1

TOPIC: Cession of the premiums taxable as income from sources within the Philippines.

4) PHIL. GUARANTY CO. VS. CIR

FACTS: The Philippine Guaranty Co., Inc., a domestic insurance company, entered into reinsurance contracts, on
various dates, with foreign insurance companies not doing business in the Philippines. Petitioner thereby agreed to
cede to the foreign reinsurers a portion of the premiums on insurance it has originally underwritten in the Philippines,
in consideration for the assumption by the latter of liability on an equivalent portion of the risks insured.

Said reinsurrance contracts were signed by Philippine Guaranty Co., Inc. in Manila and by the foreign
reinsurers outside the Philippines.

Said premiums were excluded by Philippine Guaranty Co., Inc. from its gross income when it file its income tax
returns. It did not withhold or pay tax on them. Consequently, the CIR assessed against PETITIONER .withholding tax
on the ceded reinsurance premiums.

Petitioner protested the assessment on the ground that reinsurance premiums ceded to foreign reinsurers not
doing business in the Philippines are not subject to withholding tax.

CTA: IN FAVOR OF RESPONDENT

ISSUE: Whether reinsurance premiums ceded to foreign reinsurers not doing business in the Philippines are subject to
tax

HELD: Yes. The reinsurance premiums are subject to tax.

The reinsurance contracts show that the transactions or activities that constituted the undertaking to reinsure
Philippine Guaranty Co., Inc. against loses arising from the original insurances in the Philippines were performed in the
Philippines.

Section 24 of the Tax Code subjects foreign corporations to tax on their income from sources within the
Philippine .“Sources” means the activity, property, or service giving rise to the income. The original insurance
undertakings took place in the Philippines. It is not required that the foreign corporation be engaged in business in the
Philippines. What is controlling is no the place of business, but the place of activity that created the income. Thus, the
income is subject to income tax.

NOTE: The foreign insurers' place of business should not be confused with their place of activity. Business should not be
continuity and progression of transactions while activity may consist of only a single transaction. An activity may
occur outside the place of business.
 2

Meralco v Yatco (1939)

Meralco v Yatco
GR No. 45697, November 1, 1939

FACTS:
Meralco entered into an insurance contract with a new york based insurance company. Yatco, the
Commissioner of
Internal Revenue, levied taxes on the premium paid. Meralco paid under protest alleging that the Philippines
had no jurisdiction.

ISSUE:
Whether the CIR exceeded his powers in taxing Meralco’s paid premium

RULING:
No. Where the risk insured against and certain incidents of the contract are to be attended in the Philippines
such as
payment of dividends when received in cash, the Philippines may impose tax regardless whether the
contract is executed abroad. Under such circumstances, substantial elements of the contract may be said to
be so situated in the Philippines as to give its government the power to tax. Even if it be assumed that the tax
imposed upon the insured will ultimately be passed on to the insurer, thus constituting an indirect tax upon
the foreign corporation, by stipulations of its contract, has subjected itself to the taxing jurisdiction of the
Philippines.

After all, the Government of the Philippines, by protecting the properties insured, benefits the foreign
corporation. It is thus reasonable that the latter should pay a just contribution therefor.
 3

Gutierrez vs CTA

FACTS:

Maria Morales was the registered owner of an agricultural land at Mabalacat, Pampanga. The Republic, at the request
of the U.S. Government and pursuant to the terms of the Military Bases Agreement, instituted condemnation proceedings in the
CFI Pampanga to expropriate the lands owned by Morales and others needed for the expansion of the Clark Field Air Base, which
project is necessary for the mutual protection and defense of the Phils. and US. Blas Gutierrez was also made a party defendant
in said case for being the husband of Morales. At the commencement of the action, the Republic deposited with the clerk of court
the sum of P156,960, provisionally fixed as the value of the lands sought to be expropriated for it to take immediate possession
of the same. CFI Pampanga fixed as just compensation P2,500 per hectare for some of the lots and P3,000 per hectare for the
others. Thus, Morales was to receive the amount of P94,305.75 as compensation for Lot No. 724-C which was one of the
expropriated lands.

To avoid further litigation, the parties entered into a compromise agreement fixing the compensation for all the lands,
without distinction, at P2,500 per hectare. This reduction of price did not affect Lot No. 724-C of Morales. Blas Gutierrez and
Maria Morales received the sum of P59.785.75 presenting the balance remaining in their favor after deducting the amount of
P34,580 already withdrawn from the compensation to them. In a notice of assessment of January 28, 1953, the CIR demanded
of the spouses the payment of alleged deficiency income tax for the year 1950. Counsel for petitioner sent a letter to the CIR
requesting to the latter to withdraw and reconsider said assessment. This request was denied. The spouses brought the action
to the CTA. After due hearing, CTA rendered decision held that the gain derived by the spouses from the expropriation of their
property constituted taxable income and as such was capital gain, and that said gain was taxable in 1950 when it realized. It was
also found by said Court that the evidence did not warrant the imposition of the 50 per cent surcharge because the spouses acted
in good faith and without intent to defraud the Government when they failed to include in their gross income the proceeds they
received from the expropriated property.

ISSUE:

WON the compensation received by the spouses via expropriation proceedings shall be included in their gross income
as the said transfer of property shall be considered as sale, thus, income derived therefrom is taxable.

HELD:

Since the property was acquired by the Government through condemnation proceedings, the spouses claim that same
cannot be considered as sale as the acquisition was by force. Consequently, they contend that this kind of transfer of ownership
must perforce be distinguished from sale. But, authorities in US on the matter sustain the view by CIR holding that the transfer
of property through condemnation proceedings is a sale or exchange within the meaning of section 117 (a) of the 1936 Revenue
Act and profit from the transaction constitutes capital gain. The proposition that income from expropriation proceedings is income
from sales or exchange and therefore taxable has been likewise upheld in the case of Lapham vs. U.S. (1949, 40 AFTR 1370) and
in Kneipp vs. U.S. (1949, 85 F Suppl. 902). Thus, the acquisition by the Government of private properties through the exercise of
the power of eminent domain, said properties being justly compensated, is embraced within the meaning of the term "sale"
"disposition of property", and the proceeds from said transaction clearly fall within the definition of gross income laid down by
Section 29 of the Tax Code of the Philippines.
 4

GR No. 137377 CIR vs Marubeni

Facts:

CIR assails the CA decision which affirmed CTA, ordering CIR to desist from collecting the 1985
deficiency income, branch profit remittance and contractor’s taxes from Marubeni Corp after finding the
latter to have properly availed of the tax amnesty under EO 41 & 64, as amended.

Marubeni, a Japanese corporation, engaged in general import and export trading, financing and
construction, is duly registered in the Philippines with Manila branch office. CIR examined the Manila
branch’s books of accounts for fiscal year ending March 1985, and found that respondent had undeclared
income from contracts with NDC and Philphos for construction of a wharf/port complex and ammonia
storage complex respectively.

On August 27, 1986, Marubeni received a letter from CIR assessing it for several deficiency taxes. CIR
claims that the income respondent derived were income from Philippine sources, hence subject to internal
revenue taxes. On Sept 1986, respondent filed 2 petitions for review with CTA: the first, questioned the
deficiency income, branch profit remittance and contractor’s tax assessments and second questioned the
deficiency commercial broker’s assessment.

On Aug 2, 1986, EO 41 declared a tax amnesty for unpaid income taxes for 1981-85, and that taxpayers
who wished to avail this should on or before Oct 31, 1986. Marubeni filed its tax amnesty return on Oct
30, 1986.

On Nov 17, 1986, EO 64 expanded EO 41’s scope to include estate and donor’s taxes under Title 3 and
business tax under Chap 2, Title 5 of NIRC, extended the period of availment to Dec 15, 1986 and stated
those who already availed amnesty under EO 41 should file an amended return to avail of the new
benefits. Marubeni filed a supplemental tax amnesty return on Dec 15, 1986.

CTA found that Marubeni properly availed of the tax amnesty and deemed cancelled the deficiency taxes.
CA affirmed on appeal.

Issue:

W/N Marubeni is exempted from paying tax

Held:Yes.

1. On date of effectivity

CIR claims Marubeni is disqualified from the tax amnesty because it falls under the exception in Sec 4b
of EO 41:

“Sec. 4. Exceptions.—The following taxpayers may not avail themselves of the amnesty herein granted:
xxx b) Those with income tax cases already filed in Court as of the effectivity hereof;”

Petitioner argues that at the time respondent filed for income tax amnesty on Oct 30, 1986, a case had
already been filed and was pending before the CTA and Marubeni therefore fell under the exception.
However, the point of reference is the date of effectivity of EO 41 and that the filing of income tax cases
must have been made before and as of its effectivity.
 5

EO 41 took effect on Aug 22, 1986. The case questioning the 1985 deficiency was filed with CTA on
Sept 26, 1986. When EO 41 became effective, the case had not yet been filed. Marubeni does not fall in
the exception and is thus, not disqualified from availing of the amnesty under EO 41 for taxes on income
and branch profit remittance.

The difficulty herein is with respect to the contractor’s tax assessment (business tax) and respondent’s
availment of the amnesty under EO 64, which expanded EO 41’s coverage. When EO 64 took effect on
Nov 17, 1986, it did not provide for exceptions to the coverage of the amnesty for business, estate and
donor’s taxes. Instead, Section 8 said EO provided that:

“Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not contrary to or inconsistent
with this amendatory Executive Order shall remain in full force and effect.”

Due to the EO 64 amendment, Sec 4b cannot be construed to refer to EO 41 and its date of effectivity.
The general rule is that an amendatory act operates prospectively. It may not be given a retroactive effect
unless it is so provided expressly or by necessary implication and no vested right or obligations of
contract are thereby impaired.

2. On situs of taxation

Marubeni contends that assuming it did not validly avail of the amnesty, it is still not liable for the
deficiency tax because the income from the projects came from the “Offshore Portion” as opposed to
“Onshore Portion”. It claims all materials and equipment in the contract under the “Offshore
Portion” were manufactured and completed in Japan, not in the Philippines, and are therefore not
subject to Philippine taxes.

(BG: Marubeni won in the public bidding for projects with government corporations NDC and Philphos.
In the contracts, the prices were broken down into a Japanese Yen Portion (I and II) and Philippine Pesos
Portion and financed either by OECF or by supplier’s credit. The Japanese Yen Portion I corresponds to
the Foreign Offshore Portion, while Japanese Yen Portion II and the Philippine Pesos Portion correspond
to the Philippine Onshore Portion. Marubeni has already paid the Onshore Portion, a fact that CIR does
not deny.)

CIR argues that since the two agreements are turn-key, they call for the supply of both materials and
services to the client, they are contracts for a piece of work and are indivisible. The situs of the two
projects is in the Philippines, and the materials provided and services rendered were all done and
completed within the territorial jurisdiction of the Philippines. Accordingly, respondent’s entire receipts
from the contracts, including its receipts from the Offshore Portion, constitute income from Philippine
sources. The total gross receipts covering both labor and materials should be subjected to contractor’s tax
(a tax on the exercise of a privilege of selling services or labor rather than a sale on products).

Marubeni, however, was able to sufficiently prove in trial that not all its work was performed in the
Philippines because some of them were completed in Japan (and in fact subcontracted) in accordance
with the provisions of the contracts. All services for the design, fabrication, engineering and manufacture
of the materials and equipment under Japanese Yen Portion I were made and completed in Japan. These
services were rendered outside Philippines’ taxing jurisdiction and are therefore not subject to
contractor’s tax. Petition denied.
 6

CIR vs. CA, CTA and FORTUNE TOBACCO CORPORATION G.R. No. 119761
August 29, 1996, Taxation
October 25, 2017

FACTS:

‘Champion,’ ‘Hope,’ and ‘More’ were classified as foreign brands since they were listed in the World
Tobacco Directory as belonging to foreign companies.

However, Fortune Tobacco changed the names of ‘Hope’ to ‘Hope Luxury’ and ‘More’ to ‘Premium
More,’ thereby removing the said brands from the foreign brand category and registered as a local brand.”
Ad Valorem taxes were imposed on these brands.

RMC 37-93, Reclassification of Cigarettes Subject to Excise Tax, was issued by the BIR which aims to
collect deficiencies on ad valorem taxes against Fortune Tobacco following their reclassification as
foreign branded cigarettes.

“HOPE,” “MORE” and “CHAMPION” being manufactured by Fortune Tobacco Corporation were
considered locally manufactured cigarettes bearing a foreign brand subject to the 55% ad valorem tax on
cigarettes under RA 7654.

Fortune Tobacco filed a petition for review with the CTA. RMC 37-93 is found to be defective, invalid
and unenforceable.

The CA sustained the decision of the CTA. Hence, this appeal.

ISSUE:

Is RMC 37-93 a mere interpretative ruling, therefore not requiring, for its effectivity, hearing and filing
with the UP Law Center?

RULING:

A reading of RMC 37-93, particularly considering the circumstances under which it has been issued,
convinces us that the circular cannot be viewed simply as a corrective measure (revoking in the process
the previous holdings of past Commissioners) or merely as construing Section 142(c)(1) of the NIRC, as
amended, but has, in fact and most importantly, been made in order to place “Hope Luxury,” “Premium
More” and “Champion” within the classification of locally manufactured cigarettes bearing foreign
brands and to thereby have them covered by RA 7654.

Specifically, the new law would have its amendatory provisions applied to locally manufactured
cigarettes which at the time of its effectivity were not so classified as bearing foreign brands. Prior to the
issuance of the questioned circular, “Hope Luxury,” “Premium More,” and “Champion” cigarettes were
in the category of locally manufactured cigarettes not bearing foreign brand subject to 45% ad valorem
tax.

Hence, without RMC 37-93, the enactment of RA 7654, would have had no new tax rate consequence on
private respondent’s products. Evidently, in order to place “Hope Luxury,” “Premium More,” and
“Champion” cigarettes within the scope of the amendatory law and subject them to an increased tax rate,
the now disputed RMC 37-93 had to be issued. In so doing, the BIR not simply intrepreted the law; verily,
 7

it legislated under its quasi-legislative authority.The due observance of the requirements of notice, of
hearing, and of publication should not have been then ignored.

Indeed, the BIR itself, in its RMC 10-86, has observed and provided:

In order that there shall be a just enforcement of rules and regulations, in conformity with the basic
element of due process, the following procedures are hereby prescribed for the drafting, issuance and
implementation of the said Revenue Tax Issuances:

(1) This Circular shall apply only to (a) Revenue Regulations; (b) Revenue Audit Memorandum
Orders; and (c) Revenue Memorandum Circulars and Revenue Memorandum Orders bearing on internal
revenue tax rules and regulations.

(2) Except when the law otherwise expressly provides, the aforesaid internal revenue tax issuances
shall not begin to be operative until after due notice thereof may be fairly presumed.

Due notice of the said issuances may be fairly presumed only after the following procedures have been
taken;

xxx xxx xxx

(5) Strict compliance with the foregoing procedures is

enjoined.

Nothing on record could tell us that it was either impossible or impracticable for the BIR to observe and
comply with the above requirements before giving effect to its questioned circular.

All taken, the Court is convinced that the hastily promulgated RMC 37-93 has fallen short of a valid and
effective administrative issuance.

The decision of the Court of Appeals, sustaining that of the Court of Tax Appeals, is AFFIRMED.
 8

CIR V. CA (1996)
Petitioner: COMMISSIONER OF INTERNAL REVENUE
Resondent: HON. COURT OF APPEALS, HON. COURT OF TAX APPEALS and FORTUNE TOBACCO CORPORATION
Ponente: Vitug, J.

DOCTRINE: When an administrative rule is merely interpretative in nature, its applicability needs nothing further than
its bare issuance for it gives no real consequence more than what the law itself has already prescribed. When, upon the
other hand, the administrative rule substantially adds to or increases the burden of those governed, BIR must accord at
least to those directly affected a chance to be heard, and thereafter to be duly informed, before that new issuance is given
the force and effect of law.

FACTS:

1. Philippine Patent Office issued to the corporation separate certificates of trademark registration over
"Champion," "Hope," and "More" cigarettes manufactured by Fortune Tobacco.
2. CIR initially wanted to classify Champion, Hope and More as foreign brands because they were listed in the
World Tobacco Directory as belonging to foreign companies. However, Fortune changed their names of
'Hope' to Hope Luxury' and 'More' to 'Premium More, removing them from the foreign brand category and
submitted proof that they were local brands.
3. RA 7654 was enacted charging (1) locally manufactured cigarettes currently classified at the tax rate of 55%,
will still be taxed at 55% and (2) other locally manufactured cigarettes at 45% or 20%.
4. Before the effectivity of such Act, BIR issued a Revenue Memorandum Circular (RMC 37-93) reclassifying
the three brands as locally manufactured foreign brands thus subjecting them to 55% ad valorem tax.
5. BIR sought to collect tax deficiency.
6. Fortune filed a petition with CTA. CTA decided in favor of Fortune stating that the RMC is invalid and
unenforceable because prior to the effectivity of RA 7654, the brands were still classified as locally
manufactured cigarettes and taxed at 40% or 20%. CTA enjoined CIR from collecting deficiency tax for lack
of legal basis.
7. CIR filed petition for review with CA arguing that the RMC is an interpretation of the Tax Code and being an
interpretative ruling, it became effective without need for notice, hearing or publication.

ISSUE: Whether or not the Revenue Memorandum Circular issued by BIR is valid.

RULING + RATIO: No RMC 37-93 has fallen short of a valid and effective administrative issuance.

A reading of RMC 37-93, particularly considering the circumstances under which it has been issued, convinces us that
the circular cannot be viewed simply as a corrective measure or merely as construing Section 142(c)(1) of the NIRC but
has, in fact and most importantly, been made in order to place "Hope Luxury," "Premium More" and "Champion"
within the classification of locally manufactured cigarettes bearing foreign brands and to thereby have them
covered by RA 7654.
 Prior to the issuance of the questioned circular, "Hope Luxury," "Premium More," and "Champion" cigarettes
were in the category of locally manufactured cigarettes not bearing foreign brand subject to 45% ad valorem
tax. Hence, without RMC 37-93, the enactment of RA 7654, would have had no new tax rate consequence
on private respondent's products.
 Evidently, in order to place "Hope Luxury," "Premium More," and "Champion" cigarettes within the scope of
the amendatory law and subject them to an increased tax rate, the now disputed RMC 37-93 had to be
issued. In so doing, the BIR not simply interpreted the law; verily, it legislated under its quasi-
legislative authority. The due observance of the requirements of notice, of hearing, and of publication
should not have been then ignored.

Disposition: the decision of the Court of Appeals, sustaining that of the Court of Tax Appeals, is AFFIRMED. No
costs.
 9

15 State’s undertaking to guarantee promissory notes does not diminish its taxing power. (G.R. No.
L-53961 June 30, 1987, NATIONAL DEVELOPMENT COMPANY vs. COMMISSIONER OF
INTERNAL REVENUE)
137. Residence of Obligor who pays the interest determined the source of interest income.

FACTS:The National Development Company (NDC) entered into contracts in Tokyo with several
Japanese shipbuilding companies for the construction of 12 ocean-going vessels. The purchase
price was to come from the proceeds of bonds issued by Cental Bank. Initial payments were made
in cash and through irrevocable letters of credit. 14 promissory notes were signed for the balance
by NDC and , as required by the shipbuilders, guaranteed by the Republic of The Phils. When the
vessels were completed and delivered to the NDC in Tokyo, the latter remitted to the shipbuilders
the amount of US$ 4,066,580.70 as interest on the balance of the purchase price. No tax was
withheld. The Commissioner then held the NDC liable on such tax in the total sum of P5,115,234.74.
Negotiations followed but failed. NDC went to CTA. BIR was sustained by CTA. BIR was sustained by
CTA. Hence, this petition for certiorari.

ISUUE: Is NDC liable for tax?

RULING: Yes.
The Japanese shipbuilders were liable to tax on the interest remitted to them under Section 37 of
the Tax Code. , thus:
SEC. 37. Income from sources within the Philippines. — (a) Gross income from sources within the
Philippines. — The following items of gross income shall be treated as gross income from sources
within the Philippines:
(1) Interest. — Interest derived from sources within the Philippines, and interest on bonds, notes,
orother interest-bearing obligations of residents, corporate or otherwise;
NDC is not the one taxed but the Japanese shipbuilders who were liable on the interest remitted to
them under Section 37 of the Tax Code. The imposition of the deficiency taxes on NDC is a penalty
for its failure to withhold the same from the Japanese shipbuilders. Such liability is imposed by
Section 53c of the Tax Code.
NDC was remiss in the discharge of its obligation as the withholding agent of the government and
so should be liable for the omission.
It is also incorrect to suggest that the Republic of the Philippines could not collect taxes on the
interest remitted because of the undertaking signed by the Secretary of Finance in each of the
promissory notes that. There is nothing in the PN guaranteed by the state exempting the interests
from taxes. Petitioner has not established a clear waiver therein of the right to tax interests. Tax
exemptions cannot be merely implied but must be categorically and unmistakably expressed. Any
doubt concerning this question must be resolved in favor of the taxing power.
 10

G.R. No. 60714 March 6, 1991

COMMISSIONER OF INTERNAL REVENUE, petitioner

vs.
JAPAN AIR LINES, INC., and THE COURT OF TAX APPEALS, Respondents.

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:
I. 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.

LAW:
Tax Code States:
Under Section 20 of the 1977 Tax Code:
"(h) the term `resident foreign corporation' applies to a foreign corporation engaged in trade or business within the Philippines or
having an office or place of business therein.

"(i) the term `non-resident foreign corporation' applies to a foreign corporation not engaged in trade or business within the Philippines
and not having any office or place of business therein."

`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 profession, vocations, trades, business, commerce, sales, or dealings in property, whether real
or personal, growing out of the ownership or use of or interest in such property; also from interests, rents, dividends, securities, or the
transaction of any business carried on for gain or profit, or gains, profits and income derived from any source whatever" (Sec.
29(3);Emphasis supplied)

COURT’s 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 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).
 11

Helvering v. Bruun - 309 U.S. 461, 60 S. Ct. 631 (1940)

Rule:

While economic gain is not always taxable as income, the realization of gain need not, in order to
constitute income, be in cash derived from the sale of an asset; and the fact that the gain is a portion of the
value of property received by the taxpayer in the transaction does not negative its realization.

Facts:

A landlord leased out land and a building on it for a 99-year term. The tenant removed the existing
building and erected a new one. The lease was terminated due to the tenant's default, and it was
determined that, as of the cancellation date, the fair market value of the new building exceeded that of the
old one by more than $ 50,000. The Commissioner determined that this amount represented realization of
a gain subject to income tax in the year of the lease cancellation. This determination was reversed by the
Board of Tax Appeals, whose judgment was affirmed by the court of appeals.

Issue:

Did the respondent realize a taxable gain from the building in the year of cancellation?

Answer:

Yes.

Conclusion:

The Court posited that upon the cancellation of a lease, during which the tenant had erected a new
building on the land more valuable than the previously existing one, respondent realized a taxable gain in
the year of cancellation. The Supreme Court rejected the landlord's contention that the new building was
an improvement that became indistinguishably blended with the realty and therefore no gain could be
realized until the realty was sold. Rather, the Court held that realization of a gain did not have to be in
cash derived from the sale of an asset but rather could include profit realized from the completion of a
transaction. Here, as the result of a business transaction, the landlord received back his land with a
building on it that increased its value, and gain was thus realized.