G.R. No.

76573 September 14, 1989

MARUBENI CORPORATION (formerly Marubeni Iida, Co., Ltd.), petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX APPEALS, respondents.
Melquiades C. Gutierrez for petitioner.
The Solicitor General for respondents.

FERNAN, C.J.:
Petitioner, Marubeni Corporation, representing itself as a foreign corporation duly organized and
existing under the laws of Japan and duly licensed to engage in business under Philippine laws
with branch office at the 4th Floor, FEEMI Building, Aduana Street, Intramuros, Manila seeks the
reversal of the decision of the Court of Tax Appeals 1 dated February 12, 1986 denying its claim
for refund or tax credit in the amount of P229,424.40 representing alleged overpayment of
branch profit remittance tax withheld from dividends by Atlantic Gulf and Pacific Co. of Manila
(AG&P).
The following facts are undisputed: Marubeni Corporation of Japan has equity investments in
AG&P of Manila. For the first quarter of 1981 ending March 31, AG&P declared and paid cash
dividends to petitioner in the amount of P849,720 and withheld the corresponding 10% final
dividend tax thereon. Similarly, for the third quarter of 1981 ending September 30, AG&P
declared and paid P849,720 as cash dividends to petitioner and withheld the corresponding
10% final dividend tax thereon. 2
AG&P directly remitted the cash dividends to petitioner's head office in Tokyo, Japan, net not
only of the 10% final dividend tax in the amounts of P764,748 for the first and third quarters of
1981, but also of the withheld 15% profit remittance tax based on the remittable amount after
deducting the final withholding tax of 10%. A schedule of dividends declared and paid by AG&P
to its stockholder Marubeni Corporation of Japan, the 10% final intercorporate dividend tax and
the 15% branch profit remittance tax paid thereon, is shown below:

1981

Cash Dividends Paid

10% Dividend Tax

Withheld

Cash Dividend net of

10% Dividend Tax
Withheld

FIRST
QUARTER
(three months
ended
3.31.81) (In
Pesos)

THIRD
QUARTER
(three months
ended
9.30.81)

TOTAL OF
FIRST and
THIRD
quarters

849,720.44

849,720.00

1,699,440.00

84,972.00

84,972.00

169,944.00

764,748.00

764,748.00

1,529,496.00

15% Branch Profit

Remittance Tax
Withheld

114,712.20

114,712.20

229,424.40 3

Net Amount Remitted to

Petitioner

650,035.80

650,035.80

1,300,071.60

The 10% final dividend tax of P84,972 and the 15% branch profit remittance tax of P114,712.20
for the first quarter of 1981 were paid to the Bureau of Internal Revenue by AG&P on April 20,
1981 under Central Bank Receipt No. 6757880. Likewise, the 10% final dividend tax of P84,972
and the 15% branch profit remittance tax of P114,712 for the third quarter of 1981 were paid to
the Bureau of Internal Revenue by AG&P on August 4, 1981 under Central Bank Confirmation
Receipt No. 7905930. 4
Thus, for the first and third quarters of 1981, AG&P as withholding agent paid 15% branch profit
remittance on cash dividends declared and remitted to petitioner at its head office in Tokyo in
the total amount of P229,424.40 on April 20 and August 4, 1981. 5
In a letter dated January 29, 1981, petitioner, through the accounting firm Sycip, Gorres, Velayo
and Company, sought a ruling from the Bureau of Internal Revenue on whether or not the
dividends petitioner received from AG&P are effectively connected with its conduct or business
in the Philippines as to be considered branch profits subject to the 15% profit remittance tax
imposed under Section 24 (b) (2) of the National Internal Revenue Code as amended by
Presidential Decrees Nos. 1705 and 1773.
In reply to petitioner's query, Acting Commissioner Ruben Ancheta ruled:
Pursuant to Section 24 (b) (2) of the Tax Code, as amended, only profits remitted
abroad by a branch office to its head office which are effectively connected with
its trade or business in the Philippines are subject to the 15% profit remittance
tax. To be effectively connected it is not necessary that the income be derived
from the actual operation of taxpayer-corporation's trade or business; it is
sufficient that the income arises from the business activity in which the
corporation is engaged. For example, if a resident foreign corporation is engaged
in the buying and selling of machineries in the Philippines and invests in some
shares of stock on which dividends are subsequently received, the dividends
thus earned are not considered 'effectively connected' with its trade or business
in this country. (Revenue Memorandum Circular No. 55-80).
In the instant case, the dividends received by Marubeni from AG&P are not
income arising from the business activity in which Marubeni is engaged.
Accordingly, said dividends if remitted abroad are not considered branch profits
for purposes of the 15% profit remittance tax imposed by Section 24 (b) (2) of the
Tax Code, as amended . . . 6
Consequently, in a letter dated September 21, 1981 and filed with the Commissioner of Internal
Revenue on September 24, 1981, petitioner claimed for the refund or issuance of a tax credit of
P229,424.40 "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 ... head office
in Tokyo. 7
On June 14, 1982, respondent Commissioner of Internal Revenue denied petitioner's claim for
refund/credit of P229,424.40 on the following grounds:
While it is true that said dividends remitted were not subject to the 15% profit
remittance tax as the same were not income earned by a Philippine Branch of

Marubeni Corporation of Japan; and neither is it subject to the 10%

intercorporate dividend tax, the recipient of the dividends, being a non-resident
stockholder, nevertheless, said dividend income is subject to the 25 % tax
pursuant to Article 10 (2) (b) of the Tax Treaty dated February 13, 1980 between
the Philippines and Japan.
Inasmuch as the cash dividends remitted by AG&P to Marubeni Corporation,
Japan is subject to 25 % tax, and that the taxes withheld of 10 % as
intercorporate dividend tax and 15 % as profit remittance tax totals (sic) 25 %,
the amount refundable offsets the liability, hence, nothing is left to be refunded. 8
Petitioner appealed to the Court of Tax Appeals which affirmed the denial of the refund by the
Commissioner of Internal Revenue in its assailed judgment of February 12, 1986. 9
In support of its rejection of petitioner's claimed refund, respondent Tax Court explained:
Whatever the dialectics employed, no amount of sophistry can ignore the fact
that the dividends in question are income taxable to the Marubeni Corporation of
Tokyo, Japan. The said dividends were distributions made by the Atlantic, Gulf
and Pacific Company of Manila to its shareholder out of its profits on the
investments of the Marubeni Corporation of Japan, a non-resident foreign
corporation. The investments in the Atlantic Gulf & Pacific Company of the
Marubeni Corporation of Japan were directly made by it and the dividends on the
investments were likewise directly remitted to and received by the Marubeni
Corporation of Japan. Petitioner Marubeni Corporation Philippine Branch has no
participation or intervention, directly or indirectly, in the investments and in the
receipt of the dividends. And it appears that the funds invested in the Atlantic Gulf
& Pacific Company did not come out of the funds infused by the Marubeni
Corporation of Japan to the Marubeni Corporation Philippine Branch. As a matter
of fact, the Central Bank of the Philippines, in authorizing the remittance of the
foreign exchange equivalent of (sic) the dividends in question, treated the
Marubeni Corporation of Japan as a non-resident stockholder of the Atlantic Gulf
& Pacific Company based on the supporting documents submitted to it.
Subject to certain exceptions not pertinent hereto, income is taxable to the
person who earned it. Admittedly, the dividends under consideration were earned
by the Marubeni Corporation of Japan, and hence, taxable to the said
corporation. While it is true that the Marubeni Corporation Philippine Branch is
duly licensed to engage in business under Philippine laws, such dividends are
not the income of the Philippine Branch and are not taxable to the said Philippine
branch. We see no significance thereto in the identity concept or principal-agent
relationship theory of petitioner because such dividends are the income of and
taxable to the Japanese corporation in Japan and not to the Philippine branch. 10
Hence, the instant petition for review.
It is the argument of petitioner corporation that following the principal-agent relationship theory,
Marubeni Japan is likewise a resident foreign corporation subject only to the 10 %
intercorporate final tax on dividends received from a domestic corporation in accordance with
Section 24(c) (1) of the Tax Code of 1977 which states:
Dividends received by a domestic or resident foreign corporation liable to tax
under this Code (1) Shall be subject to a final tax of 10% on the total amount
thereof, which shall be collected and paid as provided in Sections 53 and 54 of
this Code ....
Public respondents, however, are of the contrary view that Marubeni, Japan, being a nonresident foreign corporation and not engaged in trade or business in the Philippines, is subject
to tax on income earned from Philippine sources at the rate of 35 % of its gross income under
Section 24 (b) (1) of the same Code which reads:

(b) Tax on foreign corporations (1) Non-resident corporations. A foreign

corporation not engaged in trade or business in the Philippines shall pay a tax
equal to thirty-five per cent of the gross income received during each taxable
year from all sources within the Philippines as ... dividends ....
but expressly made subject to the special rate of 25% under Article 10(2) (b) of the Tax Treaty of
1980 concluded between the Philippines and Japan. 11 Thus:
Article 10 (1) Dividends paid by a company which is a resident of a Contracting
State to a resident of the other Contracting State may be taxed in that other
Contracting State.
(2) However, such dividends may also be taxed in the Contracting State of which
the company paying the dividends is a resident, and according to the laws of that
Contracting State, but if the recipient is the beneficial owner of the dividends the
tax so charged shall not exceed;
(a) . . .
(b) 25 per cent of the gross amount of the dividends in all other cases.
Central to the issue of Marubeni Japan's tax liability on its dividend income from Philippine
sources is therefore the determination of whether it is a resident or a non-resident foreign
corporation under Philippine laws.
Under the Tax Code, a resident foreign corporation is one that is "engaged in trade or business"
within the Philippines. Petitioner contends that precisely because it is engaged in business in
the Philippines through its Philippine branch that it must be considered as a resident foreign
corporation. Petitioner reasons that since the Philippine branch and the Tokyo head office are
one and the same entity, whoever made the investment in AG&P, Manila does not matter at all.
A single corporate entity cannot be both a resident and a non-resident corporation depending on
the nature of the particular transaction involved. Accordingly, whether the dividends are paid
directly to the head office or coursed through its local branch is of no moment for after all, the
head office and the office branch constitute but one corporate entity, the Marubeni Corporation,
which, under both Philippine tax and corporate laws, is a resident foreign corporation because it
is transacting business in the Philippines.
The Solicitor General has adequately refuted petitioner's arguments in this wise:
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 principalagent 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. 12
In other words, the alleged overpaid taxes were incurred for the remittance of dividend income
to the head office in Japan which is a separate and distinct income taxpayer from the branch in
the Philippines. There can be no other logical conclusion considering the undisputed fact that
the investment (totalling 283.260 shares including that of nominee) was made for purposes
peculiarly germane to the conduct of the corporate affairs of Marubeni Japan, but certainly not
of the branch in the Philippines. It is thus clear that petitioner, having made this independent
investment attributable only to the head office, cannot now claim the increments as ordinary
consequences of its trade or business in the Philippines and avail itself of the lower tax rate of
10 %.

But while public respondents correctly concluded that the dividends in dispute were neither
subject to the 15 % profit remittance tax nor to the 10 % intercorporate dividend tax, the
recipient being a non-resident stockholder, they grossly erred in holding that no refund was
forthcoming to the petitioner because the taxes thus withheld totalled the 25 % rate imposed by
the Philippine-Japan Tax Convention pursuant to Article 10 (2) (b).
To simply add the two taxes to arrive at the 25 % tax rate is to disregard a basic rule in taxation
that each tax has a different tax basis. While the tax on dividends is directly levied on the
dividends received, "the tax base upon which the 15 % branch profit remittance tax is imposed
is the profit actually remitted abroad." 13
Public respondents likewise erred in automatically imposing the 25 % rate under Article 10 (2)
(b) of the Tax Treaty as if this were a flat rate. A closer look at the Treaty reveals that the tax
rates fixed by Article 10 are the maximum rates as reflected in the phrase "shall not exceed."
This means that any tax imposable by the contracting state concerned should not exceed the 25
% limitation and that said rate would apply only if the tax imposed by our laws exceeds the
same. In other words, by reason of our bilateral negotiations with Japan, we have agreed to
have our right to tax limited to a certain extent to attain the goals set forth in the Treaty.
Petitioner, being a non-resident foreign corporation with respect to the transaction in question,
the applicable provision of the Tax Code is Section 24 (b) (1) (iii) in conjunction with the
Philippine-Japan Treaty of 1980. Said section provides:
(b) Tax on foreign corporations. (1) Non-resident corporations ... (iii) 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 Section 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 the 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 corporations and the
tax (15 %) on dividends as provided in this Section; ....
Proceeding to apply the above section to the case at bar, petitioner, being a non-resident foreign
corporation, as a general rule, is taxed 35 % of its gross income from all sources within the
Philippines. [Section 24 (b) (1)].
However, a discounted rate of 15% is given to petitioner on dividends received from a domestic
corporation (AG&P) on the condition that its domicile state (Japan) extends in favor of petitioner,
a tax credit of not less than 20 % of the dividends received. This 20 % represents the difference
between the regular tax of 35 % on non-resident foreign corporations which petitioner would
have ordinarily paid, and the 15 % special rate on dividends received from a domestic
corporation.
Consequently, petitioner is entitled to a refund on the transaction in question to be computed as
follows:
Total cash dividend paid ................P1,699,440.00
less 15% under Sec. 24
(b) (1) (iii ) .........................................254,916.00
-----------------Cash dividend net of 15 % tax
due petitioner ...............................P1,444.524.00
less net amount
actually remitted .............................1,300,071.60
------------------Amount to be refunded to petitioner
representing overpayment of

taxes on dividends remitted ..............P 144 452.40

===========
It is readily apparent that the 15 % tax rate imposed on the dividends received by a foreign nonresident stockholder from a domestic corporation under Section 24 (b) (1) (iii) is easily within the
maximum ceiling of 25 % of the gross amount of the dividends as decreed in Article 10 (2) (b) of
the Tax Treaty.
There is one final point that must be settled. Respondent Commissioner of Internal Revenue is
laboring under the impression that the Court of Tax Appeals is covered by Batas Pambansa Blg.
129, otherwise known as the Judiciary Reorganization Act of 1980. He alleges that the instant
petition for review was not perfected in accordance with Batas Pambansa Blg. 129 which
provides that "the period of appeal from final orders, resolutions, awards, judgments, or
decisions of any court in all cases shall be fifteen (15) days counted from the notice of the final
order, resolution, award, judgment or decision appealed from ....
This is completely untenable. The cited BP Blg. 129 does not include the Court of Tax Appeals
which has been created by virtue of a special law, Republic Act No. 1125. Respondent court is
not among those courts specifically mentioned in Section 2 of BP Blg. 129 as falling within its
scope.
Thus, under Section 18 of Republic Act No. 1125, a party adversely affected by an order, ruling
or decision of the Court of Tax Appeals is given thirty (30) days from notice to appeal therefrom.
Otherwise, said order, ruling, or decision shall become final.
Records show that petitioner received notice of the Court of Tax Appeals's decision denying its
claim for refund on April 15, 1986. On the 30th day, or on May 15, 1986 (the last day for appeal),
petitioner filed a motion for reconsideration which respondent court subsequently denied on
November 17, 1986, and notice of which was received by petitioner on November 26, 1986.
Two days later, or on November 28, 1986, petitioner simultaneously filed a notice of appeal with
the Court of Tax Appeals and a petition for review with the Supreme Court. 14 From the
foregoing, it is evident that the instant appeal was perfected well within the 30-day period
provided under R.A. No. 1125, the whole 30-day period to appeal having begun to run again
from notice of the denial of petitioner's motion for reconsideration.
WHEREFORE, the questioned decision of respondent Court of Tax Appeals dated February 12,
1986 which affirmed the denial by respondent Commissioner of Internal Revenue of petitioner
Marubeni Corporation's claim for refund is hereby REVERSED. The Commissioner of Internal
Revenue is ordered to refund or grant as tax credit in favor of petitioner the amount of
P144,452.40 representing overpayment of taxes on dividends received. No costs.
So ordered.

G.R. No. L-65773-74 April 30, 1987

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX
APPEALS, respondents.
Quasha, Asperilla, Ancheta, Pea, Valmonte & Marcos for respondent British Airways.

MELENCIO-HERRERA, J.:
Petitioner Commissioner of Internal Revenue (CIR) seeks a review on certiorari of the joint
Decision of the Court of Tax Appeals (CTA) in CTA Cases Nos. 2373 and 2561, dated 26
January 1983, which set aside petitioner's assessment of deficiency income taxes against
respondent British Overseas Airways Corporation (BOAC) for the fiscal years 1959 to 1967,
1968-69 to 1970-71, respectively, as well as its Resolution of 18 November, 1983 denying
reconsideration.
BOAC is a 100% British Government-owned corporation organized and existing under the laws
of the United Kingdom It is engaged in the international airline business and is a membersignatory of the Interline Air Transport Association (IATA). As such it operates air transportation
service and sells transportation tickets over the routes of the other airline members. During the
periods covered by the disputed assessments, it is admitted that BOAC had no landing rights for
traffic purposes in the Philippines, and was not granted a Certificate of public convenience and
necessity to operate in the Philippines by the Civil Aeronautics Board (CAB), except for a ninemonth period, partly in 1961 and partly in 1962, when it was granted a temporary landing permit
by the CAB. Consequently, it did not carry passengers and/or cargo to or from the Philippines,
although during the period covered by the assessments, it maintained a general sales agent in
the Philippines Wamer Barnes and Company, Ltd., and later Qantas Airways which was
responsible for selling BOAC tickets covering passengers and cargoes. 1
G.R. No. 65773 (CTA Case No. 2373, the First Case)
On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity) assessed BOAC
the aggregate amount of P2,498,358.56 for deficiency income taxes covering the years 1959 to
1963. This was protested by BOAC. Subsequent investigation resulted in the issuance of a new
assessment, dated 16 January 1970 for the years 1959 to 1967 in the amount of P858,307.79.
BOAC paid this new assessment under protest.
On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79, which claim
was denied by the CIR on 16 February 1972. But before said denial, BOAC had already filed a
petition for review with the Tax Court on 27 January 1972, assailing the assessment and praying
for the refund of the amount paid.
G.R. No. 65774 (CTA Case No. 2561, the Second Case)
On 17 November 1971, BOAC was assessed deficiency income taxes, interests, and penalty for
the fiscal years 1968-1969 to 1970-1971 in the aggregate amount of P549,327.43, and the
additional amounts of P1,000.00 and P1,800.00 as compromise penalties for violation of
Section 46 (requiring the filing of corporation returns) penalized under Section 74 of the National
Internal Revenue Code (NIRC).
On 25 November 1971, BOAC requested that the assessment be countermanded and set
aside. In a letter, dated 16 February 1972, however, the CIR not only denied the BOAC request
for refund in the First Case but also re-issued in the Second Case the deficiency income tax
assessment for P534,132.08 for the years 1969 to 1970-71 plus P1,000.00 as compromise
penalty under Section 74 of the Tax Code. BOAC's request for reconsideration was denied by
the CIR on 24 August 1973. This prompted BOAC to file the Second Case before the Tax Court
praying that it be absolved of liability for deficiency income tax for the years 1969 to 1971.
This case was subsequently tried jointly with the First Case.

On 26 January 1983, the Tax Court rendered the assailed joint Decision reversing the CIR. The
Tax Court held that the proceeds of sales of BOAC passage tickets in the Philippines by Warner
Barnes and Company, Ltd., and later by Qantas Airways, during the period in question, do not
constitute BOAC income from Philippine sources "since no service of carriage of passengers or
freight was performed by BOAC within the Philippines" and, therefore, said income is not
subject to Philippine income tax. The CTA position was that income from transportation is
income from services so that the place where services are rendered determines the source.
Thus, in the dispositive portion of its Decision, the Tax Court ordered petitioner to credit BOAC
with the sum of P858,307.79, and to cancel the deficiency income tax assessments against
BOAC in the amount of P534,132.08 for the fiscal years 1968-69 to 1970-71.
Hence, this Petition for Review on certiorari of the Decision of the Tax Court.
The Solicitor General, in representation of the CIR, has aptly defined the issues, thus:
1. Whether or not the revenue derived by private respondent British Overseas
Airways Corporation (BOAC) from sales of tickets in the Philippines for air
transportation, while having no landing rights here, constitute income of BOAC
from Philippine sources, and, accordingly, taxable.
2. Whether or not during the fiscal years in question BOAC s a resident foreign
corporation doing business in the Philippines or has an office or place of
business in the Philippines.
3. In the alternative that private respondent may not be considered a resident
foreign corporation but a non-resident foreign corporation, then it is liable to
Philippine income tax at the rate of thirty-five per cent (35%) of its gross income
received from all sources within the Philippines.
Under Section 20 of the 1977 Tax Code:
(h) the term resident foreign corporation engaged in trade or business within the
Philippines or having an office or place of business therein.
(i) The term "non-resident foreign corporation" applies to a foreign corporation not
engaged in trade or business within the Philippines and not having any office or
place of business therein
It is our considered opinion that BOAC is a resident foreign corporation. 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. 2 "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. 3
BOAC, during the periods covered by the subject - assessments, maintained a general sales
agent in the Philippines, That general sales agent, 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 as prescribed by
Article VI of the Resolution No. 850 of the IATA Agreement." 4 Those activities were in exercise

of the functions which are normally incident to, and are in progressive pursuit of, the purpose
and object 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. 5
Sec. 24. Rates of tax on corporations. ...
(b) Tax on foreign corporations. ...
(2) Resident corporations. A corporation organized, authorized, or existing
under the laws of any foreign country, except a foreign fife insurance company,
engaged in trade or business within the Philippines, shall be taxable as provided
in subsection (a) of this section upon the total net income received in the
preceding taxable year from all sources within the Philippines. (Emphasis
supplied)
Next, we address ourselves to the issue of whether or not the revenue from sales of tickets by
BOAC in the Philippines constitutes income from Philippine sources and, accordingly, taxable
under our income tax laws.
The Tax Code defines "gross income" thus:
"Gross income" includes gains, profits, and income derived from salaries, wages
or compensation for personal service of whatever kind and in whatever form
paid, or from profession, vocations, trades,business, commerce, sales, or
dealings in property, whether real or personal, growing out of the ownership or
use of or interest in such property; also from interests, rents, dividends,
securities, or the transactions of any business carried on for gain or profile, or
gains, profits, and income derived from any source whatever (Sec. 29[3];
Emphasis supplied)
The definition is broad and comprehensive to include proceeds from sales of transport
documents. "The words 'income from any source whatever' disclose a legislative policy to
include all income not expressly exempted within the class of taxable income under our laws."
Income means "cash received or its equivalent"; it is the amount of money coming to a person
within a specific time ...; it means something distinct from principal or capital. For, while capital is
a fund, income is a flow. As used in our income tax law, "income" refers to the flow of wealth. 6
The records show that the Philippine gross income of BOAC for the fiscal years 1968-69 to
1970-71 amounted to P10,428,368 .00. 7
Did such "flow of wealth" come from "sources within the Philippines",
The source of an income is the property, activity or service that produced the income. 8 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. In BOAC's case, the sale of tickets in the
Philippines is the activity that produces the income. The tickets exchanged hands here and
payments for fares were also made here in Philippine currency. The site of the source of
payments is the Philippines. 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.

A transportation ticket is not a mere piece of paper. When issued by a common carrier, it
constitutes the contract between the ticket-holder and the carrier. It gives rise to the obligation of
the purchaser of the ticket to pay the fare and the corresponding obligation of the carrier to
transport the passenger upon the terms and conditions set forth thereon. The ordinary ticket
issued to members of the traveling public in general embraces within its terms all the elements
to constitute it a valid contract, binding upon the parties entering into the relationship. 9
True, Section 37(a) of the Tax Code, which enumerates items of gross income from sources
within the Philippines, namely: (1) interest, (21) dividends, (3) service, (4) rentals and royalties,
(5) sale of real property, and (6) sale of personal property, does not mention income from the
sale of tickets for international transportation. However, that does not render it less an income
from sources within the Philippines. Section 37, by its language, does not intend the
enumeration to be exclusive. It merely directs that the types of income listed therein be treated
as income from sources within the Philippines. A cursory reading of the section will show that it
does not state that it is an all-inclusive enumeration, and that no other kind of income may be so
considered. " 10
BOAC, however, would impress upon this Court that income derived from transportation is
income for services, with the result that the place where the services are rendered determines
the source; and since BOAC's service of transportation is performed outside the Philippines, the
income derived is from sources without the Philippines and, therefore, not taxable under our
income tax laws. The Tax Court upholds that stand in the joint Decision under review.
The absence of flight operations to and from the Philippines is not determinative of the source of
income or the site of income taxation. Admittedly, BOAC was an off-line international airline at
the time pertinent to this case. The test of taxability is the "source"; and the source of an income
is that activity ... which produced the income. 11Unquestionably, the passage documentations in
these cases were sold in the Philippines and the revenue therefrom was derived from a activity
regularly pursued within the Philippines. business a And even if the BOAC tickets sold covered
the "transport of passengers and cargo to and from foreign cities", 12it cannot alter the fact that
income from the sale of tickets was derived from the Philippines. The word "source" conveys
one essential idea, that of origin, and the origin of the income herein is the Philippines. 13
It should be pointed out, however, that the assessments upheld herein apply only to the fiscal
years covered by the questioned deficiency income tax assessments in these cases, or, from
1959 to 1967, 1968-69 to 1970-71. For, pursuant to Presidential Decree No. 69, promulgated on
24 November, 1972, international carriers are now taxed as follows:
... Provided, however, That international carriers shall pay a tax of 2- per cent
on their cross Philippine billings. (Sec. 24[b] [21, Tax Code).
Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a statutory definition of
the term "gross Philippine billings," thus:
... "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. ...
The foregoing provision ensures that international airlines are taxed on their income from
Philippine sources. The 2- % tax on gross Philippine billings is an income tax. If it had been
intended as an excise or percentage tax it would have been place under Title V of the Tax Code
covering Taxes on Business.

Lastly, we find as untenable the BOAC argument that the dismissal for lack of merit by this
Court of the appeal inJAL vs. Commissioner of Internal Revenue (G.R. No. L-30041) on
February 3, 1969, is res judicata to the present case. The ruling by the Tax Court in that case
was to the effect that the mere sale of tickets, unaccompanied by the physical act of carriage of
transportation, does not render the taxpayer therein subject to the common carrier's tax. As
elucidated by the Tax Court, however, the common carrier's tax is an excise tax, being a tax on
the activity of transporting, conveying or removing passengers and cargo from one place to
another. It purports to tax the business of transportation. 14 Being an excise tax, the same can
be levied by the State only when the acts, privileges or businesses are done or performed within
the jurisdiction of the Philippines. The subject matter of the case under consideration is income
tax, a direct tax on the income of persons and other entities "of whatever kind and in whatever
form derived from any source." Since the two cases treat of a different subject matter, the
decision in one cannot be res judicata to the other.
WHEREFORE, the appealed joint Decision of the Court of Tax Appeals is hereby SET ASIDE.
Private respondent, the British Overseas Airways Corporation (BOAC), is hereby ordered to pay
the amount of P534,132.08 as deficiency income tax for the fiscal years 1968-69 to 1970-71
plus 5% surcharge, and 1% monthly interest from April 16, 1972 for a period not to exceed three
(3) years in accordance with the Tax Code. The BOAC claim for refund in the amount of
P858,307.79 is hereby denied. Without costs.
SO ORDERED.
Paras, Gancayco, Padilla, Bidin, Sarmiento and Cortes, JJ., concur.
Fernan, J., took no part.

G.R. No. 108576 January 20, 1999

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
THE COURT OF APPEALS, COURT OF TAX APPEALS and A. SORIANO
CORP., respondents.

MARTINEZ, J.:
Petitioner Commissioner of Internal Revenue (CIR) seeks the reversal of the decision of the
Court of Appeals (CA) 1 which affirmed the ruling of the Court of Tax Appeals (CTA) 2 that private
respondent A. Soriano Corporation's (hereinafter ANSCOR) redemption and exchange of the
stocks of its foreign stockholders cannot be considered as "essentially equivalent to a
distribution of taxable dividends" under, Section 83(b) of the 1939 Internal Revenue Act. 3
The undisputed facts are as follows:
Sometime in the 1930s, Don Andres Soriano, a citizen and resident of the United States, formed
the corporation "A. Soriano Y Cia", predecessor of ANSCOR, with a P1,000,000.00
capitalization divided into 10,000 common shares at a par value of P100/share. ANSCOR is
wholly owned and controlled by the family of Don Andres, who are all non-resident aliens. 4 In
1937, Don Andres subscribed to 4,963 shares of the 5,000 shares originally issued. 5

On September 12, 1945, ANSCOR's authorized capital stock was increased to P2,500,000.00
divided into 25,000 common shares with the same par value of the additional 15,000 shares,
only 10,000 was issued which were all subscribed by Don Andres, after the other stockholders
waived in favor of the former their pre-emptive rights to subscribe to the new issues. 6 This
increased his subscription to 14,963 common shares. 7 A month later, 8 Don Andres transferred
1,250 shares each to his two sons, Jose and Andres, Jr., as their initial investments in
ANSCOR. 9 Both sons are foreigners. 10
By 1947, ANSCOR declared stock dividends. Other stock dividend declarations were made
between 1949 and December 20, 1963. 11 On December 30, 1964 Don Andres died. As of that
date, the records revealed that he has a total shareholdings of 185,154 shares 12 50,495 of
which are original issues and the balance of 134.659 shares as stock dividend
declarations. 13Correspondingly, one-half of that shareholdings or 92,577 14 shares were
transferred to his wife, Doa Carmen Soriano, as her conjugal share. The other half formed part
of his estate. 15
A day after Don Andres died, ANSCOR increased its capital stock to P20M 16 and in 1966 further
increased it to P30M. 17 In the same year (December 1966), stock dividends worth 46,290 and
46,287 shares were respectively received by the Don Andres estate 18 and Doa Carmen from
ANSCOR. Hence, increasing their accumulated shareholdings to 138,867 and
138,864 19 common shares each. 20
On December 28, 1967, Doa Carmen requested a ruling from the United States Internal
Revenue Service (IRS), inquiring if an exchange of common with preferred shares may be
considered as a tax avoidance scheme 21under Section 367 of the 1954 U.S. Revenue Act. 22 By
January 2, 1968, ANSCOR reclassified its existing 300,000 common shares into 150,000
common and 150,000 preferred shares. 23
In a letter-reply dated February 1968, the IRS opined that the exchange is only a recapitalization
scheme and not tax avoidance. 24 Consequently, 25 on March 31, 1968 Doa Carmen
exchanged her whole 138,864 common shares for 138,860 of the newly reclassified preferred
shares. The estate of Don Andres in turn, exchanged 11,140 of its common shares, for the
remaining 11,140 preferred shares, thus reducing its (the estate) common shares to 127,727. 26
On June 30, 1968, pursuant to a Board Resolution, ANSCOR redeemed 28,000 common
shares from the Don Andres' estate. By November 1968, the Board further increased
ANSCOR's capital stock to P75M divided into 150,000 preferred shares and 600,000 common
shares. 27 About a year later, ANSCOR again redeemed 80,000 common shares from the Don
Andres' estate, 28 further reducing the latter's common shareholdings to 19,727. As stated in the
Board Resolutions, ANSCOR's business purpose for both redemptions of stocks is to partially
retire said stocks as treasury shares in order to reduce the company's foreign exchange
remittances in case cash dividends are declared. 29
In 1973, after examining ANSCOR's books of account and records, Revenue examiners issued
a report proposing that ANSCOR be assessed for deficiency withholding tax-at-source, pursuant
to Sections 53 and 54 of the 1939 Revenue Code, 30 for the year 1968 and the second quarter
of 1969 based on the transactions of exchange 31 and redemption of stocks. 31The Bureau of
Internal Revenue (BIR) made the corresponding assessments despite the claim of ANSCOR
that it availed of the tax amnesty under Presidential Decree
(P.D.) 23 32 which were amended by P.D.'s 67 and 157. 33 However, petitioner ruled that the
invoked decrees do not cover Sections 53 and 54 in relation to Article 83(b) of the 1939
Revenue Act under which ANSCOR was assessed. 34ANSCOR's subsequent protest on the
assessments was denied in 1983 by petitioner. 35

Subsequently, ANSCOR filed a petition for review with the CTA assailing the tax assessments
on the redemptions and exchange of stocks. In its decision, the Tax Court reversed petitioner's
ruling, after finding sufficient evidence to overcome the prima facie correctness of the
questioned assessments. 36 In a petition for review the CA as mentioned, affirmed the ruling of
the CTA. 37 Hence, this petition.
The bone of contention is the interpretation and application of Section 83(b) of the 1939
Revenue Act 38 which provides:
Sec. 83. Distribution of dividends or assets by corporations.
(b) Stock dividends A stock dividend representing the transfer of surplus to
capital account shall not be subject to tax. However, if a corporation cancels or
redeems stock issued as a dividend atsuch time and in such manner as to make
the distribution and cancellation or redemption, in whole or in part, essentially
equivalent to the distribution of a taxable dividend, the amount so distributed in
redemption or cancellation of the stock shall be considered as taxable income to
the extent it represents a distribution of earnings or profits accumulated after
March first, nineteen hundred and thirteen. (Emphasis supplied)
Specifically, the issue is whether ANSCOR's redemption of stocks from its stockholder
as well as the exchange of common with preferred shares can be considered as
"essentially equivalent to the distribution of taxable dividend" making the proceeds
thereof taxable under the provisions of the above-quoted law.
Petitioner contends that the exchange transaction a tantamount to "cancellation" under Section
83(b) making the proceeds thereof taxable. It also argues that the Section applies to stock
dividends which is the bulk of stocks that ANSCOR redeemed. Further, petitioner claims that
under the "net effect test," the estate of Don Andres gained from the redemption. Accordingly, it
was the duty of ANSCOR to withhold the tax-at-source arising from the two transactions,
pursuant to Section 53 and 54 of the 1939 Revenue Act. 39
ANSCOR, however, avers that it has no duty to withhold any tax either from the Don Andres
estate or from Doa Carmen based on the two transactions, because the same were done for
legitimate business purposes which are (a) to reduce its foreign exchange remittances in the
event the company would declare cash dividends, 40 and to (b) subsequently "filipinized"
ownership of ANSCOR, as allegedly, envisioned by Don Andres. 41 It likewise invoked the
amnesty provisions of P.D. 67.
We must emphasize that the application of Sec. 83(b) depends on the special factual
circumstances of each case.42 The findings of facts of a special court (CTA) exercising particular
expertise on the subject of tax, generally binds this Court, 43 considering that it is substantially
similar to the findings of the CA which is the final arbiter of questions of facts. 44 The issue in this
case does not only deal with facts but whether the law applies to a particular set of facts.
Moreover, this Court is not necessarily bound by the lower courts' conclusions of law drawn from
such facts. 45
AMNESTY:
We will deal first with the issue of tax amnesty. Section 1 of P.D. 67 46 provides:
1. In all cases of voluntary disclosures of previously untaxed income and/or
wealth such as earnings, receipts, gifts, bequests or any other acquisitions from
any source whatsoever which are taxable under the National Internal Revenue
Code, as amended, realized here or abroad by any taxpayer, natural or judicial;

the collection of all internal revenue taxes including the increments or penalties
or account of non-payment as well as all civil, criminal or administrative liabilities
arising from or incident to such disclosures under the National Internal Revenue
Code, the Revised Penal Code, the Anti-Graft and Corrupt Practices Act, the
Revised Administrative Code, the Civil Service laws and regulations, laws and
regulations on Immigration and Deportation, or any other applicable law or
proclamation, are hereby condoned and, in lieu thereof, a tax of ten (10%) per
centum on such previously untaxed income or wealth, is hereby imposed, subject
to the following conditions: (conditions omitted) [Emphasis supplied].
The decree condones "the collection of all internal revenue taxes including the
increments or penalties or account of non-payment as well as all civil, criminal or
administrative liable arising from or incident to" (voluntary) disclosures under the NIRC of
previously untaxed income and/or wealth "realized here or abroad by any taxpayer,
natural or juridical."
May the withholding agent, in such capacity, be deemed a taxpayer for it to avail of the
amnesty? An income taxpayer covers all persons who derive taxable income. 47 ANSCOR was
assessed by petitioner for deficiency withholding tax under Section 53 and 54 of the 1939 Code.
As such, it is being held liable in its capacity as a withholding agent and not its personality as a
taxpayer.
In the operation of the withholding tax system, the withholding agent is the payor, a separate
entity acting no more than an agent of the government for the collection of the tax 48 in order to
ensure its payments;49 the payer is the taxpayer he is the person subject to tax impose by
law; 50 and the payee is the taxing authority. 51 In other words, the withholding agent is merely a
tax collector, not a taxpayer. Under the withholding system, however, the agent-payor becomes
a payee by fiction of law. His (agent) liability is direct and independent from the
taxpayer, 52 because the income tax is still impose on and due from the latter. The agent is not
liable for the tax as no wealth flowed into him he earned no income. The Tax Code only
makes the agent personally liable for the tax 53arising from the breach of its legal duty to
withhold as distinguish from its duty to pay tax since:
the government's cause of action against the withholding is not for the collection
of income tax, but for the enforcement of the withholding provision of Section 53
of the Tax Code, compliance with which is imposed on the withholding agent and
not upon the taxpayer. 54
Not being a taxpayer, a withholding agent, like ANSCOR in this transaction is not
protected by the amnesty under the decree.
Codal provisions on withholding tax are mandatory and must be complied with by the
withholding agent. 55 The taxpayer should not answer for the non-performance by the
withholding agent of its legal duty to withhold unless there is collusion or bad faith. The former
could not be deemed to have evaded the tax had the withholding agent performed its duty. This
could be the situation for which the amnesty decree was intended. Thus, to curtail tax evasion
and give tax evaders a chance to reform, 56 it was deemed administratively feasible to grant tax
amnesty in certain instances. In addition, a "tax amnesty, much like a tax exemption, is never
favored nor presumed in law and if granted by a statute, the term of the amnesty like that of a
tax exemption must be construed strictly against the taxpayer and liberally in favor of the taxing
authority. 57 The rule on strictissimi juris equally applies. 58 So that, any doubt in the application
of an amnesty law/decree should be resolved in favor of the taxing authority.

Furthermore, ANSCOR's claim of amnesty cannot prosper. The implementing

rules of P.D. 370 which expanded amnesty on previously untaxed income under
P.D. 23 is very explicit, to wit:
Sec. 4. Cases not covered by amnesty. The following cases are not covered
by the amnesty subject of these regulations:
xxx xxx xxx
(2) Tax liabilities with or without assessments, on withholding tax at source
provided under Section 53 and 54 of the National Internal Revenue Code, as
amended; 59
ANSCOR was assessed under Sections 53 and 54 of the 1939 Tax Code. Thus, by
specific provision of law, it is not covered by the amnesty.
TAX ON STOCK DIVIDENDS
General Rule
Sec. 83(b) of the 1939 NIRC was taken from the Section 115(g)(1) of the U.S. Revenue Code of
1928. 60 It laid down the general rule known as the proportionate test 61 wherein stock dividends
once issued form part of the capital and, thus, subject to income tax. 62 Specifically, the general
rule states that:
A stock dividend representing the transfer of surplus to capital account shall not
be subject to tax.
Having been derived from a foreign law, resort to the jurisprudence of its origin may shed light.
Under the US Revenue Code, this provision originally referred to "stock dividends" only, without
any exception. Stock dividends, strictly speaking, represent capital and do not constitute income
to its
recipient. 63 So that the mere issuance thereof is not yet subject to income tax 64 as they are
nothing but an "enrichment through increase in value of capital
investment." 65 As capital, the stock dividends postpone the realization of profits because the
"fund represented by the new stock has been transferred from surplus to capital and no longer
available for actual distribution." 66 Income in tax law is "an amount of money coming to a person
within a specified time, whether as payment for services, interest, or profit from investment." 67 It
means cash or its equivalent. 68 It is gain derived and severed from capital, 69 from labor or from
both combined 70 so that to tax a stock dividend would be to tax a capital increase rather than
the income. 71 In a loose sense, stock dividends issued by the corporation, are considered
unrealized gain, and cannot be subjected to income tax until that gain has been realized. Before
the realization, stock dividends are nothing but a representation of an interest in the corporate
properties. 72 As capital, it is not yet subject to income tax. It should be noted that capital and
income are different. Capital is wealth or fund; whereas income is profit or gain or the flow of
wealth.73 The determining factor for the imposition of income tax is whether any gain or profit
was derived from a transaction. 74
The Exception
However, if a corporation cancels or redeems stock issued as a dividend at such
time and in such manner as to make the distribution and cancellation or
redemption, in whole or in part, essentially equivalent to the distribution of
a taxable dividend, the amount so distributed in redemption or cancellation of the
stock shall be considered as taxable income to the extent it represents a

distribution of earnings or profits accumulated after March first, nineteen hundred

and thirteen. (Emphasis supplied).
In a response to the ruling of the American Supreme Court in the case of Eisner v.
Macomber 75 (that pro ratastock dividends are not taxable income), the exempting clause above
quoted was added because provision corporation found a loophole in the original provision.
They resorted to devious means to circumvent the law and evade the tax. Corporate earnings
would be distributed under the guise of its initial capitalization by declaring the stock dividends
previously issued and later redeem said dividends by paying cash to the stockholder. This
process of issuance-redemption amounts to a distribution of taxable cash dividends which was
lust delayed so as to escape the tax. It becomes a convenient technical strategy to avoid the
effects of taxation.
Thus, to plug the loophole the exempting clause was added. It provides that the redemption
or cancellation of stock dividends, depending on the "time" and "manner" it was made, is
essentially equivalent to a distribution of taxable dividends," making the proceeds thereof
"taxable income" "to the extent it represents profits". The exception was designed to prevent the
issuance and cancellation or redemption of stock dividends, which is fundamentally not taxable,
from being made use of as a device for the actual distribution of cash dividends, which is
taxable. 76 Thus,
the provision had the obvious purpose of preventing a corporation from avoiding
dividend tax treatment by distributing earnings to its shareholders in two
transactions a pro rata stock dividend followed by a pro rata redemption
that would have the same economic consequences as a simple dividend. 77
Although redemption and cancellation are generally considered capital transactions, as
such. they are not subject to tax. However, it does not necessarily mean that a
shareholder may not realize a taxable gain from such transactions. 78 Simply put,
depending on the circumstances, the proceeds of redemption of stock dividends are
essentially distribution of cash dividends, which when paid becomes the absolute
property of the stockholder. Thereafter, the latter becomes the exclusive owner thereof
and can exercise the freedom of choice. 79Having realized gain from that redemption, the
income earner cannot escape income tax. 80
As qualified by the phrase "such time and in such manner," the exception was not intended to
characterize as taxable dividend every distribution of earnings arising from the redemption of
stock dividend. 81 So that, whether the amount distributed in the redemption should be treated
as the equivalent of a "taxable dividend" is a question of fact, 82 which is determinable on "the
basis of the particular facts of the transaction in question. 83 No decisive test can be used to
determine the application of the exemption under Section 83(b). The use of the words "such
manner" and "essentially equivalent" negative any idea that a weighted formula can resolve a
crucial issue Should the distribution be treated as taxable dividend. 84 On this aspect,
American courts developed certain recognized criteria, which includes the following: 85
1) the presence or absence of real business purpose,
2) the amount of earnings and profits available for the declaration
of a regular dividends and the corporation's past record with
respect to the declaration of dividends,
3) the effect of the distribution, as compared with the declaration
of regular dividend,
4) the lapse of time between issuance and redemption, 86

5) the presence of a substantial surplus 87 and a generous supply

of cash which invites suspicion as does a meager policy in relation
both to current earnings and accumulated surplus, 88
REDEMPTION AND CANCELLATION
For the exempting clause of Section, 83(b) to apply, it is indispensable that: (a) there is
redemption or cancellation; (b) the transaction involves stock dividends and (c) the "time
and manner" of the transaction makes it "essentially equivalent to a distribution of
taxable dividends." Of these, the most important is the third.
Redemption is repurchase, a reacquisition of stock by a corporation which issued the stock 89 in
exchange for property, whether or not the acquired stock is cancelled, retired or held in the
treasury.90 Essentially, the corporation gets back some of its stock, distributes cash or property
to the shareholder in payment for the stock, and continues in business as before. The
redemption of stock dividends previously issued is used as a veil for the constructive distribution
of cash dividends. In the instant case, there is no dispute that ANSCOR redeemed shares of
stocks from a stockholder (Don Andres) twice (28,000 and 80,000 common shares). But where
did the shares redeemed come from? If its source is the original capital subscriptions upon
establishment of the corporation or from initial capital investment in an existing enterprise, its
redemption to the concurrent value of acquisition may not invite the application of Sec. 83(b)
under the 1939 Tax Code, as it is not income but a mere return of capital. On the contrary, if the
redeemed shares are from stock dividend declarations other than as initial capital investment,
the proceeds of the redemption is additional wealth, for it is not merely a return of capital but a
gain thereon.
It is not the stock dividends but the proceeds of its redemption that may be deemed as taxable
dividends. Here, it is undisputed that at the time of the last redemption, the original common
shares owned by the estate were only 25,247.5 91 This means that from the total of 108,000
shares redeemed from the estate, the balance of 82,752.5 (108,000 less 25,247.5) must have
come from stock dividends. Besides, 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 92such as stock dividends. The capital cannot be distributed in the form of
redemption of stock dividends without violating the trust fund doctrine wherein the capital
stock, property and other assets of the corporation are regarded as equity in trust for the
payment of the corporate creditors. 93 Once capital, it is always capital. 94 That doctrine was
intended for the protection of corporate creditors. 95
With respect to the third requisite, ANSCOR redeemed stock dividends issued just 2 to 3 years
earlier. The time alone that lapsed from the issuance to the redemption is not a sufficient
indicator to determine taxability. It is a must to consider the factual circumstances as to the
manner of both the issuance and the redemption. The "time" element is a factor to show a
device to evade tax and the scheme of cancelling or redeeming the same shares is a method
usually adopted to accomplish the end sought. 96 Was this transaction used as a "continuing
plan," "device" or "artifice" to evade payment of tax? It is necessary to determine the "net effect"
of the transaction between the shareholder-income taxpayer and the acquiring (redeeming)
corporation. 97 The "net effect" test is not evidence or testimony to be considered; it is rather an
inference to be drawn or a conclusion to be reached. 98 It is also important to know whether the
issuance of stock dividends was dictated by legitimate business reasons, the presence of which
might negate a tax evasion plan. 99
The issuance of stock dividends and its subsequent redemption must be separate, distinct, and
not related, for the redemption to be considered a legitimate tax scheme. 100 Redemption cannot

be used as a cloak to distribute corporate earnings. 101 Otherwise, the apparent intention to
avoid tax becomes doubtful as the intention to evade becomes manifest. It has been ruled that:
[A]n operation with no business or corporate purpose is a mere devise which
put on the form of a corporate reorganization as a disguise for concealing its real
character, and the sole object and accomplishment of which was the
consummation of a preconceived plan, not to reorganize a business or any part
of a business, but to transfer a parcel of corporate shares to a stockholder.102
Depending on each case, the exempting provision of Sec. 83(b) of the 1939 Code may not be
applicable if the redeemed shares were issued with bona fide business purpose, 103 which is
judged after each and every step of the transaction have been considered and the whole
transaction does not amount to a tax evasion scheme.
ANSCOR invoked two reasons to justify the redemptions (1) the alleged "filipinization"
program and (2) the reduction of foreign exchange remittances in case cash dividends are
declared. The Court is not concerned with the wisdom of these purposes but on their relevance
to the whole transaction which can be inferred from the outcome thereof. Again, it is the "net
effect rather than the motives and plans of the taxpayer or his corporation"104 that is the
fundamental guide in administering Sec. 83(b). This tax provision is aimed at the result. 105 It
also applies even if at the time of the issuance of the stock dividend, there was no intention to
redeem it as a means of distributing profit or avoiding tax on dividends. 106 The existence of
legitimate business purposes in support of the redemption of stock dividends is immaterial in
income taxation. It has no relevance in determining "dividend equivalence". 107 Such purposes
may be material only upon the issuance of the stock dividends. The test of taxability under the
exempting clause, when it provides "such time and manner" as would make the redemption
"essentially equivalent to the distribution of a taxable dividend", is whether the redemption
resulted into a flow of wealth. If no wealth is realized from the redemption, there may not be a
dividend equivalence treatment. In the metaphor of Eisner v. Macomber, income is not deemed
"realize" until the fruit has fallen or been plucked from the tree.
The three elements in the imposition of income tax are: (1) there must be gain or and profit, (2)
that the gain or profit is realized or received, actually or constructively, 108 and (3) it is not
exempted by law or treaty from income tax. Any business purpose as to why or how the income
was earned by the taxpayer is not a requirement. Income tax is assessed on income received
from any property, activity or service that produces the income because the Tax Code stands as
an indifferent neutral party on the matter of where income comes
from. 109
As stated above, the test of taxability under the exempting clause of Section 83(b) is, whether
income was realized through the redemption of stock dividends. The redemption converts into
money the stock dividends which become a realized profit or gain and consequently, the
stockholder's separate property. 110 Profits derived from the capital invested cannot escape
income tax. As realized income, the proceeds of the redeemed stock dividends can be reached
by income taxation regardless of the existence of any business purpose for the redemption.
Otherwise, to rule that the said proceeds are exempt from income tax when the redemption is
supported by legitimate business reasons would defeat the very purpose of imposing tax on
income. Such argument would open the door for income earners not to pay tax so long as the
person from whom the income was derived has legitimate business reasons. In other words, the
payment of tax under the exempting clause of Section 83(b) would be made to depend not on
the income of the taxpayer, but on the business purposes of a third party (the corporation
herein) from whom the income was earned. This is absurd, illogical and impractical considering
that the Bureau of Internal Revenue (BIR) would be pestered with instances in determining the

legitimacy of business reasons that every income earner may interposed. It is not
administratively feasible and cannot therefore be allowed.
The ruling in the American cases cited and relied upon by ANSCOR that "the redeemed shares
are the equivalent of dividend only if the shares were not issued for genuine business
purposes", 111 or the "redeemed shares have been issued by a corporation bona fide" 112 bears
no relevance in determining the non-taxability of the proceeds of redemption ANSCOR, relying
heavily and applying said cases, argued that so long as the redemption is supported by valid
corporate purposes the proceeds are not subject to tax. 113 The adoption by the courts
below 114 of such argument is misleading if not misplaced. A review of the cited American cases
shows that the presence or absence of "genuine business purposes" may be material with
respect to the issuance or declaration of stock dividends but not on its subsequent redemption.
The issuance and the redemption of stocks are two different transactions. Although the
existence of legitimate corporate purposes may justify a corporation's acquisition of its own
shares under Section 41 of the Corporation Code, 115such purposes cannot excuse the
stockholder from the effects of taxation arising from the redemption. If the issuance of stock
dividends is part of a tax evasion plan and thus, without legitimate business reasons, the
redemption becomes suspicious which exempting clause. The substance of the whole
transaction, not its form, usually controls the tax consequences. 116
The two purposes invoked by ANSCOR, under the facts of this case are no excuse for its tax
liability. First, the alleged "filipinization" plan cannot be considered legitimate as it was not
implemented until the BIR started making assessments on the proceeds of the redemption.
Such corporate plan was not stated in nor supported by any Board Resolution but a mere
afterthought interposed by the counsel of ANSCOR. Being a separate entity, the corporation can
act only through its Board of Directors. 117 The Board Resolutions authorizing the redemptions
state only one purpose reduction of foreign exchange remittances in case cash dividends are
declared. Not even this purpose can be given credence. Records show that despite the
existence of enormous corporate profits no cash dividend was ever declared by ANSCOR from
1945 until the BIR started making assessments in the early 1970's. Although a corporation
under certain exceptions, has the prerogative when to issue dividends, yet when no cash
dividends was issued for about three decades, this circumstance negates the legitimacy of
ANSCOR's alleged purposes. Moreover, to issue stock dividends is to increase the
shareholdings of ANSCOR's foreign stockholders contrary to its "filipinization" plan. This would
also increase rather than reduce their need for foreign exchange remittances in case of cash
dividend declaration, considering that ANSCOR is a family corporation where the majority
shares at the time of redemptions were held by Don Andres' foreign heirs.
Secondly, assuming arguendo, that those business purposes are legitimate, the same cannot
be a valid excuse for the imposition of tax. Otherwise, the taxpayer's liability to pay income tax
would be made to depend upon a third person who did not earn the income being taxed.
Furthermore, even if the said purposes support the redemption and justify the issuance of stock
dividends, the same has no bearing whatsoever on the imposition of the tax herein assessed
because the proceeds of the redemption are deemed taxable dividends since it was shown that
income was generated therefrom.
Thirdly, ANSCOR argued that to treat as "taxable dividend" the proceeds of the redeemed stock
dividends would be to impose on such stock an undisclosed lien and would be extremely unfair
to intervening purchase, i.e. those who buys the stock dividends after their issuance. 118 Such
argument, however, bears no relevance in this case as no intervening buyer is involved. And
even if there is an intervening buyer, it is necessary to look into the factual milieu of the case if
income was realized from the transaction. Again, we reiterate that the dividend equivalence test
depends on such "time and manner" of the transaction and its net effect. The undisclosed
lien 119 may be unfair to a subsequent stock buyer who has no capital interest in the company.

But the unfairness may not be true to an original subscriber like Don Andres, who holds stock
dividends as gains from his investments. The subsequent buyer who buys stock dividends is
investing capital. It just so happen that what he bought is stock dividends. The effect of its (stock
dividends) redemption from that subsequent buyer is merely to return his capital subscription,
which is income if redeemed from the original subscriber.
After considering the manner and the circumstances by which the issuance and redemption of
stock dividends were made, there is no other conclusion but that the proceeds thereof are
essentially considered equivalent to a distribution of taxable dividends. As "taxable dividend"
under Section 83(b), it is part of the "entire income" subject to tax under Section 22 in relation to
Section 21 120 of the 1939 Code. Moreover, under Section 29(a) of said Code, dividends are
included in "gross income". As income, it is subject to income tax which is required to be
withheld at source. The 1997 Tax Code may have altered the situation but it does not change
this disposition.
EXCHANGE OF COMMON WITH PREFERRED SHARES 121
Exchange is an act of taking or giving one thing for another involving 122 reciprocal
transfer 123 and is generally considered as a taxable transaction. The exchange of common
stocks with preferred stocks, or preferred for common or a combination of either for both, may
not produce a recognized gain or loss, so long as the provisions of Section 83(b) is not
applicable. This is true in a trade between two (2) persons as well as a trade between a
stockholder and a corporation. In general, this trade must be parts of merger, transfer to
controlled corporation, corporate acquisitions or corporate reorganizations. No taxable gain or
loss may be recognized on exchange of property, stock or securities related to
reorganizations. 124
Both the Tax Court and the Court of Appeals found that ANSCOR reclassified its shares into
common and preferred, and that parts of the common shares of the Don Andres estate and all
of Doa Carmen's shares were exchanged for the whole 150.000 preferred shares. Thereafter,
both the Don Andres estate and Doa Carmen remained as corporate subscribers except that
their subscriptions now include preferred shares. There was no change in their proportional
interest after the exchange. There was no cash flow. Both stocks had the same par value.
Under the facts herein, any difference in their market value would be immaterial at the time of
exchange because no income is yet realized it was a mere corporate paper transaction. It
would have been different, if the exchange transaction resulted into a flow of wealth, in which
case income tax may be imposed. 125
Reclassification of shares does not always bring any substantial alteration in the subscriber's
proportional interest. But the exchange is different there would be a shifting of the balance of
stock features, like priority in dividend declarations or absence of voting rights. Yet neither the
reclassification nor exchange per se, yields realize income for tax purposes. A common stock
represents the residual ownership interest in the corporation. It is a basic class of stock
ordinarily and usually issued without extraordinary rights or privileges and entitles the
shareholder to a pro rata division of profits. 126 Preferred stocks are those which entitle the
shareholder to some priority on dividends and asset distribution. 127
Both shares are part of the corporation's capital stock. Both stockholders are no different from
ordinary investors who take on the same investment risks. Preferred and common shareholders
participate in the same venture, willing to share in the profits and losses of the
enterprise. 128 Moreover, under the doctrine of equality of shares all stocks issued by the
corporation are presumed equal with the same privileges and liabilities, provided that the
Articles of Incorporation is silent on such differences. 129

In this case, the exchange of shares, without more, produces no realized income to the
subscriber. There is only a modification of the subscriber's rights and privileges which is not a
flow of wealth for tax purposes. The issue of taxable dividend may arise only once a subscriber
disposes of his entire interest and not when there is still maintenance of proprietary interest. 130
WHEREFORE, premises considered, the decision of the Court of Appeals is MODIFIED in that
ANSCOR's redemption of 82,752.5 stock dividends is herein considered as essentially
equivalent to a distribution of taxable dividends for which it is LIABLE for the withholding tax-atsource. The decision is AFFIRMED in all other respects.
SO ORDERED.
Davide, Jr., C.J., Melo, Kapunan and Pardo, JJ., concur.

G.R. No. 172231

February 12, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
ISABELA CULTURAL CORPORATION, Respondent.
DECISION
YNARES-SANTIAGO, J.:
Petitioner Commissioner of Internal Revenue (CIR) assails the September 30, 2005 Decision1 of
the Court of Appeals in CA-G.R. SP No. 78426 affirming the February 26, 2003 Decision2 of the
Court of Tax Appeals (CTA) in CTA Case No. 5211, which cancelled and set aside the
Assessment Notices for deficiency income tax and expanded withholding tax issued by the
Bureau of Internal Revenue (BIR) against respondent Isabela Cultural Corporation (ICC).
The facts show that on February 23, 1990, ICC, a domestic corporation, received from the BIR
Assessment Notice No. FAS-1-86-90-000680 for deficiency income tax in the amount of
P333,196.86, and Assessment Notice No. FAS-1-86-90-000681 for deficiency expanded
withholding tax in the amount of P4,897.79, inclusive of surcharges and interest, both for the
taxable year 1986.
The deficiency income tax of P333,196.86, arose from:
(1) The BIRs disallowance of ICCs claimed expense deductions for professional and
security services billed to and paid by ICC in 1986, to wit:
(a) Expenses for the auditing services of SGV & Co.,3 for the year ending
December 31, 1985;4
(b) Expenses for the legal services [inclusive of retainer fees] of the law firm
Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson for the years 1984
and 1985.5
(c) Expense for security services of El Tigre Security & Investigation Agency for
the months of April and May 1986.6

(2) The alleged understatement of ICCs interest income on the three promissory notes
due from Realty Investment, Inc.
The deficiency expanded withholding tax of P4,897.79 (inclusive of interest and surcharge) was
allegedly due to the failure of ICC to withhold 1% expanded withholding tax on its claimed
P244,890.00 deduction for security services.7
On March 23, 1990, ICC sought a reconsideration of the subject assessments. On February 9,
1995, however, it received a final notice before seizure demanding payment of the amounts
stated in the said notices. Hence, it brought the case to the CTA which held that the petition is
premature because the final notice of assessment cannot be considered as a final decision
appealable to the tax court. This was reversed by the Court of Appeals holding that a demand
letter of the BIR reiterating the payment of deficiency tax, amounts to a final decision on the
protested assessment and may therefore be questioned before the CTA. This conclusion was
sustained by this Court on July 1, 2001, in G.R. No. 135210.8 The case was thus remanded to
the CTA for further proceedings.
On February 26, 2003, the CTA rendered a decision canceling and setting aside the
assessment notices issued against ICC. It held that the claimed deductions for professional and
security services were properly claimed by ICC in 1986 because it was only in the said year
when the bills demanding payment were sent to ICC. Hence, even if some of these professional
services were rendered to ICC in 1984 or 1985, it could not declare the same as deduction for
the said years as the amount thereof could not be determined at that time.
The CTA also held that ICC did not understate its interest income on the subject promissory
notes. It found that it was the BIR which made an overstatement of said income when it
compounded the interest income receivable by ICC from the promissory notes of Realty
Investment, Inc., despite the absence of a stipulation in the contract providing for a compounded
interest; nor of a circumstance, like delay in payment or breach of contract, that would justify the
application of compounded interest.
Likewise, the CTA found that ICC in fact withheld 1% expanded withholding tax on its claimed
deduction for security services as shown by the various payment orders and confirmation
receipts it presented as evidence. The dispositive portion of the CTAs Decision, reads:
WHEREFORE, in view of all the foregoing, Assessment Notice No. FAS-1-86-90-000680 for
deficiency income tax in the amount of P333,196.86, and Assessment Notice No. FAS-1-86-90000681 for deficiency expanded withholding tax in the amount of P4,897.79, inclusive of
surcharges and interest, both for the taxable year 1986, are hereby CANCELLED and SET
ASIDE.
SO ORDERED.9
Petitioner filed a petition for review with the Court of Appeals, which affirmed the CTA
decision,10 holding that although the professional services (legal and auditing services) were
rendered to ICC in 1984 and 1985, the cost of the services was not yet determinable at that
time, hence, it could be considered as deductible expenses only in 1986 when ICC received the
billing statements for said services. It further ruled that ICC did not understate its interest
income from the promissory notes of Realty Investment, Inc., and that ICC properly withheld
and remitted taxes on the payments for security services for the taxable year 1986.
Hence, petitioner, through the Office of the Solicitor General, filed the instant petition contending
that since ICC is using the accrual method of accounting, the expenses for the professional
services that accrued in 1984 and 1985, should have been declared as deductions from income
during the said years and the failure of ICC to do so bars it from claiming said expenses as

deduction for the taxable year 1986. As to the alleged deficiency interest income and failure to
withhold expanded withholding tax assessment, petitioner invoked the presumption that the
assessment notices issued by the BIR are valid.
The issue for resolution is whether the Court of Appeals correctly: (1) sustained the deduction of
the expenses for professional and security services from ICCs gross income; and (2) held that
ICC did not understate its interest income from the promissory notes of Realty Investment, Inc;
and that ICC withheld the required 1% withholding tax from the deductions for security services.
The requisites for the deductibility of ordinary and necessary trade, business, or professional
expenses, like expenses paid for legal and auditing services, are: (a) the expense must be
ordinary and necessary; (b) it must have been paid or incurred during the taxable year; (c) it
must have been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it
must be supported by receipts, records or other pertinent papers.11
The requisite that it must have been paid or incurred during the taxable year is further qualified
by Section 45 of the National Internal Revenue Code (NIRC) which states that: "[t]he deduction
provided for in this Title shall be taken for the taxable year in which paid or accrued or paid or
incurred, dependent upon the method of accounting upon the basis of which the net income is
computed x x x".
Accounting methods for tax purposes comprise a set of rules for determining when and how to
report income and deductions.12 In the instant case, the accounting method used by ICC is the
accrual method.
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of
accounting, expenses not being claimed as deductions by a taxpayer in the current year when
they are incurred cannot be claimed as deduction from income for the succeeding year. Thus, a
taxpayer who is authorized to deduct certain expenses and other allowable deductions for the
current year but failed to do so cannot deduct the same for the next year.13
The accrual method relies upon the taxpayers right to receive amounts or its obligation to pay
them, in opposition to actual receipt or payment, which characterizes the cash method of
accounting. Amounts of income accrue where the right to receive them become fixed, where
there is created an enforceable liability. Similarly, liabilities are accrued when fixed and
determinable in amount, without regard to indeterminacy merely of time of payment. 14
For a taxpayer using the accrual method, the determinative question is, when do the facts
present themselves in such a manner that the taxpayer must recognize income or expense?
The accrual of income and expense is permitted when the all-events test has been met. This
test requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the
reasonable accurate determination of such income or liability.
The all-events test requires the right to income or liability be fixed, and the amount of such
income or liability be determined with reasonable accuracy. However, the test does not demand
that the amount of income or liability be known absolutely, only that a taxpayer has at his
disposal the information necessary to compute the amount with reasonable accuracy. The allevents test is satisfied where computation remains uncertain, if its basis is unchangeable; the
test is satisfied where a computation may be unknown, but is not as much as unknowable,
within the taxable year. The amount of liability does not have to be determined exactly; it
must be determined with "reasonable accuracy." Accordingly, the term "reasonable
accuracy" implies something less than an exact or completely accurate amount.[15]
The propriety of an accrual must be judged by the facts that a taxpayer knew, or could
reasonably be expected to have known, at the closing of its books for the taxable year.

[16] Accrual method of accounting presents largely a question of fact; such that the taxpayer
bears the burden of proof of establishing the accrual of an item of income or deduction.17
Corollarily, it is a governing principle in taxation that tax exemptions must be construed
in strictissimi juris against the taxpayer and liberally in favor of the taxing authority; and one who
claims an exemption must be able to justify the same by the clearest grant of organic or statute
law. An exemption from the common burden cannot be permitted to exist upon vague
implications. And since a deduction for income tax purposes partakes of the nature of a tax
exemption, then it must also be strictly construed.18
In the instant case, the expenses for professional fees consist of expenses for legal and auditing
services. The expenses for legal services pertain to the 1984 and 1985 legal and retainer fees
of the law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson, and for
reimbursement of the expenses of said firm in connection with ICCs tax problems for the year
1984. As testified by the Treasurer of ICC, the firm has been its counsel since the
1960s.19 From the nature of the claimed deductions and the span of time during which the firm
was retained, ICC can be expected to have reasonably known the retainer fees charged by the
firm as well as the compensation for its legal services. The failure to determine the exact
amount of the expense during the taxable year when they could have been claimed as
deductions cannot thus be attributed solely to the delayed billing of these liabilities by the firm.
For one, ICC, in the exercise of due diligence could have inquired into the amount of their
obligation to the firm, especially so that it is using the accrual method of accounting. For
another, it could have reasonably determined the amount of legal and retainer fees owing to its
familiarity with the rates charged by their long time legal consultant.
As previously stated, the accrual method presents largely a question of fact and that the
taxpayer bears the burden of establishing the accrual of an expense or income. However, ICC
failed to discharge this burden. As to when the firms performance of its services in connection
with the 1984 tax problems were completed, or whether ICC exercised reasonable diligence to
inquire about the amount of its liability, or whether it does or does not possess the information
necessary to compute the amount of said liability with reasonable accuracy, are questions of
fact which ICC never established. It simply relied on the defense of delayed billing by the firm
and the company, which under the circumstances, is not sufficient to exempt it from being
charged with knowledge of the reasonable amount of the expenses for legal and auditing
services.
In the same vein, the professional fees of SGV & Co. for auditing the financial statements of ICC
for the year 1985 cannot be validly claimed as expense deductions in 1986. This is so because
ICC failed to present evidence showing that even with only "reasonable accuracy," as the
standard to ascertain its liability to SGV & Co. in the year 1985, it cannot determine the
professional fees which said company would charge for its services.
ICC thus failed to discharge the burden of proving that the claimed expense deductions for the
professional services were allowable deductions for the taxable year 1986. Hence, per Revenue
Audit Memorandum Order No. 1-2000, they cannot be validly deducted from its gross income
for the said year and were therefore properly disallowed by the BIR.
As to the expenses for security services, the records show that these expenses were incurred
by ICC in 198620and could therefore be properly claimed as deductions for the said year.
Anent the purported understatement of interest income from the promissory notes of Realty
Investment, Inc., we sustain the findings of the CTA and the Court of Appeals that no such
understatement exists and that only simple interest computation and not a compounded one
should have been applied by the BIR. There is indeed no stipulation between the latter and ICC

on the application of compounded interest.21 Under Article 1959 of the Civil Code, unless there
is a stipulation to the contrary, interest due should not further earn interest.
Likewise, the findings of the CTA and the Court of Appeals that ICC truly withheld the required
withholding tax from its claimed deductions for security services and remitted the same to the
BIR is supported by payment order and confirmation receipts.22 Hence, the Assessment Notice
for deficiency expanded withholding tax was properly cancelled and set aside.
In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount of P333,196.86 for
deficiency income tax should be cancelled and set aside but only insofar as the claimed
deductions of ICC for security services. Said Assessment is valid as to the BIRs disallowance of
ICCs expenses for professional services. The Court of Appeals cancellation of Assessment
Notice No. FAS-1-86-90-000681 in the amount of P4,897.79 for deficiency expanded
withholding tax, is sustained.
WHEREFORE, the petition is PARTIALLY GRANTED. The September 30, 2005 Decision of the
Court of Appeals in CA-G.R. SP No. 78426, is AFFIRMED with the MODIFICATION that
Assessment Notice No. FAS-1-86-90-000680, which disallowed the expense deduction of
Isabela Cultural Corporation for professional and security services, is declared valid only insofar
as the expenses for the professional fees of SGV & Co. and of the law firm, Bengzon Zarraga
Narciso Cudala Pecson Azcuna & Bengson, are concerned. The decision is affirmed in all other
respects.
The case is remanded to the BIR for the computation of Isabela Cultural Corporations liability
under Assessment Notice No. FAS-1-86-90-000680.
SO ORDERED.

G.R. No. 112675 January 25, 1999

AFISCO INSURANCE CORPORATION, petitioner,
vs.
COURT OF APPEALS, COURT OF TAX APPEALS and COMISSIONER OF INTERNAL
REVENUE, respondent.

PANGANIBAN, J.:
Pursuant to "reinsurance treaties," a number of local insurance firms formed themselves into a
"pool" in order to facilitate the handling of business contracted with a nonresident foreign
insurance company. May the "clearing house" or "insurance pool" so formed be deemed a
partnership or an association that is taxable as a corporation under the National Internal
Revenue Code (NIRC)? Should the pool's remittances to the member companies and to the
said foreign firm be taxable as dividends? Under the facts of this case, has the goverment's
right to assess and collect said tax prescribed?
The Case
These are the main questions raised in the Petition for Review on Certiorari before us, assailing
the October 11, 1993 Decision 1 of the Court of Appeals 2 in CA-GR SP 25902, which dismissed
petitioners' appeal of the October 19, 1992 Decision 3 of the Court of Tax Appeals 4 (CTA) which

had previously sustained petitioners' liability for deficiency income tax, interest and withholding
tax. The Court of Appeals ruled:
WHEREFORE, the petition is DISMISSED, with costs against petitioner 5
The petition also challenges the November 15, 1993 Court of Appeals (CA) Resolution 6 denying
reconsideration.
The Facts
The antecedent facts, 7 as found by the Court of Appeals, are as follows:
The petitioners are 41 non-life insurance corporations, organized and existing
under the laws of the Philippines. Upon issuance by them of Erection, Machinery
Breakdown, Boiler Explosion and Contractors' All Risk insurance policies, the
petitioners on August 1, 1965 entered into a Quota Share Reinsurance Treaty
and a Surplus Reinsurance Treaty with the Munchener RuckversicherungsGesselschaft (hereafter called Munich), a non-resident foreign insurance
corporation. The reinsurance treaties required petitioners to form a [p]ool.
Accordingly, a pool composed of the petitioners was formed on the same day.
On April 14, 1976, the pool of machinery insurers submitted a financial statement
and filed an "Information Return of Organization Exempt from Income Tax" for the
year ending in 1975, on the basis of which it was assessed by the Commissioner
of Internal Revenue deficiency corporate taxes in the amount of P1,843,273.60,
and withholding taxes in the amount of P1,768,799.39 and P89,438.68 on
dividends paid to Munich and to the petitioners, respectively. These assessments
were protested by the petitioners through its auditors Sycip, Gorres, Velayo and
Co.
On January 27, 1986, the Commissioner of Internal Revenue denied the protest
and ordered the petitioners, assessed as "Pool of Machinery Insurers," to pay
deficiency income tax, interest, and with [h]olding tax, itemized as follows:
Net income per information return P3,737,370.00
===========
Income tax due thereon P1,298,080.00
Add: 14% Int. fr. 4/15/76
to 4/15/79 545,193.60

TOTAL AMOUNT DUE & P1,843,273.60

COLLECTIBLE
Dividend paid to Munich
Reinsurance Company P3,728,412.00

35% withholding tax at

source due thereon P1,304,944.20
Add: 25% surcharge 326,236.05
14% interest from
1/25/76 to 1/25/79 137,019.14
Compromise penaltynon-filing of return 300.00
late payment 300.00

TOTAL AMOUNT DUE & P1,768,799.39

COLLECTIBLE ===========
Dividend paid to Pool Members P655,636.00
===========
10% withholding tax at
source due thereon P65,563.60
Add: 25% surcharge 16,390.90
14% interest from
1/25/76 to 1/25/79 6,884.18
Compromise penaltynon-filing of return 300.00
late payment 300.00

TOTAL AMOUNT DUE & P89,438.68

COLLECTIBLE =========== 8
The CA ruled in the main that the pool of machinery insurers was a partnership taxable as a
corporation, and that the latter's collection of premiums on behalf of its members, the ceding
companies, was taxable income. It added that prescription did not bar the Bureau of Internal
Revenue (BIR) from collecting the taxes due, because "the taxpayer cannot be located at the
address given in the information return filed." Hence, this Petition for Review before us. 9
The Issues

Before this Court, petitioners raise the following issues:

1. Whether or not the Clearing House, acting as a mere agent and performing
strictly administrative functions, and which did not insure or assume any risk in its
own name, was a partnership or association subject to tax as a corporation;
2. Whether or not the remittances to petitioners and MUNICHRE of their
respective shares of reinsurance premiums, pertaining to their individual and
separate contracts of reinsurance, were "dividends" subject to tax; and
3. Whether or not the respondent Commissioner's right to assess the Clearing
House had already prescribed. 10
The Court's Ruling
The petition is devoid of merit. We sustain the ruling of the Court of Appeals that the pool is
taxable as a corporation, and that the government's right to assess and collect the taxes had not
prescribed.
First Issue:
Pool Taxable as a Corporation
Petitioners contend that the Court of Appeals erred in finding that the pool of clearing house was
an informal partnership, which was taxable as a corporation under the NIRC. They point out that
the reinsurance policies were written by them "individually and separately," and that their liability
was limited to the extent of their allocated share in the original risk thus reinsured. 11 Hence, the
pool did not act or earn income as a reinsurer. 12 Its role was limited to its principal function of
"allocating and distributing the risk(s) arising from the original insurance among the signatories
to the treaty or the members of the pool based on their ability to absorb the risk(s) ceded[;] as
well as the performance of incidental functions, such as records, maintenance, collection and
custody of funds, etc." 13
Petitioners belie the existence of a partnership in this case, because (1) they, the reinsurers, did
not share the same risk or solidary liability, 14 (2) there was no common fund; 15 (3) the executive
board of the pool did not exercise control and management of its funds, unlike the board of
directors of a corporation; 16 and (4) the pool or clearing house "was not and could not possibly
have engaged in the business of reinsurance from which it could have derived income for
itself." 17
The Court is not persuaded. The opinion or ruling of the Commission of Internal Revenue, the
agency tasked with the enforcement of tax law, is accorded much weight and even finality, when
there is no showing. that it is patently wrong, 18 particularly in this case where the findings and
conclusions of the internal revenue commissioner were subsequently affirmed by the CTA, a
specialized body created for the exclusive purpose of reviewing tax cases, and the Court of
Appeals. 19Indeed,
[I]t has been the long standing policy and practice of this Court to respect the
conclusions of quasi-judicial agencies, such as the Court of Tax Appeals which,
by the nature of its functions, is dedicated exclusively to the study and
consideration of tax problems and has necessarily developed an expertise on the
subject, unless there has been an abuse or improvident exercise of its
authority. 20

This Court rules that the Court of Appeals, in affirming the CTA which had previously sustained
the internal revenue commissioner, committed no reversible error. Section 24 of the NIRC, as
worded in the year ending 1975, provides:
Sec. 24. Rate of tax on corporations. (a) Tax on domestic corporations. A
tax is hereby imposed upon the taxable net income received during each taxable
year from all sources by every corporation organized in, or existing under the
laws of the Philippines, no matter how created or organized, but not including
duly registered general co-partnership (compaias colectivas), general
professional partnerships, private educational institutions, and building and loan
associations . . . .
Ineludibly, the Philippine legislature included in the concept of corporations those entities that
resembled them such as unregistered partnerships and associations. Parenthetically, the
NIRC's inclusion of such entities in the tax on corporations was made even clearer by the tax
Reform Act of 1997, 21 which amended the Tax Code. Pertinent provisions of the new law read
as follows:
Sec. 27. Rates of Income Tax on Domestic Corporations.
(A) In General. Except as otherwise provided in this Code, an income tax of
thirty-five percent (35%) is hereby imposed upon the taxable income derived
during each taxable year from all sources within and without the Philippines by
every corporation, as defined in Section 22 (B) of this Code, and taxable under
this Title as a corporation . . . .
Sec. 22. Definition. When used in this Title:
xxx xxx xxx
(B) The term "corporation" shall include partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas en participacion),
associations, or insurance companies, but does not include general professional
partnerships [or] a joint venture or consortium formed for the purpose of
undertaking construction projects or engaging in petroleum, coal, geothermal and
other energy operations pursuant to an operating or consortium agreement under
a service contract without the Government. "General professional partnerships"
are partnerships formed by persons for the sole purpose of exercising their
common profession, no part of the income of which is derived from engaging in
any trade or business.
xxx xxx xxx
Thus, the Court in Evangelista v. Collector of Internal Revenue 22 held that Section 24 covered
these unregistered partnerships and even associations or joint accounts, which had no legal
personalities apart from their individual members. 23 The Court of Appeals astutely
applied Evangelista. 24
. . . Accordingly, a pool of individual real property owners dealing in real estate
business was considered a corporation for purposes of the tax in sec. 24 of the
Tax Code in Evangelista v. Collector of Internal Revenue, supra. The Supreme
Court said:
The term "partnership" includes a syndicate, group, pool, joint
venture or other unincorporated organization, through or by

means of which any business, financial operation, or venture is

carried on. *** (8 Merten's Law of Federal Income Taxation, p. 562
Note 63)
Art. 1767 of the Civil Code recognizes the creation of a contract of partnership when "two or
more persons bind themselves to contribute money, property, or Industry to a common fund,
with the intention of dividing the profits among themselves." 25 Its requisites are: "(1) mutual
contribution to a common stock, and (2) a joint interest in the profits." 26 In other words, a
partnership is formed when persons contract "to devote to a common purpose either money,
property, or labor with the intention of dividing the profits between
themselves." 27 Meanwhile, an association implies associates who enter into a "joint
enterprise . . . for the transaction of business." 28
In the case before us, the ceding companies entered into a Pool Agreement 29 or an
association 30 that would handle all the insurance businesses covered under their quota-share
reinsurance treaty 31 and surplus reinsurance treaty 32 with Munich. The following unmistakably
indicates a partnership or an association covered by Section 24 of the NIRC:
(1) The pool has a common fund, consisting of money and other valuables that are deposited in
the name and credit of the pool. 33 This common fund pays for the administration and operation
expenses of the pool. 24
(2) The pool functions through an executive board, which resembles the board of directors of a
corporation, composed of one representative for each of the ceding companies. 35
(3) True, the pool itself is not a reinsurer and does not issue any insurance policy; however, its
work is indispensable, beneficial and economically useful to the business of the ceding
companies and Munich, because without it they would not have received their premiums. The
ceding companies share "in the business ceded to the pool" and in the "expenses" according to
a "Rules of Distribution" annexed to the Pool Agreement. 36 Profit motive or business is,
therefore, the primordial reason for the pool's formation. As aptly found by the CTA:
. . . The fact that the pool does not retain any profit or income does not obliterate
an antecedent fact, that of the pool being used in the transaction of business for
profit. It is apparent, and petitioners admit, that their association or coaction was
indispensable [to] the transaction of the business, . . . If together they have
conducted business, profit must have been the object as, indeed, profit was
earned. Though the profit was apportioned among the members, this is only a
matter of consequence, as it implies that profit actually resulted. 37
The petitioners' reliance on Pascuals v. Commissioner 38 is misplaced, because the facts
obtaining therein are not on all fours with the present case. In Pascual, there was no
unregistered partnership, but merely a co-ownership which took up only two isolated
transactions. 39 The Court of Appeals did not err in applying Evangelista, which involved a
partnership that engaged in a series of transactions spanning more than ten years, as in the
case before us.
Second Issue:
Pool's Remittances are Taxable
Petitioners further contend that the remittances of the pool to the ceding companies and Munich
are not dividends subject to tax. They insist that such remittances contravene Sections 24 (b) (I)
and 263 of the 1977 NIRC and "would be tantamount to an illegal double taxation as it would
result in taxing the same taxpayer" 40 Moreover, petitioners argue that since Munich was not a

signatory to the Pool Agreement, the remittances it received from the pool cannot be deemed
dividends. 41They add that even if such remittances were treated as dividends, they would have
been exempt under the previously mentioned sections of the 1977 NIRC, 42 as well as Article 7
of paragraph 1 43 and Article 5 of paragraph 5 44 of the RP-West German Tax Treaty. 45
Petitioners are clutching at straws. Double taxation means taxing the same property twice when
it should be taxed only once. That is, ". . . taxing the same person twice by the same jurisdiction
for the same thing" 46 In the instant case, the pool is a taxable entity distinct from the individual
corporate entities of the ceding companies. The tax on its income is obviously different from the
tax on thedividends received by the said companies. Clearly, there is no double taxation here.
The tax exemptions claimed by petitioners cannot be granted, since their entitlement thereto
remains unproven and unsubstantiated. It is axiomatic in the law of taxation that taxes are the
lifeblood of the nation. Hence, "exemptions therefrom are highly disfavored in law and he who
claims tax exemption must be able to justify his claim or right." 47 Petitioners have failed to
discharge this burden of proof. The sections of the 1977 NIRC which they cite are inapplicable,
because these were not yet in effect when the income was earned and when the subject
information return for the year ending 1975 was filed.
Referring, to the 1975 version of the counterpart sections of the NIRC, the Court still cannot
justify the exemptions claimed. Section 255 provides that no tax shall ". . . be paid upon
reinsurance by any company that has already paid the tax . . ." This cannot be applied to the
present case because, as previously discussed, the pool is a taxable entity distinct from the
ceding companies; therefore, the latter cannot individually claim the income tax paid by the
former as their own.
On the other hand, Section 24 (b) (1) 48 pertains to tax on foreign corporations; hence, it cannot
be claimed by the ceding companies which are domestic corporations. Nor can Munich, a
foreign corporation, be granted exemption based solely on this provision of the Tax Code,
because the same subsection specifically taxes dividends, the type of remittances forwarded to
it by the pool. Although not a signatory to the Pool Agreement, Munich is patently an associate
of the ceding companies in the entity formed, pursuant to their reinsurance treaties which
required the creation of said pool.
Under its pool arrangement with the ceding companies; Munich shared in their income and loss.
This is manifest from a reading of Article 3 49 and 10 50 of the Quota-Share Reinsurance treaty
and Articles 3 51 and 10 52 of the Surplus Reinsurance Treaty. The foregoing interpretation of
Section 24 (b) (1) is in line with the doctrine that a tax exemption must be construed strictissimi
juris, and the statutory exemption claimed must be expressed in a language too plain to be
mistaken. 53
Finally the petitioners' claim that Munich is tax-exempt based on the RP- West German Tax
Treaty is likewise unpersuasive, because the internal revenue commissioner assessed the pool
for corporate taxes on the basis of the information return it had submitted for the year ending
1975, a taxable year when said treaty was not yet in effect. 54 Although petitioners omitted in
their pleadings the date of effectivity of the treaty, the Court takes judicial notice that it took
effect only later, on December 14, 1984. 55
Third Issue:
Prescription
Petitioners also argue that the government's right to assess and collect the subject tax had
prescribed. They claim that the subject information return was filed by the pool on April 14,
1976. On the basis of this return, the BIR telephoned petitioners on November 11, 1981, to give

them notice of its letter of assessment dated March 27, 1981. Thus, the petitioners contend that
the five-year statute of limitations then provided in the NIRC had already lapsed, and that the
internal revenue commissioner was already barred by prescription from making an
assessment. 56
We cannot sustain the petitioners. The CA and the CTA categorically found that the prescriptive
period was tolled under then Section 333 of the NIRC, 57 because "the taxpayer cannot be
located at the address given in the information return filed and for which reason there was delay
in sending the assessment." 58 Indeed, whether the government's right to collect and assess the
tax has prescribed involves facts which have been ruled upon by the lower courts. It is axiomatic
that in the absence of a clear showing of palpable error or grave abuse of discretion, as in this
case, this Court must not overturn the factual findings of the CA and the CTA.
Furthermore, petitioners admitted in their Motion for Reconsideration before the Court of
Appeals that the pool changed its address, for they stated that the pool's information return filed
in 1980 indicated therein its "present address." The Court finds that this falls short of the
requirement of Section 333 of the NIRC for the suspension of the prescriptive period. The law
clearly states that the said period will be suspended only "if the taxpayer informs the
Commissioner of Internal Revenue of any change in the address."
WHEREFORE, the petition is DENIED. The Resolution of the Court of Appeals dated October
11, 1993 and November 15, 1993 are hereby AFFIRMED. Cost against petitioners.1wphi1.nt
SO ORDERED.
G.R. No. L-68118 October 29, 1985
JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P.
OBILLOS, brothers and sisters, petitioners
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.
Demosthenes B. Gadioma for petitioners.

AQUINO, J.:
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.
On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots with
areas of 1,124 and 963 square meters located at Greenhills, San Juan, Rizal. The next day he
transferred his rights to his four children, the petitioners, to enable them to build their
residences. The company sold the two lots to petitioners for P178,708.12 on March 13 (Exh. A
and B, p. 44, Rollo). Presumably, the Torrens titles issued to them would show that they were
co-owners of the two lots.
In 1974, or after having held the two lots for more than a year, the petitioners resold them to the
Walled City Securities Corporation and Olga Cruz Canda for the total sum of P313,050 (Exh. C
and D). They derived from the sale a total profit of P134,341.88 or P33,584 for each of them.
They treated the profit as a capital gain and paid an income tax on one-half thereof or of
P16,792.

In April, 1980, or one day before the expiration of the five-year prescriptive period, the
Commissioner of Internal Revenue required the four petitioners to pay corporate income tax on
the total profit of P134,336 in addition to individual income tax on their shares thereof He
assessed P37,018 as corporate income tax, P18,509 as 50% fraud surcharge and P15,547.56
as 42% accumulated interest, or a total of P71,074.56.
Not only that. He considered the share of the profits of each petitioner in the sum of P33,584 as
a " taxable in full (not a mere capital gain of which is taxable) and required them to pay
deficiency income taxes aggregating P56,707.20 including the 50% fraud surcharge and the
accumulated interest.
Thus, the petitioners are being held liable for deficiency income taxes and penalties totalling
P127,781.76 on their profit of P134,336, in addition to the tax on capital gains already paid by
them.
The Commissioner acted on the theory that the four petitioners had formed an unregistered
partnership or joint venture within the meaning of sections 24(a) and 84(b) of the Tax Code
(Collector of Internal Revenue vs. Batangas Trans. Co., 102 Phil. 822).
The petitioners contested the assessments. Two Judges of the Tax Court sustained the same.
Judge Roaquin dissented. Hence, the instant appeal.
We hold that it is error to consider the petitioners as having formed a partnership under article
1767 of the Civil Code simply because they allegedly contributed P178,708.12 to buy the two
lots, resold the same and divided the profit among themselves.
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.
As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and
simple. 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. Castan Tobeas says:
Como establecer el deslinde entre la comunidad ordinaria o copropiedad y la
sociedad?
El criterio diferencial-segun la doctrina mas generalizada-esta: por razon del
origen, en que la sociedad presupone necesariamente la convencion, mentras
que la comunidad puede existir y existe ordinariamente sin ela; y por razon del
fin objecto, en que el objeto de la sociedad es obtener lucro, mientras que el de
la indivision es solo mantener en su integridad la cosa comun y favorecer su
conservacion.
Reflejo de este criterio es la sentencia de 15 de Octubre de 1940, en la que se
dice que si en nuestro Derecho positive se ofrecen a veces dificultades al tratar
de fijar la linea divisoria entre comunidad de bienes y contrato de sociedad, la
moderna orientacion de la doctrina cientifica seala como nota fundamental de

diferenciacion aparte del origen de fuente de que surgen, no siempre uniforme,

la finalidad perseguida por los interesados: lucro comun partible en la sociedad,
y mera conservacion y aprovechamiento en la comunidad. (Derecho Civil
Espanol, Vol. 2, Part 1, 10 Ed., 1971, 328- 329).
Article 1769(3) of 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.*
Such intent was present in Gatchalian vs. Collector of Internal Revenue, 67 Phil. 666, where 15
persons contributed small amounts to purchase a two-peso sweepstakes ticket with the
agreement that they would divide the prize The ticket won the third prize of P50,000. The 15
persons were held liable for income tax as an unregistered partnership.
The instant case is distinguishable from the cases where the parties engaged in joint ventures
for profit. Thus, in Oa vs.
** This view is supported by the following rulings of respondent Commissioner:
Co-owership distinguished from partnership.We find that the case at bar is
fundamentally similar to the De Leon case. Thus, like the De Leon heirs, the
Longa heirs inherited the 'hacienda' in questionpro-indiviso from their deceased
parents; they did not contribute or invest additional ' capital to increase or expand
the inherited properties; they merely continued dedicating the property to the use
to which it had been put by their forebears; they individually reported in their tax
returns their corresponding shares in the income and expenses of the 'hacienda',
and they continued for many years the status of co-ownership in order, as
conceded by respondent, 'to preserve its (the 'hacienda') value and to continue
the existing contractual relations with the Central Azucarera de Bais for milling
purposes. Longa vs. Aranas, CTA Case No. 653, July 31, 1963).
All co-ownerships are not deemed unregistered pratnership.Co-Ownership
who own properties which produce income should not automatically be
considered partners of an unregistered partnership, or a corporation, within the
purview of the income tax law. To hold otherwise, would be to subject the income
of all
co-ownerships of inherited properties to the tax on corporations, inasmuch as if a
property does not produce an income at all, it is not subject to any kind of income
tax, whether the income tax on individuals or the income tax on corporation. (De
Leon vs. CI R, CTA Case No. 738, September 11, 1961, cited in Araas, 1977
Tax Code Annotated, Vol. 1, 1979 Ed., pp. 77-78).
Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where after an
extrajudicial settlement the co-heirs used the inheritance or the incomes derived therefrom as a
common fund to produce profits for themselves, it was held that they were taxable as an
unregistered partnership.
It is likewise different from Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198, where
father and son purchased a lot and building, entrusted the administration of the building to an
administrator and divided equally the net income, and from Evangelista vs. Collector of Internal
Revenue, 102 Phil. 140, where the three Evangelista sisters bought four pieces of real property
which they leased to various tenants and derived rentals therefrom. Clearly, the petitioners in
these two cases had formed an unregistered partnership.

In the instant case, what the Commissioner should have investigated was whether the father
donated the two lots to the petitioners and whether he paid the donor's tax (See Art. 1448, Civil
Code). We are not prejudging this matter. It might have already prescribed.
WHEREFORE, the judgment of the Tax Court is reversed and set aside. The assessments are
cancelled. No costs.
SO ORDERED.