1

I. Introduction computing taxable income for the taxable period in which falls the date of his death,
A. Income Tax Systems amounts accrued up to the date of his death if not otherwise properly includible in
1. Global Tax System respect of such period or a prior period.
2. Schedular Tax System SEC. 46. Change of Accounting Period. - If a taxpayer, other than an individual,
3. Semi-schedular or semi-global Tax System changes his accounting period from fiscal year to calendar year, from calendar year
B. Features of the PH Income Tax Law to fiscal year, or from one fiscal year to another, the net income shall, with the
1. Direct Tax approval of the Commissioner, be computed on the basis of such new accounting
2. Progressive Tax period, subject to the provisions of Section 47.
3. Comprehensive SEC. 47. Final or Adjustment Returns for a Period of Less than Twelve (12)
4. Semi-schedular or semi-global Tax System Months. -
C. Criteria in imposing PH Income Tax (A) Returns for Short Period Resulting from Change of Accounting Period. - If a
1. Citizenship principle taxpayer, other than an individual, with the approval of the Commissioner, changes
2. Residence principle the basis of computing net income from fiscal year to calendar year, a separate final
3. Source principle or adjustment return shall be made for the period between the close of the last fiscal
D. Types of PH Income Tax year for which return was made and the following December 31. If the change is
E. Taxable Period from calendar year to fiscal year, a separate final or adjustment return shall be made
1. Calendar Year (22P, NIRC) for the period between the close of the last calendar year for which return was made
2. Fiscal Year (22Q, 43, 44, 46, NIRC) and the date designated as the close of the fiscal year. If the change is from one
3. Short Period (Sec. 47, NIRC) fiscal year to another fiscal year, a separate final or adjustment return shall be made
for the period between the close of the former fiscal year and the date designated as
NIRC the close of the new fiscal year.
(B) Income Computed on Basis of Short Period. - Where a separate final or
TITLE II adjustment return is made under Subsection (A) on account of a change in the
TAX ON INCOME accounting period, and in all other cases where a separate final or adjustment return
(As Last Amended by RA No. 10653) [5] is required or permitted by rules and regulations prescribed by the Secretary of
CHAPTER I- DEFINITIONS Finance, upon recommendation of the Commissioner, to be made for a fractional
SEC. 22. Definitions. - When used in this Title: part of a year, then the income shall be computed on the basis of the period for
(P) The term 'taxable year' means the calendar year, or the fiscal year ending during which separate final or adjustment return is made.
such calendar year, upon the basis of which the net income is computed under this
Title. 'Taxable year' includes, in the case of a return made for a fractional part of a II. Concept of Income
year under the provisions of this Title or under rules and regulations prescribed by A. Income Tax Defined
the Secretary of Finance, upon recommendation of the commissioner, the period for
which such return is made. 1. Madrigal v Rafferty
(Q) The term 'fiscal year' means an accounting period of twelve (12) months ending 2. Fisher v Trinidad
on the last day of any month other than December.
CHAPTER VIII EN BANC
ACCOUNTING PERIODS AND METHODS OF ACCOUNTING G.R. No. L-12287 August 7, 1918
SEC. 43. General Rule. - The taxable income shall be computed upon the basis of VICENTE MADRIGAL and his wife, SUSANA PATERNO, plaintiffs-appellants,
the taxpayer's annual accounting period (fiscal year or calendar year, as the case vs.
may be) in accordance with the method of accounting regularly employed in keeping JAMES J. RAFFERTY, Collector of Internal Revenue, and VENANCIO
the books of such taxpayer, but if no such method of accounting has been so CONCEPCION, Deputy Collector of Internal Revenue, defendants-appellees.
employed, or if the method employed does not clearly reflect the income, the Gregorio Araneta for appellants.
computation shall be made in accordance with such method as in the opinion of the Assistant Attorney Round for appellees.
Commissioner clearly reflects the income. If the taxpayer's annual accounting period MALCOLM, J.:
is other than a fiscal year, as defined in Section 22(Q), or if the taxpayer has no This appeal calls for consideration of the Income Tax Law, a law of American origin,
annual accounting period, or does not keep books, or if the taxpayer is an individual, with reference to the Civil Code, a law of Spanish origin.
the taxable income shall be computed on the basis of the calendar year. STATEMENT OF THE CASE.
SEC. 44. Period in which Items of Gross Income Included.- The amount of all Vicente Madrigal and Susana Paterno were legally married prior to January 1, 1914.
items of gross income shall be included in the gross income for the taxable year in The marriage was contracted under the provisions of law concerning conjugal
which received by the taxpayer, unless, under methods of accounting permitted partnerships (sociedad de gananciales). On February 25, 1915, Vicente Madrigal filed
under Section 43, any such amounts are to be properly accounted for as of a sworn declaration on the prescribed form with the Collector of Internal Revenue,
different period. In the case of the death of a taxpayer, there shall be included in showing, as his total net income for the year 1914, the sum of P296,302.73.

Subsequently Madrigal submitted the claim that the said P296,302.73 did not represent
his income for the year 1914, but was in fact the income of the conjugal partnership
existing between himself and his wife Susana Paterno, and that in computing and
assessing the additional income tax provided by the Act of Congress of October 3,
1913, the income declared by Vicente Madrigal should be divided into two equal parts,
one-half to be considered the income of Vicente Madrigal and the other half of Susana
Paterno. The general question had in the meantime been submitted to the Attorney-
General of the Philippine Islands who in an opinion dated March 17, 1915, held with the
petitioner Madrigal. The revenue officers being still unsatisfied, the correspondence
together with this opinion was forwarded to Washington for a decision by the United
States Treasury Department. The United States Commissioner of Internal Revenue
reversed the opinion of the Attorney-General, and thus decided against the claim of
Madrigal.
After payment under protest, and after the protest of Madrigal had been decided
adversely by the Collector of Internal Revenue, action was begun by Vicente Madrigal
and his wife Susana Paterno in the Court of First Instance of the city of Manila against
Collector of Internal Revenue and the Deputy Collector of Internal Revenue for the
recovery of the sum of P3,786.08, alleged to have been wrongfully and illegally
collected by the defendants from the plaintiff, Vicente Madrigal, under the provisions of
the Act of Congress known as the Income Tax Law. The burden of the complaint was
that if the income tax for the year 1914 had been correctly and lawfully computed there
would have been due payable by each of the plaintiffs the sum of P2,921.09, which
taken together amounts of a total of P5,842.18 instead of P9,668.21, erroneously and
unlawfully collected from the plaintiff Vicente Madrigal, with the result that plaintiff
Madrigal has paid as income tax for the year 1914, P3,786.08, in excess of the sum
lawfully due and payable.
The answer of the defendants, together with an analysis of the tax declaration, the
pleadings, and the stipulation, sets forth the basis of defendants' stand in the following
way: The income of Vicente Madrigal and his wife Susana Paterno of the year 1914
was made up of three items: (1) P362,407.67, the profits made by Vicente Madrigal in
his coal and shipping business; (2) P4,086.50, the profits made by Susana Paterno in
her embroidery business; (3) P16,687.80, the profits made by Vicente Madrigal in a
pawnshop company. The sum of these three items is P383,181.97, the gross income of
Vicente Madrigal and Susana Paterno for the year 1914. General deductions were
claimed and allowed in the sum of P86,879.24. The resulting net income was
P296,302.73. For the purpose of assessing the normal tax of one per cent on the net
income there were allowed as specific deductions the following: (1) P16,687.80, the tax
upon which was to be paid at source, and (2) P8,000, the specific exemption granted to
Vicente Madrigal and Susana Paterno, husband and wife. The remainder, P271,614.93
was the sum upon which the normal tax of one per cent was assessed. The normal tax
thus arrived at was P2,716.15.
The dispute between the plaintiffs and the defendants concerned the additional tax
provided for in the Income Tax Law. The trial court in an exhausted decision found in
favor of defendants, without costs.
ISSUES.
The contentions of plaintiffs and appellants having to do solely with the additional
income tax, is that is should be divided into two equal parts, because of the conjugal
partnership existing between them. The learned argument of counsel is mostly based
upon the provisions of the Civil Code establishing the sociedad de gananciales. The
counter contentions of appellees are that the taxes imposed by the Income Tax Law are
as the name implies taxes upon income tax and not upon capital and property; that the
fact that Madrigal was a married man, and his marriage contracted under the provisions
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governing the conjugal partnership, has no bearing on income considered as income,
and that the distinction must be drawn between the ordinary form of commercial
partnership and the conjugal partnership of spouses resulting from the relation of
marriage.
DECISION.
From the point of view of test of faculty in taxation, no less than five answers have been
given the course of history. The final stage has been the selection of income as the
norm of taxation. (See Seligman, "The Income Tax," Introduction.) The Income Tax Law
of the United States, extended to the Philippine Islands, is the result of an effect on the
part of the legislators to put into statutory form this canon of taxation and of social
reform. The aim has been to mitigate the evils arising from inequalities of wealth by a
progressive scheme of taxation, which places the burden on those best able to pay. To
carry out this idea, public considerations have demanded an exemption roughly
equivalent to the minimum of subsistence. With these exceptions, the income tax is
supposed to reach the earnings of the entire non-governmental property of the country.
Such is the background of the Income Tax Law.
Income as contrasted with capital or property is to be the test. The essential difference
between capital and income is that capital is a fund; income is a flow. A fund of property
existing at an instant of time is called capital. A flow of services rendered by that capital
by the payment of money from it or any other benefit rendered by a fund of capital in
relation to such fund through a period of time is called an income. Capital is wealth,
while income is the service of wealth. (See Fisher, "The Nature of Capital and Income.")
The Supreme Court of Georgia expresses the thought in the following figurative
language: "The fact is that property is a tree, income is the fruit; labor is a tree, income
the fruit; capital is a tree, income the fruit." (Waring vs. City of Savannah [1878], 60 Ga.,
93.) A tax on income is not a tax on property. "Income," as here used, can be defined
as "profits or gains." (London County Council vs. Attorney-General [1901], A. C., 26; 70
L. J. K. B. N. S., 77; 83 L. T. N. S., 605; 49 Week. Rep., 686; 4 Tax Cas., 265. See
further Foster's Income Tax, second edition [1915], Chapter IV; Black on Income Taxes,
second edition [1915], Chapter VIII; Gibbons vs. Mahon [1890], 136 U.S., 549; and
Towne vs. Eisner, decided by the United States Supreme Court, January 7, 1918.)
A regulation of the United States Treasury Department relative to returns by the
husband and wife not living apart, contains the following:
The husband, as the head and legal representative of the household and general
custodian of its income, should make and render the return of the aggregate income of
himself and wife, and for the purpose of levying the income tax it is assumed that he
can ascertain the total amount of said income. If a wife has a separate estate managed
by herself as her own separate property, and receives an income of more than $3,000,
she may make return of her own income, and if the husband has other net income,
making the aggregate of both incomes more than $4,000, the wife's return should be
attached to the return of her husband, or his income should be included in her return, in
order that a deduction of $4,000 may be made from the aggregate of both incomes. The
tax in such case, however, will be imposed only upon so much of the aggregate income
of both shall exceed $4,000. If either husband or wife separately has an income equal
to or in excess of $3,000, a return of annual net income is required under the law, and
such return must include the income of both, and in such case the return must be made
even though the combined income of both be less than $4,000. If the aggregate net
income of both exceeds $4,000, an annual return of their combined incomes must be
made in the manner stated, although neither one separately has an income of $3,000
per annum. They are jointly and separately liable for such return and for the payment of
the tax. The single or married status of the person claiming the specific exemption shall

be determined as one of the time of claiming such exemption which return is made,
otherwise the status at the close of the year."
With these general observations relative to the Income Tax Law in force in the
Philippine Islands, we turn for a moment to consider the provisions of the Civil Code
dealing with the conjugal partnership. Recently in two elaborate decisions in which a
long line of Spanish authorities were cited, this court in speaking of the conjugal
partnership, decided that "prior to the liquidation the interest of the wife and in case of
her death, of her heirs, is an interest inchoate, a mere expectancy, which constitutes
neither a legal nor an equitable estate, and does not ripen into title until there appears
that there are assets in the community as a result of the liquidation and settlement."
(Nable Jose vs. Nable Jose [1916], 15 Off. Gaz., 871; Manuel and
Laxamana vs. Losano [1918], 16 Off. Gaz., 1265.)
Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the property of her
husband Vicente Madrigal during the life of the conjugal partnership. She has an
interest in the ultimate property rights and in the ultimate ownership of property
acquired as income after such income has become capital. Susana Paterno has no
absolute right to one-half the income of the conjugal partnership. Not being seized of a
separate estate, Susana Paterno cannot make a separate return in order to receive the
benefit of the exemption which would arise by reason of the additional tax. As she has
no estate and income, actually and legally vested in her and entirely distinct from her
husband's property, the income cannot properly be considered the separate income of
the wife for the purposes of the additional tax. Moreover, the Income Tax Law does not
look on the spouses as individual partners in an ordinary partnership. The husband and
wife are only entitled to the exemption of P8,000 specifically granted by the law. The
higher schedules of the additional tax directed at the incomes of the wealthy may not be
partially defeated by reliance on provisions in our Civil Code dealing with the conjugal
partnership and having no application to the Income Tax Law. The aims and purposes
of the Income Tax Law must be given effect.
The point we are discussing has heretofore been considered by the Attorney-General of
the Philippine Islands and the United States Treasury Department. The decision of the
latter overruling the opinion of the Attorney-General is as follows:
TREASURY
DEPARTMENT, Washington.
Income Tax.
FRANK MCINTYRE,
Chief, Bureau of Insular Affairs, War Department,
Washington, D. C.
SIR: This office is in receipt of your letter of June 22, 1915, transmitting copy
of correspondence "from the Philippine authorities relative to the method of
submission of income tax returns by marred person."
You advise that "The Governor-General, in forwarding the papers to the
Bureau, advises that the Insular Auditor has been authorized to suspend
action on the warrants in question until an authoritative decision on the points
raised can be secured from the Treasury Department."
From the correspondence it appears that Gregorio Araneta, married and living
with his wife, had an income of an amount sufficient to require the imposition
of the net income was properly computed and then both income and
deductions and the specific exemption were divided in half and two returns
made, one return for each half in the names respectively of the husband and
wife, so that under the returns as filed there would be an escape from the
additional tax; that Araneta claims the returns are correct on the ground under
the Philippine law his wife is entitled to half of his earnings; that Araneta has
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dominion over the income and under the Philippine law, the right to determine
its use and disposition; that in this case the wife has no "separate estate"
within the contemplation of the Act of October 3, 1913, levying an income tax.
It appears further from the correspondence that upon the foregoing
explanation, tax was assessed against the entire net income against Gregorio
Araneta; that the tax was paid and an application for refund made, and that the
application for refund was rejected, whereupon the matter was submitted to
the Attorney-General of the Islands who holds that the returns were correctly
rendered, and that the refund should be allowed; and thereupon the question
at issue is submitted through the Governor-General of the Islands and Bureau
of Insular Affairs for the advisory opinion of this office.
By paragraph M of the statute, its provisions are extended to the Philippine
Islands, to be administered as in the United States but by the appropriate
internal-revenue officers of the Philippine Government. You are therefore
advised that upon the facts as stated, this office holds that for the Federal
Income Tax (Act of October 3, 1913), the entire net income in this case was
taxable to Gregorio Araneta, both for the normal and additional tax, and that
the application for refund was properly rejected.
The separate estate of a married woman within the contemplation of the
Income Tax Law is that which belongs to her solely and separate and apart
from her husband, and over which her husband has no right in equity. It may
consist of lands or chattels.
The statute and the regulations promulgated in accordance therewith provide
that each person of lawful age (not excused from so doing) having a net
income of $3,000 or over for the taxable year shall make a return showing the
facts; that from the net income so shown there shall be deducted $3,000
where the person making the return is a single person, or married and not
living with consort, and $1,000 additional where the person making the return
is married and living with consort; but that where the husband and wife both
make returns (they living together), the amount of deduction from the
aggregate of their several incomes shall not exceed $4,000.
The only occasion for a wife making a return is where she has income from a
sole and separate estate in excess of $3,000, but together they have an
income in excess of $4,000, in which the latter event either the husband or
wife may make the return but not both. In all instances the income of husband
and wife whether from separate estates or not, is taken as a whole for the
purpose of the normal tax. Where the wife has income from a separate estate
makes return made by her husband, while the incomes are added together for
the purpose of the normal tax they are taken separately for the purpose of the
additional tax. In this case, however, the wife has no separate income within
the contemplation of the Income Tax Law.
Respectfully,
DAVID A. GATES.
Acting Commissioner.
In connection with the decision above quoted, it is well to recall a few basic ideas. The
Income Tax Law was drafted by the Congress of the United States and has been by the
Congress extended to the Philippine Islands. Being thus a law of American origin and
being peculiarly intricate in its provisions, the authoritative decision of the official who is
charged with enforcing it has peculiar force for the Philippines. It has come to be a well-
settled rule that great weight should be given to the construction placed upon a revenue
law, whose meaning is doubtful, by the department charged with its execution.
(U.S. vs. Cerecedo Hermanos y Cia. [1907], 209 U.S., 338; In re Allen [1903], 2 Phil.,

630; Government of the Philippine Islands vs. Municipality of Binalonan, and Roman
Catholic Bishop of Nueva Segovia [1915], 32 Phil., 634.) We conclude that the
judgment should be as it is hereby affirmed with costs against appellants. So ordered.
Torres, Johnson, Carson, Street and Fisher, JJ., concur.
EN BANC
G.R. No. L-17518 October 30, 1922
FREDERICK C. FISHER, plaintiff-appellant,
vs.
WENCESLAO TRINIDAD, Collector of Internal Revenue, defendant-appellee.
Fisher and De Witt and Antonio M. Opisso for appellants.
Acting Attorney-General Tuason for appellee.
JOHNSON, J.:
The only question presented by this appeal is: Are the "stock dividends" in the present
case "income" and taxable as such under the provisions of section 25 of Act No. 2833?
While the appellant presents other important questions, under the view which we have
taken of the facts and the law applicable to the present case, we deem it unnecessary
to discuss them now.
The defendant demurred to the petition in the lower court. The facts are therefore
admitted. They are simple and may be stated as follows:
That during the year 1919 the Philippine American Drug Company was a corporation
duly organized and existing under the laws of the Philippine Islands, doing business in
the City of Manila; that he appellant was a stockholder in said corporation; that said
corporation, as result of the business for that year, declared a "stock dividend"; that the
proportionate share of said stock divided of the appellant was P24,800; that the stock
dividend for that amount was issued to the appellant; that thereafter, in the month of
March, 1920, the appellant, upon demand of the appellee, paid under protest, and
voluntarily, unto the appellee the sum of P889.91 as income tax on said stock dividend.
For the recovery of that sum (P889.91) the present action was instituted. The defendant
demurred to the petition upon the ground that it did not state facts sufficient to constitute
cause of action. The demurrer was sustained and the plaintiff appealed.
To sustain his appeal the appellant cites and relies on some decisions of the Supreme
Court of the United States as will as the decisions of the supreme court of some of the
states of the Union, in which the questions before us, based upon similar statutes, was
discussed. Among the most important decisions may be mentioned the following:
Towne vs. Eisner, 245 U.S., 418; Doyle vs. Mitchell Bors. Co., 247 U.S., 179; Eisner vs.
Macomber, 252 U.S., 189; Dekoven vs Alsop, 205 Ill., 309; 63 L.R.A., 587; Kaufman vs.
Charlottesville Woolen Mills, 93 Va., 673.
In each of said cases an effort was made to collect an "income tax" upon "stock
dividends" and in each case it was held that "stock dividends" were capital and not an
"income" and therefore not subject to the "income tax" law.
The appellee admits the doctrine established in the case of Eisner vs. Macomber (252
U.S., 189) that a "stock dividend" is not "income" but argues that said Act No. 2833, in
imposing the tax on the stock dividend, does not violate the provisions of the Jones
Law. The appellee further argues that the statute of the United States providing for tax
upon stock dividends is different from the statute of the Philippine Islands, and therefore
the decision of the Supreme Court of the United States should not be followed in
interpreting the statute in force here.
For the purpose of ascertaining the difference in the said statutes ( (United States and
Philippine Islands), providing for an income tax in the United States as well as that in
the Philippine Islands, the two statutes are here quoted for the purpose of determining
the difference, if any, in the language of the two statutes.
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Chapter 463 of an Act of Congress of September 8, 1916, in its title 1 provides for the
collection of an "income tax." Section 2 of said Act attempts to define what is an
income. The definition follows:
That the term "dividends" as used in this title shall be held to mean any
distribution made or ordered to made by a corporation, . . . which stock
dividend shall be considered income, to the amount of its cash value.
Act No. 2833 of the Philippine Legislature is an Act establishing "an income tax."
Section 25 of said Act attempts to define the application of the income tax. The
definition follows:
The term "dividends" as used in this Law shall be held to mean any distribution
made or ordered to be made by a corporation, . . . out of its earnings or profits
accrued since March first, nineteen hundred and thirteen, and payable to its
shareholders, whether in cash or in stock of the corporation, . . . . Stock
dividend shall be considered income, to the amount of the earnings or profits
distributed.
It will be noted from a reading of the provisions of the two laws above quoted that the
writer of the law of the Philippine Islands must have had before him the statute of the
United States. No important argument can be based upon the slight different in the
wording of the two sections.
It is further argued by the appellee that there are no constitutional limitations upon the
power of the Philippine Legislature such as exist in the United States, and in support of
that contention, he cites a number of decisions. There is no question that the Philippine
Legislature may provide for the payment of an income tax, but it cannot, under the
guise of an income tax, collect a tax on property which is not an "income." The
Philippine Legislature can not impose a tax upon "property" under a law which provides
for a tax upon "income" only. The Philippine Legislature has no power to provide a tax
upon "automobiles" only, and under that law collect a tax upon a carretonor bull cart.
Constitutional limitations, that is to say, a statute expressly adopted for one purpose
cannot, without amendment, be applied to another purpose which is entirely distinct and
different. A statute providing for an income tax cannot be construed to cover property
which is not, in fact income. The Legislature cannot, by a statutory declaration, change
the real nature of a tax which it imposes. A law which imposes an important tax on rice
only cannot be construed to an impose an importation tax on corn.
It is true that the statute in question provides for an income tax and contains a further
provision that "stock dividends" shall be considered income and are therefore subject to
income tax provided for in said law. If "stock dividends" are not "income" then the law
permits a tax upon something not within the purpose and intent of the law.
It becomes necessary in this connection to ascertain what is an "income in order that
we may be able to determine whether "stock dividends" are "income" in the sense that
the word is used in the statute. Perhaps it would be more logical to determine first what
are "stock dividends" in order that we may more clearly understand their relation to
"income." Generally speaking, stock dividends represent undistributed increase in the
capital of corporations or firms, joint stock companies, etc., etc., for a particular period.
They are used to show the increased interest or proportional shares in the capital of
each stockholder. In other words, the inventory of the property of the corporation, etc.,
for particular period shows an increase in its capital, so that the stock theretofore issued
does not show the real value of the stockholder's interest, and additional stock is issued
showing the increase in the actual capital, or property, or assets of the corporation, etc.
To illustrate: A and B form a corporation with an authorized capital of P10,000 for the
purpose of opening and conducting a drug store, with assets of the value of P2,000,
and each contributes P1,000. Their entire assets are invested in drugs and put upon the
shelves in their place of business. They commence business without a cent in the

treasury. Every dollar contributed is invested. Shares of stock to the amount of P1,000
are issued to each of the incorporators, which represent the actual investment and
entire assets of the corporation. Business for the first year is good. Merchandise is sold,
and purchased, to meet the demands of the growing trade. At the end of the first year
an inventory of the assets of the corporation is made, and it is then ascertained that the
assets or capital of the corporation on hand amount to P4,000, with no debts, and still
not a cent in the treasury. All of the receipts during the year have been reinvested in the
business. Neither of the stockholders have withdrawn a penny from the business during
the year. Every peso received for the sale of merchandise was immediately used in the
purchase of new stock — new supplies. At the close of the year there is not a centavo
in the treasury, with which either A or B could buy a cup of coffee or a pair of shoes for
his family. At the beginning of the year they were P2,000, and at the end of the year
they were P4,000, and neither of the stockholders have received a centavo from the
business during the year. At the close of the year, when it is discovered that the assets
are P4,000 and not P2,000, instead of selling the extra merchandise on hand and
thereby reducing the business to its original capital, they agree among themselves to
increase the capital they agree among themselves to increase the capital issued and for
that purpose issue additional stock in the form of "stock dividends" or additional stock of
P1,000 each, which represents the actual increase of the shares of interest in the
business. At the beginning of the year each stockholder held one-half interest in the
capital. At the close of the year, and after the issue of the said stock dividends, they
each still have one-half interest in the business. The capital of the corporation increased
during the year, but has either of them received an income? It is not denied, for the
purpose of ordinary taxation, that the taxable property of the corporation at the
beginning of the year was P2,000, that at the close of the year it was P4,000, and that
the tax rolls should be changed in accordance with the changed conditions in the
business. In other words, the ordinary tax should be increased by P2,000.
Another illustration: C and D organized a corporation for agricultural purposes with an
authorized capital stock of P20,000 each contributing P5,000. With that capital they
purchased a farm and, with it, one hundred head of cattle. Every peso contributed is
invested. There is no money in the treasury. Much time and labor was expanded during
the year by the stockholders on the farm in the way of improvements. Neither received
a centavo during the year from the farm or the cattle. At the beginning of the year the
assets of the corporation, including the farm and the cattle, were P10,000, and at the
close of the year and inventory of the property of the corporation is made and it is then
found that they have the same farm with its improvements and two hundred head of
cattle by natural increase. At the end of the year it is also discovered that, by reason of
business changes, the farm and the cattle both have increased in value, and that the
value of the corporate property is now P20,000 instead of P10,000 as it was at the
beginning of the year. The incorporators instead of reducing the property to its original
capital, by selling off a part of its, issue to themselves "stock dividends" to represent the
proportional value or interest of each of the stockholders in the increased capital at the
close of the year. There is still not a centavo in the treasury and neither has withdrawn
a peso from the business during the year. No part of the farm or cattle has been sold
and not a single peso was received out of the rents or profits of the capital of the
corporation by the stockholders.
Another illustration: A, an individual farmer, buys a farm with one hundred head of cattle
for the sum of P10,000. At the end of the first year, by reason of business conditions
and the increase of the value of both real estate and personal property, it is discovered
that the value of the farm and the cattle is P20,000. A, during the year, has received
nothing from the farm or the cattle. His books at the beginning of the year show that he
had property of the value of P10,000. His books at the close of the year show that he
5
has property of the value of P20,000. A is not a corporation. The assets of his business
are not shown therefore by certificates of stock. His books, however, show that the
value of his property has increased during the year by P10,000, under any theory of
business or law, be regarded as an "income" upon which the farmer can be required to
pay an income tax? Is there any difference in law in the condition of A in this illustration
and the condition of A and B in the immediately preceding illustration? Can the increase
of the value of the property in either case be regarded as an "income" and be subjected
to the payment of the income tax under the law?
Each of the foregoing illustrations, it is asserted, is analogous to the case before us
and, in view of that fact, let us ascertain how lexicographers and the courts have
defined an "income." The New Standard Dictionary, edition of 1915, defines an income
as "the amount of money coming to a person or corporation within a specified time
whether as payment or corporation within a specified time whether as payment for
services, interest, or profit from investment." Webster's International Dictionary defines
an income as "the receipt, salary; especially, the annual receipts of a private person or
a corporation from property." Bouvier, in his law dictionary, says that an "income" in the
federal constitution and income tax act, is used in its common or ordinary meaning and
not in its technical, or economic sense. (146 Northwestern Reporter, 812) Mr. Black, in
his law dictionary, says "An income is the return in money from one's business, labor, or
capital invested; gains, profit or private revenue." "An income tax is a tax on the yearly
profits arising from property , professions, trades, and offices."
The Supreme Court of the United States, in the case o Gray vs. Darlington (82 U.S.,
653), said in speaking of income that mere advance in value in no sense constitutes the
"income" specified in the revenue law as "income" of the owner for the year in which the
sale of the property was made. Such advance constitutes and can be treated merely as
an increase of capital. (In re Graham's Estate, 198 Pa., 216; Appeal of Braun, 105 Pa.,
414.)
Mr. Justice Hughes, later Associate Justice of the Supreme Court of the United States
and now Secretary of State of the United States, in his argument before the Supreme
Court of the United States in the case of Towne vs. Eisner, supra, defined an "income"
in an income tax law, unless it is otherwise specified, to mean cash or its equivalent. It
does not mean choses in action or unrealized increments in the value of the property,
and cites in support of the definition, the definition given by the Supreme Court in the
case of Gray vs. Darlington, supra.
In the case of Towne vs. Eisner, supra, Mr. Justice Holmes, speaking for the court,
said: "Notwithstanding the thoughtful discussion that the case received below, we
cannot doubt that the dividend was capital as well for the purposes of the Income Tax
Law. . . . 'A stock dividend really takes nothing from the property of the corporation, and
adds nothing to the interests of the shareholders. Its property is not diminished and their
interest are not increased. . . . The proportional interest of each shareholder remains
the same. . . .' In short, the corporation is no poorer and the stockholder is no richer
then they were before." (Gibbons vs. Mahon, 136 U.S., 549, 559, 560; Logan County
vs. U.S., 169 U.S., 255, 261).
In the case of Doyle vs. Mitchell Bros. Co. (247 U.S., 179, Mr. Justice Pitney, speaking
for the court, said that the act employs the term "income" in its natural and obvious
sense, as importing something distinct from principal or capital and conveying the idea
of gain or increase arising from corporate activity.
Mr. Justice Pitney, in the case of Eisner vs. Macomber (252 U.S., 189), again speaking
for the court said: "An 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."

For bookkeeping purposes, when stock dividends are declared, the corporation or
company acknowledges a liability, in form, to the stockholders, equivalent to the
aggregate par value of their stock, evidenced by a "capital stock account." If profits
have been made by the corporation during a particular period and not divided, they
create additional bookkeeping liabilities under the head of "profit and loss," "undivided
profits," "surplus account," etc., or the like. None of these, however, gives to the
stockholders as a body, much less to any one of them, either a claim against the going
concern or corporation, for any particular sum of money, or a right to any particular
portion of the asset, or any shares sells or until the directors conclude that dividends
shall be made a part of the company's assets segregated from the common fund for
that purpose. The dividend normally is payable in money and when so paid, then
only does the stockholder realize a profit or gain, which becomes his separate
property, and thus derive an income from the capital that he has invested. Until that, is
done the increased assets belong to the corporation and not to the individual
stockholders.
When a corporation or company issues "stock dividends" it shows that the company's
accumulated profits have been capitalized, instead of distributed to the stockholders or
retained as surplus available for distribution, in money or in kind, should opportunity
offer. Far from being a realization of profits of the stockholder, it tends rather to
postpone said realization, in that the fund represented by the new stock has been
transferred from surplus to assets, and no longer is available for actual distribution. The
essential and controlling fact is that the stockholder has received nothing out of the
company's assets for his separate use and benefit; on the contrary, every dollar of his
original investment, together with whatever accretions and accumulations resulting from
employment of his money and that of the other stockholders in the business of the
company, still remains the property of the company, and subject to business risks which
may result in wiping out of the entire investment. Having regard to the very truth of the
matter, to substance and not to form, the stockholder by virtue of the stock dividend has
in fact received nothing that answers the definition of an "income." (Eisner vs.
Macomber, 252 U.S., 189, 209, 211.)
The stockholder who receives a stock dividend has received nothing but a
representation of his increased interest in the capital of the corporation. There has been
no separation or segregation of his interest. All the property or capital of the corporation
still belongs to the corporation. There has been no separation of the interest of the
stockholder from the general capital of the corporation. The stockholder, by virtue of the
stock dividend, has no separate or individual control over the interest represented
thereby, further than he had before the stock dividend was issued. He cannot use it for
the reason that it is still the property of the corporation and not the property of the
individual holder of stock dividend. A certificate of stock represented by the stock
dividend is simply a statement of his proportional interest or participation in the capital
of the corporation. For bookkeeping purposes, a corporation, by issuing stock dividend,
acknowledges a liability in form to the stockholders, evidenced by a capital stock
account. The receipt of a stock dividend in no way increases the money received of a
stockholder nor his cash account at the close of the year. It simply shows that there has
been an increase in the amount of the capital of the corporation during the particular
period, which may be due to an increased business or to a natural increase of the value
of the capital due to business, economic, or other reasons. We believe that the
Legislature, when it provided for an "income tax," intended to tax only the "income" of
corporations, firms or individuals, as that term is generally used in its common
acceptation; that is that the income means money received, coming to a person or
corporation for services, interest, or profit from investments. We do not believe that the
Legislature intended that a mere increase in the value of the capital or assets of a
6
corporation, firm, or individual, should be taxed as "income." Such property can be
reached under the ordinary from of taxation.
Mr. Justice Pitney, in the case of the Einer vs. Macomber, supra, said in discussing the
difference between "capital" and "income": "That 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." It may be argued that a stockholder might sell the stock dividend which he had
acquired. If he does, then he has received, in fact, an income and such income, like any
other profit which he realizes from the business, is an income and he may be taxed
thereon.
There is a clear distinction between an extraordinary cash dividend, no matter when
earned, and stock dividends declared, as in the present case. The one is a
disbursement to the stockholder of accumulated earnings, and the corporation at once
parts irrevocably with all interest thereon. The other involves no disbursement by the
corporation. It parts with nothing to the stockholder. The latter receives, not an actual
dividend, but certificate of stock which simply evidences his interest in the entire capital,
including such as by investment of accumulated profits has been added to the original
capital. They are not income to him, but represent additions to the source of his income,
namely, his invested capital. (DeKoven vs. Alsop, 205, Ill., 309; 63 L.R.A. 587). Such a
person is in the same position, so far as his income is concerned, as the owner of
young domestic animal, one year old at the beginning of the year, which is worth P50
and, which, at the end of the year, and by reason of its growth, is worth P100. The
value of his property has increased, but has had an income during the year? It is true
that he had taxable property at the beginning of the year of the value of P50, and the
same taxable property at another period, of the value of P100, but he has had no
income in the common acceptation of that word. The increase in the value of the
property should be taken account of on the tax duplicate for the purposes of ordinary
taxation, but not as income for he has had none.
The question whether stock dividends are income, or capital, or assets has frequently
come before the courts in another form — in cases of inheritance. A is a stockholder in
a large corporation. He dies leaving a will by the terms of which he give to B during his
lifetime the "income" from said stock, with a further provision that C shall, at B's death,
become the owner of his share in the corporation. During B's life the corporation issues
a stock dividend. Does the stock dividend belong to B as an income, or does it finally
belong to C as a part of his share in the capital or assets of the corporation, which had
been left to him as a remainder by A? While there has been some difference of opinion
on that question, we believe that a great weight of authorities hold that the stock
dividend is capital or assets belonging to C and not an income belonging to B. In the
case of D'Ooge vs. Leeds (176 Mass., 558, 560) it was held that stock dividends in
such cases were regarded as capital and not as income (Gibbons vs. Mahon, 136 U.S.,
549.)
In the case of Gibbson vs. Mahon, supra, Mr. Justice Gray said: "The distinction
between the title of a corporation, and the interest of its members or stockholders in the
property of the corporation, is familiar and well settled. The ownership of that property is
in the corporation, and not in the holders of shares of its stock. The interest of each
stockholder consists in the right to a proportionate part of the profits whenever
dividends are declared by the corporation, during its existence, under its charter, and to
a like proportion of the property remaining, upon the termination or dissolution of the
corporation, after payment of its debts." (Minot vs. Paine, 99 Mass., 101; Greeff vs.
Equitable Life Assurance Society, 160 N. Y., 19.) In the case of Dekoven vs. Alsop (205
Ill ,309, 63 L. R. A. 587) Mr. Justice Wilkin said: "A dividend is defined as a corporate

profit set aside, declared, and ordered by the directors to be paid to the stockholders on
demand or at a fixed time. Until the dividend is declared, these corporate profits belong
to the corporation, not to the stockholders, and are liable for corporate indebtedness.
There is a clear distinction between an extraordinary cash dividend, no matter when
earned, and stock dividends declared. The one is a disbursement to the stockholders of
accumulated earning, and the corporation at once parts irrevocably with all interest
thereon. The other involves no disbursement by the corporation. It parts with nothing to
the stockholders. The latter receives, not an actual dividend, but certificates of stock
which evidence in a new proportion his interest in the entire capital. When a cash
becomes the absolute property of the stockholders and cannot be reached by the
creditors of the corporation in the absence of fraud. A stock dividend however, still
being the property of the corporation and not the stockholder, it may be reached by an
execution against the corporation, and sold as a part of the property of the corporation.
In such a case, if all the property of the corporation is sold, then the stockholder
certainly could not be charged with having received an income by virtue of the issuance
of the stock dividend. Until the dividend is declared and paid, the corporate profits still
belong to the corporation, not to the stockholders, and are liable for corporate
indebtedness. The rule is well established that cash dividend, whether large or small,
are regarded as "income" and all stock dividends, as capital or assets (Cook on
Corporation, Chapter 32, secs. 534, 536; Davis vs. Jackson, 152 Mass., 58; Mills vs.
Britton, 64 Conn., 4; 5 Am., and Eng. Encycl. of Law, 2d ed., p. 738.)
If the ownership of the property represented by a stock dividend is still in the
corporation and to in the holder of such stock, then it is difficult to understand how it can
be regarded as income to the stockholder and not as a part of the capital or assets of
the corporation. (Gibbsons vs. Mahon, supra.) the stockholder has received nothing but
a representation of an interest in the property of the corporation and, as a matter of fact,
he may never receive anything, depending upon the final outcome of the business of
the corporation. The entire assets of the corporation may be consumed by
mismanagement, or eaten up by debts and obligations, in which case the holder of the
stock dividend will never have received an income from his investment in the
corporation. A corporation may be solvent and prosperous today and issue stock
dividends in representation of its increased assets, and tomorrow be absolutely
insolvent by reason of changes in business conditions, and in such a case the
stockholder would have received nothing from his investment. In such a case, if the
holder of the stock dividend is required to pay an income tax on the same, the result
would be that he has paid a tax upon an income which he never received. Such a
conclusion is absolutely contradictory to the idea of an income. An income subject to
taxation under the law must be an actual income and not a promised or prospective
income.
The appelle argues that there is nothing in section 25 of Act No 2833 which
contravenes the provisions of the Jones Law. That may be admitted. He further argues
that the Act of Congress (U.S. Revenue Act of 1918) expressly authorized the
Philippine Legislatures to provide for an income tax. That fact may also be admitted.
But a careful reading of that Act will show that, while it permitted a tax upon income, the
same provided that income shall include gains, profits, and income derived from
salaries, wages, or compensation for personal services, as well as from interest, rent,
dividends, securities, etc. The appellee emphasizes the "income from dividends." Of
course, income received as dividends is taxable as an income but an income from
"dividends" is a very different thing from receipt of a "stock dividend." One is an actual
receipt of profits; the other is a receipt of a representation of the increased value of the
assets of corporation.
7
In all of the foregoing argument we have not overlooked the decisions of a few of the
courts in different parts of the world, which have reached a different conclusion from the
one which we have arrived at in the present case. Inasmuch, however, as appeals may
be taken from this court to the Supreme Court of the United States, we feel bound to
follow the same doctrine announced by that court.
Having reached the conclusion, supported by the great weight of the authority, that
"stock dividends" are not "income," the same cannot be taxes under that provision of
Act No. 2833 which provides for a tax upon income. Under the guise of an income tax,
property which is not an income cannot be taxed. When the assets of a corporation
have increased so as to justify the issuance of a stock dividend, the increase of the
assets should be taken account of the Government in the ordinary tax duplicates for the
purposes of assessment and collection of an additional tax. For all of the foregoing
reasons, we are of the opinion, and so decide, that the judgment of the lower court
should be revoked, and without any finding as to costs, it is so ordered.
Araullo, C.J. Avanceña, Villamor and Romualdez, JJ., concur.
B. When is income taxable?
1. Existence of income
2. Realization of income
a. Tests of realization (Fisher v Trinidad, ibid)
b. Actual v constructive receipt
3. Limpan v CIR
4. Republic v dela Rama
EN BANC
G.R. No. L-21570 July 26, 1966
LIMPAN INVESTMENT CORPORATION, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, ET AL., respondents.
Vicente L. San Luis for petitioner.
Office of the Solicitor General A. A. Alafriz, Assistant Solicitor General F. B. Rosete,
Solicitor A. B. Afurong and Atty. V. G. Saldajeno for respondents.
REYES, J.B.L., J.:
Appeal interposed by petitioner Limpan Investment Corporation against a decision of
the Court of Tax Appeals, in its CTA Case No. 699, holding and ordering it (petitioner)
to pay respondent Commissioner of Internal Revenue the sums of P7,338.00 and
P30,502.50, representing deficiency income taxes, plus 50% surcharge and 1%
monthly interest from June 30, 1959 to the date of payment, with cost.
The facts of this case are:
Petitioner, a domestic corporation duly registered since June 21, 1955, is engaged in
the business of leasing real properties. It commenced actual business operations on
July 1, 1955. Its principal stockholders are the spouses Isabelo P. Lim and Purificacion
Ceñiza de Lim, who own and control ninety-nine per cent (99%) of its total paid-up
capital. Its president and chairman of the board is the same Isabelo P. Lim.1äwphï1.ñët
Its real properties consist of several lots and buildings, mostly situated in Manila and in
Pasay City, all of which were acquired from said Isabelo P. Lim and his mother, Vicente
Pantangco Vda. de Lim.
Petitioner corporation duly filed its 1956 and 1957 income tax returns, reporting therein
net incomes of P3,287.81 and P11,098.36, respectively, for which it paid the
corresponding taxes therefor in the sums of P657.00 and P2,220.00.
 8

Sometime in 1958 and 1959, the examiners of the Bureau of Internal Revenue assessment of respondent Commissioner of Internal Revenue. It disclaimed having
conducted an investigation of petitioner's 1956 and 1957 income tax returns and, in the received or collected the amount of P20,199.00, as unreported rental income for 1956,
course thereof, they discovered and ascertained that petitioner had underdeclared its or any part thereof, reasoning out that 'the previous owners of the leased building has
rental incomes by P20,199.00 and P81,690.00 during these taxable years and had (have) to collect part of the total rentals in 1956 to apply to their payment of rental in the
claimed excessive depreciation of its buildings in the sums of P4,260.00 and land in the amount of P21,630.00" (par. 11, petition). It also denied having received or
P16,336.00 covering the same period. On the basis of these findings, respondent collected the amount of P81,690.00, as unreported rental income for 1957, or any part
Commissioner of Internal Revenue issued its letter-assessment and demand for thereof, explaining that part of said amount totalling P31,380.00 was not declared as
payment of deficiency income tax and surcharge against petitioner corporation, income in its 1957 tax return because its president, Isabelo P. Lim, who collected and
computed as follows: received P13,500.00 from certain tenants, did not turn the same over to petitioner
90-AR-C-348-58/56 corporation in said year but did so only in 1959; that a certain tenant (Go Tong)
deposited in court his rentals amounting to P10,800.00, over which the corporation had
Net income per audited return P 3,287.81 no actual or constructive control; and that a sub-tenant paid P4,200.00 which ought not
be declared as rental income.
Add: Unallowable deductions: Petitioner likewise alleged in its petition that the rates of depreciation applied by
Undeclared Rental Receipt respondent Commissioner of its buildings in the above assessment are unfair and
inaccurate.
(Sched. A) . . . . . . . . . . . . . . . . . . . . P20,199.00 Sole witness for petitioner corporation in the Tax Court was its Secretary-Treasurer,
Vicente G. Solis, who admitted that it had omitted to report the sum of P12,100.00 as
Excess Depreciation (Sched. B) . . . . . . . . . . . . . . . . .
P24,459.00 rental income in its 1956 tax return and also the sum of P29,350.00 as rental income in
4,260.00
its 1957 tax return. However, with respect to the difference between this omitted income
Net income per investigation P27,746.00 (P12,100.00) and the sum (P20,199.00) found by respondent Commissioner as
undeclared in 1956, petitioner corporation, through the same witness (Solis), tried to
Tax due thereon P5,549.00 establish that it did not collect or receive the same because, in view of the refusal of
Less: Amount already assessed 657.00 some tenants to recognize the new owner, Isabelo P. Lim and Vicenta Pantangco Vda.
de Lim, the former owners, on one hand, and the same Isabelo P. Lim, as president of
Balance P4,892.00 petitioner corporation, on the other, had verbally agreed in 1956 to turn over to
petitioner corporation six per cent (6%) of the value of all its properties, computed at
Add: 50% Surcharge 2,446.00 P21,630.00, in exchange for whatever rentals the Lims may collect from the tenants.
DEFICIENCY TAX DUE P7,338.00 And, with respect to the difference between the admittedly undeclared sum of
P29,350.00 and that found by respondent Commissioner as unreported rental income,
90-AR-C-1196-58/57 (P81,690.00) in 1957, the same witness Solis also tried to establish that petitioner
corporation did not receive or collect the same but that its president, Isabelo P. Lim,
Net income per audited return P11,098.00
collected part thereof and may have reported the same in his own personal income tax
Add: Unallowable deductions: return; that same Isabelo P. Lim collected P13,500.00, which he turned over to
petitioner in 1959 only; that a certain tenant (Go Tong deposited in court his rentals
Undeclared Rental Receipt (Sched. A) . . . . . . . . P81,690.00 (P10,800.00), over which the corporation had no actual or constructive control and
Excess Depreciation (Sched. B) . . . . . . . . . . . . . . . 16,338.00 P98,028.00 which were withdrawn only in 1958; and that a sub-tenant paid P4,200.00 which ought
not be declared as rental income in 1957.
Net income per investigation P109,126.00 With regard to the depreciation which respondent disallowed and deducted from the
returns filed by petitioner, the same witness tried to establish that some of its buildings
Tax due thereon P22,555.00 are old and out of style; hence, they are entitled to higher rates of depreciation than
Less: Amount already assessed 2,220.00 those adopted by respondent in his assessment.
Isabelo P. Lim was not presented as witness to corroborate the above testimony of
Balance 20,335.00 Vicente G. Solis.
On the other hand, Plaridel M. Mingoa, one of the BIR examiners who personally
Add: 50% Surcharge 10,167.50 conducted the investigation of the 1956 and 1957 income tax returns of petitioner
DEFICIENCY TAX DUE P30,502.50 corporation, testified for the respondent that he personally interviewed the tenants
of petitioner and found that these tenants had been regularly paying their rentals
Petitioner corporation requested respondent Commissioner of Internal Revenue to to the collectors of either petitioner or its president, Isabelo P. Lim, but these payments
reconsider the above assessment but the latter denied said request and reiterated its were not declared in the corresponding returns; and that in applying rates of
original assessment and demand, plus 5% surcharge and the 1% monthly interest from depreciation to petitioner's buildings, he adopted Bulletin "F" of the U.S. Federal Internal
June 30, 1959 to the date of payment; hence, the corporation filed its petition for review Revenue Service.
before the Tax Appeals court, questioning the correctness and validity of the above

On the basis of the evidence, the Tax Court upheld respondent Commissioner's
assessment and demand for deficiency income tax which, as above stated in the
beginning of this opinion, petitioner has appealed to this Court.
Petitioner corporation pursues, the same theory advocated in the court below and
assigns the following alleged errors of the trial court in its brief, to wit:
I. The respondent Court erred in holding that the petitioner had an unreported
rental income of P20,199.00 for the year 1956.
II. The respondent Court erred in holding that the petitioner had an unreported
rental income of P81,690.00 for the year 1957.
III. The respondent Court erred in holding that the depreciation in the amount
of P20,598.00 claimed by petitioner for the years 1956 and 1957 was
excessive.
and prays that the appealed decision be reversed.
This appeal is manifestly unmeritorious. Petitioner having admitted, through its own
witness (Vicente G. Solis), that it had undeclared more than one-half (1/2) of the
amount (P12,100.00 out of P20,199.00) found by the BIR examiners as unreported
rental income for the year 1956 and more than one-third (1/3) of the amount
(P29,350.00 out of P81,690.00) ascertained by the same examiners as unreported
rental income for the year 1957, contrary to its original claim to the revenue authorities,
it was incumbent upon it to establish the remainder of its pretensions by clear and
convincing evidence, that in the case is lacking.
With respect to the balance, which petitioner denied having unreported in the disputed
tax returns, the excuse that Isabelo P. Lim and Vicenta Pantangco Vda. de Lim retained
ownership of the lands and only later transferred or disposed of the ownership of the
buildings existing thereon to petitioner corporation, so as to justify the alleged verbal
agreement whereby they would turn over to petitioner corporation six percent (6%) of
the value of its properties to be applied to the rentals of the land and in exchange for
whatever rentals they may collect from the tenants who refused to recognize the new
owner or vendee of the buildings, is not only unusual but uncorroborated by the alleged
transferors, or by any document or unbiased evidence. Hence, the first assigned error is
without merit.
As to the second assigned error, petitioner's denial and explanation of the non-receipt
of the remaining unreported income for 1957 is not substantiated by satisfactory
corroboration. As above noted, Isabelo P. Lim was not presented as witness to confirm
accountant Solis nor was his 1957 personal income tax return submitted in court to
establish that the rental income which he allegedly collected and received in 1957 were
reported therein.
The withdrawal in 1958 of the deposits in court pertaining to the 1957 rental income is
no sufficient justification for the non-declaration of said income in 1957, since the
deposit was resorted to due to the refusal of petitioner to accept the same, and was not
the fault of its tenants; hence, petitioner is deemed to have constructively received such
rentals in 1957. The payment by the sub-tenant in 1957 should have been reported as
rental income in said year, since it is income just the same regardless of its source.
On the third assigned error, suffice it to state that this Court has already held that
"depreciation is a question of fact and is not measured by theoretical yardstick, but
should be determined by a consideration of actual facts", and the findings of the Tax
Court in this respect should not be disturbed when not shown to be arbitrary or in abuse
of discretion (Commissioner of Internal Revenue vs. Priscila Estate, Inc., et al., L-
18282, May 29, 1964), and petitioner has not shown any arbitrariness or abuse of
discretion in the part of the Tax Court in finding that petitioner claimed excessive
depreciation in its returns. It appearing that the Tax Court applied rates of depreciation
in accordance with Bulletin "F" of the U.S. Federal Internal Revenue Service, which this
9
Court pronounced as having strong persuasive effect in this jurisdiction, for having been
the result of scientific studies and observation for a long period in the United States,
after whose Income Tax Law ours is patterned (M. Zamora vs. Collector of internal
Revenue & Collector of Internal Revenue vs. M. Zamora; E. Zamora vs. Collector of
Internal Revenue and Collector of Internal Revenue vs. E. Zamora, Nos. L-15280, L-
15290, L-15289 and L-15281, May 31, 1963), the foregoing error is devoid of merit.
Wherefore, the appealed decision should be, as it is hereby, affirmed. With costs
against petitioner-appellant, Limpan Investment Corporation.
Concepcion, C.J., Barrera, Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar, Sanchez
and Castro, JJ., concur.
EN BANC
G.R. No. L-21108 November 29, 1966
REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,
vs.
LEONOR DE LA RAMA, ET AL., respondents-appellees.
Office of the Solicitor General for plaintiff-appellant.
Meer, Meer and Meer for respondents-appellees.
ZALDIVAR, J.:
This is an appeal from the decision of the Court of First Instance of Manila, dated
December 23, 1961, in its Civil Case No. 46494, dismissing the complaint of the
Republic of the Philippines against the heirs of the late Esteban de la Rama from the
collection of P56,032.50 as deficiency income tax, inclusive of 50% surcharge, for the
year 1950.
The estate of the late Esteban de la Rama was the subject of Special Proceedings No.
401 of the Court of First Instance of Iloilo. The executor-administrator, Eliseo Hervas,
filed on March 12, 1951, income tax returns of the estate corresponding to the taxable
year 1950, declaring a net income of P22,796.59, on the basis of which the amount of
P3,919.00 was assessed and was paid by the estate as income tax. The Bureau of
Internal Revenue later claimed that it had found out that there had been received by the
estate in 1950 from the De la Rama Steamship Company, Inc. cash dividends
amounting to P86,800.00, which amount was not declared in the income tax return of
the estate for the year 1950. The Bureau of Internal Revenue then, on March 7, 1956,
made an assessment as deficiency income tax against the estate in the sum of
P56,032.50 of which amount P37,355.00 was the deficiency and P18,677.50 was the
50% surcharge.
The Collector of Internal Revenue wrote a letter, dated February 29, 1956, to Mrs.
Lourdes de la Rama-Osmeña informing her of the deficiency income tax and asking
payment thereof. On March 13, 1956 the latter's counsel wrote to the Collector
acknowledging receipt of the assessment but contended that Lourdes de la Rama-
Osmeña had no authority to represent the estate, and that the assessment should be
sent to Leonor de la Rama who was pointed to by said counsel as the administratrix of
the estate of her late father. On the basis of this information the Deputy Collector of
Internal Revenue, on November 22, 1956, sent a letter to Leonor de la Rama as
administratrix of the estate, asking payment. The tax, as assessed, not having been
paid, the Deputy Commissioner of Internal Revenue, on September 7, 1959, wrote
another letter to Mrs. Lourdes de la Rama-Osmeña demanding, through her, upon the
heirs, the payment of the deficiency income tax within the period of thirty days from
receipt thereof. The counsel of Lourdes de la Rama-Osmeña, in a letter dated
September 25, 1959, insisted that the letter should be sent to Leonor de la Rama. The
Deputy Commissioner of Internal Revenue wrote to Leonor de la Rama another letter,
dated February 11, 1960, demanding, through her as administratrix, upon the heirs of
Esteban de la Rama, the payment of the sum of P56,032.50, as deficiency income tax

including the 50% surcharge, to the City Treasurer of Pasay City within thirty days from
receipt thereof.
The deficiency income tax not having been paid, the Republic of the Philippines filed on
March 6, 1961 with the Court of First Instance of Manila a complaint against the heirs of
Esteban de la Rama, seeking to collect from each heir his/her proportionate share in
the income tax liability of the estate. An amended complaint dated August 31, 1961,
was admitted by the court.
The defendants-appellees, Lourdes de la Rama-Osmeña, Leonor de la Rama,
Estefania de la Rama-Pirovano, Dolores de la Rama-Lopez, Charles Miller, and Aniceta
de la Rama-Sian, thru counsel, filed their respective answers, the gist of their
allegations and/or defenses being (1) that no cash dividends of P86,800.00 had been
paid to the estate; (2) that the administration of the estate had been extended by the
probate court precisely for the purpose of collecting said dividends; (3) that Leonor dela
Rama had never been administratrix of the estate; (4) that the executor of the estate,
Eliseo Hervas, had never been given notice of the assessment, and consequently the
assessment had never become final; and (5) that the collection of the alleged deficiency
income tax had prescribed. Fausto F. Gonzales, Jr., one of the defendants, not having
filed an answer, was declared in default.
From the evidence introduced at the trial, both oral and documentary, the lower court
found that the dividends of P86,800.00 declared by the De la Rama Steamship Co. in
favor of the late Esteban de la Rama were applied to the obligation of the estate to the
company declaring the dividends; that Leonor de la Rama was not the administratrix of
the estate, but it was the late Eliseo Hervas who was the executor-administrator; that
the administration of the estate was extended for the purpose of recovering for the
estate said dividends from the De la Rama Steamship Co., Inc.; and that the question of
whether the deceased Esteban de la Rama was a debtor to the entity known as the
Hijos de I. de la Rama, which was also indebted to the De la Rama Steamship Co., Inc.,
was not a settled one.
After trial, the lower court rendered its decision, dated December 23, 1961, dismissing
the complaint. The Republic of the Philippines appealed from said decision to the Court
of Appeals, but the appeal was later certified to this Court because only questions of
law are involved.
Plaintiff-appellant contends that the trial court erred (1) in holding that there was no
basis for the assessment upon the ground that it was not proved that the income in
question was received by the estate of Esteban de la Rama or by his heirs; (2) in not
holding that the income was constructively received by the estate of the late Esteban de
la Rama; (3) in not holding that the heirs and legatees of the late Esteban de la Rama
were liable for the payment of the deficiency income tax; (4) in not holding that the
assessment involved in the case had long become final; (5) in not holding that the
service of the notice of assessment on Lourdes de la Rama-Osmeña and Leonor de la
Rama was proper and valid; and (6) in not holding that said court had no jurisdiction to
take cognizance of appellees' defense that the assessment in question was erroneous.
Plaintiff-appellant argues that the deficiency income tax in this case was assessed in
the sum of P86,800.00 representing cash dividends declared in ]1950 by the De la
Rama Steamship Co., Inc. in favor of the late Esteban de la Rama and was applied as
payment of the latter's account with the former. The application of payment appears in
the books of said creditor company as follows:
Against accounts receivable due from Esteban
de la Rama P25,255.24
10
Against the account due from Hijos de I. de la
Rama, Inc., of which Don Esteban de la Rama
was the principal owner P61,544.76
Total P86,800.00
The plaintiff-appellant maintains that this crediting of accounts in the books of the
company constituted a constructive receipt by the estate or the heirs of Esteban de la
Rama of the dividends, and this dividend was an income of the estate and was,
therefore, taxable.
It is not disputed that the dividends in question were not actually paid either to the
estate, or to the heirs, of the late Esteban de la Rama. The question to be resolved is
whether or not the said application of the dividends to the personal accounts of the
deceased Esteban de la Rama constituted constructive payment to, and hence,
constructively received by, the estate or the heirs. If the debts to which the dividends
were applied really existed, and were legally demandable and chargeable against the
deceased, there was constructive receipt of the dividends; if there were no such debts,
then there was no constructive receipt.
The first debt, as above indicated, had been contested by the executor-administrator of
the estate. It does not even appear that the De la Rama Steamship Co., Inc. had ever
filed a claim against the estate in connection with that indebtedness. The existence and
the validity of the debt is, therefore, in dispute, and there was no proof adduced to show
the existence and validity of the debt.
The second debt to which the dividends were partly applied were accounts "due from
Hijos de I. de la Rama, Inc." The alleged debtor here was an entity separate and distinct
from the deceased. If that was so, its debts could not be charged against the deceased,
even if the deceased was the principal owner thereof, in the absence of proof of
substitution of debtor. There is no evidence in the instant case that the late Esteban de
la Rama substituted the "Hijos de I. de la Rama" as debtor to the De la Rama
Steamship Co., Inc.; nor was there evidence that the estate of the late Esteban de la
Rama owned the "Hijos de I. de la Rama, Inc.," this fact being, as found by the lower
court, not a settled question because the same was denied by the administrator.
Under the National Internal Revenue Code, income tax is assessed on income that has
been received. Thus, Section 21 of the Code requires that the income must be received
by an individual before a tax can be levied thereon.
Sec. 21. Rates of tax on citizens or residents.—There shall be levied,
collected, and paid annually upon the entire net income received in the
preceding taxable year from all sources by every individual, a citizen or
resident of the Philippines, . . .
Section 56 also requires receipt of income by an estate before an income tax can be
assessed thereon. It provides:
Sec. 56. Imposition of tax.—(a) Application of tax.—The taxes imposed by this
Title upon individuals shall apply to the income of estates or of any kind of
property held in trust, including —
xxx xxx xxx
(3) Income received by estates of deceased persons during the period of
administration or settlement of the estate; . . .
Hence, if income has not been received, no income tax can be assessed thereon.
Inasmuch as, the income was not received either by the estate, or by the heirs, neither
the estate nor the heir can be liable for the payment of income tax therefor.
The trial court, therefore, did not err when it held in its decision that:
After a study of the proofs, the Court is constrained to sustain the position of
the defendants on the fundamental issue that there could have been no

correct and real basis for the assessment or that there is no proof that the
income in question had been received; it was not actually delivered unto the
Estate since it was retained by the De la Rama Steamship Co., Inc.; which
applied said dividends to certain accounts receivable due from the deceased
allegedly, Exh. A-1; now if truly there had been such indebtedness owing from
the deceased unto said De la Rama Steamship Co., Inc., the Court will agree
with plaintiff that the offsetting of the dividends against such indebtedness
amounted to constructive delivery; but here has not been presented any proof
to that effect, i.e., that there was such an indebtedness due from deceased; on
the contrary what the evidence shows is that the former administrator of the
Estate had challenged the validity of said indebtedness, Exh. D, motion of 4
June, 1951; that being the case, there is no clear showing that income in the
form of said dividends had really been received, which is the verb used in
Section 21 of the Internal Revenue Code, by the Estate whether actually or
constructively; and the income tax being collected by the Government on
income received, the Government's position is here without a clear basis; the
position becomes worse when it be considered that it is not even the Estate
that is being sued but the heirs themselves, who admittedly had not received
any of said dividends themselves; the fiction of transfer of ownership by
succession from the death of the decedent will have to give way to actual fact
that the dividends have not been adjudicated at all to the heirs up to now at
least so far as the evidence shows. This being the conclusion of the Court,
there will be no need to discuss the question of whether the action has or has
not prescribed.
The factual findings of the trial court, as stated in the above-quoted portion of the
decision, are decisive in the determination of the legal issues in this case.
Appellant cites the case of Herbert v. Commissioner of Internal Revenue, 81 F. (2d) 912
as authority that the crediting of dividends against accounts constitutes payment and
constructive receipt of the dividends. The citation of authority misses the point in issue.
In that case the existence of the indebtedness of Leon S. Herbert to the corporation that
declared the dividends and against which indebtedness the dividends were applied,
was never put in issue, and was admitted. In the instant case, the existence of the
obligations has been disputed and, as the trial court found, has not been proved. It
having been shown in the instant case that there was no basis for the assessment of
the income tax, the assessment itself and the sending of notices regarding the
assessment would neither have basis, and so that assessment and the notices
produced no legal effect that would warrant the collection of the tax.
The appellant also contends that the assessment had become final, because the
decision of the Collector of Internal Revenue was sent in a letter dated February 11,
1960 and addressed to the heirs of the late Esteban de la Rama, through Leonor de la
Rama as administratrix of the estate, and was not disputed or contested by way of
appeal within thirty days from receipt thereof to the Court of Tax Appeals. This
contention is untenable. The lower court found that Leonor de la Rama was not the
administratrix of the estate of Esteban de la Rama. The alleged deficiency income tax
for 1950 was chargeable against the estate of the deceased Esteban de la Rama. On
December 5, 1955, when the letter of notice for the assessment of the deficiency
income tax was first sent to Leonor de la Rama (See Annex "A" of Answer of defendant
Lourdes de la Rama-Osmeña, pp. 16-17, Record on Appeal, the administration
proceedings, in Special Proceedings No. 401 of the Court of First Instance of Iloilo,
were still open with respect to the controverted matter regarding the cash dividends
upon which the deficiency assessment was levied. This is clear from the order dated
June 21, 1951 (Exhibit "E") of the Court of First Instance of Iloilo which in part provides:
11
El albacea-administrador hace constar, sin embargo, que quedan por cobrar
ciertos dividendos declarados y devengados por las acciones del finado
Esteban de la Rama en The De la Rama Steamship Co., Inc., que los
funcionarios de dicha corporacion . . . no han pagado aun . . . y que por tales
motivos habria necesidad de prolongar la administracion, solamente para que
esta continue atendiendo con autorizacion, a tales menesteres.
xxx xxx xxx
Se ordena el cierre de la Administracion; pero se provee, sin embargo, la
extension de la misma, solamente para el proposito de iniciar y proseguir
hasta su terminacion una accion contra The De la Rama Steamship Co., Inc.
para el cobro de dividendos declarados por dicha corporacion en Diciembre
31, 1950 sobre las 869 acciones del finado Esteban de la Rama en la misma .
...
Y finalmente, queda relevado el Administrador Sr. Eliseo Hervas de toda
responsibilidad en relacion con su administracion, excepto en lo que respecta
al cobro de dividendos . . . .
The estate was still under the administration of Eliseo Hervas as regards the collection
of said dividends. The administrator was the representative of the estate, whose duty it
was to pay and discharge all debts and charges on the estate and to perform all orders
of the court by him to be performed (Rule 71, Section 1), and to pay the taxes and
assessments due to the Government or any branch or subdivision thereof (Section 7,
Rule 89, Old Rules of Court). The tax must be collected from the estate of the
deceased, and it is the administrator who is under obligation to pay such claim (Estate
of Claude E. Haygood.) (Collector of Internal Revenue v. Haygood, 65 Phil. 520). The
notice of assessment, therefore, should have been sent to the administrator. In this
case, notice was first sent to Lourdes de la Rama-Osmeña on February 29, 1956, and
later to Leonor de la Rama on November 27, 1956, neither of whom had authority to
represent the estate. As the lower court said in its decision: "Leonor de la Rama was
not the administratrix of the estate of the late Esteban de la Rama and as such the
demand unto her, Exh. Def. 8, p. 112, was not a correct demand before November 27,
1956, because the real administrator was the late Eliseo Hervas; . . . ." (p. 45, Record
on Appeal) The notice was not sent to the taxpayer for the purpose of giving effect to
the assessment, and said notice could not produce any effect. In the case of Bautista
and Corrales Tan v. Collector of Internal Revenue, L-12259, May 27, 1959, this Court
had occasion to state that "the assessment is deemed made when the notice to this
effect is released, mailed or sent to the taxpayer for the purpose of giving effect to said
assessment." It appearing that the person liable for the payment of the tax did not
receive the assessment, the assessment could not become final and executory (R. A.
1125, Section 11).
Plaintiff-appellant also contends that the lower court could not take cognizance of the
defense that the assessment was erroneous, this being a matter that is within the
exclusive jurisdiction of the Court of Tax Appeals. This contention has no merit.
According to Republic Act 1125, the Court of Tax Appeals has exclusive jurisdiction to
review by appeal decisions of the Collector of Internal Revenue in cases involving
disputed assessments, and the disputed assessment must be appealed by the person
adversely affected by the decision within thirty days after the receipt of the decision. In
the instant case, the person adversely affected should have been the administrator of
the estate, and the notice of the assessment should have been sent to him. The
administrator had not received the notice of assessment, and he could not appeal the
assessment to the Court of Tax Appeals within 30 days from notice. Hence the
assessment did not fall within the exclusive jurisdiction of the Court of Tax Appeals.

IN VIEW OF THE FOREGOING, the decision appealed from should be, as it is hereby,
affirmed, without costs.
Concepcion, C.J., Reyes, J.B.L., Barrera, Dizon, Regala, Makalintal, Bengzon, J.P.,
Sanchez and Castro, JJ.,concur.
3. Recognition of income
4. Methods of accounting for taxable income and deductible
expenses
a. Cash v accrual method of accounting (43,44,45, NIRC;
51,52,53 RR No. 2)
b. Installment v deferred payment v percentage of
completion (in long term contracts) (49,48, NIRC; 44, RR2)
c. Distinction between tax accounting and financial
accounting
NIRC
CHAPTER VIII
ACCOUNTING PERIODS AND METHODS OF ACCOUNTING
SEC. 43. General Rule. - The taxable income shall be computed upon the basis of
the taxpayer's annual accounting period (fiscal year or calendar year, as the case
may be) in accordance with the method of accounting regularly employed in keeping
the books of such taxpayer, but if no such method of accounting has been so
employed, or if the method employed does not clearly reflect the income, the
computation shall be made in accordance with such method as in the opinion of the
Commissioner clearly reflects the income. If the taxpayer's annual accounting period
is other than a fiscal year, as defined in Section 22(Q), or if the taxpayer has no
annual accounting period, or does not keep books, or if the taxpayer is an individual,
the taxable income shall be computed on the basis of the calendar year.
SEC. 44. Period in which Items of Gross Income Included.- The amount of all
items of gross income shall be included in the gross income for the taxable year in
which received by the taxpayer, unless, under methods of accounting permitted
under Section 43, any such amounts are to be properly accounted for as of a
different period. In the case of the death of a taxpayer, there shall be included in
computing taxable income for the taxable period in which falls the date of his death,
amounts accrued up to the date of his death if not otherwise properly includible in
respect of such period or a prior period.
SEC. 45. Period for which Deductions and Credits Taken. - The deductions
provided for in this Title shall be taken for the taxable year in which 'paid or accrued'
or 'paid or incurred', dependent upon the method of accounting upon the basis of
which the net income is computed, unless in order to clearly reflect the income, the
deductions should be taken as of a different period. In the case of the death of a
taxpayer, there shall be allowed as deductions for the taxable period in which falls
the date of his death, amounts accrued up to the date of his death if not otherwise
properly allowable in respect of such period or a prior period.
SEC. 48. Accounting for Long-term Contracts. - Income from long-term contracts
shall be reported for tax purposes in the manner as provided in this Section. As used
herein, the term 'long-term contracts' means building, installation or construction
contracts covering a period in excess of one (1) year. Persons whose gross income
is derived in whole or in part from such contracts shall report such income upon the
basis of percentage of completion. The return should be accompanied by a return
certificate of architects or engineers showing the percentage of completion during
the taxable year of the entire work performed under contract. There should be
12
deducted from such gross income all expenditures made during the taxable year on
account of the contract, account being taken of the material and supplies on hand at
the beginning and end of the taxable period for use in connection with the work
under the contract but not yet so applied. If upon completion of a contract, it is found
that the taxable [net] income arising thereunder has not been clearly reflected for any
year or years, the Commissioner may permit or require an amended return.
SEC. 49. Installment Basis. -
(A) Sales of Dealers in Personal Property. - Under rules and regulations
prescribed by the Secretary of Finance, upon recommendation of the Commissioner,
a person who regularly sells or otherwise disposes of personal property on the
installment plan may return as income therefrom in any taxable year that proportion
of the installment payments actually received in that year, which the gross profit
realized or to be realized when payment is completed, bears to the total contract
price.
(B) Sales of Realty and Casual Sales of Personality. - In the case (1) of a casual
sale or other casual disposition of personal property (other than property of a kind
which would properly be included in the inventory of the taxpayer if on hand at the
close of the taxable year), for a price exceeding One thousand pesos (P1,000), or (2)
of a sale or other disposition of real property, if in either case the initial payments do
not exceed twenty-five percent (25%) of the selling price, the income may, under the
rules and regulations prescribed by the Secretary of Finance, upon recommendation
of the Commissioner, be returned on the basis and in the manner above prescribed
in this Section. As used in this Section, the term 'initial payments' means the
payments received in cash or property other than evidences of indebtedness of the
purchaser during the taxable period in which the sale or other disposition is made.
(C) Sales of Real Property Considered as Capital Asset by Individuals. - An
individual who sells or disposes of real property, considered as capital asset, and is
otherwise qualified to report the gain therefrom under Subsection (B) may pay the
capital gains tax in installments under rules and regulations to be promulgated by the
Secretary of Finance, upon recommendation of the Commissioner.
(D) Change from Accrual to Installment Basis. - If a taxpayer entitled to the
benefits of Subsection (A) elects for any taxable year to report his taxable income on
the installment basis, then in computing his income for the year of change or any
subsequent year, amounts actually received during any such year on account of
sales or other dispositions of property made in any prior year shall not be excluded.
Revenue Regulation No. 2
SECTION 44. Long term contracts. — Income from long-term contracts is taxable for
the period in which the income is determined, such determination depending upon
the nature and terms of the particular contract. As used herein the term "long-term"
contracts means building, installation, or construction contracts covering a period in
excess of one year. Persons whose income is derived in whole or in par from such
contracts may, as to such income, prepare their returns upon the following bases:
(a) Gross income derived from such contracts may be reported upon the basis of
percentage of
completion. In such case there should accompany the return certificate of architects,
or engineers showing the percentage of completion during the taxable year of the
entire work performed under contract. There should be deducted from such gross
income all expenditures made during the taxable year on account of the contract,
account being taken of the material and supplies on hand at the beginning and end
of the taxable period for use in connection with the work under the contract but not
yet so applied. If upon completion of a contract, it is found that the taxable net

income arising thereunder has not been clearly reflected for any year or years, the
Commissioner of Internal Revenue may permit or require an amended return.
(b) Gross income may be reported in the taxable year in which the contract is finally
completed and accepted if the taxpayer elects as a consistent practice to so treat
such income, provided such method clearly reflects the net income. If this method is
adopted there should be deducted from gross income all expenditures during the life
of the contract which are properly allocated thereto, taking into consideration any
material and supplies charged to the work under the contract but remaining on hand
at the time of the completion.
Where a taxpayer has filed his return in accordance with the method of accounting
regularly
employed by him in keeping his books and such method clearly reflects the income,
he will not be required to change to either of the methods above set forth. If a
taxpayer desires to change his method of accounting in accordance with paragraphs
(a) and (b) above, a statement showing the composition of all items appearing upon
his balance sheet and used in connection with the method of accounting formerly
employed by him, should accompany his return.
SECTION 51. When income is to be reported. — Gains, profits, and income are to
be included in the gross income for the taxable year in which they are received by
the taxpayer, unless they are included when they accrue to him in accordance with
the approved method of accounting followed by him. If a person sues in one year on
a pecuniary claim or for property, and money or property is recovered on a judgment
therefore in a later year, income is realized in that year, assuming that the money or
property would have been income in the earlier year if then received. This is true of a
recovery for patent infringement. Bad debts or accounts charged off subsequent to
March 1, 1913, because of the fact that they were determined to be worthless, which
are subsequently recovered, whether or not by suit, constitute income for the year in
which recovered, regardless of the date when amounts were charged off.
SECTION 52. Income constructively received. — Income which is credited to the
account of or set apart for a taxpayer and which may be drawn upon by him at any
time is subject to tax for the year during which so credited or set apart, although not
then actually reduced to possession. To constitute receipt in such a case the income
must be credited to the taxpayer without any substantial limitation or restriction as to
the time or manner of payment or condition upon which payment is to be made. A
book entry, if made, should indicate an absolute transfer from one account to
another. If the income is not credited, but is set apart, such income must be
unqualifiedly subject to the demand of the taxpayer. Where a corporation
contingently credits its employees with bonus stock, but the stock is not available to
such employees until some future date, the mere crediting on the books of the
corporation does not constitute receipt.
SECTION 53. Examples of constructive receipt. — When interest coupons have
matured and are payable, but have not been cashed, such interest payment though
not collected when due and payable, is nevertheless available to the taxpayer and
should therefore be included in his gross income for the year during which the
coupons matured. This is true if the coupons are exchanged for other property
instead of eventually being cashed. Defaulted coupons are income for the year in
which paid. The distributive share of the profits of a partner in a general co-
partnership duly registered is regarded as received by him, although not distributed.
Interest credited on savings bank deposits, even though the bank nominally has a
rule, seldom or never enforced, that it may require so many days' notice in advance
13
of cashing depositors' checks, is income to the depositor when credited. An amount
credited to shareholders of a building and loan association, when such credit passes
without restriction to the shareholder, has taxable status as income for the year of
the credit. When the amount of such accumulations has not become available to the
shareholder until the maturity of a share, the amount of any share in excess of the
aggregate amount paid in by the shareholder is income for the year of maturity of the
share.
C. Tests in determining income
1. Realization Test (+Fisher v Trinidad, ibid)
5. Eisner v Macomber
U.S. Supreme Court
Eisner v. Macomber, 252 U.S. 189 (1920)
Eisner v. Macomber
No. 318
Argued April 16, 1919
Restored to docket for reargument May 19, 1919
Reargued October 17, 20, 1919
Decided March 8, 1920
252 U.S. 189
ERROR TO THE DISTRICT COURT OF THE UNITED STATES
FOR THE SOUTHERN DISTRICT OF NEW YORK
Syllabus
Congress was not empowered by the Sixteenth Amendment to tax, as income of the
stockholder, without apportionment, a stock dividend made lawfully and in good faith
against profits accumulated by the corporation since March 1, 1913. P. 252 U. S.
201. Towne v. Eisner, 245 U. S. 418.
The Revenue Act of September 8, 1916, c. 463, 39 Stat. 756, plainly evinces the
purpose of Congress to impose such taxes, and is to that extent in conflict with Art. I, §
2, cl. 3, and Art. I, § 9, cl. 4, of the Constitution. Pp. 252 U. S. 199, 252 U. S. 217.
These provisions of the Constitution necessarily limit the extension, by construction, of
the Sixteenth Amendment. P. 252 U. S. 205.
What is or is not "income" within the meaning of the Amendment must be determined in
each case according to truth and substance, without regard to form. P. 252 U. S. 206.
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. P. 252 U. S.
207.
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. Id.
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 an capital increase,
and not on income, and, to be valid under the Constitution, such taxes must be
apportioned according to population in the several states. P. 252 U. S. 208.
Affirmed.
Page 252 U. S. 190
The case is stated in the opinion.
Page 252 U. S. 199

MR. JUSTICE PITNEY delivered the opinion of the Court.
This case presents the question whether, by virtue of the Sixteenth Amendment,
Congress has 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 since March 1, 1913.
It arises under the Revenue Act of September 8, 1916, 39 Stat. 756 et seq., which, in
our opinion (notwithstanding a contention of the government that will be
Page 252 U. S. 200
noticed), plainly evinces the purpose of Congress to tax stock dividends as income. *
The facts, in outline, are as follows:
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. Appropriate resolutions were
adopted, an amount equivalent to the par value of the proposed new stock was
transferred accordingly, and the new stock duly issued against it and divided among the
stockholders.
Defendant in error, being the owner of 2,200 shares of the old stock, received
certificates for 1, 100 additional
Page 252 U. S. 201
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, and, an
appeal to the Commissioner of Internal Revenue having been disallowed, she brought
action against the Collector to recover the tax. In her complaint, she alleged the above
facts and contended that, 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 that the stock
dividend was not income within the meaning of the Sixteenth Amendment. A general
demurrer to the complaint was overruled upon the authority of Towne v. Eisner, 245 U.
S. 418, and, defendant having failed to plead further, final judgment went against him.
To review it, the present writ of error is prosecuted.
The case was argued at the last term, and reargued at the present term, both orally and
by additional briefs.
We are constrained to hold that the judgment of the district court must be affirmed, first,
because the question at issue is controlled by Towne v. Eisner, supra; secondly,
because a reexamination of the question with the additional light thrown upon it by
elaborate arguments has confirmed the view that the underlying ground of that decision
is sound, that it disposes of the question here presented, and that other fundamental
considerations lead to the same result.
In Towne v. Eisner, the question was whether a stock dividend made in 1914 against
surplus earned prior to January 1, 1913, was taxable against the stockholder under the
Act of October 3, 1913, c. 16, 38 Stat. 114, 166, which provided (§ B, p. 167) that net
income should include "dividends," and also "gains or profits and income derived
Page 252 U. S. 202
14
from any source whatever." Suit having been brought by a stockholder to recover the
tax assessed against him by reason of the dividend, the district court sustained a
demurrer to the complaint. 242 F. 702. The court treated the construction of the act as
inseparable from the interpretation of the Sixteenth Amendment; and, having referred
to Pollock v. Farmers' Loan & Trust Co., 158 U. S. 601, and quoted the Amendment,
proceeded very properly to say (p. 704):
"It is manifest 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."
It declined, however, to accede to the contention that, in Gibbons v. Mahon, 136 U. S.
549, "stock dividends" had received a definition sufficiently clear to be controlling,
treated the language of this Court in that case as obiter dictum in respect of the matter
then before it (p. 706), and examined the question as res nova, with the result stated.
When the case came here, after overruling a motion to dismiss made by the
government upon the ground that the only question involved was the construction of the
statute, and not its constitutionality, we dealt upon the merits with the question of
construction only, but disposed of it upon consideration of the essential nature of a
stock dividend disregarding the fact that the one in question was based upon surplus
earnings that accrued before the Sixteenth Amendment took effect. Not only so, but we
rejected the reasoning of the district court, saying (245 U.S. 245 U. S. 426):
"Notwithstanding the thoughtful discussion that the case received below we cannot
doubt that the dividend was capital as well for the purposes of the Income Tax Law as
for distribution between tenant for life and remainderman. What was said by this Court
upon the latter question is equally true for the former."
"A stock dividend really takes nothing from the property of the corporation, and adds
nothing to the
Page 252 U. S. 203
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."
"Gibbons v. Mahon, 136 U. S. 549, 136 U. S. 559-560. In short, the corporation is no
poorer and the stockholder is no richer than they were before. Logan County v. United
States, 169 U. S. 255, 169 U. S. 261. If the plaintiff gained any small advantage by the
change, it certainly was not an advantage of $417,450, the sum upon which he was
taxed. . . . What has happened is that the plaintiff's old certificates have been split up in
effect and have diminished in value to the extent of the value of the new."
This language aptly answered not only the reasoning of the district court, but the
argument of the Solicitor General in this Court, which discussed the essential nature of
a stock dividend. And if, for the reasons thus expressed, such a dividend is not to be
regarded as "income" or "dividends" within the meaning of the Act of 1913, we are
unable to see how it can be brought within the meaning of "incomes" in the Sixteenth
Amendment, it being very clear that Congress intended in that act to exert its power to
the extent permitted by the amendment. In Towne v. Eisner, it was not contended that
any construction of the statute could make it narrower than the constitutional grant;
rather the contrary.
The fact that the dividend was charged against profits earned before the Act of 1913
took effect, even before the amendment was adopted, was neither relied upon nor
alluded to in our consideration of the merits in that case. Not only so, but had we
considered that a stock dividend constituted income in any true sense, it would have
been held taxable under the Act of 1913 notwithstanding it was

Page 252 U. S. 204
based upon profits earned before the amendment. We ruled at the same term, in Lynch
v. Hornby, 247 U. S. 339, that a cash dividend extraordinary in amount, and in Peabody
v. Eisner, 247 U. S. 347, that a dividend paid in stock of another company, were taxable
as income although based upon earnings that accrued before adoption of the
amendment. In the former case, concerning "corporate profits that accumulated before
the act took effect," we declared (pp. 247 U. S. 343-344):
"Just as we deem the legislative intent manifest to tax the stockholder with respect to
such accumulations only if and when, and to the extent that, his interest in them comes
to fruition as income, that is, in dividends declared, so we can perceive no constitutional
obstacle that stands in the way of carrying out this intent when dividends are declared
out of a preexisting surplus. . . . Congress was at liberty under the amendment to tax as
income, without apportionment, everything that became income, in the ordinary sense
of the word, after the adoption of the amendment, including dividends received in the
ordinary course by a stockholder from a corporation, even though they were
extraordinary in amount and might appear upon analysis to be a mere realization in
possession of an inchoate and contingent interest that the stockholder had in a surplus
of corporate assets previously existing."
In Peabody v. Eisner, 247 U. S. 349, 247 U. S. 350, we observed that the decision of
the district court in Towne v. Eisner had been reversed
"only upon the ground that it related to a stock dividend which in fact took nothing from
the property of the corporation and added nothing to the interest of the shareholder, but
merely changed the evidence which represented that interest,"
and we distinguished the Peabody case from the Towne case upon the ground that "the
dividend of Baltimore & Ohio shares was not a stock dividend but a distribution in
specie of a portion of the assets of the Union Pacific."
Therefore, Towne v. Eisner cannot be regarded as turning
Page 252 U. S. 205
upon the point that the surplus accrued to the company before the act took effect and
before adoption of the amendment. And what we have quoted from the opinion in that
case cannot be regarded as obiter dictum, it having furnished the entire basis for the
conclusion reached. We adhere to the view then expressed, and might rest the present
case there not because that case in terms decided the constitutional question, for it did
not, but because the conclusion there reached as to the essential nature of a stock
dividend necessarily prevents its being regarded as income in any true sense.
Nevertheless, in view of the importance of the matter, and the fact that Congress in the
Revenue Act of 1916 declared (39 Stat. 757) that a "stock dividend shall be considered
income, to the amount of its cash value," we will deal at length with the constitutional
question, incidentally testing the soundness of our previous conclusion.
The Sixteenth Amendment must be construed in connection with the taxing clauses of
the original Constitution and the effect attributed to them before the amendment was
adopted. In Pollock v. Farmers' Loan & Trust Co., 158 U. S. 601, under the Act of
August 27, 1894, c. 349, § 27, 28 Stat. 509, 553, it was held that taxes upon rents and
profits of real estate and upon returns from investments of personal property were in
effect direct taxes upon the property from which such income arose, imposed by reason
of ownership, and that Congress could not impose such taxes without apportioning
them among the states according to population, as required by Article I, § 2, cl. 3, and §
9, cl. 4, of the original Constitution.
Afterwards, and evidently in recognition of the limitation upon the taxing power of
Congress thus determined, the Sixteenth Amendment was adopted, in words lucidly
expressing the object to be accomplished:
15
"The Congress shall have power to lay and collect taxes on incomes, from whatever
source derived, without apportionment among
Page 252 U. S. 206
the several states and without regard to any census or enumeration."
As repeatedly held, this did not extend the taxing power to new subjects, but merely
removed the necessity which otherwise might exist for an apportionment among the
states of taxes laid on income. Brushaber v. Union Pacific R. Co., 240 U. S. 1, 240 U.
S. 17-19; Stanton v. Baltic Mining Co., 240 U. S. 103, 240 U. S. 112 et seq.; Peck & Co.
v. Lowe, 247 U. S. 165, 247 U. S. 172-173.
A proper regard for its genesis, as well as its very clear language, requires also that this
amendment shall not be extended by loose construction, so as to repeal or modify,
except as applied to income, those provisions of the Constitution that require an
apportionment according to population for direct taxes upon property, real and personal.
This limitation still has an appropriate and important function, and is not to be
overridden by Congress or disregarded by the courts.
In order, therefore, that the clauses cited from Article I of the Constitution may have
proper force and effect, save only as modified by the amendment, and that the latter
also may have proper effect, it becomes essential to distinguish between what is and
what is not "income," as the term is there used, 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. For the present purpose, we
require only a clear definition of the term "income,"
Page 252 U. S. 207
as used in common speech, in order to determine its meaning in the amendment, and,
having formed also a correct judgment as to the nature of a stock dividend, we shall find
it easy to decide the matter at issue.
After examining dictionaries in common use (Bouv. L.D.; Standard Dict.; Webster's
Internat. Dict.; Century Dict.), we find little to add to the succinct definition adopted in
two cases arising under the Corporation Tax Act of 1909 (Stratton's Independence v.
Howbert, 231 U. S. 399, 231 U. S. 415; Doyle v. Mitchell Bros. Co., 247 U. S. 179, 247
U. S. 185), "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, to which it was applied in the Doyle case, pp. 247 U. S.
183-185.
Brief as it is, it indicates the characteristic and distinguishing attribute of income
essential for a correct solution of the present controversy. The government, although
basing its argument upon the definition as quoted, placed chief emphasis upon the
word "gain," which was extended to include a variety of meanings; while the
significance of the next three words was either overlooked or misconceived. "Derived
from capital;" "the gain derived from capital," etc. Here, we have the essential
matter: not a gain accruing to capital; not a growth or increment of value in the
investment; but a gain, a profit, something of exchangeable value, proceeding from the
property, severed from the capital, however invested or employed, and coming in, being
"derived" -- that is, received or drawn by the recipient (the taxpayer) for
his separate use, benefit and disposal -- that is income derived from property. Nothing
else answers the description.

The same fundamental conception is clearly set forth in the Sixteenth Amendment --
"incomes, fromwhatever source derived" -- the essential thought being expressed
Page 252 U. S. 208
with a conciseness and lucidity entirely in harmony with the form and style of the
Constitution.
Can a stock dividend, considering its essential character, be brought within the
definition? To answer this, regard must be had to the nature of a corporation and the
stockholder's relation to it. We refer, of course, to a corporation such as the one in the
case at bar, organized for profit, and having a capital stock divided into shares to which
a nominal or par value is attributed.
Certainly the interest of the stockholder is a capital interest, and his certificates of stock
are but the evidence of it. They state the number of shares to which he is entitled and
indicate their par value and how the stock may be transferred. They show that he or his
assignors, immediate or remote, have contributed capital to the enterprise, that he is
entitled to a corresponding interest proportionate to the whole, entitled to have the
property and business of the company devoted during the corporate existence to
attainment of the common objects, entitled to vote at stockholders' meetings, to receive
dividends out of the corporation's profits if and when declared, and, in the event of
liquidation, to receive a proportionate share of the net assets, if any, remaining after
paying creditors. Short of liquidation, or until dividend declared, he has no right to
withdraw any part of either capital or profits from the common enterprise; on the
contrary, his interest pertains not to any part, divisible or indivisible, but to the entire
assets, business, and affairs of the company. Nor is it the interest of an owner in the
assets themselves, since the corporation has full title, legal and equitable, to the whole.
The stockholder has the right to have the assets employed in the enterprise, with the
incidental rights mentioned; but, as stockholder, he has no right to withdraw, only the
right to persist, subject to the risks of the enterprise, and looking only to dividends for
his return. If he desires to dissociate himself
Page 252 U. S. 209
from the company, he can do so only by disposing of his stock.
For bookkeeping purposes, the company acknowledges a liability in form to the
stockholders equivalent to the aggregate par value of their stock, evidenced by a
"capital stock account." If profits have been made and not divided, they create
additional bookkeeping liabilities under the head of "profit and loss," "undivided profits,"
"surplus account," or the like. None of these, however, gives to the stockholders as a
body, much less to any one of them, either a claim against the going concern for any
particular sum of money or a right to any particular portion of the assets or any share in
them unless or until the directors conclude that dividends shall be made and a part of
the company's assets segregated from the common fund for the purpose. The dividend
normally is payable in money, under exceptional circumstances in some other divisible
property, and when so paid, then only (excluding, of course, a possible advantageous
sale of his stock or winding-up of the company) does the stockholder realize a profit or
gain which becomes his separate property, and thus derive income from the capital that
he or his predecessor has invested.
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 to meet current liabilities and finance current operations of the
company. Often, especially in a growing business, only a part, sometimes a small part,
16
of the year's profits is in property capable of division, the remainder having been
absorbed in the acquisition of increased plant,
Page 252 U. S. 210
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. In order to make the adjustment, a
charge is made against surplus account with corresponding credit to capital stock
account, equal to the proposed "dividend;" the new stock is issued against this and the
certificates delivered to the existing stockholders in proportion to their previous
holdings. This, however, 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
Page 252 U. S. 211
"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.
The essential and controlling fact is that the stockholder has received nothing out of the
company's assets for his separate use and benefit; on the contrary, every dollar of his
original investment, together with whatever accretions and accumulations have resulted
from employment of his money and that of the other stockholders in the business of the
company, still remains the property of the company, and subject to business risks which
may result in wiping out the entire investment. Having regard to the very truth of the
matter, to substance and not to form, he has received nothing that answers the
definition of income within the meaning of the Sixteenth Amendment.
Being concerned only with the true character and effect of such a dividend when
lawfully made, we lay aside the question whether, in a particular case, a stock dividend
may be authorized by the local law governing the corporation, or whether the
capitalization of profits may be the result of correct judgment and proper business policy
on the part of its management, and a due regard for the interests of the stockholders.
And we are considering the taxability of bona fide stock dividends only.

Page 252 U. S. 212
We are clear that not only does a stock dividend really take nothing from the property of
the corporation and add nothing to that of the shareholder, but that the antecedent
accumulation of profits evidenced thereby, while indicating that the shareholder is the
richer because of an increase of his capital, at the same time shows he has not realized
or received any income in the transaction.
It is said that a stockholder may sell the new shares acquired in the stock dividend, and
so he may, if he can find a buyer. It is equally true that, if he does sell, and in doing so
realizes a profit, such profit, like any other, is income, and, so far as it may have arisen
since the Sixteenth Amendment, is taxable by Congress without apportionment. The
same would be true were he to sell some of his original shares at a profit. But if a
shareholder sells dividend stock, he necessarily disposes of a part of his capital
interest, just as if he should sell a part of his old stock, either before or after the
dividend. What he retains no longer entitles him to the same proportion of future
dividends as before the sale. His part in the control of the company likewise is
diminished. Thus, if one holding $60,000 out of a total $100,000 of the capital stock of a
corporation should receive in common with other stockholders a 50 percent stock
dividend, and should sell his part, he thereby would be reduced from a majority to a
minority stockholder, having six-fifteenths instead of six-tenths of the total stock
outstanding. A corresponding and proportionate decrease in capital interest and in
voting power would befall a minority holder should he sell dividend stock, it being in the
nature of things impossible for one to dispose of any part of such an issue without a
proportionate disturbance of the distribution of the entire capital stock and a like
diminution of the seller's comparative voting power -- that "right preservative of rights" in
the control of a corporation.
Page 252 U. S. 213
Yet, without selling, the shareholder, unless possessed of other resources, has not the
wherewithal to pay an income tax upon the dividend stock. Nothing could more clearly
show that to tax a stock dividend is to tax a capital increase, and not income, than this
demonstration that, in the nature of things, it requires conversion of capital in order to
pay the tax.
Throughout the argument of the government, in a variety of forms, runs the fundamental
error already mentioned -- a failure to appraise correctly the force of the term "income"
as used in the Sixteenth Amendment, or at least to give practical effect to it. Thus, the
government contends that the tax "is levied on income derived from corporate
earnings," when in truth the stockholder has "derived" nothing except paper certificates,
which, so far as they have any effect, deny him present participation in such earnings. It
contends that the tax may be laid when earnings "are received by the stockholder,"
whereas he has received none; that the profits are "distributed by means of a stock
dividend," although a stock dividend distributes no profits; that, under the Act of 1916,
"the tax is on the stockholder's share in corporate earnings," when in truth a stockholder
has no such share, and receives none in a stock dividend; that "the profits are
segregated from his former capital, and he has a separate certificate representing his
invested profits or gains," whereas there has been no segregation of profits, nor has he
any separate certificate representing a personal gain, since the certificates, new and
old, are alike in what they represent -- a capital interest in the entire concerns of the
corporation.
We have no doubt of the power or duty of a court to look through the form of the
corporation and determine the question of the stockholder's right in order to ascertain
whether he has received income taxable by Congress without apportionment. But,
looking through the form,
Page 252 U. S. 214
17
we cannot disregard the essential truth disclosed, ignore the substantial difference
between corporation and stockholder, treat the entire organization as unreal, look upon
stockholders as partners when they are not such, treat them as having in equity a right
to a partition of the corporate assets when they have none, and indulge the fiction that
they have received and realized a share of the profits of the company which in truth
they have neither received nor realized. We must treat the corporation as a substantial
entity separate from the stockholder not only because such is the practical fact, but
because it is only by recognizing such separateness that any dividend -- even one paid
in money or property -- can be regarded as income of the stockholder. Did we regard
corporation and stockholders as altogether identical, there would be no income except
as the corporation acquired it, and while this would be taxable against the corporation
as income under appropriate provisions of law, the individual stockholders could not be
separately and additionally taxed with respect to their several shares even when
divided, since, if there were entire identity between them and the company, they could
not be regarded as receiving anything from it, any more than if one's money were to be
removed from one pocket to another.
Conceding that the mere issue of a stock dividend makes the recipient no richer than
before, the government nevertheless contends that the new certificates measure the
extent to which the gains accumulated by the corporation have made him the richer.
There are two insuperable difficulties with this. In the first place, it would depend upon
how long he had held the stock whether the stock dividend indicated the extent to which
he had been enriched by the operations of the company; unless he had held it
throughout such operations, the measure would not hold true. Secondly, and more
important for present purposes, enrichment through increase in value
Page 252 U. S. 215
of capital investment is not income in any proper meaning of the term.
The complaint contains averments respecting the market prices of stock such as
plaintiff held, based upon sales before and after the stock dividend, tending to show that
the receipt of the additional shares did not substantially change the market value of her
entire holdings. This tends to show that, in this instance, market quotations reflected
intrinsic values -- a thing they do not always do. But we regard the market prices of the
securities as an unsafe criterion in an inquiry such as the present, when the question
must be not what will the thing sell for, but what is it in truth and in essence.
It is said there is no difference in principle between a simple stock dividend and a case
where stockholders use money received as cash dividends to purchase additional stock
contemporaneously issued by the corporation. But an actual cash dividend, with a real
option to the stockholder either to keep the money for his own or to reinvest it in new
shares, would be as far removed as possible from a true stock dividend, such as the
one we have under consideration, where nothing of value is taken from the company's
assets and transferred to the individual ownership of the several stockholders and
thereby subjected to their disposal.
The government's reliance upon the supposed analogy between a dividend of the
corporation's own shares and one made by distributing shares owned by it in the stock
of another company calls for no comment beyond the statement that the latter
distributes assets of the company among the shareholders, while the former does not,
and for no citation of authority except Peabody v. Eisner, 247 U. S. 347, 247 U. S. 349-
350.
Two recent decisions, proceeding from courts of high jurisdiction, are cited in support of
the position of the government.
Page 252 U. S. 216
Swan Brewery Co., Ltd. v. Rex, [1914] A.C. 231, arose under the Dividend Duties Act of
Western Australia, which provided that "dividend" should include "every dividend, profit,

advantage, or gain intended to be paid or credited to or distributed among any
members or directors of any company," except, etc. There was a stock dividend, the
new shares being allotted among the shareholders pro rata, and the question was
whether this was a distribution of a dividend within the meaning of the act. The Judicial
Committee of the Privy Council sustained the dividend duty upon the ground that,
although "in ordinary language the new shares would not be called a dividend, nor
would the allotment of them be a distribution of a dividend," yet, within the meaning of
the act, such new shares were an "advantage" to the recipients. There being no
constitutional restriction upon the action of the lawmaking body, the case presented
merely a question of statutory construction, and manifestly the decision is not a
precedent for the guidance of this Court when acting under a duty to test an act of
Congress by the limitations of a written Constitution having superior force.
In Tax Commissioner v. Putnam, (1917) 227 Mass. 522, it was held that the Forty-
Fourth amendment to the Constitution of Massachusetts, which conferred upon the
legislature full power to tax incomes, "must be interpreted as including every item which
by any reasonable understanding can fairly be regarded as income" (pp. 526, 531), and
that under it, a stock dividend was taxable as income, the court saying (p. 535):
"In essence, the thing which has been done is to distribute a symbol representing an
accumulation of profits, which, instead of being paid out in cash, is invested in the
business, thus augmenting its durable assets. In this aspect of the case, the substance
of the transaction is no different from what it would be if a cash dividend had been
declared with the privilege of subscription to an equivalent amount of new shares. "
Page 252 U. S. 217
We cannot accept this reasoning. Evidently, in order to give a sufficiently broad sweep
to the new taxing provision, it was deemed necessary to take the symbol for the
substance, accumulation for distribution, capital accretion for its opposite, while a case
where money is paid into the hand of the stockholder with an option to buy new shares
with it, followed by acceptance of the option, was regarded as identical in substance
with a case where the stockholder receives no money and has no option. The
Massachusetts court was not under an obligation, like the one which binds us, of
applying a constitutional amendment in the light of other constitutional provisions that
stand in the way of extending it by construction.
Upon the second argument, the government, recognizing the force of the decision
in Towne v. Eisner, supra,and virtually abandoning the contention that a stock dividend
increases the interest of the stockholder or otherwise enriches him, insisted as an
alternative that, by the true construction of the Act of 1916, the tax is imposed not upon
the stock dividend, but rather upon the stockholder's share of the undivided profits
previously accumulated by the corporation, the tax being levied as a matter of
convenience at the time such profits become manifest through the stock dividend. If so
construed, would the act be constitutional?
That Congress has power to tax shareholders upon their property interests in the stock
of corporations is beyond question, and that such interests might be valued in view of
the condition of the company, including its accumulated and undivided profits, is equally
clear. But that this would be taxation of property because of ownership, and hence
would require apportionment under the provisions of the Constitution, is settled beyond
peradventure by previous decisions of this Court.
The government relies upon Collector v. Hubbard, (1870)
Page 252 U. S. 218
12 Wall. 1, which arose under § 117 of the Act of June 30, 1864, c. 173, 13 Stat. 223,
282, providing that
"The gains and profits of all companies, whether incorporated or partnership, other than
the companies specified in that section, shall be included in estimating the annual
18
gains, profits, or income of any person, entitled to the same, whether divided or
otherwise."
The court held an individual taxable upon his proportion of the earnings of a corporation
although not declared as dividends and although invested in assets not in their nature
divisible. Conceding that the stockholder for certain purposes had no title prior to
dividend declared, the court nevertheless said (p. 79 U. S. 18):
"Grant all that, still it is true that the owner of a share of stock in a corporation holds the
share with all its incidents, and that among those incidents is the right to receive all
future dividends -- that is, his proportional share of all profits not then divided. Profits
are incident to the share to which the owner at once becomes entitled provided he
remains a member of the corporation until a dividend is made. Regarded as an incident
to the shares, undivided profits are property of the shareholder, and as such are the
proper subject of sale, gift, or devise. Undivided profits invested in real estate,
machinery, or raw material for the purpose of being manufactured are investments in
which the stockholders are interested, and when such profits are actually appropriated
to the payment of the debts of the corporation, they serve to increase the market value
of the shares, whether held by the original subscribers or by assignees."
Insofar as this seems to uphold the right of Congress to tax without apportionment a
stockholder's interest in accumulated earnings prior to dividend declared, it must be
regarded as overruled by Pollock v. Farmers' Loan & Trust Co., 158 U. S. 601, 158 U.
S. 627-628, 158 U. S. 637. Conceding Collector v. Hubbard was inconsistent with the
doctrine of that case, because it sustained a direct tax upon property not apportioned
Page 252 U. S. 219
among the states, the government nevertheless insists that the sixteenth Amendment
removed this obstacle, so that now the Hubbard case is authority for the power of
Congress to levy a tax on the stockholder's share in the accumulated profits of the
corporation even before division by the declaration of a dividend of any kind. Manifestly
this argument must be rejected, since the amendment applies to income only, and what
is called the stockholder's share in the accumulated profits of the company is capital,
not income. As we have pointed out, a stockholder has no individual share in
accumulated profits, nor in any particular part of the assets of the corporation, prior to
dividend declared.
Thus, from every point of view, we are brought irresistibly to the conclusion that neither
under the Sixteenth Amendment nor otherwise has Congress power to tax without
apportionment a true stock dividend made lawfully and in good faith, or the
accumulated profits behind it, as income of the stockholder. The Revenue Act of 1916,
insofar as it imposes a tax upon the stockholder because of such dividend, contravenes
the provisions of Article I, § 2, cl. 3, and Article I, § 9, cl. 4, of the Constitution, and to
this extent is invalid notwithstanding the Sixteenth Amendment.
Judgment affirmed.
2. Claim of right doctrine or doctrine of ownership, command, or
control
3. Economic benefit test/Doctrine of proprietary interest
4. Severance test
5. All events test
III. Kinds of Taxpayers
A. Individual taxpayers
1. Citizens
a. Resident citizens (RC) (23A, 24A1a, NIRC)
b. Non-resident citizens (NRC) (22E, 23C, 24A1b, NIRC)

CHAPTER II
GENERAL PRINCIPLES
SEC. 23. General Principles of Income Taxation in the Philippines. - Except
when otherwise provided in this Code:
(A) A citizen of the Philippines residing therein is taxable on all income derived from
sources within and without the Philippines;
(B) A nonresident citizen is taxable only on income derived from sources within the
Philippines;
(C) An individual citizen of the Philippines who is working and deriving income from
abroad as an overseas contract worker is taxable only on income derived from
sources within the Philippines: Provided, That a seaman who is a citizen of the
Philippines and who receives compensation for services rendered abroad as a
member of the complement of a vessel engaged exclusively in international trade
shall be treated as an overseas contract worker;
(D) An alien individual, whether a resident or not of the Philippines, is taxable only
on income derived from sources within the Philippines;
(E) A domestic corporation is taxable on all income derived from sources within and
without the Philippines; and
(F) A foreign corporation, whether engaged or not in trade or business in the
Philippines, is taxable only on income derived from sources within the Philippines.
CHAPTER III
TAX ON INDIVIDUALS
SEC. 24. Income Tax Rates. -
(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of
the Philippines.-
(1) An income tax is hereby imposed:
(a) On the taxable income defined in Section 31 of this Code, other than income
subject to tax under Subsections (B), (C) and (D) of this Section, derived for each
taxable year from all sources within and without the Philippines be every individual
citizen of the Philippines residing therein;
(b) On the taxable income defined in Section 31 of this Code, other than income
subject to tax under Subsections (B), (C) and (D) of this Section, derived for each
taxable year from all sources within the Philippines by an individual citizen of the
Philippines who is residing outside of the Philippines including overseas contract
workers referred to in Subsection(C) of Section 23 hereof; and
TITLE II
TAX ON INCOME
(As Last Amended by RA No. 10653) [5]
CHAPTER I- DEFINITIONS
SEC. 22. Definitions. - When used in this Title:
(E) The term 'nonresident citizen' means;
(1) A citizen of the Philippines who establishes to the satisfaction of the
Commissioner the fact of his physical presence abroad with a definite intention to
reside therein.
(2) A citizen of the Philippines who leaves the Philippines during the taxable year to
reside abroad, either as an immigrant or for employment on a permanent basis.
(3) A citizen of the Philippines who works and derives income from abroad and
whose employment thereat requires him to be physically present abroad most of the
time during the taxable year.
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(4) A citizen who has been previously considered as nonresident citizen and who
arrives in the Philippines at any time during the taxable year to reside permanently in
the Philippines shall likewise be treated as a nonresident citizen for the taxable year
in which he arrives in the Philippines with respect to his income derived from sources
abroad until the date of his arrival in the Philippines.
(5) The taxpayer shall submit proof to the Commissioner to show his intention of
leaving the Philippines to reside permanently abroad or to return to and reside in the
Philippines as the case may be for purpose of this Section.
2. Aliens
a. Resident aliens (RA) (22F, NIRC)
b. Non-resident aliens (NRA)
i. NRA engaged in trade or business in the PH
(NRA-ETB) (180-day Test) (25A1, NIRC)
ii. NRA not engaged in trade or business in the PH
(NRA-NETB) (25B, NIRC)
c. Special class of individual employees
i. Aliens employed by RHQs, AHQs, ROHQs of
MNC’s (22DD, 22EE, 25C, NIRC; RR11-2010)
ii. Aliens employed by OBUs (25D, NIRC)
iii. Aliens employed by petroleum service
contractors, subcontractors (25, NIRC)
NIRC
TITLE II
TAX ON INCOME
(As Last Amended by RA No. 10653) [5]
CHAPTER I- DEFINITIONS
SEC. 22. Definitions. - When used in this Title:
(F) The term 'resident alien' means an individual whose residence is within the
Philippines and who is not a citizen thereof.
(DD) The term 'regional or area headquarters' shall mean a branch established in
the Philippines by multinational companies and which headquarters do not earn or
derive income from the Philippines and which act as supervisory, communications
and coordinating center for their affiliates, subsidiaries, or branches in the Asia-
Pacific Region and other foreign markets.
(EE) The term 'regional operating headquarters' shall mean a branch established
in the Philippines by multinational companies which are engaged in any of the
following services: general administration and planning; business planning and
coordination; sourcing and procurement of raw materials and components; corporate
finance advisory services; marketing control and sales promotion; training and
personnel management; logistic services; research and development services and
product development; technical support and maintenance; data processing and
communications; and business development.
SEC. 25. Tax on Nonresident Alien Individual. -
(A) Nonresident Alien Engaged in trade or Business Within the Philippines. -
(1) In General. - A nonresident alien individual engaged in trade or business in the
Philippines shall be subject to an income tax in the same manner as an individual
citizen and a resident alien individual, on taxable income received from all sources
within the Philippines. A nonresident alien individual who shall come to the
Philippines and stay therein for an aggregate period of more than one hundred

eighty (180) days during any calendar year shall be deemed a 'nonresident alien
doing business in the Philippines'. Section 22 (G) of this Code notwithstanding.
(2) Cash and/or Property Dividends from a Domestic Corporation or Joint
Stock Company, or Insurance or Mutual Fund Company or Regional Operating
Headquarter or Multinational Company, or Share in the Distributable Net
Income of a Partnership (Except a General Professional Partnership), Joint
Account, Joint Venture Taxable as a Corporation or Association., Interests,
Royalties, Prizes, and Other Winnings. - Cash and/or property dividends from a
domestic corporation, or from a joint stock company, or from an insurance or mutual
fund company or from a regional operating headquarter of multinational company, or
the share of a nonresident alien individual in the distributable net income after tax of
a partnership (except a general professional partnership) of which he is a partner, or
the share of a nonresident alien individual in the net income after tax of an
association, a joint account, or a joint venture taxable as a corporation of which he is
a member or a co-venturer; interests; royalties (in any form); and prizes (except
prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to
tax under Subsection (B)(1) of Section 24) and other winnings (except Philippine
Charity Sweepstakes and Lotto winnings); shall be subject to an income tax of
twenty percent (20%) on the total amount thereof: Provided, however, that royalties
on books as well as other literary works, and royalties on musical compositions shall
be subject to a final tax of ten percent (10%) on the total amount thereof: Provided,
further, That cinematographic films and similar works shall be subject to the tax
provided under Section 28 of this Code: Provided, furthermore, That interest income
from long-term deposit or investment in the form of savings, common or individual
trust funds, deposit substitutes, investment management accounts and other
investments evidenced by certificates in such form prescribed by the Bangko Sentral
ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection:
Provided, finally, that should the holder of the certificate pre-terminate the deposit or
investment before the fifth (5th) year, a final tax shall be imposed on the entire
income and shall be deducted and withheld by the depository bank from the
proceeds of the long-term deposit or investment certificate based on the remaining
maturity thereof:
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than four (4) years - 12%; and
Less than three (3) years - 20%.
(3) Capital Gains. - Capital gains realized from sale, barter or exchange of shares of
stock in domestic corporations not traded through the local stock exchange, and real
properties shall be subject to the tax prescribed under Subsections (C) and (D) of
Section 24.
(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the
Philippines. - There shall be levied, collected and paid for each taxable year upon
the entire income received from all sources within the Philippines by every
nonresident alien individual not engaged in trade or business within the Philippines
as interest, cash and/or property dividends, rents, salaries, wages, premiums,
annuities, compensation, remuneration, emoluments, or other fixed or determinable
annual or periodic or casual gains, profits, and income, and capital gains, a tax equal
to twenty-five percent (25%) of such income. Capital gains realized by a nonresident
alien individual not engaged in trade or business in the Philippines from the sale of
shares of stock in any domestic corporation and real property shall be subject to the
income tax prescribed under Subsections (C) and (D) of Section 24.
(C) Alien Individual Employed by Regional or Area Headquarters and Regional
Operating Headquarters of Multinational Companies. - There shall be levied,
20
collected and paid for each taxable year upon the gross income received by every
alien individual employed by regional or area headquarters and regional operating
headquarters established in the Philippines by multinational companies as salaries,
wages, annuities, compensation, remuneration and other emoluments, such as
honoraria and allowances, from such regional or area headquarters and regional
operating headquarters, a tax equal to fifteen percent (15%) of such gross income:
Provided, however, That the same tax treatment shall apply to Filipinos employed
and occupying the same position as those of aliens employed by these multinational
companies. For purposes of this Chapter, the term 'multinational company' means
a foreign firm or entity engaged in international trade with affiliates or subsidiaries or
branch offices in the Asia-Pacific Region and other foreign markets.
(D) Alien Individual Employed by Offshore Banking Units. - There shall be
levied, collected and paid for each taxable year upon the gross income received by
every alien individual employed by offshore banking units established in the
Philippines as salaries, wages, annuities, compensation, remuneration and other
emoluments, such as honoraria and allowances, from such off-shore banking units, a
tax equal to fifteen percent (15%) of such gross income: Provided, however, That the
same tax treatment shall apply to Filipinos employed and occupying the same
positions as those of aliens employed by these offshore banking units.
(E) Alien Individual Employed by Petroleum Service Contractor and
Subcontractor. [14] - An Alien individual who is a permanent resident of a foreign
country but who is employed and assigned in the Philippines by a foreign service
contractor or by a foreign service subcontractor engaged in petroleum operations in
the Philippines shall be liable to a tax of fifteen percent (15%) of the salaries, wages,
annuities, compensation, remuneration and other emoluments, such as honoraria
and allowances, received from such contractor or subcontractor: Provided, however,
That the same tax treatment shall apply to a Filipino employed and occupying the
same position as an alien employed by petroleum service contractor and
subcontractor.
Any income earned from all other sources within the Philippines by the alien
employees referred to under Subsections (C), (D) and (E) hereof shall be subject to
the pertinent income tax, as the case may be, imposed under this Code.
RR 11-2010 PDF
3. Estates and Trusts (60-66, NIRC)
CHAPTER X
ESTATES AND TRUSTS
SEC. 60. Imposition of Tax. -
(A) Application of Tax. - The tax imposed by this Title upon individuals shall apply
to the income of estates or of any kind of property held in trust, including:
(1) Income accumulated in trust for the benefit of unborn or unascertained person or
persons with contingent interests, and income accumulated or held for future
distribution under the terms of the will or trust;
(2) Income which is to be distributed currently by the fiduciary to the beneficiaries,
and income collected by a guardian of an infant which is to be held or distributed as
the court may direct;
(3) Income received by estates of deceased persons during the period of
administration or settlement of the estate; and
(4) Income which, in the discretion of the fiduciary, may be either distributed to the
beneficiaries or accumulated.

(B) Exception. - The tax imposed by this Title shall not apply to employee's trust
which forms part of a pension, stock bonus or profit-sharing plan of an employer for
the benefit of some or all of his employees (1) if contributions are made to the trust
by such employer, or employees, or both for the purpose of distributing to such
employees the earnings and principal of the fund accumulated by the trust in
accordance with such plan, and (2) if under the trust instrument it is impossible, at
any time prior to the satisfaction of all liabilities with respect to employees under the
trust, for any part of the corpus or income to be (within the taxable year or thereafter)
used for, or diverted to, purposes other than for the exclusive benefit of his
employees: Provided, That any amount actually distributed to any employee or
distributee shall be taxable to him in the year in which so distributed to the extent
that it exceeds the amount contributed by such employee or distributee.
(C) Computation and Payment. -
(1) In General. - The tax shall be computed upon the taxable income of the estate or
trust and shall be paid by the fiduciary, except as provided in Section 63 (relating to
revocable trusts) and Section 64 (relating to income for the benefit of the grantor).
(2) Consolidation of Income of Two or More Trusts. - Where, in the case of two or
more trusts, the creator of the trust in each instance is the same person, and the
beneficiary in each instance is the same, the taxable income of all the trusts shall be
consolidated and the tax provided in this Section computed on such consolidated
income, and such proportion of said tax shall be assessed and collected from each
trustee which the taxable income of the trust administered by him bears to the
consolidated income of the several trusts.
SEC. 61. Taxable Income. - The taxable income of the estate or trust shall be
computed in the same manner and on the same basis as in the case of an individual,
except that:
(A) There shall be allowed as a deduction in computing the taxable income of the
estate or trust the amount of the income of the estate or trust for the taxable year
which is to be distributed currently by the fiduciary to the beneficiaries, and the
amount of the income collected by a guardian of an infant which is to be held or
distributed as the court may direct, but the amount so allowed as a deduction shall
be included in computing the taxable income of the beneficiaries, whether distributed
to them or not. Any amount allowed as a deduction under this Subsection shall not
be allowed as a deduction under Subsection (B) of this Section in the same or any
succeeding taxable year.
(B) In the case of income received by estates of deceased persons during the period
of administration or settlement of the estate, and in the case of income which, in the
discretion of the fiduciary, may be either distributed to the beneficiary or
accumulated, there shall be allowed as an additional deduction in computing the
taxable income of the estate or trust the amount of the income of the estate or trust
for its taxable year, which is properly paid or credited during such year to any
legatee, heir or beneficiary but the amount so allowed as a deduction shall be
included in computing the taxable income of the legatee, heir or beneficiary.
(C) In the case of a trust administered in a foreign country, the deductions mentioned
in Subsections (A) and (B) of this Section shall not be allowed: Provided, That the
amount of any income included in the return of said trust shall not be included in
computing the income of the beneficiaries.
SEC. 62. Exemption Allowed to Estates and Trusts. - For the purpose of the tax
provided for in this Title, there shall be allowed an exemption of Twenty thousand
pesos (P20,000) [39] from the income of the estate or trust.
SEC. 63. Revocable trusts. - Where at any time the power to revest in the grantor
title to any part of the corpus of the trust is vested (1) in the grantor either alone or in
21
conjunction with any person not having a substantial adverse interest in the
disposition of such part of the corpus or the income therefrom, or (2) in any person
not having a substantial adverse interest in the disposition of such part of the corpus
or the income therefrom, the income of such part of the trust shall be included in
computing the taxable income of the grantor.
SEC. 64. Income for Benefit of Grantor. -
(A) Where any part of the income of a trust (1) is, or in the discretion of the grantor or
of any person not having a substantial adverse interest in the disposition of such part
of the income may be held or accumulated for future distribution to the grantor, or (2)
may, or in the discretion of the grantor or of any person not having a substantial
adverse interest in the disposition of such part of the income, be distributed to the
grantor, or (3) is, or in the discretion of the grantor or of any person not having a
substantial adverse interest in the disposition of such part of the income may be
applied to the payment of premiums upon policies of insurance on the life of the
grantor, such part of the income of the trust shall be included in computing the
taxable income of the grantor. `
(B) As used in this Section, the term 'in the discretion of the grantor' means in the
discretion of the grantor, either alone or in conjunction with any person not having a
substantial adverse interest in the disposition of the part of the income in question.
SEC. 65. Fiduciary Returns. - Guardians, trustees, executors, administrators,
receivers, conservators and all persons or corporations, acting in any fiduciary
capacity, shall render, in duplicate, a return of the income of the person, trust or
estate for whom or which they act, and be subject to all the provisions of this Title,
which apply to individuals in case such person, estate or trust has a gross income of
Twenty thousand pesos (P20,000) [40] or over during the taxable year. Such fiduciary
or person filing the return for him or it, shall take oath that he has sufficient
knowledge of the affairs of such person, trust or estate to enable him to make such
return and that the same is, to the best of his knowledge and belief, true and correct,
and be subject to all the provisions of this Title which apply to individuals: Provided,
That a return made by or for one or two or more joint fiduciaries filed in the province
where such fiduciaries reside; under such rules and regulations as the Secretary of
Finance, upon recommendation of the Commissioner, shall prescribe, shall be a
sufficient compliance with the requirements of this Section.
SEC. 66. Fiduciaries Indemnified Against Claims for Taxes Paid. - Trustees,
executors, administrators and other fiduciaries are indemnified against the claims or
demands of every beneficiary for all payments of taxes which they shall be required
to make under the provisions of this Title, and they shall have credit for the amount
of such payments against the beneficiary or principal in any accounting which they
make as such trustees or other fiduciaries.
4. Co-ownerships
5. General professional partnerships (26, NIRC)
SEC. 26. Tax Liability of Members of General Professional Partnerships. - A
general professional partnership as such shall not be subject to the income tax
imposed under this Chapter. Persons engaging in business as partners in a general
professional partnership shall be liable for income tax only in their separate and
individual capacities.
For purposes of computing the distributive share of the partners, the net income of
the partnership shall be computed in the same manner as a corporation.
Each partner shall report as gross income his distributive share, actually or
constructively received, in the net income of the partnership.
 22

(D) Net Income of a Partnership Deemed Constructively Received by

B. Corporations Partners. - The taxable income declared by a partnership for a taxable year which is
1. Domestic corporation, defined (22B, 22C, NIRC) subject to tax under Section 27 (A) of this Code, after deducting the corporate
2. Taxable partnership or business partnership (73D, NIRC) income tax imposed therein, shall be deemed to have been actually or constructively
3. Joint venture received by the partners in the same taxable year and shall be taxed to them in their
a. Exempt JV (RR 10-2012) individual capacity, whether actually distributed or not.
b. Taxable JV RR 10-2012 PDF
4. Foreign corporations
a. Resident foreign corporations (RFC) (22H, NIRC)
b. Non-residential foreign corporation (22I, NIRC)
c. Subsidiary v branch of a foreign corporation

TITLE II
TAX ON INCOME
(As Last Amended by RA No. 10653) [5]
CHAPTER I- DEFINITIONS
SEC. 22. Definitions. - When used in this Title:
(A) The term 'person' means an individual, a trust, estate or corporation.
(B) The term 'corporation' shall include partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas en participacion),
association, or insurance companies, but does not include general professional
partnerships and a joint venture or consortium formed for the purpose of undertaking
construction projects or engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating consortium agreement under a service contract
with the Government. 'General professional partnerships' are partnerships formed
by persons for the sole purpose of exercising their common profession, no part of the
income of which is derived from engaging in any trade or business.
(C) The term 'domestic', when applied to a corporation, means created or organized
in the Philippines or under its laws.
(H) The term 'resident foreign corporation' applies to a foreign corporation
engaged in trade or business within the Philippines.
(I) The term 'nonresident foreign corporation' applies to a foreign corporation not
engaged in trade or business within the Philippines.
SEC. 73. Distribution of Dividends or Assets by Corporations. -
(A) Definition of Dividends. - The term 'dividends' when used in this Title means
any distribution made by a corporation to its shareholders out of its earnings or
profits and payable to its shareholders, whether in money or in other property.
Where a corporation distributes all of its assets in complete liquidation or dissolution,
the gain realized or loss sustained by the stockholder, whether individual or
corporate, is a taxable income or a deductible loss, as the case may be.
(B) Stock Dividend. - 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 taxable dividend, the amount so distributed in redemption or
cancellation of the stock shall be considered as taxable income to the extent that it
represents a distribution of earnings or profits.
(C) Dividends Distributed are Deemed Made from Most Recently Accumulated
Profits. - Any distribution made to the shareholders or members of a corporation
shall be deemed to have been made from the most recently accumulated profits or
surplus, and shall constitute a part of the annual income of the distributee for the
year in which received.