TAXATION 1  MIDTERMS

3. Income Tax
Case Digest Compilation https://docs.google.com/document/d/11NAAkvgvp-p6F3XFDMiO6UNWcCUKj4MH
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FINAL EXAM
Guidelines for Digests. ​Each digest must at least contain the following: 4. Gross Income and Exclusions [Present Digest Pool]
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1.
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2. Format: ​Use Arial, Size 10, Single spacing. Start each digest on the next 5. Deductions and Exemptions
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notes may be adjusted. 6. Tax on Individuals: Bases and Rates to Withholding Tax
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3. Citation. ​Case name, GR No., Date.
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4. Doctrine/Topic. Just a short summary on the main point of the case or the

issue resolved.
Members:
5. Relevant Facts only. Do not focus on the remedial/procedural issues.
1. Dave Alano
Petitioner’s contentions and arguments + legal basis. 2. Gretchen Cañedo
3. Eunice Ambrocio
6. Relevant Issues only. No remedial/procedural issues unless somehow
4. Kaye Laurente
related with Taxation Law. 5. Kareen Baucan
6. Vienna Miranda
7. Ruling​. Provide a legal basis. Cite the article cited by the Supreme Court, or 7. Mishing Alaba
the previous jurisprudence. You may underline/bold it if you want to 8. Vina Cagampang
9. Bimbo Gierran
emphasize it. 10. Ivan Nabatar
OPTIONAL: You can provide a simple list of the other issues discussed by 11. Andrea Panganiban-Mabborang
8.
the SC in case someone’s interested to read the full text.
TO HELP IN MONITORING THE CASES, WRITE ​“DONE”​ AFTER YOUR
NAME IF YOU HAVE ALREADY POSTED YOUR ASSIGNED CASE.
LINKS FOR OTHER DIGESTS
PRELIM
IX. GROSS INCOME AND EXCLUSIONS
1. Intro to Tax
A. Income from Whatever Source
https://docs.google.com/document/d/1YodLc-zuozj_1EXZ90bBiZYkKq9y-LsCEqM
• Gutierrez v. Collector, 101 Phil 713 BIMBO/MISHING ​DONE
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• Eisner v. Macomber, 252 US 189 ​I​VAN ​DONE
2. Limitation on the Taxing Power and Double Taxation
• CIR v. Javier, 199 SCRA 824 DAVE ​DONE
https://docs.google.com/document/d/10-BXligj1fCVCF8jHRcTnQsJSW0whZ9xG3F
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Situs of Income

JMC College of Law​ | ​Taxation 1 ​| ​Based on the Lectures of Atty. Raymund Ong-Abrantes 1
#TeamDreamworksExtended
From Sources Within the Philippines
• NDC v. CIR, 151 SCRA 472 GRETCHEN​ ​DONE
• CIR v. CTA, 127 SCRA 9 EUNICE ​DONE
• CIR v. Marubeni, GR 137377, Dec. 18, 2001 ​KAYE
• Phil. Guaranty v. CIR, GR L-22074, Apr. 30, 1965 ANDREA​DONE
From Sources outside the Philippines
B. Compensation Income
• Henderson v. Collector, 1 SCRA 649; ​KAREEN
Convenience of the Employer Rule
• CIR v. Castaneda, 203 SCRA 72 VIENNA ​DONE
Fringe Benefits Exclusions: Compensation for Injuries or Sickness
• CIR v. Castaneda, 203 SCRA 72 VIENNA (SAME CASE)​DONE
• Return of Premium Paid
F. Prizes and Winnings/Awards/Rewards
• CIR v. COA, GR 101976, Jan. 29, 1993 EUNICE ​DONE
G. Gains Derived from Dealings in Property • Secs. 32(A)(3), 39-40, NIRC
Exclusions:
• Shares of Stocks Classified as Capital Asset and Traded in PSE
H. Business Income/ Income from Exercise of Profession
I. Partner's Distributive Share of the Gross Income of General Professional Partnerships

Income Exempt Under Treaty • Sec. 28(b)(4), NIRC

GENTLE REMINDER:
• Reagan v. CIR, 30 SCRA 968 MISHING ​DONE

C. Pensions/Retirement Benefits/Separation Pay

o CIR v. CA, 203 SCRA 72 VINA ​DONE
o CIR v. GCI Retirement, 207 SCRA 487 BIMBO ​DONE
Please ​DO NOT ​copy case digest
D. Passive Income from the INTERNET. Read the
o NDC v. CIR, GR L-53961, June 30, 1987 IVAN ​DONE ​[also same with Ate
Gretch, 151 SCRA 472)
FULLTEXT assigned to you.
Thanks!
• Rentals/Leases
• Royalties
• Dividends
o CIR v. CA, GR 108576, Jan. 20, 1999 DAVE ​DONE

Exclusions:
• Income Exempt Under Tax Treaty
• Passive Income of Foreign Government

E. Annuities and Insurance Proceeds

Exclusions:
• Proceeds from Life Insurance
• El Oriente Fabrica v. Posadas, 56 Phil 147 GRETCHEN ​DONE

2
IX. GROSS INCOME AND EXCLUSIONS
A. Income from Whatever Source
• Gutierrez v. Collector, 101 Phil 713 ​BIMBO
G.R. Nos. L-9738 and L-9771 May 31, 1957
BLAS GUTIERREZ, and MARIA MORALES, ​petitioners,
vs. CTA, and CIR, ​respondents.
CIR, ​petitioner,​ vs. BLAS GUTIERREZ, MARIA MORALES, and CTA, ​respondents.
FELIX, ​J.​:
Shorter Facts: ​Maria Morales, wife of Blas Gutierrez, was the owner of a parcel of land in
Mabalacat, Pampanga. Under the Military Bases Agreement with the US, the land of Morales
was among those that are to be expropriated for the expansion of Clark Air Base. Initially, in
1949, Morales was paid P34,580 as compensation for the expropriation of her land. After
proper assessment, it was found that Morales was entitled to P94,305.75 as just compensation.
The CIR assessed and demanded from Morales the payment of P8,481 as alleged deficiency
income tax for the year 1950, inclusive of surcharges and penalties. However, Morales and
counsel contended that the compensation paid to them for the expropriation was not “income derived
from sale, dealing or disposition of property” referred to by Sec 29 of the Tax Code and therefore
not taxable. The CTA rendered judgment against Morales.
FACTS: ​Maria Morales was the registered owner of an agricultural land in Pampanga. Blas
Gutierrez is the husband of the landowner Maria. The Republic of the Philippines, at the
request of the U.S. Government and pursuant to the terms of the Military Bases Agreement
of March 14, 1947, instituted condemnation proceedings for the purpose of expropriating the
lands owned by Maria Morales and others needed for the expansion of the Clark Field Air
Base, which project is necessary for the mutual protection and defense of the PH and US.
At the commencement of the action, the Republic, deposited the sum of P156,960 as the
value of the lands sought to be expropriated, in order that it could take immediate
possession of the same.
On January 27, 1949, the sum of P34,580 was paid to Maria Morales out of the original
deposit of P156,960. Sometime in ​1950​, the spouses received the sum of P59.785.75
presenting the balance remaining in their favor after deducting the amount of P34,580
already withdrawn from the compensation to them.
On January 28, 1953, CIR demanded from the petitioners the payment of P8,481 as alleged
deficiency income tax for the year ​1950​. The counsel of Spouses Gutierrez said that the
compensation paid to the spouses by the Government for their property was ​not "income
derived from sale, dealing or disposition of property" referred to by ​section 29 of the Tax
Code a ​ nd therefore not taxable; that even granting that condemnation of private properties
is embraced within the meaning of the word "sale" or "dealing", the compensation received
by the taxpayers must be considered as income for 1948 and not for 1950 and that the
compensation in question should be exempted from taxation by reason of the provision of
section 29 (​b​)-6 of the Tax Code;
CIR​: said that under the Bases Agreement only residents of the United states are exempt
from the payment of income tax in the Philippines in respects to profits derived under a
contract with the U.S. Government in connection with the construction, maintenance and
operation of the bases.
CTA: The gain derived by the petitioners from the expropriation of their property constituted
taxable income and as such was capital gain; and that said gain was taxable in 1950 when
it realized.
The Spouses said that CTA erred in not holding that, under the particular circumstances in
which the property of the appellants was taken by the Philippine Government, the amount
paid to them as just compensation is exempt from income tax pursuant to Section 29-(​b​)-(6)
of the Tax Code.
ISSUES:
1. Whether or not the money received by Morales as just compensation is considered
income, subject to tax - YES
2. Whether or not the income included in the tax exemptions as specified in the
Military Bases Agreement – NO
HELD:
1. Yes. ​The pertinent provisions of the NIRC applicable to the instant cases are the
following:
SEC. 29. GROSS INCOME. — (​a)​ General definition. — "Gross income" includes gains, profits, and
income derived from salaries, wages, or compensation for personal service of whatever kind and in
whatever form paid, or from professions, vocations, trades, businesses, commerce, ​sales or dealings in
property, whether real or personal, growing out of ownership ​or use of or interest in such property; also
from interests, rents, dividends, securities, or the transactions of any business carried on for gain or
profit, or gains, profits, and income derived from any source whatsoever.
SEC. 37. INCOME FROM SOURCES WITHIN THE PHILIPPINES. —
(​a)​ Gross income from sources within the Philippines. — The following items of gross income shall be
treated as gross income from sources within the Philippines:
xxx xxx xxx
(5) SALE OF REAL PROPERTY. — Gains, profits, and income from the sale of real property located in
the Philippines;
xxx xxx xxx
3
The property expropriated being located in the Philippines, ​compensation or income
derived therefrom ordinarily has to be considered as income from sources within the
Philippines and subject to the taxing jurisdiction of the Philippines.
Petitioners’ stand: Since said property was acquired by the Government through
condemnation proceedings, it cannot be considered as sale as said acquisition was by
force, there being practically no meeting of the minds between the parties. Petitioners
contend that his kind of transfer of ownership must perforce be distinguished from sale, for
the purpose of Section 29-(​a​) of the Tax Code.
SC: But the authorities in the United States on the matter sustain the view expressed by the
CIR, for it is held that:
The transfer of property through condemnation proceedings is a sale or exchange within the
meaning of section 117 (​a)​ of the 1936 Revenue Act and profit from the transaction constitutes capital
gain​". "​The taking of property by condemnation and the, payment of just compensation therefore is a
"sale" or "exchange" within the meaning of section 117 (​a)​ of the Revenue Act of 1936, ​and profits from
that transaction is capital gain​.
Income from expropriation proceedings is income from sales or exchange and therefore
taxable has been likewise upheld in the case of ​Lapham vs. U.S. (1949, 40 AFTR 1370) and
in ​Kneipp vs. U.S. (1949, 85 F Suppl. 902). ​It appears then that the acquisition by the
Government of private properties through the exercise of the power of eminent
domain, ​said properties being JUSTLY compensated​, is embraced within the
meaning of the term "sale" "disposition of property", and the proceeds from said
transaction clearly fall within the definition of gross income laid down by Section 29
of the Tax Code of the Philippines.
2. ​The Spouses maintain that since, at the of the U.S. Government, the proceeding to
expropriate the land in question necessary for the expansion of the Clark Field Air Base was
instituted by the Philippine Government as part of its obligation under the Military Bases
Agreement, the compensation accruing therefrom must necessarily fall under the exemption
provided for by Section 29-(​b​)-6 of the Tax Code.
SC: We find this stand untenable. It is unmistakable that although the condemnation or
expropriation of properties was provided for, the exemption from tax of the compensation to
be paid for the expropriation of privately owned lands located in the Philippines was not
given any attention, and the internal revenue exemptions specifically taken care of by said
Agreement ​applies only to members of the U.S. Armed Forces serving in the Philippines
and U.S. nationals working in these Islands in connection with the construction,
maintenance, operation and defense of said bases.
OTHER CONTENTIONS:
Petitioner: CIR was barred from collecting the deficiency income tax assessment, it having been made
beyond the 3-year period prescribed by section 51-(​d​) of the Tax Code
Issue:​ Whether or not assessment was made within the PRESCRIPTIVE PERIOD
SC: Yes. When the assessment for deficiency income tax was made by the CIR within the 3-year
prescriptive period provided for by Section 51-d of the Tax Code, the same could be collected either by
the administrative methods of distraint and levy or by judicial action.
Although it is true that by order of the CFI, the amount of P34,580 out of the original deposit made by
the Government was withdrawn in favor of appellants on ​January 27, 1949​, the same cannot be
considered as income for 1950 when the balance of P59,785.75 was actually received. Before that date
(1950), appellant taxpayers were still the owners of their whole property that was subject of
condemnation proceedings and said amount of P34,580 was ​not paid to, but merely ​deposited in court
and ​withdrawn​ by them.
Therefore, the payment ​of the value of Maria Morales' Lot was actually made by the Republic of the
Philippines in 1950 and it has to be credited as income for 1950 for it was then when title over said
property passed to the Republic of the Philippines. Appellant taxpayers cannot say that the title over the
property expropriated already passed to the Government when the latter was placed in possession
thereof, for in condemnation proceedings, title to the land does not pass to the plaintiff until the
indemnity is paid, and notwithstanding possession acquired by the expropriator, title does not actually
pass to him until payment of the amount adjudged by the Court and the registration of the judgment
with the Register of Deeds. Now, if said amount should have been reported as income for 1950 in the
return that must have been filed on or before March 1, 1951, the assessment made by the Collector on
January 28, 1953, is still ​within the 3-year prescriptive period provided for by Section 51-d ​and could,
therefore, be collected either by the administrative methods of distraint and levy or by judicial action.
Petitioners: ​The profit, derived by them from the expropriation of their property is merely nominal and
not subject to income tax.
SC:​ We find Section 35 of the Tax Code illuminating. Said section reads as follows:
SEC. 35. DETERMINATION OF GAIN OR LOSS FROM THE SALE OR OTHER DISPOSITION OF
PROPERTY. — The gain derived or loss sustained from the sale or other disposition of property, real or
personal, or mixed, shall be determined in accordance with the following schedule:
(a) xxx xxx xxx
(b) In the case of property acquired ​on or after ​March 1, 1913, the cost thereof if such property was
acquired by purchase or the fair market price or value as of the date of the acquisition if the same was
acquired by gratuitous title.
xxx xxx xxx
4
How is gain or loss from sale determined? The property in question was adjudicated to Maria
Morales by order of the CFI on ​March 23, 1929,​ and in accordance with the aforequoted section of the
NIRC, ​only the fair market price or value of the property as of the date of the acquisition thereof should
be considered in determining the gain or loss sustained by the property owner when the property was
disposed, without taking into account the purchasing power of the currency used in the transaction. The
records placed the value of the said property at the time of its acquisition by appellant Maria Morales
P28,291.73 and it is a fact that same was compensated with P94,305.75 when it was expropriated. ​The
resulting difference is surely a capital gain and should be correspondingly taxed.

OTHERS:
TRANSFER OF OWNERSHIP; WHEN TITLE PASSES TO EX-PROPRIATOR.—In condemnation
proceedings, title to the land does not pass to the plaintiff until the indemnity is paid (Calvo ​vs.
Zandueta, 49 Phil. 605), and notwithstanding possession acquired by the expropriator, title does not
actually pass to him until payment of the amount adjudged by the Court and the registration of the
judgment with the Register of Deeds

COURT OF TAX APPEALS; REVIEW OF DECISIONS OF; ONLY QUESTIONS OF LAW MAY BE
CONSIDERED.—The question of fraud is a question of fact which is for the Court of Tax Appeals to
determine. It is already settled in this jurisdiction that in passing upon petitions to review decisions of
the Court of Tax Appeals, only questions of law may be considered.

5
 • Eisner v. Macomber, 252 US 189 ​IVAN
EISNER V. MACOMBER (salamat mishing :)
March 8, 1920
SUMMARY: In order to readjust the capitalization, the board of directors of Standard Oil Co.
decided to issue additional shares sufficient to constitute a stock dividend of 50 percent of
the outstanding stock, and to transfer from surplus account to capital stock account an
amount equivalent to such issue. Macomber, being the owner of 2,200 shares of the old
stock, received certificates for 1, 100 additional shares. She was called upon to pay, and did
pay under protest, a tax imposed under the Revenue Act of 1916, based upon a supposed
income of $19,877 because of the new shares. She then brought action against the
Collector to recover the tax. In her complaint, she alleged that, (1) in imposing such a tax
the Revenue Act of 1916 violated the provisions of the US Constitution requiring direct taxes
to be apportioned according to population, and (2) that the stock dividend was not income
within the meaning of the Sixteenth Amendment which exempts income from the
apportionment requirement. The SC held that stock dividends are not income for tax
purposes.
DOCTRINE: Income may be defined as the gain derived from capital, from labor, or from
both combined, including profit gained through sale or conversion of capital. Mere growth or
increment of value in a capital investment is not income; income is essentially a gain or
profit, in itself, of exchangeable value, proceeding from capital, severed from it, and derived
or received by the taxpayer for his separate use, benefit, and disposal .A stock dividend,
evincing merely a transfer of an accumulated surplus to the capital account of the
corporation, takes nothing from the property of the corporation and adds nothing to that of
the shareholder; a tax on such dividends is a tax on capital increase, and not on income,
and, to be valid under the US Constitution, such taxes must be apportioned according to
population in the several states. Stock dividend is not income.
FACTS: On January 1, 1916, the Standard Oil Company of California, a corporation of that
state, out of an authorized capital stock of $100,000,000, had shares of stock outstanding,
par value $100 each, amounting in round figures to $50,000,000. In addition, it had surplus
and undivided profits invested in plant, property, and business and required for the
purposes of the corporation, amounting to about $45,000,000, of which about $20,000,000
had been earned prior to March 1, 1913, the balance thereafter. In January, 1916, in order
to readjust the capitalization, the board of directors decided to issue additional shares
sufficient to constitute a stock dividend of 50 percent of the outstanding stock, and to
transfer from surplus account to capital stock account an amount equivalent to such issue.
Macomber, being the owner of 2,200 shares of the old stock, received certificates for 1, 100
additional shares, of which 18.07 percent, or 198.77 shares, par value $19,877, were
treated as representing surplus earned between March 1, 1913, and January 1, 1916. She
was called upon to pay, and did pay under protest, a tax imposed under the Revenue Act of
1916, based upon a supposed income of $19,877 because of the new shares. She then
brought action against the Collector to recover the tax. In her complaint, she alleged that,
(1) in imposing such a tax the Revenue Act of 1916 violated article 1, § 2, cl. 3, and Article I,
§ 9, cl. 4, of the Constitution of the United States, requiring direct taxes to be apportioned
according to population, and (2) that the stock dividend was not income within the meaning
of the Sixteenth Amendment.
The Sixteenth Amendment provides: "The Congress shall have power to lay and collect
taxes on incomes, from whatever source derived, without apportionment among the several
states and without regard to any census or enumeration."
ISSUES: Whether or not stock dividends are ‘income’ within the meaning of the Sixteenth
Amendment (hence, exempted from the general rule that direct taxes are to be apportioned
according to population)
RULING: No. The Court first cited its ruling in Towne v. Eisner:
"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 interests are not
increased. . . . The proportional interest of each shareholder remains the same. The only
change is in the evidence which represents that interest, the new shares and the original
shares together representing the same proportional interest that the original shares
represented before the issue of the new ones. In short, the corporation is no poorer and the
stockholder is no richer than they were before. "
Then, it elaborated on the meaning of ‘income’:
It becomes essential to distinguish between what is and what is not "income," and to apply
the distinction, as cases arise, according to truth and substance, without regard to form.
Congress cannot by any definition it may adopt conclude the matter, since it cannot by
legislation alter the Constitution, from which alone it derives its power to legislate, and within
whose limitations alone that power can be lawfully exercised.
The fundamental relation of "capital" to "income" has been much discussed by economists,
the former being likened to the tree or the land, the latter to the fruit or the crop; the former
depicted as a reservoir supplied from springs, the latter as the outlet stream, to be
measured by its flow during a period of time. Income may be 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.
In the present case, the corporation had surplus and undivided profits invested in plant,
property, and business, and required for the purposes of the corporation, amounting to
about $45,000,000, in addition to outstanding capital stock of $50,000,000. In this, the case
is not extraordinary. The profits of a corporation, as they appear upon the balance sheet at
the end of the year, need not be in the form of money on hand in excess of what is required
6
to meet current liabilities and finance current operations of the company. Often, especially in
a growing business, only a part, sometimes a small part, of the year's profits is in property
capable of division, the remainder having been absorbed in the acquisition of increased
plant, equipment, stock in trade, or accounts receivable, or in decrease of outstanding
liabilities. When only a part is available for dividends, the balance of the year's profits is
carried to the credit of undivided profits, or surplus, or some other account having like
significance. If thereafter the company finds itself in funds beyond current needs, it may
declare dividends out of such surplus or undivided profits; otherwise it may go on for years
conducting a successful business, but requiring more and more working capital because of
the extension of its operations, and therefore unable to declare dividends approximating the
amount of its profits. Thus, the surplus may increase until it equals or even exceeds the par
value of the outstanding capital stock. This may be adjusted upon the books in the mode
adopted in the case at bar -- by declaring a "stock dividend." This, however, is no more than
a book adjustment, in essence -- not a dividend, but rather the opposite; no part of the
assets of the company is separated from the common fund, nothing distributed except
paper certificates that evidence an antecedent increase in the value of the stockholder's
capital interest resulting from an accumulation of profits by the company, but profits so far
absorbed in the business as to render it impracticable to separate them for withdrawal and
distribution.
Again, this is merely bookkeeping that does not affect the aggregate assets of the
corporation or its outstanding liabilities; it affects only the form, not the essence, of the
"liability" acknowledged by the corporation to its own shareholders, and this through a
readjustment of accounts on one side of the balance sheet only, increasing "capital stock" at
the expense of "surplus"; 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. The new certificates simply increase the number of
the shares, with consequent dilution of the value of each share.
A "stock dividend" 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. Far from being a realization of profits of the
stockholder, it tends rather to postpone such realization, in that the fund represented by the
new stock has been transferred from surplus to capital, and no longer is available for actual
distribution.
DISPOSITIVE: Since the stock dividend is not income, the Revenue Act of 1916, insofar as
it imposes a tax upon the stockholder because of such dividend, is void for violating the
Constitutional provisions requiring apportionment of direct taxes according to population.

7
Eisner v. Macomber, 252 US 89 ​[FACTS are from Vienna’s digest in Midterm -
mishing]
DOCTRINE: ​Income may be defined as the gain derived from capital, from labor, or from
both combined, including profit gained through sale or conversion of capital.
Mere growth or increment of value in a capital investment is not income; income is
essentially a gain or profit, in itself, of exchangeable value, proceeding from capital, severed
from it, and derived or received by the taxpayer for his separate use, benefit, and disposal.
A stock dividend, evincing merely a transfer of an accumulated surplus to the capital
account of the corporation, takes nothing from the property of the corporation and adds
nothing to that of the shareholder; a tax on such dividends is a tax on capital increase, and
not on income, and, to be valid under the US Constitution, such taxes must be apportioned
according to population in the several states.
Stock dividend is not income. ​The Revenue Act of 1916, insofar as it imposes a tax upon
the stockholder because of such dividend, is void for violating the Constitutional provisions
requiring apportionment of direct taxes according to population.
FACTS: ​Myrtle Macomber (plaintiff) owned 2,200 shares of stock in the Standard Oil
Company of California (Standard), a publicly traded company. Standard experienced
increased growth in its value and issued a 50 percent stock dividend. As a result, Macomber
received an additional 1,100 shares of Standard stock.
Pursuant to the Revenue Act of 1916, the United States government (defendant) sought to
tax Macomber on the 1,100 shares of stock that she received. Macomber sued the
government, asserting that the stock dividend was not taxable income. The district court
ruled in favor of Macomber that the stock dividend was not income. The United States
Supreme Court granted certiorari.
***16th Amendment provided that "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."
*** Revenue Act of 1916 provides however that a "stock dividend shall be
considered income, to the amount of its cash value."
ISSUES:
● Whether or not stock dividends are ‘income’ within the meaning of the 16th
Amendment and hence, exempted from the general rule that direct taxes are to be
apportioned according to population - NO
● Does Congress have the power to tax, as income of the stockholder and without
apportionment, a stock dividend made lawfully and in good faith against profits
accumulated by the corporation? - NO
HELD: The Supreme Court of the United States ruled that a pro rata stock dividend where
a shareholder received no actual cash or other property, and retained the same
proportionate share of ownership of the corporation as was held prior to the dividend, was
not taxable income to the shareholder within the meaning of the 16th Amendment, and that
an income tax imposed by the Revenue Act of 1916 on such dividend was unconstitutional,
even where the dividend indirectly represented accrued earnings of the corporation.
The Court noted that in ​Towne v. Eisner, that it had clearly stated that stock dividends were
not income, as nothing of value was received by Towne - the company was not worth any
less than it was when the dividend was declared, and the total value of Towne's stock had
not changed. The court also stated that a stock dividend really takes nothing from the
property of the corporation and adds nothing to that of the shareholder, but that the
antecedent accumulation of profits evidenced thereby, while indicating that the shareholder
is richer because of an increase of his capital, at the same time shows he has not realized
or received any income in the transaction. Finally, the court noted that the stock dividend in
question cannot be reached by the Income Tax Act and could not, even though Congress
expressly declared it to be taxable as income, unless it is in fact income.
DISCUSSION:
"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 interests are not increased. . . .
The proportional interest of each shareholder remains the same. The only change is in the evidence
which represents that interest, the new shares and the original shares together representing the same
proportional interest that the original shares represented before the issue of the new ones. In short, the
corporation is no poorer and the stockholder is no richer than they were before. "
Then, it elaborated on the meaning of ‘income’:
It becomes essential to distinguish between what is and what is not "income," and to apply the
distinction, as cases arise, according to truth and substance, without regard to form. Congress cannot
by any definition it may adopt conclude the matter, since it cannot by legislation alter the Constitution,
from which alone it derives its power to legislate, and within whose limitations alone that power can be
lawfully exercised.
The fundamental relation of "capital" to "income" has been much discussed by economists, the ​capital
being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir
8
supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time.
Income ​may be 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.

9
 • CIR v. Javier, 199 SCRA 824 ​DAVE
G.R. No. 78953 July 31, 1991
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
MELCHOR J. JAVIER, JR. and THE COURT OF TAX APPEALS, respondents.
Facts: ​Victoria L. Javier, the wife of the private respondent herein, received a remittance
from the PBTC in Pasay City the amount of US $999,973.70 remitted by her sister, Mrs.
Dolores Ventosa.
Later, Mellon Bank, a foreign bank in the USA filed a complaint against the respondent
Melchor Javier, his wife and other defendants, claiming that its remittance of
US$1,000,000.00 was a clerical error and should have been US$1,000.00 only, and praying
that the excess amount of US$999,000.00 be returned on the ground that the defendants
are trustees of an implied trust for the benefit of Mellon Bank with the clear, immediate, and
continuing duty to return the said amount from the moment it was received.
In 1978, Melchor Javier filed his Income Tax Return for the taxable year 1977 showing a
gross income of P53,053.38 and a net income of P48,053.88 and stating in the footnote of
the return that "Taxpayer was recipient of some money received from abroad which he
presumed to be a gift but turned out to be an error and is now subject of litigation."
The CIR then assessed Javier a tax liability amounting to P4.8 Million, and included in its
assessment the money currently subject of litigation between Mellon Bank and Javier. The
CIR also imposed a 50% penalty against Javier as the CIR deemed Javier’s return as a
fraudulent return.
Disagreeing, Javier filed an appeal to CTA.
The CTA held that there was “hardly any actual and intentional fraud, consisting of
deception willfully and deliberately done or resorted to by Javier in order to induce the
Government to give up some legal right, or the latter, due to a false return, was placed at a
disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities
because petitioner literally "laid his cards on the table" for respondent to examine. Error or
mistake of fact or law is not fraud. Hence, this petition by the CIR.
Issue: ​Whether or not Melchor Javier’s tax return showing a gross income of P53,053.38
was correct?
Held: YES. Melchor’s tax return reflecting only a gross income of P53,053.38, without
including the amount currently subject of litigation between him and Mellon bank, is
correct.
Furthermore, Melchor is not liable for the 50% tax penalty as there is no fraud in the filing of
the return. The Supreme Court agrees with the Court of Tax Appeals' interpretation of
Javier's notation on his income tax return filed on March 15, 1978 thus: "Taxpayer was the
recipient of some money from abroad which he presumed to be a gift but turned out to be
an error and is now subject of litigation that it was an "error or mistake of fact or law" not
constituting fraud, that such notation was practically an invitation for investigation and that
Javier had literally "laid his cards on the table.
In the case at bar, there was no actual and intentional fraud through willful and deliberate
misleading of the government agency concerned, the Bureau of Internal Revenue, headed
by the herein petitioner. The government was not induced to give up some legal right and
place itself at a disadvantage so as to prevent its lawful agents from proper assessment of
tax liabilities because Javier did not conceal anything.
Error or mistake of law is not fraud. The petitioner's zealousness to collect taxes from the
unearned windfall to Javier is highly commendable. Unfortunately, the imposition of the
fraud penalty in this case is not justified by the extant facts. Javier may be guilty of swindling
charges, perhaps even for greed by spending most of the money he received, but the
records lack a clear showing of fraud committed because he did not conceal the fact that he
had received an amount of money although it was a "subject of litigation."
As ruled by respondent Court of Tax Appeals, the 50% surcharge imposed as fraud penalty
by the petitioner against the private respondent in the deficiency assessment should be
deleted.
10
Situs of Income
From Sources Within the Philippines
• NDC v. CIR, 151 SCRA 472 ​GRETCHEN
G.R. No. L-53961
NATIONAL DEVELOPMENT COMPANY,​ petitioner, vs.
COMMISSIONER OF INTERNAL REVENUE,​ respondent.
CRUZ, ​J.:
FACTS:
The national Development Company entered into contracts in Tokyo with several Japanese
shipbuilding companies for the construction of twelve ocean-going vessels. ​The purchase
price was to come from the proceeds of bonds issued by the Central Bank. Initial payments
were made in cash and through irrevocable letters of credit. Fourteen promissory notes
were signed for the balance by the NDC and, as required by the shipbuilders, guaranteed
by the Republic of the Philippines. Pursuant thereto, the remaining payments and the
interests thereon were remitted in due time by the NDC to Tokyo. The vessels were
eventually completed and delivered to the NDC in Tokyo.
The NDC remitted to the shipbuilders in Tokyo the total 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. The BIR thereupon served on the NDC a warrant of distraint and levy to enforce
collection of the claimed amount.​ ​The NDC went to the Court of Tax Appeals.
The BIR was sustained by the CTA except for a slight reduction of the tax deficiency in the
sum of P900.00, representing the compromise penalty. The NDC then came to this Court in
a petition for ​certiorari.
The petitioner argues that the Japanese shipbuilders were not subject to tax under the
above provision because all the related activities — the signing of the contract, the
construction of the vessels, the payment of the stipulated price, and their delivery to the
NDC — were done in Tokyo. The law, however, does not speak of activity but of "source,"
which in this case is the NDC. This is a domestic and resident corporation with principal
offices in Manila.
ISSUE:
1. Whether or not the Japanese Shipbuilding companies are liable to tax on the interests
remitted?
2. Is NDC liable for its failure to withheld the tax due?
HELD:
ISSUE 1: Yes​. Section 37 of the Tax Code, thus:
SEC. 37. ​Income from sources within the Philippines. — (​ a) Gross income from sources
within the Philippines. — The following items of gross income shall be treated as gross
income from sources within the Philippines:
(1) ​Interest. — ​Interest derived from sources within the Philippines, and interest on bonds,
notes, or ​other interest-bearing obligations of residents, corporate or otherwise;
It is quite apparent, under the terms of the law, that the Government's right to levy and
collect income tax on interest received by foreign corporations not engaged in trade or
business within the Philippines is not planted upon the condition that 'the activity or labor —
and the sale from which the (interest) income flowed had its situs' in the Philippines.
The law specifies: 'Interest derived from sources within the Philippines, and interest on
bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise.'
Nothing there speaks of the 'act or activity' of non-resident corporations in the Philippines, or
place where the contract is signed. The residence of the obligor who pays the interest rather
than the physical location of the securities, bonds or notes or the place of payment, is the
determining factor of the source of interest income.
Accordingly, if the obligor is a resident of the Philippines the interest payment paid by him
can have no other source than within the Philippines. The interest is paid not by the bond,
note or other interest-bearing obligations, but by the obligor.
The law is clear and must be applied as written. The residence of the obligor which paid the
interest under consideration, petitioner herein, is Calle Pureza, Sta. Mesa, Manila,
Philippines; and as a corporation duly organized and existing under the laws of the
Philippines, it is a domestic corporation, resident of the Philippines. (Sec. 84(c), National
Internal Revenue Code.) The interest paid by petitioner, which is admittedly a resident of the
Philippines, is on the promissory notes issued by it. Clearly, therefore, the interest remitted
to the Japanese shipbuilders in Japan in 1960, 1961 and 1962 on the unpaid balance of the
purchase price of the vessels acquired by petitioner is interest derived from sources within
the Philippines subject to income tax under the then Section 24(b)(1) of the National Internal
Revenue Code.
11

There is no basis for saying that the interest payments were obligations of the Republic of
the Philippines and that the promissory notes of the NDC were government securities
exempt from taxation under Section 29(b)[4] of the Tax Code, reading as follows:
SEC. 29. ​Gross Income. — ​xxxx xxx xxx xxx
(b) ​Exclusion from gross income. ​— The following items shall not be included in gross
income and shall be exempt from taxation under this Title:
xxx xxx xxx
(4) Interest on Government Securities. — ​ Interest upon the obligations of the
Government of the Republic of the Philippines or any political subdivision thereof, but ​in the
case of such obligations issued after approval of this Code, only to the extent provided in
the act authorizing the issue thereof. (​ As amended by Section 6, R.A. No. 82; emphasis
supplied)
The law invoked by the petitioner as authorizing the issuance of securities is R.A. No. 1407,
which in fact is silent on this matter. C.A. No. 182 as amended by C.A. No. 311 does carry
such authorization but, like R.A. No. 1407, does not exempt from taxes the interests on
such securities.
It is also incorrect to suggest that the Republic of the Philippines could not collect taxes on
the interest remitted because of the undertaking signed by the Secretary of Finance in each
of the promissory notes that:
Upon authority of the President of the Republic of the Philippines, the undersigned, for value
received, hereby absolutely and unconditionally guarantee (sic), on behalf of the Republic of
the Philippines, the due and punctual payment of both principal and interest of the above
note.
There is nothing in the above undertaking exempting the interests from taxes. Petitioner has
not established a clear waiver therein of the right to tax interests. Tax exemptions cannot be
merely implied but must be categorically and unmistakably expressed. Any doubt
concerning this question must be resolved in favor of the taxing power.
Manifestly, the said undertaking of the Republic of the Philippines merely guaranteed the
obligations of the NDC but without diminution of its taxing power under existing laws.
In suggesting that the NDC is merely an administrator of the funds of the Republic of the
Philippines, the petitioner closes its eyes to the nature of this entity as a corporation. As
such, it is governed in its proprietary activities not only by its charter but also by the
Corporation Code and other pertinent laws.
The petitioner also forgets that it is not the NDC that is being taxed. The tax was due on the
interests earned by the Japanese shipbuilders. It was the income of these companies and
not the Republic of the Philippines that was subject to the tax the NDC did not withhold.
ISSUE 2
Yes. ​The imposition of the deficiency taxes on the NDC is ​a ​penalty for its failure to
withhold the same from the Japanese shipbuilders​. Such liability is imposed by Section
53(c) of the Tax Code, thus:
Section 53(c). ​Return and Payment​. — Every person required to deduct and withhold any
tax under this section shall make return thereof, in duplicate, on or before the fifteenth day
of April of each year, and, on or before the time fixed by law for the payment of the tax, shall
pay the amount withheld to the officer of the Government of the Philippines authorized to
receive it. Every such person is made personally liable for such tax, and is indemnified
against the claims and demands of any person for the amount of any payments made in
accordance with the provisions of this section. (As amended by Section 9, R.A. No. 2343.)
In ​Philippine Guaranty Co. v. The Commissioner of Internal Revenue and the Court of
Tax Appeals​, the Court quoted with approval the following regulation of the BIR on the
responsibilities of withholding agents:
In case of doubt, a withholding agent may always protect himself by withholding the tax due,
and promptly causing a query to be addressed to the Commissioner of Internal Revenue for
the determination whether or not the income paid to an individual is not subject to
withholding. In case the Commissioner of Internal Revenue decides that the income paid to
an individual is not subject to withholding, the withholding agent may thereupon remit the
amount of a tax withheld. (2nd par., Sec. 200, Income Tax Regulations).
"Strict observance of said steps is required of a withholding agent before he could be
released from liability," so said Justice Jose P. Bengson, who wrote the decision.
"Generally, the law frowns upon exemption from taxation; hence, an exempting provision
should be construed ​strictissimi juris​."
The petitioner was remiss in the discharge of its obligation as the withholding agent of the
government an so should be held liable for its omission.
12
 • CIR v. CTA, 127 SCRA 9 ​EUNICE
No. L-54108. January 17, 1984.*
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF TAX APPEALS
and SMITH KLINE & FRENCH OVERSEAS CO. (PHILIPPINE BRANCH), respondents.
Facts:
This case is about the refund of a 1971 income tax amounting to P324,255 by Smith Kline
and French Overseas Company, a multinational firm domiciled in Philadelphia,
Pennsylvania, is licensed to do business in the Philippines. It is engaged in the importation,
manufacture and sale of pharmaceuticals, drugs and chemicals.
In its original 1971 Income Tax Return (ITR), Smith Kline declared a net taxable income of
P1,489,277 and paid and paid P511,247 as tax due. Among the deductions claimed from
gross income was P501,040 ($77,060) as its share of the head office overhead expenses.
Sometime in October, 1972, Smith Kline received from its international independent
auditors, an authenticated certification that the Philippine share in the head office overhead
expenses of the main office for 1971 was actually $219,547 (P1,427,484). The certification
further stating, that the allocation was made on the basis of the percentage of gross income
in the Philippines to gross income of the corporation as a whole. By reason of the new
adjustment, Smith Kline’s tax liability was greatly reduced from P511, 247 to P186,992
resulting in an overpayment of P324,255.
The Court of Tax appeals ordered the Commissioner to refund the overpayment of taxes or
grant a tax credit to Smith Kline.
Issue:
Whether Smith Kline is entitled to a refund or a tax credit on the overpaid taxes.
Held:
Yes. The grant of refund to Smith Kline was in order.
The governing law is found in section 37 of the old National Internal Revenue Code,
Commonwealth Act No. 466, which is reproduced in Presidential Decree No. 1158, the
National Internal Revenue Code of 1977 and which reads:
“SEC. 37. Income from sources within the Philippines.—
xxx xxx xxx
“(b) Net income from sources in the Philippines.​—From the items of gross income specified in
subsection (a) of this section there shall be deducted the expenses, losses, and other deductions
properly apportioned or allocated thereto and a ratable part of any expenses​, losses, or other
​ he remainder,
deductions which cannot definitely be allocated to some item or class of gross income. T
if any, shall be included in full as net income from sources within the Philippines.
xxx xxx x x x.”
Additionally, Revenue Regulations No. 2 of the Department of Finance contains the
following provisions on the deductions to be made to determine the net income from
Philippine sources:
“SEC. 160. Apportionment of deductions.​—From the items specified in section 37(a), as being derived
specifically from sources within the Philippines there shall be deducted the expenses, losses, and other
deductions properly apportioned or allocated thereto and a ratable part of any other expenses, losses
or deductions which can not definitely be allocated to some item or class of gross income. The
remainder shall be included in full as net income from sources within the Philippines. The ratable part is
based upon the ratio of gross income from sources within the Philippines to the total gross income.
From the foregoing provisions, it is manifest that where an expense is clearly related to the
production of Philippine-derived income or to Philippine operations (e.g. salaries of
Philippine personnel, rental of office building in the Philippines), that expense can be
deducted from the gross income acquired in the Philippines without resorting to
apportionment.
The ​overhead expenses incurred by the parent company in connection with finance,
administration, and research and development, all of which directly benefit its branches all
over the world, including the Philippines​, fall under a different category however. These are
items which cannot be definitely allocated or identified with the operations of the Philippine
branch. For 1971, the parent company of Smith Kline spent $1,077,739. ​Under section
37(b) of the Revenue Code and section 160 of the regulations. Smith Kline can claim
as its deductible share a ratable part of such expenses based upon the ratio of the
local branch’s gross income to the total gross income, worldwide, of the
multinational corporation.
The weight of evidence, the certification of the independent international auditors, bolsters
Smith Kline’s position that the amount of P1,427,484 represents the correct ratable share,
the same having been computed pursuant to section 37(b) and section 160.
Thus, the SC hold that Smith Kline's amended 1971 return is in conformity with the law and
regulations. The Tax Court correctly held that the refund or credit of the resulting
overpayment is in order.
13
 • CIR v. Marubeni, GR 137377, Dec. 18, 2001 ​KAYE
Facts:
CIR assails the CA decision which affirmed CTA, ordering CIR to desist from collecting the
1985 deficiency income, branch profit remittance and contractor’s 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 branch’s 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
contractor’s tax assessments and second questioned the deficiency commercial broker’s
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 41’s scope to include estate and donor’s 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. 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 contractor’s tax assessment (business tax) and
respondent’s availment of the amnesty under EO 64, which expanded EO 41’s 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 donor’s 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.
14
(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 supplier’s 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, respondent’s entire receipts from the contracts, including its
receipts from the Offshore Portion, constitute income from Philippine sources. The total
gross receipts covering both labor and materials should be subjected to contractor’s 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 contractor’s tax.
Petition denied.

15
• Phil. Guaranty v. CIR, GR L-22074, Apr. 30, 1965 ANDREA
[G.R. No. L-22074. April 30, 1965.]
THE PHILIPPINE GUARANTY CO., INC., ​Petitioner​, v. THE COMMISSIONER OF
INTERNAL REVENUE and THE COURT OF TAX APPEALS, ​Respondents​.
PLACE OF ACTIVITY CREATING INCOME CONTROLLING. — Section 24 of the Tax
Code does not require a foreign corporation to engage in business in the Philippines in
subjecting its income to tax. It suffices that the activity creating the income is performed or
done in the Philippines. What is controlling, therefore, is not the place of business but the
place of activity that created an income.
FACTS:
The Philippine Guaranty Co., Inc., a domestic insurance company, entered into reinsurance
contracts, on various dates, with foreign insurance companies not doing business in the
Philippines. Philippine Guaranty Co., Inc., thereby agreed to cede to the foreign reinsurers a
portion of the premiums on insurances it has originally underwritten in the Philippines, in
consideration for the assumption by the latter of liability on an equivalent portion of the risks
insured. Said reinsurance contracts were signed by Philippine Guaranty Co., Inc. in Manila
and by the foreign reinsurers outside the Philippines, except the contract with Swiss
Reinsurance Company, which was signed by both parties in Switzerland.
The reinsurance contracts made the commencement of the reinsurers’ liability simultaneous
with that of Philippine Guaranty Co., Inc. under the original insurance. Philippine Guaranty
Co., Inc. was required to keep a register in Manila where the risks ceded to the foreign
reinsurers were entered, and entry therein was binding upon the reinsurers. A proportionate
amount of taxes on insurance premiums not recovered from the original assured were to be
paid for by the foreign reinsurers. The foreign reinsurers further agreed, in consideration for
managing or administering their affairs in the Philippines, to compensate the Philippine
Guaranty Co., Inc. in an amount equal to 5% of the reinsurance premiums. Conflicts and or
differences between the parties under the reinsurance contracts were to be arbitrated in
Manila. Philippine Guaranty Co., Inc. and Swiss Reinsurance Company stipulated that their
contract shall be construed by the laws of the Philippines.
The premiums paid by such companies were excluded by the petitioner from its gross
income when it file its income tax returns for 1953 and 1954. Furthermore, it did not withhold
or pay tax on them. Consequently, the CIR assessed against the petitioner withholding
taxes on the ceded reinsurance premiums to which the latter protested the assessment on
the ground that the premiums are not subject to tax for the premiums did not constitute
income from sources within the Philippines because the foreign reinsurers did not engage in
business in the Philippines, and CIR's previous rulings did not require insurance companies
to withhold income tax due from foreign companies.
CTA: Denied. ​"IN VIEW OF THE FOREGOING CONSIDERATIONS, petitioner Philippine
Guaranty Co., Inc. is hereby ordered to pay to the Commissioner of Internal Revenue the
respective sums of P202,192.00 and P173,153.00 or the total sum of P375,345.00 as
withholding income taxes for the years 1953 and 1954, plus the statutory delinquency
penalties thereon. With costs against petitioner."
ISSUE: Whether or not reinsurance premiums that did not constitute income from sources
within the Philippines because the foreign reinsurers did not engage in business in the
Philippines are subject to tax?
HELD:
YES, reinsurance premiums that did not constitute income from sources within the
Philippines, even if foreign reinsurers did not engage in business in the Philippines are
subject to tax.
Section 24 of the Tax Code subjects foreign corporations to tax on their income from
sources within the Philippines. The word "sources" has been interpreted as the activity,
property or service giving rise to the income. 1 The reinsurance premiums were income
created from the undertaking of the foreign reinsurance companies to reinsure Philippine
Guaranty Co., Inc. against liability for loss under original insurances. Such undertaking, as
explained above, took place in the Philippines. These insurance premiums therefore came
from sources within the Philippines and, hence, are subject to corporate income tax.
The foreign insurers place of business should not be confused with their place of activity.
Business implies continuity and progression of transactions 2 while activity may consist of
only a single transaction. An activity may occur outside the place of business. Section 24 of
the Tax Code does not require a foreign corporation to engage in business in the
Philippines in subjecting its income to tax. It suffices that the activity creating the income is
performed or done in the Philippines. What is controlling, therefore, is not the place of
business but the place of activity that created an income.
16
Additional Notes:
ISSUE 2: Whether or not ​whether or not reinsurance premiums ceded to foreign reinsurers not
doing business in the Philippines are subject to withholding tax under Sections 53 and 54 of the
Tax Code
HELD:
YES.
SEC. 54. Payment of corporation income tax at source. — In the case of foreign corporation
subject to taxation under this Title not engaged in trade or business within the Philippines and not
having any office or place of business therein, there shall be deducted and withheld at the source
in the same manner and upon the same items as is provided in section fifty-three a tax equal to
twenty-four per centum thereof, and such tax shall be returned and paid in the same manner and
subject to the same conditions as provided in that section.”
The applicable portion of Section 53 provides:
"(b) Non-resident aliens. — All persons, corporations and general copartnerships
(companias colectivas), in whatever capacity acting, including lessees or mortgagors of real or
personal property, trustees acting in any trust capacity, executors, administrators receivers,
conservators, fiduciaries, employers, and all officers and employees of the Government of the
Philippines having the control, receipt, custody, disposal, or payment of interest, dividends, rents,
salaries, wages, premiums, annuities, compensation, remunerations, emoluments, or other fixed
or determinable annual or periodical gains, profits, and income of any non-resident alien
individual, not engaged in trade or business within the Philippines and not having any office or
place of business therein, shall (except) in the cases provided for in subsection (a) of this section)
deduct and withhold from such annual or periodical gains, profits, and income a tax equal to
twelve per centum hereof: Provided, That no such deduction or withholding shall be required in
the case of dividends paid by a foreign corporation unless (1) such corporation is engaged in
trade or business within the Philippines or has an office or place of business therein, and (2)
more than eighty-five per centum of the gross income of such corporation for the three-year
period ending with the close of its taxable year preceding the declaration of such dividends (or for
such part of such period as the corporation has been in existence) was derived from sources
within the Philippines as determined under the provisions of section thirty-seven: Provided,
further, That the Collector of Internal Revenue may authorize such tax to be deducted and
withheld from the interest upon any securities the owners of which are not known to the
withholding agent."​cralaw v
1. TAXATION; INCOME TAX; REINSURANCE PREMIUMS CEDED TO FOREIGN
REINSURERS SUBJECT TO WITHHOLDING TAX. — Reinsurance premiums on local risks
ceded by domestic insurers to foreign reinsurers not doing business in the Philippines are subject
to withholding tax.
2. ID.; ID.; REINSURANCE PREMIUMS CEDED TO FOREIGN REINSURERS CONSIDERED
INCOME FROM PHILIPPINE SOURCES. — Where the reinsurance contracts show that the
activities that constituted the undertaking to reinsure a domestic insurer against losses arising
from the original insurances in the Philippines were performed in the Philippines, the reinsurance
premiums are considered as coming from sources within the Philippines and are subject to
Philippine Income Tax.
3. ID.; ID.; ID.; PLACE OF ACTIVITY CREATING INCOME CONTROLLING. — Section 24 of the
Tax Code does not require a foreign corporation to engage in business in the Philippines in
subjecting its income to tax. It suffices that the activity creating the income is performed or done
in the Philippines. What is controlling, therefore, is not the place of business but the place of
activity that created an income.
4. ID.; ID.; SECTION 37 OF TAX CODE NOT ALL INCLUSIVE ENUMERATION. — Section 37 of
the Tax Code is not an all-inclusive enumeration, for it merely directs that the kinds of income
mentioned therein should be treated as income from sources within the Philippines but it does not
require that other kinds of income should not be considered likewise.
5. ID.; ID.; NO ESTOPPEL ON GOVERNMENT FOR MISTAKE OF ITS AGENTS. — The
defense of reliance in good faith on rulings of the Commissioner of Internal Revenue requiring no
withholding of the tax due on reinsurance premiums may free the taxpayer from the payment of
surcharges or penalties imposed for failure to pay the corresponding withholding tax, but it
certainly would not exculpate it from liability to pay such withholding tax. The Government is not
estopped from collecting taxes by the mistakes or errors of its agents.
6. ID.; ID.; WITHHOLDING TAX ON REINSURANCE PREMIUMS COMPUTED ON TOTAL
AMOUNT CEDED. — The withholding tax on reinsurance premiums should be computed on the
total amount ceded instead of on the amount actually remitted to foreign reinsurers. Sections 53
and 54 of the Tax Code allow no deduction from the income therein enumerated in determining
the amount to be withheld. Accordingly, in computing the withholding tax due on the reinsurance
premiums no deduction shall be recognized.
17
From Sources outside the Philippines
B. Compensation Income

G.R. No. L-12954 February 28, 1961

COLLECTOR OF INTERNAL REVENUE, petitioner, vs. ARTHUR HENDERSON,
respondent.
x---------------------------------------------------------x
G.R. No. L-13049 February 28, 1961
ARTHUR HENDERSON, petitioner, vs. COLLECTOR OF INTERNAL REVENUE,
respondent.

TAXATION; INCOME TAXES; ALLOWANCES FOR BUSINESS EXECUTIVE’S HOUSING

EXPENSES; CASE AT BAR. — The taxpayers in the case at bar, are childless and there are
only the two of them in the family. Although the quarters they occupied exceeded their
personal needs, the exigencies of husband-taxpayer’s high executive position demanded
and compelled them to live in more spawning and pretentious quarters like the ones they
had occupied. They had to entertain and put up house-guests in their apartments. This is
the reason why the husband-taxpayer’s employer-corporation had to grant him allowance
for rental and utilities in addition to his annual basic salary to take care of those extra
expenses for rental and utilities in excess of their personal needs. The fact that the
taxpayers had to live or did not have to live in the apartment’s chosen by the
husband-taxpayer’s employer-corporation is of no moment, for no part of the allowances
in question redounded to their personal benefit or was retained by them. Their bills for
rental and utilities were paid directly by the employer-corporation to the creditors.
Nevertheless, the taxpayers are entitled only to a ratable value of the allowances in
question. Only the reasonable amount they would spent for house rental and utilities such
as light, water, telephone, etc., should be subject to tax. The excess should be considered
as expenses of the corporation.

18
Convenience of the Employer Rule
• CIR v. Castaneda, 203 SCRA 72 ​VIENNA
COMMISSIONER OF INTERNAL REVENUE vs. CA and Efren Castaneda
GR 96016 October 17, 1991
*Ang topic kay wala na discuss sa Case pero based sa akong naresearch sa internet:
Employer Convenience Rule: Refers to a benefit provided by the employer on top of
the employee’s basic compensation but which would be more beneficial to the
employer than to the employee. As such, they are not considered as taxable.
FACTS:
Castaneda retired from the government service as Revenue Attache in the Philippine
Embassy in London, in 1982 under the provisions of Section 12 (c) of Commonwealth Act
186, as amended. Upon retirement, he received, among other benefits, terminal leave pay
from which CIR withheld P12,557.13 allegedly representing income tax thereon.
Castaneda filed a formal written claim with CIR for a refund contending that the cash
equivalent of his terminal leave is exempt from income tax. To comply with the two-year
prescriptive period for refund, Castaneda filed on with the CTA a Petition for Review,
seeking the refund of income tax withheld from his terminal leave pay.
The CTA ordered the CIR to refund Castaneda the sum of P12,557.13 withheld as income
tax.
CIR appealed to SC who referred the case to CA for resolution.
CA dismissed the petition for review and affirmed CTA. Hence, CIR recoursed to SC.
SolGen, in behalf of CIR, contends that the terminal leave pay is income derived from
employer-employee relationship, citing Sec. 28 of the NIRC; that as part of the
compensation for services rendered, terminal leave pay is actually part of gross income of
the recipient.
That terminal leave pay cannot be viewed as salary for purposes which would reduce it. . . .
there can thus be no "commutation of salary" when a government retiree applies for
terminal leave because he is not receiving it as salary. What he applies for is a
"commutation of leave credits." It is an accumulation of credits intended for old age or
separation from service.
ISSUE:
Whether or not terminal leave pay received by a government official or
employee on the occasion of his compulsory retirement from the government service
is subject to withholding (income) tax.
HELD:
NO.
The Court has already ruled that the terminal leave pay received by a government official or
employee is not subject to withholding (income) tax. In the recent case of Jesus N.
Borromeo vs. The Hon. Civil Service Commission, et al., G.R. No. 96032, 31 July 1991, the
Court explained the rationale behind the employee's entitlement to an exemption from
withholding (income) tax on his terminal leave pay as follows:
. . . ​commutation of leave credits, more commonly known as terminal leave, is applied
for by an officer or employee who retires, resigns or is separated from the service
through no fault of his own. (Manual on Leave Administration Course for
Effectiveness published by the Civil Service Commission, pages 16-17).
In the exercise of sound personnel policy, the Government encourages unused
leaves to be accumulated. The Government recognizes that for most public servants,
retirement pay is always less than generous if not meager and scrimpy. A modest
nest egg which the senior citizen may look forward to is thus avoided. Terminal leave
payments are given not only at the same time but also for the same policy
considerations governing retirement benefits.
In fine, not being part of the gross salary or income of a government official or employee but
a retirement benefit, terminal leave pay is not subject to income tax.
19
Fringe Benefits Exclusions: Compensation for Injuries or Sickness
• CIR v. Castaneda, 203 SCRA 72 ​VIENNA (SAME CASE)
FACTS: ​*Please refer to the previous digest.
ISSUE: ​W/N terminal leave pay/ retirement benefit is subject to withholding (income) tax.
HELD: NO. Not subject to fringe benefits tax in Phils.
The Court has already ruled that the terminal leave pay received by a government official or
employee is not subject to withholding (income) tax. In the recent case of Jesus N.
Borromeo vs. The Hon. Civil Service Commission, et al., G.R. No. 96032, 31 July 1991, the
Court explained the rationale behind the employee's entitlement to an exemption from
withholding (income) tax on his terminal leave pay as follows:
. . . commutation of leave credits, more commonly known as terminal leave, is applied for by
an officer or employee who retires, resigns or is separated from the service through no fault
of his own. (Manual on Leave Administration Course for Effectiveness published by the Civil
Service Commission, pages 16-17).
In the exercise of sound personnel policy, the Government encourages unused leaves to be
accumulated. The Government recognizes that for most public servants, retirement pay is
always less than generous if not meager and scrimpy. A modest nest egg which the senior
citizen may look forward to is thus avoided. Terminal leave payments are given not only at
the same time but also for the same policy considerations governing retirement benefits.
In fine, not being part of the gross salary or income of a government official or employee but
a retirement benefit, terminal leave pay is not subject to income tax.
DISCUSSION: *nakita ra sa internet XD
Employers are not obliged to give this kind of benefits but they are
encouraged to do so since these benefits, no matter how small, are a big help to the
workers. The concept of “de minimis benefits” had been initially introduced in RR No.
3-1998 and underwent revisions and amendments which include BIR Revenue
Regulations No. 10-2000, Revenue Regulations No. 5-2008, Revenue Regulations No.
5-2011, Revenue Regulations No. 8-2012 and the latest Revenue Regulations No.
1-2015 dated January 5, 2015.
A company might give special benefits to its employees in addition to their basic
salaries and wages. It may formulate new policies for the provision of such benefits to its
employees, or the benefits may have been provided in the contract of employment. These
additional benefits are called fringe benefits. Fringe benefits are special form of benefits
given to the employees apart from their basic compensation. These benefits may be in the
form of goods, services or any other benefits in cash or in kind granted by the employer –
whether corporation, partnership or sole proprietorship – to its employees.
However, ​the law has its own specific requirements and procedures as to
which fringe benefits are taxable with the normal income tax rate or which are subject
to the fringe benefit tax.
STATUTORY DEFINITION OF FRINGE BENEFITS:
In the Philippines, fringe benefits are defined and regulated in Section 33 of the
National Internal Revenue Code (NIRC), as amended, and the Revenue Regulations
3-1998 re: “Implementing Section 33 of the National Internal Revenue Code, as Amended
by Republic Act No. 8424 Relative to the Special Treatment of Fringe Benefits”.
Section 33(B) of the NIRC defines Fringe Benefits as “any good, service, or other benefit
furnished or granted by an employer, in cash or in kind, in addition to basic salaries, to an
individual employee such as, but are not limited to the following:
1. Housing;
2. Expense account;
3. Vehicle of any kind;
4. Household personnel, such as maid, driver and others;
5. Interest on loan at less than market rate to the extent of the difference between the
market rate and actual rate granted;
6. Membership fees, dues and other expenses borne by the employer for the employee in
social and athletic clubs or other similar organizations;
7. Expenses for foreign travel;
8. Holiday and vacation expenses;
9. Educational assistance to the employee or his dependents; and
10. Life or health insurance and other non-life insurance premiums or similar amounts in
excess of what the law allows.”
Revenue Regulations No. 3-1998(B) further explains the composition of each on the list
above, the rules, and the valuation of the fringe benefits.
20
Income Exempt Under Treaty • Sec. 28(b)(4), NIRC​#
G.R. No.
L-26379 December 27, 1969
WILLIAM C. REAGAN, ETC.,​ petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE,​ respondent.
FERNANDO, ​J.:
FACTS: Petitioner William C. Reagan is a US citizen and an employee of Bendix Radio,
Division of Bendix Aviation Corporation (an American corporation), which provides technical
assistance to the United States Air Force, was assigned at Clark Air Base in Pampanga on
or about July 7, 1959. Nine (9) months thereafter and before his tour of duty expired,
Reagan imported on April 22, 1960 a tax-free 1960 Cadillac car with accessories valued at
$6,443.83, including freight, insurance, and other charges.
On July 11, 1960, more than two (2) months after the importation of the Cadillac, Reagan
requested the Base Commander, Clark Air Base, for a permit to sell the car which was
granted provided that the sale was made to a member of the US Armed Forces or a US
citizen employed in the U.S. military bases in the Philippines. On the same date, Reagan
sold his car for $6,600 to a certain Willie Johnson, Jr. Then, on the same date, Willie
Johnson, Jr. sold the car to Fred Meneses for P32,000.
As a result of the transaction, CIR assessed an income tax on Reagan amounting to
P2,979. After paying the sum, Reagan filed a case with the CTA seeking for refund from the
CIR, on the contention that such transaction occurred in a “foreign soil”. Petitioner’s
contention is that Clark Air Base is a base outside the Philippines" the sale therefore having
taken place on "foreign soil".
ISSUE: Whether or not the said income tax of P2,979.00 was legally collected by
respondent for petitioner
HELD:​ Yes.
Clark Air Force is not a foreign soil nor a foreign territory for purposes of income tax
legislation. There is nothing in the Military Bases Agreement that lends support to such an
assertion. It has not become foreign soil or territory. This country's jurisdictional rights
therein, certainly not excluding the power to tax, have been preserved. As to certain tax
matters, an appropriate exemption was provided for.
Same; Same; Military Bases Agreement; Tax exemption from foreign sources
under Art. XII of the Agreement does not cover income derived from U.S. bases.— ​ ​The
exemption clause in the Military Bases Agreement by virtue of which a "national of the
United States serving in or employed in the Philippines in connection with the construction,
maintenance, operation or defense of the bases and residing in the Philippines only by
reason of such employment" is not to be taxed on his income "unless derived from
Philippine sources or sources other than the United States sources," ​does not ​apply to
income derived in the bases which are clearly derived in the Philippines.
For income tax purposes, the Clark Air Force Base is not outside Philippine territory.
● Petitioner was liable for the income tax arising from a sale of his automobile in the
Clark Field Air Base, which clearly is and cannot otherwise be other than, within
our territorial jurisdiction to tax.
● Petitioner himself being fully aware that if the Clark Air Force Base is to be
considered, as it ought to be and as it is, Philippine soil or territory, his claim for
exemption from the income tax due was distinguished only by its futility.
Same; Same; ​Tax exemption must be clear.— ​ The law does not look with favor on
tax exemptions and that he who would seek to be thus privileged must justify it by words too
plain to be mistaken and too categorical to be misinterpreted.
OTHER DISCUSSION:
Political law; Sovereignty; Extent of Philippine territorial and personal jurisdiction.​—Nothing is
better settled than that the Philippines being independent and sovereign, its authority may be exercised
over its entire domain. There is no portion thereof that is beyond its power. Within its limits, its decrees
are supreme, its commands paramount. Its laws govern therein, and everyone to whom it applies must
submit to its terms. That is the extent of its jurisdiction, both territorial and personal. Necessarily,
likewise, it has to be exclusive. If it were not thus, there is a diminution of its sovereignty.
Same; Same; Same; Bases under lease to the American armed forces by virtue of the ​Military
Bases Agreement of 1947 remain part of Philippine territory.​—A state is not precluded from allowing
another power to participate in the exercise of jurisdictional right over certain portions of its territory. If it
does so, it by no means follows that such areas become impressed with an alien character. They retain
their status as native soil. ​They​are still subject to its authority. Its jurisdiction may be diminished, but it
does not disappear. So it is with the bases under lease to the American armed forces by virtue of the
Military Bases Agreement of 1947. They are not and cannot be foreign territory.
21
C. Pensions/Retirement Benefits/Separation Pay Effectiveness published by the Civil Service Commission, pages 16-17). In the exercise of
sound personnel policy, the Government encourages unused leaves to be accumulated.
G.R. No. 96016. October 17, 1991.​* The Government recognizes that for most public servants, retirement pay is always less
COMMISSIONER OF INTERNAL REVENUE, petitioner, ​vs. THE COURT OF APPEALS than generous if not meager and scrimpy. A modest nest egg which the senior citizen may
and EFREN P. CASTANEDA, respondents. look forward to is thus avoided. Terminal leave payments are given not only at the same
time but also for the same policy considerations governing retirement benefits.”
Doctrine: Taxation; Withholding tax; Terminal leave pay; Terminal leave pay received
by a government official or employee is not subject to withholding tax. In fine, not being part of the gross salary or income of a government official or employee but
a retirement benefit, terminal leave pay is not subject to income tax.
Facts: Efren P. Castaneda retired from the government service. Upon retirement, he
received, among other benefits, terminal leave pay from which petitioner Commissioner of
Internal Revenue withheld P12,557.13 allegedly representing income tax thereon.
Castaneda filed a formal written claim with CIR for a refund of contending that the cash
equivalent of his terminal leave is exempt from income tax.

Court of Tax Appeals ruled in favor of Castaneda and ordered the Commissioner of Internal
Revenue to refund Castaneda the sum withheld as income tax. The Solicitor General, acting
on behalf of the Commissioner of Internal Revenue, contends that the terminal leave pay is
income derived from employer-employee relationship, citing in support of his stand Section
28 of the National Internal Revenue Code

“x x x. It (terminal leave pay) cannot be viewed as salary for purposes

which would reduce it. x x x there can thus be no ‘commutation of salary’ when a
government retiree applies for terminal leave because he is not receiving it as
salary. What he applies for is a ‘commutation of leave credits.’ It is an
accumulation of credits intended for old age or separation from service. x x x.​”

Issue: ​Whether or not terminal leave pay received by a government official or employee on
the occasion of his compulsory retirement from the government service is subject to
withholding (income) tax.

Held: No. ​Terminal Leave is not subject to withholding tax

The Court has already ruled that the terminal leave pay received by a government official or
employee is not subject to withholding (income) tax. In the recent case of ​Jesus N.
Borromeo vs. The Hon. Civil Service Commission, t​ he Court explained the ​rationale behind
the employee’s entitlement to an exemption from withholding (income) tax on his terminal
leave pay as follows: “x x x commutation of leave credits, more commonly known as
terminal leave, is applied for by an officer or employee who retires, resigns or is separated
from the service through no fault of his own. (Manual on Leave Administration Course for

22
D. Passive Income
(G.R. No. L-53961 June 30, 1987, NATIONAL DEVELOPMENT COMPANY vs.
COMMISSIONER OF INTERNAL REVENUE) ​IVAN
FACTS:
The National Development Company (NDC) entered into contracts in Tokyo with several
Japanese shipbuilding companies for the construction of twelve ocean-going vessels. The
purchase price was to come from the proceeds of bonds issued by the Central Bank. Initial
payments were made in cash and through irrevocable letters of credit. Fourteen promissory
notes were signed for the balance by the NDC and, as required by the shipbuilders,
guaranteed by the Republic of the Philippines. Pursuant thereto, the remaining payments
and the interests thereon were remitted in due time by the NDC to Tokyo. The vessels were
eventually completed and delivered to the NDC in Tokyo.
The NDC remitted to the shipbuilders in Tokyo the total 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. The BIR thereupon served on the NDC a warrant of distraint and levy to enforce
collection of the claimed amount. The NDC went to the Court of Tax Appeals.
The BIR was sustained by the CTA except for a slight reduction of the tax deficiency in the
sum of P900.00, representing the compromise penalty. Hence, this petition for certiorari.
ISSUE: ​Is NDC liable for tax?
RULING: ​Yes.
The Japanese shipbuilders were liable to tax on the interest remitted to them under Section
37 of the Tax Code. , thus:
SEC. 37. ​Income from sources within the Philippines. — ​(a) Gross income from sources
within the Philippines. — The following items of gross income shall be treated as gross
income from sources within the Philippines:
(1) ​Interest. — I​ nterest derived from sources within the Philippines, and interest
on bonds, notes, or​other interest-bearing obligations of residents, corporate or otherwise;
The petitioner argues that the Japanese shipbuilders were not subject to tax under
the above provision because all the related activities — the signing of the contract, the
construction of the vessels, the payment of the stipulated price, and their delivery to the
NDC — were done in Tokyo. 8​ The law, however, does not speak of activity but of "source,"
which in this case is the NDC. This is a domestic and resident corporation with principal
offices in Manila.
Here in the case at bar, petitioner National Development Company, a corporation duly
organized and existing under the laws of the Republic of the Philippines, with address and
principal office at Calle Pureza, Sta. Mesa, Manila, Philippines unconditionally promised to
pay the Japanese shipbuilders, as obligor in fourteen (14) promissory notes for each vessel,
the balance of the contract price of the twelve (12) ocean-going vessels purchased and
acquired by it from the Japanese corporations, including the interest on the principal sum at
the rate of five per cent (5%) per annum. And pursuant to the terms and conditions of these
promisory notes, which are duly signed by its Vice Chairman and General Manager,
petitioner remitted to the Japanese shipbuilders in Japan during the years 1960, 1961, and
1962 the sum of $830,613.17, $1,654,936.52 and $1,541.031.00, respectively, as interest
on the unpaid balance of the purchase price of the aforesaid vessels.
NDC is not the one taxed but the Japanese shipbuilders who were liable on the interest
remitted to them under Section 37 of the Tax Code. 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.
Tax exemptions cannot be merely implied but must be categorically and
unmistakably expressed- ​It is also incorrect to suggest that the Republic of the Philippines
could not collect taxes on the interest remitted because of the undertaking signed by the
Secretary of Finance in each of the promissory notes that. There is nothing in the PN
guaranteed by the state exempting the interests from taxes. Petitioner has not established a
clear waiver therein of the right to tax interests. Tax exemptions cannot be merely implied
but must be categorically and unmistakably expressed. Any doubt concerning this question
must be resolved in favor of the taxing power.
23
• Rentals/Leases
• Royalties
• Dividends
o CIR v. CA, GR 108576, Jan. 20, 1999 ​DAVE
[G.R. No. 108576. January 20, 1999]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE COURT OF APPEALS,
COURT OF TAX APPEALS and A. SORIANO CORP., respondents.
Facts: ​Don Andres Soriano, a citizen and resident of the United States, formed the
corporation A. Soriano Y Cia, predecessor of ANSCOR, with a P1,000,000.00 capitalization
divided into 10,000 common shares at a par value of P100/share. ANSCOR is wholly owned
and controlled by the family of Don Andres, who are all non-resident aliens.
On September 12, 1945, ANSCORs authorized capital stock was increased to
P2,500,000.00 divided into 25,000 common shares with the same par value. Of the
additional 15,000 shares, only 10,000 was issued which were all subscribed by Don Andres.
On December 30, 1964 Don Andres died. Records revealed that he has a total
shareholdings of 185,154 shares. Correspondingly, one-half of that shareholdings or 92,577
shares were transferred to his wife, Doa Carmen Soriano, as her conjugal share. The other
half formed part of his estate.
A day after Don Andres died, ANSCOR increased its capital stock to P20M and in 1966
further increased it to P30M. In the same year (December 1966), stock dividends worth
46,290 and 46,287 shares were respectively received by the Don Andres estate and Doa
Carmen from ANSCOR. Hence, increasing their accumulated shareholdings to 138,867 and
138,864 common shares each.
The Exchange​: ​Doa Carmen, pursuant to a BIR ruling regarding the US Revenue code,
exchanged her whole 138,864 common shares for 138,860 of the newly reclassified
preferred shares​. The estate of Don Andres in turn, exchanged 11,140 of its common
shares for the remaining 11,140 preferred shares, thus reducing its (the estate) common
shares to 127,727
The Redemption: Pursuant to a Board Resolution, ANSCOR redeemed 28,000
common shares from the Don Andres estate. About a year later, ANSCOR again
redeemed 80,000 common shares from the Don Andres estate, further reducing the
latters common shareholdings to 19,727​.
Main action: ​In 1973, after examining ANSCORs books of account and records, ​Revenue
examiners issued a report proposing that ANSCOR ​be assessed for deficiency
withholding tax-at-source, ​pursuant to Sections 53 and 54 of the 1939 Revenue Code, for
the year 1968 and the second quarter of 1969 based on the transactions of exchange and
redemption of stocks.
ANSCORs subsequent protest on the assessments was denied in 1983 by petitioner.
Sec. 83. Distribution of dividends or assets by corporations.
(b) ​Stock dividends A stock dividend representing the transfer of surplus
to capital account shall not be subject to tax. However, if a corporation ​cancels or
redeems stock issued as a dividend ​at ​such time and in such manner ​as to make
the ​distribution and cancellation or redemption, in whole or in part, essentially
equivalent to the distribution of a t​ axable dividend, t​ he amount so distributed in
redemption or cancellation of the stock shall be considered as ​taxable income to
the extent it represents a distribution of earnings or profits a ​ ccumulated after
March first, nineteen hundred and thirteen​.
CTA: ​ANSCOR filed a petition for review with the CTA assailing the tax assessments on the
redemptions and exchange of stocks. In its decision, the Tax Court reversed petitioners
ruling, after finding sufficient evidence to overcome the prima facie correctness of the
questioned assessments. In a petition for review, the CA, as mentioned, affirmed the ruling
of the CTA
Issue: ​Whether or not ANSCORs act of: (1) redemption of stocks from its stockholder Doa
Carmen and Don Andres’ estate, and (2) the exchange of common with preferred shares,
can be considered as essentially equivalent to the distribution of taxable dividend, making
the proceeds thereof taxable
Ruling:
AS TO THE REDEMPTION: YES
The three elements in the imposition of income tax are: (1) there must be gain or profit, (2)
that the gain or profit is realized or received, actually or constructively, and (3) it is not
exempted by law or treaty from income tax. Any business purpose as to why or how the
income was earned by the taxpayer is not a requirement. Income tax is assessed on income
received from any property, activity or service that produces the income because the Tax
Code stands as an indifferent neutral party on the matter of where income comes from.
24
As stated above, the test of taxability under the exempting clause of Section 83(b) is,
whether income was realized through the redemption of stock dividends. The redemption
converts into money the stock dividends which become a realized profit or gain and
consequently, the stockholders separate property. Profits derived from the capital invested
cannot escape income tax. As realized income, the proceeds of the redeemed stock
dividends can be reached by income taxation regardless of the existence of any business
purpose for the redemption.
ANSCOR invoked two reasons to justify the redemptions (1) the alleged filipinization
program and (2) the reduction of foreign exchange remittances in case cash dividends are
declared.
hence to income tax. Both stocks had the same par value. Under the facts herein, any
difference in their market value would be immaterial at the time of exchange because no
income is yet realized it was a mere corporate paper transaction. It would have been
different, if the exchange transaction resulted into a flow of wealth, in which case income tax
may be imposed.
The SC had a lengthy discussion on TAX on STOCK DIVIDENDS in this case, as
follows:

The two purposes invoked by ANSCOR under the facts of this case are no excuse for its tax
liability. First, the alleged filipinization plan cannot be considered legitimate as it was not
implemented until the BIR started making assessments on the proceeds of the redemption.
Such corporate plan was not stated in nor supported by any Board Resolution. ​To issue
stock dividends is to increase the shareholdings of ANSCORs foreign stockholders
would be contrary contrary to its filipinization plan. This would also increase rather than
reduce their need for foreign exchange remittances in case of cash dividend declaration,
considering that ANSCOR is a family corporation where the majority shares at the time of
redemptions were held by Don Andres foreign heirs.

AS TO THE EXCHANGE OF COMMON SHARES: NO

Exchange is an act of taking or giving one thing for another involving reciprocal transfer and
is generally considered as a taxable transaction. The exchange of common stocks with
preferred stocks, or preferred for common or a combination of either for both, may not
produce a recognized gain or loss, so long as the provisions of Section 83(b) is not
applicable. This is true in a trade between two (2) persons as well as a trade between a
stockholder and a corporation. In general, this trade must be parts of merger, transfer to
controlled corporation, corporate acquisitions or corporate reorganizations. No taxable gain
or loss may be recognized on exchange of property, stock or securities related to
reorganizations

Both the Tax Court and the Court of Appeals found that ANSCOR reclassified its shares into
common and preferred, and that parts of the common shares of the Don Andres estate and
all of Doa Carmens shares were exchanged for the whole 150, 000 preferred shares.
Thereafter, both the Don Andres estate and Doa Carmen remained as corporate
subscribers except that their subscriptions now include preferred shares. ​There was no
change in their proportional interest after the exchange. There was no cash flow,

25
• El Oriente Fabrica v. Posadas, 56 Phil 147 GRETCHEN ​DONE
G.R. No. 34774 September 21, 1931
EL ORIENTE FABRICA DE TABACOS, INC.,​ plaintiff-appellant,
vs.
JUAN POSADAS, Collector of Internal Revenue,​ defendant-appellee.
Gibbs and McDonough and Roman Ozaeta for appellant.
Attorney-General Jaranilla for appellee.
MALCOLM, ​J.:
FACTS:
Plaintiff, El Oriente, Fabrica de Tabacos, Inc., is a domestic corporation duly organized and
existing under and by virtue of the laws of the Philippine Islands and the defendant is the
duly appointed, qualified and acting Collector of Internal Revenue of the Philippine Islands.
On March 18, 1925, plaintiff, in order to protect itself against the loss that it might suffer by
reason of the death of its manager, A. Velhagen, who had had more than thirty-five (35)
years of experience in the manufacture of cigars in the Philippine Islands, and whose death
would be a serious loss to the plaintiff, procured from the Manufacturers Life Insurance Co.,
of Toronto, Canada, thru its local agent E.E. Elser, an insurance policy on the life of the said
A. Velhagen for the sum of $50,000, United States currency.
Plaintiff designated itself as the sole beneficiary of said policy on the life of its said manager.
During the time the life insurance policy herein before referred to was in force and effect
plaintiff paid from its funds all the insurance premiums due thereon.
Plaintiff charged as expenses of its business all the said premiums and deducted the same
from its gross incomes as reported in its annual income tax returns, which deductions were
allowed by the defendant upon a showing made by the plaintiff that such premiums were
legitimate expenses of its (plaintiff's) business.
A. Velhagen, the insured, had no interest or participation in the proceeds of said life
insurance policy. Upon the death of said A. Velhagen in the year 1929, the plaintiff received
all the proceeds of the said life insurance policy, together with the interests and the
dividends accruing thereon, aggregating P104,957.88.
Over the protest of the plaintiff, which claimed exemption under section 4 of the Income Tax
Law, the defendant Collector of Internal Revenue assessed and levied the sum of
P3,148.74 as income tax on the proceeds of the insurance policy mentioned in the
preceding paragraph, which tax the plaintiff paid under instant protest on July 2, 1930; and
that defendant overruled said protest on July 9, 1930.
Thereupon, a decision was handed down which absolved the defendant from the complaint,
with costs against the plaintiff. From this judgment, the plaintiff appealed.
ISSUE:
Whether the proceeds of insurance taken by a corporation on the life of an important official
to indemnify it against loss in case of his death, are taxable as income under the Philippine
Income Tax Law.
HELD:
NO. The Income Tax Law for the Philippines is Act No. 2833, as amended. It is divided into
four chapters:
Chapter I On Individuals,
Chapter II On Corporations,
Chapter III General Administrative Provisions
Chapter IV General Provisions.
In chapter I On Individuals, is to be found section 4 which provides that,
"The following incomes shall be exempt from the provisions of this law:
(a) The proceeds of life insurance policies paid to beneficiaries upon the death of
the insured ...”
Section 10, as amended, in Chapter II On Corporations, provides that,
There shall be levied, assessed, collected, and paid annually upon the total net
income received in the preceding calendar year from all sources by every
corporation ... a tax of three per centum upon such income ... .
Section 11 in the same chapter, provides the exemptions under the law, but neither
here nor in any other section is reference made to the provisions of section 4 in
Chapter I.
The situation will be better elucidated by a brief reference to laws on the same subject in the
United States. The Income Tax Law of 1916 extended to the Philippine Legislature, when it
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came to enact Act No. 2833, to copy the American statute. Subsequently, the Congress of
the United States enacted its Income Tax Law of 1919, in which certain doubtful subjects
were clarified. Thus, as to the point before us, it was made clear, ​when not only in the part
of the law concerning individuals were exemptions provided for beneficiaries, but
also in the part concerning corporations, specific reference was made to the
exemptions in favor of individuals, thereby making the same applicable to
corporations​.
Considering, therefore, the purport of the stipulated facts, considering the uncertainty of
Philippine law, and considering the lack of express legislative intention to tax the proceeds
of life insurance policies paid to corporate beneficiaries, particularly when in the exemption
in favor of individual beneficiaries in the chapter on this subject, the clause is inserted
"exempt from the provisions of this law," we deem it reasonable to hold the proceeds
of the life insurance policy in question as representing an indemnity and not taxable
income​.

It will be recalled that El Oriente, Fabrica de Tabacos, Inc., took out the insurance on the life
of its manager, who had had more than thirty-five years' experience in the manufacture of
cigars in the Philippines, to protect itself against the loss it might suffer by reason of the
death of its manager. The court did not believe that this fact signifies that when the plaintiff
received P104,957.88 from the insurance on the life of its manager, it thereby realized a net
profit in this amount. It is true that the Income Tax Law, in exempting individual
beneficiaries, speaks of the proceeds of life insurance policies as income, but this is a very
slight indication of legislative intention. In reality, what the plaintiff received was in the nature
of an indemnity for the loss which it actually suffered because of the death of its manager.

To quote the exact words in the cited case of Chief Justice Taft delivering the opinion of the
court:

It is earnestly pressed upon us that proceeds of life insurance paid on the death of
the insured are in fact capital, and cannot be taxed as income under the Sixteenth
Amendment. Eisner vs. Macomber, 252 U.S., 189, 207; Merchants' Loan & Trust
Co. vs. Smietanka, 255 U.S., 509, 518. We are not required to meet this question.
It is enough to sustain our construction of the act to say that proceeds of a life
insurance policy paid on the death of the insured are not usually classed as
income.

. . . Life insurance in such a case is like that of fire and marine insurance, — a
contract of indemnity. Central Nat. Bank vs. Hume, 128 U.S., 195. The benefit to
be gained by death has no periodicity. It is a substitution of money value for
something permanently lost, either in a house, a ship, or a life. Assuming, without
deciding, that Congress could call the proceeds of such indemnity income, and
validly tax it as such, we think that, in view of the popular conception of the life
insurance as resulting in a single addition of a total sum to the resources of the
beneficiary, and not in a periodical return, such a purpose on its part should be
express, as it certainly is not here.

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F. Prizes and Winnings/Awards/Rewards
• CIR v. COA, GR 101976, Jan. 29, 1993 ​EUNICE
This is a consolidated case on the petitions which focus on the general audit jurisdiction of
the Commission on Audit vis-a-vis the Bureau of Internal Revenue's power to determine
entitlement to the tax informer's reward under Section 3161 of the National Internal
Revenue Code.
Facts:
On June 25, 1986, petitioner Tirso B. Savellano furnished the Bureau of Internal Revenue
(BIR) with a confidential affidavit of information denouncing the National Coal Authority
(NCA) and the Philippine National Oil Company (PNOC) for non-payment of taxes totalling
P234 Million on interest earnings of their respective money placements with the Philippine
National Bank (PNB) since October 15, 1984 to said date. Investigation by the BIR
confirmed the reported tax liabilities, and upon demands thereafter made, NCA and PNOC
paid the BIR.
The BIR Commissioner Bienvenido Tan, Jr. recommended to the Minister of Finance
payment to petitioner Savellano of an informer's reward equivalent to 15% of the amount of
P15,986,165.00 paid by NCA, or P2,397,924.75. The same was approved by then Deputy
Minister of Finance Alfredo Pio de Roda, Jr.; and Savellano was paid the said amount.
For the PNOC’s case it was only shown that it was approved by the Finance Undersecretary
Marcelo Fernando and that Savellano was paid his informer's reward in the total amount of
P 14,093,321.89 in four (4) installments.
On February 8, 1989, the Commission on Audit (COA) ​rendered COA Decision No. 7407
disallowing in audit the payment of informer's reward ​to petitioner Savellano in the NCA
case ​on the ground that payment of ​an informer's reward ​under Section 281 of the
National Internal Revenue Code is conditioned upon the actual recovery or collection
of revenues, and ​no such revenue or income was actually realized or recovered or any
benefit accrued to the government, ​since two (2) government agencies were involved.
The income realized by the BIR out of the withholding taxes paid by the NCA was a
reduction of the income of the latter, resulting in a zero effect in revenues realized or
recovered.
COA also impugned the propriety of the claim for informer's reward based on
intergovernmental violations. In its view, allowance of claims of the kind would not only
place a premium upon violations committed by government agencies but also induce
collusion among government offices in order to obtain the informer's reward. It reasoned
that if the State cannot be held responsible for the tortious acts of its employees unless the
latter acted as special agents, with more reason it should not be held liable to pay informer's
reward upon violations committed by government agencies.
Commissioner of Internal Revenue sought reconsideration of COA Decision No. 740 but
was still denied.
SocGen’s Contention: The disallowance of the COA is erroneous because
1) Government corporations are subject to tax under the NIRC; having
personalities distinct from the government, if they evade payment of their taxes,
the amounts corresponding to such liabilities could be utilized for purposes
exclusive to them; contrarily, if they do pay their taxes, the amounts so paid accrue
to the General Fund;
2) Section 281 of the NIRC does not make any distinction among taxpayers
from whom taxes are eventually recovered; it simply prescribes that for an
informer to be entitled to the reward, the information he furnishes should result in
the recovery of revenues; statutes offering reward must be liberally construed in
favor of informers; the possibility of collusion is not sufficient basis for
disallowance, since collusion cannot be assumed;
3) the official acts of the BIR and the Department of Finance are entitled to a
presumption of regularity
COA’s contention:
1) It ​invokes its constitutionally-vested audit jurisdiction over all government
agencies​, to which, it contends, the statutorily granted power of the Secretary of
Finance under Section 90, P.D. 1445 must yield.
2) That Savellano is not entitled to the informer's reward because there was no
actual collection of revenues under the benefit-to-the government rule​; and
3) Savellano's alleged information did not lead to the discovery of a fraud. It
characterizes the payment of informer's reward as irregular, being predicated upon
violations committed by government agencies, and would have the persons named
in CSB No. 89-0001-104 (c) held liable for participation in illegal or irregular
disbursements of public funds by reason of their respective duties.
Issue:
Whether COA’s disallowance of the informer’s reward was proper
Held:
No. The disallowance was not proper.
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But it should be noted that:
The final determination by the Department of Finance, through the recommendation of the
BIR, of petitioner Savellano's entitlement to the informer's reward is, ​under Section 90,
conclusive only upon the executive agencies concerned. ​But COA is not an executive
agency. It is one of the three (3) independent constitutional commissions. Specifically, it is
the constitutional agency vested with the "power, authority and duty to examine, audit and
settle all accounts pertaining to the revenue and receipts of, and expenditures or uses of
funds and property owned or held in trust by x x x the government, or any of its
subdivisions, agencies or instrumentalities x x
The final determination made by the Finance Department cannot bind respondent COA or
foreclose its review thereof in the exercise of its constitutional function and duty to ensure
that public funds are expended and used in conformity with law. To hold otherwise would be
to ignore the clear mandate and the equally clear implications of Section 3, Article IX (D) of
the 1987 Constitution providing that:
"No law shall be passed exempting any entity of the government or it subsidiary in any
guise whatever, or any investment of public funds, from the jurisdiction of the
Commission on Audit."
The exercise by COA of its general audit power is among the constitutional mechanisms
that give life to the check-and-balance system inherent in a republican form of government
such as ours. Taken in this light, such exercise cannot be regarded as an unlawful or
unwarranted invasion of, or interference with, the authority and power of the
executive agency concerned to determine whether or not a person is entitled to a
reward​ provided by law and the amount thereof.
But this doesn’t mean that the disallowance in audit by COA is in itself final. T​he same may
be set aside and nullified by the Supreme Court, if done with grave abuse of
discretion.
The informer's reward granted to petitioner Savellano is based on Section 316 (now 281) of
the National Internal Revenue Code. It provides:
Sec. 281. Informer's reward to persons instrumental in the discovery of violation of the
National Internal Revenue Code and in the discovery and seizure of smuggled goods.
(1) For violation of the National Internal Revenue Code. ​Any person except an internal
revenue official or employee, or other public official, or his relative within the sixth
grade of consanguinity, ​who voluntarily gives definite and sworn information, ​not yet in the
possession of the Bureau of Internal Revenue, l​eading to the discovery of frauds upon
internal revenue laws or violation of any of the provisions thereof, thereby resulting in the
recovery of revenues​, surcharges and fees and/or the conviction of the guilty party and/or
imposition of any fine or penalty, ​shall be rewarded ​in the sum equivalent to fifteen per
centum of the revenues, surcharges or fees recovered and/or fine or penalty imposed and
collected. xxx
Moreover, the contention that two government agencies are involved overlooks the view
that the agencies, PNOC and NCA perform proprietary functions and possess legal
personalities separate and distinct from the Philippine government.
The informer's reward was sought and given in relation to tax delinquencies of government
agencies provides no reason for disallowance. The law on the matter makes no distinction
whatsoever between delinquent taxpayers in this regard, whether private persons or
corporations, or public or quasipublic agencies, it being sufficient for its operation that the
person or entity concerned is subject to, and violated, revenue laws, and the informer's
report thereof resulted in the recovery of revenues. It is elementary that where the law does
not distinguish, none must be made.​Ubi lex non distinguit nec nos distinguere debemos.
Collusion cannot be presumed. It must be proved by clear and convincing evidence. In the
case at bar, there is no showing of collusion between petitioner Savellano as informer and
any official or employee of the BIR or the Department of Finance. Neither is there any
evidence to overcome the presumption of regularity enjoyed by the official acts of the BIR
and the Department of Finance in approving the claim of petitioner Savellano for informer's
reward.
Therefore, the assailed decisions of COA should be set aside.
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