WEEK 8 & 9

TAXABLE INCOME

GROSS INCOME

BDO V. REPUBLIC

JANUARY 13, 2015

FACTS: The case involves the proper tax treatment of the discount or interest income arising
from the ₱35 billion worth of 10-year zero-coupon treasury bonds issued by the Bureau of
Treasury on October 18, 2001 (denominated as the Poverty Eradication and Alleviation
Certificates or the PEACe Bonds by the Caucus of Development NGO Networks).

On October 7, 2011, the Commissioner of Internal Revenue issued BIR Ruling No. 370-2011
(2011 BIR Ruling), declaring that the PEACe Bonds being deposit substitutes are subject to the
20% final withholding tax. Pursuant to this ruling, the Secretary of Finance directed the Bureau
of Treasury to withhold a 20% final tax from the face value of the PEACe Bonds upon their
payment at maturity on October 18, 2011.

ISSUE (1): WON 20% of the deposit substitutes are included in the computation of gross
income. NO

ISSUE (2): WON debt instruments that are not deposit substitutes are subject to regular income
tax. YES

RULING: The definition of gross income is broad enough to include all passive incomes subject
to specific tax rates or final taxes." Hence, interest income from deposit substitutes is
necessarily part of taxable income.

However, since these passive incomes are already subject to different rates and taxed finally at
source, they are no longer included in the computation of gross income, which determines
taxable income."
 
Stated otherwise, if there were no withholding tax system in place in this country, this 20 percent
portion of the ‘passive’ income of [creditors/lenders] would actually be paid to the
[creditors/lenders] and then remitted by them to the government in payment of their income tax.

CAB: The transactions executed for the sale of the PEACe Bonds are: (1) The issuance of the
35 billion Bonds by the Bureau of Treasury to RCBC/CODE-NGO at 10.2 billion; and (2) The
sale and distribution by RCBC Capital (underwriter) on behalf of CODE-NGO of the PEACe
Bonds to undisclosed investors at ₱11.996 billion.

It may seem that there was only one lender — RCBC on behalf of CODE-NGO — but in reality,
the entire ₱10.2 billion borrowing received by the Bureau of Treasury in exchange for the ₱35
billion worth of PEACe Bonds was sourced directly from the undisclosed number of investors to
whom RCBC Capital/CODE-NGO distributed the PEACe Bonds — all at the time of origination
or issuance. However, it is not known as to how many investors the PEACe Bonds were sold to
by RCBC Capital.

Should there have been a simultaneous sale to 20 or more lenders/investors, the PEACe Bonds
are deemed deposit substitutes within the meaning of Section 22(Y) of the 1997 National
Internal Revenue Code and RCBC Capital/CODE-NGO would have been obliged to pay the
20% final withholding tax on the interest or discount from the PEACe Bonds.

Further, the obligation to withhold the 20% final tax on the corresponding interest from the
PEACe Bonds would likewise be required of any lender/investor had the latter turned around
and sold said PEACe Bonds, whether in whole or part, simultaneously to 20 or more lenders or
investors.

However, under Section 24 of the 1997 NIRC, interest income received by individuals from long-
term deposits or investments with a holding period of not less than five (5) years is exempt from
the final tax.

Thus, should the PEACe Bonds be found to be within the coverage of deposit substitutes, the
proper procedure was for the Bureau of Treasury to pay the face value of the PEACe Bonds to
the bondholders and for the Bureau of Internal Revenue to collect the unpaid final withholding
tax directly from RCBC Capital/CODE-NGO, or any lender or investor if such be the case, as
the withholding agents.

 
Bureau of Treasury was ORDERED to immediately release and pay to the bondholders the
amount corresponding-to the 20% final withholding tax that it withheld on October 18, 2011.

CIR v. Tours Specialists Inc.

G.R. No. L-66416    March 21, 1990

Tours Specialists Inc. is a travel agency servicing foreign tourists and travelers, as well as
Filipino “Balikbayans.”

Tours Specialists and its counterpart foreign tourist agencies offered package fee for tourists.
The payment for hotel rooms, restaurants or shops are either paid directly by the tourists or the
their foreign travel agencies.

Some of Tours Specialists’ foreign counterparts requested that the hotel rooms will be paid by
the former. Their arrangement was, the foreign tour agency entrusts to the Tours Specialists,
Inc., the fund for hotel room accommodation, which in turn is paid by Tours Specialists tour
agency to the local hotel when billed.

Despite this arrangement, CIR assessed Tours Specialists 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. 

Tours Specialists protested the assessment made by the CIR. 

Tours Specialist Contention: (1) That the money received and entrusted to it by the foreign tour
agencies, earmarked to pay hotel room charges, were not considered and have never been
considered by it as part of its taxable gross receipts for purposes of computing and paying its
contractor's tax. (2) That the payment of hotel rooms through it "is only an act of
accommodation on its part" for the tourists their foreign tourists’ agencies, to be exempt from
hotel room tax under P.D. 31. 

CIR’s Contention: (1) that the hotel room charges entrusted to the Tours Specialists were part of
the package fee paid to it by foreign tourists. (2) that the 3% contractor's tax prescribed by
Section 191 of the Tax Code is imposed on the gross receipts of the contractor, "no deduction
whatever being allowed by said law." The only exception to this rule is when there is a law or
regulation which would exempt such gross receipts from being subjected to the 3% contractor's
tax.

ISSUE: WON the money entrusted to Tours Specialists, Inc., forms part of its gross receipts
subject to the 3% independent contractor's tax. NO

RULING: 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.

CAB: The room charges entrusted by the foreign travel agencies to the Tours Specialist do not
form part of its gross receipts within the definition of the Tax Code.

The said receipts never belonged to the Tours Specialists. Tours Specialists never benefited
from their payment to the local hotels. The arrangement was only to accommodate the foreign
travel agencies.

Further, if the hotel room charges entrusted to petitioner will be subjected to 3% contractor's tax,
it 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 petitioner 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.

 
 
MARIA CARLA PIROVANO, etc., et al. vs. THE COMMISSIONER OF INTERNAL REVENUE
G.R. No. L-19865
July 31, 1965
 
FACTS: De la Rama Steamship Co. insured the life of Enrico Pirovano, who was then its
President and General Manager until the time of his death during the Japanese occupation.
After the liberation of the Philippines, the BOD adopted a resolution renouncing all its
rights to the proceeds in the amount of P643,000.00 in favor of the minor children of the
deceased, subject to the express condition that said amount should be retained by the
Company in the nature of a loan to it.
However, the majority stockholders of the Company voted to revoke the resolution
approving the donation in favor of the Pirovano children.
Mrs. Estefania R. Pirovano, as the natural guardian, brought an action for the recovery
of said amount, plus interest and damages against De la Rama Steamship Co., where the Court
held that the donation was valid and remunerative in nature (Pirovano et al. vs. De la Rama
Steamship Co., 96 Phil. 367-368) The above decision became final and executory. In
compliance therewith, De la Rama Steamship Co. made, on April 6, 1955, a partial payment on
the amount of the judgment and paid the balance thereof on May 12, 1955.
On March 6, 1955, CIR assessed the amount of P60,869.67 as donees' gift tax, inclusive
of surcharges, interests and other penalties, against each of the petitioners-appellants, or for the
total sum of P243,478.68; and, on April 23, 1955, a donor's gift tax in the total amount of
P34,371.76 was also assessed against De la Rama Steamship Co., which the latter paid.
PIROVANO questions the assessment and imposition of the donees' gift taxes and
donor's gift tax and also made a claim for refund of the donor's gift tax so collected. The CIR
overruled, leading Pirovano to file with CTA. The CTA ruled that
(1) the donor's gift tax in the sum of P34,371.76 was erroneously assessed and
collected, hence, petitioners are entitled to the refund thereof;
(2) the donees' gift taxes were correctly assessed;
 Pirovano contends that the Court itself declared that the donation was renumenatory and
not simple and it  was made for a full and adequate compensation for the valuable services by
decedent to the Company; hence, the donation does not constitute a taxable gift under the
provisions of Section 108 of the National Internal Revenue Code, and that if it constitutes a
taxable gift that the entire property or right donated should not be considered as a gift for
taxation purposes; only that portion of the value of the property or right transferred, if any, which
is in excess of the value of the services rendered should be considered as a taxable gift.
 
ISSUE: Whether Pirovano is liable for the Donee’s Gift Tax. – YES
 
RULING: Past services, rendered without relying on a coetaneous promise, express or implied,
that such services would be paid for in the future, constituted cause or consideration that would
make a conveyance of property anything else but a gift or donation. This conclusion flows from
the text of Article 619 of the Code of 1889 (identical with Article 726 of the present Civil Code of
the Philippines):
When a person gives to another a thing ... on account of the latter's merits or of the
services rendered by him to the donor, provided they do not constitute a
demandable debt, ..., there is also a donation. ... .
There is nothing on record to show that when the late Enrico Pirovano rendered services
as President and General Manager of the De la Rama Steamship Co. he was not fully
compensated for such services, or that, because they were "largely responsible for the rapid
and very successful development of the activities of the company". The fact that his services
contributed in a large measure to the success of the company did not give rise to a recoverable
debt, and the conveyances made by the company to his heirs remain a gift or donation.
That the tax court regarded the conveyance as a simple donation, instead of a
remuneratory one as it was declared to be in our previous decision, is but an innocuous error;
whether remuneratory or simple, the conveyance remained a gift, taxable under Chapter 2, Title
III of the Internal Revenue Code.
Pirovano's successful activities as officer of the De la Rama Steamship Co. cannot be
deemed such consideration for the gift to his heirs, since the services were rendered long
before the Company ceded the value of the life policies to said heirs; cession and services were
not the result of one bargain or of a mutual exchange of promises.
And the Anglo-American law treats a subsequent promise to pay for past services (like
one to pay for improvements already made without prior request from the promisor) to be a
nudum pactum , i.e., one that is unenforceable in view of the common law rule that
consideration must consist in a legal benefit to the promisee or some legal detriment to the
promisor.
What is more, the actual consideration for the cession of the policies, as previously
shown, was the Company's gratitude to Pirovano; there is no consideration the value of which
can be deducted from that of the property transferred as a gift. Like "love and affection,"
gratitude has no economic value and is not "consideration" in the sense that the word is used in
this section of the Tax Code.
Love and affection are not considerations of value — they are not estimable in terms of
value. Nor are sentiments of gratitude for gratuitous part favors or kindnesses; nor are
obligations which are merely moral. It has been well said that if a moral obligation were alone
sufficient it would remove the necessity for any consideration at all, since the fact of making a
promise impose, the moral obligation to perform it."
It is of course perfectly possible that a donation or gift should at the same time impose a
burden or condition on the donee involving some economic liability for him. A, for example, may
donate a parcel of land to B on condition that the latter assume a mortgage existing on the
donated land. In this case the donee may rightfully insist that the gift tax be computed only on
the value of the land less the value of the mortgage.

COLLECTOR OF INTERNAL REVENUE vs. ARTHUR HENDERSON

G.R. No. L-12954
February 28, 1961
 
FACTS: The spouses Arthur Henderson and Marie B. Henderson filed with the BIR returns of
annual net income for the years 1948 to 1952,  and paid the taxes due thereon.
After investigation and verification, the BIR reassessed the taxpayers' income for the years
1948 to 1952, and considered as part of their taxable income the taxpayer-husband's

1.     allowance for rental, residential expenses, subsistence, water, electricity and

telephone;
2.     bonus paid to him;
3.     withholding tax and entrance fee to the Marikina gun and Country Club paid by his
employer for his account; and
4.     travelling allowance of his wife.  

It was the contention of the taxpayers that

1.     as regards the husband-taxpayer's allowances for rental and utilities such as water,
electricity and telephone, he did not receive the money for said allowances, but that
they lived in the apartment furnished and paid for by his employer for its
convenience;
2.     that as regards his allowances for rental, residential expenses and subsistence
consisting of allowances for rent and utilities such as light, water, telephone, etc,
only the amount of P3,900 for each year, which is the amount they would have
spent for rental of an apartment including utilities, should be taxed;
3.     that as regards the entrance fee to the Marikina Gun and Country Club paid for him
by his employer in 1948, the same should not be considered as part of their income
for it was an expense of his employer and his membership therein was merely
incidental to his duties of increasing and sustaining the business of his employer;
and
4.     that as regards the wife-taxpayer's travelling allowance, it should not be considered
as part of their income because she merely accompanied him in his business trip to
New York as his secretary and, at the behest of her husband's employer, to study
and look into the details of the plans and decorations of the building intended to be
constructed by his employer in its property at Dewey Boulevard.

After the hearing conducted by the BIR, except that the amount of P200 as entrance fee
to the Marikina Gun and Country Club, all others were considered as part of the income and
demanded payment of the deficiency taxes
The TP again sought a reconsideration of the denial of their request for reconsideration
and offered to settle the case on a more equitable basis by increasing the amount of the taxable
portion of the husband-taxpayer's allowances for rental, etc. from P3,000 yearly to P4,800
yearly, which "is the value to the employee of the benefits he derived there from measured by
what he had saved on account thereof' in the ordinary course of his life ... for which he would
have spent in any case'".
The CIR did not take any action on the taxpayers' request for refund.
They filed with the CTA a petition to review, where it ruled that "that the inherent nature
of petitioner's(the husband-taxpayer) employment as president of the American International
Underwriters does not require him to occupy the apartments supplied by his employer-
corporation;" that, however, only the amount of P4,800 annually, the ratable value to him of the
quarters furnished constitutes a part of taxable income; that since the taxpayers did not receive
any benefit out of the traveling expense allowance, the same could not be considered as
income; and that even if it were considered as such, still it could not be subject to tax because it
was deductible as travel expense; and ordering the CIR to refund.
The TP filed and MR claiming that the manager’s residential expense should not be
included in the net taxable income being mainly expenses for utilities as light, water and
telephone in the apartment furnished by the husband-taxpayer's employer.
 
ISSUE: Whether the allowances for rental of the apartment, including utilities such as light,
water, telephone, etc. and the allowance for travel expenses given by his employer-corporation
to his wife are part of taxable income. – NO
 
RULING: "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, 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, rents dividend, securities, or the transaction of any business carried on for gain or
profit, or gains, profits, and income derived from any source whatever.  
The evidence presented at the hearing of the case substantially supports the findings:

1.     The apartment, due to the exigencies of the husband-taxpayer's high executive

position, not to mention social standing, demanded and compelled them to live in a
more spacious quarter. This also served as house for guests of the employer-
corporation. As correctly held by the CTA, the taxpayers are entitled only to a
ratable value of the allowances in question, and only the amount of P4,800 annually,
the reasonable amount they would have spent for house rental and utilities such as
light, water, telephone, etc., should be the amount subject to tax, and the excess
considered as expenses of the corporation.
2.     As to travel expense: it was at the behest of the employer. No part of the allowance
for travelling expenses redounded to the benefit of the taxpayers. Neither was a part
thereof retained by them. The fact that she had herself operated on for tumors while
in New York was but incidental to her stay there and she must have merely taken
advantage of her presence in that city to undergo the operation.
3.     As to manager's residential expense: it is supported by the evidence from the
accounting department and should be treated as rentals for apartments and utilities
and should not form part of the ratable value subject to tax.

 
Gonzales v CTA (Taxation)
Gonzales v CTA G.R. No. L-14532 May 26, 1965

FACTS:

Both petitioners Jose and Juana Gonzales are co-heirs and co-owners, (one-sixth each) of a tract of land of 871,
[982.] square meters which they, along with four other co-heirs, inherited from their mother. So on November 15,
1956, Jose Leon Gonzales and Juana F. Gonzales submitted to the Court of Tax Appeals a joint petition seeking a
refund, this time of the amount of P86,166.00 for each of the two petitioners.

ISSUES:
(1) Whether or not petitioners' claim for refund of the total of P86,166.00 may be properly entertained; and

(2) Whether or not the sum of P89,309.61 which each of the petitioners received as interest on the value of the land
expropriated is taxable as ordinary income, and not as capital gain.

RULING:

1. No. the requirement of prior timely claim for refund of the sum of P86,166.00 had not been met in this case. The
demand for refund must precede the suit, and this requirement is mandatory; so much so that non-compliance
therewith bars the action

2. It is ordinary income."the acquisition by the Government of private properties through the exercise of the power of
eminent domain, said properties being justly compensated, is embraced within the meaning of the term 'sale' or
'disposition of property'" and the definition of gross income laid down by Section 29 of the Tax Code of the
Philippines. We also adhered to the view that the transfer of property through condemnation proceedings is a sale or
exchange and that profit from the transaction constitutes capital gain.

In fact, the authorities support the conclusion that for income tax purposes, interest does not form part of the price
paid by the Government in condemnation proceedings; and may not be treated as part of the capital gain.
COMMISSIONER OF INTERNAL REVENUE VS.
FILINVEST DEVELOPMENT CORPORATION-
Theoretical Interest

Filinvest Development Corporation extended advances in favor of its affiliates and supported the same
with instructional letters and cash and journal vouchers. The BIR assessed Filinvest for deficiency income
tax by imputing an “arm’s length” interest rate on its advances to affiliates. Filinvest disputed this by
saying that the CIR lacks the authority to impute theoretical interest and that the rule is that interests
cannot be demanded in the absence of a stipulation to the effect.

ISSUE:

Can the CIR impute theoretical interest on the advances made by Filinvest to its affiliates?

HELD:

NO. Despite the seemingly broad power of the CIR to distribute, apportion and allocate gross income
under (now) Section 50 of the Tax Code, the same does not include the power to impute theoretical
interests even with regard to controlled taxpayers’ transactions. This is true even if the CIR is able to
prove that interest expense (on its own loans) was in fact claimed by the lending entity. The term in the
definition of gross income that even those income “from whatever source derived” is covered still requires
that there must be actual or at least probable receipt or realization of the item of gross income sought to
be apportioned, distributed, or allocated. Finally, the rule under the Civil Code that “no interest shall be
due unless expressly stipulated in writing” was also applied in this case.

The Court also ruled that the instructional letters, cash and journal vouchers qualify as loan agreements
that are subject to DST.

CIR VS CA AND ANSCOR

GENERAL RULE: A stock dividend representing the transfer of surplus to capital account shall not be
subject to tax.

EXCEPTION: 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".

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.

• Simply put, depending on the circumstances, the proceeds of redemption of stock dividends are
essentially distribution of cash dividends, which when paid becomes the absolute property of the
stockholder. Thereafter, the latter becomes the exclusive owner thereof and can exercise the freedom of
choice. Having realized gain from that redemption, the income earner cannot escape income tax. For the
exempting clause of Section, 83(b) to apply, it is indispensable that: (a) there is redemption or
cancellation; (b) the transaction involves stock dividends and (c) the "time and manner" of the transaction
makes it "essentially equivalent to a distribution of taxable dividends."

• Redemption is repurchase, a reacquisition of stock by a corporation which issued the stock 89 in

exchange for property, whether or not the acquired stock is cancelled, retired or held in the treasury. 90
Essentially, the corporation gets back some of its stock, distributes cash or property to the shareholder in
payment for the stock, and continues in business as before. In the case, ANSCOR redeemed shares
twice. But where did the shares redeemed come from? If its source is the original capital subscriptions
upon establishment of the corporation or from initial capital investment in an existing enterprise, its
redemption to the concurrent value of acquisition may not invite the application of Sec. 83(b) under the
1939 Tax Code, as it is not income but a mere return of capital. On the contrary, if the redeemed shares
are from stock dividend declarations other than as initial capital investment, the proceeds of the
redemption is additional wealth, for it is not merely a return of capital but a gain thereon.
• It is not the stock dividends but the proceeds of its redemption that may be deemed as taxable
dividends. At the time of the last redemption, the original common shares owned by the estate were only
25,247.5 91 This means that from the total of 108,000 shares redeemed from the estate, the balance of
82,752.5 (108,000 less 25,247.5) must have come from stock dividends. In the absence of evidence to
the contrary, the Tax Code presumes that every distribution of corporate property, in whole or in part, is
made out of corporate profits such as stock dividends. The capital cannot be distributed in the form of
redemption of stock dividends without violating the trust fund doctrine.

• With respect to the third requisite, ANSCOR redeemed stock dividends issued just 2 to 3 years earlier.
The time alone that lapsed from the issuance to the redemption is not a sufficient indicator to determine
taxability. It is a must to consider the factual circumstances as to the manner of both the issuance and the
redemption. The issuance of stock dividends and its subsequent redemption must be separate, distinct,
and not related, for the redemption to be considered a legitimate tax scheme. Redemption cannot be
used as a cloak to distribute corporate earnings.

• ANSCOR invoked two reasons to justify the redemptions — (1) the alleged "filipinization" program and
(2) the reduction of foreign exchange remittances in case cash dividends are declared. The Court is not
concerned with the wisdom of these purposes but on their relevance to the whole transaction which can
be inferred from the outcome thereof. It is the "net effect rather than the motives and plans of the taxpayer
or his corporation". The test of taxability under the exempting clause, when it provides "such time and
manner" as would make the redemption "essentially equivalent to the distribution of a taxable dividend", is
whether the redemption resulted into a flow of wealth. If no wealth is realized from the redemption, there
may not be a dividend equivalence treatment.

• The test of taxability under the exempting clause of Section 83(b) is, whether income was realized
through the redemption of stock dividends. The redemption converts into money the stock dividends
which become a realized profit or gain and consequently, the stockholder's separate property. Profits
derived from the capital invested cannot escape income tax. As realized income, the proceeds of the
redeemed stock dividends can be reached by income taxation regardless of the existence of any
business purpose for the redemption. Otherwise, to rule that the said proceeds are exempt from income
tax when the redemption is supported by legitimate business reasons would defeat the very purpose of
imposing tax on income.
• 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.


Wise & Co., Inc. v. Meer GR NO: 48231 (1947)
FACTS:

That during the year 1937, plaintiffs, except Mr. E.M.G. Strickland (who, as husband of the plaintiff
Mrs. E.M.G. Strickland, is only a nominal party herein), were stockholders of Manila Wine Merchants,
Ltd., a foreign corporation duly authorized to do business in the Philippines.

That on May 27, 1937, the Board of Directors of Manila Wine Merchants, Ltd., (hereinafter referred to
as the Hongkong Company), recommended to the stockholders of the company that they adopt the
resolutions necessary to enable the company to sell its business and assets to Manila Wine Merchants,
Inc., a Philippine corporation formed on May 27, 1937, (hereinafter referred to as the Manila
Company), for the sum of P400,000;

HK Company made a distribution of its earnings for the year 1937 to its stockholders (Dividends
declared and paid on June 8, 1937). HK Company paid Philippine income tax on the entire earnings
from which the said distributions were paid.

After the June 8 distribution, HK Company had :

P74, 182 – surplus resulting from the active conduct of business

P270, 116 – total increased surplus as a result of the sale of the business and assets

The stockholders by proper resolution directed that the company be voluntarily liquidated and its
capital distributed among the stockholders; that the stockholders at such meeting appointed a
liquidator duly paid off the remaining debts of the Hongkong Company and distributed its capital
among the stockholders including plaintiffs; that the liquidator duly filed his accounting on January 12,
1938, and in accordance with the provisions of Hongkong Law, the Hongkong Company was duly
dissolved at the expiration of three moths from that date.

That plaintiffs duly filed Philippine income tax returns. That defendant subsequently made the
deficiency assessments. That said plaintiffs duly paid the said amounts demanded by defendant under
written protest, which was overruled in due course; that the plaintiffs have since July 1, 1939
requested from defendant a refund of the said amounts which defendant has refused and still refuses
to refund.

CONTENTIONS:
CIR-The amounts received by Wise & Co et al from the HK Company were liquidating dividends (thus,
subject to normal tax)

Wise & Co et al say- The amounts were ordinary dividends

ISSUES:

a)W/N the amounts received by Wise & Co et al from the HK Company on which the taxes were
assessed were ordinary dividends or liquidating dividends  (LIQUIDATING DIVIDENDS)

b)W/N such liquidating dividends are taxable income (YES)

RATIO:

a)The amounts received by the stockholders were liquidating dividends

•The parties agreed in the deed of sale that the sale and transfer shall take effect as of June 1, 1937.
Thus, the distribution of assets to the stockholders made after that date must have been considered by
them as liquidating dividends.

•The said distributions were NOT in the ordinary course of business and with intent to maintain the
corporation as a going concern (in which case they would be ordinary dividends) BUT they were made
after the liquidated of the business had been decided upon, which makes them payments for the
surrender and relinquishment of the stockholder’s interest in the corporation, or liquidating dividends.

•Ordinary connotation of liquidating dividend involves the distribution of assets by a corporation to its
stockholders upon dissolution.

•Wise & Co et al (stockholders) say: It was only on August 19, 1937, that the HK Company took the first
corporate steps towards liquidation.

•SC: It was expressly stipulated in the formal deed of sale (see underlined portion in facts) that the
sale or transfer shall take effect on June 1, 1937. After that date, and until completion of the transfer,
the HK Company continued to run the business in trust for the new owner, the Manila Company.
•The determining element is whether the distribution was in the ordinary course of business and with
intent to maintain the corporation as a going concern, or after deciding to quit with intent to liquidate
the business.

•The fact that the distributions were called ‘dividends’ and were made, in part, from earnings and
profits, and that some of them were made before liquidation or dissolution proceedings were
commenced, is NOT controlling.

Liquidating dividend v Ordinary dividend

•                The distinction between a distribution in liquidation and an ordinary dividend is factual;

the result in each case depending on the particular circumstances of the case and the intent of the
parties.

•                If the distribution is in the nature of a recurring return on stock it is an ordinary dividend.

•                However, if the corporation is really winding up its business or recapitalizing and narrowing
its activities, the distribution may properly be treated as in complete or partial liquidation and as
payment by the corporation to the stockholder for his stock. The corporation is, in the latter instances,
wiping out all parts of the stockholders' interest in the company . . .. “

b) Such liquidating dividends are taxable income

•Income tax law states that: “Where a corporation, partnership, association, joint-account, or
insurance company distributes all of its assets in complete liquidation or dissolution, the gain realized
or loss sustained by the stockholder, whether individual or corporation, is a taxable income or a
deductible loss as the case may be.”

•Amounts distributed in the liquidation of a corporation shall be treated as payments in exchange for
the stock or share, and any gain or profit realized thereby shall be taxed to the distributee as other
gains or profits.

•The stockholders received the distributions in question in exchange for the surrender and
relinquishment by them of their stock in the HK Company which was dissolved and in process of
complete liquidation.

•That money in the hands of the corporation formed a part of its income and was properly taxable to it
under the Income Tax Law.
•When the corporation was dissolved and in process of complete liquidation and its shareholders
surrendered their stock to it and it paid the sums in question to them in exchange, a transaction took
place.

•The shareholder who received the consideration for the stock earned that much money as income of
his own, which again was properly taxable to him under the Income Tax Law.

The profits earned by the stockholders are income from Philippine sources, and thus subject to
Philippine tax

Stockholders say: the profit realized by them does not constitute income from Philippine sources and is
not subject to Philippine taxes since all steps in the carrying out of this so-called sale took place
outside the Philippines

SC:

•The HK Company was at the time of the sale of its business in the Philippines, and the Manila
Company was a domestic corporation domiciled and doing business also in the Philippines.

•The HK Company was incorporated for the purpose of carrying on business in the Philippines which is
the business of wine, beer, and spirit merchants and the other objects set out in its memorandum of
association.

•Hence, its earnings, profits, and assets, including those from whose proceeds the distributions in
question were made, the major part of which consisted in the purchase price of thebusiness, had been
earned and acquired in the Philippines.

•As such, it is clear that said distributions were income "from Philippine sources."

Judgment affirmed.

DISPOSITIVE PORTION: For the foregoing consideration, the judgment appealed from will be affirmed
with the costs of both instances against the appellants. So ordered.
Resolution on Motion for Reconsideration: SC affirms its earlier ruling.
 COMMISSIONER vs. MANNING G.R. No.
L-28398. August 6, 1975 Income Tax on
Stock Dividends
DECEMBER 4, 2017

FACTS:

Manila Trading and Supply Co. (MANTRASCO) had an authorized capital stock of P2.5 million
divided into 25,000 common shares: 24,700 were owned by Reese and the rest at 100 shares each
by the Respondents. Reese entered into a trust agreement whereby it is stated that upon Reese’s
death, the company would purchase back all of its shares. Reese died. MANTRASCO
repurchased the 24,700 shares. Thereafter, a resolution was passed authorizing that the 24,700
shares be declared as stock dividends to be distributed to the stockholders. The BIR ordered an
examination of MANTRASCO’s books and discovered that the 24,700 shares declared as
dividends were not disclosed by respondents as part of their taxable income for the year 1958.
Hence, the CIR issued notices of assessment for deficiency income taxes to respondents.
Respondents protested but the CIR denied. Respondents appealed to the CTA. The CTA ruled in
their favor. Hence, this petition by the CIR

ISSUE:

Whether the respondents are liable for deficiency income taxes on the stock dividends?

HELD: Dividends means any distribution made by a corporation to its shareholders out of its
earnings or profits. Stock dividends which represent transfer of surplus to capital account is not
subject to income tax. But if a corporation redeems stock issued so as to make a distribution, this
is essentially equivalent to the distribution of a taxable dividend the amount so distributed in the
redemption considered as taxable income.

The distinctions between a stock dividend which does not and one which does constitute taxable
income to the shareholders is that a stock dividend constitutes income if its gives the shareholder
an interest different from that which his former stockholdings represented. On the other hand, it
does constitute income if the new shares confer no different rights or interests than did the old
shares. Therefore, whenever the companies involved parted with a portion of their earnings to
bnuy the corporate holdings of Reese, they were making a distribution of such earnings to
respondents. These amounts are thus subject to income tax as a flow of cash benefits to
respondents. Hence, respondents are liable for deficiency income taxes.
COMMISSIONER OF INTERNAL REVENUE VS.
SONY PHILIPPINES, INC.- Value Added Tax, Final
Withholding Tax, Letter of Authority

FACTS:

Sony Philippines was ordered examined for “the period 1997 and unverified prior years”
as indicated in the Letter of Authority. The audit yielded assessments against Sony
Philippines for deficiency VAT and FWT, viz: (1) late remittance of Final Withholding
Tax on royalties for the period January to March 1998 and (2) deficiency VAT on
reimbursable received by Sony Philippines from its offshore affiliate, Sony International
Singapore (SIS).

ISSUES:

(1) Is Petitioner liable for deficiency Value Added Tax?

(2) Was the investigation of its 1998 Final Withholding Tax return valid?

HELD:

(1) NO. Sony Philippines did in fact incur expenses supported by valid VAT invoices
when it paid for certain advertising costs. This is sufficient to accord it the benefit of
input VAT credits and where the money came from to satisfy said advertising billings is
another matter but does not alter the VAT effect. In the same way, Sony Philippines can
not be deemed to have received the reimbursable as a fee for a VAT-taxable activity.
The reimbursable was couched as an aid for Sony Philippines by SIS in view of the
company’s “dire or adverse economic conditions”. More importantly, the absence of a
sale, barter or exchange of goods or properties supports the non-VAT nature of the
reimbursement. This was distinguished from the COMASERCO case where even if
there was similarly a reimbursement-on-cost arrangement between affiliates, there was
in fact an underlying service. Here, the advertising services were rendered in favor of
Sony Philippines not SIS.
(2) NO.  A Letter of Authority should cover a taxable period not exceeding one year and
to indicate that it covers ‘unverified prior years’ should be enough to invalidate it. In
addition, even if the Final Withholding Tax was covered by Sony Philippines’ fiscal year
ending March 1998, the same fell outside of ‘the period 1997’ and was thus not validly
covered by the Letter of Authority.
CIR v. PHILIPPINE AIRLINES, GR NO. 160528, 2006-10-09
Facts:
(PAL) is a domestic corporation organized in accordance with the laws of the Republic of
the Philippines
[respondent's] AVP-Revenue Operations and Tax Services Officer, Atty. Edgardo P.
Curbita, filed with the Office of the then Commissioner of Internal Revenue, Mdm. Liwayway
Vinzons-Chato, a written request for refund of the amount of P2,241,527.22 which...
represents the total amount of 20% final withholding tax withheld from the [respondent] by
various withholding agent banks... filed with [petitioner] CIR another written request for
refund of the amount of P1,048,047.23, representing the total amount of 20% final
withholding tax withheld by various depository... banks of the [respondent]
"The amounts, subject of this petition, and which represent the 20% final withholding tax
allegedly erroneously withheld and remitted to the BIR by the aforesaid banks
The CTA ruled that Respondent PAL was not entitled to the refund.
the Court of Appeals reversed the Decision of the CTA.
PAL was bound to pay only the corporate income tax or the franchise tax.
Section 13 of PAL's franchise, which states in part:
"SEC. 13.    In consideration of the franchise and rights hereby granted, the grantee shall
pay to the Philippine Government during the life of this franchise whichever of subsections
(a) and (b) hereunder will result in a lower tax:
'(a)
The basic corporate income tax based on the grantee's annual net taxable income
computed in accordance with the provisions of the National Internal Revenue Code; or
Issues:
Sole Issue:
Tax Liability of PAL
Ruling:
The statutory basis for the income tax on corporations is found in Sections 27 to 30 of the
National Internal Revenue Code of 1997 under Chapter IV: "Tax on Corporations."
Being a domestic corporation, PAL is subject to Section 27
The NIRC also imposes final taxes on certain passive incomes, as follows: 1) 20 percent on
the interests on currency bank deposits, other monetary benefits from deposit substitutes,
trust funds and similar arrangements, and royalties derived from sources within the
Philippines
A corporate income tax liability, therefore, has two components: the general rate of 35
percent, which is not disputed; and the specific final rates for certain passive incomes. 
PAL's request for a refund in the present case pertains to the passive income on bank
deposits,... which is subject to the specific final tax of 20 percent.
the tax liability of PAL under the option it chose (Item "a" of Section 13 of PD 1590) is to be
"computed in accordance with the provisions of the National Internal Revenue Code
Taxable income means the pertinent items of gross income specified in the Tax Code, less
the deductions and/or personal and additional exemptions, if any, authorized for these types
of income... gross... income means income derived from whatever source, including
compensation for services; the conduct of trade or business or the exercise of a profession;
dealings in property; interests; rents; royalties; dividends; annuities; prizes and winnings;
pensions; and a partner's... distributive share in the net income of a general professional
partnership.
The definition of gross income is broad enough to include all passive incomes subject to
specific rates or final taxes.  However, since these passive incomes are already subject to
different rates and taxed finally at source, they are no longer included in the... computation
of gross income, which determines taxable income.
under the
Tax Code, "taxable income" does not include passive income subjected to final withholding
taxes... the "basic corporate income tax" identified in Section 13 (a) of the franchise relates
to the general rate of 35 percent as stipulated in Section 27 of the Tax
Code.  The final 20 percent taxes disputed in the present case are not covered under
Section 13 (a) of PAL's franchise; thus, a refund is in order.
PLDT v PROVINCE OF LAGUNA
G.R. No. 149179. July 15, 2005
Facts:
PLDT is a holder of a legislative franchise under Act No. 3436. The terms and conditions of its
franchise were later consolidated under Republic Act No. 7082, Section 12 of which
embodies the
so
-
called “in lieu of all taxes clause”, where PLDT shall pay, a
franchise tax equivalent to 3% of all its
gross receipts.
The Province of Laguna, through
its local legislative assembly enacted a provincial
ordinance
imposing a franchise tax u
pon all businesses enjoying a franchise which
includes PLDT. The
Department of Finance thru its Bureau of Local Government Finance, issued a ruling to the effect
that PLDT, among others, became exempt from local franchise tax.
Issue:
Does RA No. 7925 oper
ate to exempt PLDT to pay franchise tax?
Ruling:
No. The tax exemption must be expressed in the statute in clear language that leaves no
doubt of the intention of the legislature to grant such exemption. Even if it is
granted, the exemption
must be interp
reted in strictissimi juris against the taxpayer and
liberally in favor of the taxing
authority.
In approving Section 23 of 7925, Congress intended it to operate as a blanket tax exemption to all
telecommunications entities. Applying the rule of strict con
struction of laws granting tax exemptions
and the rule that doubts should be
resolved in favor of municipal corporations in interpreting
statutory provisions on
municipal taxing powers, we hold that the law does not entitle exemption.
CIR vs Mitsubishi GR 54908 – January 22, 1990

Facts:
The records reflect that on April 17, 1970, Atlas Consolidated Mining and Development Corporation(hereinafter,
Atlas) entered into a Loan and Sales Contract with Mitsubishi Metal Corporation(Mitsubishi, for brevity), a Japanese
corporation licensed to engage in business in the Philippines,for purposes of the projected expansion of the
productive capacity of the former's mines in Toledo,Cebu. Under said contract, Mitsubishi agreed to extend a loan to
Atlas 'in the amount of $20,000,000.00, United States currency, for the installation of a new concentrator for
copperproduction. Atlas, in turn undertook to sell to Mitsubishi all the copper concentrates produced fromsaid
machine for a period of fifteen (15) years. It was contemplated that $9,000,000.00 of saidloan was to be used for the
purchase of the concentrator machinery from Japan.
Mitsubishi thereafter applied for a loan with the Export-Import Bank of Japan (Eximbank for short)obviously for
purposes of its obligation under said contract. Its loan application was approved onMay 26, 1970 in the sum of
¥4,320,000,000.00, at about the same time as the approval of its loanfor ¥2,880,000,000.00 from a consortium of
Japanese banks. The total amount of both loans isequivalent to $20,000,000.00 in United States currency at the then
prevailing exchange rate. Therecords in the Bureau of Internal Revenue show that the approval of the loan by
Eximbank toMitsubishi was subject to the condition that Mitsubishi would use the amount as a loan to Atlas andas a
consideration for importing copper concentrates from Atlas, and that Mitsubishi had to payback the total amount of
loan by September 30, 1981.
Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by theformer to the latter
totalling P13,143,966.79 for the years 1974 and 1975. The corresponding 15%tax thereon in the amount of
P1,971,595.01 was withheld pursuant to Section 24 (b) (1) andSection 53 (b) (2) of the National Internal Revenue
Code, as amended by Presidential Decree No.131, and duly remitted to the Government.
On March 5, 1976, private respondents filed a claim for tax credit requesting that the sum of P1,971,595.01 be
applied against their existing and future tax liabilities. Parenthetically, it waslater noted by respondent Court of Tax
Appeals in its decision that on August 27, 1976, Mitsubishi executed a waiver and disclaimer of its interest in the
claim for tax credit in favor of Atlas.

Issues:

1. Whether or not the interest income from the loans extended to Atlas by Mitsubishi isexcludible from gross
income taxation pursuant to Section 29 b) (7) (A) of the tax code and,therefore, exempt from withholding
tax.
2. Whether or not Mitsubishi is a mere conduit of Eximbank which will then be considered asthe creditor whose
investments in the Philippines on loans are exempt from taxes under thecode.

Ruling:

The loan and sales contract between Mitsubishi and Atlas does not contain any direct or inferentialreference to
Eximbank whatsoever. The agreement is strictly between Mitsubishi as creditor in thecontract of loan and Atlas as
the seller of the copper concentrates. From the categorical languageused in the document, one prestation was in
consideration of the other. The specific terms and thereciprocal nature of their obligations make it implausible, if not
vacuous to give credit to thecavalier assertion that Mitsubishi was a mere agent in said transaction. The contract
between Eximbank and Mitsubishi is entirely different. It is complete in itself, doesnot appear to be suppletory or
collateral to another contract and is, therefore, not to be distorted by other considerations aliunde. The application for
the loan was approved on May 20, 1970, ormore than a month after the contract between Mitsubishi and Atlas was
entered into on April 17,1970. It is true that under the contract of loan with Eximbank, Mitsubishi agreed to use the
amountas a loan to and in consideration for importing copper concentrates from Atlas, but all that thisproves is the
justification for the loan as represented by Mitsubishi, a standard banking practice forevaluating the prospects of due
repayment. There is nothing wrong with such stipulation as theparties in a contract are free to agree on such lawful
terms and conditions as they see fit. Limitingthe disbursement of the amount borrowed to a certain person or to a
certain purpose is notunusual, especially in the case of Eximbank which, aside from protecting its financial
exposure,must see to it that the same are in line with the provisions and objectives of its charter.Respondents
postulate that Mitsubishi had to be a conduit because Eximbank's charter prevents itfrom making loans except to
Japanese individuals and corporations. We are not impressed. The allegation that the interest paid by Atlas was
remitted in full by Mitsubishi to Eximbank,assuming the truth thereof, is too tenuous and conjectural to support the
proposition thatMitsubishi is a mere conduit. Furthermore, the remittance of the interest payments may also
belogically viewed as an arrangement in paying Mitsubishi's obligation to Eximbank. Whateverarrangement was
agreed upon by Eximbank and Mitsubishi as to the manner or procedure for thepayment of the latter's obligation is
their own concern. It should also be noted that Eximbank's loan to Mitsubishi imposes interest at the rate of 75% per
annum, while Mitsubishis contract withAtlas merely states that the "interest on the amount of the loan shall be the
actual cost beginning from and including other dates of releases against loan." It is too settled a rule in this
jurisdiction, as to dispense with the need for citations, that laws granting exemption from tax are construed strictissimi
juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the
exception. The burden of proof rests upon the party claiming exemption to prove that it is in fact covered by the
exemption so claimed, which onus petitioners have failed to discharge.