Petitioner COMMISSIONER OF INTERNAL REVENUE

Respondents BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX APPEALS

Nature of the Case  Definition of income, taxable income
 Sec. 31
 Sources of Income
 "Doing" or "Engaging in" or "transacting" business have no specific
meaning. Each case has to be judged by its peculiar circumstances.
 An international airline, like BOAC, which has appointed a ticket sales
agent in the Philippines and which allocates fares received to various
airlines on the basis of their participation in the services rendered.
although BOAC does not operate any airplane in the Philippines, is a
resident foreign corporation subject to tax on income received from
Philippine sources.
 Definition of "gross income" in the Tax Code is broad enough to
include proceeds from sales of airline tickets in the Philippines even if
no service or airlifting of passenger cargo by an airline is done by its
planes in the Philippines
Facts  BOAC is a British Government-owned corporation organized and
existing under the laws of the United Kingdom.
 It is engaged in the international airline business. It did not carry
passengers or cargo to or from the Philippines, although during the
period covered by the assessments, it maintained a general sales
agent in the Philip. — Warner Barnes and Company, Ltd., and later
Qantas Airways — which was responsible for selling BOAC tickets
covering passengers and cargoes.
 It is admitted that BOAC had no landing rights for traffic purposes in
the Philippines, and was not granted a Certificate of public
convenience, except for a nine-month period, partly in 1961 and
partly in 1962, when it was granted a temporary landing permit .
 Petitioner assessed BOAC for deficiency income taxes covering the
years 1959 to 1963. BOAC paid the assessment under protest.
 CTA: proceeds of sales of BOAC passage tickets in the Philippines do
not constitute BOAC income from Philippine sources "since no service
of carriage of passengers or freight was performed by BOAC within
the Philippines" and, therefore, said income is not subject to
Philippine income tax.
Issues  Whether or not the revenue derived by private respondent British
Overseas Airways Corporation (BOAC) from sales of tickets in the
Philippines for air transportation, while having no landing rights here,
constitute income of BOAC from Philippine sources, and, accordingly,
taxable.
 Whether or not during the fiscal years in question BOAC is a resident
foreign corporation doing business in the Philippines or has an office
or place of business in the Philippines.
 In the alternative that private respondent may not be considered a
resident foreign corporation but a non-resident foreign corporation,
then it is liable to Philippine income tax at the rate of thirty-five

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 percent (35%) of its gross income received from all sources within the
Philippines.''
Ruling  YES. Sales of tickets in the Philippines is taxable.
 The source of an income is the property, activity or service that
produced the income. For the source of income to be considered as
coming from the Philippines, it is sufficient that the income is derived
from activity within the Philippines. The absence of flight operations
to and from the Philippines is not determinative of the source of
income or the site of income taxation.
 In BOAC's case, the sale of tickets in the Philippines is the activity that
produces the income:
 The tickets exchanged hands and payments for fares were also
made in Philippine currency.
 The site of the source of payments is the Philippines.
 The flow of wealth proceeded from, and occurred within,
Philippine territory, enjoying the protection accorded by the
Philippine government.
 In consideration of such protection, the flow of wealth should
share the burden of supporting the government.
 The definition of gross income under section 32 of tax code is broad
and comprehensive to include proceeds from sales of transport
documents.
 NOTE: Pursuant to Presidential Decree No. 69, international carriers
are now taxed of 2-½ per cent on their cross Philippine billings.
Name of the Case  VICENTE MADRIGAL and his wife, SUSANA PATERNO,plaintiffs and
appellants, vs.
 JAMES J. RAPFERTY, Collector of Internal Revenue, and VENANCIO
CONCEPCION, Deputy Collector of Internal Revenue, defendants and
appellees.
Nature of the Case  Definition of income, taxable income
 Sec. 31
 INCOME CONTRASTED WITH CAPITAL AND PROPERTY.·Income as
contrasted with capital or property is to be the test. The essential
difference between capital and income is that capital is a fund;
income is a flow. Capital is wealth, while income is the service of
wealth. "The fact is that property is a tree, income is the fruit; labor
is a tree, income the fruit; capital is a tree, income the fruit."
 Income means profits or gains.
Facts  Vicente Madrigal and Susana Paterno were legally married prior to
Januray 1, 1914. The marriage was contracted under the provisions of
law concerning conjugal partnership
 On 1915, Madrigal filed a declaration of his net income for year 1914,
the sum of P296,302.73
 Vicente Madrigal was contending that the said declared income does
not represent his income for the year 1914 as it was the income of his
conjugal partnership with Paterno. He said that in computing for his
additional income tax, the amount declared should be divided by 2.

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Issues  Whether or not the income reported by Madrigal on 1915 should be
divided into 2 in computing for the additional income tax because of
the conjugal partnership.
Ruling  The learned argument of counsel is mostly based upon the provisions
of the Civil Code establishing the sociedad de gananciales.
 Contention of Rafferty: The counter contentions of appellees are that
the taxes imposed by the Income Tax Law are as the name implies
taxes upon income tax and not upon capital and property; that the
fact that Madrigal was a married man, and his marriage contracted
under the provisions governing the conjugal partnership, has no
bearing on income considered as income, and that the distinction
must be drawn between the ordinary form of commercial partnership
and the conjugal partnership of spouses resulting from the relation of
marriage.
 The Supreme Court ruled against the Madrigals. To recapitulate,
Madrigal wants to divide into 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.
 Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the
property of her husband Vicente Madrigal during the life of the
conjugal partnership. She has an interest in the ultimate property
rights and in the ultimate ownership of property acquired as income
after such income has become capital.
 Susana Paterno has no absolute right to one-half the income of the
conjugal partnership. Not being seized of a separate estate, Susana
Paterno cannot make a separate return in order to receive the benefit
of the exemption which would arise by reason of the additional tax.
As she has no estate and income, actually and legally vested in her
and entirely distinct from her husband's property, the income cannot
properly be considered the separate income of the wife for the
purposes of the additional tax. Moreover, the Income Tax Law does
not look on the spouses as individual partners in an ordinary
partnership. The husband and wife are only entitled to the exemption
of P8,000 specifically granted by the law. The higher schedules of the
additional tax directed at the incomes of the wealthy may not be
partially defeated by reliance on provisions in our Civil Code dealing
with the conjugal partnership and having no application to the
Income Tax Law. The aims and purposes of the Income Tax Law must
be given effect.
Name of the Case  LlMPAN INVESTMENT CORPORATION, petitioner, vs.
COMMISSIONER OF INTERNAL REVENUE, ET AL., respondents.
Nature of the Case  Definition of income, taxable income
 Sec. 31
 Rents / Leases
 Taxation; Income taxes; Effect of admission by taxpayer of

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 undeclared income
 Constructive receipt of income.
 Rate of depreciation a question of fact.
Facts  The Limpan Investment Corporation filed income tax returns for the
years 1959 and 1960, which became the bases of two deficiency tax
assessments flowing from deduction disallowed after investigation
and verification by the Bureau on Internal Revenue.The assessment
were disputed, and thereafter appeal was seasonably lodged with the
Court of Tax Appeals (CTA).
 Decision was rendered in CTA case 1358 (L-28571) on September 20,
1967, reducing the deficiency assessment toP26,137. Decision was
rendered in CTA case 1397 (L-28644) on December 11, 1967, reducing
the deficiencyassessment to P7,240.48.
 The Commissioner ofInternal Revenue elevated the issue to the
Supreme Court in a petition for review.
Issues  When did payment by the Limpan InvestmentCorporation of the 5%
monthly interest for delinquency legally accrue?
Ruling  The Court ruled that in L-28571, interest shall be computed from
September 7, 1962, the date of notice and demand, at 1% per
month,for 3 years, no payment having been made within thirty days
from such notice and demand. The surcharge of 5%accrued on failure
to pay the deficiency tax due within thirty days from notice and
demand. In L-28644, interest shallbe computed from April 4, 1963,
the date of notice and demand. The surcharge of 5% accrued on
failure to pay thedeficiency tax due within thirty days from notice and
demand.
REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,
vs. LEONOR DE LA RAMA, ET AL., respondents appellees.
Nature of the Case  Definition of income, taxable income
 Sec. 31
 Dividends
 Income tax is due only on dividends which were received.
 Dividends not constructively received are not taxable
 Tax Court has no jurisdiction where notice of assessment was not
sent to proper party.
Facts  The estate of the late Esteban de la Rama was the subject of Special
Proceedings No. 401 of the Court of First Instance of Iloilo. The
executor-administrator, EliseoHervas, filed income tax returns of the
estate corresponding to the taxable year 1950. The Bureau of Internal
Revenue later claimed that it had found out that there had been
received by the estate in 1950 from the De la Rama Steamship
Company, Inc. cash dividends amounting to P86,800.00, which
amount was not declared in the income tax return of the estate for
the year 1950. The Bureau of Internal Revenue then made an
assessment as deficiency income tax against the estate.
 The Collector of Internal Revenue wrote a letter to Mrs. Lourdes de la
Rama-Osmeña informing her of the deficiency income tax and asking

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 for payment. Counsel for Lourdes wrote to the Collector
acknowledging receipt of the assessment but contended that Lourdes
had no authority to represent the estate, and that the assessment
should be sent to Leonor de la Rama who was pointed to by said
counsel as the administratrix.
 The Deputy Collector of Internal Revenue then sent a letter to Leonor
de la Rama as administratrix of the estate, asking payment. The tax,
as assessed, not having been paid, the Deputy Commissioner of
Internal Revenue, on September 7, 1959, wrote another letter to
Lourdes demanding the payment of the deficiency income tax within
the period of thirty days from receipt thereof. The counsel of Lourdes
insisted that the letter should be sent to Leonor de la Rama. The
Deputy Commissioner of Internal Revenue wrote to Leonor de la
Rama another letter, demanding the payment within thirty days from
receipt thereof.
 The deficiency income tax not having been paid, the Republic of the
Philippines filed a complaint against the heirs of Esteban de la Rama.
The Trial court, however, dismissed the complaint on the ground that
[relevant to the subject heading]it wasEliseoHervas, and neither
Leonor nor Lourdes, who was the proper administrator at the time,
and to whom the assessment should have been sent.
 The appellant contended that the assessment had become final,
because the decision of the Collector of Internal Revenue was sent in
a letter dated February 11, 1960 and addressed to the heirs of the
late Esteban de la Rama, through Leonor de la Rama as administratrix
of the estate, and was not disputed or contested by way of appeal
within thirty days from receipt thereof to the Court of Tax Appeals.
Issues  WON there was proper notice of the tax assessment
Ruling  If the notice was not sent to the taxpayer for the purpose of giving
effect to the assessment, said notice cannot produce any effect.
 The SC sustained the finding of the lower court that neither Leonor
nor Lourdes was the administratrix of the estate of Esteban de la
Rama. The Court noted that at the time the tax assessment was sent,
Special Proceedings No. 401 were still open with respect to the
controverted matter regarding the cash dividends upon which the
deficiency assessment was levied. It is clear that at the time these
special proceedings were taking place, EliseoHervas was the duly
appointed administrator of the estate.
 Plaintiff-appellant also contends that the lower court could not take
cognizance of the defense that the assessment was erroneous, this
being a matter that is within the exclusive jurisdiction of the Court of
Tax Appeals. This contention has no merit. According to Republic Act
1125, the Court of Tax Appeals has exclusive jurisdiction to review by
appeal decisions of the Collector of Internal Revenue in cases
involving disputed assessments, and the disputed assessment must
be appealed by the person adversely affected by the decision within
thirty days after the receipt of the decision. In the instant case, the

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 person adversely affected should have been the administrator of the
estate, and the notice of the assessment should have been sent to
him. The administrator had not received the notice of assessment,
and he could not appeal the assessment to the Court of Tax Appeals
within 30 days from notice. Hence the assessment did not fall within
the exclusive jurisdiction of the Court of Tax Appeals.
Name of the Case  COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs. JAPAN AIR LINES, INC., and THE COURT OF TAX APPEALS,
respondents.
Nature of the Case  Sources of Income
 For the source of income to be considered as coming from the
Philippines, it is sufficient that the income is derived from activities
within this country regardless of the absence of flight operations
within Philippine territory
 In order that a foreign corporation may be regarded as doing business
within a State, there must be continuity of conduct and intention to
establish a continuous business.
 There being no dispute that JAL constituted PAL as local agent to sell
its airline tickets, there can be no conclusion other than that JAL is
resident foreign corporation doing business in the Philippines
 The willful neglect to file the required tax return or the fraudulent
intent to evade the payment of taxes, considering that the same is
accompanied by legal consequences cannot be presumed.
 Negligence whether slight or gross is not equivalent to the fraud with
intent to evade the tax contemplated by the law.
Facts  Japan Air Lines, Inc. or JAL is a foreign corporation engaged in the
business of International air carriage. JAL maintained an office at the
Filipinas Hotel, Roxas Boulevard Manila.The said office did not sell
tickets but was merely for the promotion of the company. On July 17
1957, JAL constituted Philippine Airlines (PAL) as its ticket agent in the
Philippines. PAL therefore sold tickets for and in behalf of JAL.
 On June 1972, JAL received deficiency income tax assessments
notices and a demand letter from petitioner CIR for years 1959
through 1963. JAL protested against said assessments alleging that as
a non-resident foreign corporation, it is taxable only on income from
Philippines sources as determined by section 37 of the Tax Code,
there being no income on said years, JAL is not liable for taxes.

Issues  Whether or not the proceeds from sales of JAL tickets sold in the
Philippines by Philippine Airlines (PAL) are taxable as income from
sources within the Philippines.
Ruling  YES. In citing the landmark case of Commissioner of Internal Revenue
vs. British Overseas Airways Corporation, the Supreme Court ruled
that "The source of an income is the property, activity or service that
produced the income. For the source of income to be considered as
coming from the Philippines, it is sufficient that the income is derived
from activity within the Philippines. In BOAC's case, the sale of tickets

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 in the Philippines is the activity that produces the income. The tickets
exchanged hands here and payments for fares were also made here
in Philippine currency. The situs of the source of payments is the
Philippines. The flow of wealth proceeded from, and occurred within,
Philippine territory, enjoying the protection accorded by the
Philippine government. In consideration of such protection, the flow
of wealth should share the burden of supporting the government.”
 There being no dispute that JAL constituted PAL as local agent to sell
its airline tickets, there can be no conclusion other than that JAL is a
resident foreign corporation, doing business in the Philippines.
Indeed, the sale of tickets is the very lifeblood of the airline business,
the generation of sales being the paramount objective (Commissioner
of Internal Revenue vs. British Overseas Airways Corporation, supra).
Name of the Case  Western Minolco Corporation vs. Commissioner of Internal Revenue
Nature of the Case  Income tax v. property tax
 The 35% transactions tax on interest income is a tax
on income
 The 35% transactions tax is a tax on the interest income of the lender
and, therefore, a mining company who borrowed money, and
withheld and paid said tax on interest paid to the lender cannot claim
exemption therefrom even if it has a tax exemption certificate·as a
mining company
 Location of tax provision in the Tax Code does not determine its
nature. A tax is a tax on income even if located on the Code’s
provisions on business taxes.
 Tax exemptions are looked upon with disfavor
Facts  Petitioner is a domestic corporation engaged in mining, particularly
copper concentrates for export mined from mineral lands in Atok and
Kibungan, Benguet.
 It was granted a Certificate of Qualification for Tax Exemption.
 It was also granted by the Securities and Exchange Commission,
authority to borrow money and issue commercial papers.
 Pursuant to this authority, the petitioner borrowed funds from
several financial institutions and paid the corresponding 35%
transaction tax due thereon in the amount of P1,317,801.03.
 The petitioner then applied for the refund of the P1,317,801.03
alleging that it was not liable to pay the 35% transaction tax under its
Certificate of Qualification for Tax Exemption
 The respondent Commissioner of internal Revenue denied the
petitioner's claim for refund.
 Petitioner submits that inasmuch as taxes in general constitute
allowable deductions from gross income in the determination of
taxable net income, the 35% transaction tax is a business tax and not
an income tax because the Revenue Code itself classifies it as
"Business Tax" under Title V, and that P. D. No. 1154 expressly states
that the transaction tax shall be allowed as a deductible item for
purposes of determining the borrower's taxable income.

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Issues  Whether taxes in general constitute allowable deductions from gross
income in the determination of taxable net income, the 35%
transaction tax is a business tax and not an income.
Ruling  No. The 35%, transaction tax is imposed on interest income from
commercial papers issued in the primary money market. Being a tax
on interest, it is a tax on income. Income in the form of dividends,
capital gains on real property pursuant to Batas PambansaBlg, 37,
shares of stock pursuant to Presidential Decree 1739, and interests on
savings in bank accounts, for instance, are incomes, yet they are not
includible in the gross income when income taxes are paid because
these are subject to final withholding taxes.
Name of the Case  ARTHUR HENDERSON, petitioner, vs. COLLECTOR OF INTERNAL
REVENUE, respondent.
Nature of the Case  Compensation
 Allowances given by employer to husband and wife.
 The claim of the taxpayer that a certain amount was f&r "manager's
residential expenses" and should not form part of the ratable value
subject to income tax, being supported bysubstantial evidence, was
sustained.
Facts  Sps. Arthur Henderson and Marie Henderson filed their annual
income tax with the BIR. Arthur is president of American International
Underwriters for the Philippines, Inc., which is a domestic corporation
engaged in the business of general non-life insurance, and represents
a group of American insurance companies engaged in the business of
general non-life insurance.
 The BIR demanded payment for alleged deficiency taxes. In their
computation, the BIR included as part of taxable income: 1) Arthur’s
allowances for rental, residential expenses, subsistence, water,
electricity and telephone expenses 2) entrance fee to the Marikina
Gun and Country Club which was paid by his employer for his account
and 3) travelling allowance of his wife
 The taxpayers justifications are as follows:
1) as to allowances for rental and utilities, Arthur did not receive
money for the allowances. Instead, the apartment is furnished and
paid for by his employer-corporation (the mother company of
American International), for the employer corporation’s purposes.
The spouses had no choice but to live in the expensive apartment,
since the company used it to entertain guests, to accommodate
officials, and to entertain customers. According to taxpayers, only P
4,800 per year is the reasonable amount that the spouses would be
spending on rental if they were not required to live in those
apartments. Thus, it is the amount they deem is subject to tax. The
excess is to be treated as expense of the company.
2) The entrance fee should not be considered income since it is an
expense of his employer, and membership therein is merely
incidental to his duties of increasing and sustaining the business of his
employer.

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 3) His wife merely accompanied him to New York on a business trip as
his secretary, and at the employer-corporation’s request, for the wife
to look at details of the plans of a building that his employer intended
to construct. Such must not be considered taxable income.
 The Collector of Internal Revenue merely allowed the entrance fee as
nontaxable. The rent expense and travel expenses were still held to
be taxable. The Court of Tax Appeals ruled in favor of the taxpayers,
that such expenses must not be considered part of taxable income.
Letters of the wife while in New York concerning the proposed
building were presented as evidence.
Issues  Whether or not the rental allowances and travel allowances furnished
and given by the employer-corporation are part of taxable income?
Ruling  NO. Such claims are substantially supported by evidence.
 These claims are therefore NOT part of taxable income. No part of the
allowances in question redounded to their personal benefit, nor were
such amounts retained by them. These bills were paid directly by the
employer-corporation to the creditors. The rental expenses and
subsistence allowances are to be considered not subject to income
tax. Arthur’s high executive position and social standing, demanded
and compelled the couple to live in a more spacious and expensive
quarters. Such ‘subsistence allowance’ was a SEPARATE account from
the account for salaries and wages of employees. The company did
not charge rentals as deductible from the salaries of the employees.
These expenses are COMPANY EXPENSES, not income by employees
which are subject to tax.
Name of the Case  Rodriguez v. CIR, 28 SCRA 1119, (1969)
Nature of the Case  Gains derived from dealings in property
Facts  Some of petitioner’s lands were subject of expropriation under RA
No. 333. The court awarded the expropriation to the Republic of the
Phils. Petitioner negotiated with the government thru the Capital City
Planning Commission, resulting in a compromise agreement as
follows: Govt will pay petitioner the sum of around P1.2M for the
expropriated property of which around P0.62M were in tax-exempt
Government Bonds. In its income tax return for 1950, Petitioner did
not include the P0.62M worth of bonds it received from the Govt in
its computation of profits / losses. The BIR however assessed
deficiency tax on this portion to the amount of around P63K.
Petitioner contends that the payment in tax-exempt bonds exempts
such portion from income taxation. It contends that this tax
exemption is an inducement offered by the Govt to the landowners.
Petitioner refers to RA No. 1400 which expressly provides that
payment of the Govt shall not be considered as income of the
landowners for income tax purposes.
Issues  WON the P 0.62M portion paid by the Govt in the form of bonds
should be included in determining the profit / loss of petitioner for
income tax
Ruling  Yes, this portion paid in Bonds should be included for income tax

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 purposes. The income derived from the sale of land to the Govt is
different from the income derived from interests earned or profits
earned from the exchange of the said bonds. The tax exemption only
covers the latter. Petitioner must pay income tax on his profit on the
sale of land, whether payment was in the form of cash or bonds.
Reference to RA No. 1400 merely strengthens this decision because
RA No. 333 does not explicitly provide for income tax exemption,
unlike the former. The court reiterated that exemption from taxation
is not favored and presumed, and that tax exemption is strictly
construed vs. the taxpayer.
Name of the Case  COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs. JOHN L. MANNING, W.D. McDONALD, E.E. SIMMONS and THE
COURT OF TAX APPEALS,respondents.
Nature of the Case  Dividends
 A stock dividend cannot be declared out of outstanding stock in the
guise of treasury stock dividend, but only from retained earnings
 Where corporate earnings are used to purchase outstanding stock
treated as treasury stock as a technical, but prohibited device, to
avoid effects of income taxation, distribution of said corporate
earnings in the form of stock dividends will subject stockholders
receiving them to income tax
 Income tax law indifferent as to source of income liable to tax
Facts  1952 - Mantrasco had an authorized capital stock of P2.5M divided
into 25,000 common shares. 24,700 of these shares are owned by
Julius Reese while the rest, at 100 each, are owned by Manning,
McDonald & Simmons.
 February 29, 1958 - a trust agreement was executed between Reese,
Mantrasco, Ross, Selph, carrascoso & Janda law firm, Manning,
McDonald and Simmons. Said agreement was entered into because of
Reese’s desire that Mantrasco and Mantrasoc’s 2 subsidiaries,
Mantrasco Guam and Port Motors, to continue under the
management of Manning, McDonald and Simmons upon his [Reese]
death.
 October 19, 1954 - Reese died. However, the projected transfer of his
shares in the name of Mantrasco could not be immediately effected
for lack of sufficient funds to cover the initial payment on the shares.
 February 2, 1955 - after Mantrasco made a partial payment of Reese's
shares, the certificate for the 24,700 shares in Reese's name was
cancelled and a new certificate was issued in the name of Mantrasco.
Also, new certificate was endorsed to the law firm of Ross, Selph,
Carrascoso and Janda, as trustees for and in behalf of Mantrasco.
 December 22, 1958 - a resolution was passed during a special
meeting of Mantrasco stockholders.
 November 25, 1963 - entire purchase price of Reese's interest in
Mantrasco was finally paid in full by Mantrasco.
 May 4, 1964 - trust agreement was terminated and the trustees
delivered to Mantrasco all the shares which they were holding in

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 trust.
 September 14, 1962 - BIR ordered an examination of Mantrasco’s
books. This examination disclosed that:
1.as of December 31, 1958 the 24,700 shares declared as dividends
had been proportionately distributed to Manning, McDonald &
Simmons, representing a total book value or acquisition cost of
P7,973,660
2.Manning, McDonald & Simmons failed to declare the said stock
dividends as part of their taxable income for the year 1958
 Thus, BIR examiners concluded that the distribution of Reese's shares
as stock dividends was in effect a distribution of the "asset or
property of the corporation as may be gleaned from the payment of
cash for the redemption of said stock and distributing the same as
stock dividend."
 April 14, 1965 - Commissioner of Internal Revenue issued notices of
assessment for deficiency income taxes to Manning, McDonald &
Simmons for the year 1958.
 Manning, McDonald & Simmons opposed said assessments. BIR still
held them liable for these assessments.
 Manning, McDonald & Simmons appealed to the CTA.
 CTA: absolved Manning, McDonald & Simmons from any liability on
the ground that their respective 1/3 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 changed.
Issues 1. WON the shares are treasury shares [NO]
2. WON Manning, McDonald & Simmons should pay for deficiency income
taxes [YES]
Ruling  Treasury shares are stocks issued and fully paid for and re-acquired
by the corporation either by purchase, donation, forfeiture or other
means. Treasury shares are therefore issued shares, but being in the
treasury they do not have the status of outstanding shares.
Consequently, although a treasury share, not having been retired by
the corporation re-acquiring it, may be re-issued or sold again, such
share, as long as it is held by the corporation as a treasury share,
participates neither in dividends, because dividends cannot be
declared by the corporation to itself, nor in the meetings of the
corporation as voting stock, for otherwise equal distribution of voting
powers among stockholders will be effectively lost and the directors
will be able to perpetuate their control of the corporation, though it
still represents a paid-for interest in the property of the corporation.
 In this case, such essential features of a treasury share are lacking in
the former shares of Reese.
 The manifest intention of the parties to the trust agreement was, in
sum and substance, to treat the 24,700 shares of Reese as absolutely
outstanding shares of Reese's estate until they were fully paid. Such
being the true nature of the 24,700 shares, their declaration as
treasury stock dividend in 1958 was a complete nullity and plainly
violative of public policy. A stock dividend, being one payable in

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 capital stock, cannot be declared out of outstanding corporate stock,
but only from retained earnings.
 Nature of a stock dividend
 A stock dividend always involves a transfer of surplus (or profit) to
capital stock.
 A stock dividend is a conversion of surplus or undivided profits into
capital stock, which is distributed to stockholders in lieu of a cash
dividend.
 The ultimate purpose which the parties to the trust agreement aimed
to realize is to make Manning, McDonalds & Simmons the sole
owners of Reese’s interest in Mantrasco by utilizing the periodic
earnings of Mantrasco and its subsidiaries to directly subsidize their
purchase of said interests and by making it appear that they have not
received any income from those firms when, in fact, by the formal
declaration of non-existent stock dividends in the treasury they
secured to themselves the means to turn around as full owners of
Reese’s shares.
 Manning, McDonald & Simmons, using the trust instrument as a
convenient technical device, bestowed unto themselves the full
worth and value of Reese's corporate holdings with the use of the
very earnings of the companies.
 Such package device, obviously not designed to carry out the usual
stock dividend purpose of corporate expansion reinvestment but
exclusively for expanding the capital base of Manning, McDonald &
Simmons in Mantrasco, cannot be allowed to deflect their
responsibilities toward our income tax laws.
 All these amounts are subject to income tax as being a flow of cash
benefits to Manning, McDonald & Simmons.
 Commissioner’s assessment is erroneous
 Commissioner should not have assessed the income tax on the total
acquisition cost of the alleged treasury stock dividends in 1 lump sum.
 The record shows that the earnings of Mantrasco over a period of
years were used to gradually wipe out the holdings of Reese.
 Consequently, those earnings should be taxed for each of the
corresponding years when payments were made to Reese’s estate on
account of his 24,700 shares.
 Dispositive: CTA judgment set aside. Case remanded to the CTA for
further proceedings for the recomputation of the income tax
liabilities of Manning, McDonald & Simmons.

Name of the Case  COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs. MELCHOR J. JAVIER, JR. and THE COURT OF TAX APPEALS,
respondents.
Nature of the Case  Income from whatever source derived
 Court persuaded that there is no fraud in the filing of
the return and agrees fully with the Court of Tax Appeals
interpretation of JavierÊs notation on his income tax return filed on

Yukimari Jamelo
 March 15, 1978
 Fraud in relation to the filing of income tax return discussed in Aznar
vs. Court of Appeals.
 Courts never sustain findings of fraud upon circumstances which
create only suspicion and the mere understatement of a tax is not
itself proof of fraud for the purpose of tax evasion
 There was no actual and intentional fraud through willful and
deliberate misleading of the Bureau of Internal Revenue, case at bar;
Error or mistake of law is not fraud.
Facts  1977: Victoria Javier, wife of Javier-respondent, received $999k from
Prudential Bank remitted by her sister Dolores through Mellon Bank
in US.
 Around 3 weeks after, Mellon Bank filed a complaint with CFI Rizal
against Javier claiming that its remittance of $1M was a clerical error
and should have been $1k only and praying that the excess be
returned on the ground that the Javiers are just trustees of an implied
trust for the benefit of Mellon Bank.
 CFI charged Javier with estafa alleging that they misappropriated and
converted it to their own personal use.
 A year after, Javier filed his Income Tax Return for 1977 and stating in
the footnote that “the taxpayer was recipient of some money
received abroad which he presumed to be a gift but turned out to be
an error and is now subject of litigation”
 The Commissioner of Internal Revenue wrote a letter to Javier
demanding him to pay taxes for the deficiency, due to the remittance.
 Javier replied to the Commissioner and said that he will pay the
deficiency but denied that he had any undeclared income for 1977
and requested that the assessment of 1977 be made to await final
court decision on the case filed against him for filing an allegedly
fraudulent return.
 Commissioner replied that “the amount of Mellon Bank’s erroneous
remittance which you were able to dispose is definitely taxable” and
the Commissioner imposed a 50% fraud penalty on Javier.
Issues  WON there was actual fraud which would justify the 50% penalty
Ruling  No
 Under sec 72 of the tax code, a taxpayer who files a false return is
liable to pay the fraud penalty of 50% of the tax due from him or of
the deficiency tax in case payment has been made on the basis of
return filed before the discovery of the falsity or fraud.
 The SC agrees with the CTA, quoted the latter: "Taxpayer was the
recipient of some money from abroad which he presumed to be a gift
but turned out to be an error and is now subject of litigation that it
was an "error or mistake of fact or law" not constituting fraud, that
such notation was practically an invitation for investigation and that
Javier had literally "laid his cards on the table."
 In Aznar v CA, it was said that the fraud contemplated by the law is
actual, not constructive, and must be intentional fraud. It must

Yukimari Jamelo
 amount to intentional wrong-doing with the sole object of avoiding
tax. Mere mistake cannot be considered fraudulent. Fraud is never
imputed and the courts never sustain findings of fraud upon
circumstances which, at most, create only suspicion and the mere
understatement of a tax is not itself proof of fraud for the purpose of
tax evasion.
 In this case , there was no actual and intentional fraud. The
government was not induced to give up some legal right and place
itself at a disadvantage so as to prevent its lawful agents from proper
assessment of tax liabilities because Javier did not conceal anything.

Yukimari Jamelo