National Development Company v CIR (1987)
L-17518 October 30, 1922]
National Development Company v CIR GR No L-53961, June 30,
1987
FACTS:
The National Development Company (NDC) entered into
contracts in Tokyo with several Japanese shipbuilding companies
for the construction of 12 ocean-going vessels. Initial payments
were made in cash and through irrevocable letters of credit.
When the vessels were completed and delivered to the NDC in
Tokyo, the latter remitted to the shipbuilders the amount of US$
4,066,580.70 as interest on the balance of the purchase price. No
tax was withheld. The Commissioner then held the NDC liable on
such tax in the total sum of P5,115,234.74. Negotiations followed
but failed. NDC went to CTA. BIR was sustained by CTA. BIR was
sustained by CTA. Hence, this petition for certiorari.
ISSUE:
Is NDC liable for the tax?
RULING:
Yes.
Although NDC is not the one taxed since it was the Japanese
shipbuilders who were liable on the interest remitted to them
under Section 37 of the Tax Code, still, the imposition is valid.
The imposition of the deficiency taxes on NDC is a penalty for its
failure to withhold the same from the Japanese shipbuilders. Such
liability is imposed by Section 53c of the Tax Code. NDC was
remiss in the discharge of its obligation as the withholding agent
of the government and so should be liable for the omission.
Fisher vs. Trinidad [G.R. No.
Facts: Philippine American Drug Company was a corporation
duly organized and existing under the laws of the Philippine
Islands, doing business in the City of Manila. Fisher was a
stockholder in said corporation. Said corporation, as result of the
business for that year, declared a "stock dividend" and that the
proportionate share of said stock divided of Fisher was P24,800.
Said the stock dividend for that amount was issued to Fisher. For
this reason, Trinidad demanded payment of income tax for the
stock dividend received by Fisher. Fisher paid under protest the
sum of P889.91 as income tax on said stock dividend. Fisher filed
an action for the recovery of P889.91. Trinidad demurred to the
petition upon the ground that it did not state facts sufficient to
constitute cause of action. The demurrer was sustained and
Fisher appealed.
Issue: Whether or not the stock dividend was an income and
therefore taxable.
Held: No. Generally speaking, stock dividends represent
undistributed increase in the capital of corporations or firms,
joint stock companies, etc., etc., for a particular period. The
inventory of the property of the corporation for particular period
shows an increase in its capital, so that the stock theretofore
issued does not show the real value of the stockholder's interest,
and additional stock is issued showing the increase in the actual
capital, or property, or assets of the corporation.
In the case of Gray vs. Darlington (82 U.S., 653), the US Supreme
Court held that mere advance in value does not constitute the
"income" specified in the revenue law as "income" of the owner
for the year in which the sale of the property was made. Such
advance constitutes and can be treated merely as an increase of
capital.
1
In the case of Towne vs. Eisner, income was defined in an income
tax law to mean cash or its equivalent, unless it is otherwise
specified. It does not mean unrealized increments in the value of
the property. A stock dividend really takes nothing from the
property of the corporation, and adds nothing to the interests of
the shareholders. Its property is not diminished and their
interest are not increased. The proportional interest of each
shareholder remains the same. In short, the corporation is no
poorer and the stockholder is no richer then they were before.
In the case of Doyle vs. Mitchell Bros. Co. (247 U.S., 179), Mr.
Justice Pitney, said that the term "income" in its natural and
obvious sense, imports something distinct from principal or
capital and conveying the idea of gain or increase arising from
corporate activity.
In the case of Eisner vs. Macomber (252 U.S., 189), income was
defined as the gain derived from capital, from labor, or from both
combined, provided it be understood to include profit gained
through a sale or conversion of capital assets.
When a corporation or company issues "stock dividends" it
shows that the company's accumulated profits have been
capitalized, instead of distributed to the stockholders or retained
as surplus available for distribution, in money or in kind, should
opportunity offer. The essential and controlling fact is that the
stockholder has received nothing out of the company's assets for
his separate use and benefit; on the contrary, every dollar of his
original investment, together with whatever accretions and
accumulations resulting from employment of his money and that
of the other stockholders in the business of the company, still
remains the property of the company, and subject to business
risks which may result in wiping out of the entire investment.
The stockholder by virtue of the stock dividend has in fact
received nothing that answers the definition of an "income."
The stockholder who receives a stock dividend has received
nothing but a representation of his increased interest in the
capital of the corporation. There has been no separation or
segregation of his interest. All the property or capital of the
corporation still belongs to the corporation. There has been no
separation of the interest of the stockholder from the general
capital of the corporation. The stockholder, by virtue of the stock
dividend, has no separate or individual control over the interest
represented thereby, further than he had before the stock
dividend was issued. He cannot use it for the reason that it is still
the property of the corporation and not the property of the
individual holder of stock dividend. A certificate of stock
represented by the stock dividend is simply a statement of his
proportional interest or participation in the capital of the
corporation. The receipt of a stock dividend in no way increases
the money received of a stockholder nor his cash account at the
close of the year. It simply shows that there has been an increase
in the amount of the capital of the corporation during the
particular period, which may be due to an increased business or
to a natural increase of the value of the capital due to business,
economic, or other reasons. We believe that the Legislature,
when it provided for an "income tax," intended to tax only the
"income" of corporations, firms or individuals, as that term is
generally used in its common acceptation; that is that the income
means money received, coming to a person or corporation for
services, interest, or profit from investments. We do not believe
that the Legislature intended that a mere increase in the value of
the capital or assets of a corporation, firm, or individual, should
be taxed as "income."
A stock dividend, still being the property of the corporation and
not the stockholder, may be reached by an execution against the
corporation, and sold as a part of the property of the corporation.
In such a case, if all the property of the corporation is sold, then
the stockholder certainly could not be charged with having
received an income by virtue of the issuance of the stock
2
dividend. Until the dividend is declared and paid, the corporate
profits still belong to the corporation, not to the stockholders,
and are liable for corporate indebtedness. The rule is well
established that cash dividend, whether large or small, are
regarded as "income" and all stock dividends, as capital or assets
If the ownership of the property represented by a stock dividend
is still in the corporation and not in the holder of such stock, then
it is difficult to understand how it can be regarded as income to
the stockholder and not as a part of the capital or assets of the
corporation. If the holder of the stock dividend is required to pay
an income tax on the same, the result would be that he has paid a
tax upon an income which he never received. Such a conclusion is
absolutely contradictory to the idea of an income.
As stock dividends are not "income," the same cannot be
considered taxes under that provision of Act No. 2833. For all of
the foregoing reasons, SC held that the judgment of the lower
court should be REVOKED.
Madrigal vs. Rafferty
FACTS:
Vicente Madrigal and Susana Paterno were legally married
prior to Januray 1, 1914. The marriage was contracted under the
provisions of law concerning conjugal partnership
On 1915, Madrigal filed a declaration of his net income for year
1914, the sum of P296,302.73
Vicente Madrigal was contending that the said declared income
does not represent his income for the year 1914 as it was the
income of his conjugal partnership with Paterno. He said that in
computing for his additional income tax, the amount declared
should be divided by 2.
The revenue officer was not satisfied with Madrigals
explanation and ultimately, the United States Commissioner of
Internal Revenue decided against the claim of Madrigal.
Madrigal paid under protest, and the couple decided to recover
the sum of P3,786.08 alleged to have been wrongfully and
illegally assessed and collected by the CIR.
ISSUE: Whether or not the income reported by Madrigal on 1915
should be divided into 2 in computing for the additional income
tax.
HELD:
No! The point of view of the CIR is that the Income Tax Law, as
the name implies, taxes upon income and not upon capital and
property.
The essential difference between capital and income is that
capital is a fund; income is a flow. A fund of property existing at
an instant of time is called capital. A flow of services rendered by
that capital by the payment of money from it or any other benefit
rendered by a fund of capital in relation to such fund through a
period of time is called income. Capital is wealth, while income is
the service of wealth.
3
 As Paterno has no estate and income, actually and legally vested
in her and entirely distinct from her husbands property, the
income cannot properly be considered the separate income of the
wife for the purposes of the additional tax.
To recapitulate, Vicente wants to half his declared income in
computing for his tax since he is arguing that he has a conjugal
partnership with his wife. However, the court ruled that the one
that should be taxed is the income which is the flow of the capital,
thus it should not be divided into 2.
Conwi, et.al. vs. CTA and CIR
Facts: Petitioners are employees of Procter and Gamble
(Philippine Manufacturing Corporation, subsidiary of Procter &
Gamble, a foreign corporation).During the years 1970 and 1971,
petitioners were assigned to other subsidiaries of Procter &
Gamble outside the Philippines, for which petitioners were paid
US dollars as compensation.
Petitioners filed their ITRs for 1970 and 1971, computing tax due
by applying the dollar-to-peso conversion based on the floating
rate under BIR Ruling No. 70-027. In 1973, petitioners filed
amened ITRs for 1970 and 1971, this time using the par value of
the peso as basis. This resulted in the alleged overpayments,
refund and/or tax credit, for which claims for refund were filed.
CTA held that the proper conversion rate for the purpose of
reporting and paying the Philippine income tax on the dollar
earnings of petitioners are the rates prescribed under Revenue
Memorandum Circulars Nos. 7-71 and 41-71. The refund claims
were denied.
Issues:
(1) Whether or not petitioners' dollar earnings are receipts
derived from foreign exchange transactions; NO.
(2) Whether or not the proper rate of conversion of petitioners'
dollar earnings for tax purposes in the prevailing free market
rate of exchange and not the par value of the peso; YES.
Held: For the proper resolution of income tax cases, income may
be defined as an amount of money coming to a person or
corporation within a specified time, whether as payment for
services, interest or profit from investment. Unless otherwise
specified, it means cash or its equivalent. Income can also be
though of as flow of the fruits of one's labor.
Petitioners are correct as to their claim that their dollar earnings
are not receipts derived from foreign exchange transactions. For
a foreign exchange transaction is simply that a transaction in
foreign exchange, foreign exchange being "the conversion of an
amount of money or currency of one country into an equivalent
amount of money or currency of another." When petitioners were
assigned to the foreign subsidiaries of Procter & Gamble, they
were earning in their assigned nation's currency and were ALSO
spending in said currency. There was no conversion, therefore,
from one currency to another.
The dollar earnings of petitioners are the fruits of their labors in
the foreign subsidiaries of Procter & Gamble. It was a definite
amount of money which came to them within a specified period
of time of two years as payment for their services.
And in the implementation for the proper enforcement of the
National Internal Revenue Code, Section 338 thereof empowers
the Secretary of Finance to "promulgate all needful rules and
regulations" to effectively enforce its provisions pursuant to this
authority, Revenue Memorandum Circular Nos. 7-71 and 41-71
were issued to prescribed a uniform rate of exchange from US
4
dollars to Philippine pesos for INTERNAL REVENUE TAX
PURPOSES for the years 1970 and 1971, respectively. Said
revenue circulars were a valid exercise of the authority given to
the Secretary of Finance by the Legislature which enacted the
Internal Revenue Code. And these are presumed to be a valid
interpretation of said code until revoked by the Secretary of
Finance himself.
Petitioners are citizens of the Philippines, and their income,
within or without, and in these cases wholly without, are subject
to income tax. Sec. 21, NIRC, as amended, does not brook any
exemption.
DENIED FOR LACK OF MERIT.
EISNER VS. MACOMBER-
FACTS:
1. Mrs. Macomber owned 2,200 share of Standard Oil Company of
California stock.
2. In January, 1916, the company declared a stock dividend and
Mrs. Macomber received an additional 1,100 shares of stock. Of
these shares, 198.77 shares, par value $19,877, represented
surplus earned by the company after March 1, 1913.
3. The IRS treated the $19,877 as taxable income under the
Revenue Act of 1916 which provided that a stock dividend was
considered income to the amount of its cash value.
4. Mrs. Macomber argued that that provision in the Revenue Act
of 1916 was unconstitutional because it was a direct tax not
apportioned per population; since a stock dividend was not
income, a legislative provision subjecting it to income tax was not
constitutional under the 16th Amendment.
5. The District Court held that the stock dividend was not income.
ISSUE: Does Congress have the power under the 16th
Amendment to tax shareholders on stock dividends received? Are
stock dividends considered income or capital?
Laws/ References:
1) 16th Amendment - "The Congress shall have power to lay and
collect taxes on income, from whatever source derived, without
apportionment among the several States, and without regard to
any census or enumeration."
2) Revenue Act of 1916 - a "stock dividend shall be considered
income, to the amount of its cash value."
3) Brushaber v Union Pacific - in this case, the Supreme Court
stated that the 16th Amendment "did not extend the taxing
power to new subjects, but merely removed the necessity which
otherwise might exist for an apportionment among the State of
taxes laid on income." Macomber, 1 USTC 32, page 1079. Thus,
the item must be income in order for Congress to tax it.
4) The Court suggested that "income," which is not defined in the
16th Amendment, was something derived from capital or labor,
or from both.
HELD:
The Supreme Court affirmed the District Court holding for the
taxpayer that a stock dividend is not income. The Revenue Act of
1916 provision subjecting stock dividends to tax was held
unconstitutional.
If a stock dividend is not considered income, it can not be subject
to income tax under the 16th Amendment. In applying the 16th
Amendment, it is important to distinguish between capital and
income, as only income is subject to income tax.
A stock dividend reflects the corporation transferring an amount
from "surplus" (retained earnings) to "capital stock." Such a
transaction is merely a bookkeeping entry and "affects only the
5
form, not the essence, of the "liability" acknowledged by the
corporation to its own shareholders ... it does not alter the
preexisting proportionate interest of any stockholder or increase
the intrinsic value of his holding or of the aggregate holdings of
the other stockholders as they stood before" (Macomber, p.
1081). An increase to the value of capital investment is not
income. Nothing of value has been taken from the corporation
and given to the shareholder as is the case with a cash dividend.
In addition, since the shareholder receives no cash, in order to
pay any tax on a stock dividend, he might have to convert the
stock into cash - he has no wherewithal to pay from the nature of
the transaction. "Nothing could more clearly show that to tax a
stock dividend is to tax a capital increase, and not income, than
this demonstration that in the nature of things it requires
conversion of capital in order to pay the tax" (Macomber, p.
1082).
Commissioner of Internal Revenue vs W.E. Lednicky and
Maria Lednicky
GR Nos. L-18262 and L-21434, 1964
FACTS:
Spouses are both American citizens residing in the Philippines
and have derived all their income from Philippine sources for
taxable years in question.
On March, 1957, filed their ITR for 1956, reporting gross income
of P1,017,287.65 and a net income of P 733,809.44. On March
1959, file an amended claimed deduction of P 205,939.24
paid in 1956 to the United States government as federal
income tax of 1956.
ISSUE:
Whether a citizen of the United States residing in the Philippines,
who derives wholly from sources within the Philippines, may
deduct his gross income from the income taxes he has paid to the
United States government for the said taxable year?
HELD:
An alien resident who derives income wholly from sources
within the Philippines may not deduct from gross income the
income taxes he paid to his home country for the taxable year.
The right to deduct foreign income taxes paid given only where
alternative right to tax credit exists.
Section 30 of the NIRC, Gross Income Par. C (3): Credits against
tax per taxes of foreign countries.
If the taxpayer signifies in his return his desire to have the
benefits of this paragraph, the tax imposed by this shall be
credited with: Paragraph (B), Alien resident of the Philippines;
and, Paragraph C (4), Limitation on credit.
An alien resident not entitled to tax credit for foreign income
taxes paid when his income is derived wholly from sources
within the Philippines.
Double taxation becomes obnoxious only where the taxpayer is
taxed twice for the benefit of the same governmental entity. In
the present case, although the taxpayer would have to pay two
taxes on the same income but the Philippine government only
receives the proceeds of one tax, there is no obnoxious double
taxation.
6
CIR vs. Isabela Cultural Corporation
Facts: Isabela Cultural Corporation (ICC), a domestic corporation
received an assessment notice for deficiency income tax and
expanded withholding tax from BIR. It arose from the
disallowance of ICCs claimed expense for professional and
security services paid by ICC; as well as the alleged
understatement of interest income on the three promissory notes
due from Realty Investment Inc. The deficiency expanded
withholding tax was allegedly due to the failure of ICC to
withhold 1% e-withholding tax on its claimed deduction for
security services.
ICC sought a reconsideration of the assessments. Having received
a final notice of assessment, it brought the case to CTA, which
held that it is unappealable, since the final notice is not a
decision. CTAs ruling was reversed by CA, which was sustained
by SC, and case was remanded to CTA. CTA rendered a decision in
favor of ICC. It ruled that the deductions for professional and
security services were properly claimed, it said that even if
services were rendered in 1984 or 1985, the amount is not yet
determined at that time. Hence it is a proper deduction in 1986. It
likewise found that it is the BIR which overstate the interest
income, when it applied compounding absent any stipulation.
method, an expense is recognized when it is incurred. Under a
Revenue Audit Memorandum, when the method of accounting is
accrual, expenses not being claimed as deductions by a taxpayer
in the current year when they are incurred cannot be claimed in
the succeeding year.
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 test does not demand that the amount of income or liability
be known absolutely, only that a taxpayer has at its disposal the
information necessary to compute the amount with reasonable
accuracy.
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. They
cannot give as an excuse the delayed billing, since it could have
inquired into the amount of their obligation and reasonably
determine the amount.

Petitioner appealed to CA, which affirmed CTA, hence the

petition.

Issue: Whether or not the expenses for professional and security

services are deductible.

Held: No. One of the requisites for the deductibility of ordinary

and necessary expenses is that it must have been paid or
incurred during the taxable year. This requisite is dependent on
the method of accounting of the taxpayer. In the case at bar, ICC is
using the accrual method of accounting. Hence, under this

7
Tan v Del Rosario
Facts:
[if !supportLists]1. Two consolidated cases assail the validity of
RA 7496 or the Simplified Net Income Taxation Scheme ("SNIT"),
which amended certain provisions of the NIRC, as well as the
Rules and Regulations promulgated by public respondents
pursuant to said law.
[if !supportLists]2. Petitioners posit that RA 7496 is
unconstitutional as it allegedly violates the following provisions
of the Constitution:
-Article VI, Section 26(1) Every bill passed by the Congress
shall embrace only one subject which shall be expressed in the
title thereof.
- Article VI, Section 28(1) The rule of taxation shall be uniform
and equitable. The Congress shall evolve a progressive system of
taxation.
- Article III, Section 1 No person shall be deprived of . . .
property without due process of law, nor shall any person be
denied the equal protection of the laws.
[if !supportLists]3. Petitioners contended that public
respondents exceeded their rule-making authority in applying
SNIT to general professional partnerships. Petitioner contends
that the title of HB 34314, progenitor of RA 7496, is deficient for
being merely entitled, "Simplified Net Income Taxation Scheme for
the Self-Employed and Professionals Engaged in the Practice of
their Profession" (Petition in G.R. No. 109289) when the full text
of the title actually reads,
'An Act Adopting the Simplified Net Income Taxation Scheme For
The Self-Employed and Professionals Engaged In The Practice of
Their Profession, Amending Sections 21 and 29 of the National
Internal Revenue Code,' as amended. Petitioners also contend it
violated due process.
[if !supportLists]5. The Solicitor General espouses the position
taken by public respondents.
[if !supportLists]6. The Court has given due course to both
petitions.
ISSUE: Whether or not the tax law is unconstitutional for
violating due process
NO. The due process clause may correctly be invoked only when
there is a clear contravention of inherent or constitutional
limitations in the exercise of the tax power. No such
transgression is so evident in herein case.
[if !supportLists]1. Uniformity of taxation, like the concept of
equal protection, merely requires that all subjects or objects of
taxation, similarly situated, are to be treated alike both in
privileges and liabilities. Uniformity does not violate
classification as long as: (1) the standards that are used therefor
are substantial and not arbitrary, (2) the categorization is
germane to achieve the legislative purpose, (3) the law applies,
all things being equal, to both present and future conditions, and
(4) the classification applies equally well to all those belonging to
the same class.
[if !supportLists]2. What is apparent from the amendatory law is
the legislative intent to increasingly shift the income tax system
towards the schedular approach in the income taxation of
individual taxpayers and to maintain, by and large, the present
global treatment on taxable corporations. The Court does not
view this classification to be arbitrary and inappropriate.
ISSUE 2: Whether or not public respondents exceeded their
authority in promulgating the RR
8

No. There is no evident intention of the law, either before or after
the amendatory legislation, to place in an unequal footing or in
significant variance the income tax treatment of professionals
who practice their respective professions individually and of
those who do it through a general professional partnership.
Commissioner of Internal Revenue vs. Carlos Ledesma,
Julieta Ledesma, Vi-
cente Gustilo. Jr. and Amparo Ledesma de Gustilo
G.R. No. L-17509 January 30, 1970
Facts:
On July 9, 1949, Carlos Ledesma, Julieta Ledesma and the spouses
Amparo Ledesma and
Vicente Gustilo, Jr., purchased from their parents, the sugar
plantation known as "Hacienda
Fortuna," consisting of 36 parcels of land, which sugar quota was
included in the sale. By virtue of
the purchase, respondents owned one-third each of the
undivided portion of the plantation. After the
purchase of the plantation, herein respondents took over the
sugar cane farming on the plantation
beginning with the crop year 1948-1949. For the crop year
1948- 1949 the San Carlos Milling Co.,
Ltd. credited the respondents with their shares in the gross sugar
production.
The respondents shared equally the expenses of production, on
the basis of their respective
one-third undivided portions of the plantation. In their individual
income tax returns for the year
1949 the respondents included as part of their income their
respective net profits derived from their
individual sugar production from the "Hacienda Fortuna," as
herein-above stated.
On July 11, 1949, the respondents organized themselves into a
general co-partnership under
the firm name "Hacienda Fortuna", for the "production of sugar
cane for conversion into sugar,
palay and corn and such other products as may profitably be
produced on said hacienda, which
products shall be sold or otherwise disposed of for the purpose
of realizing profit for the partner-
ship." The articles of general co-partnership were registered in
the commercial register of the office
of the Register of Deeds in Bacolod City, Negros Occidental, on
July 14, 1949. Paragraph 14 of the
articles of general partnership provides that the agreement shall
have retroactive effect as of January
1, 1949.
Issue:
Whether or not respondent operated the Hacienda Fortuna as
partnership prior to the exe-
cution of articles of co-partnership.
Ruling:
Yes. Respondents operated the "Hacienda Fortuna" as a
partnership prior to the execution of
the articles of general co-partnership based on their intention as
clearly shown in paragraph 14 of
the articles of general co-partnership which provides that the
partnership agreement "shall be
retroactive as of January 1, 1949.
Pascual and Dragon v. CIR, G.R. No. 78133, October 18, 1988
25
MAR
.date
[GANCAYCO, J.]
FACTS:
Petitioners bought two (2) parcels of land and a year after, they
bought another three (3) parcels of land. Petitioners
subsequently sold the said lots in 1968 and 1970, and realized
9
net profits. The corresponding capital gains taxes were paid by
petitioners in 1973 and 1974 by availing of the tax amnesties
granted in the said years. However, the Acting BIR Commissioner
assessed and required Petitioners to pay a total amount of
P107,101.70 as alleged deficiency corporate income taxes for the
years 1968 and 1970. Petitioners protested the said assessment
asserting that they had availed of tax amnesties way back in
1974. In a reply, respondent Commissioner informed petitioners
that in the years 1968 and 1970, petitioners as co-owners in the
real estate transactions formed an unregistered partnership or
joint venture taxable as a corporation under Section 20(b) and its
income was subject to the taxes prescribed under Section 24,
both of the National Internal Revenue Code that the unregistered
partnership was subject to corporate income tax as distinguished
from profits derived from the partnership by them which is
subject to individual income tax; and that the availment of tax
amnesty under P.D. No. 23, as amended, by petitioners relieved
petitioners of their individual income tax liabilities but did not
relieve them from the tax liability of the unregistered
partnership. Hence, the petitioners were required to pay the
deficiency income tax assessed.
ISSUE:
Whether the Petitioners should be treated as an unregistered
partnership or a co-ownership for the purposes of income tax.
RULING:
The Petitioners are simply under the regime of co-
ownership and not under unregistered partnership.
By the contract of partnership 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 (Art. 1767, Civil Code of the Philippines). In the
present case, there is no evidence that petitioners entered into an
agreement to contribute money, property or industry to a
common fund, and that they intended to divide the profits among
themselves. The sharing of returns does not in itself establish a
partnership whether or not the persons sharing therein have a
joint or common right or interest in the property. There must be
a clear intent to form a partnership, the existence of a juridical
personality different from the individual partners, and the
freedom of each party to transfer or assign the whole property.
Hence, there is no adequate basis to support the proposition that
they thereby formed an unregistered partnership. The two
isolated transactions whereby they purchased properties and
sold the same a few years thereafter did not thereby make them
partners. They shared in the gross profits as co- owners and paid
their capital gains taxes on their net profits and availed of the tax
amnesty thereby. Under the circumstances, they cannot be
considered to have formed an unregistered partnership which is
thereby liable for corporate income tax, as the respondent
commissioner proposes.
LORENZO OA V CIR
29
JAN
GR No. L -19342 | May 25, 1972 | J. Barredo
Facts:
Julia Buales died leaving as heirs her surviving spouse, Lorenzo
Oa and her five children. A civil case was instituted for the
settlement of her state, in which Oa was appointed
administrator and later on the guardian of the three heirs who
were still minors when the project for partition was approved.
This shows that the heirs have undivided interest in 10 parcels
of land, 6 houses and money from the War Damage Commission.
Although the project of partition was approved by the Court, no
attempt was made to divide the properties and they remained
under the management of Oa who used said properties in
business by leasing or selling them and investing the income
derived therefrom and the proceeds from the sales thereof in real
properties and securities. As a result, petitioners properties and
investments gradually increased. Petitioners returned for income
tax purposes their shares in the net income but they did not
10
actually receive their shares because this left with Oa who
invested them.
Based on these facts, CIR decided that petitioners formed an
unregistered partnership and therefore, subject to the corporate
income tax, particularly for years 1955 and 1956. Petitioners
asked for reconsideration, which was denied hence this petition
for review from CTAs decision.
Issue:
W/N there was a co-ownership or an unregistered partnership
W/N the petitioners are liable for the deficiency corporate
income tax
Held:
Unregistered partnership. The Tax Court found that instead of
actually distributing the estate of the deceased among
themselves pursuant to the project of partition, the heirs allowed
their properties to remain under the management of Oa and let
him use their shares as part of the common fund for their
ventures, even as they paid corresponding income taxes on their
respective shares.
Yes. For tax purposes, the co-ownership of inherited properties
is automatically converted into an unregistered partnership the
moment the said common properties and/or the incomes derived
therefrom are used as a common fund with intent to produce
profits for the heirs in proportion to their respective shares in the
inheritance as determined in a project partition either duly
executed in an extrajudicial settlement or approved by the court
in the corresponding testate or intestate proceeding. The reason
is simple. From the moment of such partition, the heirs are
entitled already to their respective definite shares of the estate
and the incomes thereof, for each of them to manage and dispose
of as exclusively his own without the intervention of the other
heirs, and, accordingly, he becomes liable individually for all
taxes in connection therewith. If after such partition, he allows
his share to be held in common with his co-heirs under a single
management to be used with the intent of making profit thereby
in proportion to his share, there can be no doubt that, even if no
document or instrument were executed, for the purpose, for tax
purposes, at least, an unregistered partnership is formed.
For purposes of the tax on corporations, our National Internal
Revenue Code includes these partnerships
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 Mertens Law of Federal Income Taxation, p. 562
Note 63; emphasis ours.)
with the exception only of duly registered general copartnerships
within the purview of the term corporation. It is, therefore,
clear to our mind that petitioners herein constitute a partnership,
insofar as said Code is concerned, and are subject to the income
tax for corporations. Judgment affirmed.
Philex Mining vs CIR
PHILEX MINING CORP. v. CIR
GR No. 125704, August 28, 1998
294 SCRA 687
FACTS: Petitioner Philex Mining Corp. assails the decision of the
Court of Appeals affirming the Court of Tax
Appeals decision ordering it to pay the amount of P110.7 M as
excise tax liability for the period from the 2nd
quarter of 1991 to the 2nd quarter of 1992 plus 20% annual
interest from 1994 until fully paid pursuant to
Sections 248 and 249 of the Tax Code of 1977. Philex protested
the demand for payment of the tax liabilities
stating that it has pending claims for VAT input credit/refund for
the taxes it paid for the years 1989 to 1991 in
the amount of P120 M plus interest. Therefore these claims for
tax credit/refund should be applied against the
tax liabilities.
ISSUE: Can there be an off-setting between the tax liabilities vis-
a-vis claims of tax refund of the petitioner?
11

HELD: No. Philex's claim is an outright disregard of the basic
principle in tax law that taxes are the lifeblood of the
government and so should be collected without unnecessary
hindrance. Evidently, to countenance Philex's
whimsical reason would render ineffective our tax collection
system. Too simplistic, it finds no support in law or in
jurisprudence.
To be sure, Philex cannot be allowed to refuse the payment of its
tax liabilities on the ground that it has a
pending tax claim for refund or credit against the government
which has not yet been granted.Taxes cannot be
subject to compensation for the simple reason that the
government and the taxpayer are not creditors and
debtors of each other. There is a material distinction between a
tax and debt. Debts are due to the Government
in its corporate capacity, while taxes are due to the Government
in its sovereign capacity. xxx There can be no
off-setting of taxes against the claims that the taxpayer may have
against the government. A person cannot
refuse to pay a tax on the ground that the government owes him
an amount equal to or greater than the tax
being collected. The collection of a tax cannot await the results of
a lawsuit against the government.
Abra Valley College v. Aquino
G.R. No. L-39086 June 15, 1988
Paras, J.
Facts:
Petitioner, an educational corporation and institution of
higher learning duly incorporated with the Securities and
Exchange Commission in 1948, filed a complaint to annul and
declare void the Notice of Seizure and the Notice of Sale of its
lot and building located at Bangued, Abra, for non-payment of
real estate taxes and penalties amounting to P5,140.31. Said
Notice of Seizure by respondents Municipal Treasurer and
Provincial Treasurer, defendants below, was issued for the
satisfaction of the said taxes thereon.
The parties entered into a stipulation of facts adopted and
embodied by the trial court in its questioned decision. The trial
court ruled for the government, holding that the second floor of
the building is being used by the director for residential purposes
and that the ground floor used and rented by Northern Marketing
Corporation, a commercial establishment, and thus the property
is not being used exclusively for educational purposes. Instead of
perfecting an appeal, petitioner availed of the instant petition for
review on certiorari with prayer for preliminary injunction
before the Supreme Court, by filing said petition on 17 August
1974.
Issue:
whether or not the lot and building are used exclusively
for educational purposes
Held:
Section 22, paragraph 3, Article VI, of the then 1935
Philippine Constitution, expressly grants exemption from realty
taxes for cemeteries, churches and parsonages or convents
appurtenant thereto, and all lands, buildings, and improvements
used exclusively for religious, charitable or educational purposes.
Reasonable emphasis has always been made that the exemption
extends to facilities which are incidental to and reasonably
necessary for the accomplishment of the main purposes. The use
of the school building or lot for commercial purposes is neither
contemplated by law, nor by jurisprudence. In the case at bar, the
lease of the first floor of the building to the Northern Marketing
12
Corporation cannot by any stretch of the imagination be
considered incidental to the purpose of education. The test of
exemption from taxation is the use of the property for purposes
mentioned in the Constitution.
The decision of the CFI Abra (Branch I) is affirmed
subject to the modification that half of the assessed tax be
returned to the petitioner. The modification is derived from the
fact that the ground floor is being used for commercial purposes
(leased) and the second floor being used as incidental to
education (residence of the director).
N.V REEDERIJ AMSTERDAM AND ROYAL INTEROCEAN
LINES VS. COMMISSIONER OF INTERNAL REVENUE
FACTS:
Both vessels of petitioner N.V. Reederij Amsterdam called on
Philippine ports to load cargoes for foreign destinations.
The freight fees for these transactions were paid in abroad. In
these two transactions, petition Royal Interocean Lines acted as
husbanding agent for a fee or commission on said vessels. No
income tax has been paid by Amsterdam on the freight receipts.
As a result, Commissioner of Internal Revenue filed the
corresponding income tax returns for the petitioner.
Commissioner assessed petitioner for deficiency of income tax, as
a non-resident foreign corporation NOT engaged in trade or
business.
On the assumption that the said petitioner is a foreign
corporation engaged in trade or business in the Philippines,
petitioner Royal Interocean Lines filed an income tax return of
the aforementioned vessels and paid the tax in pursuant to their
supposed classification.
On the same date, petitioner Royal Interocean Lines, as the
husbanding agent of Amsterdam, filed a written protest against
the abovementioned assessment made by the respondent
Commissioner. The protest was denied.
On appeal, CTA modified the assessment by eliminating the
50% fraud compromise penalties imposed upon petitioners.
Petitioner still was not satisfied and decided to appeal to the SC.
ISSUE: Whether or not N.V. Reederij Amsterdam should be
taxed as a foreign corporation not engaged in trade or business in
the Philippines?
HELD:
Petitioner is a foreign corporation not authorized or licensed to
do business in the Philippines. It does not have a branch in the
Philippines, and it only made two calls in Philippine ports, one in
1963 and the other in 1964.
In order that a foreign corporation may be considered engaged
in trade or business, its business transactions must be
continuous. A casual business activity in the Philippines by a
foreign corporation does not amount to engaging in trade or
business in the Philippines for income tax purposes.
A foreign corporation doing business in the Philippines is
taxable on income solely from sources within the Philippines. It is
permitted to claim deductions from gross income but only to the
extent connected with income earned in the Philippines. On the
other hand, foreign corporations not doing business in the
Philippines are taxable on income from all sources within the
Philippines . The tax is 30% (now 35% for non-resident foreign
corp which is also known as foreign corp not engaged in trade or
business) of such gross income. (*take note that in a resident
foreign corp, what is being taxed is the taxable income, which is
with deductions, as compared to a non-resident foreign corp
which the tax base is gross income)
Petiioner Amsterdam is a non-resident foreign corporation,
organized and existing under the laws of the Netherlands with
principal office in Amsterdam and not licensed to do business in
the Philippines.
13
CIR v Solidbank Corporation (G.R. No. 148191)
Facts:
Solidbank filed its Quarterly Percentage Tax Returns reflecting
gross receipts amounting to P1,474,693.44. It alleged that the
total included P350,807,875.15 representing gross receipts from
passive income which was already subjected to 20%final
withholding tax (FWT).
The Court of Tax Appeals (CTA) held in Asian Ban Corp. v
Commissioner, that the 20% FWT should not form part of its
taxable gross receipts for purposes of computing the tax.
Solidbank, relying on the strength of this decision, filed with the
BIR a letter-request for the refund or tax credit. It also filed a
petition for review with the CTA where the it ordered the refund.
The CA ruling, however, stated that the 20% FWT did not form
part of the taxable gross receipts because the FWT was not
actually received by the bank but was directly remitted to the
government.
The Commissioner claims that although the FWT was not actually
received by Solidbank, the fact that the amount redounded to the
banks benefit makes it part of the taxable gross receipts in
computing the Gross Receipts Tax. Solidbank says the CA ruling is
correct.
Issue:
Whether or not the FWT forms part of the gross receipts tax.
Held:
Yes. In a withholding tax system, the payee is the taxpayer, the
person on whom the tax is imposed. The payor, a separate entity,
acts as no more than an agent of the government for the
collection of tax in order to ensure its payment. This amount that
is used to settle the tax liability is sourced from the proceeds
constitutive of the tax base.
These proceeds are either actual or constructive. Both parties
agree that there is no actual receipt by the bank. What needs to
be determined is if there is constructive receipt. Since the payee
is the real taxpayer, the rule on constructive receipt can be
rationalized.
The Court applied provisions of the Civil Code on actual and
constructive possession. Article 531 of the Civil Code clearly
provides that the acquisition of the right of possession is through
the proper acts and legal formalities established. The
withholding process is one such act. There may not
be actual receipt of the income withheld; however, as provided
for in Article 532, possession by any person without any power
shall be considered as acquired when ratified by the person in
whose name the act of possession is executed.
In our withholding tax system, possession is acquired by the
payor as the withholding agent of the government, because the
taxpayer ratifies the very act of possession for the government.
There is thus constructive receipt.
The processes of bookkeeping and accounting for interest on
deposits and yield on deposit substitutes that are subjected to
FWT are tantamount to delivery, receipt or remittance. Besides,
Solidbank admits that its income is subjected to a tax burden
immediately upon receipt, although it claims that it derives no
pecuniary benefit or advantage through the withholding process.
There being constructive receipt, part of which is withheld, that
income is included as part of the tax base on which the gross
receipts tax is imposed.
14
CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATION, INC.
vs. EXECUTIVE SECRETARY- Minimum Corporate Income Tax
FACTS:
CREBA assails the imposition of the minimum corporate income
tax (MCIT) as being violative of the due process clause as it levies
income tax even if there is no realized gain. They also question
the creditable withholding tax (CWT) on sales of real properties
classified as ordinary assets stating that (1) they ignore the
different treatment of ordinary assets and capital assets; (2) the
use of gross selling price or fair market value as basis for the
CWT and the collection of tax on a per transaction basis (and not
on the net income at the end of the year) are inconsistent with
the tax on ordinary real properties; (3) the government collects
income tax even when the net income has not yet been
determined; and (4) the CWT is being levied upon real estate
enterprises but not on other enterprises, more particularly those
in the manufacturing sector.
ISSUE:
Are the impositions of the MCIT on domestic corporations
and CWT on income from sales of real properties classified
as ordinary assets unconstitutional?
HELD:
NO. MCIT does not tax capital but only taxes income as shown by
the fact that the MCIT is arrived at by deducting the capital spent
by a corporation in the sale of its goods, i.e., the cost of goods and
other direct expenses from gross sales. Besides, there are
sufficient safeguards that exist for the MCIT: (1) it is only
imposed on the 4th year of operations; (2) the law allows the
carry forward of any excess MCIT paid over the normal income
tax; and (3) the Secretary of Finance can suspend the imposition
of MCIT in justifiable instances.
The regulations on CWT did not shift the tax base of a real estate
business income tax from net income to GSP or FMV of the
property sold since the taxes withheld are in the nature of
advance tax payments and they are thus just installments on the
annual tax which may be due at the end of the taxable year. As
such the tax base for the sale of real property classified as
ordinary assets remains to be the net taxable income and the use
of the GSP or FMV is because these are the only factors
reasonably known to the buyer in connection with the
performance of the duties as a withholding agent.
Neither is there violation of equal protection even if the CWT is
levied only on the real industry as the real estate industry is, by
itself, a class on its own and can be validly treated different from
other businesses.
CIR V TOKYO SHIPPING CO., LTD. May 26, 1995
Sunday, January 25, 2009 Posted by Coffeeholic Writes
Labels: Case Digests, Taxation
Facts: Private respondent is a foreign corporation represented in
the Philippines by Soriamont Steamship Agencies, Inc. It owns
and operates tramper vessel M/V Gardenia. In December 1980,
NASUTRA chartered M/V Gardenia to load 16,500 metric tons of
raw sugar in the Philippines. On December 23, 1980 Mr.
Edilberto Lising, the operations supervisor of Soriamont Agency,
paid the required income and common carriers taxes in the sum
total of P107,142.75 based on the expected gross receipts of the
vessel. Upon arriving, however, at Guimaras Port of Iloilo, the
vessel found no sugar for loading. On January 10, 1981, NASUTRA
and private respondents agent mutually agreed to have the
vessel sail for Japan without any cargo.
Claiming the pre-payment of income and common carriers taxes
as erroneous since no receipt was realized from the charter
agreement private respondent instituted a claim for tax credit or
15
refund of the sum of P107,142,75 before petitioner commissioner
of Internal Revenue on March 23, 1981. Petitioner failed to act
promptly on the claim, hence, on May 14, 1981, private
respondent filed a petition for review before public respondent
CTA.
Petitioner contested the petition. As special and affirmative
defenses, it alleged the following: that taxes are presumed to
have been collected in accordance with law; that in an action for
refund, the burden of proof is upon the taxpayer to show that
taxes are erroneously or illegally collected and the taxpayers
failure to sustain said burden is fatal to the action for refund; and
that claims for refund are construed strictly against tax
claimants.
After trial, respondent tax court decided in favor of the private
respondent.
Issue: Whether or not tax claimants has the burden of proof to
support its claim of refund.
Held: A claim for refund is in the nature of a claim for exemption
and should be construed in strictissimi juris against the taxpayer.
Likewise, there can be no disagreement with petitioners stance
that private respondent has the burden of proof to establish the
factual basis of its claim for tax refund.
CIR vs. MARUBENI
11
FEB
GR No. 137377| J. Puno
Facts:
CIR assails the CA decision which affirmed CTA, ordering CIR to
desist from collecting the 1985 deficiency income, branch profit
remittance and contractors taxes from Marubeni Corp after
finding the latter to have properly availed of the tax amnesty
under EO 41 & 64, as amended.
Marubeni, a Japanese corporation, engaged in general import and
export trading, financing and construction, is duly registered in
the Philippines with Manila branch office. CIR examined the
Manila branchs books of accounts for fiscal year ending March
1985, and found that respondent had undeclared income from
contracts with NDC and Philphos for construction of a
wharf/port complex and ammonia storage complex respectively.
On August 27, 1986, Marubeni received a letter from CIR
assessing it for several deficiency taxes. CIR claims that the
income respondent derived were income from Philippine
sources, hence subject to internal revenue taxes. On Sept 1986,
respondent filed 2 petitions for review with CTA: the first,
questioned the deficiency income, branch profit remittance and
contractors tax assessments and second questioned the
deficiency commercial brokers assessment.
On Aug 2, 1986, EO 41 declared a tax amnesty for unpaid income
taxes for 1981-85, and that taxpayers who wished to avail this
should on or before Oct 31, 1986. Marubeni filed its tax amnesty
return on Oct 30, 1986.
On Nov 17, 1986, EO 64 expanded EO 41s scope to include estate
and donors taxes under Title 3 and business tax under Chap 2,
Title 5 of NIRC, extended the period of availment to Dec 15, 1986
and stated those who already availed amnesty under EO 41
should file an amended return to avail of the new benefits.
16
Marubeni filed a supplemental tax amnesty return on Dec 15,
1986.
CTA found that Marubeni properly availed of the tax amnesty and
deemed cancelled the deficiency taxes. CA affirmed on appeal.
Issue:
W/N Marubeni is exempted from paying tax
Held:
Yes.
1. On date of effectivity
CIR claims Marubeni is disqualified from the tax amnesty because
it falls under the exception in Sec 4b of EO 41:
Sec. 4. Exceptions.The following taxpayers may not avail
themselves of the amnesty herein granted: xxx b) Those with
income tax cases already filed in Court as of the effectivity hereof;
Petitioner argues that at the time respondent filed for income tax
amnesty on Oct 30, 1986, a case had already been filed and was
pending before the CTA and Marubeni therefore fell under the
exception. However, the point of reference is the date
of effectivity of EO 41 and that the filing of income tax cases must
have been made before and as of its effectivity.
EO 41 took effect on Aug 22, 1986. The case questioning the 1985
deficiency was filed with CTA on Sept 26, 1986. When EO 41
became effective, the case had not yet been filed. Marubeni does
not fall in the exception and is thus, not disqualified from availing
of the amnesty under EO 41 for taxes on income and branch
profit remittance.
The difficulty herein is with respect to the contractors tax
assessment (business tax) and respondents availment of the
amnesty under EO 64, which expanded EO 41s coverage. When
EO 64 took effect on Nov 17, 1986, it did not provide for
exceptions to the coverage of the amnesty for business, estate
and donors taxes. Instead, Section 8 said EO provided that:
Section 8. The provisions of Executive Orders Nos. 41 and 54 which
are not contrary to or inconsistent with this amendatory Executive
Order shall remain in full force and effect.
Due to the EO 64 amendment, Sec 4b cannot be construed to
refer to EO 41 and its date of effectivity. The general rule is that
an amendatory act operates prospectively. It may not be given a
retroactive effect unless it is so provided expressly or by
necessary implication and no vested right or obligations of
contract are thereby impaired.
2. On situs of taxation
Marubeni contends that assuming it did not validly avail of the
amnesty, it is still not liable for the deficiency tax because the
income from the projects came from the Offshore Portion as
opposed to Onshore Portion. It claims all materials and
equipment in the contract under the Offshore Portion were
manufactured and completed in Japan, not in the
Philippines, and are therefore not subject to Philippine
taxes.
(BG: Marubeni won in the public bidding for projects with
government corporations NDC and Philphos. In the contracts, the
prices were broken down into a Japanese Yen Portion (I and II)
and Philippine Pesos Portion and financed either by OECF or by
suppliers credit. The Japanese Yen Portion I corresponds to the
Foreign Offshore Portion, while Japanese Yen Portion II and the
Philippine Pesos Portion correspond to the Philippine Onshore
Portion. Marubeni has already paid the Onshore Portion, a fact
that CIR does not deny.)
CIR argues that since the two agreements are turn-key, they call
for the supply of both materials and services to the client, they
are contracts for a piece of work and are indivisible. The situs of
the two projects is in the Philippines, and the materials provided
and services rendered were all done and completed within the
territorial jurisdiction of the Philippines. Accordingly,
respondents entire receipts from the contracts, including its
receipts from the Offshore Portion, constitute income from
Philippine sources. The total gross receipts covering both labor
17
and materials should be subjected to contractors tax (a tax on
the exercise of a privilege of selling services or labor rather than
a sale on products).
Marubeni, however, was able to sufficiently prove in trial that not
all its work was performed in the Philippines because some of
them were completed in Japan (and in fact subcontracted) in
accordance with the provisions of the contracts. All services for
the design, fabrication, engineering and manufacture of the
materials and equipment under Japanese Yen Portion I were
made and completed in Japan. These services were rendered
outside Philippines taxing jurisdiction and are therefore not
subject to contractors tax. Petition denied.
CIR V SC JOHNSON INC. June 25, 1999
Monday, January 26, 2009 Posted by Coffeeholic Writes
Labels: Case Digests, Taxation
Facts: Respondent is a domestic corporation organized and
operating under the Philippine Laws, entered into a licensed
agreement with the SC Johnson and Son, USA, a non-resident
foreign corporation based in the USA pursuant to which the
respondent was granted the right to use the trademark, patents
and technology owned by the later including the right to
manufacture, package and distribute the products covered by the
Agreement and secure assistance in management, marketing and
production from SC Johnson and Son USA.
For the use of trademark or technology, respondent was obliged
to pay SC Johnson and Son, USA royalties based on a percentage
of net sales and subjected the same to 25% withholding tax on
royalty payments which respondent paid for the period covering
July 1992 to May 1993 in the total amount of P1,603,443.00.
On October 29, 1993, respondent filed with the International Tax
Affairs Division (ITAD) of the BIR a claim for refund of overpaid
withholding tax on royalties arguing that, the antecedent facts
attending respondents case fall squarely within the same
circumstances under which said MacGeorge and Gillette rulings
were issued. Since the agreement was approved by the
Technology Transfer Board, the preferential tax rate of 10%
should apply to the respondent. So, royalties paid by the
respondent to SC Johnson and Son, USA is only subject to 10%
withholding tax.
The Commissioner did not act on said claim for refund. Private
respondent SC Johnson & Son, Inc. then filed a petition for review
before the CTA, to claim a refund of the overpaid withholding tax
on royalty payments from July 1992 to May 1993.
On May 7, 1996, the CTA rendered its decision in favor of SC
Johnson and ordered the CIR to issue a tax credit certificate in the
amount of P163,266.00 representing overpaid withholding tax on
royalty payments beginning July 1992 to May 1993.
The CIR thus filed a petition for review with the CA which
rendered the decision subject of this appeal on November 7,
1996 finding no merit in the petition and affirming in toto the
CTA ruling.
Issue: Whether or not tax refunds are considered as tax
exemptions.
Held: It bears stress that tax refunds are in the nature of tax
exemptions. As such they are registered as in derogation of
sovereign authority and to be construed strictissimi juris against
the person or entity claiming the exemption. The burden of proof
is upon him who claims the exemption in his favor and he must
be able to justify his claim by the clearest grant of organic or
statute law. Private respondent is claiming for a refund of the
18
alleged overpayment of tax on royalties; however there is
nothing on record to support a claim that the tax on royalties
under the RP-US Treaty is paid under similar circumstances as
the tax on royalties under the RP-West Germany Tax Treaty.
CIR VS PROCTER AND GAMBLE PHILIPPINE MANUFACTURING
CORPORATION (204 SCRA 377)
FACTS:
Procter and Gamble Philippines declared dividends payable to its
parent company and sole stockholder, P&G USA. Such dividends
amounted to Php 24.1M. P&G Phil paid a 35% dividend
withholding tax to the BIR which amounted to Php 8.3M It
subsequently filed a claim with the Commissioner of Internal
Revenue for a refund or tax credit, claiming that pursuant to
Section 24(b)(1) of the National Internal Revenue Code, as
amended by Presidential Decree No. 369, the applicable rate of
withholding tax on the dividends remitted was only 15%.
MAIN ISSUE:
Whether or not P&G Philippines is entitled to the refund or tax
credit.
HELD:
YES. P&G Philippines is entitled.
Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate
will be applied to dividend remittances to non-resident corporate
stockholders of a Philippine corporation. This rate goes down to
15% ONLY IF he country of domicile of the foreign stockholder
corporation shall allow such foreign corporation a tax credit for
taxes deemed paid in the Philippines, applicable against the tax
payable to the domiciliary country by the foreign stockholder
corporation. However, such tax credit for taxes deemed paid in
the Philippines MUST, as a minimum, reach an amount
equivalent to 20 percentage points which represents the
difference between the regular 35% dividend tax rate and the
reduced 15% tax rate. Thus, the test is if USA shall allow P&G
USA a tax credit for taxes deemed paid in the Philippines
applicable against the US taxes of P&G USA, and such tax credit
must reach at least 20 percentage points. Requirements were
met.
NOTES: Breakdown:
a) Deemed paid requirement: US Internal Revenue Code, Sec 902:
a domestic corporation (owning 10% of remitting foreign
corporation) shall be deemed to have paid a proportionate extent
of taxes paid by such foreign corporation upon its remittance of
dividends to domestic corporation.
b) 20 percentage points requirement: (computation is as follows)
P 100.00 -- corporate income earned by P&G Phils
x 35% -- Philippine income tax rate
P 35.00 -- paid by P&G Phil as corporate income tax
P 100.00
- 35.00
65. 00 -- available for remittance
P 65. 00
x 35% -- Regular Philippine dividend tax rate
P 22.75 -- regular dividend tax
P 65.0o
x 15% -- Reduced dividend tax rate
P 9.75 -- reduced dividend tax
P 65.00 -- dividends remittable
- 9.75 -- dividend tax withheld at reduced rate
P 55.25 -- dividends actually remitted to P&G USA
Dividends actually
19
remitted by P&G Phil = P 55.25
---------------------------------- ------------- x P35 = P29.75
Amount of accumulated P 65.00
profits earned
P35 is the income tax paid.
P29.75 is the tax credit allowed by Sec 902 of US Tax Code for
Phil corporate income tax deemed paid by the parent company.
Since P29.75 is much higher than P13, Sec 902 US Tax Code
complies with the requirements of sec 24 NIRC. (I did not
understand why these were divided and multiplied. Point is,
requirements were met)
Reason behind the law:
Since the US Congress desires to avoid or reduce double taxation
of the same income stream, it allows a tax credit of both (i) the
Philippine dividend tax actually withheld, and (ii) the tax credit
for the Philippine corporate income tax actually paid by P&G
Philippines but deemed paid by P&G USA.
Section 24(b)(1) does not create a tax exemption nor does it
provide a tax credit; it is a provision which specifies when a
particular (reduced) tax rate is legally applicable.
Section 24(b)(1) of the NIRC seeks to promote the in-flow of
foreign equity investment in the Philippines by reducing the tax
cost of earning profits here and thereby increasing the net
dividends remittable to the investor. The foreign investor,
however, would not benefit from the reduction of the Philippine
dividend tax rate unless its home country gives it some relief
from double taxation by allowing the investor additional tax
credits which would be applicable against the tax payable to such
home country. Accordingly Section 24(b)(1) of the NIRC requires
the home or domiciliary country to give the investor corporation
a deemed paid tax credit at least equal in amount to the 20
percentage points of dividend tax foregone by the Philippines, in
the assumption that a positive incentive effect would thereby be
felt by the investor.

Moreover, under the Philippines-United States Convention With

Respect to Taxes on Income, the Philippines, by treaty
commitment, reduced the regular rate of dividend tax to a
maximum of 20% of he gross amount of dividends paid to US
parent corporations, and established a treaty obligation on the
part of the United States that it shall allow to a US parent
corporation receiving dividends from its Philippine subsidiary a
[tax] credit for the appropriate amount of taxes paid or accrued
to the Philippines by the Philippine [subsidiary].

Note:
The NIRC does not require that the US tax law deem the parent
corporation to have paid the 20 percentage points of dividend tax
waived by the Philippines. It only requires that the US shall
allow P&G-USA a deemed paid tax credit in an amount
equivalent to the 20 percentage points waived by the Philippines.

20
CYANAMID PHILIPPINES, INC. VS. CA, CTA AND CIR- Surtax
Facts:
Petitioner is a corporation organized under Philippine laws and
is a wholly owned subsidiary of American Cyanamid Co. based in
Maine, USA. It is engaged in the manufacture of pharmaceutical
products and chemicals, a wholesaler of imported finished goods
and an imported/indentor. In 1985 the CIR assessed on
petitioner a deficiency income tax of P119,817) for the year 1981.
Cyanamid protested the assessments particularly the 25% surtax
for undue accumulation of earnings. It claimed that said profits
were retained to increase petitioners working capital and it
would be used for reasonable business needs of the company.
The CIR refused to allow the cancellation of the assessments,
petitioner appealed to the CTA. It claimed that there was not legal
basis for the assessment because 1) it accumulated its earnings
and profits for reasonable business requirements to meet
working capital needs and retirement of indebtedness 2) it is a
wholly owned subsidiary of American Cyanamid Company, a
foreign corporation, and its shares are listed and traded in the NY
Stock Exchange. The CTA denied the petition stating that the law
permits corporations to set aside a portion of its retained
earnings for specified purposes under Sec. 43 of the Corporation
Code but that petitioners purpose did not fall within such
purposes. It found that there was no need to set aside such
retained earnings as working capital as it had considerable liquid
funds. Those corporations exempted from the accumulated
earnings tax are found under Sec. 25 of the NIRC, and that the
petitioner is not among those exempted. The CA affirmed the
CTAs decision.
Issue: Whether or not the accumulation of income was justified.
Held:
In order to determine whether profits are accumulated for the
reasonable needs of the business to avoid the surtax upon the
shareholders, it must be shown that the controlling intention of
the taxpayer is manifested at the time of the accumulation, not
intentions subsequently, which are mere afterthoughts. The
accumulated profits must be used within reasonable time after
the close of the taxable year. In the instant case, petitioner did not
establish by clear and convincing evidence that such accumulated
was for the immediate needs of the business.
To determine the reasonable needs of the business, the United
States Courts have invented the Immediacy Test which
construed the words reasonable needs of the business to mean
the immediate needs of the business, and it is held that if the
corporation did not prove an immediate need for the
accumulation of earnings and profits such was not for reasonable
needs of the business and the penalty tax would apply. (Law of
Federal Income Taxation Vol 7) The working capital needs of a
business depend on the nature of the business, its credit policies,
the amount of inventories, the rate of turnover, the amount of
accounts receivable, the collection rate, the availability of credit
and other similar factors. The Tax Court opted to determine the
working capital sufficiency by using the ration between the
current assets to current liabilities. Unless, rebutted, the
presumption is that the assessment is correct. With the
petitioners failure to prove the CIR incorrect, clearly and
conclusively, the Tax Courts ruling is upheld.
21
CIR v. YMCA
GR No. 124043, October 14, 1998
298 SCRA 83
FACTS: Private Respondent YMCA--a non-stock, non-profit
institution, which conducts various programs beneficial to the
public pursuant to its religious, educational and charitable
objectives--leases out a portion of its premises to small shop
owners, like restaurants and canteen operators, deriving
substantial income for such. Seeing this, the Commissioner of
Internal Revenue (CIR) issued an assessment to private
respondent for deficiency income tax, deficiency expanded
withholding taxes on rentals and professional fees and deficiency
withholding tax on wages. YMCA opposed arguing that its rental
income is not subject to tax, mainly because of the provisions of
Section 27 of NIRC which provides that civic league or
organizations not organized for profit but operate exclusively for
promotion of social welfare and those organized exclusively for
pleasure, recreation and other non-profitble businesses shall not
be taxed.
ISSUE: Is the contention of YMCA tenable?
HELD: No. Because taxes are the lifeblood of the nation, the Court
has always applied the doctrine of strict in interpretation in
construing tax exemptions. Furthermore, a claim of statutory
exemption from taxation should be manifest and unmistakable
from the language of the law on which it is based. Thus, the
claimed exemption "must expressly be granted in a statute stated
in a language too clear to be mistaken."
CIR v. PLDT
Facts:
For equipment, machineries and spare parts it imported from
October 1, 1992 to May 31,1994, PLDT paid the BIR the amount
of P164,510,953.00, broken down as follows: (a)compensating
tax of P126,713,037.00; (b) advance sales tax of P12,460,219.00
and (c)other internal revenue taxes of P25,337,697.00. For
similar importations made betweenMarch 1994 to May 31, 1994,
PLDT paid P116,041,333.00 value-added tax (VAT).(Note: PLDT
did not necessarily pay VAT directly to the BIR.)After a ruling
was handed down by the BIR to the effect that the PLDT is
exempt from paying all taxes on its franchise and earnings
including the VAT because of the 3%franchise tax imposed on it
by Section 12 of RA 7082, the PLDT claimed from the BIR atax
credit/refund of the VAT, compensating taxes, advance sales
taxes and other taxes ithad been paying. When its claim was not
acted upon by the BIR, PLDT went to the CTA.The CTA ruled for
PLDT, but made deductions (refundable amounts which period
toclaim had already prescribed) from the total tax refund prayed
for by PLDT. The CIR appealed to the CA. The CA affirmed the
CTAs decision. The CIR appealed to the SC,saying that the CA
erred in ruling that because of the 3% franchise tax the PLDT
isexempt from paying
all
taxes, including indirect taxes.
Issue:WON the 3% franchise tax exempts the PLDT from paying
all other taxes, includingindirect taxes.
Held: No.1.Direct taxes are those exacted from the very person
who, it is intended or desired,should pay them. They are
impositions for which a taxpayer is directly liable onthe
transaction or business he is engaged in.2.Indirect taxes are those
that are demanded, in the first instance, from, or are paid by, one
22
person in the expectation and intention that he can shift the
burden tosomeone else. In other words, indirect taxes are taxes
wherein the liability for the payment of the tax falls on one
person but the burden thereof can be shifted or passed on to
another person, such as when the tax is imposed upon goods
beforereaching the consumer who ultimately pays for it. When
the seller passes on thetax to his buyer, he, in effect, shifts the tax
burden, not the liability to pay it, to the purchaser as part of the
price of goods sold or services rendered.3.The NIRC classifies
VAT as
an indirect tax the amount of [which] may be shifted or passed
on to the buyer, transferee or lessee of the goods.
The 10%VAT on importation of goods is in the nature of an excise
tax levied on the privilege of importing articles. It is imposed on
all taxpayers who import goods.
ATLAS CONSOLIDATED MINING DEVT CORP vs. CIR
524 SCRA 73, 103
GR Nos. 141104 & 148763, June 8, 2007
"The taxpayer must justify his claim for tax exemption or refund
by the clearest grant of organic or statute law and should not be
permitted to stand on vague implications."
"Export processing zones (EPZA) are effectively considered as
foreign territory for tax purposes."
FACTS: Petitioner corporation, a VAT-registered taxpayer
engaged in mining, production, and sale of various mineral
products, filed claims with the BIR for refund/credit of input VAT
on its purchases of capital goods and on its zero-rated sales in the
taxable quarters of the years 1990 and 1992. BIR did not
immediately act on the matter prompting the petitioner to file a
petition for review before the CTA. The latter denied the claims
on the grounds that for zero-rating to apply, 70% of the
company's sales must consists of exports, that the same were not
filed within the 2-year prescriptive period (the claim for 1992
quarterly returns were judicially filed only on April 20, 1994),
and that petitioner failed to submit substantial evidence to
support its claim for refund/credit.
The petitioner, on the other hand, contends that CTA failed to
consider the following: sales to PASAR and PHILPOS within the
EPZA as zero-rated export sales; the 2-year prescriptive period
should be counted from the date of filing of the last adjustment
return which was April 15, 1993, and not on every end of the
applicable quarters; and that the certification of the independent
CPA attesting to the correctness of the contents of the summary
of suppliers invoices or receipts examined, evaluated and
audited by said CPA should substantiate its claims.
ISSUE: Did the petitioner corporation sufficiently establish the
factual bases for its applications for refund/credit of input VAT?
HELD: No. Although the Court agreed with the petitioner
corporation that the two-year prescriptive period for the filing of
claims for refund/credit of input VAT must be counted from the
date of filing of the quarterly VAT return, and that sales to PASAR
and PHILPOS inside the EPZA are taxed as exports because these
export processing zones are to be managed as a separate customs
territory from the rest of the Philippines, and thus, for tax
purposes, are effectively considered as foreign territory, it still
denies the claims of petitioner corporation for refund of its input
VAT on its purchases of capital goods and effectively zero-rated
sales during the period claimed for not being established and
substantiated by appropriate and sufficient evidence.
Tax refunds are in the nature of tax exemptions. It is regarded
as in derogation of the sovereign authority, and should be
construed in strictissimi juris against the person or entity
claiming the exemption. The taxpayer who claims for exemption
must justify his claim by the clearest grant of organic or statute
law and should not be permitted to stand on vague implications.
23
Aguinaldo Industries Co. vs. CIR
Facts: Aguinaldo Industries is engaged in the manufacture of
fishing nets (a tax exempt industry), which is handled by its Fish
Nets Division. It is also engaged in the manufacture of furniture
which is operated by its Furniture Division. Each division is
provided with separate books of accounts. The income from the
Fish Nets Division, miscellaneous income of the Fish Nets
Division, and and the income from the Furniture Division are
computed individually.
Petitioner acquired a parcel of land in Muntinlupa Rizal as site for
its fishing net factory. The transaction was entered in the books
of the Fish Nets Division. The company then found another parcel
of land in Marikina Heights, which was more suitable. They then
sold the Muntinlupa property and the profit derived from the sale
was entered in the books of the Fish Nets Division as
miscellaneous income to separate it from its tax exempt income.
For 1957, petitioner filed 2 separate ITRs (one for Fish Nets and
one for Furniture). After investigation, BIR examiners found that
the Fish Nets Div deducted from its gross income PhP 61k as
additional remuneration paid to the companys officers. Such
amount was taken from the sale of the land and was reported as
part of the selling expenses. The examiners recommended that
such deduction be disallowed. Petitioner then asserted in its
letter that it should be allowed because it was paid as bonus to its
officers pursuant to Sec.3 of its by-laws: From the net profits
shall be deducted for allowance of the Pres. - 3%, VP - 1%,
members of the Board - 10%.
CTA imposed a 5% surcharge and 1% monthly interest for the
deficiency assessment. Petitioner then stressed that the profit
derived from the sale of the land is not taxable because the Fish
Nets Div enjoys tax exemption under RA 901.
Issues:
(1) Whether the bonus given to the officers of the petitioner upon
the sale of its Muntinlupa land is an ordinary and necessary
business expense deductible for income tax purposes; and
(2) Whether petitioner is liable for surcharge and interest for late
payment.
Held:
(1) YES. These extraordinary and unusual amounts paid by
petitioner to these directors in the guise and form of
compensation for their supposed services as such, without any
relation to the measure of their actual services, cannot be
regarded as ordinary and necessary expenses within the meaning
of the law. This posture is in line with the doctrine in the law of
taxation that the taxpayer must show that its claimed deductions
clearly come within the language of the law since allowances, like
exemptions, are matters of legislative grace.
Moreover, petitioner cannot now claim that the profit from the
sale is tax exempt. At the administrative level, the petitioner
implicitly admitted that the profit it derived from the sale of its
Muntinlupa land, a capital asset, was a taxable gain which was
precisely the reason why for tax purposes the petitioner
deducted therefrom the questioned bonus to its corporate
officers as a supposed item of expense incurred for the sale of the
said land, apart from the P51,723.72 commission paid by the
petitioner to the real estate agent who indeed effected the sale.
The BIR therefore had no occasion to pass upon the issue.
To allow a litigant to assume a different posture when he comes
before the court and challenge the position he had accepted at
the administrative level, would be to sanction a procedure
whereby the court which is supposed to review administrative
determinations would not review, but determine and decide
for the first time, a question not raised at the administrative
forum. The requirement of prior exhaustion of administrative
24
remedies gives administrative authorities the prior opportunity
to decide controversies within its competence, and in much the
same way that, on the judicial level, issues not raised in the lower
court cannot be raised for the first time on appeal. Up to the time
the questioned decision of the respondent Court was rendered,
the petitioner had always implicitly admitted that the disputed
capital gain was taxable, although subject to the deduction of the
bonus paid to its corporate officers. It was only after the said
decision had been rendered and on a motion for reconsideration
thereof, that the issue of tax exemption was raised by the
petitioner for the first time. It was thus not one of the issues
raised by petitioner in his petition and supporting memorandum
in the CTA.
(2) YES. Interest and surcharges on deficiency taxes are
imposable upon failure of the taxpayer to pay the tax on the date
fixed in the law for the payment thereof, which was, under the
unamended Section 51 of the Tax Code, the 15th day of the 5th
month following the close of the fiscal year in the case of
taxpayers whose tax returns were made on the basis of fiscal
years. A deficiency tax indicates non-payment of the correct tax,
and such deficiency exists not only from the assessment thereof
but from the very time the taxpayer failed to pay the correct
amount of tax when it should have been paid and the imposition
thereof is mandatory even in the absence of fraud or willful
failure to pay the tax is full.
Esso Standard Eastern Inc. vs. CIR (G.R. Nos. L-28508-9, July
7, 1989)
Post under case digests, Taxation at Saturday, March 10, 2012
Posted by Schizophrenic Mind
Facts: In CTA Case No. 1251, Esso Standard Eastern Inc. (Esso)
deducted from its gross income for 1959, as part of its ordinary
and necessary business expenses, the amount it had spent for
drilling and exploration of its petroleum concessions. This claim
was disallowed by the Commissioner of Internal Revenue (CIR)
on the ground that the expenses should be capitalized and might
be written off as a loss only when a "dry hole" should result. Esso
then filed an amended return where it asked for the refund of
P323,279.00 by reason of its abandonment as dry holes of several
of its oil wells. Also claimed as ordinary and necessary expenses
in the same return was the amount of P340,822.04, representing
margin fees it had paid to the Central Bank on its profit
remittances to its New York head office.
On August 5, 1964, the CIR granted a tax credit of P221,033.00
only, disallowing the claimed deduction for the margin fees paid
on the ground that the margin fees paid to the Central Bank could
not be considered taxes or allowed as deductible business
expenses.
Esso appealed to the Court of Tax Appeals (CTA) for the refund of
the margin fees it had earlier paid contending that the margin
fees were deductible from gross income either as a tax or as an
ordinary and necessary business expense. However, Essos
appeal was denied.
Issues:
(1) Whether or not the margin fees are taxes.
(2) Whether or not the margin fees are necessary and ordinary
business expenses.
25
Held:
(1) No. A tax is levied to provide revenue for government
operations, while the proceeds of the margin fee are applied to
strengthen our country's international reserves. The margin fee
was imposed by the State in the exercise of its police power and
not the power of taxation.
(2) No. Ordinarily, an expense will be considered 'necessary'
where the expenditure is appropriate and helpful in the
development of the taxpayer's business. It is 'ordinary' when it
connotes a payment which is normal in relation to the business of
the taxpayer and the surrounding circumstances. Since the
margin fees in question were incurred for the remittance of funds
to Esso's Head Office in New York, which is a separate and
distinct income taxpayer from the branch in the Philippines, for
its disposal abroad, it can never be said therefore that the margin
fees were appropriate and helpful in the development of Esso's
business in the Philippines exclusively or were incurred for
purposes proper to the conduct of the affairs of Esso's branch in
the Philippines exclusively or for the purpose of realizing a profit
or of minimizing a loss in the Philippines exclusively. If at all, the
margin fees were incurred for purposes proper to the conduct of
the corporate affairs of Esso in New York, but certainly not in the
Philippines.
CASE: Far East Bank & Trust Company vs. Diaz Realty, Inc.
I. FACTS
In August 1973, Diaz and company contracted a loan from Pacific
Banking Corporation (PaBC) amounting to P 720,000, with
interest of 12% per annum which was later increased to 14%,
16%, 18% and 20% respectively. The loan was secured by a real
estate mortgage over two parcels of land owned by Diaz Realty
both located in Davao City. In 1981, Allied Company rented an
office space in the building constructed in the land mortgaged; it
was further agreed that the monthly rental payments of Allied
Company shall be directly paid to the mortgagee [PaBC] for the
lessors account. Allied bank paid the monthly rentals to PaBC in
conformance with the contract. On July 5, 1985, Central Bank
closed PaBC, placed it under receivership, and appointed Renan
Santos as its liquidator. In December 1986, Far East Bank Trust
Company purchased the credit of Diaz & Company in favor of
PaBc. However, it was only in March 23, 1988 that Diaz was
informed about the said purchase of credit.
According to FEBTC, on March 23, 1988, Antonio Diaz (President
of Diaz & Company and Vice-President of Diaz Realty) went to
PaBCs office which by then housed FEBTC and was told that the
latter had acquired PaBC. Diaz was told by cashier Ramon Lim
that as of the said date, his outstanding balance with his loan is P
1,447,142.03. Diaz asked the defendant to make an accounting of
Allied Banks monthly rental payments. In December 14, 1988,
Diaz furnished a check to FEBTC in the amount of P 1,450, 000 to
avoid further payments of interests and other penalties.
However, FEBTC did not accept it as payment, instead, Diaz was
asked to deposit the same to defendants Davao City Branch
Office, pending the approval of Central Bank liquidator Renan
Santos. In the meantime, Diaz asked the defendant to reduce the
interest from 20% to 12% per annum; no reply was received
from FEBTC. The defendant asked Diaz to change the P 1,450,000
payment to a money market placement which he obeyed and that
which expired in April 14, 1989. When there was still no
response from the defendant on whether or not it will accept his
26
tender of payment, he filed his case at the Davao Regional Trial
Court.
In its responsive pleading, the defendant set up the following
affirmative defenses: that in December 1986, FEBTC purchased
from PaBC the account of Diaz for a total consideration of P
1,828, 875 and that despite the purchase PaBC Davao branch
continued to collect interests and penalty charges on the loan
from January 6, 1988 to July 8, 1988. It was not FEBTC but PaBC
that collected the interest rates mentioned in the complaint and it
is not true that FEBTC imposed exorbitant interest rates. That as
a matter of fact, FEBTC tried to negotiate with the plaintiffs and
that FEBTC has no knowledge of the rates imposed previously by
PaBC. Therefore, FEBTC could not be held responsible for
transactions which took place before the purchase and that
defendant acted at the right time to settle the account.
II. ISSUES
A. Whether or not the CA correctly ruled that the validity of the
tender of payment was not properly raised in the RTC and could
not thus be raised in the appeal.
B. Whether or not the CA erred in failing to apply settled
jurisprudential principles militating against the private
respondents contention that a valid tender of payment had been
made by it.
C. Whether or not the CA correctly found that the transaction
between petitioner and PaBC was an innefective novation and
that the consent of private respondents was necessary therefor.
D. Whether or not the CA erred in refusing to apply the rate of
interest freely stipulated upon by the parties to the respondents
obligation.
E. Whether or not the CA committed an irreconcilable error in
ordering the parties to re-negotiate the terms of the contract
while finding at the same time that the mortgage contract
containing the lease was valid.
F. Whether or not the petition, as argued by private respondent
raises questions of fact not reviewable by certiorari.
III. RESOLUTION
A. A check does not constitute legal tender, and that a creditor
may validly refuse it. It must be emphasized, however, that this
dictum does not prevent a creditor from accepting a check as
payment. Meaning, the creditor has the option and the discretion
of refusing or accepting it. Therefore, since the petitioner bank
did not refuse respondents check, and since the check was
cleared, it served as a valid tender of payment.
B. The transfer of credit from PaBC to FEBTC is not an ineffective
novation but instead a mere assignment of credit. Even so, FEBTC
had the right to collect the full value of the credit from Diaz,
ubject to the terms as originally agreed upon in the Promissory
Note.
C. Petitioner bank as assignee of respondents credit is entitled to
the full interest rate of 20% in the computation of debt of Diaz as
stipulated in the August 26, 1983 agreement. However, since
there was a valid tender f payment made on November 14, 1988,
the accrual of interest shall stop at that date. Thus, Diaz should
pay FEBTC the principal amount of P 1,067,000 plus accrued
interet thereon at 20% until November 14, 1988 less interest
payments given to PaBc from December 1986-July 8, 1988. After
that, interest should be computed at 12% per annum until full
payment.
D. The petition is hereby denied. The decision of the CA is
affirmed with the following modifications: respondent Diaz
Realty is ordered to pay FEBTC its principal obligation amounting
to P 1,067,000 with interest thereon computed ar 20% per
annum until November 14, 1988 less any interest payments
made to PaBC. Thereafter, interest shall be computed at 12% per
annum until fully paid.
27
CIR V GENERAL FOODS
14
FEB
GR No. 143672| April 24, 2003 | J. Corona
Test of Reasonableness
Facts:
Respondent corporation General Foods (Phils), which is engaged
in the manufacture of Tang, Calumet and Kool-Aid, filed its but also ordinary.
income tax return for the fiscal year ending February 1985 and
claimed as deduction, among other business expenses,
P9,461,246 for media advertising for Tang.
The Commissioner disallowed 50% of the deduction claimed and
assessed deficiency income taxes of P2,635,141.42 against
General Foods, prompting the latter to file an MR which was
denied.
General Foods later on filed a petition for review at CA, which
reversed and set aside an earlier decision by CTA dismissing the
companys appeal.
Issue:
W/N the subject media advertising expense for Tang was
ordinary and necessary expense fully deductible under the NIRC
Held:
No. Tax exemptions must be construed in stricissimi juris against
the taxpayer and liberally in favor of the taxing authority, and he
who claims an exemption must be able to justify his claim by the
clearest grant of organic or statute law. Deductions for income
taxes partake of the nature of tax exemptions; hence, if tax
exemptions are strictly construed, then deductions must also be
strictly construed.
To be deductible from gross income, the subject advertising
expense must comply with the following requisites: (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.
While the subject advertising expense was paid or incurred
within the corresponding taxable year and was incurred in
carrying on a trade or business, hence necessary, the
parties views conflict as to whether or not it was ordinary. To be
deductible, an advertising expense should not only be necessary
The Commissioner maintains that the subject advertising
expense was not ordinary on the ground that it failed the two
conditions set by U.S. jurisprudence: first, reasonableness of the
amount incurred and second, the amount incurred must not be a
capital outlay to create goodwill for the product and/or private
respondents business. Otherwise, the expense must be
considered a capital expenditure to be spread out over a
reasonable time.
There is yet to be a clear-cut criteria or fixed test for determining
the reasonableness of an advertising expense. There being no
hard and fast rule on the matter, the right to a deduction depends
on a number of factors such as but not limited to: the type and
size of business in which the taxpayer is engaged; the volume and
amount of its net earnings; the nature of the expenditure itself;
the intention of the taxpayer and the general economic
conditions. It is the interplay of these, among other factors and
properly weighed, that will yield a proper evaluation.
The Court finds the subject expense for the advertisement of a
single product to be inordinately large. Therefore, even if it is
necessary, it cannot be considered an ordinary expense
deductible under then Section 29 (a) (1) (A) of the NIRC.
Advertising is generally of two kinds: (1) advertising to stimulate
the current sale of merchandise or use of services and (2)
advertising designed to stimulate the future sale of merchandise
or use of services. The second type involves expenditures
incurred, in whole or in part, to create or maintain some form of
goodwill for the taxpayers trade or business or for the industry
28
or profession of which the taxpayer is a member. If the
expenditures are for the advertising of the first kind, then, except
as to the question of the reasonableness of amount, there is no
doubt such expenditures are deductible as business expenses. If,
however, the expenditures are for advertising of the second kind,
then normally they should be spread out over a reasonable
period of time.
The companys media advertising expense for the promotion of a
single product is doubtlessly unreasonable considering it
comprises almost one-half of the companys entire claim for
marketing expenses for that year under review. Petition
granted, judgment reversed and set aside.
Commissioner of Internal Revenue vs W.E. Lednicky and
Maria Lednicky
GR Nos. L-18262 and L-21434, 1964
FACTS:
Spouses are both American citizens residing in the Philippines
and have derived all their income from Philippine sources for
taxable years in question.
On March, 1957, filed their ITR for 1956, reporting gross income
of P1,017,287.65 and a net income of P 733,809.44. On March
1959, file an amended claimed deduction of P 205,939.24
paid in 1956 to the United States government as federal
income tax of 1956.
ISSUE:
Whether a citizen of the United States residing in the Philippines,
who derives wholly from sources within the Philippines, may
deduct his gross income from the income taxes he has paid to the
United States government for the said taxable year?
HELD:
An alien resident who derives income wholly from sources
within the Philippines may not deduct from gross income the
income taxes he paid to his home country for the taxable year.
The right to deduct foreign income taxes paid given only where
alternative right to tax credit exists.
Section 30 of the NIRC, Gross Income Par. C (3): Credits against
tax per taxes of foreign countries.
If the taxpayer signifies in his return his desire to have the
benefits of this paragraph, the tax imposed by this shall be
credited with: Paragraph (B), Alien resident of the Philippines;
and, Paragraph C (4), Limitation on credit.
An alien resident not entitled to tax credit for foreign income
taxes paid when his income is derived wholly from sources
within the Philippines.
Double taxation becomes obnoxious only where the taxpayer is
taxed twice for the benefit of the same governmental entity. In
the present case, although the taxpayer would have to pay two
taxes on the same income but the Philippine government only
receives the proceeds of one tax, there is no obnoxious double
taxation.
29

Taxation Case
Commissioner of Internal Revenue vs. Central Luzon Drug
Corporation GR No. 159647, April 15, 2005
Facts:
Respondent is a domestic corporation engaged in the retailing of
medicines and other pharmaceutical products. In 1996 it
operated six (6) drugstores under the business
name and style Mercury Drug. From January to December 1996
respondent granted
20% sales discount to qualified senior citizens on their purchases
of medicines pursuant
to RA 7432. For said period respondent granted a total of
904,769
. On April 15, 1997, respondent filed its annual ITR for taxable
year 1996 declaring therein net losses. On Jan. 16, 1998
respondent filed with petitioner a claim for tax
refund/credit of 904,769.00 alledgedly arising from the 20%
sales discount. Unable
to obtain affirmative response from petitioner, respondent
elevated its claim to the CTA via Petition for Review. CTA
dismissed the same but on MR, CTA reversed its earlier ruling
and ordered petitioner to issue a Tax Credit Certificate in favor of
respondent citing CA GR SP No. 60057 (May 31, 2001, Central
Luzon Drug Corp. vs. CIR) citing that Sec. 229 of RA 7432 deals
exclusively with illegally collected or erroneously paid taxes but
that there are other situations which may warrant a tax
credit/refund. CA affirmed CTA decision reasoning that RA 7432
required neither a tax liability nor a payment of taxes by private
establishments prior to the availment of a tax credit. Moreover,
such credit is not tantamount to an unintended benefit from the
law, but rather a just compensation for the taking of private
property for public use.
ISSUE:
W/N respondent, despite incurring a net loss, may still claim the
20% sales discount as a tax credit.
RULING:
Yes, it is clear that Sec. 4a of RA 7432 grants to senior citizens the
privilege of obtaining a 20% discount on their purchase of
medicine from any private establishment in the country. The
latter may then claim the cost of the discount as a
tax credit
. Such credit can be claimed even if the establishment operates at
a loss. A
tax credit
generally refers to an amount that is subtracted directly from
ones total tax liability. It is an allowance against the tax itself
or a deduction from what is owed by
a taxpayer to the government. A tax credit should be understood
in relation to other tax concepts. One of these is
tax deduction
which is subtraction from income for tax purposes, or an
amount that is allowed by law to reduce income prior to the
application of the tax rate to compute the
amount of tax wh
ich is due. In other words, whereas a tax credit reduces the tax
due,
tax deduction reduces the income subject to tax in order to arrive
at the taxable income. Since a
tax credit
is used to reduce directly the tax that is due, there ought to be a
tax liability
before
the
tax credit
can be applied. Without that liability, any
tax
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PHILEX MINING CORP. v. CIR
GR No. 125704, August 28, 1998
294 SCRA 687
FACTS: Petitioner Philex Mining Corp. assails the decision of the
Court of Appeals affirming the Court of Tax
Appeals decision ordering it to pay the amount of P110.7 M as
excise tax liability for the period from the 2nd
quarter of 1991 to the 2nd quarter of 1992 plus 20% annual
interest from 1994 until fully paid pursuant to
Sections 248 and 249 of the Tax Code of 1977. Philex protested
the demand for payment of the tax liabilities
stating that it has pending claims for VAT input credit/refund for
the taxes it paid for the years 1989 to 1991 in
the amount of P120 M plus interest. Therefore these claims for
tax credit/refund should be applied against the
tax liabilities.
ISSUE: Can there be an off-setting between the tax liabilities vis-
a-vis claims of tax refund of the petitioner?
HELD: No. Philex's claim is an outright disregard of the basic
principle in tax law that taxes are the lifeblood of the
government and so should be collected without unnecessary
hindrance. Evidently, to countenance Philex's
whimsical reason would render ineffective our tax collection
system. Too simplistic, it finds no support in law or in
jurisprudence.
To be sure, Philex cannot be allowed to refuse the payment of its
tax liabilities on the ground that it has a
pending tax claim for refund or credit against the government
which has not yet been granted.Taxes cannot be
subject to compensation for the simple reason that the
government and the taxpayer are not creditors and
debtors of each other. There is a material distinction between a
tax and debt. Debts are due to the Government
in its corporate capacity, while taxes are due to the Government
in its sovereign capacity. xxx There can be no
off-setting of taxes against the claims that the taxpayer may have
against the government. A person cannot
refuse to pay a tax on the ground that the government owes him
an amount equal to or greater than the tax
being collected. The collection of a tax cannot await the results of
a lawsuit against the government.
BASILAN ESTATES, INC. v. CIR G.R. No. L-22492 September 5,
1967 Bengzon, J.P., J.
Doctrine:
The income tax law does not authorize the depreciation of an asset
beyond its acquisition cost. Hence, a deduction over and above such
cost cannot be claimed and allowed. The reason is that deductions
from gross income are privileges, not matters of right. They are not
created by implication but upon clear expression in the law.
Facts:
Basilan Estates, Inc. claimed deductions for the depreciation of its
assets on the basis of their acquisition cost. As of January 1, 1950
it changed the depreciable value of said assets by increasing it to
conform with the increase in cost for their replacement.
Accordingly, from 1950 to 1953 it deducted from gross income
the value of depreciation computed on the reappraised value.
CIR disallowed the deductions claimed by petitioner,
consequently assessing the latter of deficiency income taxes.
Issue:
Whether or not the depreciation shall be determined on the
acquisition cost rather than the reappraised value of the assets
Held:
Yes. The following tax law provision allows a deduction from
gross income for depreciation but limits the recovery to the
capital invested in the asset being depreciated:
(1)In general. A reasonable allowance for deterioration of
property arising out of its use or employment in the business or
trade, or out of its not being used: Provided, That when the
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allowance authorized under this subsection shall equal the
capital invested by the taxpayer . . . no further allowance shall be
made. . . .
The income tax law does not authorize the depreciation of an
asset beyond its acquisition cost. Hence, a deduction over and
above such cost cannot be claimed and allowed. The reason is
that deductions from gross income are privileges, not matters of
right. They are not created by implication but upon clear
expression in the law [Gutierrez v. Collector of Internal Revenue,
L-19537, May 20, 1965].
Depreciation is the gradual diminution in the useful value of
tangible property resulting from wear and tear and normal
obsolescense. It commences with the acquisition of the property
and its owner is not bound to see his property gradually waste,
without making provision out of earnings for its replacement.
The recovery, free of income tax, of an amount more than the
invested capital in an asset will transgress the underlying
purpose of a depreciation allowance. For then what the taxpayer
would recover will be, not only the acquisition cost, but also
some profit. Recovery in due time thru depreciation of
investment made is the philosophy behind depreciation
allowance; the idea of profit on the investment made has never
been the underlying reason for the allowance of a deduction for
depreciation.
SILVERIO v. REPUBLIC
July 14, 2012 Leave a comment
Silverio v. Republic
October 22, 2007 (GR. No. 174689)
PARTIES:
petitioner: Rommel Jacinto Dantes Silverio
respondent: Republic of the Philippines
FACTS:
On November 26, 2002, Silverio field a petition for the change of
his first name Rommel Jacinto to Mely and his sex from male
to female in his birth certificate in the RTC of Manila, Branch 8,
for reason of his sex reassignment. He alleged that he is a male
transsexual, he is anatomically male but thinks and acts like a
female. The Regional Trial Court ruled in favor of him, explaining
that it is consonance with the principle of justice and equality.
The Republic, through the OSG, filed a petition for certiorari in
the Court of Appeals alleging that there is no law allowing change
of name by reason of sex alteration. Petitioner filed a
reconsideration but was denied. Hence, this petition.
ISSUE:
WON change in name and sex in birth certificate are allowed by
reason of sex reassignment.
HELD:
No. A change of name is a privilege and not a right. It may be
allowed in cases where the name is ridiculous, tainted with
dishonor, or difficult to pronounce or write; a nickname is
habitually used; or if the change will avoid confusion. The
petitioners basis of the change of his name is that he intends his
first name compatible with the sex he thought he transformed
himself into thru surgery. The Court says that his true name does
not prejudice him at all, and no law allows the change of entry in
the birth certificate as to sex on the ground of sex reassignment.
The Court denied the petition.
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DELPHER TRADES CORPORATION vs. IAC
G.R. No. L-69259 January 26, 1988
Facts:
Delfin Pacheco and sister Pelagia were the owners of a parcel of
land in Polo (now Valenzuela). On April 3, 1974, they leased to
Construction Components International Inc. the property and
providing for a right of first refusal should it decide to buy the said
property.
Construction Components International, Inc. assigned its rights and
obligations under the contract of lease in favor of Hydro Pipes
Philippines, Inc. with the signed conformity and consent of Delfin
and Pelagia. In 1976, a deed of exchange was executed between
lessors Delfin and Pelagia Pacheco and defendant Delpher Trades
Corporation whereby the Pachecos conveyed to the latter the
leased property together with another parcel of land also located
in Malinta Estate, Valenzuela for 2,500 shares of stock of defendant
corporation with a total value of P1.5M.
On the ground that it was not given the first option to buy the
leased property pursuant to the proviso in the lease agreement,
respondent Hydro Pipes Philippines, Inc., filed an amended
complaint for reconveyance of the lot.
Trivia lang: Delpher Trades Corp is owned by the Pacheco Family,
managed by the sons and daughters of Delfin and Pelagia. Their
primary defense is that there is no transfer of ownership because
the Pachecos remained in control of the original co-owners. The
transfer of ownership, if anything, was merely in form but not in
substance.
Issue:
WON the Deed of Exchange of the properties executed by the
Pachecos and the Delpher Trades Corporation on the other was
meant to be a contract of sale which, in effect, prejudiced the Hydro
Phils right of first refusal over the leased property included in the
deed of exchange? NO
Held:
By their ownership of the 2,500 no par shares of stock, the
Pachecos have control of the corporation. Their equity capital is
55% as against 45% of the other stockholders, who also belong to
the same family group. In effect, the Delpher Trades Corporation is
a business conduit of the Pachecos. What they really did was to
invest their properties and change the nature of their ownership
from unincorporated to incorporated form by organizing Delpher
Trades Corporation to take control of their properties and at the
same time save on inheritance taxes.
The Deed of Exchange of property between the Pachecos and
Delpher Trades Corporation cannot be considered a contract of
sale. There was no transfer of actual ownership interests by the
Pachecos to a third party. The Pacheco family merely changed their
ownership from one form to another. The ownership remained in
the same hands. Hence, the private respondent has no basis for its
claim of a light of first refusal under the lease contract.
CAVEAT: The case has not fully explained the difference between
sale and barter. So here is a foreign decision.
ERICSSON TELECOMMUNICATIONS, INC.,
vs.
CITY OF PASIG, represented by its City Mayor, Hon. Vicente P.
Eusebio, etal (G.R. No. 176667; November 22, 2007)
Facts:
1.
Ericsson Telecommunications, Inc. is a corporation engaged in
the design, engineering, and marketing of telecommunication
facilities/system with principal address at Pasig City
2.
It was assessed by the City Treasurer of Pasig City of business tax
deficiency for the years 1998 and 1999 and also for 2000 and
2001 based on its
gross revenues
.
33
3.
Petitioner filed a Protest arguing that that the local business tax
on contractors should be based on
gross receipts
and notgross revenue.Issue: What should be the basis of the local
business tax?
gross receipts
or gross revenue?Held: The basis should be gross
receiptsParagraph e, Section 143 of the Local Government Code
provides that
enterprise (such as sales of goods, sales of services, interest,
The municipality may impose taxes on the following businesses:
(e) On contractors and other independent contractors,
inaccordance with the following schedule:With
gross receipts
for the preceding calendar year in the amount of: Amount of Tax
Per Annum
The above provision specifically refers to
gross receipts.
Section 131 of the Local Government Code defines gross sales or
receipts as follows:
"Gross Sales or Receipts"
- include the total amount of money or its equivalent
representing the contract price, compensation or service fee,
including the amount charged or materials supplied with the
services and the deposits or advance payments actually or
constructively received during the taxable quarter for the
services performed or to be performed for another person
excludingdiscounts if determinable at the time of sales, sales
return, excise tax, and value-added tax (VAT);
The law is clear.
Gross receipts
include money or its equivalent actually or constructively
received in consideration of services rendered or articles sold,
exchanged or leased, whether actual or constructive.
G
ross Revenue
- covers money or its equivalent actually or constructively
received, including the value of services rendered or articles sold,
exchanged or leased, the payment of which is yet to be received.
This is in consonance with the InternationalFinancial Reporting
Standards, which defines
revenue
as the gross inflow of economic benefits (cash, receivables, and
other assets) arising from the ordinary operating activities of an
royalties,and dividends), which is measured at the fair value of
the consideration received or receivable
In petitioner's case, its audited financial statements reflect
income or revenue which accrued to it during the taxableperiod
although not yet actually or constructively received or paid. This
is because petitioner uses the accrual method of accounting,
where income is reportable when all the events have occurred
that fix the taxpayer's right to receive theincome, and the amount
can be determined with reasonable accuracy; the right to receive
income, and not the actualreceipt, determines when to include
the amount in gross income.The imposition of local business tax
based on petitioner's gross revenue will inevitably result in the
constitutionallyproscribed double taxation
taxing of the same person twice by the same jurisdiction for the
same thing
inasmuch aspetitioner's revenue or income for a taxable year will
definitely include its gross receipts already reported during
theprevious year and for which local business tax has already
been paid.
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13. Philam Asset Management, Inc. vs CTA
G.R.156637 and 162004; December 14, 2005

Facts: Petitioner acts as investment manager of PFI &PBFI. It

provides management &technical services and thus respectively
paid for its services. PFI & PBFI withhold the amount of
equivalent to 5% creditable tax regulation. On April 3, 1998, filed
ITR with a net loss thus incurred withholding tax. Petitioner filed
for refund from BIR but was unanswered . CTA denied the
petition for review. CA held that to request for either a refund or
credit of income tax paid, a corporation must signify its intention
by marking the corresponding box on its annual corporate
adjustment return.

Issue: Whether or not petitioner is entitled to a refund of its

creditible taxes.

Ruling: Any tax income that is paid in excess of its amount due to
the government may be refunded, provided that a taxpayer
properly applies for the refund. One can not get a tax refund and
a tax credit at the same time for the same excess to income taxes
paid. Failure to signify ones intention in Final Assessment Return
(FAR) does not mean outright barring of a valid request for a
refund

Requiring that the ITR on the FAR of the succeeding year be

presented to the BIR in requesting a tax refund has no basis in
law and jurisprudence. The Tax Code likewise allows the refund
of taxes to taxpayer that claims it in writing within 2 years after
payment of the taxes. Technicalities and legalism should not be
misused by the government to keep money not belonging to it,
and thereby enriched itself at the expense of its law-abiding
citizens.

35