Professional Documents
Culture Documents
FACTS
Procter and Gamble Philippines is a wholly owned subsidiary of Procter and Gamble
USA (PMC-USA), a non-resident foreign corporation in the Philippines, not engaged in
trade and business therein. PMC-USA is the sole shareholder of PMC Philippines and
is entitled to receive income from PMC Philippines in the form of dividends, if not rents
or royalties. For the taxable years 1974 and 1975, PMC Philippines filed its income tax
return and also declared dividends in favor of PMC-USA. In 1977, PMC Philippines,
invoking the tax-sparing provision of Section 24 (b) as the withholding agent of the
Philippine Government with respect to dividend taxes paid by PMC-USA, filed a claim
for the refund of 20 percentage point portion of the 35 percentage whole tax paid with
the Commissioner of Internal Revenue.
ISSUE
Whether PMC Philippines is entitled to the 15% preferential tax rate on dividends
declared and remitted to its parent corporation.
HELD
The issue raised is one made for the first time before the Supreme Court. Under the
same underlying principle of prior exhaustion of administrative remedies, on the
judicial level, issues not raised in the lower court cannot be generally raised for the first
time on appeal. Nonetheless, it is axiomatic that the state can never be allowed to
jeopardize the governments financial position. The submission of the Commissioner
that PMC Philippines is but a withholding agent of the government and therefore
cannot claim reimbursement of alleged overpaid taxes, is completely meritorious. The
real party in interest is PMC-USA, which should prove that it is entitled under the US
Tax Code to a US Foreign Tax Credit equivalent to at least 20 percentage points
spared or waived as otherwise considered or deemed paid by the Government.
Herein, the claimant failed to show or justify the tax return of the disputed 15% as it
failed to show the actual amount credited by the US Government against the income
tax due from PMC-USA on the dividends received from PMC Philippines; to present
the income tax return of PMC-USA for 1975 when the dividends were received; and to
submit duly authenticated document showing that the US government credited teh
20% tax deemed paid in the Philippines.
2.
MADRIGAL v RAFFERTY
FACTS
In 1915, Vicente Madrigal filed a sworn declaration with the CIR showing a total net
income for the year 1914 the sum of P296K. He claimed that the amount did not
represent his own income for the year 1914, but the income of the conjugal partnership
existing between him and his wife, Susana Paterno. He contended that since there
exists such conjugal partnership, the income declared should be divided into 2 equal
parts in computing and assessing the additional income tax provided by the Act of
Congress of 1913. The Attorney-General of the Philippines opined in favor of Madrigal,
but Rafferty, the US CIR, decided against Madrigal.
After his payment under protest, Madrigal instituted an action to recover the sum of
P3,800 alleged to have been wrongfully and illegally assessed and collected, under
the provisions of the Income Tax Law. However, this was opposed by Rafferty,
contending that taxes imposed by the Income Tax Law are taxes upon income, not
upon capital or property, and that the conjugal partnership has no bearing on income
considered as income.
The CFI ruled in favor of the defendants, Rafferty.
ISSUE
Whether Madrigals income should be divided into 2 equal parts in the assessment
and computation of his tax
HELD
NO. Susana Paterno, wife of Vicente Madrigal, still has an inchoate right in the
property of her husband during the life of the conjugal partnership. She has an interest
in the ultimate property rights and in the ultimate ownership of property acquired as
income after such income has become capital. Susana has no absolute right to onehalf the income of the conjugal partnership. Not being seized of a separate estate, she
cannot make a separate return in order to receive the benefit of exemption, which
could arise by reason of the additional tax. As she has no estate and income, actually
and legally vested in her and entirely separate from her husbands property, the
income cannot be considered the separate income of the wife for purposes of
additional tax.
Income, as contrasted with capital and property, is to be the test. The essential
difference between capital and income is that capital is a fund; income is a flow. A fund
of property existing at an instant of time is called capital. A flow of services rendered
by that capital by the payment of money from it or any other benefit rendered by a fund
of capital in relation to such fund through a period of time is called income. Capital is
wealth, while income is the service of wealth. A tax on income is not tax on property.
3.
EISNER v MACOMBER
FACTS
Mrs. Macomber owned 2,200 shares in Standard Oil. Standard Oil declared a 50%
stock dividend and she received 1,100 additional shares, of which about $20,000 in
par value represented earnings accumulated by the company -- recapitalized rather
than distributed -- since the effective date of the original tax law.
The current statute expressly included stock dividends in income, and the
government contended that those certificates should be taxed as income to Mrs.
Macomber as though the corporation had distributed money to her. Mrs. Macomber
sued Mr. Mark Eisner, the Collector of Internal Revenue, for a refund.
Economic substance of a stock dividend
The stock dividend in this case was the economic equivalent of a stock split -- a
transaction in which the corporation multiplies the total number of shares outstanding,
but gives the new shares to shareholders in proportion to the number they previously
held. For example, if a corporation declares a "two for one" stock split (and distributes
no money or other property to any stockholder), a stockholder who held 100 shares at
By Nikki Hipolito
Government to tax income under the Sixteenth Amendment, the Court essentially said
this did not give Congress the power to tax as income anything other than
income, i.e., that Congress did not have the power to re-define the term income as it
appeared in the Constitution:
Throughout the argument of the Government, in a variety of forms, runs the
fundamental error already mentioneda failure to appraise correctly the force of the
term "income" as used in the Sixteenth Amendment, or at least to give practical effect
to it. Thus, the Government contends that the tax "is levied on income derived from
corporate earnings," when in truth the stockholder has "derived" nothing except paper
certificates which, so far as they have any effect, deny him [or "her" in this case,
Mrs. Macomber] present participation in such earnings. It [the government] contends
that the tax may be laid when earnings "are received by the stockholder," whereas
[s]he has received none; that the profits are "distributed by means of a stock dividend,"
although a stock dividend distributes no profits; that under the Act of 1916 "the tax is
on the stockholder's share in corporate earnings," when in truth a stockholder has no
such share, and receives none in a stock dividend; that "the profits are segregated
from his [her] former capital, and [s]he has a separate certificate representing his [her]
invested profits or gains," whereas there has been no segregation of profits, nor has
[s]he any separate certificate representing a personal gain, since the certificates, new
and old, are alike in what they representa capital interest in the entire concerns of
the corporation.
The Court ordered that Macomber be refunded the tax she overpaid.
Dissents
In the dissent, Justice Louis Brandeis took issue with the majority's interpretation of
income. He argued the Sixteenth Amendment authorized Congress to tax incomes,
from whatever source derived, and the authors of the amendment intended to include
thereby everything which by reasonable understanding can fairly be regarded as
income, and that Congress possesses the power which it exercised to make
dividends representing profits, taxable as income, whether the medium in which the
dividend is paid be cash or stock, and that it may define, as it has done, what
dividends representing profits shall be deemed income.
He noted that in business circles, cash dividends and stock dividends were treated
identically. In effect, he argued that a stock dividend is really a cash dividend, since it
is really two-step affair, consisting of 1. a cash distribution, 2. subsequently used to
purchase additional shares through the exercise of stock subscription rights. Brandeis
saw no reason why two essentially identical transactions should be treated differently
for tax purposes.
Justice Brandeis' effort to construct, or read in, a cash distribution was strained and
unconvincing. The plain fact is that Mrs. Macomber did not receive, and could not have
obtained, a cash payment from Standard Oil. Had she wished to substitute cash in an
amount equivalent to the value of the stock dividend, she would have had to sell the
dividend shares to other investors. No other cash source was made available.
By Nikki Hipolito
FACTS
Raytheon built up business good will on a rectifier tube that it developed, patented,
and licensed to manufacturers. RCA licensed a competing tube to many of the same
manufacturers, with a clause requiring the licensee to only buy from RCA. These
antitrust practices caused a significant decline in Raytheons market share, eventually
leading to the complete destruction of Raytheons business good will in this product
market. RCA paid $410,000 to settle Raytheon's claims under the Federal Anti-Trust
Laws, but in the same transaction also acquired rights to some 30 patents, and
declined to state how much of its payment should be allocated between the patent
license rights versus the settlement of the suit.
In its tax return, Raytheon chose to allocate $60,000 of the settlement to the value of
the patents, thus claiming only this amount as income and excluding the remaining
$350,000 as damages. The Commissioner determined that the $350,000 constituted
income. It did not immediately argue that any damage recovery for loss of good will is
always taxable as income; rather, it protested that "[t]here exists no clear evidence of
what the amount was paid for so that an accurate apportionment can be made." At
trial, Raytheon gave evidence to support its valuation of the patents; it also assessed
the value of its lost business good will (at $3,000,000) by introducing evidence of its
profitability.
ISSUES
1. Are damages for the destruction of business good will taxable income -- or a
return of capital, of which any recovery of basis is non-taxable?
2. If the recovery is non-taxable, did the Tax Court err in holding that there was
insufficient evidence to enable it to determine what part of the lump sum
payment was properly allocable to the settlement?
HELD
Tax law treats recoveries as "income" when they represent compensation for loss of
profits. Thus, the test for taxability is: What loss were the damages designed to
compensate for? -- "In lieu of what were the damages awarded?"
Tax law treats business good will not as future profits (which are fully taxable when
recovered as damages), but as present capital -- even though evidence of future
profitability must be introduced to evaluate it. Thus, damages for its destruction are
designed to compensate for the destruction of a capital asset -- they are a "return" of
this capital.
However, tax law does not exempt compensatory damages just because they are a
return of capital -- exemption applies only to the portion that recovers the cost basis of
that capital; any excess damages serve to realize prior appreciation, and should be
taxed as income.
In this case, the record is devoid of evidence as to the amount of that basis. This
Court agrees with the Tax Court that "in the absence of evidence of the basis ... the
amount of any nontaxable capital recovery cannot be ascertained." Since Raytheon
could not establish the cost basis of its good will, its basis will be treated as zero. The
Court concludes that the $350,000 of the $410,000 attributable to the suit is thus
taxable income. (Thus, the second question as to allocation between this and the
CAPITAL GAINS TAX; Pacto de retro - The terms of the agreement between CBBOL and TMBC calling for the transfer of its assets, although denominated as Deed of
Assignment with Right to Repurchase, is in reality an equitable mortgage created over
the said properties. Instruments covering a sale with right to repurchase may be
captioned or labeled as such. However, when any or more of the circumstances
enumerated under Article 1602, Civil Code, obtain in the agreement, the contract shall
be presumed as an equitable mortgage. (BIR Ruling No. 217-81 dated November 6,
1981). This is relevant in determining whether or not the transaction had is subject to
the corresponding taxes, i.e. capital gains tax documentary stamp tax.
Insofar as corporations are concerned, its liability to the capital gains tax imposed on
the presumed gains realized from the sale, exchange or disposition of lands and/or
buildings is governed by Section 27(D)(5) of the Tax Code of 1997. Thus, for a
corporation to be liable to the tax, a true sale, exchange or disposition of capital assets
must have transpired. Unlike in transactions made by individuals under Section
24(D)(1) of the Code, where all sales of real property classified as capital assets,
including pacto de retro or other forms of conditional sales are subject to the capital
gains tax, no similar qualifications exist for capital asset transaction of a corporation.
Hence, the latter is subject to such tax only upon a close and completed transaction in
which income is realized.
Accordingly, this Office holds that only upon the executing of the final or absolute
deed of sale covering the properties of the bank subject of the pacto de retro, will the
payment of the 6% capital gains tax apply. By the same token, since no actual
conveyance of real property is to be made, the stamp tax on deeds of sale and
conveyances of real property imposed under Section 196 shall not apply. However,
since the transaction is in the nature of an equitable mortgage and made primarily as a
security for the payment of a pre-existing loan, the same is subject instead to the rate
of documentary stamp tax imposed under Section 195.
6.
FACTS
In the years 1974 to 1976, Tours derived income from its activities as a travel agency
by servicing the needs of foreign tourists and balikabayans during their stay in the
Philippines.
By some arrangements of Tours with foreign travel agencies, the latter entrusts to
Tours the fund for hotel room accommodation, which it pays to the local hotels when
billed.
By Nikki Hipolito
COMMISSIONER v JAVIER
FACTS
In 1977, Victoria Javier (wife of Melchor), received from the Prudential Bank and
Trust Co. US$999,973.70 remitted by her sister, Dolores Ventosa, through some
banks in the United States, among them Mellon Bank NA. Mellon Bank filed suit to
recover the excess amount of US$9999,000 as the remittance of US$ 1 million was a
clerical error and should have been US $1,000 only (Compare facts in Mellon Bank vs.
Magsino, GR 71479, 18 October 1990). In 1978, Melchor Javier filed his income tax
return for 1977showing a gross income of P53,053.38 and a net income of P48,053.38
and stating in the footnote of the return that taxpayer was recepient of some money
received from abroad which he presumed to be a gift but turned out to be an error and
is now subject of litigation. In 1980, the Commissioner assessed and demanded from
Javier deficiency assessment of P9,287,297.51 for 1977. Javier protested such
assessment, where the Commissioner in turn imposed a 50% fraud penalty against
Javier.
GUTIERREZ v COLLECTOR
FACTS
Maria Morales, wife of Blas Gutierrez, was the owner of a parcel of land in
Mabalacat, Pampanga. Under the Military Bases Agreement with the US, the land of
Morales was among those that are to be expropriated for the expansion of Clark Air
Base. Initially, in 1949, Morales was paid P35000 as compensation for the
expropriation of her land. After proper assessment, it was found that Morales was
entitled to P94K as just compensation.
The CIR assessed and demanded from Morales the payment of P8500 as alleged
deficiency income tax for the year 1950, inclusive of surcharges and penalties.
However, Morales and counsel contended that the compensation paid to them for the
expropriation was not income derived from sale, dealing or disposition of property
referred to by Sec 29 of the Tax Code and therefore not taxable.
The CTA rendered judgment against Morales.
ISSUE
Whether the money received by Morales as just compensation is considered income,
subject to tax
HELD
YES. Under Sec 29 of the NIRC, gross income includes gain, profits, and income
derived from salaries, wages or compensation for personal service of whatever kind
and in whatever form paid or from professions, vocations, trades, businesses,
commerce or sales, or dealings in property, whether real or personal growing out of
ownership or gains or profits and income derived from any source whatever
Moreover, US Jurisprudence provides that income from expropriation/condemnation
proceedings is income from sales or exchange and thus taxable. It appears that the
acquisition by the government of private properties through the exercise of the power
ISSUE
By Nikki Hipolito
JAMES v US
dismissal of the indictment against James, but dissenting from the over-ruling of
Wilcox. Justice Black raised a Federalism argument, arguing that this ruling constituted
a preemption of state criminal jurisdiction.
Justice Harlan, joined by Justice Frankfurter, wrote an opinion concurring with the
over-ruling of Wilcox, but contending that James should have been set for a new trial,
rather than set free of criminal liability. Justice Clark wrote a brief concurrence, also
agreeing with the over-ruling of Wilcox, but stating that James' conviction should also
have been upheld.
10. COMMISSIONER v GLENSHAW GLASS
FACTS
The defendant, Eugene James, was an official in a labor union who had embezzled
more than $738,000 in union funds, and did not report these amounts on his tax return.
He was tried for tax evasion, and claimed in his defense that embezzled funds did not
constitute taxable income because, like a loan, the taxpayer was legally obligated to
return those funds to their rightful owner. Indeed, James pointed out, the Supreme
Court had previously made such a determination in Commissioner v. Wilcox, 327 U.S.
404 (1946). However, this defense was unavailing in the trial court, where Eugene
James was convicted and sentenced to three years in prison.
FACTS
In a case between Glenshaw Glass Co. manufacturer of glass bottles and
containers, and Hartford-Empire Company, manufacturer of machinery of a character
used by Glenshaw, Hartford paid Glenshaw $800K as settlement. Out of this amount,
$325K represented payment for exemplary damages for fraud and treble damages for
injury to its business by reason of Hartfords violation of federal antitrust laws.
However, this portion was not reported as income for the tax year involved. The
Commissioner determined a deficiency, claiming as taxable the whole amount less
deductible legal fees.
ISSUE
Whether the receipt of embezzled funds constitutes income taxAble to the wrongdoer,
even though an obligation to repay exists.
ISSUE
Whether money received as exemplary damages for fraud or as the punitive 2/3
portion of a treble damage antitrust recovery must be reported by a taxpayer as gross
income under Sec 22 of Internal Revenue Code of 1939
HELD
The Supreme Court ruled that under section 22(a) of the Internal Revenue Code of
1939 and section 61(a) of the Internal Revenue Code of 1954, the receipt of
embezzled funds was includible in the gross income of the wrongdoer and was taxable
to the wrongdoer, even though the wrongdoer had an obligation to return the funds to
the rightful owner.
The Court was divided between several different rationales. The majority opinion
was written by Chief Justice Earl Warren, joined by Justices Brennan and Stewart.
That opinion held that if a taxpayer receives income legally or illegally without
consensual recognition of obligation to repay, that income is taxable.
The Court noted that the Sixteenth Amendment did not limit its scope to "lawful"
income, a distinction which had been found in the Revenue Act of 1913. The removal
of this modifier indicated that the framers of the Sixteenth Amendment had intended no
safe harbor for illegal income. The Court expressly over-ruled Commissioner v. Wilcox
and ruled that James was therefore liable for the federal income tax due on his
embezzled funds. The Court also ruled, however, that Eugene James could not be
held liable for the willful tax evasion because it is not possible to willfully violate laws
that were not established at the time of the violation.
Although James avoided the criminal sentence, the opinion of the Court left James in
a situation where he would be required to repay the embezzled $738,000 to the union,
but would also be required to pay over a half-million dollars in taxes on those funds, as
though he had been able to keep them.
Justice Black, joined by Justice Douglas, wrote an opinion concurring in the
HELD
YES. Under Sec 22, gross income includes gain, profits, and income derived from
salaries, wages or compensation for personal service of whatever kind and in
whatever form paid or from professions, vocations, trades, businesses, commerce or
sales, or dealings in property, whether real or personal or gains or profits and
income derived from any source whatever Through this catch-all provision,
Congress applied no limitations as to the source of neither taxable receipts nor
restrictive labels as to their nature and intended to tax all gains except those
specifically exempted.
The mere fact that the payments were extracted from wrongdoers as punishment for
unlawful conduct cannot detract from their character as taxable income to the
recipients.
11. FARMERS & MERCHANTS BANK v CIR
FACTS
Petitioner was engaged in the banking business in Kentucky and within the district of
the Federal Reserve Bank of Cleveland, Ohio. It charges the collection of checks on
foreign banks and checks drawn on it and sent from other banks. Petitioner was not a
member of the Fed Reserve System so that checks drawn on it are sent directly to
petitioner by the holding bank and paid by drafts.
By Nikki Hipolito
(b) BIR is not following American Laws on taxation because we have our tax laws,
including rules and regulations implementing our tax laws. However, under the
doctrine of precedent, a court may apply American Laws or Court Decisions.
(c) The amendments introduced by EO No. 37 to then Section 21(c)(2) of the Tax
Code of 1997 provides that dividend received by a citizen or resident alien from a
domestic corporation is subject to income tax at the rate of 15% in 1986, 10% effective
January 1, 1987, 5% effective January 1, 1988 and 0% effective January 1, 1989.
However, Sec. 22 (a) and (b) of the same Code provides that dividends received by a
non-resident alien individual, whether engaged or not in trade or business in the
Philippines, from a domestic corporation is subject to final withholding tax of 30% of
such dividend income.
(d) For purposes of computing the taxable income of domestic corporation derived
form within and without the Philippines, the allowable deductions are limited to those
provided under Section 29 of the Tax Code of 1997 for taxable year 1997 and prior
years but for taxable year 1998, Section 34 of the Tax Code of 1997 governs.
(e) Pursuant to then Section 117 of the Tax Code of 1997, as amended by RA 8241,
the 2% franchise tax of electric, gas and water utilities is based on gross receipts
derived from the business covered by the law granting the franchise.
14. PERRY v US
FACTS
William Perry created a trust for the benefit of the Town of Fitzwilliam in 1944. The
corpus was to be used for the construction of an addition to the Public Library and for
no other purpose. The town decided that it did not desire to expand the Library and the
corpus of the trust was returned to Perry.
The CIR required Perry to include in their income tax return for 1953 the amount
returned to them. Perry contended that it was improper since what they received was a
return of capital, not income. On the other hand, the CIR contended that it was proper
because Perry received tax benefits when he made contributions to the trust and the
deducted such amounts from their income.
ISSUE
Whether an income tax may be imposed upon the corpus of a charitable trust that
has been returned to the sole settlor when the donees thereof have refused to comply
with the terms of the gift
HELD
NO. The return of the taxpayer of the property he had given away cannot possibly be
considered as incomehe merely got back his own property. It cannot possible be
considered income, EXCEPT on the ground that he had deducted from his income the
amount of the contributions, thus reducing his income tax. In these cases, the courts
required the inclusion of an item recovered, where a deduction had been taken for it. It
would be inequitable for the taxpayer to reduce his taxes on account of the
By Nikki Hipolito
note as agent for the Bradfords and with no intention of enforcing same." The
petitioner was solvent both before and after the note was discharged.
Upon these facts the Tax Court concluded that the petitioner had realized unreported
ordinary income of $50,000 in 1946 and upheld the Commissioner's determination of
deficiency in accordance with that conclusion. Petitioner contended that the
cancellation of her $100,000 note for $50,000 was a "gratuitous forgiveness" upon the
part of the bank and therefore a gift within the meaning of 22(b) (3) of the Internal
Revenue Code of 1939, and that because she received nothing when the original note
was executed by her in 1938, she did not realize income in 1946 when the note was
cancelled for less than its face amount, even if the cancellation was not a gift.
ISSUE
Whether Bradford realized $50,000 income in 1946 when her liability upon a note for
$100,000 was discharged for $50,000.
HELD
NO. It was the view of the Tax Court that if there was no gift, the discharge of the
$100,000 note for $50,000 clearly resulted in ordinary income in the amount of
$50,000. The Commissioner in effect adopts that view in his argument here. "It has
become well settled," we are told, "that a profit is realized by a debtor whose obligation
is extinguished by payment of an amount less than that which is owing, and that such
profit constitutes gain which is taxable income within the broad sweep of Section 22(a)
of the Internal Revenue Code of 1939."
It is also a well-settled general rule that each year's transactions are to be
considered separately, without regard to what the net effect of a particular transaction
might be if viewed over a period of several years.
A mechanical application of these principles would of course support the Tax Court's
decision. Looking alone to the year 1946 under the rule of the Sanford & Brooks Co.
case, it is obvious that when $100,000 of the petitioner's indebtedness was discharged
for $50,000 in that year, she realized a balance sheet improvement of $50,000 which
would be taxable as ordinary income under the rule of the Kirby Lumber Co. case.3
We cannot agree with the Commissioner, however, that these principles are to be
applied so mechanically.
The fact is that by any realistic standard the petitioner never realized any income at
all from the transaction in issue. In 1938 "without receiving any consideration in
return," she promised to pay a prior debt of her husband's. In a later year she paid part
of that debt for less than its face value. Had she paid $50,000 in 1938 to discharge
$100,000 of her husband's indebtedness, the Commissioner could hardly contend that
she thereby realized income. Yet the net effect of what she did do was precisely the
same. We cannot agree that the transaction resulted in taxable income to her.
By Nikki Hipolito