A message to

Bravo
Dear Atty. Bravo, We would like to thank you for this opportunity to discover the sometimes confusing but wholly practical and informative world of taxation law under your esteemed tutelage. Our class feels blessed to come under your guidance once again this semester.

Atty. Dante

R. , B.S.C., L.L.B.

We promise to strive harder in meeting the quality of excellence you expect of your students. Please continue to guide us patiently even though we may sometimes fall short of your expectations. We look forward to the new challenges we will encounter this semester. Sincerely, 3B

Table of Contents
TAXABLE INCOME IN GENERAL 1. Madrigal vs. Rafferty 2. Fisher vs. Trinidad 3. Limpan Investment Corporation vs. Commissioner of Internal Revenue 4. Conwi vs. Court of Tax Appeals 5. Baas, Jr. vs. Court of Appeals INCOME TAX ON INDIVIDUALS 6. Garrison vs. Court of Appeals 7. Pansacola vs. Commissioner of Internal Revenue 8. Umali vs. Estanislao 1 3 4 5 6 8 10 12 14 15 16 18 20 21 22 24 25 27 29 31 33 35 36 37

DEFINITION OF CORPORATIONS 9. AFISCO Insurance Corporation v. Court of Appeals 10. Pascual vs. Commissioner of Internal Revenue 11. Obillos vs. Commissioner of Internal Revenue 12. Oa vs. Commissioner of Internal Revenue PASSIVE INCOME 13. Commissioner of Internal Revenue vs. Manning

MINIMUM CORPORATE INCOME TAX (MCIT) 14. Commissioner of Internal Revenue vs. Philippine Airlines, Inc. (PAL) 15. The Manila Banking Corporation vs. Commissioner of Internal Revenue 16. Chamber of Real Estate and Builders Associations, Inc. (CREBA) vs. Romulo, et al.

INCOME TAX ON RESIDENT FOREIGN CORPORATION 17. Commissioner of Internal Revenue vs. British Overseas Airways Corporation (BOAC) and Court of Tax Appeals 18. Commissioner of Internal Revenue vs. British Overseas Airways Corporation (BOAC) and Court of Tax Appeals 19. Steamship Company of Svendborg and Steamship Company of 1912 vs. Commissioner of Interval Revenue 20. Bank of America NT & SA vs. Court of Appeals 21. Commissioner of Internal Revenue vs. Burroughs Limited 22. Compania General de Tabacos de Filipinas vs. Commissioner of Internal Revenue INCOME TAX ON NON-RESIDENT FOREIGN CORPORATION 23. Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc. 24. Marubeni Corporation vs. Commissioner of Internal Revenue

25. N.V. Reederij "Amsterdam" and Royal Interocean Lines vs. Commissioner of Internal Revenue IMPROPERLY ACCUMULATED EARNINGS TAX (IAET) 26. The Manila Wine Merchants, Inc. vs. Commissioner of Internal Revenue 27. Commissioner of Internal Revenue vs. Tuason 28. Cyanamid Philippines, Inc. vs. Court of Appeals TAX-EXEMPT CORPORATIONS 29. Commissioner of Internal Revenue vs G. Sinco Educational Corp

39 40 42 43 44 45 46 47 49 51 53 54 55 56 57 59 61 62 63 64 65 66 67 69 71 73 75 77 78 80 81 83

GROSS INCOME 30. Filinvest Development Corporation and Filinvest Alabang, Inc vs Commissioner of Internal Revenue 31. Commissioner of Internal Revenue vs. Court of Appeals 32. Commissioner of Internal Revenue vs. Manning 33. Wise & Co., Inc. vs. Meer 34. Commissioner of Internal Revenue vs. Court of Appeals 35. Commissioner of Internal Revenue vs. Court of Appeals 36. RE: Request of Atty. Bernardo Zialcita for Reconsideration of the Action of the Financial and Budget Office 37. Commissioner of Internal Revenue vs. Mitsubishi Metal Corporation DEDUCTIONS; IN GENERAL 38. Aguinaldo Industries Corporation vs. Commissioner of Internal Revenues 39. Atlas Consolidated Mining Corporation vs. Commissioner of Internal Revenue 40. Roxas vs. Court of Tax Appeals 41. Zamora v. Collector of Internal Revenue 42. C. M. Hoskins & Co. Inc. v Commissioner of Internal Revenue 43. Calanoc vs. Collector of Internal Revenue 44. Kuenzle & Streiff Inc. vs. Collector of Internal Revenue 45. Paper Industries Corporation of the Philippines vs. Court of Appeals 46. Commissioner of Internal Revenue vs. Vda de Prieto 47. Commissioner of Internal Revenue vs. Lednicky 48. Paper Industries Corporation of the Philippines vs. Court of Appeals 49. Philippine Refining Company vs. Court of Appeals 50. Fernandez Hermanos, Inc. vs. Commissioner of Internal Revenue 51. Basilan Estates, Inc. vs. Commissioner of Internal Revenue 52. Limpan Investment Corporation vs. Commissioner of Internal Revenue 53. Consolidated Mines, Inc. vs. Court of Tax Appeals 54. 3M Philippines, Inc. vs. Commissioner of Internal Revenue 55. Esso Standard Eastern, Inc. vs. Commissioner of Internal Revenue CAPITAL GAIN AND LOSS 56. Calasanz, et al. vs. Commissioner of Internal Revenue

56. Tuason vs Lingad 57. China Banking Corporation vs. Court of Appeals

DETERMINATION OF GAIN OR LOSS FROM SALE OR TRANSFER OF PROPERTY 58. Commissioner of Internal Revenue v. Rufino 59. Gregory v. Helvering SITUS OF TAXATION 60. Commissioner of Internal Revenue vs. Marubeni Corporation 61. Commissioner of Internal Revenue vs. BOAC 62. Commissioner vs. CTA and Smith Kline & French Overseas Co. 63. Philippine Guaranty Co., Inc. vs. Commissioner of Internal Revenue 64. Howden and Co. Ltd. vs. Collector of Internal Revenue 65. Philippine American Life Insurance Co. Inc. vs. Court of Tax Appeals ACCOUNTING PERIODS AND METHODS 66. Consolidated Mines Inc. vs. Court of Tax Appeals 67. Banas. Jr. vs. Court of Appeals

85 87 90 92 93 95 97 99 101 103 105 106 108 110 112 113 114 115 116 117

RETURNS AND PAYMENT OF TAXES 68. BPI-Family Savings Bank vs. Court of Appeals 69. Philam Asset Management, Inc. vs. Commissioner of Internal Revenue 70. Commissioner of Internal Revenue vs. BPI 71. Bank of the Philippine Islands vs. Commissioner of Internal Revenue WITHHOLDING TAX 72. Citibank vs. Court of Appeals 73. Commissioner of Internal Revenue vs. Wander Philippines, Inc. 74. Commissioner of Internal Revenue vs. Procter & Gamble Philippine Manufacturing Corp. 75. Filipinas Synthetic Fiber Corp. vs. Court of Appeals

DOCTRINES

CASE

1. Madrigal vs. Rafferty The Income Tax Law does not look on the spouses as individual partners in an ordinary partnership. The husband and wife are only entitled to the exemption of P8,000 specifically granted by the law. The higher schedules of the additional tax directed at the incomes of the wealthy may not be partially defeated by reliance on provisions in our Civil Code dealing with the conjugal partnership and having no application to the Income Tax Law.

CASE DOCTRINES
TAXABLE INCOME IN GENERAL

2. Fisher vs. Trinidad Income is defined as the amount of money coming to a person or corporation within a specified time whether as payment for services, interest, or profit from investment. A stockholder who receives a stock dividend has received nothing but a representation of his increased interest in the capital of the corporation. We believe that the Legislature when it provided income tax, intended only to tax the income of corporations or firms as that used in its common acceptation; that is money received for services, interest or profit from investments. 3. Limpan Investment Corporation vs. Commissioner of Internal Revenue The non-collection was the petitioners fault since it refused to refused to accept the rent, and not due to nonpayment of lessees. Hence, although the corporation did not actually receive the rent, it is deemed to have constructively received them. 4. Conwi vs. Court of Tax Appeals Income may be defined as an amount of money coming to a person or corporation within a specified time, whether as payment for services, interest or profit from investment. The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of Procter & Gamble. It was a definite amount of money which came to them within a specified period of time of two years as payment for their services. 5. Baas, Jr. vs. Court of Appeals The general rule is that the whole profit accruing from a sale of property is taxable as income in the year the sale is made. But, if not all of the sale price is received during such year, and a statute provides that income shall be taxable in the year in which it is received, the profit from an installment sale is to be apportioned between or among the years in which such installments are paid and received.

6. Garrison vs. Court of Appeals An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of the Philippines for purposes of income tax. Whether he is a transient or not is determined by his intentions with regards to the length and nature of his stay. A mere floating intention indefinite as to time, to return to another country is not sufficient to constitute him as transient.

INCOME TAX ON INDIVIDUALS

9. AFISCO Insurance Corporation v. Court of Appeals The term partnership includes a syndicate, group, pool, joint venture or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on.

DEFINITION OF CORPORATIONS

10. Pascual vs. Commissioner of Internal Revenue The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a joint or common right or interest in the property. There must be a clear intent to form a partnership, the existence of a juridical personality different from the individual partners, and the freedom of each party to transfer or assign the whole property. 11. Obillos vs. Commissioner of Internal Revenue Not all co-ownerships are deemed unregistered partnership. A co-ownership owning properties which produce income should not automatically be considered partners of an unregistered partnership, or a corporation, within the purview of the income tax law. 12. Oa vs. Commissioner of Internal Revenue For tax purposes, the co-ownership of inherited properties is automatically converted into an unregistered partnership the moment the said common properties and/or the incomes derived therefrom are used as a common fund with intent to produce profits for the heirs in proportion to their respective shares in the inheritance as determined in a project partition either duly executed in an extrajudicial settlement or approved by the court in the corresponding testate or intestate proceeding.

13. Commissioner of Internal Revenue vs. Manning A stock dividend, being one payable in capital stock, cannot be declared out of outstanding corporate stock, but only from retained earnings: 'A stock dividend always involves a transfer of surplus (or profit) to capital stock.' A stock dividend is a conversion of surplus or undivided profits into capital stock, which is distributed to stockholders in lieu of a cash dividend.

PASSIVE INCOME

14. Commissioner of Internal Revenue vs. Philippine Airlines, Inc. (PAL) The tax paid by the grantee under either of the alternatives provided in Sec. 13 of P.D. 1590 (basic corporate income tax based on grantees annual net taxable income or franchise tax of 2 % of the gross revenues derived by the grantee from all sources) shall be in lieu of all other taxes, duties, royalties, registration, license, and other fees and charges of any kind, nature, or description, imposed, levied, established, assessed, or collected by any municipal, city, provincial, or national authority or government agency, now or in the future.

MINIMUM CORPORATE INCOME TAX (MCIT)

15. The Manila Banking Corporation vs. Commissioner of Internal Revenue The date of commencement of operations of a thrift bank is the date it was registered with the SEC or the date when the Certificate of Authority to Operate was issued to it by the Monetary Board of the BSP, whichever comes later. Thus, for purposes of ascertaining when the 4-year grace period commences for non-imposition of the MCIT, the date the thrift bank was registered with the SEC or the date when the Certificate of Authority to Operate was issued to it by the Monetary Board of the BSP, whichever comes later should be considered. 16. Chamber of Real Estate and Builders Associations (CREBA), Inc. vs. Romulo MCIT Is Not Violative of Due Process. An income tax is arbitrary and confiscatory if it taxes capital because capital is not income. In other words, it is income, not capital, which is subject to income tax. However, the MCIT is not a tax on capital.

17. Commissioner of Internal Revenue vs. British Overseas Airways Corporation (BOAC) and Court of Tax Appeals In order that a foreign corporation may be regarded as doing business within a State, there must be continuity of conduct and intention to establish a continuous business, such as the appointment of a local agent, and not one of a temporary character.

INCOME TAX ON RESIDENT FOREIGN CORPORATION

18. Commissioner of Internal Revenue vs. British Overseas Airways Corporation (BOAC) and Court of Tax Appeals The source of an income is the property, activity, or service that produced the income. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines.

19. Steamship Company of Svendborg and Steamship Company of 1912 vs. Commissioner of Interval Revenue Demurrage fees are definitely income or revenue accruing to the international carriers. Demurrage fees or charges consists of an inflow of funds to the international carriers which are neither capital contributions nor incurrence of liabilities. It cannot be understood in any other manner except in the concept of income to the petitioners. Income means cash received or its equivalent; it is the amount of money coming to a person within a specific time; something distinct from principal or capital. For while capital is fund, income is flow.

20. Bank of America NT & SA vs. Court of Appeals The statute employs "Any profit remitted abroad by a branch to its head office shall be subject to a tax of fifteen per cent (15%)" without more. Where the law does not qualify that the tax is imposed and collected at source based on profit to be remitted abroad, that qualification should not be read into the law. In the 15% remittance tax, the law specifies its own tax base to be on the "profit remitted abroad." There is absolutely nothing equivocal or uncertain about the language of the provision. The tax is imposed on the amount sent abroad, and the law calls for nothing further.

21. Commissioner of Internal Revenue vs. Burroughs Limited Any revocation, modification, or reversal of any of the rules and regulations promulgated in accordance with the preceding section or any of the rulings or circulars promulgated by the Commissioner shag not be given retroactive application if the revocation, modification, or reversal will be prejudicial to the taxpayer except in the following cases (a) where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the Bureau of Internal Revenue; (b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based, or (c) where the taxpayer acted in bad faith. 22. Compania General de Tabacos de Filipinas vs. Commissioner of Internal Revenue What should apply as the taxable base in computing the 15% branch profit remittance tax is the amount applied for with the Central Bank as profit to be remitted abroad and not the total amount of branch profits.

INCOME

TAX

23. Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc. It bears stress that tax refunds are in the nature of tax exemptions. As such they are registered as in derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption. The burden of proof is upon him who claims the exemption in his favor and he must be able to justify his claim by the clearest grant of organic or statute law. Private respondent is claiming for a refund of the alleged overpayment of tax on royalties; however there is nothing on record to support a claim that the tax on royalties under the RP-US Treaty is paid under similar circumstances as the tax on royalties under the RP-West Germany Tax Treaty. 24. Marubeni Corporation vs. Commissioner of Internal Revenue The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation. 25. N.V. Reederij "Amsterdam" and Royal Interocean Lines vs. Commissioner of Internal Revenue A foreign corporation not engaged in trade or business within the Philippines and which does not have any office or place of business therein is taxed on income received from all sources within the Philippines at the rate of 35% of the gross income.

ON NON-RESIDENT CORPORATION

FOREIGN

26. The Manila Wine Merchants, Inc. vs. Commissioner of Internal Revenue To determine the reasonable needs of the business in order to justify an accumulation of earnings, the Courts of the United States had developed the Immediacy Test which construed the words reasonable needs of the business to mean the immediate needs of the business, and it was generally held that; if the corporation did not prove an immediate need for the accumulation of the earnings and profits, the accumulation was not for the reasonable needs of the business, and the penalty tax would apply. 27. Commissioner of Internal Revenue vs. Tuason The importance of liability is the purpose behind the accumulation of the income and not the consequences of the accumulation. Thus, if the failure to pay dividends were for the purpose of using the undistributed earnings & profits for the reasonable needs of the business, that purpose would not fall to overcome the presumption and correctness of CIR.

IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)

28. Cyanamid Philippines, Inc. vs. Court of Appeals In order to determine whether profits are accumulated for the reasonable needs of the business to avoid the surtax upon the shareholders, it must be shown that the controlling intention of the taxpayer is manifested at the time of the accumulation, not intentions subsequently, which are mere afterthoughts.

29. Commissioner of Internal Revenue vs G. Sinco Educational Corp Mere provision for the distribution of its assets to the stockholders upon dissolution does not remove the right of an educational institution from tax exemption.

TAX-EXEMPT CORPORATIONS GROSS INCOME - INCLUSIONS

30. Filinvest Development Corporation and Filinvest Alabang, Inc vs Commissioner of Internal Revenue No taxable gain from an exchange of property for shares of stock of a corporation shall be recognized if as a result of the exchange the transferor, alone or together with others, not exceeding four persons, gains control of the corporation. 31. Commissioner of Internal Revenue vs. Court of Appeals The three elements in the impositions of income tax are. 1) There must be gain and or profit, 2) that the gain and or is realized or received actually or constructively, and 3) it is not exempted by law or treaty from income tax.

32. Commissioner of Internal Revenue vs. Manning The essence of a stock dividend was the segregation out of surplus account of a definite portion of the corporate earnings as part of the permanent capital resources of the corporation by the device of capitalizing the same, and the issuance to the stockholders of additional shares of stock representing the profits so capitalized.

33. Wise & Co., Inc. vs. Meer A dividend is a return upon the stock of its stockholders, paid to them by a going corporation without reducing their stockholdings, leaving them in a position to enjoy future returns upon the same stock. In other words, it is earnings paid to him by the corporation upon his invested capital therein, without wiping out his capital. Under the law so long as a gain is realized, it will be taxable income whether the distribution comes from the earnings or profits of the corporation or from the sale of all of its assets in general, so long as the distribution is made "in complete liquidation or dissolution".

34. Commissioner of Internal Revenue vs. Court of Appeals Employees' trusts or benefit plans normally provide economic assistance to employees upon the occurrence of certain contingencies, particularly, old age retirement, death, sickness, or disability and established for their exclusive benefit and for no other purpose. Tax-exemption is to be enjoyed by the income of the pension trust, otherwise, taxation of those earnings would result in a diminution accumulated income and reduce whatever the trust beneficiaries would receive out of the trust fund. The application of the withholdings system is essentially to maximize and expedite the collection of income taxes by requiring its payment at the source, therefore, there is no logic in withholding a certain percentage of an income which it is not supposed to pay in the first place. 35. Commissioner of Internal Revenue vs. Court of Appeals The terminal leave pay received by a government official or employee on the occasion of his compulsory retirement from the government service is not subject to withholding (income) tax. It not being part of the gross salary or income of a government official or employee but a retirement benefit. 36. RE: Request of Atty. Bernardo Zialcita for Reconsideration of the Action of the Financial and Budget Office The amount received by way of commutation of his accumulated leave credits as a result of his compulsory retirement, or his terminal leave pay, falls within the enumerated exclusions from gross income and is therefore not subject to tax. Since terminal leave is applied for by an officer or employee who has already severed his connection with his employer and who is no longer working, then it follows that the terminal leave pay, which is the cash value of his accumulated leave credits, is no longer compensation for services rendered. It cannot be viewed as salary.

GROSS INCOME - EXCLUSIONS

37. Commissioner of Internal Revenue vs. Mitsubishi Metal Corporation Laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the exception. The burden of proof rests upon the party claiming exemption to prove that it is in fact covered by the exemption so claimed, which onus petitioners have failed to discharge. Significantly, private respondents are not even among the entities which, under Section 29 (b) (7) (A), are entitled to exemption and which should indispensably be the party in interest in this case.

38. Aguinaldo Industries Corporation vs. Commissioner of Internal Revenues Whenever a controversy arises on the deductibility, for purposes of income tax, of certain items for alleged compensation of officers of the taxpayer, two (2) questions become material, namely: (a) Have personal services been actually rendered by said officers? (b) In the affirmative case, what is the reasonable allowance therefore? This posture is in line with the doctrine in the law of taxation that the taxpayer must show that its claimed deductions clearly come within the language of the law since allowances, like exemptions, are matters of legislative grace. 39. Atlas Consolidated Mining Corporation vs. Commissioner of Internal Revenue The intention of the taxpayer often may be the controlling fact in making the determination. The answer to the question as to whether the expenditure is an allowable deduction as a business expense must be determined from the nature of the expenditure itself, which in turn depends on the extent and permanency of the work accomplished by the expenditure. 40. Roxas vs. Court of Tax Appeals Representation expenses are deductible from gross income as expenditures incurred in carrying on a trade or business provided the taxpayer proves that they are reasonable in amount, ordinary and necessary, and incurred in connection with his business.

DEDUCTIONS IN GENERAL

41. Zamora v. Collector of Internal Revenue Claims for deduction of promotion expenses or entertainment expenses must also be supported and substantiated by records showing in detail the amount and nature of the expenses incurred. Where absolute certainty is usually not possible, the CTA should make as close an approximate as it can, bearing heavily, if it chooses, upon the taxpayer whose inexactness was his own making.

42. C. M. Hoskins & Co. Inc. v Commissioner of Internal Revenue Bonuses to employees made in good faith and as additional compensation for services actually rendered by the employees are deductible, provided such payments, when added to the salaries do not exceed the compensation for services rendered. 43. Calanoc vs. Collector of Internal Revenue Where the expenses submitted to the CIR are not justified and were not supported by receipts there is no reason to deduct it from the gross sales of the charitable event. 44. Kuenzle & Streiff Inc. vs. Collector of Internal Revenue Bonuses to employees made in good faith and as additional compensation for the services actually rendered by the employees are deductible, provided such payments, when added to the stipulated salaries, do not exceed a reasonable compensation for the services rendered'

DEDUCTIONS - EXPENSES

45. Paper Industries Corporation of the Philippines vs. Court of Appeals Interest payments on loans incurred by a taxpayer (whether BOI-registered or not) are allowed by the NIRC as deductions against the taxpayers gross income. (Section 30 of the 1977 Tax Code) Thus, the general rule is that interest expenses are deductible against gross income and this certainly includes interest paid under loans incurred in connection with the carrying on of the business of the taxpayer. 46. Commissioner of Internal Revenue vs. Vda de Prieto For interest to be allowed as deduction from gross income, it must be shown that there be indebtedness, that there should be interest upon it, and that what is claimed as an interest deduction should have been paid or accrued within the year.

DEDUCTIONS - INTEREST

47. Commissioner of Internal Revenue vs. Lednicky The Construction and wording of Section 30 (c) (1) (B) of the Internal Revenue Act shows the law's intent that the right to deduct income taxes paid to foreign government from the taxpayer's gross income is given only as an alternative or substitute to his right to claim a tax credit for such foreign income taxes under section 30 (c) (3) and (4); so that unless the alien resident has a right to claim such tax credit if he so chooses, he is precluded from deducting the foreign income taxes from his gross income.

DEDUCTIONS - TAXES

48. Paper Industries Corporation of the Philippines vs. Court of Appeals PICOPs claim for deduction is not only bereft of statutory basis; it does violence to the legislative intent which animates the tax incentive granted by Section 7 (c) of R.A. No. 5186. In granting the extraordinary privilege and incentive of a net operating loss carryover to BOI-registered pioneer enterprises, the legislature could not have intended to require the Republic to forego tax revenues in order to benefit a corporation which had run no risks and suffered no losses, but had merely purchased anothers losses.

DEDUCTIONS - LOSSES

49. Philippine Refining Company vs. Court of Appeals Before a debt can be considered worthless, the taxpayer must also show that it is indeed uncollectible even in the future. Furthermore, the steps to be undertaken by the taxpayer to prove that he exerted diligent efforts to collect the debts are: (1) sending of statement of accounts; (2) sending of collection letters; (3) giving the account to a lawyer for collection; and (4) filling a collection case in court. Thus, mere testimony of the Financial Accountant of the petitioner explaining the worthlessness of debts without documentary evidence to support such testimony is nothing more than a self-serving exercise which lacks probative value.

DEDUCTIONS BAD DEBTS

50. Fernandez Hermanos, Inc. vs. Commissioner of Internal Revenue Neither under Section 30 (d) (2) of our Tax Code providing for deduction by corporations of losses actually sustained and charged off during the taxable year nor under Section 30 (e) (1) thereof providing for deduction of bad debts actually ascertained to be worthless and charged off within the taxable year, can there be a partial writing off of a loss or bad debt. For such losses or bad debts must be ascertained to be so and written off during the taxable year, are therefore deductible in full or not at all, in the absence of any express provision in the Tax Code authorizing partial deductions.

51. Basilan Estates, Inc. vs. Commissioner of Internal Revenue The income tax law does not authorize the depreciation of an asset beyond its acquisition cost. Hence, a deduction over and above such cost cannot be claimed and allowed. The reason is that deductions from gross income are privileges, not matters of right. They are not created by implication but upon clear expression in the law. 52. Limpan Investment Corporation vs. Commissioner of Internal Revenue Depreciation is a question of fact and is not measured by theoretical yardstick, but should be determined by a consideration of actual facts. The findings of the Tax Court in this respect should not be disturbed when not shown to be arbitrary or in abuse of discretion and petitioner has not shown any arbitrariness or abuse of discretion in the part of the Tax Court in finding that petitioner claimed excessive depreciation in its returns.

DEDUCTIONS - DEPRECIATION

53. Consolidated Mines, Inc. vs. Court of Tax Appeals In computing net income there shall be allowed as deduction, in the case of mines, a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof which has been mined and sold during the year for which the return is made. As an income tax concept, depletion is wholly a creation of the statue solely a matter of legislative grace. Hence, the taxpayer has the burden of justifying the allowance of any deduction claimed.

DEDUCTIONS - DEPLETION

54. 3M Philippines, Inc. vs. Commissioner of Internal Revenue Improper payments of royalty are not deductible as legitimate business expenses. Section 3-C of CB Circular No. 393 provides for payment of royalties only on commodities manufactured by the licensee under the royalty agreement not on the whole sale price of finished products imported by the licensee from the licensor.

DEDUCTIONS RESEARCH AND DEVELOPMENT

55. Esso Standard Eastern, Inc. vs. Commissioner of Internal Revenue The statutory test of deductibility where it is axiomatic that to be deductible as a business expense, three conditions are imposed, namely: (1) the expense must be ordinary and necessary, (2) it must be paid or incurred within the taxable year, and (3) it must be paid or incurred in carrying on a trade or business. In addition, not only must the taxpayer meet the business test, he must substantially prove by evidence or records the deductions claimed under the law, otherwise, the same will be disallowed. The mere allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its deduction.

DEDUCTIONS NON DEDUCTIBLE EXPENSES

56. Calasanz, et al. vs. Commissioner of Internal Revenue A property initially classified as a capital asset may thereafter be treated as an ordinary asset if a combination of the factors indubitably tend to show that the activity was in furtherance of or in the course of the taxpayer's trade or business. Thus, a sale of inherited real property usually gives capital gain or loss even though the property has to be subdivided or improved or both to make it salable. However, if the inherited property is substantially improved or very actively sold or both it may be treated as held primarily for sale to customers in the ordinary course of the heir's business.

CAPITAL GAINS AND LOSSES

57. Tuason vs Lingad The Tax Codes provision on long-term capital gains constitutes a statute of partial exemption. In view of the familiar and settled rule that tax exemptions are construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority, the field of application of the term it capital assets is necessarily narrow, while its exclusions must be interpreted broadly. Consequently, it is the taxpayers burden to bring himself clearly and squarely within the terms of a tax-exempting statutory provision, otherwise, all fair doubts will be resolved against him. 58. China Banking Corporation vs. Court of Appeals The equity investment in shares of stock held by CBC of approximately 53% in its Hongkong subsidiary, the First CBC Capital (Asia), Ltd., is not an indebtedness, and it is a capital, not an ordinary, asset. Even assuming that the equity investment of CBC has indeed become worthless, the loss sustained is a capital, not an ordinary, loss. The capital loss sustained by CBC can only be deducted from capital gains if any derived by it during the same taxable year that the securities have become worthless.

DETERMINATION OF GAIN OR LOSS FROM SALE OR TRANSFER OF PROPERTY

59. Commissioner of Internal Revenue v. Rufino It is well established that where stocks for stocks were exchanged, and distributed to the stockholders of the corporations, parties to the merger or consolidation, pursuant to a plan of reorganization, such exchange is exempt from capital gains tax pursuant to Section 35(c) (2), in relation to (c) (5), of the National Internal Revenue Code. The basic consideration, of course, is the purpose of the merger, as this would determine whether the exchange of properties involved therein shall be subject or not to the capital gains tax. The criterion laid down by the law is that the merger" must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. 60. Gregory v. Helvering The Business Purpose Doctrine is simply an operation having no business or corporate purpose -- a mere device which put on the form of a corporate reorganization as a disguise for concealing its real character, and the sole object and accomplishment of which was the consummation of a preconceived plan, not to reorganize a business or any part of a business, but to transfer a parcel of corporate shares to the petitioner. The new corporation was brought into existence for no other purpose; it performed, as it was intended from the beginning it should perform, no other function.

61. Commissioner of Internal Revenue vs. Marubeni Corporation While the construction and installation work were completed within the Philippines, the evidence is clear that some pieces of equipment and supplies were completely designed and engineered in Japan. These services were rendered outside the taxing jurisdiction of the Philippines and are therefore not subject to contractor's tax. 62. Commissioner of Internal Revenue vs. BOAC For purposes of income taxation, it is well to bear in mind that the "source of income" relates not to the physical sourcing of a flow of money or the physical situs of payment but rather to the "property, activity or service which produced the income."

SITUS OF TAXATION

63. Commissioner vs. CTA and Smith Kline & French Overseas Co. It is manifest that where an expense is clearly related to the production of Philippinederived income or to Philippine operations (e.g. salaries of Philippine personnel, rental of office building in the Philippines), that expense can be deducted from the gross income acquired in the Philippines without resorting to apportionment.

64. Philippine Guaranty Co., Inc. vs. Commissioner of Internal Revenue The foreign insurers' place of business should not be confused with their place of activity. Section 24 of the Tax Code does not require a foreign corporation to engage in business in the Philippines in subjecting its income to tax; it suffices that the activity creating the income is performed or done in the Philippines. What is controlling, therefore, is not the place of business but the place of activity that created an income. 65. Howden and Co. Ltd. vs. Collector of Internal Revenue Activity that creates income should not be confused with business in the course of which an income is realized. An activity may consist of a single act; while business implies continuity of transactions. An income may be earned by a corporation in the Philippines although such corporation conducts all its businesses abroad.

66. Philippine American Life Insurance Co. Inc. vs. Court of Tax Appeals The test of taxability is the source, and the source of an income is that activity... which produced the income. It is not the presence of any property from which one derives rentals and royalties that is controlling, but includes royalties for the supply of scientific, technical, industrial or commercial knowledge or information; and the technical advise, assistance or services rendered in connection with the technical management and administration of any scientific, industrial or commercial undertaking, venture, project or scheme.

67. Consolidated Mines Inc. vs. Court of Tax Appeals The use of accounting methods to determine tax liability is dependent upon the circumstances of the taxpayer; those which are prescribed under the NIRC may be used, alternatively, methods that would accurately determine the correct tax liability may also be used if it is necessary as deemed by the commissioner.

ACCOUNTING PERIODS AND METHODS

71. Commissioner of Internal Revenue vs. BPI As shown in the NIRC of 1997 Section 76. The remedies of tax refund and tax credit for excess payment of taxes are alternative in nature; the choice of one precludes the taxpayer from claiming the other. Once a remedy has been chosen by the taxpayer either actually or constructively, it becomes irrevocable. 72. Bank of the Philippine Islands vs. Commissioner of Internal Revenue The claim for refund of taxes paid in excess prescribes after two years from the day the corporation is required by law to file its final income tax return. The expiration of the period bars the party or taxpayer the right to claim the refund.

RETURNS AND PAYMENT OF TAXES

73. Citibank vs. Court of Appeals Taxes withheld quarterly are in the nature of payment of a taxpayer of possible tax obligations. They are installments on the annual tax which may be due at the end of the taxable year. These taxes are provisional in nature unlike the withholding of final taxes on passive incomes. They are creditable withholding taxes which are creditable only if there are tax liabilities for that year, if none, they are considered erroneously collected therefore subject to claims for refunds.

WITHHOLDING TAX

74. Commissioner of Internal Revenue vs. Wander Philippines, Inc. The dividends received from a domestic corporation liable to tax, the tax shall be 15% of the dividends received, subject to the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to 20% which represents the difference between the regular tax (35%) on corporations and the tax (15%) dividends. Since the Swiss Government does not impose any tax on the dividends to be received by the said parent corporation in the Philippines, the condition imposed under Section 24 (b) (1) of the Tax Code, as amended by P.D. 369 and 778, is satisfied. The withholding tax rate of 15% is affirmed. 75. Commissioner of Internal Revenue vs. Procter & Gamble Philippine Manufacturing Corp. There is nothing in Section 902 of the U.S. Internal Revenue Code, as amended by Public Law 87-834, the law governing tax credits granted to U.S. corporations on dividends received from foreign corporation, that would justify tax return of the disputed 15% to the private respondent. Furthermore, as ably argued by the petitioner, the private respondent failed to meet certain conditions necessary in order that the dividends received by the non-resident parent company in the United States may be subject to the preferential 15% tax instead of 35%. Among other things, the private respondent failed: (1) to show the actual amount credited by the U.S. government against the income tax due from PMC-U.S.A. on the dividends received from private respondent; (2) to present the income tax return of its mother company for 1975 when the dividends were received; and (3) to submit any duly authenticated document showing that the U.S. government credited the 20% tax deemed paid in the Philippines.

76. Filipinas Synthetic Fiber Corp. vs. Court of Appeals Since Sec. 53, NIRC (now, Sec. 57 of 1997 NIRC) in relation to Sec. 54 (now Sec. 58) is silent as to when the duty to withhold arises, it is necessary to look into the nature of the accrual method of accounting. Under the accrual basis method of accounting, income is reportable when all the events have occurred that fix the taxpayers right to receive the income, and the amount can be determined with reasonable accuracy. Thus, it is the right to receive income, and not the actual receipt, that determines when to include the amount in gross income.

CASE

DIGESTS

Taxable Income

in General

Madrigal vs. Rafferty G.R. No. L-12287. August 7, 1918

Digest by: ACASILI, Carl Jillson B.

MALCOLM, J.: FACTS:

Vicente Madrigal and Susana Paterno were legally married prior to January 1, 1914. The marriage was contracted under the provisions of law concerning conjugal partnerships. On February 1915, Madrigal filed a sworn declaration showing that his total net income for the year 1914 was P296,302.73. Subsequently, Madrigal submitted a claim that the said P296,302.73 did not represent his income for the year 1914, but was in fact the income of the conjugal partnership, and that in computing and assessing the additional income tax provided by the Act of Congress of October 3, 1913, the income declared by Madrigal should be divided into two equal parts, one-half to be considered the income of Madrigal and the other half of Paterno. The general question was submitted to the Attorney-General of the Philippine Islands who in an opinion, held with the petitioner Madrigal. The revenue officers were unsatisfied, so the question was forwarded to Washington for a decision by the United States Treasury Department. The United States Commissioner of Internal Revenue reversed the opinion of the Attorney-General, and thus decided against the claim of Madrigal. Madrigal paid under protest. The Collector of Internal Revenue ruled against Madrigal so the latter filed an action in the Court of First Instance of Manila against Collector of Internal Revenue and the Deputy Collector of Internal Revenue for the recovery of the sum of P3,786.08, alleged to have been wrongfully and illegally collected by the defendants under the provisions of the Act of Congress known as the Income Tax Law. The claim was that, if the income tax for the year 1914 had been correctly and lawfully computed there would have been due payable by each of the plaintiffs the sum of P2,921.09, which taken together amounts of a total of P5,842.18 instead of P9,668.21, with the result that plaintiff Madrigal has paid as income tax for the year 1914, P3,786.08, in excess of the sum lawfully due and payable. ISSUE: Whether or not the income of Madrigal and Paterno should be divided into two equal parts, because of the conjugal partnership relations existing between them. HELD: The essential difference between capital and income is that capital is a fund; income is a flow. A fund of property existing at an instant of time is called capital. A flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is called an income. Capital is wealth, while income is the service of wealth.

Paterno, only has an inchoate right in the property of her husband Madrigal during the life of the conjugal partnership. She has an interest in the ultimate property rights and in the ultimate ownership of property acquired as income after such income has become capital. Paterno has no absolute right to one-half the income of the conjugal partnership. Not being seized of a separate estate, Paterno cannot make a separate return in order to receive the benefit of the exemption which would arise by reason of the additional tax. As she has no estate and income, actually and legally vested in her and entirely distinct from her husbands property, the income cannot properly be considered the separate income of the wife for the purposes of the additional tax. The Income Tax Law does not look on the spouses as individual partners in an ordinary partnership. The husband and wife are only entitled to the exemption of P8,000 specifically granted by the law. The higher schedules of the additional tax directed at the incomes of the wealthy may not be partially defeated by reliance on provisions in our Civil Code dealing with the conjugal partnership and having no application to the Income Tax Law.

In addition, the Income Tax Law was drafted by the Congress of the United States and has been by the Congress extended to the Philippine Islands. Being a law of American origin and being peculiarly intricate in its provisions, the authoritative decision of the official who is charged with enforcing it has peculiar force for the Philippines. It has come to be a well-settled rule that great weight should be given to the construction placed upon a revenue law, whose meaning is doubtful, by the department charged with its execution.

Fisher v. Trinidad No. 17518. October 30, 1922

Digest by: ACASILI, Carl Jillson B.

JOHNSON, J. FACTS:

The Philippine American Drug Company, a domestic corporation, in which Frederick Fisher was a stockholder declared a stock dividend for the year 1919. The proportionate share of said stock dividend was P24,800. The stock dividend for that amount was issued to Fisher. Trinidad demanded the sum of P889.91 as income tax on said stock dividend; Fisher paid the said amount under protest. To recover the paid amount, Fisher instituted an action. Trinidad filed a demurrer to the petition on the ground that it failed to constitute a cause of action. The demurrer was sustained and Fisher appealed. ISSUES: 1. What is an income? 2. Whether or not a stock dividend should be considered an income. HELD: 1. Income is defined as the amount of money coming to a person or corporation within a specified time whether as payment for services, interest, or profit from investment. The Supreme Court of the U.S. explained that a mere advance in value in no sense constitutes the income specified in revenue law as income of the owner. Such advance constitutes and can be treated merely as an increase in capital. Stock dividends represent undistributed increase in the capital of the corporation for a particular period. They are used to show the increased interest or proportional share in the capital of each stockholder.

2. NO. For bookkeeping purposes, when stock dividends are declared, the corporation acknowledges a liability to the stockholders, equivalent to the aggregate par value of their stock, evidenced by a capital stock account. A stockholder who receives a stock dividend has received nothing but a representation of his increased interest in the capital of the corporation. We believe that the Legislature when it provided income tax, intended only to tax the income of corporations or firms as that used in its common acceptation; that is money received for services, interest or profit from investments. We do not believe that the Legislature intended that a mere increase in the value of the capital or assets of a corporation or firm should be taxed as income. If the holder of the stock dividend is required to pay an income tax on the stock dividend the result would be that he has paid a tax upon an income which he never received. Such a conclusion is absolutely contradictory to the idea of an income. An income to be subject to taxation under the law must be an actual income and not a promised or prospective income.

Limpan Investment Corporation vs. Commissioner of Internal Revenue G.R. No. L-21570. July 26, 1966
Digest by: AGADER, Charisse Ann C.

REYES, J. FACTS:

BIR assessed deficiency taxes on Limpan Corp, a company that leases real property, for under-declaring its rental income for years 1956-57 by around P20K and P81K respectively. Petitioner appeals on the ground that portions of these underdeclared rents are yet to be collected by the previous owners and turned over or received by the corporation. Petitioner cited that some rents were deposited with the court, such that the corporation does not have actual nor constructive control over them. The sole witness for the petitioner, Solis (Corporate Secretary- Treasurer) admitted to some undeclared rents in 1956 and1957, and that some balances were not collected by the corporation in 1956 because the lessees refused to recognize and pay rent to the new owners and that the corps president Isabelo Lim collected some rent and reported it in his personal income statement, but did not turn over the rent to the corporation. He also cites lack of actual or constructive control over rents deposited with the court. ISSUE: Whether or not the BIR was correct in assessing deficiency taxes against Limpan Corp. for undeclared rental income HELD: Yes. Petitioner admitted that it indeed had undeclared income (although only a part and not the full amount assessed by the BIR). Thus, it has become incumbent upon them to prove their excuses by clear and convincing evidence, which it has failed to do. When is there constructive receipt of rent? With regard to 1957 rents deposited with the court, and withdrawn only in 1958, the court viewed the corporation as having constructively received said rents. The non-collection was the petitioners fault since it refused to refused to accept the rent, and not due to nonpayment of lessees. Hence, although the corporation did not actually receive the rent, it is deemed to have constructively received them.

Conwi vs. Commissioner of Internal Revenue G.R. No. 48532. August 31, 1992
Digest by: AGADER, Charisse Ann C.

NOCON, J.

FACTS: Petitioners are employees of Procter and Gamble (Philippine Manufacturing Corporation, subsidiary of Procter & Gamble, a foreign corporation).During the years 1970 and 1971, petitioners were assigned to other subsidiaries of Procter & Gamble outside the Philippines, for which petitioners were paid US dollars as compensation. Petitioners filed their ITRs for 1970 and 1971, computing tax due by applying the dollar-to-peso conversion based on the floating rate under BIR Ruling No. 70-027. In 1973, petitioners filed amened ITRs for 1970 and 1971, this time using the par value of the peso as basis. This resulted in the alleged overpayments, refund and/or tax credit, for which claims for refund were filed. CTA held that the proper conversion rate for the purpose of reporting and paying the Philippine income tax on the dollar earnings of petitioners are the rates prescribed under Revenue Memorandum Circulars Nos. 7-71 and 41-71. The refund claims were denied. ISSUE: Whether or not petitioners dollar earnings are receipts derived from foreign exchange transactions HELD: No. For the proper resolution of income tax cases, income may be defined as an amount of money coming to a person or corporation within a specified time, whether as payment for services, interest or profit from investment. Unless otherwise specified, it means cash or its equivalent. Income can also be thought of as flow of the fruits of ones labor.

Petitioners are correct as to their claim that their dollar earnings are not receipts derived from foreign exchange transactions. For a foreign exchange transaction is simply that a transaction in foreign exchange, foreign exchange being the conversion of an amount of money or currency of one country into an equivalent amount of money or currency of another. When petitioners were assigned to the foreign subsidiaries of Procter & Gamble, they were earning in their assigned nations currency and were ALSO spending in said currency. There was no conversion, therefore, from one currency to another. The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of Procter & Gamble. It was a definite amount of money which came to them within a specified period of time of two years as payment for their services.

And in the implementation for the proper enforcement of the National Internal Revenue Code, Section 338 thereof empowers the Secretary of Finance to promulgate all needful rules and regulations to effectively enforce its provisions pursuant to this authority, Revenue Memorandum Circular Nos. 7-71 and 41-71 were issued to prescribed a uniform rate of exchange from US dollars to Philippine pesos for INTERNAL REVENUE TAX PURPOSES for the years 1970 and 1971, respectively. Said revenue circulars were a valid exercise of the authority given to the Secretary of Finance by the Legislature which enacted the Internal Revenue Code. And these are presumed to be a valid interpretation of said code until revoked by the Secretary of Finance himself. Petitioners are citizens of the Philippines, and their income, within or without, and in these cases wholly without, are subject to income tax. Sec. 21, NIRC, as amended, does not brook any exemption.

Baas, Jr. vs. Court of Appeals G.R. No. 102967, February 10, 2000
Digest by: Alviar, Joyce B.

QUISUMBING, J. FACTS:

On February 20, 1976, Bibiano V. Baas Jr. sold to AYALA Corporation, a 128,265 square meters of land located at Muntinlupa, for P2,308,770.00. Petitioner received an initial payment of P461,754.00 with the balance to be paid in four equal consecutive annual installments covered by promissory note. The same day, petitioner discounted the promissory note with AYALA, for its face value. AYALA issued 9 checks to petitioner, all dated February 20, 1976, with the uniform amount of P205,224.00. In his 1976 Income Tax Return, petitioner reported only the initial payment as income from disposition of capital asset. In the succeeding years, until 1979, petitioner reported a uniform income corresponding to the annual installment as gain from sale of capital asset. Later, the BIR Regional Director, through its tax examiners, discovered that petitioner had no outstanding receivable from the 1976 land sale to AYALA and concluded that the sale was cash and the entire profit should be taxable in 1976. Petitioner was assessed deficiency tax with surcharges and penalties for the year 1976. A demand letter was then issued for the settlement of the income tax deficiency. Petitioner failed to pay and insisted that the sale of his land to AYALA was on installment.

On June 1981, a criminal complaint for tax evasion was filed against petitioner. On July 1981, petitioner filed an Amnesty Tax Return under P.D. 1740. Likewise, on November 2, 1981, petitioner again filed an Amnesty Tax Return under P.D. 1840. In both, petitioner did not recognize that his sale of land to AYALA was on cash basis.

Petitioner maintains that the proceeds of the promissory notes, were not yet due, which he discounted to AYALA should not be included as income realized in 1976. Petitioner states that the original agreement in the Deed of Sale should not be affected by the subsequent discounting of the bill. ISSUES: 1. Whether or not the mere filing of tax amnesty return under P.D. 1740 and 1840 ipso facto shield a taxpayer from immunity against prosecution? 2. Whether or not the petitioners income from the sale of the land should be declared as a cash transaction in his tax return because the buyer discounted the promissory note, issued to the seller, on the same day of the sale? HELD: 1. No. the petitioner is not entitled to the benefits of P.D. Nos. 1740 and 1840. The mere filing of tax amnesty return does not ipso facto shield him from immunity against prosecution. Tax amnesty is a general pardon to taxpayers who want to start a clean tax slate. It also gives the government a chance to collect uncollected tax from tax evaders without having to go through the tedious process of a tax case. To avail of a tax amnesty granted by the government and to be immune from suit on its delinquencies, the tax payer must have voluntarily disclosed his previously untaxed income and must have paid the corresponding tax on the same. P.D. Nos. 1740 and 1840 granted any individual, who voluntarily files a return under this decree and pays the income tax due thereon, immunity from the penalties, civil or criminal under the NIRC. Petitioner is not entitled to claim immunity from prosecution under the shield of the availing tax amnesty. His

disclosure in his tax amnesty return did not include the income from his sale of land to AYALA on cash basis. Instead he insisted that such sale was on installment. He did not amend his income tax return. He did not pay the tax in which was considerably increased by the income derived from the discounting. He did not meet the twin requirements of P.D. Nos. 1740 and 1840, declaration of his untaxed income and full payment of tax due thereon. It also bear noting that a tax amnesty, much like a tax exemption, is never favored nor presumed in law and if granted by statute, the terms of the amnesty like that of a tax exemption must be construed strictly against the taxpayer and liberally in favor of the taxing authority. 2. Yes. The general rule is that the whole profit accruing from a sale of property is taxable as income in the year the sale is made. But, if not all of the sale price is received during such year, and a statute provides that income shall be taxable in the year in which it is received, the profit from an installment sale is to be apportioned between or among the years in which such installments are paid and received.

In this case, although the proceeds of a discounted promissory note is not considered initial payment, still it must be included as taxable income on the year it was converted to cash. When petitioner had the promisorry notes covering the succeeding installment payments of the land issued by AYALA, discounted by AYALA itself, on the same day of the sale, he lost entitlement to report the sale as a sale on installment since, a taxable disposition resulted and petitioner was required by law to report in his returns the income derived from the discounting. What petitioner did is tantamount to an attempt to circumvent the rule on payment of income taxes gained from the sale of the land to AYALA for the year 1976.

on Individuals

Income Tax

Garrison vs. Court of Appeals G.R. Nos. L-44501-05. July 19, 1990
Digest by: ALVIAR, Joyce B.

NARVASA, J. FACTS:

Petitioners, JOHN L. GARRISON, JAMES W. ROBERTSON, FRANK W. ROBERTSON, ROBERT H. CATHEY, FELICITAS DE GUZMAN and EDWARD McGURK are United States citizens, entered this country under Section 9 (a) of the Philippine Immigration Act of 1940, as amended, and presently employed in the United States Naval Base, Olongapo City. For the year 1969 John L. Garrison earned $15,288.00; Frank Robertson, $12,045.84; Robert H. Cathey, $9,855.20; James W. Robertson, $14,985.54; Felicitas de Guzman, $ 8,502.40; and Edward McGurk $12,407.99 . They received separate notices from Ladislao Firmacion, District Revenue Officer, stationed at Olongapo City, informing them that they had not filed their respective income tax returns for the year 1969, as required by Section 45 of the National Internal Revenue Code, and directing them to file the said returns within ten days from receipt of the notice. But the accused refused to file their income tax returns, claiming that they are not resident aliens but only special temporary visitors, having entered this country under Section 9 (a) of the Philippine Immigration Act of 1940, as amended. The accused also claimed exemption from filing the return in the Philippines by virtue of the provisions of Article XII, paragraph 2 of the US-RP Military Bases Agreement. The petitioners contend that given these facts, they may not under the law be deemed resident aliens required to file income tax returns. The petitioners claim that they are covered by this exempting provision of the Bases Agreement since, as is admitted on all sides, they are all U.S. nationals, all employed in the American Naval Base at Subic Bay (involved in some way or other in construction, maintenance, operation or 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 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 Bases Agreement speaks of exemption from the payment of income tax, not from the filing of the income tax returns ISSUE:

Whether or not the petitioners are resident aliens and if so, whether or not they are required to file their respective income tax returns. HELD: The petitioners are Resident Aliens, however they are exempt to pay income taxes, based on the provisions of The Bases Agreement. But even if exempt from paying income tax, said petitioners were not excused from filing income tax returns. For the Internal Revenue Code (Sec. 45, supra) requires the filing of an income tax return by any alien residing in the Philippines, regardless of whether the gross income was derived from sources within or outside the Philippines; and since the petitioners, although aliens residing within the Philippines, had failed to do so, they had been properly prosecuted and convicted for having thus violated the Code. What the law requires, is merely physical or bodily presence in a given place for a period of time, not the intention to make it a permanent place of abode. It is on this proposition, that almost all of the appellants were born here, repatriated to the US and to come back, in the latest in 1967, and to stay in the Philippines up to the present time, that makes appellants resident aliens not merely transients or sojourners which residence for quite a long period of time. Each of the petitioners does indeed fall

within the letter of the codal precept that an alien residing in the Philippines and thus obliged to file an income tax return. None of them may be considered a non-resident alien, a mere transient or sojourner, who is not under any legal duty to file an income tax return under the Philippine Tax Code. This is made clear by Revenue Relations No. 2 of the Department of Finance of February 10, 1940, which lays down the relevant standards on the matter: An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of the Philippines for purposes of income tax. Whether he is a transient or not is determined by his intentions with regards to the length and nature of his stay. A mere floating intention indefinite as to time, to return to another country is not sufficient to constitute him as transient. If he lives in the Philippines and has no definite intention as to his stay, he is a resident. One who comes to the Philippines for a definite purpose which in its nature may be promptly accomplished is a transient. But if his purpose is of such a nature that an extended stay may be necessary to its accomplishment, and to that end the alien makes his home temporarily in the Philippines, he becomes a resident, though it may be his intention at all times to return to his domicile abroad when the purpose for which he came has been consummated or abandoned.

Quite apart from the evidently distinct and different character of the requirement to pay income tax in contrast to the requirement to file a tax return, it appears that the exemption granted to the petitioners by the Bases Agreement from payment of income tax is not absolute. By the explicit terms of the Bases Agreement, it exists only as regards income derived from their employment in the Philippines in connection with construction, maintenance, operation or defense of the bases; it does not exist in respect of other income, i.e., income 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 Philippine sources or sources other than the US sources, the petitioners, and all 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 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 had derived income exclusively from their employment in connection with the U.S. bases, and none whatever from Philippine sources or sources other than the US sources. They have to make this known to the Government authorities. It is not in the first instance the latters duty or burden to make unaided verification of the sources of income of American residents. The duty rests on the U.S. nationals concerned to invoke and prima facie establish their tax-exempt status. It cannot simply be presumed that they earned no income from any other sources than their employment in the American bases and are therefore totally exempt from income tax. The situation is no different from that of Filipino and other resident income-earners in the Philippines who, by reason of the personal exemptions and permissible deductions under the Tax Code, may not be liable to pay income tax year for any particular year; that they are not liable to pay income tax, no matter how plain or irrefutable such a proposition might be, does not exempt them from the duty to file an income tax return.

Pansacola vs. Commissioner of Internal Revenue G.R. No. 159991 November 16, 2006
Digest by: ARBAS, Andrei Christopher G.

10

QUISUMBING, J.: FACTS:

Carmelino Pansacola filed his income tax return for the taxable year 1997 that reflected an overpayment of P5,950 which he claimed as the increased amounts of personal and additional exemptions under Section 35 of the NIRC. BIR denied his claim for a refund of P5,950. The CTA also denied his claim because according to the tax court, it would be absurd for the law to allow the deduction from a taxpayers gross income earned on a certain year of exemptions availing on a different taxable year. Petitioner sought reconsideration, but the same was denied.

On appeal, the Court of Appeals denied his petition for lack of merit and ruled that Umali v. Estanislao, relied upon by petitioner, was inapplicable to his case. It further ruled that the NIRC took effect on January 1, 1998, thus the increased exemptions were effective only to cover taxable year 1998 and cannot be applied retroactively. ISSUE: Whether or not the exemptions under Section 35 of the NIRC, which took effect on January 1, 1998, be availed of for the taxable year 1997. HELD: NO. Since NIRC took effect on January 1, 1998, the increased amounts of personal and additional exemptions under Section 35, can only be allowed as deductions from the individual taxpayers gross or net income, as the case maybe, for the taxable year 1998 to be filed in 1999. The availability of the deductions if he is thus entitled, would be reflected on his tax return filed on or before the 15th day of April 1999 as mandated by Section 51 (C) (1). The NIRC made no reference that the personal and additional exemptions shall apply on income earned before January 1, 1998. As provided in Section 24 (A) (1) (a) in relation to Sections 31 and 22 (P) and Sections 43, 45 and 79 (H) of the NIRC, the income subject to income tax is the taxpayers income as derived and computed during the calendar year, his taxable year. What the law should consider for the purpose of determining the tax due from an individual taxpayer is his status and qualified dependents at the close of the taxable year and not at the time the return is filed and the tax due thereon is paid. Consequently, his correct taxable income and his corresponding allowable deductions e.g. personal and additional deductions, if any, had already been determined as of the end of the calendar year. Petitioners reliance in Umali v. Estanislao is misplaced because in that case the adjustment provided by Rep. Act No. 7167 effective 1992 was made to cover the past year 1991, for the reason that it is a social legislation which would especially benefit lower and middle-income taxpayers, and as cited in that case, the legislative intent is also clear in the records of the House of Representatives Journal. This is not so in the case at bar. There is nothing in the NIRC that expresses any such intent. The policy declarations in its enactment do not indicate it was a social legislation that adjusted personal and additional exemptions according to the poverty threshold level nor is there any indication that its application should retroact. At the time petitioner filed his 1997 return and paid the tax due thereon in April 1998, the increased amounts of personal and additional exemptions in Section 35 were not yet available. It has not yet accrued as of December 31, 1997, the last day of his taxable year. Petitioners taxable income covers his income for the calendar year 1997. The law cannot be given retroactive effect. It is established that tax laws are prospective in application, unless it is expressly provided to apply retroactively. In the NIRC, we note, there is no specific mention that the increased amounts of personal and additional exemptions under Section 35 shall be given retroactive effect. Conformably

too, personal and additional exemptions are considered as deductions from gross income. Deductions for income tax purposes partake of the nature of tax exemptions, hence strictly construed against the taxpayer and cannot be allowed unless granted in the most explicit and categorical language too plain to be mistaken. They cannot be extended by mere implication or inference. And, where a provision of law speaks categorically, the need for interpretation is obviated, no plausible pretense being entertained to justify non-compliance. All that has to be done is to apply it in every case that falls within its terms.

11

Umali vs. Estanislao G.R Nos. 104037 and 104069, May 29, 1992

12

PADILLA, J.: FACTS:

Digest by: ARBAS, Andrei Christopher G.

Congress enacted Rep. Act 7167, entitled AN ACT ADJUSTING THE BASIC PERSONAL AND ADDITIONAL EXEMPTIONS ALLOWABLE TO INDIVIDUALS FOR INCOME TAX PURPOSES TO THE POVERTY THRESHOLD LEVEL, AMENDING FOR THE PURPOSE SECTION 29, PARAGRAPH [L], ITEMS (1) AND (2) [A] OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES. The said Act was signed and approved by the President on 19 December 1991 and published on 14 January 1992 in Malaya a newspaper of general circulation. On 26 December 1991, respondents promulgated Revenue Regulations No. 1-92 prescribing the collection at source of income tax on compensation income paid on or after January 1, 1992 under the Revised Withholding Tax Tables which take into account the increase of personal and additional exemptions.

Thereafter, Revenue Regulations No. 6-82 is amended by Revenue Regulations No. 1-86 providing that each employee shall be allowed to claim the following amount of exemption with respect to compensation paid on or after January 1, 1992 effective on compensation income from January 1, 1992. The petitioners as taxpayers filed a Petition for Mandamus and Prohibition to compel the respondents to implement Rep. Act No. 7167 with respect to taxable income of individual taxpayers earned or received on or after 1 January 1991 or as of taxable year ending 31 December 1991 and to enjoin the respondents from implementing Revenue Regulations No. 1-92. ISSUE: Whether or not the Rep. Act 7167 covers or applies to compensation income earned or received during calendar year 1991. HELD: YES. The Court ruled that Rep. Act 7167 should cover or extend to compensation income earned or received during calendar year 1991. The Court considered the legislative intent of Congress in enacting Rep. Act 7167, that although its passage was delayed and it did not become effective law until 30 January 1992, the Bill provides for increased personal additional exemptions to individuals in view of the higher standard of living. It limits the amount of income of individuals subject to income tax to enable them to spend for basic necessities and have more disposable income. Further, it is imperative for the government to take measures to ease the burden of the individual income tax filers, The Court observed that Rep. Act 7167, speaks of the adjustments that it provides for, as adjustments to the poverty threshold level. Certainly, the poverty threshold level is the poverty threshold level at the time Rep. Act 7167 was enacted by Congress, not poverty threshold levels in futuro, at which time there may be need of further adjustments in personal exemptions. In the end, it is the lower-income and the middle-income groups of taxpayers who stand to benefit most from the increase of personal and additional exemptions. To that extent, the Act is a social legislation intended to alleviate in part the present economic plight of the lower income taxpayers. It is intended to remedy the inadequacy of the existing personal and additional exemptions for individual taxpayers. Thus, Rep. Act 7167, which became effective on 30 January 1992, the increased exemptions are

literally available on or before 15 April 1992. But these increased exemptions can be available on 15 April 1992 only in respect of compensation income earned or received during the calendar year 1991. Therefore, Revenue Regulations No. 1-92 would, in effect, postpone the availability of the increased exemptions to 1 January-15 April 1993, and thus, literally defer the effectivity of Rep. Act 7167 to 1 January 1993. The implementing regulations collide frontally with Rep. Act 7167 which states that the statute shall take effect upon its approval. The law-making authority has spoken and the Court cannot refuse to apply the lawmakers words. Whether or not the government can afford the drop in tax revenues resulting from such increased exemptions was for Congress to decide. Sections 1, 3 and 5 of Revenue Regulations No. 1-92 which provide for the effectivity of the regulation were thereby set aside. They should take effect on compensation income earned or received from 1 January 1991.

13

of Corporations

Definition

AFISCO Insurance Corporation vs. Court of Appeals G.R. No. 112675 January 25, 1999
Digest: AUMENTADO, Adrian F.

14

PANGANIBAN, J.: FACTS:

Pursuant to reinsurance treaties, a number of local insurance firms formed themselves into a pool in order to facilitate the handling of business contracted with a nonresident foreign reinsurance company. The CIR assessed them with corporate deficiency taxes and denied their protest. On appeal, the CA ruled that the pool of machinery insurers was a partnership taxable as a corporation, and that the latters collection of premiums on behalf of its members, the ceding companies, was taxable income. ISSUE:

Whether or not the clearing house or insurance pool be deemed a partnership or an association that is taxable as a corporation under the National Internal Revenue Code? HELD: The Court in Evangelista v. Collector of Internal Revenue held that the law covered these unregistered partnerships and even associations or joint accounts, which had no legal personalities apart from their individual members. The term partnership includes a syndicate, group, pool, joint venture or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on. The ceding companies entered into a Pool Agreement that would handle all the insurance businesses covered under their quota-share reinsurance treaty and surplus reinsurance treaty with Munich. The following unmistakably indicates a partnership or an association covered by Section 24 of the NIRC: (1) The pool has a common fund, consisting of money and other valuables that are deposited in the name and credit of the pool. This common fund pays for the administration and operation expenses of the pool.

(2) The pool functions through an executive board, which resembles the board of directors of a corporation, composed of one representative for each of the ceding companies.

(3) True, the pool itself is not a reinsurer and does not issue any insurance policy; however, its work is indispensable, beneficial and economically useful to the business of the ceding companies and Munich, because without it they would not have received their premiums. The ceding companies share in the business ceded to the pool and in the expenses according to a Rules of Distribution annexed to the Pool Agreement. Profit motive or business is, therefore, the primordial reason for the pools formation. As aptly found by the CTA: xxx The fact that the pool does not retain any profit or income does not obliterate an antecedent fact, that of the pool being used in the transaction of business for profit. It is apparent, and petitioners admit, that their association or co-action was indispensable [to] the transaction of the business. x x x If together they have conducted business, profit must have been the object as, indeed, profit was earned. Though the profit was apportioned among the members, this is only a matter of consequence, as it implies that profit actually resulted.

Pascual vs. Commissioner of Internal Revenue G.R. No. 78133 October 18, 1988
Digest: AUMENTADO, Adrian F.

15

GANCAYCO, J. FACTS:

Petitioners bought two (2) parcels of land from Santiago Bernardino, et al. and at a later date, they bought another three (3) parcels of land from Juan Roque. The first two parcels of land were sold by petitioners in 1968 to Marenir Development Corporation, while the three parcels of land were sold by petitioners to Erlinda Reyes and Maria Samson. Petitioners realized a net profit in the sale made in 1968 and 1970. The corresponding capital gains taxes were paid by petitioners in 1973 and 1974 by availing of the tax amnesties granted in the said years. However, in a letter of then Acting BIR Commissioner Plana, petitioners were assessed and required to pay deficiency corporate income taxes for the years 1968 and 1970. The commissioner contended that petitioners as co-owners in the real estate transactions formed an unregistered partnership or joint venture taxable as a corporation. Also, the unregistered partnership was subject to corporate income tax as distinguished from profits derived from the partnership by them which is subject to individual income tax; and that the availment of tax amnesty by petitioners relieved petitioners of their individual income tax liabilities but did not relieve them from the tax liability of the unregistered partnership. Hence, the petitioners were required to pay the deficiency income tax assessed. ISSUE: Whether or not an unregistered partnership or joint venture exists? HELD: There is no unregistered partnership or joint venture.

There is no evidence that petitioners enttered into an agreement to contribute money, property or industry to a common fund, and that they intended to divide the profits among themselves. In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the same nor make any improvements thereon. In 1966, they bought another three (3) parcels of land from one seller. It was only 1968 when they sold the two (2) parcels of land after which they did not make any additional or new purchase. The remaining three (3) parcels were sold by them in 1970. The transactions were isolated. The character of habituality peculiar to business transactions for the purpose of gain was not present. The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a joint or common right or interest in the property. There must be a clear intent to form a partnership, the existence of a juridical personality different from the individual partners, and the freedom of each party to transfer or assign the whole property. There is clear evidence of co-ownership between the petitioners. The two isolated transactions whereby they purchased properties and sold the same a few years thereafter did not thereby make them partners. They shared in the gross profits as co- owners and paid their capital gains taxes on their net profits and availed of the tax amnesty thereby. Under the circumstances, they cannot be considered to have formed an unregistered partnership which is thereby liable for corporate income tax, as the respondent commissioner proposes.

Obillos vs. Commissioner of Internal Revenue G.R. No. L-68118. October 29, 1985
Digest by: AVILA, Alyssa Daphne M.

16

AQUINO, J. FACTS:

This case is about the income tax liability of four brothers and sisters who sold two parcels of land which they had acquired from their father.

On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots located at Greenhills, San Juan, Rizal. The next day he transferred his rights to his four children, the petitioners, to enable them to build their residences. Presumably, the Torrens titles issued to them would show that they were co-owners of the two lots. In 1974, the petitioners resold them to the Walled City Securities Corporation and Olga Cruz Canda, deriving from the sale a total profit of P134,341.88 or P33,584 for each of them. They treated the profit as a capital gain and paid an income tax on one-half thereof or of P16,792. In April, 1980, the Commissioner of Internal Revenue required the four petitioners to pay corporate income tax on the total profit of P134,336 in addition to individual income tax on their shares thereof. He assessed P37,018 as corporate income tax, P18,509 as 50% fraud surcharge and P15,547.56 as 42% accumulated interest, or a total of P71,074.56. He also considered the share of the profits of each petitioner in the sum of P33,584 as a taxable in full (not a mere capital gain of which is taxable) and required them to pay deficiency income taxes aggregating P56,707.20 including the 50% fraud surcharge and the accumulated interest. Thus, the petitioners are being held liable for deficiency income taxes and penalties totalling P127,781.76 on their profit of P134,336, in addition to the tax on capital gains already paid by them. The Commissioner acted on the theory that the four petitioners had formed an unregistered partnership or joint venture within the meaning of sections 24(a) and 84(b) of the Tax Code. ISSUES: 1. Whether or not the petitioners have formed a partnership under article 1767 of the Civil Code. 2. Whether or not the petitioners are liable under the Tax Code. HELD: 1. NO. To regard the petitioners as having formed a taxable unregistered partnership would result in oppressive taxation and confirm the dictum that the power to tax involves the power to destroy. As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple. Their original purpose was to divide the lots for residential purposes. If later on they found it not feasible to build their residences on the lots because of the high cost of construction, then they had no choice but to resell the same to dissolve the co-ownership. The petitioners were not engaged in any joint venture by reason of that isolated transaction. The division of the profit was merely incidental to the dissolution of the co-ownership. Article 1769(3) of the Civil Code provides that the sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived. There must be an unmistakable intention to form a partnership or joint venture.

2. NO. Not all co-ownerships are deemed unregistered partnership. A co-ownership owning properties which produce income should not automatically be considered partners of an unregistered

partnership, or a corporation, within the purview of the income tax law. To hold otherwise, would be to subject the income of all co-ownerships of inherited properties to the tax on corporations, inasmuch as if a property does not produce an income at all, it is not subject to any kind of income tax, whether the income tax on individuals or the income tax on corporation.

17

Oa vs. Commissioner of Internal Revenue G.R. No. L-19342 May 25, 1972
Digest by: AVILA, Alyssa Daphne M.

18

BARREDO, J. FACTS:

Julia Buales died leaving as heirs her surviving spouse, Lorenzo T. Oa and her five children. Lorenzo T. Oa, the surviving spouse was appointed administrator of the estate of said deceased. Later, the administrator submitted the project of partition. The project of partition shows that the heirs have undivided one-half (1/2) interest in ten parcels of land with a total assessed value of P87,860.00, six houses with a total assessed value of P17,590.00 and an undetermined amount to be collected from the War Damage Commission. Later, they received from said Commission the amount of P50,000.00, more or less. This amount was not divided among them but was used in the rehabilitation of properties owned by them in common. Although the project of partition was approved by the Court, no attempt was made to divide the properties therein listed. Instead, the properties remained under the management of Lorenzo T. Oa who used said properties in business by leasing or selling them and investing the income derived therefrom and the proceeds from the sales thereof in real properties and securities. As a result, petitioners properties and investments gradually increased. From said investments and properties petitioners derived such incomes as profits from installment sales of subdivided lots, profits from sales of stocks, dividends, rentals and interests. Every year, petitioners returned for income tax purposes their shares in the net income derived from said properties and securities and/or from transactions involving them However, petitioners did not actually receive their shares in the yearly income. The income was always left in the hands of Lorenzo T. Oa who, as heretofore pointed out, invested them in real properties and securities. On the basis of the foregoing facts, respondent (Commissioner of Internal Revenue) decided that petitioners formed an unregistered partnership and therefore, subject to the corporate income tax, pursuant to Section 24, in relation to Section 84(b), of the Tax Code. ISSUE: Whether or not the petitioners have formed an unregistered partnership, and hence liable for corporate income taxes under the Tax Code. HELD: YES. For tax purposes, the co-ownership of inherited properties is automatically converted into an unregistered partnership the moment the said common properties and/or the incomes derived therefrom are used as a common fund with intent to produce profits for the heirs in proportion to their respective shares in the inheritance as determined in a project partition either duly executed in an extrajudicial settlement or approved by the court in the corresponding testate or intestate proceeding. The reason for this is simple. From the moment of such partition, the heirs are entitled already to their respective definite shares of the estate and the incomes thereof, for each of them to manage and dispose of as exclusively his own without the intervention of the other heirs, and, accordingly he becomes liable individually for all taxes in connection therewith. If after such partition, he allows his share to be held in common with his co-heirs under a single management to be used with the intent of making profit thereby in proportion to his share, there can be no doubt that, even if no document or instrument were executed for the purpose, for tax purposes, at least, an unregistered partnership is formed. This is exactly what happened to petitioners in this case. The Tax Court found that instead of actually distributing the estate of the deceased among themselves pursuant to the project of partition, the properties remained under the management of Oa who used

said properties in business by leasing or selling them and investing the income derived therefrom and the proceed from the sales thereof in real properties and securities, as a result of which said properties and investments steadily increased yearly. It is thus incontrovertible that petitioners did not, contrary to their contention, merely limit themselves to holding the properties inherited by them. In these circumstances, it is then the considered view that from the moment petitioners allowed not only the incomes from their respective shares of the inheritance but even the inherited properties themselves to be used by Oa as a common fund in undertaking several transactions or in business, with the intention of deriving profit to be shared by them proportionally, such act was tantamonut to actually contributing such incomes to a common fund and, in effect, they thereby formed an unregistered partnership within the purview of the above-mentioned provisions of the Tax Code.

19

It is but logical that in cases of inheritance, there should be a period when the heirs can be considered as co-owners rather than unregistered co-partners within the contemplation of our corporate tax laws aforementioned. Before the partition and distribution of the estate of the deceased, all the income thereof does belong commonly to all the heirs, obviously, without them becoming thereby unregistered co-partners, but it does not necessarily follow that such status as co-owners continues until the inheritance is actually and physically distributed among the heirs, for it is easily conceivable that after knowing their respective shares in the partition, they might decide to continue holding said shares under the common management of the administrator or executor or of anyone chosen by them and engage in business on that basis. Withal, if this were to be allowed, it would be the easiest thing for heirs in any inheritance to circumvent and render meaningless Sections 24 and 84(b) of the National Internal Revenue Code.

Passive

Income

Commissioner of Internal Revenue vs. Manning G.R. No. L-28398. August 6, 1975
Digest by: BAUTISTA, Cecille Catherine A.

20

CASTRO, J. FACTS:

MANTRASCO had an authorized capital stock of P2,500,000 divided into 25,000 common shares; 24,700 of these were owned by Julius S. Reese, and the rest, at 100shares each, by the three respondents. On February 29, 1952, a trust agreement on Reeses and the respondents interests in MANTRASCO was executed by and among Reese, MANTRASCO, and the law firm of Ross, Selph, Carrascoso and Janda, and the respondents. On October 19, 1954 Reese died. On November 25,1963 the entire purchase price of Reeses interest in MANTRASCO was finally paid in full by the latter. The trust agreement was subsequently terminated and the trustees delivered to MANTRASCO all the shares which they were holding in trust. Commissioner of Internal Revenue issued notices of assessment for deficiency income taxes to the respondents for 1958. Commissioner argues that the full value of the shares redeemed from Reese by MANTRASCO which were subsequently distributed to the respondents as stock dividends in 1958 should be taxed as income of the respondents for that year, the said distribution being in effect a distribution of cash. ISSUE: Whether or not respondents are subject to income tax HELD: Yes. The intention of the parties to the trust agreement was to treat the 24,700 shares of Reese as absolutely outstanding shares of Reeses estate until they were fully paid. As such, their declaration as treasury stock dividend in 1958 was violative of public policy. A stock dividend, being one payable in capital stock, cannot be declared out of outstanding corporate stock, but only from retained earnings: A stock dividend always involves a transfer of surplus (or profit) to capital stock. A stock dividend is a conversion of surplus or undivided profits into capital stock, which is distributed to stockholders in lieu of a cash dividend. The respondents conferred to themselves the full worth and value of Reeses corporate holdings with the use of the very earnings of the companies. Such package device cannot be allowed to deflect the respondents responsibilities toward our income tax laws. Thus, these amounts are subject to income tax.

Income Tax

Minimum Corporate

(MCIT)

CIR vs. Philippine Airlines, Inc. (PAL) G.R. No. 179800. February 4, 2010 Digest by: BAUTISTA, Cecille Catherine A.

21

PERALTA, J. FACTS:

PAL availed of the communication services of the Philippine Long Distance Company (PLDT). For the period January 1, 2002 to December 31, 2002, PAL allegedly paid PLDT the 10% (Overseas Communications Tax) OCT in the amount of P134,431.95 on its overseas telephone calls. Subsequently, PAL filed a claim for refund in the for the amount of 10% OCT paid to PLDT from January to December 2002 citing as legal bases Section 13 of Presidential Decree No. 1590 and BIR Ruling No. 97-94 dated April 13, 1994. PAL contends that since it incurred negative taxable income for fiscal years 2002 and 2003 and opted for zero basic corporate income tax, which was lower than the 2% franchise tax, it had complied with the in lieu of all other taxes clause of Presidential Decree (P.D.) No. 1590. Thus, it was no longer liable for all other taxes of any kind, nature, or description, including the 10% OCT, and the erroneous payments thereof entitled it to a refund pursuant to its franchise. Petitioner CIR, on the other hand, insists that Section 120 of the 1997 NIRC, as amended, imposes 10% OCT on overseas dispatch, message or conversion originating from the Philippines, which includes PLDT communication services. It further stated that respondent PAL, in order for it to be not liable for other taxes, in this case the 10% OCT, should pay the 2% franchise tax, since it did not pay any amount as its basic corporate income tax. ISSUE: Whether or not respondent PAL is entitled to the tax refund claimed HELD: Yes. The Court, citing a similar case entitled Commissioner of Internal Revenue vs. PAL, ruled that Presidential Decree 1590 granted Philippine Airlines an option to pay the lower of two alternatives: (a) the basic corporate income tax based on PALs annual net taxable income computed in accordance with the provisions of the National Internal Revenue Code or (b) a franchise tax of two percent of gross revenues. Availment of either of these two alternatives shall exempt the airline from the payment of all other taxes, including the 20 percent final withholding tax on bank deposits. A careful reading of Section 13 rebuts the argument of the CIR that the in lieu of all other taxes proviso is a mere incentive that applies only when PAL actually pays something. It is clear that PD 1590 intended to give respondent the option to avail itself of Subsection (a) or (b) as consideration for its franchise. Either option excludes the payment of other taxes and dues imposed or collected by the national or the local government. PAL has the option to choose the alternative that results in lower taxes. It is not the fact of tax payment that exempts it, but the exercise of its option.

The Manila Banking Corporation vs. Commissioner of Internal Revenue G.R. No. 168118 August 28, 2006 SANDOVAL-GUTIERREZ, J.: FACTS: Digest by: CABATU, Ricky Boy V.

22

The Monetary Board of the BSP issued a resolution pursuant to Section 29 of R.A. No. 265 (the Central Bank Act), prohibiting petitioner from engaging in business by reason of insolvency. Thus, petitioner ceased operations that year and its assets and liabilities were placed under the charge of a governmentappointed receiver. Meanwhile, R.A. No. 8424 (Comprehensive Tax Reform Act of 1997) became effective. One of the changes introduced by this law is the imposition of the minimum corporate income tax on domestic and resident foreign corporations. Implementing this law is Revenue Regulations No. 9-98 stating that the law allows a four (4) year period from the time the corporations were registered with the Bureau of Internal Revenue (BIR) during which the minimum corporate income tax should not be imposed.

After 12 years since petitioner stopped its business operations, the BSP authorized it to operate as a thrift bank. On April 7, 2000, it filed with the BIR its annual corporate income tax return and paid P33,816,164.00 for taxable year 1999.

Prior to the filing of its income tax return, petitioner sent a letter to the BIR requesting a ruling on whether it is entitled to the four (4)-year grace period reckoned from 1999. In other words, petitioners position is that since it resumed operations in 1999, it will pay its minimum corporate income tax only after four (4) years thereafter.

BIR issued a BIR Ruling stating that petitioner is entitled to the four (4)-year grace period. Since it reopened in 1999, the minimum corporate income tax may be imposed not earlier than 2002, i.e. the fourth taxable year beginning 1999. According to the BIR, although TMBC had been registered with the BIR before 1994, yet it did not have any business from 1987 to June 1999 due to its involuntary closure. Thus, TMBCs reopening last July 1999 is akin to the commencement of business operations of a new corporation, in consideration of which the law allows a 4-year period during which MCIT is not to be applied. Petitioner then filed with the BIR a claim for refund of the sum of P33,816,164.00 erroneously paid as MCIT for taxable year 1999. ISSUE:

Whether petitioner is entitled to a refund of its minimum corporate income tax paid to the BIR for taxable year 1999. HELD: Yes. According to Revenue Regulations No. 4-95, the date of commencement of operations of a thrift bank is the date it was registered with the SEC or the date when the Certificate of Authority to Operate was issued to it by the Monetary Board of the BSP, whichever comes later. On the other hand, Revenue Regulations No. 9-98, implementing R.A. No. 8424 imposing the minimum corporate income tax on corporations, provides that for purposes of this tax, the date when business operations commence is the year in which the domestic corporation registered with the BIR. SC held that Revenue Regulations No. 4-95, not Revenue Regulations No. 9-98, applies to petitioner, being a thrift bank. It is, therefore, entitled to a grace period of four (4) years counted from June 23,

1999 when it was authorized by the BSP to operate as a thrift bank. Consequently, it should only pay its minimum corporate income tax after four (4) years from 1999. Thus, petitioner is entitled to a refund.

23

Chamber of Real Estate and Builders Associations (CREBA), Inc. vs. Romulo, et al. G.R. No. 16075. March 9, 2010 Digest by: CABATU, Ricky Boy V.

24

CORONA, J.: FACTS:

Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is assessed an MCIT of 2% of its gross income when such MCIT is greater than the normal corporate income tax imposed under Section 27(A). If the regular income tax is higher than the MCIT, the corporation does not pay the MCIT. Any excess of the MCIT over the normal tax shall be carried forward and credited against the normal income tax for the three immediately succeeding taxable years. Petitioner assails the validity of the imposition of MCIT on corporations. Petitioner argues that the MCIT violates the due process clause because it levies income tax even if there is no realized gain. It explains that gross income as defined under said provision only considers the cost of goods sold and other direct expenses; other major expenditures, such as administrative and interest expenses which are equally necessary to produce gross income, were not taken into account. Thus, pegging the tax base of the MCIT to a corporations gross income is tantamount to a confiscation of capital because gross income, unlike net income, is not realized gain. ISSUE: Whether or not the imposition of the MCIT on domestic corporations is unconstitutional. HELD: MCIT Is Not Violative of Due Process. An income tax is arbitrary and confiscatory if it taxes capital because capital is not income. In other words, it is income, not capital, which is subject to income tax. However, the MCIT is not a tax on capital. The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a corporation in the sale of its goods, i.e., the cost of goods and other direct expenses from gross sales. Clearly, the capital is not being taxed. Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net income tax, and only if the normal income tax is suspiciously low. The MCIT merely approximates the amount of net income tax due from a corporation, pegging the rate at a very much reduced 2% and uses as the base the corporations gross income.

Further, Revenue Regulation 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or negative taxable income, merely defines the coverage of Section 27(E). This means that even if a corporation incurs a net loss in its business operations or reports zero income after deducting its expenses, it is still subject to an MCIT of 2% of its gross income. This is consistent with the law which imposes the MCIT on gross income notwithstanding the amount of the net income. But the law also states that the MCIT is to be paid only if it is greater than the normal net income. Obviously, it may well be the case that the MCIT would be less than the net income of the corporation which posts a zero or negative taxable income.

Resident Foreign Corporation

Income Tax on

Commissioner of Internal Revenue vs. British Overseas Airways Corporation (BOAC) and Court of Tax Appeals G.R.No. L-65773-74. April 30, 1987
Digest by: De Guzman, Pristine B.

25

MELENCIO-HERRERA, J. FACTS:

British Overseas Airways Corporation (BOAC) is a 100% British Government-owned corporation organized and existing under the laws of the United Kingdom It is engaged in the international airline business and is a member-signatory of the Interline Air Transport Association (IATA). BOAC did not carry passengers and/or cargo to or from the Philippines, although during the period covered by the assessments, it maintained a general sales agent in the Philippines - Wamer Barnes and Company, Ltd., and later Qantas Airways which was responsible for selling BOAC tickets covering passengers and cargoes. On May 7, 1968 CIR assessed BOAC with P2,498,358.56 for deficiency income taxes covering the years 1959 to 1963. BOAC protested. Investigation resulted to an assessment in the amount of P858,307.79 covering the years 1959 to 1967. BOAC paid this new assessment under protest. BOAC filed a claim for refund in the amount of P858,307.79 with the CIR. However, BOAC did not wait for the decision of the CIR, filed petition for review with the tax court. Thereafter, CIR denied claim for refund

On November 17, 1971 CIR assessed BOAC with deficiency income taxes ,interests, and penalty for the fiscal years 1968-1969 to 1970-1971 in the aggregate amount 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 filing of corporation returns) penalized under Section 74 of the National Internal Revenue Code (NIRC).BOAC in a letter requested that the assessment to countermanded and set aside. CIR denied the request and reissued the deficiency income tax assessment for P534,132.08 for the years1969 to 1970-71 plus P1,000.00 as compromise penalty under Section 74 of the Tax Code. BOAC asked for reconsideration but CIR denied the same. BOAC filed a 2nd petition for review with the tax court. The 2 cases before the CTA were consolidated Tax Court rendered the assailed joint Decision reversing the CIR. Its position was that income from transportation is income from services so that the place where services are rendered determines the source. It further held that the proceeds of sales of BOAC passage tickets in the Philippines by Warner Barnes and Company, Ltd., and later by Qantas Airways, during the period in question, do not constitute BOAC income from Philippine sources sinceno service of carriage of passengers or freight was performed by BOAC within the Philippines and, therefore, said income is not subject to Philippine income tax. ISSUE: Whether or not during the fiscal years in question BOAC is a resident foreigncorporation doing business in the Philippines or has an office or place of business in the Philippines. HELD: Yes, BOAC is a resident foreign corporation. There is no specific criterion as to what constitutes doing or engaging in or transacting business. The term 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 functions normally incident to, and in progressive prosecution of commercial gain or for the purpose and object of the business organization. In order that a foreign corporation may be regarded as doing business within a State, there must be continuity of conduct and intention to establish a continuous business, such as the appointment of a local agent, and not one of a temporary character. BOAC, during the periods covered by the subject - assessments, maintained a general sales agent in the Philippines, That general sales agent, from 1959 to 1971, was engaged in (1)selling and issuing tickets; (2) breaking down the whole trip into series of trips - each trip in the series corresponding to a different

airline company; (3) receiving the fare from the whole trip; and (4) consequently allocating to the various airline companies on the basis of their 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. Those activities were in exercise of the functions which are normally incident to, and are in progressive pursuit of, the purpose and object of its organization as an international air carrier. 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 should be no doubt then that BOAC was engaged in business in the Philippines through a local agent during the period covered by the assessments. Accordingly, it is a resident foreign corporation subject to tax upon its total net income received in the preceding taxable year from all sources within the Philippines.

26

Commissioner of Internal Revenue vs. British Overseas Airways Corporation (BOAC) and Court of Tax Appeals G.R.No. L-65773-74. April 30, 1987
Digest by: DE GUZMAN, Pristine B.

27

MELENCIO-HERRERA, J. FACTS:

British Overseas Airways Corporation (BOAC) is a 100% British Government-owned corporation organized and existing under the laws of the United Kingdom It is engaged in the international airline business and is a member-signatory of the Interline Air Transport Association (IATA). BOAC did not carry passengers and/or cargo to or from the Philippines, although during the period covered by the assessments, it maintained a general sales agent in the Philippines - Wamer Barnes and Company, Ltd., and later Qantas Airways which was responsible for selling BOAC tickets covering passengers and cargoes.

On May 7, 1968 CIR assessed BOAC with P2,498,358.56 for deficiency income taxes covering the years 1959 to 1963. BOAC protested. Investigation resulted to an assessment in the amount of P858,307.79 covering the years 1959 to 1967. BOAC paid this new assessment under protest. BOAC filed a claim for refund in the amount of P858,307.79 with the CIR. However, BOAC did not wait for the decision of the CIR, filed petition for review with the tax court. Thereafter, CIR denied claim for refund

On November 17, 1971 CIR assessed BOAC with deficiency income taxes ,interests, and penalty for the fiscal years 1968-1969 to 1970-1971 in the aggregate amount 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 filing of corporation returns) penalized under Section 74 of the National Internal Revenue Code (NIRC).BOAC in a letter requested that the assessment to countermanded and set aside. CIR denied the request and reissued the deficiency income tax assessment for P534,132.08 for the years1969 to 1970-71 plus P1,000.00 as compromise penalty under Section 74 of the Tax Code. BOAC asked for reconsideration but CIR denied the same. BOAC filed a 2nd petition for review with the tax court. The 2 cases before the CTA were consolidated Tax Court rendered the assailed joint Decision reversing the CIR. Its position was that income from transportation is income from services so that the place where services are rendered determines the source. It further held that the proceeds of sales of BOAC passage tickets in the Philippines by Warner Barnes and Company, Ltd., and later by Qantas Airways, during the period in question, do not constitute BOAC income from Philippine sources sinceno service of carriage of passengers or freight was performed by BOAC within the Philippines and, therefore, said income is not subject to Philippine income tax. ISSUE: Whether proceeds from the sale of BOAC tickets in the Philippines by Warner Barnesand Company, Ltd are considered income from sources within the Philippines HELD: Yes, proceeds from the sale of BOAC tickets in the Philippines by Warner Barnes andCompany, Ltd. are considered income from sources within the Philippines hence taxable by the Philippine government. The Tax Code defines gross income thus:

Gross income includes gains, profits, and income derived from salaries, wages or compensation for personal service of whatever kind and in whatever form paid, or from profession, vocations, trades, business, commerce, sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interests, rents, dividends, securities, or the transactions of any business carried on for gain or profile, or gains, profits, and income derived from any source whatever (Sec. 29[3])

The phrase income from any source whatever discloses a legislative policy to include all income not expressly exempted within the class of taxable income under our laws. Income means cash received or its equivalent; it is the amount of money coming to a person within a specific time ...; it means something distinct from principal or capital. For, while capital is a fund, income is a flow. As used in our income tax law, income refers to the flow of wealth. The source of an income is the property, activity or service that produced the income. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. In BOACs case, the sale of tickets in the Philippines is the activity that produces the income. The tickets exchanged hands here and payments for fares were also made here in Philippine currency. The site of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the protection accorded by the Philippine government. Inconsideration of such protection, the flow of wealth should share the burden of supporting the government. The absence of flight operations to and from the Philippines is not determinative of the source of income or the site of income taxation. Admittedly, BOAC was an off-line international airline at the time pertinent to this case. The test of taxability is the source; and the source of an income is that activity ... which produced the income. Unquestionably, the passage documentations in these cases were sold in the Philippines and the revenue therefrom was derived from an activity regularly pursued within the Philippines. And even if the BOAC tickets sold covered the transport of passengers and cargo to and from foreign cities, it cannot alter the fact that income from the sale of tickets was derived from the Philippines. The word source conveys one essential idea, that of origin, and the origin of the income herein is the Philippines.

28

Steamship Company of Svendborg and Steamship Company of 1912 vs. Commissioner of Interval Revenue CTA EB No. 117, September 12, 2006
Digest by: DESTURA, Kristina Bianca D.

29

CASTANEDA, JR., J. FACTS:

Petitioner Maersk-Tabacalera Shippine, Agency (Filipinas), Inc. (Now MAERSK-FILIPINAS, INC.), hereinafter referred to as Maersk, is a corporation duly organized and existing under the laws of the Republic of the Philippines, with its principal office in Paco, Manila; and petitioner Steamship Company of Svendborg (SVENDBORG) and Steamship Company of 1912 (STEAMSHIP) are foreign corporations organized and existing under the laws of Denmark and engaged in international shipping with Maersk as the general agent in the Philippines. On January 22, 1992 Maersk received from respondent CIR a demand letter together with various assessment notices for alleged deficiency income taxes and deficiency withholding taxes for the taxable years 1988 and 1989 in the aggregate amount of P8,882,466.81.

Petitioners duly protested the said demand and assessment. In a decision dated August 8, 2002 respondent ordered petitioners to pay the deficiency income tax assessments in the aggregate amount of P6,856,483.48, stating that the decision was final on the matter. In the said decision, respondent cancelled the deficiency withholding tax against Maeersk but reiterated the deficiency income tax. Petitioners, Svendborg and Steamship were ordered to collect demurrage fees from importers. The assessment for deficiency income tax against Svendborg and Steamship of P10,888.75 each arose from a finding of additional freight revenue for November, 1989, plus demurrage fees of 35% on Gross Demurrage. The demurrage fee is a fee collected for the inbound cargoes of importers. The demurrage rates are fixed in accordance with the Transpacific Westbound Rate Agreement to which Maersk is a signatory. On July 13, 2005, the petitioners filed a Motion for Partial Reconsideration, which was denied by the CTA Division. ISSUE:

Whether or not, demurrage fees are considered as income of the petitioners, as international carriers, that are subject to the 35% regular corporate income tax under Sec. 25 (a)(1) of the 1977 NIRC in addition to the 2.5% tax imposed on their gross Philippine Billings under Sec. 25(a)(2). HELD: Petitioners are considered as resident foreign corporations doing business in the Philippines. As a resident foreign corporation, petitioner were not able to show that they are beyond the scope of Section 25 (a) of the NIRC which imposes 35% regular corporate income tax on the net income of all resident foreign corporations.

Neither did the provision of Sec. 25 (a)(2) in relation to Sec. 25 (a)(1) preclude the imposition upon international carriers such as petitioner of the 35% regular corporate income tax and citing the decision of the CTA division, to construe otherwise would be to provide an exemption where no exemption is intended. Settled is the rule that exemptions from taxation are construed in strictissimi juris against the taxpayer. The CTA further said that demurrage fees are definitely income or revenue accruing to the international carriers. Demurrage fees or charges consists of an inflow of funds to the international carriers which are neither capital contributions nor incurrence of liabilities. It cannot be understood in any other manner

except in the concept of income to the petitioners. Income means cash received or its equivalent; it is the amount of money coming to a person within a specific time; something distinct from principal or capital. For while capital is fund, income is flow. Furthermore, the demurrage fees are income derived from sources within the Philippines, they were generated within the Philipines, hence, the flow of wealth enjoyed the protection accorded by the Philippine government, thus, the flow of wealth should share the burden of supporting the government.

30

Bank of America NT & SA vs. Court of Appeals G.R. No. 103092 July 21, 1994
Digest by: DESTURA, Kristina Bianca D.

31

VITUG, J. FACTS:

Petitioner is a foreign corporation duly licensed to engage in business in the Philippines with Philippine branch office at Paseo de Roxas, Makati, Metro Manila. On July 20, 1982 it paid 15% branch profit remittance tax in the amount of P7,538,460.72 on profit from its regular banking unit operations and P445,790.25 on profit from its foreign currency deposit unit operations or a total of P7,984,250.97. The tax was based on net profits after income tax without deducting the amount corresponding to the 15% tax.

Petitioner filed a claim for refund with the Bureau of Internal Revenue of that portion of the payment which corresponds to the 15% branch profit remittance tax, on the ground that the tax should have been computed on the basis of profits actually remitted, which is P45,244,088.85, and not on the amount before profit remittance tax, which is P53,228,339.82. Subsequently, without awaiting respondents decision, petitioner filed a petition for review on June 14, 1984 with this Honorable Court for the recovery of the amount of P1,041,424.03. Section 24(b) (2) (ii) of the National Internal Revenue Code, in the language it was worded in 1982 (the taxable period relevant to the case at bench), provided, in part: Sec. 24. Rates of tax on corporations. . . . (b) Tax on foreign corporations. . . . (2) (ii) Tax on branch profit and remittances. Any profit remitted abroad by a branch to its head office shall be subject to a tax of fifteen per cent (15%) . . . . Petitioner Bank of America NT & SA argues that the 15% branch profit remittance tax on the basis of the above provision should be assessed on the amount actually remitted abroad, which is to say that the 15% profit remittance tax itself should not form part of the tax base. Respondent CIR, contending otherwise, holds the position that, in computing the 15% remittance tax, the tax should be inclusive of the sum deemed remitted. The Court of Tax Appeals upheld petitioner bank in its claim for refund. CIR filed a timely appeal to the Supreme Court, which referred it to the Court of Appeals which the latter set aside the decision of the Court of Tax Appeals. Hence, this petitions for review. ISSUE: Whether or not the 15% branch profit remittance tax should be assessed on the amount actually remitted abroad, which is to say that the 15% profit remittance tax itself should not form part of the tax base. HELD: The Supreme Court citing a decision of the Tax Court said that . . . In all the situations . . . where the mechanism of withholding of taxes at source operates to ensure collection of the tax, and which respondent claims the base on which the tax is computed is the amount to be paid or remitted, the law applicable expressly, specifically and unequivocally mandates that the tax is on the total amount thereof which shall be collected and paid as provided in Sections 53 and 54 of the Tax Code. Thus: Dividends received by an individual who is a citizen or resident of the Philippines from a domestic corporation, shall be subject to a final tax at the rate of fifteen (15%) per cent on the total amount thereof, which shall be collected and paid as provided in Sections 53 and 54 of this Code.

There is absolutely nothing in Section 24(b) (2) (ii), which indicates that the 15% tax on branch profit remittance is on the total amount of profit to be remitted abroad which shall be collected and paid in accordance with the tax withholding device provided in Sections 53 and 54 of the Tax Code. The statute employs Any profit remitted abroad by a branch to its head office shall be subject to a tax of fifteen per cent (15%) without more. Nowhere is there said of base on the total amount actually applied for by the branch with the Central Bank of the Philippines as profit to be remitted abroad, which shall be collected and paid as provided in Sections 53 and 54 of this Code. Where the law does not qualify that the tax is imposed and collected at source based on profit to be remitted abroad, that qualification should not be read into the law. And to our mind, the term any profit remitted abroad can only mean such profit as is forwarded, sent, or transmitted abroad as the word remitted is commonly and popularly accepted and understood. To say therefore that the tax on branch profit remittance is imposed and collected at source and necessarily the tax base should be the amount actually applied for the branch with the Central Bank as profit to be remitted abroad is to ignore the unmistakable meaning of plain words. In the 15% remittance tax, the law specifies its own tax base to be on the profit remitted abroad. There is absolutely nothing equivocal or uncertain about the language of the provision. The tax is imposed on the amount sent abroad, and the law calls for nothing further. The taxpayer is a single entity, and it should be understandable if, such as in this case, it is the local branch of the corporation, using its own local funds, which remits the tax to the Philippine Government.

32

The remittance tax was conceived in an attempt to equalize the income tax burden on foreign corporations maintaining, on the one hand, local branch offices and organizing, on the other hand, subsidiary domestic corporations where at least a majority of all the latters shares of stock are owned by such foreign corporations. In order to avert what would otherwise appear to be an unequal tax treatment on such subsidiaries vis-a-vis local branch offices, a 20%, later reduced to 15%, profit remittance tax was imposed on local branches on their remittances of profits abroad. But this is where the tax pari-passu ends between domestic branches and subsidiaries of foreign corporations.

Commissioner of Internal Revenue v. Burroughs Limited G.R. No. L-66653; June 19, 1986
Submitted by: ERIGA, Ronald Fredric H.

33

PARAS, J.: FACTS:

Burroughs Limited is a foreign corporation authorized to engage in trade or business in the Philippines. Sometime in March 1979, said branch office applied with the Central Bank for authority to remit to its parent company abroad, branch profit amounting to P7,647,058.00. Thus, on March 14, 1979, it paid the 15% branch profit remittance tax, pursuant to Sec. 24 (b) (2) (ii) and remitted to its head office the amount of P6,499,999.30 computed as follows: Amount applied for remittance................................ P7,647,058.00 Deduct: 15% branch profit remittance tax ..............................................1,147,058.70 Net amount actually remitted.................................. P6,499,999.30 Claiming that the 15% profit remittance tax should have been computed on the basis of the amount actually remitted (P6,499,999.30) and not on the amount before profit remittance tax (P7,647,058.00), private respondent filed on December 24, 1980, a written claim for the refund or tax credit of the amount of P172,058.90 representing alleged overpaid branch profit remittance tax. Burroughs filed with CTA petition for review for the recovery of said amount. CTA ordered to grant a tax credit in favor of Burroughs. CIR filed instant petition to SC. ISSUE: Wheather or not Burroughs should be granted tax credit. YES. HELD: The pertinent provision of the National Revenue Code is Sec. 24 (b) (2) (ii) which states: Sec. 24. Rates of tax on corporations.... (b) Tax on foreign corporations. ... (2) (ii) Tax on branch profits remittances. Any profit remitted abroad by a branch to its head office shall be subject to a tax of fifteen per cent (15 %) ... In a Bureau of Internal Revenue ruling dated January 21, 1980 by then Acting Commissioner of Internal Revenue Hon. Efren I. Plana the aforequoted provision had been interpreted to mean that the tax base upon which the 15% branch profit remittance tax ... shall be imposed...(is) the profit actually remitted abroad and not on the total branch profits out of which the remittance is to be made.

CIR contends that respondent is no longer entitled to a refund because Memorandum Circular No. 8-82 dated March 17, 1982 had revoked and/or repealed the BIR ruling of January 21, 1980. The said memorandum circular states Considering that the 15% branch profit remittance tax is imposed and collected at source, necessarily the tax base should be the amount actually applied for by the branch with the Central Bank of the Philippines as profit to be remitted abroad. Petitioners aforesaid contention is without merit. What is applicable in the case at bar is still the Revenue Ruling of January 21, 1980 because private respondent Burroughs Limited paid the branch profit remittance tax in question on March 14, 1979. Memorandum Circular No. 8-82 dated March 17, 1982 cannot be given retroactive effect in the light of Section 327 of the National Internal Revenue Code which provides- Sec. 327. Non-retroactivity of rulings. Any revocation, modification, or reversal of any of the rules and regulations promulgated in accordance with the preceding section or any of the rulings or circulars promulgated by the Commissioner shag not be given retroactive application if the revocation, modification, or reversal will be prejudicial to the taxpayer except in the following cases (a) where the taxpayer deliberately misstates or omits material facts from his return or in any document

required of him by the Bureau of Internal Revenue; (b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based, or (c) where the taxpayer acted in bad faith. (ABS-CBN Broadcasting Corp. v. CTA, 108 SCRA 151-152)

34

The prejudice that would result to private respondent Burroughs Limited by a retroactive application of Memorandum Circular No. 8-82 is beyond question for it would be deprived of the substantial amount of P172,058.90. And, insofar as the enumerated exceptions are concerned, admittedly, Burroughs Limited does not fall under any of them.

Compania General De Tabacos De Filipinas v. Commissioner of Internal Revenue CTA Case Nos. 4141. August 23, 1993 and CTA Case No. 4451 November 17, 1993
Submitted by: ERIGA, Ronald Fredric H.

35

FACTS:

Compania General, a foreign corporation duly licensed by the Philippine laws to engage in business through a branch office, paid 15% branch profit remittance tax for 1985 and 1986. It filed a claim for refund with the Commissioner in the amount of P539,948.61 for alleged overpaid branch profit remittance tax should be based on the profits actually remitted abroad, citing Section 24 (b)(2)(ii) of the NIRC whereas the Commissioner opined that the 15% branch profit remittance tax is imposed and collected at source. Hence, the tax base should be the amount actually applied for by the branch in pursuance to Revenue Memorandum No. 8-82. ISSUE: Whether or not the branch profits tax are computed based on the profits actually remitted abroad or on the total branch profits out of which the remittance was made. HELD: In view of the fact that the Companias branch profit remittance tax for 1985 to 1986 were paid on May 3, 1988 after the effectivity of Revenue Memorandum Circular No. 8-82, what should apply as the taxable base in computing the 15% branch profit remittance tax is the amount applied for with the Central Bank as profit to be remitted abroad and not the total amount of branch profits. The case in question Is readily distinguishable from the Burroghs Limited case, where the Supreme Court upheld the application of BIR Ruling of January 1980 because the branch profit remittance tax was paid on March 14, 1979. The High added that Memorandum Circular No. 8-82 dated March 17, 1982 cannot be given retroactive effect in the light of Section 327 of the NIRC.

Income Tax on Non-Resident Foreign

Corporation

Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc. G.R. No. 127105. June 25, 1999
Digest by: ESCANER, Michael Joseph L.

36

GONZAGA-REYES, J. FACTS:

Respondent is a domestic corporation organized and operating under the Philippine Laws, entered into a licensed agreement with the SC Johnson and Son, USA, a non-resident foreign corporation based in the USA pursuant to which the respondent was granted the right to use the trademark, patents and technology owned by the later including the right to manufacture, package and distribute the products covered by the Agreement and secure assistance in management, marketing and production from SC Johnson and Son USA. For the use of trademark or technology, respondent was obliged to paySC Johnson and Son, USA royalties based on a percentage of net sales and subjected the same to 25% withholding tax on royalty payments which respondent paid for the period covering July 1992 to May 1993 in the total amount of P1,603,443.00.

On October 29, 1993, respondent filed with the International Tax Affairs Division (ITAD) of the BIR a claim for refund of overpaid withholding tax on royalties arguing that, the antecedent facts attending respondents case fall squarely within the same circumstances under which said MacGeorge and Gillette rulings were issued. Since the agreement was approved by the Technology Transfer Board, the preferential tax rate of 10% should apply to the respondent. So, royalties paid by the respondent to SC Johnson and Son, USA is only subject to 10% withholding tax. The Commissioner did not act on said claim for refund. Private respondent SC Johnson & Son, Inc. then filed a petition for review before the CTA, to claim a refund of the overpaid withholding tax on royalty payments from July 1992 to May 1993. On May 7, 1996, the CTA rendered its decision in favor of SC Johnsonand ordered the CIR to issue a tax credit certificate in the amount of P163,266.00 representing overpaid withholding tax on royalty payments beginning July 1992 to May 1993. The CIR thus filed a petition for review with the CA which rendered the decision subject of this appeal on November 7, 1996 finding no merit in the petition and affirming in toto the CTA ruling. ISSUE: Whether or not tax refunds are considered as tax exemptions. HELD: It bears stress that tax refunds are in the nature of tax exemptions. As such they are registered as in derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption. The burden of proof is upon him who claims the exemption in his favor and he must be able to justify his claim by the clearest grant of organic or statute law. Private respondent is claiming for a refund of the alleged overpayment of tax on royalties; however there is nothing on record to support a claim that the tax on royalties under the RP-US Treaty is paid under similar circumstances as the tax on royalties under the RP-West Germany Tax Treaty.

Marubeni Corporation vs. Commissioner of Internal Revenue G.R. No. 76573.September 14, 1989
Digest by: ESCANER, Michael Joseph L.

37

FERNAN, C.J. FACTS:

Petitioner is a Japanese corporation licensed to engage in business in the Philippines. When the profits on Marubenis investments in Atlantic Gulf and Pacific Co. of Manila were declared, a 10% final dividend tax was withheld from it, and another 15% profit remittance tax based on the remittable amount after the final 10% withholding tax were paid to the Bureau of Internal Revenue. Marubeni Corp. now claims for a refund or tax credit for the amount which it has allegedly overpaid the BIR. To determine whether the said corporation is entitled to a tax refund or tax credit, it must first be determined whether said corporation is a resident or a non-resident foreign corporation under Philippine laws. ISSUE: Whether or not the petitioner is a resident or non-resident foreign corporation. HELD: Under the Tax Code, a resident foreign corporation is one that is engaged in trade or business within the Philippines. Petitioner contends that precisely because it is engaged in business in the Philippines through its Philippine branch that it must be considered as a resident foreign corporation. Petitioner reasons that since the Philippine branch and the Tokyo head office are one and the same entity, whoever made the investment in AG&P, Manila does not matter at all. A single corporate entity cannot be both a resident and a non-resident corporation depending on the nature of the particular transaction involved. Accordingly, whether the dividends are paid directly to the head office or coursed through its local branch is of no moment for after all, the head office and the office branch constitute but one corporate entity, the Marubeni Corporation, which, under both Philippine tax and corporate laws, is a resident foreign corporation because it is transacting business in the Philippines. Petitioner, being a non-resident foreign corporation with respect to the transaction in question, the applicable provision of the Tax Code is Section 24 (b) (1) (iii) in conjunction with the Philippine-Japan Treaty of 1980. Accordint to the said provision, petitioner is taxed 35 % of its gross income from all sources within the Philippines. However, a discounted rate of 15% is given to petitioner on dividends received from a domestic corporation (AG&P) on the condition that its domicile state (Japan) extends in favor of petitioner, a tax credit of not less than 20 % of the dividends received. This 20 % represents the difference between the regular tax of 35 % on non-resident foreign corporations which petitioner would have ordinarily paid, and the 15 % special rate on dividends received from a domestic corporation.

N.V. Reederij Amsterdam and Royal Interocean Lines vs. Commissioner of Internal Revenue G.R. No. L-46029 June 23, 1988
Digest by: GARCIA, Vianne Marie O.

38

GANCAYCO, J.: FACTS:

From March 27 to April 30, 1963, M.V. Amstelmeer and from September 24 to October 28, 1964, MV Amstelkroon, both of which are vessels of petitioner N.B. Reederij AMSTERDAM, called on Philippine ports to load cargoes for foreign destination. The freight fees for these transactions were paid abroad in the amount of US $98,175.00 in 1963 and US $137,193.00 in 1964. In these two instances, petitioner Royal Interocean Lines acted as husbanding agent for a fee or commission on said vessels. No income tax appears to have been paid by petitioner N.V. Reederij AMSTERDAM on the freight receipts. Respondent CIR, through his examiners, filed the corresponding income tax returns for and in behalf of the former under Section 15 of the National Internal Revenue Code. Applying the then prevailing market conversion rate of P3.90 to the US $1.00, the gross receipts of petitioner N.V. Reederij Amsterdam for 1963 and 1964 amounted to P382,882.50 and P535,052.00, respectively. On June 30, 1967, respondent Commissioner assessed said petitioner in the amounts of P193,973.20 and 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 under Section 24 (b) (1) of the Tax Code. On the assumption that petitioner is a foreign corporation engaged in trade or business in the Philippines, on August 28, 1967, petitioner Royal Interocean Lines filed an income tax return of the aforementioned vessels computed at the exchange rate of P2.00 to US1.00 and paid the tax thereon in the amount of P1,835.52 and P9,448.94, respectively, pursuant to Section 24 (b) (2) in relation to Section 37 (B) (e) of the National Internal Revenue Code and Section 163 of Revenue Regulations No. 2. On the same two dates, petitioner Royal Interocean Lines as the husbanding agent of petitioner N.V. Reederij AMSTERDAM filed a written protest against the abovementioned assessment made by the respondent Commissioner which protest was denied. On March 31, 1969, petitioners filed a petition for review with the respondent Court of Tax Appeals praying for the cancellation of the subject assessment. After due hearing, the respondent court, rendered a decision modifying said assessments by eliminating the 50% fraud compromise penalties imposed upon petitioners. Petitioners filed a motion for reconsideration of said decision but this was denied by the respondent court. Hence, this petition for review.

ISSUE: Whether or not petitioner is a non-resident foreign corporations, thus taxable on income from all sources within the Philippines, as interest, dividends, rents, salaries, wages, premiums, annuities Compensations, remunerations, emoluments, or other fixed or determinable annual or periodical or casual gains, profits and income and capital gains the amount of tax is 30% (now 35%) of such gross income. HELD: The petition is devoid of merit. Petitioner N.V. Reederij AMSTERDAM is a foreign corporation not authorized or licensed to do business in the Philippines. It does not have a branch office in the Philippines and it made only two calls in Philippine ports, one in 1963 and the other in 1964. In order that a foreign corporation may be considered engaged in trade or business, its business transactions must be continuous. A casual business activity in the Philippines by a foreign corporation, as in the present case, does not amount to engaging in trade or business in the Philippines for income tax purposes.

The Court reproduces with approval the following disquisition of the respondent court A corporation is itself a taxpaying entity and speaking generally, for purposes of income tax, corporations are classified into (a) domestic corporations and (b) foreign corporations. (Sec. 24(a) and (b), Tax Code.) Foreign corporations are further classified into (1) resident foreign corporations and (2) non-resident foreign corporations. (Sec. 24(b) (1) and (2). Tax Code.) A resident foreign corporation is a foreign corporation engaged in trade or business within the Philippines or having an office or place of business therein (Sec. 84(g), Tax Code) while a nonresident foreign corporation is a foreign corporation not engaged in trade or business within the Philippines and not having any office or place of business therein. (Sec. 84(h), Tax Code.) A domestic corporation is taxed on its income from sources within and without the Philippines, but a foreign corporation is taxed only on its income from sources within the Philippines. (Sec. 24(a), Tax Code; Sec. 16, Rev. Regs. No. 2.) However, while a foreign corporation doing business in the Philippines is taxable on income solely from sources within the Philippines, it is permitted to deductions from gross income but only to the extent connected with income earned in the Philippines. (Secs. 24(b) (2) and 37, Tax Code.) On the other hand, foreign corporations not doing business in the Philippines are taxable on income from all sources within the Philippines, as interest, dividends, rents, salaries, wages, premiums, annuities Compensations, remunerations, emoluments, or other fixed or determinable annual or periodical or casual gains, profits and income and capital gains The tax is 30% (now 35%) of such gross income. (Sec. 24 (b) (1), Tax Code.) At the time material to this case, certain corporations were given special treatment, namely, building and loan associations operating as such in accordance with Section 171 of the Corporation Law, educational institutions, domestic life insurance companies and for foreign life insurance companies doing business in the Philippines. (Sec. 24(a) & (c), Tax Code.) It bears emphasis, however, that foreign life insurance companies which were not doing business in the Philippines were taxable as other foreign corporations not authorized to do business in the Philippines. (Sec. 24(c) Tax Code.)

39

Now to the case at bar. Petitioner N.V. Reederij Amsterdam is a non-resident foreign corporation, organized and existing under the laws of The Netherlands with principal office in Amsterdam and not licensed to do business in the Philippines. As a non-resident foreign corporation, it is thus a foreign corporation, not engaged in trade or business within the Philippines and not having any office or place of business therein. (Sec. 84(h), Tax Code.) As stated above, it is therefore taxable on income from all sources within the Philippines, as interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical or casual gains, profits and income and capital gains, and the tax is equal to thirty per centum of such amount, under Section 24(b) (1) of the Tax Code. The accent is on the words of--`such amount. Accordingly, petitioner N. V. Reederij Amsterdam being a non-resident foreign corporation, its taxable income for purposes of our income tax law consists of its gross income from all sources within the Philippines.

A foreign corporation engaged in trade or business within the Philippines, or which has an office or place of business therein, is taxed on its total net income received from all sources within the Philippines at the rate of 25% upon the amount but which taxable net income does not exceed P100,000.00, and 35% upon the amount but which taxable net income exceeds P100,000.00. On the other hand, a foreign corporation not engaged in trade or business within the Philippines and which does not have any office or place of business therein is taxed on income received from all sources within the Philippines at the rate of 35% of the gross income. The transactions involved in this case are for the taxable years 1963 and 1964. Under Rep. Act No. 2609, the monetary board was authorized to fix the legal conversion rate for foreign exchange. The free market conversion rate during those years was P3.90 to US $1.00.

Improperly Accumulated

Earnings Tax
(IAET)

The Manila Wine Merchants, Inc. vs. Commissioner of Internal Revenue G.R. No. L-26145,February 20, 1984
Digest by: GARCIA, Vianne Marie O.

40

FACTS:

Manila Wine Merchants organized in 1937 was engaged in the importation and sale of whiskey, wines, liquor and distilled spirits. Its original paid up capital was Php 500,000. At one point, they reduced to their capital to Php 250,000 with the approval of the SEC but this reduction was never implemented. When the business began to flourish, they increased their capital to 1 Million Pesos, again with the approval of SEC in 1958. Wine Merchants invested in several companies including Acme Commercial, Co., Union Insurance of Canton and bought shares in Wack Wack Golf and Country Club. Wine Merchants also acquired USA Treasury Bills valued at around 347,000 Pesos.

The CIR examined the books of Manila Wine Merchants and found that it had unreasonably accumulated a surplus of Php 428,000 from 1947-1957 in excess of the reasonable needs of business subject to the surtax of 2% imposed by Section 25 of the Tax Code then demanded payment of the IAET. Wine Merchants appealed to the CTA. For the CTA, the purchase of shares in Wack Wack, Union Insurance and Acme Commercial were harmless and not subject to 25% surtax. However, the purchase of the Treasury Bills was in no way related to the business of importing and selling wines and ordered Manila Wine Merchants to pay IAET on the Treasury Bills. Manila Wine Merchants appealed to the CTA. ISSUE: Whether or not Manila Wine Merchants unreasonably accumulated earnings in excess of the reasonable needs of business, thus making it liable to surtax under the Tax Code? HELD: Sec. 29 (A) - Imposition of Improperly Accumulated Earnings Tax (A) In General. - In addition to other taxes imposed by this Title, there is hereby imposed for each taxable year on the improperly accumulated taxable income of each corporation described in Subsection B hereof, an improperly accumulated earnings tax equal to ten percent (10%) of the improperly accumulated taxable income.

Tax on improper accumulation of surplus is essentially a penalty tax. The provision discouraged tax avoidance through corporate surplus accumulation. When corporations do not declare dividends, income taxes are not paid on the undeclared dividends received by the shareholders. The tax on improper accumulation of surplus is essentially a penalty tax designed to compel corporations to distribute earnings so that the said earnings by shareholders could, in turn, be taxed. Immediacy Test may be used to determine the reasonable needs of the business. To determine the reasonable needs of the business in order to justify an accumulation of earnings, the Courts of the United States had developed the Immediacy Test which construed the words reasonable needs of the business to mean the immediate needs of the business, and it was generally held that; if the corporation did not prove an immediate need for the accumulation of the earnings and profits, the accumulation was not for the reasonable needs of the business, and the penalty tax would apply. Touchstone of liability is the purpose behind the accumulation of the income and not the consequences of the accumulation.

A prerequisite to the imposition of the tax has been that the corporation be formed or availed of for the purpose of avoiding the income tax (or surtax) on its shareholders, or on the shareholders of any other corporation by permitting the earnings and profits of the corporation to accumulate instead of dividing them among or distributing them to the shareholders. If the earnings and profits were distributed, the

shareholders would be required to pay an income tax thereon whereas, if the distribution were not made to them, they would incur no tax in respect to the undistributed earnings and profits of the corporation. The touchstone of liability is the purpose behind the accumulation of the income and not the consequences of the accumulation. Thus, if the failure to pay dividends is due to some other cause, such as the use of undistributed earnings and profits for the reasonable needs of the business, such purpose does not fall within the interdiction of the statute. Taxpayers intention at the time of accumulation is controlling. In order to determine whether profits are accumulated for the reasonable needs of the business as to avoid the surtax upon shareholders, the controlling intention of the taxpayer is that which is manifested at the time of accumulation not subsequently declared intentions, which are merely the product of afterthought. A speculative and indefinite purpose will not suffice. The mere recognition of a future problem and the discussion of possible and alternative solutions is not sufficient. Definiteness of plan coupled with action taken towards its consummation are essential.

41

Commissioner of Internal Revenue vs. Tuason G.R. No. 85749 May 15, 1989
Digest by: HATOL, Michelle Marie U.

42

GRIO-AQUINO, J.: FACTS:

CTA set aside petitioners revenue commissioners assessment of 1.1 M as the 25% surtax on private respondents unreasonable accumulation of surplus for the year 1975-1978.

Private respondent protested the assessment on the ground that the accumulation of surplus profits during the years in question was solely for the purpose of expanding its business operations as a real estate broker. Private respondent filed a petition that pending determination of the case, an order be issued restraining the commissioner and/or his reps from enforcing the warrants of distraint and levy. Writ of injunction was issued by tax court. Due to the reversal of CTA of the commissioners decision, CIR appeals to the SC. ISSUES: 1. Whether or not private respondent is a holding company and/or investment company? 2. Whether or not Antonio accumulated surplus for years 75-78 3. Whether or not Tuason Inc. is liable for the 25% surtax on undue accumulation of surplus for 75-78 HELD: Yes to all. Antionio is liable for the 25% surtax assessed.

Sec. 25. Additional tax on corporation improperly accumulating profits or surplus. (a) Imposition of tax. If any corporation, except banks, insurance companies, or personal holding companies, whether domestic or foreign, is formed or availed of for the purpose of preventing the imposition of the tax upon its shareholders or members or the shareholders or members of another corporation, through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, there is levied and assessed against such corporation, for each taxable year, a tax equal to twenty-five per centum of the undistributed portion of its accumulated profits or surplus which shall be in addition to the tax imposed by section twentyfour, and shall be computed, collected and paid in the same manner and subject to the same provisions of law, including penalties, as that tax. (b) Prima facie evidence. The fact that any corporation is a mere holding company shall be prima facie evidence of a purpose to avoid the tax upon its shareholders or members. Similar presumption will lie in the case of an investment company where at any time during the taxable year more than fifty per centum in value of its outstanding stock is owned, directly or indirectly, by one person. In this case, Tuason Inc, a mere holding company for the corporation did not involve itself in the development of subdivisions but merely subdivided its own lots and sold them for bigger profits. It derived its income mostly from interest, dividends, and rentals realized from the sale of realty.

Tuason Inc is also owned by Antonio himself. While these profits were actually made, the commissioner points out that the corp. did not use up its surplus profits. Antonio claims that he spent the money to build an apartment in urdaneta but theres a large discrepancy bet. The market value and the alleged investment cost. The importance of liability is the purpose behind the accumulation of the income and not the consequences of the accumulation. Thus, if the failure to pay dividends were for the purpose of using the undistributed earnings & profits for the reasonable needs of the business, that purpose would not fall to overcome the presumption and correctness of CIR.

Cyanamid Philippines, Inc, vs. Court of Appeals G.R. No. 108067. January 20, 2000
Digest by: HATOL, Michelle Marie U.

43

QUISIMBING, J FACTS:

Petitioner is a corporation organized under Philippine laws and is a wholly owned subsidiary of American Cyanamid Co. based in Maine, USA. It is engaged in the manufacture of pharmaceutical products and chemicals, a wholesaler of imported finished goods and an imported/indentor. In 1985 the CIR assessed on petitioner a deficiency income tax of P119,817) for the year 1981. Cyanamid protested the assessments particularly the 25% surtax for undue accumulation of earnings. It claimed that said profits were retained to increase petitioners working capital and it would be used for reasonable business needs of the company. The CIR refused to allow the cancellation of the assessments, petitioner appealed to the CTA. It claimed that there was not legal basis for the assessment because 1) it accumulated its earnings and profits for reasonable business requirements to meet working capital needs and retirement of indebtedness 2) it is a wholly owned subsidiary of American Cyanamid Company, a foreign corporation, and its shares are listed and traded in the NY Stock Exchange. The CTA denied the petition stating that the law permits corporations to set aside a portion of its retained earnings for specified purposes under Sec. 43 of the Corporation Code but that petitioners purpose did not fall within such purposes. It found that there was no need to set aside such retained earnings as working capital as it had considerable liquid funds. Those corporations exempted from the accumulated earnings tax are found under Sec. 25 of the NIRC, and that the petitioner is not among those exempted. The CA affirmed the CTAs decision. ISSUE: Whether or not the accumulation of income was justified. HELD: In order to determine whether profits are accumulated for the reasonable needs of the business to avoid the surtax upon the shareholders, it must be shown that the controlling intention of the taxpayer is manifested at the time of the accumulation, not intentions subsequently, which are mere afterthoughts. The accumulated profits must be used within reasonable time after the close of the taxable year. In the instant case, petitioner did not establish by clear and convincing evidence that such accumulated was for the immediate needs of the business.

To determine the reasonable needs of the business, the United States Courts have invented the Immediacy Test which construed the words reasonable needs of the business to mean the immediate needs of the business, and it is held that if the corporation did not prove an immediate need for the accumulation of earnings and profits such was not for reasonable needs of the business and the penalty tax would apply. (Law of Federal Income Taxation Vol 7) The working capital needs of a business depend on the nature of the business, its credit policies, the amount of inventories, the rate of turnover, the amount of accounts receivable, the collection rate, the availability of credit and other similar factors. The Tax Court opted to determine the working capital sufficiency by using the ration between the current assets to current liabilities. Unless, rebutted, the presumption is that the assessment is correct. With the petitioners failure to prove the CIR incorrect, clearly and conclusively, the Tax Courts ruling is upheld.

Corporations

Tax Exempt

Commissioner of Internal Revenue vs G. Sinco Educational Corp. G. R. No. L-9276. October 23, 1956
Digest by: JHOCSON, Maria Alexandria B.

44

BAUTISTA ANGELO, J. FACTS:

In June, 1949, Vicente G. Sinco established and operated an educational institution known as Foundation College of Dumaguete. Sinco would have continued operating said college were it not for the requirement of the Department of Education that as far as practicable schools and colleges recognized by the government should be incorporated, and so on September 21, 1951, the V. G. Sinco Educational Institution was organized. This corporation was non-stock and was capitalized by V. G. Sinco and members of his immediate family. This corporation continued the operations of Foundation College of Dumaguete

Invoking section 27 (e) of the National Internal Revenue Code, the Appellee claims that it is exempt from the payment of the income tax because it is organized and 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, the Appellant maintains that part of the net income accumulated by the Appellee inured to the benefit of V. G. Sinco, president and founder of the corporation, and therefore the Appellee is not entitled to the exemption prescribed by the law. ISSUES: Whether or not appellee is entitled to the exemption provided by law HELD: Yes. Invoking section 27 (e) of the National Internal Revenue Code, the Appellee claims that it is exempt from the payment of the income tax because it is organized and 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, the Appellant maintains that part of the net income accumulated by the Appellee inured to the benefit of V. G. Sinco, president and founder of the corporation, and therefore the Appellee is not entitled to the exemption prescribed by the law. While the acquisition of additional facilities, may redound to the benefit of the institution itself, it cannot be positively asserted that the same will redound to the benefit of its stockholders, for no one can predict the financial condition of the institution upon its dissolution. It has been held that the mere provision for the distribution of its assets to the stockholders upon dissolution does not remove the right of an educational institution from tax exemption. The fact that the members may receive some benefit on dissolution upon distribution of the assets is a contingency too remote to have any material bearing upon the question where the association is admittedly not a scheme to avoid taxation and its good faith and honesty or purpose is not challenged.

Gross Income

Filinvest Development Corporation and Filinvest Alabang, Inc vs Commissioner of Internal Revenue CTA Case No. 6182. September 10, 2002.
Digest by: JHOCSON, Maria Alexandria B. FACTS: Petitioner FDC, FAI and FLI entered into a Deed of Exchange whereby FDC and FAI agreed to transfer to FLI certain parcel of land. The reduction of FDCs proportionate equity interest in FLI resulted from an increase in the total number of outstanding shares of FLI brought about by the issuance of additional shares necessitated by the exchange. As of the date of the Deed, FDC directly owned 80% of the outstanding shares of FAI, the remaining 20% being held by FLI. Through its 805 ownership of FAI, FDCs ownership interest in FLI increased through FAIs acquisition of 9.96% of the outstanding shares of FLI after the exchange. Thereafter, FDC entered into a joint venture agreement with RHPL resulting in FAC. Pursuant to the Shareholders Agreement between FDC and RHPL, the equity participation of FDC and RHPL in FAC was 60% and 40%, respectively. In payment of its subscription in FAC, FDC executed a Deed of Assignment transferring to FAC a portion of FDCs rights and interests in the Project to the extent of P500.7 million. FAI received a Formal Notice of Demand with Assessment Notice from BIR for its deficiency income tax for 1997. ISSUE: Whether or not income tax may be imposed on the prospective gain from appreciation in the value of FDCs shareholdings in FAC but not yet realized through sale or conversion of said shareholding? HELD: No. Section 34(c )(2) of the Tax Code provides: No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for shares of stock in such corporation of which as a result of such exchange said person, alone or together with others, not exceeding four persons, gains control of said corporation: Provided, that stocks issued for services shall not be considered as issued in return of property. No taxable gain from an exchange of property for shares of stock of a corporation shall be recognized if as a result of the exchange the transferor, alone or together with others, not exceeding four persons, gains control of the corporation. Prior to the exchange FDC held 67.42% of the total voting stocks of FLI while FAI, initially, did not hold any stock at all. After the exchange, new shares of stock were issued and as a result, FDC owned 61.03% and FAI had 9.96% of stockholdings. Evidently, the exchange of properties between FDC and FAI with FLI resulted in the further control of FDC and FAI as far as stock ownership of FLI is concerned. The seeming reduction of the number of shares owned by FDC after the exchange does not affect the so-called control requirement in Section 34(c )(2) of the Tax Code. The transaction of FDC and FAI with FLI should not be treated separate and distinct from each other, but instead they must be viewed together. It is not required that each of the several transferors individually gains control or individually increases their interest. What is important is that each of the transferor, numbering not more than four, collectively increases his equity in the transferee corporation by 51% or more. As it is, the total number of shares of FDC and FAI, if sum up together is 70.99%, which is more than the 51% contemplated by law to have the so-called control in the corporation. With all the elements having been complied with, we conclude that Section 34(c )(2) is on all fours applicable to the subject exchange. Hence, any gain or loss derived thereat is not recognized it being a tax- free exchange.

45

Commission of Internal Revenue vs. Court of Appeals G.R No. 108576. January 20, 1999
Digested by: JULIAN, Nicole Alora G.

46

MARTINEZ, J: FACTS:

In 1930, Andres Soriano, a citizen and resident of U.S formed Anscor with capital of 1M divided into 10, 000.00 common shares. Anscor is wholly owned and controlled by the family of Don Andres, who are all non- resident aliens. In 1945, Don Andres transferred 1, 250 shares to his two sons as their initial investment. 1947, Anscor declared stock dividend and also between 1949 and 1963. Don Andres. Died in 1964 and Left a shareholding of 185, 154 shares. By a Board Resolution, Anscor redeemed 108, 000 common shares from the estate of Don Andres. Revenue examiners, in 1973 issued a report that Anscor be assessed for deficiency withholding tax at source but the Corporation claimed that they availed of tax amnesty under PD 23. Anscor filed a petition for review with the CTA availing that tax assessment on the redemptions and exchange of stocks. Ca affirmed the decision. ISSUE:

Whether on or Anscor redemption of stocks from its stockholder as well as the exchange of common with preferred shares can be considered as essentially equivalent to the distribution of taxable dividend making the proceeds thereof taxable under the provisions of 1939 Revenue Act. HELD: Not being taxpayers but a tax agent on behalf of the government, Anscor is not protected by the amnesty under the Decree. The implementing rules of PD 23 are very explicit to wit. Tax liabilities with or without assessment, on withholding tax at source provided under Sec. 53 and 54 of the NIRC. Anscor was assessed under said Sections thus by specific provision of law, it is not covered by amnesty.

The three elements in the impositions of income tax are. 1) There must be gain and or profit, 2) that the gain and or is realized or received actually or constructively, and 3) it is not exempted by law or treaty from income tax.

The redemption made by anscor converts into money the stock dividends which become a realized profit or gain and consequently, the stockholders separate property. As realized income the proceeds of the redeemed stock dividends can be reached by income taxation regardless of the existence of any business purpose for the redemption. To rule that said proceeds are exempt from tax when the redemption is supported by legitimate business reasons would open doors for income earners not to pay tax so long as the person from whom the income was divided has legitimate business reasons. CAs decision is modified in that Anscors decision is modified in that Ansccors redemption of stock dividends is hereby considered as essentially equivalent to distribution taxable dividends for which it is liable for the withholding tax-at-source.

Commissioner of Internal Revenue vs. Manning G.R. No. L-28398. August 6, 1975
Digested by: JULIAN, Nicole Alora G. CASTRO, J: FACTS: In 1952 the MANTRASCO had an authorized capital stock of P2,500,000 divided into 25,000 common shares; 24,700 of these were owned by Julius S. Reese, and the rest, at 100 shares each, by the three respondents. On February 29, 1952, in view of Reeses desire that upon his death MANTRASCO and its two subsidiaries, MANTRASCO (Guam), Inc. and the Port Motors, Inc., would continue under the management of the respondents, a trust agreement on his and the respondents interests in MANTRASCO was executed by and among Reese , MANTRASCO , the law firm of Ross, Selph, Carrascoso and Janda , and the respondents. On October 19, 1954 Reese died. The projected transfer of his shares in the name of MANTRASCO could not, however, be immediately effected for lack of sufficient funds to cover initial payment on the shares. On February 2, 1955, after MANTRASCO made a partial payment of Reeses shares, the certificate for the 24,700 shares in Reeses name was cancelled and a new certificate was issued in the name of MANTRASCO. On the same date, and in the meantime that Reeses interest had not been fully paid, the new certificate was endorsed to the law firm of Ross, Selph, Carrascoso and Janda, as trustees for and in behalf of MANTRASCO. On November 25, 1963 the entire purchase price of Reeses interest in MANTRASCO was finally paid in full by the latter, On May 4, 1964 the trust agreement was terminated and the trustees delivered to MANTRASCO all the shares which they were holding in trust. Bureau of Internal Revenue examination disclosed that (a) as of December 31, 1958 the 24,700 shares declared as dividends had been proportionately distributed to the respondents, representing a total book value or acquisition cost of P7,973,660; (b) the respondents failed to declare the said stock dividends as part of their taxable income for the year 1958.

47

On the basis of their examination, the BIR examiners concluded that the distribution of Reeses shares as stock dividends was in effect a distribution of the asset or property of the corporation as may be gleaned from the payment of cash for the redemption of said stock and distributing the same as stock dividend. On April 14, 1965 the Commissioner of Internal Revenue issued notices of assessment for deficiency income taxes to the respondents for the year 1958

The respondents unsuccessfully challenged the assessments and, failing to secure a favorable reconsideration, appealed to the Court of Tax Appeals. On October 30, 1967 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 before and after the declaration of stock dividends and only the number of shares held by each of them had changed. Commissioner maintains that the full value (P7,973,660) of the shares redeemed from Reese by MANTRASCO which were subsequently distributed to the respondents as stock dividends in 1958 should be taxed as income of the respondents for that year, the said distribution being in effect a distribution of cash. The respondents interests in MANTRASCO, he further argues, were only .4% prior to the declaration of the stock dividends in 1958, but rose to 33 1/3% each after the said declaration. In submitting their respective contentions, it is the assumption of both parties that the 24,700 shares declared as stock dividends were treasury shares. ISSUE: Are the shares in question treasury shares? Discuss nature of treasury shares and stock dividends.

HELD: Treasury shares are stocks issued and fully paid for and re-acquired by the corporation either by purchase, donation, forfeiture or other means. Treasury shares are therefore issued shares, but being in the treasury they do not have the status of outstanding shares. Consequently, although a treasury share, not having been retired by the corporation re-acquiring it, may be re-issued or sold again, such share, as long as it is held by the corporation as a treasury share, participates neither in dividends, because dividends cannot be declared by the corporation to itself, nor in the meetings of the corporation as voting stock, for otherwise equal distribution of voting powers among stockholders will be effectively lost and the directors will be able to perpetuate their control of the corporation, though it still represents a paid-for interest in the property of the corporation. The foregoing essential features of a treasury stock are lacking in the questioned shares. The manifest intention of the parties to the trust agreement was, in sum and substance, to treat the 24,700 shares of Reese as absolutely outstanding shares of Reeses estate until they were fully paid. Such being the true nature of the 24,700 shares, their declaration as treasury stock dividend in 1958 was a complete nullity and plainly violative of public policy. A stock dividend, being one payable in capital stock, cannot be declared out of outstanding corporate stock, but only from retained earnings: A stock dividend always involves a transfer of surplus (or profit) to capital stock. Graham and Katz, Accounting in Law Practice, 2d ed. 1938, No. 70. As the court said in United States vs. Siegel, 8 Cir., 1931, 52 F 2d 63, 65, 78 ALR 672: A stock dividend is a conversion of surplus or undivided profits into capital stock, which is distributed to stockholders in lieu of a cash dividend. Congress itself has defined the term dividend in No. 115(a) of the Act as meaning any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits. In Eisner v. Macomber, 1920, 252 US 189, 40 S Ct 189, 64 L Ed 521, 9 ALR 1570, both the prevailing and the dissenting opinions recognized that within the meaning of the revenue acts the essence of a stock dividend was the segregation out of surplus account of a definite portion of the corporate earnings as part of the permanent capital resources of the corporation by the device of capitalizing the same, and the issuance to the stockholders of additional shares of stock representing the profits so capitalized. The respondents, using the trust instrument as a convenient technical device, bestowed unto themselves the full worth and value of Reeses corporate holdings with the use of the very earnings of the companies. Such package device, obviously not designed to carry out the usual stock dividend purpose of corporate expansion reinvestment, e.g. the acquisition of additional facilities and other capital budget items, but exclusively for expanding the capital base of the respondents in MANTRASCO, cannot be allowed to deflect the respondents responsibilities toward our income tax laws. The conclusion is thus ineluctable that whenever the companies involved herein parted with a portion of their earnings to buy the corporate holdings of Reese, they were in ultimate effect and result making a distribution of such earnings to the respondents. All these amounts are consequently subject to income tax as being, in truth and in fact, a flow of cash benefits to the respondents.

48

Wise & Co., Inc. vs. Meer G.R. No. 48231. June 30, 1947
Digest by: MAGAT, Kristianne S.

49

HILADO, J. FACTS:

During the year 1937, plaintiffs were stockholders of Manila Wine Merchants, Ltd., a foreign corporation duly authorized to do business in the Philippines. On May 27, 1937, the Board of Directors of Manila Wine Merchants, Ltd., (Hongkong Company), recommended to the stockholders of the company that they adopt the resolutions necessary to enable the company to sell its business and assets to Manila Wine Merchants, Inc., a Philippine corporation formed on May 27, 1937, (Manila Company), for the sum of P400,000 Philippine currency. This sale was duly authorized by the stockholders of the Hongkong Company at a meeting held on July 22, 1937 and the contract of sale between the two companies was executed on the same date. The final resolutions completing the said sale and transferring the business and assets of the Hongkong Company to the Manila Company were adopted on August 3, 1937, on which date the Manila Company were adopted on August 3, 1937, on which date the Manila Company paid the Hongkong company the P400,000 purchase price. Pursuant to a resolution by its Board of Directors purporting to declare a dividend, the Hongkong Company made a distribution from its earnings for the year 1937 to its stockholders, plaintiffs on which Hongkong Company has paid Philippine income tax on the entire earnings from which the said distributions were paid. After deducting the said dividend of June 8, 1937, the surplus of the Hongkong Company resulting from the active conduct of its business was P74,182.12. As a result of the sale of its business and assets to the Manila Company, the surplus of the Hongkong Company was increased to a total of P270,116.59.

On August 19, 1937, at a special general meeting of the shareholders of the Hongkong Company, the stockholders by proper resolution directed that the company be voluntarily liquidated and its capital distributed among the stockholders. The stockholders at such meeting appointed a liquidator who duly filed his accounting on January 12, 1938, and the Hongkong Company was duly dissolved at the expiration of three moths from that date.

Plaintiffs duly filed Philippine income tax returns. Defendant subsequently made a deficiency assessments against plaintiffs. Plaintiffs duly paid the amounts demanded by defendant under written protest, which was overruled in due course and they have since July 1, 1939 requested from defendant a refund of the amounts paid which defendant has refused and still refuses to refund. ISSUES: Whether or not the sums received from the Hongkong Company is taxable in the Philippines. HELD: The distributions involved herein were not ordinary dividends but payments for stock surrendered and relinquished by the shareholders to the dissolved corporation, or so-called liquidating dividends, hence, we declare that under section 25 (a) of the former Income Tax Law, as amended, said distributions were taxable alike to Wise and Co., Inc. and to the other plaintiffs. We hold that both the proviso of section 10 (a) of said Income Tax Law and section 198 of Regulations No. 81 refer to ordinary dividends, not to distributions made in complete liquidation or dissolution of a corporation which result in the realization of a gain as specifically contemplated in section 25 (a) of the same law, as amended, which as aforesaid expressly provides for the taxability of such gain as income, whether the stockholder happens to be an individual or a corporation. It is true that if section 201 (a) stood alone its broad definition of the term dividend would apparently

include distributions made to stockholders in the liquidation of a corporation although this term, as generally understood and used, refers to the recurrent return upon stock paid to stockholders by a going corporation in the ordinary course of business, which does not reduce their stockholdings and leaves them in a position to enjoy future returns upon the same stock. However, when section 201 (a) and section 201 (c) are read together, we think it clear that the general definition of a dividend in section 201 (a) was not intended to apply to distributions made to stockholders in the liquidation of a corporation, but that it was intended that such distributions should be governed by section 201 (c), which, dealing specifically with such liquidation, provided that the amounts distributed should be treated as payments in exchange for stock, and that any gain realized thereby should be taxed to the stockholders as other gains or profits. This brings the two sections into entire harmony and gives to each its natural meaning and due effect.

50

Such distributions under the law were subject to both the normal and the additional tax provided for. A dividend is a return upon the stock of its stockholders, paid to them by a going corporation without reducing their stockholdings, leaving them in a position to enjoy future returns upon the same stock. In other words, it is earnings paid to him by the corporation upon his invested capital therein, without wiping out his capital. On the other hand, when a solvent corporation dissolves and liquidates, it distributes to its stockholders not only any earnings it may have on hand, but it also pays to them their invested capital, namely, the amount which they had paid in for their stocks, thus wiping out their interest in the company. As provided in Regulations No. 81, in all cases where a corporation distributes all of its property or assets in complete liquidation or dissolution, the gain realized from the transaction by the stockholder is taxable as a dividend to the extent that it is paid out of earnings or profits of the corporation. If the amount received by the stockholder in liquidation is less than the cost or other basis of the stock, a deductible loss is sustained.

This regulation would seem to support the contention that the distributions in question, at least those proceeding from sources other than the earnings or profits of the dissolved corporation, were not taxable. Placing the above-quoted section of Regulations No. 81 side by side with section 25 (a) of the amended Income Tax Law then in force, we notice that while the regulation limits the taxability of the gain realized by the stockholder to the extent that it is paid out of earnings or profits of the corporation, section 25 (a) of the law, far from so limiting its taxability, provides that the gain thus realized, is a taxable income under the law so long as a gain is realized, it will be taxable income whether the distribution comes from the earnings or profits of the corporation or from the sale of all of its assets in general, so long as the distribution is made in complete liquidation or dissolution. The regulation makes the gain taxable as a dividend, while the law makes it a taxable income. An inevitable conflict between the two provisions seems to exist, and in such a case, of course, the law prevails.

Commissioner of Internal Revenue vs. Court of Appeals G.R. No. 95022. March 23, 1992
Digest by: MAGAT, Kristianne S.

51

MELENCIO-HERRERA, J. FACTS:

GCL Retirement Plan (GCL) is an employees trust maintained by the employer, GCL Inc., to provide retirement, pension, disability and death benefits to its employees. The Plan as submitted was approved and qualified as exempt from income tax by Petitioner Commissioner of Internal Revenue in accordance with Rep. Act No. 4917. In 1984, Respondent GCL made investsments and earned therefrom interest income from which was witheld the fifteen per centum (15%) final witholding tax imposed by Pres. Decree No. 1959, which took effect on 15 October 1984. On 15 January 1985, Respondent GCL filed with Petitioner a claim for refund in the amounts of P1,312.66 withheld by Anscor Capital and Investment Corp., and P2,064.15 by Commercial Bank of Manila. On 12 February 1985, it filed a second claim for refund of the amount of P7,925.00 withheld by Anscor, stating in both letters that it disagreed with the collection of the 15% final withholding tax from the interest income as it is an entity fully exempt from income tax as provided under Rep. Act No. 4917 in relation to Section 56 (b) 3 of the Tax Code. The refund requested having been denied, Respondent GCL elevated the matter to respondent Court of Tax Appeals (CTA). The latter ruled in favor of GCL, holding that employees trusts are exempt from the 15% final withholding tax on interest income and ordering a refund of the tax withheld. Upon appeal, originally to this Court, but referred to respondent Court of Appeals, the latter upheld the CTA Decision. It is to be noted that the exemption from withholding tax on interest on bank deposits previously extended by Pres. Decree No. 1739 if the recipient (individual or corporation) of the interest income is exempt from income taxation, and the imposition of the preferential tax rates if the recipient of the income is enjoying preferential income tax treatment, were both abolished by Pres. Decree No. 1959. Petitioner thus submits that the deletion of the exempting and preferential tax treatment provisions under the old law is a clear manifestation that the single 15% (now 20%) rate is impossible on all interest incomes from deposits, deposit substitutes, trust funds and similar arrangements, regardless of the tax status or character of the recipients thereof. In short, petitioners position is that from 15 October 1984 when Pres. Decree No. 1959 was promulgated, employees trusts ceased to be exempt and thereafter became subject to the final withholding tax. ISSUES: Whether or not the GCL Plan is exempt from the final withholding tax on interest income from money placements and purchase of treasury bills required by Pres. Decree No. 1959. HELD: Yes. It is significant to note that the GCL Plan was qualified as exempt from income tax by the Commissioner of Internal Revenue in accordance with Rep. Act No. 4917 approved on 17 June 1967. This law specifically provided:

Sec. 1. Any provision of law to the contrary notwithstanding, the retirement benefits received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer shall be exempt from all taxes and shall not be liable to attachment, levy or seizure by or under any legal or equitable process whatsoever except to pay a debt of the official or employee concerned to the private benefit plan or that arising from liability imposed in a criminal action. In so far as employees trusts are concerned, the foregoing provision should be taken in relation to then Section 56(b) (now 53[b]) of the Tax Code, as amended by Rep. Act No. 1983, supra, which took effect on 22 June 1957. This provision specifically exempted employees trusts from income tax. The

tax-exemption privilege of employees trusts, as distinguished from any other kind of property held in trust, springs from the foregoing provision. It is unambiguous. Manifest therefrom is that the tax law has singled out employees trusts for tax exemption. And rightly so, by virtue of the raison deetre behind the creation of employees trusts. Employees trusts or benefit plans normally provide economic assistance to employees upon the occurrence of certain contingencies, 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 independent and additional source of protection for the working group. What is more, it is established for their exclusive benefit and for no other purpose.

52

The tax advantage in Rep. Act No. 1983, Section 56(b), was conceived in order to encourage the formation and establishment of such private Plans for the benefit of laborers and employees outside of the Social Security Act. It is evident that tax-exemption is likewise to be enjoyed by the income of the pension trust. Otherwise, taxation of those earnings would result in a diminution accumulated income and reduce whatever the trust beneficiaries would receive out of the trust fund. This would run afoul of the very intendment of the law. The deletion in Pres. Decree No. 1959 of the provisos regarding tax exemption and preferential tax rates under the old law, therefore, can not be deemed to extent to employees trusts. Said Decree, being a general law, can not repeal by implication a specific provision, Section 56(b) now 53 [b]) in relation to Rep. Act No. 4917 granting exemption from income tax to employees trusts. Rep. Act 1983, which excepted employees trusts in its Section 56 (b) was effective on 22 June 1957 while Rep. Act No. 4917 was enacted on 17 June 1967, long before the issuance of Pres. Decree No. 1959 on 15 October 1984. Notably, too, all the tax provisions herein treated of come under Title II of the Tax Code on Income Tax. Section 21 (d), as amended by Rep. Act No. 1959, refers to the final tax on individuals and falls under Chapter II; Section 24 (cc) to the final tax on corporations under Chapter III; Section 53 on withholding of final tax to Returns and Payment of Tax under Chapter VI; and Section 56 (b) to tax on Estates and Trusts covered by Chapter VII, Section 56 (b), taken in conjunction with Section 56 (a), supra, explicitly excepts employees trusts from the taxes imposed by this Title. Since the final tax and the withholding thereof are embraced within the title on Income Tax, it follows that said trust must be deemed exempt therefrom. Otherwise, the exception becomes meaningless.

There can be no denying either that the final withholding tax is collected from income in respect of which employees trusts are declared exempt (Sec. 56 [b], now 53 [b], Tax Code). The application of the withholdings system to interest on bank deposits or yield from deposit substitutes is essentially to maximize and expedite the collection of income taxes by requiring its payment at the source. If an employees trust like the GCL enjoys a tax-exempt status from income, we see no logic in withholding a certain percentage of that income which it is not supposed to pay in the first place.

Commissioner of Internal Revenue vs. Court of Appeals G.R. No. 96016 October 17, 1991
Digest by: MALAMUG, Jena Lemienne Mae A.

53

PADILLA, J. FACTS:

When Efren P. Castaeda retired from the government service as Revenue Attache in the Philippine Embassy in London, England, he received several benefits including terminal leave pay or commutation of leave credits from which the Commissioner of Internal Revenue withheld P12,557.13 allegedly representing income tax thereon. The Commissioner contends that the terminal leave pay is income derived from employer-employee relationship and as part of the compensation for services rendered, it is actually part of gross income of the recipient. Subsequently, Castaeda filed a formal written claim with the Commissioner for refund of the amount withheld contending that the cash equivalent of his terminal leave is exempt from income tax. He likewise filed with the Court of Tax Appeals a Petition for Review praying for the refund. The Court of Tax Appeals and Court of Appeals ruled in favor of Castaeda. Hence, this petition for review on certiorari. ISSUE: Whether or not terminal leave pay received by a government official or employee on the occasion of his compulsory retirement from the government service is subject to withholding (income) tax. HELD: No. It not being part of the gross salary or income of a government official or employee but a retirement benefit, terminal leave pay is not subject to income tax.

RE: RE: Request of Atty. Bernardo Zialcita for Reconsideration of the Action of the Financial and Budget Office A.M. No. 90-6-015-SC October 18, 1990
Digest by: MALAMUG, Jena Lemienne Mae A.

54

GUTIERREZ, JR., J FACTS:

Atty. Bernardo Zialcita rendered government service from 1962-1990. Upon reaching the compulsory retirement age of 65, he applied for retirement benefits. Upon his compulsory retirement, he is entitled to the commutation of his accumulated leave credits to its money value. Subsequently he questioned the deductions on the benefits given to him. ISSUE: Whether or not terminal leave pay received by virtue of his compulsory retirement is considered as a part of his salary and is thus subject to the payment of income tax. HELD: No. Since terminal leave is applied for by an officer or employee who has already severed his connection with his employer and who is no longer working, then it follows that the terminal leave pay, which is the cash value of his accumulated leave credits, is no longer compensation for services rendered. It cannot be viewed as salary. The commutation of accumulated leave credits may thus be considered a retirement gratuity since it is given only upon retirement and in consideration of the retirees meritorious services. Within the purview of Section 28 (b) 7 (b) of the NIRC, compulsory retirement may be considered as a cause beyond the control of the said official or employee. Consequently, the amount that he received by way of commutation of his accumulated leave credits as a result of his compulsory retirement, or his terminal leave pay, falls within the enumerated exclusions from gross income and is therefore no subject to tax.

Commissioner of Internal Revenue vs. Mitsubishi Metal Corporation G.R. No. L-54908. January 22, 1990
Digest by: MANALO, Samantha Grace N.

55

REGALADO, J. FACTS:

Private respondent Atlas Consolidated Mining and Development Corporation entered into a Loan and Sales Contract with Mitsubishi Metal Corporation for purposes of the projected expansion of the productive capacity of the Atlas mines in Toledo, Cebu. Under said contract, Mitsubishi agreed to extend a loan to Atlas in the amount of $20,000,000.00 for the installation of a new concentrator for copper production. Atlas, in turn undertook to sell to Mitsubishi all the copper concentrates produced from said machine for a period of fifteen (15) years Mitsubishi thereafter applied for a loan equivalent to $20,000,000. 00 with the Export-Import Bank of Japan to comply with its obligation under said contract subject to the condition that Mitsubishi would use the amount as a loan to Atlas and as a consideration for importing copper concentrates from Atlas, and that Mitsubishi had to pay back the total amount of loan by September 30, 1981.

Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by the former to the latter totalling P13,143,966.79 for the years 1974 and 1975. The corresponding 15% tax thereon in the amount of P1,971,595.01 was withheld pursuant to Section 24 (b) (1) and Section 53 (b) (2) of the NIRC and duly remitted to the Government.

On March 1976, private respondents filed a claim for tax credit requesting that the sum of P1,971,595.01 be applied against their existing and future tax liabilities. Not having acted upon the claim for tax credit, respondents filed a petition for review on the ground that Mitsubishi was a mere agent of Eximbank, which is a financing institution owned, controlled and financed by the Japanese Government. Such governmental status of Eximbank, if it may be so called, is the basis for private respondents claim for exemption from paying the tax on the interest payments on the loan as earlier stated pursuant to Sec. 29 (b) (7) (A) of the NIRC. ISSUE: Whether or not the interest income from the loans extended to Atlas by Mitsubishi is excludible from gross income taxation pursuant to Section 29 b) (7) (A) and, therefore, exempt from withholding tax. HELD: No. The loan and sales contract between Mitsubishi and Atlas does not contain any direct or inferential reference to Eximbank whatsoever. The agreement is strictly between Mitsubishi as creditor in the contract of loan and Atlas as the seller of the copper concentrates. When Mitsubishi therefore secured the said loans, it was in its own independent capacity as a private entity and not as a conduit of the consortium of Japanese banks or the Eximbank. Hence it was a loan by Eximbank to Mitsubishi and not to Atlas. The transaction between Mitsubishi and Eximbak was a distinct and separate contract from that entered into by Mitsubishi and Atlas. Therefore, Mitsubishi, and NOT Eximbank, is the sole creditor of Atlas, the former being the owner of the $20 million upon completion of its loan contract. The interest income of the loan paid by Atlas to Mitsubishi is therefore entirely different from the interest income paid by Mitsubishi to Eximbank. What was the subject of the 15% withholding tax is not the interest income paid by Mitsubishi to Eximbank, but the interest income earned by Mitsubishi from the loan to Atlas.

Also, it is well-settled that in tax exemption the burden of proof rests upon the party claiming exemption to prove that it is in fact covered by the exemption so claimed, which onus petitioners have failed to discharge. Significantly, private respondents are not even among the entities which, under Section 29 (b) (7) (A), are entitled to exemption and which should indispensably be the party in interest in this case.

Deductions

Aguinaldo Industries Corporation vs. Commissioner of Internal Revenues G.R. No. L-29790 February 25, 1982
Digest by: MANALO, Samantha Grace N.

56

PLANA, J. FACTS:

Aguinaldo Industries Corporation is engaged in the businesses of: (a) the manufacture of fishing nets, a tax-exempt industry, and (b) the manufacture of furniture. For accounting purposes, each division is provided with separate books of accounts as required by the Department of Finance. Previously, petitioner acquired a parcel of land in Muntinlupa as site of the fishing net factory. This transaction was entered in the books of the Fish Nets Division. Later, it sold the said property and the profit from this sale was again entered in the books of the Fish Nets Division as miscellaneous income to distinguish it from its tax-exempt income. For the year 1957, petitioner filed two separate income tax returns. After investigation of these returns, the examiners of the BIR found that the Fish Nets Division deducted from its gross income for that year the amount of P61,187.48 as additional remuneration paid to the officers of petitioner. The examiner further found that this amount was taken from the net profit of sale of the land and not in the course of or carrying on of its trade or business. The said amount was disallowed as deduction from gross income. Petitioner argues that the profit derived from the sale of its Muntinlupa land is not taxable for it is taxexempt income, considering that its Fish Nets Division enjoys tax exemption as a new and necessary industry under Republic Act 901. ISSUE:

Whether or not the bonus given to the officers of the petitioner upon the sale of its Muntinlupa land is an ordinary and necessary business expense deductible for income tax purposes. HELD: No. Pursuant to Sec.30 (a)(1) of the NIRC, the bonus given to the officers of the petitioner as their share of the profit realized from the sale of petitioners Muntinlupa land cannot be deemed a deductible expense for tax purposes, even if the aforesaid sale could be considered as a transaction for carrying on the trade or business of the petitioner and the grant of the bonus to the corporate officers pursuant to petitioners by-laws could, as an intra-corporate matter, be sustained. The records show that the sale was effected through a broker who was paid by petitioner a commission for his services. On the other hand, there is absolutely no evidence of any service actually rendered by petitioners officers which could be the basis of a grant to them of a bonus out of the profit derived from the sale. This being so, the payment of a bonus to them out of the gain realized from the sale cannot be considered as a selling expense; nor can it be deemed reasonable and necessary so as to make it deductible for tax purposes. Hence, the alleged amounts paid by petitioner to these directors in the guise and form of compensation for their supposed services as such, without any relation to the measure of their actual services, cannot be regarded as ordinary and necessary expenses within the meaning of the law.

Atlas Consolidated Mining & Development Corporation vs. Commissioner of Internal Revenue G.R. No. L-26911 January 27, 1981
Digest by: MEJIA, Daryll Margaret V.

57

DE CASTRO, J.: FACTS:

Atlas is a corporation engaged in the mining industry registered under the laws of the Philippines. The Commissioner assessed against Atlas the sum of P546,295.16 and P215,493.96 or a total of P761,789.12 as deficiency income taxes for the years 1957 and 1958. For the year 1958, the assessment of deficiency income tax of P761,789.12 covers the disallowance of items claimed by Atlas as deductible from gross income.

The assessment for 1958 was reduced to P39,646.82 from which Atlas appealed to the Court of Tax Appeals, assailing the disallowance of the following items claimed as deductible from its gross income for 1958: Transfer agents fee.........................................................P59,477.42 Stockholders relation service fee....................................25,523.14 U.S. stock listing expenses..................................................8,326.70 Suit expenses..........................................................................6,666.65 Provision for contingencies..................................... .........60,000.00 Total....................................................................P159,993.91 The Court of Tax Appeals allowed the above mentioned disallowed items, except the those in relation service fee and suit expenses.

It is the contention of Atlas that the amount of P25,523.14 paid in 1958 as annual public relations expenses is a deductible expense from gross income. Atlas claimed that it was paid for services of a public relations firm, hence, an ordinary and necessary business expense in order to compete with other corporations. ISSUE: Whether or not the expenses paid for the services rendered by a public relations firm (P.K MacKer & Co) labelled as stockholders relation service fee is an allowable deduction as business expense. HELD: An item of expenditure, in order to be deductible under the statute, must fall squarely within its language.

In order to be deductible as a business expense, three conditions are imposed, namely: (1) the expense must be ordinary and necessary, (2) it must be paid or incurred within the taxable year, and (3) it must be paid or incurred in carrying in a trade or business. He must substantially prove by evidence or records the deductions claimed under the law, otherwise, the same will be disallowed. Ordinarily, an expense will be considered necessary where the expenditure is appropriate and helpful in the development of the taxpayers business. It is ordinary when it connotes a payment which is normal in relation to the business of the taxpayer and the surrounding circumstances. The term ordinary does not require that the payments be habitual or normal in the sense that the same taxpayer will have to make them often; the payment may be unique or non-recurring to the particular taxpayer affected.

The expenditure of P25,523.14 paid to P.K. Macker & Co. as compensation for services carrying on the selling campaign in an effort to sell Atlas additional capital stock of P3,325,000 is not an ordinary expense. Accordingly, as found by the Court of Tax Appeals, the said expense is not deductible from Atlas gross income in 1958 because expenses relating to recapitalization and reorganization of the corporation, the cost of obtaining stock subscription, promotion expenses, and commission or fees paid for the sale of stock reorganization are capital expenditures.

58

That the expense in question was incurred to create a favorable image of the corporation in order to gain or maintain the publics and its stockholders patronage, does not make it deductible as business expense.

Roxas vs. Court of Tax Appeals G.R. No. L-25043 April 26, 1968
Digest by: MEJIA, Daryll Margaret V.

59

BENGZON, J.P., J.: FACTS:

Don Pedro Roxas and Dona Carmen Ayala, transmitted to their grandchildren by hereditary succession various properties (1) Agricultural lands with a total area of 19,000 hectares, situated in the municipality of Nasugbu, 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 properties given to their children by their parents, said children, namely, Antonio Roxas, Eduardo Roxas and Jose Roxas, formed a partnership called Roxas y Compania. The Government persuaded the Roxas brothers to part with their landholdings in the Nasugbu property. The Roxas brothers agreed to sell 13,500 hectares to the Government since it did not have funds to cover the purchase price, and so a special arrangement was made for the Rehabilitation Finance Corporation to advance to Roxas y Cia. the amount of P1,500,000.00 as loan.

In 1953 and 1955 Roxas y Cia. derived from said installment payments a net gain of P42,480.83 and 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. Jose lived in the residential house at Wright St., Malate, Manila and paid to Roxas y Cia. rentals for the house in the sum of P8,000.00 a year.

The Commissioner of Internal Revenue demanded from Roxas y Cia the payment of real estate dealers tax for 1952 in the amount of P150.00.The assessment for real estate dealers tax was based on the fact that Roxas y Cia. received house rentals from Jose Roxas in the amount of P8,000.00. In the same assessment, the Commissioner assessed deficiency income taxes against the Roxas Brothers for the years 1953 and 1955, which included 50% of the net profits for 1953 and 1955 derived from the sale of the Nasugbu farm lands to the tenants, and the disallowance of deductions from gross income of various business expenses and contributions claimed by Roxas y Cia. and the Roxas brothers. ISSUE: Are the deductions for business expenses and contributions deductible? HELD: Roxas y Cia. deducted from its gross income the amount of P40.00 for tickets to a banquet given in honor of Sergio Osmena and P28.00 for San Miguel beer given as gifts to various persons. The deduction were claimed as representation expenses. Representation expenses are deductible from gross income as expenditures incurred in carrying on a trade or business provided the taxpayer proves that they are reasonable in amount, ordinary and necessary, and incurred in connection with his business. In the case at bar, the evidence does not show such link between the expenses and the business of Roxas y Cia. The contributions to the Christmas funds of the Pasay City Police, Pasay City Firemen and Baguio City Police are not deductible for the reason that the Christmas funds were not spent for public purposes but as Christmas gifts to the families of the members of said entities. Under Section 39(h), a contribution to a government entity is deductible when used exclusively for public purposes. For this reason, the

disallowance must be sustained. The contribution to the Manila Police trust fund is an allowable deduction for said trust fund belongs to the Manila Police, a government entity, intended to be used exclusively for its public functions.

60

The contributions to the Philippines Heralds fund for Manilas neediest families were disallowed on the ground that the Philippines Herald is not a corporation or an association contemplated in Section 30 (h) of the Tax Code. It should be noted however that the contributions were not made to the Philippines Herald but to a group of civic spirited citizens organized by the Philippines Herald solely for charitable purposes. There is no question that the members of this group of citizens do not receive profits, for all the funds they raised were for Manilas neediest families. Such a group of citizens may be classified as an association organized exclusively for charitable purposes mentioned in Section 30(h) of the Tax Code.

Rightly, the Commissioner of Internal Revenue disallowed the contribution to Our Lady of Fatima chapel at the Far Eastern University on the ground that the said university gives dividends to its stockholders. Located within the premises of the university, the chapel in question has not been shown to belong to the Catholic Church or any religious organization. On the other hand, the lower court found that it belongs to the Far Eastern University, contributions to which are not deductible under Section 30(h) of the Tax Code for the reason that the net income of said university injures to the benefit of its stockholders. The disallowance should be sustained.

Zamora v. Collector of Internal Revenue G.R. No. L-15290. May 31, 1963
Digested by: MERCADO, Paul Joseph V.

61

PAREDES, J: FACTS:

Mariano Zamora, owner of the Bay View Hotel and Farmcia Zamora, Manila, filed his income tax returns for the said businesses. The Collector of Internal Revenue found that the promotion expenses incurred by his wife for the promotion of the Bay View Hotel and Farmacia Zamora were not allowable deductions. Mariano Zamora contends that the whole amount of the promotion expenses in his income tax returns, should be allowed and not merely one-half of it, on the ground that, while not all itemized expense are supported receipt, the absence of some supporting receipts has been sufficiently and satisfactorily established. ISSUE: Whether or not in the absence of receipt, the Collector of Internal Revenue allow full deductions in the promotion expense and not merely one-half of it. HELD: One half only. Claims for deduction of promotion expenses or entertainment expenses must also be supported and substantiated by records showing in detail the amount and nature of the expenses incurred. Considering that the application of Mrs. Zamora for dollar allocation shows that she went abroad on a combined business and medical trip, not all of her expenses came into the category of ordinary or necessary expenses; part thereof constituted her personal expenses. There having been no means to ascertain which expense were incurred by her in connection with the business of Zamora and that of her personal expense, the Collector and the CTA in their decision considered 50% of the said amount as business expense and the other 50% as personal. In situation like the present where absolute certainty is usually not possible, the CTA should make as close an approximate as it can, bearing heavily, if it chooses, upon the taxpayer whose inexactness was his own making.

C. M. Hoskins & Co. Inc. v Commissioner of Internal Revenue G.R. No. L-24059 November 28, 1969
Digested by: MERCADO, Paul Joseph V.

62

FACTS:

Hoskins, a domestic corporation engaged in the real estate business as broker, managing agents and administrators, filed its income tax return (ITR) showing a net income of P92,540.25 and a tax liability of P18,508 which it paid.

CIR disallowed 4 items of deductions in the ITR. Court of Tax Appeals upheld the disallowance of an item which was paid to Mr. C. Hoskins representing 50% of supervision fees earned and set aside the disallowance of the other 3 items. ISSUE: Whether or not the disallowance of the 4 items were proper. HELD: NOT deductible. It did not pass the test of reasonableness which is: General rule, bonuses to employees made in good faith and as additional compensation for services actually rendered by the employees are deductible, provided such payments, when added to the salaries do not exceed the compensation for services rendered.

The conditions precedent to the deduction of bonuses to employees are: 1) Payment of bonuses is in fact compensation 2) Must be for personal services actually rendered 3) Bonuses when added to salaries are reasonable when measured by the amount and quality of services performed with relation to the business of the particular taxpayer. There is no fixed test for determining the reasonableness of a given bonus as compensation. This depends upon many factors.

In this case, Hoskins fails to pass the test. CTA was correct in holding that the payment of the company to Mr. Hoskins of the sum P99,977.91 as 50% share of supervision fees received by the company was inordinately large and could not be treated as an ordinary and necessary expenses allowed for deduction to prosper.

Calanoc vs. Collector of Internal Revenue G.R. No. L-15922 November 29, 1961 Digest by: Nieva, Aubin Arn R.

63

LABRADOR, J.: FACTS:

This is a petition to review the decision of the Court of Tax Appeals affirming an assessment of P7,378.57, by the Collector of Internal Revenue as amusement tax and surcharge due on a boxing and wrestling exhibition held by petitioner Calanoc. To solicit and receive contributions for the orphans and destitute children of the Child Welfare Workers Club of the Social Welfare Commission, CF Calanoc financed and promoted a boxing and wrestling exhibition. The CIR found that the gross sales generated by the exhibition amounted toP26,553.00; the expenditures incurred was P25,157.62; and the net profit was onlyP1,375.30. Upon examination of the receipts, the CIR also found the following items of expenditures: (a) P461.65 for police protection; (b) P460.00 for gifts; (c)P1,880.05 for parties; and (d) several items for representation. Calanoc remitted to SWC P1,375.30 only. Based on its findings, the CIR assessed Calanoc an amusement tax of P7,378.57. ISSUE: Should petitioner be exempted from payment of amusement tax in cases where the net proceeds are not substantial or where the expenses are exorbitant? HELD: Expenses were excessive and not justified, not deductible. Calanoc denied having received the stadium fee P1,000, which was not included in the receipts. And that even if he did, he could not be made to pay almost seven times the amount as amusement tax. Evidence was submitted, however, that the said stadium fee of P1,000, was paid by the O-SO Beverages directly to the stadium management for advertisement privileges on the day of the exhibition. Since the fee was paid by the concessionaire, Calanoc had no right to include the P1,000 stadium fee among the items of his expenses. It results, therefore, that P1,000 went into Calanocs pocket unaccounted. Furthermore petitioner admitted that he could not justify the other expenses, such as those for police protection and gifts. He claims further that the accountant who prepared the statement of receipts was already dead and could no longer be questioned on the items contained in said statement. Most of the items of expenditures contained in the statement submitted to the CIR were either exorbitant or not supported by receipts. The payment of P461.65 for police protection was illegal as it was a consideration given by Calanoc to the police for the performance by the latter of the functions required of them to be rendered by law. The expenditures of P460 for gifts, P1,880.05 for parties, and other items for representation were rather excessive, considering that the purpose of the exhibition was for a charitable cause.

Kuenzle & Streiff Inc. vs Collector of Internal Revenue CIR G.R. No. L-18840 November 29, 1961
Digest by: Nieva, Aubin Arn R.

64

DIZON, J.: FACTS:

Petition filed by Kuenzle & Streiff Inc. for the review of the decision of the Court of Tax Appeals in C.T.A. Case No. 551 sustaining the assessments of the respondent issued against it, for deficiency income taxes arising from the disallowance, as deductible expenses, of the bonuses paid by petitioner to its officers, upon the ground that they were not ordinary, nor necessary, nor reasonable expenses . The petitioner claimed as a deduction for income tax purposes for the years 1950, 1951 and 1952 salaries, directors fees and bonuses of its non-resident president and vice president; bonuses of some of its resident officers and employees; and interests on earned but unpaid salaries and bonuses of its officers and employees. Petitioner however gave its resident officers and employees higher bonuses on the alleged reason because of their valuable contribution to the business of the corporation which has made it possible for it to realize huge profits during the aforesaid years. The CIR disallowed the said deductions hence they were assessed for the deficiency income taxes. Upon re-examination by the respondents, they allowed as deductions all items comprising directors fees and salaries of the nonresident president and vice president, but disallowing the bonuses insofar as they exceed the salaries of the recipients, as well as the interests on earned but unpaid salaries and bonuses. ISSUE: Should the excessive bonuses and interest be allowed as a deduction for income tax purposes? RULING: It should not be allowed. It is a general rule that `Bonuses to employees made in good faith and as additional compensation for the services actually rendered by the employees are deductible, provided such payments, when added to the stipulated salaries, do not exceed a reasonable compensation for the services rendered (4 Mertens Law of Federal Income Taxation, Sec. 25.50, p. 410). The condition precedents to the deduction of bonuses to employees are: (1) the payment of the bonuses is in fact compensation; (2) it must be for personal services actually rendered; and (3) bonuses, when added to the salaries, are `reasonable ... when measured by the amount and quality of the services performed with relation to the business of the particular taxpayer (Idem., Sec. 25.44, p. 395). Here it is admitted that the bonuses are in fact compensation and were paid for services actually rendered.

Paper Industries Corporation of the Philippines vs. Court of Appeals G.R. Nos. 106949-50. December 1, 1995 Digest by: ONG, Ruth Ann Q.

65

FELICIANO, J. FACTS:

Paper Industries Corporation of the Philippines (Picop), which is petitioner in G.R. Nos. 106949-50 and private respondent in G.R. Nos. 106984-85, is a Philippine corporation registered with the Board of Investments (BOI) as a preferred pioneer enterprise with respect to its integrated pulp and paper mill, and as a preferred non-pioneer enterprise with respect to its integrated plywood and veneer mills.

On 21 April 1983, Picop received from the Commissioner of Internal Revenue (CIR) two (2) letters of assessment and demand both dated 31 March 1983: (a) one for deficiency transaction tax and for documentary and science stamp tax; and (b) the other for deficiency income tax for 1977, for an aggregate amount of P88,763,255.00. On 26 April 1983, Picop protested the assessment of deficiency transaction tax and documentary and science stamp taxes. Picop also protested on 21 May 1983 the deficiency income tax assessment for 1977. These protests were not formally acted upon by respondent CIR. On 26 September 1984, the CIR issued a warrant of distraint on personal property and a warrant of levy on real property against Picop, to enforce collection of the contested assessments; in effect, the CIR denied Picops protests.

Thereupon, Picop went before the Court of Tax Appeals (CTA) appealing the assessments. After trial, the CTA rendered a decision dated 15 August 1989, modifying the findings of the CIR and holding Picop liable for the reduced aggregate amount of P20,133,762.33. ISSUE: Whether or not Picop is entitled to deduct against current income interest payments on loans for the purchase of machinery and equipment. HELD: In 1969, 1972 and 1977, Picop obtained loans from foreign creditors in order to finance the purchase of machinery and equipment needed for its operations. In its 1977 Income Tax Return, Picop claimed interest payments made in 1977, amounting to P42,840,131.00, on these loans as a deduction from its 1977 gross income.

Interest payments on loans incurred by a taxpayer (whether BOI-registered or not) are allowed by the NIRC as deductions against the taxpayers gross income. (Section 30 of the 1977 Tax Code) Thus, the general rule is that interest expenses are deductible against gross income and this certainly includes interest paid under loans incurred in connection with the carrying on of the business of the taxpayer. Our 1977 NIRC does not prohibit the deduction of interest on a loan incurred for acquiring machinery and equipment. Neither does our 1977 NIRC compel the capitalization of interest payments on such a loan. The 1977 Tax Code is simply silent on a taxpayers right to elect one or the other tax treatment of such interest payments. Accordingly, the general rule that interest payments on a legally demandable loan are deductible from gross income must be applied.

Commissioner of Internal Revenue vs. Vda de Prieto G.R. No. L-13912. September 30, 1960 Digest by: ONG, Ruth Ann Q.

66

GUTIERREZ DAVID, J. FACTS:

On December 4, 1945, the respondent conveyed by way of gifts to her four children, namely, Antonio, Benito, Carmen and Mauro, all surnamed Prieto, real property with a total assessed value of P892,497.50. After the filing of the gift tax returns on or about February 1, 1954, the petitioner Commissioner of Internal Revenue appraised the real property donated for gift tax purposes at P1,231,268.00 and assessed the total sum of P117,706.50 as donors gift tax, interests and compromises due thereon. Of the total sum of P117,706.50 paid by respondent on April 29, 1954, the sum of P55,978.65 represents the total interest on account of delinquency. This sum of P55,978.65 was claimed as deduction, among others, by respondent in her 1954 income tax return. Petitioner, however, disallowed the claim and as a consequence of such disallowance assessed respondent for 1954 the total sum of P21,410.38 as deficiency income tax due on the aforesaid P55,978.65, including interest up to March 31, 1957, surcharge and compromise for the late payment. Under the law, for interest to be deductible, it must be shown that there be an indebtedness, that there should be interest upon it, and that what is claimed as an interest deduction should have been paid or accrued within the year. It is here conceded that the interest paid by respondent was in consequence of the late payment of her donors tax, and the same was paid within the year it is sought to be deducted. ISSUE: Whether or not such interest was paid upon an indebtedness within the contemplation of section 30(b) (1) of the Tax Code. HELD: Sec. 30. Deductions from gross income. In computing net income there shall be allowed as deductions: (b) Interest: (1) In general. The amount of interest paid within the taxable year on indebtedness, except on indebtedness incurred or continued to purchase or carry obligations the interest upon which is exempt from taxation as income under this Title.

The term indebtedness as used in the Tax Code of the United States containing similar provisions as in the above-quoted section has been defined as an unconditional and legally enforceable obligation for the payment of money. Within the meaning of that definition, it is apparent that a tax may be considered an indebtedness. Where statute imposes a personal liability for a tax, the tax becomes, at least in a board sense, a debt. A tax is a debt for which a creditors bill may be brought in a proper case. It follows that the interest paid by herein respondent for the late payment of her donors tax is deductible from her gross income under section 30 (b) of the Tax Code above quoted.

For interest to be allowed as deduction from gross income, it must be shown that there be indebtedness, that there should be interest upon it, and that what is claimed as an interest deduction should have been paid or accrued within the year.

Commissioner of Internal Revenue vs. Lednicky G.R. Nos. L-18169, L-18262 & L-21434. July 31, 1964
Digest by: OSOTEO, Maureen Kascha L.

67

REYES, J. FACTS:

The respondents, V. E. Lednicky and Maria Valero Lednicky, are husband and wife, respectively, both American citizens residing in the Philippines, and have derived all their income from Philippine sources for the taxable years in question.

In G. R. No. L-18286, Respondents filed their income tax return for 1956. Pursuant to the petitioners assessment notice, the respondents paid the total amount of P326,247.41, inclusive of the withheld taxes. The respondents Lednickys filed an amended income tax return for 1956. The amendment consists in a claimed deduction of P205,939.24 paid in 1956 to the United States government as federal income tax for 1956. Simultaneously with the filing of the amended return, the respondents requested the refund of P112,437.90.

G. R. No. L-18169 (formerly CTA Case No. 570) is also a claim for refund in the amount of P150,269.00, as alleged overpaid income tax for 1955, the facts of which are as follows: Respondents-spouses filed their domestic income tax return for 1955. On 19 April 1956, they filed an amended income tax return. After audit, the petitioner determined a deficiency of P16,116.00, which amount, the respondents paid on 5 December 1956.

Back in 1955, however, the Lednickys filed with the U.S. Internal Revenue Agent in Manila their federal income tax return for the years 1947, 1951, 1952, 1953, and 1954 on income from Philippine sources on a cash basis. Payment of these federal income taxes were made in 1955 to the U.S. Director of Internal Revenue. On 11 August 1958, the said respondents amended their Philippine income tax return for 1955 to include the such deductions.

In G. R. No. 21434 (CTA Case No. 783), the facts are similar, but refer to respondents Lednickys income tax return for 1957. ISSUE: Whether or not a citizen of the United States residing in the Philippines, who derives income wholly from sources within the Republic of the Philippines, may deduct from his gross income the income taxes he has paid to the United States government for the taxable year on the strength of section 30 (C-1) of the Philippine Internal Revenue Code, reading as follows: SEC. 30. Deduction from gross income. In computing net income there shall be allowed as deductions (c) Taxes: (1) In general. Taxes paid or accrued within the taxable year, except (B) Income, war-profits, and excess profits taxes imposed by the authority of any 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 paragraph (3) of this subsection (relating to credit for foreign countries); HELD: NO. The Construction and wording of Section 30 (c) (1) (B) of the Internal Revenue Act shows the laws intent that the right to deduct income taxes paid to foreign government from the taxpayers gross income is given only as an alternative or substitute to his right to claim a tax credit for such foreign

income taxes under section 30 (c) (3) and (4); so that unless the alien resident has a right to claim such tax credit if he so chooses, he is precluded from deducting the foreign income taxes from his gross income. For it is obvious that in prescribing that such 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 paragraph (3) (relating to credits for taxes paid to foreign countries), the statute assumes that the taxpayer in question also may signify his desire to claim a tax credit and waive the deduction; otherwise, the foreign taxes would always be deductible, and their mention in the list of non-deductible items in Section 30(c) might as well have been omitted, or at least expressly limited to taxes on income from sources outside the Philippine Islands. Much stress is laid on the thesis that if the respondent taxpayers are not allowed to deduct the income taxes they are required to pay to the government of the United States in their return for Philippine income tax, they would be subjected to double taxation. What respondents fail to observe is that double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity. In the present case, while the taxpayers would have to pay two taxes on the same income, the Philippine government only receives the proceeds of one tax. As between the Philippines, where the income was earned and where the taxpayer is domiciled, and the United States, where that income was not earned and where the taxpayer did not reside, it is indisputable that justice and equity demand that the tax on the income should accrue to the benefit of the Philippines. Any relief from the alleged double taxation should come from the United States, and not from the Philippines, since the formers right to burden the taxpayer is solely predicated on his citizenship, without contributing to the production of the wealth that is being taxed. Finally, to allow an alien resident to deduct from his gross income whatever taxes he pays to his own government amounts to conferring on the latter the power to reduce the tax income of the Philippine government simply by increasing the tax rates on the alien resident. Everytime the rate of taxation imposed upon an alien resident is increased by his own government, his deduction from Philippine taxes would correspondingly increase, and the proceeds for the Philippines diminished, thereby subordinating our own taxes to those levied by a foreign government. Such a result is incompatible with the status of the Philippines as an independent and sovereign state.

68

Paper Industries Corporation of the Philippines vs. Court of Appeals G.R. Nos. 106984-85. December 1, 1995
Digest by: OSOTEO, Maureen Kascha L.

79

FELICIANO, J. FACTS:

The Paper Industries Corporation of the Philippines (Picop) is a Philippine corporation registered with the Board of Investments (BOI) as a preferred pioneer enterprise with respect to its integrated pulp and paper mill, and as a preferred non-pioneer enterprise with respect to its integrated plywood and veneer mills.

On 21 April 1983, Picop received from the Commissioner of Internal Revenue (CIR) two (2) letters of assessment and demand both dated 31 March 1983: (a) one for deficiency transaction tax and for documentary and science stamp tax; and (b) the other for deficiency income tax for 1977, for an aggregate amount of P88,763,255.00. On 26 April 1983, Picop protested the assessment of deficiency transaction tax and documentary and science stamp taxes. Picop also protested on 21 May 1983 the deficiency income tax assessment for 1977. Thereupon, Picop went before the Court of Tax Appeals (CTA) appealing the assessments. After trial, the CTA rendered a decision modifying the findings of the CIR and holding Picop liable for the reduced aggregate amount of P20, 133,762.33. Picop and the CIR filed separate Petitions for Review before the Supreme Court.

Picop maintains that it is not liable at all to pay any of the assessments or any part thereof. The CIR, upon the other hand, insists that the Court of Appeals erred in finding Picop not liable for surcharge and interest on unpaid transaction tax and for documentary and science stamp taxes and in allowing Picop to claim as deductible expenses: xxx (a) the net operating losses of another corporation (i.e., Rustan Pulp and Paper Mills, Inc.) ISSUE: Whether or not PICOP is entitled to deduct against current income net operating losses incurred by Rustan Pulp and Paper Mills, Inc HELD: NO. As a backgrounder, Picop entered into a merger agreement with the Rustan Pulp and Paper Mills, Inc. (RPPM) and Rustan Manufacturing Corporation (RMC). Under this agreement, the rights, properties, privileges, powers and franchises of RPPM and RMC were to be transferred, assigned and conveyed to Picop as the surviving corporation. Thereupon, on 30 November 1977, apparently the effective date of merger, RPPM and RMC were dissolved. The Board of Investments approved the merger agreement on 12 January 1978. It appears that RPPM and RMC were, like Picop, BOI-registered companies. Immediately before merger effective date, RPPM had over preceding years accumulated losses in the total amount of P81, 159,904.00. In its 1977 Income Tax Return, Picop claimed P44, 196,106.00 of RPPMs accumulated losses as a deduction against Picops 1977 gross income. In claiming such deduction, Picop relies on section 7 (c) of R.A. No. 5186 which provides as follows: Sec. 7. Incentives to Registered Enterprise. A registered enterprise, to the extent engaged in a preferred area of investment, shall be granted the following incentive benefits: xxx xxx xxx (c) Net Operating Loss Carry-over. A net operating loss incurred in any of the first ten years of operations may be carried over as a deduction from taxable income for the six years immediately following the year of such loss.

The CIR disallowed all the deductions claimed on the basis of RPPMs losses on the ground that the previous losses were incurred by another taxpayer, RPPM, and not by Picop in connection with Picops own registered operations. The CIR took the view that Picop, RPPM and RMC were merged into one (1) corporate personality only on 12 January 1978, upon approval of the merger agreement by the BOI. Thus, during the taxable year 1977, Picop on the one hand and RPPM and RMC on the other, still had their separate juridical personalities.

70

R.A. No. 5186 introduced the carry-over of net operating losses as a very special incentive to be granted only to registered pioneer enterprises and only with respect to their registered operations. The statutory purpose here may be seen to be the encouragement of the establishment and continued operation of pioneer industries by allowing the registered enterprise to accumulate its operating losses which may be expected during the early years of the enterprise and to permit the enterprise to offset such losses against income earned by it in later years after successful establishment and regular operations. To promote its economic development goals, the Republic foregoes or defers taxing the income of the pioneer enterprise until after that enterprise has recovered or offset its earlier losses. We consider that the statutory purpose can be served only if the accumulated operating losses are carried over and charged off against income subsequently earned and accumulated by the same enterprise engaged in the same registered operations. In the instant case, to allow the deduction claimed by Picop would be to permit one corporation or enterprise, Picop, to benefit from the operating losses accumulated by another corporation or enterprise, RPPM. To grant Picops claimed deduction would be to permit Picop to purchase a tax deduction and RPPM to peddle its accumulated operating losses. Under the CTA and Court of Appeals decisions, Picop would benefit by immunizing P44,196,106.00 of its income from taxation thereof although Picop had not run the risks and incurred the losses which had been encountered and suffered by RPPM. Picops claim for deduction is not only bereft of statutory basis; it does violence to the legislative intent which animates the tax incentive granted by Section 7 (c) of R.A. No. 5186. In granting the extraordinary privilege and incentive of a net operating loss carry-over to BOI-registered pioneer enterprises, the legislature could not have intended to require the Republic to forego tax revenues in order to benefit a corporation which had run no risks and suffered no losses, but had merely purchased anothers losses.

Philippine Refining Company vs. Court of Appeals G.R. No. 118794. May 8, 1996
Digest by: PADUA, Julie Ann E.

71

REGALADO, J. FACTS:

Philippine Refining Company (PRC) was assessed by the Commissioner of Internal Revenue (Commissioner) to pay a deficiency tax for the year 1985 in the amount of P1,892,584.00, computed as follows: Deficiency Income Tax Add: Bad Debts Net Income per investigation Disallowances Interest Expense Tax Paid Php 197,502,568.00 Php 3,379,616.00

Net Taxable Income Tax Due Thereon Less: Add:

Php

713,070.93

2,666,545.49

Php 200,882,184.00 Php 70,298,764.00 69,115,899.00 1,182,865.00 709,719.00

Deficiency Income Tax

Total Amount Due and Collectible

20% Interest (60% max.)

Php 1,892,584.00

On April 26, 1989, PRC timely protested the assessment on the ground that it was based on the erroneous disallowances of bad debts and interest expense although the same are both allowable and legal deductions. However, the Commissioner issued a warrant of garnishment against the deposits of PRC at a branch of City Trust Bank, in Makati, Metro Manila, which action the latter considered as a denial of its protest.

Consequently, PRC filed a petition for review with the Court of Tax Appeals (CTA) on the same assignment of error, that is, that the bad debts and interest expense are legal and allowable deductions. In its decision of February 3, 1993 , the CTA modified the findings of the Commissioner by reducing the deficiency income tax assessment to P237,381.26, with surcharge and interest incident to delinquency. In said decision, the Tax Court reversed and set aside the Commissioners disallowance of the interest expense of P2,666,545.19 but maintained the disallowance of the supposed bad debts of 13 debtors in the total sum of P395,324.27. PRC then elevated the case to the Court of Appeals but was denied; hence, this appeal by certiorari. ISSUE: Whether or not the bad debts of PRCs 13 debtors may be considered worthless and deductible. HELD: No. The rule on determining the worthlessness of a debt was established in the case of Collector vs. Goodrich International Rubber Co. In that case, the Supreme Court held that for debts to be considered as worthless, and thereby 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 be worthless and uncollectible during the taxable year; (3) the debt must be charged off during the taxable year; and (4) the debt must arise from the business or trade of the taxpayer.

Moreover, before a debt can be considered worthless, the taxpayer must also show that it is indeed uncollectible even in the future. The steps to be undertaken by the taxpayer to prove that he exerted

diligent efforts to collect the debts are: (1) sending of statement of accounts; (2) sending of collection letters; (3) giving the account to a lawyer for collection; and (4) filling a collection case in court.

In this case, the only evidentiary support given by PRC for its alleged bad debts was the explanation or justification posited by its financial adviser or accountant, Guia D. Masagana. However, her allegation were not supported by any documentary evidence, hence both the Court of Appeals and CTA ruled that said contentions per se cannot prove that the debts were indeed uncollectible and can be considered as bad debts as to make them deductible. Thus, mere testimony of the Financial Accountant of the petitioner explaining the worthlessness of debts without documentary evidence to support such testimony is nothing more than a self-serving exercise which lacks probative value.

72

Fernandez Hermanos, Inc. vs. Commissioner of Internal Revenue G.R. Nos. L-21551, L-21557, L-24972, L-24978. September 30, 1969
Digest by: PADUA, Julie Ann E.

73

TEEHANKEE, J. FACTS:

Fernandez Hermanos, Inc. is a domestic corporation organized for the principal purpose of engaging in business as an investment company with main office in Manila. Upon verification of the taxpayers income tax returns for the year 1950 to 1954, the Commissioner of Internal Revenue (Commissioner) assessed against the taxpayer the following alleged deficiency income taxes: P 13,414.00 P 119,613.00 P 11,698.00 P 6,887.00 P 14,451.00 One of the alleged discrepancies found upon examination and verification of the taxpayers income tax was the losses in or bad debts of Palawan Manganese Mines, Inc. amounting to P353,134.25 in 1951. The said loss or bad debt represents the financial assistance or loan given by the taxpayer to Palawan Manganese Mines, Inc. pursuant to a memorandum agreement in 1945 to enable the latter to resume its mining operations in Coron, Palawan. Under the said memorandum agreement, Palawan Manganese, Inc. agrees to pay the taxpayer 15% of its net profits. 1950 1951 1952 1953 1954

Despite the advances extended by the taxpayer and the resumption of its mining operations, Palawan Manganese Mines, Inc. continued to suffer losses. Consequently, the taxpayer decided to write off the sum of P353,134.25 in its income tax return for 1951. The said amount was arrived at on the basis of the total advances made from 1945 to 1949 in the sum of P438,981.39 deducted by P85,647.14, representing its pre-war assets. However, the Commissioner disallowed the deductions of the said bad debts. Subsequently, the said disallowance was sustained by the Tax Court; hence, this appeal. ISSUE: Whether the Tax Courts disallowance of the losses in or bad debts of Palawan Manganese Mines, Inc. was proper. HELD: Yes. The advances made by the taxpayer to its 100% subsidiary, Palawan Manganese Mines, Inc. amounting to P587,308,07 as of 1951 were investments and not loans. The evidence on record shows that the board of directors of the two companies since August, 1945, were identical and that the only capital of Palawan Manganese Mines, Inc. is the amount of P100,000.00 entered in the taxpayers balance sheet as its investment in its subsidiary company. This fact explains the liberality with which the taxpayer made such large advances to the subsidiary, despite the latters admittedly poor financial condition. The taxpayers contention that its advances were loans to its subsidiary as against the Tax Courts finding that under their memorandum agreement, the taxpayer did not expect to be repaid, since if the subsidiary had no earnings, there was no obligation to repay those advances, becomes immaterial, in the resolution of the question. The Tax Court correctly held that the subsidiary company was still in operation in 1951 and 1952 and the taxpayer continued to give it advances in those years, and, therefore, the alleged debt or investment could not properly be considered worthless and deductible in 1951, as claimed by the taxpayer. Furthermore, neither under Section 30 (d) (2) of our Tax Code providing for deduction by corporations of losses actually sustained and charged off during the taxable

year nor under Section 30 (e) (1) thereof providing for deduction of bad debts actually ascertained to be worthless and charged off within the taxable year, can there be a partial writing off of a loss or bad debt, as was sought to be done here by the taxpayer. For such losses or bad debts must be ascertained to be so and written off during the taxable year, are therefore deductible in full or not at all, in the absence of any express provision in the Tax Code authorizing partial deductions.

74

Basilan Estates, Inc. vs. Commissioner of Internal Revenue G.R. No. L-22492. September 5, 1967
Digest by: PALATTAO, Claudine M.

75

BENGZON, J.P., J.: FACTS:

A Philippine corporation engaged in the coconut industry, Basilan Estates, Inc., with principal offices in Basilan City, filed on March 24, 1954 its income tax returns for 1953 and paid an income tax of P8,028. On February 26, 1959, the Commissioner of Internal Revenue, per examiners report of February 19, 1959, assessed Basilan Estates, Inc., a deficiency income tax of P3,912 for 1953 and P86,876.85 as 25% surtax on unreasonably accumulated profits as of 1953 pursuant to Section 25 of the Tax Code. On non-payment of the assessed amount, a warrant of distraint and levy was issued but the same was not executed because Basilan Estates, Inc. succeeded in getting the Deputy Commissioner of Internal Revenue to order the Director of the district in Zamboanga City to hold execution and maintain constructive embargo instead. Because of its refusal to waive the period of prescription, the corporations request for reinvestigation was not given due course, and on December 2, 1960, notice was served the corporation that the warrant of distraint and levy would be executed. On December 20, 1960, Basilan Estates, Inc. filed before the Court of Tax Appeals a petition for review of the Commissioners assessment, alleging prescription of the period for assessment and collection; error in disallowing claimed depreciations, travelling and miscellaneous expenses; and error in finding the existence of unreasonably accumulated profits and the imposition of 25% surtax thereon. On October 31, 1963, the Court of Tax Appeals found that there was no prescription and affirmed the deficiency assessment in toto. ISSUE: Whether or not depreciation shall be determined on the acquisition cost or on the reappraised value of the assets. HELD: Depreciation is the gradual diminution in the useful value of tangible property resulting from wear and tear and normal obsolescense. The term is also applied to amortization of the value of intangible assets, the use of which in the trade or business is definitely limited in duration. Depreciation commences with the acquisition of the property and its owner is not bound to see his property gradually waste, without making provision out of earnings for its replacement. It is entitled to see that from earnings the value of the property invested is kept unimpaired, so that at the end of any given term of years, the original investment remains as it was in the beginning. It is not only the right of a company to make such a provision, but it is its duty to its bond and stockholders, and, in the case of a public service corporation, at least, its plain duty to the public. Accordingly, the law permits the taxpayer to recover gradually his capital investment in wasting assets free from income tax. Precisely, Section 30 (f) (1) which states: (1)In general. A reasonable allowance for deterioration of property arising out of its use or employment in the business or trade, or out of its not being used: Provided, That when the allowance authorized under this subsection shall equal the capital invested by the taxpayer . . . no further allowance shall be made. . . .allows a deduction from gross income for depreciation but limits the recovery to the capital invested in the asset being depreciated.

The income tax law does not authorize the depreciation of an asset beyond its acquisition cost. Hence, a deduction over and above such cost cannot be claimed and allowed. The reason is that deductions from gross income are privileges, not matters of right. They are not created by implication but upon clear expression in the law.

Moreover, the recovery, free of income tax, of an amount more than the invested capital in an asset will transgress the underlying purpose of a depreciation allowance. For then what the taxpayer would recover will be, not only the acquisition cost, but also some profit. Recovery in due time thru depreciation of investment made is the philosophy behind depreciation allowance; the idea of profit on the investment made has never been the underlying reason for the allowance of a deduction for depreciation. Accordingly, the claim for depreciation beyond P36,842.04 or in the amount of P10,500.49 has no justification in the law. The determination, therefore, of the Commissioner of Internal Revenue disallowing said amount, affirmed by the Court of Tax Appeals, is sustained.

76

Limpan Investment Corporation vs. Commissioner of Internal Revenue G.R. No. L-21570. July 26, 1966
Digest by: PALATTAO, Claudine M.

77

REYES, J.B.L., J.: FACTS:

Petitioner is a domestic corporation engaged in the business of leasing real properties. It commenced actual business operations on July 1, 1955. Its real properties consist of several lots and buildings, mostly situated in Manila and in Pasay City. Petitioner corporation duly filed its 1956 and 1957 income tax returns, reporting therein net incomes of P3,287.81 and P11,098.36, respectively, for which it paid the corresponding taxes therefor in the sums of P657.00 and P2,220.00.

Sometime in 1958 and 1959, the examiners of the Bureau of Internal Revenue conducted an investigation of petitioners 1956 and 1957 income tax returns and, in the course thereof, they discovered and ascertained that petitioner had underdeclared its rental incomes by P20,199.00 and P81,690.00 during these taxable years and had claimed excessive depreciation of its buildings in the sums of P4,260.00 and P16,336.00 covering the same period. On the basis of these findings, respondent Commissioner of Internal Revenue issued its letter-assessment and demand for payment of deficiency income tax and surcharge against petitioner corporation.

Petitioner corporation requested respondent Commissioner of Internal Revenue to reconsider the above assessment but the latter denied said request and reiterated its original assessment and demand, plus 5% surcharge and the 1% monthly interest from June 30, 1959 to the date of payment; hence, the corporation filed its petition for review before the Tax Appeals court, questioning the correctness and validity of the above assessment of respondent Commissioner of Internal Revenue. ISSUE: Whether or not the depreciation in the amount of P20,598.00 claimed by petitioner for the years 1956 and 1957 was excessive. HELD: No. Depreciation is a question of fact and is not measured by theoretical yardstick, but should be determined by a consideration of actual facts. The findings of the Tax Court in this respect should not be disturbed when not shown to be arbitrary or in abuse of discretion and petitioner has not shown any arbitrariness or abuse of discretion in the part of the Tax Court in finding that petitioner claimed excessive depreciation in its returns. The Tax Court applied rates of depreciation in accordance with Bulletin F of the U.S. Federal Internal Revenue Service, which this Court pronounced as having strong persuasive effect in this jurisdiction, for having been the result of scientific studies and observation for a long period in the United States, after whose Income Tax Law ours is patterned. Wherefore, the appealed decision should be, as it is hereby, affirmed. With costs against petitionerappellant, Limpan Investment Corporation.

Consolidated Mines, Inc. vs. Court of Tax Appeals G.R. Nos. L-18843 and L-18844 August 29, 1974
Digest by: PALATTAO, Rose Angelie T.

78

MAKALINTAL, C.J FACTS:

Consolidated filed a refund for overpayments of income taxes for the year 1951. However, after investigation of the BIR, instead of having a refund, the company was instead assessed for deficiency income taxes for the years 1953, 1954 and 1956 with 5% surcharge and 1% monthly interest. After investigation, for the years 1951 and 1954 (1) the company had not accrued as an expense the share in the company profits of Benguet Consolidated Mines as operator of the Consolidated Mines, although for income tax purposes the Consolidated had reported income and expenses on the accrual basis; (2) depletion and depreciation expenses had been overcharged; and (3) the claims for audit and legal fees and miscellaneous expenses for 1953 and 1954 had not been properly substantiated.; and that (b) for the year 1956 (1) the company had overstated its claim for depletion; and (2) certain claims for miscellaneous expenses were not duly supported by evidence. Consolidated and Benguet entered into a development agreement whereby Consolidated, as the owner of several mining claims, allowed Benguet to explore, develop, mine, concentrate and market the ore in the mining claims. Once profit is derived, expenditures from its own resources shall be charged against the subsequent gross income of the properties. During the time Benguet is being reimbursed for all its expenditures, the net profits resulting from the operation of the claims shall be divided 90% of the net profits pertaining to Benguet and 10% to Consolidated. After Benguet has been fully reimbursed for its expenditures, the net profits from the operation shall be divided between Benguet and Consolidated share and share alike, it being understood however, that the net profits as the term is used in this agreement shall be computed by deducting from gross income all operating expenses and all disbursements of any nature. By 1953, Benguet had completely recouped its advances. Consolidated used the accrual method of accounting in computing its income. One of its income is the amount paid to Benguet as mine operator, which amount is computed as 50% of net income. Consolidated deducts as an expense 50% of cash receipts minus disbursements, but does not deduct at the end of each calendar year what the Commissioner alleges is 50% if and when the accounts receivable are actually paid. ISSUE: Whether or not Consolidateds accounting method is allowed. HELD: YES. It is said that accounting methods for tax purposes comprise a set of rules for determining when and how to report income and deductions. The US Internal Revenue Code allows taxpayers to adopt the accounting method most suitable to his business, and requires only that taxable income generally be based on the method of accounting regularly employed in keeping the taxpayers books, provided that the method clearly reflects income. A deduction cannot be accrued until an actual liability is incurred, even if payment has not been made.

ON DEPLETION: The first issue raised by Consolidated is with respect to the rate of mine depletion used by the CTA. The Tax Code provides that in computing net income there shall be allowed as deduction, in the case of mines, a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof which has been mined and sold during the year for which the return is made. (Sec. 30(g) (1) (B). as an income tax concept, depletion is wholly a creation of the statue solely a matter of legislative grace. Hence, the taxpayer has the burden of justifying the allowance of any deduction claimed. As in connection with all other tax controversies, the burden of proof to show that a disallowance of depletion by the Commissioner is incorrect or that an allowance made is inadequate is upon the taxpayer, and this is true with respect to the value of the property constituting 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. Here, SC considered the evidence presented (testimony of Eligio Garcia) and the Report to Stockholders which includes the Balance Sheet as of 1946), geological report on the estimated amount of ore in the claims, etc.) it set forth a very detailed computation of the depletion rate, determining the value of each component of the formula of depletion, viz: Rate of Depletion Per Unit=Cost of Mine Property/Estimated Ore Deposit of product Mined and sold depletion is different from depreciation. In determining the amount of cost depletion allowable the following three facts are essential: 1. The basis of the property, 2. The estimated total recoverable units in the property; and 3. The no. of units recovered during the taxable year in question. As used as an element in cost depletion, basis means the dollar amount of the taxpayers capital or investment in the property which he is entitled to recover tax free during the period he is removing the mineral in the deposit. Disposition Decision modified.

79

3M Philippines, Inc. vs. Commissioner of Internal Revenue G.R. NO. 82833. September 26, 1988
Digest by: PALATTAO, Rose Angelie T.

80

GRIO-AQUINO, J.

FACTS: The petitioner 3M claimed as deductions for income tax purposes business expenses in the form of royalty payments to its foreign licensor which the respondent Commissioner disallowed. The petitioner claimed the following deductions royalties and technical service fees and pre-operational cost of tape coater. The amount was not allowed as entire deduction. The petitioner argues that the law applicable to its case is only Section 29(a)(1) of the Tax Code and not Circular No. 393 of the Central Bank. ISSUE: Whether or not the royalty payments are valid deductible expenses. HELD: NO. Although the Tax Code allows payments of royalty to be deducted from gross income as business expenses, it is CB Circular No. 393 that defines what royalty payments are proper. Improper payments of royalty are not deductible as legitimate business expenses. Section 3-C of CB Circular No. 393 provides for payment of royalties only on commodities manufactured by the licensee under the royalty agreement not on the whole sale price of finished products imported by the licensee from the licensor. CB Circulars, like CB Circular No. 393 dated December 7, 1973, published in the Official Gazette issue of December 17, 1973, 69 OG No. 51, p. 11737 issued by Central Bank in the exercise of its authority under the Central Bank Act, duly published in the OG, have the force and effect of law and binding on everybody.

Esso Standard Eastern, Inc. vs. Commissioner of Internal Revenue G.R. Nos. L-28508-9 July 7, 1989
Digest by: PAMATMAT, John Red C.

81

CRUZ, J. FACTS:

In CTA case no. 1251, a claim for refund was filed by petitioner ESSO, by reason of its abandonment as dry holes of several of its oils wells. The refund occurred after ESSOs deduction from its gross income for 1959 as part of its ordinary and necessary expenses was disallowed by the Respondent Commissioner of Internal Revenue. Along with the refund, ESSO also claimed as ordinary and necessary expenses for the margin fees it had paid to the Central Bank on its profit remittances to its New York head office. The CIR granted the tax credit but disallowed the claims on the deduction for the margin fees. In CTA case no. 1558, the CR assessed ESSO deficiency tax for the year 1960 which arose from the disallowance of the margin fees in CTA case no. 1251. ESSO then settled this deficiency assessment by applying a tax credit for its overpayment on its income tax in 1959 and paying under protest a certain additional amount. After which, it claimed the refund as overpayment on the interest on its deficiency income tax. It argued that the 18% interest should have been imposed not on the total deficiency but only on the amount of P146,961.00, the difference between the total deficiency and its tax credit given. The claim was denied. ESSO appealed to the CTA and was denied the claim for refund but sustained the claim for excess interest. ISSUE: Were the deductions from its gross income proper deductions? HELD: The principle is recognized that when a taxpayer claims a deduction, he must point to some specific provision of the statute in which that deduction is authorized and must be able to prove that he is entitled to the deduction which the law allows. As previously adverted to, the law allowing expenses as deduction from gross income for purposes of the income 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 year in carrying on any trade or business. An item of expenditure, in order to be deductible under this section of the statute, must fall squarely within its language. We come, then, to the statutory test of deductibility where it is axiomatic that to be deductible as a business expense, three conditions are imposed, namely: (1) the expense must be ordinary and necessary, (2) it must be paid or incurred within the taxable year, and (3) it must be paid or incurred in carrying on a trade or business. In addition, not only must the taxpayer meet the business test, he must substantially prove by evidence or records the deductions claimed under the law, otherwise, the same will be disallowed. The mere allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its deduction.

Considering the foregoing test of what constitutes an ordinary and necessary deductible expense, it may be asked: Were the margin fees paid by petitioner on its profit remittance to its Head Office in New York appropriate and helpful in the taxpayers business in the Philippines? Were the margin fees incurred for purposes proper to the conduct of the affairs of petitioners branch in the Philippines? Or were the margin fees incurred for the purpose of realizing a profit or of minimizing a loss in the Philippines? Obviously not. As stated in the Lopez case, the margin fees are not expenses in connection with the production or earning of petitioners incomes in the Philippines. They were expenses incurred in the disposition of said incomes; expenses for the remittance of funds after they have already been earned by petitioners branch in the Philippines for the disposal of its Head Office in New York which is already another distinct and separate income taxpayer.

Since the margin fees in question were incurred for the remittance of funds to petitioners Head Office in New York, which is a separate and distinct income taxpayer from the branch in the Philippines, for its disposal abroad, it can never be said therefore that the margin fees were appropriate and helpful in the development of petitioners business in the Philippines exclusively or were incurred for purposes proper to the conduct of the affairs of petitioners branch in the Philippines exclusively or for the purpose of realizing a profit or of minimizing a loss in the Philippines exclusively. If at all, the margin fees were incurred for purposes proper to the conduct of the corporate affairs of Standard Vacuum Oil Company in New York, but certainly not in the Philippines.

82

and Losses

Capital Gains

Calasanz, et al. vs. Commissioner of Internal Revenue G.R. No. L-26284 October 8, 1986
Digest by: PAMATMAT, John Red C.

83

FERNAN, J. FACTS:

An agricultural land was inherited by Ursula Calasanz in Cainta, Laguna from her father Mariano de Torres. The Land was surveyed, subdivided and then the improvements (roads, concrete gutters, drainage and lighting system) were sold at a public auction. In their joint income tax return for the year 1957 filed with the Bureau of Internal Revenue on March 31, 1958, petitioners disclosed a profit of P31,060.06 realized from the sale of the subdivided lots, and reported fifty per centum thereof or P15,530.03 as taxable capital gains. Upon an audit and review of the return thus filed, the Revenue Examiner adjudged petitioners engaged in business as real estate dealers, as defined in Section 194 [s] of the National Internal Revenue Code, required them to pay the real estate dealers tax and assessed a deficiency income tax on profits derived from the sale of the lots based on the rates for ordinary income. Demands were given by the CIR for the following: a. Demand No. 90-B-032293-57 in the amount of P160.00 representing real estate dealers fixed tax of P150.00 and P10.00 compromise penalty for late payment; and b. Assessment No. 90-5-35699 in the amount of P3,561.24 as deficiency income tax on ordinary gain of P3,018.00 plus interest of P 543.24.

Petitioners then filed with the Court of Tax Appeals a petition for review contesting the aforementioned assessments. On June 7, 1966, the Tax Court upheld the respondent Commissioner except for that portion of the assessment regarding the compromise penalty of P10.00 for the reason that in this jurisdiction, the same cannot be collected in the absence of a valid and binding compromise agreement. Hence, the present appeal. ISSUE: Whether or not petitioners are real estate dealers liable for real estate dealers fixed tax; and whether the gains realized from the sale of the lots are taxable in full as ordinary income or capital gains taxable at capital gain rates. HELD: Upon an examination of the facts on record, We are convinced that the activities of petitioners are indistinguishable from those invariably employed by one engaged in the business of selling real estate. The assets of a taxpayer are classified for income tax purposes into ordinary assets and capital assets. Section 34[a] [1] of the National Internal Revenue Code broadly defines capital assets as follows: [1] Capital assets.-The term capital assets means property held by the taxpayer [whether or not connected with his trade or business], but does not include, stock in trade of the taxpayer or other property of a kind which would properly be included, in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business of a character which is subject to the allowance for depreciation provided in subsection [f] of section thirty; or real property used in the trade or business of the taxpayer. The statutory definition of capital assets is negative in nature. If the asset is not among the exceptions, it is a capital asset; conversely, assets falling within the exceptions are ordinary assets. And necessarily, any gain resulting from the sale or exchange of an asset is a capital gain or an ordinary gain depending on the kind of asset involved in the transaction.

However, there is no rigid rule or fixed formula by which it can be determined with finality whether property sold by a taxpayer was held primarily for sale to customers in the ordinary course of his trade or business or whether it was sold as a capital asset. Although several factors or indices have been recognized as helpful guides in making a determination, none of these is decisive; neither is the presence nor the absence of these factors conclusive. Each case must in the last analysis rest upon its own peculiar facts and circumstances. Also a property initially classified as a capital asset may thereafter be treated as an ordinary asset if a combination of the factors indubitably tend to show that the activity was in furtherance of or in the course of the taxpayers trade or business. Thus, a sale of inherited real property usually gives capital gain or loss even though the property has to be subdivided or improved or both to make it salable. However, if the inherited property is substantially improved or very actively sold or both it may be treated as held primarily for sale to customers in the ordinary course of the heirs business.

84

Tuason vs. Lingad G.R. No. L-24248. July 31, 1974

Digest by: PANGANIBAN, Rachelle P.

85

CASTRO, J. FACTS:

The petitioner Antonio Tuason, Jr. assails the Tax Courts conclusion that the gains he realized from the sale of residential lots (inherited from his mother) were ordinary gains and not gains from the sale of capital assets under section 34(1) of the National Internal Revenue Code. In 1948 the petitioner inherited from his mother several tracts of land, among which were two contiguous parcels situated on Pureza and Sta. Mesa streets in Manila, with an area of 318 and 67,684 square meters, respectively. When the petitioners mother was yet alive she had these two parcels subdivided into twenty-nine lots. Twenty-eight were allocated to their then occupants who had lease contracts with the petitioners predecessor at various times from 1900 to 1903, which contracts expired on December 31, 1953. The 29th lot, 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 elevation, and was planted to kangkong and other crops.

After the petitioner took possession of the mentioned parcels in 1950, he instructed his attorney-infact, J. Antonio Araneta, to sell them. There was no difficulty encountered in selling the 28 small lots as their respective occupants bought them on a 10-year installment basis. Lot 29 could not however be sold immediately due to its low elevation. Sometime in 1952 the petitioners attorney-in-fact had Lot 29 filled, then subdivided into small lots and paved with macadam roads. The small lots were then sold over the years on a uniform 10-year annual amortization basis. J. Antonio Araneta, the petitioners attorney-in-fact, did not employ any broker nor did he put up advertisements in the matter of the sale thereof. In 1953 and 1954 the petitioner reported his income from the sale of the small lots (P102,050.79 and P103,468.56, respectively) as long-term capital gains. On May 17, 1957 the Collector of Internal Revenue upheld the petitioners treatment of his gains from the said sale of small lots, against a contrary ruling of a revenue examiner. In his 1957 tax return the petitioner as before treated his income from the sale of the small lots (P119,072.18) as capital gains and included only thereof as taxable income. In this return, the petitioner deducted the real estate dealers tax he paid for 1957. It was explained, however, that the payment of the dealers tax was on account of rentals received from the mentioned 28 lots and other properties of the petitioner. On the basis of the 1957 opinion of the Collector of Internal Revenue, the revenue examiner approved the petitioners treatment of his income from the sale of the lots in question. In a memorandum dated July 16, 1962 to the Commissioner of Internal Revenue, the chief of the BIR Assessment Department advanced the same opinion, which was concurred in by the Commissioner of Internal Revenue.

On January 9, 1963, however, the Commissioner reversed himself and considered the petitioners profits from the sales of the mentioned lots as ordinary gains. ISSUE: Whether or not the properties in question which the petitioner had inherited and subsequently sold in small lots to other persons should be regarded as capital assets.

HELD: No, the petitioners thesis is bereft of merit. As thus defined by law, the term capital assets includes all the properties of a taxpayer whether or not connected with his trade or business, except: (1) stock in trade or other property included in the taxpayers inventory; (2) property primarily for sale to customers in the ordinary course of his trade or business; (3) property used in the trade or business of the taxpayer and subject to depreciation allowance; and (4) real property used in trade or business. If the taxpayer sells or exchanges any of the properties above-enumerated, any gain or loss relative thereto is an ordinary gain or an ordinary loss; the gain or loss from the sale or exchange of all other properties of the taxpayer is a capital gain or a capital loss. Under section 34(b) (2) of the Tax Code, if a gain is realized by a taxpayer (other than a corporation) from the sale or exchange of capital assets held for more than twelve months, only 50% of the net capital gain shall be taken into account in computing the net income. The Tax Codes provision on so-called long-term capital gains constitutes a statute of partial exemption. In view of the familiar and settled rule that tax exemptions are construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority, the field of application of the term it capital assets is necessarily narrow, while its exclusions must be interpreted broadly. Consequently, it is the taxpayers burden to bring himself clearly and squarely within the terms of a tax-exempting statutory provision, otherwise, all fair doubts will be resolved against him. It bears emphasis nonetheless that in the determination of whether a piece of property is a capital asset or an ordinary asset, a careful examination and weighing of all circumstances revealed in each case must be made. In the case at bar, when the petitioner obtained by inheritance the parcels in question, transferred to him was not merely the duty to respect the terms of any contract thereon, but as well the correlative right to receive and enjoy the fruits of the business and property which the decedent had established and maintained. Moreover, the record discloses that the petitioner owned other real properties which he was putting out for rent, from which he periodically derived a substantial income, and for which he had to pay the real estate dealers tax (which he used to deduct from his gross income). In fact, as far back as 1957 the petitioner was receiving rental payments from the mentioned 28 small lots, even if the leases executed by his deceased mother thereon expired in 1953. Under the circumstances, the petitioners sales of the several lots forming part of his rental business cannot be characterized as other than sales of non-capital assets. The sales concluded on installment basis of the subdivided lots comprising Lot 29 do not deserve a different characterization for tax purposes. The following circumstances in combination show unequivocally that the petitioner was, at the time material to this case, engaged in the real estate business: (1) the parcels of land involved have in totality a substantially large area, nearly seven (7) hectares, 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 subdivided into small lots and then sold on installment basis (this manner of selling residential lots is one of the basic earmarks of a real estate business); (3) comparatively valuable improvements were introduced in the subdivided lots for the unmistakable purpose of not simply liquidating the estate but of making the lots more saleable to the general public; (4) the employment of J. Antonio Araneta, the petitioners attorney-in-fact, for the purpose of developing, managing, administering and selling the lots in question indicates the existence of owner-realty broker relationship; (5) the sales were made with frequency and continuity, and from these the petitioner consequently received substantial income periodically; (6) the annual sales volume of the petitioner from the said lots was considerable, e.g., P102,050.79 in 1953; P103,468.56 in 1954; and P119,072.18 in 1957; and (7) the petitioner, by his own tax returns, was not a 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 income of the petitioner from the sales of the lots in question should be considered as ordinary income. 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 hereby set aside.

86

China Banking Corporation vs. Court of Appeals G.R. No. 125508. July 19, 2000
Digest by: PANGANIBAN, Rachelle P.

87

VITUG, J. FACTS:

Sometime in 1980, petitioner China Banking Corporation made a 53% equity investment in the First CBC Capital (Asia) Ltd., a Hongkong subsidiary engaged in financing and investment with deposittaking function. The investment amounted to P16,227,851.80, consisting of 106,000 shares with a par value of P100 per share.

In the course of the regular examination of the financial books and investment portfolios of petitioner conducted by Bangko Sentral in 1986, it was shown that First CBC Capital (Asia), Ltd., has become insolvent. With the approval of Bangko Sentral, petitioner wrote-off as being worthless its investment in First CBC Capital (Asia), Ltd., in its 1987 Income Tax Return and treated it as a bad debt or as an ordinary loss deductible from its gross income. Respondent Commissioner of Internal Revenue disallowed the deduction and assessed petitioner for income tax deficiency in the amount of P8,533,328.04, inclusive of surcharge, interest and compromise penalty. The disallowance of the deduction was made on the ground that the investment should not be classified as being worthless and that, although the Hongkong Banking Commissioner had revoked the license of First CBC Capital as a deposit-taking company, the latter could still exercise, however, its financing and investment activities. Assuming that the securities had indeed become worthless, respondent Commissioner of Internal Revenue held the view that they should then be classified as capital loss, and not as a bad debt expense there being no indebtedness to speak of between petitioner and its subsidiary.

Petitioner contested the ruling of respondent Commissioner before the CTA. The tax court sustained the Commissioner, holding that the securities had not indeed become worthless and ordered petitioner to pay its deficiency income tax for 1987 of P8,533,328.04 plus 20% interest per annum until fully paid. When the decision was appealed to the Court of Appeals, the latter upheld the CTA. In its instant petition for review on certiorari, petitioner bank assails the CA decision. ISSUE: Whether or not the securities had become worthless. HELD: Yes, the securities had become worthless. First, the equity investment in shares of stock held by CBC of approximately 53% in its Hongkong subsidiary, the First CBC Capital (Asia), Ltd., is not an indebtedness, and it is a capital, not an ordinary, asset.

Subject to certain exceptions, such as the compensation income of individuals and passive income subject to final tax, as 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 the taxpayer. Among the deductible items allowed by the NIRC are bad debts and losses. An equity investment is a capital, not ordinary, asset of the investor the sale or exchange of which results in either a capital gain or a capital loss. The gain or the loss is ordinary when the property sold or exchanged is not a capital asset. A capital asset is defined negatively in Section 33(1) of the NIRC; viz: (1) Capital assets. - The term capital assets means property held by the taxpayer (whether or

Thus, shares of stock; like the other securities defined in Section 20(t) of the NIRC, would be ordinary assets only to a dealer in securities or a person engaged in the purchase and sale of, or an active trader (for his own account) in, securities. Section 20(u) of the NIRC defines a dealer in securities thus: (u) The term dealer in securities means a merchant of stocks or securities, whether an individual, partnership or corporation, with an established place of business, regularly engaged in the purchase of securities and their resale to customers; that is, one who as a merchant buys securities and sells them to customers with a view to the gains and profits that may be derived therefrom.

not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in subsection (f) of section twenty-nine; or real property used in the trade or business of the taxpayer.

88

Second, 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 such investor become worthless, the loss is deemed to be a loss from the sale or exchange of capital assets. Section 29(d)(4)(B) of the NIRC states: (B) Securities becoming worthless. - If securities as defined in Section 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 a loss from the sale or exchange, on the last day of such taxable year, of capital assets. The above provision conveys that the loss sustained by the holder of the securities, which are capital assets (to him), is to be treated as a capital loss as if incurred from a sale or exchange transaction. A capital gain or a capital loss normally requires the concurrence of two conditions for it to result: (1) There is a sale or exchange; and (2) the thing sold or exchanged is a capital asset. When securities become worthless, there is strictly no sale or exchange but the law deems the loss anyway to be a loss from the sale or exchange of capital assets. A similar kind of treatment is given, by the NIRC on the retirement of certificates of indebtedness with interest coupons or in registered form, short sales and options to buy or sell property where no sale or exchange strictly exists. In these cases, the NIRC dispenses, in effect, with the standard requirement of a sale or exchange for the application of the capital gain and loss provisions of the code. Capital losses are allowed to be deducted only to the extent of capital gains, i.e., gains derived from the sale or exchange of capital assets, and not from any other income of the taxpayer. In the case at bar, First CBC Capital (Asia), Ltd., the investee corporation, is a subsidiary corporation of petitioner bank whose shares in said investee corporation are not intended for purchase or sale but as an investment. Unquestionably then, any loss therefrom would be a capital loss, not an ordinary loss, to the investor. Finally, the capital loss sustained by CBC can only be deducted from capital gains if any derived by it during the same taxable year that the securities have become worthless. Section 34(c)(1) of the NIRC, states that the entire amount of the gain or loss upon the sale or exchange of property, as the case may be, shall be recognized. This should be taken within context on the general subject of the determination, and recognition of gain or loss; it is not preclusive of, let alone renders completely inconsequential, the more specific provisions of the code. Thus, pursuant, to the same section of the law, no such recognition shall be made if the sale or exchange is made in pursuance of a plan of corporate merger or consolidation or, if as a result of an exchange of property for stocks, the exchanger, alone or together with others not exceeding four, gains control of the corporation. Then, too,

how the resulting gain might be taxed, or whether or not the loss would be deductible and how, are matters properly dealt with elsewhere in various other sections of the NIRC. At all events, it may not be amiss to once again stress that the basic rule is still that any capital loss can be deducted only from capital gains under Section 33(c) of the NIRC.

89

from Sale or

Determination of Gain or Loss

Transfer of Property

Commissioner of Internal Revenue v. Rufino G.R. Nos. L-33665-68 February 27, 1987
Digest by: PASCASIO, Jarmae Z.

90

CRUZ, J. FACTS:

Private respondents Vicente Rufino, Ernesto Rufino et al. were the majority stockholders of Eastern Theatrical Co., Inc., (OLD CORPORATION), a corporation engaged in the business of operating theaters, more particularly the Lyric and Capitol Theaters in Manila. Private respondents were also the majority and controlling stockholders of another corporation, the Eastern Theatrical Co Inc., (NEW CORPORATION) engaged in the same kind of business as the Old Corporation. A resolution was passed authorizing the merger of the Old and New Corporation by transferring the formers business, assets, goodwill, and liabilities to the latter, which in exchange would issue and distribute to the shareholders of the Old Corporation one share for each share held by them in the said Corporation. A Deed of Assignment were approved in a resolution by stockholders of the New Corporation and said transfer was eventually made by the Old Corporation to the New Corporation, which continued the operation of the Lyric and Capitol Theaters. Petitioner, upon examination, declared that there was no merger since the automatic dissolution of the Old Corporation on its expiry date resulted in its liquidation, for which the respondents are now liable in taxes on their capital gains. Private respondents insist that there was a genuine merger between the Old Corporation and the New Corporation pursuant to a plan aimed at enabling the latter to continue the business of the former in the operation of places of amusement, specifically the Capitol and Lyric Theaters. ISSUES:

Whether or not there was a valid merger which would exempt private respondents from capital gains tax HELD: YES. 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 merger. It was necessary for the Old Corporation to surrender its net assets first to the New Corporation before the latter could issue its own stock to the shareholders of the Old Corporation because the New Corporation had to increase its capitalization for this purpose. The basic consideration is the purpose of the merger, which would determine whether the exchange of properties involved therein shall be subject or not to the capital gains tax. The criterion laid down by the law is that the merger must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. One certain indication of a scheme to evade the capital gains tax is the subsequent dissolution of the new corporation after the transfer to it of the properties of the old corporation and the liquidation of the former soon thereafter. This highly suspect development is likely to be a mere subterfuge aimed at circumventing the requirements of Section 35 of the Tax Code while seeming to be a valid corporate combination. In the instant case, no intention to evade tax is found. The purpose of the merger was to continue the business of the Old Corporation, whose corporate life was about to expire, through the New Corporation to which all the assets and obligations of the former had been transferred. The exemption was intended to encourage corporations in pooling, combining or expanding their resources conducive to the economic development of the country.

When the Old Corporation was dissolved on December 31, 1958, there has been no distribution of the assets of the New Corporation since then. Private respondents have not derived any benefit from the merger of the Old Corporation and the New Corporation almost three decades earlier that will make them subject to the capital gains tax under Section 35. They are no more liable now than they were when the merger took effect in 1959, as the merger, being genuine, exempted them under the law from such tax. The merger which had merely deferred the claim for taxes may be asserted by the government later, when gains are realized and benefits are distributed among the stockholders as a result of the merger. In other words, the corresponding taxes are not forever foreclosed or forfeited but may at the proper time and without prejudice to the government still be imposed upon the private respondents, in accordance with Section 35(c) (4) of the Tax Code.

91

Gregory v. Helvering 293 U.S. 465, January 7, 1935

Digest by: PASCASIO, Jarmae Z.

92

SUTHERLAND, J.

FACTS: Petitioner Gregory was the owner of all the stock of United Mortgage Corporation (UMC). UMC held among its assets 1,000 shares of the Monitor Securities Corporation (MSC). She sought to bring about a reorganization under 112(g) of the Revenue Act of 1928 for the sole purpose of transferring the shares to herself for individual profit and in order to reduce the amount of income tax through direct transfer by way of dividend.

Petitioner caused Averill Corporation (AC) to be organized under the laws of Delaware. Three days later, UMC transferred to the AC the 1,000 shares of Monitor stock, for which all the shares of the AC were issued to the petitioner. Later, AC was dissolved, and liquidated by distributing all its assets, namely, the Monitor shares, to the petitioner. No other business was ever transacted, or intended to be transacted, by that company. The Commissioner of Internal Revenue held petitioner liable for tax. ISSUES:

Whether or not the reorganization is without substance and must be disregarded as to hold petitioner liable for tax HELD: When the law speaks of a transfer of assets by one corporation to another, it means a transfer made in pursuance of a plan of reorganization of corporate business, and not a transfer of assets by one corporation to another in pursuance of a plan having no relation to the business of either, as plainly is the case here. Putting aside the question of motive in respect of taxation altogether, there is simply an operation having no business or corporate purpose -- a mere device which put on the form of a corporate reorganization as a disguise for concealing its real character, and the sole object and accomplishment of which was the consummation of a preconceived plan, not 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 created. But that corporation was nothing more than a contrivance to the end last described. It was brought into existence for no other purpose; it performed, as it was intended from the beginning it should perform, no other function.

While the plan conformed to the terms of the statute, there was no reorganization within the intent of the statute.

Taxation

Situs of

Commissioner of Internal Revenue vs. Marubeni Corporation G.R. No. 137377. December 18, 2001
Digest by: RAMOS, Marinel M.

93

PUNO, J. FACTS:

Marubeni Corporation (MC) is a foreign corporation organized and existing under the laws of Japan. It is engaged in general import and export trading, financing and the construction business. It is duly registered to engage in such business in the Philippines and maintains a branch office in Manila. Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a letter of authority to examine the books of accounts of the Manila branch office of MC for the fiscal year ending March 1985. In the course of the examination, petitioner found respondent to have undeclared income from two (2) contracts in the Philippines, both of which were completed in 1984. One of the contracts was with the National Development Company (NDC) in connection with the construction and installation of a wharf/port complex at the Leyte Industrial Development Estate in the municipality of Isabel, province of Leyte. The other contract was with the Philippine Phosphate Fertilizer Corporation (Philphos) for the construction of an ammonia storage complex also at the Leyte Industrial Development Estate. Petitioners revenue examiners recommended an assessment for deficiency taxes. Respondent questioned this assessment but it received a letter from petitioner assessing its several deficiency taxes. The assessed deficiency internal revenue taxes, inclusive of surcharge and interest, were as follows: (1) P290,583,972.40 for deficiency income tax; (2) P83,036,965.16 for deficiency branch profit remittance tax; (3) P85,563,625.46 for deficiency contractors tax; and (4) P3,600,535.68 for deficiency commercial brokers tax. Petitioner alleged that the NDC and Philphos contracts were contracts for a piece of work and since the projects called for the construction and installation of facilities in the Philippines, the entire income therefrom constituted income from Philippine sources, hence, subject to internal revenue taxes. However, upon issuance of E.O. No. 41 declaring a one-time amnesty covering unpaid income taxes for the years 1981 to 1985, as extended by E.O. No. 64, respondent was able to apply for the amnesty of its deficiency taxes. And almost ten (10) years after filing of the case, CTA rendered a decision in CTA Case No. 4109. The tax court found that respondent had properly availed of the tax amnesty under E.O. Nos. 41 and 64 and declared the deficiency taxes subject of said case as deemed cancelled and withdrawn.

Petitioner appealed with the CA, which dismissed the petition and affirmed the decision of CTA. Respondent argued that assuming it did not validly avail of the 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, not Onshore Portion of the contracts; that all materials and equipment in the contract under the Offshore Portion were manufactured and completed in Japan, not in the Philippines, and are therefore not subject to Philippine taxes. And that under the Philippine Onshore Portion, which petitioner has not denied, the income it derived from the said portion had been declared for tax purposes and the taxes thereon already paid to the Philippine government. ISSUE: Whether or not respondent is liable to pay the income, branch profit remittance, and contractors taxes assessed by petitioner HELD: NO. Respodent is not liable to pay for income and branch profit remittance as it did not fall under exception for the applicability of the tax amnesty in Section 4 (b) of E.O. No. 41; and also not liable to pay for contractors tax as the materials used for the contracts are produced in Japan, outside the jurisdiction of the taxing power of the Philippines. A contractors tax is a tax imposed upon the privilege of engaging in business. It is 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 the person exercising the privilege. Being an excise tax, it can be levied by the taxing authority only when the acts, privileges or business are done or performed within the jurisdiction of said authority. Like property taxes, it cannot be imposed on an occupation or privilege outside the taxing district.

94

In the case at bar, it is undisputed that respondent was an independent contractor under the terms of the two subject contracts. Respondent, however, argues that 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. An examination of Annex III to the two contracts reveals that the materials and equipment to be made and the works and services to be performed by respondent are indeed made by sub-contractors and manufacturers which are Japanese corporations and are based in Japan and all engineering and design works were performed in that country. All the materials and equipment transported to the Philippines were inspected and tested in Japan prior to shipment in accordance with the terms of the contracts. The inspection was made by representatives of respondent corporation, of NDC and Philphos. Clearly, the service of design and engineering, supply and delivery, construction, erection and installation, supervision, direction and control of testing and commissioning, coordination. . . of the two projects involved two taxing jurisdictions. These acts occurred in two countries Japan and the Philippines. While the construction and installation work were completed within the Philippines, the evidence is clear that some pieces of equipment and supplies were completely designed and engineered in Japan. These services were rendered outside the taxing jurisdiction of the Philippines and are therefore not subject to contractors tax.

Commissioner of Internal Revenue vs. British Overseas Airways Corporation (BOAC) G.R. No. L-65773-74. April 30, 1987
Digest by: RAMOS, Marinel M.

95

MELENCIO-HERRERA, J. FACTS:

British Overseas Airways Corporation (BOAC) is a 100% British Government-owned corporation organized and existing under the laws of the UK. It is engaged in the international airline business and is a member-signatory of the Interline Air Transport Association (IATA). As such it operates air transportation service and sells transportation tickets over the routes of the other airline members. During the periods covered by the disputed assessments, it is admitted that BOAC had no landing rights for traffic purposes in the Philippines, and was not granted a Certificate of Public Convenience and Necessity (CPCN) to operate in the Philippines by the Civil Aeronautics Board (CAB), except for a ninemonth period, partly in 1961 and partly in 1962, when it was granted a temporary landing permit by CAB. Consequently, it did not carry passengers and/or cargo to or from the Philippines, although during the period covered by the assessments, it maintained a general sales agent in the Philippines Wamer Barnes and Company, Ltd., and later Qantas Airways which was responsible for selling BOAC tickets covering passengers and cargoes.

For G.R. No. 65773 (first case), CIR 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 investigation resulted in the issuance of a new assessment, for the years 1959 to 1967 in the amount of P858,307.79. BOAC paid this new assessment under protest. BOAC then filed a claim for refund of the amount of P858,307.79, which claim was denied by the CIR. For G.R. No. 65774 (second case), BOAC was assessed deficiency income taxes, interests, and penalty for the fiscal years 1968-1969 to 19701971 in the aggregate amount 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 filing of corporation returns) penalized under Section 74 of the NIRC. BOAC requested that the assessment be countermanded and set aside. However, the CIR not only denied the BOAC request for refund in the First Case but also reissued in the Second Case the deficiency income tax assessment for P534,132.08 for the years 1969 to 1970-71 plus P1,000.00 as compromise penalty under Section 74 of the Tax Code. BOACs request for reconsideration was denied by the CIR.

The Tax Court rendered the assailed joint Decision reversing the CIR and held that the proceeds of sales of BOAC passage tickets in the Philippines by Warner Barnes and Company, Ltd., and later by Qantas Airways, during the period in question, do not constitute BOAC income from Philippine sources since no service of carriage of passengers or freight was performed by BOAC within the Philippines and, therefore, said income is not subject to Philippine income tax. The CTA position was that income from transportation is income from services so that the place where services are rendered determines the source. Thus, the Tax Court ordered petitioner to credit BOAC with the sum of P858,307.79, and to cancel the deficiency income tax assessments against BOAC in the amount of P534,132.08 for the fiscal years 1968-69 to 1970-71. ISSUE: Whether or not the revenue derived by BOAC from sales of tickets in the Philippines for air transportation, while having no landing rights here, constitute income of BOAC from Philippine sources, and, accordingly, taxable. HELD: The source of an income is the property, activity or service that produced the income. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. In BOACs case, the sale of tickets in the Philippines is the activity

that produces the income. The tickets exchanged hands here and payments for fares were also made here in Philippine currency. The site of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the protection accorded by the Philippine government. In consideration of such protection, the flow of wealth should share the burden of supporting the government.

96

True, Section 37(a) of the Tax Code, which enumerates items of gross income from sources within the Philippines, namely: (1) interest, (21) dividends, (3) service, (4) rentals and royalties, (5) sale of real property, and (6) sale of personal property, does not mention income from the sale of tickets for international transportation. However, that does not render it less an income from sources within the Philippines. Section 37, by its language, does not intend the enumeration to be exclusive. It merely directs that the types of income listed therein be treated as income from sources within the Philippines. A cursory reading of the section will show that it does not state that it is an all-inclusive enumeration, and that no other kind of income may be so considered. BOAC, however, would impress upon this Court that income derived from transportation is income for services, with the result that the place where the services are rendered determines the source; and since BOACs service of transportation is performed outside the Philippines, the income derived is from sources without the Philippines and, therefore, not taxable under our income tax laws. The Tax Court upholds that stand in the joint Decision under review. The absence of flight operations to and from the Philippines is not determinative of the source of income or the site of income taxation. Admittedly, BOAC was an off-line international airline at the time pertinent to this case. The test of taxability is the source; and the source of an income is that activity ... which produced the income. Unquestionably, the passage documentations in these cases were sold in the Philippines and the revenue therefrom was derived from an activity regularly pursued within the Philippines. And even if the BOAC tickets sold covered the transport of passengers and cargo to and from foreign cities, it cannot alter the fact that income from the sale of tickets was derived from the Philippines. The word source conveys one essential idea, that of origin, and the origin of the income herein is the Philippines.

Commissioner vs. CTA and Smith Kline & French Overseas Co. G.R. No. L-54108. January 17, 1984
Digest by: REY, Floyd Ericson M.

97

AQUINO, J. FACTS:

In its 1971 original income tax return, Smith Kline declared a net taxable income of P1,489,277 and paid P511,247 as tax due. Among the deductions claimed from gross income was P501,040 as its share of the head office overhead expenses. However, in its amended return filed on March 1, 1973, there was an overpayment of P324,255 arising from underdeduction of home office overhead. It made a formal claim for the refund of the alleged overpayment. It appears that sometime in October, 1972, Smith Kline received from its international independent auditors, an authenticated certification to the effect that the Philippine share in the unallocated overhead expenses of the main office for the year ended December 31, 1971 was actually P1,427,484. It further stated in the certification that the allocation was made on the basis of the percentage of gross income in the Philippines to gross income of the corporation as a whole. By reason of the new adjustment, Smith Klines tax liability was greatly reduced from P511,247 to P186,992 resulting in an overpayment of P324,255. ISSUE: Whether or not the amended return filed by respondent is contrary to law. HELD: No. The governing law is found in section 37 of the old National Internal Revenue Code, Commonwealth Act No. 466, which is reproduced in Presidential Decree No. 1158, the National Internal Revenue Code of 1977 and which reads SEC. 37. Income form sources within the Philippines.: xxx xxx xxx (b) Net income from sources in the Philippines. From the items of gross income specified in subsection (a) of this section there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income. The remainder, if any, shall be included in full as net income from sources within the Philippines. xxx xxx xxx Revenue Regulations No. 2 of the Department of Finance contains the following provisions on the deductions to be made to determine the net income from Philippine sources: SEC. 160. Apportionment of deductions. From the items specified in section 37(a), as being derived specifically from sources within the Philippines there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any other expenses, losses or deductions which cannot definitely be allocated to some item or class of gross income. The remainder shall be included in full as net income from sources within the Philippines. The ratable part is based upon the ratio of gross income from sources within the Philippines to the total gross income.

Example: A non-resident alien individual whose taxable year is the calendar year, derived gross income from all sources for 1939 of P180,000, including therein: Interest on bonds of a domestic corporation P9,000; Dividends on stock of a domestic corporation 4,000; Royalty for the use of patents within the Philippines 12,000; Gain from sale of real property located within the Philippines 11,000; Total P36,000 that is, one-fifth of the total gross income was from sources within the Philippines. The remainder of the gross income was from sources without the Philippines, determined under section 37(c).

The expenses of the taxpayer for the year amounted to P78,000. Of these expenses the amount of P8,000 is properly allocated to income from sources within the Philippines and the amount of P40,000 is properly allocated to income from sources without the Philippines. The remainder of the expense, P30,000, cannot be definitely allocated to any class of income. A ratable part thereof, based upon the relation of gross income from sources within the Philippines to the total gross income, shall be

deducted in computing net income from sources within the Philippines. Thus, these are deducted from the P36,000 of gross income from sources within the Philippines expenses amounting to P14,000 [representing P8,000 properly apportioned to the income from sources within the Philippines and P6,000, a ratable part (one-fifth) of the expenses which could not be allocated to any item or class of gross income.] The remainder, P22,000, is the net income from sources within the Philippines.

98

Where an expense is clearly related to the production of Philippine-derived income or to Philippine operations (e.g. salaries of Philippine personnel, rental of office building in the Philippines), that expense can be deducted from the gross income acquired in the Philippines without resorting to apportionment. Clearly, the weight of evidence bolsters its position that the amount of P1,427,484 represents the correct ratable share, the same having been computed pursuant to section 37(b) and section 160.

Philippine Guaranty Co., Inc. vs. Commissioner of Internal Revenue G.R. No. L-22074. April 30, 1965
Digest by: REY, Floyd Ericson M.

99

BENGZON, J. FACTS:

The Philippine Guaranty Co., Inc., a domestic insurance company, entered into reinsurance contracts with foreign insurance companies not doing business in the Philippines. It agreed to cede to the foreign reinsurers a 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 equivalent portion of the risks insured. Said reinsurance contracts were signed by Philippine Guaranty Co., Inc. in Manila and by the foreign reinsurers outside the Philippines, except the contract with Swiss Reinsurance Company, which was signed by both parties in Switzerland. The reinsurance contracts made the commencement of the reinsurers liability simultaneous with that of Philippine Guaranty Co., Inc. under the original insurance. Philippine Guaranty Co., Inc. was required to keep a register in Manila where the risks ceded to the foreign reinsurers where entered, and entry therein was binding upon the reinsurers. A proportionate amount of taxes on insurance premiums not recovered from the original assured were to be paid for by the foreign reinsurers. The foreign reinsurers further agreed, in consideration for managing or administering their affairs in the Philippines, to compensate the Philippine Guaranty Co., Inc., in an amount equal to 5% of the reinsurance premiums. Conflicts and/or differences between the parties under the reinsurance contracts were to be arbitrated in Manila. Philippine Guaranty Co., Inc. and Swiss Reinsurance Company stipulated that their contract shall be construed by the laws of the Philippines.

Pursuant to the aforesaid reinsurance contracts, Philippine Guaranty Co., Inc. ceded to the foreign reinsurers the following premiums P842,466.71 for 1953 and P721,471.85 for 1954. Said premiums were excluded by Philippine Guaranty Co., Inc. from its gross income when it file its income tax returns for 1953 and 1954. Furthermore, it did not withhold or pay tax on them. Consequently, per letter dated April 13, 1959, the Commissioner of Internal Revenue assessed against Philippine Guaranty Co., Inc. withholding tax on the ceded reinsurance premiums. Philippine Guaranty Co., Inc., protested the assessment on the ground that reinsurance premiums ceded to foreign reinsurers not doing business in the Philippines are not subject to withholding tax. Its protest was denied and it appealed to the Court of Tax Appeals. ISSUE: Whether or not the reinsurance premiums in question constitute income from sources within the Philippines. HELD: Yes. The reinsurance contracts show that the transactions or activities that constituted the undertaking to reinsure Philippine Guaranty Co., Inc. against loses arising from the original insurances in the Philippines were performed in the Philippines. The liability of the foreign reinsurers commenced simultaneously with the liability of Philippine Guaranty Co., Inc. under the original insurances. Philippine Guaranty Co., Inc. kept in Manila a register of the risks ceded to the foreign reinsurers. Entries made in such register bound the foreign reinsurers, localizing in the Philippines the actual cession of the risks and premiums and assumption of the reinsurance undertaking by the foreign reinsurers. Taxes on premiums imposed by Section 259 of the Tax Code for the privilege of doing insurance business in the Philippines were payable by the foreign reinsurers when the same were not recoverable from the original assured. The foreign reinsurers paid Philippine Guaranty Co., Inc. an amount equivalent to 5% of the ceded premiums, in consideration for administration and management by the latter of the affairs of the former in the Philippines in regard to their reinsurance activities here. Disputes and differences between the parties were subject to arbitration in the City of Manila.

All the reinsurance contracts, except that with Swiss Reinsurance Company, were signed by Philippine Guaranty Co., Inc. in the Philippines and later signed by the foreign reinsurers abroad. Although the contract between Philippine Guaranty Co., Inc. and Swiss Reinsurance Company was signed by both parties in Switzerland, the same specifically provided that its provision shall be construed according to the laws of the Philippines, thereby manifesting a clear intention of the parties to subject themselves to Philippine law.

100

Section 24 of the Tax Code subjects foreign corporations to tax on their income from sources within the Philippines. The word sources has been interpreted as the activity, property or service giving rise to the income. The reinsurance premiums were income created from the undertaking of the foreign reinsurance companies to reinsure Philippine Guaranty Co., Inc., against liability for loss under original insurances. Such undertaking, as explained above, took place in the Philippines. These insurance premiums, therefore, came from sources within the Philippines and, hence, are subject to corporate income tax.

The foreign insurers place of business should not be confused with their place of activity. Business should not be continuity and progression of transactions while activity may consist of only a single transaction. An activity may occur outside the place of business. Section 24 of the Tax Code does not require a foreign corporation to engage in business in the Philippines in subjecting its income to tax. It suffices that the activity creating the income is performed or done in the Philippines. What is controlling, therefore, is not the place of business but the place of activity that created an income. Petitioner further contends that the reinsurance premiums are not income from sources within the Philippines because they are not specifically mentioned in Section 37 of the Tax Code. Section 37 is not an all-inclusive enumeration, for it merely directs that the kinds of income mentioned therein should be treated as income from sources within the Philippines but it does not require that other kinds of income should not be considered likewise.

Howden and Co. Ltd. vs. Collector of Internal Revenue G.R. No. L-19392. April 14, 1965
Digest by: RUAYA, Ronald S.

101

BENGZON, J.P., J.:

FACTS: Herein petitioner is a British company engaged in the business of insurance in the United Kingdom, it represented the British companies that procured reinsurance contracts with Commonwealth Insurance Co., a domestic corporation, the latter agreeing to cede to the various British companies a portion of the premiums it had underwritten. Pursuant to their contract, Commonwealth Co., in behalf of Howden and Co. declared the gross income of the latter in the amount of Php798,297 with a tax liability of around Php66,000 paid to the BIR. However, Howden Co. filed before the Court of First Instance of Manila an action for the recovery of the paid tax liability invoking a decision of the Commissioner stating that it exempted from withholding tax reinsurance premiums received from domestic insurance companies by foreign insurance companies not authorized to do business in the Philippines as is the case with Howden Co. and the British companies it represents.

The primary contention of Howden Co. in claiming for a refund is that the tax paid was not taxable as it was an income that is derived outside the Philippines. ISSUE: Whether or not the portions of the premiums of the reinsurance contracts perfected here in the Philippines and ceded to British companies not engaged in business in the Philippines are taxable? HELD: YES, the income is taxable. The source of an income is the property, activity or service that produced the income. The reinsurance premiums remitted to appellants by virtue of the reinsurance contracts, accordingly, had for their source the undertaking to indemnify Commonwealth Insurance Co. against liability. Said undertaking is the activity that produced the reinsurance premiums, and the same took place in the Philippines. In the first place, the reinsured, the liabilities insured and the risks originally underwritten by Commonwealth Insurance Co., upon which the reinsurance premiums and indemnity were based, were all situated in the Philippines. Secondly, contrary to appellants view, the reinsurance contracts were perfected in the Philippines, for Commonwealth Insurance Co. signed them last in Manila. Thirdly, the parties to the reinsurance contracts in question evidently intended Philippine law to govern. Article 11 thereof provided for arbitration in Manila, according to the laws of the Philippines, of any dispute arising between the parties in regard to the interpretation of said contracts or rights in respect of any transaction involved. Furthermore, the contracts provided for the use of Philippine currency as the medium of exchange and for the payment of Philippine taxes. Appellants should not confuse activity that creates income with business in the course of which an income is realized. An activity may consist of a single act; while business implies continuity of transactions. An income may be earned by a corporation in the Philippines although such corporation conducts all its businesses abroad. Precisely, Section 24 of the Tax Code does not require a foreign corporation to be engaged 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 Philippines to tax for income from sources within the Philippines. If by source of income is meant the business of the taxpayer, foreign corporations not engaged in business in the Philippines would be exempt from taxation on their income from sources within the Philippines.

Furthermore, as used in our income tax law, income refers to the flow of wealth. Such flow, in the instant case, proceeded from the Philippines. Such income enjoyed the protection of the Philippine Government. As wealth flowing from within the taxing jurisdiction of the Philippines and in consideration for protection accorded it by the Philippines, said income should properly share the burden of maintaining the government. Thus, the Supreme Court resolved against petitioner, stating that said tax liability was proper as the contract and the income derived therefrom were proper subjects of taxation, it being from within the Philippines.

102

Philippine American Life Insurance Co. Inc. vs. Court of Tax Appeals CA-G.R. SP No. 31283. April 25, 1995
Digest by: RUAYA, Ronald S.

103

TAYAO-JAGUIROS, J P: FACTS:

Petitioner PHILAMLIFE, a domestic corporation in the Philippines, entered into a management contract with American International Reinsurance Co. Inc. (AIRCO), a foreign corporation, whereby the latter would be paid $250,000 annually for management services rendered for PHILAMLIFE. In relation to an erroneous withholding tax from source 1979, the Commissioner of Internal revenue issued to PHILAMLIFE a tax credit in the amount of Php643,000. Thereafter, PHILAMLIFE sought to claim said amount for a second erroneous payment for source 1980. While the claim was pending before the CTA, petitioner filed a claim for refund before the Court of Appeals. On the other hand, the BIR canceled the tax credit memo it previously issued to petitioner. Thus the demand for payment of the said tax liability was issued to PHILAMLIFE/ AIRCO. Petitioner now avers, that said tax liability is not proper as the income taxed was that of AIRCOs, a foreign company not doing business in the Philippines for management services rendered by its personnel abroad and is therefore not subject to Philippine withholding tax.

ISSUE: Whether or not compensation for advisory services admittedly performed abroad by the personnel of a non-resident corporation not doing business in the Philippines are subject to Philippine withholding tax?

HELD: YES, it is subject to withholding tax. The pertinent provision in the NIRC with regard to this issue is Section 37 (a) (4), whereby gross income derived from rentals and royalties is subject to withholding tax. Petitioner contends that it is not subject to such classification as it does not have property in the Philippines by which rentals and royalties may be derived. However, upon a careful perusal of the law in this case shows that such classification is apt so as to subject petitioner to withholding tax. A reading from the various management agreement will show that the arrangment between PHILAMLIFE and AIRCO falls easily into the expanded meaning of royalties; basically, from the heading investments to personnel, the services call for the supply by the non-resident foreign corporation of technical and commercial information, knowledge, advise, assistance or services in connection with technical management or administration of an insurance business-- a commercial undertaking. Therefore, the income derived for the services performed by AIRCO for PHILAMLIFE under the said management contract shall be considered as income from services within the Philippines. AIRCO, being a non-resident foreign corporation not engaged in trade and business in the Philippines shall pay a tax equal to 35% the gross income received during each taxable year from all sources within the Philippines as interests, dividends, rents and royalties, including remuneration for technical services. Although it is true that AIRCO (now AIGI by way of merger) has no properties in the Philippines, agreement with PHILAMLIFE necessary for the latter companys efficient operation and growth with AIRCO deriving income from said agreement, AIRCO is well within the ambit of Section 37 (a) (7) of the NIRC. In our jurisprudence, the test of taxability is the source, and the source of an income is that activity... which produced the income. It is not the presence of any property from which one derives rentals and royalties that is controlling, but rather as expressed under the expanded meaning of royalties, it includes royalties for the supply of scientific, technical, industrial or commercial knowledge or

information; and the technical advise, assistance or services rendered in connection with the technical management and administration of any scientific, industrial or commercial undertaking, venture, project or scheme. Thus, as rendered in this decision, AIRCOs income derived from the management agreement with PHILAMLIFE is subject to Philippine withholding tax.

104

Accounting Periods

and Methods

Consolidated Mines Inc. vs. Court of Tax Appeals G.R. Nos. L-18843 and L-18844 August 29, 1974
Digest by: RUAYA, Ronald S.

105

MAKALINTAL, C.J.:

FACTS: Consolidated Mines Inc. sought from the BIR the refund of certain amounts alleged to be overpayments of its tax liability for the year 1951. Acting on such request, the BIR conducted an investigation, however the resulting action was that Consolidated Mines Inc. actually had deficiencies for the years 1951 to 1954. The said deficiencies were thereafter demanded by BIR to be paid hence the opposition of Consolidated Mines. Among the contentions of the case was that the method used by Consolidated Mines was not a method prescribed by the National Internal Revenue Code of the Philippines and was dubbed a hybrid method which did not correctly reflect the actual tax liability of Consolidated Mines as opposed to the usual accrual method. ISSUE: Whether or not Consolidated Mines used the proper method in the determination of its tax liability?

HELD: The Supreme Court found that Consolidated Mines did not use a hybrid method to determine its tax liability. Since Consolidated Mines had contracted with Benguet Mining as to the operation and the expenses of some of its Zambales mines and the expenses thereof was to be shouldered by Benguet Mines until it came to operation status and only to be reimbursed, then the adjustments made by Consolidated Mines accountants was proper. Moreover, as determined bu the SC, the determination of the tax liability was derived using the accrual method. In the determination of the total tax liability of Consolidated Mines, it was reduced from the original assessment of the BIR since it was also determined that there were several adjustments with regard to mining industry-specific rates such as ore depletion and the actual mine costs that contribute to the assessment of the tax liability of petitio

Baas, Jr. vs. Court of Appeals G.R. No. 102967. February 10, 2000
Digest by: SANTOS, Maricar Jan M.

106

QUISUMBING, J.:

FACTS: On February 20, 1976, petitioner, Bibiano V. Baas Jr. sold to Ayala Investment Corporation (AYALA), 128,265 square meters of land located at Bayanan, Muntinlupa, for two million, three hundred eight thousand, seven hundred seventy (P2,308,770.00) pesos. The Deed of Sale provided that upon the signing of the contract AYALA shall pay four hundred sixty-one thousand, seven hundred fifty-four (P461,754.00) pesos. The balance of one million, eight hundred forty-seven thousand and sixteen (P1,847,016.00) pesos was to be paid in four equal consecutive annual installments, with twelve (12%) percent interest per annum on the outstanding balance. On April 11, 1978, then Revenue Director Mauro Calaguio authorized tax examiners, Rodolfo Tuazon and Procopio Talon to examine the books and records of petitioner for the year 1976. They discovered that petitioner had no outstanding receivable from the 1976 land sale to AYALA and concluded that the sale was cash and the entire profit should have been taxable in 1976 since the income was wholly derived in 1976.

Tuazon and Talon filed their audit report and declared a discrepancy of two million, ninety-five thousand, nine hundred fifteen (P2,095,915.00) pesos in petitioners 1976 net income. They recommended deficiency tax assessment for two million, four hundred seventy-three thousand, six hundred seventythree (P2,473,673.00) pesos. On June 27, 1980, respondent Larin sent a letter to petitioner informing of the income tax deficiency that must be settled him immediately.

On September 26, 1980, petitioner acknowledged receipt of the letter but insisted that the sale of his land to AYALA was on installment On June 27, 1980, respondent Larin sent a letter to petitioner informing of the income tax deficiency that must be settled him immediately.

On September 26, 1980, petitioner acknowledged receipt of the letter but insisted that the sale of his land to AYALA was on installment On June 17, 1981, Larin filed a criminal complaint for tax evasion against the petitioner. The trial court decided in favor of the respondents and awarded Larin damages, as already stated. Petitioner seasonably appealed to the Court of Appeals. In its decision of November 29, 1991, the respondent court affirmed the trial courts decision. ISSUE: Whether respondent court erred in finding that petitioners income from the sale of land in 1976 should be declared as a cash transaction in his tax return for the same year (because the buyer discounted the promissory note issued to the seller on future installment payments of the sale, on the same day of the sale). HELD: Yes. As a general rule, the whole profit accruing from a sale of property is taxable as income in the year the sale is made. But, if not all of the sale price is received during such year, and a statute provides that income shall be taxable in the year in which it is received, the profit from an installment sale is to be

apportioned between or among the years in which such installments are paid and received.

Sec. 43 and Sec. 175 says that among the entities who may use the above-mentioned installment method is a seller of real property who disposes his property on installment, provided that the initial payment does not exceed 25% of the selling price. They also state what may be regarded as installment payment and what constitutes initial payment. Initial payment means the payment received in cash or property excluding evidences of indebtedness due and payable in subsequent years, like promissory notes or mortgages, given of the purchaser during the taxable year of sale. Initial payment does not include amounts received by the vendor in the year of sale from the disposition to a third person of notes given by the vendee as part of the purchase price which are due and payable in subsequent years.14 Such disposition or discounting of receivable is material only as to the computation of the initial payment. If the initial payment is within 25% of total contract price, exclusive of the proceeds of discounted notes, the sale qualifies as an installment sale, otherwise it is a deferred sale. Although the proceed of a discounted promissory note is not considered part of the initial payment, it is still taxable income for the year it was converted into cash. The subsequent payments or liquidation of certificates of indebtedness is reported using the installment method in computing the proportionate income16 to be returned, during the respective year it was realized. Non-dealer sales of real or personal property may be reported as income under the installment method provided that the obligation is still outstanding at the close of that year. If the seller disposes the entire installment obligation by discounting the bill or the promissory note, he necessarily must report the balance of the income from the discounting not only income from the initial installment payment.

107

Where an installment obligation is discounted at a bank or finance company, a taxable disposition results, even if the seller guarantees its payment, continues to collect on the installment obligation, or handles repossession of merchandise in case of default. This rule prevails in the United States. Since our income tax laws are of American origin, interpretations by American courts an our parallel tax laws have persuasive effect on the interpretation of these laws.20 Thus, by analogy, all the more would a taxable disposition result when the discounting of the promissory note is done by the seller himself. Clearly, the indebtedness of the buyer is discharged, while the seller acquires money for the settlement of his receivables. Logically then, the income should be reported at the time of the actual gain. For income tax purposes, income is an actual gain or an actual increase of wealth. Although the proceeds of a discounted promissory note is not considered initial payment, still it must be included as taxable income on the year it was converted to cash. When petitioner had the promissory notes covering the succeeding installment payments of the land issued by AYALA, discounted by AYALA itself, on the same day of the sale, he lost entitlement to report the sale as a sale on installment since, a taxable disposition resulted and petitioner was required by law to report in his returns the income derived from the discounting. What petitioner did is tantamount to an attempt to circumvent the rule on payment of income taxes gained from the sale of the land to AYALA for the year 1976.

Returns and Payment

of Taxes

BPI-Family Savings Bank, Inc., vs. Court of Appeals G.R. No. 122480. April 12, 2000
Digest by: SANTOS, Maricar Jan M.

108

PANGANIBAN, J.: FACTS:

In its Corporate Annual Income Tax Return for the year 1989, the following items are reflected: Income P1,017,931,831.00 Deductions P1,026,218,791.00 Net Income (Loss) (P8,286,960.00) Taxable Income (Loss) (P8,286,960.00) Less: 1988 Tax Credit P185,001.00 1989 Tax Credit P112,491.00 TOTAL AMOUNT P297,492.00 REFUNDABLE It appears from the foregoing 1989 Income Tax Return that petitioner had a total refundable amount of P297,492 inclusive of the P112,491.00 being claimed as tax refund in the present case. However, petitioner declared in the same 1989 Income Tax Return that the said total refundable amount of P297,492.00 will be applied as tax credit to the succeeding taxable year. On October 11, 1990, petitioner filed a written claim for refund in the amount of P112,491.00 with the respondent Commissioner of Internal Revenue alleging that it did not apply the 1989 refundable amount of P297,492.00 (including P112,491.00) to its 1990 Annual Income Tax Return or other tax liabilities due to the alleged business losses it incurred for the same year. Without waiting for respondent Commissioner of Internal Revenue to act on the claim for refund, petitioner filed a petition for review with respondent Court of Tax Appeals, seeking the refund of the amount of P112,491.00. The respondent Court of Tax Appeals dismissed petitioners petition on the ground that petitioner failed to present as evidence its corporate Annual Income Tax Return for 1990 to establish the fact that petitioner had not yet credited the amount of P297,492.00 (inclusive of the amount P112,491.00 which is the subject of the present controversy) to its 1990 income tax liability. Petitioner filed a motion for reconsideration, however, the same was denied by respondent court. ISSUE:

Whether or not petitioner is entitled to the refund of P112,491.90, representing excess creditable withholding tax paid for the taxable year 1989. HELD: Yes. It is undisputed that petitioner had excess withholding taxes for the year 1989 and was thus entitled to a refund amounting to P112,491. Pursuant to Section 69 10 of the 1986 Tax Code which states that a corporation entitled to a refund may opt either (1) to obtain such refund or (2) to credit said amount for the succeeding taxable year, petitioner indicated in its 1989 Income Tax Return that it would apply the said amount as a tax credit for the succeeding taxable year, 1990. Subsequently, petitioner informed the Bureau of Internal Revenue (BIR) that it would claim the amount as a tax refund, instead of applying it as a tax credit. When no action from the BIR was forthcoming, petitioner filed its claim with the Court of Tax Appeals. We disagree with the Court of Appeals. As a rule, the factual findings of the appellate court are binding on this Court. This rule, however, does not apply where, inter alia, the judgment is premised on a misapprehension of facts, or when the appellate court failed to notice certain relevant facts which if

considered would justify a different conclusion. 11 This case is one such exception.

In the first place, petitioner presented evidence to prove its claim that it did not apply the amount as a tax credit. During the trial before the CTA, Ms. Yolanda Esmundo, the manager of petitioners accounting department, testified to this fact. It likewise presented its claim for refund and a certification issued by Mr. Gil Lopez, petitioners vice-president, stating that the amount of P112,491 has not been and/or will not be automatically credited/offset against any succeeding quarters income tax liabilities for the rest of the calendar year ending December 31, 1990. Also presented were the quarterly returns for the first two quarters of 1990.

109

In the present case, the Return attached to the Motion for Reconsideration clearly showed that petitioner suffered a net loss in 1990. Contrary to the holding of the CA and the CTA, petitioner could not have applied the amount as a tax credit. In failing to consider the said Return, as well as the other documentary evidence presented during the trial, the appellate court committed a reversible error. It should be stressed that the rationale of the rules of procedure is to secure a just determination of every action. They are tools designed to facilitate the attainment of justice. 14 But there can be no just determination of the present action if we ignore, on grounds of strict technicality, the Return submitted before the CTA and even before this Court. 15 To repeat, the undisputed fact is that petitioner suffered a net loss in 1990; accordingly, it incurred no tax liability to which the tax credit could be applied. Consequently, there is no reason for the BIR and this Court to withhold the tax refund which rightfully belongs to the petitioner.

Philam Asset Management, Inc. vs. Commissioner of Internal Revenue G.R. Nos. 156637/162004 December 14, 2005
Digest by: SANTOS, Maricar Jan M.

110

PANGANIBAN, J.: FACTS:

Petitioner, formerly Philam Fund Management, Inc., is a domestic corporation duly organized and existing under the laws of the Republic of the Philippines. It acts as the investment manager of both Philippine Fund, Inc. (PFI) and Philam Bond Fund, Inc. (PBFI), which are open-end investment companies[,] in the sale of their shares of stocks and in the investment of the proceeds of these sales into a diversified portfolio of debt and equity securities. Being an investment manager, [p]etitioner provides management and technical services to PFI and PBFI. Petitioner is, likewise, PFIs and PBFIs principal distributor which takes charge of the sales of said companies shares to prospective investors. Pursuant to the separate [m]anagement and [d]istribution agreements between the [p]etitioner and PFI and PBFI, both PFI and PBFI [agree] to pay the [p]etitioner, by way of compensation for the latters services and facilities, a monthly management fee from which PFI and PBFI withhold the amount equivalent to [a] five percent (5%) creditable tax[,] pursuant to the Expanded Withholding Tax Regulations. On September 11, 1998, [p]etitioner filed an administrative claim for refund with the [Bureau of Internal Revenue (BIR)] -- Appellate Division in the amount of P522,092.00 representing unutilized excess tax credits for calendar year 1997. Thereafter, on July 28, 1999, a written request was filed with the same division for the early resolution of [p]etitioners claim for refund. Respondent did not act on [p]etitioners claim for refund[;] hence, a Petition for Review was filed with this Court6on November 29, 1999 to toll the running of the two-year prescriptive period. In GR No. 162004, the antecedents are narrated by the CA in this wise:

On April 13, 1999, [petitioner] filed its Annual Income Tax Return with the [BIR] for the taxable year 1998 declaring a net loss of P1,504,951.00. Thus, there was no tax due against [petitioner] for the taxable year 1998. Likewise, [petitioner] had an unapplied creditable withholding tax in the amount of P459,756.07, which amount had been previously withheld in that year by petitioners withholding agents[,] namely x x x [PFI], x x x [PBFI], and Philam Strategic Growth Fund, Inc. (PSGFI).

In the next succeeding year, [petitioner] had a tax due in the amount of P80,042.00, and a creditable withholding tax in the amount of P915,995.00. [Petitioner] likewise declared in its 1999 tax return the amount of P459,756.07, which represents its prior excess credit for taxable year 1998. Thereafter, on November 14, 2000, [petitioner] filed with the Revenue District Office No. 50, Revenue Region No. 8, a written administrative claim for refund with respect to the unapplied creditable withholding tax of P459,756.07. According to [petitioner,] the amount of P80,042.00, representing the tax due for the taxable year 1999 has been credited from its P915,995.00 creditable withholding tax for taxable year 1999, thus leaving its 1998 creditable withholding tax in the amount of P459,756.07 still unapplied.

ISSUE: whether petitioner is entitled to a refund of its creditable taxes withheld for taxable years 1997 and 1998. whether petitioner is entitled to a refund of its creditable taxes withheld for taxable years 1997 and 1998. HELD: The Petition in GR No. 156637 is meritorious, but that in GR No. 162004 is not. Thus, Section 69 of the NIRC of 1977 was renumbered as Section 86 under PD 1705; later, as Section 79 under PD 1994;25 then, as Section 76 under EO 273.26 Finally, after being renumbered and reduced to

the chaff of a grain, Section 69 was repealed by EO 37.

Subsequently, Section 69 reappeared in the NIRC (or Tax Code) of 1997 as Section 76, which reads: Section 76. Final Adjustment Return. -- Every corporation liable to tax under Section 24 shall file a final adjustment return covering the total net income27 for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable net income28 of that year the corporation shall either: (a) Pay the excess tax still due; or (b) Be refunded the excess amount paid, as the case may be. In case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid, the refundable amount shown on its final adjustment return may be credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable year. This section applies to the first case before the Court. Differently numbered in 1977 but similarly worded 20 years later (1997), Section 76 offers two options to a taxable corporation whose total quarterly income tax payments in a given taxable year exceeds its total income tax due. These options are (1) filing for a tax refund or (2) availing of a tax credit. The first option is relatively simple. Any tax on income that is paid in excess of the amount due the government may be refunded, provided that a taxpayer properly applies for the refund. The second option works by applying the refundable amount, as shown on the FAR of a given taxable year, against the estimated quarterly income tax liabilities of the succeeding taxable year.

111

These two options under Section 76 are alternative in nature.29 The choice of one precludes the other. Indeed, inPhilippine Bank of Communications v. Commissioner of Internal Revenue,30 the Court ruled that a corporation must signify its intention -- whether to request a tax refund or claim a tax credit -by marking the corresponding option box provided in the FAR.31 While a taxpayer is required to mark its choice in the form provided by the BIR, this requirement is only for the purpose of facilitating tax collection. GR No. 162004 As to the second case, Section 76 also applies. Amended by Republic Act (RA) No. 8424, otherwise known as the Tax Reform Act of 1997, it now states: SEC. 76. Final Adjustment Return. -- Every corporation liable to tax under Section 27 shall file a final adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable income of that year, the corporation shall either: (A) Pay the balance of tax still due; or (B) Carry over the excess credit; or (C) Be credited or refunded with the excess amount paid, as the case may be.

In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, the excess amount shown on its final adjustment return may be carried over and credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to carry-over and apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed therefor.

The carry-over option under Section 76 is permissive. A corporation that is entitled to a tax refund or a tax creditfor excess payment of quarterly income taxes may carry over and credit the excess income taxes paid in a given taxable year against the estimated income tax liabilities of the succeeding quarters. Once chosen, the carry-over option shall be considered irrevocable45 for that taxable period, and no application for a tax refund or issuance of a tax credit certificate shall then be allowed.

Commissioner of Internal Revenue vs. BPI G.R. No. 178490, July 7, 2009 Digest by: TAN, Carlo Mari Crisregienald C.

112

CHICO-NAZARIO, J.

FACTS: BPI filed its income tax return for the taxable year 1998 with the BIR to which payments were made. After computations, it showed that there was an excess in payment in the amount of over 33 million pesos to which BPI is entitled either to refund or to credit pursuant to Section 76 of the NIRC. BPI opted to carry it over and apply the credit to the next taxable year 1999 but on the said year the bank recorded losses which prevented them from applying the said credit. On the taxable year 2000, the bank incurred no taxable income so the tax credits were still not applied. In 2001, the bank then opted to file a claim for refund for the excess payments made in taxable year 1998. The claim was not acted upon by the commissioner so it was elevated to the CTA which denied it, upon appeal to the CA though, the CA ruled in favor of the bank construing that the irrevocability of the option to carry over the excess payment on taxes as mentioned in section 76 of the NIRC expires for every taxable year. That because it was not used in 1999, the bank is then allowed to exercise again any of the two remedies mentioned in the law, ie. refund or credit. The CIR filed for review. ISSUE: Whether or not the decision of the BPI to carry over the excess payment is irrevocable therefore barring a claim of refund after previously asking for it to be credited.

HELD: The Court ruled that, the remedies mentioned in Section 76 are alternative in nature and the choice of one precludes the other. That one can not get a tax refund and a tax credit at the same time for the same excess income taxes paid. Section 76 is clear and unequivocal, once the carry over option is taken, actually or constructively, it becomes irrevocable, and there are not mentions of any exceptions or qualifications to this irrevocability rule. Hence, the controlling factor for the application of the irrevocability rule is that the taxpayer chooses an option, once done, it can no longer make another one. The choice of BPI to carry over the excess payments made in 1998 to succeeding taxable years which it expressly indicated in its 1998 income tax return is irrevocable, regardless if it was actually applied to a tax liability.

Bank of the Philippine Islands vs. Commissioner of Internal Revenue C.A-G.R. SP. No. 38304, April 14, 2000
Digest by: TAN, Carlo Mari Crisregienald C.

113

AQUINO, J. p: FACTS:

By virtue of the articles of merger, BPI became the successor in interest of Family Bank and Trust Company (FBTC) whose corporate existence ended in 1995. FBTC earned rental incomes from its leased properties and income from its treasury notes purchased from the Central Bank in 1985, and pursuant to Expanded Withholding Tax Regulations, the lessee withheld 5% of the rentals and the Central Bank 15% of the interests of the treasury notes and remitted them to the BIR. FBTC filed its final income tax return and showed that they incurred a net loss and that the amount withheld before represent refundable amounts. BPI as successor, in December 29, 1987, filed a claim for the said refunds but the BIR did not refund the said amount stating that the right to claim refunds on those amounts has already prescribed. BPI then filed a petition for review for the reversal of the BIRs resolution. ISSUE: Whether or not BPI is entitled to the refund. HELD: No. BPIs right has prescribed. Under Sec. 292 of the Tax Code, and action to claim for refund of an excessively collected tax starts to run from the day in which a corporate taxpayer is required by law to file its final income tax return. Accordingly, BPI should have filed the action for the refund within two (2) years from July 31, 1985 which was July 31, 1987. Unfortunately, petitioner filed said action only on December 229, 1987 which was late by 151 days. Said action was, therefore, clearly time-barred. The petitioners contention that the period should run from the filing of the final adjustment income tax return is inferior to the construction made by the agency tasked with the implementation of the laws regarding the case. The law contemplates income tax returns and not final adjustment income tax returns or those which determine the correctness of the returns filed. For all purposes, income tax returns are presumed valid unless they are unreasonable or contrary to law.

Withholding Tax

Citibank vs. Court of Appeals G.R. No.107434 . April 14, 2000

Digest by: TAN, Carlo Mari Crisregienald C.

114

PANGANIBAN, J.

FACTS: In 1979 and 1980, Citibanks tenants withheld and paid to the Bureau of Internal Revenue taxes on rents due to Citibank, pursuant to Section 1(c) of the Expanded Withholding Tax Regulations (BIR Revenue Regulations No. 13-78, as amended). On both years, Citibank reported in its income tax returns net losses which then caused it to file for claims of refund concerning the rental taxes withheld and paid to the BIR.

On August 30, 1981, the Court of Tax Appeals adjudged Citibanks entitlement to the tax refund sought for, representing the 5% tax withheld and paid on Citibanks rental income for 1979 and 1980. The Commissioner of Internal Revenue was not satisfied with the judgment so he filed an appeal on the Court of Appeals which reversed the ruling of the CTA. The CA refused to allow the claim for refund for the reason that the taxes were collected pursuant to BIR Revenue Regulation No. 13-78, and were not illegally or erroneously collected as would warrant a valid claim under Section 230 of the NIRC. Hence, Citibank filed a petition for review under Rule 45 of the Rules of Court. ISSUE: Whether or not Citibank is entitled to refund or credit the withheld rental taxes.

HELD: The Supreme Court disagrees with the CA. Income taxes remitted partially on a periodic or quarterly basis should be credited or refunded to the taxpayer on the basis of the taxpayers final adjusted returns, or on such periodic or quarterly basis. In the present case, there is no question that the taxes were withheld in accordance with Section 1(c), Rev. Reg. No. 13-78. In that sense, it can be said that they were withheld legally by the tenants. However, the annual income tax returns of petitioner-bank for tax years 1979 and 1980 undisputedly reflected the net losses it suffered. The question arises: whether the taxes withheld remained legal and correct at the end of each taxable year. The SC hold in the negative. The taxes withheld quarterly, are in the nature of payment by a taxpayer in order to extinguish his possible tax obligation. They are installments on the annual tax which may be due at the end of the taxable year. These withheld taxes are provisional in nature unlike the withholding of final taxes on passive incomes, they are creditable withholding taxes that are creditable against income tax liability if any, for that taxable year.

As petitioner posted net losses in its 1979 and 1980 returns, it was not liable for any income taxes. Consequently and clearly, the taxes withheld during the course of the taxable year, while collected legally under the aforesaid revenue regulation, became untenable and took on the nature of erroneously collected taxes at the end of the taxable year. A refund therefore is warranted.

Commissioner of Internal Revenue vs. Wander Phils., Inc. G.R. No. L-68375, April 15, 1988
Digest by: TUAZON, Diana Jean M.

115

BIDIN, J. FACTS:

Wander Philippines, Inc. (Wander), is a domestic corporation organized under Philippine laws. It is wholly-owned subsidiary of the Glaro S.A. Ltd. (Glaro), a Swiss corporation not engaged in trade or business in the Philippines. On July 18, 1975, Wander filed its withholding tax return for the second quarter ending June 30, 1975 and remitted to its parent company, Glaro dividends in the amount of P222,000.00, on which 35% withholding tax thereof in the amount of P77,700.00 was withheld and paid to the Bureau of Internal Revenue. Again, on July 14, 1976, Wander filed a withholding tax return for the second quarter ending June 30, 1976 on the dividends it remitted to Glaro amounting to P355,200.00, on which 35% tax in the amount of P124,320.00 was withheld and paid to the Bureau of Internal Revenue. On July 5, 1977, Wander filed with the Appellate Division of the Internal Revenue a claim for refund and/or tax credit in the amount of P115,400.00, contending that it is liable only to 15% withholding tax in accordance with Section 24 (b) (1) of the Tax Code, as amended by Presidential Decree Nos. 369 and 778, and not on the basis of 35% which was withheld and paid to and collected by the government. There being no immediate action by the BIR on Wanders letter-claim the latter sought the intervention of the CTA, the latter ruled for the private respondent. ISSUES: (1) Whether or not Wander is the proper party to claim the refund (2) Whether or not private respondent Wander is entitled to the preferential rate of 15% withholding tax on dividends declared and remitted to its parent corporation, Glaro HELD: (1) YES. The submission of petitioner that Wander is but a withholding agent of the government and therefore cannot claim reimbursement of the alleged overpaid taxes, is untenable. It will be recalled, that said corporation is first and foremost a wholly owned subsidiary of Glaro. The fact that it became a withholding agent of the government which was not by choice but by compulsion under Section 53 (b) of the Tax Code, cannot by any stretch of the imagination be considered as an abdication of its responsibility to its mother company. Thus, this Court construing Section 53 (b) of the Internal Revenue Code held that the obligation imposed thereunder upon the withholding agent is compulsory. It is a device to insure the collection by the Philippine Government of taxes on incomes, derived from sources in the Philippines, by aliens who are outside the taxing jurisdiction of this Court. In fact, Wander may be assessed for deficiency withholding tax at source, plus penalties consisting of surcharge and interest (Section 54, NLRC). Therefore, as the Philippine counterpart, Wander is the proper entity who should for the refund or credit of overpaid withholding tax on dividends paid or remitted by Glaro.

(2) YES. The dividends received from a domestic corporation liable to tax, the tax shall be 15% of the dividends received, subject to the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to 20% which represents the difference between the regular tax (35%) on corporations and the tax (15%) dividends. Since the Swiss Government does not impose any tax on the dividends to be received by the said parent corporation in the Philippines, the condition imposed under the Section 24 (b) (1) of the Tax Code, as amended by P.D. 369 and 778, is satisfied. The withholding tax rate of 15% is hereby affirmed.

Commissioner of Internal Revenue vs. Procter & Gamble Philippine Manufacturing Corp. G.R. No. L-66838 April 15, 1988
Digest by: TUAZON, Diana Jean M.

116

PARAS, J. FACTS:

Private respondent Procter and Gamble Philippine Manufacturing Corporation (PMC-Phil.) is engaged in business in the Philippines and is a wholly owned subsidiary of Procter and Gamble, U.S.A. (PMCUSA), a non-resident foreign corporation in the Philippines, not engaged in trade and business therein. As such PMC-U.S.A. is the sole shareholder or stockholder of PMC Phil., as PMC-U.S.A. owns wholly or by 100% the voting stock of PMC Phil. and is entitled to receive income from PMC-Phil. in the form of dividends, if not rents or royalties. In addition, PMC-Phil has a legal personality separate and distinct from PMC-U.S.A. For the taxable year ending June 30, 1974 PMC-Phil. realized a taxable net income of P56,500,332.00 and accordingly paid the corresponding income tax thereon equivalent to P25%-35% or P19,765,116.00 as provided for under Section 24(a) of the Philippine Tax Code. After taxation, its net profit was P36,735,216.00. Out of said amount it declared a dividend in favor of its sole corporate stockholder and parent corporation PMC-U.S.A. in the total sum of P17,707,460.00 which latter amount was subjected to Philippine taxation of 35% or P6,197,611.23 as provided for in Section 24(b) of the Philippine Tax Code. In July, 1977 PMC-Phil., invoking the tax-sparing credit provision in Section 24(b) as the withholding agent of the Philippine government, with respect to the dividend taxes paid by PMC-U.S.A., filed a claim with the herein petitioner, Commissioner of Internal Revenue, for the refund of the 20 percentage-point portion of the 35 percentage-point whole tax paid, arising allegedly from the alleged overpaid withholding tax at source or overpaid withholding tax in the amount of P4,832,989.00. There being no immediate action by the BIR on PMC-Phils letter-claim the latter sought the intervention of the CTA, the latter ruled for the private respondent. ISSUES: (1) Whether or not PMC-Phil. is the proper party to claim the refund (2) Whether or not private respondent PMC-Phil is entitled to the preferential 15% tax rate on dividends declared and remitted to its parent corporation HELD: (1) NO. The submission of the Commissioner of Internal Revenue that PMC-Phil. is but a withholding agent of the government and therefore cannot claim reimbursement of the alleged over paid taxes, is completely meritorious. The real party in interest being the mother corporation in the United States, it follows that American entity is the real party in interest, and should have been the claimant in this case. (2) NO. There is nothing in Section 902 of the U.S. Internal Revenue Code, as amended by Public Law 87-834, the law governing tax credits granted to U.S. corporations on dividends received from foreign corporation, that would justify tax return of the disputed 15% to the private respondent. Furthermore, as ably argued by the petitioner, the private respondent failed to meet certain conditions necessary in order that the dividends received by the non-resident parent company in the United States may be subject to the preferential 15% tax instead of 35%. Among other things, the private respondent failed: (1) to show the actual amount credited by the U.S. government against the income tax due from PMCU.S.A. on the dividends received from private respondent; (2) to present the income tax return of its mother company for 1975 when the dividends were received; and (3) to submit any duly authenticated document showing that the U.S. government credited the 20% tax deemed paid in the Philippines.

Filipinas Synthetic Fiber Corp. vs. Court of Appeals G.R. Nos. 118498 & 124377. October 12, 1999
Digest by: TUAZON, Diana Jean M.

117

PURISIMA, J. FACTS:

Filipinas Synthetic Fiber Corporation, a domestic corporation received on December 27, 1979 a letter of demand, from the Commissioner of Internal Revenue assessing it for deficiency withholding tax at source in the total amount of P829,748.77, inclusive of interest and compromise penalties, for the period from the fourth quarter of 1974 to the fourth quarter of 1975. The bulk of the deficiency withholding tax assessment, however, consisted of interest and compromise penalties for alleged late payment of withholding taxes due on interest loans, royalties and guarantee fees paid by the petitioner to non-resident corporations. The assessment was seasonably protested by the petitioner through its auditor, SGV and Company. Respondent denied the protest in a letter dated 14 May 1985 on the following ground: For Philippine internal revenue tax purposes, the liability to withhold and pay income tax withheld at source from certain payments due to a foreign corporation is at the time of accrual and not at the time of actual payment or remittance thereof, citing BIR Ruling No. 71-003 and BIR Ruling No. 24-71-003-154-84 dated 12 September 1984 as well as the decision of the Court of Tax Appeals in CTA Case No. 3307 entitled Construction Resources of Asia, Inc., versus Commissioner of Internal Revenue. The aforementioned case held that the liability of the taxpayer to withhold and pay the income tax withheld at source from certain payments due to a non-resident foreign corporation attaches at the time of accrual payment or remittance thereof and the withholding agent/corporation is obliged to remit the tax to the government since it already and properly belongs to the government. Since the taxpayer failed to pay the withholding tax on interest, royalties, and guarantee fee at the time of their accrual and in the books of the corporation the aforesaid assessment is therefore legal and proper. ISSUE: Whether the liability to withhold tax at source on income payments to non-resident foreign corporations arises upon remittance of the amounts due to the foreign creditors or upon accrual thereof HELD: UPON ACCRUAL THEREOF. The Supreme Court held that since Sec. 53, NIRC (now, Sec. 57 of 1997 NIRC) in relation to Sec. 54 (now Sec. 58) is silent as to when the duty to withhold arises, it is necessary to look into the nature of the accrual method of accounting. Under the accrual basis method of accounting, income is reportable when all the events have occurred that fix the taxpayers right to receive the income, and the amount can be determined with reasonable accuracy. Thus, it is the right to receive income, and not the actual receipt, that determines when to include the amount in gross income. Gleanable from this notion are the following requisites of accrual method of accounting, to wit: (1) that the right to receive the amount must be valid, unconditional and enforceable, i.e., not contingent upon future time; (2) the amount must be reasonably susceptible of accurate estimate; and (3) there must be a reasonable expectation that the amount will be paid in due course.

ACASILI, Carl Jillson B. AGADER, Charisse Ann C. ALVIAR, Joyce B. ARBAS, Andrei Christopher G. AUMENTADO, Adrian F. AVILA, Alyssa Daphne M. BAUTISTA, Cecille Catherine A. CABATU, Ricky Boy V. DE GUZMAN, Pristine B. DESTURA, Kristina Bianca D. ERIGA, Ronald Fredric H. ESCANER, Michael Joseph GARCIA, Vianne Marie O. HATOL, Michelle Marie U. JHOCSON, Maria Alexandria B. JULIAN, Nicole Alora G. MAGAT, Kristianne S. MALAMUG, Jena Lemienne Mae A. MANALO, Samantha Grace N. MEJIA, Daryll Margaret V. MERCADO, Paul Joseph V. NIEVA, Aubin Arn R. ONG, Ruth Ann Q. OSOTEO, Maureen Kascha L. PADUA, Julie Ann E. PALATTAO, Claudine M. PALATTAO, Rose Angelie T. PAMATMAT, John Red C. PANGANIBAN, Rachelle P. PASCASIO, Jarmae Z. RAMOS, Marinel M. REY, Floyd Ericson M. RUAYA, Ronald S. SANTOS, Maricar Jan M. TAN, Carlo Mari Crisregienald C. TUAZON, Diana Jean M.