Madrigal vs. Rafferty G.R. No.

L-12287
August 7, 1918 Income Tax defined,
Income vs. Capital
DECEMBER 4, 2017

FACTS:

Vicente Madrigal and Susana Paterno were married with Conjugal Partnership as their property
relations.Vicente filed his 1914 income tax return but later claimed a refund on the contention
that it was the income of the conjugal partnership. Vicente claimed that the income should be
divided into two with each spouse filing a separate return.Hence, Vicente claimed that each
spouse should be entitled to the P8,000 exemption, which would result in a lower amount of
income tax due.

ISSUE:

Define Income Tax

RULING:

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.

A tax on income is not a tax on property. Income can be defined as profits or gains. Susana, has
an inchoate right in the property of her husband during the life of the conjugal partnership.Her
interest in the ultimate property rights and in the ultimate ownership of property acquired as
income lies after such income has become capital.She has no absolute right to ½ the income of
the conjugal partnership.Not being seized of a separate estate, Susana cannot make a separate
return in order to receive the benefit of the exemption which would arise by reason of the
additional tax.As she has no estate and income, actually and legally vested in her and entirely
distinct from her husband’s property, the income cannot properly be considered the separate
income of the wife for purposes of the additional tax.

Tax Case Digest: CIR V. Isabela Cultural

Corp. (2007)
THIRD DIVISION
G.R. No. 172231 February 12, 2007
YNARES-SANTIAGO, J.

Lessons Applicable: Accrual method, burden of proof in accrual method, deductibility of ordinary and
necessary trade, business, or professional expenses, all events test

Laws Applicable:

FACTS:

 BIR disallowed Isabela Cultural Corp. deductible expenses for services which were rendered in
1984 and 1985 but only billed, paid and claimed as a deduction on 1986.
 After CA sent its demand letters, Isabela protested.
 CTA found it proper to be claimed in 1986 and affirmed by CA
ISSUE: W/N Isabela who uses accrual method can claim on 1986 only

HELD: case is remanded to the BIR for the computation of Isabela Cultural Corporation’s liability
under Assessment Notice No. FAS-1-86-90-000680.

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; - qualified by Section 45 of the
National Internal Revenue Code (NIRC) which states that: "[t]he deduction provided for in this
Title shall be taken for the taxable year in which ‘paid or accrued’ or ‘paid or incurred’,
dependent upon the method of accounting upon the basis of which the net income is computed
 (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.
 Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of
accounting, expenses not being claimed as deductions by a taxpayer in the current year when
they are incurred cannot be claimed as deduction from income for the succeeding year. Thus, a
taxpayer who is authorized to deduct certain expenses and other allowable deductions for the
current year but failed to do so cannot deduct the same for the next year.
 The accrual method relies upon the taxpayer’s right to receive amounts or its obligation to pay
them, in opposition to actual receipt or payment, which characterizes the cash method of
accounting. Amounts of income accrue where the right to receive them become fixed, where
there is created an enforceable liability. Similarly, liabilities are accrued when fixed and
determinable in amount, without regard to indeterminacy merely of time of payment.
 The accrual of income and expense is permitted when the all-events test has been met. This test
requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the reasonable
accurate determination of such income or liability.
 The all-events test requires the right to income or liability be fixed, and the amount of such
income or liability be determined with reasonable accuracy. However, the test does not demand
that the amount of income or liability be known absolutely, only that a taxpayer has at his
disposal the information necessary to compute the amount with reasonable accuracy. The all-
events test is satisfied where computation remains uncertain, if its basis is unchangeable; the
test is satisfied where a computation may be unknown, but is not as much as unknowable, within
the taxable year. The amount of liability does not have to be determined exactly; it must be
determined with "reasonable accuracy." Accordingly, the term "reasonable accuracy" implies
something less than an exact or completely accurate amount.
 The propriety of an accrual must be judged by the facts that a taxpayer knew, or could
reasonably be expected to have known, at the closing of its books for the taxable year.
 Accrual method of accounting presents largely a question of fact; such that the taxpayer bears
the burden of proof of establishing the accrual of an item of income or deduction.
 In the instant case, the expenses for professional fees consist of expenses for legal and auditing
services. The expenses for legal services pertain to the 1984 and 1985 legal and retainer fees of
the law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson, and for
reimbursement of the expenses of said firm in connection with ICC’s tax problems for the year
1984. As testified by the Treasurer of ICC, the firm has been its counsel since the 1960’s. - failed
to prove the burden

CIR vs. Isabela Cultural Corporation

Isabela Cultural Corp.(ICC for brevity) , a domestic corporation received from BIR assessment notice no.
FAS-1-86-90000680 (680 for brevity) for deficiency income tax in the amount of PhP 333,196.86 and
assessment notice no. FAS-1-86-90-000681 (681 for brevity) for deficiency expanded withholding tax in
the amount of PhP 4,897.79, inclusive of surcharge and interest both for the taxable year 1986. The
deficiency income tax of PhP 333,196 arose from BIR disallowance of ICC claimed expenses deductions
for professional and security services billed to and paid by ICC in 1986.
The deficiency expanded withholding tax of PhP4,897.79 was allegedly due to the failure of ICC to
withhold 1% expanded withholding tax on its claimed PhP244,890 deduction for security services.

Court of Tax Appeal and Court of Appeal affirmed that the professional services were rendered to ICC in
1984 and 1985, the cost of the service was not yet determinable at that time, hence, it could be
considered as deductible expenses only in 1986 when ICC received the billing statement for said service.
It further ruled that ICC did not state its interest income from the promissory notes of Realty Investment
and that ICC properly withheld the remitted taxes on the payment for security services for the taxable year
1986.

Petitioner contend that since ICC is using the accrual method of accounting, the expenses for the
professional services that accrued in 1984 and 9185 should have been declared as deductions from
income during the said years and the failure of ICC to do so bars it from claiming said expenses as
deduction for the taxable year 1986.

ISSUE (1): WON CA is correct in sustaining the deduction of the expenses for professionals and security
services form ICC gross income?

HELD: NO

Revenue Audit Memorandum Order No.1-2000 provides that under the accrual method of accounting,
expenses not being claimed as deductions by a tax payer in the current year when they are incurred
cannot be claimed as deductions from the income for the succeeding year.

ISSUE (2): WON CA correctly held that ICC did not understate its interest income from the promissory
notes of Realty Investment, Inc; that ICC withheld the required 1% withholding tax from the deduction for
security services.

HELD:

Sustaining the finding of the CTA and CA that no such understatement exist and that only simple interest
computation and not a compounded one should have been applied by the BIR. There is no indeed no
stipulation between the latter and ICC on the application of compound interest.

Under Article 1959 of the Civil Code, unless there is a stipulation to the contrary, interest due should not
further earn interest.

[ G.R. No. 205473, December 10, 2019 ]

REPUBLIC OF THE PHILIPPINES, REPRESENTED BY THE DEPARTMENT OF PUBLIC WORKS

AND HIGHWAYS, PETITIONER, VS. SPOUSES MARCELINO BUNSAY ANDNENITABUNSAY,
RESPONDENTS.

DECISION
CAGUIOA, J:

The Facts

This is a petition for review on certiorari1 (Petition) filed under Rule 45 of the Rules of Court against
the Order/Resolution2 dated August 23, 2012 (assailed Resolution) and Order3 dated January 10,
2013 (assailed Order) of the Regional Trial Court of Valenzuela City, Branch 270 (RTC) in Civil Case
No. 188-V-11.

The assailed Resolution and Order: (i) directed the expropriation of a 100-square meter lot in
Valenzuela City covered by Transfer Certificate of Title (TCT) No. V-16548 (Disputed Property)
issued in the name of respondents Spouses Marcelino and Nenita Bunsay (Spouses Bunsay); and
(ii) ordered petitioner Republic of the Philippines (Republic), through the Department of Public Works
and Highways (DPWH), to pay Spouses Bunsay consequential damages equivalent to the value of
the capital gains tax (CGT) and other taxes necessary to transfer the Disputed Property in its name.

The facts are undisputed.

DPWH is the Republic's engineering and construction arm tasked to undertake the "planning,
design, construction and maintenance of infrastructure facilities, especially national highways, flood
control and water resource development system, and other public works in accordance with national
development objectives."4

Among DPWH's projects is the C-5 Northern Link Road Project Phase 2 (Segment 9) connecting the
North Luzon Expressway (NLEX) to McArthur Highway, Valenzuela City (the Project).5

In connection with the implementation of the Project, DPWH filed with the RTC a Complaint for
Expropriation with Urgent Prayer for the Issuance of a Writ of Possession6 (Expropriation Complaint)
against Spouses Bunsay, concerning the Disputed Property.7

Records show that while notices were sent to Spouses Bunsay, they were returned with the notation
"party moved". As expected, Spouses Bunsay did not file an Answer.8

The RTC later scheduled a hearing on the issuance of the writ of possession prayed for. During the
hearing, DPWH deposited checks in the total amount of Two Hundred Thousand Pesos
(Php200,000.00), representing the sum of the Disputed Property's zonal value and replacement cost
of the improvements built thereon.9 Thereafter, the RTC issued a Writ of Possession in favor of
DPWH in its Order dated February 20, 2012. 10

Later still, the RTC directed the parties to submit their respective nominees to the Board of
Commissioners for determination of just compensation. However, during the subsequent hearing
held on August 23, 2012, DPWH manifested in open court that while all notices sent to Spouses
Bunsay were returned unserved, they already claimed the checks that DPWH deposited with the
RTC. Thus, DPWH moved that the amount received by Spouses Bunsay be deemed as just
compensation for the Disputed Property.11

The RTC granted DPWH's oral motion through the assailed Resolution, the dispositive portion
of which reads:

WHEREFORE, foregoing considered, judgment is hereby rendered in favor of [DPWH] condemning

the [Disputed Property], free from all liens and encumbrances for the purpose of implementing the
construction [of the Project] from NLEX to McArthur Highway, Valenzuela City, and vesting unto
[DPWH] the title to the property so described for such public use or purpose.

[DPWH) is directed to issue [a] manager's check in the amount of Five Hundred Five Thousand
Three Hundred Seventy-Four Pesos and Seventy-One Centavos (Php 505,374.71), representing the
total valuation of the improvements located on the [Disputed Property], in the name of [Spouses
Bunsay] and to deposit the same [with] the Office of the Clerk of Court, Regional Trial Court,
Valenzuela City within fifteen (15) days from receipt of this Resolution.

As consequential damages, [DPWH] is further directed to pay the value of the [CGT] and other taxes
necessary for the transfer of the [Disputed Property] in [DPWH's) name.

[Spouses Bunsay are] hereby directed to tum-over the owner's duplicate certificate of title to
[DPWH].

After [the] parties have complied x x x, the Register of Deeds of Valenzuela City is directed to effect
the transfer of ownership of the [Disputed Property] to [DPWH] and to issue the corresponding
certificate of title X X X.

SO ORDERED.12 (Emphasis supplied)

The RTC's award of just compensation represented the sum of the replacement cost of the following
improvements built on the Disputed Property, as alleged by DPWH in the Expropriation Complaint:

[1. A] one-storey residential house (semi-concrete) with x x x [f]ence and [s]teel [g]ate, the
replacement cost of which is valued at Three Hundred Thirty Thousand Six Hundred Four
Pesos and Thirty-Five Centavos (Php 330,604.35); and

[2. A] one[-]storey residential house (concrete) with upper concrete slab, the replacement
cost of which is valued at One Hundred Seventy-Four Thousand Seven Hundred Seventy
Pesos and Thirty-Six Centavos (Php 174,770.36).13

DPWH filed a Motion for Partial Reconsideration (MPR), praying that the award corresponding to the
replacement cost of improvements, and equivalent value of CGT and other transfer taxes be
deleted.14

After due proceedings, the RTC issued the assailed Order granting DPWH's MPR in part. Therein,
the RTC resolved to exclude the replacement cost of improvements from the total award since
Spouses Bunsay acknowledged, in their Comment to the MPR, that they had already received
payment for these improvements. 15

However, with respect to the value of CGT and other transfer taxes, the RTC held:

[With respect to] the aspect of payment of [CGT] and other transfer tax, the [RTC] finds the
argument of [DPWH] that it has been ordered to pay [CGT] and other transfer taxes to be misplaced
and misleading.

The [RTC] did not order [DPWH] to pay the [CGT] and other transfer taxes. What was ordered of
[DPWH] is to pay the consequential damages constituting the value [of CGT] and other transfer
taxes.16 (Emphasis and underscoring supplied)
Aggrieved, DPWH filed the present Petition via Rule 45 of the Rules of Court on March 4, 2013.

In compliance with the Court's directive, Spouses Bunsay filed their Comment 17 to the Petition, to
which DPWH filed its Reply.18 Thereafter, the Petition was submitted for resolution.

Here, DPWH insists that by directing it to pay consequential damages equivalent to the value of
CGT and other transfer taxes, the RTC indirectly held DPWH liable for payment of taxes for which it
cannot be charged.

For its part, Spouses Bunsay argue that the consequential damages should be understood in its
general sense so as to permit recovery of damages arising from "some involuntary act which is
prejudicial to the person entitled [to] the same."19

The Issue

The sole issue for the Court's resolution is whether the RTC erred in awarding consequential
damages equivalent to the value of CGT and transfer taxes in favor of Spouses Bunsay.

The Court's Ruling

The Petition is granted.

The crux of the controversy is hinged on the definition of "consequential damages" in the
context of an expropriation proceeding.

Rule 67 of the Rules of Court governs expropriation. proceedings. With respect to consequential
damages, Section 6 of Rule 67 states:

SEC. 6. Proceedings by commissioners.- Before entering upon the performance of their duties, the
commissioners shall take and subscribe an oath that they will faithfully perform their duties as
commissioners, which oath shall be filed in court with the other proceedings in the case. Evidence
may be introduced by either party before the commissioners who are authorized to administer oaths
on hearings before them, and the commissioners shall, unless the parties consent to the contrary,
after due notice to the parties to attend, view and examine the property sought to be expropriated
and its surroundings, and may measure the same, after which either party may, by himself or
counsel, argue the case. The commissioners shall assess the consequential damages to the
property not taken and deduct from such consequential damages the consequential benefits to be
derived by the owner from the public use or purpose of the property taken, the operation of its
franchise by the corporation or the carrying on of the business of the corporation or person taking
the property. But in no case shall the consequential benefits assessed exceed the consequential
damages assessed, or the owner be deprived of the actual value of his property so taken.
(Emphasis and underscoring supplied)

In Republic v. Court of Appeals,20 the Court explained that consequential damages may be
awarded to the owner if, as a result of the expropriation, the remaining portion not so
expropriated suffers from an impairment or decrease in value.21

From the foregoing, it becomes clear that the award of consequential damages representing the
value of CGT and other transfer taxes in favor of Spouses Bunsay was improper.
To recall, the expropriation covered the entire Disputed Property, that is, the entire 100-square meter
lot covered by Spouses Bunsay's TCT No. V- 16548. Hence, there is no basis for an award of
consequential damages where there is no "remaining portion" to speak of, as in this case.

In any event, even if there was a "property not taken" or "remaining portion" to speak of, the award of
consequential damages constituting the value of CGT and transfer taxes would still be improper, in
the absence of evidence showing that said remaining portion had been impaired or had suffered a
decrease in value as a result of the expropriation. The Court's ruling in Republic v. Spouses
Salvador 22 (Spouses Salvador) involving the same expropriating authority, project and handling
court, is on all fours.

In Spouses Salvador, DPWH filed a complaint for expropriation concerning an 83-square meter
portion of a 229-square meter property registered in the name of the respondents therein, Spouses
Senando and Josefina Salvador (Spouses Salvador). Like Spouses Bunsay, Spouses Salvador also
received checks from DPWH representing the zonal value of the expropriated portion and the cost of
the improvements built thereon. However, in addition to the sum received by Spouses Salvador, the
RTC also directed DPWH to pay consequential damages "equivalent to the value of the [CGT] and
other taxes necessary for the transfer of the subject property in the Republic's name."23

Hence, DPWH assailed the propriety of the award of consequential damages therein, as it does
here. Resolving the issue, the Court held, as follows:

We likewise rule that the RTC committed a serious error when it directed the Republic to pay
respondents consequential damages equivalent to the value of the capital gains tax and other taxes
necessary for the transfer of the subject property.

"Just compensation [is defined as] the full and fair equivalent of the property sought to be
expropriated. x x x The measure is not the taker's gain but the owner's loss. [The compensation, to
be just,] must be fair not only to the owner but also to the taker."

In order to determine just compensation, the trial court should first ascertain the market value of the
property by considering the cost of acquisition, the current value of like properties, its actual or
potential uses, and in the particular case of lands, their size, shape, location, and the tax
declarations thereon. If as a result of the expropriation, the remaining lot suffers from an impairment
or decrease in value, consequential damages may be awarded by the trial court, provided that the
consequential benefits which may arise from the expropriation do not exceed said damages suffered
by the owner of the property.

While it is true that "the determination of the amount of just compensation is within the court's
discretion, it should not be done arbitrarily or capriciously. [Rather,] it must [always] be based on all
established rules, upon correct legal principles and competent evidence." The court cannot base its
judgment on mere speculations and surmises.

In the present case, the RTC deemed it "fair and just that x x x whatever is the value of the [CGT]
and all other taxes necessary for the transfer of the subject property to the [Republic] are but
consequential damages that should be paid by the latter." x x x

xxxx

This is clearly an error. It is settled that the transfer of property through expropriation proceedings is
a sale or exchange within the meaning of Sections 24(D) and 56(A)(3) of the National Internal
Revenue Code, and profit from the transaction constitutes capital gain. Since [CGT] is a tax on
passive income, it is the seller, or respondents in this case, who are liable to shoulder the tax.

In fact, the Bureau of Internal Revenue (BIR), in BIR Ruling No. 476-2013 dated December 18,
2013, has constituted the DPWH as a withholding agent tasked to withhold the 6% final withholding
tax in the expropriation of real property for infrastructure projects. Thus, as far as the government is
concerned, the [CGT] in expropriation proceedings remains a liability of the seller, as it is a tax on
the seller's gain from the sale of real property.

Besides, as previously explained, consequential damages are only awarded if as a result of the
expropriation, the remaining property of the owner suffers from an impairment or decrease in
value. In this case, no evidence was submitted to prove any impairment or decrease in value of the
subject property as a result of the expropriation. More significantly, given that the payment of [CGT]
on the transfer of the subject property has no effect on the increase or decrease in value of the
remaining property, it can hardly be considered as consequential damages that may be awarded to
respondents.24 (Emphasis and underscoring supplied while those in the original omitted)

The Court's ruling in Spouses Salvador is clear -CGT may not be awarded in the form of
consequential damages since the term assumes a fixed definition in the context of expropriation
proceedings; it is limited to the impairment or decrease in value of the portion which remains with the
affected owner after expropriation.

It must be clarified, however, that the ruling in Spouses Salvador should not be interpreted to
preclude the courts from considering the value of CGT and other transfer taxes in determining the
amount of just compensation to be awarded to the affected owner.

To recall, Section 5 of Republic Act No. (RA) 897425 sets forth the standards in the determination of
just compensation. It states:

SEC. 5. Standards for the Assessment of the Value of the Land Subject of Expropriation
Proceedings or Negotiated Sale. - In order to facilitate the determination of just compensation, the
court may consider, among other well-established factors, the following relevant standards:

(a) The classification and use for which the property is suited;

(b) The developmental costs for improving the land;

(c) The value declared by the owners;

(d) The current selling price of similar lands in the vicinity;

(e) The reasonable disturbance compensation for the removal and/or demolition of certain
improvements on the land and for the value of improvements thereon;

(f) The size, shape or location, tax declaration and zonal valuation of the land;

(g) The price of the land as manifested in the ocular findings, oral as well as documentary
evidence presented; and
 (h) Such facts and events as to enable the affected property owners to have sufficient funds
to acquire similarly situated lands of approximate areas as those required from them by the
government, and thereby rehabilitate themselves as early as possible. (Emphasis supplied)

CGT, being a tax on passive income, is imposed by the National Internal Revenue Code on the
seller as a consequence of the latter's presumed income from the sale or exchange of real property.
Notably however, the transfer of real property by way of expropriation is not an ordinary sale
contemplated under Article 145826 of the Civil Code. Rather, it is akin to a "forced sale" or one
which arises not from the consensual agreement of the vendor and vendee, but by compulsion of
law.27 Unlike in an ordinary sale wherein the vendor sets and agrees on the selling price, the
compensation paid to the affected owner in an expropriation proceeding comes in the form of just
compensation determined by the court.

In turn, just compensation is defined as the fair and full equivalent of the loss incurred by the
affected owner28 More specifically:

x x x [J]ust compensation in expropriation cases is defined "as the full and fair equivalent of the
property taken from its owner by the expropriator. The Court repeatedly stressed that the true
ᇈ WᑭHIL

measure is not the taker's gain but the owner's loss. The word 'just' is used to modi1fy the meaning
of the word 'compensation' to convey the idea that the equivalent to be given for the property to be
taken shall be real, substantial, full and ample."29 (Emphasis supplied)

To recall, Section 6, Rule 67 of the Rules of Court mandates that "in no case shall x x x the owner be
deprived of the actual value of his property so taken."30 Since just compensation requires that real,
substantial, full and ample equivalent be given for the property taken, the loss incurred by the
affected owner necessarily includes all incidental costs to facilitate the transfer of the expropriated
property to the expropriating authority, including the CGT, other taxes and fees due on the forced
sale. These costs must be taken into consideration in determining just compensation in the same
way these costs are factored into the selling price of real property in an arm's length transaction.
Notably, the value of the expropriated property, as declared by the affected owner, and the current
selling price of similar lands are factors listed under Section 5 of RA 8974.

Here, Spouses Bunsay received, as just compensation, an amount equal to the sum of the zonal
value of the Disputed Property and the replacement cost of the improvements built thereon.
Evidently, the value of CGT and transfer taxes due on the transfer of the Disputed Property was not
factored into the amount paid to Spouses Bunsay, but instead, separately awarded as consequential
damages.

While the award of consequential damages equivalent to the value of CGT and transfer taxes must
be struck down for being erroneous, the Court deems it just and equitable to direct the Republic to
shoulder such taxes to preserve the compensation awarded to Spouses Bunsay as a consequence
of the expropriation. To stress, compensation, to be just, must be of such value as to fully
rehabilitate the affected owner; it must be sufficient to make the affected owner whole.

WHEREFORE, premises considered, the Petition is GRANTED. The Order/Resolution and Order
respectively dated August 23, 2012 and January 10, 2013 rendered by the Regional Trial Court of
Valenzuela City, Branch 270, in Civil Case No. 188-V-11 are MODIFIED, in that the award of
consequential damages, equivalent to the value of capital gains tax and other transfer taxes,
is DELETED.

Nevertheless, the petitioner is DIRECTED to shoulder such capital gains tax and other transfer taxes
as part of the just compensation due the respondents.
 SO ORDERED.

Peralta, C.J., (Chairperson), Caguioa, J. Reyes, Jr., Lazaro-Javier, Lopez, JJ., concur.

The Supreme Court grants a petition and modifies the decision of the
Regional Trial Court, ruling that consequential damages for capital
gains tax and transfer taxes are improper in an expropriation case, but
the Republic is still required to shoulder these taxes as part of the just
compensation due to the property owners.

Facts:
 Petition for review on certiorari filed by the Republic of the Philippines,
represented by the Department of Public Works and Highways (DPWH),
against Spouses Marcelino and Nenita Bunsay.
 Regional Trial Court (RTC) of Valenzuela City issued a resolution and
order directing the expropriation of a 100-square meter lot owned by
the Spouses Bunsay and ordered DPWH to pay consequential damages
equivalent to the value of the capital gains tax (CGT) and other taxes
necessary for the transfer of the property.
 DPWH filed a complaint for expropriation against the Spouses Bunsay
for a portion of their property for the C-5 Northern Link Road Project
Phase 2.
 Spouses Bunsay did not file an answer to the complaint, and the RTC
issued a writ of possession in favor of DPWH.
 DPWH claimed that the checks they deposited with the RTC were
already received by the Spouses Bunsay and moved that the amount
be deemed as just compensation for the property.
 RTC granted DPWH's motion and ordered the transfer of ownership of
the property to DPWH. They also directed DPWH to pay the value of the
CGT and other transfer taxes as consequential damages.
 DPWH filed a motion for partial reconsideration, arguing that they
should not be held liable for the payment of taxes.
 RTC granted the motion in part, excluding the replacement cost of
improvements from the award but maintaining the payment of CGT and
transfer taxes as consequential damages.
 Issue:
 Whether the RTC erred in awarding consequential damages equivalent
to the value of CGT and transfer taxes in favor of the Spouses Bunsay.

Ruling:
 Supreme Court granted the petition and modified the RTC's decision.
 Court held that the award of consequential damages representing the
value of CGT and transfer taxes was improper.
 Consequential damages may only be awarded if the remaining portion
of the property not taken in the expropriation suffers from an
impairment or decrease in value.
 In this case, the entire property was expropriated, so there was no
remaining portion to speak of.
 Even if there was a remaining portion, the award of consequential
damages for CGT and transfer taxes would still be improper without
evidence of impairment or decrease in value.
 Court cited a previous case involving the same expropriating authority
and handling court, which held that CGT may not be awarded as
consequential damages.
 However, the value of CGT and transfer taxes should still be
considered in determining just compensation.
 The loss incurred by the affected owner includes all incidental costs to
facilitate the transfer of the expropriated property, including taxes and
fees.
 Therefore, the Republic was directed to shoulder the CGT and transfer
taxes as part of the just compensation due to the Spouses Bunsay.

Ratio:
 The award of consequential damages equivalent to the value of CGT
and transfer taxes was improper because there was no remaining
portion of the property and no evidence of impairment or decrease in
value.
 The value of CGT and transfer taxes should still be considered in
determining just compensation.
 The Republic was directed to shoulder these taxes to preserve the
compensation awarded to the Spouses Bunsay.

GUTIERREZ VS. COLLECTOR- Tax on Disposition

of Property
Category: Income Taxation
It appears then that the acquisition by the Government of private properties through the exercise of the
power of eminent domain, said properties being JUSTLY compensated, is embraced within the meaning
of the term "sale" "disposition of property", and the proceeds from said transaction clearly fall within the
definition of gross income laid down by Section 29 of the Tax Code of the Philippines.

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.

3. In an assessment notice, CIR demanded payment of Php 8k for deficiency of income tax for the year
1950.

4. The spouses contend that the expropriation was not taxable because it is not "income derived from
sale, dealing or disposition of property" as defined in Sec. 29 of the Tax Code. The spouses further
contend that they did not realize any profit in the said transaction. CIR did not agree.
5. The spouses appealed to the CTA. The Solicitor General, in representation of the respondent
Collector of Internal Revenue, filed an answer that the profit realized by petitioners from the sale of the
land in question was subject to income tax, that the full compensation received by petitioners should be
included in the income received in 1950, same having been paid in 1950 by the Government. CTA
favored SolGen but disregarded the penalty charged.

6. Both parties appealed to the SC.

ISSUES:

1. Whether or not that for income tax purposes, the expropriation should be deemed as income from
sale and any profit derived therefrom is subject to income taxes capital gain?

2. Whether or not there was profit or gain to be taxed?

HELD: Yes to both. CTA decision affirmed. It is subject to income tax.

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.

SEC. 29. 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, sales or dealings in
property, whether real or personal, growing out of ownership or use of or interest in such property; also
from interests, rents, dividends, securities, or the transactions of any business carried on for gain or
profit, or gains, profits, and income derived from any source whatsoever.

SEC. 37. INCOME FROM SOURCES WITHIN THE PHILIPPINES.

—
(a) Gross income from sources within the Philippines. — The following items of gross income shall be
treated as gross income from sources within the Philippines:
xxxxxxxxx
(5) SALE OF REAL PROPERTY. — Gains, profits, and income from the sale of real property located in
the Philippines;
xxxxxxxxx
It appears then that the acquisition by the Government of private properties through the exercise of the
power of eminent domain, said properties being JUSTLY compensated, is embraced within the meaning
of the term "sale" "disposition of property", and the proceeds from said transaction clearly fall within the
definition of gross income laid down by Section 29 of the Tax Code of the Philippines.

RATIO 2: As to appellant taxpayers' proposition that the profit, derived by them from the expropriation of
their property is merely nominal and not subject to income tax, We find Section 35 of the Tax Code
illuminating. Said section reads as follows:

SEC. 35. DETERMINATION OF GAIN OR LOSS FROM THE SALE OR OTHER DISPOSITION OF
PROPERTY. —The gain derived or loss sustained from the sale or other disposition of property, real or
personal, or mixed, shall be determined in accordance with the following schedule:
(a) xxx xxx xxx
(b) In the case of property acquired on or after March first, nineteen hundred and thirteen, the cost
thereof if such property was acquired by purchase or the fair market price or value as of the date of the
acquisition if the same was acquired by gratuitous title.
xxxxxxxxx

The records show that the property in question was adjudicated to Maria Morales by order of the Court
of First Instance of Pampanga on March 23, 1929, and in accordance with the aforequoted section of
the National Internal Revenue Code, only the fair market price or value of the property as of the date of
the acquisition thereof should be considered in determining the gain or loss sustained by the property
owner when the property was disposed, without taking into account the purchasing power of the
currency used in the transaction. The records placed the value of the said property at the time of its
acquisition by appellant Maria Morales P28,291.73 and it is a fact that same was compensated with
P94,305.75 when it was expropriated. The resulting difference is surely a capital gain and should be
correspondingly taxed.
 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.

The case involves the distribution of stock dividends in a Philippine

corporation, which were declared as treasury stock dividends but were found
to be a nullity and subject to income tax. The Court of Tax Appeals absolved
the respondents from liability, but the Supreme Court held that the
distribution of the stock dividends was a distribution of earnings and should
be taxed accordingly.

Facts:
 The case involves the distribution of stock dividends in a Philippine corporation,
MANTRASCO.
 Julius Reese owned 24,700 shares of the 25,000 common shares of MANTRASCO, and the three
respondents (John L. Manning, W.D. McDonald, and E.E. Simmons) owned the rest.
 Under a trust agreement, MANTRASCO would purchase Reese's shares upon his death.
 After Reese's death and partial payment by the company for Reese's shares, a new certificate was
issued in the name of MANTRASCO and endorsed to the Trustees.
 The stockholders reverted the 24,700 shares in the Treasury to the capital account of the
company as stock dividends to be distributed to the stockholders.
 The Bureau of Internal Revenue (BIR) assessed the respondents for deficiency income taxes,
fraud penalty, and interest charges, claiming that the distribution of the stock dividends was a
distribution of the "assets or property of the corporation."
 The Court of Tax Appeals absolved the respondents from liability.

Issue:
 Whether the distribution of the stock dividends should be considered a distribution of the "assets
or property of the corporation" or a distribution of earnings subject to income tax.

Ruling:
 The distribution of the stock dividends constituted a distribution of earnings and should be taxed
accordingly.
 The assessment by the Commissioner of fraud penalty and the imposition of interest charges
were based on the total acquisition cost of the alleged treasury stock dividends, which was an
error.
 The Court of Tax Appeals was ordered to recompute the income tax liabilities of the respondents
in accordance with the decision.

Ratio:
 The newly acquired shares were not treasury shares and their declaration as treasury stock
dividends was a complete nullity.
 The trust agreement treated the 24,700 shares as outstanding shares until they were fully paid,
and therefore, their declaration as treasury stock dividends was a nullity.
 Treasury shares do not participate in dividends or voting rights, which was not the case with the
questioned shares.
 The distribution of the stock dividends constituted a distribution of earnings and should be taxed
accordingly.
 The assessment should be based on the payments made to Reese's estate in each corresponding
year, rather than the total acquisition cost of the alleged treasury stock dividends.

Background and Parties Involved

 The case involves the distribution of stock dividends in a Philippine
corporation called MANTRASCO.
 Julius Reese owned 24,700 shares of the 25,000 common shares of
MANTRASCO, and the three respondents (John L. Manning, W.D.
McDonald, and E.E. Simmons) owned the rest.
 A trust agreement was executed, stating that upon Reese's death,
MANTRASCO would purchase Reese's shares to ensure the company's
continuity under the management of the respondents.

Distribution of Stock Dividends

 After Reese's death, a new certificate for the 24,700 shares was
issued in the name of MANTRASCO and endorsed to the trustees.
 The stockholders then reverted the 24,700 shares in the Treasury to
the capital account of the company as stock dividends to be
distributed to the stockholders.
 The Bureau of Internal Revenue (BIR) concluded that this distribution
of shares as stock dividends was a distribution of the "assets or
property of the corporation."

Court of Tax Appeals Decision

 The Court of Tax Appeals absolved the respondents from liability,
stating that their respective one-third interest in the company
remained the same before and after the declaration of the stock
dividends.
 Supreme Court Decision on Treasury Shares
 The Supreme Court held that the newly acquired shares were not
treasury shares and that their declaration as treasury stock dividends
was a complete nullity.
 Treasury shares are stocks issued and fully paid for and re-acquired by
the corporation, but they do not have the status of outstanding shares.
 The trust agreement treated the 24,700 shares as absolutely
outstanding shares of Reese's estate until they were fully paid, making
the declaration of the shares as treasury stock dividends a violation of
public policy.

Taxation of Distribution of Earnings

 The Court held that the distribution of the earnings of the company to
the respondents through the trust agreement should be subject to
income tax.
 The trust agreement was seen as a technical device used by the
respondents to bestow upon themselves the full worth and value of
Reese's corporate holdings.
 Whenever the company used its earnings to buy the corporate holdings
of the deceased stockholder, it was effectively making a distribution
of those earnings to the surviving stockholders.

Tax Assessment and Liability

 The Court found that the Commissioner of Internal Revenue erred in
assessing the respondents the total acquisition cost of the alleged
treasury stock dividends in one lump sum.
 The earnings used to gradually pay off Reese's shares should be taxed
for each corresponding year when payments were made.
 The respondents should be liable for income tax purposes to the
extent of the aggregate amount paid by the company to buy off
Reese's shares.

Fraud Penalty and Interest Charges

 The Court set aside the assessment of fraud penalty and the
imposition of interest charges, stating that the nullity of the resolution
authorizing the distribution of earnings was of no consequence.
 The case was remanded to the Court of Tax Appeals for further
proceedings to recompute the income tax liabilities of the respondents
in accordance with the Court's decision.