1. Fisher v.

Trinidad, 43 Phil 973

FREDERICK C. FISHER v. WENCESLAO TRINIDAD, GR No. 17518, 1922-10-30

Facts:
Philippine American Drug Company was a corporation- duly organized and existing under the laws
of the Philippine Islands, doing business in the city of Manila... ppellant was a stoekohlder in said
corporation; that said corporation, as a... result of the business for that year, declared a "stock
dividend;... proportionate share of said stock dividend of the appellant was P24,800... the
appellant,... upon demand of the appellee, paid, under protest, and involuntarily, unto the appellee
the sum of P889.91 as income tax on said stock dividend.
recovery of that sum (P889.91) the present action was instituted... appellant cites and relies on
some decisions of the Supreme Court of the United States
In each of said cases an effort was made to collect an "income tax" upon "stock dividends" and in
each case it was held that "stock dividends" were capital and not an "income" and therefore not
subject to the "income tax" Jaw.
The appellee admits the doctrine established in the case of Eisner vs. Macomber (252 U. S., 189),
that a "stock dividend" is not "income" but argues that said Act No. 2833, in imposing the tax on the
stock dividend, does not violate the provisions of the Jones Law.
further argues that the statute of the United States providing for tax upon stock dividends is
different from the statute of the Philippine Islands, and therefore the decision of the Supreme Court
of the United States should not be followed in interpreting the statute... in force here.
It will be rioted from a reading of the provisions of the two laws above quoted that the writer of the
law of the Philippine Islands must have had before him the statute of the United States. No
important argument can be based upon the slight difference in the wording of the two... sections.
There is no question that the Philippine
Legislature may provide for the payment of an income tax, but it cannot, under the guise of an
income tax, collect a tax on property which is not an "income." The Philippine Legislature cannot
impose a tax upon "property" under a law which provides for a tax upon "income" only.
The Philippine Legislature has no power to provide a tax upon "automobiles" only, and under that
law collect a tax upon a carreton or bull cart.
A statute providing for an income tax cannot be construed to cover property which is not, in fact,
income. The Legislature cannot, by a... statutory declaration, change the real nature of a tax which it
imposes. A law which imposes an importation tax on rice only cannot be construed to impose an
importation tax on corn.
Issues:
Are the "stock dividends" in the present case "income" and taxable as such under the provisions of
section 25 of Act No. 2833 ?
Ruling:
stock dividends represent undistributed increase in the capital of corporations or firms, joint stock
companies, etc., etc., for a particular period.
used to show the... increased interest or proportional share in the capital of each stockholder.
the inventory of the property of the corporation, etc., for a 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, etc.
The New Standard Dictionary, edition of 1915, defines an income as "the amount of... money coming
to a person or corporation within a specified time whether as payment for services, interest, or
profit from investment."
Webster's International Dictionary defines an income as "the receipts, salary; especially, the annual
receipts of a private person or a... corporation from property."
Bouvier, in his law dictionary, says that an "income" in the federal constitution and income tax act,
is used in its common or ordinary meaning and not in its technical or economic sense.
Mr. Black, in his law... dictionary, says: "An income is the return in money from one's business,
labor, or capital invested ; gains, profit, or private revenue." "An income tax is a tax on the yearly
profits arising from property, professions, trades, and offices."
Gray vs. Darlington (82 U. S., 63), said in speaking of income that mere advance in value in no sense
constitutes the "income"
Such advance constitutes and can be treated merely as an increase of capital.
Mr. Justice Hughes
"income" in an income... tax law, unless it is otherwise specified, to mean cash or its equivalent. It
does not mean choses in action or unrealized increments in the value of the property
Towne vs. Eisner, supra, Mr, Justice Holmes
'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 interests are 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.
Mr. Justice Pitney
Eisner vs. Macomber
"An income may be 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 stock dividends are declared, the corporation or company acknowledges a liability, in form, to
the stockholders
If profits have been made by the... corporation... they create additional bookkeeping liabilities under
the head of "profit and loss,"
None of these, however, gives to the stockholders as a body, much less to any... one of them, either a
claim against the going concern or corporation, for any particular sum of money, or a right to any
particular portion of the asset, or any share unless or until the directors conclude that dividends
shall be made and a part of the company's assets... segregated from the common fund for that
purpose.
The dividend normally is payable in money and when so paid, then only does the stockholder
realize a profit or gain, which becomes his separate property, and thus derive an income from the
capital that he has invested. Until that... is done the increased assets belong to the corporation and
not to the individual stockholders.
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.
it tends rather to postpone said realization, in that the fund represented by the new stock has been
transferred from surplus to assets, and no longer is available for actual distribution.
The essential and controlling fact is... that the stockholder has received nothing out of the
company's assets for his separate use and benefit
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.
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
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.
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 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."
Mr. Justice Pitney, in the case of Eisner vs. Macomber
"That the fudamental relation of 'capital' to 'income' has been much discussed by economists, the
former being likened to the tree or the... land, the latter to the fruit or the crop... the former depicted
as a reservoir supplied from springs; the latter as the outlet stream, to be measured by its flow
during a period of time."
There is a clear distinction between an extraordinary cash dividend, no matter when earned, and
stock dividends declared, as in the present case.
The one is a disbursement to the stockholder of accumulated earnings, and the corporation at once
parts irrevocably with all... interest thereon. The other involves no disbursement by the
corporation. It parts with nothing to the stockholder.
The latter receives, not an actual dividend, but certificate of stock which simply evidences his
interest in the entire capital, including such as by investment of... accumulated profits has been
added to the original capital.
They are not income to him, but represent additions1 to the source of his income, namely, his
invested capital.
Gibbons vs. Mahon
The ownership of that property is in... the corporation, and not in the holders of shares of its stock.
DeKoven vs. Alsop
Mr. Justice Wilkin said: "A dividend is defined as 'a corporate profit set aside, declared, and ordered
by the directors to be paid to the stockholders on demand or at a fixed time. Until the dividend is...
declared, these corporate
  profits belong to the corporation, not to the stockholders, and are liable for corporate
indebtedness.'"
When a cash dividend is declared and paid to the... stockholders, such cash becomes the absolute
property of the stockholders and cannot be reached by the creditors of the corporation in the
absence of fraud. A stock dividend, however, still being the property of the corporation, and not of
the stockholder, it may be reached by... an execution against the corporation, and sold as a part of
the property of the corporation
The rule is well established that cash dividends, whether large or small, are regarded as "income"...
and all stock dividends, as capital or assets.
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. An income subject to taxation under the law must be an
actual income... and not a promised or prospective income.
The appellee emphasizes the "income from dividends." Of course, income received as dividends is
taxable as an income, but an income from "dividends" is a very different thing from a receipt of a
"stock dividend." One is... an actual receipt of profits; the other is a receipt of a representation of the
increased value of the assets of a corporation.
Yuck imperyalismo
In- asmuch, however, as appeals may be taken... from this court to the Supreme Court of the United
States, we feel bound to follow the same doctrine announced by that court.
"stock dividends" are not "income," the same cannot be taxed under that provision of Act No, 2833
which provides for a tax upon income.
Under the guise of an income tax, property which is not an... income cannot be taxed.
Principles:
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."
"That the fudamental relation of 'capital' to 'income' has been much discussed by economists, the
former being likened to the tree or the... land, the latter to the fruit or the crop; the former depicted
as a reservoir supplied from springs; the latter as the outlet stream, to be measured by its flow
during a period of time."
When a cash dividend is declared and paid to the... stockholders, such cash becomes the absolute
property of the stockholders and cannot be reached by the creditors of the corporation in the
absence of fraud. A stock dividend, however, still being the property of the corporation, and not of
the stockholder, it may be reached by... an execution against the corporation, and sold as a part of
the property of the corporation.
The rule is well established that cash dividends, whether large or small, are regarded as "income"...
and all stock dividends, as capital or assets.
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. An income subject to taxation under the law must be an
actual income... and not a promised or prospective income.
The appellee emphasizes the "income from dividends." Of course, income received as dividends is
taxable as an income, but an income from "dividends" is a very different thing from a receipt of a
"stock dividend." One is... an actual receipt of profits; the other is a receipt of a representation of the
increased value of the assets of a corporation.
"stock dividends" are not "income," the same cannot be taxed under that provision of Act No, 2833
which provides for a tax upon income. Under the guise of an income tax, property which is not an...
income cannot be taxed.

2. CIR vs. Protect & Gamble, GR No. 66838, December 2, 1991, 204 SCRA 378
FACTS:
Procter and Gamble Philippines declared dividends payable to its parent company and sole
stockholder, P&G USA. Such dividends amounted to Php 24.1M. P&G Phil paid a 35%
dividend withholding tax to the BIR which amounted to Php 8.3M It subsequently filed a
claim with the Commissioner of Internal Revenue for a refund or tax credit, claiming that
pursuant to Section 24(b)(1) of the National Internal Revenue Code, as amended by
Presidential Decree No. 369, the applicable rate of withholding tax on the dividends
remitted was only 15%.

MAIN ISSUE:
Whether or not P&G Philippines is entitled to the refund or tax credit.

HELD:
 YES. P&G Philippines is entitled.
Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to dividend
remittances to non-resident corporate stockholders of a Philippine corporation. This rate
goes down to 15% ONLY IF  he country of domicile of the foreign stockholder corporation
“shall allow” such foreign corporation a tax credit for “taxes deemed paid in the
Philippines,” applicable against the tax payable to the domiciliary country by the foreign
stockholder corporation. However, such tax credit for “taxes deemed paid in the
Philippines” MUST, as a minimum, reach an amount equivalent to 20 percentage points
which represents the difference between the regular 35% dividend tax rate and the reduced
15% tax rate. Thus, the test is if USA “shall allow” P&G USA a tax credit for ”taxes deemed
paid in the Philippines” applicable against the US taxes of P&G USA, and such tax credit must
reach at least 20 percentage points. Requirements were met.

NOTES: Breakdown:
a) Deemed paid requirement: US Internal Revenue Code, Sec 902: a domestic corporation
(owning 10% of remitting foreign corporation) shall be deemed to have paid a
proportionate extent of taxes paid by such foreign corporation upon its remittance of
dividends to domestic corporation.

b) 20 percentage points requirement: (computation is as follows)

P 100.00 -- corporate income earned by P&G Phils
x 35% -- Philippine income tax rate
P 35.00 -- paid by P&G Phil as corporate income tax

3. Silkair (Singapore) PTE. LTD. V. CIR, GR No. 184398, February 25, 2010

FACTS:

 Petitioner Silkair (Singapore)  Pte. Ltd., a foreign corp. which has a Philippine
representative office, is an outline international air carrier
 Dec 19, 2001: Silkair filed with the BIR a written application for the refund of excise tax it
paid on its purchases or jet fuels from Petron Corp. from Jan - June 2000
 Dec 26, 2001: not having been acted upon by the BIR, it filed a petition for review before the
CTA
 CTA: denied its petition on the ground that the excise tax is imposed on Petron are
manufacturer
 When the burden is shifted to Silkair, it is no longer a tax but added cost of goods purchased
 After changing counsel to Atty. Pastrana CTA En Banc dismissed it for being filed out of
time.  
 Petitioner filed a Petition for Review with the SC
ISSUE: W/N Silkair can claim a refund for indirect excise tax

HELD: Petition is denied.

NO

 Section 130 (A) (2) of the NIRC provides that "[u]nless otherwise specifically allowed, the
return shall be filed and the excise tax paid by the manufacturer or producer before removal of
domestic products from place of production." Thus, Petron Corporation, not Silkair, is the
statutory taxpayer which is entitled to claim a refund based on Section 135 of the NIRC of 1997
and Article 4(2) of the Air Transport Agreement between RP and Singapore. 
 Even if Petron Corporation passed on to Silkair the burden of the tax, the additional amount
billed to Silkair for jet fuel is not a tax but part of the price which Silkair had to pay as a
purchaser
 Unlike in Maceda v. Macaraig Jr. where it expressly includes indirect taxes.  Rule that tax
exemptions are construed in strictissimi juris against taxpayer applies

4. Tan vs. Del Rosario and CIR, GR L-109289 October 3, 1994

FACTS:

Republic Act No. 7496, also commonly known as the Simplified Net Income Taxation Scheme
(SNIT):

(1) Amended the tax bracket essentially increasing the income tax. [Sec 21(f)], and
(2) Limited the type of expenses that can be deducted from the Net Income [Sec. 29]

On the other hand, Section 6 of Revenue Regulations No. 2-93, the IRR of RA 7946, provides that: 

The general professional partnership (GPP) and the partners comprising the GPP are covered by R.A.
No. 7496. Thus, in determining the net profit of the partnership, only the direct costs mentioned in said
law are to be deducted from partnership income. Also, the expenses paid or incurred by partners in
their individual capacities in the practice of their profession which are not reimbursed or paid by the
partnership but are not considered as direct cost, are not deductible from his gross income.

Petitioners argue that the respondents have exceeded their rule-making authority in applying SNIT
to general professional partnerships (GPPs). Petitioners cite the pertinent deliberations in Congress
during its enactment of RA 7946:

MR. ALBANO: Now Mr. Speaker, I would like to get the correct impression on this bill. Do we speak
here of individuals who are earning, I mean, who earn through business enterprises and therefore,
should file an income tax return?

MR. PEREZ: That is correct, Mr. Speaker. This does not apply to corporations. It applies only to
individuals.

(Possible explanation: Before RA 7946 and its IRR, the income of general professional partnership
is not taxable. The income is taxed when distributed to the partners in the same way the income of
other individuals whether from their business or from employment is taxed.The petitioners
thought that because the IRR explicitly states that the SNIT is applicable to GPPs, both the income of
the GPP and the distribution the partners are now taxable)

ISSUE:

WON public respondents have exceeded their authority in applying SNIT to GPPs. (NO)

RATIO:

The Court, first of all, should like to correct the apparent misconception that general
professional partnerships are subject to the payment of income tax or that there is a difference
in the tax treatment between individuals engaged in business or in the practice of their respective
professions and partners in general professional partnerships.

The income tax is imposed not on the professional partnership, which is tax exempt, but on the
partners themselves in their individual capacity computed on their distributive shares of
partnership profits. (Basis: Section 23 of the NIRC)

There is, then and now, no distinction in income tax liability between a person who practices his
profession alone or individually and one who does it through partnership (whether registered or
not) with others in the exercise of a common profession. 

Partnerships are, under the Code, either:

(1) Taxable Partnerships. 

Covered: Regular partnership where 2 or more partners enter into a business enterprise like
manufacturing or selling.
Tax Treatment: Like a corporation, taxed at 30% of their net income (generally)

(2) Exempt partnerships:

Covered: General professional partnership, certain joint ventures 
Tax Treatment: Here, the partners themselves, not the partnership (although the partnership is
still obligated to file an income tax return [mainly for administration and data]), are liable for the
payment of income tax in their individual, capacity computed their respective and distributive
shares of profits. 

In the determination of the tax liability, a partner does so as an individual, and there is no choice on
the matter. In fine, under the Tax Code on income taxation, the general professional partnership is
deemed to be no more than a mere mechanism or a flow-through entity in the generation of income
by, and the ultimate distribution of such income to, respectively, each of the individual partners.

Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the above standing
rule as now so modified by Republic Act No. 7496 on basically the extent of allowable deductions
applicable to all individual income taxpayers on their non-compensation income.

DISPOSITIVE:

Petition dismissed.
5. CIR v Visayas Electric 23 SCRA 715 (SEE PDF)
6. CIR vs. CA, CTA, GCL Retirement Plan 207 SCRA 487

FACTS:
Private Respondent, GCL Retirement Plan (GCL, for brevity) is an employees' trust maintained by the
employer,
GCL Inc., to provide retirement, pension, disability and death benefits to its employees. The Plan as
submitted
was approved and qualified as exempt from income tax by Petitioner Commissioner of Internal
Revenue in
accordance with Rep. Act No. 4917.
Respondent GCL made investsments and earned therefrom interest income from which was witheld
the fifteen
per centum (15%) final witholding tax imposed by Pres. Decree No. 1959.
Respondent GCL filed with Petitioner a claim for refund in the amounts of P1,312.66 withheld by
Anscor Capital
and Investment Corp., and P2,064.15 by Commercial Bank of Manila. On 12 February 1985, it filed a
second
claim for refund of the amount of P7,925.00 withheld by Anscor, stating in both letters that it
disagreed with the
collection of the 15% final withholding tax from the interest income as it is an entity fully exempt from
income
tax as provided under Rep. Act No. 4917 in relation to Section 56 (b)of the Tax Code.
The refund requested having been denied, Respondent GCL elevated the matter to respondent Court
of Tax
Appeals (CTA). The latter ruled in favor of GCL, holding that employees' trusts are exempt from the
15% final
withholding tax on interest income and ordering a refund of the tax withheld.
HELD:
It is to be noted that the exemption from withholding tax on interest on bank deposits previously
extended by
Pres. Decree No. 1739 if the recipient (individual or corporation) of the interest income is exempt from
income
taxation, and the imposition of the preferential tax rates if the recipient of the income is enjoying
preferential
income tax treatment, were both abolished by Pres. Decree No. 1959. Petitioner thus submits that the
deletion of
the exempting and preferential tax treatment provisions under the old law is a clear manifestation that
the single
15% (now 20%) rate is impossible on all interest incomes from deposits, deposit substitutes, trust
funds and
similar arrangements, regardless of the tax status or character of the recipients thereof. In short,
petitioner's
position is that from 15 October 1984 when Pres. Decree No. 1959 was promulgated, employees'
trusts ceased to
be exempt and thereafter became subject to the final withholding tax.
To begin with, it is significant to note that the GCL Plan was qualified as exempt from income tax by
the
Commissioner of Internal Revenue in accordance with Rep. Act No. 4917 approved on 17 June 1967.
This law
specifically provided:
Sec. 1. Any provision of law to the contrary notwithstanding, the retirement benefits received by
officials and
employees of private firms, whether individual or corporate, in accordance with a reasonable private
benefit plan
maintained by the employer shall be exempt from all taxes and shall not be liable to attachment, levy
or seizure
by or under any legal or equitable process whatsoever except to pay a debt of the official or employee
concerned
to the private benefit plan or that arising from liability imposed in a criminal action; . . . (emphasis
ours).
In so far as employees' trusts are concerned, the foregoing provision should be taken in relation to
then Section
56(b) (now 53[b]) of the Tax Code, as amended by Rep. Act No. 1983, supra, which took effect on 22
June 1957.
This provision specifically exempted employee's trusts from income tax and is repeated hereunder for
emphasis:
Sec. 56. Imposition of Tax. (a) Application of tax. The taxes imposed by this Title upon individuals
shall apply to
the income of estates or of any kind of property held in trust.
xxx xxx xxx
(b) Exception. The tax imposed by this Title shall not apply to employee's trust which forms part of a
pension,
stock bonus or profitsharing plan of an employer for the benefit of some or all of his employees . . .
The tax-exemption privilege of employees' trusts, as distinguished from any other kind of property
held in trust,
springs from the foregoing provision. It is unambiguous. Manifest therefrom is that the tax law has
singled out
employees' trusts for tax exemption.

And rightly so, by virtue of the raison de'etre behind the creation of employees' trusts. Employees'
trusts or benefit
plans normally provide economic assistance to employees upon the occurrence of certain
contingencies,
particularly, old age retirement, death, sickness, or disability. It provides security against certain
hazards to
which members of the Plan may be exposed. It is an independent and additional source of protection
for the
working group. What is more, it is established for their exclusive benefit and for no other purpose.
The tax advantage in Rep. Act No. 1983, Section 56(b), was conceived in order to encourage the
formation and
establishment of such private Plans for the benefit of laborers and employees outside of the Social
Security Act.
It is evident that tax-exemption is likewise to be enjoyed by the income of the pension trust.
Otherwise, taxation
of those earnings would result in a diminution accumulated income and reduce whatever the trust
beneficiaries
would receive out of the trust fund. This would run afoul of the very intendment of the law.
The deletion in Pres. Decree No. 1959 of the provisos regarding tax exemption and preferential tax
rates under
the old law, therefore, can not be deemed to extent to employees' trusts. Said Decree, being a
general law, can not
repeal by implication a specific provision.
7. Lorenzo Ona v. CIR G.R. No. L-19342, May 25, 1972,45 SCRA 74

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:   
W/N there was a co-ownership or an unregistered partnership
W/N the petitioners are liable for the deficiency corporate income tax

Held:
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.
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.

8. Evangelist vs. Collector G.R. No. L-9996, October 15, 1957. 102 Phil 140 (SEE PDF)
9. Afisco Insurance Corp vs. CIR GR 112675 Jan 25, 1999 302 SCRA 1

The Facts

The antecedent facts,7 as found by the Court of Appeals, are as follows:

The petitioners are 41 non-life insurance corporations, organized and existing under the laws of the
Philippines. Upon issuance by them of Erection, Machinery Breakdown, Boiler Explosion and
Contractors All Risk insurance policies, the petitioners on August 1, 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 [p]ool. Accordingly, a pool
composed of the petitioners was formed on the same day.

On April 14, 1976, the pool of machinery insurers submitted a financial statement and filed an
Information Return of Organization Exempt from Income Tax for the year ending in 1975, on the
basis of which it was assessed by the Commissioner of Internal Revenue deficiency corporate taxes
in the amount 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. These assessments
were protested by the petitioners through its auditors Sycip, Gorres, Velayo and Co.

On January 27, 1986, the Commissioner of Internal Revenue denied the protest and ordered the
petitioners, assessed as Pool of Machinery Insurers, to pay deficiency income tax, interest, and
with[h]olding tax, itemized as follows:

Net income per information

return P3,737,370.00
===========

Income tax due thereon P1,298,080.00

Add: 14% Int. fr. 4/15/76

to 4/15/79 545,193.60

TOTAL AMOUNT DUE & P1,843,273.60

COLLECTIBLE ===========

Dividend paid to Munich

Reinsurance Company P3,728,412.00

===========

35% withholding tax at

source due thereon P1,304,944.20

Add: 25% surcharge 326,236.05

14% interest from

1/25/76 to 1/25/79 137,019.14

Compromise penalty-

non-filing of return 300.00

late payment 300.00

TOTAL AMOUNT DUE & P1,768,799.39

COLLECTIBLE ===========

Dividend paid to Pool Members P 655,636.00

===========

10% withholding tax at

source due thereon P 65,563.60

Add: 25% surcharge 16,390.90

14% interest from

1/25/76 to 1/25/79 6,884.18

Compromise penalty-

non-filing of return 300.00

late payment 300.00

TOTAL AMOUNT DUE & P 89,438.68

COLLECTIBLE ===========8

The CA ruled in the main that the pool of machinery insurers was a partnership taxable as a
corporation, and that the latters collection of premiums on behalf of its members, the ceding
companies, was taxable income. It added that prescription did not bar the Bureau of Internal
Revenue (BIR) from collecting the taxes due, because the taxpayer cannot be located at the address
given in the information return filed. Hence, this Petition for Review before us.9

The Issues

Before this Court, petitioners raise the following issues:

1.Whether or not the Clearing House, acting as a mere agent and performing strictly administrative
functions, and which did not insure or assume any risk in its own name, was a partnership or
association subject to tax as a corporation;

2.Whether or not the remittances to petitioners and MUNICHRE of their respective shares of
reinsurance premiums, pertaining to their individual and separate contracts of reinsurance, were
dividends subject to tax; and

3.Whether or not the respondent Commissioners right to assess the Clearing House had already
prescribed.10
The Courts Ruling

The petition is devoid of merit. We sustain the ruling of the Court of Appeals that the pool is taxable
as a corporation, and that the governments right to assess and collect the taxes had not prescribed.

First Issue:

Pool Taxable as a Corporation

Petitioners contend that the Court of Appeals erred in finding that the pool or clearing house was an
informal partnership, which was taxable as a corporation under the NIRC. They point out that 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.11 Hence, the pool
did not act or earn income as a reinsurer.12 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.13crä lä wvirtualibrä ry

Petitioners belie the existence of a partnership in this case, because (1) they, the reinsurers, did not
share the same risk or solidary liability;14 (2) there was no common fund;15 (3) the executive
board of the pool did not exercise control and management of its funds, unlike the board of
directors of a corporation;16 and (4) the pool or clearing house was not and could not possibly
have engaged in the business of reinsurance from which it could have derived income for
itself.17crä lä wvirtualibrä ry

The Court is not persuaded. The opinion or ruling of the Commission of Internal Revenue, the
agency tasked with the enforcement of tax laws, is accorded much weight and even finality, when
there is no showing that it is patently wrong,18 particularly in this case where the findings and
conclusions of the internal revenue commissioner were subsequently affirmed by the CTA, a
specialized body created for the exclusive purpose of reviewing tax cases, and the Court of
Appeals.19 Indeed,
[I]t has been the long standing policy and practice of this Court to respect the conclusions of quasi-
judicial agencies, such as the Court of Tax Appeals which, by the nature of its functions, is dedicated
exclusively to the study and consideration of tax problems and has necessarily developed an
expertise on the subject, unless there has been an abuse or improvident exercise of its authority.20

This Court rules that the Court of Appeals, in affirming the CTA which had previously sustained the
internal revenue commissioner, committed no reversible error. Section 24 of the NIRC, as worded
in the year ending 1975, provides:

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 (compaias 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. Parenthetically, the NLRCs
inclusion of such entities in the tax on corporations was made even clearer by the Tax Reform Act of
1997,21 which amended the Tax Code. Pertinent provisions of the new law read as follows:

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.

xxx xxx xxx."

Thus, the Court in Evangelista v. Collector of Internal Revenue22 held that Section 24 covered these
unregistered partnerships and even associations or joint accounts, which had no legal personalities
apart from their individual members.23 The Court of Appeals astutely applied
Evangelista:24crä lä wvirtualibrä ry

xxx Accordingly, a pool of individual real property owners dealing in real estate business was
considered a corporation for purposes of the tax in sec. 24 of the Tax Code in Evangelista v.
Collector of Internal Revenue, supra. The Supreme Court said:

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 Mertens Law of Federal Income Taxation, p. 562 Note 63)

Article 1767 of the Civil Code recognizes the creation of a contract of partnership when two or
more persons bind themselves to contribute money, property, or industry to a common fund, with
the intention of dividing the profits among themselves.25 Its requisites are: (1) mutual contribution
to a common stock, and (2) a joint interest in the profits.26 In other words, a partnership is formed
when persons contract to devote to a common purpose either money, property, or labor with the
intention of dividing the profits between themselves.27 Meanwhile, an association implies
associates who enter into a joint enterprise x x x for the transaction of
business.28crä lä wvirtualibrä ry

In the case before us, the ceding companies entered into a Pool Agreement29 or an association30
that would handle all the insurance businesses covered under their quota-share reinsurance
treaty31 and surplus reinsurance treaty32with Munich. The following unmistakably indicates a
partnership or an association covered by Section 24 of the NIRC:
(1) The pool has a common fund, consisting of money and other valuables that are deposited in the
name and credit of the pool.33 This common fund pays for the administration and operation
expenses of the pool.34crä lä wvirtualibrä ry

(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.35crä lä wvirtualibrä ry

(3) True, the pool itself is not a reinsurer and does not issue any insurance policy; however, 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. The ceding
companies share in the business ceded to the pool and in the expenses according to a Rules of
Distribution annexed to the Pool Agreement.36 Profit motive or business is, therefore, the
primordial reason for the pools formation. As aptly found by the CTA:

xxx The fact that the pool does not retain any profit or income does not obliterate an antecedent
fact, that of the pool being used in the transaction of business for profit. It is apparent, and
petitioners admit, that their association or coaction was indispensable [to] the transaction of the
business. x x x If together they have conducted business, profit must have been the object as,
indeed, profit was earned. Though the profit was apportioned among the members, this is only a
matter of consequence, as it implies that profit actually resulted.37

The petitioners reliance on Pascual v. Commissioner38 is misplaced, because the facts obtaining
therein are not on all fours with the present case. In Pascual, there was no unregistered
partnership, but merely a co-ownership which took up only two isolated transactions.39 The Court
of Appeals did not err in applying Evangelista, which involved a partnership that engaged in a series
of transactions spanning more than ten years, as in the case before us.

Second Issue:

Pools Remittances Are Taxable

Petitioners further contend that the remittances of the pool to the ceding companies and Munich
are not dividends subject to tax. They insist that taxing such remittances contravene Sections 24 (b)
(I) and 263 of the 1977 NIRC and 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.40 Moreover,
petitioners argue that since Munich was not a signatory to the Pool Agreement, the remittances it
received from the pool cannot be deemed dividends.41 They add that even if such remittances were
treated as dividends, they would have been exempt under the previously mentioned sections of the
1977 NIRC,42 as well as Article 7 of paragraph 143 and Article 5 of paragraph 544 of the RP-West
German Tax Treaty.45crä lä wvirtualibrä ry

Petitioners are clutching at straws. Double taxation means taxing the same property twice when it
should be taxed only once. That is, xxx taxing the same person twice by the same jurisdiction for the
same thing.46 In the instant case, the pool is a taxable entity distinct 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 said companies. Clearly, there is no double taxation here.

The tax exemptions claimed by petitioners cannot be granted, since their entitlement thereto
remains unproven and unsubstantiated. It is axiomatic in the law of taxation that taxes are the
lifeblood of the nation. Hence, exemptions therefrom are highly disfavored in law and he who
claims tax exemption must be able to justify his claim or right.47 Petitioners have failed to
discharge this burden of proof. The sections of the 1977 NIRC which they cite are inapplicable,
because these were not yet in effect when the income was earned and when the subject information
return for the year ending 1975 was filed.

Referring to the 1975 version of the counterpart sections of the NIRC, the Court still cannot justify
the exemptions claimed. Section 255 provides that no tax shall xxx be paid upon reinsurance by any
company that has already paid the tax xxx. This cannot be applied to the present case because, as
previously discussed, the pool is a taxable entity distinct from the ceding companies; therefore, the
latter cannot individually claim the income tax paid by the former as their own.

On the other hand, Section 24 (b) (1)48 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.
Although not a signatory to the Pool Agreement, Munich is patently an associate of the ceding
companies in the entity formed, pursuant to their reinsurance treaties which required the creation
of said pool.
Under its pool arrangement with the ceding companies, Munich shared in their income and loss.
This is manifest from a reading of Articles 349 and 1050 of the Quota Share Reinsurance Treaty and
Articles 351 and 1052 of the Surplus Reinsurance Treaty. 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.53crä lä wvirtualibrä ry

Finally, the petitioners claim that Munich is tax-exempt based on the RP-West German Tax Treaty is
likewise unpersuasive, because the internal revenue commissioner assessed the pool for corporate
taxes on the basis of the information return it had submitted for the year ending 1975, a taxable
year when said treaty was not yet in effect.54 Although petitioners omitted in their pleadings the
date of effectivity of the treaty, the Court takes judicial notice that it took effect only later, on
December 14, 1984.55

Third Issue: Prescription

Petitioners also argue that the governments right to assess and collect the subject tax had
prescribed. They claim that the subject information return was filed by the pool on April 14, 1976.
On the basis of this return, the BIR telephoned petitioners on November 11, 1981, to give them
notice of its letter of assessment dated March 27, 1981. Thus, the petitioners contend that the five-
year statute of limitations then provided in the NIRC had already lapsed, and that the internal
revenue commissioner was already barred by prescription from making an
assessment.56crä lä wvirtualibrä ry

We cannot sustain the petitioners. The CA and the CTA categorically found that the prescriptive
period was tolled under then Section 333 of the NIRC,57 because the taxpayer cannot be located at
the address given in the information return filed and for which reason there was delay in sending
the assessment.58 Indeed, whether the governments right to collect and assess the tax has
prescribed involves facts which have been ruled upon by the lower courts. It is axiomatic that in the
absence of a clear showing of palpable error or grave abuse of discretion, as in this case, this Court
must not overturn the factual findings of the CA and the CTA.

Furthermore, petitioners admitted in their Motion for Reconsideration before the Court of Appeals
that the pool changed its address, for they stated that the pools information return filed in 1980
indicated therein its present address. The Court finds that this falls short of the requirement of
Section 333 of the NIRC for the suspension of the prescriptive period. The law clearly states that the
said period will be suspended only if the taxpayer informs the Commissioner of Internal Revenue of
any change in the address.

WHEREFORE, the petition is DENIED. The Resolutions of the Court of Appeals dated October 11,
1993 and November 15, 1993 are hereby AFFIRMED. Costs against petitioners.

SO ORDERED.

10. PAscual v. CIR 166 SCRA 560

FACTS:

Petitioners bought two (2) parcels of land and a year after, they bought another three (3) parcels of
land. Petitioners subsequently sold the said lots in 1968 and 1970, and realized net profits. The
corresponding capital gains taxes were paid by petitioners in 1973 and 1974 by availing of the tax
amnesties granted in the said years. However, the Acting BIR Commissioner assessed and required
Petitioners to pay a total amount of P107,101.70 as alleged deficiency corporate income taxes for
the years 1968 and 1970. Petitioners protested the said assessment asserting that they had availed
of tax amnesties way back in 1974. In a reply, 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; and that the
availment of tax amnesty under P.D. No. 23, as amended, by petitioners relieved petitioners of their
individual income tax liabilities but did not relieve them from the tax liability of the unregistered
partnership. Hence, the petitioners were required to pay the deficiency income tax assessed.

ISSUE:

Whether the Petitioners should be treated as an unregistered partnership or a co-ownership for the
purposes of income tax.

RULING:
The Petitioners are simply under the regime of co-ownership and not under unregistered
partnership.

By the contract of partnership two or more persons bind themselves to contribute money, property,
or industry to a common fund, with the intention of dividing the profits among themselves (Art.
1767, Civil Code of the Philippines). In the present case, there is no evidence that petitioners
entered into an agreement to contribute money, property or industry to a common fund, and that
they intended to divide the profits among themselves. 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. Hence, 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.

11. CIR vs. St. Luke’s Medical Center, Inc. (GR 195909 & GR 195960 dated September 26, 2012)

CIR vs St. Luke's 2012

FACTS: St. Luke’s Medical Center, Inc. is a hospital organized as a non-stock and non-profit
corporation. The BIR assessed St. Luke’s deficiency taxes for 1998, comprised of deficiency income
tax, value-added tax, withholding tax on compensation and expanded withholding tax. St. Luke’s
filed an administrative protest with the BIR against the deficiency tax assessments. The BIR did not
act on the protest within the 180-day period under Section 228 of the NIRC. Thus, St. Luke’s
appealed to the CTA.

BIR’s contentions: The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a
10% preferential tax rate on the income of proprietary nonprofit hospitals, should be applicable to
St. Luke’s. According to the BIR, Section 27(B), introduced in 1997, “is a new provision intended to
amend the exemption on non-profit hospitals that were previously categorized as non-stock, non-
profit corporations under Section 26 of the 1997 Tax Code x x x.” It is a specific provision which
prevails over the general exemption on income tax granted under Section 30(E) and (G) for non-
stock, non-profit charitable institutions and civic organizations promoting social welfare. The BIR
claimed that St. Luke’s was actually operating for profit in 1998 because only 13% of its revenues
came from charitable purposes. Moreover, the hospital’s board of trustees, officers and employees
directly benefit from its profits and assets.
St. Luke’s contention: St. Luke’s contended that the BIR should not consider its total revenues,
because its free services to patients was P218,187,498 or 65.20% of its 1998 operating income. St.
Luke’s also claimed that its income does not inure to the benefit of any individual. St. Luke’s
maintained that it is a non-stock and non-profit institution for charitable and social welfare
purposes under Section 30(E) and (G) of the NIRC. It argued that the making of profit per se does
not destroy its income tax exemption.

ISSUE/S: Whether St. Luke’s is liable for deficiency income tax in 1998 under Section 27(B) of the
NIRC, which imposes a preferential tax rate of 10% on the income of proprietary non-profit
hospitals

RULING: There is no dispute that St. Luke’s is organized as a non-stock and non-profit charitable
institution. However, this does not automatically exempt St. Luke’s from paying taxes. This only
refers to the organization of St. Luke’s. Even if St. Luke’s meets the test of charity, a charitable
institution is not ipso facto tax exempt. To be exempt from real property taxes, Section 28(3),
Article VI of the Constitution requires that a charitable institution use the property “actually,
directly and exclusively” for charitable purposes. To be exempt from income taxes, Section 30(E) of
the NIRC requires that a charitable institution must be “organized and operated exclusively” for
charitable purposes. Likewise, to be exempt from income taxes, Section 30(G) of the NIRC requires
that the institution be “operated exclusively” for social welfare.

However, the last paragraph of Section 30 of the NIRC qualifies the words “organized and operated
exclusively.”

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from any
of their activities conducted for profit regardless of the disposition made of such income, shall be
subject to tax imposed under this Code

In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution
conducts “any” activity for profit, such activity is not tax exempt even as its not-for-profit activities
remain tax exempt. This paragraph qualifies the requirements in Section 30(E) that the “[n]on-
stock corporation or association [must be] organized and operated exclusively for x x x charitable x
x x purposes x x x.” It likewise qualifies the requirement in Section 30(G) that the civic organization
must be “operated exclusively” for the promotion of social welfare.

Thus, even if the charitable institution must be “organized and operated exclusively” for charitable
purposes, it is nevertheless allowed to engage in “activities conducted for profit” without losing its
tax exempt status for its not-for-profit activities. The only consequence is that the “income of
whatever kind and character” of a charitable institution “from any of its activities conducted for
profit, regardless of the disposition made of such income, shall be subject to tax.”

In 1998, St. Luke’s had total revenues of P1,730,367,965 from services to paying patients. It cannot
be disputed that a hospital which receives approximately P1.73 billion from paying patients is not
an institution “operated exclusively” for charitable purposes. Clearly, revenues from paying
patients are income received from “activities conducted for profit.” Services to paying patients are
activities conducted for profit. They cannot be considered any other way. There is a “purpose to
make profit over and above the cost” of services.

The Court finds that St. Luke’s is a corporation that is not “operated exclusively” for charitable or
social welfare purposes insofar as its revenues from paying patients are concerned. This ruling is
based not only on a strict interpretation of a provision granting tax exemption, but also on the clear
and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an
institution be “operated exclusively” for charitable or social welfare purposes to be completely
exempt from income tax. An institution under Section 30(E) or (G) does not lose its tax exemption if
it earns income from its for-profit activities. Such income from for-profit activities, under the last
paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate rate
but now at the preferential 10% rate pursuant to Section 27(B).

12. N.V. Reederit Armsterdam v. Commissioner GR 46029 June 23, 1988 162 SCRA 487

FACTS:

• Both vessels of petitioner N.V. Reederij “Amsterdam” called on Philippine ports to load
cargoes for foreign destinations.
• The freight fees for these transactions were paid in abroad. In these two transactions,
petition Royal Interocean Lines acted as husbanding agent for a fee or commission on
said vessels. No income tax has been paid by “Amsterdam” on the freight receipts.
• As a result, Commissioner of Internal Revenue filed the corresponding income tax
returns for the petitioner. Commissioner assessed petitioner for deficiency of income
tax, as a non-resident foreign corporation NOT engaged in trade or business.
• On the assumption that the said petitioner is a foreign corporation engaged in trade or
business in the Philippines, petitioner Royal Interocean Lines filed an income tax return
of the aforementioned vessels and paid the tax in pursuant to their supposed
classification.
• On the same date, petitioner Royal Interocean Lines, as the husbanding agent of
“Amsterdam”, filed a written protest against the abovementioned assessment made by
the respondent Commissioner. The protest was denied.
• On appeal, CTA modified the assessment by eliminating the 50% fraud compromise
penalties imposed upon petitioners. Petitioner still was not satisfied and decided to
appeal to the SC.
ISSUE: Whether or not N.V. Reederij “Amsterdam” should be taxed as a
foreign corporation not engaged in trade or business in the Philippines?

HELD:

• Petitioner is a foreign corporation not authorized or licensed to do business in the

Philippines. It does not have a branch in the Philippines, and it only made two calls in
Philippine ports, one in 1963 and the other in 1964.
• In order that a foreign corporation may be considered engaged in trade or business, its
business transactions must be continuous. A casual business activity in the Philippines
by a foreign corporation does not amount to engaging in trade or business in the
Philippines for income tax purposes.
• A foreign corporation doing business in the Philippines is taxable on income solely
from sources within the Philippines. It is permitted to claim deductions from gross
income but only to the extent connected with income earned in the Philippines. On the
other hand, foreign corporations not doing business in the Philippines are taxable on
income from all sources within the Philippines . The tax is 30% (now 35% for non-
resident foreign corp which is also known as foreign corp not engaged in trade or
business) of such gross income. (*take note that in a resident foreign corp, what is
being taxed is the taxable income, which is with deductions, as compared to a non-
resident foreign corp which the tax base is gross income)
• Petiioner “Amsterdam” is a non-resident foreign corporation, organized and existing
under the laws of the Netherlands with principal office in Amsterdam and not licensed to
do business in the Philippines.
13. Marubeni Corp v. Commissioner, GR No. 65783, 14 September 1989177 SCRA 500

Facts:

Marubeni Corporation is a Japanese corporation licensed to engage in business in the

Philippines. When the profits on Marubeni’s investments in Atlantic Gulf and Pacific Co.
of Manila were declared, a 10% final dividend tax was withheld from it, and another 15%
profit remittance tax based on the remittable amount after the final 10% withholding tax
were paid to the Bureau of Internal Revenue. Marubeni Corp. now claims for a refund or
tax credit for the amount which it has allegedly overpaid the BIR.

Issues and Ruling:

1. Whether or not the dividends Marubeni Corporation received from Atlantic Gulf and Pacific Co.
are effectively connected with its conduct or business in the Philippines as to be considered branch
profits subject to 15% profit remittance tax imposed under Section 24(b)(2) of the National Internal
Revenue Code.

NO. Pursuant to Section 24(b)(2) of the Tax Code, as amended, only profits remitted
abroad by a branch office to its head office which are effectively connected with its trade
or business in the Philippines are subject to the 15% profit remittance tax. The
dividends received by Marubeni Corporation from Atlantic Gulf and Pacific Co. are not
income arising from the business activity in which Marubeni Corporation is engaged.
Accordingly, said dividends if remitted abroad are not considered branch profits for
purposes of the 15% profit remittance tax imposed by Section 24(b)(2) of the Tax Code,
as amended.

2. Whether Marubeni Corporation is a resident or non-resident foreign corporation.

Marubeni Corporation is a non-resident foreign corporation, with respect to the

transaction. Marubeni Corporation’s head office in Japan is a separate and distinct
income taxpayer from the branch in the Philippines. The investment on Atlantic Gulf and
Pacific Co. was made for purposes peculiarly germane to the conduct of the corporate
affairs of Marubeni Corporation in Japan, but certainly not of the branch in the
Philippines.

3. At what rate should Marubeni be taxed?

15%. The applicable provision of the Tax Code is Section 24(b)(1)(iii) in conjunction with
the Philippine-Japan Tax Treaty of 1980. As a general rule, it is taxed 35% of its gross
income from all sources within the Philippines. However, a discounted rate of 15% is
given to Marubeni Corporation on dividends received from Atlantic Gulf and Pacific Co.
on the condition that Japan, its domicile state, extends in favor of Marubeni Corporation
a tax credit of not less than 20% of the dividends received. This 15% tax rate imposed
on the dividends received under Section 24(b)(1)(iii) is easily within the maximum
ceiling of 25% of the gross amount of the dividends as decreed in Article 10(2)(b) of the
Tax Treaty.
Note: Each tax has a different tax basis.
Under the Philippine-Japan Tax Convention, the 25% rate fixed is the maximum rate, as
reflected in the phrase “shall not exceed.” This means that any tax imposable by the
contracting state concerned  hould not exceed the 25% limitation and said rate would
apply only if the tax imposed by our laws exceeds the same.

14. Bank of America NT & SA vs. CA & CIR , GR No. 103092, July 21, 1994.]234 SCRA 302

FACTS:

1. Bank of America is a foreign corporation licensed to engage in business in the

Philippines through a branch in Makati.
2. Bank of America paid 15% branch profit remittance tax amounting to PhP7.5M from
its REGULAR UNIT OPERATIONS and another 405K PhP from its FOREIGN
CURRENCY DEPOSIT OPERATIONS
3. The tax was based on net profits after income tax without deducting the amount
corresponding to the 15% tax.
4. Bank of America thereafter filed a claim for refund with the BIR for the portion the
corresponds with the 15% branch profit remittance tax. BOA’s claim: “BIR should tax us
based on the profits actually remitted (45M), and NOT on the amount before profit
remittance tax (53M)... The basis should be the amount actually remitted abroad.”
5. CIR contends otherwise and holds that in computing the 15% remittance tax, the tax
should be inclusive of the sum deemed remitted.

ISSUES: Whether or not the branch profit remittance tax should be base
on the amount actually remitted?

HELD: YES.

1. It should be based on the amount actually committed, NOT what was applied for.
2. There is nothing in Section 24which indicates that the 15% tax/branch profit
remittance is on the total amount of profit; where the law does NOT qualify that the tax
is imposed and collected at source, the qualification should not be read into law.
3. Rationale of 15%: To equalize/ share the burden of income taxation with foreign
corporations

15. Commissioner v. Procter & Gamble PMC, G.R. No. 66838. December 2, 1991, 204 SCRA 377

NON-RESIDENT FOREIGN CORPORATION- DIVIDENDS

Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to
dividend remittances to non-resident corporate stockholders of a Philippine corporation.
This rate goes down to 15% ONLY IF the country of domicile of the foreign stockholder
corporation “shall allow” such foreign corporation a tax credit for “taxes deemed paid in
the Philippines,” applicable against the tax payable to the domiciliary country by the
foreign stockholder corporation. However, such tax credit for “taxes deemed paid in the
Philippines” MUST, as a minimum, reach an amount equivalent to 20 percentage points

FACTS:

Procter and Gamble Philippines declared dividends payable to its parent company and
sole stockholder, P&G USA. Such dividends amounted to Php 24.1M. P&G Phil paid a
35% dividend withholding tax to the BIR which amounted to Php 8.3M It subsequently
filed a claim with the Commissioner of Internal Revenue for a refund or tax credit,
claiming that pursuant to Section 24(b)(1) of the National Internal Revenue Code, as
amended by Presidential Decree No. 369, the applicable rate of withholding tax on the
dividends remitted was only 15%.

MAIN ISSUE:

Whether or not P&G Philippines is entitled to the refund or tax credit.

HELD:

YES. P&G Philippines is entitled.

Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to
dividend remittances to non-resident corporate stockholders of a Philippine corporation.
This rate goes down to 15% ONLY IF  he country of domicile of the foreign stockholder
corporation “shall allow” such foreign corporation a tax credit for “taxes deemed paid in
the Philippines,” applicable against the tax payable to the domiciliary country by the
foreign stockholder corporation. However, such tax credit for “taxes deemed paid in the
Philippines” MUST, as a minimum, reach an amount equivalent to 20 percentage points
which represents the difference between the regular 35% dividend tax rate and the
reduced 15% tax rate.

NOTES: Breakdown:

a) Deemed paid requirement: US Internal Revenue Code, Sec 902: a domestic

corporation (owning 10% of remitting foreign corporation) shall be deemed to have paid
a proportionate extent of taxes paid by such foreign corporation upon its remittance of
dividends to domestic corporation.

b) 20 percentage points requirement: (computation is as follows)

P 100.00 -- corporate income earned by P&G Phils
x 35% -- Philippine income tax rate
P 35.00 -- paid by P&G Phil as corporate income tax

P 100.00
- 35.00
65. 00 -- available for remittance

P 65. 00
x 35% -- Regular Philippine dividend tax rate
P 22.75 -- regular dividend tax

P 65.0o
x 15% -- Reduced dividend tax rate
P 9.75 -- reduced dividend tax

16. Commissioner v. Wander Phils., G.R. No. 68375, April 15, 1988. 160 SCRA 573

FACTS:
Private respondents Wander Philippines, Inc. (wander) is a domestic corporation organized under
Philippine laws. It is wholly-owned subsidiary of the Glaro S.A. Ltd. (Glaro), a Swiss corporation not
engaged in trade for business in the Philippines.

Wander filed it's witholding tax return for 1975 and 1976 and remitted to its parent company Glaro
dividends from which 35% withholding tax was withheld and paid to the BIR.

In 1977, Wander filed with the Appellate Division of the Internal Revenue a claim for reimbursement,
contending that it is liable only to 15% withholding tax in accordance with sec. 24 (b) (1) of the Tax
code, as amended by PD nos. 369 and 778, and not on the basis of 35% which was withheld ad
paid to and collected by the government. petitioner failed to act on the said claim for refund, hence
Wander filed a petition with Court of Tax Appeals who in turn ordered to grant a refund and/or tax
credit. CIR's petition for reconsideration was denied hence the instant petition to the Supreme Court.

ISSUE:

Whether or not Wander is entitled to the preferential rate of 15% withholding tax on dividends
declared and to remitted to its parent corporation.

HELD:

Section 24 (b) (1) of the Tax code, as amended by PD 369 and 778, the law involved in this case,
reads:
sec. 1. The first paragraph of subsection (b) of section 24 of the NIRC, as amended is hreby further
amended to read as follows:
(b) Tax on foreign corporations - (1) Non resident corporation -- A foreign corporation not engaged in
trade or business in the Philippines, including a foreign life insurance company not engaged in life
insurance business in the Philippines, shall pay a tax equal to 35% of the gross income received
during its taxable year from all sources within the Philippines, as interest (except interest on a
foreign loans which shall be subject to 15% tax), dividends, premiums, annuities, compensation,
remuneration for technical services or otherwise emolument, or other fixed determinable annual,
periodical ot casual gains, profits and income, and capital gains: xxx Provided, still further that on
dividends received from a domestic corporation liable to tax under this chapter, the tax shall be 15%
of the dividends received, which shall be collected and paid as provided in sec 53 (d) of this code,
subject to the condition that the country in which the non-resident foreign corporation is domiciled
shall allow a credit against tax due from the non-resident foreign corporation taxes deemed to have
been paid in the Philippines equivalent to 20% which represents the difference between the regular
tax (35%) on corporation and the tax (15%) dividends as provided in this section: xxx."

From the above-quoted provision, the dividends received from a domestic corporation liable to tax,
the tax shall be 15% of the dividends received, subject to the condition that the country in which the
non-resident foreign corporation is domiciled shall allow a credit against the tax due from the non-
resident foreign corporation taxes deemed to have been paid in the Philippines equivakent to 20%  
which represents the difference betqween the regular tax (35%) on corpoorations and the tax (15%)
on dividends.

While it may be true that claims for refund construed strictly against the claimant, nevertheless, the
fact that Switzerland did not impose any tax on the dividends received by Glaro from  the Philippines
should be considered as a full satisfaction if the given condition. For, as aptly stated by respondent
Court, to deny private respondent the privilege to withhold only 15% tax provided for under PD No.
369 amending section 24 (b) (1) of the Tax Code, would run counter to the very spirit and intent of
said law and definitely will adversely affect foreign corporations interest here and discourage them
for investing capital in our country.
 17. Chamber of Real Estate and Builder’s Associations, Inc. v. Romulo, et. Al., GR No. 160756,
March 9, 2010

Congress has the power to condition, limit or deny deductions from gross income in order to arrive
at the net that it chooses to tax. This is because deductions are a matter of legislative grace. The
assignment of gross income, instead of net income, as the tax base of the MCIT, taken with the
reduction of the tax rate from 32% to 2%, is not constitutionally objectionable.

FACTS:

Chamber of Real Estate and Builders' Associations, Inc. (CHAMBER) is questioning the
constitutionality of Sec 27 (E) of RA 8424 and the revenue regulations (RRs) issued by the Bureau
of Internal Revenue (BIR) to implement said provision and those involving creditable withholding
taxes (CWT). [CWT issues will not be discussed]

CHAMBER assails the validity of the imposition of minimum corporate income tax (MCIT) on
corporations and creditable withholding tax (CWT) on sales of real properties classified as ordinary
assets. Chamber argues that the MCIT violates the due process clause because it levies income tax
even if there is no realized gain.

MCIT scheme: (Section 27 (E). [MCIT] on Domestic Corporations.)

A corporation, beginning on its fourth year of operation, is assessed an MCIT

of 2% of its gross income when such MCIT is greater than the normal

corporate income tax imposed under Section 27(A) (Applying the 30% tax

rate to net income).

If the regular income tax is higher than the MCIT, the corporation does not pay the MCIT.

Any excess of the MCIT over the normal tax shall be carried forward and credited against the
normal income tax for the three immediately succeeding taxable years.

The Secretary of Finance is hereby authorized to suspend the imposition of the [MCIT] on any
corporation which suffers losses on account of prolonged labor dispute, or because of force
majeure, or because of legitimate business reverses.

The term ‘gross income’ shall mean gross sales less sales returns, discounts and allowances and
cost of goods sold. "Cost of goods sold" shall include all business expenses directly incurred to
produce the merchandise to bring them to their present location and use.

CHAMBER claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because it is
highly oppressive, arbitrary and confiscatory which amounts to deprivation of property without
due process of law. It explains that gross income as defined under said provision only considers the
cost of goods sold and other direct expenses; other major expenditures, such as administrative and
interest expenses which are equally necessary to produce gross income, were not taken into
account. Thus, pegging the tax base of the MCIT to a corporation’s gross income is tantamount to a
confiscation of capital because gross income, unlike net income, is not "realized gain."

ISSUE:

1. WON the imposition of the MCIT on domestic corporations is unconstitutional

2. WON RR 9-98 is a deprivation of property without due process of law because the MCIT is being
imposed and collected even when there is actually a loss, or a zero or negative taxable income

HELD:

1. NO. MCIT is not violative of due process. The MCIT is not a tax on capital. The MCIT is imposed on
gross income which is arrived at by deducting the capital spent by a corporation in the sale of its
goods, i.e., the cost of goods and other direct expenses from gross sales. Clearly, the capital is not
being taxed.

Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net
income tax, and only if the normal income tax is suspiciously low.

The MCIT merely approximates the amount of net income tax due from a corporation, pegging the
rate at a very much reduced 2% and uses as the base the corporation’s gross income.

CHAMBER failed to support, by any factual or legal basis, its allegation that the MCIT is arbitrary
and confiscatory. It does not cite any actual, specific and concrete negative experiences of its
members nor does it present empirical data to show that the implementation of the MCIT resulted
in the confiscation of their property.

Taxation is necessarily burdensome because, by its nature, it adversely affects property rights. The
party alleging the law’s unconstitutionality has the burden to demonstrate the supposed violations
in understandable terms.

2. NO. RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or
negative taxable income, merely defines the coverage of Section 27(E).

This means that even if a corporation incurs a net loss in its business operations or reports zero
income after deducting its expenses, it is still subject to an MCIT of 2% of its gross income. This is
consistent with the law which imposes the MCIT on gross income notwithstanding the amount of
the net income.

18. The Manila Banking Corporation v. CIR, GR No. 168118, August 28, 2006
The intent of Congress relative to the minimum corporate income tax(MCIT) is to grant a 4-year
suspension of tax payment to newly formed corporations. Corporations still starting their business
operations have to stabilize their venture in order to obtain a stronghold in the industry.

Facts:

• 1961- Manila Banking Corp was incorporated. It engaged in the banking industry til 1987.

• May 1987- Monetary Board of Bangko Sentral ng Pilipinas (BSP) issued Resolution # 505
{pursuant to the Central Bank Act (RA 265)} prohibiting Manila Bank from engaging in business by
reason of insolvency. So, Manila Bank ceased operations and its assets and liabilities were placed
under charge of a gov.- appointed receiver.

• 1998- Comprehensive Tax Reform Act (RA8424) imposed a minimum corporate income tax on
domestic and resident foreign corporations.

o Implementing law: Revenue Regulation # 9-98 stating that the law allows a 4year period from
the time the corporations were registered with the BIR during which the minimum corporate
income tax should not be imposed.

• June 23, 1999- BSP authorized Manila Bank to operate as a thrift bank.

o NOTE: June 15, 1999 Revenue Regulation #4-95 (pursuant to Thrift Bank Act of 1995) provides
that the date of commencement of operations shall be understood to mean the date when the thrift
bank was registered with SEC or when Certificate of Authority to Operate was issued by the
Monetary Board, whichever comes LATER.

• Dec 1999- Manila Bank wrote to BIR requesting a ruling on whether it is entitled to the 4 year
grace period under RR 9-98.

• April 2000- Manila bank filed with BIR annual income tax return for taxable year 1999 and paid
33M.

• Feb 2001- BIR issued BIR Ruling 7-2001 stating that Manila Bank is entitled to the 4year grace
period. Since it reopened in 1999, the min. corporate income tax may be imposed not earlier than
2002. It stressed that although it had been registered with the BIR before 1994, but it ceased
operations 1987-1999 due to involuntary closure.

o Manila Bank, then, filed with BIR for the refund. • Due to the inaction of BIR on the claim, it filed
with CTA for a petition for review, which was denied and found that Manila Bank’s payment of 33M
is correct, since its operations were merely interrupted during 1987-1999. CA affirmed CTA.

Issue: Whether or not Manila Bank is entitled to a refund of its minimum corporate income tax paid
to BIR for 1999.

Held: Yes.
• CIR’s contensions are without merit. He contended that based on RR# 9-98, Manila Bank should
pay the min. corporate income tax beg. 1998 as it did not close its operations in 1987 but merely
suspended it. Even if placed under suspended receivership, its corporate existence was never
affected. Thus falling under the category of a existing corporation recommencing its banking
business operations

** Sec. 27 E of the Tax Code provides the Minimum Corporate Income Tax (mcit) on Domestic
Corporations.

o (1) Imposition of Tax- MCIT of 2% of gross income as of the end of the taxable year, as defined
here in, is hereby imposed on a corporation taxable under this title, beginning on the 4th taxable
year immediately following the year in which such corp commenced its business operations, when
the mcit is greater than the tax computed under Subsec. A of this section for the taxable year.

19. CIR vs. Tuason, Jr. 173 SCRA 397

The importance of liability is the purpose behind the accumulation of the income and not the
consequences of the accumulation. Thus, if the failure to pay dividends were for the purpose of
using the undistributed earnings & profits for the reasonable needs of the business, that purpose
would not fall to overcome the presumption and correctness of CIR.

FACTS:

• CTA set aside petitioner’s revenue commissioner’s assessment of 1.1 M as the 25% surtax on
private respondent’s unreasonable accumulation of surplus for the year 1975-1978.

• Private respondent protested the assessment on the ground that the accumulation of surplus
profits during the years in question was solely for the purpose of expanding its business operations
as a real estate broker.

• Private res. Filed a petition that pending determination of the case, an order be issued restraining
the commissioner and/or his reps from enforcing the warrants of distraint and levy. Writ of
injunction was issued by tax court.

• Due to the reversal of CTA of the commissioner’s decision, CIR appeals to the SC.

ISSUES:

1. Whether or not private respondent is a holding company and/or investment company?

2. Whether or not Antonio accumulated surplus for years 75-78

3. Whether or not Tuason Inc. is liable for the 25% surtax on undue accumulation of surplus for 75-
78

HELD: Yes to all. Antionio is liable for the 25% surtax assessed.

Sec. 25. Additional tax on corporation improperly accumulating profits or surplus.—

(a) Imposition of tax. — If any corporation, except banks, insurance companies, or personal holding
companies, whether domestic or foreign, is formed or availed of for the purpose of preventing the
imposition of the tax upon its shareholders or members or the shareholders or members of another
corporation, through the medium of permitting its gains and profits to accumulate instead of being
divided or distributed, there is levied and assessed against such corporation, for each taxable year,
a tax equal to twenty-five per centum of the undistributed portion of its accumulated profits or
surplus which shall be in addition to the tax imposed by section twentyfour, and shall be computed,
collected and paid in the same manner and subject to the same provisions of law, including
penalties, as that tax.

(b) Prima facie evidence. — The fact that any corporation is a mere holding company shall be prima
facie evidence of a purpose to avoid the tax upon its shareholders or members. Similar presumption
will lie in the case of an investment company where at any time during the taxable year more than
fifty per centum in value of its outstanding stock is owned, directly or indirectly, by one person.

• In this case, Tuason Inc, a mere holding company for the corporation did not involve itself in the
development of subdivisions but merely subdivided its own lots and sold them for bigger profits. It
derived its income mostly from interest, dividends, and rentals realized from the sale of realty.

• Tuason Inc is also owned by Antonio himself. While these profits were actually made, the
commissioner points out that the corp. did not use up its surplus profits. Antonio claims that he
spent the money to build an apartment in urdaneta but there’s a large discrepancy bet. The market
value and the alleged investment cost.

• The importance of liability is the purpose behind the accumulation of the income and not the
consequences of the accumulation. Thus, if the failure to pay dividends were for the purpose of
using the undistributed earnings & profits for the reasonable needs of the business, that purpose
would not fall to overcome the presumption and correctness of CIR.

20. Cyanamid vs. CA 322 SCRA 639

In order to determine whether profits are accumulated for the reasonable needs of the business to
avoid the surtax upon the shareholders, it must be shown that the controlling intention of the
taxpayer is manifested at the time of the accumulation, not intentions subsequently, which are
mere afterthoughts.

Facts:

Petitioner is a corporation organized under Philippine laws and is a wholly owned subsidiary of
American Cyanamid Co. based in Maine, USA. It is engaged in the manufacture of pharmaceutical
products and chemicals, a wholesaler of imported finished goods and an imported/indentor. In
1985 the CIR assessed on petitioner a deficiency income tax of P119,817) for the year 1981.
Cyanamid protested the assessments particularly the 25% surtax for undue accumulation of
earnings. It claimed that said profits were retained to increase petitioner’s working capital and it
would be used for reasonable business needs of the company. The CIR refused to allow the
cancellation of the assessments, petitioner appealed to the CTA. It claimed that there was not legal
basis for the assessment because 1) it accumulated its earnings and profits for reasonable business
requirements to meet working capital needs and retirement of indebtedness 2) it is a wholly owned
subsidiary of American Cyanamid Company, a foreign corporation, and its shares are listed and
traded in the NY Stock Exchange. The CTA denied the petition stating that the law permits
corporations to set aside a portion of its retained earnings for specified purposes under Sec. 43 of
the Corporation Code but that petitioner’s purpose did not fall within such purposes. It found that
there was no need to set aside such retained earnings as working capital as it had considerable
liquid funds. Those corporations exempted from the accumulated earnings tax are found under Sec.
25 of the NIRC, and that the petitioner is not among those exempted. The CA affirmed the CTA’s
decision.

Issue: Whether or not the accumulation of income was justified.

Held:

In order to determine whether profits are accumulated for the reasonable needs of the business to
avoid the surtax upon the shareholders, it must be shown that the controlling intention of the
taxpayer is manifested at the time of the accumulation, not intentions subsequently, which are
mere afterthoughts. The accumulated profits must be used within reasonable time after the close of
the taxable year. In the instant case, petitioner did not establish by clear and convincing evidence
that such accumulated was for the immediate needs of the business.

To determine the reasonable needs of the business, the United States Courts have invented the
“Immediacy Test” which construed the words “reasonable needs of the business” to mean the
immediate needs of the business, and it is held that if the corporation did not prove an immediate
need for the accumulation of earnings and profits such was not for reasonable needs of the business
and the penalty tax would apply. (Law of Federal Income Taxation Vol 7) The working capital needs
of a business depend on the nature of the business, its credit policies, the amount of inventories, the
rate of turnover, the amount of accounts receivable, the collection rate, the availability of credit and
other similar factors. The Tax Court opted to determine the working capital sufficiency by using the
ration between the current assets to current liabilities. Unless, rebutted, the presumption is that the
assessment is correct. With the petitioner’s failure to prove the CIR incorrect, clearly and
conclusively, the Tax Court’s ruling is upheld.

21. Jesus Sacred Heart College v. Collector of Internal Revenue G.R. No. L-6807, May 24, 1954
see PDF
22. Dumagueta Cathedral Credit Cooperative (DCCC) v. CIR, G.R. No. 182722, January 22, 2010

Cooperatives, including their members, deserve a preferential tax treatment because of the vital
role they play in the attainment of economic development and social justice. Thus, although taxes
are the lifeblood of the government, the State’s power to tax must give way to foster the creation
and growth of cooperatives. To borrow the words of Justice Isagani A. Cruz: "The power of taxation,
while indispensable, is not absolute and may be subordinated to the demands of social justice."
FACTS:

1. Dumaguete Cathedral Credit Cooperative (DCCCO) is a credit cooperative with the following
objectives and purposes: (1) to increase the income and purchasing power of the members; (2) to
pool the resources of the members by encouraging savings and promoting thrift to mobilize capital
formation for development activities; and (3) to extend loans to members for provident and
productive purposes.

2. (BIR) Operations Group Deputy Commissioner, issued Letters of Authority authorizing BIR
Officers to examine petitioner’s books of accounts and other accounting records for all internal
revenue taxes for the taxable years 1999 and 2000.

3. On 2002, DCCCO received Pre-Assessment Notices for deficiency withholding taxes for taxable
years 1999 and 2000. The deficiency withholding taxes cover the payments of the honorarium of
the Board of Directors, security and janitorial services, legal and professional fees, and interest on
savings and time deposits of its members.

4. DCCCO informed BIR that it would ONLY pay the deficiency withholding taxes corresponding to
the honorarium of the Board of Directors, security and janitorial services, legal and professional
fees for the year 1999 and 2000, EXCLUDING penalties and interest.
5. After payment, DCCCO received from the BIR Transcripts of Assessment and Audit
Results/Assessment Notices, ordering petitioner to pay the deficiency withholding taxes,
INCLUSIVE of penalties, for the years 1999 and 2000.

6. DCCO's contention:

Under Sec. 24. Income Tax Rates. — x x x x (B) Rate of Tax on Certain Passive Income: — (1)
Interests, Royalties, Prizes, and Other Winnings. — A final tax at the rate of twenty percent (20%) is
hereby imposed upon the amount of interest from any currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust funds and similar arrangements; x x x
applies only to banks and not to cooperatives, since the phrase "similar arrangements" is preceded
by terms referring to banking transactions that have deposit peculiarities. Therefore, the savings
and time deposits of members of cooperatives are not included in the enumeration, and thus not
subject to the 20% final tax. Also, pursuant to Article XII, Section 15 of the Constitution 25 and
Article 2 of Republic Act No. 6938 (RA 6938) or the Cooperative Code of the Philippines,
cooperatives enjoy a preferential tax treatment which exempts their members from the application
of Section 24(B)(1) of the NIRC.

ISSUE:

Whether or not DCCCO is liable to pay the deficiency withholding taxes on interest from savings and
time deposits of its members for the taxable years 1999 and 2000, as well as the delinquency
interest of 20% per annum?

HELD:

DCCCO is not liable. The NIRC states that a "final tax at the rate of twenty percent (20%) is hereby
imposed upon the amount of interest on currency bank deposit and yield or any other monetary
benefit from the deposit substitutes and from trust funds and similar arrangement x x x" for
individuals under Section 24(B)(1) and for domestic corporations under Section 27(D)(1).
Considering the members’ deposits with the cooperatives are not currency bank deposits nor
deposit substitutes, Section 24(B)(1) and Section 27(D)(1), therefore, do not apply to members of
cooperatives and to deposits of primaries with federations, respectively.

Under Article 2 of RA 6938, as amended by RA 9520, it is a declared policy of the State to foster the
creation and growth of cooperatives as a practical vehicle for promoting self-reliance and
harnessing people power towards the attainment of economic development and social justice. Thus,
to encourage the formation of cooperatives and to create an atmosphere conducive to their growth
and development, the State extends all forms of assistance to them, one of which is providing
cooperatives a preferential tax treatment.

23. Madrigal v. Raffferty 38 Phil 14

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.

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.

• The revenue officer was not satisfied with Madrigal’s explanation and ultimately, the United
States Commissioner of Internal Revenue decided against the claim of Madrigal.

• Madrigal paid under protest, and the couple decided to recover the sum of P3,786.08 alleged to
have been wrongfully and illegally assessed and collected by the CIR.
ISSUE: Whether or not the income reported by Madrigal on 1915 should be divided into 2 in
computing for the additional income tax.

HELD:

• 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.

24. Limpan Investment Corp. v. CIR, GR No. L-21570. July 26, 1966

Limpan Investment Company deemed to have constructively received rental payments in 1957
when they were deposited in court due to its refusal to receive them.

FACTS:

• 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 underdeclared 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.

25. Eisner v. Macomber 252 US 89

Income means something derived from labor or capital. To be “derived” means something of
exchangeable value separated from the capital.
FACTS:

1. Mrs. Macomber owned 2,200 share of Standard Oil Company of California stock.

2. In January, 1916, the company declared a stock dividend and Mrs. Macomber received an
additional 1,100 shares of stock. Of these shares, 198.77 shares, par value $19,877, represented
surplus earned by the company after March 1, 1913.

3. The IRS treated the $19,877 as taxable income under the Revenue Act of 1916 which provided
that a stock dividend was considered income to the amount of its cash value.

4. Mrs. Macomber argued that that provision in the Revenue Act of 1916 was unconstitutional
because it was a direct tax not apportioned per population; since a stock dividend was not income,
a legislative provision subjecting it to income tax was not constitutional under the 16th
Amendment.

5. The District Court held that the stock dividend was not income.

ISSUE: Does Congress have the power under the 16th Amendment to tax shareholders on stock
dividends received? Are stock dividends considered income or capital?

Laws/ References:

1) 16th Amendment - "The Congress shall have power to lay and collect taxes on income, from
whatever source derived, without apportionment among the several States, and without regard to
any census or enumeration."

2) Revenue Act of 1916 - a "stock dividend shall be considered income, to the amount of its cash
value."

3) Brushaber v Union Pacific - in this case, the Supreme Court stated that the 16th Amendment "did
not extend the taxing power to new subjects, but merely removed the necessity which otherwise
might exist for an apportionment among the State of taxes laid on income." Macomber, 1 USTC ¶32,
page 1079. Thus, the item must be income in order for Congress to tax it.

4) The Court suggested that "income," which is not defined in the 16th Amendment, was something
derived from capital or labor, or from both.
HELD:

The Supreme Court affirmed the District Court holding for the taxpayer that a stock dividend is not
income. The Revenue Act of 1916 provision subjecting stock dividends to tax was held
unconstitutional.

If a stock dividend is not considered income, it can not be subject to income tax under the 16th
Amendment. In applying the 16th Amendment, 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"
(Macomber, p. 1081). An increase to the value of capital investment is not income. Nothing of value
has been taken from the corporation and given to the shareholder as is the case with a cash
dividend.

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" (Macomber, p. 1082).

26. Raytheon Production Corp vs. CIR 144 F2d 110

ACTS:

Raytheon (original company) was a pioneer manufacturer of rectifier tubes which are
used in radio receiving sets (using alternating current instead of batteries). The Radio
Corporation of America developed a competitive tube, with the same effect as the
Raytheon tube. RCA owned many patents covering radio circuits. Beginning 1927,
RCA’s license agreements with radio set manufacturers included a clause which
required the manufacturers to buy their tubes only from RCA. Soon, Raytheon’s sales
gradually declined.

Raytheon (new company that bought original company) brought an action against RCA
for violating anti-trust laws, as well as for destruction of Raytheon’s profitable business
and goodwill. Both parties finally agreed on a $410,000 settlement of the anti-trust case,
with RCA acquiring patent license rights and sublicensing rights. Raytheon counted the
$60,000 from the amount as income from patent licenses, while the remaining $350,000
were counted as damages, and therefore not subject to income tax. The income from
patents was determined from the cost of the development of such patents, and the fact
that few of them were being used and none were earning royalties. Thus, the value of
patents and the goodwill was backed by evidence during trial.

The fact that the case ended in settlement is of no moment. The determining factor is
the NATURE of the basic claim from which the compromised amount was realized.

However, compensation for the loss of goodwill in excess of its cost is gross income.
The law does not exempt compensatory damages just because they are a return of
capital. The tax exemption applies only to the portion that recovers the cost basis of that
capital; any excess damages serve to realize prior appreciation, and should be taxed as
income. In addition, evidence must be produced to establish the value of the goodwill
and business. In this case, Raytheon was not able to establish the value of its goodwill
and business. It did not produce enough evidence to such effect. The amount of
nontaxable capital cannot be ascertained. Since Raytheon could not establish the cost
basis of its good will, its basis will be treated as zero. The Court concludes that the
$350,000 of the $410,000 attributable to the suit is thus taxable income.
 27. Anderson v. Posadas, GR No. 44100. September 22, 1938, 66 Phil 205

FACTS:

William Anderson purchased the business of Erlanger & Galinger. He incorporated the partnership
with an authorized capital of P600,000 (all of which were subscribed by Anderson). Anderson paid
P70,000 and the amount left (totaling P530,000) was entered in an underwriting account.

A good will account was opened by Anderson. In 1918, he sold to Simon Feldstein 500 of his shares
which amounted to P150,000 but in the course of their transactions incurred losses. In view of the
said losses, Anderson deducted P125,000 from his taxable income which was approved by the BIR.

Juan Posadas, Commissioner of Internal Revenue attempted to collect a tax (P300,000) at which
Anderson was assessed the goodwill of the business. Anderson agreed to eliminate the goodwill by
debiting the sum in his capital account and crediting it to the good will account .

It appears, that with the P100,000 paid by Feldstein on account of his purchasing 500 shares, the
loss (P125,000) has been recovered and it is but just that the P125,000 be restored as taxable
income.

CFI Manila decided and held that P155,000 (which represents proceeds of the sale of the Goodwill
Account) and that P125,000 (representing the recovered loss) is not subject to income tax.

ISSUES:

1. Whether or not goodwill account is subject to income tax

2. Whether or not the amount of P125,000 subject to income tax.

HELD:

1. YES. Good will is the reputation of good name of an establishment. If the good will, that is, the
good reputation of the business is acquired in the course of its management and operation, it does
form part of the capital with which it was established. It is an intangible moral profit, susceptible of
valuation in money, acquired by the business by reason of the confidence reposed in it by the
public, due to the efficiency and honesty shown by the manager and personnel thereof in
conducting the same on account of the courtesy accorded its customers, which moral profit, once it
is valuated and used, becomes a part of the assets.

In the case, the good will of P155,000 created by Anderson has been beneficial not only to him but
also to Feldstein. Aside from the benefit, he also realized a gain of P70,838 from the sale of the 500
shares to Feldstein. When you add these two amounts, it totals to P161,250 which is more than
what the CIR is trying to collect from Anderson.

2. YES. It is subject to income tax.* (no legal explanation given by the Court)
In the case, the loss of P125,000 suffered by Anderson (by reason of the sale of said 500 shares) has
been recovered, and it is but just that the sum of P125,000, deducted from the profits by reason of
losses suffered temporarily on the capital, be restored.

28. Commissioner v. Tours Specialist 183 SCRA 402

29. FACTS: -- petition to review on certiorari the decision of the CTA

30.
• From 1974 to 1976, Tours Specialists, Inc. had derived income from its
activities as a travel agency by servicing the needs of foreign tourists and
travelers and Filipino "Balikbayans" during their stay in this country. Some of the
services extended to the tourists consist of booking said tourists and travelers in
local hotels for their lodging and board needs; transporting these foreign tourists
from the airport to their respective hotels, and from the latter to the airport upon
their departure from the Philippines, transporting them from their hotels to various
embarkation points for local tours, visits and excursions; securing permits for
them to visit places of interest; and arranging their cultural entertainment,
shopping and recreational activities.
31.
• In order to ably supply these services to the foreign tourists, TOURS and its
correspondent counterpart tourist agencies abroad have agreed to offer a
package fee for the tourists. . Although the fee to be paid by said tourists is
quoted by the petitioner, the payments of the hotel room accommodations, food
and other personal expenses of said tourists, as a rule, are paid directly either by
tourists themselves, or by their foreign travel agencies to the local hotels and
restaurants or shops, as the case may be. • Some tour agencies abroad request
the local tour agencies that the hotel room charges be paid through them. By this
arrangement, the foreign tour agency entrusts to Tours, the fund for hotel room
accommodation, which in turn is paid by petitioner tour agency to the local hotel
when billed. The billing hotel sends the bill to Tours. The local hotel identifies the
individual tourist, or the particular groups of tourists by code name or group
designation and also the duration of their stay for purposes of payment. Upon
receipt of the bill, Tours then pays the local hotel with the funds entrusted to it by
the foreign tour correspondent agency.
32. • Commissioner of Internal Revenue assessed petitioner for deficiency 3%
contractor's tax as independent contractor by including the entrusted hotel room
charges in its gross receipts from services for the years 1974 to 1976.
33.
• In addition to the deficiency contractor's tax of P122,946.93, petitioner was
assessed to pay a compromise penalty of P500.00.
34.
• During one of the hearings in this case, a witness, Serafina Sazon, Certified
Public Accountant and in charge of the Accounting Department of Tours, had
testified, that the amounts entrusted to it by the foreign tourist agencies intended
for payment of hotel room charges, were paid entirely to the hotel concerned,
without any portion thereof being diverted to its own funds. And that the reason
why tourists pay their room charge, or through their foreign tourists agencies, is
the fact that the room charge is exempt from hotel room tax under P.D. 31

35.
ISSUE/S:
36.
• WON amounts received by a local tourist and travel agency included in a
package fee from tourists or foreign tour agencies, intended or earmarked for
hotel accommodations form part of gross receipts subject to 3% contractor's tax.

37.
HELD:
38.
• 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 and receipts within the meaning
of gross receipts under the Tax Code.
39.
• The room charges entrusted by the foreign travel agencies to the private
respondent 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. As stated
earlier, this arrangement was only to accommodate the foreign travel agencies.
40. Another objection raised by the petitioner is to the respondent court's application
of Presidential Decree 31 which exempts foreign tourists from payment of hotel
room tax. Section 1 thereof provides: Sec. 1. — Foreign tourists and travelers
 shall be exempt from payment of any and all hotel room tax for the entire period
of their stay in the country.
41.
• If the hotel room charges entrusted to Tours will be subjected to 3% contractor's
tax as what CIR would want to do in this case, that would in effect do indirectly
what P.D. 31 would not like hotel room charges of foreign tourists to be subjected
to hotel room tax. Although, CIR may claim that the 3% contractor's tax is
imposed upon a different incidence i.e. the gross receipts of the tourist agency
which he asserts includes the hotel room charges entrusted to it, the effect would
be to impose a tax, and though different,  it nonetheless imposes a tax actually
on room charges. One way or the other, it would not have the effect of promoting
tourism in the Philippines as that would increase the costs or expenses by the
addition of a hotel room tax in the overall expenses of said tourists.
29. Commissioner vs. Javier 199 SCRA 824

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.

ISSUE: Whether or not Javier is liable for the 50% penalty.

HELD: No.

• The court held that there was no actual and intentional fraud through willful and deliberate
misleading of the BIR in the case. Javier even noted 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 ff are not expressly written in the case, in fact the doctrine I just found it elsewhere but this is
relevant to the topic rather than the issue in the case)

o Claim of right doctrine- a taxable gain is conditioned upon the presence of a claim of right to the
alleged gain and the absence of a definite and unconditional obligation to return or repay.

o In this case, the remittance was not a taxable gain, since it is still under litigation and there is a
chance that Javier might have the obligation to return it. It will only become taxable once the case
has been settled because by then whatever amount that will be rewarded, Javier has a claim of right
over it.

30. Fernandez Hermanos, Inc. V. CIR, GR No. L-21551, September 30 1969

FACTS:

• Four cases involve two decisions of the Court of Tax Appeal s determining the
taxpayer ' s income tax liability for the years 1950 to 1954 and for the year 1957. Both
the taxpayer and the Commissioner of Internal Revenue, as petitioner and respondent
in the cases a quo respectively , appealed from the Tax Court's decisions , insofar as
their respective contentions on particular tax items were therein resolved against them.
Since the issues raised are inter related, the Court resolves the four appeals in this joint
decision.
• The taxpayer , Fernandez Hermanos, Inc. , is a domestic corporation organized for the
principal purpose of engaging in business as an " investment company " wi th main
office at Manila. Upon verification of the taxpayer's income tax returns for the period in
quest ion, the Commissioner of Internal Revenue assessed against the taxpayer the
sums of P13,414.00, P119,613.00, P11,698.00, P6,887.00 and P14,451.00 as alleged
deficiency income taxes for the year s 1950, 1951, 1952, 1953 and 1954, respectively.
Said assessments were the result of alleged discrepancies found upon the examination
and verification of the taxpayer's income tax returns for the said years, summarized by
the Tax Court in its decision of June 10, 1963 in CTA Case No. 787, as follows:

 
ISSUE: The correctness of the Tax Court's rulings with respect to the
disputed items of disallowances enumerated in the Tax Court's
summary reproduced

HELD:

That the circumstances are such that the method does not reflect the taxpayer’s income
with reasonable accuracy and certainty and proper and just additions of personal
expenses and other non-deductible expenditures were made and correct , fair and
equitable credit adjustments were given by way of eliminating non-taxable items.

Proper adjustments to conform to the income tax laws. Proper adjustments for non-
deductible items must be made. The following non-deductibles , as the case may be,
must be
added to the increase of decrease in the net worth:

1. Personal living or family expenses

2. Premiums paid on any life insurance policy
3. Losses from sales or exchanges of property between members of the family
4. Income taxes paid
5. Other non-deductible taxes
6. Election expenses and other expense against public policy
7. Non-deductible contributions
8. Gifts to others
9. Estate inheritance and gift taxes
10. Net Capital Loss

On the other hand, non- taxable items should be deducted therefrom. These items are
necessary adjustments to avoid the inclusion of what otherwise are non-taxable
receipts. They are:
1. inheritance gifts and bequests received
2. non- taxable gains
3. compensation for injuries or sickness
4. proceeds of life insurance policies
5. sweepstakes
6. winnings
7. interest on government securities and increase in net worth are not taxable if they are
shown not to be the result of unreported income but to be the result of the correction of
errors in the taxpayer’s entries in the books relating to indebtedness

 
31. Perry v. US 160 F Supp 270

Facts of the case

John Perry bought a $10,000 gold bond which was payable in “gold coin of the present standard
value”. When Perry purchased the bond, the standard gold dollars contained 25.8 grains of gold.
By the time Perry redeemed the bond Congress changed the standard gold dollar to 15 5/21
grains. Perry claimed he was entitled to the weight of gold the original gold dollars would have
given him instead of the dollar amount of the bond. The Court of Claims certified the question
before the court.

Question
Is Perry entitled to receive an amount in legal tender currency in excess of the face amount of the
bond?

Conclusion
No. In a 5-4 decision, Justice Charles E. Hughes wrote the majority opinion. The Supreme Court
held that Perry was only entitled to the dollar amount of the bond, not the weight of the gold.
Perry failed to show that the change in coin weight had cause him any actual damages. Justice
James C. McReynolds wrote a dissent stating that the Court was allowing the Government to
ignore the contractual obligations to its benefit.

32. Bradford v. CIR 233 F2d 935

FACTS:
• In 1938 the petitioner's husband owed a Nashville bank approximately
$305,000. The husband had a debt which had grown out of investment
banking ventures he had engaged in prior to the depression. Fearing
that disclosure of so much indebtedness might impair the position of his
brokerage firm with the NY Stock Exchange, he persuaded the bank to
substitute the note of his wife, the petitioner, for a portion of his
indebtedness. Accordingly, the petitioner executed her note to the bank
for $205,000 without receiving any consideration in return. Her husband
remained the obligor on two notes to the bank for $100,000 and so
reported to the New York Stock Exchange.

• About two years later the petitioner at the bank's request executed two notes to
replace her $205,000 note, one for $105,000, on which all the collateral was pledged,
and another for $100,000 which was unsecured. In 1943 a bank examiner required the
bank to write off $50,000 of the petitioner's $100,000 unsecured note. In 1946 the bank
advised petitioner that it was willing to sell the $100,000 note for $50,000, its then value
on the bank's books. The petitioner's husband accordingly persuaded his half-brother, a
Mr. Duval, to purchase the note from the bank for $50,000 with funds furnished by the
petitioner and her husband. The Tax Court found that this transaction "was, in essence,
a discharge of Mrs. Bradford's indebtedness for $50,000." And Upon these facts the Tax
Court concluded that the petitioner had realized unreported ordinary income of $50,000
in 1946 and upheld the Commissioner's determination of deficiency in accordance with
that conclusion.

• The petitioner asks us to reverse the Tax Court's decision upon two separate grounds:
(1) that the cancellation of her $100,000 note for $50,000 was a "gratuitous forgiveness"
upon the part of the bank and therefore a gift within the meaning of § 22(b) (3) of the
Internal Revenue Code of 1939,2 and (2) that because she received nothing when the
original note was executed by her in 1938, she did not realize income in 1946 when the
note was cancelled for less than its face amount, even if the cancellation was not a gift.

ISSUE: Whether or not the petitioner realized $50,000 income in 1946

when her liability upon a note for $100,000 was discharged for $50,000.

HELD: NO

Note: tax court found the cancellation not as a gift as it failed the the factual test of the
Jacobson case. They were unable to find an intent by the creditor to release an unpaid
balance "for nothing", Denman Tire & Rubber Co. v. Commissioner. SC agreed. (GR
taxable when not a gift, I guess exception ito sa GR)

 
• The fact is that by any realistic standard the petitioner never realized any income at all
from the transaction in issue. In 1938 "without receiving any consideration in return,"
she promised to pay a prior debt of her husband's. In a later year she paid part of that
debt for less than its face value. Had she paid $50,000 in 1938 to discharge $100,000 of
her husband's indebtedness, the Commissioner could hardly contend that she thereby
realized income. Yet the net effect of what she did do was precisely the same.

 Note: to prove their conclusion, they cited analogous cases: In Bowers v. Kerbaugh-
Empire Co., 1926, 271 U.S. 170, 46 S.Ct. 449, 451, 70 L.Ed. 886, the corporate
taxpayer had borrowed money from a bank in Germany repayable in marks. The marks
were immediately converted into dollars, and the money was lost in the performance of
construction contracts by a subsidiary company over a period of years. In a subsequent
year, the taxpayer repaid the loan with greatly devalued marks. The question for
decision was "Whether the difference between the value of marks measured by dollars
at the time of payment * * * and the value when the loans were made was income." The
Court decided that it was not, saying that "The loss was less than it would have been if
marks had not declined in value; but the diminution of loss is not gain, profit, or income.

• In Commissioner of Internal Revenue v. Rail Joint Co., 2 Cir., 1932, 61 F.2d 751, a
corporate taxpayer, after a reappraisal of its assets, distributed a dividend consisting of
its own debenture bonds. In a subsequent year the corporation purchased some of
these bonds at less than their face amounts, retired them, and credited the difference to
surplus. The court rejected the Commissioner's claim that the corporation thereby
realized income in the year the bonds were retired. Stripped of superficial distinctions,
the Rail Joint Co. case is identical in principle with the present case. In that case, as in
this, the taxpayer received nothing of value when the indebtedness was assumed.
Although the indebtedness was discharged at less than its face value, the taxpayer was
in fact poorer by virtue of the entire transaction.
33. Gutierrez vs. Collector, GR Nos. L-9738 & L-9771, May 31, 1957,101 Phil 713

FACTS:

1. Maria Morales, married to Gutierrez(spouses), was the owner of an agricultural land.

The U.S. Gov(pursuant to Military Bases Agreement) wanted to expropriate the land of
Morales to expand the Clark Field Air Base.
2. The Republic was the plaintiff, and deposited a sum of Php 152k to be able to take
immediate possession. The spouses wanted consequential damages but instead settled
with a compromise agreement. In the compromise agreement, the parties agreed to
keep the value of Php 2,500 per hectare, except to some particular lot which would be
at Php 3,000 per hectare.
RATIO 1: It is to be remembered that said property was acquired by the Government through
condemnation proceedings and appellants' stand is, therefore, that same cannot be considered
as sale as said acquisition was by force, there being practically no meeting of the minds
between the parties. U.S jurisprudence has held 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 taking of
property by condemnation and the, payment of just compensation therefore is a "sale" or
"exchange" within the meaning of section 117 (a) of the Revenue Act of 1936, and profits from
that transaction is capital gain.

34. James v. US 366 US 213

FACTS:

• The defendant, Eugene James, was an official in a labor union who had embezzled
more than $738,000 in union funds, and did not report these amounts on his tax return.

• He was tried for tax evasion, and claimed in his defense that embezzled funds did not
constitute taxable income because, like a loan, the taxpayer was legally obligated to
return those funds to their rightful owner

• Indeed, James pointed out, the Supreme Court had previously made such a
determination in Commissioner v. Wilcox, 327 U.S. 404 (1946). However, this defense
was unavailing in the trial court, where Eugene James was convicted and sentenced to
three years in prison

ISSUE: Whether or not the receipt of embezzled funds constitutes

income taxable to the wrongdoer, even though an obligation to repay
exists.
HELD:

• The Supreme Court of the US ruled that the receipt of embezzled funds was
includable in the gross income of the wrongdoer and was taxable to the wrongdoer,
even though the wrongdoer had an obligation to return the funds to the rightful owner.

• If a taxpayer receives income , legally or illegally, without consensual recognition of

obligation to repay, that income is automatically taxable.

• The Court noted that the Sixteenth Amendment did not limit its scope to "lawful"
income, a distinction which had been found in the Revenue Act of 1913. The removal of
this modifier indicated that the framers of the Sixteenth Amendment had intended no
safe harbor for illegal income.

• The Court also ruled, however, that Eugene James could not be held liable for the
willful tax evasion because it is not possible to willfully violate laws that were not
established at the time of the violation.

35. Commissioner v. Glenshaw Glass 348 US 426

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 

• 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.

• 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.
36. Farmers & Merchants Bank v. CIR 59 F2nd 912

FACTS:

• Petitioner, a corporation, was engaged in the banking within the district of the Federal
Reserve Bank of Cleveland, Ohio. It was the custom of petitioner to make a charge for
the collection of checks on foreign banks and of checks drawn on it and sent from other
banks.
• Petitioner was not a member of the Federal Reserve System so that checks drawn on
it instead of being cleared through the Reserve Bank were sent direct to petitioner by
the holding bank and paid by drafts on Cincinnati or New York.

• In 1920 the Reserve Bank demanded that petitioner should clear checks at par. This
demand was refused, and thereupon the Reserve Bank notified its members that it
would collect without charge all checks sent to it and drawn on petitioner.

• Its method was to employ agents who would appear daily at the bank with these
checks and demand payment thereof in cash.

• This practice was followed about eighteen months. For a greater portion of the time
these collections were effected in such an unusual and unbusiness-like manner as to
attract unfavorable public comment, and petitioner claimed that it was thereby annoyed,
embarrassed, and interfered with in the conduct of its affairs.

• Subsequently petitioner brought an action against the Reserve Bank for damages
alleged to have been sustained by reason of these tactics. In its petition it set out
particularly that, by reason of the wrongful conduct of the Reserve Bank, it had been
forced to procure and keep in its vaults and with its correspondents unusually large
amounts of money; that it had lost the earning power of a great deal of money; that it
had lost deposits and depositors, and had failed to gain new ones; that it had been
unable to grow, and to develop new business; and that it had been permanently injured
in its reputation, standing, growth, and prosperity. The petition also included a claim for
exemplary damages based upon a charge that the conduct of the Reserve Bank was
malicious.

• This action was compromised in 1925 and the Reserve Bank paid $18,750.00 in full
settlement. The expense of the suit being deducted the net amount received by
petitioner was reduced to $13,792.96.

 
• Respondent conceived that this fund represented earnings for the year 1925 and
included it in petitioner's net income for that year.

• The Board of Tax Appeals sustained the respondent. It decided that at least some
portion thereof represented earnings and that petitioner had failed to show what portion
did not.

ISSUE: Whether or not the Board of Tax Appeals was correct in sustain
the respondent.

HELD: The court did not assent. Reversed.

• The fund involved must be considered in the light of the claim from which it was
realized and which is reflected in the petition filed in its action against the Reserve
Bank.

• “We find nothing therein to indicate that petitioner sought reparation for profits which
petitioner's misconduct prevented it from earning in 1925.”

• The petitioner's cashier testified before the Board that the loss of such earnings could
not be definitely determined and this probably furnishes the explanation for the failure
definitely to demand it.

• Petitioner not only did not insist upon the restoration of anticipated profits as a matter
of fact, but based its claim for damages upon an alleged tortious injury to the good will
of its business, and the court sees no legal distinction between compensation for
destruction of or damage to incorporeal or intangible property, such as good will, and
similar compensation for damage to tangible property.

• The gravamen of petitioner's action against the Reserve Bank was the injury inflicted
to its banking business generally, and that the true measure of damages was
compensation to be determined by ascertaining how much less valuable its business
was by reason of the wrongful acts of the Reserve Bank.

• Injury to its business of course means injury to its financial standing, credit, reputation,
good will, capital, and other possible elements. Profits were one of the chief indications
of the worth of the business; but the usual earnings before the injury, as compared with
those afterward, were only an evidential factor in determining actual loss and not an
independent basis for recovery.

• “We think that, if petitioner's case had proceeded to a verdict, the law would not have
awarded to it what it might have expected to gain but only that which it had actually lost.
We are not justified in reading an element into the compromise which was not therein
distinctly recognized in fact and would not have been recognized in law. We think
therefore that there is no logical basis upon which petitioner could be charged with
gain.”
37. CIR v. Castaneda GR 96016 Oct 17, 1991 203 SCRA 72 (see PDF)
38. CIR v. CA, CTA, & ANSCOR GR 108576 Jan 30 , 1999

FACTS: -- reversal of the decision of the CA

• Don Andres Soriano, a citizen and resident of the United States, formed the
corporation "A. Soriano Y Cia", predecessor of ANSCOR, with a P1,000,000.00
capitalization divided into 10,000 common shares at a par value of P100/share.
ANSCOR is wholly owned and controlled by the family of Don Andres, who are all
nonresident aliens.

• In 1937, Don Andres subscribed to 4,963 shares of the 5,000 shares originally issued.
In 1945, ANSCOR's authorized capital stock was increased to P2,500,000.00 divided
into 25,000 common shares with the same par value. Don Andres' increased his
subscription to 14,963 common shares. A month later, Don Andres transferred 1,250
shares each to his two sons, Jose and Andres, Jr., as their initial investments in
ANSCOR. Both sons are foreigners.

• From 1947-1963, ANSCOR declared stock dividends. On December 30, 1964 Don
Andres died. As of that date, the records revealed that he has a total shareholdings of
185,154 shares. Correspondingly, one-half of that shareholdings or 92,577 shares were
transferred to his wife, Doña Carmen Soriano, as her conjugal share. The other half
formed part of his estate.

• A day after Don Andres died, ANSCOR increased its capital stock to P20M and in
1966 further increased it to P30M. Stock dividends worth 46,290 and 46,287 shares
were respectively received by the Don Andres estate and Doña Carmen from ANSCOR.
Hence, increasing their accumulated shareholdings to 138,867 and 138,864 common
shares each.

• On June 30, 1968, pursuant to a Board Resolution, ANSCOR redeemed 28,000

common shares from the Don Andres' estate. By November 1968, the Board further
increased ANSCOR's capital stock to P75M. About a year later, ANSCOR again
redeemed 80,000 common shares from the Don Andres' estate. As stated in the Board
Resolutions, ANSCOR's business purpose for both redemptions of stocks is to partially
retire said stocks as treasury shares in order to reduce the company's foreign exchange
remittances in case cash dividends are declared.

• In 1973, after examining ANSCOR's books of account and records, Revenue

examiners issued a report proposing that ANSCOR be assessed for deficiency
withholding tax-at-source, pursuant to Sections 53 and 54 of the 1939 Revenue Code
for the year 1968 and the second quarter of 1969 based on the transactions of
exchange and redemption of stocks.

ISSUE:

• Whether or not ANSCOR's redemption of stocks from its stockholder as well as the
exchange of common with preferred shares can be considered as "essentially
equivalent to the distribution of taxable dividend" making the proceeds thereof taxable.

HELD:
• YES. The bone of contention is the interpretation and application of Section 83(b) of
the 1939 Revenue Act 38 which provides:

• Sec. 83. Distribution of dividends or assets by corporations. — (b) Stock dividends —

A stock dividend representing the transfer of surplus to capital account shall not be
subject to tax. However, if a corporation cancels or redeems stock issued as a dividend
at such time and in such manner as to make the distribution and cancellation or
redemption, in whole or in part, essentially equivalent to the distribution of a taxable
dividend, the amount so distributed in redemption or cancellation of the stock shall be
considered as taxable income to the extent it represents a distribution of earnings or
profits accumulated after March first, nineteen hundred and thirteen.

• Sec. 83(b) of the 1939 NIRC was taken from the Section 115(g)(1) of the U.S.
Revenue Code of 1928. It laid down the general rule known as the proportionate test
wherein stock dividends once issued form part of the capital and, thus, subject to
income tax. Specifically, the general rule states that: A stock dividend representing the
transfer of surplus to capital account shall not be subject to tax.

• Stock dividends, strictly speaking, represent capital and do not constitute income to its
recipient. So that the mere issuance thereof is not yet subject to income tax as they are
nothing but an "enrichment through increase in value of capital investment."

• The exception provides that the redemption or cancellation of stock dividends,

depending on the "time" and "manner" it was made, is essentially equivalent to a
distribution of taxable dividends," making the proceeds thereof "taxable income" "to the
extent it represents profits". The exception was designed to prevent the issuance and
cancellation or redemption of stock dividends, which is fundamentally not taxable, from
being made use of as a device for the actual distribution of cash dividends, which is
taxable.

 The issuance and the redemption of stocks are two different transactions. Although the
existence of legitimate corporate purposes may justify a corporation's acquisition of its
own shares under Section 41 of the Corporation Code, such purposes cannot excuse
the stockholder from the effects of taxation arising from the redemption.

• Even if the said purposes support the redemption and justify the issuance of stock
dividends, the same has no bearing whatsoever on the imposition of the tax herein
assessed because the proceeds of the redemption are deemed taxable dividends since
it was shown that income was generated therefrom.

• The proceeds thereof are essentially considered equivalent to a distribution of taxable

dividends. As "taxable dividend" under Section 83(b), it is part of the "entire income"
subject to tax under Section 22 in relation to Section 21 120 of the 1939 Code.
Moreover, under Section 29(a) of said Code, dividends are included in "gross income".
As income, it is subject to income tax which is required to be withheld at source.
39. Eisner v. Macomber 252 US 89

FACTS:

1. Mrs. Macomber owned 2,200 share of Standard Oil Company of California stock.
2. In January, 1916, the company declared a stock dividend and Mrs. Macomber
received an additional 1,100 shares of stock. Of these shares, 198.77 shares, par value
$19,877, represented surplus earned by the company after March 1, 1913.
3. The IRS treated the $19,877 as taxable income under the Revenue Act of 1916
which provided that a stock dividend was considered income to the amount of its cash
value.
4. Mrs. Macomber argued that that provision in the Revenue Act of 1916 was
unconstitutional because it was a direct tax not apportioned per population; since a
stock dividend was not income, a legislative provision subjecting it to income tax was
not constitutional under the 16th Amendment.
5. The District Court held that the stock dividend was not income.

ISSUE: Does Congress have the power under the 16th Amendment to
tax shareholders on stock dividends received? Are stock dividends
considered income or capital?

 
Laws/ References:

1) 16th Amendment - "The Congress shall have power to lay and collect taxes on
income, from whatever source derived, without apportionment among the several
States, and without regard to any census or enumeration."
2) Revenue Act of 1916 - a "stock dividend shall be considered income, to the amount
of its cash value."
3) Brushaber v Union Pacific - in this case, the Supreme Court stated that the 16th
Amendment "did not extend the taxing power to new subjects, but merely removed the
necessity which otherwise might exist for an apportionment among the State of taxes
laid on income." Macomber, 1 USTC ¶32, page 1079. Thus, the item must be income in
order for Congress to tax it.
4) The Court suggested that "income," which is not defined in the 16th Amendment, was
something derived from capital or labor, or from both.

HELD:

The Supreme Court affirmed the District Court holding for the taxpayer that a stock
dividend is not income. The Revenue Act of 1916 provision subjecting stock dividends
to tax was held unconstitutional.

If a stock dividend is not considered income, it can not be subject to income tax under
the 16th Amendment. In applying the 16th Amendment, 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" (Macomber, p. 1081). An increase to the
value of capital investment is not income. Nothing of value has been taken from the
corporation and given to the shareholder as is the case with a cash dividend.

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" (Macomber, p.
1082).
40. ESSO v. CIR, GR Nos. L-28508-9. July 7, 1989, 175 SCRA 149

FACTS:

ESSO deducted from its gross income for 1959, as part of its ordinary and necessary
business expenses, the amount it had spent for drilling and exploration of its petroleum
concessions. The Commissioner disallowed the claim on the ground that the expenses
should be capitalized and might be written off as a loss only when a “dry hole” should
result. Hence, ESSO filed an amended return where it asked for the refund of P323,270
by reason of its abandonment, as dry holes, of several of its oil wells. It also claimed as
ordinary and necessary expenses in the same return amount representing margin fees
it had paid to the Central Bank on its profit remittances to its New York Office.

ISSUE: Whether the margin fees may be considered ordinary and

necessary expenses when paid.

HELD:

For an item to be deductible as a business expense, the expense must be ordinary and
necessary; it must be paid or incurred within the taxable year; and it must be paid or
incurred in carrying on a trade or business. In addition, the taxpayer must substantially
prove by evidence or records the deductions claimed under law, otherwise, the same
will be disallowed. There has been no attempt to define “ordinary and necessary” with
precision. However, as guiding principle in the proper adjudication of conflicting claims,
an expenses is considered necessary where the expenditure is appropriate and helpful
in the development of the taxpayer’s business. It is ordinary when it connotes a
payment which is normal in relation to the business of the taxpayer and the surrounding
circumstances. Assuming that the expenditure is ordinary and necessary in the
operation of the taxpayer’s business; the expenditure, to be an allowable deduction as a
business expense, must be determined from the nature of the expenditure itself, and on
the extent and permanency of the work accomplished by the expenditure. Herein,
ESSO has not shown that the remittance to the head office of part of its profits was
made in furtherance of its own trade or business. The petitioner merely presumed that
all corporate expenses are necessary and appropriate in the absence of a showing that
they are illegal or ultra vires; which is erroneous. Claims for deductions are a matter of
legislative grace and do not turn on mere equitable considerations.
41. Zamora v. Collector 8 SCRA 163, G.R. No. L-15290. May 31, 1963

FACTS:

• Mariano Zamora, owner of the Bay View Hotel and Farmacia Zamora, Manila, filed his
income tax returns the years 1951 and 1952. The Collector of Internal Revenue found
that he failed to file his return of the capital gains derived from the sale of certain real
properties and claimed deductions which were not allowable. The collector required him
to pay the sums of P43,758.50 and P7,625.00, as deficiency income tax for the years
1951 and 1952.

• On appeal by Zamora, the Court of Tax Appeals modified the decision appealed from
and ordered him to pay the reduced total sum of P30,258.00 (P22,980.00 and
P7,278.00, as deficiency income tax for the years 1951 and 1952.

• Having failed to obtain a reconsideration of the decision, Mariano Zamora appealed

alleging that the Court of Tax Appeals erred (amongst other things, this being the only
relevant to the topic) in disallowing P10,478.50, as promotion expenses incurred by his
wife for the promotion of the Bay View Hotel and Farmacia Zamora (which is ½ of
P20,957.00, supposed business expenses).

• Note: He contends that the whole amount of P20,957.00 as promotion expenses in his
1951 income tax returns, should be allowed and not merely one-half of it or P10,478.50,
on the ground that, while not all the itemized expenses are supported by receipts, the
absence of some supporting receipts has been sufficiently and satisfactorily
established. For, as alleged, the said amount of P20,957.00 was spent by Mrs.
Esperanza A. Zamora (wife of Mariano), during her travel to Japan and the United
States to purchase machinery for a new Tiki-Tiki plant, and to observe hotel
management in modern hotels. The CTA, however, found that for said trip Mrs. Zamora
obtained only the sum of P5,000.00 from the Central Bank and that in her application for
dollar allocation, she stated that she was going abroad on a combined medical and
business trip, which facts were not denied by Mariano Zamora. No evidence had been
submitted as to where Mariano had obtained the amount in excess of P5,000.00 given
to his wife which she spent abroad. No explanation had been made either that the
statement contained in Mrs. Zamora's application for dollar allocation that she was
going abroad on a combined medical and business trip, was not correct. The alleged
expenses were not supported by receipts. Mrs. Zamora could not even remember how
much money she had when she left abroad in 1951, and how the alleged amount of
P20,957.00 was spent.

ISSUE:

Whether or not the CTA erred in disallowing P10,478.50 as promotion expenses

incurred by his wife for the promotion of the Bay View Hotel and Farmacia Zamora in
the absence of receipts proving the same.

HELD: NO

• Section 30, of the Tax Code, provides that in computing net income, there shall be
allowed as deductions all the ordinary and necessary expenses paid or incurred during
the taxable year, in carrying on any trade or business. Since promotion expenses
constitute one of the deductions in conducting a business, same must testify these
requirements. Claim for the deduction of promotion expenses or entertainment
expenses must also be substantiated or supported by record showing in detail the
amount and nature of the expenses incurred (N.H. Van Socklan, Jr. v. Comm. of Int.
Rev.; 33 BTA 544). Considering, as heretofore stated, that the application of Mrs.
Zamora for dollar allocation shows that she went abroad on a combined medical and
business trip, not all of her expenses came under the category of ordinary and
necessary expenses; part thereof constituted her personal expenses. There having
been no means by which to ascertain which expense was incurred by her in connection
with the business of Mariano Zamora and which was incurred for her personal benefit,
the Collector and the CTA in their decisions, considered 50% of the said amount of
P20,957.00 as business expenses and the other 50%, as her personal expenses. We
hold that said allocation is very fair to Mariano Zamora, there having been no receipt
whatsoever, submitted to explain the alleged business expenses, or proof of the
connection which said expenses had to the business or the reasonableness of the said
amount of P20,957.00. While in situations like the present, absolute certainty is usually
not possible, the CTA should make as close an approximation as it can, bearing heavily,
if it chooses, upon the taxpayer whose inexactness is of his own making.

• In the case of Visayan Cebu Terminal Co., Inc. v. Collector of Int. Rev, it was declared
that representation expenses fall under the category of business expenses which are
allowable deductions from gross income, if they meet the conditions prescribed by law,
particularly section 30 (a) [1], of the Tax Code; that to be deductible, said business
expenses must be ordinary and necessary expenses paid or incurred in carrying on any
trade or business; that those expenses must also meet the further test of
reasonableness in amount; that when some of the representation expenses claimed by
the taxpayer were evidenced by vouchers or chits, but others were without vouchers or
chits, documents or supporting papers; that there is no more than oral proof to the effect
that payments have been made for representation expenses allegedly made by the
taxpayer and about the general nature of such alleged expenses; that accordingly, it is
not possible to determine the actual amount covered by supporting papers and the
amount without supporting papers, the court should determine from all available data,
the amount properly deductible as representation expenses.
42. KUenzle & Streiff, Inc. V. CIR , GR No. L-18840, May 29, 1969

FACTS:

1. Kuenzle & Streiff for the years 1953, 1954 and 1955 filed its income tax return,
declaring losses.

2. CIR filed for deficiency of income taxes against Kuenzle & Streiff Inc. for the said
years in the amounts of P40,455.00, P11,248.00 and P16,228.00, respectively, arising
from the disallowance, as deductible expenses, of the bonuses paid by the corporation
to its officers, upon the ground that they were not ordinary, nor necessary, nor
reasonable expenses within the purview of Section 30(a) (1) of the National Internal
Revenue Code.

 
3. The corporation filed with the Court of Tax Appeals a petition for review contesting
the assessments. CTA favored the CIR, however lowered the tax due on 1954. The
corporation moved for reconsideration, but still lost.

4. The Corporation contends that the tax court, in arriving at its conclusion, acted "in a
purely arbitrary manner", and erred in not considering individually the total
compensation paid to each of petitioner's officers and staff members in determining the
reasonableness of the bonuses in question, and that it erred likewise in holding that
there was nothing in the record indicating that the actuation of the respondent was
unreasonable or unjust.

ISSUE: Whether or not the bonuses in question was reasonable and just
to be allowed as a deduction?

HELD: No.

RATIO: It is a general rule that `Bonuses to employees made in good faith and as
additional compensation for the services actually rendered by the employees are
deductible, provided such payments, when added to the stipulated salaries, do not
exceed a reasonable compensation for the services rendered. The condition precedents
to the deduction of bonuses to employees are: (1) the payment of the bonuses is in fact
compensation; (2) it must be for personal services actually rendered; and (3) bonuses,
when added to the salaries, are `reasonable ... when measured by the amount and
quality of the services performed with relation to the business of the particular taxpayer.
Here it is admitted that the bonuses are in fact compensation and were paid for services
actually rendered. The only question is whether the payment of said bonuses is
reasonable.

There is no fixed test for determining the reasonableness of a given bonus as

compensation. This depends upon many factors, one of them being the amount and
quality of the services performed with relation to the business. Other tests suggested
are: payment must be 'made in good faith'; the character of the taxpayer's business, the
volume and amount of its net earnings, its locality, the type and extent of the services
rendered, the salary policy of the corporation'; 'the size of the particular business'; 'the
employees' qualifications and contributions to the business venture'; and 'general
economic conditions. However, 'in determining whether the particular salary or
compensation payment is reasonable, the situation must be considered as a whole.

It seems clear from the record that, in arriving at its main conclusion, the tax
court considered, inter alia, the following factors:
1) The paid officers, in the absence of evidence to the contrary, that they were
competent, on the other the record discloses no evidence nor has petitioner ever made
the claim that all or some of them were gifted with some special talent, or had
undergone some extraordinary training, or had accomplished any particular task, that
contributed materially to the success of petitioner's business during the taxable years in
question.

2) All the other employees received no pay increase in the said years.

3) The bonuses were paid despite the fact that it had suffered net losses for 3 years.
Furthermore the corporation cannot use the excuse that it is 'salary paid' to an
employee because the CIR does not question the basic salaries paid by petitioner to the
officers and employees, but disallowed only the bonuses paid to petitioner's top officers
at the end of the taxable years in question.

43. CM Hoskins & Co., Inc. v. Commissioner, GR No. L-24059. November 28, 1969. 30 SCRA
434

Facts:

Hoskins, a domestic corporation engaged in the real estate business as broker, managing agents
and administrators, filed its income tax return (ITR) showing a net income of P92,540.25 and a tax
liability of P18,508 which it paid.

CIR disallowed 4 items of deductions in the ITR. Court of Tax Appeals upheld the disallowance of an
item which was paid to Mr. C. Hoskins representing 50% of supervision fees earned and set aside
the disallowance of the other 3 items.

Issue:
Whether or not the disallowance of the 4 items were proper.

Held:

NOT deductible. It did not pass the test of reasonableness which is:

General rule, bonuses to employees made in good faith and as additional compensation for services
actually rendered by the employees are deductible, provided such payments, when added to the
salaries do not exceed the compensation for services rendered.

The conditions precedent to the deduction of bonuses to employees are:

· Payment of bonuses is in fact compensation

· Must be for personal services actually rendered

· Bonuses when added to salaries are reasonable when measured by the amount and quality of
services performed with relation to the business of the particular taxpayer.

There is no fixed test for determining the reasonableness of a given bonus as compensation. This
depends upon many factors.

In the case, Hoskins fails to pass the test. CTA was correct in holding that the payment of the
company to Mr. Hoskins of the sum P99,977.91 as 50% share of supervision fees received by the
company was inordinately large and could not be treated as an ordinary and necessary expenses
allowed for deduction.

44. CIR vs. CTA & Smith Kline & French Overseas Co. (Phil Branch) 127 SCRA 9, L-54108
January 17, 1984 (see PDF)
45. Gutierrez vs. Collector 14 SCRA 33(GR L-19537) May 20, 1995

FACTS:

1. Maria Morales, married to Gutierrez(spouses), was the owner of an agricultural land.

The U.S. Gov(pursuant to Military Bases Agreement) wanted to expropriate the land of
Morales to expand the Clark Field Air Base.
2. The Republic was the plaintiff, and deposited a sum of Php 152k to be able to take
immediate possession. The spouses wanted consequential damages but instead settled
with a compromise agreement. In the compromise agreement, the parties agreed to
keep the value of Php 2,500 per hectare, except to some particular lot which would be
at Php 3,000 per hectare.
RATIO 1: It is to be remembered that said property was acquired by the Government through
condemnation proceedings and appellants' stand is, therefore, that same cannot be considered
as sale as said acquisition was by force, there being practically no meeting of the minds
between the parties. U.S jurisprudence has held 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 taking of
property by condemnation and the, payment of just compensation therefore is a "sale" or
"exchange" within the meaning of section 117 (a) of the Revenue Act of 1936, and profits from
that transaction is capital gain.

46. Gancayco vs. The Collector 1 SCRA 980 L-13325 dated April 20, 1961

Gancayco vs.Collector
Gancyaco files his income tax return for the year 1949.  Respondent issued a warrant of distraint and levy
against the properties of Gancayco for the satisfaction of his deficiency income tax liability, and
accordingly, the municipal treasurer issued a notice of sale of said property at public auction. Gancayco
filed a petition to cancel the sale and direct that the same be re-advertised at a future date

ISSUE: Whether the sum of PhP 16,860.31 is due from Gancayco as deficiency income tax for 1949
hinges on the validity of his claim for deduction:
                                       a) farming expense PhP 27,459
                                       b) representation expenses PhP 8,933.45

HELD:
a)Farming Expenses - no evidence has been presnted as to the nature of the said farming expenses
other than the care statement of petitioner that they were spent for the development and cultivation of his
property.

No specification has been made as to the actual amount spent for purchase of tools, equipment or
materials or the amount spent for improvement.

b) Representation expense
PhP 22, 820 is allowed
PhP 8,993.45 is disallowed because of the absence of recipt, invoices or vouchers of the expenditures in
question, petitioner could not sspecify the items constituting the same when or on whom or on what they
were incurred.

47. 3M Philippines, Inc. v. CIR, GR No. 82833, September 26, 1988

FACTS: The petitioner 3M claimed as deductions for income tax purposes “business expenses” in the
form of royalty payments to its foreign licensor which the respondent Commissioner disallowed. The
petitioner claimed the following deductions royalties and technical service fees and pre-operational cost
of tape coater. The amount was not allowed as entire deduction. The petitioner argues that the law
applicable to its case is only Section 29(a)(1) of the Tax Code and not Circular No. 393 of the Central
Bank.

ISSUE: Whether or not the royalty payments are valid deductible expenses.

HELD: NO. Although the Tax Code allows payments of royalty to be deducted from gross income as
business expenses, it is CB Circular No. 393 that defines what royalty payments are proper. Improper
payments of royalty are not deductible as legitimate business expenses. Section 3-C of CB Circular No.
393 provides for payment of royalties only on commodities manufactured by the licensee under the
royalty agreement not on the whole sale price of finished products imported by the licensee from the
licensor. CB Circulars, like CB Circular No. 393 dated December 7, 1973, published in the Official Gazette
issue of December 17, 1973, 69 OG No. 51, p. 11737 issued by Central Bank in the exercise of its
authority under the Central Bank Act, duly published in the OG, have the force and effect of law and
binding on everybody.

48. Paper Industries Corp.(PICOP) v. CA , CIR & CTA, GR No. 106949-50. December 1,1995,
250 SCRA 434

FACTS: Paper Industries Corporation of the Philippines (“Picop”), which is petitioner in G.R. Nos. 106949-
50 and private respondent in G.R. Nos. 106984-85, is a Philippine corporation registered with the Board
of Investments (“BOI”) as a preferred pioneer enterprise with respect to its integrated pulp and paper
mill, and as a preferred non-pioneer enterprise with respect to its integrated plywood and veneer mills.
On 21 April 1983, Picop received from the Commissioner of Internal Revenue (“CIR”) two (2) letters of
assessment and demand both dated 31 March 1983: (a) one for deficiency transaction tax and for
documentary and science stamp tax; and (b) the other for deficiency income tax for 1977, for an
aggregate amount of P88,763,255.00. On 26 April 1983, Picop protested the assessment of deficiency
transaction tax and documentary and science stamp taxes. Picop also protested on 21 May 1983 the
deficiency income tax assessment for 1977. These protests were not formally acted upon by respondent
CIR. On 26 September 1984, the CIR issued a warrant of distraint on personal property and a warrant of
levy on real property against Picop, to enforce collection of the contested assessments; in effect, the CIR
denied Picop’s protests. Thereupon, Picop went before the Court of Tax Appeals (“CTA”) appealing the
assessments. After trial, the CTA rendered a decision dated 15 August 1989, modifying the findings of
the CIR and holding Picop liable for the reduced aggregate amount of P20,133,762.33.

ISSUE: Whether or not Picop is entitled to deduct against current income interest payments on loans for
the purchase of machinery and equipment.

HELD: In 1969, 1972 and 1977, Picop obtained loans from foreign creditors in order to finance the
purchase of machinery and equipment needed for its operations. In its 1977 Income Tax Return, Picop
claimed interest payments made in 1977, amounting to P42,840,131.00, on these loans as a deduction
from its 1977 gross income. Interest payments on loans incurred by a taxpayer (whether BOI-registered
or not) are allowed by the NIRC as deductions against the taxpayer’s gross income. (Section 30 of the
1977 Tax Code) Thus, the general rule is that interest expenses are deductible against gross income and
this certainly includes interest paid under loans incurred in connection with the carrying on of the
business of the taxpayer. Our 1977 NIRC does not prohibit the deduction of interest on a loan incurred
for acquiring machinery and equipment. Neither does our 1977 NIRC compel the capitalization of
interest payments on such a loan. The 1977 Tax Code is simply silent on a taxpayer’s right to elect one or
the other tax treatment of such interest payments. Accordingly, the general rule that interest payments
on a legally demandable loan are deductible from gross income must be applied.

49. Palanca v. CIR G.R. No. L-16626. October 29, 1966, 18 SCRA 496

FACTS:
The late Don Carlos Palanca, Sr. donated in favor of his son, Carlos Palanca, Jr. shares of stock in La Tondeña Inc. 
amounting to 12,500 shares. Later, the BIR considered the donation as transfer in contemplation of death;
consequently, the BIR assessed against the respondent, Palanca Jr., the sum of P191,591.62 as estate and
inheritance taxes on the transfer of said 12,500 shares of stock, including therein interest for delinquency of
P60,581.80. The respondent then filed an amended income tax return, claiming an additional deduction in the
amount P60,581.80; hence, his new income tax due is only P428. He attached a letter requesting the refund of
P20,624.01. However, the said request for refund was denied by the BIR. Court of tax appeals ordered the refund.
Hence, this petition. 

ISSUES: 

1. Whether the interest on the delinquent estate and inheritance tax is deductible from the gross income 

RULING: 

1. Yes, the interest is deductible. The rule is settled that although taxes already due have not, strictly speaking,
the same 
concept as debts, they are, however, obligations that may be considered as such. In CIR v Prieto, the Court
explicitly announced that while the distinction between “taxes” and “debts” was recognized in this
jurisdiction, the variance in their legal conception does not extend to the interests paid on them. 

50. CIR v. Lednicky GR L- 18169 July 31, 1964

FACTS: The respondents, V. E. Lednicky and Maria Valero Lednicky, are husband and wife, respectively,
both American citizens residing in the Philippines, and have derived all their income from Philippine
sources for the taxable years in question. In G. R. No. L-18286, Respondents filed their income tax return
for 1956. Pursuant to the petitioner’s assessment notice, the respondents paid the total amount of
P326,247.41, inclusive of the withheld taxes. The respondents Lednickys filed an amended income tax
return for 1956. The amendment consists in a claimed deduction of P205,939.24 paid in 1956 to the
United States government as federal income tax for 1956. Simultaneously with the filing of the amended
return, the respondents requested the refund of P112,437.90.

Back in 1955, however, the Lednickys filed with the U.S. Internal Revenue Agent in Manila their federal
income tax return for the years 1947, 1951, 1952, 1953, and 1954 on income from Philippine sources on
a cash basis. Payment of these federal income taxes were made in 1955 to the U.S. Director of Internal
Revenue. On 11 August 1958, the said respondents amended their Philippine income tax return for 1955
to include the such deductions. In G. R. No. 21434 (CTA Case No. 783), the facts are similar, but refer to
respondents Lednickys’ income tax return for 1957.

ISSUE: Whether or not a citizen of the United States residing in the Philippines, who derives income
wholly from sources within the Republic of the Philippines, may deduct from his gross income the
income taxes he has paid to the United States government for the taxable year on the strength of
section 30 (C-1) of the Philippine Internal Revenue Code,

HELD: NO. The Construction and wording of Section 30 (c) (1) (B) of the Internal Revenue Act shows the
law’s intent that the right to deduct income taxes paid to foreign government from the taxpayer’s gross
income is given only as an alternative or substitute to his right to claim a tax credit for such foreign 67
income taxes under section 30 (c) (3) and (4); so that unless the alien resident has a right to claim such
tax credit if he so chooses, he is precluded from deducting the foreign income taxes from his gross
income. For it is obvious that in prescribing that such deduction shall be allowed in the case of a
taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3)
(relating to credits for taxes paid to foreign countries), the statute assumes that the taxpayer in question
also may signify his desire to claim a tax credit and waive the deduction; otherwise, the foreign taxes
would always be deductible, and their mention in the list of non-deductible items in Section 30(c) might
as well have been omitted, or at least expressly limited to taxes on income from sources outside the
Philippine Islands.

Finally, 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 the 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.

51. Marcelo Steel Corp. v. Collector, GR No. L-12401, October 31, 1960, 109 Phil 921

Facts:

The petitioner is a corporation duly organized and existing under and by virtue of the laws of the
Philippines, with offices at Malabon, Rizal. It is engaged in three (3) industrial activities, namely, (1)
manufacture of wire fence, (2) manufacture of nails, and (3) manufacture of steel bars, rods and other
allied steel products. enjoined the benefits of the tax exemption under Republic Act No. 35. On May 21,
1953, the petitioner filed an income tax return for the year 1952, reflecting a net income of P34,386.58
realized solely from its business of manufacturing wire fence, an activity which is not tax exempt, and on
March 31, 1954, it filed its income tax return for the year 1953, showing a net income of P58,329.00
realized from the same sources, i.e., the manufacture of wire fence.

On basis of the said income tax return filed by the petitioner for the year 1952 and 1953 which did not
reflect the financial of its tax exempt business activities, the respondent assessed the total sum of
P12,750. On October 1, 1954, the petitioner filed amended income tax returns for taxable years 1952
and 1953, showing that bit suffered a net loss of P871,407.37 in 1952, and P10,956.29 in 1953. The said
losses were arrived at by consolidating the gross income and expenses and/or deductions of the
petitioner in all its business activities. On October 1, 1954, the petitioner, claiming that instead of
earning the net income shown in its original income tax returns for 1952 and 1953, it sustained the
losses shown in its amended income tax returns for refund of the income taxes for the said years
amounting to P12,750.00 which it allegedly paid to the respondent. After more than ten months of
waiting without any action being taken by the respondent on the claim for refund, and in order to
protect its right under Section 306 of the National Internal Revenue Code, the petitioner, on August 13,
1955, filed with this Court the instant petition for review. The Court of Tax Appeals held that "petitioner
cannot deduct from the profits realized from its taxable industries, the losses sustained by its tax
exempt business activities, . . ."

Issue:

whether or not the petitioner may be allowed to deduct from the profits realized from its taxable
business activities, the losses sustained by its tax except industries

Held:

No. The fact that the petitioner is a corporate organized with a single capital that answer for all its
financial obligations including those incurred in the tax exempt industries is of no moment. The intent of
the law is to treat taxable or nonexempt industries as separate and distinct from new and necessary
industries which are tax-exempt for purposes of taxation. Section 7, Executive Order No. 341, series of
1950, issued by the President of the Philippines pursuant to section 2, Republic Act No. 35, provides: Any
industry granted tax exemption under the provisions of Republic Act No. 35 shall report to the Secretary
of Finance at the end of every fiscal rear a complete list and a correct valuation of all real and personal
property of its industrial plant of factory: shall file a separate income tax return; shall keep separetely
the accounting records relative to the industry declared exempt; shall keep such records and submit
such sworn statements as may be prescribed from time to time by the Secretary of Finance

52. Plaridel Surety & Ins Co v. CIR, G.R. No. L-21520. December 11, 1967, 21 SCRA 1187

FACTS: Petitioner Plaridel Surety & Insurance Co., is a domestic corporation engaged in the bonding
business. On November 9, 1950, petitioner, as surety, and Constancio San Jose, as principal, solidarily
executed a performance bond in the penal sum of P30,600.00 in favor of the P. L. Galang Machinery Co.,
Inc., to secure the performance of San Jose's contractual obligation to produce and supply logs to the
latter. To afford itself adequate protection against loss or damage on the performance bond, petitioner
required San Jose and one Ramon Cuervo to execute an indemnity agreement obligating themselves,
solidarily, to indemnify petitioner for whatever liability it may incur by reason of said performance bond.
Accordingly, San Jose constituted a chattel mortgage on logging machineries and other movables in
petitioner's favor while Ramon Cuervo executed a real estate mortgage. San Jose later failed to deliver
the logs to Galang Machinery and the latter sued on the performance bond. CFI: San Jose and petitioner
= liable. CA and SC affirmed. In its income tax return for the year 1957, petitioner claimed the amount of
P44,490.00 (paid to Galang machinery) as deductible loss from its gross income and, accordingly, paid
the amount of P136.00 as its income tax for 1957. CIR disallowed deduction. Petitioner filed protest but
was denied.

ISSUE: WON the amount of interest bond is an interest deduction.

HELD: NO. Loss is deductible only in the taxable year it actually happens or is sustained. However, if it is
compensable by insurance or otherwise, deduction for the loss suffered is postponed to a subsequent
year, which, to be precise, is that year in which it appears that no compensation at all can be had, or
that there is a remaining or net loss, i.e., no full compensation. There is no question that the year in
which the petitioner Insurance Co. effected payment to Galang Machinery pursuant to a final decision
occurred in 1957. However, under the same court decision, San Jose and Cuervo were obligated to
reimburse petitioner for whatever payments it would make to Galang Machinery. Clearly, petitioner's
loss is compensable otherwise (than by insurance).itc-al It should follow, then, that the loss deduction
can not be claimed in 1957. The rule is that loss deduction will be denied if there is a measurable right to
compensation for the loss, with ultimate collection reasonably clear. So where there is reasonable
ground for reimbursement, the taxpayer must seek his redress and may not secure a loss deduction until
he establishes that no recovery may be had. The alleged interest deduction not having been properly
litigated as an issue before the Tax Court, it is now too late to raise and assert it before this Court.

53. CIR v. Priscilla Estate, GR No. L-18282, May 29,1964

MAGLEAVE KA NALANG 3 PAGES DING
54. China Bank Corp vs. CA,CIR,CTA GR No. 125508, July 19, 2000, 336 SCRA 178

FACTS: Sometime in 1980, petitioner China Banking Corporation made a 53% equity investment in the
First CBC Capital (Asia) Ltd., a Hongkong subsidiary engaged in financing and investment with
“deposittaking” function. The investment amounted to P16,227,851.80, consisting of 106,000 shares
with a par value of P100 per share. In the course of the regular examination of the financial books and
investment portfolios of petitioner conducted by Bangko Sentral in 1986, it was shown that First CBC
Capital (Asia), Ltd., has become insolvent. With the approval of Bangko Sentral, petitioner wrote-off as
being worthless its investment in First CBC Capital (Asia), Ltd., in its 1987 Income Tax Return and treated
it as a bad debt or as an ordinary loss deductible from its gross income. Respondent Commissioner of
Internal Revenue disallowed the deduction and assessed petitioner for income tax deficiency in the
amount of P8,533,328.04, inclusive of surcharge, interest and compromise penalty. The disallowance of
the deduction was made on the ground that the investment should not be classified as being
“worthless” and that, although the Hongkong Banking Commissioner had revoked the license of First
CBC Capital as a “deposit-taking” company, the latter could still exercise, however, its financing and
investment activities. Assuming that the securities had indeed become worthless, respondent
Commissioner of Internal Revenue held the view that they should then be classified as “capital loss,” and
not as a bad debt expense there being no indebtedness to speak of between petitioner and its
subsidiary. Petitioner contested the ruling of respondent Commissioner before the CTA. The tax court
sustained the Commissioner, holding that the securities had not indeed become worthless and ordered
petitioner to pay its deficiency income tax for 1987 of P8,533,328.04 plus 20% interest per annum until
fully paid. When the decision was appealed to the Court of Appeals, the latter upheld the CTA. In its
instant petition for review on certiorari, petitioner bank assails the CA decision.

ISSUE: Whether or not the securities had become worthless.

HELD: Yes, the securities had become worthless. First, the equity investment in shares of stock held by
CBC of approximately 53% in its Hongkong subsidiary, the First CBC Capital (Asia), Ltd., is not an
indebtedness, and it is a capital, not an ordinary, asset. Subject to certain exceptions, such as the
compensation income of individuals and passive income subject to final tax, as well as income of non-
resident aliens and foreign corporations not engaged in trade or business in the Philippines, the tax on
income is imposed on the net income allowing certain specified deductions from gross income to be
claimed by the taxpayer. Among the deductible items allowed by the NIRC are bad debts and losses.

55. Collector v. Goodrich International Rubber Co., GR No. L-22265. December 22, 1967,
21 SCRA 1336

FACTS: Respondent was assessed by the CIR for Taxable Years 1951-1952. These assessments
were based on disallowed deductions, claimed by Goodrich, consisting of several alleged bad
debts, in the aggregate sum of P50,455.41, for the year 1951, and the sum of P30,138.88, as
representation expenses allegedly incurred in the year 1952. Goodrich had appealed from said
assessments to the Court of Tax Appeals, which, after appropriate proceedings, rendered, on
June 8, 1963, a decision allowing the deduction for bad debts, but disallowing the alleged
representation expenses, hence, this appeal.

ISSUE: Whether or not the bad debts had been properly deducted for the year 1951.
RULING: Some but not all. The requirement of ascertainment of worthlessness requires proof of
two facts: (1) that the taxpayer did in fact ascertain the debt to be worthlessness, in the year for
which the deduction is sought; and (2) that, in so doing, he acted in good faith. Good faith on
the part of the taxpayer is not enough. He must show, also, that he had reasonably investigated
the relevant facts and had drawn a reasonable inference from the information thus obtained by
him. The payments made, some in full, after some of the foregoing accounts had been
characterized as bad debts, merely stresses the undue haste with which the same had been
written off. At any rate, respondent has not proven that said debts were worthless. There is no
evidence that the debtors can not pay them.lawphil.net It should be noted also that, in violation
of Revenue Regulations No. 2, Section 102, respondent had not attached to its income tax
returns a statement showing the propriety of the deductions therein made for alleged bad
debts.

56. Phil Refining Company v. CA, CTA and Commissioner, GR No. 118794, May 8, 1996, 326
Phil 680

FACTS: Philippine Refining Company (PRC) was assessed by the Commissioner of Internal
Revenue (Commissioner) to pay a deficiency tax for the year 1985 in the amount of
P1,892,584.00.

On April 26, 1989, PRC timely protested the assessment on the ground that it was based on
the erroneous disallowances of “bad debts” and “interest expense” although the same are
both allowable and legal deductions. However, the Commissioner issued a warrant of
garnishment against the deposits of PRC at a branch of City Trust Bank, in Makati, Metro
Manila, which action the latter considered as a denial of its protest. Consequently, PRC filed
a petition for review with the Court of Tax Appeals (CTA) on the same assignment of error,
that is, that the “bad debts” and “interest expense” are legal and allowable deductions. In
its decision of February 3, 1993 , the CTA modified the findings of the Commissioner by
reducing the deficiency income tax assessment to P237,381.26, with surcharge and interest
incident to delinquency. In said decision, the Tax Court reversed and set aside the
Commissioner’s disallowance of the interest expense of P2,666,545.19 but maintained the
disallowance of the supposed bad debts of 13 debtors in the total sum of P395,324.27. PRC
then elevated the case to the Court of Appeals but was denied; hence, this appeal by
certiorari.

ISSUE: Whether or not the bad debts of PRC’s 13 debtors may be considered worthless and
deductible.

HELD: No. The rule on determining the “worthlessness of a debt” was established in the
case of Collector vs. Goodrich International Rubber Co. In that case, the Supreme Court held
that for debts to be considered as “worthless,” and thereby qualify as “bad debts” making
them deductible, the taxpayer should show that (1) there is a valid and subsisting debt; (2)
the debt must be actually ascertained to be worthless and uncollectible during the taxable
year; (3) the debt must be charged off during the taxable year; and (4) the debt must arise
from the business or trade of the taxpayer. Moreover, before a debt can be considered
worthless, the taxpayer must also show that it is indeed uncollectible even in the future. The
steps to be undertaken by the taxpayer to prove that he exerted 71 diligent efforts to collect
the debts are: (1) sending of statement of accounts; (2) sending of collection letters; (3)
giving the account to a lawyer for collection; and (4) filling a collection case in court. In this
case, the only evidentiary support given by PRC for its alleged bad debts was the explanation
or justification posited by its financial adviser or accountant, Guia D. Masagana. However,
 her allegation were not supported by any documentary evidence, hence both the Court of
Appeals and CTA ruled that said contentions per se cannot prove that the debts were indeed
uncollectible and can be considered as bad debts as to make them deductible.

57. Basilan Estate, Inc. v. Commissioner 21 SCRA 17

FACTS: CIR, per examiners' report of February 19, 1959, assessed Basilan Estates, Inc., a deficiency
income tax of P3,912 for 1953 and P86,876.85 as 25% surtax on unreasonably accumulated profits as of
1953 pursuant to Section 25 of the Tax Code. Basilan Estates, Inc. filed before the CTA a petition for
review of the Commissioner's assessment, alleging prescription of the period for assessment and
collection; error in disallowing claimed depreciations, travelling and miscellaneous expenses; and error
in finding the existence of unreasonably accumulated profits and the imposition of 25% surtax thereon.
BEI claimed deductions for the depreciation of its assets up to 1949 on the basis of their acquisition cost.
As of January 1, 1950 it changed the depreciable value of said assets by increasing it to conform with the
increase in cost for their replacement. Accordingly, from 1950 to 1953 it deducted from gross income
the value of depreciation computed on the reappraised value. Upon investigation and examination of
taxpayer's books and papers, the CIR found that the reappraised assets depreciated in 1953 were the
same ones upon which depreciation was claimed in 1952. And for the year 1952, the Commissioner had
already determined, with taxpayer's concurrence, the depreciation allowable on said assets to be
P36,842.04, computed on their acquisition cost at rates fixed by the taxpayer. Hence, the Commissioner
pegged the deductible depreciation for 1953 on the same old assets at P36,842.04 and disallowed the
excess thereof in the amount of P10,500.49.

ISSUE: W/N depreciation shall be determined on the acquisition cost or on the reappraised value of the
assets.

HELD: It shall be determined on the acquisition cost. Depreciation is the gradual diminution in the
useful value of tangible property resulting from wear and tear and normal obsolescense. The term is
also applied to amortization of the value of intangible assets, the use of which in the trade or business is
definitely limited in duration. Depreciation commences with the acquisition of the property and its
owner is not bound to see his property gradually waste, without making provision out of earnings for its
replacement. The income tax law does not authorize the depreciation of an asset beyond its acquisition
cost. Hence, a deduction over and above such cost cannot be claimed and allowed. The reason is that
deductions from gross income are privileges, not matters of right. They are not created by implication
but upon clear expression in the law.

58. Zamora v. Collector 8 SCRA 163

FACTS: Mariano Zamora, owner of the Bay View Hotel and Farmacia Zamora, filed his income tax
returns. The CIR found that he failed to file his return of the capital gains derived from the sale of certain
real properties and claimed deductions which were not allowable. The collector required him to pay
deficiency income tax. On appeal by Zamora, the CTA reduced the amount of DEFICIENCY INCOME TAX

Mariano Zamora and his deceased sister Felicidad Zamora, bought a piece of land located in Manila on
May 16, 1944, for P132,000.00 and sold it for P75,000.00 on March 5, 1951. They also purchased a lot
located in Quezon City for P68,959.00 on January 19, 1944, which they sold for P94,000 on February 9,
1951. The CTA ordered the estate of the late Felicidad Zamora (represented by Esperanza A. Zamora, as
special administratrix of her estate), to pay the sum of P235.50, representing alleged deficiency income
tax and surcharge due from said estate. Petitioner Mariano Zamora alleges that the CTA erred in
disallowing 3-½% per annum as the rate of depreciation of the Bay View Hotel Building but only 2-½%. In
justifying depreciation deduction of 3-½ %, Mariano Zamora contends that (1) the Ermita District, where
the Bay View Hotel is located, is now becoming a commercial district; (2) the hotel has no room for
improvement; and (3) the changing modes in architecture, styles of furniture and decorative designs,
"must meet the taste of a fickle public".

ISSUE: w/n the depreciation rate 2-1/2% is correct?

HELD: YES. Section 30, of the Tax Code, provides that in computing net income, there shall be allowed as
deductions all the ordinary and necessary expenses paid or incurred during the taxable year, in carrying
on any trade or business. Since promotion expenses constitute one of the deductions in conducting a
business, same must satisfy these requirements. Claim for the deduction of promotion expenses or
entertainment expenses must also be substantiated or supported by record showing in detail the
amount and nature of the expenses incurred.

59. US v. Ludley 247 US 295

FACTS Ludey brought this suit in the Court of Claims to recover an amount exacted as additional taxes
for 1917. The tax was assessed on the alleged gain from a sale in 1917 of oil mining properties which had
been owned and operated by him for several years. The Commissioner of Internal Revenue determined
that there was a gain on the sale of $26, 904.15. Ludey insists that there was a loss of $14,777.33. The
amount sued for is the tax assessed on the difference. ,hether there was the gain or the loss depends
primarily upon whether deductions for depletion and depreciation are to be made from the original cost
in determining gain or loss on sale of oil mining properties. The question is one of statutory construction
or application. The Court of Claims entered judgment for the plaintiff.

ISSUE: Whether or not depreciation of the mining e-uipment should be deducted on the cost of the
same to determine whether there was a gain or loss on the sale of the said equipment.

RULING: YES Until 1924, none of the revenue Acts provided in terms that in computing the gain from a
sale of any property' a deduction shall be made from the original cost on account of depreciation and
depletion during the period of operation. But ever since March 1,1913, the revenue acts have required
that gains from sales made within the tax year shall be included in the taxable income of the year' and
that losses on sales may be deducted from gross income. We are of opinion that the revenue acts should
be construed as requiring deductions for both depreciation and depletion when determining the original
cost of oil properties sold. The depreciation charge permitted as a deduction from the gross income in
determining the taxable income of a business for any year represents the reduction during the year' of
the capital assets through wear and tear of the plant used.

60. Roxas v. CTA 23 SCRA 276

FACTS: Don Pedro Roxas and Dona Carmen Ayala, transmitted to their grandchildren by hereditary
succession various properties. To manage the properties given to their children by their parents, said
children, namely, Antonio Roxas, Eduardo Roxas and Jose Roxas, formed a partnership called Roxas y
Compania. The Government persuaded the Roxas brothers to part with their landholdings in the
Nasugbu property. The Roxas brothers agreed to sell 13,500 hectares to the Government since it did not
have funds to cover the purchase price, and so a special arrangement was made for the Rehabilitation
Finance Corporation to advance to Roxas y Cia. the amount of P1,500,000.00 as loan.

The Commissioner of Internal Revenue demanded from Roxas y Cia the payment of real estate dealer’s
tax for 1952 in the amount of P150.00.The assessment for real estate dealer’s tax was based on the fact
that Roxas y Cia. received house rentals from Jose Roxas in the amount of P8,000.00. In the same
assessment, the Commissioner assessed deficiency income taxes against the Roxas Brothers for the
years 1953 and 1955, which included 50% of the net profits for 1953 and 1955 derived from the sale of
the Nasugbu farm lands to the tenants, and the disallowance of deductions from gross income of various
business expenses and contributions claimed by Roxas y Cia. and the Roxas brothers.

ISSUE: Are the deductions for business expenses and contributions deductible?

HELD: Roxas y Cia. deducted from its gross income the amount of P40.00 for tickets to a banquet given
in honor of Sergio Osmena and P28.00 for San Miguel beer given as gifts to various persons. The
deduction were claimed as representation expenses. Representation expenses are deductible from gross
income as expenditures incurred in carrying on a trade or business provided the taxpayer proves that
they are reasonable in amount, ordinary and necessary, and incurred in connection with his business. In
the case at bar, the evidence does not show such link between the expenses and the business of Roxas y
Cia. Rightly, the Commissioner of Internal Revenue disallowed the contribution to Our Lady of Fatima
chapel at the Far Eastern University on the ground that the said university gives dividends to its
stockholders. Located within the premises of the university, the chapel in question has not been shown
to belong to the Catholic Church or any religious organization. On the other hand, the lower court found
that it belongs to the Far Eastern University, contributions to which are not deductible under Section
30(h) of the Tax Code for the reason that the net income of said university injures to the benefit of its
stockholders. The disallowance should be sustained.

61. Atlas Consolidated Mining Co. v. CIR, G.R. No. L-26911, January 27, 1981, 102 SCRA
246
FACTS: Atlas is a corporation engaged in the mining industry registered under the laws of the
Philippines. The Commissioner assessed against Atlas the sum of P546,295.16 and P215,493.96
or a total of P761,789.12 as deficiency income taxes for the years 1957 and 1958. For the year
1958, the assessment of deficiency income tax of P761,789.12 covers the disallowance of items
claimed by Atlas as deductible from gross income. The assessment for 1958 was reduced to
P39,646.82 from which Atlas appealed to the Court of Tax Appeals. It is the contention of Atlas
that the amount of P25,523.14 paid in 1958 as annual public relations expenses is a deductible
expense from gross income. Atlas claimed that it was paid for services of a public relations firm,
hence, an ordinary and necessary business expense in order to compete with other
corporations.

ISSUE: Whether or not the expenses paid for the services rendered by a public relations firm
(P.K MacKer & Co) labelled as stockholders relation service fee is an allowable deduction as
business expense.

HELD: An item of expenditure, in order to be deductible under the statute, must fall squarely
within its language. In order to be deductible as a business expense, three conditions are
imposed, namely: (1) the expense must be ordinary and necessary, (2) it must be paid or
incurred within the taxable year, and (3) it must be paid or incurred in carrying in a trade or
business. He must substantially prove by evidence or records the deductions claimed under the
law, otherwise, the same will be disallowed. That the expense in question was incurred to create
a favorable image of the corporation in order to gain or maintain the public’s and its
stockholders’ patronage, does not make it deductible as business expense

62. CIR v. Isabela Cultural Corp. GR No. 172231, February 12,2007

FACTS: In February 1990, ICC, a domestic corporation, received from the BIR an Assessment
Notice for deficiency income tax in the amount of P333,196.86, and an Assessment Notice for
deficiency expanded withholding tax in the amount of P4,897.79, inclusive of surcharges and
interest, both for the taxable year 1986. The deficiency expanded withholding tax was allegedly
due to the failure of ICC to withhold 1% expanded withholding tax on its claimed P244,890.00
deduction for security services. The CTA held however that the claimed deductions for
professional and security services were properly claimed by ICC in 1986 because it was only in
the said year when the bills demanding payment were sent to ICC. Hence, even if some of these
professional services were rendered to ICC in 1984 or 1985, it could not declare the same as
deduction for the said years as the amount thereof could not be determined at that time. CIR
appealed to the CA which upheld CTA holding that although the professional services (legal and
auditing services) were rendered to ICC in 1984 and 1985, the cost of the services was not yet
determinable at that time, hence, it could be considered as deductible expenses only in 1986
when ICC received the billing statements for said services. Hence, this case before the SC.
ISSUE: W/N the deduction of the expenses for professional and security services from ICCs gross
income was correct.

HELD: NO. The requisites for the deductibility of ordinary and necessary trade, business, or
professional expenses, like expenses paid for legal and auditing services, are: (a) the expense
must be ordinary and necessary; (b) it must have been paid or incurred during the taxable year;
(c) it must have been paid or incurred in carrying on the trade or business of the taxpayer; and
(d) it must be supported by receipts, records or other pertinent papers.