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The CIR, being of opinion that the reorganization attempted was without substance and must be
disregarded, held that petitioner was liable for a tax.
RULING: No. The court held that By means which the law permits, a taxpayer has the right to
decrease the amount of what otherwise would be his taxes, or altogether to avoid them.
DOCTRINE: if a reorganization in reality was effected within the meaning of the law, the ulterior
purpose mentioned will be disregarded. The legal right of a taxpayer to decrease the amount of
what otherwise would be his taxes, or altogether avoid them, by means which the law permits,
cannot be doubted. But the question for determination is whether what was done, apart from the
tax motive, was the thing which the statute intended. The reasoning of the court below in
justification of a negative answer leaves little to be said. Here, When the law speaks of a transfer of
assets by one corporation to another, it means a transfer made "in pursuance of a plan of
reorganization" of corporate business, and not a transfer of assets by one corporation to another in
pursuance of a plan having no relation to the business of either. It was a an operation having no
business or corporate purpose -- a mere device 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 the petitioner.
FLI were issued to FDC and FAI. As a result of the exchange, FLIs ownership structure was
changed. FLI requested a ruling from the Bureau of Internal Revenue (BIR) to the effect that no
gain or loss should be recognized in the aforesaid transfer of real properties.
FDC received from the BIR a Formal Notice of Demand to pay deficiency income. The deficiency
taxes were assessed on the taxable gain supposedly realized by FDC from the Deed of Exchange
it executed with FAI and FLI.
DOCTRINE: requisites for the non-recognition of gain or loss under the foregoing provision are as
follows: (a) the transferee is a corporation; (b) the transferee exchanges its shares of stock for
property/ies of the transferor; (c) the transfer is made by a person, acting alone or together with
others, not exceeding four persons; and, (d) as a result of the exchange the transferor, alone or
together with others, not exceeding four, gains control of the transferee.
The term control is defined as ownership stocks in a corporation possessing at least 50% of the
total voting power of classes of stocks entitled to one vote under the tax code.
ISSUE: Whether the advances extended by respondent to its affiliates are subject to income tax?
RULING: No. The court held that CIR's power to distribute, apportion or allocate gross income or
deductions between or among controlled taxpayers may be exercised as long as the controlled
taxpayers taxable income is not reflective of that which it would have realized had it been dealing
at arms length with an uncontrolled taxpayer, the CIR can make the necessary rectifications in
order to prevent evasion of taxes. However, the to power to impute "theoretical interests" is not
included in the broad parameters of CIR. Here, There is no evidence of actual or possible showing
that the advances FDC extended to its affiliates had resulted to the interests subsequently
assessed by the CIR.
DOCTRINE: CIR's power to distribute, apportion or allocate gross income or deductions between
or among controlled taxpayers may be exercised as long as the controlled taxpayers taxable
income is not reflective of that which it would have realized had it been dealing at arms length with
an uncontrolled taxpayer, the CIR can make the necessary rectifications in order to prevent
evasion of taxes. However, the to power to impute "theoretical interests" is not included in the
broad parameters of CIR
6. Source rules in determining income from within and without
South African Airways v. CIR, G.R. No. 180356, February 16, 2010
FACTS: Petitioner South African Airways is a foreign corporation organized and existing under and
by virtue of the laws of the Republic of South Africa. Its principal office is located at South Africa. In
the Philippines, it is an internal air carrier having no landing rights in the country. Petitioner has a
general sales agent in the Philippines, Aerotel. Aerotel sells passage documents for compensation
or commission for petitioners off-line flights for the carriage of passengers and cargo between ports
or points outside the territorial jurisdiction of the Philippines. Petitioner is not registered with the
Securities and Exchange Commission as a corporation, branch office, or partnership. It is not
licensed to do business in the Philippines.
Petitioner filed with the Bureau of Internal Revenuea claim for the refund as erroneously paid tax
on Gross Philippine Billings (GPB) for the taxable year 2000.
Petitioner argues that it does not maintain flights to or from the Philippine. Hence, there income
cannot be taxed.
ISSUE: Whether or not petitioner, as an off-line international carrier selling passage documents
through an independent sales agent in the Philippines, is engaged in trade or business in the
Philippines subject to income tax?
RULING: Yes. the court held that an off-line air carrier is doing business in the Philippines and that
income from the sale of passage documents here is Philippine-source income. If an international
air carrier maintains flights to and from the Philippines, it shall be taxed at the rate of 2 1/2% of its
Gross Philippine Billings while an international air carriers that do not have flights to and from the
Philippines but nonetheless earn income from other activities in the country will be taxed at the rate
of 32% of such income.
DOCTRINE: If an international air carrier maintains flights to and from the Philippines, it shall be
taxed at the rate of 2 1/2% of its Gross Philippine Billings while an international air carriers that do
not have flights to and from the Philippines but nonetheless earn income from other activities in the
country will be taxed at the rate of 32% of such income.
Note: Petitioner contend that CIR vs BOAC case is not applicable to their case because it was
decided under the 1939 NIRC. Hence, the rule applicable is the 1997 NIRC. SC held no difference
with regard to the taxation of off-line air carriers.
As a corollary to its sales tax, North Dakota imposes a use tax upon property purchased for
storage, use or consumption within the State. North Dakota requires every "retailer maintaining a
place of business in" the State to collect the tax from the consumer and remit it to the State.
Quill contends that North Dakota does not have the power to compel it to collect a use tax from its
North Dakota customers.
RULING: Yes. The court held that if a foreign corporation purposefully avails itself of the benefits of
an economic market in the forum State, it may subject itself to the State's in personam jurisdiction
even if it has no physical presence in the State. Here, quill has purposefully directed its activities at
North Dakota residents, that the magnitude of those contacts are more than sufficient for due
process purposes, and that the use tax is related to the benefits Quill receives from access to the
State.
DOCTRINE: if a foreign corporation purposefully avails itself of the benefits of an economic market
in the forum State, it may subject itself to the State's in personam jurisdiction even if it has no
physical presence in the State.
Respondents contend that punitive damages, characterized as "windfalls" flowing from the
culpable conduct of third parties, are not within the scope of the section
RULING: Yes. the court held that Money received as exemplary damages for fraud or as the
punitive two-thirds portion of a treble damage antitrust recovery must be reported by a taxpayer as
"gross income. Here, there was undeniable accessions to wealth, clearly realized, and over which
the taxpayers have complete dominion. The mere fact that the payments were extracted from the
wrongdoers as punishment for unlawful conduct cannot detract from their character as taxable
income to the recipients.
DOCTRINE: Money received as exemplary damages for fraud or as the punitive two-thirds portion
of a treble damage antitrust recovery must be reported by a taxpayer as "gross income.