Tax I Gruba Notes 2 Digests

1 Madrigal v. Rafferty, GR No. L-12287, 7 August 1918 ...............................................................3

2 Conwi v. Court of Tax Appeals, GR Nos. 48532 and 48533, 31 August 1992 ...........................4
3 CIR v. Court of Appeals, GR No. 108576, 20 January 1999 ......................................................5
4 Chamber of Real Estate and Builders Associations, Inc. v. Romulo, GR No. 160756, 9 March 2010
......................................................................................................................................................8
5 CIR v. British Overseas Airways Corporation, GR Nos. L-65773-74, 30 April 1987 ................10
6 CIR v. Baier-Nickel, GR No. 153793, 29 August 2006 .............................................................12
7 Republic of the Philippines v. Manila Electric Company, GR Nos. 141314 and 141369, 15 November
2002 ............................................................................................................................................14
8 CIR v. Solidbank Corporation, GR No. 148191, 25 November 2003 .......................................16
9 Tan v. del Rosario, GR Nos. 109289 and 109446, 3 October 1994 .........................................17
10 Obillos v. CIR, GR No. L-68118, 29 October 1985 ................................................................18
11 Pascual v. CIR, GR No. L-78133, 18 October 1988 ...............................................................18
12 Afisco Insurance Corporation v. Court of Appeals, GR No. 112675, 25 January 1999 ..........20
13 CIR v. Tokyo Shipping Co., Ltd., GR No. 68252, 26 May 1995 .............................................22
14 N.V. Reederij Amsterdam v. CIR, GR No. L-46029, 23 June 1988 .....................................23
15 Marubeni Corporation v. CIR, GR No. 76573, 14 September 1989 .......................................24
16 State Investment House, Inc. v. Citibank, N.A., GR Nos. 79926-27, 17 October 1991 ..........25
17 China Banking Corporation v. CIR, GR Nos. 146749, 10 June 2003 .....................................26
18 CIR v. Bank of Commerce, GR No. 149636, 8 June 2005 .....................................................27
19 Ericsson Telecommunications, Inc. v. City of Pasig, GR No. 176667, 22 November 2007 ...28
20 Chua v. Court of Appeals, GR No. 119255, 9 April 2003 .......................................................29
21 Torcuator v. Bernabe, GR No. 134219, 8 June 2005 .............................................................31
22 CIR v. Philippine Airlines, Inc., GR No. 160528, 9 October 2006 ..........................................32
23 Manila International Airport Authority v. City of Pasay, GR No. 163072, 2 April 2009 ...........33
24 Compagnie Financiere Sucres et Denrees v. CIR, GR No. 133834, 28 August 2006 ...........35
25 Vive Eagle Land, Inc. v. Court of Appeals, GR No. 150308, 26 November 2004 ..................37
26 CIR v. Burroughs Limited, GR No. L-66653, 19 June 1986 ...................................................39
27 Bank of America NT & SA v. Court of Appeals, GR Nos. 103092 and 103106, 21 July 199440
28 CIR v. Wander Philippines, Inc., GR No. L-68375, 15 April 1988 ..........................................41
29 CIR v. Procter & Gamble Philippine Manufacturing Corporation, GR No. 66838, 2 December 1991
....................................................................................................................................................43

30 Basilan Estates, Inc. v. CIR, GR No. L-22492, 5 September 1967 ........................................44

31 Manila Wine Merchants, Inc. v. CIR, GR No. L-26145, 20 February 1984 ............................46
32 CIR v. Antonio Tuason, Inc., GR No. 85749, 15 May 1989 ....................................................48
33 Cyanamid Philippines, Inc. v. Court of Appeals, GR No. 108067, 20 January 2000 ..............50
34 CIR v. Court of Appeals, GR No. 124043, 14 October 1998 ..................................................51

1 Madrigal v. Rafferty, GR No. L-12287, 7 August 1918

Q: What is income? How is it different from capital? p. 1
Facts

Vicente Madrigal and Susana Paterno were married under the provisions of law concerning
conjugal partnerships
Sometime in 1915, Vicente filed his tax return with the Collector of Internal Revenue showing as
his total net income for the year 1914 the amount of around P296,000
Subsequently, Madrigal submitted the claim that the amount as stated in the return did not
represent his personal income, but was the income of the conjugal partnership existing between
him and his wife Susana
o Vicente claimed that in computing and assessing the additional income tax, the income
he previously declared should actually be divided into two equal parts- to himself and
to Susana-wife
o Why did Vicente want to lessen his previously declared income? Because in doing so he
would avoid paying an additional income tax as provided by an Act of Congress
The US Commissioner of Internal Revenue decided against the theory of Vicente, and so
Vicente was forced to pay under protest
After payment under protest, Vicente and Susana filed a case in the Court of First Instance
against the CIR for the recovery of around P3,000, alleged to have been the amount wrongfully
and illegally collected by the CIR (but the CFI ruled against the couple)
Vicentes argument: Since he and his wife have a conjugal partnership, the income he originally
declared is actually shared with his wife, so his personal income is only 50% of that declared
amount
CIRs argument: the taxes imposed by the Income Tax Law are taxes upon income tax and not
upon capital and property

Issue: W/N the actual income of Vicente is only half of that he originally declared considering that he is
married to Susana under the law on conjugal partnerships?
Held: NO
It is true that Susana has an inchoate (just begun) right in the property of her husband Vicente
Susana has an interest in the ultimate property rights and in the ultimate ownership of property
acquired as income after such income has become capital.
HOWEVER, Susana has NO absolute right to one-half 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 the purposes of the additional tax.
IMPORTANT: Income as contrasted with capital or property is to be the test. The essential
difference between capital and income is that capital is a fund; income is a flow.
o A tax on income is not a tax on property. "Income," as here used, can be defined as
"profits or gains."
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 an income. Capital is wealth, while
income is the service of wealth.

2 Conwi v. Court of Tax Appeals, GR Nos. 48532 and 48533, 31 August 1992
What is income? How is it different from capital? p.1
How is a resident citizen taxed? p.11
FACTS:
Petitoners are Filipino Citizens and employees of P&G who is a foreign corporation based in the
US. During 1970-71, petitioners where assigned to other subsidiaries of P&G OUTSIDE
Philippines to which they were paid in US Dollars as compensation.
When they filed their income tax returns, for 1970, they computed tax due by applying dollar to
peso conversion [Jan-Feb 1970 is P3.90 to $1.00 and Feb-Dec 1970 is P6.25 to $1.00]
o They also used above conversion rate for their 1971 income tax return
o However, 1973, they filed their amended income tax return using the par value of peso
section 48 of Republic Act No. 265 in relation to Section 6 of Commonwealth Act No.
265 in relation to Section 6 of Commonwealth Act No. 699 as the basis which resulted in
OVERPAYMENTS.
Petitioners filed for REFUND for alleged overpayments
CTA said that proper conversion rates should be under Revenue Memorandum Circular nos 771 and 41-71. DENIED the claim for REFUND/ TAX CREDIT.
o Section 21 of the National Internal Revenue Code, before its amendment by Presidential
Decrees Nos. 69 and 323 which took effect on January 1, 1973 and January 1, 1974,
respectively, imposed a tax upon the taxable net income received during each taxable
year from all sources by a citizen of the Philippines, whether residing here or abroad.
ISSUE: 1. W/N Were petitioners liable to pay income tax on their dollar earnings?
2. What is the exchange rate used to determine the peso equivalent of their dollar
earnings?
HELD: 1. YES. Petitioners should pay income tax on their dollar earnings.
2. The PAR VALUE of peso shall be the guiding rate used for purposes of computing
income tax and NOT the prevailing free market exchange rate.
This involves and INCOME TAX case wherein an INCOME is defined as an amount of money
coming to a person or a corporation within a specified time, whether as payment for services,
interest or profit from investment.
o Cash/Equivalent or fruits of ones labor
FOREIGN EXCHANGE TRANSACTION is conversion of an amount of money or currency of
one country into an equivalent amount of money or currency of another.
o When petitioners were earning nations currency, they spending said currency, therefore
there was no conversion.
Section 21 of the old Tax Code, amended up to 4 August 1969, which imposed a tax upon the
TAXABLE NET INCOME received during each taxable year from all sources by a citizen of the
Philippines, whether RESIDING HERE OR ABROAD.
o As CITIZENS of the Philippines, and their income, within or without, and in these cases
wholly without, are subject to INCOME TAX. Sec. 21, NIRC, as amended, does not
brook any exemption.
Having already paid their 1970 and 1971 income taxes under the uniform rate of exchange
prescribed under the aforestated Revenue Memorandum Circulars, NO REASON FOR
REFUND any taxes to petitioner as said Revenue Memorandum Circulars, being of long
standing and not contrary to law, are VALID.
[Today, 1997 Tax Code treats resident and non-resident citizens differently]

3 CIR v. Court of Appeals, GR No. 108576, 20 January 1999

What is income? How is it different from capital? p.2
What is income tax? P. 5
Petitioner: CIR
Respondent: CA, CTA, A. Soriano Corp. (ANSCOR)
Facts:

During the 1930s, Don Andres Soriano (US Citizen) formed A Soriano Y Cia, corporation which
is now known as ANSCOR, and is now wholly owned and controlled by his family. When he
died in 1964, his shares in the company were divided to his wife and to his estate.
On several occasions, ANSCOR increased its capital stock and the estate and Dona Carmen
(wife) received their respective stock dividends. Dona Carmen asked the US IRS (Internal
Revenue Service) if an exchange of common with preferred shares can be considered as a tax
avoidance scheme to which the US IRS replied that it is not tax avoidance but a recapitalization
scheme.
o So both Dona Carmen and the Estate converted portions of their common shares into
preferred shares. (exchange)
o ANSCOR then redeemed (bought back) the common shares from the estate which
reduced the Estates common shareholdings in the company. And based on the Board
Resolution, the purpose was to partially retire said stocks as treasury shares in order to
reduce the companys foreign exchange remittances in case cash dividends are
declared. (redemption)
CIR then assessed ANSCOR for deficiency withholding tax-at-source pursuant to Sec. 53 and
54 of the 1939 Revenue Code. (Withholding tax at source = withholding of tax by a payer prior
to payment of various types of income)
o ANSCOR protested - said that it was covered by tax amnesty PD 23.
o ANSCOR filed a petition for review with CTA
CTA reversed CIRs ruling saying that there was sufficient evidence to overcome the prima facie
correctness of the questioned assessments.
CA affirmed CTA.

Issue: W/N the redemption of stock and exchange of common with preferred shares is
equivalent to distribution of taxable dividends?
Petitioners (CIR) position: exchange transaction is cancellation. It was the duty of ANSCOR to
withhold the tax-at-source arising from the exchange of common shares to preferred shares by Dona
Carmen and the Estate.
Respondents (ANSCOR) position: it had no duty to withhold tax from such exchanges because
these were done to reduce foreign exchange remittances and also filipinized ownership of ANSCOR
(since theyre reducing the capital stock from foreigners -- heirs of Don Andres).
Held: Only the redeemed stocks can be taxed. The exchange of common shares to preferred shared
did NOT amount to income. But the redemption of shares caused the stock dividends to be realized as
income. Thus, only the PROCEEDS from the redemption of the stock dividends are taxable.

Ratio:

Sec. 83(b) of the 1939 Revenue Act states that Distribution of dividends are taxable if a
corporation cancels or redeems stock issued as a dividend at such time and in a manner that it
amounts to a taxable dividend.
In short, the capital stock of corporations are not taxable because these represent capital and if
youre going to tax them, you are imposing tax on a capital increase. Stock dividends are
unrealized gain as compared to income which is already realized gain.
Tax income can be only be imposed if there was any gain or profit derived from the transaction.
In this case, 108,000 shares were redeemed from the Estate alone. 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 sold to others. Sale of stock dividends is taxable since youre
reacquiring it in exchange for cash or property but mere issuance of stock dividends is not
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.

Discussions in the guidenotes:

a.
Income vs. Capital (p.2)
The exchange of stocks did not result to a proportional interest in the Estate and Dona Carmen.
So since the exchange did not result to a flow of wealth, there was no income tax liability.
Income is defined as an amount of money coming to a person within a specified time, whether
as payment for services, interest, or profit from investment. Cash or equivalent.
Capital is wealth or fund; Income is profit or gain or flow of wealth.
determining factor: whether any gain or profit was derived from the transaction.

i.
ii.
iii.

b. Definition of Income tax (p. 5)

income taxpayer = all persons who derive taxable income
taxable income = 3 elements in imposition of income tax:
1. gain or profit
2. such gain or profit is realized or received, actually or constructively
3. gain or profit is not exempted by law or treaty from income tax.
It doesnt matter where the income comes from or how it was earned or the purpose for which it
was derived.
c. Dividends (p. 44)
General rule is: Stock dividends represent transfer for surplus to capital and do not constitute
income to its recipient.
Exception: if a corporation cancels or redeems stock issued as a dividend at such time and in
such manner to make the distribution and cancellation or redemption essentially equivalent to
the distribution of a taxable dividend, the amount distributed is taxable income to the extent
that it represents a distribution of earnings or profits accumulated after March 1, 1913. (Sec.
83(b) of the 1939 Revenue Act).
the question of whether the amount distributed in the redemption should be treated as
taxable dividend depends upon the circumstances.
Thus, the mere issuance of stock dividends as a means of redemption is not subject to income
tax since, in effect, you are just returning capital.
But, proceeds from the redeemed stock dividends are then subject to income tax.
Other issues:

> on applicability of tax amnesty - SC held that being a withholding agent, ANSCOR is not protected by
the amnesty. Because as an agent, he is only liable if there is a breach in his legal duty to withhold
(whereas it is the taxpayer who has the duty to pay). Plus, PD 370 explicitly states that tax liabilities
with or without assessments on withholding tax at source are not covered by the tax amnesty.
Definitions:
>Redemption = reacquisition of stock by a corporation in exchange for cash or property to be given
back to the shareholder.
>Exchange = act of taking common stocks for preferred stocks or vice versa.

4 Chamber of Real Estate and Builders Associations, Inc. v. Romulo, GR No. 160756, 9 March
2010
Q: What is income? How is it different from capital?
FACTS:
Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT) on corporations
and creditable withholding tax (CWT) on sales of real properties classified as ordinary assets by
persons habitually engaged in the real estate business. Without payment of CWT, the sale, barter or
exchange will not be recorded by the Registry of Deeds.
Under the MCIT scheme, a corporation is assessed an MCIT of 2% of its gross income when such
MCIT is greater than the normal corporate income tax. If the regular income tax is higher than MCIT,
the corporation does not pay the MCIT. Any excess if the MCIT paid over the normal tax shall be
carried forward and credited against the normal income tax for the 3 immediately succeeding taxable
years.
Petitioner argues that MCIT violates the due process clause because it levies income tax even if there
is no realized gain. This is because gross income only considers the cost of goods sold and other direct
expenses. Other major expenditures, such as administrative and interest expenses necessary to
produce gross income, were not taken into account.
Petitioner also alleges that MCIT tantamount to deprivation of property because it is being imposed
even when there is actually a loss.
It also allegedly contravened the equal protection clause because the CWT is being levied upon real
estate enterprises but not other business enterprise.
ISSUES:
1. Whether or not the imposition of the MCIT on domestic corporations is unconstitutional.
2. Whether or not the imposition of CWT on income from sales of real properties classified as ordinary
assets is unconstitutional.
SC RULING:
[MCIT Scheme]
Constitutional.
MCIT came about as a result of the perceived inadequacy of the self-assessment system in capturing
the true income of corporations to ensure that everyone will make some minimum contribution to the
support of the public sector.
Congress intended to put a stop to corporations which, having large turn-overs, report minimal or
negative net income resulting to minimal or zero income taxes through under or over-declaration of
expenses or tax shelters.
Petitioner is correct in saying that income is distinct from capital. Income means all the wealth
flowing into the taxpayer other than mere return on capital. Capital is a fund or property existing
at one distinct point in time while income denotes a flow of wealth during a definite period of
time. Income is derived from capital.

For income to be taxable, there must be (1) gain (2) gain must be realized or received (3) gain must not
be excluded by law or treaty from taxation.
Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income.
However, MCIT is not a tax on capital.
MCIT is imposed on gross income which is arrived at by deducting the capital spent in the sale of its
goods. Clearly, capital is not being taxed.
Furthermore, MCIT is not an additional tax imposition but it is imposed in lieu of the normal net income
tax and if the latter is suspiciously low. Besides, there is no legal objection to a broader tax base or
taxable income by eliminating all deductible items and at the same time, reducing the applicable tax
rate.
[CWT]
Constitutional.
No deprivation of property since the tax withheld will be deducted from the tax due from the taxpayer.
The seller can claim a tax refund in the event that its net income is less than the taxes withheld.
No violation of equal protection clause because the real estate industry is, by itself, a class and can be
validly treated differently. What distinguishes the real estate business from other enterprises is the
prices of their goods sold and the number of transactions involved. Income from sale of real property is
bigger and its frequency of transaction limited, making it less cumbersome for the parties to comply.

5 CIR v. British Overseas Airways Corporation, GR Nos. L-65773-74, 30 April 1987

Q: What is the source of an income?
Q: Give examples of non resident foreign corporation.
Q: Explain the concept of gross Philippine billings.
Facts:

British Overseas Airways Corp (BOAC) is a 100% British Government-owned corporation

engaged in international airline business and is a member of the Interline Air Transport
Association, and thus, it operates air transportation services and sells transportation tickets over
the routes of the other airline members.
From 1959 to 1972, BOAC had no landing rights for traffic purposes in the Philippines and thus,
did not carry passengers and/or cargo to or from the Philippines but instead maintained a
general sales agent in the Philippines - Warner Barnes & Co. Ltd. and later, Qantas Airways which was responsible for selling BOAC tickets covering passengers and cargoes. The
Commissioner of Internal Revenue assessed deficiency income taxes against BOAC.

Issue:
1. W/N the revenue derived by BOAC from ticket sales in the Philippines, constitute income of
BOAC from Philippine sources, and accordingly taxable.
2. W/N BOAC was a resident foreign corporation doing business in the Philippines
Held:
1. Yes. The source of income is the property, activity of service that produces the income.
For the source of income to be considered coming from the Philippines, it is sufficient that the
income is derived from the activity coming from the Philippines. The tax code provides that for
revenue to be taxable, it must constitute income from Philippine sources. In this case, the sale
of tickets in the Philippines was the activity that produced the income. The tickets exchanged
hands here and payment for fares were also made here in Philippines currency.The situs of the
source of payments is the Philippines.
o The flow of wealth proceeded from, and occurred within Philippine territory, enjoying the
protection accorded by the Philippine government. In consideration of such protection,
the flow of wealth should share the burden of supporting the government.
2. Yes. BOAC, from 1959 to 1971, was engaged in: (1) Selling and issuing tickets, (2) Breaking
down the whole trip into series of trips each trip in the series corresponding to a different
airline company, (3) Receiving the fare from the whole trip and (4) Consequently allocating to
the various airline companies on the basis of their participation in the services rendered through
the mode of interline settlement.
o Those activities were in exercise of the functions of its organization as an international
air carrier. In fact, the regular sale of tickets, its main activity, is the very lifeblood of the
airline business, the generation of sales being the paramount objective. There should be
no doubt then that BOAC was "engaged in" business in the Philippines through a
local agent during the period covered by the assessments. Accordingly, it is a
resident foreign corporation subject to tax upon its total net income received in
the preceding taxable year from all sources within the Philippines
o There is no specific criterion as to what constitutes "doing" or "engaging in" or
"transacting" business. Each case must be judged in the light of its peculiar
environmental circumstances. The term implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of acts or works or the
exercise of some of the functions normally incident to, and in progressive prosecution of
commercial gain or for the purpose and object of the business organization. In order
that a foreign corporation may be regarded as doing business within a State, there

must be continuity of conduct and intention to establish a continuous business,

such as the appointment of a local agent, and not one of a temporary character.
Discussions from Dean Grubas notes:
Q: Explain the concept of gross Philippine billings.
"Gross Philippine billings" includes gross revenue realized from uplifts anywhere in the world by
any international carrier doing business in the Philippines of passage documents sold therein,
whether for passenger, excess baggage or mail provided the cargo or mail originates from the
Philippines
Gross Philippine billings tax is an income tax, i.e., a direct tax on the income of persons and
other entities of whatever kind and in whatever form derived from any source. On the other
hand, common carriers tax is an excise tax, that is, a tax on the activity of transporting,
conveying or removing passengers and cargo from one place to another.

6 CIR v. Baier-Nickel, GR No. 153793, 29 August 2006

Q: What is the source of an income?
Key doctrine: The important factor which determines the source of income of personal services is not
the residence of the payer, or the place where the contract for service is entered into, or the place of
payment, but the place where the services were actually rendered.
Facts:
CIR appeals the CA decision, which granted the tax refund of respondent Baier-Nickel and reversed
that of the CTA. Juliane Baier-Nickel, a non-resident German, is the president of JUBANITEX, a
domestic corporation engaged in the manufacturing, marketing and selling of embroidered textile
products. Through Jubanitexs general manager, Marina Guzman, the company appointed respondent
as commission agent with 10% sales commission on all sales actually concluded and collected through
her efforts.
In 1995, respondent received P1, 707, 772. 64 as sales commission from w/c Jubanitex deducted the
10% withholding tax of P170, 777.26 and remitted to BIR. Respondent filed her income tax return but
then claimed a refund from BIR for the P170K, alleging this was mistakenly withheld by Jubanitex and
that her sales commission income was compensation for services rendered in Germany not Philippines
and thus not taxable here.
She filed a petition for review with CTA for alleged non-action by BIR. CTA denied her claim but CA
reversed the decision on appeal, holding that the commission was received as sales agent not as
President and that the source of income arose from marketing activities in Germany.
Issue: W/N respondent is entitled to refund because respondents sales commission income is not
taxable here in the Philippines
Held:
NO. Sec 25 of NIRC states that non-resident aliens, whether or not engaged in trade or business, are
subject to the Philippine income taxation on their income received from all sources in the Philippines. In
determining the meaning of source, the Court resorted to origin of Act 2833 (the first Philippine
income tax law), the US Revenue Law of 1916, as amended in 1917.
US SC has said that income may be derived from three possible sources only: (1) capital and/or (2)
labor; and/or (3) the sale of capital assets. If the income is from labor, the place where the labor is done
should be decisive; if it is done in this country, the income should be from sources within the United
States. If the income is from capital, the place where the capital is employed should be decisive; if it is
employed in this country, the income should be from sources within the United States. If the income is
from the sale of capital assets, the place where the sale is made should be likewise decisive. Source
is not a place; it is an activity or property. As such, it has a situs or location, and if that situs is within
the United States the resulting income is taxable to nonresident aliens and foreign corporations.

The source of an income is the property, activity or service that produced the income. For the
source of income to be considered as coming from the Philippines, it is sufficient that the
income is derived from activity within the Philippines.
The settled rule is that tax refunds are in the nature of tax exemptions and are to be
construed strictissimi juris against the taxpayer. To those therefore, who claim a refund rest the burden
of proving that the transaction subjected to tax is actually exempt from taxation.
In the instant case, respondent failed to give substantial evidence to prove that she performed the
incoming producing service in Germany, which would have entitled her to a tax exemption for income
from sources outside the Philippines. Petition granted.

7 Republic of the Philippines v. Manila Electric Company, GR Nos. 141314 and 141369, 15
November 2002
Does income tax form part of operating expenses? No.
Facts:
Meralco applied for an increase in its energy rates with the Energy Regulatory Board (ERB). This was
conditionally granted, subject to the condition that should the ERB determine that Meralco is entitled to
a lesser rate of increase, the difference between the rate provisionally approved and the rate Meralco
was entitled would be refunded to its customers.
After an audit by the Commission on Audit (COA), said body recommended that the payment of income
taxes be excluded from Meralcos operating expenses. This was adopted by the ERB.
Upon appeal by the Meralco to the Court of Appeals (CA), this was reversed. The CA ordered the
reinstatement of income taxes as part of Meralcos operating expenses.
Tax Issue:
Should income taxes be included in a companys, in this case, Meralcos, operating expenses?
Ruling:
It should not be part of Meralcos operating expenses.
I.
On the doctrine of primary jurisdiction, the Supreme Court ruled that the findings of administrative
bodies, in this case, the ERB, are binding upon the Court, in the absence of any patent error or grave
abuse of discretion.
II.
Grubas Guide Notes
In general, operating expenses are those which are reasonably incurred in connection with
business operations to yield revenue or income. They are items of expenses which contribute
or are attributable to the production of income or revenue.
Income tax, it should be stressed, is imposed on an individual or entity as a form of excise tax
or a tax on the privilege of earning income.
End of Grubas Guide Notes
In exchange for the protection extended by the State to the taxpayer, the government collects taxes as
a source of revenue to finance its activities. Clearly, by its nature, income tax payments of a public
utility are not expenses which contribute to or are incurred in connection with the production of profit of
a public utility
Income tax should be borne by the taxpayer alone as they are payments made in exchange for
benefits received by the taxpayer from the State. No benefit is derived by the customers of a public
utility for the taxes paid by such entity and no direct contribution is made by the payment of income tax
to the operation of a public utility for purposes of generating revenue or profit.
Meralco cited an American case, which allowed income taxes to be imputed as an operating expense.
The Court replied, to wit:
The Court cannot give in to the importunings of MERALCO that we blindly apply the
rulings of American courts on the treatment of income tax as operating expenses in rate
regulation cases. An approach allowing the indiscriminate inclusion of income tax
payments as operating expenses may create an undesirable precedent and serve as a
blanket authority for public utilities to charge their income tax payments to operating
expenses and unjustly shift the tax burden to the customer. To be sure, public utility
taxation in the United States is going through the eye of criticism. Some commentators
are of the view that by allowing the public utility to collect its income tax payment from its
customers, a form of sales tax is, in effect, imposed on the public for consumption of

public utility services. By charging their income tax payments to their customers, public
utilities virtually become tax collectors rather than taxpayers.
Kenneth Cajigal: I submit that, although not particularly mentioned in the original text of the
case, this boils down to the lifeblood theory of taxation. Up to you how you are to jibber-jabber
your way through this if you desire to do so.
III.
A discussion ensues on the proper method to use in determining the proper tax base. Here, what are
being taxed are Meralcos properties that are in service for the fiscal year taxed. Which should be used,
the net average investment method or the average investment method?
Under the net average investment method, properties and equipment used in the operation of a public
utility are entitled to a return only on the actual number of months they are in service during the period.
In contrast, the average investment method computes the proportionate value of the property by
adding the value of the property at the beginning and at the end of the test year with the resulting sum
divided by two.
The ERB did not abuse its discretion when it applied the net average investment method. The
reasonableness of net average investment method is borne by the records of the case. In its report, the
COA explained that the computation of the proportionate value of the property and equipment in
accordance with the actual number of months such property or equipment is in service for purposes of
determining the rate base is favored, as against the trending method employed by MERALCO,
At the end of the day, the Court favored the findings of the ERB, as a corollary, the doctrine of primary
jurisdiction of the ERB, finding no grave abuse of discretion.
Petitions granted, the ERB resolution was reinstated.

8 CIR v. Solidbank Corporation, GR No. 148191, 25 November 2003

Solidbank filed its Quarterly Percentage Tax Returns reflecting gross receipts amounting to
P1,474,693.44. It alleged that the total included P350,807,875.15 representing gross receipts
from passive income which was already subjected to 20%final withholding tax (FWT).
The Court of Tax Appeals (CTA) held in Asian Ban Corp. v Commissioner, that the 20% FWT
should not form part of its taxable gross receipts for purposes of computing the tax. Solidbank,
relying on the strength of this decision, filed with the BIR a letter-request for the refund or tax
credit. It also filed a petition for review with the CTA where the it ordered the refund.
The CA ruling, however, stated that the 20% FWT did not form part of the taxable gross receipts
because the FWT was not actually received by the bank but was directly remitted to the
government.
The Commissioner claims that although the FWT was not actually received by Solidbank, the
fact that the amount redounded to the banks benefit makes it part of the taxable gross receipts
in computing the Gross Receipts Tax. Solidbank says the CA ruling is correct.

Issue:

Whether or not the FWT forms part of the gross receipts tax.

Held:

Yes. In a withholding tax system, the payee is the taxpayer, the person on whom the tax is
imposed. The payor, a separate entity, acts as no more than an agent of the government for the
collection of tax in order to ensure its payment. This amount that is used to settle the tax liability
is sourced from the proceeds constitutive of the tax base.
These proceeds are either actual or constructive. Both parties agree that there is no actual
receipt by the bank. What needs to be determined is if there is constructive receipt. Since the
payee is the real taxpayer, the rule on constructive receipt can be rationalized.
The Court applied provisions of the Civil Code on actual and constructive possession. Article
531 of the Civil Code clearly provides that the acquisition of the right of possession is through
the proper acts and legal formalities established. The withholding process is one such
act. There may not be actual receipt of the income withheld; however, as provided for in Article
532, possession by any person without any power shall be considered as acquired when ratified
by the person in whose name the act of possession is executed.
In our withholding tax system, possession is acquired by the payor as the withholding agent of
the government, because the taxpayer ratifies the very act of possession for the government.
There is thus constructive receipt.
The processes of bookkeeping and accounting for interest on deposits and yield on deposit
substitutes that are subjected to FWT are tantamount to delivery, receipt or remittance. Besides,
Solidbank admits that its income is subjected to a tax burden immediately upon receipt,
although it claims that it derives no pecuniary benefit or advantage through the withholding
process.
There being constructive receipt, part of which is withheld, that income is included as part of the
tax base on which the gross receipts tax is imposed.

9 Tan v. del Rosario, GR Nos. 109289 and 109446, 3 October 1994

What are the kinds of tax systems?
How are partners of a general professional partnership taxed?
Facts
The petitioners challenge the constitutionality of RA 7496 or the Simplified Net Income Taxation
Scheme which amended certain provisions of the National Internal Revenue Code as well as
the validity of Sec. 6, Revenue Regulations No. 2-93 promulgated pursuant to RA 7496.
The petitioners allege that RA 7496 violates (1) the one subject-one bill rule, (2) the rule on
uniformity of taxation, and (3) the due process clause.
Issues/Ruling
As regards the allegation that RA 7496 violates the one subject-one bill rule
The purpose of such rule is merely to prevent log-rolling legislation, to prevent surprises or fraud
upon the legislator and fairly apprise the people. These objectives have been sufficiently met in
the case at bar.

As regards the allegation that said law violates the rule on uniformity of taxation (according to
petitioners, the law seeks to tax single proprietorships and professionals differently from
corporations and partnerships)
o Such system of income taxation is the prevailing rule even prior to RA 7496
o Uniformity of taxation merely requires that all subjects or objects of taxation, similarly
situated, are to be treated alike both in privileges and liabilities.
o Classification is allowed so long as
The standards are substantial.
The categorization is germane to the purpose of the law.
The law applies to both present and future conditions.
The classification applies equally to all those belonging to the same class.
st
o What may be perceived from the law is the legislative intent to [answers the 1
question]:
Increasingly shift the income tax system towards the scheduler approach (a
system employed where the income tax treatment varies and made to depend on
the kind or category of taxable income of the taxpayer) in the income taxation of
individual taxpayers.
Maintain the present global treatment (a system where the tax treatment views
indifferently the tax base and generally treats in common all categories of taxable
income of the taxpayer) on taxable corporations.
o The due process clause may only be invoked when there is a clear contravention of
inherent or constitutional limitations in the exercise of the tax power.
o With the legislative lies the discretion to determine the nature, object, extent, coverage
and situs of taxation. Courts, therefore, cannot delve into these matters.

As regards the allegation that public respondents have exceeded their authority in promulgating
Sec. 6, Revenue Regulations No. 2-93 (which says that RA 7496 applies to general professional
partnerships and the partners therein) to carry out RA 7496.
o The Supreme Court clarified that the partnership is not itself subject to income tax.
o The income tax is imposed on the partners themselves in their individual capacity
computed on their distributive shares of partnership profits [answers the 2nd question].
o This is similar to Sec. 23 of the Tax Code which was not amended by RA 7496

10 Obillos v. CIR, GR No. L-68118, 29 October 1985

Definition of corporation for income tax purposes, as provided under Section 22(B) of the
1997 Tax Code
Difference in treatment between a co-owner and a partner
FACTS
This case is about the income tax liability of four brothers and sisters who sold two parcels of
land which they had acquired from their father, Jose Obillos, Sr.
Jose Obillos, Sr. bequeathed two lots located in Greenhills, San Juan to his four children (herein
petitioners) to enable them to build their residences.
After more than a year, petitioners resold the lots to Walled City Securities Corporation and
Canda.
Petitioners derived from the sale a total profit of Php 134,341.88, or Php 33,584 for each of
them.
Petitioners treated each of their profits as a capital gain and paid an income tax on thereof.
Later, the CIR issued an assessment against petitioners for deficiency income tax on the ground
that petitioners formed an unregistered partnership or joint venture. Hence, the CIR required
petitioners to pay corporate income tax on the total profit, in addition to individual income tax on
each of their shares.
The CIR assessed Php37,018 as corporate income tax, Php18,509 as 50% fraud surcharge and
Php15,547.56 as 42% accumulated interest, or a total of Php71,074.56.
The CIR also considered the share of the profits of each of petitioners as a distributive dividend
taxable in full (not a mere capital gain of which is taxable) aggregating Php56,707.20
including the 50% fraud surcharge and the accumulated interest.
ISSUE

Whether or not the siblings formed a partnership or joint venture and are liable to pay corporate
income tax on total profit plus individual income tax on each of their share in the profit

HELD

NO
o

The Supreme Court held that it was error to consider petitioners as having formed a
partnership. Petitioners were merely co-owners. To consider them as partners would
obliterate the distinction between a co-ownership and a partnership. The petitioners
were not engaged in any joint venture by reason of that isolated transaction. Their
original purpose was to divide the lots for residential purposes. If later on they found it
not feasible to build their residences on the lots because of the high cost of construction,
then they had no choice but to resell the same to dissolve the co-ownership. The division
of the profit was merely incidental to the dissolution of the co-ownership which was in the
nature of things a temporary state. It had to be terminated sooner or later.
To regard the petitioners as having formed a taxable unregistered partnership would
result in oppressive taxation and confirm the dictum that the power to tax involves the
power to destroy. That eventuality should be obviated.
The Civil Code provides that "the sharing of gross returns does not of itself establish a
partnership, whether or not the persons sharing them have a joint or common right or
interest in any property from which the returns are derived". There must be an
unmistakable intention to form a partnership or joint venture.

11 Pascual v. CIR, GR No. L-78133, 18 October 1988

What are considered corporations for income tax purposes?

FACTS:
Petitioners Mariano Pascual and Renato Dragon bought 2 parcels of land from Santiago
Bernardino and another 3 parcels from Juan Roque.
The first 2 parcels were subsequently sold to Marenir Development Corporation, while the other
3 were sold to Erlinda Reyes and Maria Samson.
Petitioners derived a profit of P165,224.70 from the first sale and P60,000.00 from the second
sale. Corresponding capital gains taxes were paid through tax amnesties.
1979 - Petitioners were assessed and required to pay a total amount of P107,101.70 as alleged
deficiency corporate income taxes for the years 1968 and 1970 (years of the 2 sales)
BIR Commissioner Plana informed petitioners than in the years 1968 and 1970, petitioners as
co-owners in the real estate transactions formed an unregistered partnership or joint
venture taxable as a corporation.
o unregistered partnership was subject to corporate income tax as distinguished from
profits derived from the partnership by them which is subject to corporate income tax
as distinguished from profits derived from the partnership by them which is subject to
individual income tax.
o tax amnesty relieved them of their individual income tax liabilities but not from the tax
liability of the unregistered partnership.
ISSUE:
Whether petitioners formed an unregistered partnership subject to corporate income tax
HELD/RATIO:
NO. There is no evidence that petitioners entered into an agreement to contributed money,
property or industry to a common fund, and that they intended to divide the profits among
themselves. Respondent Commissioner just assumed these conditions to be present on the
basis of the fact that petitioners purchased certain parcels of land and became co-owners
thereof.
The sharing of returns does not in itself establish a partnership whether or not the persons
sharing therein have a joint or common interest in the property. There must be a clear intent to
form a partnership, the existence of a juridical personality different from the individual partners,
and the freedom of each party to transfer or assign the whole property.
As there was no partnership formed, petitioners are not liable for corporate income tax.
Furthermore, as petitioners have availed of the benefits of tax amnesty as individual taxpayers
in these transactions, they are thereby relieved of any further tax liability arising therefrom.

12 Afisco Insurance Corporation v. Court of Appeals, GR No. 112675, 25 January 1999

What are considered corporations for income tax purposes?
FACTS:
Petitioners are 41 non-life insurance corporations which entered into a Quota Share
Reinsurance Treaty and a Surplus Reinsurance Treaty with a non-resident foreign insurance
corporation (Munchener Ruckversicherungs-Gesselschaft or "Munich"). This was pursuant to
the issuance by petitioners of machinery insurance policies.
The reinsurance treaties required petitioners to form a pool, which petitioners did.
The Commissioner of Internal Revenue assessed the pool of machinery insurers with deficiency
corporate taxes (Php 1.8 million) and withholding taxes (Php 1.7 million and Php 89k on
dividends paid to Munich and to petitioners, respectively)
Petitioners protested the assessment.
The CTA sustained petitioners' liability for deficiency income tax, interest, and withholding tax.
The CA ruled that the pool of machinery insurers was a partnership taxable as a corporation,
and considered as taxable income the said pool's collection of premiums on behalf of its
member companies.
Petitioners deny the existence of a partnership because
o as reinsurers, they did not share the same risk or solidary liability
o there was no common fund
o the executive board of the pool did not exercise control and management of the funds,
and
o the pool was not engaged in the business of reinsurance from which it could have
derived income for itself.
ISSUE: W/N the pool of machinery insurers (acting as a mere agent and performing strictly
administrative functions, which did not insure or assume any risk in its own name) was a partnership or
association subject to tax as a corporation
HELD: YES, the pool is taxable as a corporation.
RATIO:
Unregistered partnerships and even associations or joint accounts, which had no legal
personalities apart from their individual members, come within the definition of a "corporation"
as contemplated by the NIRC and the Tax Reform Code.
In Evangelista vs Collector of Internal Revenue, the Supreme Court said that the term
'partnership' includes a syndicate, group, pool, joint venture, or other unincorporated
organization, through or by means of which any business, financial operation, or venture is
carried on.
A partnership is formed when persons contract to devote to a common purpose either money,
property, or labor with the intention of dividing the profits between themselves. Meanwhile, an
association implies associates who enter into a joint enterprise for the transaction of business.
In the instant case, the ceding companies entered into a Pool Agreement or an association that
would handle all the insurance business covered under the Quota Share Reinsurance Treaty
and Surplus Reinsurance Treaty with Munich.
The following indicates a partnership or association covered by NIRC Section 24:
o The pool has a common fund, consisting of money and other valuables that are
deposited in the name and credit of the pool. This common fund pays for the
administration and operation expenses of the pool.

o
o

The pool functions through an executive board, which resembles the board of directors
of a corporation, composed of one representative for each of the ceding companies.
Although the pool itself is NOT a reinsurer and does NOT issue any insurance policy, its
work is indispensable, beneficial, and economically useful to the business of the ceding
companies and Munich. Without it, they (the companies) would not have received their
premiums. The ceding companies share in the business ceded to the pool and in the
expenses according to a "Rules of Distribution" annexed to the Pool Agreement. Profit
motive or business is the primordial reason for the pool's formation.

FINAL RULING: The CA ruling is affirmed; petitioners are liable for assessed taxes.

13 CIR v. Tokyo Shipping Co., Ltd., GR No. 68252, 26 May 1995

(Q: Give an example of a resident foreign corporation.)
FACTS
-

Tokyo Shipping, a resident foreign corporation represented by Soriamont Steamship Agencies,

Inc., owns a vessel (M/V Gardenia).
- NASUTRA chartered said vessel to load raw sugar in the Philippines.
- Operations Supervisor of Soriamont paid the required income and common carriers tax based
on the expected gross receipts of the vessel.
- Upon arrival at Iloilo, the vessel found no sugar for loading.
- Both NASUTRA and Tokyo agreed to have the vessel sail for Japan without any cargo.
- Since no receipt was realized from the charter agreement, Tokyo Shipping instituted a claim for
tax credit/refund.
- Tax Court sided with Tokyo Shipping, hence, this petition for review on certiorari.
NO DISPUTE: The applicable law is Sec. 24 b(2) of the NIRC:
A corporation organized, authorized or existing under the laws of any foreign country, engaged
in trade or business within the Philippines, shall be taxable as provided in subsection (a) of this
Section upon the total net income derived in the preceding taxable year from all sources within
the Philippine. Provided, however, that International carriers shall pay a tax of 2.5% on their
gross Philippine billings. Gross Philippine Billings include: gross revenue realized from uplifts
anywhere in the world by any international carrier doing business in the Philippines of passage
documents sold therein, whether for passenger, excess baggage or mail, PROVIDED the cargo
or mail originates from the Philippines.
The gross revenue realized from the said cargo or mail include: the gross freight charge up to
final destination. Gross revenue from chartered flights originating from the Philippines shall
likewise form part of Gross Philippine Billings regardless of the place or payment of the
passage documents.
This means that:
-

A resident foreign corporation engaged in the transport of cargo IS liable for taxes
depending on the amount of income it derives from sources within the Philippines.

Thus, before such a tax liability can be enforced, the taxpayer must be shown to have
earned income sourced from the Philippines.

SUB-ISSUE
w/n Tokyo Shipping was able to prove that it derived no receipts from its charter agreement and
hence is entitled to a refund of the taxes it pre-paid to the Government
SUB-HELD: YES!
-

M/V Gardenia arrived in Iloilo on Jan 10, 1981 but found no raw sugar to load and returned to
japan without any cargo laden on board.

MAIN ISSUE: w/n Tokyo Shipping was entitled to its claim

MAIN HELD: YES! Because it was able to adduce sufficient evidence that it derived no receipts from
its charter agreement.

14 N.V. Reederij Amsterdam v. CIR, GR No. L-46029, 23 June 1988

Nonresident foreign corporation not engaged in trade or business
2 transactions only not continuous
Facts:

Two vessels (MV Amstelmeer in 1963 and Amstelkroom in 1964) of petitioner NB Reedij
Amsterdam loaded cargoes for foreign destination from Philippine ports.

The freight fees were paid abroad.

The husbanding agent of petitioner in the Philippines, Royal Interocean Lines, filed the
income tax return of petitioner on the assumption that the petitioner was a foreign corporation
engaged in trade or business in the Philippines.

CIR assessed petitioner for deficiency income taxes as a non-resident foreign

corporation not engaged in trade or business in the Philippines.

Royal Interocean filed a written protest against the assessment.

Issue: WON N.V Reederij Amsterdam was a corporation engaged in trade or business or not engaged
in trade or business in the Philippines
Ruling: NOT engaged in trade or business in the Philippines

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

Philippines.

It does not have a branch or office and it made only two calls in the Philippine ports, one
in 1963 and the other in 1964.

In order that a foreign corporation may be considered engaged in trade or business, its
business transactions must be continuous.

A casual business activity in the Philippines by a foreign corporation does not amount to
engaging trade or business in the Philippines for income tax purposes.

TAX BASIS engaged in trade or business --> net come (may expenses deduction)
Rate: 25% on net income below 100k and 35% on net income above 100k
not engaged in trade or business --> gross income
Rate: 35% on gross income

15 Marubeni Corporation v. CIR, GR No. 76573, 14 September 1989

Facts: Marubeni Corporation, a foreign corporation organized in Japan made financial investments with
Atlantic, Gulf and Pacific Company. In 1981, AG&P twice remitted (1st quarter and 3rd quarter) cash
dividends to Marubeni Corporation Head Office in Tokyo Japan net of the 15% profit remittance tax
based on the remittable amount after deducting the final withholding tax of 10%. Thereafter, Marubeni
Japan, via SGV posed a query on the CIR regarding the applicability of the 15% profit remittance tax to
the dividends remitted. Upon receiving favorable response from the CIR, Marubeni claimed for a
Php229,424.40 refund representing profit tax remittance erroneously paid on the dividends remitted by
Atlantic Gulf and Pacific Co. of Manila (AG&P) on April 20 and August 4, 1981 to x x x head office in
Tokyo. The CIR, to whom the CTA concurred, rejected the application since the refund which was
supposedly available was to be applied to a 25% income tax pursuant to a Tax Treaty between Japan
and the Republic of the Philippines.
Issue: W/N Marubeni Japan is entitled to the refund?
Held: Yes, but only up to Php144,452.40. In order to determine the qualification for the refund, the SC
resolved whether Marubeni can be considered a resident foreign or a non-resident foreign corporation
in this particular transaction. Ruling for the latter status, the SC cited the Solicitor General saying:
The general rule that a foreign corporation is the same juridical entity as its branch office in the
Philippines cannot apply here. This rule is based on the premise that the business of the foreign
corporation is conducted through its branch office, following the principal agent relationship theory. It is
understood that the branch becomes its agent here. So that when the foreign corporation transacts
business in the Philippines independently of its branch, the principal-agent relationship is set aside. The
transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is
the foreign corporation, not the branch or the resident foreign corporation.
Corollarily, if the business transaction is conducted through the branch office, the latter becomes the
taxpayer, and not the foreign corporation.
Having ruled that it is non-resident foreign corporation, Marubeni cannot claim the lower tax rate of
10% since this is not an activity related to business. Applying the relevant Treaty provisions (tax sparing
rule) and the then Tax Code, Marubeni is liable for a 15% tax on the income provided that the
Japanese Government extends unto it a tax credit of not less than 20% of the dividends received.

16 State Investment House, Inc. v. Citibank, N.A., GR Nos. 79926-27, 17 October 1991
Facts:
-Respondent foreign banks filed a petition for involuntary insolvency against Consolidated
Mines, Inc.(CMI). CMI allegedly has outstanding loans from the 3 banks
-State Investment House (SIHI) separately instituted an action against CMI for the collection of
sums of money which the latter owed.
-SIHI opposed the 3 banks' petition for involuntary insolvency claiming that the banks are not
resident creditors of CMI in contemplation of the Insolvency Law
-The Insolvency law provides that:
An adjudication of insolvency may be made on the petition of three or more creditors, residents
of the Philippine Islands, whose credits or demands accrued in the Philippine Islands, and the
amount of which credits or demands are in the aggregate not less than one thousand pesos:
Provided, that none of said creditors has become a creditor by assignment, however made,
within thirty days prior to the filing of said petition. Such petition must be filed in the Court of
First Instance of the province or city in which the debtor resides or has his principal place of
business, and must be verified by at least three (3) of the petitioners. . .
Issue: WON foreign banks licensed to do business in the Philippines may be considered
"residents of the Philippine Islands" within the meaning of Sec.20 of the Insolvency Law? YES
Ratio:
-Sec. 123 of the Corporation Code provides for a definition of foreign corporation: one formed,
organized or existing under laws other than those of the Philippines and which laws allow
Filipino citizens and corporations to do business. It is clear that the 3 banks are foreign
corporations doing business in the Philippines through branch offices, agencies, and foreign
currency deposit units
-The Insolvency Law does not contain a definition of "resident" however other statutes
subsequently enacted provide a definition for the term.
-NIRC defines resident foreign corporations as a foreign corporation engaged in trade or
business in the Philippines while nonresident foreign corporations are those not engaged in
trade or business within the Philippines
-Offshore Banking Law states that branches, subsidiaries, affiliation, extension offices or any
other units of corporation or juridical person organized under the laws of any foreign country
operating in the Philippines shall be considered.
-General Banking Act, Republic Act No. 337, places "branches and agencies in the Philippines
of foreign banks . . . (which are) called Philippine branches," in the same category as
"commercial banks, savings associations, mortgage banks, development banks, rural banks,
stock savings and loan associations" (which have been formed and organized under Philippine
laws)
-The Court itself said in one case that "our laws and jurisprudence indicate a purpose to
assimilate foreign corporations duly licensed to do business here to the status of domestic
corporations
-In American law: the residence of a corporation, if it can be said to have a residence, is
necessarily where it exercises corporate functions.
-It is not the grant of license to do business that determines whether a foreign corporation is a
resident or not. What effectively makes such a foreign corporation a resident corporation in the
Philippines is its actually being in the Philippines and licitly doing business here, "locality of
existence" being, the "necessary element in . . . signification" of the term, resident corporation.
-Distinguish: residence (place where the corporation operates and transacts business) from
domicile (the state of the corporation's formation or organization)

17 China Banking Corporation v. CIR, GR Nos. 146749, 10 June 2003

FACTS:

1994: CBC paid approximately 12M as gross receipts tax on its income.
January 1996: Court of Tax Appeals rendered a decision ruling that 20% final withholding tax on
a banks passive interest income does not form part of its taxable gross receipts.
In this regard, CBC filed a formal claim for tax refund or credit of approximately P1M from the
P12M it paid.
Commissioner argued otherwise: The final withholding tax on a banks interest income forms
part of its gross receipts in computing the gross receipts tax because gross receipts mean entire
income or receipt without any deduction.
Court of Tax Appeals rendered a decision partially in favor of CBC. It only allowed for a refund
of approximately P100,000 but denied the remaining amount for insufficiency of evidence.

ISSUE:

Whether the 20% final withholding tax on interest income should form part of CBCs gross
receipts in computing the gross receipts tax on banks (MAIN ISSUE)

HELD: The 20% final withholding tax on interest income should form part of CBCs gross receipts in
computing the gross receipts tax on banks.

Petitioner CBCs argument:

o 01: We have a right to refund on the basis of the Court of Tax Appeals decision in the
case of Asia Banking where it ruled the final withholding tax should not form part of the
banks taxable gross receipts. The Court of Tax Appeals in this case cited Sec. 4 (3) of
Revenue Regulation 12-80 which provided that gross receipts shall be based on all
items actually received. It argued that since withholding taxes are directly remitted to the
government, earmarked by law or regulation, then it can be considered that it was never
actually received by the bank and thus should not form part of the gross receipts.
o 02: Including withheld income tax as part of gross receipts for taxing amounts to double
taxation.
Courts Response:
o 01: Court of Tax Appeal already reversed its ruling. Its interpretation amounts to a tax
exemption when no exemption is provided. Note that tax exemptions should be
expressly provided. CBCs argument will create tax exemptions where none exist.
Further, court defined gross receipts: Absent statutory definition, the ordinary meaning
of the concept shall be applied. The term has been consistently defined as the entire
receipt without any deduction. Deducting any amount from the gross receipts changes
the result, and the meaning, to net receipts. Any deduction from gross receipts is
inconsistent with a law that mandates a tax on gross receipts, unless the law itself
makes an exception.
o 02: There is no double taxation when Section 121 of the Tax Code imposes a gross
receipts tax on interest income that is already subjected to the 20% final withholding tax
under Section 27 of the Tax Code. The gross receipts tax is a business tax under Title V
of the Tax Code, while the final withholding tax is an income tax under Title II of the
Code. There is no double taxation if the law imposes two different taxes on the same
income, business or property.

18 CIR v. Bank of Commerce, GR No. 149636, 8 June 2005

FACTS

In 1994 and 1995, the respondent Bank of Commerce derived passive income in the form of interests
or discounts from its investments in government securities and private commercial papers.
On several occasions during that period, it paid 5% gross receipts tax on its income. Included therein
were the respondent banks passive income from the said investments amounting to P85M+, which
had already been subjected to a final tax of 20%.
Meanwhile, CTA held in the Case ASIA BANK CORP. VS CIR, that the 20% final withholding tax on
interest income from banks does not form part of taxable gross receipts for Gross Receipts Tax (GRT)
purposes. The CTA relied on Sec 4(e) of Revenue Regulations.12-80.
The respondent bank filed an administrative claim for refund with the Commissioner of Internal
Revenue on July 19, 1996. It claimed that it had overpaid its gross receipts tax for 1994 to 1995 by
P853K+ submitted its own computation.
Before the Commissioner could resolve the claim, the respondent bank filed a petition for review with
the CTA
The CIR answered that the alleged refundable/creditable gross receipts taxes were collected and paid
pursuant to law and pertinent BIR implementing rules and regulations; hence, the same are not
refundable. Petitioner must prove that the income from which the refundable/creditable taxes were paid
from, were declared and included in its gross income during the taxable year under review;-That the
alleged excessive payment does automatically warrant the refund/credit
ISSUE:
1. What constitutes gross receipts?
2.
WON the final income tax withheld should form part of the gross receipts of the taxpayer
for GRT purposes
On Issue 1
Actual receipt of interest income is not limited to physical receipt. Actual receipt may either be physical
receipt or constructive receipt. When the depository bank withholds the final tax to pay the tax liability
of the lending bank, there is prior to the withholding a constructive receipt by the lending bank of the
amount withheld. From the amount constructively received by the lending bank, the depository bank
deducts the final withholding tax and remits it to the government for the account of the lending
bank. Thus, the interest income actually received by the lending bank, both physically and
constructively, is the net interest plus the amount withheld as final tax.
The word gross must be used in its plain and ordinary meaning. It is defined as whole, entire, total,
without deduction. A common definition is without deduction. Gross is also defined as taking in
the whole; having no deduction or abatement; whole, total as opposed to a sum consisting of separate
or specified parts. Gross is the antithesis of net. Indeed, in China Banking Corporation v. Court of
Appeals the Court defined the term in this wise:
As commonly understood, the term gross receipts means the entire receipts without any
deduction. Deducting any amount from the gross receipts changes the result, and the meaning, to net
receipts. Any deduction from gross receipts is inconsistent with a law that mandates a tax on gross
receipts, unless the law itself makes an exception.
Issue 2 - Yes
The concept of a withholding tax on income obviously and necessarily implies that the amount of the
tax withheld comes from the income earned by the taxpayer. Since the amount of the tax withheld
constitutes income earned by the taxpayer, then that amount manifestly forms part of the taxpayers
gross receipts. Because the amount withheld belongs to the taxpayer, he can transfer its ownership to
the government in payment of his tax liability. The amount withheld indubitably comes from
income of the taxpayer, and thus forms part of his gross receipts.

19 Ericsson Telecommunications, Inc. v. City of Pasig, GR No. 176667, 22 November 2007

Facts:

Ericsson Telecommunications, Inc. is a corporation with principal office in Pasig City. It is

engaged in the design, engineering, and marketing of telecommunication facilities/system.
The City of Pasig assessed Ericsson with a business tax deficiency based on its gross revenues
as reported in its audited financial statements for the years 1997 and 1998.
Ericsson protested the assessment and claimed that it should be based on gross receipts and
not on gross revenues.
When City of Pasig denied the protest, Ericsson filed a petition for review for the annulment and
cancellation of its deficiency local business taxes.
RTC declared City of Pasig in default for failure to include a notice of hearing in its motion to
dismiss, allowed Ericsson to present evidence ex parte, and subsequently ruled in favor of
Ericsson.
CA overturned RTCs decision and dismissed the petition. It declared that the petition filed in the
RTC should be dismissed as Ericsson failed to show that Atty. Ramos, their Manager for Tax
and Legal Affairs and the person who signed the Verification and Certification of Non-Forum
Shopping, was duly authorized by their Board of Directors.

Issue:

W/N the local business tax, as imposed by the Pasig City Revenue Code and LGC of 1991,
should be based on gross receipts or gross revenues

Held:

Local business tax should be based on gross receipts, and not on gross revenues
City of Pasig assessed deficiency local business taxes on Ericsson based on the latters gross
revenue as reported in its financial statements, arguing that gross receipts is synonymous with
gross earnings/revenue, which, in turn, includes uncollected earnings.
LGC specifically provides that the business tax should be based on gross receipts.
LGC defines gross receipts as :
o Gross Sales or Receipts include the total amount of money or its equivalent
representing the contract price, compensation or service fee, including the amount
charged or materials supplied with the services and the deposits or advance payments
actually or constructively received during the taxable quarter for the services performed
or to be performed for another person excluding discounts if determinable at the time of
sales, sales return, excise tax, and value-added tax (VAT);
In contrast, gross revenue covers money or its equivalent actually or constructively received,
including the value of services rendered or articles sold, exchanged or leased, the payment of
which is yet to be received.
Ericssons audited financial statements reflect income or revenue which accrued to it during the
taxable period although not yet actually or constructively received or paid because it uses the
accrual method of accounting >income is reportable when all the events have occurred that
fix the taxpayers right to receive the income, and the amount can be determined with
reasonable accuracy; the right to receive income, and not the actual receipt, determines when
to include the amount in gross income.
Taxing Ericsson based on its gross revenue will amount to double taxation.
PETITION GRANTED.

20 Chua v. Court of Appeals, GR No. 119255, 9 April 2003

(Sales case where one of the parties tore the deeds of sale into pieces)
Facts:
Valdes-Choy advertised for sale her house and lot in Makati City. Chua responded to the
advertisement and after several meetings, Chua and Valdes-Choy agreed on a purchase price
of P10.8M payable in cash.
On June 30, 1989, Chua paid P100K earnest money evidenced by a receipt.
In the morning of July 13, 1989, Chua secured a PBCom managers check for P480K.
Strangely, after securing the managers check, Chua immediately gave PBCom a verbal stop
payment prder claiming that the check was lost and/or misplaced.
In the afternoon of the same day, Chua and Valdes-Choy met to execute the necessary
documents and arrange the payments. They also signed 2 Deeds of Sale, 1 for the house and
lot and the second for the furnishings, fixtures and movable properties contained in the house.
The parties also computed the capital gains tax amounting to P485, 000.
On 14 July 1989, the parties met again at the office of Valdes-Choy's counsel. Chua handed to
Valdes-Choy the PBCom manager's check for P485,000 so Valdes-Choy could pay the capital
gains tax as she did not have sufficient funds to pay the tax. Valdes-Choy issued a receipt
showing that Chua had a remaining balance of P10,215,000 after deducting the advances made
by Chua.
On the same day, Valdes-Choy, accompanied by Chua, deposited the P485,000.00 manager's
check to her account with Traders Royal Bank. She then purchased a Traders Royal Bank
manager's check for P480,000.00 payable to the Commissioner of Internal Revenue for the
capital gains tax.
It was then also that Chua showed to Valdes-Choy a PBCom Managers check for P10,215,000
representing the balance of the purchase price. Chua, however did not give the check to
Valdes-Choy because the TCT was still registered with Valdes-Choy. This angered ValdesChoy who tore up the deeds of sale, claiming that what Chua required was not part of their
agreement.
Still on the same day, Chua confirmed his stop payment border, however, PBCom assistant VP
Pe, testified that the managers check was nevertheless honored because Chua subsequently
verbally advised the bank that he was lifting the stop-payment order.
On 15 July 1989, Valdes-Choy suggested to her counsel that to break the impasse Chua should
deposit in escrow the P10,215,000.00 balance. Upon such deposit, Valdes-Choy was willing to
cause the issuance of a new TCT in the name of Chua even without receiving the balance of the
purchase price. Valdes-Choy believed this was the only way she could protect herself if the
certificate of title is transferred in the name of the buyer before she is fully paid.
Chua filed a complaint for specific performance against Valdes-Choy. The TC ruled in favor of
Chua.
Valdes-Choy appealed to the CA which reversed the decision of the TC.
o The Court of Appeals did not consider the non-payment of the capital gains tax as failure
by Valdes-Choy to put the papers "in proper order." The Court of Appeals explained that
the payment of the capital gains tax has no bearing on the validity of the Deeds of Sale.
It is only after the deeds are signed and notarized can the final computation and
payment of the capital gains tax be made.
Issue(s):
1.
Contract of sale or contract to sell?
We hold that the agreement between Chua and Valdes-Choy, as evidenced by the Receipt, is a
contract to sell and not a contract of sale

2.
WON the non-payment of the capital gains tax precludes Valdes-Choy from forfeiting the earnest
money.
There is a variance of interpretation on the phrase "all papers are in proper order" as written in
the Receipt. There is no dispute though, that as long as the papers are "in proper order," Valdes-Choy
has the right to forfeit the earnest money if Chua fails to pay the balance before the deadline.
The trial court interpreted the phrase to include payment of the capital gains tax, with the Bureau
of Internal Revenue receipt as proof of payment. The Court of Appeals held otherwise
o The trial court made much fuss in connection with the payment of the capital gains tax, of which
Section 33 of the National Internal Revenue Code of 1977, is the governing provision insofar as its
computation is concerned. The trial court failed to consider Section 34-(a) of the said Code, the last
sentence of which provides, that "[t]he amount realized from the sale or other disposition of property
shall be the sum of money received plus the fair market value of the property (other than money)
received;" and that the computation of the capital gains tax can only be finally assessed by the
Commission on Internal Revenue upon the presentation of the Deeds of Absolute Sale themselves,
without which any premature computation of the capital gains tax becomes of no moment. At any rate,
the computation and payment of the capital gains tax has no bearing insofar as the validity and
effectiveness of the deeds of sale in question are concerned, because it is only after the contracts of
sale are finally executed in due form and have been duly notarized that the final computation of the
capital gains tax can follow as a matter of course.
We see no reason to disturb the ruling of the Court of Appeals.
Customarily, in the absence of a contrary agreement, the submission by an individual seller to
the buyer of the following papers would complete a sale of real estate: (1) owner's duplicate copy of the
Torrens title; (2) signed deed of absolute sale; (3) tax declaration; and (3) latest realty tax receipt. The
buyer can retain the amount for the capital gains tax and pay it upon authority of the seller, or the seller
can pay the tax, depending on the agreement of the parties.
The buyer has more interest in having the capital gains tax paid immediately since this is a prerequisite to the issuance of a new Torrens title in his name. Nevertheless, as far as the government is
concerned, the capital gains tax remains a liability of the seller since it is a tax on the seller's gain from
the sale of the real estate. Payment of the capital gains tax, however, is not a pre-requisite to the
transfer of ownership to the buyer. The transfer of ownership takes effect upon the signing and
notarization of the deed of absolute sale.
Chua had no reason to fear being swindled. Valdes-Choy was prepared to turn-over to him the
owner's duplicate copy of the TCT, the signed Deeds of Sale, the tax declarations, and the latest realty
tax receipt. There was no hindrance to paying the capital gains tax as Chua himself had advanced the
money to pay the same and Valdes-Choy had procured a manager's check payable to the Bureau of
Internal Revenue covering the amount. It was only a matter of time before the capital gains tax would
be paid.

21 Torcuator v. Bernabe, GR No. 134219, 8 June 2005

FACTS
The Salvadors purchased a parcel of land from the Developers of Ayala Alabang with the
following conditions:

(a) that the lot buyer shall deposit with Ayala Corporation a cash bond which shall be refunded
to him if he builds a residence thereon within two (2) years of purchase, otherwise the deposit
shall be forfeited,
(b) architectural plans for any improvement shall be approved by Ayala Corporation, and
(c) no lot may be resold by the buyer unless a residential house has been constructed thereon

They later sold the parcel of land to the spouses Bernabes without building the residential house
but athourized the latter to build one.

Without building the house, the Bernabes contracted to sell the parcel of land to the spouses
Torcuators and since no residential house has been constructed as of yet, they made it appear
that the sale was directly from the Salvadors to the Torcuators and that the latter would have the
obligation to construct a residential house conformably with the conditions.

A case ensued when the consideration was not paid.

The lower courts ruled that the Bernabes and Torcuators entered into the contract with the
intention of circumventing the condition that the lot cannot be transferred without having first
built a residential house.

The CA likewise held that the method they used in making it appear that the sale was directly
from the Salvadors to the Torcuators deprived the government of taxes as each transaction
would have had taxes imposed.

ISSUE
W/N the agreement violated the law as it deprived the government of capital gains tax
RULING

It is wholly irrelevant at this point. Capital gains taxes are only imposed on gains presumed to
have been realized from sales, exchanges or dispositions of property. Having declared that the
contract to sell in this case was aborted by the spouses Torcuators failure to comply with the
twin suspensive conditions of full payment and construction of a residence, the obligation to pay
taxes never arose.

22 CIR v. Philippine Airlines, Inc., GR No. 160528, 9 October 2006

23 Manila International Airport Authority v. City of Pasay, GR No. 163072, 2 April 2009
FACTS:
Petitioner Manila International Airport Authority (MIAA) operates and administers the Ninoy Aquino
International Airport (NAIA) Complex under Executive Order No. 903 (EO 903),3otherwise known as the
Revised Charter of the Manila International Airport Authority, issued by then President Ferdinand E.
Marcos. The NAIA Complex is located along the border between Pasay City and Paraaque City.
MIAA received Final Notices of Real Property Tax Delinquency from the City of Pasay for the taxable
years 1992 to 2001. The Court of Appeals upheld the power of the City of Pasay to impose and collect
realty taxes on the NAIA Pasay properties. MIAA filed a motion for reconsideration, which the Court of
Appeals denied.
On 29 October 2001, MIAA filed with the Court of Appeals a petition for prohibition and injunction with
prayer for preliminary injunction or temporary restraining order. The petition sought to enjoin the City of
Pasay from imposing real property taxes on, levying against, and auctioning for public sale the NAIA
Pasay properties
ISSUE:
1.
Whether the NAIA Pasay properties of MIAA are exempt from real property tax.
2.
Differentiate GOCC from government instrumentality
RULING:
1.
Yes. The Supreme Court held that the Airport Lands and Buildings of MIAA are properties
devoted to public use and thus are properties of public dominion. Properties of public dominion are
owned by the State or the Republic.
2.
To summarize, MIAA is not a government-owned or controlled corporation under Section
2(13) of the Introductory Provisions of the Administrative Code because it is not organized as a
stock or non-stock corporation. Neither is MIAA a government-owned or controlled corporation
under Section 16, Article XII of the 1987 Constitution because MIAA is not required to meet the test of
economic viability. MIAA is a government instrumentality vested with corporate powers and performing
essential public services pursuant to Section 2(10) of the Introductory Provisions of the Administrative
Code. As a government instrumentality, MIAA is not subject to any kind of tax by local governments
under Section 133(o) of the Local Government Code.
The exception to the exemption in Section 234(a) does not apply to MIAA because MIAA is not a
taxable entity under the Local Government Code. Such exception applies only if the beneficial use of
real property owned by the Republic is given to a taxable entity.
The definition of "instrumentality" under Section 2(10) of the Introductory Provisions of the
Administrative Code of 1987 uses the phrase "includes x x x government-owned or controlled
corporations" which means that a government "instrumentality" may or may not be a "governmentowned or controlled corporation." Obviously, the term government "instrumentality" is broader
than the term "government-owned or controlled corporation." Section 2(10) provides:
EC. 2. General Terms Defined. x x x
(10) Instrumentality refers to any agency of the national Government, not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some if not all
corporate powers, administering special funds, and enjoying operational autonomy, usually through a
charter. This term includes regulatory agencies, chartered institutions and government-owned or
controlled corporations.
The term "government-owned or controlled corporation" has a separate definition under Section 2(13)8
of the Introductory Provisions of the Administrative Code of 1987:

SEC. 2. General Terms Defined. x x x

(13) Government-owned or controlled corporation refers to any agency organized as a stock or nonstock corporation, vested with functions relating to public needs whether governmental or proprietary in
nature, and owned by the Government directly or through its instrumentalities either wholly, or, where
applicable as in the case of stock corporations, to the extent of at least fifty-one (51) percent of its
capital stock: Provided, That government-owned or controlled corporations may further be categorized
by the department of Budget, the Civil Service Commission, and the Commission on Audit for the
purpose of the exercise and discharge of their respective powers, functions and responsibilities with
respect to such corporations.
A close scrutiny of the definition of "government-owned or controlled corporation" in Section 2(13) will
show that MIAA would not fall under such definition. MIAA is a government "instrumentality" that
does not qualify as a "government-owned or controlled corporation."

24 Compagnie Financiere Sucres et Denrees v. CIR, GR No. 133834, 28 August 2006

Facts: Compagnie Financiere Sucres et Denrees is a non-resident private corporation organized under
the laws of the Republic of France. Compagnie transferred its 8% equity interest in the Makati ShangriLa Hotel and Resort to Kerry Holdings which is evidenced by a Deed of Sale and Assignment of
Subscription and Rights of Subscription. The following were transferred to Kerry: (a) 107,929 issued
shares of stock valued at P100.00 per share with a total par value of P10,792,900.00; (b) 152,031 with
a par value of P100.00 per share with a total par value of P15,203,100.00; (c) deposits on stock
subscriptions amounting to P43,147,630.28; and (d) petitioners right of subscription. Subsequently,
Compagnie paid, under protest, DST and capital gains tax. Under the belief that the transfer of deposits
on stock subscription is not a sale/assignment of shares of stock which is subject to DST and capital
gains tax, Compagnie filed with the CIR a claim for refund which the latter denied.
Issues: 1. Whether or not the deposit on stock subscription is subject to DST.
2. Whether or not the deposit on stock subscription is subject to capital gains tax.
Held: 1. NO
Since a tax refund is a derogation of the States taxing power then, like tax exemptions, it is
construed in strictissimi juris against the tax payer. In the instant case, Compagnie failed to point any
provision that allows its claim of tax refund. On the contrary, Section 176 of the NIRC provides:
SEC. 176. Stamp tax on sales, agreements to sell, memoranda of sales, deliveries or transfer
of due-bills, certificates of obligation, or shares or certificates of stock. On all sales, or agreements to
sell, or memoranda of sales, or deliveries, or transfer of due-bills, certificates of obligation, or shares or
certificates of stock in any association, company, or corporation, or transfer of such securities by
assignment in blank, or by delivery, or by any paper or agreement, or memorandum or other evidences
of transfer or sale whether entitling the holder in any manner to the benefit of such due bills, certificates
of obligation or stock, or to secure the future payment of money, or for the future transfer of any duebill, certificates of obligation or stock, there shall be collected a documentary stamp tax of fifty centavos
(P1.50) on each two hundred pesos(P200.00), or fractional part thereof, of the par value of such duebill, certificates of obligation or stock: Provided, That only one tax shall be collected on each sale or
transfer of stock or securities from one person to another, regardless of whether or not a certificate of
stock or obligation is issued, indorsed, or delivered in pursuance of such sale or transfer; and Provided,
further, That in case of stock without par value the amount of the documentary stamp tax herein
prescribed shall be equivalent to twenty-five percentum (25%) of the documentary stamp tax paid upon
the original issue of the said stock.
2. NO
Petitioner contends that the assignment of its deposits on stock subscription is not subject to
capital gains tax because there is no gain to speak of. In the Capital Gains Tax Return on Stock
Transaction, which petitioner filed with the Bureau of Internal Revenue, the acquisition cost of the
shares it sold, including the stock subscription isP69,143,630.28. The transfer price to Kerry Holdings,
Ltd. is P70,332,869.92. Obviously, petitioner has a net gain in the amount of P1,189,239.64. As the
CTA aptly ruled, atax on the profit of sale on net capital gain is the very essence of the net capital

gains tax law. To hold otherwise will ineluctably deprive the government of its due and unduly set free
from tax liability persons who profited from said transactions.

25 Vive Eagle Land, Inc. v. Court of Appeals, GR No. 150308, 26 November 2004
How is capital gains tax computed in sales of real property
Facts

The Spouses Flores were the owners of two parcels of land situated along Cubao. On October
10, 1987, the spouses Flores and Tatic Square International Corporation (TATIC) executed an
Agreement to Sell in which the said spouses bound and obliged themselves to sell the properties to
TATIC. The latter then applied for a loan with the Capital Rural Bank of Makati, Inc. (Bank) to finance
its purchase of the said lots.

On April 13, 1988, the Spouses Flores, TATIC, Isidro S. Tobias (who acted as broker), and the
Bank executed a Memorandum of Agreement (MOA) where Tobias, as broker, undertook to pay any
and all the taxes and assessments imposed and/or charged over the lots, including the payment of
capital gains tax; and to secure tax clearances. Tobias also undertook to remove any and all
tenants/occupants.

On the same day, the Spouses Flores executed a deed of absolute sale over the two parcels of
land for the price of P5,700,000.00 in favor of TATIC. The Spouses Flores, thereafter, turned over the
custody of the owner's copy of their titles to the Bank.

Although the torrens titles over the lots were still in the custody of the Bank, TATIC, as vendor,
and petitioner VELI, as vendee, executed a deed of absolute sale on April 14, 1988, in which TATIC
sold the properties to the petitioner.

On November 11, 1988, VELI, as vendor, through its president, and respondent Genuino Ice
Co., Inc., as vendee, executed a deed of absolute sale over the parcel of land.

the respondent, through counsel, wrote petitioner VELI and made the following demands: In
view of the foregoing facts, demand is hereby made upon you to pay to the BIR the capital gains tax
amounting to P285,000.00...
Issue
Whether or not Vive Eagle Land Inc is liable for the Capital Gains tax for the third sale
Held
No, petitioner VELI is not liable for the payment of capital gains tax for the third deed of sale. A
capital gains tax is a final tax assessed on the presumed gain derived by citizens and resident aliens,
as well as estates and trusts, from the sale or exchange of real property. Under the first sale, per the
agreement of the Spouses Flores, TATIC, and Tobias, the said spouses were obliged to pay the capital
gains tax. However, under the deed of absolute sale for the second sale, TATIC was not obliged to pay
the said tax. The Court notes that in answer to the respondent's demand letter, petitioner VELI claimed
that such tax could not be assessed against it or against TATIC for the reason that they are
corporations and, therefore, exempt from the payment of capital gains tax for any sale or exchange or
disposition of property.
It is settled that only laws existing at the time of the execution of a contract are applicable
thereto and not later statutes, unless the latter are specifically intended to have retroactive effect. When
the first and second deeds of absolute sale took place in 1988, the 1977 National Internal Revenue
Code (NIRC), as amended by Batas Pambansa Blg. 37 and Executive Order No. 237 was still in effect.
Under Sections 21(e)and 34(h)of the 1977 NIRC, as amended, the Spouses Flores, as vendors,
were liable for the payment of capital gains tax.
The BIR ruled that Section 34(h) of the Tax Code, as amended by Batas Pambansa Blg. 37 is
explicit that only natural persons or individuals are liable to the final capital gains tax prescribed
therein. that is the reason why in the second sale, neither TATIC nor petitioner VELI paid any capital
gains tax. Similarly, in the third sale, i.e., between petitioner VELI and the respondent, petitioner VELI,
being a corporation, was not obliged to pay the capital gains tax. However, petitioner VELI, as seller,

should have included in its ordinary income tax return, whatever gain or loss it incurred with respect to
the sale of the property in dispute, pursuant to Section 24(a) of the 1977 NIRC, as amended.
NOTE: 1997 NIRC, which requires corporations to pay capital gains tax at rates provided for in
Chapter IV, Section 27 thereof, cannot be applied retroactively. The sale between petitioner VELI and
the respondent occurred in November 11, 1988. At that point in time, it was the 1977 NIRC as
amended, which was in effect. Hence, the applicable law is Section 34(h). Section 24(d) of the 1997
NIRC.

26 CIR v. Burroughs Limited, GR No. L-66653, 19 June 1986

Page 33 of Gruba Notes
Branch Profit Remittance tax
Facts:
1.
Burroughs Limited foreign corporation engaging in trade through a branch office in Makati City
They applied with the Central Bank for authority to remit to its parent company abroad their branch
profit of around Php 7.6M.
It paid 15% branch profit remittance tax (equal to Php 1.1M) and remitted Php 6.5
Claimed that, based from a 1980 BIR ruling that tax base upon which the 15% branch profit
remittance taxis the profit actually remitted abroad and not on the total branch profits out of which the
remittance is to be made, profit remittance tax should have been computed on the basis of the amount
actually remitted (Php 6.5M) and not on the amount before profit remittance tax (Php 7.6M)
They filed a written claim for refund (Php 172thou ) for the overpaid branch profit remittance tax
Filed with CTA for the recovery of the overpaid amount
2.
CTA granted Burroughs Limited tax credit
3.
CIR filed instant petition before SC
Issue:
W/N Burroughs Limited is legally entitled to a refund or tax credit
Held:
Yes.
CIR contends that Burroughs Limited is no longer entitled to a refund because of Memorandum
Circular 8-82 revoking or repealing the BIR ruling on 1980
According to the SC, what is applicable in this case is still the BIR ruling of 1980 because
Burroughs Limited paid the branch profit remittance tax in question on 1979
Memorandum Circular 8-82 was promulgated on March 1982 and cannot be given retroactive
effect
There would be prejudice to Burroughs Limited by retroactive application of the Memorandum
for it will be deprived of a substantial amount of Php 172 000.

27 Bank of America NT & SA v. Court of Appeals, GR Nos. 103092 and 103106, 21 July 1994
(Branch Profit Remittance Tax)
FACTS: Bank of America is a foreign corporation duly licensed to engage in business in the Philippines.
It paid the 15% branch profit remittance tax on profit from its foreign currency deposit unit operations.
The tax was based on net profits after income tax without deducting the amount corresponding to the
15% tax. Thereafter, Bank of America filed a claim for refund with the BIR. Of that portion of its
payment which corresponds to the 15% branch profit remittance tax. It based its claim on Section
24(B)(2)(ii) (Now Section 28(A)(5)) of the NIRC which provides that any profit remitted abroad by a
branch of a foreign corporation to its head office shall be subject to 15% tax. The Bank of America
argues that the 15% branch profit remittance tax should be assessed on the amount actually remitted
or in other words, the 15% profit remittance tax should not form part of the tax base. The CTA upheld
Bank of America in its claim for refund. The CA reversed. Hence, this appeal by Bank of America
ISSUE: Whether the 15% branch profit remittance tax should be assessed on the amount actually
remitted and not on the amount before profit remittance tax?
HELD: There is absolutely nothing in Section 24(b)(2)(ii) (Now Section 28(A)(5)) which indicates that
the 15% tax on branch profit remittance is on the total amount of profits of the branch (not all of which
need be sent or would be ordered remitted abroad). The statute employs "Any profit remitted abroad by
a branch to its head office shall be subject to a tax of fifteen per cent (15%)" without more. And to
our mind, the term "any profit remitted abroad" can only mean such profit as is "forwarded, sent, or
transmitted abroad" as the word "remitted" is Brccommonly and popularly accepted and understood. To
say therefore that the tax on branch profit remittance is imposed and collectedat sourceand necessarily
the tax base should be the amount actually applied for the branch with the Central Bank as profit to be
remitted abroad is to ignore the unmistakable meaning of plain words. In the 15% remittance tax, the
law specifies its own tax base to be on the "profit remitted abroad." There is absolutely nothing
equivocal or uncertain about the language of the provision. The tax is imposed on the amount sent
abroad, and the law (then in force) calls for nothing further. Hence, the Bank of America is entitled to
the refund.

28 CIR v. Wander Philippines, Inc., GR No. L-68375, 15 April 1988

FACTS:
Private respondents Wander Philippines, Inc. (wander) is a domestic corporation organized under
Philippine laws. It is wholly-owned subsidiary of the Glaro S.A. Ltd. (Glaro), a Swiss corporation not
engaged in trade for business in the Philippines.
Wander filed it's witholding tax return for 1975 and 1976 and remitted to its parent company Glaro
dividends from which 35% withholding tax was withheld and paid to the BIR.
In 1977, Wander filed with the Appellate Division of the Internal Revenue a claim for reimbursement,
contending that it is liable only to 15% withholding tax in accordance with sec. 24 (b) (1) of the Tax
code, as amended by PD nos. 369 and 778, and not on the basis of 35% which was withheld ad paid to
and collected by the government.
Wander filed a petition with Court of Tax Appeals who in turn ordered to grant a refund and/or tax
credit. CIR's petition for reconsideration was denied hence the instant petition to the Supreme Court.
Petitioner maintains and argues that it is Glaro the tax payer, and not Wander, the remitter or payor of
the dividend income and a mere withholding agent for and in behalf of the Philippine Government,
which should be legally entitled to receive the refund if any.
ISSUE:
Whether or not Wander is entitled to the preferential rate of 15% withholding tax on dividends
declared and to remitted to its parent corporation.
HELD:
Yes, the dividens should be subject to 15% preferential rate withholding tax.
The Supreme Court noted that during the period in question, Switzerland did not impose any income
tax on dividends received by a Swiss corporation from corporations domiciled in foreign countries. To
the Courts mind, the fact that Switzerland did not impose any tax or the dividends received by [the
Swiss corporation] from the Philippines should be considered as a full satisfaction of the given
condition. Hence, the dividends should be subject to the preferential rate of 15% withholding tax.
Section 24 (b) (1) of the Tax code, as amended by PD 369 and 778, the law involved in this case,
reads:sec. 1. The first paragraph of subsection (b) of section 24 of the NIRC, as amended is hreby
further amended to read as follows:
(b) Tax on foreign corporations - (1) Non resident corporation -- A foreign corporation not engaged in
trade or business in the Philippines, including a foreign life insurance company not engaged in life
insurance business in the Philippines, shall pay a tax equal to 35% of the gross income received during
its taxable year from all sources within the Philippines, as interest (except interest on a foreign loans
which shall be subject to 15% tax), dividends, premiums, annuities, compensation, remuneration for
technical services or otherwise emolument, or other fixed determinable annual, periodical ot casual
gains, profits and income, and capital gains: xxx Provided, still further that on dividends received from a

domestic corporation liable to tax under this chapter, the tax shall be 15% of the dividends received,
which shall be collected and paid as provided in sec 53 (d) of this code, subject to the condition that the
country in which the non-resident foreign corporation is domiciled shall allow a credit against tax due
from the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent
to 20% which represents the difference between the regular tax (35%) on corporation and the tax (15%)
dividends as provided in this section: xxx."
From the above-quoted provision, the dividends received from a domestic corporation liable to tax, the
tax shall be 15% of the dividends received, subject to the condition that the country in which the nonresident foreign corporation is domiciled shall allow a credit against the tax due from the non-resident
foreign corporation taxes deemed to have been paid in the Philippines equivakent to 20% which
represents the difference betqween the regular tax (35%) on corpoorations and the tax (15%) on
dividends.

In the instant case, Switzerland did not impose any tax on the dividends received by Glaro. Accordingly,
Wander claims that full credit is granted and not merely credit equivalent to 20%.

29 CIR v. Procter & Gamble Philippine Manufacturing Corporation, GR No. 66838, 2 December
1991
Topic: Explain the tax sparing rule
Facts:

For 74 and 75 P&G-PH declared dividends payable to is parent company, P&G-US of 24M,
from which dividends of 35% withholding tax was deducted.
Thereafter, P&G-PH filed a claim with CIR for tax refund/credit because pursuant to NIRC it is
only 15% withholding tax.
CTA granted the tax refund because CIR did not act on the petition.
Then CIR appealed saying that P&G-Ph was not the proper party to claim the tax refund but
the parent company.

Issue:
W/N P&G-PH should pay 15% or 35& withholding tax? 15% only.
Ratio:
CIR did not raise the question regarding P&G-PHs capacity to claim the refund in the administrative
level and in the CTA, but only on appeal before the courts.
o This is just a matter of procedure that CIR did not comply with and they should not be
allowed to defeat an otherwise valid claim for refund.
o CIR should have raised it in the administrative level so that P&G-PH could have
produced an authorization letter from P&G-US to file the claim for refund.
Next, substantively: Pursuant to NIRC, the ordinary 35% tax rate applicable to remittances to nonresident corporate stockholders of a Ph corporation, goes down to 15% instead of 35% if the country of
domicile of the foreign corporation shall allow such foreign corporation a tax credit for taxes deemed
paid in the Philippines.
So it is 15% in this case if USA shall allow, not must allow, P&G-US a tax credit for taxes deemed
paid in Ph.
NIRC does not require that the US tax law deem the parent-corporation to have paid the 20% of
dividend tax waived by the Ph.
NIRC only requires that US shall allow P&G-US a deemed paid tax credit in an amount equivalent to
20% waived by the PH.
US did comply with the requirement as seen from their Tax Code.
o US law (Section 901, Tax Code) grants P&G-USA a tax credit for the amount of the
dividend tax actually paid (i.e., withheld) from the dividend remittances to P&G-USA
o b. US law (Section 902, US Tax Code) grants to P&G-USA a "deemed paid' tax credit
Thus P&G-US is deemed to have paid a portion of the Philippine corporate income tax although the
tax was actually paid by its Philippine subsidiary, P&G-Ph.
The intent of the US congress in such a rule was to avoid or reduce double taxation of the same
income stream.

30 Basilan Estates, Inc. v. CIR, GR No. L-22492, 5 September 1967

Q: What is the improperly accumulated earnings tax?
FACTS

Basilan Estates, Inc. is engaged in the coconut industry

In 1954, it filed for its income tax returns for 1953 and paid an income tax of P8,028.
In 1959, the CIR assessed Basilan Estates, Inc., a deficiency income tax of P3.9K for 1953 and
P86k as 25% surtax on unreasonably accumulated profits as of 1953 pursuant to Section 25 of
the Tax Code.
Basilan Estates, Inc. filed before the CTA a petition for review of the CIRs assessment, alleging
o (1) prescription of the period for assessment and collection;
o (2) error in disallowing claimed depreciations, travelling and miscellaneous expenses;
o (3) and error in finding the existence of unreasonably accumulated profits and the
imposition of 25% surtax thereon.
The CTA found that there was no prescription and affirmed the deficiency assessment

ISSUES:
1. W/N the Commissioner's right to collect deficiency income tax has prescribed?
2. W/N the disallowance of items claimed as deductible proper?
3. W/N there have been unreasonably accumulated profits?
a.
If so, should the 25% surtax be imposed on the balance of the entire surplus from 19471953, or only for 1953?
4. W/N the Basilan Estate is exempt from the penalty tax under Republic Act 1823 amending
Section 25 of the Tax Code?
HELD:
1. PRESCRIPTION -- No, the right to collect has not yet prescribed.
a.
The evidence is not clear on this point so there is presumption of regularity in the performance
of official functions. The notice of assessment shows the assessment to have been made on February
26, 1959, well within the five-year period.
2. DEDUCTION -- Yes, the income tax law does not authorize the depreciation of an asset beyond
its acquisition cost. Hence, a deduction over and above such cost cannot be claimed and
allowed.
.
Basilan Estates claimed deductions for the depreciation of its assets up to 1949 on the basis of
their acquisition cost (P36k) but from 1950-1953, computed it based on the reappraised value (P47k).
a.
Hence, CIR pegged the deductible depreciation for 1953 on the same old assets at P36.5k and
disallowed the excess thereof in the amount of P10.5k
3. UNREASONABLY ACCUMULATED PROFITS -- Yes, the petitioner made unreasonable
accumulation of surplus beyond the needs of the business.
.
Provision on surtax on profits unreasonably accumulated - Sec. 25. If any corporation, except
banks, insurance companies, or personal holding companies, whether domestic or foreign, is formed or
availed of for the purpose of preventing the imposition of the tax upon its shareholders or members or
the shareholders or members of another corporation, through the medium of permitting its gains and
profits to accumulate instead of being divided or distributed, there is levied and assessed against such
corporation, for each taxable year, a tax equal to twenty-five per centum of the undistributed portion of
its accumulated profits or surplus which shall be in addition to the tax imposed by section twenty-four,
and shall be computed, collected and paid in the same manner and subject to the same provisions of
law, including penalties, as that tax.
a.
CIR found that petitioner had unreasonably accumulated profits as of 1953 in the amount of
P347K based on the Examiners Report

b.
Petitioner tried to show that the surplus was intended for future projects but such intention did
not appear in their records.
i.
"In order to determine whether profits were accumulated for the reasonable needs of the
business or to avoid the surtax upon shareholders, the controlling intention of the taxpayer is
that which is manifested at the time of the accumulation, not subsequently declared intentions
which are merely the products of after-thought."
c.
Petitioner questions why the examiner covered the period from 1948-1953 when the taxable
year on review was 1953.
.
"In determining whether accumulations of earnings or profits in a particular year are
within the reasonable needs of a corporation, it is neccessary to take into account prior
accumulations, since accumulations prior to the year involved may have been sufficient to
cover the business needs and additional accumulations during the year involved would not
reasonably be necessary."
4. EXEMPTION FROM PENALTY TAX - No
.
The unreasonable accumulation was in 1953. The exemption was enacted only on June 22,
1957 more than three years after the period covered by the assessment.

31 Manila Wine Merchants, Inc. v. CIR, GR No. L-26145, 20 February 1984

Q: What is the improperly accumulated earnings tax? p. 39
Facts

Manila Wine Merchants (MWM) is a domestic corporation principally engaged in the importation
and sale of whisky, wines, liquors and distilled spirits
In 1957, the CIR examined MWMs book of account and found MWM of having unreasonably
accumulated surplus for the years 1947-1957 in excess of the reasonable needs of the business
(such is subject to the 25% surtax imposed by the Tax Code)
The CIR demanded from MWM payment of around P126,000 as 25% surtax and interest on
MWMs unreasonable accumulation of profits and surplus for 1957
o The CIR pointed out that MWM made substantial investments of their profits in unrelated
businesses including the purchase of US Treasury Bills in 1951 amounting to around
P347,000
The CIR said that the accumulated surplus were invested to unrelated business which were
not considered in the immediate needs of MWM such that the 25% surtax be imposed therefrom
MWM claimed that it bought the Treasury Bills to finance their importation, to meet urgent
orders of their local customers and to take care of future expansion including the acquisition of a
lot and construction of their office building and bottling plant
With regard to the US Treasury Bills, the CTA ruled in favor of the CIR, saying that MWMs
purchase of such was in no way related to its business of selling and importing wines, whisky,
liquors and spirits
o The CTA was convinced that the surplus of around P347,000 which was invested in the
Bills was availed of by MWM to prevent the imposition of the surtax upon MWMs
shareholders by permitting its earnings and profits to accumulate beyond the reasonable
needs of business

Issue: W/N the purchase of the US Treasury bills by Manila Wine Merchants can be construed as an
investment to an unrelated business?
Held: YES
The CTA was correct in saying that the purchase of the US Treasury Bills by MWM was in no
way related to its principal business of importing and selling wines, whisky, etc.
To determine the "reasonable needs" of the business in order to justify an accumulation of
earnings, the Courts of the United States have invented the so-called "Immediacy Test" which
construed the words "reasonable needs of the business" to mean the immediate needs of the
business, and it was generally held that if the corporation did not prove an immediate need for
the accumulation of the earnings and profits, the accumulation was not for the reasonable
needs of the business, and the penalty tax would apply.
American cases likewise hold that investment of the earnings and profits of the corporation in
stock or securities of an unrelated business usually indicates an accumulation beyond the
reasonable needs of the business.
In order to determine whether profits are accumulated for the reasonable needs of the business
as to avoid the surtax upon shareholders, the controlling intention of the taxpayer is that which
is manifested at the time of accumulation not subsequently declared intentions which are merely
the product of afterthought. Definiteness of plan coupled with action taken towards its
consummation are essential.
o From 1951 when MWM purchased Bills until 1962 when it finally liquidated the same,
MWM never had the occasion to use the said shares in aiding or financing its
importation.

MWM advanced the argument that the US Treasury Bills were held for a few more years
from 1957, in view of a plan to buy a lot and construct a building of their own; that at that
time (1957), MWM was not yet qualified to own real property in the Philippines, hence it
(MWM) had to wait until sixty percent (60%) of the stocks of the Company would be
owned by Filipino citizens before making definite plans.
These arguments of MWM indicate that it considers the US Treasury Bills not only for
the purpose of aiding or financing its importation but likewise for the purpose of buying a
lot and constructing a building thereon in the near future, but conditioned upon the
completion of the 60% citizenship requirement of stock ownership of the Company in
order to qualify it to purchase and own a lot. The time when the company would be able
to establish itself to meet the said requirement and the decision to pursue the same are
dependent upon various future contingencies.

32 CIR v. Antonio Tuason, Inc., GR No. 85749, 15 May 1989

Q: What is the improperly accumulated earnings tax?, 25% surtax
FACTS:
This is a review of a CTA case which set aside the petitioner Revenue Commissioner's
assessment of P1,151,146.98 as the 25% surtax on the private respondent's unreasonable
accumulation of surplus for the years 1975-1978.
Commissioner of Internal Revenue assessed Antonio Tuason, Inc. for:
o (a)Deficiency income tax for the years 1975,1976 and 1978: P37,491.83
o (b) Deficiency corporate quarterly income tax for the first quarter of 1975: P161.49
o (c) 25% surtax on unreasonable accumulation of surplus for the years 1975-1978:
1,151,146.98.
Tuason Inc. Did not object to items (a) and (b) and paid the same, however it contested the third
item on the ground that the accumulation of surplus profits during the years in question was
solely for the purpose of expanding its business operations as real estate broker.
The Revenue Commissioner issued warrants of distraint and levy to enforce collection of the
total amount originally assessed including the amounts already paid.Tuason Inc. filed a petition
for review in the Court of Tax Appeals which ordered the Commissioner to refrain from enforcing
said warrants of distraint and levy.
In view of the reversal of the Commissioner's decision by the Court of Tax Appeals, the
petitioner appealed to this Court.
ISSUE:
Whether or not Antonio Tuason, Inc. is liable for the 25% surtax on undue accumulation of surplus for
the years 1975 to 1978?
HELD:

YES, Tuason Inc. is liable to pay. The SC held that private respondent failed to overcome
the presumption of correctness of the Commissioner's assessment. The touchstone of
liability is the purpose behind the accumulation of the income and not the consequences
of the accumulation. Thus, if the failure to pay dividends were for the purpose of using
the undistributed earnings and profits for the reasonable needs of the business, that
purpose would not fall within the interdiction of the statute" (portion found in guide
notes)
The company's failure to distribute dividends to its stockholders in 1975-1978 was for reasons
other than the reasonable needs of the business, thereby falling within the interdiction of Section
25 of the Tax Code of 1977.
o The fact that any corporation is a mere holding company shall be prima facie evidence of
a purpose to avoid the tax upon its shareholders or members. (It was proven that
Tuason Inc. was a mere holding or investment company as it did not involve itself in the
development of subdivisions but merely subdivided its own lots and sold them for bigger
profits.)
o Another circumstance supporting that presumption is that 99.99% in value of the
outstanding stock of Antonio Tuason, Inc., is owned by Antonio Tuason himself.
Respondent does not deny that it accumulated surplus profits amounting to P3,263,305.88 for
1975 up to 1978, but it denies that its purpose was to evade payment of the progressive income
tax on such dividends by its stockholders. It claims that such were set aside by the company to
build up sufficient capital for its expansion program. (It was claimed that the money was spent to
build an apartment in Urdaneta but theres a large discrepancy between the market value and
the alleged investment cost) However CIR was able to prove that it did not use up its surplus
profits. Tuason Inc. at the time of the assessment in 1981, had invested in its business

operations only P 773,720 out of its accumulated surplus profits of P3,263,305.88 for 19751978, its remaining accumulated surplus profits of P2,489,858.88 are subject to the 25% surtax.
DISPOSITIVE PORTION:
WHEREFORE, the appealed decision of the Court of Tax Appeals is hereby set aside. The petitioner's
assessment of a 25% surtax against the Antonio Tuason, Inc. is reinstated but only on the latter's
unspent accumulated surplus profits of P2,489,585.88. No costs.

33 Cyanamid Philippines, Inc. v. Court of Appeals, GR No. 108067, 20 January 2000

Q: What is the improperly accumulated earnings tax?
Facts

Cyanamid (organized under PH laws) is a wholly owned subsidiary of American Cyanamid

based in the US
Cyanamid is engaged in the manufacture of pharmaceutical products and chemicals, a
wholesaler of imported finished goods, and an importer/ indentor
CIR sent an assessment letter to Cyanamid and demanded payment of deficiency income tax of
P119,817 for taxable year 1981
Cyanamid protested the assessment, particularly the:
1) 25% Surtax Assessment of P3,774,867.50, (Reason: the profits were retained to increase
Cyanamids working capital and it would be used for reasonable business needs of the
company)
2) 1981 Deficiency Income Assessment of P119,817, and
3) 1981 Deficiency Percentage Assessment of P8,846.72
Cyanamid also contended that it availed Tax Amnesty under EO No. 41 (amnesty from civil and
criminal prosecution granted by law)
The CIR, in a letter to SGV, Cyanamids accountant, refused to allow the cancellation of the
assessment notices and rendered its resolution. In the resolution, the CIR said that although
Cyanamid availed of the tax amnesty under EO No. 41, the amnesty does not apply to
Cyanamid because it only applies to assessments issued before August 21, 1986. It only
applies to assessments issued after the said date.
Cyanamid appealed to the CTA. The parties agreed to enter into a compromise agreement,
which lowered the tax due to P26,577. However, the accumulated surtax remained unsolved.
Cyanamid contended that the surtax for undue accumulation did not apply to it because
Cyanamid was a wholly owned subsidiary of a publicly owned company.

Issue
Whether Cyanamid is liable for the accumulated earnings tax for the year 1981.

Held
Yes, Cyanamid is liable for the accumulated earnings tax.
Under Sec. 25 of the 1977 NIRC, only the following were exempted from the improperly accumulated
earnings tax: banks, non-banks, financial intermediaries, corporation organized primarily, and
authorized by the Central Bank of the Philippines to hold shares of stock of banks, insurance
companies, whether domestic or foreign.
(Note: express mention of one thing, excludes all others)

The provisions discouraged tax avoidance through corporate surplus accumulation. When corporations
do not declare dividends, income taxes are not paid on the undeclared dividends received by the
shareholders. The tax on improper accumulation of surplus is essentially a penalty tax designed to
compel corporations to distribute earnings so that the earnings by the shareholders could be taxed.
34 CIR v. Court of Appeals, GR No. 124043, 14 October 1998
Q: What is the tax consequence of real property owned by exempt corporations?
FACTS:
YMCA, a non-stock, non-profit institution conducting programs beneficial to the public especially the
young people, earned an income of P676,829.80 from leasing out a portion of its premises to small
shop owners, like restaurants and canteen operators, and P44, 249.00 from parking fees collected.
CIR issued an assessment to YMCA for deficiency income tax, expanded withholding taxes on rentals
and wages. YMCA protested but CIR denied its claims.
CTA dismissed CIRs assessment for lack merit saying that the leasing of YMCA to small shop owners
are reasonably incidental to and necessary for the accomplishment of YMCAs objectives. CIR elevated
the case to the Court of Appeals. CA decided in favor of CIR but it later reversed through YMCAs
reconsideration.
ISSUE:
Is the income derived by YMCA through rentals exempt from taxation?
SC RULING:
No.
Section 27 of the NIRC states that the following organizations shall not be taxed in respect to income
received by them as such (g) Civil league or organization not organized for profit but operated
exclusively for the promotion of social welfare (h) Club organized and operated exclusively for
pleasure, recreation, and other non-profitable purposes, no part of the net income of which inures to the
benefit of any private stockholder or member.
However, the last paragraph of Section 27 states that NOTWITHSTANDING THE PROVISION OF
THE PRECEDING PARAGRAPHS, the income of the foregoing organization from any of their
properties or from any of their activities CONDUCTED FOR PROFIT, regardless of the disposition
made of such income, shall be subject to the tax imposed under this Code.
The Court has always applied the doctrine of strict intepretation in construing tax exemptions. The
exemption claimed by the YMCA is expressly disallowed by the very wording of the last paragraph of
Section 27 which mandates that the income of exempt organizations from any of their properties is
subject to tax.
Hence, the CTA committed an error when it said that the rentals were not for profit but merely incidental
to YMCAs operation. This is because the law does not make a distinction. Rental income is taxable
regardless of whence such income is derived.

Additionally, the constitutional provision on tax exemptions on charitable institutions, churches, etc. only
apply to property taxes and not on the institution itself as concurred by Justice Davide and Father
Bernas.
YMCA cannot also claim tax exemption under Article 14, Section 4, par. 3 of the Constitution claiming
that it is a non-stock, non-profit education institution whose revenues are exempt from taxes on its
properties and income. Such bare allegation is insufficient to justify exemption from payment of income
tax. In fact, not a scintilla of evidence was presented to prove such allegations.