VICENTE MADRIGAL and SUSANA PATERNO, petitioners,

vs.
JAMES J. RAFFERTY (Collector of Internal Revenue) and
VENANCIO CONCEPCION (Deputy Collector of Internal Revenue), defendants.

G.R. No. L-12287

August 7, 1918

FACTS:
Vicente Madrigal and Susana Paterno were legally married prior to January 1,
1914. The marriage was contracted under the provisions of law concerning
conjugal partnerships (sociedad de gananciales). On February 25, 1915, Vicente
Madrigal filed sworn declaration with the Collector of Internal Revenue, showing
as his total net income for the year 1914, the sum of P296,302.73. Subsequently,
Madrigal submitted the claim that the said P296,302.73 did not represent his
income for the year 1914, but was in fact the income of the conjugal partnership
existing between himself and his wife Susana Paterno, and that in computing and
assessing the additional income tax provided by the Act of Congress of October 3,
1913, the income declared by Vicente Madrigal should be divided into two equal
parts, one-half to be considered the income of Vicente Madrigal and the other
half of Susana Paterno.

The revenue officer was not satisfied with Madrigals explanation and ultimately,
the United States Commissioner of Internal Revenue decided against the claim of
Madrigal. Madrigal paid under protest, and the couple decided to recover the
sum of P3,786.08 alleged to have been wrongfully and illegally assessed and
collected by the CIR.

ISSUE:
Whether or not the income reported by Madrigal on 1915 should be divided into
2 in computing for the additional income tax because of the conjugal partnership.

HELD:
No. The point of view of the CIR is that the Income Tax Law, as the name implies,
taxes upon income and not upon capital and property.
The essential difference between capital and income is that capital is a fund;
income is a flow. A fund of property existing at an instant of time is called capital.
A flow of services rendered by that capital by the payment of money from it or
any other benefit rendered by a fund of capital in relation to such fund through a
period of time is called income. Capital is wealth, while income is the service of
wealth.
As Paterno has no estate and income, actually and legally vested in her and
entirely distinct from her husbands property, the income cannot properly be
considered the separate income of the wife for the purposes of the additional tax.
To recapitulate, Vicente wants to half his declared income in computing for his tax
since he is arguing that he has a conjugal partnership with his wife. However, the
court ruled that the one that should be taxed is the income which is the flow of
the capital, thus it should not be divided into 2.

Commissioner of Internal Revenue, petitioner,

vs
W.E. Lednicky and Maria Lednicky, defendants.

GR Nos. L-18262 and L-21434,

July 31, 1964

FACTS:
Respondent spouses V.E. Lednicky and Maria Valero Lednicky are American
citizens residing in the Philippines and derived their income from Philippine
sources for the taxable years in question. On 1957 Spouses filed their ITR for
1956 reporting a gross income P1,017,287.65 and a net income of P733,809.44 on
which P317,395.40 was assessed after deducting P4,805.59 as withholding tax.
Spouses paid 326,247.41 on April 1957. In March 1959 Spouses filed an

amended ITR for 1956. They claimed a deduction of P205,939.24 paid in 1956 to
US govt. Respondents requested refund of 112,437.90. CIR failed to answer the
claim for refund, resps filed their petition with the Tax Court G.R. No. L-18169
formerly CTA case 570[different case/year] is also a claim for refund in the
amount of P150,269.00 as alleged overpaid income tax for 1955.

In Feb 1956, spouses filed ITR for 1955 = gross income of P1,7771,124.63 and net
income of P1,052,550.67. For the year of 1956 spouses filed an amended ITR.
Back in 1955, spouses filed with the US Internal Revenue Agent in Manila their
federal ITR for the years 1947,1951-54 on income from Phil sources on a cash
basis. On 1958 Spouses amended their Phil ITR for 1955 to include the
deductions of US Federal income taxes, interest accrued up to May 15, 1955, and
exchange and bank charges

CTA case 570 was filed. G.R. No. 21434 formerly CTA Case No. 783, facts are
similar but refer to Lednickys OTR for 1957 filed in Feb 1958. In 1959, spouses
filed amended return for 1957 claiming deductions representing taxes paid to US
Govt.

ISSUE:
Whether a citizen of the United States residing in the Philippines, who derives
wholly from sources within the Philippines, may deduct his gross income from the
income taxes he has paid to the United States government for the said taxable
year?

HELD:
An alien resident who derives income wholly from sources within the Philippines
may not deduct from gross income the income taxes he paid to his home country

for the taxable year. The right to deduct foreign income taxes paid given only
where alternative right to tax credit exists.
Section 30 of the NIRC, Gross Income Par. C (3): Credits against tax per taxes of
foreign countries.If the taxpayer signifies in his return his desire to have the
benefits of this paragraph, the tax imposed by this shall be credited with:
Paragraph (B), Alien resident of the Philippines; and, Paragraph C (4), Limitation
on credit.
An alien resident not entitled to tax credit for foreign income taxes paid when his
income is derived wholly from sources within the Philippines.
Double taxation becomes obnoxious only where the taxpayer is taxed twice for
the benefit of the same governmental entity. In the present case, although the
taxpayer would have to pay two taxes on the same income but the Philippine
government only receives the proceeds of one tax, there is no obnoxious double
taxation.

FILIPINAS SYNTHETIC FIBER CORPORATION, petitioner

vs.
COURT OF APPEALS, COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.

G.R. Nos. 118498 & 124377

October 12, 1999

FACTS:
Filipinas Synthetic Fiber Corp., a domestic corporation, is protesting part of the
deficiency withholding tax assessed upon it by the Commissioner of Internal

Revenue which pertains to interest and compromise penalties for the alleged late
payment of withholding taxes due on interest loans, royalties, and guarantee fees
paid by Filipinas Synthetic Fiber Corp. to non-resident corporations.

ISSUE:
W/N the liability to withhold tax at source on income payments to non-resident
foreign corporations arises upon remittance of the amounts due to the foreign
creditors or upon accrual thereof.

HELD:
The decisions of the Court of Appeals in CA GR. SP Nos. 32922 and 32022 are
affirmed in toto. The Tax Code is silent as to when the duty to withhold the taxes
arise. Thus, to determine the same, an inquiry as to the nature of the accrual
method of accounting (which is the method used by the petitioner) must be
made. Under the accrual basis method, it is the right to receive income, and not
the actual receipt, that determines when to include the amount in gross income.
Therefore, the liability arises UPON REMITTANCE OFTHE AMOUNTS, and not upon
accrual thereof.

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED MINING AND
DEVELOPMENTCORPORATION and the COURT OF TAX APPEALS, respondents.

G.R. No. 80041

January 22, 1990

FACTS:
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 copper production. Atlas,
in turn undertook to sell to Mitsubishi all the copper concentrates produced from
said machine for a period of fteen (15) years. It was contemplated that
$9,000,000.00 of said loan 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
(Exim bank for short) obviously for purposes of its obligation under said contract.
Its loan application was approved on May 26, 1970 in the sum of

4,320,000,000.00, at about the same time as the approval of its loan for
2,880,000,000.00froma consortium of Japanese banks. The total amount of both
loans is equivalent to $20,000,000.00 in United States currency at the then
prevailing exchange rate. The records in the Bureau of Internal Revenue show
that the approval of the loan by Exim bank to Mitsubishi was subject to the
condition that Mitsubishi would use the amount as a loan to Atlas and as a
consideration for importing copper concentrates from Atlas, and that Mitsubishi
had to pay back the total amount of loan by September 30 ,1981.
Pursuant to the contract between Atlas and Mitsubishi, interest payments were
made by the former to the latter totallingP13,143,966.79 for the years 1974 and
1975.Thecorresponding15% tax thereon in the amount of Pl,971,595.01 was
withheld pursuant to Section 24 (b) (1) and Section 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 led 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 was later noted by respondent
Court of Tax Appeals in its decision that on August27,1976 ,Mitsubishi executed a
waiver and disclaimer of its interest in the claim for tax credit in favor of Atlas.

ISSUE:
Whether or not private respondents are entitled to such tax credit?
Whether or not Mitsubishi acted only as a conduit for Atlas for it to obtain a loan
from Exim bank?

HELD:
On the rst issue, the High Court held - No. They are not entitled to the tax credit
because Mitsubishi and Atlas were not one of the companies contemplated in
Section 29 (b) (7) (A)which states, (A) Income received from their investments in
the Philippines in loans, stocks, bonds or other domestic securities, or from

interest on their deposits in banks in the Philippines by(1) foreign governments,

(2) nancing institutions owned, controlled, or enjoying renancing from them,
and (3)international or regional nancing institutions established by governments.
Both Atlas and Mitsubishi were not nancing institutions nanced by a particular
government, therefore, they are not entitled to tax credit from income derived
from interest earned. Regarding the second issue, Mitsubishi was a mere conduit
for Atlas, the latter used the former to avail the tax credit from such interest and
then later on, such tax credit was waived and a disclaimer was led in favor Atlas.
From this action, it became clear to the court that the provision of the law was
used as a cloak to escape the tax imposed, therefore in order to prevent bad
precedent in the future, the Court reversed the decision of the CTA

CARMELINO F. PANSACOLA, petitioner

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

G.R. No. 159991,

November 16, 2006

FACTS:
On April 13, 1998, petitioner Carmelino F. Pansacola filed his income tax return
for the taxable year 1997 that reflected an overpayment of P5,950. In it he
claimed the increased amounts of personal and additional exemptions under
Section 354 of the NIRC, although his certificate of income tax withheld on
compensation indicated the lesser allowed amounts5 on these exemptions. He
claimed a refund of P5,950 with the Bureau of Internal Revenue, which was
denied. Later, the Court of Tax Appeals also denied his claim because according to
the tax court, "it would be absurd for the law to allow the deduction from a
taxpayers gross income earned on a certain year of exemptions availing on a
different taxable year"6 Petitioner sought reconsideration, but the same was
denied.
On appeal, the Court of Appeals denied his petition for lack of merit. The
appellate court ruled that Umali v. Estanislao,8 relied upon by petitioner, was
inapplicable to his case. It further ruled that the NIRC took effect on January 1,

1998, thus the increased exemptions were effective only to cover taxable year
1998 and cannot be applied retroactively.
ISSUE:
Could the exemptions under Section 35 of the NIRC, which took effect on January
1, 1998, be availed of for taxable year 1997?

HELD:
No. There is nothing in the law that expresses any such intent of making its
application retroactive. The policy declaration in the enactment of R.A. No. 8424
do not indicate it was a social legislation that adjusted personal and additional
exemption should retroact.
What is the nature of personal exemptions? Personal exemptions are the
theoretical personal, living and family expenses of an individual taxpayer. These
are arbitrary amounts which have been calculated by our lawmakers to be
roughly equivalent to the minimum of subsistence, taking into account the
personal status and additional qualified dependents of the taxpayer.

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
THE COURT OF APPEALS, COURT OF TAX APPEALS and A. SORIANO CORP.,
respondents.

G.R. No. 108576

January 20, 1999

FACTS:
Don Andres Soriano (American), founder of A. Soriano Corp. (ASC) had a total
shareholdings of 185,154 shares. Broken down, the shares comprise of 50,495
shares which were of original issue when the corporation was founded and
134,659 shares as stock dividend declarations. So in 1964 when Soriano died, half
of the shares he held went to his wife as her conjugal share (wifes legitime) and
the other half (92,577 shares, which is further broken down to 25,247.5 original
issue shares and 82,752.5 stock dividend shares) went to the estate. For
sometime after his death, his estate still continued to receive stock dividends
from ASC until it grew to at least 108,000 shares.
In 1968, ASC through its Board issued a resolution for the redemption of shares
from Sorianos estate purportedly for the planned Filipinization of ASC.
Eventually, 108,000 shares were redeemed from the Soriano Estate. In 1973, a tax
audit was conducted. Eventually, the Commissioner of Internal Revenue (CIR)

issued an assessment against ASC for deficiency withholding tax-at-source. The

CIR explained that when the redemption was made, the estate profited (because
ASC would have to pay the estate to redeem), and so ASC would have withheld
tax payments from the Soriano Estate yet it remitted no such withheld tax to the
government.
ASC averred that it is not duty bound to withhold tax from the estate because it
redeemed the said shares for purposes of Filipinization of ASC and also to
reduce its remittance abroad.

ISSUE:
Whether or not ASCs arguments are tenable.

HELD:
No. The reason behind the redemption is not material. The proceeds from a
redemption is taxable and ASC is duty bound to withhold the tax at source. The
Soriano Estate definitely profited from the redemption and such profit is taxable,
and again, ASC had the duty to withhold the tax. There was a total of 108,000
shares redeemed from the estate. 25,247.5 of that was original issue from the
capital of ASC. The rest (82,752.5) of the shares are deemed to have been from
stock dividend shares. Sale of stock dividends is taxable. It is also to be noted that
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.
It cannot be argued that all the 108,000 shares were distributed from the capital
of ASC and that the latter is merely redeeming them as such. The capital cannot
be distributed in the form of redemption of stock dividends without violating the
trust fund doctrine wherein the capital stock, property and other assets of the
corporation are regarded as equity in trust for the payment of the corporate

creditors. Once capital, it is always capital. That doctrine was intended for the
protection of corporate creditors.

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
John Manning, W.D. McDonald, E.E. Simmons & CTA, respondents.
L-28398
Aug 6, 1975

FACTS:
Reese, the majority stockholder of Mantrasco, executed a trust agreement
between him, Mantrasco, Ross, Selph, Carrascoso & Janda law firm and the
minority stockholders, Manning, McDonald and Simmons. Said agreement was
entered into because of Reeses desire that Mantrasco and Mantrasocs 2
subsidiaries, Mantrasco Guam and Port Motors, to continue under the
management of Manning, McDonald and Simmons upon his [Reese] death. When
Reese died, Mantrasco paid Reeses estate the value of his shares. When said
purchase price has been fully paid, the24,700 shares, which were declared as
dividends, were proportionately distributed to Manning, McDonald and Simmons.
Because of this, the BIR issued assessments on Manning, McDonald and Simmons
for deficiency income tax for 1958. Manning et al, opposed this assessment but
the BIR still found them liable. Manning et al. appealed to the CTA, which
absolved them from any liability.

ISSUES:
Whether or not the shares are treasury shares?
Whether or not Manning, McDonald & Simmons should pay for deficiency income
taxes?

HELD:
The manifest intention of the parties to the trust agreement was, in sum and
substance, to treat the 24,700shares of Reese as absolutely outstanding shares of
Reese's estate until they were fully paid. Such being the true nature of the 24,700
shares, their declaration as treasury stock dividend in 1958 was a complete nullity
and plainly violative of public policy. A stock dividend, being one payable in capital
stock, cannot be declared out of outstanding corporate stock, but only from
retained earnings. A stock dividend always involves a transfer of surplus (or profit)
to capital stock. A stock dividend is a conversion of surplus or undivided profits
into capital stock, which is distributed to stockholders in lieu of a cash dividend.