I.

DEFINITIONS

TAX ON INCOME
(As Last Amended by RA No. 10653)

CHAPTER I- DEFINITIONS

SEC. 22. Definitions. - When used in this Title:

(A) The term 'person' means an individual, a trust, estate or corporation.

(B) The term 'corporation' shall include partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en participacion), association, or insurance
companies, but does not include general professional partnerships and a joint venture or
consortium formed for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to an operating
consortium agreement under a service contract with the Government. 'General professional
partnerships' are partnerships formed by persons for the sole purpose of exercising their
common profession, no part of the income of which is derived from engaging in any trade or
business.

(C) The term 'domestic', when applied to a corporation, means created or organized in the
Philippines or under its laws.

(D) The term 'foreign', when applied to a corporation, means a corporation which is not
domestic

(E) The term 'nonresident citizen' means;

(1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the
fact of his physical presence abroad with a definite intention to reside therein.

(2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside
abroad, either as an immigrant or for employment on a permanent basis.

(3) A citizen of the Philippines who works and derives income from abroad and whose
employment thereat requires him to be physically present abroad most of the time during
the taxable year.

(4) A citizen who has been previously considered as nonresident citizen and who arrives in
the Philippines at any time during the taxable year to reside permanently in the Philippines
shall likewise be treated as a nonresident citizen for the taxable year in which he arrives in
the Philippines with respect to his income derived from sources abroad until the date of his
arrival in the Philippines.
(5) The taxpayer shall submit proof to the Commissioner to show his intention of leaving the
Philippines to reside permanently abroad or to return to and reside in the Philippines as the
case may be for purpose of this Section.

(F) The term 'resident alien' means an individual whose residence is within the Philippines
and who is not a citizen thereof.

(G) The term 'nonresident alien' means an individual whose residence is not within the
Philippines and who is not a citizen thereof.

(H) The term 'resident foreign corporation' applies to a foreign corporation engaged in trade
or business within the Philippines.

(I) The term 'nonresident foreign corporation' applies to a foreign corporation not engaged
in trade or business within the Philippines.

(GG) The term 'statutory minimum wage' shall refer to the rate fixed by the Regional
Tripartite Wage and Productivity Board, as defined by the Bureau of Labor and Employment
Statistics (BLES) of the Department of Labor and Employment (DOLE).

(HH) The term 'minimum wage earner' shall refer to a worker in the private sector paid the
statutory minimum wage or to an employee in the public sector with compensation income
of not more than the statutory minimum wage in the non-agricultural sector where he/she is
assigned.

SEC. 25. Tax on Nonresident Alien Individual. -

(A) Nonresident Alien Engaged in trade or Business Within the Philippines. -

(1) In General. - A nonresident alien individual engaged in trade or business in the Philippines
shall be subject to an income tax in the same manner as an individual citizen and a resident
alien individual, on taxable income received from all sources within the Philippines. A
nonresident alien individual who shall come to the Philippines and stay therein for an
aggregate period of more than one hundred eighty (180) days during any calendar year shall
be deemed a 'nonresident alien doing business in the Philippines'. Section 22 (G) of this Code
notwithstanding.

SEC. 31. Taxable Income Defined. -The term 'taxable income' means the pertinent items of
gross income specified in this Code, less the deductions and/or personal and additional
exemptions, if any, authorized for such types of income by this Code or other special laws.

SEC. 35. Allowance of Personal Exemption for Individual Taxpayer. –

(B) Additional Exemption for Dependents. - There shall be allowed an additional exemption
of Twenty-five thousand pesos (P25,000) for each dependent not exceeding four (4).

The additional exemption for dependent shall be claimed by only one of the spouses in the
case of married individuals.

In the case of legally separated spouses, additional exemptions may be claimed only by the
spouse who has custody of the child or children: Provided, That the total amount of
additional exemptions that may be claimed by both shall not exceed the maximum
additional exemptions herein allowed.

For purposes of this Subsection, a 'dependent' means a legitimate, illegitimate or legally

adopted child chiefly dependent upon and living with the taxpayer if such dependent is not
more than twenty-one (21) years of age, unmarried and not gainfully employed or if such
dependent, regardless of age, is incapable of self-support because of mental or physical
defect.

SEC. 39. Capital Gains and Losses. -

(A) Definitions. - As used in this Title -

(1) Capital Assets. - The term 'capital assets' means property held by the taxpayer (whether
or not connected with his trade or business), but does not include stock in trade of the
taxpayer or other property of a kind which would properly be included in the inventory of
the taxpayer if on hand at the close of the taxable year or property held by the taxpayer
primarily for sale to customers in the ordinary course of his trade or business, or property
used in the trade or business, of a character which is subject to the allowance for
depreciation provided in Subsection (F) of Section 34; or real property used in trade or
business of the taxpayer.

(2) Net Capital Gain. - The term 'net capital gain' means the excess of the gains from sales
or exchanges of capital assets over the losses from such sales or exchanges.

(3) Net Capital Loss. - The term 'net capital loss' means the excess of the losses from sales
or exchanges of capital assets over the gains from such sales or exchanges.
 [REPUBLIC ACT NO. 10754]

AN ACT EXPANDING THE BENEFITS AND PRIVILEGES OF PERSONS WITH DISABILITY (PWD)

Be it enacted by the Senate and House of Representatives of the Philippines in Congress

assembled:

SECTION 1. Section 32 of Republic Act No. 7277, as amended, otherwise known as the
“Magna Carta for Persons with Disability”, is hereby further amended to read as follows:

“SEC. 32. Persons with disability shall be entitled to:

“(a) At least twenty percent (20%) discount and exemption from the value-added tax (VAT),
if applicable, on the following sale of goods and services for the exclusive use and
enjoyment or availment of the PWD:

“(1) On the fees and charges relative to the utilization of all services in hotels and similar
lodging establishments; restaurants and recreation centers;

“(2) On admission fees charged by theaters, cinema houses, concert halls, circuses, carnivals
and other similar places of culture, leisure and amusement;

“(3) On the purchase of medicines in all drugstores;

“(4) On medical and dental services including diagnostic and laboratory fees such as, but not
limited to, x-rays, computerized tomography scans and blood tests, and professional fees of
attending doctors in all government facilities, subject to the guidelines to be issued by the
Department of Health (DOH), in coordination with the Philippine Health Insurance
Corporation (PhilHealth);

“(5) On medical and dental services including diagnostic and laboratory fees, and
professional fees of attending doctors in all private hospitals and medical facilities, in
accordance with the rules and regulations to be issued by the DOH, in coordination with the
PhilHealth;

“(6) On fare for domestic air and sea travel;

“(7) On actual fare for land transportation travel such as, but not limited to, public utility
buses or jeepneys (PUBs/PUJs), taxis, asian utility vehicles (AUVs), shuttle services and
public railways, including light Rail Transit (LRT), Metro Rail Transit (MRT) and Philippine
National Railways (PNR); and
“(8) On funeral and burial services for the death of the PWD: Provided, That the beneficiary
or any person who shall shoulder the funeral and burial expenses of the deceased PWD shall
claim the discount under this rule for the deceased PWD upon presentation of the death
certificate. Such expenses shall cover the purchase of casket or urn, embalming, hospital
morgue, transport of the body to intended burial site in the place of origin, but shall exclude
obituary publication and the cost of the memorial lot.

“(b) Educational assistance to PWD, for them to pursue primary, secondary, tertiary, post
tertiary, as well as vocational or technical education, in both public and private schools,
through the provision of scholarships, grants, financial aids, subsidies and other incentives
to qualified PWD, including support for books, learning materials, and uniform allowance to
the extent feasible: Provided, That PWD shall meet the minimum admission requirements;

“(c) To the extent practicable and feasible, the continuance of the same benefits and
privileges given by the Government Service Insurance System (GSIS), Social Security System
(SSS), and Pag-IBIG, as the case may be, as are enjoyed by those in actual service;

“(d) To the extent possible, the government may grant special discounts in special programs
for PWD on purchase of basic commodities, subject to the guidelines to be issued for the
purpose by the Department of Trade and Industry (DTI) and the Department of Agriculture
(DA); and

“(e) Provision of express lanes for PWD in all commercial and government establishments; in
the absence thereof, priority shall be given to them.

“The abovementioned privileges are available only to PWD who are Filipino citizens upon
submission of any of the following as proof of his/her entitlement thereto:

“(i) An identification card issued by the city or municipal mayor or the barangay captain of
the place where the PWD resides;

“(ii) The passport of the PWD concerned; or

“(iii) Transportation discount fare Identification Card (ID) issued by the National Council for
the Welfare of Disabled Persons (NCWDP).

“The privileges may not be claimed if the PWD claims a higher discount as may be granted
by the commercial establishment and/or under other existing laws or in combination with
other discount program/s.

“The establishments may claim the discounts granted in subsection (a), paragraphs (1), (2),
(3), (5), (6), (7), and (8) as tax deductions based on the net cost of the goods sold or services
rendered: Provided, however, That the cost of the discount shall be allowed as deduction
from the gross income for the same taxable year that the discount is granted: Provided,
further, That the total amount of the claimed tax deduction net of value-added tax, if
applicable, shall be included in their gross sales receipts for tax purposes and shall be subject
to proper documentation and to the provisions of the National Internal Revenue Code
(NIRC), as amended.”

SEC. 2. Section 33 of Republic Act No. 7277, as amended, is hereby further amended to read
as follows:

“SEC. 33. Incentives. – Those caring for and living with a PWD shall be granted the following
incentives:

“(a) PWD, who are within the fourth civil degree of consanguinity or affinity to the taxpayer,
regardless of age, who are not gainfully employed and chiefly dependent upon the taxpayer,
shall be treated as dependents under Section 35(b) of the NIRC of 1997, as amended, and as
such, individual taxpayers caring for them shall be accorded the privileges granted by the
Code insofar as having dependents under the same section are concerned; and

“x x x.”

SEC. 3. Implementing Rules and Regulations, – The Department of Social Welfare and
Development (DSWD), in consultation with the Department of Health (DOH), the
Department of Finance (DOF), and the National Council on Disability Affairs (NCDA), shall
promulgate the necessary rules and regulations for the effective implementation of the
provisions of this Act: Provided, That the failure of the concerned agencies to promulgate
the said rules and regulations shall not prevent the implementation of this Act upon its
effectivity.

SEC. 4. Separability Clause. – If any provision of this Act is declared invalid or

unconstitutional, other provisions hereof which are not affected thereby shall remain in full
force and effect.

SEC. 5. Repealing Clause. – All laws, orders, decrees, rules and regulations, and other parts
thereof inconsistent with the provisions of this Act are hereby repealed, amended or
modified accordingly.

SEC. 6. Effectivity. – This Act shall take effect fifteen (15) days after its publication in the
Official Gazette or in two (2) newspapers of general circulation.
 Resident Citizens and Resident Aliens

Garrison et al. vs. Court of Appeals

[G.R. Nos. 44501-05. July 19, 1990.]

Doctrine: An alien actually present in the Philippines who is not a mere transient or
sojourner is a resident of the Philippines for purposes of income tax.

Facts: Petitioners, John Garrison, Frank Robertson, Robert Cathey, James Robertson,
Felicitas de Guzman and Edward McGurk (PETITIONERS) are US Citizens who entered the
country through the Philippine Immigration Act of 1940 and are employed in the US Naval
Base in Olongapo City. They earn no Philippine source income and it is also their intention to
return to the US as soon as their employment has ended.

The BIR sent notices to Petitioners stating that they did not file their Income Tax Returns
(ITR) for 1969. The BIR claimed that they were resident aliens and required them to file their
returns. Under then then Internal Revenue Code resident aliens may be taxed regardless of
whether the gross income was derived from Philippine sources.

Petitioners refused stating that they were not resident aliens but only special temporary
visitors. Hence, they were not required to file ITRs. They also claimed exemption by virtue of
the RP-US Military Bases Agreement.

Under Military Bases Agreement, a “national of the United States serving in or employed in
the Philippines in connection with construction, maintenance, operation or defense of the
bases and reside in the Philippines by reason only of such employment” is only liable for tax
on Philippine sources of income.

The Court of Appeals held that the Bases Agreement “speaks of exemption from the
payment of income tax, not from the filing of the income tax returns . . .”

Issue:
1. Whether or not Petitioners can be considered resident aliens.

2. Whether or not Petitioners are exempt from income tax under the RP-US Military Bases
Agreement.

3. Whether or not Petitioners must still file ITR notwithstanding the exemption.
Held:
1. Yes. Revenue Regulations No. 2 Section 5 provides: “An alien actually present in the
Philippines who is not a mere transient or sojourner is a resident of the Philippines for
purposes of income tax.” Whether or not an alian is a transient or not is further determined
by his: “intentions with regards to the length and nature of his stay. A mere floating
intention indefinite as to time, to return to another country is not sufficient to constitute
him as transient. If he lives in the Philippines and has no definite intention as to his stay, he is
a resident.” The Section 5 further provides that if the alien is in the Philippines for a definite
purpose which by its nature may be promptly accomplished, he is considered a
transient. However, if an extended stay is necessary for him to accomplsh his purpose, he is
considered a resident, “though it may be his intention at all times to return to his domicile
abroad when the purpose for which he came has been consummated or abandoned.”

2. Yes. Notwithstanding the fact that the Petitioners are resident aliens who are generally
taxable, their class is nonetheless exempt from paying taxes on income derived from their
employment in the naval base by virtue of the RP-US Military bases agreement. The Bases
Agreement identifies the persons NOT “liable to pay income tax in the Philippines except in
regard to income derived from Philippine sources or sources other than the US sources.”

They are the persons in whom concur the following requisites, to wit:
1) nationals of the United States serving in or employed in the Philippines;
2) their service or employment is "in connection with construction,maintenance, operation
or defense of the bases;
3) they reside in the Philippines by reason only of such employment; and
4) their income is derived exclusively from “U.S. Sources.”

3. Yes. Even though the petitioners are exempt from paying taxes from their employment in
the Naval Base, they must nevertheless file an ITR. The Supreme Court held that the filing of
an ITR and the payment of taxes are two distinct obligations. While income derived from
employment connected with the Naval Base is exempt, income from Philippine Sources is
not. The requirement of filing an ITR is so that the BIR can determine whether or not the
US National should be taxed. “The duty rests on the U.S. nationals concerned to invoke
and prima facie establish their tax-exempt status. It cannot simply be presumed that they
earned no income from any other sources than their employment in the American bases and
are therefore totally exempt from income tax.”
 Non-resident Citizens

RR 1-79 (January 8, 1979) (Section 2 only)

SECTION 2. Who are considered as nonresident citizens. —

The term "non-resident citizen" means one who establishes to the satisfaction of the
Commissioner of Internal Revenue the fact of his physical presence abroad with the definite
intention to reside therein and shall include any Filipino who leaves the country during the
taxable year as:
(a) Immigrant — one who leaves the Philippines to reside abroad as an immigrant for
which a foreign visa as such has been secured.
(b) Permanent employee — one who leaves the Philippines to reside abroad for
employment on a more or less permanent basis.
(c) Contract worker — one who leaves the Philippines on account of a contract of
employment which is renewed from time to time within or during the taxable
year under such circumstances as to require him to be physically present abroad
most of the time during the taxable year. To be considered physically present
abroad most of the time during the taxable year, a contract worker must have
been outside the Philippines for not less than 183 days during such taxable year.
Any such Filipino shall be considered a non-resident citizen for such taxable year with
respect to the income he derived from foreign sources from the date he actually departed
from the Philippines.
A Filipino citizen who has been previously considered as a non-resident citizen and who
arrives in the Philippines at any time during the taxable year to reside therein permanently
shall also be considered a non-resident citizen for the taxable year in which he arrived in the
Philippines with respect to his income derived from sources abroad until the date of his
arrival.
 Non-resident aliens engaged in trade or business in the Philippines

RR 02-40 (Sections 5 and 6)

SECTION 5. Definition. — A "non-resident alien individual" means an individual —

(a) Whose residence is not within the Philippines; and

(b) Who is not a citizen of the Philippines.

An alien actually present in the Philippines who is not a mere transient or sojourner is a
resident of the Philippines for purposes of the income tax. Whether he is a transient or not is
determined by his intentions with regard to the length and nature of his stay. A mere
floating intention indefinite as to time, to return to another country is not sufficient to
constitute him a transient. If he lives in the Philippines and has no definite intention as to his
stay, he is a resident. One who comes to the Philippines for a definite purpose which in its
nature may be promptly accomplished is a transient. But if his purpose is of such a nature
that an extended stay may be necessary for its accomplishment, and to that end the alien
makes his home temporarily in the Philippines, he becomes a resident, though it may be his
intention at all times to return to his domicile abroad when the purpose for which he came
has been consummated or abandoned.

SECTION 6. Loss of residence by alien. — An alien who has acquired residence in the
Philippines retains his status as a resident until he abandons the same and actually departs
from the Philippines. An intention to change his residence does not change his status as a
resident alien to that of a nonresident alien. Thus an alien who has acquired a residence in
the Philippines is taxable as a resident for the remainder of his stay in the Philippines.
 Corporations

AFISCO INSURANCE CORP. et al. vs. COURT OF APPEALS

[G.R. No. 112675. January 25, 1999]

DOCTRINE:

Unregistered Partnerships and associations are considered as corporations for tax purposes –
Under the old internal revenue code, “A tax is hereby imposed upon the taxable net income
received during each taxable year from all sources by every corporation organized in, or
existing under the laws of the Philippines, no matter how created or organized, xxx.”
Ineludibly, the Philippine legislature included in the concept of corporations those entities
that resembled them such as unregistered partnerships and associations.

Insurance pool in the case at bar is deemed a partnership or association taxable as a

corporation – In the case at bar, petitioners-insurance companies formed a Pool Agreement,
or an association that would handle all the insurance businesses covered under their quota-
share reinsurance treaty and surplus reinsurance treaty with Munich is considered a
partnership or association which may be taxed as a ccorporation.

Double Taxation is not Present in the Case at Bar – Double taxation means “taxing the same
person twice by the same jurisdiction for the same thing.” In the instant case, the insurance
pool is a taxable entity distince from the individual corporate entities of the ceding
companies. The tax on its income is obviously different from the tax on the dividends
received by the companies. There is no double taxation.

FACTS: The petitioners are 41 non-life domestic insurance corporations. They issued risk
insurance policies for machines. The petitioners in 1965 entered into a Quota Share
Reinsurance Treaty and a Surplus Reinsurance Treaty with the Munchener
Ruckversicherungs-Gesselschaft (hereafter called Munich), a non-resident foreign insurance
corporation. The reinsurance treaties required petitioners to form a pool, which they
complied with.

In 1976, the pool of machinery insurers submitted a financial statement and filed an
“Information Return of Organization Exempt from Income Tax” for 1975. On the basis of
this, the CIR assessed a deficiency of P1,843,273.60, and withholding taxes in the amount
of P1,768,799.39 and P89,438.68 on dividends paid to Munich and to the petitioners,
respectively.

The Court of Tax Appeal sustained the petitioner's liability. The Court of Appeals dismissed
their appeal.
The CA ruled in that the pool of machinery insurers was a partnership taxable as a
corporation, and that the latter’s collection of premiums on behalf of its members, the
ceding companies, was taxable income.

ISSUE/S:
1. Whether or not the pool is taxable as a corporation.
2. Whether or not there is double taxation.

HELD:

1) Yes: Pool taxable as a corporation

Argument of Petitioner: The reinsurance policies were written by them “individually and
separately,” and that their liability was limited to the extent of their allocated share in the
original risks thus reinsured. Hence, the pool did not act or earn income as a reinsurer. Its
role was limited to its principal function of “allocating and distributing the risk(s) arising
from the original insurance among the signatories to the treaty or the members of the pool
based on their ability to absorb the risk(s) ceded[;] as well as the performance of incidental
functions, such as records, maintenance, collection and custody of funds, etc.”

Argument of SC: According to Section 24 of the NIRC of 1975:

“SEC. 24. Rate of tax on corporations. -- (a) Tax on domestic corporations. -- A tax is hereby
imposed upon the taxable net income received during each taxable year from all sources by
every corporation organized in, or existing under the laws of the Philippines, no matter how
created or organized, but not including duly registered general co-partnership (compañias
colectivas), general professional partnerships, private educational institutions, and building
and loan associations xxx.”

Ineludibly, the Philippine legislature included in the concept of corporations those

entities that resembled them such as unregistered partnerships and associations.
Interestingly, the NIRC’s inclusion of such entities in the tax on corporations was made even
clearer by the Tax Reform Act of 1997 Sec. 27 read together with Sec. 22 reads:

“SEC. 27. Rates of Income Tax on Domestic Corporations. --

(A) In General. -- Except as otherwise provided in this Code, an income tax of thirty-five
percent (35%) is hereby imposed upon the taxable income derived during each taxable year
from all sources within and without the Philippines by every corporation, as defined in
Section 22 (B) of this Code, and taxable under this Title as a corporation xxx.”
“SEC. 22. -- Definition. -- When used in this Title:
xxx xxx xxx
(B) The term ‘corporation’ shall include partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en participacion), associations, or insurance
companies, but does not include general professional partnerships [or] a joint venture or
consortium formed for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to an operating or
consortium agreement under a service contract without the Government. ‘General
professional partnerships’ are partnerships formed by persons for the sole purpose of
exercising their common profession, no part of the income of which is derived from
engaging in any trade or business.

Thus, the Court in Evangelista v. Collector of Internal Revenue held that Section 24 covered
these unregistered partnerships and even associations or joint accounts, which had no legal
personalities apart from their individual members.

Furthermore, Pool Agreement or an association that would handle all the insurance
businesses covered under their quota-share reinsurance treaty and surplus reinsurance
treaty with Munich may be considered a partnership because it contains the following
elements: (1) The pool has a common fund, consisting of money and other valuables that are
deposited in the name and credit of the pool. This common fund pays for the administration
and operation expenses of the pool. (2) The pool functions through an executive board,
which resembles the board of directors of a corporation, composed of one representative
for each of the ceding companies. (3) While, the pool itself is not a reinsurer and does not
issue any policies; its work is indispensable, beneficial and economically useful to the
business of the ceding companies and Munich, because without it they would not have
received their premiums pursuant to the agreement with Munich. Profit motive or business
is, therefore, the primordial reason for the pool’s formation.

2) No: There is no double taxation.

Argument of Petitioner: Remittances of the pool to the ceding companies and Munich are
not dividends subject to tax. Imposing a tax “would be tantamount to an illegal double
taxation, as it would result in taxing the same premium income twice in the hands of the
same taxpayer.” Furthermore, even if such remittances were treated as dividends, they
would have been exempt under tSections 24 (b) (I) and 263 of the 1977 NIRC , as well as
Article 7 of paragraph 1and Article 5 of paragraph 5 of the RP-West German Tax Treaty.

Argument of Supreme Court: Double taxation means “taxing the same person twice by the
same jurisdiction for the same thing.” In the instant case, the insurance pool is a taxable
entity distince from the individual corporate entities of the ceding companies. The tax on its
income is obviously different from the tax on the dividends received by the companies.
There is no double taxation.

Tax exemption cannot be claimed by non-resident foreign insurance corporattion; tax

exemption construed strictly against the taxpayer - Section 24 (b) (1) pertains to tax on
foreign corporations; hence, it cannot be claimed by the ceding companies which are
domestic corporations. Nor can Munich, a foreign corporation, be granted exemption based
solely on this provision of the Tax Code because the same subsection specifically taxes
dividends, the type of remittances forwarded to it by the pool. The foregoing interpretation
of Section 24 (b) (1) is in line with the doctrine that a tax exemption must be
construed strictissimi juris, and the statutory exemption claimed must be expressed in a
language too plain to be mistaken.
PASCUAL v. Commissioner of Internal Revenue #10 BUSORG
G.R. No. 78133 October 18, 1988
GANCAYCO, J.:

FACTS: On June 22, 1965, petitioners bought two (2) parcels of land from Santiago
Bernardino, et al. and on May 28, 1966, they bought another three (3) parcels of land from
Juan Roque. The first two parcels of land were sold by petitioners in 1968 to Marenir
Development Corporation, while the three parcels of land were sold by petitioners to Erlinda
Reyes and Maria Samson on March 19,1970. Petitioner realized a net profit in the sale made
in 1968 in the amount of P165, 224.70, while they realized a net profit of P60,000 in the sale
made in 1970. The corresponding capital gains taxes were paid by petitioners in 1973 and
1974 .

Respondent Commissioner informed petitioners that in the years 1968 and 1970, petitioners
as co-owners in the real estate transactions formed an unregistered partnership or joint
venture taxable as a corporation under Section 20(b) and its income was subject to the
taxes prescribed under Section 24, both of the National Internal Revenue Code; that the
unregistered partnership was subject to corporate income tax as distinguished from profits
derived from the partnership by them which is subject to individual income tax.

ISSUE: Whether petitioners formed an unregistered partnership subject to corporate income

tax (partnership vs. co-ownership)

RULING: Article 1769 of the new Civil Code lays down the rule for determining when a
transaction should be deemed a partnership or a co-ownership. Said article paragraphs 2 and
3, provides:(2) Co-ownership or co-possession does not itself establish a partnership,
whether such co-owners or co-possessors do or do not share any profits made by the use of
the property; (3) The sharing of gross returns does not of itself establish a partnership,
whether or not the persons sharing them have a joint or common right or interest in any
property from which the returns are derived;

The sharing of returns does not in itself establish a partnership whether or not the persons
sharing therein have a joint or common right or interest in the property. There must be a
clear intent to form a partnership, the existence of a juridical personality different from the
individual partners, and the freedom of each party to transfer or assign the whole property.

In the present case, there is clear evidence of co-ownership between the petitioners. There
is no adequate basis to support the proposition that they thereby formed an unregistered
partnership. The two isolated transactions whereby they purchased properties and sold the
same a few years thereafter did not thereby make them partners. They shared in the gross
profits as co- owners and paid their capital gains taxes on their net profits and availed of the
tax amnesty thereby. Under the circumstances, they cannot be considered to have formed
an unregistered partnership which is thereby liable for corporate income tax, as the
respondent commissioner proposes.
And even assuming for the sake of argument that such unregistered partnership appears to
have been formed, since there is no such existing unregistered partnership with a distinct
personality nor with assets that can be held liable for said deficiency corporate income tax,
then petitioners can be held individually liable as partners for this unpaid obligation of the
partnership.
JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P. OBILLOS,
brothers and sisters vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS
G.R. No. L-68118 October 29, 1985
AQUINO, J.:

Facts: On March 2, 1973 Jose Obillos, Sr. bought two lots with areas of 1,124 and 963 square
meters of located at Greenhills, San Juan, Rizal. The next day he transferred his rights to his
four children, the petitioners, to enable them to build their residences. The Torrens titles
issued to them showed that they were co-owners of the two lots.

In 1974, or after having held the two lots for more than a year, the petitioners resold them to
the Walled City Securities Corporation and Olga Cruz Canada for the total sum of P313,050.
They derived from the sale a total profit of P134, 341.88 or P33,584 for each of them. They
treated the profit as a capital gain and paid an income tax on one-half thereof or of P16,792.

In April, 1980, the Commissioner of Internal Revenue required the four petitioners to
pay corporate income tax on the total profit of P134,336 in addition to individual income tax
on their shares thereof. The petitioners are being held liable for deficiency income taxes and
penalties totalling P127,781.76 on their profit of P134,336, in addition to the tax on capital
gains already paid by them.

The Commissioner acted on the theory that the four petitioners had formed an unregistered
partnership or joint venture The petitioners contested the assessments. Two Judges of the
Tax Court sustained the same. Hence, the instant appeal.

Issue: Whether or not the petitioners had indeed formed a partnership or joint venture and
thus liable for corporate tax.

Held: The Supreme Court held that the petitioners should not be considered to have formed
a partnership just because they allegedly contributed P178,708.12 to buy the two lots, resold
the same and divided the profit among themselves. To regard so would result in oppressive
taxation and confirm the dictum that the power to tax involves the power to destroy. That
eventuality should be obviated.

As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and
simple. To consider them as partners would obliterate the distinction between a co-
ownership and a partnership. The petitioners were not engaged in any joint venture by
reason of that isolated transaction.

*Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself
establish a partnership, whether or not the persons sharing them have a joint or common
right or interest in any property from which the returns are derived". There must be an
unmistakable intention to form a partnership or joint venture.*

Their original purpose was to divide the lots for residential purposes. If later on they found it
not feasible to build their residences on the lots because of the high cost of construction,
then they had no choice but to resell the same to dissolve the co-ownership. The division of
the profit was merely incidental to the dissolution of the co-ownership which was in the
nature of things a temporary state. It had to be terminated sooner or later.

They did not contribute or invest additional ' capital to increase or expand the properties,
nor was there an unmistakable intention to form partnership or joint venture.

WHEREFORE, the judgment of the Tax Court is reversed and set aside. The assessments are
cancelled. No costs.

All co-ownerships are not deemed unregistered partnership.—Co-Ownership who own

properties which produce income should not automatically be considered partners of an
unregistered partnership, or a corporation, within the purview of the income tax law. To
hold otherwise, would be to subject the income of all

Co-ownerships of inherited properties to the tax on corporations, inasmuch as if a property

does not produce an income at all, it is not subject to any kind of income tax, whether the
income tax on individuals or the income tax on corporation.

As compared to other cases:

Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where after an
extrajudicial settlement the co-heirs used the inheritance or the incomes derived therefrom
as a common fund to produce profits for themselves, it was held that they were taxable as
an unregistered partnership.

This case is different from Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198, where
father and son purchased a lot and building, entrusted the administration of the building to
an administrator and divided equally the net income, and from Evangelista vs. Collector of
Internal Revenue, 102 Phil. 140, where the three Evangelista sisters bought four pieces of
real property which they leased to various tenants and derived rentals therefrom. Clearly,
the petitioners in these two cases had formed an unregistered partnership.
LORENZO OÑA V CIR
GR No. L -19342 | May 25, 1972 | J. Barredo

Facts: Julia Buñales died leaving as heirs her surviving spouse, Lorenzo Oña and her five
children. A civil case was instituted for the settlement of her state, in which Oña was
appointed administrator and later on the guardian of the three heirs who were still minors
when the project for partition was approved. This shows that the heirs have undivided ½
interest in 10 parcels of land, 6 houses and money from the War Damage Commission.

Although the project of partition was approved by the Court, no attempt was made to divide
the properties and they remained under the management of Oña who used said properties
in business by leasing or selling them and investing the income derived therefrom and the
proceeds from the sales thereof in real properties and securities. As a result, petitioners’
properties and investments gradually increased. Petitioners returned for income tax
purposes their shares in the net income but they did not actually receive their shares
because this left with Oña who invested them.

Based on these facts, CIR decided that petitioners formed an unregistered partnership and
therefore, subject to the corporate income tax, particularly for years 1955 and 1956.
Petitioners asked for reconsideration, which was denied hence this petition for review from
CTA’s decision.

Issue:

1. W/N there was a co-ownership or an unregistered partnership

2. W/N the petitioners are liable for the deficiency corporate income tax

Held:

1. Unregistered partnership. The Tax Court found that instead of actually distributing
the estate of the deceased among themselves pursuant to the project of partition,
the heirs allowed their properties to remain under the management of Oña and let
him use their shares as part of the common fund for their ventures, even as they paid
corresponding income taxes on their respective shares.

2. Yes. For tax purposes, the co-ownership of inherited properties is automatically

converted into an unregistered partnership the moment the said common properties
and/or the incomes derived therefrom are used as a common fund with intent to
produce profits for the heirs in proportion to their respective shares in the
inheritance as determined in a project partition either duly executed in an
 extrajudicial settlement or approved by the court in the corresponding testate or
intestate proceeding. The reason is simple. From the moment of such partition, the
heirs are entitled already to their respective definite shares of the estate and the
incomes thereof, for each of them to manage and dispose of as exclusively his own
without the intervention of the other heirs, and, accordingly, he becomes liable
individually for all taxes in connection therewith. If after such partition, he allows his
share to be held in common with his co-heirs under a single management to be used
with the intent of making profit thereby in proportion to his share, there can be no
doubt that, even if no document or instrument were executed, for the purpose, for
tax purposes, at least, an unregistered partnership is formed.

For purposes of the tax on corporations, our National Internal Revenue Code includes these
partnerships —

The term “partnership” includes a syndicate, group, pool, joint venture or other
unincorporated organization, through or by means of which any business, financial
operation, or venture is carried on… (8 Merten’s Law of Federal Income Taxation, p.
562 Note 63; emphasis ours.)

with the exception only of duly registered general copartnerships — within the purview of
the term “corporation.” It is, therefore, clear to our mind that petitioners herein constitute a
partnership, insofar as said Code is concerned, and are subject to the income tax for
corporations. Judgment affirmed.
 II. INCOME

In general…

Madrigal vs. Rafferty

G.R. No. L-12287 August 7, 1918

Income Tax defined, Income vs. Capital

*Income means profits or gain.*

FACTS: Vicente Madrigal and Susana Paterno were married with Conjugal Partnership as
their property relations.Vicente filed his 1914 income tax return but later claimed a refund on
the contention that it was the income of the conjugal partnership. Vicente claimed that the
income should be divided into two with each spouse filing a separate return.Hence, Vicente
claimed that each spouse should be entitled to the P8,000 exemption, which would result in
a lower amount of income tax due.

ISSUE:

1) Define Income Tax

2) Whether or not the income reported by Madrigal on 1915 should be divided into 2 in
computing for the additional income tax.

HELD:

1) The essential difference between capital and income is that capital is a fund; income is a
flow. A fund of property existing at an instant of time is called capital.A flow of services
rendered by that capital by the payment of money from it or any other benefit rendered by a
fund of capital in relation to such fund through a period of time is called income. Capital is
wealth, while income is the service of wealth.

A tax on income is not a tax on property. Income can be defined as profits or gains. Susana,
has an inchoate right in the property of her husband during the life of the conjugal
partnership.Her interest in the ultimate property rights and in the ultimate ownership of
property acquired as income lies after such income has become capital.She has no absolute
right to ½ the income of the conjugal partnership.Not being seized of a separate estate,
Susana cannot make a separate return in order to receive the benefit of the exemption
which would arise by reason of the additional tax.As she has no estate and income, actually
and legally vested in her and entirely distinct from her husband’s property, the income
cannot properly be considered the separate income of the wife for purposes of the
additional tax.
2) No! The point of view of the CIR is that the Income Tax Law, as the name implies, taxes
upon income and not upon capital and property.

The essential difference between capital and income is that capital is a fund; income is a
flow. A fund of property existing at an instant of time is called capital. A flow of services
rendered by that capital by the payment of money from it or any other benefit rendered by a
fund of capital in relation to such fund through a period of time is called income. Capital is
wealth, while income is the service of wealth.

As Paterno has no estate and income, actually and legally vested in her and entirely distinct
from her husband’s property, the income cannot properly be considered the separate
income of the wife for the purposes of the additional tax.

To recapitulate, Vicente wants to half his declared income in computing for his tax since he
is arguing that he has a conjugal partnership with his wife. However, the court ruled that the
one that should be taxed is the income which is the flow of the capital, thus it should not be
divided into 2.
Fisher vs Trinidad
43 Phil 973 – Oct. 30, 1922

Doctrine: Cash dividends are actual receipt of profits; stock dividends are the receipt of a
representation of the increased value of the assets of a corporations.

Facts: No Gross receipts subject to tax under the Tax Code do not include monies or receipts
entrusted to the taxpayer which do not belong to them and do not redound to the
taxpayer’s benefit; and it is not necessary that there must be a law or regulation which
would exempt such monies or receipts within the meaning of gross receipts under the Tax
Code. Parenthetically, the room charges entrusted by the foreign travel agencies to the
private respondents do not form part of its gross receipts within the definition of the Tax
Code. The said receipts never belonged to the private respondent. The private respondent
never benefited from their payment to the local hotels. This arrangement was only to
accommodate the foreign travel agencies.

Issue: Whether or not the stock dividend was an income and therefore taxable

Ruling: No. Generally speaking, stock dividends represent undistributed increase in the
capital of corporations or firms, joint stock companies, etc., etc., for a particular period. The
inventory of the property of the corporation for particular period shows an increase in its
capital, so that the stock theretofore issued does not show the real value of the
stockholder's interest, and additional stock is issued showing the increase in the actual
capital, or property, or assets of the corporation.

In the case of Gray vs. Darlington (82 U.S., 653), the US Supreme Court held that mere
advance in value does not constitute the "income" specified in the revenue law as "income"
of the owner for the year in which the sale of the property was made. Such advance
constitutes and can be treated merely as an increase of capital.

In the case of Towne vs. Eisner, income was defined in an income tax law to mean cash or its
equivalent, unless it is otherwise specified. It does not mean unrealized increments in the
value of the property. A stock dividend really takes nothing from the property of the
corporation, and adds nothing to the interests of the shareholders. Its property is not
diminished and their interest is not increased. The proportional interest of each shareholder
remains the same. In short, the corporation is no poorer and the stockholder is no richer
than they were before.
In the case of Doyle vs. Mitchell Bros. Co. (247 U.S., 179), Mr. Justice Pitney, said that the term
"income" in its natural and obvious sense, imports something distinct from principal or
capital and conveying the idea of gain or increase arising from corporate activity.

In the case of Eisner vs. Macomber (252 U.S., 189), income was defined as the gain derived
from capital, from labor, or from both combined, provided it be understood to include profit
gained through a sale or conversion of capital assets.

When a corporation or company issues "stock dividends" it shows that the company's
accumulated profits have been capitalized, instead of distributed to the stockholders or
retained as surplus available for distribution, in money or in kind, should opportunity offer.
The essential and controlling fact is that the stockholder has received nothing out of the
company's assets for his separate use and benefit; on the contrary, every dollar of his
original investment, together with whatever accretions and accumulations resulting from
employment of his money and that of the other stockholders in the business of the
company, still remains the property of the company, and subject to business risks which may
result in wiping out of the entire investment. The stockholder by virtue of the stock dividend
has in fact received nothing that answers the definition of an "income." The stockholder
who receives a stock dividend has received nothing but a representation of his increased
interest in the capital of the corporation. There has been no separation or segregation of his
interest. All the property or capital of the corporation still belongs to the corporation. There
has been no separation of the interest of the stockholder from the general capital of the
corporation.

The stockholder, by virtue of the stock dividend, has no separate or individual control over
the interest represented thereby, further than he had before the stock dividend was issued.
He cannot use it for the reason that it is still the property of the corporation and not the
property of the individual holder of stock dividend. A certificate of stock represented by the
stock dividend is simply a statement of his proportional interest or participation in the
capital of the corporation. The receipt of a stock dividend in no way increases the money did
not receive of a stockholder nor his cash account at the close of the year. It simply shows
that there has been an increase in the amount of the capital of the corporation during the
particular period, which may be due to an increased business or to a natural increase of the
value of the capital due to business, economic, or other reasons. We believe that the
Legislature, when it provided for an "income tax," intended to tax only the "income" of
corporations, firms or individuals, as that term is generally used in its common acceptation;
that is that the income means money received, coming to a person or corporation for
services, interest, or profit from investments. We do not believe that the Legislature
intended that a mere increase in the value of the capital or assets of a corporation, firm, or
individual, should be taxed as "income."

A stock dividend, still being the property of the corporation and not the stockholder, may be
reached by an execution against the corporation, and sold as a part of the property of the
corporation. In such a case, if all the property of the corporation is sold, then the
stockholder certainly could not be charged with having received an income by virtue of the
issuance of the stock dividend. Until the dividend is declared and paid, the corporate profits
still belong to the corporation, not to the stockholders, and are liable for corporate
indebtedness. The rule is well established that cash dividend, whether large or small, are
regarded as "income" and all stock dividends, as capital or assets If the ownership of the
property represented by a stock dividend is still in the corporation and not in the holder of
such stock, then it is difficult to understand how it can be regarded as income to the
stockholder and not as a part of the capital or assets of the corporation. If the holder of the
stock dividend is required to pay an income tax on the same, the result would be that he has
paid a tax upon an income which he never received. Such a conclusion is absolutely
contradictory to the idea of an income. As stock dividends are not "income," the same
cannot be considered taxes under that provision of Act No. 2833.

For all of the foregoing reasons, SC held that the judgment of the lower court should be
REVOKED.
Limpan Investment Corporation vs CIR
July 26, 1966

FACTS: The BIR assessed deficiency taxes on Limpan Corp, a company that leases real
property, for under-declaring its rental income for years 1956-57 by around P20K and P81K
respectively.

Petitioner appeals on the ground that portions of these under declared rents are yet to be
collected by the previous owners and turned over or received by the corporation.

Petitioner cited that some rents were deposited with the court, such that the corporation
does not have actual nor constructive control over them.

The sole witness for the petitioner, Solis (Corporate Secretary- Treasurer) admitted to some
undeclared rents in 1956 and1957, and that some balances were not collected by the
corporation in 1956 because the lessees refused to recognize and pay rent to the new
owners and that the corp’s president Isabelo Lim collected some rent and reported it in his
personal income statement, but did not turn over the rent to the corporation.

He also cites lack of actual or constructive control over rents deposited with the court.

ISSUE: Whether or not the BIR was correct in assessing deficiency taxes against Limpan
Corp. for undeclared rental income

HELD: Yes. Petitioner admitted that it indeed had undeclared income (although only a part
and not the full amount assessed by BIR). Thus, it has become incumbent upon them to
prove their excuses by clear and convincing evidence, which it has failed to do. When is
there constructive receipt of rent? With regard to 1957 rents deposited with the court, and
withdrawn only in 1958, the court viewed the corporation as having constructively received
said rents. The non-collection was the petitioner’s fault since it refused to refused to accept
the rent, and not due to nonpayment of lessees. Hence, although the corporation did not
actually receive the rent, it is deemed to have constructively received them.
CONWI vs CTA 213 SCRA 83
August 31, 1992

Facts: Petitioners are employees of Procter and Gamble (Philippine Manufacturing

Corporation, subsidiary of Procter & Gamble, a foreign corporation).During the years 1970
and 1971, petitioners were assigned to other subsidiaries of Procter & Gamble outside the
Philippines, for which petitioners were paid US dollars as compensation.

Petitioners filed their ITRs for 1970 and 1971, computing tax due by applying the dollar-to-
peso conversion based on the floating rate under BIR Ruling No. 70-027. In 1973, petitioners
filed amened ITRs for 1970 and 1971, this time using the par value of the peso as basis. This
resulted in the alleged overpayments, refund and/or tax credit, for which claims for refund
were filed.

CTA held that the proper conversion rate for the purpose of reporting and paying the
Philippine income tax on the dollar earnings of petitioners are the rates prescribed under
Revenue Memorandum Circulars Nos. 7-71 and 41-71. The refund claims were denied.

Issue: Whether or not petitioners' dollar earnings are receipts derived from foreign
exchange transactions

Ruling: No. For the proper resolution of income tax cases, income may be defined as an
amount of money coming to a person or corporation within a specified time, whether as
payment for services, interest or profit from investment. Unless otherwise specified, it
means cash or its equivalent. Income can also be thought of as flow of the fruits of one's
labor.

Petitioners are correct as to their claim that their dollar earnings are not receipts derived
from foreign exchange transactions. For a foreign exchange transaction is simply that — a
transaction in foreign exchange, foreign exchange being "the conversion of an amount of
money or currency of one country into an equivalent amount of money or currency of
another." When petitioners were assigned to the foreign subsidiaries of Procter & Gamble,
they were earning in their assigned nation's currency and were ALSO spending in said
currency. There was no conversion, therefore, from one currency to another.
The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of
Procter & Gamble. It was a definite amount of money which came to them within a specified
period of time of two years as payment for their services.
Commissioner vs Glenshaw Glass Co.
March 28, 1955

Doctrine: “Income from whatever source” includes award of damages received by a winning
party in a case.

FACTS: Glenshaw manufactures glass bottles and containers. Hatford- Empire company
manufactures the machines used by Glenshaw.

Glenshaw sued Hatford-Empire. His claims were demands for exemplary damages for fraud
and treble damages for injury to its business by reason of Hartford’s violation of the federal
antitrust laws. They had a settlement wherein Hartford paid Glenshaw $800,000. Of this
amount, around $324k, which was for punitive damages for fraud and antitrust violations,
was not reported by Glenshaw as income.

The Commissioner determined a deficiency, claiming as taxable the entire sum less only
deductible legal fees. The Tax Court and the Court of Appeals ruled for Glenshaw.

ISSUE: Whether or not the award for damages falls under “income derived from whatever
source,” thus taxable

HELD: YES. The US Tax Code: SEC. 22. GROSS INCOME.

"(a) GENERAL DEFINITION. 'Gross income' includes gains, profits, and income derived
from salaries, wages, or compensation for personal service . . . of whatever kind and in
whatever form paid, or from professions, vocations, trades, businesses, commerce, or
sales, or dealings in property, whether real or personal, growing out of the ownership or
use of or interest in such property; also from interest, rent, dividends, securities, or the
transaction of any business carried on for gain or profit, or gains or profits and income
derived from any source whatever. . . ."

Here, we have instances of undeniable accessions to wealth, clearly realized, and over which
the taxpayers have complete dominion. The mere fact that the payments were extracted
from the wrongdoers as punishment for unlawful conduct cannot detract from their
character as taxable income to the recipients. Respondents concede, as they must, that the
recoveries are taxable to the extent that they compensate for damages actually incurred. It
would be an anomaly that could not be justified in the absence of clear congressional intent
to say that a recovery for actual damages is taxable, but not the additional amount
extracted as punishment for the same conduct which caused the injury. And we find no such
evidence of intent to exempt these payments.
Cesarini v. United States, 296 F. Supp. 3, 1969 U.S. Dist. LEXIS 12677, 69-1 U.S. Tax Cas. (CCH)
P9270, 23 A.F.T.R.2d (RIA) 997, 18 Ohio Misc. 1, 47 Ohio Op. 2d 27 (N.D. Ohio Feb. 17, 1969)

Brief Fact Summary. Plaintiffs purchased a used piano and found $4,467 in cash inside.
Plaintiffs originally reported this as income but filed an amended return and sought a refund
of the taxes paid on that income.

Synopsis of Rule of Law. Gross income means all income from whatever source derived.

Facts. Plaintiffs, husband and wife, bought a used piano for $15.00. Inside they found $4,467
and reported this as income. They filed an amended return and sought $836.51, which was
the tax they believed owed to them because they found money should not have been
reported as income.

The Commissioner of Internal Revenue rejected their claim and they filed suit.

Issue. Should the found money be included as income?

Held. Judge Young issued the opinion for the United States District Court in holding that the
found money should be included as gross income of Plaintiffs.

Discussion. The rule requiring all income to be included as gross income is intentionally
broad to allow Congress to use its taxing power broadly under the Sixteenth Amendment.
Plaintiffs could not show a specific exception for found money.
Hornung v. Commissioner, 47 T.C. 428, 1967 U.S. Tax Ct. LEXIS 153 (T.C. 1967)

Brief Fact Summary. Petitioner is a well-known professional football player for the Green
Bay Packers. He received a Corvette as an award for his performance in the championship
game.

Synopsis of Rule of Law. All items which constitute gross income are to be included for the
taxable year in which actually or constructively received.

Facts. Petitioner is a well-known football player for the Green Bay Packers and resides in
Louisville, Kentucky. Each year Sports Magazine awards a new Corvette car to the player
selected by its editors as the outstanding players in the National Football League
championship game. The car is usually purchased several months before the award is given.
The game was played on December 31, 1961 and Petitioner was awarded the car for his
performance. He accepted the award but did not take possession. The car was not available
for pickup that day because it was located at a dealership in New York that was closed on
Sunday. He received the car on January 3, 1962. Petitioner sold the car and reported the
income from the sale as gain on his 1962 tax return. He did not include the fair market value
of the car on his gross income in any tax year.

Issue. Whether the value of the car should in his gross income for the tax year 1962?

Held. Judge Hoyt issued the opinion for the Tax Court in holding that the value should have
been included.

Discussion. The Tax Court found that constructive receipt means “unfettered control” and
Petitioner failed to show that he met this standard. He could not have obtained the car the
day of the award. The editor of Sports Magazine did not have the keys or title to transfer to
him that day and the dealership, which was several states away, was closed.
Murphy v. Internal Revenue Service
Unites States Court of Appeals for the District of Columbia
493 F.3d 170 (2007)

Facts: Marrita Murphy (plaintiff) was unlawfully fired from her job at the New York Air
National Guard (NYANG) after reporting environmental hazards to state authorities. Murphy
filed a retaliation claim against NYANG with the Department of Labor (DOL). At the
administrative hearing, Murphy testified to her physical and emotional damages. The DOL
awarded Murphy $45,000 for emotional distress and $25,000 for injury to reputation.
Murphy initially included the $70,000 award as income and paid taxes on it. Murphy later
filed an amended return, seeking reimbursement of the taxes paid on the $70,000 award.
The Internal Revenue Service (IRS) (defendant) denied reimbursement. Murphy brought suit
in federal district court against the IRS and the United States government (defendant). The
district court ruled in favor of the defendants. Murphy appealed to the United States Court
of Appeals for the District of Columbia. The court of appeals reversed, holding that the
award was not income and was not subject to taxation. The government petitioned for an
en banc rehearing, and the court of appeals granted the petition.

Issue: Whether compensatory damages received for emo tional distress and loss of
reputation qualify as taxable gross income under Section 61(a) of the Internal Reve nue
Code, 26 U.S.C. 61(a).

Held: The court of appeals correctly concluded that com pensatory damages received for
emotional distress and loss of professional reputation qualify as taxable "gross income"
under Section 61(a) of the Internal Revenue Code, 26 U.S.C. 61(a). Its decision does not
conflict with any decision of this Court or of any other court of ap peals. Further review is
unwarranted.

a. The Internal Revenue Code imposes a tax on "taxable income," which the Code defines as
"gross income" adjusted for various deductions allowed by statute. 26 U.S.C. 1 (2000 &
Supp. V 2005); 26 U.S.C. 63(a)-(b). "Gross income" is "capaciously defined" in Section 61(a)
of the Code as "all income from whatever source derived." Knight v. Commissioner, 128 S. Ct.
782, 785 (2008); 26 U.S.C. 61(a).

Section 61(a) has its origins in Section II(B) of the Revenue Act of 1913, which was
enacted shortly after adoption of the Sixteenth Amendment.1 See Revenue Act of
1913, ch. 16, § II(B), 38 Stat. 167 ("[T]he net in come of a taxable person shall include *
* * income de rived from any source whatever."). A few years after the passage of
the Revenue Act of 1913, Congress en acted an exclusion from gross income for
"[a]mounts received, through accident or health insurance or under workmen's
compensation acts, as compensation for personal injuries or sickness, plus the
amount of any damages received whether by suit or agreement on account of such
injuries." Revenue Act of 1918, ch. 18, § 213(b)(6), 40 Stat. 1066. That exclusion has
been amended several times since it was first enacted. In 1996, Congress amended
 that provision to exclude from gross income "damages * * * received * * * on
account of personal physical injury or physical sickness." 26 U.S.C. 104(a)(2); see 1996
Act §1605(a), 110 Stat. 1838. As amended, the statute provides that "emotional
distress shall not be treated as a physical injury or phys ical sickness" for purposes of
the exclusion. 26 U.S.C. 104(a).

b. The court of appeals correctly held that compen satory damages received for emotional
distress and loss of reputation are taxable as income under Section 61(a). Such damages are
explicitly excluded from the personal- injury exemption, as that provision was amended by
the 1996 Act. As the court correctly noted, "[f]or the 1996 amendment of § 104(a) to 'make
sense,' gross income in § 61(a) must * * * include an award for nonphysical damages such as
[petitioner] received." Pet. App. 23; see id. at 22 (citing Stone v. INS, 514 U.S. 386, 397
(1995)). That conclusion is, moreover, supported by the legislative history of the 1996 Act,
which indicates that Congress understood that the amended statute would "[i]nclude in
income damage recoveries for nonphysical injuries." H.R. Rep. No. 586, 104th Cong., 2d Sess.
143 (1996); see Pet. App. 22 n.*.

c. Congress's decision to tax nonphysical personal injury damages is, as the court of appeals
correctly con cluded (Pet. App. 24-37), well within Congress's "Power To lay and collect
Taxes, Duties, Imposts and Excises" under Article I, Section 8. U.S. Const. Art. I, § 8, Cl. 1. As
relevant here, there are two restrictions on Con gress's exercise of its Article I taxing power:
duties, imposts, and excises must be uniform throughout the nation, and "direct taxes"
must be apportioned by popu lation. See id. Art. I, § 8, Cl. 1; id. Art. I, § 9, Cl. 4. The court of
appeals correctly determined that the tax chal lenged in this case does not violate either
restriction.
OFFICEMETRO PHILIPPINES, INC. (formerly REGUS CENTRES, INC.) v. COMMISSIONER OF
INTERNAL REVENUE, CTA Case No. 8382, June 3, 2014

Taxation; Association/condominium dues and other fees and charges collected from members
that are used solely for administrative purposes are not subject to income tax and
withholding tax. The BIR in its various rulings, held that association/condominium dues,
membership fees and other assessment/charges collected from the members, which
are merely held in trust and which are to be used solely for administrative expenses in
implementing their purpose(s), viz., to protect and safeguard the welfare of the
owners, lessees and occupants; provide utilities and amenities for their members, and from
which the corporation could not realize any gain or profit as a result of their receipt
thereof, must not be included in said corporation’s gross income. This means that the same
are not subject to income tax and to withholding tax.