies even if at the 82. a reacquisition of stock by a corporation which issued the [A]n operation with no business or corporate purpose — is a mere stock 89 in exchange for property. 102 (Don Andres) twice (28. The time alone that lapsed from the issuance to the redemption is not "realize" until the fruit has fallen or been plucked from the tree. the most important is the third. In the metaphor of Eisner v. the balance of Sec. 99 REDEMPTION AND CANCELLATION – YES! The issuance of stock dividends and its subsequent redemption must be separate. as it is not income but a mere considered and the whole transaction does not amount to a tax evasion scheme.

illogical and impractical considering that the Bureau of Internal Revenue (BIR) deemed taxable dividends since it was shown that income was generated therefrom. redeemed stock dividends would be to impose on such stock an undisclosed lien and would be extremely unfair to intervening purchase. Any separate entity. the stockholder's separate property. would be pestered with instances in determining the legitimacy of business reasons that every income earner may interposed. this circumstance negates the As stated above. 108 and (3) it is not exempted by law or treaty from income tax. it genuine business purposes". that those business purposes are legitimate. This would also increase rather than reduce their need for foreign gain and consequently. ANSCOR argued that to treat as "taxable dividend" the proceeds of the cannot therefore be allowed. The increase the shareholdings of ANSCOR's foreign stockholders contrary to its redemption converts into money the stock dividends which become a realized profit or "filipinization" plan. The proceeds thereof are essentially considered equivalent to a distribution of taxable substance of the whole transaction. bears no relevance in this redeemed shares are the equivalent of dividend only if the shares were not issued for case as no intervening buyer is involved. which is income if redeemed from the the existence of legitimate corporate purposes may justify a corporation's acquisition original subscriber. First. 117 The business purpose as to why or how the income was earned by the taxpayer is not a Board Resolutions authorizing the redemptions state only one purpose — reduction of Page requirement. And even if there is an intervening buyer. the corporation can act only through its Board of Directors. existence of any business purpose for the redemption. It just so happen that what he bought is stock the issuance or declaration of stock dividends but not on its subsequent redemption. activity foreign exchange remittances in case cash dividends are declared. the same has no bearing whatsoever on third party (the corporation herein) from whom the income was earned. under the facts of this case are no excuse for As income. but on the business purposes of a and justify the issuance of stock dividends.e. actually or Resolution but a mere afterthought interposed by the counsel of ANSCOR. Although is merely to return his capital subscription. usually controls the tax dividends. The effect of its (stock dividends) redemption from that subsequent buyer The issuance and the redemption of stocks are two different transactions. legitimacy of ANSCOR's alleged purposes. Not even this or service that produces the income because the Tax Code stands as an indifferent purpose can be given credence. relying heavily and applying said cases.3rd Meeting Case Digest TAXREV LOCK The three elements in the imposition of income tax are: (1) there must be gain or and of the redemption. of its own shares under Section 41 of the Corporation Code. the redemption becomes suspicious which exempting clause. assuming arguendo. the taxpayer's liability person from whom the income was derived has legitimate business reasons. who holds misleading if not misplaced. Being a constructively. 111 or the "redeemed shares have been issued by a is necessary to look into the factual milieu of the case if income was realized from the corporation bona fide" 112 bears no relevance in determining the non-taxability of the transaction. even if the said purposes support the redemption made to depend not on the income of the taxpayer. 113 The adoption by the courts below 114 of such argument is the unfairness may not be true to an original subscriber like Don Andres. there is no other conclusion but that the business reasons. (2) that the gain or profit is realized or received. 115such purposes cannot excuse the stockholder from the effects of taxation arising from the redemption. The undisclosed lien 119 may so long as the redemption is supported by valid corporate purposes the proceeds are be unfair to a subsequent stock buyer who has no capital interest in the company. Secondly. But not subject to tax. yet when no cash dividends was issued for about three decades. we reiterate that the dividend equivalence test depends on such proceeds of redemption ANSCOR. has the prerogative when to issue dividends. It is not administratively feasible and Thirdly. to issue stock dividends is to whether income was realized through the redemption of stock dividends. considering that ANSCOR the capital invested cannot escape income tax. i. Otherwise. As "taxable dividend" under Section 83(b). as it was not implemented until the BIR started making assessments on the proceeds . The its tax liability. In other to pay income tax would be made to depend upon a third person who did not earn the words. the payment of tax under the exempting clause of Section 83(b) would be income being taxed. dividends are included in "gross income". the test of taxability under the exempting clause of Section 83(b) is. Although a corporation under certain exceptions. under Section 29(a) of said Code. Moreover. those who buys the stock The ruling in the American cases cited and relied upon by ANSCOR that "the dividends after their issuance. Such corporate plan was not stated in nor supported by any Board 16 profit. If the After considering the manner and the circumstances by which the issuance and issuance of stock dividends is part of a tax evasion plan and thus. 109 BIR started making assessments in the early 1970's. Otherwise. without legitimate redemption of stock dividends were made. to rule that the said proceeds are exempt from income tax when the redemption is supported by legitimate business reasons would defeat the very purpose of imposing tax on income. dividends. it is subject to income tax which is required to be withheld at source. however. the same Such argument would open the door for income earners not to pay tax so long as the cannot be a valid excuse for the imposition of tax. not its form. A review of the cited American cases shows that the stock dividends as gains from his investments. Moreover. This is the imposition of the tax herein assessed because the proceeds of the redemption are absurd. Records show that despite the existence of enormous neutral party on the matter of where income comes corporate profits no cash dividend was ever declared by ANSCOR from 1945 until the from. the proceeds of is a family corporation where the majority shares at the time of redemptions were the redeemed stock dividends can be reached by income taxation regardless of the held by Don Andres' foreign heirs. argued that "time and manner" of the transaction and its net effect. The two purposes invoked by ANSCOR. Income tax is assessed on income received from any property. the alleged "filipinization" plan cannot be considered legitimate 1997 Tax Code may have altered the situation but it does not change this disposition. As realized income. it is part of the "entire income" consequences. The subsequent buyer who buys stock presence or absence of "genuine business purposes" may be material with respect to dividends is investing capital. Furthermore. Again. 110 Profits derived from exchange remittances in case of cash dividend declaration. 116 subject to tax under Section 22 in relation to Section 21 120 of the 1939 Code. 118 Such argument.

and that parts of the common shares of the Don Andres estate and all of Doña Carmen's shares were exchanged for the whole 150. so long as the provisions WISE v MEER of Section 83(b) is not applicable.NO! entire interest and not when there is still maintenance of proprietary interest. In this case. The exchange of common stocks with preferred stocks. transfer to controlled corporation. stock or securities related to reorganizations. this trade must Complaint. willing to share in the profits and losses of the enterprise. In general. yields realize income for tax purposes. under the doctrine of equality of shares — all stocks issued by the corporation are presumed equal with the same privileges and liabilities.3rd Meeting Case Digest TAXREV LOCK issue of taxable dividend may arise only once a subscriber disposes of his 17 EXCHANGE OF COMMON WITH PREFERRED SHARES. There was no cash flow. This is true in a trade between two (2) persons as well as a trade between a stockholder and a corporation. 126 Preferred stocks are those which entitle the shareholder to some priority on dividends and asset distribution. Under the facts herein. 1937  all dividends declared and paid thereafter were distributions of all its assets in Both the Tax Court and the Court of Appeals found that ANSCOR reclassified its shares complete liquidation into common and preferred. both the Don Andres estate and Doña Carmen remained as corporate subscribers except that their subscriptions now include preferred shares. the exchange of shares. corporate acquisitions or corporate reorganizations. without more. if the exchange transaction resulted into a flow of wealth. provided that the Articles of Incorporation is silent on such differences. or preferred for common or a combination of either for both. like priority in dividend declarations or absence of voting rights. Preferred and common shareholders participate in the same venture. The .recovery of certain amounts paid under protest against CIR be parts of merger. It is a basic class of stock ordinarily and usually issued without extraordinary rights or privileges and entitles the shareholder to a pro rata division of profits. There was no change in their proportional interest after the exchange. Page Exchange is an act of taking or giving one thing for another involving 122 reciprocal transfer and is generally considered as a taxable transaction. Thereafter. Both shares are part of the corporation's capital stock. A common stock represents the residual ownership interest in the corporation. Yet neither the reclassification nor exchange per se. Both stockholders are no different from ordinary investors who take on the same investment risks. Both stocks had the same par value. It would have been different. any difference in their market value would be immaterial at the time of exchange because no income is yet realized — it was a mere corporate paper transaction.000 preferred shares. Ltd property. produces no realized income to the subscriber. in which case income tax may be imposed. 124  a Hongkong corporation  was in liquidation beginning June 1. There is only a modification of the subscriber's rights and privileges — which is not a flow of wealth for tax purposes. 128 Moreover. may not produce a recognized gain or loss. No taxable gain or loss may be recognized on exchange of Manila Wine Merchants. But the exchange is different — there would be a shifting of the balance of stock features. 125 Reclassification of shares does not always bring any substantial alteration in the subscriber's proportional interest.