Commissioner of Internal Revenue vs.

St Luke's Medical Center

Facts:

St. Luke’s Medical Center, Inc. (St. Luke’s) is a hospital organized as a non-stock and non-profit
corporation. St. Luke’s accepts both paying and non-paying patients. The BIR assessed St. Luke’s
deficiency taxes for 1998 comprised of deficiency income tax, value-added tax, and withholding tax.
The BIR claimed that St. Luke’s should be liable for income tax at a preferential rate of 10% as
provided for by Section 27(B). Further, the BIR claimed that St. Luke’s was actually operating for
profit in 1998 because only 13% of its revenues came from charitable purposes. Moreover, the
hospital’s board of trustees, officers and employees directly benefit from its profits and assets.

On the other hand, St. Luke’s maintained that it is a non-stock and non-profit institution for
charitable and social welfare purposes exempt from income tax under Section 30(E) and (G) of the
NIRC. It argued that the making of profit per se does not destroy its income tax exemption.

Issue:

The sole issue is whether St. Luke’s is liable for deficiency income tax in 1998 under Section
27(B) of the NIRC, which imposes a preferential tax rate of 10^ on the income of proprietary non-
profit hospitals.

Ruling:

Section 27(B) of the NIRC does not remove the income tax exemption of proprietary non-
profit hospitals under Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G)
on the other hand, can be construed together without the removal of such tax exemption.

Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary
non-profit educational institutions and (2) proprietary non-profit hospitals. The only
qualifications for hospitals are that they must be proprietary and non-profit. “Proprietary” means
private, following the definition of a “proprietary educational institution” as “any private school
maintained and administered by private individuals or groups” with a government permit. “Non-
profit” means no net income or asset accrues to or benefits any member or specific person, with all
the net income or asset devoted to the institution’s purposes and all its activities conducted not for
profit.

“Non-profit” does not necessarily mean “charitable.” In Collector of Internal Revenue v. Club
Filipino Inc. de Cebu, this Court considered as non-profit a sports club organized for recreation and
entertainment of its stockholders and members. The club was primarily funded by membership
fees and dues. If it had profits, they were used for overhead expenses and improving its golf course.
The club was non-profit because of its purpose and there was no evidence that it was engaged
in a profit-making enterprise.

The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not charitable. The Court
defined “charity” in Lung Center of the Philippines v. Quezon City as “a gift, to be applied
consistently with existing laws, for the benefit of an indefinite number of persons, either by
bringing their minds and hearts under the influence of education or religion, by assisting them to
establish themselves in life or [by] otherwise lessening the burden of government.” However,
despite its being a tax exempt institution, any income such institution earns from activities
conducted for profit is taxable, as expressly provided in the last paragraph of Sec. 30.

To be a charitable institution, however, an organization must meet the substantive test of charity
in Lung Center. The issue in Lung Center concerns exemption from real property tax and not
income tax. However, it provides for the test of charity in our jurisdiction. Charity is essentially a
gift to an indefinite number of persons which lessens the burden of government. In other words,
charitable institutions provide for free goods and services to the public which would otherwise
fall on the shoulders of government. Thus, as a matter of efficiency, the government forgoes taxes
which should have been spent to address public needs, because certain private entities already
assume a part of the burden. This is the rationale for the tax exemption of charitable institutions.
The loss of taxes by the government is compensated by its relief from doing public works which
would have been funded by appropriations from the Treasury

The Constitution exempts charitable institutions only from real property taxes. In the NIRC,
Congress decided to extend the exemption to income taxes. However, the way Congress crafted
Section 30(E) of the NIRC is materially different from Section 28(3), Article VI of the Constitution.

Section 30(E) of the NIRC defines the corporation or association that is exempt from income tax. On
the other hand, Section 28(3), Article VI of the Constitution does not define a charitable institution,
but requires that the institution “actually, directly and exclusively” use the property for a charitable
purpose.

To be exempt from real property taxes, Section 28(3), Article VI of the Constitution requires that a
charitable institution use the property “actually, directly and exclusively” for charitable purposes.

To be exempt from income taxes, Section 30(E) of the NIRC requires that a charitable institution
must be “organized and operated exclusively” for charitable purposes. Likewise, to be exempt
from income taxes, Section 30(G) of the NIRC requires that the institution be “operated
exclusively” for social welfare.

However, the last paragraph of Section 30 of the NIRC qualifies the words “organized and operated
exclusively” by providing that:

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or
from any of their activities conducted for profit regardless of the disposition made of such
income, shall be subject to tax imposed under this Code.

In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution
conducts “any” activity for profit, such activity is not tax exempt even as its not-for-profit
activities remain tax exempt.
Thus, even if the charitable institution must be “organized and operated exclusively” for charitable
purposes, it is nevertheless allowed to engage in “activities conducted for profit” without losing its
tax exempt status for its not-for-profit activities. The only consequence is that the “income of
whatever kind and character” of a charitable institution “from any of its activities conducted
for profit, regardless of the disposition made of such income, shall be subject to tax.” Prior to the
introduction of Section 27(B), the tax rate on such income from for-profit activities was the
ordinary corporate rate under Section 27(A). With the introduction of Section 27(B), the tax rate is
now 10%.

The Court finds that St. Luke’s is a corporation that is not “operated exclusively” for charitable or
social welfare purposes insofar as its revenues from paying patients are concerned. This ruling is
based not only on a strict interpretation of a provision granting tax exemption, but also on the clear
and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an
institution be “operated exclusively” for charitable or social welfare purposes to be completely
exempt from income tax. An institution under Section 30(E) or (G) does not lose its tax exemption if
it earns income from its for-profit activities. Such income from for-profit activities, under the last
paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate rate
but now at the preferential 10% rate pursuant to Section 27(B).

St. Luke’s fails to meet the requirements under Section 30(E) and (G) of the NIRC to
be completely tax exempt from all its income. However, it remains a proprietary non-profit hospital
under Section 27(B) of the NIRC as long as it does not distribute any of its profits to its members
and such profits are reinvested pursuant to its corporate purposes. St. Luke’s, as a proprietary non-
profit hospital, is entitled to the preferential tax rate of 10% on its net income from its for-profit
activities.

St. Luke’s is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC.
However, St. Luke’s has good reasons to rely on the letter dated 6 June 1990 by the BIR, which
opined that St. Luke’s is “a corporation for purely charitable and social welfare purposes” and thus
exempt from income tax.

In Michael J. Lhuillier, Inc. v. Commissioner of Internal Revenue, the Court said that “good faith and
honest belief that one is not subject to tax on the basis of previous interpretation of government
agencies tasked to implement the tax law, are sufficient justification to delete the imposition of
surcharges and interest.”

WHEREFORE, St. Luke’s Medical Center, Inc. is ORDERED TO PAY the deficiency income tax in
1998 based on the 10% preferential income tax rate under Section 27(8) of the National
Internal Revenue Code. However, it is not liable for surcharges and interest on such deficiency
income tax under Sections 248 and 249 of the National Internal Revenue Code. All other
parts of the Decision and Resolution of the Court of Tax Appeals are AFFIRMED.
 COMMISSIONER OF INTERNAL REVENUE, vs. DE LA SALLE UNIVERSITY, INC.

G.R. No. 196596, November 09, 2016

The Commissioner submits the following arguments:

DLSU's rental income is taxable regardless of how such income is derived, used or disposed
of. DLSU's operations of canteens and bookstores within its campus even though exclusively
serving the university community do not negate income tax liability.

Article XIV, Section 4 (3) of the Constitution and Section 30 (H) of the Tax Code

“the income of whatever kind and character of [a non-stock and non-profit educational
institution] from any of [its] properties, real or personal, or from any of (its] activities conducted
for profit regardless of the disposition made of such income, shall be subject to tax imposed by this
Code.”

The Commissioner posits that a tax-exempt organization like DLSU is exempt only from property
tax but not from income tax on the rentals earned from property. Thus, DLSU's income from
the leases of its real properties is not exempt from taxation even if the income would be used for
educational purposes.41

DLSU stresses that Article XIV, Section 4 (3) of the Constitution is clear that all assets and
revenues of non-stock, non-profit educational institutions used actually, directly and exclusively for
educational purposes are exempt from taxes and duties.

ISSUE: Whether DLSU's income and revenues proved to have been used actually, directly
and exclusively for educational purposes are exempt from duties and taxes.

RULING: YES.

The requisites for availing the tax exemption under Article XIV, Section 4 (3),
namely: (1) the taxpayer falls under the classification non-stock, non-profit educational
institution; and (2) the income it seeks to be exempted from taxation is used actually, directly
and exclusively for educational purposes.

A plain reading of the Constitution would show that Article XIV, Section 4 (3) does not
require that the revenues and income must have also been sourced from educational activities or
activities related to the purposes of an educational institution. The phrase all revenues is
unqualified by any reference0 to the source of revenues. Thus, so long as the revenues and income
are used actually, directly and exclusively for educational purposes, then said revenues and income
shall be exempt from taxes and duties.

Thus, when a non-stock, non-profit educational institution proves that it uses

its revenues actually, directly, and exclusively for educational purposes, it shall be exempted from
income tax, VAT, and LBT. On the other hand, when it also shows that it uses its assets in the form of
real property for educational purposes, it shall be exempted from RPT.

We further declare that the last paragraph of Section 30 of the Tax Code is without force and
effect for being contrary to the Constitution insofar as it subjects to tax the income and revenues of
non-stock, non-profit educational institutions used actually, directly and exclusively for educational
purpose. We make this declaration in the exercise of and consistent with our duty to uphold the
primacy of the Constitution. We stress that our holding here pertains only to non-stock, non-profit
educational institutions and does not cover the other exempt organizations under Section 30 of the
Tax Code.

For all these reasons, we hold that the income and revenues of DLSU proven to have
been used actually, directly and exclusively for educational purposes are exempt from duties
and taxes.

2.Banco De Oro, Bank of Commerce, China Banking Corporation, Metropolitan Bank & Trust
Company, Philippine Bank of Communications, Philippine Nation Bank, Philippine Veterans
Bank and Planters Development Bank vs. Republic of the Philippines, Commissioner of Internal
Revenue, Bureau of Internal Revenue, Secretary of Finance, Department of Finance, The
National Treasurer and Bureau of Treasury (G.R. No. 198756. January 13, 2015)i

This case involves P35 billion worth of 10-year zero-coupon treasury bonds issued by the
Bureau of Treasury (BTr) denominated as the Poverty Eradication and Alleviation Certificates or
the PEACe Bonds. These PEACe Bonds would initially be purchased by a special purpose vehicle on
behalf of Caucus of Development NGO Networks (CODE-NGO), repackaged and sold at a premium to
investors. The net proceeds from the sale will be used to endow a permanent fund to finance
meritorious activities and projects of accredited non-government organizations (NGOs) throughout
the country.

In relation to this, CODE-NGO wrote a letter to the Bureau of Internal Revenue (BIR) to
inquire as to whether the PEACe Bonds will be subject to withholding tax of 20%. The BIR issued
several rulings beginning with BIR Ruling No.020-2001 (issued on May 31, 2001) and was
subsequently reiterated its points in BIR Ruling No. 035-200119 dated August 16, 2001 and BIR
Ruling No. DA-175-0120. The rulings basically say that in determining whether financial assets such
as a debt instrument are deposit substitute, the “20 or more individual or corporate lenders rule”
should apply. Likewise, the “at any one time” stated in the rules should be construed as “at the time
of the original issuance.”

With this BTr made a public offering of the PEACe Bonds to the Government Securities
Eligible Dealers (GSED) wherby RCBC won as the highest bidder for approximately 10.17 billion,
resulting in a discount of approximately 24.83 billion. RCBC Capital Capital entered into an
underwriting agreement with CODE-NGO, whereby RCBC Capital was appointed as the Issue
Manager and Lead Underwriter for the offering of the PEACe Bonds.

In October 7, 2011, BIR issued BIR RULING NO. 370-2011 in response to the query of the
Secretary of Finance as to the proper tax treatment of the discounts and interest derived from
Government Bonds. It cited three other rulings issued in 2004 and 2005. The above ruling states
that the all treasury bonds (including PEACe Bonds), regardless of the number of
purchasers/lenders at the time of origination/issuance are considered deposit substitutes. In the
case of zero-coupon bonds, the discount (i.e. difference between face value and purchase
price/discounted value of the bond) is treated as interest income of the purchaser/holder.

Ruling:

The PEACe Bonds, according to the SC, requires further information for proper
determination of whether these bonds are within the purview of deposit substitutes. The Court
noted that it may seem that the lender is only CODE-NGO through RCBC. However, the underwriting
agreement reveals that the entire 35billion worth of zero-coupon bonds were sourced directly from
the undisclosed number of investors. These are the same investors to whom RCBC Capital
distributed the PEACe Bonds all at the time of the origination or issuance. Hence, until there is
information as to whether the PEACe Bonds are found within the coverage of deposit substitutes,
the proper procedure for the BIR is to collect the unpaid final withholding tax directly from RCBC
Capital/ CODE-NGO, or any lender if such be the case.

The court also noted that according to the NIRC, Section 24, interest income received by
individuals from long term deposits or investments with a holding period of not less than
five years is exempt from final tax.

The decision provided the definition of deposit substitute 1997 National Internal Revenue
Code which placed the 20-lender rule. In particular, Section 22 (Y) states that a debt instrument
shall mean “…an alternative form of obtaining funds from the public (the term 'public' means
borrowing from twenty (20) or more individual or corporate lenders at any one time) other than
deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower’s
own account….” The determination as to whether a deposit substitute will be imposed with 20%
final withholding tax rests on the number of lenders.

In construing the phrase “at any one time” provided for in the definition of “public”, the
Supreme Court made an analysis of how financial market works. According to the Court, in the
financial market whether this refers to capital markets securities or money market securities,
transactions happen in two venues: the Primary and the Secondary Market. The primary market
transactions happen between issuers and investors where issuance of new securities is facilitated.
The secondary market is where the trading occurs among investors. This goes to show that for one
security, there are different and separate transactions happening depending on the flow of the
transaction. In the exact words of the Supreme Court, “an agglomeration of financial transactions in
securities performed by market participants that works to transfer the funds from the surplus units
(or investors/lenders) to those who need them (deficit units or borrowers)….”

When there are 20 or more lenders/investors in a transaction for a specific bond issue, the
seller is required to withhold the 20% final income tax on the imputed interest income from the
bonds. The Supreme Court cited Sections 24(B) (1), 27(D)(1), and 28(A)(7) of the 1997 National
Internal Revenue Code. These provisions state the imposition of a final tax rate of 20% upon the
amount of interest from any currency bank deposit and yield or any other monetary benefit from
deposit substitutes. On the other hand, for instruments not considered as deposit substitutes, these
will be subjected to regular income tax. The prevailing provision is Section 32(A). Hence, should the
deposit substitute involves less than 20 lenders in a transaction, the income is considered as
“income derived from whatever source”.

The income is a “gain from sale” and should not be confused with “interest” provided for in
Sections 24, 27 and 28. The Supreme Court noted that the “gain” referred to in Section 32 (A)
pertains to that realized from the trading of bonds at maturity rate (difference between selling
price in the secondary market and that upon purchase) or the gain realized by the last holder of the
bonds when redeemed at maturity (the difference between proceeds from retirement of bonds and
the price upon acquisition of the last holder). In the case of discounted instruments, like the zero-
coupon bonds, the trading gain shall be the excess of the selling price over the book value or
accreted value (original issue price plus accumulated discount from the time of purchase up to the
time of sale) of the instruments.

The Supreme Court finds that the BIR Rulings issued in 2001 and the assailed BIR Rulings
are defective taking into consideration the above discussions on deposit substitutes and its tax
treatment. As for the BIR Rulings issued in 2001, the SC finds that the interpretation of the phrase
“at any one time”, is “…to mean at the point of origination alone is unduly restrictive….” On the
other hand, the 2011 BIR Ruling which relied on the 2004 and 2005 BIR Rulings is void for creating
a distinction between government bonds and those issued by private corporations, when there is
none in the law. Further, it completely disregarding the 20-lender rule under the NIRC since it says,
““all treasury bonds . . . regardless of the number of purchasers/lenders at the time of
origination/issuance are considered deposit substitutes…”

3. CIR vs. Filinvest Dev’t Corp.

G.R. 163653 ; July 19, 2011

Facts: Filinvest Development Corp (FDC) is the owner of outstanding shares of both Filinvest
Alabang, Inc. (FAI) and Filinvest Land, Inc. (FLI) with 80% and 67.42%, respectively. Sometime in
1996, FDC and FAI entered into a Deed of Exchange with FLI where both transferred parcels of land
in exchange for shares of stocks of FLI. As a result, the ownership structure of FLI changed whereby
FDC’s ownership decreased from 67.42% to 61.03% meanwhile FAI now owned 9.96% of shares of
FLI. FLI then requested from the BIR a ruling to the effect that no gain or loss should be recognized
on said transfer and BIR issued Ruling No. S-34-046-97 finding the exchange falling within Sec. 34
(c) (2) (now Sec. 40 (c)(2)) of the NIRC. Furthermore, FDC extended advances in favor of its
affiliates during 1996 and 1997 duly evidenced by instructional letters as well as cash and journal
vouchers. Moreover, FDC also entered into a shareholder’s agreement with Reco-Herrera PTE ltd.
(RHPL) for the formation of a Singapore-based joint venture company called Filinvest Asia Corp.
(FAC). The equity participation of FDC was pegged at 60% subscribing to P500.7M worth of shares
of FAC.

On Jan 3, 2000, FDC received assessment notices for deficiency income tax and deficiency
stamp taxes. The foregoing deficiency taxes were assessed on the taxable gain realized by FDC on
the taxable gain supposedly realized by FDC from the Deed of Exchange it executed with FAI and
FLI, on the dilution resulting from the shareholder’s agreement FDC executed with RHPL and with
the interest rate and documentary stamp taxes imposable on the advances executed by FDC. FAI
also received similar assessment on deficiency income tax relating to the deed of exchange. Both
FDC and FAI protested and after having failed to act on their protest they docketed their case with
the CTA. They raised the issue that pursuant to BIR Ruling No. S-34-046-97, no taxable gain should
have been assessed from the deed of exchange and that the BIR cannot impute theoretical interests
on the cash advances of FDC in the absence of stipulation and that not being promissory notes such
are not subject to documentary stamp taxes. CIR, for its part, raised that the said transfer of
property resulted to a diminution of ownership by FDC of FLI rather than gaining further control
and as such should not be tax free. Furthermore, CIR invoked Sec. 43 (now Sec. 50) of NIRC as
implemented by RR No. 2, the CIR is given the "the power to allocate, distribute or apportion
income or deductions between or among such organizations, trades or business in order to prevent
evasion of taxes." Also the CIR justified the imposition of documentary stamp taxes on the
instructional letters citing Sec. 180 of the NIRC and RR No. 9-94 which provide that loan
transactions are subject to tax irrespective of whether or not they are evidenced by a formal
agreement or by mere office memo. Lastly, it reiterated that there was dilution of its shares as a
result of its shareholder’s agreement with RHPL. CTA decided in favor of FDC with the exception on
the deficiency income tax on the interest income from the income it supposedly realized from the
advances to its affiliates, the rest of the assessment were cancelled. The CTA opined that CIR was
justified in assessing undeclared interests on the same cash advances pursuant to his authority
under Section 43 of the NIRC in order to forestall tax evasion. Dissatisfied, FDC filed a petition for
review with the Court of Appeals claiming that the cash advances it extended to its affiliates were
interest-free in the absence of express stipulation. Moreover, it claimed that under Sec. 43 (now Sec.
50) the CIR’s authority does not include the power to impute imaginary interests, directed only to
controlled corp and not to holding company and can be invoked only on cases of understatement of
taxable income or evident tax evasion. The CA rendered a decision in favor of FDC cancelling said
assessment. The CIR filed a petition for review with the CA which subsequently denied for lack of
merit. The CA has the following conclusions: 1. The deed of exchange resulted in a combined control
of more than 51% of FLI , hance no taxable gain; 2. The instructional letters do not partake the
nature of loan agreements; 3. Although subsequently modified by BIR Ruling No. 108-99 to the
effect that documentary stamp tax are now imposable on interoffice memos, to give a retroactive
application would be prejudicial to the taxpayer.; 4. FDC’s alleged gain from the increase of its
shareholding in FAC are mere unrealized increase in capital unless converted thru sale are not
taxable. Hence, this petition for review on certiorari.
Issue: (1) Whether or not FDC is liable for theoretical interest on said advances extended by it to its
affiliates.

(2) Whether or not FDC met all the requirements for non-recognition of taxable gain under Sec. 34
(c) (2) (now Sec. 40 (C) (2) of the NIRC and therefore, is not taxable.

(3) WON the letters of instructions or cash vouchers are deemed loan agreements subject to
documentary stamp tax.

(4) WON the dilution as a result of increase of FDC’s shareholding in FAC is taxable.

Held:

(1) No. Sec. 43 (now Sec. 50) of the NIRC does not include the power to impute theoretical
interest to the CIR’s powers of distribution, apportionment or allocation of gross income
and deductions. There must be proof of actual or probable receipt or realization by the
controlled taxpayer of the item of gross income sought to be distributed, apportioned or
allocated by the CIR. In the case at bar, records do not show that there was evidence that the
advances extended yielded interests. Even if FDC deducted substantial interest expenses
from its gross income, there would still be no basis for the imputation of theoretical
interests on the subject advances. Under Art. 1956 of the Civil Code, no interest shall be due
unless it has been expressly stipulated in writing. Moreover, taxes being burdens are not to
be presumed and that tax statutes must be construed strictly against the government and
liberally in favor of the taxpayer.
(2) Yes. It was admitted in the stipulation of facts that the following are the requisites: (a) the
transferee is a corporation; (b) the transferee exchanges its shares of stock for property/ies
of the transferor; (c) the transfer is made by a person, acting alone or together with others,
not exceeding four persons; and, (d) as a result of the exchange the transferor, alone or
together with others, not exceeding four, gains control of the transferee. Moreover, it is not
taxable because the exchange did not result to a decrease of the ownership of FDC in FLI
rather combining the interests of FDC and FAI result to 70.99% of FLI’s outstanding shares.
Since the term "control" is clearly defined as "ownership of stocks in a corporation
possessing at least fifty-one percent (51%) of the total voting power of classes of stocks
entitled to one vote” then the said exchange clearly qualify as a tax-free transaction.
Therefore, both FDC and FAI cannot be held liable for deficiency income tax on said transfer.
(3) Yes. The instructional letters as well as the journal and cash vouchers evidencing the
advances FDC extended to its affiliates in 1996 and 1997 qualified as loan agreements upon
which documentary stamp taxes may be imposed. apply them would be prejudicial to the
taxpayers. This rule does not apply: (a) where the taxpayer deliberately misstates or omits
material facts from his return or in any document required of him by the Bureau of Internal
Revenue; (b) where the facts subsequently gathered by the Bureau of Internal Revenue are
materially different from the facts on which the ruling is based; or (c) where the taxpayer
acted in bad faith. The principle of non-retroactivity of BIR rulings does not apply in favor
of FDR because it is not the taxpayer who in the first place, sought the said BIR ruling from
the CIR.
 (4) No. the CIR has no factual and legal basis in assessing income tax on the increase in the
value of FDC's shareholdings in FAC until the same is actually sold at a profit. A mere
increase or appreciation in the value of said shares cannot be considered income for
taxation purposes. Besides, tax revenues should be strictly construed and that rulings of the
CTA should be accorded with respect and upheld by the Court absent any reversible errors.

4. COMMISSIONER vs. MANNING G.R. No. L-28398. August 6, 1975 Income Tax on Stock Dividends
DECEMBER 4, 2017

FACTS:

Manila Trading and Supply Co. (MANTRASCO) had an authorized capital stock of P2.5 million
divided into 25,000 common shares: 24,700 were owned by Reese and the rest at 100 shares each
by the Respondents. Reese entered into a trust agreement whereby it is stated that upon Reese’s
death, the company would purchase back all of its shares. Reese died. MANTRASCO repurchased the
24,700 shares. Thereafter, a resolution was passed authorizing that the 24,700 shares be declared
as stock dividends to be distributed to the stockholders. The BIR ordered an examination of
MANTRASCO’s books and discovered that the 24,700 shares declared as dividends were not
disclosed by respondents as part of their taxable income for the year 1958. Hence, the CIR issued
notices of assessment for deficiency income taxes to respondents. Respondents protested but the
CIR denied. Respondents appealed to the CTA. The CTA ruled in their favor. Hence, this petition by
the CIR

ISSUE:

Whether the respondents are liable for deficiency income taxes on the stock dividends?

HELD: Dividends means any distribution made by a corporation to its shareholders out of its
earnings or profits. Stock dividends which represent transfer of surplus to capital account is not
subject to income tax. But if a corporation redeems stock issued so as to make a distribution, this is
essentially equivalent to the distribution of a taxable dividend the amount so distributed in the
redemption considered as taxable income.

The distinctions between a stock dividend which does not and one which does constitute taxable
income to the shareholders is that a stock dividend constitutes income if its gives the shareholder
an interest different from that which his former stockholdings represented. On the other hand, it
does constitute income if the new shares confer no different rights or interests than did the
old shares. Therefore, whenever the companies involved parted with a portion of their
earnings to buy the corporate holdings of Reese, they were making a distribution of such
earnings to respondents. These amounts are thus subject to income tax as a flow of cash
benefits to respondents. Hence, respondents are liable for deficiency
5.COMMISSIONER OF INTERNAL REVENUE vs. THE COURT OF APPEALS, COURT OF
TAX APPEALS and A. SORIANO CORP.

G.R. No. 108576. January 20, 1999.

FACTS:
Don Andres Soriano, a citizen and resident of the USA formed in the 1930's the corporation
"A Soriano Y Cia," predecessor of ANSCOR. On December 30, 1964 Don Andres died.
A day after Don Andres died, ANSCOR increased its capital stock to P20M and in 1966
further increased it to P30M. In the same year, stock dividends worth 46,290 and 46,287
shares were respectively received by the Don Andres estate and Doña Carmen from
ANSCOR. Hence, increasing their accumulated shareholdings to 138,867 and 138,864
common shares each.
On June 30, 1968, pursuant to a Board Resolution, ANSCOR redeemed 28,000 common
shares from Don Andres' estate. By November 1968, the Board further increased ANSCOR's
capital stock to P75M divided into 150,000 preferred shares and 600,000 common shares.
About a year later ANSCOR again redeemed 80,000 common shares from Don Andres'
estate, further reducing the latter's common shareholdings.
ANSCOR's business purpose for both redemptions of stock is to partially retire said stocks
as treasury shares in order to reduce the company's foreign exchange remittances in case
cash dividends are declared. In 1973, after examining ANSCOR's books of account and
records Revenue Examiners issued a report proposing that ANSCOR be assessed for
deficiency withholding tax-at-source, pursuant to Secs 53 and 54 of the 1939 Revenue Code
for the year 1968 and the second quarter of 1969 based on the transactions of exchange
and redemption of stocks.
Subsequently, ANSCOR filed a petition for review with the CTA assailing the tax
assessments on the redemptions and exchange of stocks. In its decision, the CTA reversed
the BIR's ruling after finding sufficient evidence to overcome the prima facie correctness of
the questioned assessments. In a petition for review, the CA affirmed the ruling of the CTA.

ISSUE:
Whether ANSCOR's redemption of stocks from its stockholders as well as the exchange of
common shares can be considered as equivalent to the distribution of taxable dividend
making the proceeds thereof taxable under the provisions Section 83 (B) of the 1939
Revenue Act.

HELD:
 The Supreme Court modified the decision of the Court of Appeals in that ANSCOR'S
redemption of 82,752.5 stock dividends is herein considered as essentially equivalent to a
distribution of taxable dividends for which it is liable for the withholding tax-at-source.
While the Board Resolutions authorizing the redemptions state only one purpose —
reduction of foreign exchange remittances in case cash dividends are declared. Said
purpose was not given credence by the court in case at bar. Records show that despite the
existence of enormous corporate profits no cash dividends were ever declared by ANSCOR
from 1945 until the BIR started making assessments in the early 1970's. Although a
corporation under certain exceptions, has the prerogative when to issue dividends, yet
when no cash dividends are issued for about three decades, this circumstance negate the
legitimacy of ANSCOR's alleged purposes. With regard to the exchange of shares, the Court
ruled that the exchange of common with preferred shares is not taxable because it
produces no realized income to the subscriber but only a modification of the subscriber's
rights and privileges which is not a flow of wealth for tax purposes.

Both the Tax Court and the CA found that ANSCOR reclassified its shares into common and
preferred, and that parts of the common shares of the Don Andres estate and all of Doña
Carmen's shares were exchanged for the whole 150,000 preferred shares. Thereafter, both
the Don Andres estate and Doña Carmen remained as corporate subscribers except that
their subscriptions now include preferred shares. There was no change in their
proportional interest after the exchange. There was no cash flow. Both stocks had the same
par value. Under the facts herein, any difference in their market value would be immaterial
at the time of exchange because no income is yet realized — it was a mere corporate paper
transaction. It would have been different, if the exchange transaction resulted into a flow of
wealth, in which case income tax may be imposed. Reclassification of shares does not
always bring any substantial alteration in the subscriber's proportional interest. But the
exchange is different — there would be a shifting of the balance of stock features, like
priority in dividend declarations or absence of voting rights. Yet neither the reclassification
nor exchange per se, yields realize income for tax purposes. A common stock represents
the residual ownership interest in the corporation. It is a basic class of stock ordinarily and
usually issued without extraordinary rights or privileges and entitles the shareholder to a
pro rata division of profits. Preferred stocks are those which entitle the shareholder to
some priority on dividends and asset distribution. Both shares are part of the corporation's
capital stock. Both stockholders are no different from ordinary investors who take on the
same investment risks. Preferred and common shareholders participate in the same
venture, willing to share in the profits and losses of the enterprise. Moreover, under the
doctrine of equality of shares — all stocks issued by the corporation are presumed equal
with the same privileges and liabilities, provided that the Articles of Incorporation is silent
on such differences. In this case, the exchange of shares, without more, produces no
realized income to the subscriber. There is only a modification of the subscriber's rights
and privileges — which is not a flow of wealth for tax purposes. The issue of taxable
dividend may arise only once a subscriber disposes of his entire interest and not when
there is still maintenance of proprietary interest.
 Marubeni v. CIR
September 14, 1989
Fernan, C.J.
Rañeses, Roberto Miguel O.

SUMMARY: Marubeni Corporation is a Japanese corporation licensed to engage in business in the

Philippines. When the profits on Marubeni’s investments in Atlantic Gulf and Pacific Co. of Manila were
declared, a 10% final dividend tax was withheld from it, and another 15% profit remittance tax based on the
remittable amount after the final 10% withholding tax were paid to the Bureau of Internal Revenue.
Marubeni Corp. now claims for a refund or tax credit for the amount which it has allegedly overpaid the BIR.
The CIR and the CTA denied such claim, stating that, while it was not subject to the 15% profit remittance
tax and the 10% intercorporate tax, it was subject to the 25% tax according to the tax treaty between Japan
and the Philippines. The SC said that Marubeni was a non-resident foreign corporation. However, the SC
granted the claim for refund on the basis of a different computation, considering that, according to the SC,
the CIR and the CTA should not have simply added the two taxes together to justify the denial of the claim
for refund.

DOCTRINE: Under the Tax Code, a resident foreign corporation is one that is "engaged in trade or business"
within the Philippines.

FACTS: Marubeni Corp. of Japan has equity investments in AG&P of Manila. For the first quarter of 1981
ending March 31, AG&P declared and paid cash dividends to petitioner in the amount of P849,720 and
withheld the corresponding 10% final dividend tax thereon. Similarly, for the third quarter of 1981 ending
September 30, AG&P declared and paid P849,720 as cash dividends to petitioner and withheld the
corresponding 10% final dividend tax thereon.

AG&P directly remitted the cash dividends to petitioner's head office in Tokyo, Japan, net not only of the 10%
final dividend tax in the amounts of P764,748 for the first and third quarters of 1981, but also of the withheld
15% profit remittance tax based on the remittable amount after deducting the final withholding tax of 10%.

The 10% final dividend tax of P84,972 and the 15% branch profit remittance tax of P114,712.20 for the first
quarter of 1981 were paid to the BIR by AG&P, same with the 10% final dividend tax of P84,972 and the 15%
branch profit remittance tax of P114,712 for the third quarter of 1981.

Subsequently, the 10% final dividend tax of P84,972 and the 15% branch profit remittance tax of
P114,712.20 for the first quarter of 1981 were paid to the BIR, same with the 10% final dividend tax of
P84,972 and the 15% branch profit remittance tax of P114,712 for the third quarter of 1981.

Marubeni, through SGV and Co., sought a ruling from the BIR on on whether or not the dividends petitioner
received from AG&P are effectively connected with its conduct or business in the Philippines as to be considered
branch profits subject to the 15% profit remittance tax imposed under Section 24 (b) (2) of the National Internal
Revenue Code as amended by Presidential Decrees Nos. 1705 and 1773.

In reply, Acting Commissioner Ancheta said that such dividends were not branch profits for purposes of the
15% profit remittance tax imposed by Section 24 (b) (2) of the Tax Code, as amended.
1. Only profits remitted abroad by a branch office to its head office which are effectively connected with
its trade or business in the Philippines are subject to the 15% profit remittance tax.
2. To be effectively connected it is not necessary that the income be derived from the actual operation
of taxpayer-corporation's trade or business; it is sufficient that the income arises from the business
activity in which the corporation is engaged.
a. E.g. if a resident foreign corporation is engaged in the buying and selling of machineries in
the Philippines and invests in some shares of stock on which dividends are subsequently
 received, the dividends thus earned are not considered 'effectively connected' with its trade
or business in this country.

Consequently, Marubeni filed with the CIR a claim for refund of or issuance of a tax credit of P229,424.40,
representing the profit tax remittance incorrectly paid on the dividends remitted by AG&P to Marubeni’s
head office in Tokyo. CIR denied the claim, saying that while it is not covered by the 15% profit remittance tax
and the 10% intercorporate dividend tax, it, as a non-resident stockholder, is subject to the 25 % tax pursuant
to Article 10 (2) (b) of the Tax Treaty dated February 13, 1980 between the Philippines and Japan.

The CTA affirmed the denial.

1. It stated that the dividends in question are income taxable to the Marubeni.
2. The said dividends were distributions made by AG&P to its shareholder out of its profits on the
investments of the Marubeni, a non-resident foreign corporation.
3. The investments in AG&P of Marubeni were directly made by it and the dividends on the investments
were likewise directly remitted to and received by the latter.
4. Marubeni Corporation Philippine Branch has no participation or intervention, directly or indirectly,
in the investments and in the receipt of the dividends.
5. Subject to certain exceptions not pertinent hereto, income is taxable to the person who earned it.
Admittedly, the dividends under consideration were earned by the Marubeni Corporation of Japan, and
hence, taxable to the said corporation.
a. While it is true that the Marubeni Corporation Philippine Branch is duly licensed to engage
in business under Philippine laws, such dividends are not the income of the Philippine
Branch and are not taxable to the said Philippine branch.

ISSUES:
1. WON Marubeni Corporation is resident foreign corporation.
2. WON the CIR and CTA were correct in claiming that no refund was due Marubeni because the taxes
thus withheld totaled the 25% rate imposed by the Philippine-Japan Tax Convention.

RULING:
1. No. Marubeni is a non-resident foreign corporation.
2. No. The CIR and CTA should not have simply added the two taxes to arrive at such conclusion.

RATIO:
1. Marubeni: following the principal-agent relationship theory, Marubeni Japan is likewise a resident
foreign corporation subject only to the 10 % intercorporate final tax on dividends received from a
domestic corporation in accordance with Section 24(c) (1) of the Tax Code of 19771.
a. Precisely because it is engaged in business in the Philippines through its Philippine branch
that it must be considered as a resident foreign corporation.
b. Since the Philippine branch and the Tokyo head office are one and the same entity, whoever
made the investment in AG&P, Manila does not matter at all.

CIR and CTA: Marubeni, Japan, being a non-resident foreign corporation and not engaged in trade or
business in the Philippines, is subject to tax on income earned from Philippine sources at the rate of
35 % of its gross income under Section 24 (b) (1) of the tax code2 but expressly made subject to the

1
Dividends received by a domestic or resident foreign corporation liable to tax under this Code — (1) Shall be subject to a final
tax of 10% on the total amount thereof, which shall be collected and paid as provided in Sections 53 and 54 of this Code ....
2
(b) Tax on foreign corporations — (1) Non-resident corporations. — A foreign corporation not engaged in trade or business in
the Philippines shall pay a tax equal to thirty-five per cent of the gross income received during each taxable year from all
sources within the Philippines as ... dividends
 special rate of 25% under Article 10(2) (b) of the Tax Treaty of 1980 concluded between the
Philippines and Japan3.
a. OSG: The general rule that a foreign corporation is the same juridical entity as its branch
office in the Philippines cannot apply here. This rule is based on the premise that the
business of the foreign corporation is conducted through its branch office, following the
principal agent relationship theory. It is understood that the branch becomes its agent here.
So that when the foreign corporation transacts business in the Philippines independently of
its branch, the principal-agent relationship is set aside. The transaction becomes one of the
foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation,
not the branch or the resident foreign corporation.

SC: Marubeni is clearly a non-resident foreign corporation.

a. The alleged overpaid taxes were incurred for the remittance of dividend income to the head
office in Japan which is a separate and distinct income taxpayer from the branch in the
Philippines.
b. The investment (totalling 283.260 shares including that of nominee) was made for purposes
peculiarly germane to the conduct of the corporate affairs of Marubeni Japan, but certainly
not of the branch in the Philippines.

2. To simply add the two taxes [10% intercorporate tax + 15% profit remittance tax = 25% tax under
the Phil. – Japan Treaty] to arrive at the 25 % tax rate is to disregard a basic rule in taxation that each
tax has a different tax basis. While the tax on dividends is directly levied on the dividends received,
"the tax base upon which the 15 % branch profit remittance tax is imposed is the profit actually
remitted abroad."
a. The 25% tax rate should not have been imposed as if it was a fixed rate.
i. A closer look at the Treaty reveals that the tax rates fixed by Article 10 are the
maximum rates as reflected in the phrase "shall not exceed." This means that any tax
imposable by the contracting state concerned should not exceed the 25 % limitation
and that said rate would apply only if the tax imposed by our laws exceeds the same.
In other words, by reason of our bilateral negotiations with Japan, we have agreed
to have our right to tax limited to a certain extent to attain the goals

3
Article 10 (1) Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting
State may be taxed in that other Contracting State.

(2) However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a
resident, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the dividends the tax
so charged shall not exceed;

(a) . . .

(b) 25 per cent of the gross amount of the dividends in all other cases.
 ii. set forth in the Treaty.
iii. Marubeni, being a non-resident foreign
 iv. corporation with respect to the transaction in question, the applicable provision of
the Tax Code is Section 24 (b) (1) (iii) in conjunction with the Philippine-Japan
Treaty of 19804.
b. Being a non-resident foreign corporation, as a general rule, Marubeni is taxed 35 % of its
gross income from all sources within the Philippines, on the basis of the cited provision in
footnote number four [4].
i. However, a discounted rate of 15% is given to petitioner on dividends received from
a domestic corporation (AG&P) on the condition that its domicile state (Japan)
extends in favor of petitioner, a tax credit of not less than 20 % of the dividends
received.

DISPOSITIVE: WHEREFORE, the questioned decision of respondent Court of Tax Appeals dated February 12,
1986 which affirmed the denial by respondent Commissioner of Internal Revenue of petitioner Marubeni
Corporation's claim for refund is hereby REVERSED. The Commissioner of Internal Revenue is ordered to
refund or grant as tax credit in favor of petitioner the amount of P144,452.40 representing overpayment of
taxes on dividends received. No costs.

4 (b) Tax on foreign corporations. — (1) Non-resident corporations — ... (iii) On dividends received from a domestic
corporation liable to tax under this Chapter, the tax shall be 15% of the dividends received, which shall be collected and
paid as provided in Section 53 (d) of this Code, subject to the condition that the country in which the non-resident foreign
corporation is domiciled shall allow a credit against the tax due from the non-resident foreign corporation, taxes deemed
to have been paid in the Philippines equivalent to 20 % which represents the difference between the regular tax (35 %)
on corporations and the tax (15 %) on dividends as provided in this Section; ....
Title: CIR vs. Goodyear Philippines (GR 216130, August 3, 2016)

Facts: Respondent is a domestic corporation duly organized and existing under the laws of the Philippines,
and registered with the Bureau of Internal Revenue (BIR) as a large taxpayer with Taxpayer Identification
Number 000-409-561-000.6 On August 19, 2003, the authorized capital stock of respondent was increased
from P400,000,000.00 divided into 4,000,000 shares with a par value of P100.00 each, to P1,731,863,000.00
divided into 4,000,000 common shares and 13,318,630 preferred shares with a par value of P100.00 each.
Consequently, all the preferred shares were solely and exclusively subscribed by Goodyear Tire and Rubber
Company (GTRC), which was a foreign company organized and existing under the laws of the State of Ohio,
United States of America (US) and is unregistered in the Philippines.7chanrobleslaw

On May 30, 2008, the Board of Directors of respondent authorized the redemption of GTRC's 3,729,216
preferred shares on October 15, 2008 at the redemption price of P470,653,914.00, broken down as follows:
P372,921,600.00 representing the aggregate par value and P97,732,314.00, representing accrued and unpaid
dividends.8chanrobleslaw

On October 15, 2008, respondent filed an application for relief from double taxation before the International
Tax Affairs Division of the BIR to confirm that the redemption was not subject to Philippine income tax,
pursuant to the Republic of the Philippines (RP) - US Tax Treaty.9 This notwithstanding, respondent still took
the conservative approach, and thus, withheld and remitted the sum of P14,659,847.10 to the BIR on
November 3, 2008, representing fifteen percent (15%) FWT, computed based on the difference of the
redemption price and aggregate par value of the shares.10chanrobleslaw

On October 21, 2010, respondent filed an administrative claim for refund or issuance of TCC, representing
15% FWT in the sum of P14,659,847.10 before the BIR. Thereafter, or on November 3, 2010, it filed a judicial
claim, by way of petition for review, before the CTA, docketed as C.T.A. Case No. 8188.11chanrobleslaw

For her part, petitioner maintained that respondent's claim must be denied, considering that: (a) it failed to
exhaust administrative remedies by prematurely filing its petition before the CTA; and (b) it failed to submit
complete supporting documents before the BIR.

Issue/s: WON the judicial claim of respondent should be dismissed for non-exhaustion of administrative
remedies.

Ruling: NO.

Section 229 of the Tax Code states that judicial claims for refund must be filed within two (2) years from the
date of payment of the tax or penalty, providing further that the same may not be maintained until a claim for
refund or credit has been duly filed with the Commissioner of Internal Revenue (CIR), viz.:
SEC. 229. Recovery of Tax Erroneously or Illegally Collected. – No suit or proceeding shall be maintained in
any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or
illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any
sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit
has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not
such tax, penalty, or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date of
payment of the tax or penalty regardless of any supervening cause that may arise after payment x x x.
(Emphases and underscoring supplied)
Verily, the primary purpose of filing an administrative claim was to serve as a notice of warning to the CIR
that court action would follow unless the tax or penalty alleged to have been collected erroneously or illegally
is refunded. To clarify, Section 229 of the Tax Code – [then Section 306 of the old Tax Code] – however does
not mean that the taxpayer must await the final resolution of its administrative claim for refund, since doing
so would be tantamount to the taxpayer's forfeiture of its right to seek judicial recourse should the two (2)-
year prescriptive period expire without the appropriate judicial claim being filed. In CBK Power Company,
Ltd. v. CIR,36 the Court enunciated:
In the foregoing instances, attention must be drawn to the Court's ruling in P.J. Kiener Co., Ltd. v. David
(Kiener), wherein it was held that in no wise does the law, i.e., Section 306 of the old Tax Code (now, Section
229 of the NIRC), imply that the Collector of Internal Revenue first act upon the taxpayer's claim, and that the
taxpayer shall not go to court before he is notified of the Collector's action. In Kiener, the Court went on to say
that the claim with the Collector of Internal Revenue was intended primarily as a notice of warning that
unless the tax or penalty alleged to have been collected erroneously or illegally is refunded, court action will
follow x x x.37 (Emphases and underscoring supplied)
In the case at bar, records show that both the administrative and judicial claims for refund of respondent for
its erroneous withholding and remittance of FWT were indubitably filed within the two-year prescriptive
period.38 Notably, Section 229 of the Tax Code, as worded, only required that an administrative claim should
first be filed. It bears stressing that respondent could not be faulted for resorting to court action, considering
that the prescriptive period stated therein was about to expire. Had respondent awaited the action of
petitioner knowing fully well that the prescriptive period was about to lapse, it would have resultantly
forfeited its right to seek a judicial review of its claim, thereby suffering irreparable damage.

Thus, in view of the aforesaid circumstances, respondent correctly and timely sought judicial redress,
notwithstanding that its administrative and judicial claims were filed only 13 days apart.

CIR V. PROCTER AND GAMBLE 204 SCRA 378

FACTS:
PMC paid a 25-35% tax on its income for a relevant year. Thereafter, deriving at its net income, it declared
dividends for the benefit of PMCUSA. From this declared dividends, it paid a 25% tax, as per taxation laws.
The company did the same for the next few quarters. Then, contending that it is the withholding agent for the
tax paid on the dividends paid to PMC-USA, it requested for the refund of its alleged overpayments of taxes.
The company was denied the refund and coursing through the CTA, the latter ruled in its favor.
HELD: The submission of the Commissioner of Internal Revenue that PMC-Phil. is but a withholding agent of
the government and therefore cannot claim reimbursement of the alleged over paid taxes, is completely
meritorious.
The real party in interest being the mother corporation in the United States, it follows that American entity is
the real party in interest, and should have been the claimant in this case.
Closely intertwined with the first assignment of error is the issue of whether or not PMC-U.S.A. is a non-
resident foreign corporation under Section 24(b)(1) of the Tax Code (the subsidiary of an American) a
domestic corporation domiciled in the United States, is entitled under the U.S. Tax Code to a United States
Foreign Tax Credit
equivalent to at least the 20 percentage paid portion (of the 35% dividend tax) spared or waived as otherwise
considered or deemed paid by the government. The law pertinent to the issue is Section 902 of the U.S.
Internal
Revenue Code, as amended by Public Law 87-834, the law governing tax credits granted to U.S. corporations
on dividends received from foreign corporations, which to the extent applicable reads:
SEC. 902 -CREDIT FOR CORPORATE STOCKHOLDERS IN FOREIGN CORPORATION.
(a) Treatment of Taxes Paid by Foreign Corporation -
For purposes of this subject, a domestic corporation which
owns at least 10 percent of the voting stock of a foreign corporation from which it receives dividends in any
taxable year shall-(1)
to the extent such dividends are paid by such foreign corporation out of accumulated profits [as defined
in subsection (c) (1) (a)] of a year for which such foreign corporation is not a less
developed country corporation,
be deemed to have paid the same proportion of any income, war profits, or excess profits taxes paid or
deemed to
be paid by such foreign corporation to any foreign country or to any possession of the United States on or
with
respect to such accumulated profits, which the amount of such dividends (determined without regard to
Section 78) bears to the amount of such accumulated profits in excess of such income, war profits, and excess
profits taxes (other than those deemed paid);and
(2)to the extent such dividends are paid by such foreign corporation out of accumulated profits [as defined in
subsection (c) (1) (b)] of a year for which such foreign corporation is a less-developed country corporation,
be deemed to have paid the same propor
tion of any income, war profits, or excess profits taxes paid or deemed to be paid by such foreign corporation
to any foreign country or to any possession of the United States on or with respect to such accumulated
profits, which the amount of such dividends bears to the amount of such accumulated profits.
xxx xxx xxx
(c) Applicable Rules
(1)
Accumulated profits defined -For purpose of this section, the term 'accumulated profits' means with respect
to any foreign corporation. (A) for purposes of subsections (a) (1) and (b) (1), the amount of its gains, profits,
or income computed without reduction by the amount of the income, war profits, and excess profits taxes
imposed on or with respect to such profits or income by any foreign country.... ; and
(B) for purposes of subsections (a) (2) and (b) (2), the amount of its gains, profits, or income in excess of the
income, was profits, and excess profits taxes imposed on or with respect to such profits or income.
The Secretary or his delegate sha
ll have full power to determine from the accumulated profits of what year or years such dividends were paid,
treating dividends paid in the first 20 days of any year as having been paid from the accumulated profits of
the preceding year or years (unless to
his satisfaction shows otherwise), and in other respects treating dividends as having been paid from the most
recently accumulated gains, profits, or earnings.
There is nothing in the aforecited provision that would justify tax return of the disputed
5% to the private respondent. Furthermore, as ably argued by the petitioner, the private respondent failed to
meet certain conditions necessary in order that the dividends received by the nonresident parent company in
the United States may be subject to t
he preferential 15% tax instead of 35%. Among other things, the private respondent failed: (1) to show the
actual amount credited by the U.S. government against the income tax due from PMC-U.S.A. on the dividends
received from private respondent; (2) to present the income tax return of its mother company for 1975 when
the dividends were received; and (3) to submit any duly authenticated document showing that the U.S.
government credited the 20% tax deemed paid in the Philippines.

Wise & Co., Inc. v. Meer GR NO: 48231 (1947)

FACTS:

That during the year 1937, plaintiffs, except Mr. E.M.G. Strickland (who, as husband of the plaintiff
Mrs. E.M.G. Strickland, is only a nominal party herein), were stockholders of Manila Wine Merchants,
Ltd., a foreign corporation duly authorized to do business in the Philippines.

That on May 27, 1937, the Board of Directors of Manila Wine Merchants, Ltd., (hereinafter referred to
as the Hongkong Company), recommended to the stockholders of the company that they adopt the
resolutions necessary to enable the company to sell its business and assets to Manila Wine Merchants,
Inc., a Philippine corporation formed on May 27, 1937, (hereinafter referred to as the Manila
Company), for the sum of P400,000;
HK Company made a distribution of its earnings for the year 1937 to its stockholders (Dividends
declared and paid on June 8, 1937). HK Company paid Philippine income tax on the entire earnings
from which the said distributions were paid.

After the June 8 distribution, HK Company had :

P74, 182 – surplus resulting from the active conduct of business

P270, 116 – total increased surplus as a result of the sale of the business and assets

The stockholders by proper resolution directed that the company be voluntarily liquidated and its
capital distributed among the stockholders; that the stockholders at such meeting appointed a
liquidator duly paid off the remaining debts of the Hongkong Company and distributed its capital
among the stockholders including plaintiffs; that the liquidator duly filed his accounting on January 12,
1938, and in accordance with the provisions of Hongkong Law, the Hongkong Company was duly
dissolved at the expiration of three moths from that date.

That plaintiffs duly filed Philippine income tax returns. That defendant subsequently made the
deficiency assessments. That said plaintiffs duly paid the said amounts demanded by defendant under
written protest, which was overruled in due course; that the plaintiffs have since July 1, 1939
requested from defendant a refund of the said amounts which defendant has refused and still refuses
to refund.

CONTENTIONS:

CIR-The amounts received by Wise & Co et al from the HK Company were liquidating dividends (thus,
subject to normal tax)

Wise & Co et al say- The amounts were ordinary dividends

ISSUES:

a)W/N the amounts received by Wise & Co et al from the HK Company on which the taxes were
assessed were ordinary dividends or liquidating dividends (LIQUIDATING DIVIDENDS)

b)W/N such liquidating dividends are taxable income (YES)

RATIO:

a)The amounts received by the stockholders were liquidating dividends

•The parties agreed in the deed of sale that the sale and transfer shall take effect as of June 1, 1937.
Thus, the distribution of assets to the stockholders made after that date must have been considered by
them as liquidating dividends.

•The said distributions were NOT in the ordinary course of business and with intent to maintain the
corporation as a going concern (in which case they would be ordinary dividends) BUT they were made
after the liquidated of the business had been decided upon, which makes them payments for the
surrender and relinquishment of the stockholder‟s interest in the corporation, or liquidating dividends.

•Ordinary connotation of liquidating dividend involves the distribution of assets by a corporation to its
stockholders upon dissolution.

•Wise & Co et al (stockholders) say: It was only on August 19, 1937, that the HK Company took the first
corporate steps towards liquidation.

•SC: It was expressly stipulated in the formal deed of sale (see underlined portion in facts) that the
sale or transfer shall take effect on June 1, 1937. After that date, and until completion of the transfer,
the HK Company continued to run the business in trust for the new owner, the Manila Company.

•The determining element is whether the distribution was in the ordinary course of business and with
intent to maintain the corporation as a going concern, or after deciding to quit with intent to liquidate
the business.

•The fact that the distributions were called „dividends‟ and were made, in part, from earnings and
profits, and that some of them were made before liquidation or dissolution proceedings were
commenced, is NOT controlling.

Liquidating dividend v Ordinary dividend

• The distinction between a distribution in liquidation and an ordinary dividend is factual;

the result in each case depending on the particular circumstances of the case and the intent of the
parties.

• If the distribution is in the nature of a recurring return on stock it is an ordinary dividend.

• However, if the corporation is really winding up its business or recapitalizing and narrowing
its activities, the distribution may properly be treated as in complete or partial liquidation and as
payment by the corporation to the stockholder for his stock. The corporation is, in the latter instances,
wiping out all parts of the stockholders' interest in the company . . .. “

b) Such liquidating dividends are taxable income

•Income tax law states that: “Where a corporation, partnership, association, joint-account, or
insurance company distributes all of its assets in complete liquidation or dissolution, the gain realized
or loss sustained by the stockholder, whether individual or corporation, is a taxable income or a
deductible loss as the case may be.”

•Amounts distributed in the liquidation of a corporation shall be treated as payments in exchange for
the stock or share, and any gain or profit realized thereby shall be taxed to the distributee as other
gains or profits.

•The stockholders received the distributions in question in exchange for the surrender and
relinquishment by them of their stock in the HK Company which was dissolved and in process of
complete liquidation.

•That money in the hands of the corporation formed a part of its income and was properly taxable to it
under the Income Tax Law.

•When the corporation was dissolved and in process of complete liquidation and its shareholders
surrendered their stock to it and it paid the sums in question to them in exchange, a transaction took
place.

•The shareholder who received the consideration for the stock earned that much money as income of
his own, which again was properly taxable to him under the Income Tax Law.

The profits earned by the stockholders are income from Philippine sources, and thus subject to
Philippine tax

Stockholders say: the profit realized by them does not constitute income from Philippine sources and is
not subject to Philippine taxes since all steps in the carrying out of this so-called sale took place
outside the Philippines

SC:

•The HK Company was at the time of the sale of its business in the Philippines, and the Manila
Company was a domestic corporation domiciled and doing business also in the Philippines.

•The HK Company was incorporated for the purpose of carrying on business in the Philippines which is
the business of wine, beer, and spirit merchants and the other objects set out in its memorandum of
association.

•Hence, its earnings, profits, and assets, including those from whose proceeds the distributions in
question were made, the major part of which consisted in the purchase price of thebusiness, had been
earned and acquired in the Philippines.

•As such, it is clear that said distributions were income "from Philippine sources."
Judgment affirmed.

DISPOSITIVE PORTION: For the foregoing consideration, the judgment appealed from will be affirmed
with the costs of both instances against the appellants. So ordered.

Resolution on Motion for Reconsideration: SC affirms its earlier ruling.