COMWI VS.

CTA

For the proper resolution of these cases income may be defined as an amount of money coming
to a person or corporation within a specified atime, 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 a 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 on currency to another.

The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of
Procter Gamble. Petitioners argue that since there were no remittances and acceptances of
their salaries and wages in US dollars into the Philippines, they are exempt from the coverage
of such circulars. Petitioners forget that they are citizens of the Philippines, and their income,
within or without, and in these cases wholly without, are subject to income tax. Sec. 21, NIRC,
as amended, does not brook any exemption.

JAVIER VS. CA

Under Sec 72 of the Tax Code, a taxpayer who files a false return is liable to pay a fraud penalty
of 50% of the tax due from him of the deficiency tax in case payment has been made on the
basis of the return filed before the discovery of the falsity or fraud. The fraud contemplated by
law is actual and not constructive.

In the case at bar, there was no actual and intentional fraud through willful and deliberate
misleading of the government agency concerned, the BIR. 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. Error or
mistake of law is not fraud.

The imposition of the fraud penalty in this case is not justifies by the extant facts because he did
not conceal the facts that he received an amount of money although it was a subject of litigation.

LIMPAN INVESTMENT CORPORATION VS. CIR

Constructive receipt of income.- The withdrawal in 1958 of the deposits in court pertaining to the
1957 rental income is not sufficient justification for the non-declaration of said income in 1957,
since the deposit was resorted to due to the refusal of petitioner to accept the same, and was
not the fault of its tenants; hence, petitioner is deemed to have constructively received such
rentals in 1957. The payment by the sub-tenant in 1957 should have been reported as rental
income in said year, since it is income just the same regardless of its source.

Limban Investments admitted that it had undeclared more than half of the amount, therefore it
was incumbent upon the corporation to establish the remainder of its pretensions by clear and
convincing evidence which was lacking in this case.
The payment by the sub-tenant should have been reported as rental income in said year as it in
still income regardless of the source.

FERNANDEZ HERMANOS, INC. VS. CIR

Increases in the taxpayer's net worth are not taxable increases in net worth if they are not the
result of the receipt by unreported or unexplained taxable income, but are shown to be merely
the result of the correction of errors in its entries in its books relating to its indebtednesses to
certain creditors, which had been erroneously overstated or listed as outstanding when they had
in fact been duly paid.

A judicial action for the collection of a tax is begun by the filing of a complaint with the proper
court of first instance, or where the assessment is appealed to the Court of Tax Appeals, by
filing an answer to the taxpayer's petition for review wherein payment of the tax is prayed for.
This is but logical for where the taxpayer avails of the right to appeal the .tax assessment to the
Court of Tax Appeals, the said Court is vested with the authority to pronounce judgment as to
the taxpayer's liability to the exclusion of any other court.

RUTKIN VS. US

Money obtained by extortion is income taxable to the extortioner under Sec. 22(a) of the Internal
Revenue Code money obtained by extortion is income taxable to the extortioner under Sec.
22(a) of the Internal Revenue Code.

An unlawful gain, as well as a lawful one, constitutes taxable income when its recipient has such
control over it that, as a practical matter, he derives readily realizable economic value from it.
That occurs when cash, as here, is delivered by its owner to the taxpayer in a manner which
allows the recipient freedom to dispose of it at will, even though it may have been obtained by
fraud and his freedom to use it may be assailable by someone with a better title to it.

Such gains are taxable in the yearly period during which they are realized. There is no adequate
reason why assailable unlawful gains should be treated differently in this respect from assailable
lawful gains. Certainly there is no reason for treating them more leniently.

EISNER VS. MACOMBER

Income means something derived from labor or capital. To be “derived” means something of
exchangeable value separated from the capital. A stock dividend is not income. Thus, If a stock
dividend is not considered income, it cannot be subject to income tax. It is important to
distinguish between capital and income, as only income is subject to income tax.

A stock dividend reflects the corporation transferring an amount from "surplus" (retained
earnings) to "capital stock." Such a transaction is merely a bookkeeping entry and "affects only
the form, not the essence, of the "liability" acknowledged by the corporation to its own
shareholders; it does not alter the preexisting proportionate interest of any stockholder or
increase the intrinsic value of his holding or of the aggregate holdings of the other stockholders
as they stood before".

In addition, since the shareholder receives no cash, in order to pay any tax on a stock dividend,
he might have to convert the stock into cash - he has no wherewithal to pay from the nature of
the transaction. "Nothing could more clearly show that to tax a stock dividend is to tax a capital
increase, and not income, than this demonstration that in the nature of things it requires
conversion of capital in order to pay the tax"

HELVERING V. HORST

The rule that income is not taxable until realized has never been taken to mean that a taxpayer
who has fully enjoyed the benefit of the economic gain represented by his right to receive
income, can escape taxation because he has not himself received payment. One who gives
giving away his right to interest income in advance of payment does not escape taxation
because he did not actually receive the money. His obvious exercise of such control supports
the idea that he had earned the interest and that it was taxable to him.

The dominant purpose of the income tax laws is the taxation of income to those who earn or
otherwise create the right to receive it and who enjoy the benefit of it when paid.

The tax laid by the 1934 Revenue Act upon income "derived from wages or compensation for
personal service, of whatever kind and in whatever form paid, also from interest" cannot fairly be
interpreted as not applying to income derived from interest or compensation when he who is
entitled to receive it makes use of his power to dispose of it in procuring satisfactions which he
would otherwise procure only by the use of the money when received.

In this case, the Court ruled that although the donor, by the transfer of the coupons, has
precluded any possibility of his collecting them himself, he has nevertheless, by his act,
procured payment of the interest as a valuable gift to a member of his family. As such, the Court
held that that the deficiency was properly assessed against respondent because when
respondent gave the gift of the coupons, he separated his right to interest payments from his
investment and procured the payment of the interest to his donee and enjoyed the economic
benefits of the income in the same manner and to the same extent as though the transfer were
of earnings.

BIR RULING 029-1998

INCOME TAX; Income tax paid or accrued (now incurred) by a company within a taxable year
not allowed as deduction –

(a) BIR is prohibited from issuing further comments on Questions Nos. 1, 2, 3, 7 and issued by
the Energy Regulatory Board in relation to ERB Case No. 93-118 entitled "Meralco vs. Energy
Regulatory Board, et. al." in so far as the rate fixing issue is concerned considering that the
issues are all sub judice pending before the Court of Appeals. With regard to the question of
whether the appraisal increase of property, plant and equipment of electric utilities is taxable,
the general rule is that, mere increase in the value of property without actual realization, either
through sale or other disposition, is not taxable. However, if by reason of appraisal, the cost
basis of property is increased and the resulting basis is used as the new tax base for purposes
of computing the allowable depreciation expense, the net difference between the original cost
basis and new basis due to appraisal is taxable under the economic benefit principle.

(b) BIR is not following American Laws on taxation because we have our tax laws, including
rules and regulations implementing our tax laws. However, under the doctrine of precedent, a
court may apply American Laws or Court Decisions.
(c) The amendments introduced by EO No. 37 to then Section 21(c)(2) of the Tax Code of 1997
provides that dividend received by a citizen or resident alien from a domestic corporation is
subject to income tax at the rate of 15% in 1986, 10% effective January 1, 1987, 5% effective
January 1, 1988 and 0% effective January 1, 1989. However, Sec. 22 (a) and (b) of the same
Code provides that dividends received by a non-resident alien individual, whether engaged or
not in trade or business in the Philippines, from a domestic corporation is subject to final
withholding tax of 30% of such dividend income.

(d) For purposes of computing the taxable income of domestic corporation derived form within
and without the Philippines, the allowable deductions are limited to those provided under
Section 29 of the Tax Code of 1997 for taxable year 1997 and prior years but for taxable year
1998, Section 34 of the Tax Code of 1997 governs.

(e) Pursuant to then Section 117 of the Tax Code of 1997, as amended by RA 8241, the 2%
franchise tax of electric, gas and water utilities is based on gross receipts derived from the
business covered by the law granting the franchise. (BIR Ruling No. 029-98 dated March 19,
1998)

CIR VS. LEDNICKY

Partnership Theory- Fundamental doctrine of income taxation that the right of a government to
tax income emanates from its partnership in the production of income, by providing the
protection, resources, incentives, and proper climate for such production to allow an alien
resident to deduct from his gross income whatever taxes he pays to his own government
amounts to conferring on the latter power to reduce the tax income of the Philippine government
simply by increasing the tax rates on the alien resident. Everytime the rate of taxation imposed
upon an alien resident is increased by his own government, his deduction from Philippine taxes
would correspondingly increase, and the proceeds for the Philippines diminished, thereby
subordinating our own taxes to those levied by a foreign government. Such a result is
incompatible with the status of the Philippines as an independent and sovereign state.

CIR VS. ISABELA CULTURAL CORP.

The all-events test requires the right to income or liability be fixed, and the amount of such
income or liability be determined with reasonable accuracy. However, the test does not demand
that the amount of income or liability be known absolutely, only that a taxpayer has at his
disposal the information necessary to compute the amount with reasonable accuracy. The all-
events test is satisfied where computation remains uncertain, if its basis is unchangeable; the
test is satisfied where a computation may be unknown, but is not as much as unknowable,
within the taxable year. The amount of liability does not have to be determined exactly; it must
be determined with "reasonable accuracy." Accordingly, the term "reasonable accuracy" implies
something less than an exact or completely accurate amount.

TAN VS. DEL ROSARIO

Uniformity of taxation, like equal protection, merely requires that all subjects or objects of
taxation, similarly situated, are to be treated alike both in privileges and liabilities. Uniformity
does not forfend classification as long as: (1) the standards that are used therefor are
substantial and not arbitrary, (2) the categorization is germane to achieve the legislative
purpose, (3) the law applies, all things being equal, to both present and future conditions, and
(4) the classification applies equally well to all those belonging to the same class.
What may instead be perceived to be apparent from the amendatory law is the legislative intent
to increasingly shift the income tax system towards the schedular approach in the income
taxation of individual taxpayers and to maintain, by and large, the present global treatment on
taxable corporations.

COLLECTOR VS. HENDERSON

Rental allowances and travel allowances furnished and given by the employer-corporation to the
employees are 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