Commissioner of Internal Revenue vs.

Mitsubishi Metal Corporation

(G.R. No. L-54908)
Facts:
Atlas Consolidated Mining and Development Corporation (hereinafter, Atlas) entered
into a Loan and Sales Contract with Mitsubishi Metal Corporation (Mitsubishi, for brevity),
a Japanese corporation licensed to engage in business in the Philippines, for purposes of the
projected expansion of the productive capacity of the former's mines in Toledo, Cebu. Under
said contract, Mitsubishi agreed to extend a loan to Atlas 'in the amount of $20,000,000.00,
United States currency, 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. It was contemplated that $9,000,000.00 of said
loan was to be used for the purchase of the concentrator machinery from Japan.
Mitsubishi thereafter applied for a loan with the Export Import Bank of Japan
(Eximbank for short) obviously for purposes of its obligation under said contract. Its loan
application was approved on May 26, 1970 in the sum of 4,320,000,000.00, at about the
same time as the approval of its loan for 2,880,000,000.00 from a consortium of Japanese
banks. The total amount of both loans is equivalent to $20,000,000.00 in United States
currency at the then prevailing exchange rate. The records in the Bureau of Internal Revenue
show that the approval of the loan by Eximbank to Mitsubishi was 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 Pl,971,595.01 was withheld pursuant to
Section 24 (b) (1) and Section 53 (b) (2) of the National Internal Revenue Code, as amended
by Presidential Decree No. 131, and duly remitted to the Government.
On March 5, 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.
Parenthetically, it was later noted by respondent Court of Tax Appeals in its decision that on
August 27, 1976, Mitsubishi executed a waiver and disclaimer of its interest in the claim for
tax credit in favor of Atlas.
Issue:
1. Whether or not private respondents are entitled to such tax credit?
2. Whether or not Mitsubishi acted only as a conduit for Atlas for it to obtain a loan
from Eximbank?
Ruling:
1. No. They are not entitled to the tax credit because Mitsubishi and Atlas were not
one of the companies contemplated in Section 29 (b) (7) (A) which states, (A) Income

received from their investments in the Philippines in loans, stocks, bonds or other domestic
securities, or from interest on their deposits in banks in the Philippines by (1) foreign
governments, (2) financing institutions owned, controlled, or enjoying refinancing from
them, and (3) international or regional financing institutions established by governments.
Both Atlas and Mitsubishi were not financing institutions financed by a particular
government,therefore, they are not entitled to tax credit from income derived from interest
earned.
2. Mitsubishi was a mere conduit for Atlas, the latter used the former to avail the tax
credit from such interest and then later on, such tax credit was waived and a disclaimer was
filed in favor Atlas. From this action, it became clear to the court that the provision of the
law was used as a cloak to escape the tax imposed, therefore in order to prevent bad
precedent in the future, the Court reversed the decision of the CTA.

Madrigal vs Rafferty (G.R. No. L-12287)

Facts:
Vicente Madrigal and Susana Paterno, married under conjugal partnership filed a
sworn declaration with the Collector of Internal Revenue showing that his net income for the
year being Php 296,302.73. Subsequently, Madrigal submitted a claim that the indicated
income was in fact the income of the conjugal partnership existing between him and his
wife. He further argued that the income should be divided into two parts; one to his wife and
one on his wife, Susana. The General Questions was then submitted to the Attorney General
of the Philippine Islands which decided in favor of Madrigal, in which case, the Collector of
Internal Revenue forwarded the case to the United States Treasury Department where it was
made to find that;
Php 362,407.67- profits made by Vicente Madrigal in his coal and shipping business;
Php 4,086.50 were profits made by Susana Paterno in her embroidery business;
Php16,687.80 were profits made by Vicente Madrigal in a pawnshop business;
This in sum is Php 383,181.97- representing the Gross Income of Vicente and Susana
Paterno.
General deductions - Php 86,879.24, resulting to an income of Php 296,30273
As a result, other specific deductions were included; (1) Php 16,687.80 the tax to be
made at source and (2) Php 8,000 exemption granted to Vicente Madrigal and
SusanaPaterno, husband and wife with then a remainder of Php 271,614.93.The dispute was
then found to be in favor of the defendants.
Issue:
Whether or not the income tax of husband and wife should be divided into two equal
parts, because of the conjugal partnership existing between them thus having separate
income tax returns.
Ruling:
As provided in a regulation of the US Treasury Department states that; "If a wife has a
separate estate managed by herself as her own property, and receives an income of more than
$3,000, she may make return of her own income, and if the husband has other net income,
making the aggregate of both incomes more than $4,000, the wife's return should be attached
to the return of her husband, or his income should be included in her return, in order that a
deduction of $4,000 may be ,made from the aggregate of both incomes. In the present case,
Vicente and Susana is governed by the conjugal partnership of marriage, therefore the
regulation stated above is not applicable. Susana Paterno has no absolute right to one half of
the income of conjugal partnership. Not being seized of a separate estate, she cannot make a
separate return in order to receive benefit of the exemption which would give rise to a
benefit of exemption. By law, husband and wives are only entitled to Php 8,000 exemption,
therefore, there can be no additional claim for Vicente Madrigal and Susana Paterno.

Conwi vs. Court of Tax Appeals (G.R. No. 48532-33)

Facts:
Petitioners are Filipino Citizens and employees of Procter and Gamble Philippines
who were assigned for certain periods in other subsidiaries of Procter and Gamble outside
the Philippines and were therefore, paid in US dollars as compensation for their services in
their foreign assignments. When petitioners filed their income tax returns, they computed
their returns applying the dollar-to-peso conversion provided in BIR ruling no. 70-027 as
follows; (1) From January 1- February 20, 1970 at the conversation rate of Php 3.90 to US $
1.00 and (2) From February 21 to December 31, 1970 at the conversation rate of Php 6.25 to
US $ 1.00. However, upon the release of their returns, the Commissioner based his
computation of Section 48 of RA No. 265 in relation to Section 6 of Commonwealth Act No.
699 as basis for converting their dollar income into Philippine Peso which resulted to
overpayments, refunds, and/or tax credit. Arising from this, petitioners filed their claims
before the CTA, which denied their petitions therefore giving rise to this case.
Issues:
1. Whether or not the petitioner's dollar earnings are receipts derived from foreign
exchange transactions;
2. Whether or not the proper rate of conversion of petitioner's dollar earnings for tax
purposes in the prevailing free market rate of exchange and not the par value of the peso;
3. Whether or not the par value of the peso to convert petitioner's dollar earnings for
tax purposes into Philippine Pesos is "unrealistic" and therefore, the prevailing free market
rate should be the rate used.
Ruling:
1. The Supreme Court held that CTA erred in deciding that the petitioner's dollar
earnings are derived from foreign exchange transactions, being that the petitioners were
"assigned" to the foreign subsidiaries of Procter and Gamble, they were earning in their
assigned nation's currency and were also spending their currency, therefore, there was no
conversion from one currency to another.
2. The Supreme Court decided that the petitioners erred in such claim, said Circular
No. 289 shall only be applied to export products, invisibles, receipts of foreign exchange,
foreign exchange payments, new foreign borrowing and investments, nothing by way of
income tax payments.
3. Petitioners also claimed that conversion is unrealistic and that there were no
remittances and acceptances of their salaries and wages in US dollar into the Philippines,
therefore they are exempted. The Supreme Court held that pursuant to RMC No. 7-71 and
41-71 providing that a uniform exchange rate for internal revenue tax purpose, is valid and
therefore is applicable to them, being citizens of the Philippines, and as provided for in Sec
21 of the NIRC. Thus, the petitioner's claim are denied for lack of merit.

Commissioner of Internal Revenue vs Javier (G.R. No. 78953)

Facts:
Victoria Javier, wife of the private respondent received from Prudential bank and Trust
Company the amount of USD 999,973.70 remitted by her sister, Mrs. Dolores Vertosa,
through some banks in the US, among which is Mellon Bank, NA.
Mellon Bank filed a complaint against private respondent, his wife and other
defendants, claiming that its remittance of US$1M was a clerical error and should have been
US$1,000. On the ground that the defendants are trustees of an implied trust for the benefit
of Mellon Bank with the clear, immediate and continuing duty to return the said amount
from the moment it was received.
Private respondent filed his income tax return for the taxable year 1977 showing a
gross income of PhP 53,053.38 and a net income of PhP 48.053.88 and stating in the
footnote of the return that Taxpayer was a recipient of some money received from abroad
which he presumed to be a gift but turned out to be an error and is now subject to litigation.
Private respondent wrote the BIR that he was paying the deficiency income
assessment for the year 1976 but denying that he had any undeclared income for the year
1977 and requested that the assessment for 1977 be made to wait final court decision on the
case filed against him for filing an allegedly fraudulent return.
CIR reply stating that the amount of Mellon Bank erroneous remittance which were
depose is definitely taxable. The Commission also imposed a 50% fraud penalty against
Javier.
Issue:
Whether or not private respondent is liable for the 50% fraud?
Ruling:
Under Sec 72 of the NIRC, a taxpayer who files a false return is liable to pay a fraud
penalty of 50% of the tax due from him of the deficiency tax in case payment has been made
on the basis of the return filed before the discovery of the falsity or fraud. The fraud
contemplated by law is actual and not constructive.
In the case, there was no actual and intentional fraud through willful and deliberate
misleading of the BIR. The government was not induced to give up some legal right and
place itself at a disadvantage so as to prevent its lawful agents from proper assessment of tax
liabilities because Javier did not conceal anything. Error or mistake of law is not fraud. The
imposition of the fraud penalty in this case is not justifiesd by the extant facts because he did
not conceal the facts that he received an amount of money although it was a subject of
litigation. 50% surcharge imposed as fraud penalty by the CTA against the private
respondent in the deficiency assessment should be deleted.

Eisner vs Macomber (252 US 189)

Facts:
Mrs. Macomber owned 2,200 shares in Standard Oil. Standard Oil declared a 50%
stock dividend and she received 1,100 additional shares, of which about $20,000 in par value
represented earnings accumulated by the company -- recapitalized rather than distributed -since the effective date of the original tax law.
The current statute expressly included stock dividends in income, and the government
contended that those certificates should be taxed as income to Mrs. Macomber as though the
corporation had distributed money to her. Mrs. Macomber sued Mr. Mark Eisner, the
Collector of Internal Revenue, for a refund.
Issue:
Whether or not a stock dividend is taxable income.
Ruling:
In the majority opinion, Justice Mahlon Pitney ruled that this stock dividend was not a
realization of income by the taxpayer-shareholder for purposes of the Sixteenth Amendment:
We are clear that not only does a stock dividend really take nothing from the property of the
corporation and add nothing to that of the shareholder, but that the antecedent accumulation
of profits evidenced thereby, while indicating that the shareholder is richer because of an
increase of his capital, at the same time shows he has not realized or received any income in
the transaction.
The Court noted that in Towne v. Eisner, it had clearly stated that stock dividends
were not income, as nothing of valuewas received by Towne - the company was not worth
any less than it was when the dividend was declared, and the total value of Towne's stock
had not changed.
Although the Eisner v. Macomber Court acknowledged the power of the Federal
Government to tax income under the Sixteenth Amendment, the Court essentially said this
did not give Congress the power to tax - as income - anything other than income, i.e., that
Congress did not have the power to re-define the term income as it appeared in the
Constitution: Throughout the argument of the Government, in a variety of forms, runs the
fundamental error already mentioned-a failure to appraise correctly the force of the term
"income" as used in the Sixteenth Amendment, or at least to give practical effect to it.
Thus, the Government contends that the tax "is levied on income derived from
corporate earnings," when in truth the stockholder has "derived" nothing except paper
certificates which, so far as they have any effect, deny Mrs. Macombers present
participation in such earnings.

It [the government] contends that the tax may be laid when earnings "are received by
the stockholder," whereas [s]he has received none; that the profits are "distributed by means
of a stock dividend," although a stock dividend distributes no profits; that under the Act of
1916 "the tax is on the stockholder's share in corporate earnings," when in truth a
stockholder has no such share, and receives none in a stock dividend; that "the profits are
segregated from his[her] former capital, and [s]he has a separate certificate representing his
[her] invested profits or gains," whereas there has been no segregation of profits, nor has
[s]he any separate certificate representing a personal gain, since the certificates, new and old,
are alike in what they represent-a capital interest in the entire concerns of the corporation.
The Court ordered that Macomber be refunded the tax she overpaid.

Commissioner of Internal Revenue vs Lednicky (G.R. No. L-18169, L-18262, L-21434)

Facts:
This case involves separate petitions by the Commissioner for review of the
corresponding decisions of the Court of Tax Appeals which have been decided jointly,
namely; G.R No. L-18169, G.R. No.L- 18286 and G.R. No. L-21434.
The respondents are husband and wife; both are American citizens residing in the
Philippines and have derived all their income from Philippine resources for the taxable years
under question: 1955, 1956, and 1957. Subsequently, they filed separate amended tax return
covering the above-mentioned taxable years, claiming deductions representing taxes paid to
the United States on income derived wholly from Philippine sources. The Commissioner
failed to take action on the amended tax returns, hence; the Lednicky spouse brought suits in
the Tax Court which decided in favor of the respondents.
Issue:
Whether or not citizens of the US residing in Philippines who derives income wholly from
sources within the Philippines may deduct from his gross income the income taxes he has
paid to US govt for the taxable year?
Ruling:
No. The taxpayers are not entitled to tax deductions because all their income is
derived from Philippine sources. 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 power to
reduce the tax income of the Philippine government simply by increasing the tax rates on the
alien resident. Such a result is incompatible with the status of the Philippines as an
independent and sovereign State.

Commissioner of Internal Revenue vs. Isabela Cultural Corporation (G.R. No. 172231)
Facts:
ICC, domestic Corp. received from the BIR Assessment notice for deficiency income
tax in the amount of P333,196.86 and deficiency Expanded Withholding tax in the amount of
P4,897.79 inclusive of surcharges and interest for the taxable year 1986.The deficiency
income tax arose from claimed deductions for auditing services for 1985, legal services for
1984 and 1985, security services for April and May 1986. The deficiency expanded w/tax of
P4,897.79 was allegedly due to the failure of ICC to withhold 1%w /tax for security
services.
ICC received a final notice before seizure demanding payment of the amounts stated
in the said notices. CTA held that the claimed deductions for professional and security
services were properly claimed by ICC in 1986 because it was only on said year as the
amount thereof could not be determined at that time. ICC in fact withheld that the claimed
deductions for security services. Petitioner filed a petition for review with the CA, which
affirms CTA decision which holds that although the professional services were rendered to
ICC in 1984 and 1985 the cost of the services was not yet determinable at that time, hence it
could only be considered as deductions in 1986. Hence, the petitioner, through the office of
Solicitor General, filed the instant petition contending that since ICC is using the accrual
method of accounting, the said expenses should have been declared as deductions from
income during the said year and failure of ICC to do so bars it form claiming said expenses
as deduction for the taxable year 1986.
Issue:
Whether or not the professional and security services are deductible expenses for the
taxable year 1986.
Ruling:
The requisites for the deductibility of ordinary and necessary trade, business, or
professional expenses, like expenses paid for legal and security services are (a) the expenses
must be ordinary and necessary, (b) it must have been paid and incurred during the taxable
year, (c) it must have been paid or incurred in the carrying on the trade or business of the
taxpayer, Cd) it must be supported by a receipts, records, or other pertinent papers. Sec 45
(NIRC) states that "the deduction provided for in this TITLE shall be taken for the taxable
year in which paid or incurred , dependent upon the method of accounting upon the basis of
which the net income is computed."
A taxpayer who is authorized to deduct certain expenses and other allowable
deductions for the current year but failed to do so cannot deduct the same of the next year. In
the instant case, the expenses for legal services pertain to the 1984&1985. The failure to
determine the exact amount of the expenses for during the taxable year cannot thus be
attributed solely to the delayed billing of these liabilities by the firm. The professional fee

for the year 1985 cannot be validly claimed as expense deductions in 1986. This is so
because ICC failed to discharge the burden of proving that the expenses were allowable
deduction for the taxable year. As to the security services, the records show that these
expenses were incurred by ICC in 1986 and could there be validly claimed for the said year.

Fisher v. Trinidad (G.R. No. 17518)

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.
Ruling:
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.

The Manila Wine Merchants, Inc. vs. CIR (G.R. No. L-26145)
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 WackWack 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 WackWack, 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?
Ruling:
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, theshareholders 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.

Commissioner of Internal Revenue vs. British Overseas Airways Corporation (BOAC)

and Court of Tax Appeals (G.R. No. L-65773-74)
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:
1. Whether or not during the fiscal years in question BOAC is a resident foreign corporation
doing business in the Philippines or has an office or place of business in the Philippines.
2. Whether proceeds from the sale of BOAC tickets in the Philippines by Warner Barnesand
Company, Ltd are considered income from sources within the Philippines

Ruling:
1. 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.
2. 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.

C. M. Hoskins & Co. Inc. v Commissioner of Internal Revenue (G.R. No. L-24059)

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.
Ruling:
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.

Filipinas Synthetic Fiber Corp. vs. Court of Appeal (G.R. Nos. 118498 & 124377)
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
Ruling:
Upon accrual hereof. 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.
Santos vs Servier Philippines Inc (G.R. No. 166377)
Facts:

Ma. Isabela Santos was the Human Resource Manager of the respondent Servier
Philippines Inc since 1991 until her termination from service in 1999 due to her inability to
resume from work. A retirement package was offered with a retirement package. However,
the retirement benefits amounting to P1, 063,841.76, only P701, 454.89 were released to the
petitioners husband, the balance thereof was allegedly for taxation purposes. The
respondent also failed to award other retirement benefits as promised.
Issue:
Whether or not the retirement benefits are taxable?
Ruling:
Yes. For the retirement benefits to be exempt from withholding tax, the taxpayer is
burdened to prove the concurrence of the following: a) a reasonable private benefit plan
maintained by the employer; b) the retiring official or employer has been in the service of
the same employer for atleast ten (10) years; c) the retiring official or employee is not less
than fifty (50) years of age of his retirement; and d) the benefit had been availed of only
once.
However, the above provision is not applicable in this case, for failure to comply with
the age and length of service requirements.

Intercontinental Broadcasting Corporation vs Amarilla, et. Al (G.R. No. 162775)

Facts:

Petitioner employed the following persons at its Cebu station: Candido C. Quiones,
Jr.; on February 1, 1975;[3] Corsini R. Lagahit, as Studio Technician, also on February 1,
1975; Anatolio G. Otadoy, as Collector, on April 1, 1975; and Noemi Amarilla, as Traffic
Clerk, on July 1, 1975. On March 1, 1986, the government sequestered the station, including
its properties, funds and other assets, and took over its management and operations from its
owner, Roberto Benedicto. However, in December 1986, the government and Benedicto
entered into a temporary agreement under which the latter would retain its management and
operation. On November 3, 1990, the Presidential Commission on Good Government
(PCGG) and Benedicto executed a Compromise Agreement, where Benedicto transferred
and assigned all his rights, shares and interests in petitioner station to the government.
The four (4) employees retired from the company and received, on staggered basis,
their retirement benefits under the 1993 CBA between petitioner and the bargaining unit of
its employees. When a salary increase took effect P1, 500.00 salary increase was given to
all employees of the company, current and retired, effective July 1994. However, when the
four retirees demanded theirs, petitioner refused and instead informed them via a letter that
their differentials would be used to offset the tax due on their retirement benefits in
accordance with NIRC.
Issues:
1. Whether the retirements of the respondents are part of their gross income?
2. Whether the petitioner is estopped from reneging on its agreement with respondent to pay
for the taxes on said retirement benefits?
Ruling:
1. Yes. For the retirement benefits to be exempt from withholding tax, the taxpayer is
burdened to prove the concurrence of the following: a) a reasonable private benefit plan
maintained by the employer; b) the retiring official or employer has been in the service of
the same employer for at least ten (10) years; c) the retiring official or employee is not less
than fifty (50) years of age of his retirement; and d) the benefit had been availed of only
once. More so, there is no evidence on record that the 1993 CBA had been approved or was
ever presented to the BIR. Hence, the retirement benefits of the respondents are taxable.
2. Yes. The agreement to pay the taxes on the retirement benefits had been agreed upon by
the parties and relied upon by the respondents. Such agreement is not contrary to law or to
public morals. For petitioner to renege on its contract simply because its new management
had found the same disadvantageous would amount to a breach of contract. The wellentrenched rule is that estoppel may arise from a making a promise if it was intended that the
promise be relied upon and in fact, was relied upon and if a refusal to sanction the
perpetration of fraud would result to injustice. The mere omission by the promisor to do
whatever he promises is sufficient forbearance to give rise to a promissory estoppel.
Commissioner of Internal Revenue vs General Foods (G.R. No. 143672)
Facts:

On June 14, 1985, the respondent corporation filed its income tax return wherein it
claimed as a deduction the amount of P9, 461. 246 spent for Tangs media advertising. On
May 31, 1980, the Commissioner disallowed 50% of the deduction claimed and assessed the
respondent deficiency income taxes. The latter filed a motion for reconsideration but the
same was denied. It appealed to the Court of Tax Appeals but it was dismissed on the ground
that such expenditure is akin to an acquisition of the capital assets and therefore, expenses
related thereto are not business expenses but capital expenditures. The respondent filed a
petition for review at the Court of Appeals which rendered a decision reversing the decision
of the Court of Tax Appeal on the ground that it was not sufficiently established that the item
claimed as a deduction is excessive.
Issue:
Whether or not the subject media advertising expense for Tang incurred by the
respondent was an ordinary and necessary expense fully deductible under the NIRC?
Ruling:
It is necessary but not an ordinary expense. The Court ruled that to be deductible an
advertising expense should not only be necessary but also be ordinary. The subject media
advertising was not an ordinary expense on the ground that it failed to meet the two
conditions: first, reasonableness of the amount incurred and second, the amount incurred
must not be a capital outlay to create goodwill for the product and/or private respondents
business. Otherwise, the expense must be considered a capital expenditure to be spread out
over a reasonable time.

El Oriente Fabricia de Tabacos vs Juan Posadas (G.R. No. 34774)

Facts:

El Oriente Fabricia de Tabacos, a domestic corporation, procured from the

Manufacturers Life Insurance Co., an insurance policy of A. Velhagen, who is its manager in
order to protect itself from loss by reason of the latters loss. The plaintiff designated itself
as the sole beneficiary. It also charged as an expense of its business all the said premiums
and deducted the same from its gross income. However, the Collector of Internal Revenue
assessed and levied the sum of P3, 148.74 as income tax on the proceeds of the insurance
policy, which the plaintiff paid under protest but was consequently, overruled by the
defendants. The plaintiff appealed.
Issues:
Whether the proceeds of the insurance policy taken by a corporation on the life of an
official or employer to indemnify it against loss in case of his death are taxable income?
Ruling:
No. The Court held that the proceeds of the life insurance policy represents as an
indemnity and not taxable income.