Tax2 - Midterms Digests

TAXATION
LAW 2 DIGESTS – ATTY. PADILLA – AY 2018-2019 – 2nd SEMESTER

CHAPTER 1 – INCOME TAXATION HELD: No. Income as contrasted with capital or property is to be the test. The
TOPIC: INCOME TAXATION 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
1. MADRIGAL vs. RAFFERTY, G.R. No. 12287 (1918) 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
FACTS: Vicente Madrigal and Susana Paterno Were legally married prior to time is called income. Capital is wealth, while income is the service of wealth.
January 1, 1914. The marriage was contracted under the provisions of law Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the property of
concerning conjugal partnerships. On February 25, 1915, Vicente Madrigal led her husband Vicente Madrigal during the life of the conjugal partnership. She has
a sworn declaration on the prescribed form with the Collector of Internal an interest in the ultimate property rights and in the ultimate ownership of
Revenue, showing, as his total net income for the year 1914, the sum of property acquired as income after such income has become capital. Susana
P296,302.73. Subsequently Madrigal submitted the claim that the said Paterno has no absolute right to one-half the income of the conjugal partnsership.
P296,302.73 did not represent his income for the year 1914, but was in fact the Not being seized of a separate estate, Susana Paterno cannot make a separate
income of the conjugal partnership existing between himself and his wife Susana return in order to receive the benefit of the exemption, which would arise by
Paterno, and that in computing and assessing the additional income tax provided reason of the additional tax. As she has no estate and income, actually and legally
by the Act of Congress of October 3, 1913, the income declared by Vicente vested in her and entirely distinct from her husband's property, the income
Madrigal should be divided into two equal parts, one-half to be considered the cannot properly be considered the separate income of the wife for the purposes
income of Vicente Madrigal and the other half the income of Susana Paterno. The of the additional tax.
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 2. CONWI vs. CTA, G.R. No. 48532 (1992)
petitioner Madrigal. The revenue officers being still unsatisfied, the
correspondence together with this opinion was forwarded to Washington for a FACTS: Petitioners are Filipino citizens and employees of Procter and Gamble,
decision by the United States Treasury Department. The United States Philippine Manufacturing Corporation, Said corporation is a subsidiary of Procter
Commissioner of Internal Revenue reversed the opinion of the Attorney-General, & Gamble, a foreign corporation based in Cincinnati, Ohio, U.S.A. During the years
and thus decided against the claim of Madrigal. 1970 and 1971 petitioners were assigned, for certain periods, to other
subsidiaries of Procter & Gamble, outside of the Philippines, during which
After payment under protest, and after the protest of Madrigal had been decided petitioners were paid U.S. dollars as compensation for services in their foreign
adversely by the Collector of Internal Revenue, action was begun by Vicente assignments. When petitioners in C.T.A. Case No. 2511 filed their income tax
Madrigal and his wife Susana Paterno in the Court of First Instance of the city of returns for the year 1970, they computed the tax due by applying the dollar-to-
Manila against the Collector of Internal Revenue and the Deputy Collector of peso conversion on the basis of the floating rate ordained under B.I.R. Ruling No.
Internal Revenue for the recovery of the sum of P3,786.08, alleged to have been 70-027 dated May 14, 1970, as follows: from January 1 to February 20, 1970 at
wrongfully and illegally assessed and collected by the defendants from the the conversion rate of P3.90 to U.S. $1.00; From February 21 to December 31,
plaintiff 1970 at the conversion rate of P6.25 to U.S. $1.00. Petitioners in C.T.A. Case No.
2594 likewise used the above conversion rate in converting their dollar income
The answer of the defendants, together with an analysis of the tax declaration, for 1971 to Philippine peso. However, on February 8, 1973 and October 8, 1973,
the pleadings, and the stipulation, sets forth the basis of defendants' with the petitioners in said cases filed with the office of the respondent Commissioner,
resulting net income as P296,302.73. amended income tax returns for the above-mentioned years, this time using the
par value of the peso as prescribed in Section 48 of Republic Act No. as the basis
The dispute between the plaintiffs and the defendants concerned the additional for converting their respective dollar income into Philippine pesos for purposes
tax provided for in the Income Tax Law. The trial court in an exhausted decision of computing and paying the corresponding income tax due from them. The
found in favor of defendants, without costs. aforesaid computation as shown in the amended income tax returns resulted in
the alleged overpayments, refund and/or tax credit. Accordingly, claims for
ISSUE: Whether or not the income reported by Madrigal on 1915 should be refund of said over-payments were filed with respondent Commissioner. Without
divided into 2 in computing for the additional income tax awaiting the resolution of the Commissioner of the Internal Revenue on their
claims, petitioners filed their petitioner for review in the above-mentioned cases.
PREPARED BY || BARIL || DAVID || DE LEON || EBUÑA || IRABON || JACINTO || NIETO || PASCUAL || PILLAS || TIO || VILLANUEVA 1
TAXATION LAW 2 DIGESTS – ATTY. PADILLA – AY 2018-2019 – 2nd SEMESTER
Upon joint motion of the parties on the ground that these two cases involve 3. CONSOLIDATED MINES, INC. vs. CTA, G.R. Nos. L-18843-44 (1974)
common question of law and facts, that respondent Court of Tax Appeals heard
the cases jointly. FACTS: Petitioner Consolidated Mines, Inc. (the Company), a domestic
corporation engaged in mining, had filed its income tax returns for 1951, 1952,
Petitioner’s contention: Petitioners claim that public respondent Court of Tax 1953, and 1956. In 1957, examiners of the BIR investigated the income tax
Appeals erred in holding that the dollar earning receipts are derived from foreign returns filed by the Company because on August 10, 1954, its auditor Felipe
transactions, therefore it is exempted from taxation in the Philippines. That the Ollada claimed the refund of the sum of P107,472.00 representing alleged
proper rate of conversion of petitioners' dollar earnings for tax purposes in the overpayments of income taxes for the year 1951.
prevailing free market rate of exchange and not the par value of the peso; and
that the use of the par value of the peso to convert petitioners' dollar earnings for After the investigation, the examiners reported that (A) for the years
tax purposes into Philippine pesos is "unrealistic" and, therefore, the prevailing 1951 to 1954 (1) the Company had not accrued as an expense the share in the
free market rate should be the rate used. company profits of Benguet Consolidated Mines as operator of the Company’s
mines, although for income tax purposes the Company had reported income and
Respondent’s contention: Respondent Commissioner argues that CB Circular expenses on the accrual basis; (2) depletion and depreciation expenses had been
No. 289 speaks of receipts for export products, receipts of sale of foreign overcharged; and (3) the claims for audit and legal fees and miscellaneous
exchange or foreign borrowings and investments but not income tax. He also expenses for 1953 and 1954 had not been properly substantiated; and that (B)
claims that he had to use the prevailing free market rate of exchange in these for the year 1956 (1) the Company had overstated its claim for depletion; and (2)
cases because of the need to ascertain the true and correct amount of income in certain claims for miscellaneous expenses were not duly supported by evidence.
Philippine peso of dollar earners for Philippine income tax purposes.
In view of said reports, the CIR sent the Company a letter of demand
ISSUE: WON THE DOLLAR EARNING RECEIPTS ARE FOREIGN TRANSACTIONS requiring it to pay certain deficiency income taxes for the years 1951-1954,
AND THEREFORE EXEMPTED FROM TAXATION IN PH JURISDICTION? inclusive, and for the year 1956. Deficiency income tax assessment notices for
said years were also sent to the Company.
HELD: NO. For a foreign exchange transaction is simply that — a transaction in
foreign exchange, foreign exchange being "the conversion of an amount of money The Company requested a reconsideration of the assessment, but the CIR
or currency of one country into an equivalent amount of money or currency of refused to reconsider, hence the Company appealed to the CTA.
another." When petitioners were assigned to the foreign subsidiaries of Procter
& Gamble, they were earning in their assigned nation's currency and were ALSO On May 6, 1961, the CTA rendered judgment ordering the Company to
spending in said currency. There was no conversion, therefore, from one pay the amounts of P107,846.56, P134,033.01 and P71,392.82 as deficiency
currency to another. The dollar earnings of petitioners are the fruits of their income taxes for the years 1953, 1954, and 1956, respectively. The CTA nullified
labors in the foreign subsidiaries of Procter & Gamble. It was a definite amount the assessments for the years 1951 and 1952 on the ground that they were issued
of money which came to them within a specified period of time of two years as beyond the five-year period prescribed by Sec. 33 of the NIRC.
payment for their services. Section 21 of the National Internal Revenue Code,
states as follows: Sec. 21. Rates of tax on citizens or residents. — A tax is hereby However, on August 7, 1961, upon motion of the Company, the CTA
imposed upon the taxable net income received during each taxable year from all reconsidered its decision and further reduced the deficiency income tax liabilities
sources by every individual, whether a citizen of the Philippines residing therein of the Company to P79,812.93, P51,528.24 and P71,382.82 for the years 1953,
or abroad or an alien residing in the Philippines, determined in accordance with 1954, and 1956, respectively. In this amended decision, the CTA subscribed to the
the following schedule. theory of the Company that Benguet Consolidated Mining Co. had no right to
share in “Accounts Receivable,” hence one-half thereof may not be accrued as an
DOCTRINE: Citizens of the Philippines, and their income, within or without, and expense of the Company for a given year.
in these cases wholly without, are subject to income tax. Sec. 21, NIRC, as
amended, does not brook any exemption. Both the Company and the Commissioner appealed to Supreme Court.
The Company questions the rate of mine depletion adopted by the CTA and the
Disallowance of depreciation charges and certain miscellaneous. The CIR, on the
other hand, questions what he characterizes as the “hybrid” or “mixed” method The Company’s balance sheet for December 31, 1947 lists the “mine cost:
of accounting utilized by the Company, and approved by the CTA, in treating the of P2,500,000 as “development costs” and the amount of P1,738,974.37 as
share of Benguet in the net profits from the operation of the mines in connection “suspense account (mining properties subject to war losses).” The Company
with its income tax returns. claims that its accountant, Mr. Calpo, made these errors, because he was then new
at the job. Granting that was what had happened, it does not affect the fact that
ISSUE/S: Whether or not the CTA erred with respect to the rate of mine depletion. the evidence on hand is insufficient to prove the cost of development alleged by
the Company. Nor can we rely on the statements of Eligio S. Garcia who was the
HELD: No. The Tax Code provides that in computing net income, there shall be Company’s treasurer and assistant secretary at the time he testified. He admitted
allowed as deduction, in the case of mines, a reasonable allowance for depletion that he did not know how the figure P4,238,974.57 was arrived at, explaining: “I
thereof not to exceed the market value in the mine of the produce thereof which only know that it is the figure appearing on the balance sheet as of December 31,
has been mined and sold during the year for which the return is made [Sec. 30(g) 1946 as certified by the Company’s auditors; and this we made as the basis of the
(1) (B)]. valuation of the depletable value of the mines.”

The formula for computing the rate of depletion is: We, therefore, have to rely on the CIR’s assertion that the “development
cost” was P131,878.44, broken down as follows: assessment, P34,092.12;
Cost of Mine Property development, P61,484.63; exploration, P13,966.62; and diamond drilling,
---------------------- = Rate of Depletion Per Unit Estimated Ore Deposit of Product P22,335.07.
Mined and Sold.
The question as to which figure should properly correspond to “mine
The CIR and the Company do not agree as to the figures corresponding cost” is one of fact. The findings of fact of the CTA, which was reasonably
to either factor that affects the rate of depletion per unit. The figures according supported by evidence, are conclusive upon the Supreme Court.
to the CIR are:
P2,646,878.44 (mine cost) P0.59189 (rate of 4. CIR vs. TOURS SPECIALISTS, INC., G.R. No. L-66416 (1990)
--------------------- = depletion per ton)
4,471,892 tons (estimated ore deposit) DOCTRINE: Gross receipts subject to tax under the Tax Code do not include
monies or receipts entrusted to the taxpayer which do not belong to them and do
While the Company insists they are: not redound to the taxpayer’s benefit; and it is not necessary that there must be
P4,238,974.57 (mine cost) P1.0197 (rate of a law or regulation which would exempt such monies or receipts within the
---------------------- = depletion per ton) meaning of gross receipts under the Tax Code
4,156,888 tons (estimated ore deposit)
FACTS: Petitioner (Tours Specialists, Inc.) had derived income from its activities
They agree, however, that the “cost of the mine property” consists of as a travel agency by servicing the needs of foreign tourists and travelers and
(1) mine cost and (2) expenses of development before production. Filipino "Balikbayans" during their stay in this country. Some of the services
extended to the tourists consist of booking said tourists and travelers in local
As an income tax concept, depletion is wholly a creation of the statute— hotels for their lodging and board needs; transporting these foreign tourists from
“solely a matter of legislative grace.” Hence, the taxpayer has the burden of the airport to their respective hotels, and from the latter to the airport upon their
justifying the allowance of any deduction claimed. As in connection with all other departure from the Philippines, transporting them from their hotels to various
tax controversies, the burden of proof to show that a disallowance of depletion embarkation points for local tours, visits and excursions; securing permits for
by the CIR is incorrect or that an allowance made is inadequate is upon the them to visit places of interest; and arranging their cultural entertainment,
taxpayer, and this is true with respect to the value of the property constituting shopping and recreational activities.
the basis of the deduction. This Burden of Proof Rule has been frequently applied
and a value claimed has been disallowed for lack of evidence. In order to ably supply these services to the foreign tourists, petitioner and its
correspondent counterpart tourist agencies abroad have agreed to offer a
package fee for the tourists. Although the fee to be paid by said tourists is quoted
by the petitioner, the payments of the hotel room accommodations, food and taxpayer which do not belong to them and do not redound to the taxpayer's
other personal expenses of said tourists, as a rule, are paid directly either by benefit; and it is not necessary that there must be a law or regulation which would
tourists themselves, or by their foreign travel agencies to the local hotels and exempt such monies and receipts within the meaning of gross receipts under the
restaurants or shops, as the case may be. Tax Code.

It is also the case that some tour agencies abroad request the local tour agencies, Parenthetically, the room charges entrusted by the foreign travel agencies to the
such as the petitioner in the case that the hotel room charges, in some specific private respondent do not form part of its gross receipts within the definition of
cases, be paid through them. By this arrangement, the foreign tour agency the Tax Code. The said receipts never belonged to the private respondent. The
entrusts to the petitioner Tours Specialists, Inc., the fund for hotel room private respondent never benefited from their payment to the local hotels. As stated
accommodation, which in turn is paid by petitioner tour agency to the local hotel earlier, this arrangement was only to accommodate the foreign travel agencies.
when billed. The procedure observed is that the billing hotel sends the bill to the
petitioner. The local hotel identifies the individual tourist, or the particular 5. CIR vs. JAVIER, G.R. No. 78953 (1991)
groups of tourists by code name or group designation and also the duration of
their stay for purposes of payment. Upon receipt of the bill, the petitioner then FACTS: Victoria Javier, wife of respondent Javier, received from Prudential Bank
pays the local hotel with the funds entrusted to it by the foreign tour US$999,973.70 remitted by her sister Mrs. Dolores Ventosa, through banks in the
correspondent agency. US including Mellon Bank. Mellon filed a case in CFI Rizal against Javier claiming
that the remittance of US$1,000,000.00 was a clerical error, and it should have
Despite this arrangement, respondent Commissioner of Internal Revenue been US$1,000.00 only, praying the excess be returned, since the Javiers were
assessed petitioner for deficiency 3% contractor's tax as independent contractor only trustees of an implied trust for the benefit of Mellon Bank with the clear,
by including the entrusted hotel room charges in its gross receipts from services immediate, and continuing duty to return the said amount from the moment it
for the years 1974 to 1976. Consequently, on December 6, 1979, petitioner was received.
received from respondent the 3% deficiency independent contractor's tax
assessment in the amount of P122,946.93 for the years 1974 to 1976. Petitioner The City Fiscal of Pasay City filed an Information with the then Circuit Criminal
was also assessed to pay a compromise penalty of P500.00. charging the petitioner (private respondent herein) and his wife with the crime
of estafa, alleging that they misappropriated, misapplied, and converted to their
Subsequently on December 11, 1979, petitioner formally protested the own personal use and benefit the amount of US$999,000.00 which they received
assessment made by respondent on the ground that the money received and under an implied trust for the benefit of Mellon Bank and as a result of the
entrusted to it by the tourists, earmarked to pay hotel room charges, were not mistake in the remittance by the latter.
considered and have never been considered by it as part of its taxable gross
receipts for purposes of computing and paying its contractor’s tax. Petitioner (private respondent herein) filed his Income Tax Return for the taxable
year 1977 showing a gross income of P53,053.38 and a net income of P48,053.88
Nevertheless, on June 2, 1980, respondent, without deciding the petitioner's and stating in the footnote of the return that "Taxpayer was recipient of some
written protest, caused the issuance of a warrant of distraint and levy. And later, money received from abroad which he presumed to be a gift but turned out to be
respondent had petitioner's bank deposits garnished. Taking this action of an error and is now subject of litigation."
respondent as the adverse and final decision on the disputed assessment,
petitioner appealed to this Court. Petitioner (private respondent herein) received a letter from the acting
Commissioner of Internal Revenue dated November 14, 1980, together with
ISSUE: W]hether or not the hotel room charges held in trust for foreign tourists income assessment notices for the years 1976 and 1977, demanding that
and travelers and/or correspondent foreign travel agencies and paid to local host petitioner (private respondent herein) pay the amount of P1,615.96 and
hotels form part of the taxable gross receipts for purposes of the 3% contractor's P9,287,297.51 as deficiency assessments for the years 1976 and 1977
tax. respectively.

HELD: NO. As demonstrated in the above-mentioned case, gross receipts subject Petitioner (private respondent herein) wrote the Bureau of Internal Revenue that
to tax under the Tax Code do not include monies or receipts entrusted to the he was paying the deficiency income assessment for the year 1976 but denying
that he had any undeclared income for the year 1977 and requested that the We are persuaded considerably by the private respondent's contention that there
assessment for 1977 be made to await final court decision on the case filed is no fraud in the filing of the return and agree fully with the Court of Tax Appeals'
against him for filing an allegedly fraudulent return. interpretation of Javier's notation on his income tax return filed on March 15,
1978 thus: "Taxpayer was the recipient of some money from abroad which he
Petitioner (private respondent herein) received from Acting Commissioner of presumed to be a gift but turned out to be an error and is now subject of litigation
Internal Revenue Romulo Villa a letter dated October 8, 1981 stating in reply to that it was an "error or mistake of fact or law" not constituting fraud, that such
his December 15, 1980 letter-protest that "the amount of Mellon Bank's notation was practically an invitation for investigation and that Javier had
erroneous remittance which you were able to dispose, is definitely taxable." The literally "laid his cards on the table."
Commissioner also imposed a 50% fraud penalty against Javier.
Disagreeing, Javier filed an appeal before the respondent Court of Tax Appeals on 6. ROXAS vs. CTA, G.R. No. L-25043 (1968)
December 10, 1981. CTA deleted the 50% fraud penalty, saying that there was no
fraud. FACTS: Don Pedro Roxas and Dona Carmen Ayala, transmitted to their
grandchildren by hereditary succession the following properties: (1) Agricultural
The Commissioner of Internal Revenue, not satisfied with the respondent CTA's lands with a total area of 19,000 hectares, situated in the municipality of Nasugbu,
ruling, elevated the matter to us, by the present petition Batangas province; (2) A residential house and lot located at Wright St., Malate,
Manila; and (3) Shares of stocks in different corporations. To manage the
ISSUE: Whether or not a taxpayer who merely states as a footnote in his income properties, said children, namely, Antonio Roxas, Eduardo Roxas and Jose Roxas,
tax return that a sum of money that he erroneously received and already spent is formed a partnership called Roxas y Compania.
the subject of a pending litigation and there did not declare it as income is liable
to pay the 50% penalty for filing a fraudulent return. The tenants who have all been tilling the lands in Nasugbu for generations
expressed their desire to purchase from Roxas y Cia, the parcels which they
HELD: NO. In the case at bar, there was no actual and intentional fraud through actually occupied. For its part, the Government, in consonance with the
willful and deliberate misleading of the government agency concerned, the constitutional mandate to acquire big landed estates and apportion them among
Bureau of Internal Revenue, headed by the herein petitioner. The government landless tenants-farmers, persuaded the Roxas brothers to part with their
was not induced to give up some legal right and place itself at a disadvantage so landholdings. The Roxas brothers agreed to sell 13,500 hectares to the
as to prevent its lawful agents from proper assessment of tax liabilities because Government for distribution to actual occupants for a price of P2,079,048.47 plus
Javier did not conceal anything. Error or mistake of law is not fraud. The P300,000.00 for survey and subdivision expenses. It turned out however that the
petitioner's zealousness to collect taxes from the unearned windfall to Javier is Government did not have funds to cover the purchase price, and so a special
highly commendable. Unfortunately, the imposition of the fraud penalty in this arrangement was made for the Rehabilitation Finance Corporation to advance to
case is not justified by the extant facts. Javier may be guilty of swindling charges, Roxas y Cia. The amount of P1,500,000.00 as loan. Collateral for such loan were
perhaps even for greed by spending most of the money he received, but the the lands proposed to be sold to the farmers. Under the arrangement, Roxas y Cia
records lack a clear showing of fraud committed because he did not conceal the allowed the farmers to buy the lands for the same price but by installment, and
fact that he had received an amount of money although it was a "subject of contracted with the Rehabilitation Finance Corporation to pay its loan from the
litigation." As ruled by respondent Court of Tax Appeals, the 50% surcharge proceeds of the yearly amortizations paid by the farmers. In 1953 and 1955
imposed as fraud penalty by the petitioner against the private respondent in the Roxas y Cia. derived from said installment payments a net gain of P42,480.83 and
deficiency assessment should be deleted. P29,500.71. Fifty percent of said net gain was reported for income tax purposes
as gain on the sale of capital asset held for more than one year pursuant to Section
Under the then Section 72 of the Tax Code (now Section 248 of the 1988 National 34 of the Tax Code.
Internal Revenue Code), a taxpayer who files a false return is liable to pay the
fraud penalty of 50% of the tax due from him or of the deficiency tax in case During their bachelor days the Roxas brothers lived in the residential house at
payment has been made on the basis of the return filed before the discovery of Wright St., Malate, Manila, which they inherited from their grandparents. After
the falsity or fraud. Antonio and Eduardo got married, they resided somewhere else leaving only Jose
in the old house. Jose paid to Roxas y Cia. rentals for the house in the sum of the gain derived from the sale thereof is capital gain, taxable only to the extent of
P8,000.00 a year. 50%.

Commissioner of Internal Revenue demanded from Roxas y Cia the payment of Lastly, Roxas y Cia. questions the imposition of the real estate dealer's fixed tax
real estate dealer's tax for 1952 in the amount of P150.00 plus P10.00 upon it, because although it earned a rental income of P8,000.00 per annum in
compromise penalty for late payment, and P150.00 tax for dealers of securities 1952, said rental income came from Jose Roxas, one of the partners. Section 194
for 1952 plus P10.00 compromise penalty for late payment. The assessment for of the Tax Code, in considering as real estate dealers owners of real estate
real estate dealer's tax was based on the fact that Roxas y Cia. received house receiving rentals of at least P3,000.00 a year, does not provide any qualification
rentals from Jose Roxas in the amount of P8,000.00. Pursuant to Sec. 194 of the as to the persons paying the rentals. The law, which states: "Real estate dealer"
Tax Code, an owner of a real estate who derives a yearly rental income therefrom includes any person engaged in the business of buying, selling, exchanging,
in the amount of P3,000.00 or more is considered a real estate dealer and is liable leasing or renting property on his own account as principal and holding himself
to pay the corresponding fixed tax. out as a full or part-time dealer in real estate or as an owner of rental property or
properties rented or offered to rent for an aggregate amount of three thousand
In the same assessment, the Commissioner assessed deficiency income taxes pesos or more a year” is too clear and explicit to admit construction.
against the Roxas Brothers for the years 1953 and 1955. The deficiency income
taxes resulted from the inclusion as income of Roxas y Cia. of the unreported 50% 7. FISHER vs. TRINIDAD, G.R. No. L-17518 (1922)
of the net profits for 1953 and 1955 derived from the sale of the Nasugbu farm
lands to the tenants. For the reason that Roxas y Cia. subdivided its Nasugbu farm FACTS: During 1919, the Ph American Drug Company (PADC) was a corp
lands and sold them to the farmers on installment, the Commissioner considered organized and existing under Ph laws, doing business in Manila. Fisher was a
the partnership as engaged in the business of real estate, hence, 100% of the stockholder. As a result of the business for 1919, PADC declared a “stock dividend”
profits derived therefrom was taxed. and Fisher’s share was P24,800. The stock dividend was issued to Fisher and in
1920, Fisher paid under protest P899.91 as income tax on said stock dividend.
ISSUE: Is the gain derived from the sale of the Nasugbu farm lands an ordinary
gain, hence 100% taxable? NO Fisher filed an action to recover the sum paid but Trinidad demurred to the
Is Roxas y Cia. liable for the payment of the fixed tax on real estate dealers (RE: petition on the ground that it did not state facts sufficient to constitute a cause of
8,000 rental fee)? Yes action. Fisher cited US Supreme Court decisions assailing that in those cases, an
effort was made to collect an “income tax” upon “stock dividends” and that “stock
HELD: Although they paid for their respective holdings in installment for a period dividends” were capital and not an “income” and therefore not subject to “income
of ten years, it would nevertheless not make the vendor Roxas y Cia. a real estate tax” law. Trinidad contends that US SC decisions should not be followed because
dealer during the ten-year amortization period. the US statute providing for tax upon stock dividends is different from Ph laws.

It should be borne in mind that the sale of the Nasugbu farm lands to the very Section 2 of Act of Congress Chapter 463 attempts to define what is an income. The
farmers who tilled them for generations was not only in consonance with, but definition follows:
more in obedience to the request and pursuant to the policy of our Government
to allocate lands to the landless. However, the Government could not comply with 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,
its duty for lack of funds. Obligingly, Roxas y Cia. shouldered the Government's to the amount of its cash.
burden, went out of its way and sold lands directly to the farmers in the same way
and under the same terms as would have been the case had the Government done Section 25 of said Act no. 2883 attempts to define the application of the income tax.
it itself. The power of taxation is sometimes called also the power to destroy. The term "dividends" as used in this Law shall be held to mean any distribution made or
Therefore, it should be exercised with caution to minimize injury to the ordered to be made by a corporation, out of its earnings or profits accrued since March 1,
proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, 1913, payable to its shareholders, whether in cash or in stock of the corporation. Stock
lest the tax collector kill the "hen that lays the golden egg". In fine, Roxas y Cia. dividend shall be considered income, to the amount of the earnings or profits distributed.
cannot be considered a real estate dealer for the sale in question. Hence, pursuant
to Section 34 of the Tax Code the lands sold to the farmers are capital assets, and
But no important argument can be based in the slight difference of the wordings in the 2 ISSUE: WON stock dividends are income which can be taxed as “income tax”
sections.
HELD: No. SC followed the same US doctrine. Stock dividends are not income
Further argued by Trinidad, the Philippine Legislature may provide for the payment of an hence cannot be taxed under Act No 2883 which provides for a tax upon income
income tax, but it cannot, under the guise of an income tax, collect a tax on property which
is not an "income." a statute expressly adopted for one purpose cannot, without
stating Sec25 Act 2833 “Stock dividends shall be considered income, to the
amendment, be applied to another purpose which is entirely distinct and different. The amount of the earnings or profits distributed”. Under the guise of an income tax,
Legislature cannot, by a statutory declaration, change the real nature of a tax which it property which is not an income cannot be taxed. When the assets of a
imposes. Example, a law which imposes an important tax on rice only cannot be construed corporation have increased so as to justify the issuance of a stock dividend, the
to an impose an importation tax on corn. It is true that the statute in question provides for increase of the assets should be taken account of the Government in the ordinary
an income tax and contains a further provision that "stock dividends" shall be considered tax duplicates for the purposes of assessment and collection of an additional tax.
income and are therefore subject to income tax provided for in said law. If "stock An income subject to taxation under the law must be an actual income and not a
dividends" are not "income" then the law permits a tax upon something not within the promised or prospective income.
purpose and intent of the law.

“Stock dividends” represent undistributed increase in the capital of corps for a particular
8. LIMPAN INVESTMENT CORP. vs. CIR, G.R. No. L-21570 (1966)
period.
“Income” according to Gray vs Darlington states that mere advance in value does not FACTS: Petitioner, a domestic corporation, is engaged in the business of leasing
constitute income specified in Revenue law as income of the owner for the year in which real properties. Its principal stockholders are the spouses Isabelo and
the sale of the property was made; its merely an increase of capital. Purificacion Lim. Said properties are situated in Manila and Pasay City.
“Income” according to Towne vs. Eisner refers to cash or its equivalent, and does not
pertain to unrealized increments in the value of the property. Stock dividend rakes nothing Petitioner corporation duly filed its 1956 and 1957 income tax returns. The BIR
from the property of the corp, and adds nothing to the interests of shareholders. conducted an investigation of the said returns in 1956 and 1957, they discovered
“Income” according to Doyle vs Mitchell Bros. Co. pertains to importing something distinct and ascertained that petitioner had underdeclared its rental incomes during said
from principal or capital and conveying the idea of gain or increase arising from corporate
activity.
taxable years. CIR issued a letter-assessment and demanded for payment of the
“Income” according to Eisner vs Macomber is defined as the gain derived from capital, deficiency.
labor or both provided it includes profit gained through a sale or conversion of capital
assets Petitioner corporation requested CIR to reconsider the assessment but denied
the request and adding surcharge. Hence, the corporation filed its petition for
The Legislature, when it provided for an "income tax," intended to tax only the "income" review before the CTA, questioning the validity and correctness of the
of corporations, firms or individuals, as that term is generally used in its common assessment given by the CIR. It disclaimed having received and collected the
acceptation; that is that the income means money received, coming to a person or unreported rental income for 1956 contending that ‘the previous owners of the
corporation for services, interest, or profit from investments. We do not believe that the
leased building have to collect part of the total rentals in 1956 to apply to their
Legislature intended that a mere increase in the value of the capital or assets of a
payment of rental. They also argued that the rentals were deposited in Court thus,
corporation, firm, or individual, should be taxed as "income." 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 not receiving the rental payments when in fact they did not collect said payments.
a tax upon an income which he never received. Such a conclusion is absolutely For 1957 rental income, petitioner corporation said that Isabelo Lim did not turn
contradictory to the idea of an income. An income subject to taxation under the law must over it to them.
be an actual income and not a promised or prospective income.
Vicente Solis, Secretary-Treasurer of petitioner corporation admitted that it had
Trinidad argues that there is nothing in Sec 25 of Act 2883 contravenes the provisions of omitted to report rental income in both 1956 and 1957 tax return. Solis also tried
the Jones Law; that income shall include gains, profits, and income derived from salaries, to establish that it did not collect or receive the payments from the tenants
wages or compensation for personal services as well as from interest, rent, dividends, because the refuse to recognize the new owner (petitioner corporation).
securities, etc. Trinidad 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 The BIR examiner found that the tenants of petitioner regularly made their
other is a receipt of a representation of the increased value of the assets of corporation. payments to petitioner corporation or Isabelo Lim.

CIR: Demanded the deficiency income tax + surcharges from petitioner regardless of whether the gross income was derived from sources within or
corporation for the undeclared rental income. outside the Philippines;" and since the petitioners, although aliens residing
CTA: Upheld CIR’s assessment and demand for the deficiency income tax within the Philippines, had failed to do so, they had been properly prosecuted and
convicted for having thus violated the Code.
ISSUE: Whether or not the BIR was correct in assessing deficiency taxes against
Limpan Corporation for undeclared rental income. ISSUE: W/N petitioners are exempt from paying their income tax

HELD: Yes. Petitioner admitted that it indeed had undeclared income through its HELD: Quite apart from the evidently distinct and different character of the
Secretary-Treasurer, Solis. They failed to prove their arguments and excuses requirement to pay income tax in contrast to the requirement to file a tax return,
through clear and convincing evidence. There is already constructive payment it appears that the exemption granted to the petitioners by the Bases Agreement
when the rental payments were deposited to the court. It is deemed to have from payment of income tax is not absolute. By the explicit terms of the Bases
constructively received by them. Agreement, it exists only as regards income derived from their employment "in
the Philippines in connection with construction, maintenance, operation or
DOCTRINE: Sec. 23(E) of the NIRC, general principles: “A domestic corporation defense of the bases;" it does not exist in respect of other income, i.e., "income
is taxable on all income derived from sources within and without the Philippines.” derived from Philippine sources or sources other than the US sources." Obviously,
with respect to the latter form of income, i.e., that obtained or proceeding from
CHAPTER 2 – TAXPAYERS "Philippine sources or sources other than the US sources," the petitioners, and all
TOPIC: RESIDENT ALIENS other American nationals who are residents of the Philippines, are legally bound
to pay tax thereon. In other words, so that American nationals residing in the
9. GARRISON vs. CA, G.R. Nos. L-4450105 (1990) country may be relieved of the duty to pay income tax for any given year, it is
incumbent on them to show the Bureau of Internal Revenue that in that year they
FACTS: All 6 petitioners alleged that they are US citizens working in the US Naval had derived income exclusively from their employment in connection with the
Base in Olongapo City. They received separate notices from the District Revenue U.S. bases, and none whatever "from Philippine sources or sources other than the
Officer of Olongapo City, informing them that they had not filed their respective US sources." They have to make this known to the Government authorities. It is
income tax returns for the year 1969 as required by the NIRC. They were asked not in the first instance the latter's duty or burden to make unaided verification
to file their returns within 10 days from the receipt of the notice. The accused of the sources of income of American residents. The duty rests on the U.S.
refused to file their income tax returns, claiming that they are not resident aliens nationals concerned to invoke and prima facie establish their tax-exempt status.
but only special temporary visitors, having entered this country under the It cannot simply be presumed that they earned no income from any other sources
Philippine Immigration Act. The accused also claimed exemption from filing the than their employment in the American bases and are therefore totally exempt
return in the Philippines by virtue of the provisions of the US-RP Military Bases from income tax. The situation is no different from that of Filipino and other
Agreement. Given these facts, the petitioner contend that they are not required resident income-earners in the Philippines who, by reason of the personal
to file income tax returns. The petitioners claim that they are covered by this exemptions and permissible deductions under the Tax Code, may not be liable to
exempting provision of the Bases Agreement since, as is admitted on all sides, pay income tax year for any particular year; that they are not liable to pay income
they are all U.S. nationals, all employed in the American Naval Base at Subic Bay tax, no matter how plain or irrefutable such a proposition might be, does not
(involved in some way or other in "construction, maintenance, operation or exempt them from the duty to file an income tax return.
defense" thereof), and receive salary therefrom exclusively and from no other
source in the Philippines; and it is their intention, as is shown by the unrebutted TOPIC: RESIDENT FOREIGN CORPORATIONS
evidence, to return to the United States on termination of their employment. That
claim had been rejected by the Court of Appeals with the terse statement that the 10. CIR vs. BRITISH OVERSEAS AIRWAYS CORPORATION, G.R. Nos. L-
Bases Agreement "speaks of exemption from the payment of income tax, not from 65773-74 (1987)
the filing of the income tax returns”. But even if exempt from paying income tax,
said petitioners were, it is contended by the respondents, not excused from filing FACTS: BOAC is a 100% British Government-owned corporation organized and
income tax returns. For the Internal Revenue Code (Sec. 45, supra) requires the existing under the laws of the United Kingdom. It is engaged in the international
filing of an income tax return also by any "alien residing in the Philippines, airline business and is a member-signatory of the Interline Air Transport
Association (IATA). During the periods covered by the disputed assessments, it is Airways, during the period in question, do not constitute BOAC income from
admitted that BOAC had no landing rights for traffic purposes in the Philippines, Philippine sources "since no service of carriage of passengers or freight was
and was not granted a Certificate of public convenience and necessity to operate performed by BOAC within the Philippines" and, therefore, said income is not
in the Philippines by the Civil Aeronautics Board (CAB), except for a nine-month subject to Philippine income tax. The CTA position was that income from
period, partly in 1961 and partly in 1962, when it was granted a temporary transportation is income from services so that the place where services are
landing permit by the CAB. Consequently, it did not carry passengers and/or rendered determines the source.
cargo to or from the Philippines, although during the period covered by the
assessments, it maintained a general sales agent in the Philippines — Warner ISSUE: Whether or not the revenue derived by BOAC from sales of tickets in the
Barnes and Company, Ltd., and later Qantas Airways — which was responsible Philippines for air transportation, while having no landing rights here, constitute
for selling BOAC tickets covering passengers and cargoes. income of BOAC from Philippine sources, and, accordingly, taxable
On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity) HELD: Yes. Under Section 20 of the 1977 Tax Code:
assessed BOAC the aggregate amount of P2,498,358.56 for deficiency income
taxes covering the years 1959 to 1963. This was protested by BOAC. Subsequent "(h) the term 'resident foreign corporation' applies to a foreign corporation
investigation resulted in the issuance of a new assessment, dated 16 January engaged in trade or business within the Philippines or having an office or place
1970 for the years 1959 to 1967 in the amount of P858,307.79. BOAC paid this of business therein.
new assessment under protest.
"(i) The term 'non-resident foreign corporation' applies to a foreign corporation
On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79, not engaged in trade or business within the Philippines and not having any office
which claim was denied by the CIR on 16 February 1972. But before said denial, or place of business therein.
BOAC had already filed a petition for review with the Tax Court on 27 January
1972, assailing the assessment and praying for the refund of the amount paid. It is our considered opinion that BOAC is a resident foreign corporation. There is
no specific criterion as to what constitutes "doing" or "engaging in" or
On 17 November 1971, BOAC was assessed deficiency income taxes, interests, "transacting" business. Each case must be judged in the light of its peculiar
and penalty for the fiscal years 1968/1969 to 1970-1971 in the aggregate amount environmental circumstances.
of P549,327.43, and the additional amounts of P1,000.00 and P1,800.00 as
compromise penalties for violation of Section 46 (requiring the ling of "In order that a foreign corporation may be regarded as doing business within a
corporation returns) penalized under Section 74 of the National Internal State, there must be continuity of conduct and intention to establish a continuous
Revenue Code (NIRC). business, such as the appointment of a local agent, and not one of a temporary
character.'
On 25 November 1971, BOAC requested that the assessment be countermanded
and set aside. In a letter, dated 16 February 1972, however, the CIR not only BOAC, during the periods covered by the subject-assessments, maintained a
denied the BOAC request for refund in the First Case but also re-issued in the general sales agent in the Philippines. That general sales agent, from 1959 to
Second Case the deficiency income tax assessment for P534,132.08 for the years 1971, "was engaged in (1) selling and issuing tickets; (2) breaking down the
1969 to 1970-71 plus P1,000.00 as compromise penalty under Section 74 of the whole trip into series of trips — each trip in the series corresponding to a
Tax Code. BOAC's request for reconsideration was denied by the CIR on 24 August different airline company; (3) receiving the fare from the whole trip; and (4)
1973. This prompted BOAC to file the Second Case before the Tax Court praying consequently allocating to the various airline companies on the basis of their
that it be absolved of liability for deficiency income tax for the years 1969 to 1971. participation in the services rendered through the mode of interline settlement
as prescribed by Article VI of the Resolution No. 850 of the IATA Agreement."
This case was subsequently tried jointly with the First Case.
Those activities were in exercise of the functions, which are normally incident to,
On 26 January 1983, the Tax Court rendered the assailed joint Decision reversing and are in progressive pursuit of, the purpose and object of its organization as an
the CIR. The Tax Court held that the proceeds of sales of BOAC passage tickets in international air carrier.
the Philippines by Warner Barnes and Company, Ltd., and later by Qantas
In fact, the regular sale of tickets, its main activity, is the very lifeblood of the

airline business, the generation of sales being the paramount objective. There ISSUE: WON N.V. REEDERIJ "AMSTERDAM" NOT HAVING ANY OFFICE OR PLACE
should be no doubt then that BOAC was "engaged in" business in the Philippines OF BUSINESS IN THE PHILIPPINES, WHOSE VESSELS CALLED ON THE
through a local agent during the period covered by the assessments. PHILIPPINE PORTS FOR THE PURPOSE OF LOADING CARGOES SHOULD BE
TAXED AS A FOREIGN CORPORATION ENGAGED IN TRADE/BUSINESS WITHIN
11. N.V. REEDERIJ “AMSTERDAM” and ROYAL INTEROCEAN LINES vs. THE PH?
CIR, G.R. No. L-46029 (1988)
RULING: NO. Petitioner N.V. Reederij "AMSTERDAM" is a foreign corporation not
FACTS: From March 27 to April 30, 1963, M.V. Amstelmeer and from September authorized or licensed to do business in the Philippines. It does not have a branch
24 to October 28, 1964, MV "Amstelkroon, " both of which are vessels of office in the Philippines and it made only two calls in Philippine ports, one in 1963
petitioner N.B. Reederij "AMSTERDAM," called on Philippine ports to load and the other in 1964. In order that a foreign corporation may be considered
cargoes for foreign destination. The freight fees for these transactions were paid engaged in trade or business, its business transactions must be continuous. A
abroad in the amount of US $98,175.00 in 1963 and US $137,193.00 in 1964. In casual business activity in the Philippines by a foreign corporation, as in the
these two instances, petitioner Royal Interocean Lines acted as husbanding agent present case, does not amount to engaging in trade or business in the Philippines
for a fee or commission on said vessels. No income tax appears to have been paid for income tax purposes. Here, petitioner N.V. Reederij "Amsterdam" is a non-
by petitioner N.V. Reederij "AMSTERDAM" on the freight receipts. Respondent resident foreign corporation, organized and existing under the laws of The
CIR filed the corresponding income tax returns for and in behalf of the former Netherlands with principal office in Amsterdam and not licensed to do business
under Section 15 of the National Internal Revenue Code. Applying the then in the Philippines. As a non-resident foreign corporation, it is thus a foreign
prevailing market conversion rate of P3.90 to the US $1.00, the gross receipts of corporation, not engaged in trade or business within the Philippines and not
petitioner N.V. Reederij "Amsterdam" for 1963 and 1964 amounted to having any office or place of business therein. WHEREFORE, the petition is
P382,882.50 and P535,052.00, respectively. On June 30, 1967, respondent DENIED with costs against petitioners. This decision is immediately executory
Commissioner assessed said petitioner in the amounts of P193,973.20 and and no extension of time to file motion for reconsideration shall be entertained.
P262,904.94 as deficiency income tax for 1963 and 1964, respectively, as "a non-
resident foreign corporation not engaged in trade or business in the Philippines DOCTRINE: A domestic corporation is taxed on its income from sources within
under Section 24 (b) (1) of the Tax Code. and without the Philippines, but a foreign corporation is taxed only on its income
from sources within the Philippines. However, while a foreign corporation doing
On the assumption that the said petitioner is a foreign corporation engaged in business in the Philippines is taxable on income solely from sources within the
trade or business in the Philippines, on August 28, 1967, petitioner Royal Philippines, it is permitted to deductions from gross income but only to the extent
Interocean Lines filed an income tax return of the aforementioned vessels connected with income earned in the Philippines. On the other hand, foreign
computed at the exchange rate of P2.00 to USs1.00 1 and paid the tax thereon in corporations not doing business in the Philippines are taxable on income from all
the amount of P1,835.52 and P9,448.94, respectively, pursuant to Section 24 and sources within the Philippines, as interest, dividends, rents, salaries, wages,
37 (B) (e) of the National Internal Revenue Code and Section 163 of Revenue premiums, annuities Compensations, remunerations, emoluments, or other fixed
Regulations No. 2. On the same two dates, petitioner Royal Interocean Lines as or determinable annual or periodical or casual gains, profits and income and
the husbanding agent of petitioner N.V. Reederij "AMSTERDAM" filed a written capital gains" The tax is 30% (now 35%) of such gross income. (Sec. 24 (b) (1),
protest against the abovementioned assessment made by the respondent Tax Code.
Commissioner which protest was denied by said respondent in a letter dated
March 3, 1969: On March 31, 1969. 12. MARUBENI CORP. vs. CIR, G.R. No.76573 (1989)

Petitioners filed a petition for review with the respondent Court of Tax Appeals FACTS: Petitioner Marubeni Corporation is a foreign corporation duly organized
praying for the cancellation of the subject assessment. After due hearing, the and existing under the laws of Japan and duly licensed to engage in business
respondent court, on December 1, 1976, rendered a decision modifying said under Philippine laws.
assessments by eliminating the 50% fraud compromise penalties imposed upon
petitioners. Petitioners filed a motion for reconsideration of said decision but this Marubeni Corporation of Japan (Marubeni Japan) has equity investments
was denied by the respondent court. in Atlantic, Gulf & Pacific Co. (AG&P) of Manila.
Thus, the alleged overpaid taxes were incurred for the remittance of
AG&P declared and directly remitted the cash dividends to Marubeni’s dividend income to the head office in Japan which is considered as a separate and
head office in Tokyo, Japan, net not only of the 10% final dividend tax in the distinct income taxpayer from the branch in the Philippines.
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 13. ACCENTURE, INC. vs. CIR, G.R. No 190102 (2012)
deducting the final withholding tax of 10%.
FACTS: Petitioner Accenture, Inc. (Accenture) is a corporation engaged in the
Thereafter, Marubeni, through Sycip, Gorres, Velayo and Company (SGV), business of providing management consulting, business strategies development,
sought a ruling from the BIR on whether or not the dividends it received from and selling and/or licensing of software. It is duly registered with the Bureau of
AG&P are effectively connected with its business in the Philippines as to be Internal Revenue (BIR) as a Value Added Tax (VAT) taxpayer or enterprise in
considered branch profits subject to profit remittance tax. accordance with Section 236 of the National Internal Revenue Code (Tax Code).

The Acting Commissioner ruled that the dividends received by Marubeni The monthly and quarterly VAT returns of Accenture show that, notwithstanding
are not income from the business activity in which it is engaged. Thus, the its application of the input VAT credits earned from its zero-rated transactions
dividend if remitted abroad are not considered branch profits subject to profit against its output VAT liabilities, it still had excess or unutilized input VAT credits.
remittance tax. These VAT credits are in the amounts of P9,355,809.80 for the 1st period and
P27,682,459.38 for the 2nd period, or a total of P37,038,269.18.
Pursuant to such ruling, petitioner Marubeni filed a claim for refund for
the profit tax remittance erroneously paid on the dividends remitted by AG&P.
Thus, on 1 July 2004, Accenture filed with the Department of Finance (DoF) an
Respondent CIR denied the claim ruling that since Marubeni is a non- administrative claim for the refund or the issuance of a Tax Credit Certificate
resident corporation not engaged in trade or business in the Philippines, it shall (TCC). The DoF did not act on the claim of Accenture. Hence, on 31 August 2004,
be subject to tax on income earned from Philippine sources at the rate of 35% of the latter filed a Petition for Review with the First Division of the Court of Tax
its gross income. Appeals (Division), praying for the issuance of a TCC in its favor in the amount of
P35,178,844.21.
Petitioner Marubeni, on the other hand, contends that following the
principal-agent relationship theory, Marubeni Japan is a resident foreign Respondent’s contention. The Commissioner of Internal Revenue (CIR), in its
corporation subject only to final tax on dividends received from a domestic Answer, argued thus: 1. the sale by Accenture of goods and services to its clients
corporation. are not zero-rated transactions. 2. Claims for refund are construed strictly against
the claimant, and Accenture has failed to prove that it is entitled to a refund,
ISSUE: Whether or not Marubeni Japan is a resident foreign corporation. because its claim has not been fully substantiated or documented.

HELD: No. The general rule is that a foreign corporation is the same juridical The First Division of the CTA denied the Petition of Accenture for failing to prove
entity as its branch office in the Philippines. The rule is based on the premise that that the latter’s sale of services to the alleged foreign clients qualified for zero
the business of the foreign corporation is conducted through tis branch office, percent VAT. On appeal before the CTA en banc, Accenture argued that because
following the principal-agent relationship theory. It is understood that the branch the case pertained to the third and the fourth quarters of taxable year 2002, the
becomes its agent. applicable law was the 1997 Tax Code, and not R.A. 9337 and that prior to the
amendment introduced by (R.A.) 9337, there was no requirement that the
However, when the foreign corporation transacts business in the services must be rendered to a person engaged in business conducted outside the
Philippines independently of its branch, the principal-agent relationship is set Philippines to qualify for zero-rating. Nevertheless, the CTA en banc affirmed the
aside. The transaction becomes one of the foreign corporation, and not of the decision of the division. Hence this present petition for review before the SC.
branch. Consequently, the taxpayer is the foreign corporation, not the branch or
the resident foreign corporation.

ISSUE: WON the recipient of the services be "doing business outside the Section 3 thereof reads: SECTION 3. Section 102 of the National Internal Revenue
Philippines" for the transaction to be zero-rated under Section 108(B)(2) of the Code, as amended, is hereby further amended to read as follows: "SEC. 102.
1997 Tax Code? Value-added tax on sale of services and use or lease of properties. x x x "(b)
Transactions subject to zero-rate. — The following services performed in the
Whether or not Accenture has established that the recipients of its services do Philippines by VAT-registered persons shall be subject to 0%:
business outside the Philippines
"(1) Processing, manufacturing or repacking goods for other persons doing
Whether or not Accenture is entitled to the refund business outside the Philippines which goods are subsequently exported, where
the services are paid for in acceptable foreign currency and accounted for in
HELD: Recipient of services must be doing business outside the Philippines accordance with the rules and regulations of the Bangko Sentral ng Pilipinas
for the transactions to qualify as zero-rated. (BSP).
Accenture anchors its refund claim on Section 112(A) of the 1997 Tax Code, "(2) Services other than those mentioned in the preceding sub-paragraph, the
which allows the refund of unutilized input VAT earned from zero-rated or consideration for which is paid for in acceptable foreign currency and accounted
effectively zero-rated sales. The provision reads: for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas
(BSP)."
SEC. 112. Refunds or Tax Credits of Input Tax. - (A) Zero-Rated or Effectively
Zero-Rated Sales. - Any VAT-registered person, whose sales are zero-rated or Essentially, Section 102(b) of the 1977 Tax Code—as amended by P.D. 1994, E.O.
effectively zero-rated may, within two (2) years after the close of the taxable 273, and R.A. 7716—provides that if the consideration for the services provided
quarter when the sales were made, apply for the issuance of a tax credit by a VAT-registered person is in a foreign currency, then this transaction shall be
certificate or refund of creditable input tax due or paid attributable to such sales, subjected to zero percent rate.
except transitional input tax, to the extent that such input tax has not been
applied against output tax: Provided, however, That in the case of zero-rated The 1997 Tax Code reproduced Section 102(b) of the 1977 Tax Code in its Section
sales under Section 106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), 108(B), to wit: (B) Transactions Subject to Zero Percent (0%) Rate. - The
the acceptable foreign currency exchange proceeds thereof had been duly following services performed in the Philippines by VAT- registered persons shall
accounted for in accordance with the rules and regulations of the Bangko Sentral be subject to zero percent (0%) rate.
ng Pilipinas (BSP):
(1) Processing, manufacturing or repacking goods for other persons doing
Provided, further, That where the taxpayer is engaged in zero-rated or effectively business outside the Philippines which goods are subsequently exported, where
zero-rated sale and also in taxable or exempt sale of goods of properties or the services are paid for in acceptable foreign currency and accounted for in
services, and the amount of creditable input tax due or paid cannot be directly accordance with the rules and regulations of the Bangko Sentral ng Pilipinas
and entirely attributed to any one of the transactions, it shall be allocated (BSP);
proportionately on the basis of the volume of sales. (2) Services other than those mentioned in the preceding paragraph, the
consideration for which is paid for in acceptable foreign currency and accounted
Two years thereafter, or on 1 January 1988, Executive Order No. (E.O.) 27333 for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas
further amended provisions of Title IV. E.O. 273 by transferring the old Title IV (BSP); x x x.
provisions to Title VI and filling in the former title with new provisions that On 1 November 2005, Section 6 of R.A. 9337, which amended the foregoing
imposed a VAT. provision, became effective. It reads: SEC. 6. Section 108 of the same Code, as
amended, is hereby further amended to read as follows:
The VAT system introduced in E.O. 273 was restructured through Republic Act
No. (R.A.) 7716. This law, which was approved on 5 May 1994, widened the tax "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. -
base. (B) Transactions Subject to Zero Percent (0%) Rate. –
The following services performed in the Philippines by VAT-registered persons
shall be subject to zero percent (0%) rate:

(1) Processing, manufacturing or repacking goods for other persons doing foreign currency inwardly remitted by the payer-recipient. Such interpretation
business outside the Philippines which goods are subsequently exported, where removes Section 102 (a) as a tax measure in the Tax Code, an interpretation this
the services are paid for in acceptable foreign currency and accounted for in Court cannot sanction. A tax is a mandatory exaction, not a voluntary contribution.
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas x x x x x x x x x
(BSP); Further, when the provider and recipient of services are both doing business in
"(2) Services other than those mentioned in the preceding paragraph rendered the Philippines, their transaction falls squarely under Section 102 (a) governing
to a person engaged in business conducted outside the Philippines or to a domestic sale or exchange of services. Indeed, this is a purely local sale or
nonresident person not engaged in business who is outside the Philippines when exchange of services subject to the regular VAT, unless of course the transaction
the services are performed, the consideration for which is paid for in acceptable falls under the other provisions of Section 102 (b).
foreign currency and accounted for in accordance with the rules and regulations
of the Bangko Sentral ng Pilipinas (BSP); x x x." (Emphasis supplied) Lastly, it is worth mentioning that prior to the promulgation of Burmeister,
Congress had already clarified the intent behind Sections 102(b)(2) of the 1977
We rule that the recipient of the service must be doing business outside the Tax Code and 108(B)(2) of the 1997 Tax Code amending the earlier provision.
Philippines for the transaction to qualify for zero-rating under Section 108(B) R.A. 9337 added the following phrase: "rendered to a person engaged in business
of the Tax Code. conducted outside the Philippines or to a nonresident person not engaged in
business who is outside the Philippines when the services are performed."
This Court upholds the position of the CTA en banc that, because Section 108(B)
of the 1997 Tax Code is a verbatim copy of Section 102(b) of the 1977 Tax Code, 2. Accenture has failed to establish that the recipients of its services do
any interpretation of the latter holds true for the former. business outside the Philippines.
In the CTA’s opinion, however, the documents presented by Accenture merely
Moreover, even though Accenture’s Petition was filed before Burmeister was substantiate the existence of the sales, receipt of foreign currency payments, and
promulgated, the pronouncements made in that case may be applied to the inward remittance of the proceeds of these sales duly accounted for in
present one without violating the rule against retroactive application. When this accordance with BSP rules. Petitioner presented no evidence whatsoever that
Court decides a case, it does not pass a new law, but merely interprets a these clients were doing business outside the Philippines. Accenture insists,
preexisting one. When this Court interpreted Section 102(b) of the 1977 Tax Code however, that it was able to establish that it had rendered services to foreign
in Burmeister, this interpretation became part of the law from the moment it corporations doing business outside the Philippines, unlike in Burmeister, which
became effective. It is elementary that the interpretation of a law by this Court allegedly involved a foreign corporation doing business in the Philippines.
constitutes part of that law from the date it was originally passed, since this
Court's construction merely establishes the contemporaneous legislative intent 3. We deny Accenture’s Petition for a tax refund.
that the interpreted law carried into effect. The evidence presented by Accenture may have established that its clients are
foreign. This fact does not automatically mean, however, that these clients were
That the recipient of the service should be doing business outside the Philippines doing business outside the Philippines. After all, the Tax Code itself has
to qualify for zero-rating is the only logical interpretation of Section 102(b)(2) of provisions for a foreign corporation engaged in business within the Philippines
the 1977 Tax Code, as we explained in Burmeister: and vice versa, to wit:
SEC. 22. Definitions - When used in this Title: (H) The term "resident foreign
This can only be the logical interpretation of Section 102 (b) (2). If the provider corporation" applies to a foreign corporation engaged in trade or business within
and recipient of the "other services" are both doing business in the Philippines, the Philippines.
the payment of foreign currency is irrelevant. Otherwise, those subject to the
regular VAT under Section 102 (a) can avoid paying the VAT by simply stipulating (I) The term ‘nonresident foreign corporation’ applies to a foreign corporation
payment in foreign currency inwardly remitted by the recipient of services. To not engaged in trade or business within the Philippines. (Emphasis in the original)
interpret Section 102 (b) (2) to apply to a payer-recipient of services doing Consequently, to come within the purview of Section 108(B)(2), it is not enough
business in the Philippines is to make the payment of the regular VAT under that the recipient of the service be proven to be a foreign corporation; rather, it
Section 102 (a) dependent on the generosity of the taxpayer. The provider of must be specifically proven to be a nonresident foreign corporation.
services can choose to pay the regular VAT or avoid it by stipulating payment in
There is no specific criterion as to what constitutes "doing" or "engaging in" or Philippine Billings under Section 28(A)(3)(a) of the 1997 National Internal
"transacting" business. We ruled thus in Commissioner of Internal Revenue v. Revenue Code (NIRC).
British Overseas Airways Corporation: x x x. There is no specific criterion as to
what constitutes "doing" or "engaging in" or "transacting" business. Each case To prevent the running of the prescriptive period, Air Canada filed a Petition for
must be judged in the light of its peculiar environmental circumstances. The term Review before the Court of Tax Appeals (CTA).
implies a continuity of commercial dealings and arrangements, and contemplates,
to that extent, the performance of acts or works or the exercise of some of the The CTA denied the petition. It found that Air Canada was engaged in business in
functions normally incident to, and in progressive prosecution of commercial the Philippines through a local agent that sells airline tickets on its behalf. As such,
gain or for the purpose and object of the business organization. " it held that while Air Canada was not liable for tax on its Gross Philippine Billings
under Section 28(A)(3), it was nevertheless liable to pay the 32% corporate
In order that a foreign corporation may be regarded as doing business within a income tax on income derived from the sale of airline tickets within the
State, there must be continuity of conduct and intention to establish a continuous Philippines pursuant to Section 28(A)(1). On appeal, the CTA En Banc affirmed
business, such as the appointment of a local agent, and not one of a temporary the ruling of the CTA First Division.
character."
ISSUE: Whether petitioner Air Canada, as an offline international carrier selling
A taxpayer claiming a tax credit or refund has the burden of proof to establish the passage documents through a general sales agent in the Philippines, is-a resident
factual basis of that claim. Tax refunds, like tax exemptions, are construed strictly foreign corporation within the meaning of Section 28(A)(1) of the 1997 National
against the taxpayer. Internal Revenue Code;

Accenture failed to discharge this burden. It alleged and presented evidence to HELD: Petitioner, an offline carrier, is a resident foreign corporation for income
prove only that its clients were foreign entities. However, as found by both the tax purposes. Petitioner falls within the definition of resident foreign corporation
CTA Division and the CTA En Banc, no evidence was presented by Accenture to under Section 28(A)(1) of the 1997 National Internal Revenue Code.
prove the fact that the foreign clients to whom petitioner rendered its services
were clients doing business outside the Philippines. Commonwealth Act No. 466, known as the National Internal Revenue Code
defined "resident foreign corporation" as applying to "a foreign corporation
14. AIR CANADA vs. CIR, G.R. No. 169507 (2016) engaged in trade or business within the Philippines or having an office or place
of business therein."
FACTS: Air Canada is a foreign corporation organized and existing under the laws
of Canada. On April 24, 2000, it was granted an authority to operate as an offline There is no specific criterion as to what constitutes "doing" or "engaging in" or
carrier by the Civil Aeronautics Board, subject to certain conditions, which "transacting" business. Each case must be judged in the light of its peculiar
authority would expire on April 24, 2005. As an off-line carrier, Air Canada does environmental circumstances. The term implies a continuity of commercial
not have flights originating from or coming to the Philippines and does not dealings and arrangements, and contemplates, to that extent, the
operate any airplane in the Philippines. performance of acts or works or the exercise of some of the functions
normally incident to, and in progressive prosecution of commercial gain or
On July 1, 1999, Air Canada engaged the services of Aerotel Ltd., Corp. (Aerotel) for the purpose and object of the business organization. In order that a
as its general sales agent in the Philippines. Aerotel sells Air Canada’s passage foreign corporation may be regarded as doing business within a State, there
documents in the Philippines. For the period ranging from the third quarter of must be continuity of conduct and intention to establish a continuous
2000 to the second quarter of 2002, Air Canada, through Aerotel, filed quarterly business, such as the appointment of a local agent, and not one of a
and annual income tax returns and paid the income tax on Gross Philippine temporary character.
Billings in the total amount of ₱5,185,676.77.
Republic Act No. 7042 or the Foreign Investments Act of 1991 also provides
On November 28, 2002, Air Canada filed a written claim for refund of alleged guidance with its definition of "doing business" with regard to foreign
erroneously paid income taxes amounting to ₱5,185,676.77 before the Bureau of corporations. Section 3(d) of the law enumerates the activities that constitute
Internal Revenue (BIR). It’s basis was found in the revised definition of Gross doing business:
Further, petitioner was issued by the Civil Aeronautics Board an authority to
d. the phrase "doing business" shall include soliciting orders, service contracts, operate as an offline carrier in the Philippines for a period of five years, or from
opening offices, whether called "liaison" offices or branches; appointing April 24, 2000 until April 24, 2005.
representatives or distributors domiciled in the Philippines or who in any
calendar year stay in the country for a period or periods totaling one hundred Petitioner is, therefore, a resident foreign corporation that is taxable on its
eighty (180) days or more; participating in the management, supervision or income derived from sources within the Philippines. Petitioner's income from
control of any domestic business, firm, entity or corporation in the Philippines; sale of airline tickets, through Aerotel, is income realized from the pursuit of its
and any other act or acts that imply a continuity of commercial dealings or business activities in the Philippines.
arrangements, and contemplate to that extent the performance of acts or works,
or the exercise of some of the functions normally incident to, and in progressive OTHER RELATED ISSUES:
prosecution of, commercial gain or of the purpose and object of the business
organization: Provided, however, That' the phrase "doing business" shall not be Whether Air Canada is subject to the 2½% tax on Gross Philippine
deemed to include mere investment as a shareholder by a foreign entity in Billings pursuant to Section 28(A)(3).
domestic corporations duly registered to do business, and/or the exercise of
rights as such investor; nor having a nominee director or officer to represent its NO. Air Canada is not is not liable to tax on Gross Philippine Billings under Section
interests in such corporation; nor appointing a representative or distributor 28(A)(3). The tax attaches only when the carriage of persons, excess baggage,
domiciled in the Philippines which transacts business in its own name and for its cargo, and mail originated from the Philippines in a continuous and
own account. uninterrupted flight, regardless of where the passage documents were sold. Not
having flights to and from the Philippines, petitioner is clearly not liable for the
An offline carrier is "any foreign air carrier not certificated by the Civil Gross Philippine Billings tax.
Aeronautics Board, but who maintains office or who has designated or appointed
agents or employees in the Philippines, who sells or offers for sale any air Whether Air Canada is a resident foreign corporation engaged in trade or
transportation in behalf of said foreign air carrier and/or others, or negotiate for, business and thus, can be subject to the regular corporate income tax of
or holds itself out by solicitation, advertisement, or otherwise sells, provides, 32% pursuant to Section 28(A)(1);
furnishes, contracts, or arranges for such transportation."
YES. Petitioner falls within the definition of resident foreign corporation under
Petitioner is undoubtedly "doing business" or "engaged in trade or business" in Section 28(A)(1)1, thus, it may be subject to 32% tax on its taxable income.
the Philippines.
The Court in Commissioner of Internal Revenue v. British Overseas Airways
Aerotel performs acts or works or exercises functions that are incidental and Corporation declared British Overseas Airways Corporation, an international air
beneficial to the purpose of petitioner's business. The activities of Aerotel bring carrier with no landing rights in the Philippines, as a resident foreign corporation
direct receipts or profits to petitioner. There is nothing on record to show that engaged in business in the Philippines through its local sales agent that sold and
Aerotel solicited orders alone and for its own account and without interference issued tickets for the airline company. According to said case, there is no specific
from, let alone direction of, petitioner. On the contrary, Aerotel cannot "enter into criterion as to what constitutes “doing” or “engaging in” or “transacting” business.
any contract on behalf of petitioner Air Canada without the express written Each case must be judged in the light of its peculiar environmental circumstances.
consent of the latter," and it must perform its functions according to the The term implies a continuity of commercial dealings and arrangements, and
standards required by petitioner.68 Through Aerotel, petitioner is able to engage contemplates, to that extent, the performance of acts or works or the exercise of
in an economic activity in the Philippines. some of the functions normally incident to, and in progressive prosecution of
commercial gain or for the purpose and object of the business organization.

An offline carrier is “any foreign air carrier not certificated by the Civil that the corresponding check covering the prize of P50,000 was drawn in favor
Aeronautics Board, but who maintains office or who has designated or appointed of Jose Gatchalian & Company against the PNB, which check was cashed by Jose
agents or employees in the Philippines, who sells or offers for sale any air Gatchalian & Company; on December 29, 1934, Jose Gatchalian was required by
transportation in behalf of said foreign air carrier and/or others, or negotiate for, income tax examiner to file the corresponding income tax return covering the
or holds itself out by solicitation, advertisement, or otherwise sells, provides, prize won by Jose Gatchalian & Company.
furnishes, contracts, or arranges for such transportation.”
The defendant made an assessment against Jose Gatchalian & Company
Petitioner is undoubtedly “doing business” or “engaged in trade or business” in requesting the payment of the sum of P1,499.94 to the deputy provincial
the Philippines. In the case at hand, Aerotel performs acts or works or exercises treasurer of Pulilan, Bulacan. The plaintiffs, sent to defendant a reply, requesting
functions that are incidental and beneficial to the purpose of petitioner’s business. exemption from payment of the income tax; defendant denied this request.
The activities of Aerotel bring direct receipts or profits to petitioner. Further, Because of the failure to pay the amount the CIR issued a warrant of distraint and
petitioner was issued by the Civil Aeronautics Board an authority to operate as levy against the property of the plaintiffs. The plaintiffs on June 15, 1935, paid
an offline carrier in the Philippines for a period of five years. Petitioner is, under protest the sum of P601.51 as part of the tax and penalties to the municipal
therefore, a resident foreign corporation that is taxable on its income derived treasurer of Pulilan, Bulacan, and requested defendant that plaintiffs be allowed
from sources within the Philippines. to pay under protest the balance of the tax and penalties by monthly installments.
That plaintiff's request to pay the balance of the tax and penalties was granted by
Whether petitioner Air Canada is entitled to the refund. defendant subject to the condition that plaintiffs file the usual bond secured by
two solvent persons to guarantee prompt payment of each installments as it
NO. As discussed in South African Airways, the grant of a refund is founded on the becomes due; On July 16, 1935 the said plaintiffs formally protested against the
assumption that the tax return is valid, that is, the facts stated therein are true payment of the sum of P602.51. That, in view of the failure of the plaintiffs to pay
and correct. The deficiency assessment, although not yet final, created a doubt as the monthly installments in accordance with the terms and conditions of bond
to and constitutes a challenge against the truth and accuracy of the facts stated in filed by them, the defendant ordered the municipal treasurer to execute within
said return which, by itself and without unquestionable evidence, cannot be the five days the warrant of distraint and levy issued against the plaintiffs; in order
basis for the grant of the refund. to avoid annoyance and embarrassment arising from the levy of their property,
the plaintiffs paid under protest the sum of P1,260.93 representing the unpaid
In this case, the P5,185,676.77 Gross Philippine Billings tax paid by petitioner balance of the income tax and penalties demanded by defendant and that on
was computed at the rate of 1 ½% of its gross revenues amounting to September 3, 1936, the plaintiffs formally protested to the defendant against the
P345,711,806.08149 from the third quarter of 2000 to the second quarter of payment of said amount and requested the refund thereof, the defendant
2002. It is quite apparent that the tax imposable under Section 28(A)(l) of the overruled the protest and denied the refund thereof; plaintiffs demanded upon
1997 NIRC 32% of taxable income, that is, gross income less deductions will defendant the refund of the total sum of one thousand eight hundred and sixty
exceed the maximum ceiling of 1 ½% of gross revenues as decreed in Article VIII three pesos and forty-four centavos (P1,863.44) paid under protest by them but
of the Republic of the Philippines-Canada Tax Treaty. Hence, no refund is that defendant refused to refund the said amount notwithstanding the plaintiffs'
forthcoming. demands.

TOPIC: NON-RESIDENT FOREIGN CORPORATIONS ISSUE: W/N the plaintiffs formed a partnership and thus liable for the payment
of income tax?
15. GATCHALIAN vs. CIR, G.R. No. L-45425 (1939)
HELD: Yes. There is no doubt that if the plaintiffs merely formed a community of
FACTS: Prior to December 15, 1934 plaintiffs, in order to enable them to property the latter is exempt from the payment of income tax under the law. But
purchase one sweepstakes ticket valued at two pesos (P2), subscribed and paid according to the stipulation facts the plaintiffs organized a partnership of a civil
a certain sum totaling to P2; plaintiffs purchased, from one of the duly authorized nature because each of them put up money to buy a sweepstakes ticket for the
agents of the National Charity Sweepstakes Office one ticket bearing No. 178637 sole purpose of dividing equally the prize which they may win, as they did in fact
and that the said ticket was registered in the name of Jose Gatchalian and in the amount of P50,000 (article 1665, Civil Code). The partnership was not only
Company; the ticket won one of the third prizes in the amount of P50,000 and formed, but upon the organization thereof and the winning of the prize, Jose
Gatchalian personally appeared in the office of the Philippines Charity income tax distinct from that imposed on the partners based on the principle
Sweepstakes, in his capacity as co-partner, as such collection the prize, the office enunciated in Evangelista case.
issued the check for P50,000 in favor of Jose Gatchalian and company, and the In a dissenting opinion by Associate Judge Roaquin, although there might be a co-
said partner, in the same capacity, collected the said check. All these ownership between the petitioners, there was no adequate basis that they
circumstances repel the idea that the plaintiffs organized and formed a formed an unregistered partnership which made them liable for corporate
community of property only. income tax under the Tax Code.

Having organized and constituted a partnership of a civil nature, the said ISSUE: a) WON CTA erred in holding that the determination of CIR that
entity is the one bound to pay the income tax which the defendant collected under petitioners formed an unregistered partnership is subject to corporate income
the aforesaid section 10 (a) of Act No. 2833, as amended by section 2 of Act No. tax
3761. There is no merit in plaintiff's contention that the tax should be prorated
among them and paid individually, resulting in their exemption from the tax. b) WON CTA erred in making a finding solely on the basis of isolated sale
transactions that unregistered partnership existed, ignoring the requirements
16. PASCUAL vs. CIR, G.R. No. 78133 (1988) laid by law that would warrant the presumption/conclusion that a partnership
exists
FACTS: Petitioners bought 2 parcels of land from Bernardino, and another 3 from
Roque. The first 2 parcels were sold by petitioners to Marenir Devt. Corp in 1968 c) WON CTA erred in ruling that tax amnesty did not relieve the petitioners from
and the other 3 were sold to Reyes and Samson in 1970. Petitioners had a net payment of other taxes for the period covered by such amnesty
profit in the sale lands. Petitioners paid Capital Gains Taxes in 1973 and 1974 by
availing of the tax amnesties in those years. HELD: Petition is meritorious. Basing on the Evangelista case wherein CIR
demanded payment of income tax on a corporation as the issue in the Evangelista
March 31, 1979, petitioners were assessed and required to pay 107,101.70 as case is whether the petitioners are subject to tax on corporations provided for by
alleged deficiency corporate income taxes for 1968 and 1970. NIRC as well as residence tax for corps and real estate dealers’ fixed tax. It ruled
in this case that there was no partnership not having satisfied the two essential
Petitioners protested with CIR, June 26, 1979 asserting that they availed elements: a)an agreement to contribute money, property, or industry to a
amnesties in 1974. common fund; and b) intent to divide the profits among the contracting parties.
The sharing of returns does not in itself establish a partnership whether or not
In a reply August 22, 1979, CIR informed petitioners that in the years 1968 and the persons sharing therein have a joint or common right or interest in the
1970, petitioners as co-owners in the real estate transactions formed an property. There must be a clear intent to form a partnership, the existence of a
unregistered partnership or joint venture taxable as a corporation under Section juridical personality different from the individual partners, and the freedom of
20(b) and its income was subject to the taxes prescribed under Section 24, both each party to transfer or assign the whole property.
of the National Internal Revenue Code, that the unregistered partnership was
subject to corporate income tax as distinguished from profits derived from the It is evident that an isolated transaction whereby two or more persons contribute
partnership by them which is subject to individual income tax; and that the funds to buy certain real estate for profit in the absence of other circumstances
availment of tax amnesty under P.D. No. 23 “Proclaiming a tax amnesty”, as showing a contrary intention cannot be considered a partnership.
amended, by petitioners relieved petitioners of their individual income tax In this case there is clear evidence of co-ownership between petitioners. There is
liabilities but did not relieve them from the tax liability of the unregistered no basis that they formed an unregistered partnership. The 2 isolated
partnership. Hence, the petitioners were required to pay the deficiency income transactions did not make them partners; they merely shared in the gross profits
tax assessed. as co-owners and paid their capital gains taxes on their net profits and availed of
tax amnesty.
CTA Decision-Petitioners filed a petition for review with CTA. CTA affirmed CIR’s
decision against petitioners wherein CIR ruled that an unregistered partnership a) Yes CTA erred in affirming CIR’s decision that an unregistered
was formed by petitioners which, like a corporation was subject to corporate partnership was formed. Petitioners did not form an unregistered
partnership which would make them liable for corporate income tax.
They are mere co-owners. And even assuming for the sake of argument The CIR did not act on said claim for refund. SC Johnson and Son filed a petition
that such unregistered partnership appears to have been formed, since for review before the CTA, to claim a refund of the overpaid withholding tax on
there is no such existing unregistered partnership with a distinct royalty payments from July 1992 to May 1993.
personality nor with assets that can be held liable for said deficiency
corporate income tax, then petitioners can be held individually liable as CTA: Rendered its decision in favor of SC Johnson and ordered the CIR to issue a
partners for this unpaid obligation of the partnership. tax credit certificate representing overpaid withholding tax on royalty payments
b) Yes CTA erred in making a finding solely on the basis of the isolated sale from July 1992 to May 1993.
transactions. It is evident that an isolated transaction whereby two or
more persons contribute funds to buy certain real estate for profit in the CIR: Filed a petition for review to the CA
absence of other circumstances showing a contrary intention cannot be
considered a partnership. There 2 isolated transactions did not make CA: Finds no merit in the petition and affirming in toto the CTA ruling.
them partners.
c) Yes. As petitioners have availed of the benefits of tax amnesty as ISSUE: (1) Whether or not SC Johnson and Son, a foreign corporation is entitled
individual taxpayers in these transactions, they are thereby relieved of to the MOST FAVORED NATION CLAUSE which provides that tax rate of 10% on
any further tax liability arising therefrom. royalties as provided in the RP-US TAX TREATY IN RELATION TO THE RP-WEST
GERMANY TAX TREATY
Petition is granted and decision of CTA is reversed and set aside. Petitioners are
relieved from paying corporate income tax liability. (2) Whether or not tax refunds are considered as tax exemptions

17. CIR vs. S.C. JOHNSON AND SON, INC., G.R. No. 127106 (1999) HELD: (1) No, said clause cannot be invoked for the reason that when a tax treaty
contemplates circumstances attendant to the payment of a tax, or royalty
FACTS: Respondent, a domestic corporation organized and operating under PH remittances for that matter, these must necessarily refer to circumstances that
Laws, entered into a license agreement with SC Johnson and Son, USA, a non- are tax-related.
resident foreign corporation based in the US pursuant to which the respondent
was granted the right to use the trademark, patents and technology owned by the (2) It has been discussed in Taxation Law I that tax refunds are in the nature of
latter including the right to manufacture, package and distribute products tax exemptions. As such they are registered as in derogation of sovereign
covered by the agreement. authority and to be construed strictissimi juris against the person or entity
claiming the exemption. SC Johnson and Son is claiming for a refund of the alleged
For the use of the trademark or technology, respondent was obliged to pay SC overpayment of tax on royalties; however there is nothing on record to support
Johnson and Son royalties based on a percentage of net sales and subjected the a claim that the tax on royalties under the RP-US Treaty is paid under similar
same 25% withholding tax on royalty payments which respondent paid from July circumstances as the tax on royalties under the RP-West Germany Tax Treaty.
1992 to May 1993.
DOCTRINE: (1) Most favored nation clause which provides that the lowest rate of
On October 1993, respondent filed with the International Tax Affairs Division the Philippine tax at 10% may be imposed on royalties derived by a resident of
(ITAD) of the BIR a claim for refund of overpaid withholding tax on royalties the US from sources within the Philippines only if the circumstances of the
arguing that, the antecedent facts attending respondents’ case fall squarely resident of the US are similar to those of the resident of West Germany.
within the same circumstances under which said MacGeorge and Gillete rulings
were issued. Since the agreement was approved by the Technology Transfer (2) Tax refunds are in the nature of tax exemptions. It must be construed strictly
Board, the preferential tax rate of 10% should apply to respondent. Thus, against the taxpayer claiming the exemption. Burden of proof is upon the
royalties paid by the respondent to SC Johnson and Son is only subject to 10% taxpayer and he must be able to justify his claim by the clearest grant of organic
withholding tax. or statute law.

18. REYES vs. CIR, G.R. Nos. L-24020-21 (1968) commands assent, then clearly what respondent Court of Tax Appeals did fails to
find shelter in the law. That is the crux of the matter. A perusal of the Evangelista
FACTS: Petitioners in this case were assessed by respondent Commissioner of decision is therefore unavoidable
Internal Revenue the sum of P46,647.00 as income tax, surcharge and
compromise for the years 1951 to 1954, an assessment subsequently reduced to ISSUE: W/N petitioners are subject to the tax on corporations as required by the
P37,528.00. This assessment sought to be reconsidered unsuccessfully was the NIRC
subject of an appeal to respondent Court of Tax Appeals. Thereafter, another
assessment was made against petitioners, this time for back income taxes plus HELD: Yes. After referring to another section of the National Internal Revenue
surcharge and compromise in the total sum of P25,973.75, covering the years Code, which explicitly provides that the term corporation "includes partnerships"
1955 and 1956. There being a failure on their part to have such assessments and then to Article 1767 of the Civil Code of the Philippines, defining what a
reconsidered, the matter was likewise taken to the respondent Court of Tax contract of partnership is, the opinion goes on to state that "the essential
Appeals. elements of a partnership are two, namely: (a) an agreement to contribute money,
property or industry to a common fund; and (b) intent to divide the profits among
Petitioners father and son purchased a lot and building known as the Gibbs the contracting parties. The first element is undoubtedly present in the case at
Building for P835,000.00 of which they paid the sum of P375,000.00, leaving a bar, for, admittedly, petitioners have agreed to and did, contribute money and
balance of P460,000.00, representing the mortgage obligation of the vendors property to a common fund.
with the China Banking Corporation, which mortgage obligations were assumed
by the vendees. The initial payment of P375,000.00 was shared equally by This is the way it was disposed of in the opinion of the present Chief Justice: "This
petitioners. At the time of the purchase, the building was leased to various pretense was correctly rejected by the Court of Tax Appeals."14 Then came the
tenants, whose rights under the lease contracts with the original owners, the explanation why: "To begin with, the tax in question is one imposed upon
purchasers, petitioners herein, agreed to respect. The administration of the "corporations", which, strictly speaking, are distinct and different from
building was entrusted to an administrator who collected the rents; kept its "partnerships". When our Internal Revenue Code includes "partnerships" among
books and records and rendered statements of accounts to the owners; the entities subject to the tax on "corporations", said Code must allude, therefore,
negotiated leases; made necessary repairs and disbursed payments, whenever to organizations which are not necessarily "partnerships", in the technical sense
necessary, after approval by the owners; and performed such other functions of the term. Thus, for instance, section 24 of said Code exempts from the
necessary for the conservation and preservation of the building. Petitioners aforementioned tax "duly registered general partnerships", which constitute
divided equally the income of operation and maintenance. The gross income from precisely one of the most typical forms of partnerships in this jurisdiction.
rentals of the building amounted to about P90,000.00 annually. Likewise, as defined in section 84(b) of said Code, "the term corporation includes
partnerships, no matter how created or organized." This qualifying expression
From the above facts, the respondent Court of Tax Appeals applying the clearly indicates that a joint venture need not be undertaken in any of the
appropriate provisions of the National Internal Revenue Code, the first of which standard forms, or in conformity with the usual requirements of the law on
imposes an income tax on corporations "organized in, or existing under the laws partnerships, in order that one could be deemed constituted for purposes of the
of the Philippines, no matter how created or organized but not including duly tax on corporations. Again, pursuant to said section 84(b), the term "corporation"
registered general co-partnerships (companias colectivas), ...,"6 a term, which includes, among others, "joint accounts, (cuentas en participacion)" and
according to the second provision cited, includes partnerships "no matter how "associations", none of which has a legal personality of its own, independent of
created or organized, ...,"7 and applying the leading case of Evangelista v. that of its members. Accordingly, the lawmaker could not have regarded that
Collector of Internal Revenue,8 sustained the action of respondent Commissioner personality as a condition essential to the existence of the partnerships therein
of Internal Revenue, but reduced the tax liability of petitioners, as previously referred to. In fact, as above stated, "duly registered general co-partnerships" —
noted. which are possessed of the aforementioned personality - have been expressly
excluded by law (sections 24 and 84[b]) from the connotation of the term
Petitioners maintain the view that the Evangelista ruling does not apply; for them, "corporation". "The opinion went on to summarize the matter aptly: "For
the situation is dissimilar. Consequently they allege that the reliance by purposes of the tax on corporations, our National Internal Revenue Code, include
respondent Court of Tax Appeals was unwarranted and the decision should be these partnerships — with the exception only of duly registered general co-
set aside. If their interpretation of the authoritative doctrine therein set forth partnerships within the purview of the term "corporation." It is, therefore, clear
to our mind that petitioners herein constitute a partnership, insofar as said Code FOREGOING, we hold that the petitioners are liable for the income tax, real estate
is concerned, and are subject to the income tax for corporations." dealer's tax and the residence tax for the years 1945 to 1949, inclusive, in
accordance with the respondent's assessment for the same in the total amount of
In the light of the above, it cannot be said that the respondent Court of Tax P6,878.34, which is hereby affirmed and the petition for review filed by
Appeals decided the matter incorrectly. There is no warrant for the assertion that petitioners is hereby dismissed with costs against petitioners." and, a petition for
it failed to apply the settled law to uncontroverted facts. Its decision cannot be reconsideration and new trial having been subsequently denied.
successfully assailed. Moreover, an observation made in Alhambra Cigar &
Cigarette Manufacturing Co. v. Commissioner of Internal Revenue,17 is well- ISSUE: Whether or not the petitioners are subject to the tax on corporations as
worth recalling. Thus: "Nor as a matter of principle is it advisable for this Court well as to the residence tax for corporations and the real estate dealers' fixed tax.
to set aside the conclusion reached by an agency such as the Court of Tax Appeals
which is, by the very nature of its functions, dedicated exclusively to the study HELD: Yes. With respect to the tax on corporations, the issue hinges on the
and consideration of tax problems and has necessarily developed an expertise on meaning of the terms "corporation" and "partnership", as used in sections 24 and
the subject, unless, as did not happen here, there has been an abuse or 84 of said Code, the pertinent parts of which read:
improvident exercise of its authority.
"SEC. 24. Rate of tax on corporations. — There shall be levied, assessed, collected,
19. EVANGELISTA vs. CIR, G.R. No. L-9996 (1957) and paid annually upon the total net income received in the preceding taxable year
from all sources by every corporation organized in, or existing under the laws of the
FACTS: This is a petition, filed by Eufemia Evangelista, Manuela Evangelista and Philippines, no matter how created or organized but not including duly registered
Francisca Evangelista, for review of a decision of the Court of Tax Appeals. The general co-partnerships
petitioners borrowed from their father the sum of P59, 140.00 which amount
together with their personal monies was used by them for the purpose of buying "Sec. 84(b). The term 'corporation' includes partnerships, no matter how created or
real properties; The petitioners purchased several different properties during organized, joint-stock companies, joint accounts, associations or insurance
the years 1943-1944. In a document dated August 16, 1945, they appointed their companies, but does not include duly registered general copartnerships.”
brother Simeon Evangelista to 'manage their properties with full power to lease;
to collect and receive rents; to issue receipts therefor; in default of such payment, Pursuant to this article, the essential elements of a partnership are two, namely:
to bring suits against the defaulting tenant; to sign all letters, contracts, etc., for (a) an agreement to contribute money, property or industry to a common fund;
and in their behalf, and to endorse and deposit all notes and checks for them. After and (b) intent to divide the profits among the contracting parties. The first
having bought the above-mentioned real properties, the petitioners had the same element is undoubtedly present in the case at bar, for, admittedly, petitioners
rented or leased to various tenants. From the month of March, 1945 up to and have agreed to, and did, contribute money and property to a common fund. Hence,
including December, 1945, the total amount collected as rents on their real the issue narrows down to their intent in acting as they did.
properties was P9,599.00 while the expenses amounted to P3,650.00 thereby
leaving them a net rental income of P5,948.33. In 1946, they realized a gross Upon consideration of all the facts and circumstances surrounding the case, we
rental income in the sum of P24,786.30, out of which amount was deducted the are fully satisfied that their purpose was to engage in real estate transactions for
sum of P16,288.27 for expenses thereby leaving them a net rental income of monetary gain and then divide the same among themselves. Said common fund
P7,498.13; In 1948 they realized a gross rental income of P17,453.00 out of the was not something they found already in existence. It was not a property
which amount was deducted the sum of P4,837.65 as expenses, thereby leaving inherited by them pro indiviso. They invested the same, not merely in one
them a net rental income of P12,615.35." transaction, but in a series of transactions. The number of lots (24) acquired and
transactions undertaken, is strongly indicative of a pattern or common design
It further appears that on September 24, 1954, respondent Collector of Internal that was not limited to the conservation and preservation of the aforementioned
Revenue demanded the payment of income tax on corporations, real estate common fund or even of the property acquired by petitioners. In other words,
dealer's fixed tax and corporation residence tax for the years 1945-1949 one cannot but perceive a character of habituality peculiar to business
transactions engaged in for purposes of gain.
After appropriate proceedings, the Court of Tax Appeals rendered the decision
for the respondent, the dispositive part of which reads: "FOR ALL THE
Petitioners insist, however, that they are mere co-owners, not copartners, for, in converted into the Philippine peso equivalent thereof, under the prevailing free
consequence of the acts performed by them, a legal entity, with a personality market rate, for purposes of the common carrier’s tax prescribed in Section 192
independent of that of its members, did not come into existence, and some of the of the National Internal Revenue Code. Thereafter, the taxpayer discontinued this
characteristics of partnerships are lacking in the case at bar. This pretense was practice and, since February, 1962, it reported said revenues, in its monthly
correctly rejected by the Court of Tax Appeals. returns for carrier’s tax, based on the parity rate of P2 to $1, and paid P1,500.00
as such carrier’s tax. Upon examination of the records of the taxpayer, the
Considering that the pertinent part of this provision is analogous to that of Commissioner of Internal Revenue, hereinafter referred to as the petitioner, held
sections 24 and 84(b) of our National Internal Revenue Code, and that the latter that, applying the free market conversion rate, the taxpayer’s gross receipts from
was approved on June 15, 1939, the day immediately after the approval of said February to May, 1962, aggregated P163,776.38, and, based thereon demanded
Commonwealth Act No. 465 (June 14, 1939), it is apparent that the terms payment of P2,219.35 as deficiency common carrier’s tax, plus surcharge and
"corporation" and "partnership" are used in both statutes with substantially the penalty.
same meaning. Consequently, petitioners are subject, also, to the residence tax
for corporations. RESPONDENT’S CONTENTION: The theory of the taxpayer to the effect that, not
having been physically remitted to the Philippines, the fees in question do not
Lastly, the records show that petitioners have habitually engaged in leasing the partake of the nature of revenues derived from foreign exchange transactions is
properties above mentioned for a period of over twelve years, and that the yearly manifestly devoid of merit. The transactions from which said revenues were
gross rentals of said properties from 1945 to 1948 ranged from P9,599 to derived involved the loading of cargo in the Philippines, the transportation of said
P17,453. Thus, they are subject to the tax provided in section 193 (q) of our cargo to its ports of destination, the delivery of the cargo to the respective
National Internal Revenue Code, for real estate dealers. consignees, and the payment of the corresponding fees to the taxpayer’s head
office at Amsterdam. As regards the taxpayer, the transactions were
20. ROYAL INTEROCEAN LINES vs. CIR, G.R. No. L-46029 (1988) consummated upon delivery of the cargo to the consignee. Upon the other hand,
the obligations of the latter or the shipper were discharged upon payment of the
FACTS: Appeal by the Commissioner of Internal Revenue from a decision of the freight. Insofar as the parties to said transaction were concerned, the same were
Court of Tax Appeals reversing that of said official, in connection with the liability fully completed upon payment of the fees at Amsterdam.
of the Royal Interocean Lines, Inc., for deficiency carrier’s percentage tax, plus
surcharge. ISSUE: WON the freight revenues in the case at bar is a foreign exchange
transaction?
Said Royal Interocean, Liner, Inc. — hereinafter referred to as the taxpayer — is
a foreign corporation duly licensed to do business in the Philippines, with head HELD: YES. It is, thus, our considered view that the freight revenues accruing to
office in Amsterdam, Holland. The taxpayer is engaged in the operation of ocean- the taxpayer in the present case, even though collected abroad and not remitted
going vessels, plying between the Philippines and other countries, transporting to its branch office in the Philippines, are part of its foreign exchange operations
passengers and cargo. It is, likewise, an agent and representative of the Holland and subject to the common carrier’s tax, computed at the free market rate then
East Asia Lines, a Dutch shipping company, from which the taxpayer receives prevailing. The remittance or non-remittance of fees paid to the head office for
compensation in the form of commissions for services rendered. It is not disputed services performed by the employees in the branch office can not affect the
that from February to May, 1962, inclusive, vessels of the taxpayer and/or the nature of said transactions involving foreign exchange for it is not a part thereof
Holland East Asia Lines called at Philippine ports to load cargo, with freight, in any manner whatever.
payable at destination, valued at US $37,501.50. This sum had been collected by
and paid to the taxpayer’s head office in Holland. and was not actually turned over It is next urged that the 25% surcharge sought to be collected by the petitioner
or forwarded, as such freight fees, to the taxpayer in the Philippines. The only should not be imposed upon the taxpayer, it having acted in good faith in doing
remittances received by the latter from its aforementioned head office were what it did, for it merely followed the advice of counsel. The aforementioned
those made, through its agent bank, for the operational expenses of the branch surcharge was imposed by petitioner herein in accordance with Section 183 of
office in the Philippines. the National Internal Revenue Code, 4 subdivision (a) of which reads:

Prior to January, 1962, its dollar earnings derived from freight revenues were "SEC. 183. Payment of percentage taxes — (a) In general. — It shall be the duty
of every person conducting a business on which a percentage tax is imposed HELD:
under this Title, to make a true and complete return of the amount of his, her or 1) Unregistered partnership.
its gross monthly sales, receipts or earnings, or gross value of output actually
removed from the factory or mill warehouse and within twenty days after the end The CTA found that instead of actually distributing the estate of the
of each month, pay the tax due thereon: Provided, That any person retiring from deceased among themselves pursuant to the project of partition, the heirs
a business subject to the percentage tax shall notify the nearest internal revenue allowed their properties to remain under the management of Ona and allowed
officer thereof, file his return or declaration, and pay the tax due thereon within him to use their shares as part of the common fund for their ventures, even as
twenty days after closing his business. "If the percentage tax on any business is they paid corresponding income taxes on their respective shares.
not paid within the time specified above, the amount of the tax shall be increased
by twenty-five per centum, the increment to be a part of the tax. 2) Yes.

21. OÑA vs. CIR, G.R. No. L-19342 (1972) For tax purposes, the co-ownership of inherited properties is
automatically converted into an unregistered partnership the moment the said
FACTS: Julia Bunales died leaving as heirs her surviving spouse Lorenzo Ona common properties and/or the incomes derived therefrom are used as a common
and her five children. fund with intent to produce profits for the heirs in proportion to their respective
shares in the inheritance as determined in a project partition either duly executed
A civil case was instituted for the settlement of her estate, in which Ona in an extrajudicial settlement or approved by the court in the corresponding
was appointed administrator and subsequently a guardian of the three heirs who testate or intestate proceeding. The reason is simple. From the moment of such
were still minors when the project of partition was approved. The heirs had an partition, the heirs are entitled already to their respective definite shares of the
undivided ½ interest in 10 parcels of land, 6 houses and money from the War estate and the incomes thereof, for each of them to manage and dispose of as
Damage Commission. exclusively his own without the intervention of the other heirs, and, accordingly,
he becomes liable individually for all taxes in connection therewith. If after such
Although the project of partition was approved by the Court, no attempt partition, he allows his share to be held in common with his co-heirs under a
was made to divide the properties and they remained under the management of single management to be used with the intent of making profit thereby in
Ona who used said properties in business by leasing or selling them and investing proportion to his share, there can be no doubt that, even if no document or
the income derived therefrom and the proceeds from the sales thereof in real instrument were executed, for the purpose, for tax purposes, at least, an
properties and securities. As a result, petitioners’ properties and investments unregistered partnership is formed.
gradually increased. Petitioners returned for income tax purposes their shares in
the net income, but they did not actually receive their shares because this was left For purposes of the tax on corporations, our NIRC includes as
with Ona who had invested them. partnerships: a syndicate, group, pool, joint venture or other unincorporated
organization, through or by means of which any business, financial operation, or
Based on these facts, CIR decided that petitioners formed an venture is carried on, with the exception only of duly registered general co-
unregistered partnership and, therefore, subject to the corporate income tax, partnerships—within the purview of the term “corporation.” It is, therefore, clear
particularly for years 1955 and 1956. to our mind that petitioners herein constitute a partnership, insofar as said Code
is concerned, and are subject to the income tax for corporations.
Petitioners asked for reconsideration, which was denied, hence, this
petition for review assailing the decision of the CTA.

ISSUE/S:
1) Whether or not there was a co-ownership or an unregistered
partnership.
2) Whether or not petitioners are liable for the deficiency corporate
income tax.

CHAPTER 3 – INCOME HELD: NO. To be clear, the principles under financial or business accounting, in
TOPIC: GENERAL AND FISCAL CONCEPTS theory and application, are not necessarily interchangeable with those in tax
accounting. Thus, although closely related, tax and business accounting had
22. CIR vs. LANCASTER PHILIPPINES, INC., G.R. No. 183408 (2017) invariably produced concepts that at some point diverge in understanding or
usage. For instance, two of such important concepts are taxable income and
FACTS: Petitioner Commissioner of Internal Revenue (CIR) is authorized by law, business income (or accounting income). Much of the difference can be attributed
among others, to investigate or examine and, if necessary, issue assessments for to the distinct purposes or objectives that the concepts of tax and business
deficiency taxes. On the other hand, respondent Lancaster Philippines, accounting are aimed at.
Inc. (Lancaster) is a domestic corporation established in 1963 and is engaged in
the production, processing, and marketing of tobacco. While there may be differences between tax and accounting, it cannot be said that
the two mutually exclude each other. As already made clear, tax laws borrowed
In 1999, the Bureau of Internal Revenue (BIR) issued Letter of concepts that had origins from accounting. In truth, tax cannot do away with
Authority (LOA) No. 00012289 authorizing its revenue officers to examine accounting. It relies upon approved accounting methods and practices to
Lancaster's books of accounts and other accounting records for all internal effectively carry out its objective of collecting the proper amount of taxes from
revenue taxes due from taxable year 1998 to an unspecified date. the taxpayers. Thus, an important mechanism established in many tax systems is
the requirement for taxpayers to make a return of their true income. Maintaining
After the conduct of an examination pursuant to the LOA, the BIR issued accounting books and records, among other important considerations, would in
a Preliminary Assessment Notice (PAN) which cited Lancaster for: 1) turn assist the taxpayers in complying with their obligation to file their income
overstatement of its purchases for the fiscal year April 1998 to March1999; and 2) tax returns. At the same time, such books and records provide vital information
noncompliance with the generally accepted accounting principle of proper and possible bases for the government, after appropriate audit, to make an
matching of cost and revenue. More concretely, the BIR disallowed the purchases assessment for deficiency tax whenever so warranted under the circumstances.
of tobacco from farmers covered by Purchase Invoice Vouchers (PIVs) for the
months of February and March 1998 as deductions against income for the fiscal An accounting method is a "set of rules for determining when and how to report
year April 1998 to March 1999 for a total tax income deficiency of P6,466,065.50. income and deductions." The provisions under Chapter VIII, Title II of the NIRC
cited above enumerate the methods of accounting that the law expressly
RESPONDENT’S CONTENTION: recognizes, to wit:
Lancaster replied to the PAN contending, among other things, that for the past (1) Cash basis method;
decades, it has used an entire 'tobacco-cropping season' to determine its total (2) Accrual method;
purchases covering a one-year period from 1 October up to 30 September of the (3) Installment method;
following year (as against its fiscal year which is from 1 April up to 31 March of (4) Percentage of completion method; and
the following year); that it has been adopting the 6~month timing difference to (5) Other accounting methods.
conform to the matching concept (of cost and revenue); and that this has long
been installed as part of the company's system and consistently applied in its Any of the foregoing methods may be employed by any taxpayer so long as it
accounting books. reflects its income properly and such method is used regularly. The peculiarities
of the business or occupation engaged in by a taxpayer would largely determine
RULING OF THE CTA how it would report incomes and expenses in its accounting books or records.
The CTA granted Lancaster’s Petition, ordering CIR to cancel and withdraw the The NIRC does not prescribe a uniform, or even specific, method of accounting.
tax deficiency assessment.
Too, other methods approved by the CIR, even when not expressly mentioned in
ISSUE: WHETHER OR NOT THE COURT OF TAX APPEALS EN BANC ERRED IN the NIRC, may be adopted if such method would enable the taxpayer to properly
ORDERING PETITIONER TO CANCEL AND WITHDRAW THE DEFICIENCY reflect its income. Section 43 of the NIRC authorizes the CIR to allow the use of a
ASSESSMENT ISSUED AGAINST RESPONDENT. method of accounting that in its opinion would clearly reflect the income of the
taxpayer. An example of such method not expressly mentioned in the NIRC, but
duly approved by the CIR, is the 'crop method of accounting' authorized under reimbursed of the 5% GRT it paid on the portion of 20% FWT or the amount
RAM No. 2-95. of P326,007.01. On the same date, Citytrust filed a petition for review with the
CTA, which eventually granted its claim.
The crop method recognizes that the harvesting and selling of crops do not fall
within the same year that they are planted or grown. This method is especially On appeal by the Commissioner, the Court of Appeals affirmed the CTA Decision.
relevant to farmers, or those engaged in the business of producing crops who,
pursuant to RAM No. 2-95, would then be able to compute their taxable income ISSUE: Does the twenty percent (20%) final withholding tax (FWT) on a bank’s
on the basis of their crop year. On when to recognize expenses as deductions passive income form part of the taxable gross receipts for the purpose of
against income, the governing rule is found in the second sentence of Subsection computing the five percent (5%) gross receipts tax (GRT)?
F cited above. The rule enjoins the recognition of the expense (or the deduction
of the cost) of crop production in the year that the crops are sold (when income HELD: NO. Numerous cases are unanimous in defining "gross receipts" as "the
is realized). entire receipts without any deduction.”

In the present case, we find it wholly justifiable for Lancaster, as a business CIR v. Bank of Philippine Islands: The Tax Code does not provide a definition
engaged in the production and marketing of tobacco, to adopt the crop method of of the term "gross receipts". Accordingly, the term is properly understood in its
accounting. A taxpayer is authorized to employ what it finds suitable for its plain and ordinary meaning and must be taken to comprise of the entire receipts
purpose so long as it consistently does so, and in this case, Lancaster does appear without any deduction
to have utilized the method regularly for many decades already. Considering that
the crop year of Lancaster starts from October up to September of the following CIR v. Bank of Commerce: The word gross must be used in its plain and
year, it follows that all of its expenses in the crop production made within the ordinary meaning. It is defined as whole, entire, total, without deduction. A
crop year starting from October 1997 to September 1998, including the February common definition is without deduction. Gross is also defined as taking in the
and March 1998 purchases covered by purchase invoice vouchers, are rightfully whole; having no deduction or abatement; whole, total as opposed to a sum
deductible for income tax purposes in the year when the gross income from the consisting of separate or specified parts. Gross is the antithesis of net.
crops are realized.
China Banking Corporation v. Court of Appeals: Under the ordinary basic
TOPIC: GROSS INCOME methods of handling accounts, the term gross receipts, in the absence of any
statutory definition of the term, must be taken to include the whole total gross
23. CIR vs. CITYTRUST INVESTMENT PHILIPPINES, INC., G.R. No. receipts without any deductions.
139786 (2006)
The legislative intent to apply the term in its plain and ordinary meaning may be
FACTS: Citytrust is a domestic corporation engaged in quasi-banking activities. surmised from a historical perspective of the levy on gross receipts. From the
Citytrust reported the amount of P110,788,542.30 as its total gross receipts and time the GRT on banks was first imposed in 1946 under Republic Act No. 39 the
paid the amount of P5,539,427.11 corresponding to its 5% GRT. legislature has not established a definition of the term "gross receipts."

Meanwhile, on January 30, 1996, the CTA, in Asian Bank Corporation v. Under Revenue Regulations No. 12-80 and No. 17-84, as well as several
Commissioner of Internal Revenue (ASIAN BANK case), ruled that the basis in numbered rulings, the BIR has consistently ruled that the term "gross receipts"
computing the 5% GRT is the gross receipts minus the 20% FWT. In other words, does not admit of any deduction. This interpretation has remained unchanged
the 20% FWT on a banks passive income does not form part of the taxable gross throughout the various re-enactments of the present Section 121 of the Tax Code.
receipts.
Commissioner of Internal Revenue v. Solidbank Corporation: When we
Citytrust, inspired by the above-mentioned CTA ruling, filed with the speak of the "gross earnings" of a person or corporation, we mean the entire
Commissioner a written claim for the tax refund or credit in the amount earnings or receipts of such person or corporation from the business or operation
of P326,007.01. It alleged that its reported total gross receipts included the 20% to which we refer.
FWT on its passive income amounting to P32,600,701.25. Thus, it sought to be
TOPIC: PASSIVE INVESTMENT INCOME
The respondents anchor their argument on the same basis as the Court
24. CIR vs. MANNING, G.R. No. L-28398 (1975) of Tax Appeals. The Commissioner maintains that the full value (P7,973,660) of
the shares redeemed from Reese by MANTRASCO which were subsequently
FACTS: In 1952 the MANTRASCO had an authorized capital stock of P2,500,000 distributed to the respondents as stock dividends in 1958 should be taxed as
divided into 25,000 common shares, 24,700 of these were owned by Julius S. income of the respondents for that year, the said distribution being in effect a
Reese. In view of Reese's desire that upon his death MANTRASCO and its two distribution of cash. it is the assumption of both parties that the 24,700 shares
subsidiaries, MANTRASCO (Guam), Inc. and the Port Motors, Inc., would declared as stock dividends were treasury shares.
continue under the management of the respondents, a trust agreement on his
and the respondents' interests in MANTRASCO was executed. ISSUE: Whether or not respondents are liable for deficiency income on the stock
Upon the death of the OWNER and the receipt by the TRUSTEES of the dividends
initial payment from the company purchasing the OWNER'S SHARES, the
TRUSTEES shall cause the OWNER'S SHARES to be transferred into the name of HELD: YES.
such company and such company shall thereupon transfer such shares into the
name of the TRUSTEES and the TRUSTEES shall hold such shares until payment The ultimate purpose which the parties to the trust agreement aimed to
for all such shares shall have been made by the company as provided in this realize is to make Manning, McDonalds & Simmons the sole owners of Reese’s
agreement. interest in Mantrasco by utilizing the periodic earnings of Mantrasco and its
On October 19, 1954 Reese died. The projected transfer of his shares in subsidiaries to directly subsidize their purchase of said interests and by making
the name of MANTRASCO could not, however, be immediately effected for lack of it appear that they have not received any income from those firms when, in fact,
sufficient funds to cover initial payment on the shares. by the formal declaration of non- existent stock dividends in the treasury they
In 1955, after MANTRASCO made a partial payment of Reese's shares, secured to themselves the means to turn around as full owners of Reese’s shares.
the certificate for the 24,700 shares in Reese's name was cancelled and a new
certificate was issued in the name of MANTRASCO. The new certificate was Manning, McDonald & Simmons, using the trust instrument as a
endorsed to the law firm of Ross, Selph, Carrascoso and Janda, as trustees for and convenient technical device, bestowed unto themselves the full worth and value
in behalf of MANTRASCO. of Reese's corporate holdings with the use of the very earnings of the companies.
In 1958, the following resolution was passed: All these amounts are subject to income tax as being a flow of cash benefits to
Manning, McDonald & Simmons.  Commissioner’s assessment is erroneous as he
"RESOLVED, that the 24,700 shares in the Treasury be reverted back to should not have assessed the income tax on the total acquisition cost of the
the capital account of the company as a stock dividend to be distributed to alleged treasury stock dividends in 1 lump sum. The record shows that the
shareholders of record” earnings of Mantrasco over the period of years were used to gradually wipe out
the holdings of Reese. Consequently, those earnings should be taxed for each of
On November 25, 1963 the entire purchase price of Reese's interest in the corresponding years when payments were made to Reese’s estate on account
MANTRASCO was finally paid in full by the latter. On May 4, 1964 the trust of his 24,700 shares.  
agreement was terminated and the trustees delivered to MANTRASCO all the
shares which they were holding in trust. DOCTRINE/S: The fact that the resolution authorizing the distribution of
earnings is null and void is of no moment. Under the National Internal Revenue
The respondents failed to declare the said stock dividends as part of their Code, income tax is assessed on income received from any property, activity or
taxable income for the year 1958. The BIR examiners concluded that the service that produces income. The Tax Code stands as an indifferent, neutral
distribution of Reese's shares as stock dividends was in effect a distribution of party on the matter of where the income comes from. The action taken by the
the "asset or property of the corporation as may be gleaned from the payment of Commissioner of assessing fraud penalty and imposing interest charges pursuant
cash for the redemption of said stock and distributing the same as stock dividend. to the provisions of the Tax Code is in accordance with law.
The CTA rendered judgment absolving the respondents from any liability for
receiving the questioned stock dividends on the ground that their respective one-
third interest in MANTRASCO remained the same
25. BACHRACH vs. SEIFERT AND ELIANOFF, G.R. No. L-2659 (1950) of the original shares, just as the offspring of a domestic animal may be sold
independently of its mother.
FACTS: In the last will and testament of the deceased E.M Bachrach he made
various legacies in cash and willed the remainder of his estate as follows: It is clear that testator intent the remaindermen should have only the corpus of
the estate he left in trust, and that all dividends should go the life tenants. It is
Sixth: It is my will and do herewith bequeath and devise to my beloved true that profits realized are not dividends until declared by the proper officials
wife Mary McDonald Bachrach for life all the fruits and usufruct of the of the corporation, but distribution of profits, however made, in dividends, and
remainder of all my estate after payment of the legacies, bequests, and the form of the distribution is immaterial.
gifts provided for above; and she may enjoy said usufruct and use or
spend such fruits as she may in any manner wish. 26. WISE AND CO, INC., ET. AL. vs. MEER, G.R. No. 48231 (1947)

The estate of E. M. Bachrach, as owner of 108,000 shares of stock of the Atok-Big FACTS: 1937, plaintiffs except Mr. Strickland (husband of plaintiff Ms. Strickland),
Wedge Mining Co., Inc., received from the latter 54,000 shares representing 50 stockholders of Manila Wine Merchants (Hongkong Compony), foreign corp
per cent stock dividend on the said 108,000 shares. authorized to do business in PH. Board of Directors of HK Company
recommended to the stockholders that they adopt resolutions to enable the
Mary McDonald Bachrach, as usufructuary or life tenant of the estate, petitioned company to sell its business and assets to Manila Wine Merchants Inc (MNL
the lower court to authorize the Peoples Bank and Trust Company as Company) for P400k PH currency; sale was authorized by stockholders of HK
administrator of the estate of E. M. Bachrach, to her the said 54,000 share of stock company’ contract of sale between HK company and MNL company was executed
dividend by endorsing and delivering to her the corresponding certificate of stock, on same date and final resolutions were adopted and MNL company paid HK
claiming that said dividend, although paid out in the form of stock, is fruit or company P400k purchase price.
income and therefore belonged to her as usufructuary or life tenant. Sophie
Siefert and Elisa Elianoff, legal heirs of the deceased, opposed said petition on the HK company made a distribution from its earnings for the year 1937 to its
ground that the stock dividend in question was not income but formed part of the stockholders including plaintiffs pursuant to a resolution of the BOD. HK
capital and therefore belonged not to the usufructuary but to the remainderman. company paid income tax on the entire earnings from which distributions were
paid. After deducting the dividend, the surplus of HK company from its active
While appellants admits that a cash dividend is an income, they contend that a business was P74k. As a result of the sale of its business and assets to MNL
stock dividend is not, but merely represents an addition to the invested capital. company, surplus of HK company was increased to P270k. HK company again
distributed dividends, and income tax was paid again.
ISSUE : Is a stock dividend fruit or income, which belongs to the usufructuary, or
is it capital or part of the corpus of the estate, which pertains to the HK stockholders directed that the company be voluntarily liquidated and its
remainderman? capital distributed among stockholders including plaintiffs. Liquidator filed his
accounting on 1938 and according to HK law, HK company was dissolved.
HELD: It belongs to the usufructuary. Under section 16 of our Corporation Law,
no corporation may make or declare any dividend except from the surplus profits Plaintiffs filed PH income tax returns. CIR made deficiency assessments against
arising from its business. Any dividend, therefore, whether cash or stock, plaintiffs. Plaintiffs paid under protest which was overruled. Plaintiffs requested
represents surplus profits. Article 471 of the Civil Code provides that the from CIR a refund but CIR refused.
usufructuary shall be entitled to receive all the natural, industrial, and civil fruits
of the property in usufruct. Plaintiffs maintain that amounts they received were ordinary dividends but CIR
contends that they were liquidating dividends. By the HK company’s BOD
The 108,000 shares of stock are part of the property in usufruct. The 54,000 recommendation of sale to MNL company as purchaser, it showed that at the time
shares of stock dividend are civil fruits of the original investment. They represent of recommendation, MNL company was already formed although on the very
profits, and the delivery of the certificate of stock covering said dividend is same day of the sale. MNL company was organized for the express purpose of
equivalent to the payment of said profits. Said shares may be sold independently succeeding HK company. It was clear in the sale that the sale is made on June 1,
1937. The 1st distribution made after June 1 of what plaintiffs call ordinary
dividends but what defendant call liquidating dividends was paid on June 8. Liquidating Dividends
-corp is winding up its business or recapitalizing and narrowing its activities
It will be recalled that the recommendation of the Board of Directors of the HK -corp is wiping out all parts of stockholder’s interest in the company
company "that the company should be wound up voluntarily by the members" -taxable income
and in pursuance of that purpose, it was further recommended that the business
be sold as a going concern to the MNL company. Complying with the Companies Ordinary Dividends
Ordinance for companies for the voluntary winding up by members, a Declaration -distribution is in the nature of a recurring return on stock
of Solvency was drawn up and was returned to HK for filing with the Registrar of
Companies. Both recommendations were in due course approved and ratified. 2) Liquidating dividends are taxable. The distinction is factual, depending on the
The later execution of the formal deed of sale and the successive distributions of circumstances of the case and intent of the parties. Income tax law states “Where
the amounts among the stockholders of HK Company were other steps in its a corp, partnership, association, joint account or insurance company distributes
complete liquidation. They leave no room for doubt in the mind of the court that all of its assets in complete liquidation or dissolution, the gain realized or loss
said distributions were not in the ordinary course of business and with intent to sustained by the stockholder, individual or corp, is a taxable income or a
maintain the corporation as a going concern — in which case they would have deductible loss as the case may be”
been distributions of ordinary dividends — but after the liquidation of the
business had been decided upon, which makes them payments for the surrender In this case, the law at the time of transactions in providing that where a corp
and relinquishment of the stockholders' interest in the corporation, or so-called distributes all its assets in complete liquidation or dissolution, the gain realized
liquidating dividends. or loss sustained by the stockholder is taxable income. HK company was
incorporated for the purpose of carrying on business in PH. Hence its earnings,
CIR contends that the amounts were liquidating dividends subject to tax. profits, and assets including those from whose proceeds the distributions were
Plaintiffs however state that they were ordinary dividends made, the major part of which consisted in the purchase price of the business,
had been earned and acquired in the PH. Said distributions were considered
ISSUE: 1) WON dividends were ordinary or liquidating dividends –liquidating income from PH sources hence taxable under PH tax laws.
dividends
2) WON liquidating dividends are taxable income –yes 27. CIR vs. CA, G.R. No. 108576 (1999)

HELD: 1) Amounts received by stockholders were liquidating dividends. The FACTS: Don Andres Soriano, a citizen and resident of the United States, formed
parties agreed in the deed of sale that the sale and transfer will take effect on June the corporation “A. Soriano Y Cia”, predecessor of ANSCOR with a 1,000,000.00
1, thus, distribution of assets to stockholders made after that date are liquidating capitalization divided into 10,000 common shares at a par value of P100/share.
dividends. Also, the distributions were not in the ordinary course of business and ANSCOR is wholly owned and controlled by the family of Don Andres,
with intent to maintain the corp as a going concern (ordinary dividends) however, who are all non-resident aliens. In 1937, Don Andres subscribed to 4,963 shares
distributions were made after the liquidation was decided upon, making the of the 5,000 shares originally issued.
distribution as payments for relinquishment of stockholder’s interest or On September 12, 1945, ANSCOR’s authorized capital stock was
liquidating dividends. increased to P2,500,000.00 divided into 25,000 common shares with the same
“Liquidating dividends” involves the distribution of assets by a corp to its par value. Of the additional 15,000 shares, only 10,000 was issued which were all
stockholders upon dissolution. Plaintiffs contended that it was on Aug 19, 1937 subscribed by Don Andres, after the other stockholders waived in favor of the
that HK company took steps towards liquidation but SC held that it was expressly former their pre-emptive rights to subscribe to the new issues. This increased his
stipulated in their deed of sale that the sale and transfer takes effect on June 1, subscription to 14,963 common shares. A month later, Don Andres transferred
1937. 1,250 shares each to his two sons, Jose and Andres Jr., as their initial investments
The determining element is whether the distribution was in the ordinary course in ANSCOR. Both sons are foreigners.
of business and with intent to maintain the corp as a going concern. The fact that By 1947, ANSCOR declared stock dividends. Other stock dividend
the distributions were called “dividends” and some were made before liquidation declarations were made between 1949 and December 20, 1963. On December 30,
or dissolution proceedings were commenced is not controlling. 1964 Don Andres died. As of that date, the records revealed that he has a total
shareholding of 185,154 shares. 50,495 of which are original issues and the corporation are regarded as equity in trust for the payment of the corporate
balance of 134,659 shares as stock dividend declarations. Correspondingly, one- creditors
half of that shareholdings or 92,577 shares were transferred to his wife, Doña
Carmen Soriano, as her conjugal share. The offer half formed part of his estate. ANSCOR redeemed stock dividends issued just 2 to 3 years earlier. The time
Don Andres died, and ANSCOR increased its capital stock to P20M and in alone that lapsed from the issuance to the redemption is not a sufficient indicator
1966 further increased it to P30M. In the same year stock dividends worth 46,290 to determine taxability. It is a must to consider the factual circumstances as to the
and 46,287 shares were respectively received by the Don Andres estate and Doña manner of both the issuance and the redemption. The issuance of stock dividends
Carmen from ANSCOR. Hence, increasing their accumulated shareholdings to and its subsequent redemption must be separate, distinct, and not related, for the
138,867 and 138,864 common shares each. redemption to be considered a legitimate tax scheme. Redemption cannot be
Doña Carmen requested a ruling from the United States Internal Revenue used as a cloak to distribute corporate earnings.
Service (IRS), inquiring if an exchange of common with preferred shares may be As stated above, the test of taxability under the exempting clause of Section
considered as a tax avoidance scheme. By January 2, 1968, ANSCOR reclassified 83(b) is, whether income was realized through the redemption of stock
its existing 300,000 common shares into 150,000 common and 150,000 dividends. The redemption converts into money the stock dividends which
preferred shares. become a realized profit or gain and consequently, the stockholders separate
In a letter-reply dated February 1968, the IRS opined that the exchange property. Profits derived from the capital invested cannot escape income tax. As
is only a recapitalization scheme and not tax avoidance. Consequently, on March realized income, the proceeds of the redeemed stock dividends can be reached by
31, 1968 Doña Carmen exchanged her whole 138,864 common shares for income taxation regardless of the existence of any business purpose for the
138,860 of the preferred shares. The estate of Don Andres in turn exchanged redemption. Otherwise, to rule that the said proceeds are exempt from income
11,140 of its common shares for the remaining 11,140 preferred shares. tax when the redemption is supported by legitimate business reasons would
After examining ANSCOR’s books of account and record Revenue defeat the very purpose of imposing tax on income. Such argument would open
examiners issued a report proposing that ANSCOR be assessed for deficiency the door for income earners not to pay tax so long as the person from whom the
withholding tax-at-source, for the year 1968 and the 2nd quarter of 1969 based income was derived has legitimate business reasons. In other words, the payment
on the transaction of exchange and redemption of stocks. BIR made the of tax under the exempting clause of Section 83(b) would be made to depend not
corresponding assessments. ANSCOR’s subsequent protest on the assessments on the income of the taxpayer but on the business purposes of a third party (the
was denied in 1983 by petitioner. ANSCOR filed a petition for review with the corporation herein) from whom the income was earned. This is absurd, illogical
CTA, the Tax Court reversed petitioners ruling. CA affirmed the ruling of the CTA. and impractical considering that the Bureau of Internal Revenue (BIR) would be
Hence this position. pestered with instances in determining the legitimacy of business reasons that
every income earner may interposed. It is not administratively feasible and
ISSUE: Whether or not ANSCORs redemption of stocks from its stockholder as cannot therefore be allowed.
well as the exchange of common with preferred shares can be considered as
essentially equivalent to the distribution of taxable dividend, making the DOCTRINE: The test of taxability under the exempting clause of Section 83(b) is,
proceeds thereof taxable whether income was realized through the redemption of stock dividends. The
redemption converts into money the stock dividends which become a realized
HELD: It is not the stock dividends but the proceeds of its redemption that may profit or gain and consequently, the stockholders separate property. Profits
be deemed as taxable dividends. Here, it is undisputed that at the time of the last derived from the capital invested cannot escape income tax. As realized income,
redemption, the original common shares owned by the estate were only the proceeds of the redeemed stock dividends can be reached by income taxation
25,247.5This means that from the total of 108,000 shares redeemed from the regardless of the existence of any business purpose for the redemption.
estate, the balance of 82,752.5 (108,000 less 25,247.5) must have come Otherwise, to rule that the said proceeds are exempt from income tax when the
from stock dividends. Besides, in the absence of evidence to the contrary, the Tax redemption is supported by legitimate business reasons would defeat the very
Code presumes that every distribution of corporate property, in whole or in part, purpose of imposing tax on income. Such argument would open the door for
is made out of corporate profit such as stock dividends. The capital cannot be income earners not to pay tax so long as the person from whom the income was
distributed in the form of redemption of stock dividends without violating the derived has legitimate business reasons
trust fund doctrine wherein the capital stock, property and other assets of the

28. AFISCO INSURANCE, ET. AL. (POOL OF MACHINERY INSURERS) vs. Petitioners contend that CA erred in finding that the pool was an informal
CA, G.R. No. 112675 (1999) partnership. They pointed out that the reinsurance policies were written by them
“individually and separately,” and that their liability was limited to the extent of
FACTS: Pursuant to “reinsurance treaties”, a number of local insurance firms their allocated share in the original risks thus reinsured. Its role was limited to
formed themselves into a “pool” in order to facilitate the handling of business its principal function of “allocating and distributing the risks arising from the
contracted with a non-resident foreign reinsurance company. original insurance among the members of the pool”.

Petitioners are 41 non-life insurance corporations. Upon issuance by them of The Court was not persuaded with their contention. The rulings of the CIR, is
Erection, Machinery Breakdown, Boiler Explosion and Contractors’ All Risk accorded much weight and even finality, when there is no showing that it is
insurance policies, the petitioners entered into a Quota Share Reinsurance Treaty patently wrong, particularly in this case where the conclusions of the CIR were
and a Surplus Reinsurance Treaty with Muchener Ruckversicherungs- affirmed by the CTA, in which the CA also upheld the exclusivity of the CTA as a
Gesselschaft (Munich), a non-resident foreign insurance corp. in 1965. The specialized body in reviewing such cases.
reinsurance treaties required petitioners to form a pool.
Argument of SC: According to Section 24 of the NIRC of 1975:
In 1976, the pool of machinery insurers submitted a financial statement and filed
an “Information Return of Organization Exempt from income Tax” for the year “SEC. 24. Rate of tax on corporations. -- (a) Tax on
domestic corporations. -- A tax is hereby imposed upon
1975, on the basis of which it was assessed by the CIR deficiency corporate taxes
the taxable net income received during each taxable year
in the amount of P1.8 million, and withholding taxes in the amount of P1.7 million from all sources by every corporation organized in, or
and P89k on dividends paid to Munich and to petitioners, respectively. existing under the laws of the Philippines, no matter how
Assessments were protested by petitioners through their auditors. (Technically, created or organized, but not including duly registered
general co-partnership (compañias colectivas), general
the Pool of Machinery Insurers were claiming for an exemption for the Income
professional partnerships, private educational institutions,
Tax assessed). and building and loan associations xxx.”

CIR: In 1986, denied the protest and ordered the petitioners, assessed as “Pool of Ineludibly, the Philippine legislature included in the concept of corporations
Machinery Insurers,” to pay deficiency income tax, interest, and withholding tax. those entities that resembled them such as unregistered partnerships and
associations. Interestingly, the NIRC’s inclusion of such entities in the tax on
CA: Pool of machinery insurers was a partnership taxable as a corporation, and corporations was made even clearer by the Tax Reform Act of 1997 Sec. 27 read
that the premiums was taxable income. Prescription did not bar BIR from together with Sec. 22 reads:
collection because the taxpayer cannot be located at the address given. Hence,
Petition for Review. “SEC. 27. Rates of Income Tax on Domestic Corporations. -
-
(A) In General. -- Except as otherwise provided in this
ISSUE/S: (1) Whether or not the Clearing House was a partnership or association
Code, an income tax of thirty-five percent (35%) is hereby
subject to tax as a corporation? imposed upon the taxable income derived during each
taxable year from all sources within and without the
(2) Whether or not the remittances to petitioners and MUNICHRE of their Philippines by every corporation, as defined in Section 22
(B) of this Code, and taxable under this Title as a
respective shares of reinsurance premiums, pertaining to their individual and
corporation xxx.”
separate contracts of reinsurance, were dividends subject to tax?
“SEC. 22. -- Definition. -- When used in this Title:
(3) Whether or not the respondent CIR’s right to assess the Clearing House had xxx xxx xxx
(B) The term ‘corporation’ shall include partnerships, no
already prescribed?
matter how created or organized, joint-stock companies,
joint accounts (cuentas en participacion), associations, or
HELD: (1) Yes. The Court ruled that the Pool is taxable as a Corporation. insurance companies, but does not include general
professional partnerships [or] a joint venture or
consortium formed for the purpose of undertaking
construction projects or engaging in petroleum, coal, companies. Tax exemption cannot be granted as the entitlement thereto remains
geothermal and other energy operations pursuant to an
unproven and unsubstantiated.
operating or consortium agreement under a service
contract without the Government. ‘General professional
partnerships’ are partnerships formed by persons for the (3) No. Petitioners contended that the five-year statute of limitations then
sole purpose of exercising their common profession, no provided by the NIRC had already lapsed, and that the CIR was already barred
part of the income of which is derived from engaging in any
from making an assessment. The Court cannot sustain its contention as the CA
trade or business.
and CTA found that the prescriptive period was tolled under then Sec. 333 of the
Thus, the Court in Evangelista v. Collector of Internal Revenue held that Section 24 NIRC, because “the taxpayer cannot be located at the address given in the
covered these unregistered partnerships and even associations or joint accounts, information return filed and for which reason there was delay in sending the
which had no legal personalities apart from their individual members. assessment.”

Furthermore, Pool Agreement or an association that would handle all the 29. CIR vs. GOODYEAR PHILIPPINES, INC., G.R. No. 216130 (2016)
insurance businesses covered under their quota-share reinsurance treaty and
surplus reinsurance treaty with Munich may be considered a partnership FACTS: Respondent is a domestic corporation duly organized and
because it contains the following elements: existing under the laws of the Philippines, and registered with the
Bureau of Internal Revenue (BIR) as a large taxpayer. The authorized
1. The pool has a common fund, consisting of money and other valuables that are capital stock of respondent was increased. Consequently, all the
deposited in the name and credit of the pool. This common fund pays for the preferred shares were solely and exclusively subscribed by Goodyear
administration and operation expenses of the pool. Tire and Rubber Company (GTRC), which was a foreign company
organized and existing under the laws of the State of Ohio, United States
2. The pool functions through an executive board, which resembles the board of of America (US) and is unregistered in the Philippines. The Board of
directors of a corporation, composed of one representative for each of the ceding Directors of respondent authorized the redemption of GTRC’s preferred
companies. shares.

3. While, the pool itself is not a reinsurer and does not issue any policies; its work Respondent filed an application for relief from double taxation before the BIR to
is indispensable, beneficial and economically useful to the business of the ceding confirm that the redemption was not subject to Philippine income tax, pursuant
companies and Munich, because without it they would not have received their to the RP-US Tax Treaty. This notwithstanding, respondent still took the
premiums pursuant to the agreement with Munich. Profit motive or business is, conservative approach and withheld and remitted to the BIR its withholding tax.
therefore, the primordial reason for the pool’s formation.
Respondent filed an administrative claim for refund or issuance of TCC before the
(2) No. There is no double taxation. BIR. Petitioner maintained respondent’s claim must be denied considering that it
failed to exhaust administrative remedies by prematurely filing its petition
Petitioners contend that the remittances of the pool to the ceding companies and before the CTA and it failed to submit complete supporting documents before the
Munich are not dividends subject to tax, contended that it would be tantamount BIR.
to an illegal double taxation, as it would result in taxing the same premium
income twice in the hands of the same taxpayer, and that since Munich was not a CTA Division ruled that respondent is entitled to the TCC due to the fact that the
part of the Pool Agreements, the remittances it received from the pool cannot be redemption shares issued to GTRC which were then converted to treasury shares
dividends. was not subject to Philippine income tax.

Double taxation means “taxing the same property twice, taxing the same person ISSUE: WON CTA correctly ruled that the gain derived by GTRC was not subject
twice by the same jurisdiction for the same thing”. In the case, the pool is a taxable to 15% Final Withholding Tax on dividends.
entity distinct from the individual corporate entities of the ceding companies. The
tax on its income is different from the tax on the dividends received by the said
HELD: Yes. The imposition of 15% FWT on intercorporate dividends received by have unrestricted retained earnings, and in fact, operated from a position of
a non-resident foreign corporation is found in Section 28 (B) (5) (b) of the Tax deficit. Thus, absent the availability of unrestricted retained earnings, the board
Code which reads: of directors of respondent had no power to issue dividends. It is also worth
mentioning that one of the primary features of an ordinary dividend is that the
SEC. 28. Rates of Income Tax on Foreign Corporations. — distribution should be in the nature of a recurring return on stock which,
xxx xxx xxx
however, does not obtain in this case.
(B) Tax on Nonresident Foreign Corporation. —
xxx xxx xxx
(5) Tax on Certain Incomes Received by a Nonresident Foreign All told, the amount of P97,732,314.00 received by GTRC from respondent for the
Corporation. — redemption of its 3,729,216 preferred shares were not accumulated dividends in
(b) Intercorporate Dividends. — A final
withholding tax at the rate of fifteen percent (15%) is
arrears. Contrary to petitioner's claims, it is therefore not subject to 15% FWT on
hereby imposed on the amount of cash and/or dividends in accordance with Section 28 (B) (5) (b) of the Tax Code.
property dividends received from a domestic
corporation, which shall be collected and paid as 30. BDO vs. REPUBLIC OF THE PHILIPPINES, G.R. No. 198756 (2015)
provided in Section 57 (A) of this Code, subject to the

condition that the country in which the nonresident
foreign corporation is domiciled, shall allow a credit DOCTRINE: Deposit substitutes' shall mean an alternative form of
against the tax due from the nonresident foreign obtaining funds from the public, other than deposits, through the issuance,
corporation taxes deemed to have been paid in the endorsement, or acceptance of debt instruments for the borrower's own account,
Philippines equivalent to twenty percent (20%),
which represents the difference between the regular
for the purpose of relending or purchasing of receivables and other obligations,
income tax of thirty-five percent (35%) and the or financing their own needs or the needs of their agent or dealer. When there
fifteen percent (15%) tax on dividends as provided in are 20 or more lenders/investors in a transaction for a specific bond issue, the
this subparagraph: Provided, That effective January 1, seller is required to withhold the 20% final income tax on the imputed interest
2009, the credit against the tax due shall be
income from the bonds.
equivalent to fifteen percent (15%), which
represents the difference between the regular
income tax of thirty percent (30%) and the fifteen FACTS: The case involves the proper tax treatment of the discount or
percent (15%) tax on dividends; interest income arising from the P35 billion worth of 10-year zero-coupon
treasury bonds issued by the Bureau of Treasury on October 18, 2001
It must be noted, however, that GTRC is a non-resident foreign corporation, (denominated as the Poverty Eradication and Alleviation Certificates or the
specifically a resident of the US. Thus, pursuant to the cardinal principle that PEACe Bonds by the Caucus of Development NGO Networks).
treaties have the force and effect of law in this jurisdiction, the RP-US Tax
Treaty complementarily governs the tax implications of respondent's On October 7, 2011, the Commissioner of Internal Revenue issued the 2011 BIR
transactions with GTRC. Ruling, declaring that the PEACe Bonds being deposit substitutes are subject to
the 20% Final withholding tax. Pursuant to this ruling, the Secretary of Finance
Under Article 11 (5) of the RP-US Tax Treaty, the term "dividends" should be directed the Bureau of Treasury to withhold a 20% final tax from the face value
understood according to the taxation law of the State in which the corporation of the PEACe Bonds upon their payment at maturity on October 18, 2011.
making the distribution is a resident, which, in this case, pertains to respondent,
a resident of the Philippines. Accordingly, attention should be drawn to the
By letter dated March 23, 2001, the Caucus of Development NGO Networks
statutory definition of what constitutes "dividends," pursuant to Section 73 (A) (CODE-NGO) "with the assistance of its financial advisors, Rizal Commercial
of the Tax Code which provides that "[t]he term 'dividends' . . . means any Banking Corp. ("RCBC"), RCBC Capital Corp. ("RCBC Capital"), CAPEX Finance and
distribution made by a corporation to its shareholders out of its earnings or
Investment Corp. ("CAPEX") and SEED Capital Ventures, Inc. (SEED)," requested
profits and payable to its shareholders, whether in money or in other property." an approval from the Department of Finance for the issuance by the Bureau of
In light of the foregoing, the Court therefore holds that the redemption price
Treasury of 10-year zero-coupon Treasury Certificates (T-notes). The T-notes
representing the amount of P97,732,314.00 received by GTRC could not be would initially be purchased by a special purpose vehicle on behalf of CODE-NGO,
treated as accumulated dividends in arrears that could be subjected to 15% FWT. repackaged and sold at a premium to investors as the PEACe Bonds. The net
Verily, respondent's AFS covering the years 2003 to 2009 show that it did not proceeds from the sale of the Bonds "will be used to endow a permanent fund
(Hanapbuhay® Fund) to finance meritorious activities and projects of accredited quoting excerpts of the ruling issued by the Bureau of Internal Revenue
non-government organizations (NGOs) throughout the country." Prior to and concerning the Bonds' exemption from 20% final withholding tax and the opinion
around the time of the proposal of CODE-NGO, other proposals for the issuance of the Monetary Board on reserve eligibility.
of zero-coupon bonds were also presented by banks and financial institutions.
Both the proposals of First Metro Investment Corp. and ATR-Kim Eng Fixed After the auction, RCBC which participated on behalf of CODE-NGO was declared
Income indicate that the interest income or discount earned on the proposed as the winning bidder having tendered the lowest bids. Accordingly, on October
zero-coupon bonds would be subject to the prevailing withholding tax." 18, 2001, the Bureau of Treasury issued P35 billion worth of Bonds at yield-to-
maturity of 12.75% to RCBC for approximately P10.17 billion, resulting in a
A zero-coupon bond is a bond bought at a price substantially lower than its face discount of approximately P24.83 billion.
value (or at a deep discount), with the face value repaid at the time of maturity.
Also on October 16, 2001, RCBC Capital entered into an underwriting agreement
On May 31, 2001, the Bureau of Internal Revenue, in reply to CODE-NGO's letters with CODE-NGO, whereby RCBC Capital was appointed as the Issue Manager and
dated May 10, 15, and 25, 2001, issued BIR Ruling No. 020-2001 on the tax Lead Underwriter for the offering of the PEACe Bonds. RCBC Capital agreed to
treatment of the proposed PEACe Bonds. BIR Ruling No. 020-2001, signed by then underwrite on a firm basis the offering, distribution and sale of the P35 billion
Commissioner of Internal Revenue René G. Bañez confirmed that the PEACe Bonds at the price of P11,995,513,716.51. In Section 7 (r) of the underwriting
Bonds would not be classified as deposit substitutes and would not be subject to agreement, CODE-NGO represented that "all income derived from the Bonds,
the corresponding withholding tax: inclusive of premium on redemption and gains on the trading of the same, are
exempt from all forms of taxation as confirmed by Bureau of Internal Revenue
Thus, to be classified as "deposit substitutes", the borrowing of funds must be (BIR) letter rulings dated 31 May 2001 and 16 August 2001, respectively."
obtained from twenty (20) or more individuals or corporate lenders at any one
time. In the light of your representation that the PEACe Bonds will be issued only RCBC Capital sold the Government Bonds in the secondary market for an issue
to one entity, i.e., Code NGO, the same shall not be considered as "deposit price of P11,995,513,716.51. Petitioners purchased the PEACe Bonds on different
substitutes" falling within the purview of the above definition. Hence, the dates.
withholding tax on deposit substitutes will not apply.
In October 7, 2011, BIR issued BIR RULING NO. 370-2011 in response to the
Meanwhile, in the memorandum dated July 4, 2001, Former Treasurer Eduardo query of the Secretary of Finance as to the proper tax treatment of the discounts
Sergio G. Edeza (Former Treasurer Edeza) questioned the propriety of issuing the and interest derived from Government Bonds. It cited three other rulings issued
bonds directly to a special purpose vehicle considering that the latter was not a in 2004 and 2005. The above ruling states that the all treasury bonds (including
Government Securities Eligible Dealer (GSED). PEACe Bonds), regardless of the number of purchasers/lenders at the time of
origination/issuance are considered deposit substitutes. In the case of zero-
Subsequently, in the notice to all GSEDs entitled Public Offering of Treasury coupon bonds, the discount (i.e. difference between face value and purchase
Bonds (Public Offering) dated October 9, 2001, the Bureau of Treasury price/discounted value of the bond) is treated as interest income of the
announced that "P30.0B worth of 10-year Zero Coupon Bonds would be purchaser/holder.
auctioned on October 16, 2001" The notice stated that the Bonds "shall be issued
to not more than 19 buyers/lenders hence, the necessity of a manual auction for ISSUE: Whether or not the PEACe Bonds are "deposit substitutes" and
this maiden issue." Lastly, it stated that "the issue being limited to 19 lenders and thus subject to 20% final withholding tax under the 1997 National Internal
while taxable shall not be subject to the 20% final withholding tax." Revenue Code.
A day before the auction date or on October 15, 2001, the Bureau of Treasury HELD: The PEACe Bonds, according to the SC, requires further
issued the "Auction Guidelines for the 10-year Zero-Coupon Treasury Bond to be information for proper determination of whether these bonds are within the
Issued on October 16, 2001" (Auction Guidelines). The Auction Guidelines purview of deposit substitutes. The Court noted that it may seem that the lender
reiterated that the Bonds to be auctioned are "not subject to 20% withholding tax is only CODE-NGO through RCBC. However, the underwriting agreement reveals
as the issue will be limited to a maximum of 19 lenders in the primary market. that the entire 35billion worth of zero-coupon bonds were sourced directly from
Also on the same date, the Bureau of Treasury issued another memorandum 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 On October 15, 2001, one (1) day before the auction date, the Bureau of Treasury
found within the coverage of deposit substitutes, the proper procedure for the issued the Auction Guidelines for the 10-year Zero-Coupon Treasury Bond to be
BIR is to collect the unpaid final withholding tax directly from RCBC Capital/ Issued on October 16, 2001 (Auction Guidelines). The Auction Guidelines
CODE-NGO, or any lender if such be the case. The court also noted that according reiterated that the Bonds to be auctioned are "[n]ot subject to 20% withholding
to the NIRC, Section 24, interest income received by individuals from long term tax as the issue will be limited to a maximum of 19 lenders in the primary market
deposits or investments with a holding period of not less than five years is exempt (pursuant to BIR Revenue Regulation No. 020 2001)."
from final tax. Thus, should the PEACe Bonds be found to be within the coverage
of deposit substitutes, the proper procedure was for the Bureau of Treasury to At the auction held on October 16, 2001, Rizal Commercial Banking Corporation
pay the face value of the PEACe Bonds to the bondholders and for the Bureau of (RCBC) participated on behalf of Caucus of Development NGO Networks (CODE-
Internal Revenue to collect the unpaid final withholding tax directly from RCBC NGO) and won the bid. Accordingly, on October 18, 2001, the Bureau of Treasury
Capital/CODE-NGO, or any lender or investor if such be the case, as the issued P35 billion worth of Bonds at yield-to-maturity of 12.75% to RCBC for
withholding agents. approximately P10.17 billion, resulting in a discount of approximately P24.83
billion.
Deposit substitutes' shall mean an alternative form of obtaining funds
from the public ( Public = 20 or more indivuiduals or corporate lenders at any RCBC Capital entered into an underwriting agreement with CODE-NGO, where
one time), other than deposits, through the issuance, endorsement, or acceptance RCBC Capital was appointed as the Issue Manager and Lead Underwriter for the
of debt instruments for the borrower's own account, for the purpose of relending offering of the PEACe Bonds. RCBC Capital agreed to underwrite on a firm basis
or purchasing of receivables and other obligations, or financing their own needs the offering, distribution, and sale of the P35 billion Bonds at the price of
or the needs of their agent or dealer. P11,995,513,716.51. In Section 7(r) of the underwriting agreement, CODE-NGO
represented that "[a]ll income derived from the Bonds, inclusive of premium on
When there are 20 or more lenders/investors in a transaction for a redemption and gains on the trading of the same, are exempt from all forms of
specific bond issue, the seller is required to withhold the 20% final income tax on taxation as confirmed by [the] Bureau of Internal Revenue . . . letter rulings dated
the imputed interest income from the bonds. The Supreme Court cited Sections 31 May 2001 and 16 August 2001, respectively."
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 RCBC Capital sold and distributed the Government Bonds for an issue price of
of interest from any currency bank deposit and yield or any other monetary P11,995,513,716.51.Banco de Oro, et al. purchased the PEACe Bonds on different
benefit from deposit substitutes. On the other hand, for instruments not dates.
considered as deposit substitutes, these will be subjected to regular income tax.
The prevailing provision is Section 32(A). Hence, should the deposit substitute On October 7, 2011, barely 11 days before maturity of the PEACe Bonds, the
involves less than 20 lenders in a transaction, the income is considered as Commissioner of Internal Revenue issued BIR Ruling No. 370-2011 declaring
“income derived from whatever source”. that the PEACe Bonds, being deposit substitutes, were subject to 20% final
withholding tax. Under this ruling, the Secretary of Finance directed the Bureau
31. BDO vs. REPUBLIC (RESOLUTION), G.R. No. 198756 (2016) of Treasury to withhold a 20% final tax from the face value of the PEACe Bonds
upon their payment at maturity on October 18, 2011.hanrobleslaw
FACTS: This resolves separate motions for reconsideration and clarification filed
by the Office of the Solicitor General and petitioners-intervenors Rizal On October 17, 2011, replying to an urgent query from the Bureau of Treasury,
Commercial Banking Corporation and RCBC Capital Corporation of our Decision the Bureau of Internal Revenue issued BIR Ruling No. DA 378-2011 clarifying
dated January 13, 2015, which: (1) granted the Petition and Petitions-in- that the final withholding tax due on the discount or interest earned on the PEACe
Intervention and nullified Bureau of Internal Revenue (BIR) Ruling Nos. 370- Bonds should "be imposed and withheld not only on RCBC/CODE NGO but also
2011 and DA 378-2011; and (2) reprimanded the Bureau of Treasury for its [on] 'all subsequent holders of the Bonds.'"
continued retention of the amount corresponding to the 20% final withholding
tax that it withheld on October 18, 2011, and ordered it to release the withheld On October 17, 2011, petitioners filed before this Court a Petition for Certiorari,
amount to the bondholders.
Prohibition, and/or Mandamus (with urgent application for a temporary The general rule of requiring adherence to the letter in construing statutes
restraining order and/or writ of preliminary injunction). applies with peculiar strictness to tax laws and the provisions of taxing act are
not to be extended by implication.
COURT’S RULING: WHEREFORE, the petition for review and petitions-in-
intervention are GRANTED. BIR Ruling Nos. 370-2011 and DA 378-2011 The definition of deposit substitutes in Section 22(Y) specifically defined "public"
are NULLIFIED. to mean "twenty (20) or more individual or corporate lenders at any one time.
"The qualifying phrase for public introduced by the National Internal Revenue
Furthermore, respondent Bureau of Treasury is REPRIMANDED for its Code shows that a change in the meaning of the provision was intended, and this
continued retention of the amount corresponding to the 20% final withholding Court should construe the provision as to give effect to the amendment. Hence, in
tax despite this court's directive in the temporary restraining order and in the light of Section 22(Y), the reckoning of whether there are 20 or more individuals
resolution dated November 15, 2011 to deliver the amounts to the banks to be or corporate lenders is crucial in determining the tax treatment of the yield from
placed in escrow pending resolution of this case. the debt instrument. In other words, if there are 20 or more lenders, the debt
instrument is considered a deposit substitute and subject to 20% final
ISSUE(S): (1) Whether the seller in the secondary market can be the proper withholding tax.
withholding agent of the final withholding tax due on the yield or interest income
derived from government debt instruments considered as deposit substitutes 2) YES AND IT IS TAXABLE.

2) Whether the PEACe Bonds are considered "deposit substitutes," whether The definition of deposit substitutes in the banking laws was brought about by
government or the Bureau of Internal Revenue is estopped from imposing and/or an observation that banks and non-bank financial intermediaries have
collecting the 20% final withholding tax from the face value of these Bonds increasingly resorted to issuing a variety of debt instruments, other than bank
deposits, to obtain funds from the public. The definition also laid down the
3) WON jurisdiction of the Court of Tax Appeals in view of the previous groundwork for the supervision by the Central Bank of quasi-banking functions.
conflicting rulings of this Court.
As defined in the banking sector, the term "public" refers to 20 or more lenders.
HELD: 1) Respondents contend that the 20-lender rule should not strictly apply "What controls is the actual number of persons or entities to whom the products
to issuances of government debt instruments, which by nature, are borrowings or instruments are issued. If there are at least twenty (20) lenders or creditors,
from the public. Applying the rule otherwise leads to an absurd result. They point then the funds are considered obtained from the public."
out that in BIR Ruling No. 007-04 dated July 16, 2004 (the precursor of BIR Ruling
Nos. 370-2011 and DA 378-2011), the Bureau of Treasury's admitted intent to If a bank or non-bank financial intermediary sells debt instruments to 20 or more
make the government securities freely tradable to an unlimited number of lenders/placers at any one time, irrespective of outstanding amounts, for the
lenders/investors in the secondary market was considered in place of an actual purpose of relending or purchasing of receivables or obligations, it is considered
head count of lenders/investors due to the limitations brought about by the to be performing a quasi-banking function and consequently subject to the
absolute confidentiality of investments in government bonds under Section 2 of appropriate regulations of the Bangko Sentral Pilipinas (BSP).
Republic Act No. 1405, otherwise known as the Bank Secrecy Law.
The term 'deposit substitutes' shall mean an alternative form of obtaining funds
Considering that the PEACe Bonds were intended to be freely tradable in the from the public (the term 'public' means borrowing from twenty (20) or more
secondary market to 20 or more lenders/investors, respondents contend- that individual or corporate lenders at any one time), other than deposits, through
they, like other similarly situated government securities—awarded to 19 or less the issuance, endorsement, or acceptance of debt instruments for the borrower's
GSEDs in the primary market but freely tradable to 20 or more lenders/investors own account, for the purpose of re-lending or purchasing of receivables and
in the secondary market—should be treated as deposit substitutes subject to the other obligations, or financing their own needs or the needs of their agent or
20% final withholding tax. We find respondents' proposition to consider the dealer.
intended public distribution of government securities—in this case, the PEACe
Bonds—in place of an actual head count to be untenable. For internal revenue tax purposes, therefore, even debt instruments issued and
sold to 20 or more lenders/investors by commercial or industrial companies to
finance their own needs are considered deposit substitutes, taxable as such. The law or regulation or administrative issuance (revenue orders, revenue
interest income on bank deposits was subjected for the first time to the memorandum circulars, rulings).
withholding tax system under Presidential Decree No. 1156.
Respondents did not submit any withholding tax return or tax remittance advice
The intent and purpose of the National Internal Revenue Code provisions on to prove that the 20% final withholding tax was, indeed, remitted by the Bureau
withholding taxes is also explicitly stated, i.e., that all gains, profits, and income of Treasury to the Bureau of Internal Revenue on October 18, 2011, and
"are charged and assessed with the corresponding tax"134 and said tax paid by consequently became part of the general fund of the government. The
"the owners of such gains, profits and income, or the proper person having the corresponding journal entry in the books of both the Bureau of Treasury and
receipt, custody, control or disposal of the same.” Bureau of Internal Revenue showing the transfer of the withheld funds to the
Bureau of Internal Revenue was likewise not submitted to this Court. The burden
The obligation to deduct and withhold tax at source arises at the time an income of proof lies on them to show their claim of remittance. Until now, respondents
subject to withholding is paid or payable, whichever comes first. In interest- have failed to submit sufficient supporting evidence to prove their claim.
bearing bonds, the interest is taxed at every instance that interest is paid (and
income is earned) on the bond. However, in a zero-coupon bond, it is expected WHEREFORE, respondents' Motion for Reconsideration and Clarification
that no periodic interest payments will be made. Rather, the investor will be paid is DENIED, and petitioners-intervenors RCBC and RCBC Capital Corporation's
the principal and interest (discount) together when the bond reaches maturity. Motion for Clarification and/or Partial Reconsideration is PARTLY GRANTED.

As explained by respondents, "the discount is the imputed interest earned on the Respondent Bureau of Treasury is hereby ORDERED to immediately release and
security, and since payment is made at maturity, there is an accreted interest that pay the bondholders the amount of P4,966,207,796.41, representing the 20%
causes the price of a zero coupon instrument to accordingly increase with time, final withholding tax on the PEACe Bonds, with legal interest of 6% per annum
all things being constant." from October 19, 2011 until full payment.

In a 10-year zero-coupon bond, for instance, the discount (or inter is not earned SO ORDERED
in the first period, i.e., the value of the instrument does not equal par at the end
of the first period. The total discount is earned over the life of the instrument. DOCTRINE: The term "taxpayer" is defined in our NIRC as referring to "any
Nonetheless, the total discount is considered earned on the year of sale based on person subject to tax imposed by the Title [on Tax on Income]." It thus becomes
current value. important to note that under Section 53 (c) of the NIRC, the withholding agent
who is "required to deduct and withhold any tax" is made "personally liable for
In view of this, the successful GSED-bidder, as agent of the Bureau of Treasury, such tax" and indeed is indemnified against any claims and demands which the
has the primary responsibility to withhold the 20% final withholding tax on the stockholder might wish to make in questioning the amount of payments effected
interest valued at present value, when its sale and distribution of the government by the withholding agent in accordance with the provisions of the NIRC.
securities constitutes a deposit substitute transaction. The 20% final tax is
deducted by the buyer from the discount of the bonds and included in the TOPIC: SITUS OF INCOME TAXATION
remittance of the purchase price.
32. CIR vs. ANGLO CALIFORNIA NATIONAL BANK (CROCKER-ANGLO
3) The Court of Tax Appeals has undoubted jurisdiction to pass upon the NATIONAL BANK), AS TREASURER FOR CALAMBA SUGAR ESTATE,
constitutionality or validity of a tax law or regulation when raised by the taxpayer INC., G.R. No. L-12476 (1960)
as a defense in disputing or contesting an assessment or claiming a refund. It is
only in the lawful exercise of its power to pass upon all maters brought before it, FACTS: Respondent Calamba Sugar Estate, Inc., herein represented by its
as sanctioned by Section 7 of Republic Act No. 1125, as amended. trustee, the Anglo California National Bank, is a foreign corporation organized
and existing under the laws of the State of California, USA, duly licensed to do
This Court, however, declares that the Court of Tax Appeals may likewise take business in the Philippines. It has consistently filed its income tax returns here
cognizance of cases directly challenging the constitutionality or validity of a tax through its resident attorney-in-fact.

On May 14, 1956, petitioner CIR notified the corporation of an
assessment for alleged deficiency income taxes for the years 1953, 1954 and The CIR argues that the situs of shares of stock of a corporation is
1955 in the respective amounts of P138,8855.00, P131,759.00 and P393,459.00, considered to be at the domicile of the latter; but in the instant problem, we are
supposedly based upon capital gains derived from the respondent’s sale to the not concerned with the imposition of taxes upon the shares themselves, but on a
Pasumil Planters, Inc. of P250,000 shares of the capital stock of the Pampanga sale effected abroad that resulted in capital gains, for which there is a specific
Sugar Mills (a domestic corporation) and of a promissory note, dated January 1, provision of law (Sec. 37 [e] NIRC [PRIOR TO AMENDMENT]). As stated by the Tax
1950, executed by the Pampanga Sugar Mills in the sum of $500,000.00. Court, there is a distinction between the situs of personal properties and the situs
of the income derived from the sale or exchange of such properties.
In an appeal by the respondent from the ruling of the CIR, the CTA
reversed said ruling and absolved respondent from liability. The CTA held that 33. PHILIPPINE GUARANTY CO., INC. vs. CIR and CTA, G.R. No. L-22074
the capital gains obtained from the sale constituted income derived from outside (1965)
the Philippines and, thus, not subject to income tax.
FACTS: The Philippine Guaranty Co., Inc., a domestic insurance company, entered
The present case is an appeal by the CIR from that decision. into reinsurance contracts, on various dates, with foreign insurance companies
not doing business in the Philippines namely: Imperio Compañia de Seguros, La
The parties stipulated that: (a) the negotiations leading to the execution Union y El Fenix Español, Overseas Assurance Corp., Ltd., Socieded Anonima de
and conclusion of the agreement of sale, dated January 16, 1953, between the Reaseguros Alianza, Tokio Marino & Fire Insurance Co., Ltd., Union Assurance
respondent corporation and the Pasumil Planters took place in San Francisco, Society Ltd., Swiss Reinsurance Company and Tariff Reinsurance Limited.
California; (b) the payment on account of the sale were made by the Pasumil
Planters at the same foreign city; and (c) the sale was made under and in Philippine Guaranty Co., Inc., thereby agreed to cede to the foreign reinsurers a
accordance with the laws of that State. portion of the premiums on insurance it has originally underwritten in the
Philippines, in consideration for the assumption by the latter of liability on an
From the evidence presented, it also appears that on December 16, 1955, equivalent portion of the risks insured. Said reinsurance contracts were signed
the SEC cancelled respondent’s license to transact business in the Philippines, by Philippine Guaranty Co., Inc. in Manila and by the foreign reinsurers outside
and on December 30, 1955, the corporation was dissolved in accordance with the the Philippines, except the contract with Swiss Reinsurance Company, which was
California law. signed by both parties in Switzerland.

ISSUE/S: Whether the capital gains obtained from the sale constituted income The reinsurance contracts made the commencement of the reinsurers' liability
from sources outside the Philippines and, thus, not subject to income tax. simultaneous with that of Philippine Guaranty Co., Inc. under the original
insurance. Philippine Guaranty Co., Inc. was required to keep a register in Manila
HELD: Yes. Although shares of stock of a corporation represent equities that where the risks ceded to the foreign reinsurers where entered, and entry therein
may consist of real as well as personal properties therein, they are considered was binding upon the reinsurers. A proportionate amount of taxes on insurance
under applicable law and jurisprudence as intangible personal properties. The premiums not recovered from the original assured were to be paid for by the
Tax Code levies income taxes on foreign corporations only on income derived foreign reinsurers.
from sources within the Philippines. With respect to capital gains on the sale of
personal property, the Tax Code deems the place of sale as also the place or Pursuant to the aforesaid reinsurance contracts, Philippine Guaranty Co., Inc.
source of the capital gains. ceded to the foreign reinsurers the following premiums amounting to
P842,466.71 for the year 1953 and P721,471.85 for the year 1954. Said
It is the prevailing view that in ascertaining the place of sale, the premiums were excluded by Philippine Guaranty Co., Inc. from its gross income
determination of when and where title to the goods passes from the seller to the when it file its income tax returns for 1953 and 1954. Furthermore, it did not
buyer is decisive. In this case, it is admitted that the negotiation, perfection and withhold or pay tax on them. Consequently, per letter dated April 13, 1959, the
consummation of the contract of sale were all done in California, USA. It follows Commissioner of Internal Revenue assessed against Philippine Guaranty Co., Inc.
that title to the shares of stock passed from the vendor to the vendee at said place, withholding tax on the ceded reinsurance premiums.
from which time the incidents of ownership vested on the buyer.
Philippine Guaranty Co., Inc., protested the assessment on the ground that and privileges guaranteed by our laws, such reinsurance premiums and reinsurers
reinsurance premiums ceded to foreign reinsurers not doing business in the should share the burden of maintaining the state.
Philippines are not subject to withholding tax. Its protest was denied and it
appealed to the Court of Tax Appeals. The CTA rendered judgment ordering 34. ALEXANDER HOWDEN AND CO., LTD., vs. CIR, G.R. No. L-19392
Petitioner Phil. Guaranty Co. to pay to the Commissioner of Internal Revenue the (1965)
respective sums of P202,192.00 and P173,153.00 or the total sum of P375,345.00
as withholding income taxes for the years 1953 and 1954, plus the statutory FACTS: Commonwealth Insurance Co., a domestic corporation, entered into
delinquency penalties thereon. reinsurance contracts with 32 British insurance companies not engaged in trade
or business in the Philippines, whereby the former agreed to cede to them a
ISSUE: Whether or not reinsurance premiums ceded to foreign reinsurers portion of the premiums on insurances on fire, marine and other risks it has
not doing business in the Philippines are subject to tax? YES. underwritten in the Philippines.

HELD: The reinsurance contracts, however, show that the transactions or The reinsurance contracts were prepared and signed by the foreign reinsurers in
activities that constituted the undertaking to reinsure Philippine Guaranty Co., England and sent to Manila where Commonwealth Insurance Co. signed them.
Inc. against losses arising from the original insurances in the Philippines were Alexander Howden & Co., Ltd., also a British corporation, represented the British
performed in the Philippines. insurance companies.

Section 24 of the Tax Code subjects foreign corporations to tax on their income Pursuant to the contracts, Commonwealth Insurance Co remitted P798,297.47 to
from sources within the Philippines. The word "sources" has been interpreted as Alexander Howden & Co., Ltd., as reinsurance premiums.
the activity, property or service giving rise to the income. 1 The reinsurance
premiums were income created from the undertaking of the foreign reinsurance In behalf of Alexander Howden & Co., Ltd., Commonwealth Insurance Co. filed an
companies to reinsure Philippine Guaranty Co., Inc., against liability for loss income tax return declaring the sum of P798,297.47, with accrued interest in the
under original insurances. Such undertaking, as explained above, took place in amount of P4,985.77, as Alexander Howden & Co., Ltd.'s gross income for
the Philippines. These insurance premiums, therefore, came from sources within calendar year 1951. It also paid the BIR P66,112.00 income tax.
the Philippines and, hence, are subject to corporate income tax.
Alexander Howden & Co., Ltd. filed with the BIR a claim for refund of the
The foreign insurers' place of business should not be confused with their place of P66,112.00, later reduced to P65,115.00, because it agreed to the payment of
activity. Business should not be continuity and progression of transactions while P977.00 as income tax on the P4,985.77 accrued interest.
activity may consist of only a single transaction. An activity may occur outside the
place of business. Section 24 of the Tax Code does not require a foreign A ruling of the CIR was invoked, stating that it exempted from withholding tax
corporation to engage in business in the Philippines in subjecting its income to reinsurance premiums received from domestic insurance companies by foreign
tax. It suffices that the activity creating the income is performed or done in the insurance companies not authorized to do business in the Philippines.
Philippines. What is controlling, therefore, is not the place of business but the
place of activity that created an income. Subsequently, petitioner. instituted an action in the CFI of Manila for the recovery
of the amount claimed. Tax Court denied the claim.
The power to tax is an attribute of sovereignty. It is a power emanating from
necessity. It is a necessary burden to preserve the State's sovereignty and a ISSUE: Are portions of premiums earned from insurances locally underwritten
means to give the citizenry an army to resist an aggression, a navy to defend its by a domestic corporation, ceded to and received by non-resident foreign
shores from invasion, a corps of civil servants to serve, public improvement reinsurance companies, thru a non-resident foreign insurance broker, pursuant
designed for the enjoyment of the citizenry and those which come within the to reinsurance contracts signed by the reinsurers abroad but signed by the
State's territory, and facilities and protection which a government is supposed to domestic corporation in the Philippines, subject to income tax or not?
provide. Considering that the reinsurance premiums in question were afforded
protection by the government and the recipient foreign reinsurers exercised rights HELD: YES. Section 24 of the National Internal Revenue Code subjects to tax a
non-resident foreign corporation's income from sources within the Philippines.
Appellants contends that the reinsurance premiums came from sources outside Philippines, the same should not be treated as such. Section 37, however, is not
the Philippines, for these reasons: (1) The contracts of reinsurance, out of which an all-inclusive enumeration. It states that "the following items of gross income
the reinsurance premiums were earned, were prepared and signed abroad (2) shall be treated as gross income from sources within the Philippines." It does not
The reinsurers, not being engaged in business in the Philippines, received the state or imply that an income not listed therein is necessarily from sources
reinsurance premiums as income from their business conducted in England and, outside the Philippines.
as such, taxable in England; and, (3) Section 37 of the Tax Code, enumerating
what are income from sources within the Philippines, does not include As to appellants' contention that reinsurance premiums constitute "gross
reinsurance premiums. receipts" instead of "gross income", not subject to income tax, suffice it to say that,
"gross receipts" of amounts that do not constitute return of capital, such as
The source of an income is the property, activity or service that produced the reinsurance premiums, are part of the gross income of a taxpayer. At any rate, the
income. The reinsurance premiums remitted to appellants by virtue of the tax actually collected in this case was computed not on the basis of gross premium
reinsurance contracts, had for their source the undertaking to indemnify receipts but on the net premium income, that is, after deducting general expenses,
Commonwealth Insurance Co. against liability. Said undertaking is the activity payment of policies and taxes.
that produced the reinsurance premiums, and the same took place in the
Philippines. 35. CIR vs. CA, G.R. No. L-54108 (1984)
o In the first place, the reinsured, the liabilities insured and the risks
originally underwritten by Commonwealth Insurance Co., upon which the FACTS: Smith Kline & French Overseas Company (the Company) is a
reinsurance premiums and indemnity were based, were all situated in the multinational firm domiciled in Philadelphia, USA and licensed to do business in
Philippines.
the Philippines, engaged in the importation, manufacture, and sale of
o Secondly, contrary to appellants' view, the reinsurance contracts were
pharmaceutical drugs and chemicals.
perfected in the Philippines, for Commonwealth Insurance Co. signed them
last in Manila. In 1971, the Company filed an amended return and claimed for refund alleging
that there was an overpayment of Php 324,255.00 from an alleged
o Thirdly, the parties to the reinsurance contracts in question evidently underdeduction of home office overhead costs.
intended Philippine law to govern. Article 11 thereof provided for arbitration
in Manila, and the contracts provided for the use of Philippine currency as the The overpayment was found to be due to a large reduction of the Company’s tax
medium of exchange and for the payment of Philippine taxes. liability in relation to its share in the unallocated overhead expenses of the main
office for the year based on the percentage of the Philippine office’s gross income
Section 24 of the Tax Code does not require a foreign corporation to be engaged to the company income as a whole.
in business in the Philippines in order for its income from sources within the
Philippines to be taxable. It subjects foreign corporations not doing business in The Company filed for a petition for review without waiting for the action of the
the Philippines to tax for income from sources within the Philippines. If by source Commissioner of Internal Revenue. The CTA ordered herein Petitioner to refund
of income is meant the business of the taxpayer, foreign corporations not engaged the overpayment or grant a tax credit to the Company. The Commissioner
in business in the Philippines would be exempt from taxation on their income appealed to the SC contending that:
from sources within the Philippines.
1. While under the NIRC and Rev. Reg. No. 2 of the DOF, where an expense
"Income" refers to the flow of wealth. Such flow, proceeded from the Philippines. is clearly related to Philippine derived income or to Philippine
Such income enjoyed the protection of the Philippine Government. As wealth operations, can be deducted from the gross income acquired in the
flowing from within the taxing jurisdiction of the Philippines and in consideration Philippines, the overhead expenses incurred by the parent company
for protection accorded it by the Philippines, said income should properly share including the Philippine office fall under a different category and thus the
the burden of maintaining the government. Company can only claim a ratable part of the same based upon the ratio
of the local branch’s gross income to the worldwide income of the
Appellants further contend that reinsurance premiums not being among those Corporation; and
mentioned in Section 37 of the Tax Code as income from sources within the
2. Further, while the Copration may avail itself of the allowable deductions some item or class of gross income. The remainder shall be
under Sec. 37 (b) of the NIRC, a Service Agreement which the Company included in full as net income from sources within the
has entered into with its home office prescribing the amount that a Philippines. The ratable part is based upon the ratio of gross
branch can deduct as its share of the main office’s expenses, and as the income from sources within the Philippines to the total gross
law between the parties, such contract is binding. income.”

ISSUE: WON the CIR is correct. 36. CIR vs. MARUBENI CORPORATION, G.R. No. 137377 (2001)

HELD: No. The Supreme Court affirmed the ruling of the CTA. The Company FACTS: Respondent Marubeni Corporation is a foreign corporation organized
correctly posited that the Service Agreement between it and its home office and existing under the laws of Japan. It is engaged in general import and export
cannot amend tax laws and regulations. The matter of allocated expenses which trading, financing and the construction business. It is duly registered to engage
are deductible under the law cannot be the subject of an agreement between in such business in the Philippines and maintains a branch office in Manila.
private parties. While examining the books of accounts of the Manila branch office of the
respondent corporation, petitioner found respondent to have undeclared
Further, the Company had to amend its return as there were no available financial income from two contracts in the Philippines, both of which were completed in
statements when the company treasurer computed the share in the home office 1984. Petitioners revenue examiners recommended an assessment for
overhead expenses in accordance with Rev. Reg. No. 2. deficiency income, branch profit remittance, contractors and commercial
brokers taxes. Respondent questioned this assessment.
Finally, the evidence presented (authenticated statements of independent
auditors in the USA and SGV) clearly bolstered the Company’s position that the Petitioner found that the NDC and Philphos contracts were made on a turn-key
amended return represents the correct ratable share, being computed pursuant basis and that the gross income from the two projects amounted to
to Section 37 (b) of the NIRC and Section 160 of Rev. Reg. No. 2 as follows: P967,269,811.14. Each contract was for a piece of work and since the projects
called for the construction and installation of facilities in the Philippines, the
“SEC. 37. Income form sources within the Philippines. entire income therefrom constituted income from Philippine sources, hence,
subject to internal revenue taxes. The assessment letter further stated that the
xxx xxx xxx same was petitioners final decision and that if respondent disagreed with it,
respondent may file an appeal with the Court of Tax Appeals within thirty (30)
(b) Net income from sources in the Philippines. — From days from receipt of the assessment.
the items of gross income specified in subsection (a) of this
section there shall be deducted the expenses, losses, and other Executive Order (E.O.) No. 41 declaring a one-time amnesty covering unpaid
deductions properly apportioned or allocated thereto and a income taxes for the years 1981 to 1985 was issued. In accordance with the terms
ratable part of any expenses, losses, or other deductions which of E.O. No. 41, respondent filed its tax amnesty return and attached thereto its
cannot definitely be allocated to some item or class of gross sworn statement of assets and liabilities and net worth as of Fiscal Year (FY) 1981
income. The remainder, if any, shall be included in full as net and FY 1986. The return was received by the BIR on November 3, 1986 and
income from sources within the Philippines. respondent paid the amount of P2,891,273.00 equivalent to ten percent (10%) of
its net worth increase between 1981 and 1986.
xxx xxx xxx
The tax court found that respondent had properly availed of the tax amnesty
SEC. 160. Apportionment of deductions. — From the under E.O. Nos. 41 and 64 and declared the deficiency taxes subject of said case
items specified in section 37(a), as being derived specifically as deemed cancelled and withdrawn. Petitioner challenged the decision of the tax
from sources within the Philippines there shall be deducted the court with the Court of Appeals.
expenses, losses, and other deductions properly apportioned or
allocated thereto and a ratable part of any other expenses, It is respondents other argument that assuming it did not validly avail of the
losses or deductions which can not definitely be allocated to amnesty under the two Executive Orders, it is still not liable for the deficiency
contractors tax because the income from the projects came from the Offshore
Portion of the contracts. The two contracts were divided into two parts, i.e., the Clearly, the service of design and engineering, supply and delivery, construction,
Onshore Portion and the Offshore Portion. All materials and equipment in the erection and installation, supervision, direction and control of testing and
contract under the Offshore Portion were manufactured and completed in Japan, commissioning, coordination of the two projects involved two taxing
not in the Philippines, and are therefore not subject to Philippine taxes. jurisdictions. These acts occurred in two countries Japan and the Philippines.
While the construction and installation work were completed within the
ISSUE: Whether or not respondent is liable to pay the income, branch profit Philippines, the evidence is clear that some pieces of equipment and supplies
remittance, and contractors taxes assessed by petitioner. were completely designed and engineered in Japan. The two sets of ship unloader
and loader, the boats and mobile equipment for the NDC project and the ammonia
RULING: NO. The contract price for the project was Y3,255,751,000.00 and storage tanks and refrigeration units were made and completed in Japan. They
P17,406,000.00. Like the NDC contract, the price was divided into three portions. were already finished products when shipped to the Philippines. The other
The price in Japanese currency was broken down into the Japanese Yen Portion I construction supplies listed under the Offshore Portion such as the steel sheets,
and Japanese Yen Portion II while the price in Philippine currency was classified pipes and structures, electrical and instrumental apparatus, these were not
as the Philippine Pesos Portion. Both Japanese Yen Portions I and II were financed finished products when shipped to the Philippines. They, however, were likewise
by suppliers credit from the Export-Import Bank of Japan. The price stated in the fabricated and manufactured by the sub-contractors in Japan. All services for the
three portions were further broken down into the corresponding materials, design, fabrication, engineering and manufacture of the materials and equipment
equipment and services required for the project and their individual prices. under Japanese Yen Portion I were made and completed in Japan. These services
were rendered outside the taxing jurisdiction of the Philippines and are therefore
The division of the price into Japanese Yen Portions I and II and the Philippine not subject to contractors tax.
Pesos Portion under the two contracts corresponds to the two parts into which
the contracts were classified the Foreign Offshore Portion and the Philippine 37. CIR vs. AMERICAN AIRLINES, INC., G.R. No. 67983 (1989)
Onshore Portion. In both contracts, the Japanese Yen Portion I corresponds to the
Foreign Offshore Portion. Japanese Yen Portion II and the Philippine Pesos FACTS: AAI is organized under laws of US, an offline intl. carrier without any
Portion correspond to the Philippine Onshore Portion. flight originating from PH. Subsequently, by virtue of BOI cert and license issued
by SEC, a liaison office was established by AAI in PH for passenger and flight
A contractors tax is a tax imposed upon the privilege of engaging in business. It is information and reservation and ticketing services.
generally in the nature of an excise tax on the exercise of a privilege of selling
services or labor rather than a sale on products; and is directly collectible from CIR assessed AAI for deficiency income tax, interest and compromise penalty for
the person exercising the privilege. Being an excise tax, it can be levied by the 1974 amounting to P298. AAI received a letter of demand with notice of
taxing authority only when the acts, privileges or business are done or performed assessment on the PH gross billings, July 31, 1979. CIR also demanded that AAI
within the jurisdiction of said authority. Like property taxes, it cannot be imposed pay 5% surcharge and interest rate of 14% per annum from July 31, 1979 to July
on an occupation or privilege outside the taxing district. 31, 1980, and interest rate of 20% per annum from Aug 1 1980 to July 31 1982
pursuant to Tax Code which took effect on Aug 1 1980.
In the case at bar, it is undisputed that respondent was an independent contractor AAI protested and said that it is not doing business within the PH and selling
under the terms of the two subject contracts. Respondent, however, argues that tickets is not an activity subject to assessed tax on gross Ph billings.
the work therein were not all performed in the Philippines because some of them
were completed in Japan in accordance with the provisions of the contracts. CTA reversed CIR decision holding that acts of foreign corp. in the business of intl.
air carriage and of selling passage tickets in PH through its agent; in maintaining
Between Marubeni and the two Philippine corporations, payments for all an office in PH; receipt of payments for passage tickets sold in Ph do not make
materials and equipment under Japanese Yen Portion I were made to Marubeni such intl. air carrier engaged in business in PH.
by NDC and Philphos also in Japan. The NDC, through the Philippine National
Bank, established letters of credit in favor of respondent through the Bank of CIR seeks the reversal of CTA decision wherein AAI was absolved in its tax
Tokyo. The letters of credit were financed by letters of commitment issued by the liability under sec24(b)(2) of NIRC as amended by PD 69
OECF with the Bank of Tokyo.
“Resident corps-a corp organized, authorized, or existing under the laws of merely directs that the types of income listed therein be treated as income from
any foreign country, engaged in trade and business within PH shall be sources within the Philippines.
taxable as provided in subsection (a) of this section upon the total net
income received in the preceding taxable year from all sources in PH: The 2&1/2% tax on gross PH billings is an income tax levied on the presumed
Provided however that international carriers shall pay a tax of 2&1/2% on gain of airline companies ensuring that intl. airlines are taxed on the income they
their gross PH billings” derive from Ph sources. The revenues from the sale of tickets is derived from Ph
sources.
Amended by PD 1355
Gross PH billings include gross revenue realized form uplifts anywhere in AAi is also liable to pay interest under section 51(e)(2) in addition to interest
the world by any intl. carrier doing business in Ph of passage documents sold therein, under sec51(d) which shall be computed from the date when CIR demanded
for passenger, excess baggage or mail, provided the cargo or mail originates from payment of deficiency tax and shall be based on the entire amount of liability
Ph. The gross revenue realized from the said cargo or mail (shall) include the gross inclusive of the previous interest.
freight charge up to final destination. Gross revenue from chartered flights
originating from the Philippines shall likewise form part of 'Gross Philippine AAi shall also pay the 5% surcharge for nonpayment of tax deficiency within
Billings' regardless of the place of sale or payment of the passage documents. For 30days after notice and demand. The 5% surcharge refers to 5% of the actual
purposes of determining the taxability of revenues from chartered flights, the term deficiency income tax.
'originating from the Philippines' shall include flight of passengers who stay in the
Philippines for more than forty-eight (48) hours prior to embarkation.” 38. CIR vs. AMERICAN EXPRESS INTL. INC., G.R. No. 153609 (2005)

ISSUE: WON AAI, an offline intl. carrier without flight operations in PH but FACTS: The Respondent is the Philippine branch of American Express
rendering ticketing services in Ph is liable to pay tax on its gross Ph billings International Inc., a US company with a branch office at Makati City, Philippines.
It is a servicing unit of the company’s Hong Kong branch and is engaged primarily
HELD: Yes it is liable to pay tax. It is considered a resident foreign corp engaged to facilitate the collections of the latter company from card members situated in
in trade or business in the country. Such activities show continuity of commercial the Philippines and payment to service establishments in the Philippines.
dealings and exercise of functions normally incident to and in progressive
prosecution of commercial gain. It filed with BIR a letter-request for the refund of its 1997 excess input taxes,
citing as basis Section 110B of the 1997 Tax Code, which held that “xxx Any input
For the source of income to be considered as coming from Ph, it is sufficient that tax attributable to the purchase of capital goods or to zero-rated sales by a VAT-
the income is derived from activities within PH. The absence of flight operations registered person may at his option be refunded or credited against other
in Ph territory cannot alter the fact that income was derived from activity within internal revenue taxes, subject to the provisions of Section 112.”
Ph jurisdiction.
Due to the inaction of the Petitioner, the Respondent filed a Petition for Review
The sale of tickets in Ph is the activity that produces income. Tickets exchanged with the CTA on April 1999 contending that as per VAT ruling No. 080-89: as a
and payments were also made in Ph currency. The situs of the source of payments VAT registered entity whose service is paid for in foreign currency inwardly
is the PH. The flow of wealth occurred within the Ph territory enjoying protection remitted to the Philippines and accounted for in accordance with the rules and
accorded by the Ph government, thus in consideration for that protection, the regulations of the Bangko Sentral, their service income is automatically zero
flow of wealth should share the burden of supporting the govt. rated.

Section 37(a) of the Tax Code, which enumerates items of gross income from Petitioner alleges that the claim for refund should be construed strictly against
sources within the Philippines, namely: (1) interest, (2) dividends, (3) service, (4) the Petitioner (claimant) as the same partakes of the nature of a tax exemption.
rentals and royalties, (5) sale of real property, and (6) sale of personal property,
does not mention income from the sale of tickets of international transportation. The CTA rendered a decision in favor of the Respondent and the CA affirmed the
However, that does not render it less an income from within the Philippines. same further holding that the Respondent’s services were “services other than
Section 37, by its language, does not intend the enumeration to be exclusive. It the processing, manufacturing, or repackaging of goods for persons doing
business outside the Philippines” and thus one of the zero-rated transactions
BSP.” The respondent meets the following requirements for exemption, and thus
under Section 102, Title IV of the NIRC. should be zero-rated:

ISSUE: WON AMEX PHILS is entitled to a refund. (1) Service be performed in the Philippines
(2) The service fall under any of the categories in Section 102B of the Tax Code
HELD: Yes. Section 102 of the Tax Code provides for the VAT on sale of services (3) It be paid in acceptable foreign currency accounted for in accordance with
and use or lease of properties. Section 102B particularly provides for the services BSP R&R.
or transactions subject to 0% rate:
39. CIR vs. PLACER DOME TECHNICAL SERVICES (PHILIPPINES) INC.,
(1) Processing, manufacturing or repacking goods for other G.R. No. 164365 (2007)
persons doing business outside the Philippines which goods
are subsequently exported, where the services are paid for in CIR vs. PLACER DOME TECHNICAL SERVICES, INC., G.R. No. 164365 (2007)
acceptable foreign currency and accounted for in accordance
with the rules and regulations of the BSP; FACTS: Mine tailings from the Taipan Pit (owned by Marcopper Mining
Coproration in Marinduque) started to escape through the Makulapnit Tunnel
(2) Services other than those mentioned in the preceding and Boac Rivers, casing the cessation of mining and milling operations, and
subparagraph, e.g. those rendered by hotels and other service potential environmental damage to rivers. To prevent the further spread of the
establishments, the consideration for which is paid for in tailing leak, Placer Dome, Inc. (PDI), part owner of Marcopper, undertook to
acceptable foreign currency and accounted for in accordance perform the clean-up and rehabilitation of the Makalupnit and Boac Rivers,
with the rules and regulations of the BSP through a subsidiary. PDI engaged Placer Dome Technical Services Limited
(PDTSL), a non-resident foreign corporation with office in Canada. PDTSL
Under subparagraph 2, services performed by VAT-registered engaged the services of Placer Dome Technical Services (Philippines), Inc.
persons in the Philippines (other than the processing, (respondent), a domestic corp. and VAT registered entity.
manufacturing or repackaging of goods for persons doing
business outside the Philippines), when paid in acceptable PDTSL and respondent thus entered into an Implementation Agreement
foreign currency and accounted for in accordance with the which stipulated that all implementation services rendered by respondent even
R&R of BSP, are zero-rated. Respondent renders service prior to the agreement’s signing shall be deemed to have been provided pursuant
falling under the category of zero rating. to the said Agreement. Agreement stipulated that PDTSL was to pay respondent
an amount in USD equal to all Costs incurred for the Implementation Services.
As a general rule, the VAT system uses the destination principle as a basis for the
jurisdictional reach of the tax. Goods and services are taxed only in the country Respondent amended its quarterly VAT returns for the last two quarters
where they are consumed. Thus, exports are zero-rated, while imports are taxed. of 1996 and four quarters of 1997. In 1998, respondent filed an administrative
claim for the refunds of its reported total inputs in relation to the Services
In the present case, the facilitation of the collection of receivables is different
contracted with PDTSL, around P43 million. Respondent argued that the
from the utilization of consumption of the outcome of such service. While the
revenues it derived from services rendered to PDTSL, pursuant to the Agreement,
facilitation is done in the Philippines, the consumption is not. The services
qualified as zero-rated sales under Section 102 (b) (2) since it was paid in foreign
rendered by respondent are performed upon its sending to its foreign client the currency.
drafts and bulls it has gathered from service establishments here, and are
therefore, services also consumed in the Philippines. Under the destination CIR: did not act on this claim
principle, such service is subject to 10% VAT. CTA: respondent filed Petition for Review
CIR (Answer to the Petition): merely invoked the presumption that taxes are
However, the law clearly provides for an exception to the destination principle; collected in accordance with law, and that claims for refund are construed strictly
that is 0% VAT rate for services that are performed in the Philippines, “paid for against claimants, as it was in the nature of an exemption.
in acceptable foreign currency and accounted for in accordance with the R&R of
CTA: supported respondent’s contention that the services contracted with PDTSL (1) Processing, manufacturing or repacking
constituted a zero-rated transaction as it was paid in foreign currency. goods for other persons doing business outside
the Philippines which goods are subsequently
CTA further pointed out that not the entire amount paid by PDTSL was inwardly exported, where the services are paid for in
remitted and accounted for. The CTA also noted that not all the reported total acceptable foreign currency and accounted for
input VAT payments of respondent were properly supported by VAT invoices or in accordance with the rules and regulations of
official receipts, thus, not all allowable input could be attributed to its zero-rated the Bangko Sentral ng Pilipinas (BSP);
sales. CTA found that only P17 million could be refunded.
(2) Services other than those mentioned in the
CIR: filed a Motion for Reconsideration invoking Sec. 4. 102-2 (b) (2) of Revenue preceding subparagraph, the consideration for
Regulation No. 5-96 and VAT Ruling N. 040-98 dated Nov. 23, 1998. which is paid for in acceptable foreign
currency and accounted for in accordance with
CTA resolution: Denied the MR. VAT Ruling and Revenue Regulation cannot the rules and regulations of the BSP.
amend the act of Congress, for administrative rules are intended to carry out, not The last paragraph [of Section 102(b)], services performed by VAT-registered
supplant or modify, the law. persons in the Philippines, when paid in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the BSP, are zero-
CA: petitioner filed Petition for Review. CA affirmed CTA’s decision. rated.
Section 102 (b) (2) explicitly says that a zero-rated VAT transaction includes
services by VAT-registered persons other than processing, manufacturing or As a general rule, the VAT system uses the destination principle as a basis for the
repacking goods for other persons doing business outside the Philippines, which jurisdictional reach of the tax. Goods and services are taxed only in the country
goods are subsequently exported, the consideration for which is paid in foreign where they are consumed. Thus, exports are zero-rated, while imports are taxed.
currency and accounted for in accordance with the rules and regulations of the
Confusion in zero rating arises because petitioner equates the performance of a
BSP.
particular type of service with the consumption of its output abroad. In the

present case, the facilitation of the collection of receivables is different from the
In the present case, it is because of such enumeration that petitioner now argues
utilization or consumption of the outcome of such service. While the facilitation
that “respondent’s services likewise do not fall under the second category
is done in the Philippines, the consumption is not. Respondent renders assistance
mentioned in Section 4.102-2 (b2) (2) [as amended by Revenue Regulation No.
to its foreign clients — the ROCs outside the country — by receiving the bills of
5-96], because they are not similar to project studies, info services, engineering
service establishments located here in the country and forwarding them to the
and architectural designs which are destined to be consumed abroad by non-
ROCs abroad. The consumption contemplated by law, contrary to petitioner's
resident foreign clients.”
administrative interpretation, does not imply that the service be done abroad in

ISSUE: Whether or not respondent’s sale of services to PDTSL constitutes as zero- order to be zero-rated.
rated transaction Consumption is "the use of a thing in a way that thereby exhausts it." Applied to
services, the term means the performance or "successful completion of a
HELD: Yes. Section 102 (b) of the 1986 NIRC reads: contractual duty, usually resulting in the performer's release from any past or
Section 102. Value-Added Tax on Sale of future liability . . ." The services rendered by respondent are performed or
successfully completed upon its sending to its foreign client the drafts and bills it
Services and Use or Lease of Properties.
has gathered from service establishments here. Its services, having been
(a) . . . performed in the Philippines, are therefore also consumed in the Philippines.
(b) Transactions Subject to Zero Percent (0%) Unlike goods, services cannot be physically used in or bound for a specific place
Rate. — The following services performed in when their destination is determined. Instead, there can only be a
the Philippines by VAT-registered persons "predetermined end of a course" when determining the service "location or
shall be subject to zero percent (0%) rate: position . . . for legal purposes." Respondent's facilitation service has no physical
existence, yet takes place upon rendition, and therefore upon consumption, in the CHAPTER 4 – EXCLUSIONS, DEDUCTIONS AND EXEMPTIONS
Philippines. Under the destination principle, as petitioner asserts, such service is TOPIC: INCLUSIONS VIS-À-VIS EXCLUSIONS
subject to VAT at the rate of 10 percent.
40. EL ORIENTE, FABRICA DE TABACOS, INC. vs. POSADAS, G.R. No.
However, the law clearly provides for an exception to the destination principle; 34774 (1931)
that is, for a zero percent VAT rate for services that are performed in the
Philippines, "paid for in acceptable foreign currency and accounted for in DOCTRINE: The proceeds of insurance taken by a corporation on the life of an
accordance with the rules and regulations of the [BSP]." Thus, for the supply of important official to indemnify it against loss in case of his death, are not taxable
service to be zero-rated as an exception, the law merely requires that first, the as income under the Philippine Income Tax Law. The indefiniteness of the local
service be performed in the Philippines; second, the service fall under any of the law is emphasized.|||
categories in Section 102(b) of the Tax Code; and, third, it be paid in acceptable
foreign currency accounted for in accordance with BSP rules and regulations. FACTS: The plaintiff is a domestic corporation duly organized under the laws of
Again, contrary to petitioner's stand, for the cost of respondent's service to be the Philippines. Defendant is the collector of Internal Revenue of the Philippines.
zero-rated, it need not be tacked in as part of the cost of goods exported. The law Plaintiff, in order to protect itself against the loss that it might suffer by reason of
neither imposes such requirement nor associates services with exported goods. the death of its manager, A. Velhagen, who had had more than thirty-five (35)
It simply states that the services performed by VAT-registered persons in the years of experience in the manufacture of cigars in the Philippine Islands, and
Philippines — services other than the processing, manufacturing or repacking of whose death would be a serious loss to the plaintiff, procured from the
goods for persons doing business outside this country — if paid in acceptable Manufacturers Life Insurance Co., of Toronto, Canada, thru its local agent E. E.
foreign currency and accounted for in accordance with the rules and regulations Elser, an insurance policy on the life of the said A. Velhagen for the sum of $50,000,
of the BSP, are zero-rated. The service rendered by respondent is clearly different United States currency. The plaintiff designated itself as beneficiary of said policy
from the product that arises from the rendition of such service. The activity that on the life of the said manager. The plaintiff paid from its funds all the insurance
creates the income must not be confused with the main business in the course of premiums funds all the insurance premiums due thereon. Plaintiff charged as
which that income is realized. expenses all the said premiums and deducted the same from its gross incomes,
which deductions were allowed by the defendant upon a showing made by the
The law neither makes a qualification nor adds a condition in determining the tax plaintiff that such premiums were legitimate expenses of its business. Upon the
situs of a zero-rated service. Under this criterion, the place where the service is death of A. Velhagen, the plaintiff received all the proceeds of the said life
rendered determines the jurisdiction to impose the VAT. Performed in the insurance policy, together with the interests and the dividends accruing thereon,
Philippines, such service is necessarily subject to its jurisdiction, for the State aggregating P104,957.88. Over the protest of the plaintiff, which claimed
necessarily has to have "a substantial connection" to it, in order to enforce a zero exemption under the Tax Law, the defendant assessed and levied the sum of
rate. The place of payment is immaterial; much less is the place where the output P3,148.74 as income tax on the proceeds of the insurance policy, which the
of the service will be further or ultimately used. plaintiff paid under protest.

ISSUE: Whether the proceeds of insurance taken by a corporation on the life of
an important official to indemnify it against loss in case of his death, are taxable
as income under the Philippine Income Tax Law.

HELD: The Income Tax Law for the Philippines is Act No. 2833, as amended. It is

divided into four chapters: Chapter I On Individuals, Chapter II On Corporations,
Chapter III General Administrative Provisions, and Chapter IV General Provisions.
In Chapter I On Individuals, is to be found section 4 which provides that, "The
following incomes shall be exempt from the provisions of this law: (a) The
proceeds of life insurance policies paid to beneficiaries upon the death of the
insured . . ." Section 10, as amended, in Chapter II On Corporations, provides that,
"There shall be levied, assessed, collected, and paid annually upon the total net
income received in the preceding calendar year from all sources by every 20426, entitled "Commissioner of Internal Revenue vs. GCL Retirement Plan,
corporation . . .a tax of three per centum upon such income . . ." Section 11 in the represented by its Trustee-Director and the Court of Tax Appeals," which
same chapter, provides the exemptions under the law, but neither here nor in any affirmed the Decision of the latter Court, dated 15 December 1986, in Case no.
other section is reference made to the provisions of section 4 in Chapter I. 3888, ordering a refund, in the sum of P11,302.19, to the GCL Retirement Plan
representing the withholding tax on income from money market placements and
purchase of treasury bills, imposed pursuant to Presidential Decree No. 1959.
Under the view we take of the case, it is sufficient for our purposes to direct
attention to the anomalous and vague condition of the law. It is certain that the Private Respondent, GCL Retirement Plan (GCL, for brevity) is an employees'
proceeds of life insurance policies paid to individual beneficiaries upon the trust maintained by the employer, GCL Inc., to provide retirement, pension,
death of the insured are exempt. It is not so certain that the proceeds of life disability and death benefits to its employees. The Plan as submitted was
insurance policies paid to corporate beneficiaries upon the death of the insured approved and qualified as exempt from income tax by Petitioner Commissioner
are likewise exempt. But at least, it may be said that the law is indefinite in of Internal Revenue in accordance with Rep. Act No. 4917.
phraseology and does not permit us unequivocally to hold that the proceeds of
life insurance policies received by corporations constitute income which is On 15 January 1985, Respondent GCL fied with Petitioner a claim for refund in
taxable. the amounts of P1,312.66 withheld by Anscor Capital and Investment Corp., and
It is true that the Income Tax Law, in exempting individual beneficiaries, speaks P2,064.15 by Commercial Bank of Manila. On 12 February 1985, it filed a second
of the proceeds of life insurance policies as income, but this is a very slight claim for refund of the amount of P7,925.00 withheld by Anscor, stating in both
indication of legislative intention. In reality, what the plaintiff received was in the letters that it disagreed with the collection of the 15% final withholding tax from
nature of an indemnity for the loss which it actually suffered because of the death the interest income as it is an entity fully exempt from income tax as provided
of its manager. under Rep. Act No 4917 in relation to Section 56 (b) 3 of the Tax Code.
According to Chief Justice Taft: The refund requested having been denied, Respondent GCL elevated the matter
"It is earnestly pressed upon us that proceeds of life insurance paid on to respondent Court of Tax Appeals (CTA). The latter ruled in favor of GCL,
the death of the insured are in fact capital, and cannot be taxed as income holding that employees' trusts are exempt from the 15% final withholding tax on
under the Sixteenth Amendment. We are not required to meet this interest income and ordering a refund of the tax withheld. Upon appeal, originally
question. It is enough to sustain our construction of the act to say that to this Court, but referred to respondent Court of Appeals, the latter upheld the
proceeds of a life insurance policy paid on the death of the insured are CTA Decision.
not usually classed as income. Life insurance in such case is like that of
fire and marine, a contract of indemnity. The benefit to be gained by ISSUE: Whether or not the GCL Plan is exempt from the final withholding tax on
death has no periodicity.” interest income from money placements and purchase of treasury bills

Considering, therefore, the purport of the stipulated facts, considering the HELD: Yes. GCL Plan was qualified as exempt from income tax by the CIR in
uncertainty of Philippine law, and considering the lack of express legislative accordance with Rep. Act. 4917. The tax-exemption privilege of employees' trusts,
intention to tax the proceeds of life insurance policies paid to corporate as distinguished from any other kind of property held in trust, springs from
beneficiaries, particularly when in the exemption in favor of individual Section 56(b) (now 53[b]) of the Tax Code, “The tax imposed by this Title shall
beneficiaries in the chapter on this subject, the clause is inserted "exempt from not apply to employee's trust which forms part of a pension, stock bonus or
the provisions of this law," we deem it reasonable to hold the proceeds of the life profit-sharing plan of an employer for the benefit of some or all of his
insurance policy in question as representing an indemnity and not taxable employees . . .” And rightly so, by virtue of the raison d'etre behind the creation
income. of employees' trusts. Employees' trusts or benefit plans normally provide
economic assistance to employees upon the occurrence of certain contingencies,
41. CIR vs. CA, G.R. No.95022 (1992) particularly, old age retirement, death, sickness, or disability. It provides security
against certain hazards to which members of the Plan may be exposed. It is an
FACTS: Petitioner, the Commissioner of Internal Revenue, seeks a reversal of the independent and additional source of protection for the working group. What is
Decision of respondent Court of Appeals, dated August 27, 1990, in CA-G.R. SP No. more, it is established for their exclusive benefit and for no other purpose.
It is evident that tax-exemption is likewise to be enjoyed by the income of the same should not be considered as part of their income for it was an expense of
pension trust. Otherwise, taxation of those earnings would result in a diminution his employer and his membership therein was merely incidental to his duties of
of accumulated income and reduce whatever the trust beneficiaries would increasing and sustaining the business of his employer; and that as regards the
receive out of the trust fund. This would run afoul of the very intendment of the wife-taxpayer's travelling allowance of P3,247.40 in 1952, it should not be
law. considered as part of their income because she merely accompanied him in his
business trip to New York as his secretary and, at the behest of her husband's
There can be no denying either that the final withholding tax is collected from employer, to study and look into the details of the plans and decorations of the
income in respect of which employees' trusts are declared exempt (Sec. 56[b], building intended to be constructed by his employer in its property at Dewey
now 53[b], Tax Code). The application of the withholdings system to interest on Boulevard. On 15 and 27 February 1954, the taxpayers paid the deficiency taxes
bank deposits or yield from deposit substitute is essentially to maximize and assessed under Official Receipts Nos. 451841, 451842, 451843, 451748 and
expedite the collection of income taxes by requiring its payment at the source. If 451844 (Exhibits C, I, M, Q, and Y). After hearing conducted by the Conference
an employees' trust like the GCL enjoys a tax-exempt status from income, we see Staff of the Bureau of Internal Revenue on5 October 1954 (pp. 74-85, BIR rec.),
no logic in withholding a certain percentage of that income which it is not on 27 May 1955the Staff recommended to the Collector of Internal Revenue that
supposed to pay in the first place the assessments made on 28 November 1953 (Exhibits2, 4, 6, 8, 10) be sustained
except that the amount of P200 as entrance fee to the Marikina Gun and Country
42. CIR vs. HENDERSON, G.R. No. L-12954 (1961) Club paid for the husband-taxpayer's account by his employer in 1948 should not
be considered as part of the taxpayers' taxable income for that year (pp. 95-107,
FACTS: The spouses Arthur Henderson and Marie B. Henderson (later referred BIR rec.). On 14 July 1955, in line with the recommendation of the Conference
to as the taxpayers) filed with the Bureau of Internal Revenue returns of annual Staff, the Collector of Internal Revenue denied the taxpayers' request for
net income for the years 1948 to 1952. reconsideration, except as regards the assessment of their income tax due for the
year 1948,
In the foregoing assessments, the BIR considered as part of their taxable income
the taxpayer-husband's allowances for rental, residential expenses, subsistence, The taxpayers again sought a reconsideration of the denial of their request for
water, electricity and telephone; bonus paid to him; withholding tax and entrance reconsideration and offered to settle the case on a more equitable basis by
fee to the Marikina gun and Country Bluc paid by his employer for his account; increasing the amount of the taxable portion of the husband-taxpayer's
and travelling allowance of his wife. On 26 and 27 January 1954 the taxpayers allowances for rental, etc. from P3,000 yearly to P4,800 yearly, which "is the value
asked for reconsideration of the foregoing assessment and on 11 February 1954 to the employee of the benefits he derived therefrom measured by what he had
and 28 February 1955 stated the grounds and reasons in support of their request saved on account thereof' in the ordinary course of his life ... for which he would
for reconsideration (pp. 36-38, 62-66, BIR rec.). have spent in any case'". The taxpayers also reiterated their previous stand
regarding the transportation allowance of the wife-taxpayer of P3,247.40 in 1952
The claim that as regards the husband-taxpayer's allowances for rental and and requested the refund of the amounts.
utilities such as water, electricity and telephone, he did not receive the money for
said allowances, but that they live in the apartment furnished and paid for by his On 10 February 1956 the taxpayers again requested the Collector of Internal
employer for its convenience; that they had no choice but live in the said Revenue to refund to them the amounts allegedly paid in excess as income taxes
apartment furnished by his employer, otherwise they would have lived in a less for the years 1948 to 1952, inclusive (Exhibit Z-1). The Collector of Internal
expensive one; that as regards his allowances for rental of P7,200 and residential Revenue did not take any action on the taxpayers' request for refund.
expenses of P1,400 and P1,849.32 in 1948, rental of P1,800 and subsistence of
P6,051.50 (the latter merely consisting of allowances for rent and utilities such ISSUE: Are the allowances for rental of the apartment furnished by the
as light, water, telephone, etc.) in 1949 rental, electricity and water of P8,373.73 husband-taxpayer's employer-corporation, including utilities such as light,
in 1950, rental of P5,782.91 in 1951 and rental, telephone, water, electricity, etc. water, telephone, etc. and the allowance for travel expenses given by his
of P7,044.67 in 1952, only the amount of P3,900 for each year, which is the employer-corporation to his wife in 1952 part of taxable income?
amount they would have spent for rental of an apartment including utilities,
should be taxed; that as regards the amount ofP200 representing entrance fee to
the Marikina Gun and Country Club paid for him by his employer in 1948, the
HELD: Nevertheless, as correctly held by the Court of Tax Appeals, the taxpayers to Mr. C. V. Starr support the said findings (Exhibits U-2, V-1, W-1, X). No part of
are entitled only to a ratable value of the allowances in question, and only the the allowance for travelling expenses redounded to the benefit of the taxpayers.
amount of P4,800 annually, the reasonable amount they would have spent for Neither was a part thereof retained by them. The fact that she had herself
house rental and utilities such as light, water, telephone, etc., should be the operated on for tumors while in New York was but incidental to her stay there
amount subject to tax, and the excess considered as expenses of the and she must have merely taken advantage of her presence in that city to undergo
corporation. the operation.
Section 29, Commonwealth Act No. 466, National Internal Revenue Code, Buenaventura Loberiza, acting head of the accounting department of the
provides: "Gross income" includes gains, profits, and income derived from salaries, American International Underwriters for the Philippines, Inc., testified that
wages, or compensation for personal service of whatever kind and in whatever form rentals, utilities, water, telephone and electric bills of executives of the
paid, or from professions, vocations, trades, businesses, commerce, sales, or corporation were entered in the books of account as "subsistence allowances and
dealings in property, whether real or personal, growing out of the ownership or expenses;" that there was a separate account for salaries and wages of employees
use of or interest in such property; also from interest, rents dividend, securities, and officers; and that expenses for rentals and other utilities were not charged to
or the transaction of any business carried on for gain or profit, or gains, profits, salary accounts.
and income derived from any source whatever.
The taxpayers' claim is supported by the evidence. The total amount of P3,249.32
The evidence presented at the hearing of the case substantially supports the "for manager's residential expense" in 1948 should be treated as rentals for
findings of the Court of Tax Appeals. The taxpayers are childless and are the only apartments and utilities and should not form part of the ratable value subject to
two in the family. The quarters, therefore, that they occupied at the Embassy tax.
Apartments consisting of a large sala, three bedrooms, dining room, two
bathrooms, kitchen and a large porch, and at the Rosaria Apartments consisting The computation made by the taxpayers is correct. Adding to the amount of
of a kitchen, sala dining room, two bedrooms and a bathroom, exceeded their P29,573.79, their net income per return, the amount of P6,500, the bonus
personal needs. But the exigencies of the husband-taxpayer's high executive received in 1948, and P4,800, the taxable ratable value of the allowances, brings
position, not to mention social standing, demanded and compelled them to live in up their gross income to P40,873.79. Deducting therefrom the amount of P2,500
amore spacious and pretentious quarters like the ones they had occupied. for personal exemption, the amount of P38,373.79 is the amount subject to
Although entertaining and putting up houseguests and guests of the husband- income tax. The income tax due on this amount is P6,957.19 only. Deducting the
taxpayer's employer-corporation were not his predominant occupation as amount of income tax due, P6,957.19, from the amount already paid, P8,562.47
president, yet he and his wife had to entertain and put up houseguests in their (Exhibits B, B-1, C), the amount of P1,605.28 is the amount refundable to the
apartments. That is why his employer-corporation had to grant him allowances taxpayers. Add this amount to P563.33, P1,294.00, P354.00 and P2,154.00,
for rental and utilities in addition to his annual basic salary to take care of those refundable to the taxpayers for 1949, 1950, 1951 and 1952 and the total is
extra expenses for rental and utilities in excess of their personal needs. Hence, P5,986.61.
the fact that the taxpayers had to live or did not have to live in the apartments
chosen by the husband-taxpayer's employer-corporation is of no moment, for no The judgment under review is modified as above indicated. The Collector of
part of the allowances in question redounded to their personal benefit or was Internal Revenue is ordered to refund to the taxpayers the sum of P5,986.61,
retained by them. Their bills for rental and utilities were paid directly by the without pronouncement as to costs.
employer-corporation to the creditors (Exhibit AA to DDD, inclusive; pp. 104,
170-193, t.s.n.).
43. CIR vs. CA, CTA, GCL RETIREMENT PLAN, represented by its Trustee-
Director. G.R. No. 95022 (1992)
Likewise, the findings of the Court of Tax Appeals that the wife-taxpayer had to
make the trip to New York at the behest of her husband's employer-corporation FACTS
to help in drawing up the plans and specifications of a proposed building, is also Private Respondent, GCL Retirement Plan (GCL) is an employees’ trust
supported by the evidence. The parts of the letters written by the wife-taxpayer maintained by the employer, GCL Inc., to provide retirement, pension, disability
to her husband while in New York and the letter written by the husband-taxpayer and death benefits to its employees. The Plan as submitted was approved and
qualified as exempt from income tax by petitioner CIR in accordance with Rep. Yes. It appears that under RA No. 1983, which took effect 22 June 1957,
Act No. 4917. amending Sec. 56(b) of the NIRC, employees’ trusts were exempt from income tax.
It is significant to note that the GCL Plan was qualified as exempt from income tax
In 1984, private respondent GCL made investments and earned by the CIR in accordance with RA No. 4917, approved on 17 June 1967. Insofar as
therefrom interest income from which was withheld the fifteen per centum (15%) employees’ trusts are concerned, the foregoing provision should be taken in
final withholding tax imposed by PD No. 1959, which took effect on 15 October relation to then Section 56(b). This provision specifically exempted employees’
1984. trust from income tax.

On 15 January 1985, private respondent GCL filed with petitioner CIR a And rightly so, by virtue of the raison d’etre behind the creation of
claim for refund in the amounts of P1,312.66 withheld by Anscor Capital and
employees’ trusts. Employees’ trusts or benefit plans normally provide economic
Investment Corp., and P2,064.15 by Commercial Bank of Manila. On 12 February assistance to employees upon the occurrence of certain contingencies,
1985, it filed a second claim for refund of the amount of P7,925.00 withheld by particularly, old age retirement, death, sickness, or disability. It provides security
Anscor, stating in both letters that it disagreed with the collection of the 15% final
against certain hazards to which members of the Plan may be exposed. It is an
withholding tax from the interest income as it is an entity fully exempt from
independent and additional source of protection for the working group. What is
income tax. more, it is established for their exclusive benefit and for no other purpose.

The refund requested having been denied, private respondent GCL The tax advantage in RA No. 1983, Section 56(b) was conceived in order
elevated the matter to respondent CTA, which ruled in favor of private to encourage the formation and establishment of such private Plans for the
respondent GCL, holding that employees’ trust are exempt from the 15% final benefit of laborers and employees outside of the Social Security Act.
withholding tax on interest income and ordering a refund of the tax withheld.

On appeal, respondent CA upheld the CTA Decision. *** WITH THE AMENDMENT TO THE NIRC, EMPLOYEES’ TRUST ARE STILL
EXEMPTED FROM INCOME TAX; REFER TO SEC. 32(B)(6)(a)
Hence, the instant petition.
44. CIR vs. CA, G.R. No. 96016 (1991)
Petitioner CIR seeks a reversal of the Decision of the respondent CA
which affirmed the Decision of the CTA ordering a refund in the sum of FACTS: Private respondent Efren P. Castaneda retired from the government
P11,302.19 to the GCL Retirement Plan representing the withholding tax on service as Revenue Attache in the Philippine Embassy in London, England, on 10
income from money market placements and purchase of treasury bills, imposed December 1982 under the provisions of Section 12 (c) of Commonwealth Act 186,
pursuant to PD No. 1959. as amended. Upon retirement, he received, among other benefits, terminal leave
pay from which petitioner Commissioner of Internal Revenue withheld
Petitioner CIR contends that from 15 October 1984 when PD No. 1959 P12,557.13 allegedly representing income tax thereon.
was promulgated, employees’ trusts ceased to be exempt and thereafter became Castaneda filed a formal written claim with petitioner for a refund of the
subject to the final withholding tax. On the other hand, private respondent GCL P12,557.13, contending that the cash equivalent of his terminal leave is exempt
contends that the tax-exempt status of employees’ trusts applies to all kinds of from income tax. To comply with the two-year prescriptive period within which
taxes, including the final withholding tax on interest income. claims for refund may be filed, Castaneda filed on 16 July 1984 with the Court of
Tax Appeals a Petition for Review, seeking the refund of income tax withheld
ISSUE/S from his terminal leave pay.
The Court of Tax Appeals found for private respondent Castaneda and ordered
Whether or not private respondent GCL, as an employees’ trust, is the Commissioner of Internal Revenue to refund Castaneda the sum of
exempt from the 15% final withholding tax on interest income. P12,557.13 withheld as income tax.
Petitioner appealed the above-mentioned Court of Tax Appeals decision to this
Court. On 26 September 1990, the Court of Appeals dismissed the petition for
HELD
review and affirmed the decision of the Court of Tax Appeals. Hence, the present sometime after his death, his estate still continued to receive stock dividends
recourse by the Commissioner of Internal Revenue. from ASC until it grew to at least 108,000 shares.
CIR’S CONTENTION: The Solicitor General, acting on behalf of the Commissioner
of Internal Revenue, contends that the terminal leave pay is income derived from In 1968, ASC through its Board issued a resolution for the redemption of shares
employer-employee relationship, citing in support of his stand Section 28 of the from Soriano’s estate purportedly for the planned “Filipinization” of ASC.
National Internal Revenue Code; that as part of the compensation for services Eventually, 108,000 shares were redeemed from the Soriano Estate. In 1973, a
rendered, terminal leave pay is actually part of gross income of the recipient. tax audit was conducted. Eventually, the Commissioner of Internal Revenue (CIR)
Thus —It (terminal leave pay) cannot be viewed as salary for purposes which issued an assessment against ASC for deficiency withholding tax-at-source. The
would reduce it. . . . there can thus be no "commutation of salary" when a CIR explained that when the redemption was made, the estate profited (because
government retiree applies for terminal leave because he is not receiving it as ASC would have to pay the estate to redeem), and so ASC would have withheld
salary. What he applies for is a "commutation of leave credits." It is an tax payments from the Soriano Estate yet it remitted no such withheld tax to the
accumulation of credits intended for old age or separation from service. . . . government. ASC averred that it is not duty bound to withhold tax from the estate
ISSUE: Whether or not terminal leave pay received by a government official because it redeemed the said shares for purposes of “Filipinization” of ASC and
or employee on the occasion of his compulsory retirement from the also to reduce its remittance abroad.
government service is subject to withholding (income) tax.
RULING: NO. The Court has already ruled that the terminal leave pay received by ISSUE: Whether or not ASC’s arguments are tenable.
a government official or employee is not subject to withholding (income) tax.
In the recent case of Jesus N. Borromeo vs. The Hon. Civil Service Commission, et al, HELD: No. The reason behind the redemption is not material. The proceeds from
the Court explained the rationale behind the employee's entitlement to an a redemption is taxable and ASC is duty bound to withhold the tax at source. The
exemption from withholding (income) tax on his terminal leave pay as follows: . Soriano Estate definitely profited from the redemption and such profit is taxable,
. . commutation of leave credits, more commonly known as terminal leave, is and again, ASC had the duty to withhold the tax. There was a total of 108,000
applied for by an officer or employee who retires, resigns or is separated from shares redeemed from the estate. 25,247.5 of that was original issue from the
the service through no fault of his own. (Manual on Leave Administration Course capital of ASC. The rest (82,752.5) of the shares are deemed to have been from
for Effectiveness published by the Civil Service Commission, pages 16-17). In the stock dividend shares. Sale of stock dividends is taxable. It is also to be noted that
exercise of sound personnel policy, the Government encourages unused leaves to in the absence of evidence to the contrary, the Tax Code presumes that every
be accumulated. The Government recognizes that for most public servants, distribution of corporate property, in whole or in part, is made out of corporate
retirement pay is always less than generous if not meager and scrimpy. A modest profits such as stock dividends. It cannot be argued that all the 108,000 shares
nest egg which the senior citizen may look forward to is thus avoided. Terminal were distributed from the capital of ASC and that the latter is merely redeeming
leave payments are given not only at the same time but also for the same policy them as such. The capital cannot be distributed in the form of redemption of stock
considerations governing retirement benefits. dividends without violating the trust fund doctrine — wherein the capital stock,
In fine, not being part of the gross salary or income of a government official or property and other assets of the corporation are regarded as equity in trust for
employee but a retirement benefit, terminal leave pay is not subject to income the payment of the corporate creditors. Once capital, it is always capital. That
tax. doctrine was intended for the protection of corporate creditors.

45. CIR vs. CA, G.R. No. 108576 (1999) 46. CIR vs. MITSUBISHI METAL CORPORATION, G.R. No. L-54908 (1990)

FACTS: Don Andres Soriano (American), founder of A. Soriano Corp. (ASC) had a FACTS: Atlas Consolidated Mining and Dev Corp (Atlas) entered into a loan and
total shareholdings of 185,154 shares. Broken down, the shares comprise of sales contract with Mitsubishi, a Japanese corp licenses to engage in business in
50,495 shares which were of original issue when the corporation was founded the Phils., for purposes of the projected expansion of the productive capacity of
and 134,659 shares as stock dividend declarations. So in 1964 when Soriano died, Atlas.
half of the shares he held went to his wife as her conjugal share (wife’s “legitime”)
and the other half (92,577 shares, which is further broken down to 25,247.5 Mitsubishi agreed to extend a loan to Atlas for the installation of a new
original issue shares and 82,752.5 stock dividend shares) went to the estate. For concentrator for copper production and Atlas to sell to Mitsubishi all the copper
concentrates produced for 15 years.
entirely different from the interest income paid by Mitsubishi to Eximbank of
Mitsubishi applied for a loan with Export-Import Bank of Japan (Eximbank) for Japan. What was the subject of the 15% withholding tax is not the interest income
purpose of its obligation under said contract. Pursuant to the contract between paid by Mitsubishi to Eximbank, but the interest income earned by Mitsubishi
Atlas and Mitsubishi, interest payments were made by Atlas to Mitsubishi for the from the loan to Atlas.
years 1974-75. The corresponding 15% tax thereon in the amount of
P1,971,595.01 was withheld pursuant to sec. 24(b)(1) and sec. 53 (b)(2) of NIRC, When Mitsubishi secured the loan, it was in its own independent capacity as a
as amended by PD 131, and duly remitted to the government. private entity and not as a conduit of the consortium of Japanese banks or the
Eximbank of Japan. While loans were secured by Mitsubishi primarily “as a loan
Private respondent filed a claim for the tax credit requesting the sum of to and in consideration for importing copper concentrates from Atlas, the fact
P1,971,595.01 be applied against their existing and future tax liabilities. It was remains that it was a loan by Eximbank of Japan to Mitsubishi and not to Atlas.
later noted by respondent CTA that Mitsubishi executed a waiver and disclaimer
of its interest in the claim for tax credit in favor of Atlas. 47. SANTOS vs. SERVIER PHILIPPINES, INC., G.R. No. 166377 (2008)

Mitsubishi filed a petition for review with respondent court on the ground that FACTS: Petitioner Ma. Isabel T. Santos was the Human Resource Manager of
Mitsubishi was a mere agent of Eximbank, which is a financing institution owned, respondent Servier Philippines, Inc. Petitioner attended a meeting of all human
controlled and financed by the Japanese Government. Such government status of resource managers of respondent, held in Paris, France. Petitioner, together with
Eximbank, if it may be so called, is the basis for private respondents claim for her husband Antonio P. Santos, her son, and some friends, had dinner at Leon des
exemption from paying the tax on the interest payment on the loan. It was further Bruxelles, a Paris restaurant known for mussels as their specialty. She vomited
claimed that the interest payments on the loan from the consortium of Japanese and brought to the hospital known as Centre Chirurgical de L’Quest where she
banks were likewise exempt because loan supposedly came from or were fniancé fell into coma for 21 days; and later stayed at the Intensive Care Unit (ICU) for 52
by Eximbank. Relying on the provision of sec. 29(b)(7)(A) NIRC. days. Petitioner’s hospitalization expenses, as well as those of her husband and
son, were paid by respondent. During the period of petitioner’s rehabilitation,
CTA promulgated its decision ordering petitioner to grant a tax credit in favor of respondent continued to pay the former’s salaries; and to assist her in paying her
Atlas and the court declared that all papers and documents pertaining to the loan hospital bills. Petitioner’s physician concluded that the former had not fully
obtained by Mitsubishi from Eximbank shows that this was the same amount recovered mentally and physically. Hence, respondent was constrained to
given to Atlas. It also observed that the money for the loan from the consortium terminate petitioner’s services.
of private Japanese banks originated from Eximbank. From these, respondent
court concluded that the ultimate creditor of Atlas was Eximbank. Mitsubishi was As a consequence of petitioner’s termination from employment, respondent
acting as a mere “arranger or conduit through which the loan flowed from the offered a retirement package. Of the promised retirement benefits amounting to
creditor Eximbank to the debtor Atlas. P1,063,841.76, only P701,454.89 was released to petitioner’s husband, the
balance thereof was withheld allegedly for taxation purposes.
ISSUE: WON the interest income from the loan extended to Atlas by
Mitsubishi is excludible from gross income taxation pursuant to sec. Petitioner, instituted the instant case for unpaid salaries; unpaid separation pay;
29(b)(7)(A), NIRC and therefore, exempt from withholding tax. unpaid balance of retirement package plus interest; insurance pension for
permanent disability; educational assistance for her son; medical assistance;
HELD: NO. The signatories on the loans and sales contract were Mitsubishi and reimbursement of medical and rehabilitation expenses; moral, exemplary, and
Atlas, nowhere in the contract can it be inferred that Mitsubishi acted for and actual damages, plus attorney’s fees.
behalf of Eximbank of Japan nor of any entity, private or public, for that matter.
When Mitsubishi obtained the loan of USD 20M from Eximbank of Japan said The arbiter refused to rule on the legality of the deductions made by respondent
amount ceased to be the property of the bank and become property of Mitsubishi. from petitioner’s total retirement benefits for taxation purposes, as the issue was
beyond the jurisdiction of the NLRC.
Mitsubishi and not Eximbank is the sole creditor of Atlas, the former being the
owner of the USD 20M upon completion of its loan contract with Eximbank of She argued that her situation could not be characterized as a disease; rather, she
Japan. The interest income of the loan paid by Atlas to Mitsubishi is therefore became disabled. In short, in her petition before us, she now changes her theory
by saying that she is not entitled to separation pay but to retirement pay pursuant authorized capital stock increased to P2.5M. Of the 15,000 shares, only 10,000
to Section 4,26 Article V of the Retirement Plan, on disability retirement. She, thus, was issued which were all subscribed by Don Soriano, increasing his subscription
prayed for the full payment of her retirement benefits by giving back to her the shares. He transferred 1250 of his shares to his 2 sons Jose and Andres JR as their
amount deducted for taxation purposes. initial investments in ANSCOR. Jose and Andres are foreigners.

ISSUE: Whether the Php 362,386.87 deduction for taxation purposes made by the ANSCOR declared stock dividends. When don Soriano died, ANSCOR increased its
respondent was proper. capital stock to P30M. Stock dividends were received by Don Soriano’s estate and
Dona Carmen from ANSCOR, increasing their accumulated shareholdings to
RULING: Yes. Section 32 (B) (6) (a) of the New National Internal Revenue Code 138,867 and 138,864 common shares each. Dona Carmen requested a ruling from
(NIRC) provides for the exclusion of retirement benefits from gross income, thus: US Internal Revenue Service (IRS) inquiring if an exchange of common preferred
shares may be considered as a tax avoidance scheme under sec367 of 1954 US
(6) Retirement Benefits, Pensions, Gratuities, etc. – revenue act. ANSCOR reclassified its existing 300k common shares into 150k
common and 150k preferred.
a) Retirement benefits received under Republic Act 7641 and those
received by officials and employees of private firms, whether individual In a letter-reply, IRS said that the exchange is only a recapitalization scheme and
or corporate, in accordance with a reasonable private benefit plan not tax avoidance.
maintained by the employer: Provided, That the retiring official or After examination, Revenue examiners proposed that ANSCOR be assessed for
employee has been in the service of the same employer for at least ten deficiency withholding tax-at-source pursuant to sec53 and 54 of 1939 revenue
(10) years and is not less than fifty (50) years of age at the time of his code for the year1968 and 2nd quarter of 1969 based on the transactions of
retirement: Provided further, That the benefits granted under this exchange and redemption of stocks. BIR made assessments despite ANSCOR’s
subparagraph shall be availed of by an official or employee only once. x claim that it availed of tax amnesty under PD 23 amended by PD74 and 157. CIR
x x. ruled that the PDs don’t cover sec53 and 54 in relation to art83(b) of 1939
revenue code under which ANSCOR was assessed.
Thus, for the retirement benefits to be exempt from the withholding tax, the
taxpayer is burdened to prove the concurrence of the following elements: (1) a ANSCOR protested; denied by CIR.
reasonable private benefit plan is maintained by the employer; (2) the retiring ANSCOR filed petition for review with CTA; CTA reversed CIR’s ruling finding
official or employee has been in the service of the same employer for at least ten evidence to overcome the prima facie correctness of the assessments.
(10) years; (3) the retiring official or employee is not less than fifty (50) years of CA affirmed CTA ruling.
age at the time of his retirement; and (4) the benefit had been availed of only The bone of contention is the interpretation and application of Section 83(b) of
once.43 the 1939 Revenue Act which provides:
Sec. 83. Distribution of dividends or assets by corporations.
As discussed above, petitioner was qualified for disability retirement. At the time (b) Stock dividends A stock dividend representing the transfer of surplus to
of such retirement, petitioner was only 41 years of age; and had been in the capital account shall not be subject to tax. However, if a corporation cancels or
service for more or less eight (8) years. As such, the above provision is not redeems stock issued as a dividend at such time and in such manner as to make the
applicable for failure to comply with the age and length of service requirements. distribution and cancellation or redemption, in whole or in part, essentially
Therefore, respondent cannot be faulted for deducting from petitioner’s total equivalent to the distribution of a taxable dividend, the amount so distributed in
retirement benefits the amount of P362,386.87, for taxation purposes. redemption or cancellation of the stock shall be considered as taxable income to the
extent it represents a distribution of earnings or profits
48. CIR vs. A. SORIANO CORPORATION, G.R. No. 108576 (1999)
ISSUE: WON ANSCOR’s redemption of stocks from its stockholder and exchange
FACTS: 1930, Don Soriano, resident citizen of US formed a corp A. Soriano Y Cia, of common with preferred shares can be considered essentially equivalent to the
predecessor of Anscor with P1M capitalization. ANSCOR is wholly owned and distribution of taxable dividend, making the proceeds thereof taxable under
controlled by fam of Don Soriano, all nonresident aliens. 1937, Don Soriano sec83(b) 1939 revenue code
subscribed to 4963 shares of the 5000 shares originally issued. 1945, ANSCOR’s
HELD: Yes, proceeds from a redemption is taxable and ANSCOR is duty bound to nonperformance by withholding agent of its legal duty to withhold unless there
withhold the tax at source. The Soriano Estate profited from the redemption and is collusion or bad faith.
such profit is taxable. Exchange generally is considered a taxable transaction. It Not being a taxpayer, ANSCOR, a withholding agent, is not protected by amnesty.
cant be argued that shares were distributed from the capital of ANSCOR and it is
merely redeeming them; the capital cant be distributed in the form of redemption STOCK DIVIDEND representing transfer of surplus to capital account shall not be
of stock dividends without violating the trust fund doctrine wherein capital stock, subject to tax. Except if a corp cancels/redeems stock issued as a dividend at such
prop and assets of corp are regarded as equity in trust for payment of corporate time and in such manner as to make the distribution and cancellation or
creditors. Once a capital, always a capital. redemption, in whole or in part, essentially equivalent to the distribution of a
CIR argues that the exchange transaction is tantamount to cancellation under
taxable dividend, the amount so distributed in redemption or cancellation of the
sec83(b) making the proceeds taxable and that the section applies to stock
stock shall be considered as taxable income to the extent it represents a
dividends. It also claimed that under the NET EFFECT TEST the estate of Don
distribution of earnings or profit.
Soriano gained from the redemption, that it was the duty of ANSCOR to withhold Though redemption and cancellation are generally considered capital
the tax-at-source arising from 2 transactions pursuant to sec53 and 54 of 1939 transactions, they are not subject to tax. However, depending on the
revenue act. In this test, it is the net effect rather than the motives and plans of circumstances, proceeds of redemption of stock dividends are essentially
taxpayer/corp that is the fundamental guide in administering sec83(b) distribution of cash dividends, which when paid becomes absolute property of
stockholder; having realized gain from that redemption, income earner is subject
Sec83(b) depends on factual circumstances of each case. to income tax.
TAX AMNESTY much like tax exemption, is never favored nor presumed. Must be
construed strictly against taxpayer and liberally in favor of taxing authority. Application of sec83(b), if the distribution is to be treated as taxable dividend
PD 67 provides: In all cases of voluntary disclosures of previously untaxed income (accdg to an American case)
and/or wealth such as earnings, receipts, gifts, bequests or any other acquisitions 1. Presence/absence of real business purpose
from any source whatsoever which are taxable under the National Internal 2. Amount of earnings and profits available for declaration of a regular
Revenue Code, as amended, realized here or abroad by any taxpayer, natural or dividend and corps past record with respect to declaration of dividends
juridical; the collection of all internal revenue taxes including the increments or 3. Effect of distribution as compared with declaration of regular dividend
penalties or account of non-payment as well as all civil, criminal or administrative 4. Lapse of time between issuance and redemption
liabilities arising from or incident to such disclosures under the National Internal 5. Presence of substantial surplus and generous supply of cash which
Revenue Code, the Revised Penal Code, the Anti-Graft and Corrupt Practices Act, invites suspicion as does a meager policy in relation both to current
the Revised Administrative Code, the Civil Service laws and regulations, laws and earnings and accumulated surplus
regulations on Immigration and Deportation, or any other applicable law or
proclamation, are hereby condoned and, in lieu thereof, a tax of ten (10%) per REDEMPTION AND CANCELLATION
centum on such previously untaxed income or wealth is hereby imposed, subject to For the exempting clause of Section 83(b) to apply, it is indispensable that:
the following conditions: (conditions omitted) (a) there is redemption or cancellation; (b) the transaction involves stock
The decree condones collection of internal revenue taxes arising from voluntary dividends and (c) the time and manner of the transaction makes it essentially
disclosures under NIRC of previously untaxed income/wealth realized in equivalent to a distribution of taxable dividends. Of these, the most important is
PH/abroad by any taxpayer. the third.
Redemption is repurchase, a reacquisition of stock by a corporation which issued
The withholding agent is deemed a taxpayer for it to avail of tax amnesty. An
the stock in exchange for property, whether or not the acquired stock is cancelled,
income taxpayer covers all persons who derive taxable income. ANSCOR was retired or held in the treasury.
assessed by CIR for deficiency withholding tax hence liable in its capacity as
If the redeemed shares are from stock dividend declarations other than as initial
withholding agent and not in its personality as taxpayer. capital investment, the proceeds of the redemption is additional wealth, hence, a
WITHHOLDING AGENT is the payor, a separate entity acting no more than an gain, then sec83(b) applies.
agent of the govt for collection of tax. The payer is the taxpayer, he is subject to It is not the stock dividends but the proceeds of tis redemption that may be
tax imposed by law. The payee is the taxing authority. A withholding agent is
deemed as taxable dividends.
merely a tax collector, not a taxpayer. The taxpayer shouldn’t answer for
The exempting provision of sec83(b) may not be applicable if the redeemed The course of deliberations, debates, and amendments on the draft proposal of
shares were issued with bona fide business purpose. Section 10, Article VIII further clarified the issue:

3 ELEMENTS IN IMPOSITION OF INCOME TAX Commissioner Cirilo Rigos’s proposal, that the term “diminished” be changed to
1. There must be gain/profit “decreased” and that the word “nor subjected to income tax” be deleted, was
2. Gain/profit is realized or received actually or constructively accepted.
3. Not exempted by law/treaty from income tax
Commissioner Joaquin G. Bernas announced that by putting a period after
The test of taxability under sec83(b) is whether income was realized through
“decreased”, it is with the understanding that the salaries of justices are subject
redemption of stock dividends. ANSCOR’s citing of the American case that one to tax. He cited that this is based on the understanding that there will be a
requirement is the issuance of shares for a business purpose is immaterial on
provision in the Constitution similar to Section 6 of Article XV, the General
redemption, not with respect to issuance of stock dividends. Provisions of the 1973 Constitution, which states that no salary of any public
Proceeds of redemption of stock dividends are taxable dividends as it is part of officer shall be exempt from payment of income tax.
the entire income subject to tax. Dividends are included as gross income.
Due to these issues, Fr. Bernas stated that the ruling in Perfecto vs Meer and
49. NITAFAN vs. CIR, G.R. No. L-78780 (1987) Dencia vs David were not applicable anymore.

FACTS: Petitioners are judges of the Regional Trial Court. They sought to prohibit 50. CIR vs. BRITISH OVERSEAS AIRWAYS CORPORATION, G.R. Nos. L-
the Commissioner of Internal Revenue and the Financial Officer of the Supreme 65773-74 (1987)
Court from making deductions of withholding taxes from their salaries.
FACTS: BRITISH OVERSEAS AIRWAYS CORPORATION (BOAC) is a 100% British
According to the petitioners, the tax withheld from their compensation as judicial Government-owned corporation organized and existing under the laws of the UK.
officers is a violation of Section 10, Article VIII of the 1987 Constitution which It is engaged in the international airline business and is a member-signatory of
states that: the Interline Air Transport Association (IATA). As such, it operates air
transportation service and sells transportation tickets over the routes of the
“The salary of the Chief Justice and of the Associate Justices of the Supreme Court, other airline members. During the periods, 1959 to 1967, 1968-69 to 1970-71,
and of judges of lower courts shall be fixed by law. During their continuance in the CIR filed for deficiency of income taxes against BOAC, it is admitted that BOAC
office, their salary shall not be decreased” had no landing rights for traffic purposes in the Philippines, and was not granted
a Certificate of public convenience and necessity to operate in the PH by the Civil
Thus, it was averred that the deduction of withholding taxes from their salaries Aeronautics Board (CAB), except for a nine-month period, partly in 1961 and
constitutes an unconstitutional decrease of their salaries. partly in 1962, when it was granted a temporary landing permit by the CAB.
Consequently, it did not carry passengers and/or cargo to or from the PH,
ISSUE: WON members of the judiciary are subject to income tax although during the period covered by the assessments, it maintained a general
sales agent in the PH – Warner Barnes and Company, Ltd., and later Qantas
HELD: Yes. This payment of income tax does not fall within the constitutional
Airways – which was responsible for selling BOAC tickets covering passengers
protection against decrease of their salaries during their continuance in office. and cargoes.
Further, the deletion of the grant of exemption from payment of income tax to
members of the Judiciary was a way of ensuring the equality of the three branches FIRST CASE (G.R. No. 65773): CIR assessed BOAC the aggregate amount of over
of government. P2.5m for deficiency income taxes (1959-1963). It was protested by BOAC and
was issues a new assessment in the amount of P858k for (195901967). BOAC
Based on jurisprudence, it was concluded that the true intent of the framers was paid this new assessment under protest.
to make the salaries of members of the Judiciary taxable, as is applicable to all
income earners.

Then, the BOAC filed a claim for refund of the P858k which was denied by the CIR. the source and the source of an income is that activity which produced
However, prior to such denial, BOAC already filed a petition for review with the the income.
CTA assailing the said assessment and praying for refund
2. Yes. BOAC is a resident foreign corporation. In order that a foreign
SECOND CASE (G.R. No. 65774): BOAC was assessed deficiency income taxes, corporation may be regarded as doing business within a State, there
interests, and penalty for fiscal years of 1968/1969 to 1970-71 in the amount of must be continuity of conduct and intention to establish a continuous
P549k, and the additional Amounts of P1k and P1.8k as compromise penalties business, such as the appointment of a local agent, and not one of a
(Sec. 46 violation) penalized under (Sec. 74 of the NIRC). temporary character.

BOAC requested that assessment be set aside. The CIR denied the request for BOAC, during the periods of the subject assessments, maintained a
refund in the FIRST CASE but also re-issued in the SECOND CASE the deficiency general sales agent in the PH that was engaged in selling and issuing
income tax assessment for P534k for the years 1969 to 1970-71 plus P1k. BOAC’s tickets; breaking down the whole trip into series of trips; receiving fare
request for reconsideration was denied thus, prompting for the filing of the from the whole trip; and consequently allocating to various airline
second case to the CTA praying that it be absolved of liability for 1969 to 1971. companies on the basis of their participation by virtue of the IATA
Agreement. Thus, there should be no doubt then that BOAC was “engaged
CTA: Joint decision for the both cases. CTA rendered assailed joint decision in” business in the PH through a local agent during the period covered. It
REVERSING the CIR ruling. “Do not constitute BOAC income from PH sources is a resident foreign corporation subject to tax upon its total net income
since no service of carriage of passengers or freight was performed by the BOAC received in the preceding taxable year from all sources within the PH.
within the Philippines” and, therefore, is not subject to PH income tax.
3. P.D. No. 69 promulgated international carriers shall pay a tax of 2 ½ %
ISSUE/S: on their gross PH billings. P.D. No 1355 promulgated, provided a
1. Whether or not the revenue derived by BOAC from sales of tickets in the statutory definition of “gross PH billings”: “…includes gross revenue
PH for air transportation, while having no landing rights here, constitute realized from uplifts anywhere in the world by any international carrier
income of BOAC from PH sources, hence, taxable doing business in the PH of passage documents sold therein, whether for
2. Whether or not during the fiscal years in question BOAC is a resident passenger, excess baggage or mail, provided the cargo or mail originates
foreign corporation doing business in the PH or has an office or place of from the PH…”
business in the PH
3. Whether or not BOAC may not be considered as a resident foreign Wherefore, the appealed joint Decision of the CTA is hereby SET ASIDE. BOAC is
corporation but a non-resident foreign corporation, then it is liable to the hereby ordered to pay the amount of P534,132.08 as deficiency income tax for
rate of 35% of its gross income received from all sources within the PH the fiscal years 1968-69 to 1970-71 plus 5% surcharge, and 1% monthly interest
from April 16, 1972 for a period not to exceed three (3) years in accordance with
HELD: the Tax Code. The BOAC claim for refund in the amount of P858,307.79 is hereby
1. Yes. The sale of tickets in the PH is the activity that produces the income. denied. Without costs.
The tickets exchanged hands here and payments for fares were also
made in the PH currency. The situs of the source of payments in the PH. 51. CIR vs. AIR INDIA, G.R. No. L-72443 (1988)
The flow of wealth proceeded from, and occurred within, PH territory,
enjoying the protection accorder by the PH government. In protection, DOCTRINE:
the flow of wealth should share the burden of supporting the Revenue derived by an international air carrier from sales of tickets in the
government. Philippines for air transportation, while having no landing rights in the country,
constitutes income of the said international air carrier from Philippine sources
The absence of flight operations to and from the PH is not determinative and, accordingly, taxable under Section 24 (b) (2) of the National Internal
of the source of income or the situs of income taxation. Admittedly, BOAC Revenue Code as ruled in Commissioner of Internal Revenue v. British Overseas
was an offline international airline at the time. The test of taxability is Airways Corporation, 149 SCRA 395 (1987)
"'Gross Income' includes gains, profits, and income derived
FACTS: from salaries, wages or compensation for personal service of
The private respondent Air India is a foreign corporation organized under the whatever kind and in whatever form paid, or from profession,
laws of India. It is not licensed to do business in the Philippines as an vocations, trades, business, commerce, sales, or dealings in
international carrier. Its airplanes do not operate within Philippine territory nor property, whether real or personal, growing out of the
service passengers embarking from Philippine ports. The firm is represented in ownership or use of or interest in such property; also from
the Philippines by its general sales agent, Philippine Airlines, Inc., a corporate interests, rents, dividends, securities, or the transactions of
entity duly organized under the laws of the Philippines. Air India sells airplane any business carried on for gain or profit, or gains, profits, and
tickets in the Philippine through this agent. These tickets are serviced income derived from any source whatever. . .
by Air India airplanes outside the Philippines. In sum, Air India's status in the
Philippines is that of an off-line international carrier not engaged in the business "The definition is broad and comprehensive to include
of air transportation in the Philippines. proceeds from sales of transport documents. 'The words
income from any source whatever' disclose a legislative policy
The total sales of airplane tickets transacted by Philippine Air Lines, Inc. for the to include all income not expressly exempted within the class
private respondent during the fiscal year ending March 31, 1976 amounted to of taxable income under our laws.' Income means 'cash
P2,968,156.00. On account of the same, the herein petitioner Commissioner of received or its equivalent'; it is the amount of money coming
Internal Revenue held the private respondent liable for the payment of to a person within a specific time . . . ; it means something
P142,471.68. The amount represents the 2.5% income tax on the private distinct from principal or capital. For, while capital is a fund,
respondent's gross Philippine billings for the said fiscal year pursuant to Section income is a flow. As used in our income tax law, 'income' refers
24 (b) (2) of the National Internal Revenue Code, as amended, inclusive of the to the flow of wealth.
50% surcharge and interest for willful neglect to file a return as provided under xxx xxx xxx
Section 72 of the same code.
"The source of an income is the property, activity or service
From the action taken by the petitioner, the private respondent brought an that produced the income. For the source of income to be
Appeal to the Court of Tax Appeals. The thrust of the Appeal is, inter alia, that the considered as coming from the Philippines, it is sufficient that
private respondent cannot be held liable to pay the said imposition because it did the income is derived from activity within the Philippines. In
not derive any income from sources within the Philippines during the said fiscal BOAC's case, the sale of tickets in the Philippines is the activity
year and that the amount of P2,968,156.00 mentioned in the assessment made that produces the income. The tickets exchanged hands here
by the petitioner was derived exclusively from sources outside the Philippines. and payments for fares were also made here in Philippine
currency. The situs of the source of payments is the
ISSUE: Philippines. The flow of wealth proceeded from, and occurred
W/N the revenue derived by an international air carrier from sales of tickets in within, Philippine territory, enjoying the protection accorded
the Philippines for air transportation, while having no landing rights in the by the Philippine government. In consideration of such
country, constitutes income of the said international air carrier from Philippine protection, the flow of wealth should share the burden of
sources and, accordingly, taxable under Section 24 (b) (2) of the National Internal supporting the government.
Revenue Code. xxx xxx xxx

HELD: "BOAC, however, would impress upon this Court that income
This issue has been settled in the affirmative in Commissioner of Internal derived from transportation is income for services, with the
Revenue v. British Overseas Airways Corporation, This Court, speaking, through result that the place where the services are rendered
Mme. Justice Ameurfina A. Melencio-Herrera, held that such revenue constitutes determines the source and since BOAC's service of
taxable income. The pertinent portions of the said Decision are as follows — transportation is performed outside the Philippines, the
income derived is from sources without the Philippines and,
"The Tax Code defines 'gross income' thus: therefore, not taxable under income tax laws, . . .
"The absence of flight operations to and from the Philippines P2,968,156.00. 2.5% of this amount or P74,203.90 constitutes the income tax due
is not determinative of the source of income or the situs of from the private respondent.
income taxation. Admittedly, BOAC was an off-line
international airline at the time pertinent to this case. The test 52. CIR vs. ATLAS CONSOLIDATED, G.R. No. L-26924 (1981)
of taxability is the 'source'; and the source of an income is that
activity . . . which produced the income. Unquestionably, the FACTS: Atlas is a corporation engaged in the mining industry registered under
passage documentations in these cases were sold in the the laws of the Philippines. On August 20, 1962, the Commissioner assessed
Philippines and the revenue therefrom was derived from a against Atlas the sum of P546,295.16 and P215,493.96 or a total of P761,789.12
business activity regularly pursued within the Philippines. as de ciency income taxes for the years 1957 and 1958. For the year 1957, it was
And even if the BOAC tickets sold covered the 'transport of the opinion of the Commissioner that Atlas is not entitled to exemption from the
passengers and cargo to and from foreign cities,' it cannot income tax under Section 4 of Republic Act 909 because same covers only gold
alter the fact that income from the sale of tickets was derived mines, the provision of which reads:
from the Philippines. The word source' conveys one essential
idea, that of origin, and the origin of the income herein is the "New mines, and old mines which resume operation, when certifed to as such by
Philippines." the Secretary of Agriculture and Natural Resources upon the recommendation of
the Director of Mines, shall be exempt from the payment of income tax during the
Moreover, the taxable income involved in this case is for the fiscal year ending first three (3) years of actual commercial production. Provided that, any such
March 31, 1976. In the concurring opinion of Chief Justice Teehankee in aforesaid mine and/or mines making a complete return of its capital investment at any time
case he made the following observations: within the said period, shall pay income tax from that year."
"I just wish to point out that the conflict between the majority For the year 1958, the assessment of deficiency income tax of P761,789.12 covers
opinion penned by Mme. Justice Melencio-Herrera and the the disallowance of items claimed by Atlas as deductible from gross income. llcd
dissenting opinion penned by Mr. Justice Feliciano as to the
proper characterization of the taxable income derived by
On October 9, 1962, Atlas protested the assessment asking for its reconsideration
respondent BOAC from the sales in the Philippines of tickets
and cancellation. Acting on the protest, the Commissioner conducted a
for BOAC flights as sold and issued by its general sales agent
reinvestigation of the case.
in the Philippines has become moot after November 24, 1972.
Both opinions state that by amendment through P.D. No. 69,
On October 25, 1962, the Secretary of Finance ruled that the exemption provided
promulgated on November 24, 1972, of section 24 (b)(2) of
in Republic Act 909 embraces all new mines and old mines whether gold or other
the Tax Code providing for the rate of income tax on foreign
minerals. Accordingly, the Commissioner recomputed Atlas deficiency income
corporations, international carriers such as respondent BOAC,
tax liabilities' in the light of the ruling of the Secretary of Finance.
have since then been taxed at a reduced rate of 2-1/2% on
their gross Philippine billings. There is, therefore, no longer
On June 9, 1964, the Commissioner issued a revised assessment entirely
any source of substantial conflict between the two opinions as
eliminating the assessment of P546,295.16 for the year 1957. The assessment for
to the present 2-1/2% tax on their gross Philippine billings
1958 was reduced from P215,493.96 to P39,646.82 from which Atlas appealed
charged against such international carriers as herein
to the Court of Tax Appeals, assailing the disallowance of the following items
respondent foreign corporation."
claimed as deductible from its gross income for 1958.
On the basis of the doctrine announced in British Overseas Airways
Corporation, the revenue derived by the private respondent Air India from the After hearing, the Court of Tax Appeals rendered a decision on October 25, 1966
sales of airplane tickets through its agent Philippine Air Lines, Inc., here in the allowing the above mentioned disallowed items, except the items denominated
Philippines, must be considered taxable income. As correctly assessed by the by Atlas as stockholders relation service fee and suit expenses
petitioner, such income is subject to a 2.5% tax pursuant to Presidential Decree
No. 1355, amending Section 24 (b)(2) of the tax code. The total Philippine billings It is the contention of Atlas that the amount of P25,523.14 paid in 1958 as annual
of the private respondent for the taxable year in question amounts to public relations expenses is a deductible expense from gross income under
Section 30(a) (1) of the National Internal Revenue Code. Atlas claimed that it was conducted by BIR examiners. Specifically, in his answer to the amended petition
paid for services of a public relations firm, P.K. Macker & Co., a reputable public for review in the Court of Tax Appeals, the Commissioner did not deny the fact of
relations consultant in New York City, U.S.A., hence, an ordinary and necessary payment, merely contesting the legitimacy of the deduction on the ground that
business expense in order "to compete with other corporations also interested in same was not ordinary and necessary business expenses.
the investment market in the United States." It is the stand of Atlas that
information given out to the public in general and to the stockholder in particular We, therefore, hold that it was too late for the Commissioner to raise the issue of
by the P.K. Macker & Co., concerning the operation of the Atlas was aimed at fact of payment for the first time in his memorandum in the Court of Tax Appeals
creating a favorable image and goodwill to gain or maintain their patronage. and in this instant appeal to the Supreme Court. If raised earlier, the matter ought
to have been seriously delved into by the Court of Tax Appeals. On this ground,
ISSUE: we are of the opinion that under all the attendant circumstances of the case,
substantial justice would be served if the Commissioner be held as precluded
1) Whether or not the business expenses deducted from Atlas' gross income in from now attempting to raise an issue to disallow deduction of the item in
1958 may be allowed in the absence of proof of payments question at this stage. Failure to assert a question within a reasonable time
warrants a presumption that the party entitled to assert it either has abandoned
2) Whether or not the Commissioner can raise the fact of payment for the first or declined to assert it.
time on appeal in its memorandum in the Court of Tax Appeals
TOPIC: ALLOWABLE DEDUCTIONS
HELD:
53. ZAMORA vs. CIR, G.R. No. L-15290 (1963)
1) No. The Commissioner contended that under Section 30(a) (1) of the National
Internal Revenue Code, it is a requirement for an expense to be deductible from FACTS: Mariano Zamora and his deceased sister Felicidad Zamora, bought a piece
gross income that it must have been "paid or incurred during the year" for which of land located in Manila on May 16, 1944, for P132,000.00 and sold it for
it is claimed; that in the absence of convincing and satisfactory evidence of P75,000.00 on March 5, 1951. They also purchased a lot located in Quezon City
payment, the deduction from gross income for the year 1958 income tax return for P68,959.00 on January 19, 1944, which they sold for P94,000 on February 9,
cannot be sustained; and that the best evidence to prove payment, if at all any has 1951. The CTA ordered the estate of the late Felicidad Zamora (represented by
been made, would be the vouchers or receipts issued therefor which ATLAS failed Esperanza A. Zamora, as special administratrix of her estate), to pay the sum of
to present. P235.50, representing alleged deficiency income tax and surcharge due from said
estate. Esperanza A. Zamora appealed and alleged that the CTA erred: —
Atlas admitted that it failed to adduce evidence of payment of the deduction
claimed in its 1958 income tax return, but explains the failure with the allegation The CIR likewise appealed from the decision, claiming that the lower court erred.
that the Commissioner did not raise that question of fact in his pleadings, or even It is alleged by Mariano Zamora that the CTA erred in disallowing P10,478.50 as
in the report of the investigating examiner and/or letters of demand and promotion expenses incurred by his wife for the promotion of the Bay View Hotel
assessment notices of ATLAS which gave rise to its appeal to the Court of Tax and Farmacia Zamora. He contends that the whole amount of P20,957.00 as
Appeal. 18 promotion expenses in his 1951 income tax returns, should be allowed and not
merely one-half of it or P10,478.50, on the ground that, while not all the itemized
2) No. We fully agree with the ruling of the tax court that the Commissioner on expenses are supported by receipts, the absence of some supporting receipts has
appeal cannot be allowed to adopt a theory distinct and different from that he has been sufficiently and satisfactorily established. For, as alleged, the said amount of
previously pursued, as shown by the BIR records and the answer to the amended P20,957.00 was spent by Mrs. Esperanza A. Zamora (wife of Mariano), during her
petition for review. travel to Japan and the United States to purchase machinery for a new Tiki-Tiki
plant, and to observe hotel management in modern hotels. The CTA, however,
In the case at bar, the Court of Tax Appeals found that the fact of payment of the found that for said trip Mrs. Zamora obtained only the sum of P5,000.00 from the
claimed deduction from gross income was never controverted by the Central Bank and that in her application for dollar allocation, she stated that she
Commissioner even during the initial stages of routiary administrative scrutiny was going abroad on a combined medical and business trip, which facts were not
denied by Mariano Zamora. No evidence had been submitted as to where Mariano as it can, bearing heavily, if it chooses, upon the taxpayer whose inexactness is of
had obtained the amount in excess of P5,000.00 given to his wife which she spent his own making.
abroad. No explanation had been made either that the statement contained in
Mrs. Zamora's application for dollar allocation that she was going abroad on a DOCTRINE: Since promotion expenses constitute one of the deductions in
combined medical and business trip, was not correct. The alleged expenses conducting a business, same must testify these requirements. Claim for the
were not supported by receipts. Mrs. Zamora could not even remember how deduction of promotion expenses or entertainment expenses must also be
much money she had when she left abroad in 1951, and how the alleged substantiated or supported by record showing in detail the amount and
amount of P20,957.00 was spent. nature of the expenses incurred.

ISSUE: WON PROMOTION EXPENSES MAY BE DEDUCTED FROM INCOME TAX 54. GREGORY vs. HELVERING, 293 US 465 (1935)
RETURN?
FACTS
HELD: PARTIALLY YES. SC HELD THAT PROMOTIONAL EXPENSES ARE Petitioner Gregory was the owner of all the stock of United Mortgage
DEDUCTIBLE BUT MUST BE SUBSTANTIATED. When some of the Corp. (UMC), which held among its assets 1,000 shares of the Monitor Securities
representation expenses claimed by the taxpayer were evidenced by vouchers or Corp.
chits, but others were without vouchers or chits, documents or supporting
papers, that accordingly, there is no evidence of representation as to the definite For the sole purpose of procuring a transfer of these shares to herself in
amount incurred by such expenses, CTA, did not commit error in allowing as order to sell them for her individual profit, and, at the same time, diminish the
promotion expenses of Mrs. Zamora claimed in Mariano Zamora's 1951 income amount of income tax which would result from a direct transfer by way of
tax returns, merely one-half or P10,478.50. Petitioner Mariano Zamora alleges dividend, she sought to bring about a “reorganization” of the corporation. To that
that the CTA erred in disallowing 3-½% per annum as the rate of depreciation of end, she caused the Averill Corp. to be organized under the laws of Delaware.
the Bay View Hotel Building but only 2-½%. In justifying depreciation deduction Thereafter, the UMC transferred to the Averill Corp. the 1,000 shares of the
of 3-½%, Mariano Zamora contends that (1) the Ermita District, where the Bay Monitor stock, for which all the shares of the Averill Corp. were issued to the
View Hotel is located, is now becoming a commercial district; (2) the hotel has no petitioner.
room for improvement; and (3) the changing modes in architecture, styles of
furniture and decorative designs, "must meet the taste of a fickle public". On a later date, Averill Corp. was dissolved and liquidated by distributing
all its assets, namely, the Monitor shares, to the petitioner. No other business was
Section 30, of the Tax Code, provides that in computing net income, there shall ever transacted, or intended to be transacted, by that company.
be allowed as deductions all the ordinary and necessary expenses paid or
incurred during the taxable year, in carrying on any trade or business. Moreover, Petitioner immediately sold the Monitor shares for $133,333.33. She
that the application of Mrs. Zamora for dollar allocation shows that she went returned for taxations, as capital net gain, the sum of $76,007.88, based upon an
abroad on a combined medical and business trip, not all of her expenses came apportioned cost or $57,325.45. It is not disputed that if the interposition of the
under the category of ordinary and necessary expenses; part thereof constituted so-called reorganization was ineffective, petitioner became liable for a much
her personal expenses. There having been no means by which to ascertain which larger tax as a result of the transaction.
expense was incurred by her in connection with the business of Mariano Zamora
and which was incurred for her personal benefit, the Collector and the CTA in Respondent CIR, being of the opinion that the reorganization attempted
their decisions, considered 50% of the said amount of P20,957.00 as business was without substance and must be disregarded, held that petitioner was liable
expenses and the other 50%, as her personal expenses. We hold that said for a tax as though the UMC had paid her a dividend consisting of the amount
allocation is very fair to Mariano Zamora, there having been no receipt realized from the sale of the Monitor shares.
whatsoever, submitted to explain the alleged business expenses, or proof of the
connection which said expenses had to the business or the reasonableness of the In a proceeding before the Board of Tax Appeals, that body rejected the
said amount of P20,957.00. While in situations like the present, absolute Commissioner’s view and upheld that of petitioner.
certainty is usually no possible, the CTA should make as close an approximation
Upon review, the Circuit Court of Appeals sustained the Commissioner But the question for determination is whether what was done, apart
and reversed the board, holding that there had been no “reorganization” within from the tax motive, was the thing which the statute intended. The reasoning of
the meaning of the law. the court below in justification of a negative answer leaves little to be said.

Aggrieved, petitioner applied to this Court for a writ of certiorari. When subdivision (B) speaks of a transfer of assets by one corporation
to another, it means a transfer made 'in pursuance of a plan of reorganization'
ISSUE/S (section 112(g) of corporate business; and not a transfer of assets by one
Whether or not the reorganization was validly implemented. corporation to another in pursuance of a plan having no relation to the business
of either, as plainly is the case here. Putting aside, then, the question of motive in
HELD respect of taxation altogether, and fixing the character of the proceeding by what
No. Section 112 of the Revenue Act of 1928 (26 USCA § 2112) deals with actually occurred, what do we find? Simply an operation having no business or
the subject of gain or loss resulting from the sale or exchange of property. Such corporate purpose—a mere device which put on the form of a corporate
gain or loss is to be recognized in computing the tax, except as provided in that reorganization as a disguise for concealing its real character, and the sole object
section. The provisions of the section, so far as they are pertinent to the question and accomplishment of which was the consummation of a preconceived plan, not
here presented, follow: to reorganize a business or any part of a business, but to transfer a parcel of
corporate shares to the petitioner. No doubt, a new and valid corporation was
'Sec. 112. * * * (g) Distribution of Stock on Reorganization. If created. But that corporation was nothing more than a contrivance to the end last
there is distributed, in pursuance of a plan of reorganization, to described. It was brought into existence for no other purpose; it performed, as it
a shareholder in a corporation a party to the reorganization, was intended from the beginning it should perform, no other function. When that
stock or securities in such corporation or in another corporation limited function had been exercised, it immediately was put to death.
a party to the reorganization, without the surrender by such
shareholder of stock or securities in such a corporation, no gain In these circumstances, the facts speak for themselves and are
to the distributee from the receipt of such stock of securities susceptible of but one interpretation. The whole undertaking, though conducted
shall be recognized. * * * according to the terms of subdivision (B), was in fact an elaborate and devious
form of conveyance masquerading as a corporate reorganization, and nothing
'(i) Definition of Reorganization. As used in this section * * * else. The rule which excludes from consideration the motive of tax avoidance is
not pertinent to the situation, because the transaction upon its face lies outside
'(1) The term 'reorganization' means * * * (B) a transfer by a the plain intent of the statute. To hold otherwise would be to exalt artifice above
corporation of all or a part of its assets to another corporation if reality and to deprive the statutory provision in question of all serious purpose.
immediately after the transfer the transferor or its stockholders
or both are in control of the corporation to which the assets are 55. CALANOC vs. CIR, G.R. No. L-15922 (1961)
transferred. * * *' 26 USCA § 2112(g), (i) (1).
FACTS: This involves a petition to review the decision of the Court of Tax Appeals
It is earnestly contended on behalf of the taxpayer that since every affirming an assessment of P7,378.57, by the Collector of Internal Revenue as
element required by the foregoing subdivision (B) is to be found in what was amusement tax and surcharge due on a boxing and wrestling exhibition held by
done, a statutory reorganization was effected; and that the motive of the taxpayer Petitioner Calanoc on December 3, 1949 at the Rizal Memorial Stadium.
thereby to escape payment of a tax will not alter the result or make unlawful what By authority of a solicitation permit issued by the Social Welfare Commission on
the statute allows. It is quite true that if a reorganization in reality was effected November 24, 1949, whereby the petitioner was authorized to solicit and receive
within the meaning of subdivision (B), the ulterior purpose mentioned will be contributions for the orphans and destitute children of the Child Welfare
disregarded. The legal right of a taxpayer to decrease the amount of what Workers Club of the Commission, the petitioner financed and promoted a boxing
otherwise would be his taxes, or altogether avoid them, by means which the law and wrestling exhibition at the Rizal Memorial Stadium for the said charitable
permits, cannot be doubted. purpose. Before the exhibition took place, the petitioner applied with the
respondent Collector of Internal Revenue for exemption from payment of the
amusement tax, relying on the provisions of Section 260 of the National Internal
Revenue Code, to which the respondent answered that the exemption depended 56. KUENZLE AND STREIFF, INC. vs. CIR, G.R. Nos. L-12010 and L-12113
upon petitioner’s compliance with the requirements of law. (1959)
After the said exhibition, the respondent, through his agent, investigated the tax
case of the petitioner, and from the statement of receipts which was furnished FACTS: This is a petition for review of a decision of the Court of Tax Appeals, as
the agent, the latter found that the gross sales amounted to P26,553.00; the
later modified, declaring petitioner liable for the total sum of P33,187.00 as
expenditures incurred was P25,157.62; and the net profit was only P1,375.38.
deficiency income tax due for the years 1950, 1951 and 1952.
Upon examination of the said receipts, the agent also found the following items In the income tax returns for the years 1950, 1951 and 1952 it filed with
of expenditures: (a) P461.65 for police protection; (b) P460.00 for gifts; (c)
respondent, petitioner deducted from its gross income certain items
P1,880.05 for parties; and (d) several items for representation. Out of the
representing salaries, directors' fees and bonuses of its non-resident president
proceeds of the exhibition, only P1,375.38 was remitted to the Social Welfare
and vice-president; bonuses of its resident officers and employees; and interests
Commission for the said charitable purpose for which the permit was issued. on earned but unpaid salaries and bonuses of its officers and employees. The
On November 24, 1951, the Collector of Internal Revenue demanded from the income tax computed in accordance with these returns was duly paid by
petitioner payment of the amount of P7,378.57 as the amusement tax for the
petitioner.
exhibition. Authority for this demand for payment is an opinion of the Secretary The BIR disallowed the deductions of the items representing director’s fees,
of Finance dated June 15, 1948, authorizing denial of application for exemption salaries and bonuses of petitioner’s non-resident president and vice-president
from payment of amusement tax in cases where the net proceeds are not and assessed the petitioner for the tax deficiency in the sums of P26,370.00,
substantial or where the expenses are exorbitant. Not satisfied with the P53,865.00 and P44,112.00 for the years 1950, 1951 and 1952, respectively.
assessment imposed upon him, the petitioner brought this case to the Court of Petitioner requested for the re-examination of this assessment, and respondent
Tax Appeals for review. After hearing, the tax court rendered the decision sought modified the same by allowing as deductible all items comprising directors' fees
herein to be reviewed. Hence, this petition. and salaries of the non-resident president and vice-president, but disallowing the
ISSUE: Petitioner Calanoc questions the VALIDITY of the assessment of bonuses insofar as they exceed the salaries of the recipients, as well as the
AMUSEMENT tax against him (as financer of the exhibition) interests on earned but unpaid salaries and bonuses. Hence, for the years 1950,
1951 and 1952, respondent made a new assessment and demanded from
HELD: AMUSEMENT TAX IS VALID. But evidence was submitted that while he petitioner as deficiency income taxes the amounts of P10,147.00, P26,783.00 and
did not receive said stadium fee of P1,000, said amount was paid by the O-SO
P20,481.00, respectively.
Beverages directly to the stadium for advertisement privileges in the evening of ISSUE: Whether or not the expenses incurred by the petitioners are allowable
the entertainments. As the fee was paid by said concessionaire, petitioner had no expenses under the NIRC.
right to include the P1,000 stadium fee among the items of his expenses. It results, HELD: Bonuses to employees made in good faith and as additional compensation
therefore, that P1,000 went into petitioner’s pocket which is not accounted for. for the services actually rendered by the employees are deductible, provided such
Furthermore petitioner admitted that he could not justify the other expenses,
payments, when added to the stipulated salaries, do not exceed a reasonable
such as those for police protection and gifts. He claims further that the accountant compensation for the services rendered. The condition precedents to the
who prepared the statement of receipts is already dead and could no longer be deduction of bonuses to employees are: (1) the payment of the bonuses is in fact
questioned on the items contained in said statement. compensation; (2) it must be for personal services actually rendered; and (3) the
We have examined the records of the case and we agree with the lower court that bonuses, when added to the salaries, are reasonable when measured by the
most of the items of expenditures contained in the statement submitted to the amount and quality of the services performed with relation to the business of the
agent are either exorbitant or not supported by receipts. We agree with the tax particular taxpayer".
court that the payment of P461.65 for police protection is illegal as it is a
There is no fixed test for determining the reasonableness of a given bonus as
consideration given by the petitioner to the police for the performance by the
compensation. This depends upon many factors, one of them being "the amount
latter of the functions required of them to be rendered by law. The expenditures and the quality of the services performed with relation to the business." Other
of P460.00 for gifts, P1,880.05 for parties and other items for representation are tests suggested are: payment must be "made in good faith"; "the character of the
rather excessive, considering that the purpose of the exhibition was for a
taxpayer's business, the volume and amount of its net earnings, its locality, the
charitable cause. type and extent of the services rendered, the salary policy of the corporation";
"the size of the particular business"; "the employees' qualifications and
contributions to the business venture"; and "general economic conditions”.
However, in determining whether the particular salary or compensation tax and for documentary and science stamp tax; and (b) the other for deficiency
payment is reasonable, the situation must be considered as a whole. income tax for 1977, for an aggregate amount of PhP88,763,255.00.
Ordinarily, no single factor is decisive. It is important to keep in mind that it PICOP protested the assessment of deficiency transaction tax, the documentary
seldom happens that the application of one test can give satisfactory answer, and and science stamp taxes, and the deficiency income tax assessment. CIR did not
that ordinarily it is the interplay of several factors, properly weighted for the formally act upon these protests, but issued a warrant of distraint on personal
particular case, which must furnish the final answer. property and a warrant of levy on real property against PICOP, to enforce
Respondent claims the trial court erred also in allowing the deduction bonuses in collection of the contested assessments, thereby denying PICOP's
excess of the yearly salaries of their respective recipients predicated upon his protests. Thereupon, PICOP went before (CTA) appealing the assessments.
own decision that the deductible amount of said bonuses should be only equal to
their respective yearly salaries cannot also be sustained. CTA rendered a decision, modifying the CIR’s findings and holding PICOP liable
However, respondent's claim cannot be justified considering the factors we have for the reduced aggregate amount of P20,133,762.33. Both parties went to the
already mentioned that play in the determination of the reasonableness of the Supreme Court, which referred the case to the Court of Appeals (CA).
bonuses or additional compensation that may be given to an officer or an CA denied the appeal of the CIR and modified the judgment against PICOP holding
employee which, if properly considered, warrant the payment of the bonuses in it liable for transaction tax and absolved it from payment of documentary and
question to the extent allowed by the trial court. science stamp tax and compromise penalty. It also held PICOP liable for
This is specially so considering the post-war policy of the corporation in giving deficiency of income tax.
salaries at low levels because of the unsettled conditions resulting from war and
the imposition of government controls on imports and exports and on the use of Issues:
foreign exchange which resulted in the diminution of the amount of business and 1. Whether PICOP is liable for transaction tax
the consequent loss of profits on the part of the corporation. The payment of 2. Whether PICOP is liable for documentary and science stamp tax
bonuses in amounts a little more than the yearly salaries received considering 3. Whether PICOP is liable for deficiency income tax
the prevailing circumstances is in our opinion reasonable.
ARE THE BONUSES GRANTED TO LOWER RANKING EMPLOYEES REASONABLE? Held:
No, but a certain amount should still be deductible. 1. YES. PICOP reiterates that it is exempt from the payment of the transaction tax
A.P. Kuenzle and H.A. Streiff have been the president and vice president, by virtue of its tax exemption under R.A. No. 5186, as amended, known as the
respectively, of the company. They have been the policy-makers for the company. Investment Incentives Act, which in the form it existed in 1977-1978, read in
All decisions to be made by the company on important matters and anything and relevant part as follows: "SECTION 8. Incentives to a Pioneer Enterprise. — In
everything outside of the routinary have always been determined by them and addition to the incentives provided in the preceding section, pioneer enterprises
made only upon their instructions which had been strictly adhered to by the shall be granted the following incentive benefits: (a) Tax Exemption. Exemption
management of the Company. from all taxes under the National Internal Revenue Code, except income tax, from
Indeed, the trial court was justified in expressing the view that "there is no special the date of investment is included in the Investment Priorities. The Supreme
reason for granting greater bonuses to such lower ranking officers than those Court holds that that PICOP's tax exemption under R.A. No. 5186, as amended,
given to Messrs. Kuenzle and Streiff." We concur in this observation. does not include exemption from the thirty-five percent (35%) transaction tax.
In the first place, the thirty-five percent (35%) transaction tax is an income tax, a
57. PAPER INDUSTRIES CORP. OF THE PHILIPPINES vs. CA, G.R. Nos. tax on the interest income of the lenders or creditors as held by the Supreme
106949-50 (1995) Court in the case of Western Minolco Corporation v. Commissioner of Internal
Revenue. The 35% transaction tax is an income tax on interest earnings to the
Facts: Paper Industries Corporation of the Philippines (PICOP) is a Philippine lenders or placers. The latter are actually the taxpayers. Therefore, the tax cannot
corporation registered with the Board of Investments (BOI) as a preferred be a tax imposed upon the petitioner. In other words, the petitioner who
pioneer enterprise with respect to its integrated pulp and paper mill, and as a borrowed funds from several financial institutions by issuing commercial papers
preferred non-pioneer enterprise with respect to its integrated plywood and merely withheld the 35% transaction tax before paying to the financial
veneer mills. Petitioner received from the Commissioner of Internal Revenue institutions the interest earned by them and later remitted the same to the
(CIR) two (2) letters of assessment and demand (a) one for deficiency transaction respondent CIR. The tax could have been collected by a different procedure but
the statute chose this method. Whatever collecting procedure is adopted does not
change the nature of the tax. It is thus clear that the transaction tax is an income donated for gift tax purposes at P1,231,268.00, and assessed the total sum of
tax and as such, in any event, falls outside the scope of the tax exemption granted P117,706.50 as donor's gift tax, interest and compromises due thereon. Of the
to registered pioneer enterprises by Section 8 of R.A. No. 5186, as amended. total sum of P117,706.50 paid by respondent, the sum of P55,978.65 represents
PICOP was the withholding agent, obliged to withhold thirty-five percent (35%) the total interest on account of delinquency. This sum of P55,978.65 was claimed
of the interest payable to its lenders and to remit the amounts so withheld to the as deduction, among others, by respondent in her 1954 income tax return.
Bureau of Internal Revenue ("BIR"). As a withholding, agent, PICOP is made Petitioner, however, disallowed the claim and as a consequence of such
personally liable for the thirty-five percent (35%) transaction tax 10 and if it did disallowance assessed respondent for 1954 the total sum of P21,410.38 as
not actually withhold thirty-five percent (35%) of the interest monies it had paid deficiency income tax due on the aforesaid P55,978.65, including interest up to
to its lenders, PICOP had only itself to blame. March 31, 1957, surcharge and compromise for the late payment.

2. NO. The CIR assessed documentary and science stamp taxes, amounting to The interest paid by respondent was in consequence of the late payment of her
PhP300,000.00, on the issuance of PICOP's debenture bonds. Tax exemptions are, donor's tax, and the same was paid within the year it is sought to be declared.
to be sure, to be "strictly construed," that is, they are not to be extended beyond
the ordinary and reasonable intendment of the language actually used by the ISSUE: whether or not such interest paid can be deducted from the gross income.
legislative authority in granting the exemption. The issuance of debenture bonds
is certainly conceptually distinct from pulping and paper manufacturing RULING:
operations. But no one contends that issuance of bonds was a principal or regular Yes. Although taxes already due have not, strictly speaking, the same concept as
business activity of PICOP; only banks or other financial institutions are in the debts, they are, however, obligations that may be considered as such. Where
regular business of raising money by issuing bonds or other instruments to the statute imposes a personal liability for a tax, the tax becomes, at least in a board
general public. The actual dedication of the proceeds of the bonds to the carrying sense, a debt. It follows that the interest paid by herein respondent for the late
out of PICOP's registered operations constituted a sufficient nexus with such payment of her donor's tax is deductible from her gross income under section
registered operations so as to exempt PICOP from taxes ordinarily imposed upon 30(b) of the Tax Code.
or in connection with issuance of such bonds. The Supreme Court agrees with the
Court of Appeals on this matter that the CTA and the CIR had erred in rejecting It finds support in the established jurisprudence in the United States after whose
PICOP's claim for exemption from stamp taxes. laws our Income Tax Law has been patterned. Thus, under sec. 23(b) of the
Internal Revenue Code of 1939, as amended 1, which contains similarly worded
3. YES. PICOP did not deny the existence of discrepancy in their Income Tax Return provisions as sec. 30(b) of our Tax Code, the uniform ruling is that interest on
and Books of Account owing to their procedure of recording its export sales taxes is interest on indebtedness and is deductible.
(reckoned in U.S. dollars) on the basis of a fixed rate, day to day and month to
month, regardless of the actual exchange rate and without waiting when the To sustain the proposition that the interest payment in question is not deductible
actual proceeds are received. In other words, PICOP recorded its export sales at for the purpose of computing respondent's net income, petitioner relies heavily
a pre-determined fixed exchange rate. That pre-determined rate was decided on section 80 of Revenue Regulation No. 2 (known as Income Tax Regulation)
upon at the beginning of the year and continued to be used throughout the promulgated by the Department of Finance, which provides that "the word `taxes'
year. Because of this, the CIR has made out at least a prima facie case that PICOP means taxes proper and no deductions should be allowed for amounts
had understated its sales and overstated its cost of sales as set out in its Income representing interest, surcharge, or penalties incident to delinquency." The court
Tax Return. For the CIR has a right to assume that PICOP's Books of Accounts below, however, held section 80 as inapplicable to the instant case because while
speak the truth in this case since, as already noted, they embody what must it implements sections 30(c) of the Tax Code governing deduction of taxes, the
appear to be admissions against PICOP's own interest. respondent taxpayer seeks to come under section 30(b) of the same Code
providing for deduction of interest on indebtedness.
58. CIR vs. VDA. DE PRIETO, G.R. No. L-13912 (1960) It have been invariably held that interest on deficiency taxes are deductible, not
as taxes, but as interest. Section 80 of Revenue Regulation No. 2, therefore, merely
FACTS: The respondent conveyed by way of gifts to her four children, real incorporated the established application of the tax deduction statute in the
property with a total assessed value of P892,497.50. After the filing of the gift tax United States, where deduction of "taxes" has always been limited to taxes proper
returns on or about February 1, 1954, the petitioner appraised the real property and has never included interest on delinquent taxes, penalties and surcharges.
which the taxpayer's net income from sources within such country taxable under
59. CIR vs. LEDNICKY, G.R. No. Nos. L-18169, L-18262, and L-21434 this Title bears to his entire net income for the same taxable year; and
(1964) (B) The total amount of the credit shall not exceed the same proportion of the tax
against which such credit is taken, which the taxpayer's net income from sources
FACTS: 2nd case-Lednickys are husband and wife both American citizens residing without the Philippines taxable under this Title bears to his entire net income for
in PH, derived all income from PH sources for taxable yrs in question. Filed their the same taxable year.
income tax return for 1956 and was assessed as withholding tax. Lednickys paid
but filed an amended income tax return for 1956 claiming a deduction which was ISSUE: Common issue to all 3 cases: WON a resident alien deduct from their gross
paid in 1956 to US govt as federal income tax and requested a refund. income, income taxes they paid to their government
SEC. 30. Deduction from gross income. — In computing net income there shall be
1st case- CIR failed to answer claim for refund for 1956 so Lednickys filed petition allowed as deductions
with CTA for refund of the overpaid income tax for 1955 also. (c) Taxes:
In 1955, Lednickys filed with US internal reveneue agent in mnl their federal
(1) In general. — Taxes paid or accrued within the taxable year, except —
income tax return for 1947, 1951, 1953, 1954 on income from PH sources on cash (A) The income tax provided for under this Title;
basis. Payments were made in 1955 to US director of internal revenue, mnl (B) Income, war-profits, and excess profits taxes imposed by the authority of any
branch. foreign country; but this deduction shall be allowed in the case of a taxpayer who
does not signify in his return his desire to have to any extent the benefits of
1958, Lednickys amended their PH income tax return for 1955 to include the
paragraph (3) of this subsection (relating to credit for foreign countries);
deductions: US federal income taxes, interest and exchange and bank charges (C) Estate, inheritance and gift taxes; and
which they previously paid, and claimed a refund. (D) Taxes assessed against local benefits of a kind tending to increase the value of
the property assessed
3rd case-1959, they filed an amended return for 1957 claiming a deduction
representing taxes paid to US govt on income derived wholly from PH sources HELD: No. A resident alien who derives income wholly from sources within the
seeking a refund as overpayment. CTA favored Lednickys PH may not deduct from gross income the income taxes he paid to his home
country for the taxable year. The right to deduct foreign income taxes paid is
CTA held that they may be deducted because of the fact that Lednickys did not given only where alternative right to tax credit exists. A resident alien is not
signify in their income tax return a desire to avail themselves of the benefits
entitled to tax credit for foreign income taxes paid when his income is derived
par3(b) wholly from sources within the PH. SC held that to allow a resident alien to deduct
Par. (c) (3) Credits against tax for taxes of foreign countries. — If the taxpayer
from his gross income whatever taxes he pays to his own government is
signifies in his return his desire to have the benefits of this paragraph, the tax
incompatible with the status of the PH as a sovereign state. This is becase the
imposed by this Title shall be credited with — foreign government will have the power to reduce the tax income of the PH govt
(A) ...; simply by increasing their tax rates.
(B) Alien resident of the Philippines. — In the case of an alien resident of the
SC agrees with CIR that the right to deduct income taxes paid to foreign govt from
Philippines, the amount of any such taxes paid or accrued during the taxable year taxpayer’s gross income is given only as alternative/substitute to his right to
to any foreign country, if the foreign country of which such alien resident is a citizen
claim a tax credit for such foreign income taxes. Unless an alien resident has a
or subject, in imposing such taxes, allows a similar credit to citizens of the
right to claim such tax credit if he chooses, he is precluded from deducting the
Philippines residing in such country; foreign income taxes from his gross income.
But this is with limitation
It is well to note that the tax credit so authorized is limited under paragraph 4 (A CIR admit that the purpose of the law is to prevent taxpayer from claiming twice
and B) of the same subsection, in the following terms: the benefits of his payment of foreign taxes by deduction from gross income and
Par. (c) (4) Limitation on credit. — The amount of the credit taken under this
by tax credit. If Lednickys are not allowed to deduct the income taxes they are
section shall be subject to each of the following limitations: required to pay to the US govt in their return for PH income tax, they would be
(A) The amount of the credit in respect to the tax paid or accrued to any country subjected to double taxation. BUT Lednickys failed to observe that double
shall not exceed the same proportion of the tax against which such credit is taken,
taxation becomes obnoxious only where the taxpayer is taxed twice for the for
benefit of the same governmental entity. collection; and (4) filing a collection case in court.
In this case, while Lednickys would have to pay 2 taxes on the same income, PH
govt only receives the proceeds of one tax. As between PH where the income is PRC only used the testimony of its accountant Ms. Masagana in order to prove
earned and where taxpayer is domiciled, and US where income was not earned that these accounts were bad debts. This was considered by all 3 courts to be self-
and where taxpayer didn’t reside, it is indisputable that tax on income should serving. The SC said that PRC failed to exercise due diligence in order to ascertain
accrue to the benefit of PH. that these debts were uncollectible. In fact, PRC did not even show the demand
letters they allegedly gave to some of their debtors.
FUNDAMENTAL DOCTRINE OF INCOME TAXATION is that the right of govt to tax
income emanates from its partnership in the production of income, by providing 61. HERMANOS, INC. vs. CIR, G.R. Nos. L-21551, L-21557, L-24972 and L-
the protection, resources, incentive, and proper climate for such production. 24978 (1969)

60. PHILIPPINE REFINING COMPANY vs. CA, G.R. No. 118794 (1996) FACTS: These four appeals involve two decisions of the Court of Tax Appeals
determining the taxpayer's income tax liability for the years 1950 to 1954 and for
Facts: Philippine Refining Corp (PRC) was assessed deficiency tax payments for the year 1957. The taxpayer, Fernandez Hermanos, Inc., is a domestic-
the year 1985 in the amount of around 1.8M. This figure was computed based on corporation organized for the principal purpose of engaging in business as an
the disallowance of the claim of bad debts by PRC. PRC duly protested the "investment company" with main office at Manila. Upon verification of the
assessment claiming that under the law, bad debts and interest expense are taxpayer's income tax returns for the period in question, the Commissioner of
allowable deductions. When the BIR subsequently garnished some of PRC’s Internal Revenue assessed against the taxpayer the sums of P13,414.00,
properties, the latter considered the protest as being denied and filed an appeal P119,613.00, P11,698.00, P6,887.00 and P14,451.00 as alleged deficiency income
to the CTA which set aside the disallowance of the interest expense and modified taxes. Said assessments were the result of alleged discrepancies found upon the
the disallowance of the bad debts by allowing 3 accounts to be claimed as examination and verification of the taxpayer's income tax returns. The Tax Court
deductions. However, 13 supposed “bad debts” were disallowed as the CTA sustained the Commissioner's disallowances of Item 1, sub-items (b) and (c) and
claimed that these were not substantiated and did not satisfy the jurisprudential Item 2 of the above summary, but overruled the Commissioner's disallowances
requirement of “worthlessness of a debt” The CA denied the petition for review. of all the remaining items. . It therefore modified the deficiency assessments
accordingly, found the total deficiency income taxes due from the taxpayer for the
ISSUE: Whether or not the CA was correct in disallowing the 13 accounts as bad years under review to amount to P23,436.00
debts. ISSUE: Whether Tax Court's rulings are correct with respect to the disputed items
of disallowances enumerated in the Tax Court's summary reproduced?
RULING: YES.Both the CTA and CA relied on the case of Collector vs. Goodrich
International, which laid down the requisites for “worthlessness of a debt” to wit: HELD:

In said case, we held that for debts to be considered as "worthless," and thereby Allowance of losses in Mati Lumber Co. (1950).
qualify as "bad debts" making them deductible, the taxpayer should show that (1)
there is a valid and subsisting debt. (2) the debt must be actually ascertained to There was adequate basis for the writing off of the stock as worthless securities.
be worthless and uncollectible during the taxable year; (3) the debt must be Assuming that the Company would later somehow realize some proceeds from
charged off during the taxable year; and (4) the debt must arise from the business its sawmill and equipment, which were still existing as claimed by the
or trade of the taxpayer. Additionally, before a debt can be considered worthless, Commissioner, and that such proceeds would later be distributed to its
stockholders such as the taxpayer, the amount so received by the taxpayer would
the taxpayer must also show that it is indeed uncollectible even in the future.
then properly be reportable as income of the taxpayer in the year it is received.

Furthermore, there are steps outlined to be undertaken by the taxpayer to prove
(b) Disallowance of losses in or bad debts of Palawan Manganese Mines, Inc. (1951).
that he exerted diligent efforts to collect the debts, viz.: (1) sending of statement
of accounts; (2) sending of collection letters; (3) giving the account to a lawyer
The Tax Court's disallowance of the write-off was proper. proof of the correctness of the taxpayer's claim that the depreciable assets or
buildings in question had a useful life only of 10 years so as to justify its 10%
SC sustain the government's position that the advances made by the taxpayer to depreciation per annum claim, such finding being supported by the record. The
its 100% subsidiary, Palawan Manganese Mines, Inc. amounting to P587,308,07 taxpayer's contention that it has many zero or one-peso assets, representing very
as of 1951 were investments and not loans. The evidence on record shows that old and fully depreciated assets serves but to support the Commissioner's
the board of directors of the two companies since August, 1945, were identical position that a 10% annual depreciation rate was excessive.
and that the only capital of Palawan Manganese Mines, Inc. is the amount of
P100,000.00 entered in the taxpayer's balance sheet as its investment in its Taxable increase in net worth (1950-1951). — The Tax Court set aside the
subsidiary company. This fact explains the liberality with which the taxpayer Commissioner's treatment as taxable income of certain increases in the
made such large advances to the subsidiary, despite the latter's admittedly poor taxpayer's net worth.
financial condition.
The Commissioner advances no valid grounds in his brief for contesting the Tax
(c) Disallowance of losses in Balamban Coal Mines (1950 and 1951) Court's findings. Certainly, these increases in the taxpayer's net worth were not
taxable increases in net worth, as they were not the result of the receipt by it of
The Court sustains the Tax Court's disallowance of the sums of P8,989.76 and unreported or unexplained taxable income, but were shown to be merely the
P27,732.66 spent by the taxpayer for the operation of its Balamban coal mines in result of the correction of errors in its entries in its books relating to its
Cebu in 1950 and 1951, respectively, and claimed as losses in the taxpayer's indebtedness to certain creditors, which had been erroneously overstated or
returns for said years. The Tax Court correctly held that the losses "are deductible listed as outstanding when they had in fact been duly paid. The Tax Court's action
in 1952, when the mines were abandoned, and not in 1950 and 1951, when they must be affirmed.
were still in operation." 9 The taxpayer's claim that these expeditions should be
allowed as losses for the corresponding years that they were incurred, because it Gain realized from sale of real property (1950)
made no sales of coal during said years, since the promised road or outlet through
which the coal could be transported from the mines to the provincial road was It was sufficiently proved from the taxpayer's books that after acquiring the
not constructed, cannot be sustained property, the taxpayer had made improvements totaling P11,147.26, accounting
for the apparent discrepancy in the reported gain. In other words. this figure
d) and (e) Allowance of losses in Hacienda Dalupiri (1950 to 1954) and Hacienda added to the original acquisition cost of P11,852.74 results in a total cost of
Samal (1951-1952). P23,000.00, and the gain derived from the sale of the property for P60,000.00
was correctly reported by the taxpayer at P37,000.00.
The Tax Court overruled the Commissioner's allowance of these items of losses
62. 3M PHILIPPINES, INC. vs. CIR, G.R. No. 82833 (1988)
The Commissioner questions that the losses sustained by the taxpayer were
properly based on the inventory method of accounting. He concedes, however, DOCTRINE:
"that the regulations referred to does not specify how the inventories are to be Section 3-c of CB Circular No. 393 provides for payment of royalties only on
made. The Tax Court, however, felt satisfied with the evidence presented by the commodities manufactured by the licensee under the royalty agreement not on
taxpayer . . . which merely consisted of an alleged physical count of the number the wholesale price of finished products imported by the licensee from the
of the livestock in Hacienda Dalupiri for the years involved." 1The Tax Court was licensor. Although the Tax Code allows payments of royalty to be deducted from
satisfied with the method adopted by the taxpayer as a farmer breeding livestock, gross income as business expenses, it is CB Circular No. 393 that defines what
reporting on the basis of receipts and disbursements. We find no compelling royalty payments are proper. Improper payments of royalty are not deductible
reason to disturb its findings as legitimate business expenses.

Disallowance of excessive depreciation of buildings (1950- 1954). FACTS:
3M Philippines, Inc. is a subsidiary of the Minnesota Mining and Manufacturing
We sustain the Tax Court's finding that the taxpayer did not submit adequate Company (or "3M-St. Paul") a non-resident foreign corporation with principal
office in St. Paul, Minnesota, U.S.A. It is the exclusive importer, manufacturer,
wholesaler, and distributor in the Philippines of all products of 3M-St. Paul. To WON the assessment of the commissioner is proper
enable it to manufacture, package, promote, market, sell and install the highly
specialized products of its parent company, and render the necessary post-sales HELD:
service and maintenance to its customers, petitioner entered into a "Service The pertinent legal provisions in the case are Sec 29(a)(1) of the Internal Revenue
Information and Technical Assistance Agreement" and a "Patent and Trademark Code and Circular No. 393 of the Central Bank.
License Agreement" with the latter under which the petitioner agreed to pay to
3M-St. Paul a technical service fee of 3% and a royalty of 2% of its net sales. Both Because remittances to foreign licensors of technical service fees and royalties
agreements were submitted to, and approved by, the Central Bank of the are made in foreign exchange, CB Circular No. 393 was promulgated by the
Philippines. Central Bank as an exchange control regulation to conserve foreign exchange and
avoid unnecessary reserves. Sec 3-C of the circular provides that royalties shall
In its income tax return for the fiscal year ended October 31, 1974, the petitioner be paid only in commodities manufactured by the licensee under the royalty
claimed the following deductions as business expenses: agreement.

(a) royalties and technical service fees of P3,050,646.00; and "Section 3. Requirements for Approval and Registration. — The
requirements for approval and registration as provided for in
(b) pre-operational cost of tape coater of P97,485.08. Section 2 above include, but are not limited to the following:

On the first item, the respondent Commissioner of Internal Revenue allowed a "a. . . .
deduction of P797,046.09 only as technical service fee and royalty for locally "b. . . .
manufactured products, but disallowed the sum of P2,323,599.92 alleged to have
been paid by the petitioner to 3M-St. Paul as technical service fee and royalty on "c. The royalty/rental contracts involving manufacturing'
P46,471,998.00 worth of finished products imported by the petitioner from the royalty, e.g., actual transfers of technological services such as
parent company, on the ground that the fee and royalty should be based only on secret formula/processes, technical know-how and the like
locally manufactured goods. The improper deduction was treated by respondent shall not exceed five (5) per cent of the wholesale price of the
as a disguised dividend or income. commodity/ties manufactured under the royalty agreement.
For contracts involving 'marketing' services such as the use of
On the second item, respondent allowed P19,544.77 or one-fifth (1/5) of foreign brands or trade names or trademarks, the
petitioner's capital expenditure of P97,046.09 for its tape coater which was royalty/rental rate shall not exceed two (2) per cent of the
installed in 1973 because such expenditure should be amortized for a period of wholesale price of the commodity/ties manufactured under
five (5) years, hence, payment of the disallowed balance of P77,740.38 should be the royalty agreement. The producer's or foreign licensor's
spread over the next four (4) years. Respondent ordered petitioner to pay share in the proceeds from the distribution/exhibition of the
P840,540 as deficiency income tax on its 1974 return, plus P353,026.80 as 14% films shall not exceed sixty (60) per cent of the net proceeds
interest per annum from February 15, 1975 to February 15, 1976, or a total of (gross proceeds less local expenses) from the
P1,193,566.80. exhibition/distribution of the films.

Clearly, no royalty is payable on the wholesale price of finished products
Petitioner protested the assessment in a letter dated March 7, 1980. The
imported by the licensee from the licensor. Petitioner argues that the law
respondent Commissioner did not answer the protest. Instead, he issued
applicable to its case is only Sec 29 (a)(1) of the tax code.
warrants of distraint and levy on October 1, 1984. On October 23, 1984,
petitioner appealed to the Court of Tax Appeals by petition for review with a
prayer for the issuance of a writ of preliminary injunction to stop the The argument is specious, for, although the Tax Code allows payments of royalty
enforcement of the warrants of distraint and levy. The writ was issued upon to be deducted from gross income as business expenses, it is CB Circular No. 393
petitioner posting a P1,850,000 bond. that defines what royalty payments are proper. Hence, improper payments of
royalty are not deductible as legitimate business expenses.
ISSUE:
CB Circular No. 393 dated December 7, 1983 was published in the Official Gazette factors indubitably tend to show that the activity was in furtherance of or in the
issue of December 17, 1973 (69 O.G. No. 51, p. 11737). Circulars issued by the course of the taxpayer's trade or business. Thus, a sale of inherited real property
Central Bank in the exercise of its authority under the Central Bank Act, and usually gives capital gain or loss even though the property has to be subdivided
which have been duly published in the Official Gazette, have the force and effect or improved or both to make it salable. However, if the inherited property is
of law (People vs. Que Po Lay, 94 Phil. 640; Lim Hoa Ting vs. Central Bank, 104 Phil. substantially improved or very actively sold or both it may be treated as held
573). They are binding on everybody, the petitioner, as much as the public primarily for sale to customers in the ordinary course of the heir's business.
respondent.
Upon an examination of the facts on record, we are convinced that the activities
63. CALASANZ vs. CIR, G.R. No. L-26284 (1986) of petitioners are indistinguishable from those invariably employed by one
engaged in the business of selling real estate. One strong factor against
Facts: Petitioner Ursula Calasanz inherited from her father Mariano de Torres an petitioners' contention is the business element of development which is very
agricultural land located in Cainta, Rizal, containing a total area of 1,678,000 much in evidence. Petitioners did not sell the land in the condition in which they
square meters. In order to liquidate her inheritance, Ursula Calasanz had the land acquired it.
surveyed and subdivided into lots. Improvements, such as good roads, concrete
gutters, drainage and lighting system, were introduced to make the lots saleable. While the land was originally devoted to rice and fruit trees, it was subdivided
Soon after, the lots were sold to the public at a profit. into small lots and in the process converted into a residential subdivision and
given the name Don Mariano Subdivision. Extensive improvements like the laying
In their joint income tax return for the year 1957 filed with the Bureau of Internal out of streets, construction of concrete gutters and installation of lighting system
Revenue on March 31, 1958, petitioners disclosed a profit of P31,060.06 realized and drainage facilities, among others, were undertaken to enhance the value of
from the sale of the subdivided lots, and reported fifty per centum thereof or the lots and make them more attractive to prospective buyers. The audited
P15,530.03 as taxable capital gains. financial statements submitted together with the tax return in question disclosed
that a considerable amount was expended to cover the cost of improvements. As
Upon an audit and review of the return this filed, the Revenue Examiner adjudged a matter of fact, the estimated improvements of the lots sold reached
petitioners engaged in business as real estate dealers, as defined in Section 194 P170,028.60 whereas the cost of the land is only P4,742.66. There is authority
[s] of the National Internal Revenue Code, required them to pay the real estate that a property ceases to be a capital asset if the amount expended to improve it
dealer's tax and assessed a deficiency income tax on profits derived from the sale is double its original cost, for the extensive improvement indicates that the seller
of the lots based on the rates for ordinary income. held the property primarily for sale to customers in the ordinary course of his
business.
On October 17, 1962, petitioners filed with the Court of Tax Appeals a petition for
review contesting the aforementioned assessments. 64. TUASON vs. LINGAD, G.R. No. L-24248 (1974)
On June 7, 1966, the Tax Court upheld the respondent Commissioner except for
FACTS: In 1948 the petitioner inherited from his mother several tracts of land,
that portion of the assessment regarding the compromise penalty of P10.00 for
among which were two contiguous parcels situated on Pureza and Sta. Mesa
the reason that in this jurisdiction, the same cannot be collected in the absence of
streets in Manila, with an area of 318 and 67,684 square meters, respectively.
a valid and binding compromise agreement.
When the petitioner's mother was yet alive she had these two parcels subdivided
into twenty-nine lots. Twenty-eight were allocated to their then occupants who
ISSUE: Whether or not petitioners are real estate dealers liable for real estate
had lease contracts with the petitioner's predecessor at various times from 1900
dealer's fixed tax; and whether the gains realized from the sale of the lots are
to 1903, which contracts expired on December 31, 1953. The 29th lot
taxable in full as ordinary income or capital gains taxable at capital gain rates.
(hereinafter referred to as Lot 29), with an area of 48,000 square meters, more
or less, was not leased to any person. It needed filling because of its very low
HELD: Yes. We hold that in the course of selling the subdivided lots, petitioners
elevation, and was planted to kangkong and other crops. After the petitioner took
engaged in the real estate business and accordingly, the gains from the sale of the
possession of the mentioned parcels in 1950, he instructed his attorney-in-fact, J.
lots are ordinary income taxable in full. A property initially classified as a capital
Antonio Araneta, to sell them.
asset may thereafter be treated as an ordinary asset if a combination of the
Sometime in 1952 the petitioner's attorney-in-fact had Lot 29 filled, then petitioner's sales of the several lots forming part of his rental business cannot be
subdivided into small lots and paved with macadam roads. The small lots were characterized as other than sales of non-capital assets.
then sold over the years on a uniform 10-year annual amortization basis. J.
Antonio Araneta, the petitioner's attorney-in-fact, did not employ any broker nor The sales concluded on installment basis of the subdivided lots comprising Lot
did he put up advertisements in the matter of the sale thereof. In 1953 and 1954 29 do not deserve a different characterization for tax purposes. The following
the petitioner reported his income from the sale of the small lots (P102,050.79 circumstances in combination show unequivocally that the petitioner was, at the
and P103,468.56, respectively) as long-term capital gains. On May 17, 1957 the time material to this case, engaged in the real estate business: (1) the parcels of
Collector of Internal Revenue upheld the petitioner's treatment of his gains from land involved have in totality a substantially large area, nearly seven (7) hectares,
the said sale of small lots, against a contrary ruling of a revenue examiner. big enough to be transformed into a subdivision, and in the case at bar, the said
properties are located in the heart of Metropolitan Manila; (2) they were
In his 1957 tax return the petitioner as before treated his income from the sale of subdivided into small lots and then sold on installment basis (this manner of
the small lots (P119,072.18) as capital gains and included only ½ thereof as selling residential lots is one of the basic earmarks of a real estate business); (3)
taxable income. In this return, the petitioner deducted the real estate dealer's tax comparatively valuable improvements were introduced in the subdivided lots for
he paid for 1957. It was explained, however, that the payment of the dealer's tax the unmistakable purpose of not simply liquidating the estate but of making the
was on account of rentals received from the mentioned 28 lots and other lots more saleable to the general public; (4) the employment of J. Antonio
properties of the petitioner. On the basis of the 1957 opinion of the Collector of Araneta, the petitioner's attorney-in-fact, for the purpose of developing,
Internal Revenue, the revenue examiner approved the petitioner's treatment of managing, administering and selling the lots in question indicates the existence
his income from the sale of the lots in question. In a memorandum dated July 16, of owner-realty broker relationship; (5) the sales were made with frequency and
1962 to the Commissioner of Internal Revenue, the chief of the BIR Assessment continuity, and from these the petitioner consequently received substantial
Department advanced the same opinion, which was concurred in by the income periodically; (6) the annual sales volume of the petitioner from the said
Commissioner of Internal Revenue.On January 9, 1963, however, the lots was considerable, e.g., P102,050.79 in 1953; P103,468.56 in 1954; and
Commissioner reversed himself and considered the petitioner's profits from the P119,072.18 in 1957; and (7) the petitioner, by his own tax returns, was not a
sales of the mentioned lots as ordinary gains. person who can be indubitably adjudged as a stranger to the real estate business.
Under the circumstances, this Court finds no error in the holding below that the
ISSUE: WON the properties in question which the petitioner had inherited income of the petitioner from the sales of the lots in question should be
and subsequently sold in small lots to other persons should be regarded as considered as ordinary income.
capital assets?
ACCORDINGLY, the judgment of the Court of Tax Appeals is affirmed, except the
portion thereof that imposes 5% surcharge and 1% monthly interest, which is
HELD: NO. In the case at bar, this Court is of the view, and so holds, that the hereby set aside. No costs.
petitioner's thesis is bereft of merit.
DOCTRINE: The Tax Code's provision on so-called long-term capital gains
When the petitioner obtained by inheritance the parcels in question, transferred constitutes a statute of partial exemption. In view of the familiar and settled rule
to him was not merely the duty to respect the terms of any contract thereon, but that tax exemptions are construed in strictissimi juris against the taxpayer and
as well the correlative right to receive and enjoy the fruits of the business and liberally in favor of the taxing authority,3 the field of application of the term it
property which the decedent had established and maintained.7 Moreover, the "capital assets" is necessarily narrow, while its exclusions must be interpreted
record discloses that the petitioner owned other real properties which he was broadly.4 Consequently, it is the taxpayer's burden to bring himself clearly and
putting out for rent, from which he periodically derived a substantial income, and squarely within the terms of a tax-exempting statutory provision, otherwise, all
for which he had to pay the real estate dealer's tax (which he used to deduct from fair doubts will be resolved against him.5 It bears emphasis nonetheless that in
his gross income).8 In fact, as far back as 1957 the petitioner was receiving rental the determination of whether a piece of property is a capital asset or an ordinary
payments from the mentioned 28 small lots, even if the leases executed by his asset, a careful examination and weighing of all circumstances revealed in each
deceased mother thereon expired in 1953. Under the circumstances, the case must be made.
(1) Capital assets. — The term "capital assets" means property held by the The CTA reversed and held that there was a valid merger. It ruled that
taxpayer (whether or not connected with his trade or business), but does no taxable gain was derived by petitioners from the exchange of their old stocks
not include stock in trade of the taxpayer or other property of a kind solely for stocks of the New Corp. because it was pursuant to a plan of
which would properly be included in the inventory of the taxpayer if on reorganization. Thus, such exchange is exempt from Capital Gains Tax.
hand at the close of the taxable year, or property held by the taxpayer
primarily for sale to customers in the ordinary course of his trade or ISSUE/S
business, or property, used in the trade or business, of a character which Whether or not taxable gain was derived by the private respondents
is subject to the allowance for depreciation provided in subsection (f) of from the questioned transaction.
section thirty; or real property used in the trade or business of the
taxpayer.
HELD
65. CIR vs. RUFINO, G.R. Nos. L-33665-68 (1987) No. There was a valid merger although the actual transfer of the
properties subject of the Deed of Assignment was not made on the date of the
FACTS merger. In the nature of things, this was not possible. Obviously, it was necessary
Private respondents were the majority stockholders of the defunct for the Old Corp. to surrender its net assets first to the New Corp. before the latter
Eastern Theatrical Co., Inc. (Old Corp.), which was organized to engage in the could issue its own stock to the shareholders of the Old Corp. because the New
business of operating theaters, opera houses, places of amusement and other Corp. had to increase its capitalization for this purpose. This required the
related business enterprises. Ernesto Rufino was the President. adoption of the resolution for the registration of such issuance with the SEC and
its approval. All these took place after the date of the merger but they were
Private respondents were also the majority and controlling stockholders deemed part and parcel of, and indispensable to the validity and enforceability of,
of another corporation, the Eastern Theatrical Co. Inc., which was engaged in the the Deed of Assignment.
same kind of business as the Old Corporation. The General-Manager of this
corporation (hereinafter referred to as the New Corp.) at the time was Vicente A. There is no impediment to the exchange of property for stock between
Rufino. the two corporations being considered to have been effected on the date of the
merger. That, in fact, was the intention, and the reason why the Deed of
In a special meeting of the stockholders of the Old Corp., a resolution was Assignment was made retroactive which provided in effect that all transactions
passed authorizing the Old Corp. to merge with the New Corp. Pursuant to the set forth in the merger agreement shall be deemed to be taking place
said resolution, the Old Corp., represented by Ernesto Rufino, and the New Corp., simultaneously when the Deed of Assignment became operative.
represented by Vicente Rufino, signed a Deed of Assignment providing for the
conveyance and transfer of all the business, assets, goodwill, and liabilities of the The basic consideration is the purpose of the merger, as this would
Old Corp. to the New Corp. in exchange for the latter’s shares of stock to be determine whether the exchange of properties involved therein shall be subject
distributed among the shareholders on the basis of one stock for each stock held or not to the capital gains tax. The criterion laid down by the law is that the
in the Old Corp. this agreement was made retroactive. The aforesaid transfer was merger must be undertaken for a bona fide business purpose and not solely for
eventually made. The resolution and the deed of assignment were approved in a the purpose of escaping the burden of taxation.
resolution by the stockholders of the New Corp. in their special meeting. The
increased capitalization of the New Corp. was registered and approved by the SEC. Here, the purpose of the merger was to continue the business of the Old
Corp, whose corporate life was about to expire, through the New Corp. to which
The BIR, after examination, declared that the merger was not undertaken all the assets and obligations of the former had been transferred. What argues
for a bona fide business purpose but merely to avoid liability for the capital gains strongly for the New Corp. is that it was not dissolved after the merger agreement.
tax on the exchange of the old for the new shares of stock. Accordingly, deficiency On the contrary, it continued to operate the places of amusement originally
assessments were imposed against the private respondent. With the Motion for owned by the Old Corp. and continues to do so today after taking over the
Reconsideration being denied, private sought relief from the CTA. business of the Old Corp. 27 years ago.

What is also worth noting is that, as in the case of the Old Corp. when it claims of ESSO for refund of the overpayment of its 1959 and 1960 income taxes,
was dissolved, there has been no distribution of the assets of the New Corp. since holding that the margin fees paid to the Central Bank could not be considered
then and up to now, as far as the record discloses. To date, the private taxes or allowed as deductible business expenses.
respondents have not derived any benefit from the merger of the Old Corp. and ESSO appealed to the CTA and sought the refund of P102,246.00 for 1959,
the New Corp. almost 3 decades earlier that will make them subject to the capital contending that the margin fees were deductible from gross income either as a
gains tax under Section 35. They are no more liable now than they were when the tax or as an ordinary and necessary business expense. It also claimed an
merger took effect, as the merger, being genuine, exempted them under the law overpayment of its tax by P434,232.92 in 1960, for the same reason. Additionally,
from such tax. ESSO argued that even if the amount paid as margin fees were not legally
deductible, there was still an overpayment by P39,787.94 for 1960, representing
By this decision, the government is not left entirely without recourse, at excess interest.
least in the future. The fact is that the merger had merely deferred the claim for CTA’S Ruling: After trial, the CTA denied petitioner's claim for refund of
taxes, which may be asserted by the government later, when gains are realized P102,246.00 for 1959 and P434,234.92 for 1960 but sustained its claim for
and benefits are distributed among the stockholders as a result of the merger. In P39,787.94 as excess interest. This portion of the decision was appealed by the
other words, the corresponding taxes are not forever foreclosed or forfeited but CIR but was affirmed by this Court in Commissioner of Internal Revenue v.
may at the proper time and without prejudice to the government still be imposed. ESSO, G.R. No. L-28502- 03, promulgated on April 18, 1989. ESSO for its part
appealed the CTA decision denying its claims for the refund of the margin fees
66. ESSO STANDARD EASTERN, INC. vs. CIR, G.R. Nos. 18508-9 (1989) P102,246.00 for 1959 and P434,234.92 for 1960. That is the issue now before us.
ISSUE: Whether or not the margin fees should be considered necessary and
FACTS: On CTA Case No. 1251, petitioner ESSO deducted from its gross income ordinary business expenses, hence deductible from its gross income.
for 1959, as part of its ordinary and necessary business expenses, the amount it HELD:
had spent for drilling and exploration of its petroleum concessions. This claim The applicable provision is Section 30(a) of the National Internal Revenue Code
was disallowed by the respondent Commissioner of Internal Revenue on the reading as follows:
ground that the expenses should be capitalized and might be written off as a loss SEC. 30. Deductions from gross income in computing net income there shall be
only when a "dry hole" should result. ESSO then filed an amended return where allowed as deductions
it asked for the refund of P323,279.00 by reason of its abandonment as dry holes (a) Expenses: (1) In general. — All the ordinary and necessary expenses paid or
of several of its oil wells. Also claimed as ordinary and necessary expenses in the incurred during the taxable year in carrying on any trade or business, including a
same return was the amount of P340,822.04, representing margin fees it had paid reasonable allowance for salaries or other compensation for personal services
to the Central Bank on its profit remittances to its New York head office. The CIR actually rendered; traveling expenses while away from home in the pursuit of a
granted a tax credit of P221,033.00 only, disallowing the claimed deduction for trade or business; and rentals or other payments required to be made as a
the margin fees paid. condition to the continued use or possession, for the purpose of the trade or
In CTA Case No. 1558, the CR assessed ESSO a deficiency income tax for the year business, of property to which the taxpayer has not taken or is not taking title or
1960, in the amount of P367,994.00, plus 18% interest thereon of P66,238.92 for in which he has no equity.
the period from April 18,1961 to April 18, 1964, for a total of P434,232.92. The (2) Expenses allowable to non-resident alien individuals and foreign corporations.
deficiency arose from the disallowance of the margin fees of Pl,226,647.72 paid — In the case of a non-resident alien individual or a foreign corporation, the
by ESSO to the Central Bank on its profit remittances to its New York head office. expenses deductible are the necessary expenses paid or incurred in carrying on
ESSO settled this deficiency assessment on August 10, 1964, by applying the tax any business or trade conducted within the Philippines exclusively.
credit of P221,033.00 representing its overpayment on its income tax for 1959 In the case of Atlas Consolidated Mining and Development Corporation v.
and paying under protest the additional amount of P213,201.92. It thereafter Commissioner of Internal Revenue, 4 the Court laid down the rules on the
claimed the refund of P39,787.94 as overpayment on the interest on its deficiency deductibility of business expenses, thus: The principle is recognized that when a
income tax. It argued that the 18% interest should have been imposed not on the taxpayer claims a deduction, he must point to some specific provision of the
total deficiency of P367,944.00 but only on the amount of P146,961.00, the statute in which that deduction is authorized and must be able to prove that he is
difference between the total deficiency and its tax credit of P221,033.00. entitled to the deduction which the law allows. As previously adverted to, the law
This claim was denied by the CIR, who insisted on charging the 18% interest on allowing expenses as deduction from gross income for purposes of the income
the entire amount of the deficiency tax. On May 4,1965, the CIR also denied the tax is Section 30(a) (1) of the National Internal Revenue which allows a deduction
of 'all the ordinary and necessary expenses paid or incurred during the taxable incurred for purposes proper to the conduct of the corporate affairs of Standard
year in carrying on any trade or business.' An item of expenditure, in order to be Vacuum Oil Company in New York, but certainly not in the Philippines.
deductible under this section of the statute, must fall squarely within its language. ESSO has not shown that the remittance to the head office of part of its profits
We come, then, to the statutory test of deductibility where it is axiomatic that was made in furtherance of its own trade or business. The petitioner merely
to be deductible as a business expense, three conditions are imposed, namely: (1) presumed that all corporate expenses are necessary and appropriate in the
the expense must be ordinary and necessary, (2) it must be paid or incurred absence of a showing that they are illegal or ultra vires. This is error. The public
within the taxable year, and (3) it must be paid or incurred in carrying on a trade respondent is correct when it asserts that "the paramount rule is that claims for
or business. In addition, not only must the taxpayer meet the business test, he deductions are a matter of legislative grace and do not turn on mere equitable
must substantially prove by evidence or records the deductions claimed under considerations ... . The taxpayer in every instance has the burden of justifying the
the law, otherwise, the same will be disallowed. The mere allegation of the allowance of any deduction claimed." 5It is clear that ESSO, having assumed an
taxpayer that an item of expense is ordinary and necessary does not justify its expense properly attributable to its head office, cannot now claim this as an
deduction. ordinary and necessary expense paid or incurred in carrying on its own trade or
There is thus no hard and fast rule on the matter. The right to a deduction business.
depends in each case on the particular facts and the relation of the payment to
the type of business in which the taxpayer is engaged. The intention of the 67. CIR vs. GENERAL FOODS PHILS., INC., G.R. No. 143672 (2003)
taxpayer often may be the controlling fact in making the determination. Assuming
that the expenditure is ordinary and necessary in the operation of the taxpayer's FACTS: Respondent corporation General Foods (Phils), which is engaged in the
business, the answer to the question as to whether the expenditure is an manufacture of “Tang”, “Calumet” and “Kool-Aid”, filed its income tax return for
allowable deduction as a business expense must be determined from the nature the fiscal year ending February 1985 and claimed as deduction, among other
of the expenditure itself, which in turn depends on the extent and permanency of business expenses, P9,461,246 for media advertising for “Tang”.
the work accomplished by the expenditure. The Commissioner disallowed 50% of the deduction claimed and assessed
In the light of the above explanation, we hold that the Court of Tax Appeals did deficiency income taxes of P2,635,141.42 against General Foods, prompting the
not err when it held on this issue as follows: Considering the foregoing test of latter to file a Motion for Reconsideration which was denied.
what constitutes an ordinary and necessary deductible expense, it may be asked: General Foods later on filed a petition for review at Court of Appeals, which
Were the margin fees paid by petitioner on its profit remittance to its Head Office reversed and set aside an earlier decision by Court of Tax Appeals dismissing the
in New York appropriate and helpful in the taxpayer's business in the Philippines? company’s appeal.
Were the margin fees incurred for purposes proper to the conduct of the affairs ISSUE: Whether or not the subject media advertising expense for “Tang” was
of petitioner's branch in the Philippines? Or were the margin fees incurred for the ordinary and necessary expense fully deductible under the NIRC
purpose of realizing a profit or of minimizing a loss in the Philippines? Obviously HELD: No. Tax exemptions must be construed in stricissimi juris against the
not. As stated in the Lopez case, the margin fees are not expenses in connection taxpayer and liberally in favor of the taxing authority, and he who claims an
with the production or earning of petitioner's incomes in the Philippines. They exemption must be able to justify his claim by the clearest grant of organic or
were expenses incurred in the disposition of said incomes; expenses for the statute law. Deductions for income taxes partake of the nature of tax exemptions;
remittance of funds after they have already been earned by petitioner's branch in hence, if tax exemptions are strictly construed, then deductions must also be
the Philippines for the disposal of its Head Office in New York which is already strictly construed.
another distinct and separate income taxpayer. To be deductible from gross income, the subject advertising expense must
Since the margin fees in question were incurred for the remittance of funds to comply with the following requisites: (a) the expense must be ordinary and
petitioner's Head Office in New York, which is a separate and distinct income necessary; (b) it must have been paid or incurred during the taxable year; (c) it
taxpayer from the branch in the Philippines, for its disposal abroad, it can never must have been paid or incurred in carrying on the trade or business of the
be said therefore that the margin fees were appropriate and helpful in the taxpayer; and (d) it must be supported by receipts, records or other pertinent
development of petitioner's business in the Philippines exclusively or were papers.
incurred for purposes proper to the conduct of the affairs of petitioner's branch While the subject advertising expense was paid or incurred within the
in the Philippines exclusively or for the purpose of realizing a profit or of corresponding taxable year and was incurred in carrying on a trade or business,
minimizing a loss in the Philippines exclusively. If at all, the margin fees were hence necessary, the parties’ views conflict as to whether or not it was ordinary.
To be deductible, an advertising expense should not only be necessary but also Secretary of Finance ruled that the exemption provided in RA 909 embraces all
ordinary. new mines and old mines whether gold or other minerals. Accordingly, the CIR
The Commissioner maintains that the subject advertising expense was not recomputed Atlas deficiency income tax liabilities in the light of said ruling. On
ordinary on the ground that it failed the two conditions set by U.S. jurisprudence: June 1964, the CIR issued a revised assessment entirely eliminating the
first, “reasonableness” of the amount incurred and second, the amount incurred assessment for the year 1957. The assessment for 1958 was reduced from which
must not be a capital outlay to create “goodwill” for the product and/or private Atlas appealed to the CTA, assailing the disallowance of the following items
respondent’s business. Otherwise, the expense must be considered a capital claimed as deductible from its gross income for 1958: Transfer agent's fee,
expenditure to be spread out over a reasonable time. Stockholders relation service fee, U.S. stock listing expenses, Suit expenses, and
There is yet to be a clear-cut criteria or fixed test for determining the Provision for contingencies. The CTA allowed said items as deduction except
reasonableness of an advertising expense. There being no hard and fast rule on those denominated by Atlas as stockholders relation service fee and suit
the matter, the right to a deduction depends on a number of factors such as but expenses.
not limited to: the type and size of business in which the taxpayer is engaged; the
volume and amount of its net earnings; the nature of the expenditure itself; the Both parties appealed the CTA decision to the SC by way of two (2) separate
intention of the taxpayer and the general economic conditions. It is the interplay petitions for review. Atlas appealed only the disallowance of the deduction from
of these, among other factors and properly weighed, that will yield a proper gross income of the so-called stockholders relation service fee.
evaluation.
The Court finds the subject expense for the advertisement of a single product to ISSUE: Whether or not the stockholders relation service fee paid to a public
be inordinately large. Therefore, even if it is necessary, it cannot be considered relations consultant is a deductible expense from gross income
an ordinary expense deductible under then Section 29 (a) (1) (A) of the NIRC.
Advertising is generally of two kinds: (1) advertising to stimulate the current sale
RULING: Section 30 (a) (1) of the Tax Code allows a deduction of "all the ordinary
of merchandise or use of services and (2) advertising designed to stimulate
and necessary expenses paid or incurred during the taxable year in carrying on
the future sale of merchandise or use of services. The second type involves
any trade or business." An item of expenditure, in order to be deductible under
expenditures incurred, in whole or in part, to create or maintain some form of
this section of the statute, must fall squarely within its language. To be deductible
goodwill for the taxpayer’s trade or business or for the industry or profession of
as a business expense, three conditions are imposed, namely: (1) the expense
which the taxpayer is a member. If the expenditures are for the advertising of the
first kind, then, except as to the question of the reasonableness of amount, there must be ordinary and necessary, (2) it must be paid or incurred within the taxable
is no doubt such expenditures are deductible as business expenses. If, however, year, and (3) it must be paid or incurred in carrying in a trade or business. In
the expenditures are for advertising of the second kind, then normally they addition, not only must the taxpayer meet the business test, he must substantially
should be spread out over a reasonable period of time. prove by evidence or records the deductions claimed under the law, otherwise,
The company’s media advertising expense for the promotion of a single product the same will be disallowed. The mere allegation of the taxpayer that an item of
is doubtlessly unreasonable considering it comprises almost one-half of the expense is ordinary and necessary does not justify its deduction.
company’s entire claim for marketing expenses for that year under review.
The SC has never attempted to define with precision the terms "ordinary and
68. ATLAS CONSOLIDATED MINING & DEV’T CORP. vs. CIR, G.R. No. L- necessary." As a guiding principle, ordinarily, an expense will be considered
26911 (1981) "necessary" where the expenditure is appropriate and helpful in the development
of the taxpayer's business. It is "ordinary" when it connotes a payment which is
FACTS: On August 1962, CIR assessed against Atlas for deficiency income taxes normal in relation to the business of the taxpayer and the surrounding
for the years 1957 and 1958. For the year 1957, it was the opinion of the CIR that circumstances. The term "ordinary" does not require that the payments be
Atlas is not entitled to exemption from the income tax under RA 909 because habitual or normal in the sense that the same taxpayer will have to make them
same covers only gold mines. For the year 1958, the deficiency income tax covers often; the payment may be unique or non- recurring to the particular taxpayer
the disallowance of items claimed by Atlas as deductible from gross income. Atlas affected.
protested for reconsideration and cancellation, thus the CIR conducted a
reinvestigation of the case. right to a deduction depends in each case on the particular facts and the relation
of the payment to the type of business in which the taxpayer is engaged. The
intention of the taxpayer often may be the controlling fact in making the appointed representative, whenever the Company is in a position to meet said
determination. Assuming that the expenditure is ordinary and necessary in the obligation. The stockholders of the Company formally ratified the various
operation of the taxpayer's business, the answer to the question as to whether resolutions that the payment of the donation shall not be effected until such time
the expenditure is an allowable deduction as a business expense must be as the Company shall have first duly liquidated its present bonded indebtedness
determined from the nature of the expenditure itself, which in turn depends on in the amount of P3,260,855.77 with the National Development Company, or fully
the extent and permanency of the work accomplished by the expenditure. redeemed the preferred shares of stock in the amount which shall be issued to
the National Development Company in lieu thereof; and that any and all taxes,
It appears that Atlas increased its capital stock. It claimed that its shares of stock legal fees, and expenses in any way connected with the above transaction shall be
were sold in the United States because of the services rendered by the public chargeable and deducted from the proceeds of the life insurance policies
relations firm. The information about Atlas given out and played up in the mass
communication media resulted in full subscription of the additional shares issued The majority stockholders of the Company voted to revoke the resolution
by Atlas; consequently, the ‘stockholders relation service fee’, the compensation approving the donation in favor of the Pirovano children. As a consequence of this
for services carrying on the selling campaign, was in effect spent for the revocation and refusal of the Company to pay the balance of the donation
acquisition of additional capital, ergo, a capital expenditure, and not an ordinary amounting to P564,980.90 despite demands therefor, the herein petitioners-
expense. It is not deductible from Atlas gross income in 1958 because expenses appellants brought an action for the recovery of said amount, plus interest and
relating to recapitalization and reorganization of the corporation, the cost of damages against De la Rama Steamship Co. On December 29, 1954, this court
obtaining stock subscription, promotion expenses, and commission or fees paid rendered its decision in the appealed case holding that the donation was valid
for the sale of stock reorganization are capital expenditures. That the expense in and remunerative in nature.

question was incurred to create a favorable image of the corporation in order to
Respondent assessed the amount of P60,869.67 as donees' gift tax, inclusive of
gain or maintain the public's and its stockholders' patronage, does not make it
surcharges, interests and other penalties, against each of the petitioners-
deductible as business expense. As held in a US case, efforts to establish
appellants, or for the total sum of P243,478.68; and, on April 23, 1955, a donor's
reputation are akin to acquisition of capital assets
gift tax in the total amount of P34,371.76 was also assessed against De la Rama
Steamship Co., which the latter paid.
69. MARIA CARLA PIROVANO ET. AL., vs. CIR, G.R. No. L-5377 (1954)

Petitioners-appellants contested respondent Commissioner's assessment and
FACTS:
imposition of the donees' gift taxes and donor's gift tax and also made a claim for
Enrico Pirovano was the father of the herein petitioners-appellants. De la Rama
refund of the donor's gift tax so collected. Respondent Commissioner overruled
Steamship Co. insured the life of said Enrico Pirovano, who was then its President
petitioners' claims.
and General Manager until the time of his death, for a total sum of one million

pesos. Upon receipt of the last stated sum of money, the Board of Directors of the
ISSUE: Whether Pirovano should pay the donee’s gift tax
Company modified, the resolution by renouncing all its rights title, and interest

to the said amount of P643,000.00 in favor of the minor children of the deceased,
RULING:
subject to the express condition that said amount should be retained by the
Yes. In their brief and memorandum, they dispute the factual finding of the lower
Company in the nature of a loan to it, drawing interest at the rate of five per
court that De la Rama Steamship Company's renunciation of its rights, title, and
centum (5%) per annum, and payable to the Pirovano children after the Company
interest over the proceeds of said life insurance policies in favor of the Pirovano
shall have first settled in full the balance of its present remaining bonded
children "was motivated solely and exclusively by its sense of gratitude, an act of
indebtedness in the sum of approximately P5,000,000.00.
pure liberality, and not to pay additional compensation for services inadequately

paid for." Petitioners now contend that the lower court's finding was erroneous
The Board of Directors of the Company further modified the resolution providing
in seemingly considering the disputed grant as a simple donation, since our
that the Company shall pay the proceeds of said life insurance policies to the heirs
previous decision had already declared that the transfer to the Pirovano children
of the said Enrico Pirovano after the Company shall have settled in full the balance
was a remuneratory donation. Petitioners further contend that the same was
of its present remaining bonded indebtedness, but the annual interests accruing
made not for an insufficient or inadequate consideration but rather it a was made
on the principal shall be paid to the heirs of the said Enrico Pirovano, or their duly
for a full and adequate compensation for the valuable services rendered by the
late Enrico Pirovano to the De la Rama Steamship Co.; hence, the donation does gratitude has no economic value and is not "consideration" in the sense that the
not constitute a taxable gift under the provisions of Section 108 of the National word is used in this section of the Tax Code.
Internal Revenue Code.
70. CIR vs. PALANCA, G.R. No. L-16626 (1966)
The argument for petitioners-appellants fails to take into account the fact that
neither in Spanish nor in Anglo-American law was it considered that past services, FACTS: 1950, Don Palanca Sr. donated in favor of his son, Carlos, 12,500shares of
rendered without relying on a coetaneous promise, express or implied, that such stock in LaTondena Inc . For failure to file a return on the donation, Carlos was
services would be paid for in the future, constituted cause or consideration that assessed gift tax, 25% surcharge and interest. Carlos paid in 1955.
would make a conveyance of property anything else but a gift or donation.
1956, Carlos filed with BIR his income tax return for 1955 claiming a deduction
There is nothing on record to show that when the late Enrico Pirovano rendered for interest; he was assessed an income tax. Carlos paid.
services as President and General Manager of the De la Rama Steamship Co. he Carlos filed an amended return for 1955 claiming an additional deduction
was not fully compensated for such services, or that, because they were "largely representing the interest paid as donee’s gift tax. The claim for deduction was
responsible for the rapid and very successful development of the activities of the based on sec30(b)(1) of Tax Code authorizing deduction from gross income of
company". That the tax court regarded the conveyance as a simple donation, interest paid within taxable year on indebtedness.
instead of a remuneratory one as it was declared to be in our previous decision,
is but an innocuous error; whether remuneratory or simple, the conveyance 1957, Carlos reiterated his claim for refund and requested that the case be
remained a gift, taxable under Chapter 2, Title III of the Internal Revenue Code. elevated to Appellate Division of BIR; denied. Carlos requested that the case be
referred to the conference staff of BIR for review and subsequently requested CIR
But then appellants contend, the entire property or right donated should not be to hold his action in abeyance until after CTA renders its decision on a similar
considered as a gift for taxation purposes; only that portion of the value of the case.
property or right transferred, if any, which is in excess of the value of the services
rendered should be considered as a taxable gift. They cite in support Section 111 CIR denied the claim for refund.
of the Tax Code which provides that —
BIR considered the transfer of 12,500 shares of stock to be a transfer in
Where property is transferred for less, than an adequate and full contemplation of death pursuant to sec88(b) of NIRC. CIR assessed estate and
consideration in money or money's worth, then the amount by which the inheritance taxes on the transfer of 12,500 shares of stock. The amount paid by
value of the property exceeded the value of the consideration shall, for Carlos as gift tax was applied to his estate and inheritance tax liability. He also
the purpose of the tax imposed by this Chapter, be deemed a gift, ... . paid interest for delinquency.

The flaw in this argument lies in the fact that, as copied from American law, the 1958, Carlos filed an amended tax return for 1955, again, claiming, in addition to
term consideration used in this section refers to the technical "consideration" the interest deduction appearing in his original return, a deduction also
defined by the American Law Institute as "anything that is bargained for by the representing the interest on the estate and inheritance taxes.
promisor and given by the promisee in exchange for the promise". But, as we have
seen, Pirovano's successful activities as officer of the De la Rama Steamship Co. Without awaiting for CIR;s decision on his claim for refund, Carlos filed his petrev
cannot be deemed such consideration for the gift to his heirs, since the services with CTA; CTA ruled that the amount paid by Carlos for interest on his delinquent
were rendered long before the Company ceded the value of the life policies to said estate and inheritance tax is deductible from gross income and claim for refund
heirs; cession and services were not the result of one bargain or of a mutual has not prescribed.
exchange of promises.
CIR urges that tax is no indebtedness. The deductibility of “interest on
What is more, the actual consideration for the cession of the policies, as indebtedness” from a person’s income tax under sec30(b)(1) cannot extend to
previously shown, was the Company's gratitude to Pirovano; so that under “interest on taxes”.Citing American cases, he argues that there is material
section 111 of the Code there is no consideration the value of which can be distinction between “tax” and “debt”
deducted from that of the property transferred as a gift. Like "love and affection,"
DEBTS are due to the govt in its corporate capacity; sum of money due upon should be computed from the receipt of the final denial by the BIR of the said
contract express/implied /one which is evidenced by a judgment claim.
Inasmuch as the said account was paid by him by installment, then the
TAXES are due to govt in its sovereign capacity; imposts levied by govt for its computation of the two-year prescriptive period, under Section 306 of the
support or special purpose which the govt has recognized. National Internal Revenue Code, should be from the date of the last installment.
Respondent Palanca paid the last installment on his 1955 income tax account on
In our jurisdiction, though taxes are already due, have not, strictly speaking, the August 14, 1956. His claim for refund was filed on August 13, 1958. It was,
same concept as debts, they are however obligations that may be considered as therefore, still timely instituted.
such. While there is distinction, the variance does not extend to the interests paid
on them concerning sec30(b)(1) NIRC. 71. BASILAN ESTATES, INC. vs. CIR, G.R. No. L-22492 (1967)

Sec. 30. Deductions from gross income — In computing net income there shall be Doctrine: The income tax law does not authorize the depreciation of an asset
allowed as deductions beyond its acquisition cost. Hence, a deduction over and above such cost cannot
"Interest: be claimed and allowed. The reason is that deductions from gross income are
privileges, not matters of right. They are not created by implication but upon clear
(1) In general. — The amount of interest paid within the taxable year on expression in the law.
indebtedness, except on indebtedness incurred or continued to purchase or carry
obligations the interest upon which is exempt from taxation as income under this Facts: Basilan Estates, Inc. claimed deductions for the depreciation of its assets
Title. on the basis of their acquisition cost. As of January 1, 1950 it changed the
The term "indebtedness" as used in the Tax Code of the United States containing depreciable value of said assets by increasing it to conform with the increase in
similar provisions as in the above-quoted section has been defined as the cost for their replacement. Accordingly, from 1950 to 1953 it deducted from
unconditional and legally enforceable obligation for the payment of money. Within gross income the value of depreciation computed on the reappraised value.
the meaning of that definition, it is apparent that a tax may be considered an
indebtedness CIR disallowed the deductions claimed by petitioner, consequently assessing the
"It follows that the interest paid by herein respondent for the late payment of her latter of deficiency income taxes.
donor's tax is deductible from her gross income under section 30 (b) of the Tax Code
above-quoted." Issue: Whether or not the depreciation shall be determined on the acquisition
cost rather than the reappraised value of the assets
ISSUES: a)WON interest on delinquent estate and inheritance tax is deductible
from gross income Held: Yes. The following tax law provision allows a deduction from gross income
b) WON claim for refund has prescribed for depreciation but limits the recovery to the capital invested in the asset being
depreciated:
HELD: a) Yes. The interest is deductible. The rule is settled that although taxes
already due have not, strictly speaking, the same concept as debts, they are (1) In general. — A reasonable allowance for deterioration of property arising
however, obligations that may be considered as such. Citing CIR V. PRIETO, while out of its use or employment in the business or trade, or out of its not being used:
there is distinction between taxes and debts, the variance in legal conception Provided, That when the allowance authorized under this subsection shall equal
doesn’t extend to interests paid on them. the capital invested by the taxpayer . . . no further allowance shall be made. . . .
Interest on taxes should be considered as interests on indebtedness within the
meaning of sec30 of Tax Code. The interpretation was based on the intent and not The income tax law does not authorize the depreciation of an asset beyond its
on the nature of the tax for which the interest was paid. acquisition cost. Hence, a deduction over and above such cost cannot be claimed
and allowed. The reason is that deductions from gross income are privileges, not
b) No, Carlos’ claim for refund has not prescribed. Considering that it is the matters of right. They are not created by implication but upon clear expression in
interest paid on this latter-assessed estate and inheritance tax that respondent is the law [Gutierrez v. Collector of Internal Revenue, L-19537, May 20, 1965].
claiming for refund, then the 30-day period for prescription under RA 1125
Depreciation is the gradual diminution in the useful value of tangible property We find that said accounts have not satisfied the requirements of the
resulting from wear and tear and normal obsolescense. It commences with the 'worthlessness of a debt'. Mere testimony of the Financial Accountant of the
acquisition of the property and its owner is not bound to see his property Petitioner explaining the worthlessness of said debts is seen by this Court as
gradually waste, without making provision out of earnings for its replacement.
nothing more than a self-serving exercise which lacks probative value. There was

The recovery, free of income tax, of an amount more than the invested capital in no iota of documentary evidence (e.g., collection letters sent, report from
an asset will transgress the underlying purpose of a depreciation allowance. For investigating fieldmen, letter of referral to their legal department, police
then what the taxpayer would recover will be, not only the acquisition cost, but report/affidavit that the owners were bankrupt due to fire that engulfed their
also some profit. Recovery in due time thru depreciation of investment made is stores or that the owner has been murdered etc.), to give support to the testimony
the philosophy behind depreciation allowance; the idea of profit on the of an employee of the Petitioner. Mere allegations cannot prove the
investment made has never been the underlying reason for the allowance of a worthlessness of such debts in 1985. Hence, the claim for deduction of these
deduction for depreciation.
thirteen (13) debts should be rejected.

72. PRC (UNILEVER) vs. CA, CTA, and CIR, G.R. No. 118794 (1996)
ISSUE: W/N the disallowance of bad debts by CTA and CA is valid?
FACTS: This is an appeal by certiorari from the decision of respondent Court of
Appeals affirming the decision of the Court of Tax Appeals which disallowed HELD: YES.
petitioner's claim for deduction as bad debts of several accounts in the total sum Rule in determining the "worthlessness of a debt" as held in Collector vs.
of P395,324,27, and imposing a 25% surcharge and 20% annual delinquency Goodrich International Rubber Co: For debts to be considered as "worthless," and
interest on the alleged deficiency income tax liability of petitioner. thereby qualify as "bad debts" making them deductible, the taxpayer should show
Petitioner Philippine Refining Company (PRC) was assessed by respondent that
Commissioner of Internal Revenue (Commissioner) to pay a deficiency tax for the (1) there is a valid and subsisting debt;
year 1985 in the amount of P1,892,584.00. (2) the debt must be actually ascertained to be worthless and uncollectible during
The assessment was timely protested by petitioner on April 26, 1989, on the the taxable year; (3) the debt must be charged off during the taxable year; and
ground that it was based on the erroneous disallowances of "bad debts" and (4) the debt must arise from the business or trade of the taxpayer. Additionally,
"interest expense" although the same are both allowable and legal deductions. before a debt can be considered worthless, the taxpayer must also show that it is
Respondent Commissioner, however, issued a warrant of garnishment against indeed uncollectible even in the future.
the deposits of petitioner at a branch of City Trust Bank, in Makati, Metro Manila, Furthermore, there are steps outlined to be undertaken by the taxpayer to prove
which action the latter considered as a denial of its protest. that he exerted diligent efforts to collect the debts, viz: (1) sending of statement
Petitioner accordingly filed a petition for review with the Court of Tax Appeals of accounts; (2) sending of collection letters; (3) giving the account to a lawyer
(CTA) on the same assignment of error, that is, that the "bad debts" and "interest for collection; and (4) filing a collection case in court.
expense" are legal and allowable deductions.
CTA: set aside the Commissioner's disallowance of the interest expense of On the foregoing considerations, respondent Court of Appeals held that
P2,666,545.19 but maintained the disallowance of the bad debts of thirteen (13) petitioner did not satisfy the requirements of "worthlessness of a debt" as to the
debtors in the total sum of P395,324.27. thirteen (13) accounts disallowed as deductions.

CA: affirmed CTA decision. Out of the sixteen (16) accounts alleged as bad debts, It appears that the only evidentiary support given by PRC for its aforesaid claimed
We find that only three (3) accounts have met the requirements of the deductions was the explanation or justification posited by its financial adviser or
worthlessness of the accounts, hence were properly written off as bad debts accountant, Guia D. Masagana. Her allegations were not supported by any
documentary evidence, hence, both the Court of Appeals and the CTA ruled that
said contentions per se cannot prove that the debts were indeed uncollectible and presumptuous and uncalled for. The Court of Tax Appeals is a highly specialized
can be considered as bad debts as to make them deductible. That both lower body specifically created for the purpose of reviewing tax cases. Through its
courts are correct is shown by petitioner's own submission and the discussion expertise, it is undeniably competent to determine the issue of whether or not the
thereof which we have taken time and patience to cull from the antecedent debt is deductible through the evidence presented before it. (they mentioned
proceedings in this case, albeit bordering on factual settings. other transactions where they failed to prove that it was a bad debt, almost all the
same namaaan hehe)
The accounts of Remoblas Store in the amount of P11,961.00 and CM Variety
Store in the amount of P10,895.82 are uncollectible, according to petitioner, since Because of this recognized expertise, the findings of the CTA will not ordinarily
the stores were burned in November, 1984 and in early 1985, respectively, and be reviewed absent a showing of gross error or abuse on its part. The findings of
there are no assets belonging to the debtors that can be garnished by PRC. fact of the CTA are binding on this Court and in the absence of strong reasons for
However, PRC failed to show any documentary evidence for said allegations. Not this Court to delve into facts, only questions of law are open for determination.
a single document was offered to show that the stores were burned, even just a Were it not, therefore, due to the desire of this Court to satisfy petitioner's calls
police report or an affidavit attesting to such loss by fire. In fact, petitioner did for clarification and to use this case as a vehicle for exemplification, this appeal
not send even a single demand letter to the owners of said stores. could very well have been summarily dismissed.
The account of Tomas Store in the amount of P16,842.79 is uncollectible, claims
petitioner PRC, since the owner thereof was murdered and left no visible assets The Court vehemently rejects the absurd thesis of petitioner that despite the
which could satisfy the debt. Withal, just like the accounts of the two other stores supervening delay in the tax payment, nothing is lost on the part of the
just mentioned, petitioner again failed to present proof of the efforts exerted to Government because in the event that these debts are collected, the same will be
collect the debt, other than the aforestated asseverations of its financial adviser. returned as taxes to it in the year of the recovery. This is an irresponsible
The amount of P13,772.00 corresponding to the debt of Lucito Sta. Maria is statement which deliberately ignores the fact that while the Government may
allegedly due to the loss of his stocks through robbery and the account is eventually recover revenues under that hypothesis, the delay caused by the non-
uncollectible due to his insolvency. Petitioner likewise failed to submit payment of taxes under such a contingency will obviously have a disastrous effect
documentary evidence, not even the written reports of the alleged investigation on the revenue collections necessary for governmental operations during the
conducted by its agents as testified to by its aforenamed financial adviser. period concerned.
Regarding the accounts of C. Itoh in the amount of P19,272.22, Crocklaan B.V. in
the sum of P77,690.00, and Craig, Mostyn Pty. Ltd. with a balance of P23,738.00, ACCORDINGLY, the petition at bar is DENIED and the judgment of respondent
petitioner contends that these debtors being foreign corporations, it can sue them Court of Appeals is hereby AFFIRMED, with treble costs against petitioner.
only in their country of incorporation; and since this will entail expenses more
73. AGUINALDO INDUSTRIES CORP. vs. CIR, G.R. No. L-29790 (1982)
than the amounts of the debts to be collected, petitioner did not file any collection

suit but opted to write them off as bad debts. Petitioner was unable to show proof DOCTRINE:
of its efforts to collect the debts, even by a single demand letter therefor. While it On the basis of the legal provision of Section 30(a) (1) of the Tax Code, the bonus
is not required to file suit, it is at least expected by the law to produce reasonable given to the officers of the petitioner as their share of the profit realized from the
proof that the debts are uncollectible although diligent efforts were exerted to sale of petitioner's Muntinlupa land cannot be deemed a deductible expense for
collect the same. tax purposes, even if the aforesaid sale could be considered as a transaction for
The contentions of PRC that nobody is in a better position to determine when an carrying on the trade or business of the petitioner and the grant of the bonus to
the corporate officers pursuant to petitioner's by-laws could, as an intra-
obligation becomes a bad debt than the creditor itself, and that its judgment
corporate matter, be sustained. The records show that the sale was effected
should not be substituted by that of respondent court as it is PRC which has the through a broker who was paid by petitioner a commission of P51,723.72 for his
facilities in ascertaining the collectibility or uncollectibility of these debts, are services. On the other hand, there is absolutely no evidence of any service actually
rendered by petitioner's officers which could be the basis of a grant to them of a HELD:
bonus out of the profit derived from the sale. Thus, the payment of a bonus to Anent the first question, the applicable legal provision is Sec. 30 (a) (1) of the Tax
them out of the gain realized from the sale cannot be considered as a selling Code which reads:
expense; nor can it be deemed reasonable and necessary so as to make it
deductible for tax purposes. "In computing net income there shall be allowed as deductions —

FACTS: "(a) Expenses:
Aguinaldo Industries Corporation is a domestic corporation engaged in 2 lines of
business: a). the manufacture of fish nets, a tax-exempt industry, and b). the "(1) In general. — All the ordinary and necessary
manufacture of furniture. Its business of manufacturing fishing nets is handled by expenses paid or incurred during the taxable year in
its Fish Nets Division, while the manufacture of Furniture is operated by its carrying on any trade or business, including a reasonable
Furniture Division. Both division is provided with separate books of accounts as allowance for personal services actually rendered. . . ."
required by the Department of Finance.
On the basis of the forgoing standards, the bonus given to the officers of the
Petitioner acquired a parcel of land in Muntinlupa, Rizal as site of its fishing net petitioner as their share of the profit realized from the sale of petitioner's
factory. This transaction was entered in the books of the Fish Nets Divisions. Later, Muntinlupa land cannot be deemed a deductible expense for tax purposes, even if
when another parcel of land in Marikina was found to be more suitable for the the aforesaid sale could be considered as a transaction for carrying on the trade or
needs of the petitioner, it sold the Muntinlupa property. Petitioner derived profit business of the petitioner and the grant of the bonus to the corporate officers
from this sale which was entered in the books of the Fish Nets Division as pursuant to petitioner's by-laws could, as an intra-corporate matter, be sustained.
miscellaneous income to distinguish it from its tax-exempt income. The records show that the sale was effected through a broker who was paid by
petitioner a commission of P51,723 72 for his services. On the other hand, there is
The petitioner filed 2 separate income tax returns for the 2 different divisions of absolutely no evidence of any service actually rendered by petitioner's officers
the company. After investigation of these returns, the examiners of the BIR which could be the basis of a grant to them of a bonus out of the profit derived from
deducted from its gross income the amount of P61,187.48 as additional the sale. This being so, the payment of a bonus to them of the gain realized from
remuneration paid to the officers of petitioner. The examiner found out that this the sale cannot be considered as a selling expense; nor can it be deemed reasonable
amount was taken from the net profit of an isolated transaction (the sale of the and necessary so as to make it deductible for tax purposes. As stated by this Court
land) and not in the course of petitioner’s business. It was reported as a selling in Alhambra Cigar and Cigarette Manufacturing Co. vs. Collector of Internal
expense of the land in Muntinlupa. Revenue, G.R. No. L-12026, May 29, 1959, construing Section 30 (a) (1) of the Tax
Code:
Upon recommendation of the examiner, the sum must be disallowed as deduction
from gross income. Petitioner said that the amount should be allowed as deduction ". . . whenever a controversy arises on the deductibility, for purposes of
because it was paid to its officers as allowance and bonus pursuant to its by-laws. income tax, of certain items for alleged compensation of officers of the
Petitioner explained that to arrive at the 20%, it gets 20% of the profit from the taxpayer, two (2) questions become material, namely: (a) Have 'personal
furniture and 20% of the fish net venture. services' been 'actually rendered' by said officers? (b) In the affirmative
case, what is the 'reasonable allowance' thereof?
Petitioner argues that the profit derived from the sale of its Muntinlupa land is not
taxable for it is tax-exempt income, considering that its Fish Nets Division enjoys Then, this Court quoted with approval the appealed decision:
tax exemption as a new and necessary industry under Republic Act 901.
". . . these extraordinary and unusual amounts paid by petitioner to these
ISSUE: directors in the guise and form of compensation for their supposed
WON the bonus and allowance given to the officers upon the sale of its Muntinlupa services as such, without any relation to the measure of their actual
land is an ordinary and necessary business expense deductible for income tax services, cannot be regarded as ordinary and necessary expenses within
purposes. the meaning of the law."

This posture is in line with the doctrine in the law of taxation that the taxpayer supervision of a subdivision project were to be paid to an experienced realtor
must show that its claimed deductions clearly come within the language of the such as Hoskins, its fairness and deductibility by the taxpayer could be conceded;
law since allowances, like exemptions, are matters of legislative grace. but here 50% of the supervision fee of petitioner was being paid by it to Hoskins
every year since 1955 up to 1963 and for as long as its contract with the
74. C.M. HOSKINS & CO., INC. vs. CIR, G.R. No. L-24059 (1969) subdivision owner subsisted, regardless of whether services were actually
rendered by Hoskins, since his services to petitioner included such planning and
FACTS: Petitioner, a domestic corporation engaged in the real estate business as supervision and were already handsomely paid for by petitioner.
brokers, managing agents and administrators, filed its income tax return for its
fiscal year ending September 30, 1957 showing a net income of P92,540.25 and a It did not pass the test of reasonableness which is: General rule, bonuses to
tax liability due thereon of P18,508.00, which it paid in due course. Upon employees made in good faith and as additional compensation for services
verification of its return, respondent Commissioner of Internal Revenue, actually rendered by the employees are deductible, provided such payments,
disallowed four items of deduction in petitioner's tax returns and assessed when added to the salaries do not exceed the compensation for services rendered.
against it an income tax deficiency in the amount of P28,054.00 plus interests.
The Court of Tax Appeals upon reviewing the assessment at the taxpayer's The conditions precedent to the deduction of bonuses to employees are:  
petition, upheld respondent's disallowance of the principal item of petitioner's Payment of bonuses is in fact compensation, must be for personal services
having paid to Mr. C. M. Hoskins, its founder and controlling stockholder the actually rendered, bonuses when added to salaries are reasonable when
amount of P99,977.91 representing 50% of supervision fees earned by it and set measured by the amount and quality of services performed with relation to the
aside respondent's disallowance of three other minor items. The Tax Court business of the particular taxpayer.
therefore determined petitioner's tax de ciency to be in the amount of
P27,145.00 and on November 8, 1964 rendered judgment against it, as follows: There is no fixed test for determining the reasonableness of a given bonus as
compensation. This depends upon many factors.
"WHEREFORE, premises considered, the decision of the respondent is hereby
modified. Petitioner is ordered to pay to the latter or his representative the sum In the case, Hoskins fails to pass the test. CTA was correct in holding that the
of P27,145.00, representing deficiency income tax for the year 1957, plus interest payment of the company to Mr. Hoskins of the sum P99,977.91 as 50% share of
at 1/2% per month from June 20, 1959 to be computed in accordance with the supervision fees received by the company was inordinately large and could not
provisions of Section 51(d) of the National Internal Revenue Code. If the be treated as an ordinary and necessary expenses allowed for deduction.
deficiency tax is not paid within thirty (30) days from the date this decision
becomes final, petitioner is also ordered to pay surcharge and interest as 75. HOSPITAL DE SAN JUAN DE DIOS vs. CIR, G.R. No. L-31305 (1990)
provided for in Section 51(e) of the Tax Code, without costs."
FACTS: Petitioner is engaged in both taxable and non-taxable operations. The
Petitioner questions in this appeal the Tax Court's findings that the disallowed
income derived from the operations of the hospital and the nursing school are
payment to Hoskins was an inordinately large one, which bore a close
exempt from income tax while the rest of petitioner’s income are subject thereto.
relationship to the recipient's dominant stockholdings and therefore amounted
Its taxable or non-operating income consists of rentals, interests and dividends
in law to a distribution of its earnings and profits.
received from its properties and investments. In the computation of its taxable
income for the years 1952 to 1955, petitioner allowed all its taxable income to
ISSUE: Whether or not the CTA erred in its decision
share in the allocation of administrative expenses. Respondent, Commissioner of
Internal Revenue disallowed, however, the interests and dividends from sharing
HELD: No. The CTA was correct in holding that it is not deductible. in the allocation of administrative expense on the ground that the expenses
incurred in the administration or management of petitioner’s investments are
If such payment of P99,977.91 were to be allowed as a deductible item, then not allowable business expenses inasmuch as they were not incurred in ‘carrying
Hoskins would receive on these three items alone (salary, bonus and supervision on any trade or business’ within the contemplation of Section 30 (a) (1) of the
fee) a total of P184,977.91, which would be double the petitioner's reported net Revenue Code. Consequently, petitioner was assessed deficiency income taxes for
income for the year of P92,540.25. As correctly observed by respondent, if the years in question
independently, a one- time P100,000.00-fee to plan and lay down the rules for
The petitioner protested against the assessment and requested the for financial gain”. It is not carrying on a trade or business for the word “business”
Commissioner to cancel and withdraw it. After reviewing the assessment, the in its ordinary and common use means “human efforts which have for their end
Commissioner advised petitioner that the deficiency income tax assessment living or reward; it is not commonly used as descriptive of charitable, religious,
against it was reduced to only P16,852.41. Still the petitioner, through its educational or social agencies” or “any particular occupation or employment
auditors, insisted on the cancellation of the revised assessment. The request was, habitually engaged in especially for livelihood or gain” or “activities where profit
however, denied. is the purpose or livelihood is the motive.”
Petitioner sought a review of the assessment by the CTA, which upheld the 76. REPUBLIC vs. MANILA ELECTRIC COMPANY, G.R. No. 141369 (2002)
Commissioner holding that the expenses incurred by the petitioner for handling
its funds or income consisting solely of dividends and interests, were not FACTS
expenses incurred in “carrying on any trade or business,” hence, not deductible Meralco filed with the Energy Regulatory Board (ERB) an application for
as business or administrative expenses. the revision of its rate schedules. The application reflected an average increase of
21 centavos per kilowatt-hour (kwh) in its distribution charge. The application
also included a prayer for provisional approval of the increase.
Petitioner filed a motion for reconsideration of the CTA decision. When its motion
was denied, it filed this petition for review. The ERB issued an Order granting the provisional increase of P0.184 per
kwh. In the same Order, the ERB requested the Commission on Audit (COA) to
ISSUE: Whether or not the dividends and interests are expenses incurred in conduct an audit and examination of the books and other records of account of
carrying on any trade or business, hence, deductible as business expense under the applicant for such period of time and to submit a copy thereof to the ERB
Section 30 (A) (I) of the Revenue Code. immediately upon completion.

At a later date, COA submitted its “COA Report” which contained, among
RULING: The Supreme Court ruled in the negative. The CTA found that petitioner others, the recommendation not to include income taxes paid by Meralco as part
failed to establish by competent proof that its receipt of interests and dividends of its operating expenses for purposes of rate determination and the use of the
constituted the carrying on of a trade or business so as to warrant the net average investment method for the computation of the proportionate value
deductibility of the expenses incurred in their realization. Petitioner could have of the properties used by Meralco during the test year for the determination of
easily required any of its responsible officials to testify on this regard but it failed the rate base.
to do so. Under these circumstances and coupled with the fact that the interests
and dividends here in question are merely incidental income to petitioner’s main Subsequently, the ERB rendered its decision adopting the above
activity, which is the operation of its hospital and nursing schools, the conclusion recommendations and authorized Meralco to implement a rate adjustment. The
becomes inevitable that petitioner’s activities never go beyond that of a passive ERB held that income tax should not be treated as operating expenses as this
investor, which under existing jurisprudence do not come within the purview of should be borne by the stockholders who are recipients of the income or profits
carrying on any “trade or business”. realized from the operation of their business.

On appeal, the CA set aside the ERB decision insofar as it directed the
That factual finding is binding on this Court. And, as the principle of allocating
reduction of the Meralco rates by an average of P0.167 per kwh and the refund of
expenses is grounded on the premise that the taxable income was derived from
such amount to Meralco’s customers beginning February 1994 and until its
carrying on a trade or business, as distinguished from mere receipt of interests
billing cycle beginning February 1998. Separate Motions for Reconsideration
and dividends from one’s investments, the CTA correctly ruled that said income
filed by the petitioners were denied by the CA. Hence, the instant action.
should not share in the allocation of administrative expenses.

Hospital de San Juan De Dios, Inc., according to its Articles of Incorporation, was
established for purposes “Which are benevolent, charitable and religious, and not
ISSUE/S paying income tax should be Meralco’s alone and should not be shifted to the
Whether or not the income tax paid by Meralco should be treated as part consumers by including the same in the computation of its operating expenses.
of its operating expenses and thus considered in determining the amount of
increase in the electric rates imposed by Meralco. 77. CHINA BANKING CORPORATION vs. CA, G.R. No. 125508 (2000)

HELD FACTS: Sometime in 1980, petitioner China Banking Corporation made a 53%
No. Income tax paid by a public utility is inconsistent with the nature of equity investment in the First CBC Capital (Asia) Ltd., a Hongkong subsidiary
operating expenses. Operating expenses are those which are reasonably incurred engaged in financing and investment with "deposit-taking" function. The
in connection with business operations to yield revenue or income. Income tax is investment amounted to P16,227,851.80, consisting of 106,000 shares with a par
imposed on the entity for the privilege of earning income and for the benefits Value of P100 per share.
received by the taxpayer from the State.
In the course of the regular examination of the financial books and investment
In determining whether or not a rate yields a fair return to the utility, the portfolios of petitioner conducted by Bangko Sentral in 1986, it was shown that
operating expenses of the utility must be considered. The return allowed to a First CBC Capital (Asia), Ltd., has become insolvent. With the approval of Bangko
public utility in accordance with the prescribed rate must be sufficient to provide Sentral, petitioner wrote-off as being worthless its investment in First CBC
for the payment of such reasonable operating expenses incurred by the public Capital (Asia), Ltd., in its 1987 Income Tax Return and treated it as a bad debt or
utility in the provision of its services to the public. Thus, the public utility is as an ordinary loss deductible from its gross income.
allowed a return on capital over and above operating expenses. However, only
such expenses and in such amounts as are reasonable for the efficient operation Respondent Commissioner of internal Revenue disallowed the deduction and
of the utility should be allowed for determination of the rates to be charged by a assessed petitioner for income tax deficiency in the amount of P8,533,328.04,
public utility. inclusive of surcharge, interest and compromise penalty. The disallowance of the
deduction was made on the ground that the investment should not be classified
The ERB correctly ruled that income tax should not be included in the as being "worthless" and that, although the Hongkong Banking Commissioner
computation of operating expenses of a public utility. Income tax paid by a public had revoked the license of First CBC Capital as a "deposit-taping" company, the
utility is inconsistent with the nature of operating expenses. In general, operating latter could still exercise, however, its financing and investment activities.
expenses are those which are reasonably incurred in connection with business Assuming that the securities had indeed become worthless, respondent
operations to yield revenue or income. They are items of expenses which Commissioner of Internal Revenue held the view that they should then be
contribute or are attributable to the production of income or revenue. As classified as "capital loss," and not as a bad debt expense there being no
correctly put by the ERB, operating expenses “should be a requisite of or indebtedness to speak of between petitioner and its subsidiary.
necessary in the operation of a utility, recurring, and that it redounds to the
service or benefit of customers.” Petitioner contested the ruling of respondent Commissioner before the CTA. The
tax court sustained the Commissioner, holding that the securities had not indeed
Income tax, it should be stressed, is imposed on an individual or entity become worthless and ordered petitioner to pay its deficiency income tax for
as a form of excise tax or a tax on the privilege of earning income. In exchange for 1987 of P8,533,328.04 plus 20% interest per annum until fully paid. When the
the protection extended by the State to the taxpayer, the government collects decision was appealed to the Court of Appeals, the latter upheld the CTA. In its
taxes as a source of revenue to finance its activities. Clearly, by its nature, income instant petition for review on certiorari, petitioner bank assails the CA decision.
tax payments of a public utility are not expenses which contribute to or are
incurred in connection with the production of profit of a public utility. Income tax ISSUE: Whether or not Capital losses are allowed to be deducted only to the
should be borne by the taxpayer alone as they are payments made in exchange extent of capital gains.
for benefits received by the taxpayer from the State. No benefit is derived by the
customers of a public utility for the taxes paid by such entity and no direct HELD: The petition must fail. Subject to certain exceptions, such as the
contribution is made by the payment of income tax to the operation of a public compensation income of individuals and passive income subject to final tax, as
utility for purposes of generating revenue or profit. Accordingly, the burden of well as income of non-resident aliens and foreign corporations not engaged in
trade or business in the Philippines, the tax on income is imposed on the net
income allowing certain specified deductions from gross income to be claimed by When securities become worthless, there is strictly no sale or exchange but the
the taxpayer. Among the deductible items allowed by the National Internal law deems the loss anyway to be "a loss from the sale or exchange of capital assets.
Revenue Code ("NIRC") are bad debts and losses. A similar kind of treatment is given, by the NIRC on the retirement of certificates
An equity investment is a capital, not ordinary, asset of the investor the sale or of indebtedness with interest coupons or in registered form, short sales and
exchange of which results in either a capital gain or a capital loss. The gain or the options to buy or sell property where no sale or exchange strictly exists. In these
loss is ordinary when the property sold or exchanged is not a capital asset. cases, the NIRC dispenses, in effect, with the standard requirement of a sale or
A capital asset is defined negatively in Section 33(1) of the NIRC; viz: exchange for the application of the capital gain and loss provisions of the code.

(1) Capital assets. - The term 'capital assets' means property held by the Capital losses are allowed to be deducted only to the extent of capital gains,
taxpayer (whether or not connected with his trade or business), but does i.e., gains derived from the sale or exchange of capital assets, and not from
not include stock in trade of the taxpayer or other property of a kind any other income of the taxpayer.
which would properly be included in the inventory of the taxpayer if on
hand at the close of the taxable year, or property held by the taxpayer In the case at bar, First CBC Capital (Asia), Ltd., the investee corporation, is a
primarily for sale to customers in the ordinary course of his trade or subsidiary corporation of petitioner bank whose shares in said investee
business, or property used in the trade or business, of a character which corporation are not intended for purchase or sale but as an
is subject to the allowance for depreciation provided in subsection (f) of investment. Unquestionably then, any loss therefrom would be a capital loss, not
section twenty-nine; or real property used in the trade or business of the an ordinary loss, to the investor.
taxpayer.
In sum - (a) The equity investment in shares of stock held by CBC of
Thus, shares of stock; like the other securities defined in Section 20(t)[4] of the approximately 53% in its Hongkong subsidiary, the First CBC Capital (Asia), Ltd.,
NIRC, would be ordinary assets only to a dealer in securities or a person is not an indebtedness, and it is a capital, not an ordinary, asset.
engaged in the purchase and sale of, or an active trader (for his own account)
in, securities. (b) Assuming that the equity investment of CBC has indeed become "worthless,"
the loss sustained is a capital, not an ordinary, loss.
In the hands, however, of another who holds the shares of stock by way of an
investment, the shares to him would be capital assets. When the shares held by (c) The capital loss sustained by CBC can only be deducted from capital gains if
such investor become worthless, the loss is deemed to be a loss from the any derived by it during the same taxable year that the securities have become
sale or exchange of capital assets. Section 29(d)(4)(B) of the NIRC states: "worthless."

"(B) Securities becoming worthless. - If securities as defined in Section 78. CIR vs. ISABELA CULTURA CORPORATION, G.R. No. 172231 (2007)
20 become worthless during the tax" year and are capital assets, the loss
resulting therefrom shall, for the purposes of his Title, be considered as FACTS: Isabela Cultural Corp., a domestic corporation received from BIR
a loss from the sale or exchange, on the last day of such taxable year, of assessment notice no. FAS-1-86-90000680 for deficiency income tax in the
capital assets." amount of PhP 333,196.86 and assessment notice no. FAS-1-86-90-000681 for
deficiency expanded withholding tax in the amount of PhP 4,897.79, inclusive of
The above provision conveys that the loss sustained by the holder of the surcharge and interest both for the taxable year 1986. The deficiency income tax
securities, which are capital assets (to him), is to be treated as a capital loss as if of PhP 333,196 arose from BIR disallowance of ICC claimed expenses deductions
incurred from a sale or exchange transaction. A capital gain or a capital loss for professional and security services billed to and paid by ICC in 1986.
normally requires the concurrence of two conditions for it to result:
The deficiency expanded withholding tax of PhP4,897.79 was allegedly due to the
(1) There is a sale or exchange; and failure of ICC to withhold 1% expanded withholding tax on its claimed
(2) the thing sold or exchanged is a capital asset. PhP244,890 deduction for security services. Court of Tax Appeal and Court of
Appeal affirmed that the professional services were rendered to ICC in 1984 and
1985, the cost of the service was not yet determinable at that time, hence it could
be considered as deductible expenses only in 1986 when ICC received the billing Notes: The requisites for the deductibility of ordinary and necessary trade,
statement for said service. It further ruled that ICC did not state its interest business, or professional expenses, like expenses paid for legal and auditing
income from the promissory notes of Realty Investment and that ICC properly services, are:
withheld the remitted taxes on the payment for security services for the taxable
year 1986. a. The expense must be ordinary and necessary;
b. It must have been paid or incurred during the taxable year;
Petitioner contend that since ICC is using the accrual method of accounting, the c. It must have been paid or incurred in carrying on the trade or business of the
expenses for the professional services that accrued in 1984 and 9185 should have taxpayer; and
been declared as deductions from income during the said years and the failure of d. It must be supported by receipts, records, or other pertinent papers.
ICC to do so bars it from claiming said expenses as deduction for the taxable year
1986. Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual
method of accounting, expenses not being claimed as deductions by a taxpayer in
ISSUES: (1) For a taxpayer using the accrual method, when do the facts present the current year when they are incurred cannot be claimed as deduction from
themselves in such a manner that the taxpayer must recognize income or expense? income for the succeeding year. Thus, a taxpayer who is authorized to deduct
(2) Whether or not the deductions were properly claimed by Isabela Cultural certain expenses and other allowable deductions for the current year but failed
Corporation. to do so cannot deduct the same for the next year.

HELD: (1) The accrual of income and expense is permitted when the all-events The propriety of an accrual must be judged by the facts that a taxpayer knew, or
test has been met. This test requires: could reasonably be expected to have known, at the closing of its books for the
1) fixing of a right to income or liability to pay; and taxable year. Accrual method of accounting presents largely a question of fact;
2) the availability of the reasonable accurate determination of such income or such that the taxpayer bears the burden of proof of establishing the accrual of an
liability. item of income or deduction.

The test does not demand that the amount of income or liability be known 79. CIR vs. CENTRAL LUZON DRUG CORPORATION, G.R. No. 148512
absolutely, only that a taxpayer has at his disposal the information necessary to (2006)
compute the amount with reasonable accuracy. The all-events test is satisfied
where computation remains uncertain, if its basis is unchangeable; the test is Facts: Respondents operated six drugstores under the business name Mercury
satisfied where a computation may be unknown, but is not as much as Drug. From January to December 1996 respondent granted 20% sales discount
unknowable, within the taxable year. to qualified senior citizens on their purchases of medicines pursuant to RA 7432
for a total of ₱ 904,769.
(2) The deductions for expenses for professional fees consisting of expenses
for legal and auditing services are NOT allowable. However, the On April 15, 1997, respondent filed its annual Income Tax Return for taxable year
deductions for expenses for security services were properly claimed by 1996 declaring therein net losses. On Jan. 16, 1998 respondent filed with
Isabela CulturalCorporation. For the legal and auditing services, Isabela petitioner a claim for tax refund/credit of ₱ 904,769.00 allegedly arising from the
Cultural Corporation could have reasonably known the fees of those 20% sales discount. Unable to obtain affirmative response from petitioner,
firms that it hired, thus satisfying the all-events test. As such, per respondent elevated its claim to the Court of Tax Appeals. The court dismissed
Revenue Audit Memorandum Order No. 1-2000, they cannot validly be the same but upon reconsideration, the latter reversed its earlier ruling and
deducted from its gross income for the said year and were therefore ordered petitioner to issue a Tax Credit Certificate in favor of respondent citing
properly disallowed by the BIR. As for the security services, because they CA GR SP No. 60057 (May 31, 2001, Central Luzon Drug Corp. vs. CIR) citing that
were incurred in 1986, they could be properly claimed as deductions for Sec. 229 of RA 7432 deals exclusively with illegally collected or erroneously paid
the said year. taxes but that there are other situations which may warrant a tax credit/refund.

CA affirmed Court of Tax Appeal's decision reasoning that RA 7432 required
neither a tax liability nor a payment of taxes by private establishments prior to
the claim of a tax credit. Moreover, such credit is not tantamount to an unintended income tax returns for taxable years 1993 and 1994, it claimed as a deduction
benefit from the law, but rather a just compensation for the taking of private from its gross income the respective amounts of P80,330 and P515,000
property for public use. representing the 20% sales discount it granted to senior citizens.

Issue: Whether or not respondent, despite incurring a net loss, may still claim the On March 28, 1995, however, alleging error in the computation and claiming that
20% sales discount as a tax credit. the aforementioned 20% sales discount should have been treated as a tax credit
pursuant to R.A. No. 7432 instead of a deduction from gross income, petitioner
Ruling: Yes, it is clear that Sec. 4a of RA 7432 grants to senior citizens the filed a claim for refund or credit of overpaid income tax for 1993 and 1994,
privilege of obtaining a 20% discount on their purchase of medicine from any amounting to P52,215 and P334,750, respectively.
private establishment in the country. The latter may then claim the cost of the
discount as a tax credit. Such credit can be claimed even if the establishment The Commissioner pointed out that the provision in question employs the word
operates at a loss. "may," thereby implying that the availability of the remedy of tax credit is not
A tax credit generally refers to an amount that is “subtracted directly from one’s absolute and mandatory and it does not confer an absolute right on the taxpayer
total tax liability.” It is an “allowance against the tax itself” or “a deduction from to avail of the tax credit scheme if he so chooses.
what is owed” by a taxpayer to the government.
A tax credit should be understood in relation to other tax concepts. One of these CTA declared that Revenue Regulations No. 2-94 gave a new meaning to the
is tax deduction – which is subtraction “from income for tax purposes,” or an phrase "tax credit," interpreting it to mean that the 20% discount granted to
amount that is “allowed by law to reduce income prior to the application of the qualified senior citizens is an amount deductible from the establishment’s gross
tax rate to compute the amount of tax which is due.” In other words, whereas a sales, which is completely contradictory to the literal or widely accepted meaning
tax credit reduces the tax due, tax deduction reduces the income subject to tax in of the said phrase, as an amount subtracted from an individual’s or entity’s tax
order to arrive at the taxable income. liability to arrive at the total tax liability. And ruled that petitioner is entitled to a
refund and directed the respondent to issue a tax credit certificate in the amounts
A tax credit is used to reduce directly the tax that is due, there ought to be a tax of P45, 574.63 and P135,906.48.
liability before the tax credit can be applied. Without that liability, any tax credit
application will be useless. There will be no reason for deducting the latter when Petitioner, in its Motion for Partial Reconsideration, claimed that the "cost" that
there is, to begin with, no existing obligation to the government. However, as will private establishments may claim as tax credit under Section 4 of R.A. No. 7432
be presented shortly, the existence of a tax credit or its grant by law is not the should be construed to mean the full amount of the 20% sales discount granted
same as the claim or use of such credit. While the grant is mandatory, the claim to senior citizens instead of the formula --[Tax Credit = Cost of Sales/Gross Sales
or use is not. If a net loss is reported by, and no other taxes are currently due from, x 20% discount] – used by the CTA in computing for the amount of the tax credit.
a business establishment, there will obviously be no tax liability against which In view of this, petitioner prayed for the refund of the amount of income tax it
any tax credit can be applied. For the establishment to choose the immediate allegedly overpaid in the aggregate amount of P45,574.63 and P135,906.48,
claim of a tax credit will be premature and impracticable. respectively, for the taxable years 1993 and 1994 as a result of treating the sales
discount of 20% as a tax deduction rather than as a tax credit.
80. BICOLANDIA DRUG CORPORATION vs. CIR, G.R. No. 142299 (2006)
The Commissioner, on the other hand, moved for a re-computation of petitioner’s
FACTS: Petitioner Bicolandia Drug Corporation is a domestic corporation tax liability averring that the sales discount of 20% should be deducted from
principally engaged in the retail of pharmaceutical products. Petitioner has a gross income to arrive at the taxable income. Such discount cannot be considered
drugstore located in Naga City under the name and business style of "Mercury a tax credit because the latter, being in the nature of a tax refund, is treated as a
Drug." return of tax payments erroneously or excessively assessed and collected as
provided under Section 204(3) of the Tax Code.
Pursuant to the provisions of R.A. No. 7432"Senior Citizens Act," and Revenue
Regulations No. 2-94, petitioner granted to qualified senior citizens a 20% sales ISSUE: Whether or not petitioner can claim its refund.
discount on their purchase of medicines covering the period from July 19, 1993
to December 31, 1994. When petitioner filed its corresponding corporate annual RULING:
No. Section 4(a) of R.A. No. 7432 which states: (20%) discount from all establishments relative to the
utilization of services in hotels and similar lodging
Sec. 4. Privileges for the Senior citizens. – The senior citizens shall be entitled to establishments, restaurants and recreation centers, and
the following: purchase of medicines in all establishments for the exclusive
use or enjoyment of senior citizens, including funeral and
a) the grant of twenty percent (20%) discount from all establishments relative to burial services for the death of senior citizens; The
utilization of transportation services, hotels and similar lodging establishments, establishment may claim the discounts granted under (a),
restaurants and recreation centers and purchase of medicines anywhere in the (f), (g) and (h) as tax deduction based on the net cost of the
country: Provided, That private establishments may claim the cost as tax credit. goods sold or services rendered: Provided, That the cost of
the discount shall be allowed as deduction from gross
The term "cost" in the above provision refers to the amount of the 20% discount income for the same taxable year that the discount is
extended by a private establishment to senior citizens in their purchase of granted. Provided, further, That the total amount of the
medicines. This amount shall be applied as a tax credit, and may be deducted from claimed tax deduction net of value added tax if applicable,
the tax liability of the entity concerned. If there is no current tax due or the shall be included in their gross sales receipts for tax
establishment reports a net loss for the period, the credit may be carried over to purposes and shall be subject to proper documentation and
the succeeding taxable year. This is in line with the interpretation of this Court in to the provisions of the National Internal Revenue Code, as
Commissioner of Internal Revenue v. Central Luzon Drug Corporation wherein it amended.
affirmed that R.A. No. 7432 allows private establishments to claim as tax credit 2004, DSWD adopted the IRR on tax deductions of establishments.
the amount of discounts they grant to senior citizens.
Regulations are to be issued by BIR and approved by DOF.

In reference to the query of Drug Stores Association of PH
The Court notes that petitioner, while praying for the reinstatement of the CTA
(DSAP) concerning the meaning of TAX DEDUCTION
Resolution, dated December 7, 1998, directing the issuance of tax certificates in
under the Expanded Senior Citizens Act. DOF clarified diff
favor of petitioner for the respective amounts of P45,574.63 and P135,906.48
between tax credit (old senior citizens act) and tax
representing overpaid income tax for 1993 and 1994, asks for the refund of the
deduction (Expanded Senior citizens act)
same.
TAX CREDIT is contemplated in th Old Senior Citizens Act granting
In this regard, petitioner’s claim for refund must be denied. The law expressly 20% discount. It is a peso-for-peso deduction from
provides that the discount given to senior citizens may be claimed as a tax credit, taxpayers tax liability due to govt of the amount of
and not a refund. Thus, where the words of a statute are clear, plain and free from discounts such establishment has granted to a senior
ambiguity, it must be given its literal meaning and applied without attempted citizen. The establishment recovers the full amount given
interpretation. to a senior citizen hence the govt shoulders 100% of the
discounts granted. It is a scheme that necessitates that
81. CARLOS SUPERDRUG CORPORATION vs. DSWD, G.R. No. 166494 prior payments of taxes have been made and the taxpayer
(2007) is attempting to recover this tax payment from his income
tax due. The tax credit scheme under RA 7432 is
FACTS: Petitioners are domestic corps and proprietors operating drugstores in inapplicable since no tax payments have previously
PH. Public respondents, DSWD, DOH, DOF, DOJ, DILG have been tasked to monitor occurred.
drugstores compliance with law. TAX DEDUCTION under the Expanded Senior citizens act RA 9257
provides that the establishment may claim the discounts
2004, RA9257, amending RA 7432 was signed into law by President Gloria as tax deduction from gross income based on the net cost
Arroyo and became effective March 21, 2004. of goods sold/services. The establishment is allowed to
Sec4( c) Privileges for the Senior Citizens. The senior citizens shall be deduct from gross income in computing for its tax liability,
entitled to the following: (a) the grant of twenty percent the amount of discounts granted to senior citizens. The
govt loses in terms of foregone revenues an amount
equivalent to the marginal tax rate the establishment is for the law to allow the deduction from a taxpayer’s gross income earned on a
liable to pay govt. This will be an amount equivalent to certain year of exemptions availing on a different taxable year …” Petitioner, on
32& of the 20% discounts granted. The establishment the other hand insists that the increased exemptions were already available on
shoulders the remaining portion of granted discounts. April 15, 1998, the deadline for filing income tax returns for taxable year 1997,
Under the Expanded senior citizens act, establishments that may because the NIRC was already effective. He reasons that by making the said law
claim tax credit are added. 2004, the Expanded senior citizens act effective on the 1998 tax period would postpone the availability of the increased
provided 20% discount in the purchase of unbranded generic meds exemptions and literally defer the effectivity of the NIRC to January 1, 1999.
from all establishments dispensing meds for exclusive use of senior
citizens which was amended-extending the 20% to both prescription Issue: Could the exemptions under Section 35 of the NIRC, which took effect on
and nonprescription meds, generic or branded. January 1, 1998, be availed of for taxable year 1997?

ISSUE: WON the 20% discount is considered a tax deduction on part Held: No. There is nothing in the law that expresses any such intent of making its
of the private establishments application retroactive. The policy declaration in the enactment of R.A. No. 8424
do not indicate it was a social legislation that adjusted personal and additional
HELD: Yes. The tax deduction scheme does not fully reimburse exemption should retroact.
petitioners for the discount privilege because the discount is treated
as a deduction, a tax-deductible expense that is subtracted from the What is the nature of personal exemptions? Personal exemptions are the
gross income and results in a lower taxable income. It is an amount theoretical personal, living and family expenses of an individual taxpayer. These
are arbitrary amounts which have been calculated by our lawmakers to be
that is allowed by law to reduce the income prior to the application of
roughly equivalent to the minimum of subsistence, taking into account
tax rate to compute the amount of tax which is due. Being a tax
the personal status and additional qualified dependents of the taxpayer.
deduction, the discount doesn’t reduce taxes owed on a peso for peso

basis but merely offers a fractional reduction in taxes owed. The
83. ROXAS vs. CTA, G.R. No. L-25043 (1968)
treatment of the discount as a deduction reduces the net income of the
private establishments.
Facts: Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects, transmitted
The permanent reduction in their total revenues is a forced subsidy to their grandchildren by hereditary succession several properties. To manage
corresponding to the taking of private property for public use, making the above-mentioned properties, said children, namely, Antonio Roxas, Eduardo
Roxas and Jose Roxas, formed a
petitioners entitled to just compensation. A tax deduction does not
offer full reimbursement of the senior citizen discount hence it would
not meet the definition of just compensation. partnership called Roxas y Compania. At the conclusion of the WW2, the tenants
who have all been tilling the lands in Nasugbu for generations expressed their
As a form of reimbursement, the law provides that business desire to purchase from Roxas y Cia. the parcels which they actually occupied. For
establishments extending the 20% discount may claim the discount its part, the Government, in consonance with the constitutional mandate to
as tax deduction. acquire big landed estates and apportion them among landless tenants-farmers,
persuaded the Roxas brothers to part with their landholdings. Conferences were
82. PANSACOLA vs. CIR, G.R. No. 159991 (2006) held with the farmers in the early part of 1948 and finally the Roxas brothers
agreed to sell 13,500 hectares to the Government for distribution to actual
Facts: On April 13, 1998, petitioner Carmelino F. Pansacola filed his income tax occupants for a price of P2,079,048.47 plus P300,000.00 for survey and
subdivision expenses. It turned out however that the Government did not have
return for the taxable year 1997 that reflected an overpayment of P5, 950. He
claimed the increased amounts of personal and additional exemptions funds to cover the purchase price, and so a special arrangement was made for the
under Section 35 of the NIRC and thus prayed for a refund. Both the Bureau of Rehabilitation Finance Corporation to advance to Roxas y Cia. The amount of
Internal Revenue and Court of Tax Appeals denied his petition. His motion for P1,500,000.00 as loan. Collateral for such loan were the lands proposed to be sold
reconsideration was also denied. According to the tax court, “it would be absurd to the farmers. Under the arrangement, Roxas y Cia. allowed the farmers to buy
the lands for the same price but by installment, and contracted with the farmers are capital assets, and the gain derived from the sale thereof is capital
Rehabilitation Finance Corporation gain, taxable only to the extent of 50%.
to pay its loan from the proceeds of the yearly amortizations paid by the farmers. TOPIC: EXEMPT CORPORATIONS – FRAGMENTATION RULE
The CIR demanded from Roxas y Cia the payment of deficiency income taxes 84. CIR vs. YMCA, G.R. No. 124043 (1998)
resulting from the inclusion as income of Roxas y Cia. of the unreported 50% of
the net profits for 1953 and 1955 derived from the sale of the Nasugbu farm lands DOCTRINE:
to the tenants, and the disallowance of deductions from gross income of various Private respondent is exempt from the payment of property tax, but not income
business expenses and contributions claimed by Roxas y Cia. and the Roxas tax on the rentals from its property. The bare allegation alone that it is a non-
brothers. For the reason that Roxas y Cia. subdivided its Nasugbu farm lands and stock, non-profit educational institution is insufficient to justify its exemption
sold from the payment of income tax. For the YMCA to be granted the exemption it
claims under the aforecited provision, it must prove with substantial evidence
them to the farmers on installment, the Commissioner considered the that (1) it falls under the classification non-stock, non-profit educational
partnership as engaged in the business of real estate, hence, 100% of the profits institution; and (2) the income it seeks to be exempted from taxation is used
derived therefrom was taxed. The Roxas brothers protested the assessment but actually, directly, and exclusively for educational purposes. However, the Court
inasmuch as said protest was denied, they instituted an appeal in the CTA which notes that not a scintilla of evidence was submitted by private respondent to
sustained the assessment. Hence, this appeal. prove that it met the said requisites.

Issue: Is Roxas y Cia. liable for the payment of deficiency income for the sale of FACTS:
Nasugbu farmlands? Private Respondent YMCA is a non-stock, non-profit institution, which conducts
various programs and activities that are beneficial to the public, especially to the
your people. Private respondent earned an income from leasing out portion of its
Held: NO. The proposition of the CIR cannot be favorably accepted in this isolated premises to small shop owners and from parking fees collected from non-members.
transaction with its peculiar circumstances in spite of the fact that there were CIR issued an assessment to private respondent. YMCA protested the assessment.
hundreds of vendees. Although they paid for their respective holdings in CIR denied the claims of YMCA.
installment for a period of 10 years, it would nevertheless not make the vendor

Roxas y Cia. a real estate dealer during the 10-year amortization period. It should
ISSUE:
be borne in mind that the sale of the Nasugbu farm lands to the very farmers who WON the rental income of the YMCA taxable
tilled them for generations was not only in consonance with, but more in
obedience to the request and pursuant to the policy of our Government to allocate HELD:
lands to the landless. It was the bounden duty of the Government to pay the At the outset, we set forth the relevant provision of the NIRC: prLL
agreed compensation after it had persuaded Roxas y Cia. to sell its haciendas, and
to subsequently subdivide them among the farmers at very "SEC. 27. Exemptions from tax on corporations. — The following
organizations shall not be taxed under this Title in respect to income
reasonable terms and prices. However, the Government could not comply with received by them as such —
its duty for lack of funds. Obligingly, Roxas y Cia. shouldered the Government's
burden, went out of its way and sold lands directly to the farmers in the same way xxx xxx xxx
and under the same terms as would have been the case had the Government done
it itself. For this magnanimous act, the municipal council of Nasugbu passed a (g) Civic league or organization not organized for profit but operated
resolution expressing the people's gratitude. exclusively for the promotion of social welfare;

In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale in
question. Hence, pursuant to Section 34 of the Tax Code the lands sold to the
(h) Club organized and operated exclusively for pleasure, recreation, and income is taxable regardless of whence such income is derived and how it is used
other non-profitable purposes, no part of the net income of which inures or disposed of. Where the law does not distinguish, neither should we.
to the benefit of any private stockholder or member;
As previously discussed, laws allowing tax exemption are construed strictissimi
xxx xxx xxx juris. Hence, for the YMCA to be granted the exemption it claims under the
aforecited provision, it must prove with substantial evidence that (1) it falls under
Notwithstanding the provisions in the preceding paragraphs, the income the classification non-stock, non-profit educational institution; and (2) the income
of whatever kind and character of the foregoing organizations from any of it seeks to be exempted from taxation is used actually, directly, and exclusively for
their properties, real or personal, or from any of their activities conducted educational purposes. However, the Court notes that not a scintilla of evidence was
for profit, regardless of the disposition made of such income, shall be submitted by private respondent to prove that it met the said requisites.
subject to the tax imposed under this Code. (as amended by Pres. Decree
No. 1457)" Is the YMCA an educational institution within the purview of Article XIV, Section 4,
par. 3 of the Constitution? We rule that it is not. The term "educational institution
In the instant case, the exemption claimed by the YMCA is expressly disallowed by " or "institution of learning" has acquired a well-known technical meaning, of
the very wording of the last paragraph of then Section 27 of the NIRC which which the members of the Constitutional Commission are deemed cognizant. 38
mandates that the income of exempt organizations (such as the YMCA) from any Under the Education Act of 1982, such term refers to schools. 39 The school system
of their properties, real or personal, be subject to the tax imposed by the same Code. is synonymous with formal education, 40 which "refers to the hierarchically
Because the last paragraph of said section unequivocally subjects to tax the rent structured and chronologically graded learnings organized and provided by the
income of the YMCA from its real property, 20 the Court is duty-bound to abide formal school system and for which certification is required in order for the learner
strictly by its literal meaning and to refrain from resorting to any convoluted to progress through the grades or move to the higher levels." 41 The Court has
attempt at construction. LLpr examined the "Amended Articles of Incorporation" 42 and "By-Laws" 43 of the
YMCA, but found nothing in them that even hints that it is a school or an
It is axiomatic that where the language of the law is clear and unambiguous, its educational institution. 44
express terms must be applied. 21Parenthetically, a consideration of the question
of construction must not even begin, particularly when such question is on Furthermore, under the Education Act of 1982, even non-formal education is
whether to apply a strict construction or a liberal one on statutes that grant tax understood to be school-based and "private auspices such as foundations and
exemptions to "religious, charitable and educational propert[ies] or institutions." civic-spirited organizations" are ruled out. 45 It is settled that the term
22 "educational institution," when used in laws granting tax exemptions, refers to a
". . . school seminary, college or educational establishment . . ." 46 Therefore, the
The last paragraph of Section 27, the YMCA argues, should be "subject to the private respondent cannot be deemed one of the educational institutions covered
qualification that the income from the properties must arise from activities by the constitutional provision under consideration.
'conducted for profit' before it may be considered taxable." 23 This argument is
erroneous. As previously stated, a reading of said paragraph ineludibly shows that ". . . Words used in the Constitution are to be taken in their ordinary
the income from any property of exempt organizations, as well as that arising from acceptation. While in its broadest and best sense education embraces all
any activity it conducts for profit, is taxable. The phrase "any of their activities forms and phases of instruction, improvement and development of mind
conducted for profit" does not qualify the word "properties." This makes income and body, and as well of religious and moral sentiments, yet in the
from the property of the organization taxable, regardless of how that income is common understanding and application it means a place where
used — whether for profit or for lofty non-profit purposes. cdrep systematic instruction in any or all of the useful branches of learning is
given by methods common to schools and institutions of learning. That we
Verba legis non est recedendum. Hence, Respondent Court of Appeals committed conceive to be the true intent and scope of the term [educational
reversible error when it allowed, on reconsideration, the tax exemption claimed institutions,] as used in the Constitution.
by YMCA on income it derived from renting out its real property, on the solitary
but unconvincing ground that the said income is not collected for profit but is Moreover, without conceding that Private Respondent YMCA is an educational
merely incidental to its operation. The law does not make a distinction. The rental institution, the Court also notes that the former did not submit proof of the
proportionate amount of the subject income that was actually, directly and with its laudable work.
exclusively used for educational purposes. Article XIII, Section 5 of the YMCA by-
laws, which formed part of the evidence submitted, is patently insufficient, since ISSUE: Whether or not the income derived from rentals of real property owned
the same merely signified that "[t]he net income derived from the rentals of the by the Young Men's Christian Association of the Philippines, Inc. (YMCA) —
commercial buildings shall be apportioned to the Federation and Member established as "a welfare, educational and charitable non-profit corporation" —
Associations as the National Board may decide. In sum, we find no basis for subject to income tax under the National Internal Revenue Code (NIRC) and the
granting the YMCA exemption from income tax under the constitutional provision Constitution
invoked.
HELD: YES, subject to tax.
85. CIR vs. CA, G.R. No. 124043 (1998)
"SEC. 27. Exemptions from tax on corporations. — The following organizations
FACTS: Private Respondent YMCA is a non-stock, non-profit institution, which shall not be taxed under this Title in respect to income received by them as such
conducts various programs and activities that are beneficial to the public, —
especially the young people, pursuant to its religious, educational and charitable
objectives. (g) Civic league or organization not organized for profit but operated exclusively
for the promotion of social welfare;
In 1980, private respondent earned, among others, an income of P676,829.80
from leasing out a portion of its premises to small shop owners, like restaurants (h) Club organized and operated exclusively for pleasure, recreation, and other
and canteen operators, and P44,259.00 from parking fees collected from non- non-profitable purposes, no part of the net income of which inures to the benefit
members. On July 2, 1984, the commissioner of internal revenue (CIR) issued an of any private stockholder or member;
assessment to private respondent, in the total amount of P415,615.01 including
surcharge and interest, for deficiency income tax, deficiency expanded xxx xxx xxx
withholding taxes on rentals and professional fees and deficiency withholding tax
on wages. Private respondent formally protested the assessment and, as a Notwithstanding the provisions in the preceding paragraphs, the income of
supplement to its basic protest, filed a letter dated October 8, 1985. In reply, the whatever kind and character of the foregoing organizations from any of their
CIR denied the claims of YMCA. 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 the tax
Contesting the denial of its protest, the YMCA filed a petition for review at the imposed under this Code. (as amended by Pres. Decree No. 1457)"Cdpr
Court of Tax Appeals (CTA) on March 14, 1989. In due course, the CTA issued this
ruling in favor of the YMCA. Dissatisfied with the CTA ruling, the CIR elevated the Petitioner argues that while the income received by the organizations
case to the Court of Appeals (CA). In its Decision of February 16, 1994, the CA enumerated in Section 27 (now Section 26) of the NIRC is, as a rule, exempted
initially decided in favor of the CIR and disposed of the appeal. Finding merit in from the payment of tax "in respect to income received by them as such," the
the Motion for Reconsideration filed by the YMCA, the CA reversed itself and exemption does not apply to income derived ". . . from any of their properties, real
promulgated on September 28, 1995 its first assailed Resolution which, in part, or personal, or from any of their activities conducted for profit, regardless of the
reads: disposition made of such income . . ."
"The Court cannot depart from the CTA's findings of fact, as they are supported Petitioner adds that "rental income derived by a tax-exempt organization from
by evidence beyond what is considered as substantial. the lease of its properties, real or personal, [is] not, therefore, exempt from
income taxation, even if such income [is] exclusively used for the accomplishment
"The second ground raised is that the respondent CTA did not err in saying that of its objectives." We agree with the commissioner.
the rental from small shops and parking fees do not result in the loss of the
exemption. Not even the petitioner would hazard the suggestion that YMCA is Because taxes are the lifeblood of the nation, the Court has always applied the
designed for profit. Consequently, the little income from small shops and parking doctrine of strict interpretation in construing tax exemptions. Furthermore, a
fees help[s] to keep its head above the water, so to speak, and allow it to continue
claim of statutory exemption from taxation should be manifest and unmistakable verified but it reported a taxable net profit of P26,868.60 for the year 1951; chan
from the language of the law on which it is based. Thus, the claimed exemption roblesvirtualawlibrarya loss of P9,129.80 for the year 1952 and a profit of P223.56
"must expressly be granted in a statute stated in a language too clear to be for the year 1953. The Collector of Internal Revenue assessed against the college an
mistaken. income tax for the years 1950 and 1951 in the aggregate sum of P5,364.77, which
was paid by the college. Two years thereafter, the corporation commenced an action
In the instant case, the exemption claimed by the YMCA is expressly disallowed in the Court of First Instance of Negros Oriental for the refund of this amount
by the very wording of the last paragraph of then Section 27 of the NIRC which alleging that it is exempt from income tax under section 27 (e) of the National
mandates that the income of exempt organizations (such as the YMCA) from any Internal Revenue Code. Pursuant to the provisions of Republic Act 1125, the case
of their properties, real or personal, be subject to the tax imposed by the same was remanded to the Court of Tax Appeals which, after due trial, decided the case in
Code. Because the last paragraph of said section unequivocally subjects to tax the favor of the corporation.
rent income of the YMCA from its real property, the Court is duty-bound to abide
Invoking section 27 (e) of the National Internal Revenue Code, the Appellee claims
strictly by its literal meaning and to refrain from resorting to any convoluted
that it is exempt from the payment of the income tax because it is organized and
attempt at construction.LLpr
maintained exclusively for the educational purposes and no part of its net income
inures to the benefit of any private individual. On the other hand,
Hence, Respondent Court of Appeals committed reversible error when it allowed,
the Appellant maintains that part of the net income accumulated by
on reconsideration, the tax exemption claimed by YMCA on income it derived
the Appellee inured to the benefit of V. G. Sinco, president and founder of the
from renting out its real property, on the solitary but unconvincing ground that
corporation, and therefore the Appellee is not entitled to the exemption prescribed
the said income is not collected for profit but is merely incidental to its operation.
by the law.
The law does not make a distinction. The rental income is taxable regardless of
whence such income is derived and how it is used or disposed of. Where the law Appellant claims that a great portion of the net profits realized by the corporation
does not distinguish, neither should we. was channeled and redounded to the personal benefit of V. G. Sinco, who was its
founder and president. Another benefit that accrued to Sinco according
86. CIR vs. G. CINCO EDUCATIONAL CORPORATION, G.R. No. L-2976 to Appellant is represented by the several amounts which appear payable to the
(1956) Community Publishers, Inc. because, being the biggest stockholder of this entity, the
money to be paid by the Appellee to that entity as appearing in the above quoted
FACTS: entries would redound to the personal benefit of Sinco.

This is an appeal from a decision of the Court of Tax Appeals which orders the
Considering this explanation, it is indeed too sweeping if not unfair to conclude that
Collector of Internal Revenue to refund to Respondent-Appellee the sum of
part of the income of the Appellee as an institution inured to the benefit of one of its
P5,364.77 representing income tax paid by said Appellee for the years 1950 and
stockholders simply because part of the income was carried in its books as
1951.
accumulated salaries of its president and teacher. Much less can it be said that the
In June, 1949, Vicente G. Sinco established and operated an educational institution payments made by the college to the Community Publishers, Inc. redounded to the
known as Foundation College of Dumaguete. Sinco would have continued operating personal benefit of Sinco simply because he is one of its stockholders. The fact is
said college were it not for the requirement of the Department of Education that as that, as it has been established, the Appellee is a non-profit institution and since its
far as practicable schools and colleges recognized by the government should be organization it has never distributed any dividend or profit to its stockholders. Of
incorporated, and so on September 21, 1951, the V. G. Sinco Educational Institution course, part of its income went to the payment of its teachers or professors and to
was organized. This corporation was non-stock and was capitalized by V. G. Sinco the other expenses of the college incident to an educational institution but none of
and members of his immediate family. This corporation continued the operations of the income has ever been channeled to the benefit of any individual stockholder.
Foundation College of Dumaguete.
Another point raised by Appellant to show that Appellee is not entitled to the
The investigation conducted by an income tax examiner of the Bureau of Internal
exemption of the law refers to the use made by it of part of its income in acquiring
Revenue revealed that the college realized a taxable net income for the year 1949 in additional buildings and equipment which, it is claimed would in the end redound
the sum of P3,098.06 and for the year 1950 in the sum of P17,038.59. For the years
to the benefit of its stockholders. Appellant claims that “By capitalizing its earnings
1951 to 1953, inclusive, the income tax returns of the college have not as yet been
in the aforementioned manners, the value of the properties of the corporation was
enhanced and, therefore, such profits inured to the benefit of the stockholders or pretense would limit the benefits of the exemption, under said section 27 (e),
members. The property of the corporation may be sold at any time and the profits to institutions which do not hope, or propose, to have such surplus. Intended
thereof divided among the stockholders or members.” to relieve the taxpayer of the duty of filing returns and paying the tax, it cannot
be said that the failure to observe the requirement called for therein
ISSUE: WON THE APPELLEE CORPORATION IS EXEMPTED AS A NON-PROFIT constitutes a waiver of the right to enjoy the exemption. To hold otherwise
EDUCATIONAL INSTITUTION? would be tantamount to incorporating into our tax laws some legislative
matter by administrative regulation.”

HELD: YES. While the acquisition of additional facilities, may redound to the benefit
87. COCONUT OIL REFINERS vs. EXECUTIVE SECRETARY, G.R. No.
of the institution itself, it cannot be positively asserted that the same will redound
132527 (2005)
to the benefit of its stockholders, for no one can predict the financial condition of the

institution upon its dissolution. At any rate, it has been held by several authorities
FACTS
that the mere provision for the distribution of its assets to the stockholders upon
This is a Petition to enjoin and prohibit the public respondent Ruben
dissolution does not remove the right of an educational institution from tax
Torres in his capacity as Executive Secretary from allowing other private
exemption. Thus, in the case of U. S. vs. Picwick Electric Membership Corp., 158 F.
respondents to continue with the operation of tax and duty-free shops located at
2d 272, 277, it was held — “The fact that the members may receive some benefit on
the Subic Special Economic Zone (SSEZ) and the Clark Special Economic Zone
dissolution upon distribution of the assets is a contingency too remote to have any
(CSEZ). The petitioner seeks to declare Republic Act No. 7227 as unconstitutional
material bearing upon the question where the association is admittedly not a
on the ground that it allowed only tax-free (and duty-free) importation of raw
scheme to avoid taxation and its good faith and honesty or purpose is not
materials, capital and equipment. It reads:
challenged.”

With regard to the claim of Appellant that Appellee is not entitled to exemption The Subic Special Economic Zone shall be operated and managed as a
because it has not complied with the requirement of section 24, Regulation No. 2 of separate customs territory ensuring free flow or movement of goods and
the Department of Finance, we find correct the following observation of the Court capital within, into and exported out of the Subic Special Economic Zone,
of Tax Appeals:chanroblesvirtuallawlibrary as well as provide incentives such as tax and duty-free importations of raw
materials, capital and equipment. However, exportation or removal of
“And regarding the proof of exemption required by section 24, Regulation No. 2,
goods from the territory of the Subic Special Economic Zone to the other
Department of Finance which, according to the Defendant, is a condition precedent
parts of the Philippine territory shall be subject to customs duties and taxes
before an educational institution can avail itself of the exemption under
under the Customs and Tariff Code and other relevant tax laws of the
consideration, we understand that it was probably promulgated for the effective
Philippines [RA 7227, Sec 12 (b)].
enforcement of the provisions of the Tax Code pursuant to Section 338 of the

National Internal Revenue Code. Intended to relieve the taxpayer of the duty of filing
Petitioners contend that the wording of Republic Act No. 7227 clearly
returns and paying the tax, it cannot be said that the failure to observe the
limits the grant of tax incentives to the importation of raw
requirement called for therein constitutes a waiver of the right to enjoy the
materials, capital and equipment only thereby violating the equal protection
exemption. To hold otherwise would be tantamount to incorporating into our tax
clause of the Constitution.
laws some legislative matter by administrative regulation.”

He also assailed the constitutionality of Executive Order No. 97-A for
being violative of their right to equal protection. They asserted that private
Wherefore, the decision appealed from is affirmed, without pronouncement as to
respondents operating inside the SSEZ are not different from the retail
costs.
establishments located outside.

DOCTRINE: “Needless to say, every responsible organization must be so run as ISSUE/S
to, at least, insure its existence, by operating within the limits of its own Whether or not R.A. No. 7227 violates the equal protection clause.
resources, especially its regular income. In other words, it should always
strive, whenever possible, to have a surplus. Upon the other hand, Appellant’s
local distributors, Petron Corporation (Petron), which imports the same and pays
HELD the corresponding customs duties to the Bureau of Customs. When the fuel and
No. The phrase ‘tax and duty-free importations of raw materials, capital petroleum products are delivered at Philphos’s manufacturing plant, it is billed
and equipment was merely cited as an example of incentives that may be given by Petron the corresponding customs duties imposed on these products.
to entities operating within the zone. Public respondent SBMA correctly argued Effectively thus, Philphos reimburses Petron for the customs duties on the
that the maxim expressio unius est exclusio alterius, on which petitioners purchased fuels and petroleum products which are passed on by the Petron as
impliedly rely to support their restrictive interpretation, does not apply when part of the selling price.
words are mentioned by way of example. Philphos made several purchases from Petron of fuels and other petroleum
products used directly or indirectly in the manufacture of fertilizers for the
period of October 1991 until June 1992. During the period in question, Philphos
indirectly paid as customs duties.
The petition with respect to declaration of unconstitutionality of
In a letter to the Bureau of Customs, Philphos sought the refund of customs duties
Executive Order No. 97-A cannot be, likewise, sustained. The guaranty of the
it had paid for the period covering the months of October to December 1991, and
equal protection of the laws is not violated by a legislation based on reasonable
January to June, 1992. It pointed out that Philphos, being an enterprise registered
classification. A classification, to be valid, must (1) rest on substantial distinction,
with the export processing zone, is entitled to tax incentives under Presidential
(2) be germane to the purpose of the law, (3) not be limited to existing conditions
Decree No. 66 (EPZA Law), it also argued that the customs duties billed by Petron
only, and (4) apply equally to all members of the same class. Applying the
on Philphos should be refunded.
foregoing test to the present case, this Court finds no violation of the right to equal
The Bureau of Customs denied the claim for refund. Hence, a Petition for Review
protection of the laws. There is substantial distinctions lying between the
was filed with the Court of Tax Appeals. The CTA ruled for Philphos. The matter
establishments inside and outside the zone. There are substantial differences in
was elevated by the Commissioner of Customs (Commissioner) to the Court of
a sense that, investors will be lured to establish and operate their industries in
Appeals (CA), which eventually affirmed the CTA’s Decision.
the so-called ‘secured area and the present business operators outside the area.
Both the CTA and the CA relied upon Section 17(1) of the EPZA Law to justify the
There is, then, hardly any reasonable basis to extend to them the benefits and
conclusion that Philphos is entitled to the refund. It likewise insists that
incentives accorded in R.A. 7227.
controlling in this case is Section 18(i) of the EPZA Law, under which claims for
refunds similar to Philphos’s are precluded. Finally, the Commissioner posits that
88. COMMISSIONER OF CUSROMES vs. PHILIPPINE PHOSPHATE since a refund on tax credit partake the nature of an exemption, the grant thereof
FERTILIZER CORPORATION, G.R. No. 144440 (2004) must be explicit. Petitioner dispute the legal basis for the exemption.
Section 17 and 18 of the EPZA Law states: SEC. 17. Tax Treatment of Merchandize
DOCTRINE: The financial planners of the State are often confounded by the in the Zone. – (1) Except as otherwise provided in this Decree, foreign and
precarious balance between the need to provide a conducive investment climate domestic merchandise, raw materials, supplies, articles, equipment,
and the need to enhance revenue collections. Tax exemptions are generally machineries, spare parts and wares of every description, except those
construed strictly against the taxpayer; yet, when the purported ambiguities in prohibited by law, brought into the Zone to be sold, stored, broken up, repacked,
the law are more imagined than real, there should be no hesitation to rule for the assembled, installed, sorted, cleaned, graded, or otherwise processed,
taxpayer. manipulated, manufactured, mixed with foreign or domestic merchandise or
FACTS: Respondent Philippine Phosphate Fertilizer Corporation (Philphos) is a used whether directly or indirectly in such activity, shall not be subject to
domestic corporation engaged in the manufacture and production of fertilizers customs and internal revenue laws and regulations nor to local tax
for domestic and international distribution, based in Leyte Industrial ordinances, the following provisions of law to the contrary notwithstanding.
Development Estate, an export processing zone. It is also registered with the (emphasis supplied)
Export Processing Zone Authority (EPZA), now known as the Philippine Export SEC. 18. Additional Incentives. A zone registered enterprise shall also enjoy
Zone Authority (PEZA). the following incentives: (i)Tax credit. – Every registered zone enterprise shall
The manufacture of fertilizers required Philphos to purchase fuel and petroleum enjoy a tax credit equivalent to the sales, compensating and specific taxes and
products for its machineries, which are considered indispensable by Philphos, as duties on supplies, raw materials and semi-manufactured products used in the
they are used to run the machines and equipment and in the transformation of manufacture, processing or production of its export products and forming part
raw materials into fertilizer. The fuel supplies are secured domestically from thereof; x x x. (emphasis supplied)
89. CIR vs. ST. LUKE’S MEDICAL CENTER, INC., G.R. No. 203514 (2017)

ISSUE: Whether or not Philphos is entitled for tax exemption FACTS: On December 14, 2007, St. Luke’s Medical Center, Inc. (SLMC) received
from the BIR Audit Results/Assessment assessing SLMC deficiency income tax
HELD: The relief sought for erroneously paid taxes would be a return to the under Section 27(B) 7 of the Tax Code in the aggregate amount of P135,737,301
taxpayer of the amount paid to the government. The Tax Reform Act of 1997 for taxable years 2005 and 2006. SLMC filed an administrative protest assailing
authorizes either a refund or credit as a means of recovery of tax erroneously or the assessments. SLMC claimed that as a non-stock, non-profit charitable and
illegally collected. It may be that there is no essential difference between a tax social welfare organization under Section 30(E) and (G)9 of the 1997 NIRC, as
refund and a tax credit since both are modes of recovering taxes erroneously or amended, it is exempt from paying income tax. Meanwhile, on September 26,
illegally paid to the government. Yet, there are unmistakable formal and practical 2012, the Court rendered a Decision in G.R. Nos. 195909 and 195960, entitled CIR
differences between the two modes. Formally, a tax refund requires a physical v. St. Luke's Medical Center, Inc., finding SLMC not entitled to the tax exemption
return of the sum erroneously paid by the taxpayer, while a tax credit involves under Section 30(E) and (G) of the NIRC of 1997 as it does not operate exclusively
the application of the reimbursable amount against any sum that may be due and for charitable or social welfare purposes insofar at its revenue from paying
collectible from the taxpayer. On the practical side, the taxpayer to whom the tax patients are concerned. Accordingly, SLMC was ordered to pay the deficiency
is refunded would have the option, among others, to invest for profit the returned income tax based on the I0% preferential income tax rate under Section 27(B) of
sum, an option not proximately available if the taxpayer chooses instead to the National Internal Revenue Code. SLMC argues that earning a profit by a
receive a tax credit. charitable, benevolent hospital or educational institution does not result in the
It should be noted that the initial letter to the Commissioner, Philphos specifically withdrawal of its tax exempt privilege. SLMC further claims that the income it
requested the refund of P20, 149, 473.77. However, in its Petition for derives from operating a hospital is not income from "activities conducted for
Review before the CTA, Philphos prayed for the issuance of "corresponding tax profit.
credits" in the same amount. Still, there is no vehement insistence on the part of ISSUE: Whether or not St. Luke’s is liable for deficiency income tax in 1998 under
Philphos that the return of the amount paid should come in the form of a refund Section 27(B) of the NIRC, which imposes a preferential tax rate of 10% on the
or a credit. income of proprietary non-profit hospitals.
The CTA, as affirmed by the CA, ordered the issuance of a Tax Credit Certificate in
favor of Philphos. No elaboration was made as to why the relief granted was a tax HELD: Section 27(B) of the NIRC does not remove the income tax exemption of
credit and not a refund, but it is deduce that such was the relief afforded as it was proprietary non-profit hospitals under Section 30(E) and (G). Section 27(B) on
the relief prayed for by Philphos in its Petition before the tax court. However, a one hand, and Section 30(E) and (G) on the
slight modification of the award is necessary so as not to render nugatory the other hand, can be construed together without the removal of such tax
proscription under Section 18(i) that a tax credit avails only if the supplies form exemption.
part of the export product. Instead of awarding a Tax Credit Certificate to
Philphos, a refund of the same amount is warranted under the circumstances. Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of
The grant of exemption under Section 17(1) is clear and unambiguous. There is (1)proprietary non-profit educational institutions and (2)proprietary non-
neither logic nor need to cast a speck of uncertainly on a doubt-free situation to profit hospitals. The only qualifications for hospitals are that they must be
resolve the resulting forced question in favor of the government. The disposition proprietary and non-profit. “Proprietary” means private, following the definition
arises not out of a blind solicitude towards the concerns of business, but from the of a “proprietary educational institution” as
duty to affirm and enforce a crystal-clear legislative policy and initiative intent. “any private school maintained and administered by private individuals or
Indeed, the revenue collectors of the government should be cautious before groups” with a government permit. “Non-profit” means no net income or asset
attempting to gut away at concessions the State itself has deemed worthy of accrues to or benefits any member or specific person, with all the net income or
award to deserving investors. It is unsound practice and uncouth behaviour to asset devoted to the institution’s purposes and all its activities conducted not for
invite over guests to dinner at home, then charge them for the use of the profit.
silverware before allowing them to dine.
“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 Constitution exempts charitable institutions only from real property taxes. The Court finds that St. Luke’s is a corporation that is not “operated exclusively”
In the NIRC, Congress decided to extend the exemption to income taxes. However, for charitable or social welfare purposes insofar as its revenues from paying
the way Congress crafted Section 30(E) of the NIRC is materially different from patients are concerned. This ruling is based not only on a strict interpretation of
Section 28(3), Article VI of the Constitution. 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
Section 30(E) of the NIRC defines the corporation or association that is exempt “operated exclusively” for charitable or social welfare purposes to be completely
from income tax. On the other hand, Section 28(3), Article VI of the Constitution exempt from income tax. An institution under Section 30(E) or (G) does not
does not define a charitable institution, but requires that the institution “actually, lose its tax exemption if it earns income from its for-profit activities. Such
directly and exclusively” use the property for a charitable purpose. 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
To be exempt from real property taxes, Section 28(3), Article VI of the preferential 10% rate pursuant to Section 27(B).
Constitution requires that a charitable institution use the property “actually,
directly and exclusively” for charitable purposes. 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
To be exempt from income taxes, Section 30(E) of the NIRC proprietary non-profit hospital under Section 27(B) of the NIRC as long as it does
requires that a charitable institution must be “organized and operated not distribute any of its profits to its members and such profits are reinvested
exclusively” for charitable purposes. Likewise, to be exempt from income pursuant to its corporate purposes. St. Luke’s, as a proprietary non-profit hospital,
taxes, Section 30(G) of the NIRC requires that the institution be “operated is entitled to the preferential tax rate of 10% on its net income from its for-profit
exclusively” for social welfare. activities.

However, the last paragraph of Section 30 of the NIRC qualifies the words St. Luke’s is therefore liable for deficiency income tax in 1998 under Section 27(B)
“organized and operated exclusively” by providing that: of the NIRC.
Notwithstanding the provisions in the preceding paragraphs, the income of
whatever kind and character of the foregoing organizations from any of 90. PAGCOR vs. CIR, G.R. Nos. 210689-90 (2017)
their properties, real or personal, or from any of their activities
conducted for profit regardless of the disposition made of such income, shall FACTS:
be subject to tax imposed under this Code. PAGCOR is a duly created government instrumentality by virtue of Presidential
Decree (PD) No. 1869. PD No. 1869 provides that "[n]o tax of any kind or form,
In short, the last paragraph of Section 30 provides that if a tax exempt charitable income or otherwise, as well as fees, charges or levies of whatever nature,
institution conducts “any” activity for profit, such activity is not whether National or Local, shall be assessed and collected under this Franchise
tax exempt even as its not-for-profit activities remain tax exempt. from [PAGCOR]; nor shall any form of tax or charge attach in any way to the
earnings of [PAGCOR], except a Franchise Tax of five (5%) percent of the gross
Thus, even if the charitable institution must be “organized and operated revenue or earnings derived by [PAGCOR] from its operation under this
exclusively” for charitable purposes, it is nevertheless allowed to engage in Franchise. Such tax shall be due and payable quarterly to the National
“activities conducted for profit” without losing its tax exempt status for its not- Government and shall be in lieu of all kinds of taxes, levies, fees or assessments
for-profit activities. The only consequence is that the of any kind, nature or description, levied, established or collected by any
“income of whatever kind and character” of a charitable institution municipal, provincial, or national government authority."
“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 Subsequently, on July 1, 2005, RA No. 9337 amended Section 27(C) of the 1997
27(B), the tax rate on such income from for-profit activities was the ordinary NIRC, by removing PAGCOR from the list of the GOCCs exempt from payment of
corporate rate under Section 27(A). With the introduction of Section 27(B), the income tax.
tax rate is now 10%.

On June 20, 2007, RA No. 9487 was enacted extending PAGCOR's franchise under exists independently from the enactment of R.A. No. 8424. To adopt an
PD No. 1869 for another period of 25 years, renewable for another 25 years. assumption otherwise would be downright ridiculous, if not deleterious, since
[PAGCOR] would be in a worse position if the exemption was granted (then
On July 14, 2008, PAGCOR received a letter dated July 2, 2008 from the Head of withdrawn) than when it was not granted at all in the first place.
Revenue Executive Assistant (HREA) of the Large Taxpayers Service, Bureau of
Internal Revenue (BIR), requesting for an informal conference on the results of When [PAGCOR's] franchise was extended on June 20, 2007 without revoking or
an investigation regarding all its internal revenue tax liabilities for the taxable withdrawing its tax exemption, it effectively reinstated and reiterated all of
years 2005 and 2006. [PAGCOR's] rights, privileges and authority granted under its Charter. Otherwise,
Congress would have painstakingly enumerated the rights and privileges that it
On March 3, 2009, PAGCOR filed a letter-protest dated February 16, 2009, wants to withdraw, given that a franchise is a legislative grant of a special
addressed to the CIR. privilege to a person. Thus, the extension of [PAGCOR's] franchise under the same
terms and conditions means a continuation of its tax exempt status with respect
to its income from gaming operations.
On September 29, 2009, PAGCOR filed a petition for review with the CTA, alleging
inaction on the part of the CIR. As regards PAGCOR's liability for FBT, the same had already been settled in the
case of Commissioner of Internal Revenue v. Secretary of Justice, which involved
On December 10, 2009, the CIR filed an Answer raising the following assessments for deficiency VAT, FBT and expanded withholding tax against
arguments, inter alia: (a) that PAGCOR is subject to ordinary corporate income PAGCOR for the years 1996 to 2000. In said case, the Court ruled that FBT is not
tax; (b) that as an ordinary corporate taxpayer, PAGCOR is liable for payment of covered by the exemptions provided under PD No. 1869; and considering that
VAT on its income from casino operations and related services pursuant to the PAGCOR failed to present any evidence showing that the fringe benefits granted
provisions of RA No. 7716 or the Expanded VAT Law; (c) that PAGCOR is liable to its officers were necessary to its business or for its convenience, the deficiency
for FBT under Section 33 of the 1997 NIRC in relation to Revenue Regulation (RR) FBT assessments on PAGCOR's car benefit plan was upheld
No. 3-98; and, (d) that PAGCOR was duly assessed and informed of its deficiency
tax liabilities for taxable years 2005 and 2006. FBT is treated as a final income tax on the employee that shall be withheld and
paid by the employer on a calendar quarterly basis. As such, PAGCOR is a mere
Issue: Whether or not PAGCOR is exempt from FBT and Income Tax? withholding agent inasmuch as the FBT is imposed on PAGCOR's employees who
receive the fringe benefit. PAGCOR's liability as a withholding agent is not
Ruling: covered by the tax exemptions under its Charter.

PAGCOR is liable for corporate income tax only on its income derived from other

related services.

Under P.D. 1869, as amended, [PAGCOR] is subject to income tax only with
respect to its operation of related services. Accordingly, the income tax

exemption ordained under Section 27(c) of R.A. No. 8424 clearly pertains only to
[PAGCOR's] income from operation of related services. Such income tax
exemption could not have been applicable to [PAGCOR's] income from gaming
operations as it is already exempt therefrom under P.D. 1869

In other words, there was no need for Congress to grant tax exemption to
[PAGCOR] with respect to its income from gaming operations as the same is
already exempted from all taxes of any kind or form, income or otherwise,
whether national or local, under its Charter, save only for the five percent (5%)
franchise tax. The exemption attached to the income from gaming operations

Tax2 - Midterms Digests

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Tax2 - Midterms Digests

Uploaded by

Copyright:

Available Formats

TAXATION

LAW 2 DIGESTS – ATTY. PADILLA – AY 2018-2019 – 2nd SEMESTER

You might also like